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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 3, 1994
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 No. 1-2267
THE MEAD CORPORATION
(Exact name of registrant as specified in its charter)
Ohio 31-0535759
(State of Incorporation) (I.R.S. Employer Identification No.)
MEAD WORLD HEADQUARTERS
COURTHOUSE PLAZA NORTHEAST
DAYTON, OHIO 45463
(Address of principal executive offices)
Registrant's telephone number, including area code: 513-495-6323
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 __ .
The number of Common Shares outstanding at July 3, 1994 was 59,314,164.
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THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
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QUARTERLY PERIOD ENDED JULY 3, 1994
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PART I - FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
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THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
- - --------------------------------------------------
BALANCE SHEETS
- - --------------
(All dollar amounts in millions)
July 3, Dec. 31,
1994 1993
-------- --------
ASSETS
- - ------
Current assets:
Cash and cash equivalents $ 17.7 $ 9.3
Accounts receivable 783.8 598.2
Inventories 447.7 446.8
Other current assets 77.3 77.0
-------- --------
Total current assets 1,326.5 1,131.3
Investments and other assets:
Investees 80.1 65.1
Other assets 563.5 555.2
-------- --------
643.6 620.3
Property, plant and equipment 4,531.4 4,382.6
Less accumulated depreciation and
amortization (2,059.5) (1,969.7)
-------- --------
2,471.9 2,412.9
-------- --------
Total assets $4,442.0 $4,164.5
======== ========
LIABILITIES AND SHAREOWNERS' EQUITY
- - ------------------------------------
Current liabilities:
Notes payable $ 204.4 $
Accounts payable 319.8 350.3
Accrued liabilities 367.0 348.7
Current maturities of long-term debt 12.8 12.5
-------- --------
Total current liabilities 904.0 711.5
Long-term debt 1,368.8 1,368.8
Commitments and contingent liabilities
Deferred items 538.9 506.2
Shareowners' equity:
Common shares 176.9 176.5
Additional paid-in capital 30.5 26.3
Foreign currency translation adjustment (7.6) (7.7)
Net unrealized gain on securities 6.3 9.1
Retained earnings 1,424.2 1,373.8
-------- --------
1,630.3 1,578.0
-------- --------
Total liabilities and
shareowners' equity $4,442.0 $4,164.5
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See notes to financial statements
THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
- - --------------------------------------------------
STATEMENTS OF EARNINGS
- - ----------------------
(All amounts in millions, except per share amounts)
Second Quarter Ended First Half Ended
-------------------- --------------------
July 3, July 4, July 3, July 4,
1994 1993 1994 1993
-------- -------- -------- --------
Net sales $1,317.2 $1,263.4 $2,472.8 $2,398.9
Cost of products sold 1,039.0 1,003.9 1,958.4 1,914.5
-------- -------- -------- --------
Gross profit 278.2 259.5 514.4 484.4
Selling, administrative and
research expenses 188.4 169.2 364.9 340.0
-------- -------- -------- --------
Earnings from operations 89.8 90.3 149.5 144.4
Other revenues (expenses) - net 3.7 4.7 (4.2) 5.5
Interest and debt expense (26.0) (24.1) (50.6) (48.5)
-------- -------- -------- --------
Earnings before income taxes 67.5 70.9 94.7 101.4
Income taxes 27.4 27.3 38.4 39.0
-------- -------- -------- --------
Earnings before equity in net
earnings of investees 40.1 43.6 56.3 62.4
Equity in net earnings of investees 12.3 3.6 23.7 10.4
-------- -------- -------- --------
Net earnings $ 52.4 $ 47.2 $ 80.0 $ 72.8
======== ======== ======== ========
Net earnings per common and
common equivalent share $ .86 $ .78 $1.33 $1.22
===== ===== ===== =====
Cash dividends per common share $ .25 $ .25 $ .50 $ .50
===== ===== ===== =====
Average common and common equivalent
shares outstanding (millions) 62.4 62.3 62.4 62.1
===== ===== ===== =====
See notes to financial statements
THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
- - --------------------------------------------------
STATEMENTS OF CASH FLOWS
- - ------------------------
(All dollar amounts in millions)
First Half Ended
----------------
July 3, July 4,
1994 1993
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Cash flows from operating activities:
Net earnings $ 80.0 $ 72.8
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation, amortization and depletion of
property, plant and equipment 115.1 128.4
Depreciation and amortization of other assets 26.8 27.0
Deferred income taxes 23.8 26.7
Investees-earnings and dividends (17.8) (4.1)
Other 12.5 (13.6)
Change in assets and liabilities:
Accounts receivable (185.6) (156.7)
Inventories (.9) (42.8)
Other current assets (5.4) 7.4
Accounts payable and accrued liabilities (12.2) (37.4)
Cash (used in) discontinued operations (2.1) (1.0)
