1997
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 MARCH 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 1-11749
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PACIFIC GREYSTONE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-4337490
(State of Incorporation) (I.R.S. Employer Identification No.)
6767 FOREST LAWN DRIVE, SUITE 300
LOS ANGELES, CALIFORNIA 90068-1027
(213) 436-6300
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
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.
The number of shares of common stock, par value $.01 per share, outstanding
as of April 30, 1997 was 14,959,741.
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PACIFIC GREYSTONE CORPORATION
FORM 10-Q
INDEX
PAGE NUMBER
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income
Three Months Ended March 31, 1997 and 1996 3
Consolidated Balance Sheets
March 31, 1997 and December 31, 1996 4
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PACIFIC GREYSTONE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA - UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
---------------------------
1997 1996
---------- ---------
Revenues $ 101,482 $ 63,219
Cost of sales (83,531) (51,840)
---------- ---------
Gross margin 17,951 11,379
Selling, general and administrative expenses (11,376) (8,173)
Interest and other, net 139 (2)
---------- ---------
Pretax income 6,714 3,204
Provision for income taxes (2,739) (1,307)
---------- ---------
Net income $ 3,975 $ 1,897
---------- ---------
---------- ---------
Earnings per share $ 0.27
----------
----------
Weighted average number of shares outstanding 14,960
----------
----------
Pro forma earnings per share $ 0.13
---------
---------
Pro forma weighted average number of shares outstanding 14,972
---------
---------
SEE ACCOMPANYING NOTES
3
PACIFIC GREYSTONE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
MARCH 31, DECEMBER 31,
1997 1996
---------- ---------
(UNAUDITED)
Cash and cash equivalents $ 18,345 $ 31,142
Housing inventories 324,968 301,934
Deferred tax asset 4,207 4,480
Other assets 9,551 12,913
---------- ---------
Total assets $ 357,071 $ 350,469
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and other liabilities $ 31,584 $ 32,532
Notes payable 43,829 40,254
Senior unsecured notes payable 125,000 125,000
---------- ----------
Total liabilities 200,413 197,786
Shareholders' equity:
Common stock 150 150
Additional paid-in capital 132,482 132,482
Retained earnings 24,026 20,051
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Total shareholders' equity 156,658 152,683
---------- ---------
Total liabilities and shareholders' equity $ 357,071 $ 350,469
---------- ----------
---------- ----------
SEE ACCOMPANYING NOTES
4
PACIFIC GREYSTONE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS - UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
----------------------
1997 1996
--------- -------
OPERATING ACTIVITIES:
Net income $ 3,975 $ 1,897
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 273 208
Deferred portion of provision for income taxes 273 1,082
Net changes in operating assets and liabilities:
Housing inventories (23,034) (30,286)
Other assets 3,089 606
Accounts payable and accrued liabilities (948) (5,867)
--------- -------
Net cash used in operating activities (16,372) (32,360)
FINANCING ACTIVITIES:
Net proceeds from revolving credit facility 5,000 10,000
Repayments of notes payable (1,425) (1,387)
--------- -------
Net cash provided by financing activities 3,575 8,613
--------- -------
Net decrease in cash and cash equivalents (12,797) (23,747)
Cash and cash equivalents at beginning of period 31,142 49,294
--------- -------
Cash and cash equivalents at end of period $ 18,345 $ 25,547
--------- -------
--------- -------
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $ 2,000 $ 75
--------- -------
--------- -------
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Housing inventories acquired through seller financing $ - $ 1,451
--------- -------
--------- -------
SEE ACCOMPANYING NOTES
5
PACIFIC GREYSTONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements of the Company have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission for reporting on Form 10-Q. Accordingly, certain information
and footnote disclosures required by generally accepted accounting principles
for complete financial statements have been condensed or omitted. In the opinion
of the Company's management, all adjustments, which include normal recurring
accruals, considered necessary for a fair presentation have been included. These
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
The Company historically has experienced, and expects to continue to
experience, variability in quarterly sales and revenues. The consolidated
statement of income for the three months ended March 31, 1997 are not
necessarily indicative of the results to be expected for the full year. Certain
reclassifications have been made to the 1996 financial information to conform to
the current period presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Estimates made by management relate primarily to accruals,
including warranty, project budgets, and the valuation of certain real estate.
Actual results could differ from those original estimates.
2. EARNINGS PER SHARE
The computation of earnings per share is based on the weighted average
number of common shares and common share equivalents outstanding during the
period. Common share equivalents include dilutive stock options using the
treasury stock method.
