10-Q 1 0001.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended November 30, 2000 [ ] 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: 0-8656 -------------------------------------------------------- TSR, Inc. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 13-2635899 --------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 400 Oser Avenue, Hauppauge, NY 11788 -------------------------------------------------------------------------------- (Address of principal executive offices) 631-231-0333 -------------------------------------------------------------------------------- (Registrant's telephone number) 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. [X] Yes [ ] No SHARES OUTSTANDING ------------------ 4,423,012 shares of common stock, par value $.01 per share, as of December 31, 2000 ------------------------------------------------------------------------------- TSR, INC. AND SUBSIDIARIES INDEX Page Number ------ Part I. Financial Information: Item 1. Financial Statements (unaudited): Consolidated Condensed Balance Sheets - November 30, 2000 and May 31, 2000.................. 3 Consolidated Condensed Statements of Earnings - For the three months and six months ended November 30, 2000 and 1999.................... 4 Consolidated Condensed Statements of Cash Flows - For the six months ended November 30, 2000 and 1999............................................ 5 Notes to Consolidated Condensed Financial Statements..... 6 Item 2. Management's Discussion and Analysis..................... 7 Part II. Other Information................................................ 12 Signatures................................................................. 12 Page 2 Part I. Financial Information Item 1. Financial Statements TSR, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
November 30, May 31, ASSETS 2000 2000 ---- ---- Current Assets: Cash and cash equivalents (Note 6) ......................................... $ 2,527,532 $ 4,110,283 Marketable securities (Note 7) .............................................. 2,605,877 3,279,232 Accounts receivable (net of allowance for doubtful accounts of $173,000) ......................................... 16,049,711 12,816,762 Other receivables ........................................................... 51,696 146,318 Prepaid expenses ............................................................. 33,869 39,700 Prepaid and recoverable income taxes ....................................... 20,790 39,158 Deferred income taxes ....................................................... 59,000 59,000 ----------- ----------- Total current assets ................................................... 21,348,475 20,490,453 Equipment and leasehold improvements, at cost (net of accumulated depreciation and amortization of $639,000 and $577,000) ..................... 180,320 183,356 Other assets ..................................................................... 54,869 Deferred income taxes ........................................................... 227,000 231,000 ----------- ----------- $21,810,664 $20,945,111 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts and other payables ................................................. $ 145,419 $ 178,077 Accrued and other liabilities ............................................... 3,482,470 3,563,024 Advances from customers ..................................................... 1,306,717 1,234,660 Income taxes payable ....................................................... 236,024 220,823 ----------- ----------- Total current liabilities ............................................. 5,170,630 5,196,584 ----------- ----------- Shareholders' Equity: Preferred stock, $1 par value, authorized 1,000,000 shares; none issued .......................................... -- -- Common stock, $.01 par value, authorized 25,000,000 shares; issued 60,783,326 shares ............................. 60,783 60,783 Additional paid-in capital ................................................. 4,134,053 4,134,053 Retained earnings ........................................................... 24,300,026 22,165,851 ----------- ----------- 28,494,862 26,360,687 Less: Treasury Stock, 1,624,714 and 1,397,914 shares at cost ............... 11,854,828 10,612,160 ----------- ----------- 16,640,034 15,748,527 ----------- ----------- $21,810,664 $20,945,111 =========== =========== The accompanying notes are an integral part of these consolidated condensed financial statements.
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TSR, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2000 AND 1999 (UNAUDITED) Three Months Ended Six Months Ended November 30, November 30, 2000 1999 2000 1999 ---- ---- ---- ---- Revenues ................................................... $21,234,273 $ 20,680,945 $41,135,503 $41,635,639 Cost of sales .............................................. 16,607,668 15,637,241 32,002,701 31,798,934 Selling, general and administrative expenses ............... 2,828,035 3,037,298 5,602,798 5,901,385 ----------- ------------ ----------- ----------- 19,435,703 18,674,539 37,605,499 37,700,319 ----------- ------------ ----------- ----------- Income from operations ..................................... 1,798,570 2,006,406 3,530,004 3,935,320 Other income: Interest and dividend income ............................. 106,298 117,906 207,114 209,947 Unrealized gain (loss) from marketable securities, net ... 1,118 (2,378) 43,057 8,973 Gain from sales of assets ................................ -- 1,950 -- 1,950 ----------- ------------ ----------- ----------- Income before income taxes ................................. 1,905,986 2,123,884 3,780,175 4,156,190 Provision for income taxes ................................. 830,000 910,000 1,646,000 1,787,000 ----------- ------------ ----------- ----------- Net income ............................................... $ 1,075,986 $ 1,213,884 $ 2,134,175 $ 2,369,190 =========== ============ =========== =========== Basic and diluted net income per common share ............................................. $ 0.24 $ 0.23 $ 0.47 $ 0.45 =========== ============ =========== =========== Weighted average number of basic and diluted common shares outstanding ................................ 4,522,845 5,181,657 4,568,012 5,229,317 =========== ============ =========== =========== The accompanying notes are an integral part of these consolidated condensed financial statements.