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Net cash provided by operating activities 34.2 6.7
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Cash flows from investing activities:
Capital expenditures (172.7) (134.6)
Additions to equipment rented to others (26.6) (24.9)
Investments in and advances to investees (.7) (.6)
Other (4.8) (3.5)
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Net cash (used in) investing activities (204.8) (163.6)
------ ------
Cash flows from financing activities:
Additional borrowings 174.4 213.1
Payments on borrowings (174.8) (209.5)
Notes payable 204.4 165.4
Cash dividends paid (29.6) (29.5)
Common shares issued 4.6 10.3
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Net cash provided by financing activities 179.0 149.8
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Increase (decrease) in cash and cash equivalents 8.4 (7.1)
Cash and cash equivalents at beginning of year 9.3 18.4
------ ------
Cash and cash equivalents at end of half $ 17.7 $ 11.3
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See notes to financial statements
THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
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NOTES TO FINANCIAL STATEMENTS
- - -----------------------------
(All dollar amounts in millions, except per share amounts)
A - FINANCIAL STATEMENTS
The balance sheet at December 31, 1993 is condensed financial information taken
from the audited balance sheet. The interim financial statements are unaudited.
In the opinion of management, all adjustments (which consist only of normal
recurring adjustments) necessary to present fairly the financial position and
results of operations for the interim periods presented have been made.
B - ACCOUNTING POLICIES
On an interim basis, all costs subject to recurring year-end adjustments have
been estimated and allocated ratably to the quarters. Income taxes have been
provided based on the estimated tax rate for the respective years after
excluding infrequently occurring items whose specific tax effect is reported
during the same interim period as the related transaction.
C - INVENTORIES
The amount of inventories is (principally last-in, first-out method):
July 3, Dec. 31,
1994 1993
------ ------
Finished and semi-finished products $316.8 $301.3
Raw materials 67.0 81.0
Stores and supplies 63.9 64.5
------ ------
$447.7 $446.8
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D - INVESTEES
The summarized operating data for all investees is presented in the following
table:
Second Quarter Ended First Half Ended
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July 3, July 4, July 3, July 4,
1994 1993 1994 1993
-------- -------- -------- --------
Revenues $174.5 $122.7 $326.2 $275.8
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Gross profit $ 45.9 $ 18.4 $ 88.0 $ 48.5
====== ====== ====== ======
Net earnings $ 27.5 $ 10.2 $ 53.5 $ 27.3
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E - ADDITIONAL INFORMATION ON CASH FLOWS
First Half Ended
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July 3, July 4,
1994 1993
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Cash paid for:
Interest $ 42.2 $ 45.8
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Income taxes $ 6.9 $ 18.4
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F - LONG-TERM DEBT
Long-term debt at July 3, 1994, includes $236.0 million of short-term borrowings
which have been classified as long-term debt since the company has the intent to
consummate these transactions on a long-term basis and has the ability to do so
under the existing $550 million bank credit agreement. After reduction for
these financings, the company has unused lines of credit of $314.0 million.
G - CHANGE IN ACCOUNTING ESTIMATE
Effective January 1, 1994, the depreciable lives of certain paper mill equipment
were changed to 20 years from 16 years to more closely reflect the current
service lives of the assets. The effect of the change was to increase net
earnings by $6.4 million ($.10 per share) in the second quarter of 1994 and
$12.9 million ($.21 per share) in the first half of 1994.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS OF OPERATIONS
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RESULTS OF OPERATIONS
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Net Sales
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Net sales for the first half of 1994 increased 3% to $2.473 billion from $2.399
billion for the first half of 1993. Net sales for the second quarter increased
to $1.317 billion in 1994 from $1.263 billion in 1993. Increased search volume
at Mead Data Central and a favorable sales mix in School & Office Product's
Back-to-School season provided much of the improvement. Many of Mead's
markets, however, continue to be weak. Selling prices for coated and uncoated
papers, coated natural kraft and beverage packaging are averaging below 1993
levels. There are signs of improvement in some segments, but the magnitude of
these improvements remains uncertain.