3. PRO FORMA DATA
The Company completed its initial public offering (the "Offering") on June
20, 1996 and sold 5,000,000 shares of common stock. Earnings per share data
included in the Company's registration statement for the Offering excluded
historical per share data calculated in accordance with Accounting Principles
Board Opinion No. 15, "Earnings Per Share," since such information was not
indicative of the continuing capital structure of the Company. Pro forma
earnings per share data included herein was calculated as if (a) the Offering
was consummated on January 1, 1996 and (b) the changes in the capital structure
as discussed in Note 1 and Note 9 of the Company's consolidated financial
statements, which are included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1996, occurred on such date.
6
PACIFIC GREYSTONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
4. HOUSING INVENTORIES
As of March 31, 1997 and December 31, 1996, the finished homes and
completed model portion of housing inventories was $72,197,000 and $75,189,000,
respectively. An analysis of interest incurred is as follows:
THREE MONTHS
ENDED MARCH 31,
-----------------------
1997 1996
-------- ---------
(in thousands)
Interest incurred $ 4,191 $ 3,912
Less: interest capitalized (4,167) (3,801)
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Net interest expense $ 24 $ 111
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Interest paid $ 7,558 $ 7,303
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Amortization of capitalized interest included
in cost of sales $ 2,973 $ 2,080
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5. SUPPLEMENTAL INFORMATION ON GREYSTONE HOMES, INC.
Summarized consolidated financial information for Greystone Homes, Inc.
("Greystone") is presented below. In accordance with the Company's management
agreement, corporate general and administrative expenses are allocated based
upon the gross revenues of the companies. Such allocation of corporate general
and administrative expenses is included in Greystone's selling, general and
administrative expenses presented below.
SUMMARY CONSOLIDATED BALANCE SHEETS
ASSETS
MARCH 31, DECEMBER 31,
1997 1996
--------- ---------
(in thousands)
Cash and cash equivalents $ 13,275 $ 22,594
Housing inventories 324,968 301,934
Deferred tax asset 4,207 4,480
Other assets 9,004 12,554
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Total assets $ 351,454 $ 341,562
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LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Accounts payable and other liabilities $ 25,628 $ 24,011
Intercompany payable to the Company 4,297 3,675
Notes payable 43,829 40,254
Senior unsecured notes payable 125,000 125,000
--------- ---------
Total liabilities 198,754 192,940
Shareholder's equity: 152,700 148,622
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Total liabilities and shareholder's equity $ 351,454 $ 341,562
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7
PACIFIC GREYSTONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
5. SUPPLEMENTAL INFORMATION ON GREYSTONE HOMES, INC. (CONTINUED)
SUMMARY CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS
ENDED MARCH 31,
------------------------
1997 1996
--------- ---------
(in thousands)
Revenues $ 101,482 $ 63,220
Cost of sales (83,531) (51,840)
--------- ---------
Gross margin 17,951 11,380
Selling, general and administrative expenses (11,298) (8,164)
Interest and other, net 164 (1)
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Pretax income 6,817 3,215
Provision for income taxes (2,739) (1,307)
--------- ---------
Net income $ 4,078 $ 1,908
--------- ---------
--------- ---------
Greystone is a wholly-owned subsidiary of the Company and is the obligor
on the Senior Unsecured Notes Payable (the "Notes"). The Notes are fully and
unconditionally guaranteed by the Company, except for certain subsidiaries of
the Company which are considered inconsequential individually and in the
aggregate to the Company on a consolidated basis. Separate financial statements
and other related disclosures for Greystone are not presented, as the Company's
management does not consider the information material to investors.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS DISCUSSED IN
THIS REPORT CONTAIN FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS INVOLVE KNOWN
AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE ACTUAL RESULTS
TO DIFFER MATERIALLY. SUCH RISKS, UNCERTAINTIES AND OTHER FACTORS INCLUDE, BUT
ARE NOT LIMITED TO, THOSE RISKS DISCUSSED HEREIN, CHANGES IN THE GENERAL
ECONOMIC CONDITIONS, FLUCTUATIONS IN INTEREST RATES, INCREASES IN LABOR AND RAW
MATERIAL COSTS, LABOR SHORTAGES, INCLEMENT WEATHER CONDITIONS, LEVELS OF
COMPETITION AND OTHER FACTORS DESCRIBED IN DETAIL IN THE COMPANY'S ANNUAL REPORT
ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 AND OTHER DOCUMENTS FILED BY
THE COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION FROM TIME TO TIME.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, selected housing data
of the Company (dollar amounts in thousands):
THREE MONTHS
ENDED MARCH 31,
-------------------------
HOUSING DATA: 1997 1996
UNITS: ---------- ----------
Homes closed:
Northern California 141 113
Southern California 167 109
Outside California 140 81
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Total 448 303
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Joint Ventures - 3
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Net new orders:
Northern California 221 188
Southern California 242 198
Outside California 216 105
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Total 679 491
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Joint Ventures - 1
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Backlog (at period end):
Northern California 292 143
Southern California 216 198
Outside California 306 169
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Total 814 510
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Joint Ventures - 1
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Sales value of backlog (at period end): $ 196,822 $ 101,011
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Net income for the first quarter of 1997 increased by 111% to $4.0 million
compared to $1.9 million for the first quarter of 1996. The strong performance
for the current quarter was driven by a 61% surge in revenues, primarily
attributable to a recovering Southern California economy. This led to increased
volume, as well as a lower selling, general and administrative ratio.