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TSR, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED NOVEMBER 30, 2000 AND 1999 (UNAUDITED) Six Months Ended November 30, ---------------------------- 2000 1999 ---- ---- Cash flows from operating activities: Net income ........................................................ $ 2,134,175 $ 2,369,190 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization ................................ 62,524 74,055 Unrealized gain from marketable securities, net .............. (43,057) (8,973) Deferred income taxes ........................................ 4,000 12,000 Gain on sales of assets ...................................... -- (1,950) Changes in assets and liabilities: Accounts receivable ......................................... (3,232,949) 733,422 Other receivables ........................................... 94,622 (41,970) Prepaid expenses ............................................ 5,831 41,900 Prepaid and recoverable income taxes ....................... 18,368 (103,236) Other assets ................................................ (14,567) (6,960) Accounts payable and accrued expenses ........................ (113,212) (253,436) Income taxes payable ........................................ 15,201 (21,822) Advances from customers .................................... 72,057 458,624 ----------- ----------- Net cash provided by (used in) operating activities ............ (997,007) 3,250,844 ----------- ----------- Cash flows from investing activities: Proceeds from maturities and sales of marketable securities .. 3,140,322 2,892,956 Purchases of marketable securities ............................ (2,423,910) (1,929,703) Purchases of fixed assets ...................................... (59,488) (51,300) Proceeds from sales of assets ................................ -- 1,950 ----------- ----------- Net cash provided by investing activities .................... 656,924 913,903 ----------- ----------- Cash flows from financing activities: Purchases of treasury stock ................................... (1,242,668) (3,173,440) ----------- ----------- Net cash used in financing activities .......................... (1,242,668) (3,173,440) ----------- ----------- Net increase (decrease) in cash and cash equivalents .................. (1,582,751) 991,307 Cash and cash equivalents at beginning of period ...................... 4,110,283 2,234,723 ----------- ----------- Cash and cash equivalents at end of period ............................ $ 2,527,532 $ 3,226,030 =========== =========== Supplemental Disclosures: Income tax payments ............................................ $ 1,612,000 $ 1,909,000 =========== =========== Interest paid .................................................. $ -- $ -- =========== =========== The accompanying notes are an integral part of these consolidated condensed financial statements.
Page 5 TSR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS NOVEMBER 30, 2000 1. The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q of Regulation S-X. Accordingly, they do not include all the information and notes required by generally accepted accounting principles for complete financial statements. For further information refer to the Company's consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended May 31, 2000. 2. In the opinion of the Company, the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the consolidated financial position, the consolidated results of operations, and consolidated cash flows for the periods presented. 3. The Company is primarily engaged in the business of providing computer programming consulting services. The Company provides technical computer personnel to companies to supplement their in-house information technology capabilities. In addition, the Company provided services converting software applications to be year 2000 compliant utilizing Catch/21 a year 2000 software solution which automated to a significant extent the conversion process. 4. The consolidated condensed financial statements include the accounts of TSR, Inc. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. 5. The Company recognizes computer programming consulting services revenues as services are provided. Provided that acceptance was probable, revenue from Catch/21 code conversion was recognized when the converted code was delivered. 6. The Company considers short-term highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. Cash and cash equivalents were comprised of the following as of November 30, 2000: Cash in banks ............................. $ -- Money Market Funds......................... 1,050,542 United States Treasury Bills............... 1,476,990 ----------- $ 2,527,532 =========== 7. Marketable securities consists of United States Treasury Bills and equity securities. The treasury bills with maturities at acquisition in excess of 90 days, are classified as held to maturity investments. The Company's equity securities are classified as trading securities. The amortized cost, gross unrealized holding gains, gross unrealized holding losses and carrying value for marketable securities by major security type at November 30, 2000 are as follows:
Gross Gross Unrealized Unrealized Amortized Holding Holding Carrying Cost Gains Losses Value ---------- -------- ----------- ---------- United States Treasury Bills $2,423,910 -- -- 2,423,910 Equity Securities .......... 133,289 51,407 (2,729) 181,967 ---------- -------- ----------- ---------- $2,557,199 $ 51,407 $ (2,729) $2,605,877 ========== ======== =========== ==========