Operating Costs and Expenses
- - ----------------------------
Strong operating performance and productivity improvements helped to offset the
impact of weaker selling prices. Additionally, in the first quarter of 1994,
Mead lengthened the depreciable life of certain paper mill equipment to twenty
years from sixteen years. Gross profit as a percent of sales was 20.8% for the
first half of 1994 and 21.1% for the second quarter compared to 20.2% and 20.5%
for the corresponding periods in 1993. Without the depreciation change this
ratio would have been 19.9% for the first half of 1994 and 20.3% for the second
quarter.
Selling, administrative and research expenses were higher for both the first
half ($364.9 million) and second quarter ($188.4 million) of 1994 compared
to the prior year ($340.0 million and $169.2 million, respectively). Most
of the increase came from higher sales-related expenses at Zellerbach,
Packaging, Mead Data Central and School and Office Products and from continuing
restructuring costs, most notably at Zellerbach.
Other Revenues (Expenses) - Net
- - -------------------------------
Other (expenses) were $(4.2) million for the first half of 1994 compared to
other revenues of $5.5 million for the first half of 1993. For the second
quarter, other revenues were $3.7 million in 1994 compared to $4.7 million for
1993. In the first quarter of 1994, Mead incurred $12.1 million ($7.4 million
after tax, or 12 cents per share) in losses relating to adjustments to market of
certain interest rate options, principally a one-time loss on the close-out
of a leveraged written option embedded in an interest rate swap transaction with
Bankers Trust Company.
Interest and Debt Expense
- - -------------------------
Due to higher interest rates and slightly higher debt levels, interest and debt
expense increased 8% to $26.0 million for the second quarter of 1994 and 4% to
$50.6 million for the first half compared to similar periods in 1993.
Income Taxes
- - ------------
The effective tax rate was 40.6% for the second quarter of 1994 and 40.5% for
the first half. In 1993, it was 38.5% for both the second quarter and first
half. The Omnibus Budget Reconciliation Act of 1993 increased the federal
corporate income tax rate by 1 percentage point and limited the deduction of
certain expenses. In the third quarter of 1993, Mead recorded the cumulative
effect of the higher rate. The difference in the effective tax rate from 1993
to 1994 is due primarily to provisions of the Act.
Equity in Net Earnings of Investees
- - -----------------------------------
Continued strong markets for wood products and improving prices and demand for
pulp provided increased earnings from Mead's 50%-owned Northwood companies.
Mead's share of 1994 first half earnings from all investees are more than double
1993 earnings while second quarter earnings improved from $3.6 million in 1993
to $12.3 million in 1994.
Financial Data by Business
- - --------------------------
Comparisons between 1994 and 1993 earnings in the following discussion have been
made prior to the effect on depreciation expense resulting from the change in
asset lives. This change increased the first half earnings of the Paper segment
by $14.3 million and the Paperboard and Packaging segment by $7.1 million.
Mead's Paper segment generated sales to unaffiliated customers of $543.6 million
in the first half of 1994, down 4% from last year's level driven principally by
lower selling prices. Sales for the second quarter of 1994 were about 2% behind
the same period of 1993. On a comparable basis, first half 1994 earnings
dropped slightly from $44.5 million in 1993 to $41.2 million in 1994. Mead's
two largest paper mills, Chillicothe, Ohio, and Escanaba, Michigan, have
operated well thus far in 1994, each having set a number of mill production
records in the second quarter. Improved operations and productivity gains at
these two mills helped to offset continuing losses at the Kingsport, Tennessee,
mill. Overall, second quarter 1994 Paper segment earnings were level with that
of the 1993 second quarter.
First half and second quarter 1994 sales in the Packaging and Paperboard segment
increased slightly over the corresponding periods of 1993. The sales gains can
be attributed to increases in volume. Prices, particularly for coated natural
kraft and beverage packaging, continue to be under pressure. This situation
contributed to the decline in this segment's first half 1994 earnings
(comparable basis) to $61.8 million from the $81.5 million in earnings posted
a year ago. Similarly, earnings for the second quarter of 1994 were below that
of the same period of 1993. Mead's coated board mill in Phenix City, Alabama,
has run well in 1994 and is producing at a rate above its design capacity.
It also set a number of mill production records. Good operations and the
strong results of the division's two sawmill operations caused first half 1994
earnings to be level with last year. For the second quarter, however, earnings
were about 10% lower than the same period of last year. During 1994's
second quarter, Mead Packaging scheduled costly short production runs to
satisfy domestic customer needs and is incurring start-up expenses as it
penetrates new markets, particularly in Latin America and the Pacific Rim.
These factors and the lower selling prices for beverage packaging have caused
1994 Packaging earnings to decline to about half of the levels of 1993.
In Mead's Distribution and School and Office Products segment, sales increased
4% to $1,017.3 million for the first half of 1994 compared to the first half of
1993. 1994 second quarter sales were also slightly above those of the same
period of last year. Both Zellerbach, Mead's distribution business, and Mead
School and Office Products posted sales gains for the second quarter and the
half compared to last year. Earnings for the second quarter and first half of
1994 were below those of the corresponding periods of 1993 due to
continuing competitive pressure on margins at Zellerbach and additional expenses
incurred by that division for continued restructuring activities. Mead expects
the market pressures at Zellerbach to continue, at least into the near
future. Mead School and Office Products benefitted from a favorable product
mix of value-added products at the beginning of the traditional Back-to-School
season and 1994 first half and second quarter earnings are ahead of comparable
periods in 1993.
At Mead Data Central, Mead's Electronic Publishing segment, both sales and
earnings were significantly higher in 1994 than they were in 1993 for both the
first half and second quarter. Increased search volume sparked a 14% increase
in first half sales, from $262.6 million in 1993 to $299.3 million in 1994.
Sales for the second quarter of 1994 were also 14% higher than the same quarter
of 1993. During the first half of 1993, Mead Data Central incurred significant
expense in reshaping and expanding its sales force. In the last half of that
year, a significant restructuring program was introduced with an emphasis on
lowering costs. 1994 earnings have benefitted from these efforts. Lower costs,
along with the increased search volume and lower amortization of certain
intangible assets related to a previous acquisition, resulted in 1994 first half
earnings of $34.0, more than twice the amount earned in 1993. Second quarter
earnings were about 60% higher in 1994 than in 1993. In the second quarter of
1994, The Mead Corporation announced its intention to divest Mead Data Central.
This transaction is expected to be completed by the end of 1994.
Liquidity and Capital Resources
- - -------------------------------
Mead's consolidated working capital at July 3, 1994 was $422.5 million compared
to $419.8 million at December 31, 1993. The seasonal increase in accounts
receivable, caused primarily by Mead School and Office Product's Back-to-School
season, was financed through short-term borrowings. The current ratio was 1.5
at the end of the second quarter of 1994 compared to 1.6 at December 31, 1993.
Borrowed capital (long-term debt) as a percent of total capital (long-term debt
plus shareowners' equity) decreased from 46.4% at December 31, 1993 to 45.6% at
July 3, 1994.
Capital expenditures totaled $172.7 million and $92.0 million for the first half
and second quarter of 1994, respectively. In 1993, capital expenditures were
$134.6 million in the first half and $82.2 million in the second quarter. Much
of the 1994 spending was at the Escanaba, Michigan, and Chillicothe, Ohio, paper
mills to upgrade Mead's coated paper system.
Mead uses various financial instruments, including derivative products, with
off-balance sheet risk, to manage its interest rate exposure. These derivatives
include options, forward contracts and interest rate swaps. The current
derivative portfolio includes:
(A) Interest rate caps with notional amount of $400 million having an
average strike rate of 10.1% and an average maturity of 4.7 years.