8. In October 2000, the Board of Directors authorized an additional buy-back of up to 250,000 shares of the Company's common stock. During the six months ended November 30, 2000, the Company repurchased 226,800 shares of its common stock at a cost of $1,242,668. Page 6 Part I. Financial Information Item 2. TSR, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following discussion and analysis should be read in conjunction with the consolidated condensed financial statements and the notes to the consolidated condensed financial statements. Results of Operations The following table sets forth for the periods indicated certain financial information derived from the Company's consolidated statements of earnings. There can be no assurance that trends in sales growth or operating results will continue in the future: Three months ended November 30, 2000 compared with three months ended November 30, 1999
3 Months Ended November 30, (Dollar amounts in Thousands) ----------------------------------------- 2000 1999 ------------------- ------------------ % of % of Amount Revenues Amount Revenues ------ -------- ------ -------- Revenues ....................................... $21,234 100.0 $20,681 100.0 Cost of Sales .................................. 16,607 78.2 15,637 75.6 ------- ----- ------- ----- Gross Profit ................................... 4,627 21.8 5,044 24.4 Selling, General, and Administrative expenses .. 2,828 13.3 3,038 14.7 ------- ----- ------- ----- Income from Operations ......................... 1,799 8.5 2,006 9.7 Other Income ................................... 107 0.5 118 0.6 ------- ----- ------- ----- Income Before Income Taxes ..................... 1,906 9.0 2,124 10.3 Provision for Income Taxes ..................... 830 3.9 910 4.4 ------- ----- ------- ----- Net Income ..................................... $ 1,076 5.1 $ 1,214 5.9 ======= ===== ======= =====
Revenues Revenues for the quarter ended November 30, 2000 increased $553,000 or 2.7% from the comparable period in fiscal 2000. For the current quarter 100% of revenues were derived from computer programming consulting services as compared with 96.6% from computer programming consulting services and 3.4% from Year 2000 services in fiscal 2000. Computer programming consulting services revenues increased $1,260,000 or 6.3% from $19,975,000 in the quarter ended November 30, 1999 to $21,234,000 in the quarter ended November 30, 2000. This increase resulted primarily from an increase in billing rates. The Company had approximately 530 consultants on billing at November 30, 1999. The Company experienced a low-point in the number of consultants on billing of approximately 450 in March 2000 and since April 2000 the Company has experienced an increase in new business to approximately 520 consultants on billing as of November 30, 2000. The Company believes that the consulting business will continue to strengthen; however, there is uncertainty in the levels of IT budgets for 2001 due to the current economic climate. Revenues from the Company's Catch/21 Year 2000 compliance services, were $705,000 for the fiscal 2000 second quarter while there were no Year 2000 revenues in the fiscal 2001 second quarter. The Company's Year 2000 projects have been completed. Page 7 Cost of Sales Cost of sales as a percentage of revenues increased from 75.6% in the quarter ended November 30, 1999 to 78.2% in the quarter ended November 30, 2000. This increase is primarily attributable to the decrease in Year 2000 revenues for which cost of sales as a percentage of revenues is less than the computer programming consulting services business. In the computer programming consulting services business, cost of sales as a percentage of sales increased from 77.1% in the quarter ended November 30, 1999 to 78.2% in the quarter ended November 30, 2000. This increase is partly attributable to a change in the Company's consultant sourcing mix. The number of consultant subcontractors have increased, which decreased the payroll tax benefits usually realized at the end of the calendar year. This increase is also attributable to increases in amount being paid to qualified programming professionals outpacing the Company's ability to pass the increases onto customers due to competitive markets pressures in the industry. The Year 2000 business incurred no cost of sales in the quarter ended November 30, 2000 versus $241,000 in the prior year quarter. Selling, General and Administrative Expenses Selling, general and administrative expenses consist primarily of expenses relating to account executives, technical recruiters, facilities costs, management and corporate overhead. These expenses decreased $209,000 or 6.9% from $3,037,000 in the quarter ended November 30, 1999 to $2,828,000 in the quarter ended November 30, 2000. Selling, general and administrative expenses related to computer programming consulting services decreased $166,000 from the prior year period to $2,828,000. This decrease was primarily attributable to lower commission based compensation as a result of lower gross profits. In the quarter ended November 30, 2000, no selling, general and administrative expenses were attributable to Year 2000 services. Year 2000 selling, general and administrative expenses in the quarter ended November 30, 1999 were $43,000. Income from Operations In the quarter ended November 30, 2000, the computer programming consulting service business contributed $1,799,000 or 100% of the income from operations. In the prior year quarter, the computer programming consulting service business contributed $1,585,000 or 79.0% of income from operations and the Year 2000 business $421,000 or 21.0%. The Company believes that continued growth in contract computer programming services will, over time, offset the loss of income from operations from Year 2000 services. Other Income Other income resulted primarily from interest and dividend income which decreased by $11,000 to $107,000 due to lower average investable funds in the quarter ended November 30, 2000. Income Taxes The effective income tax rate increased to 43.5% in the quarter ended November 30, 2000 from 42.8% in the quarter ended November 30, 1999 because of higher state and local taxes. Page 8 Six months ended November 30, 2000 compared with six months ended November 30, 1999.