Purchased caps give Mead the right to receive a payment to offset
an increase in interest rates above strike rates. Mead uses caps
to protect its floating rate debt from abnormal rate increases
such as those experienced in the early 1980's.
(B) Interest rate swaps with a notional amount of $275 million convert
a floating rate liability into a fixed rate liability for one
party and achieves the reverse for the other party. These swap
agreements do not involve a transfer of any principal dollars, only
the exchange of interest payments for a specified period. Mead
uses swaps to adjust its mix of fixed and floating rate debt.
The average fixed interest rate received is 5.8% for an average
maturity of 3.3 years and the average fixed interest rate paid
is 8.4% for an average maturity 4.9 years.
In the opinion of management, the risk of loss to the Company in the event of
nonperformance by any counterparty under these agreements is not significant.
All counterparties are rated A or higher by Moody's and Standard and Poor's with
the majority of the contracts executed with counterparties rated AA or higher by
both agencies.
At the end of the second quarter, the Company paid a fixed rate or variable rate
subject to a capped rate on 67% of its debt and paid a floating rate of interest
on the remainder. A change of 1% in the floating interest rate, on an annual
basis, would result in a $.07 change in net earnings per share for the year.
The estimated market value of long-term debt, excluding capital leases, was
$15.3 million less than the book value at the end of the second quarter of 1994.
The Company also uses foreign currency options and forward contracts to reduce
the Company's risk due to foreign currency exchange rate movement. Gains and
losses on these contracts generally offset losses and gains on the assets,
liabilities and transactions being hedged. These financial instruments are used
to minimize exposure and to reduce risk from exchange rate fluctuations in the
regular course of the Company's global business. Based on the opinion of
management, no material exposure exists in any of these instruments.
PART II - OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS
-----------------
Reference is made to the fifth and sixth paragraphs under "Item 3. Legal
Proceedings" in Mead's Annual Report on Form 10-K for the fiscal year ended
December 31, 1993, regarding a hazardous substance site involving a closed coke
manufacturing facility located in Chattanooga, Tennessee. Mead signed an
agreement with the Tennessee Department of Environment and Conservation to
commence a removal action at the site to permit demolition of structures,
removal of asbestos, control of surface water ponding and repairs to fencing.
Execution of this agreement does not resolve the underlying proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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(a) The Annual Meeting of Shareholders of Mead was held on April 28,
1994.
(b) Proxies were solicited for the meeting pursuant to Regulation
14A. There was no solicitation in opposition to management's nominees listed
in the proxy statement, and all of management's nominees were elected.
(c) (1) The results of the election of directors
are as follows:
Number of Votes
---------------
Nominee For Withheld
------- --- --------
J. C. Bogle 51,781,194 971,147
W. E. Hoglund 51,821,727 930,614
B. C. Jordan 51,642,840 1,109,501
W. S. Shanahan 51,842,446 909,895
Nominee Abstentions Broker Non-Votes
------- ----------- ----------------
J. C. Bogle -0- -0-
W. E. Hoglund -0- -0-
B. C. Jordan -0- -0-
W. S. Shanahan -0- -0-
(2) The results of a shareholder proposal
introduced by The United Paperworkers
International Union urging the Board of
Directors to take steps to declassify the
Board of Directors for the purpose of
director elections are as follows:
Number of Votes
---------------
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
26,254,461 22,423,407 559,315 3,515,158
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
(10) Material Contracts:
(1) Amendment No. 2 dated May 1, 1994 to the Credit
Agreement dated November 15, 1989, as amended
November 30, 1991 and supplemented February 26,
1993 and April 6, 1993, among The Mead
Corporation, the banks listed in the Amendment
and The First National Bank of Chicago and
Morgan Guaranty Trust Company of New York as
Co-Agents for the banks.
(2) The "Direction 2000" Executive Incentive Plan
for 1994 in which executive officers
participate.
(11.1), (11.2) Calculations of Net Earnings per Share.
(b) Mead filed a Current Report on Form 8-K (Item 5 and Item 7)
with the Commission on May 18, 1994.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 16, 1994
THE MEAD CORPORATION
- - --------------------
(Registrant)
By J. D. Fuller
-----------------------------
J. D. Fuller
Controller and
Chief Accounting Officer
QUARTERLY\FORM10Q.WP
081594