6 Months Ended November 30, (Dollar amounts in Thousands) -------------------------------------------- 2000 1999 ------------------- ------------------ % of % of Amount Revenues Amount Revenues ------ -------- ------ -------- Revenues ....................................................... $41,136 100.0 $41,636 100.0 Cost of Sales .................................................. 32,003 77.8 31,799 76.4 ------- ----- ------- ----- Gross Profit ................................................... 9,133 22.2 9,837 23.6 Selling, General, and Administrative expenses .................. 5,603 13.6 5,902 14.2 ------- ----- ------- ----- Income from Operations ......................................... 3,530 8.6 3,935 9.4 Other Income ................................................... 250 0.6 221 0.6 ------- ----- ------- ----- Income Before Income Taxes ..................................... 3,780 9.2 4,156 10.0 Provision for Income Taxes ..................................... 1,646 4.0 1,787 4.3 ------- ----- ------- ----- Net Income ..................................................... $ 2,134 5.2 $ 2,369 5.7 ======= ===== ======= =====
Revenues Revenues for the six months ended November 30, 2000 decreased $500,000 or 1.2% from the comparable period in fiscal 2000. For the current period 99.8% of revenues were derived from computer programming consulting services and 0.2% from Year 2000 services, as compared with 96.8% and 3.2% respectively in fiscal 2000. Computer programming consulting services revenues increased $780,000 or 1.9% from $40,289,000 in the six months ended November 30, 1999 to $41,069,000 in the six months ended November 30, 2000. This increase resulted primarily from an increase in billing rates. The Company had approximately 530 consultants on billing at November 30, 1999. The Company experienced a low-point in the number of consultants on billing of approximately 450 in March 2000 and since April 2000 the Company has experienced an increase in new business to approximately 520 consultants on billing as of November 30, 2000. The Company believes that the consulting business will continue to strengthen; however, there is uncertainty in the levels of IT budgets for 2001 due to the current economic climate. Revenues from the Company's Catch/21 Year 2000 compliance services, were $67,000 for the current period versus $1,346,000 in the fiscal 2000 six month period. The Company's Year 2000 projects have been completed. Page 9 Cost of Sales Cost of sales as a percentage of revenues increased from 76.4% in the six months ended November 30, 1999 to 77.8% in the six months ended November 30, 2000. This increase is primarily attributable to the decrease in Year 2000 revenues for which cost of sales as a percentage of revenues is less than the computer programming consulting services business. In the computer programming consulting services business, cost of sales as a percentage of sales increased from 77.7% in the six months ended November 30, 1999 to 77.8% in the six months ended November 30, 2000. This increase is primarily attributable to increases in amounts being paid to qualified programming professionals outpacing the Company's ability to pass the increases onto customers due to competitive market pressures in the industry. The Year 2000 business incurred cost of sales of $30,000 in the six months ended November 30, 2000 versus $501,000 in the prior year period. Selling, General and Administrative Expenses Selling, general and administrative expenses consist primarily of expenses relating to account executives, technical recruiters, facilities costs, management and corporate overhead. These expenses decreased $299,000 or 5.1% from $5,902,000 in the six months ended November 30, 1999 to $5,603,000 in the six months ended November 30, 2000. Selling, general and administrative expenses related to computer programming consulting services decreased $219,000 from the prior year period to $5,587,000. This decrease was primarily attributable to lower commission based compensation as a result of lower gross profits. In the six months ended November 30, 2000, approximately $16,000 in selling, general and administrative expenses were attributable to Year 2000 services. These expenses consist primarily of general overhead, and facilities expenses. Comparable Year 2000 selling, general and administrative expenses in the six months ended November 30, 1999 were $95,000. Income from Operations In the six months ended November 30, 2000, the computer programming consulting service business contributed $3,509,000 or 99.4% of the income from operations, while the Year 2000 business contributed the remaining $21,000 or 0.6%. In the prior year period, the computer programming consulting service business contributed $3,185,000 or 80.9% of income from operations and the Year 2000 business $750,000 or 19.1%. The Company believes that continued growth in contract computer programming services will, over time, offset the loss of income from operations from Year 2000 services. Other Income Other income resulted primarily from interest and dividend income of $207,000. The increase of $29,000 in other income was primarily attributable to a net unrealized gain of $43,000 from marketable securities due to mark to market adjustments of its equity portfolio in the current period. Income Taxes The effective income tax rate increased to 43.5% in the six months ended November 30, 2000 from 43.0% in the six months ended November 30, 1999 because of higher state and local taxes. Page 10 Liquidity, Capital Resources and Changes in Financial Condition The Company expects that cash flow generated from operations together with its cash and marketable securities will be sufficient to provide the Company with adequate resources to meet its cash requirements. At November 30, 2000, the Company had working capital of $16,178,000 and cash and cash equivalents of $2,528,000 as compared to working capital of $15,294,000 and cash and cash equivalents of $4,110,000 at May 31, 2000. Working capital increased primarily due to the Company's net income of $2,134,000 in the six months ended November 30, 2000. The Company had negative net cash flow of $997,000 from operations during the six months ended November 30, 2000 as compared to positive net cash flow from operations of $3,251,000 in the six months ended November 30, 1999. The Company had net income of $2,134,000 in the six months ended November 30, 2000. However, the Company used cash to support an increase in accounts receivable of $3,233,000. The increase in accounts receivable occurred primarily because of a temporary slowness in collections due to system changes at several customers. Cash flow provided by investing activities resulted primarily from the maturity of United States Treasury Bills in the current period. Cash flow used in financing activities of $1,243,000 in the six months ended November 30, 2000 resulted from the repurchase of 226,800 shares of common stock. As of November 30, 2000, the Company has repurchased a total of 1,624,714 shares at an average price of $7.30 or a total cost of $11,854,828. The Company has completed the buy back authorizations totaling 1,600,000 shares and the Company's board of directors has authorized the repurchase of up to an additional 250,000 shares of its common stock. No time limit has been placed on the duration of the share repurchases. Subject to applicable securities laws, such purchases will be at times and in amounts as the Company deems appropriate and may be discontinued at any time. The Company has no obligation or commitment to repurchase all or any portion of the shares covered by the authorization. The Company's capital resource commitments at November 30, 2000 consisted of lease obligations on its branch and corporate facilities. The Company intends to finance these lease commitments from cash flow provided by operations, available cash and short-term marketable securities. The Company's cash and marketable securities were sufficient to enable it to meet its cash requirements during the period ended November 30, 2000. The Company has available a revolving line of credit of $5,000,000 with a major money center bank, which the Company believes provides sufficient financing if the need arose. As of November 30, 2000 no amounts were outstanding under this line of credit. Recent Accounting Pronouncements Effective June 1, 2001, the Company will adopt SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. This statement requires companies to record derivatives on the balance sheet as assets or liabilities at their fair value. In certain circumstances changes in the value of such derivatives may be required to be recorded as gains or losses. The impact of this statement is not expected to have a material effect on the Company's consolidated financial statements. Page 11 Forward-Looking Statements Certain statements contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations", including statements concerning the Company's future prospects, the anticipated increase in consulting projects, and the Company's future cash flow requirements are forward looking statements, as defined in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projections in the forward looking statements which statements involve risks and uncertainties, including but not limited to the following: risks relating to the competitive nature of the markets for computer programming consulting services, the extent to which growth in the Company's contract computer programming services will offset the anticipated loss of Year 2000 profits, concentration of the Company's business with certain customers and uncertainty as to the Company's ability to bring in new customers. Item 3. Quantitative and Qualitative Disclosure About Market Risk The Company's earnings and cash flows are subject to fluctuations due to changes in interest rates primarily from its investment of available cash balances in money market funds and marketable securities. Under its current policies, the Company does not use interest rate derivative instruments to manage exposure to interest rate changes. TSR, INC. AND SUBSIDIARIES Part II. Other Information Item 6. Exhibits and Reports on Form 8K (a). Exhibit 27: Financial Data Schedule (b). Reports on Form 8K: None 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. TSR, INC. -------------------------------------------------- (Registrant) Date: January 4, 2001 /s/ J.F. HUGHES -------------------------------------------------- J.F. Hughes, Chairman, President and Treasurer Date: January 4, 2001 /s/ JOHN G. SHARKEY -------------------------------------------------- John G. Sharkey, Vice President, Finance Page 12