Furthermore, the Company's operations outside of California continue to provide
profitable growth during the first quarter of 1997 with revenues increasing by
130% to $17.7 million on 140 homes closed.
9
Net new orders for the first quarter of 1997 increased 38% to 679 units
compared to 492 units for the comparable quarter one year ago. This increase was
accomplished despite high sales levels experienced during the first quarter of
last year. Net new orders from the Company's California operations showed a 20%
increase while operations outside of California produced a strong 106% increase
during the current quarter. The combined 216 net new orders from the Las Vegas
and Phoenix markets represented the highest level of quarterly orders since the
Company initiated operations in those markets in December 1995. At March 31,
1997, backlog consisted of 814 units with an aggregate sales value of $196.8
million, representing 59% and 95% increases, respectively, over comparable
figures at March 31, 1996.
The Company has received a letter of intent from its lead lender to
increase its unsecured bank credit facility to $150 million, of which $125
million has been committed by its lenders. The Company expects to finalize the
new agreement during the second quarter of 1997. The new agreement will provide
for lower borrowing costs and administrative costs, as well as less restrictive
covenants. Interest on outstanding borrowings will be based on the bond rating
on the Company's 10 3/4% senior notes (the "Notes"). In April 1997, the bond
rating on the Notes was upgraded to Ba3 and B+ by Moody's Investors Service and
Standard & Poor's Corporation, respectively.
The following table sets forth, for the periods indicated, certain income
statement data as a percentage of total revenues:
THREE MONTHS
ENDED MARCH 31,
--------------------------
1997 1996
---------- ----------
Revenues 100.0% 100.0%
Cost of sales (82.3) (82.0)
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Gross margin 17.7 18.0
Selling, general and administrative expenses (11.2) (12.9)
Interest and other, net 0.1 -
---------- ----------
Pretax income 6.6 5.1
Provision for income taxes (2.7) (2.1)
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Net income 3.9% 3.0%
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THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
Total revenues increased to $101.5 million on 448 homes closed in the first
quarter of 1997 from $63.2 million on 303 homes closed in the first quarter of
1996. The increased revenues were largely driven by the increased number of
homes closed, which was due to the greater number of actively selling projects
from which the Company was delivering homes and the stronger backlog levels of
homes at the end of 1996. All regions produced solid growth with revenues
increasing by 51% and 130% in California and outside of California,
respectively. The largest increase for the current quarter, in terms of dollars,
was in the Southern California region where revenues increased by 91% to $48.6
million from $25.5 million for the same period last year. The overall average
sales price on homes closed increased to $227,000 for the three months ended
March 31, 1997 from $209,000 for the three months ended March 31, 1996, largely
reflecting an increased proportion of higher-priced homes from the Company's
move-up segment. There were no land sales in the first quarter of 1997 or 1996.
10
The gross margin increased to $18.0 million or 17.7% of revenues in the
current quarter from $11.4 million or 18.0% in the year-earlier quarter. The
slight decline in the gross margin percentage was largely a result of a change
in the product mix partially offset, however, by the continued downward levels
of sales incentives offered in the Southern California region. During the first
quarter of last year, the Company's home closings were heavily weighted toward
the higher margin projects in California causing an unusual product mix.
Selling, general and administrative ("SG&A") expenses as a percentage of
revenues decreased to 11.2% for the first quarter of 1997 from 12.9% for the
same period in 1996. Selling expenses as a percentage of revenues for the three
months ended March 31, 1997 and 1996 were 5.7% and 6.3%, respectively. General
and administrative expenses as a percentage of revenues for the three months
ended March 31, 1997 and 1996 were 5.5% and 6.6%, respectively. The reduction in
selling and general and administrative expenses as a percentage of revenues is
largely attributable to the increased revenues in 1997.
In the first three months of 1997, interest and other, net totaled $0.1
million. Included in interest and other, net is interest incurred, less amounts
capitalized to housing inventories and interest income. For the three months
ended March 31, 1997 and 1996, the Company incurred interest of $4.2 million and
$3.9 million and capitalized interest to housing inventories of $4.2 million and
$3.8 million, respectively. Interest and other, net for the first three months
of 1997 was similar to that in the comparable 1996 period.
The Company's effective tax rate was 40.8% for the quarters ended March 31,
1997 and 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal cash requirements are for the acquisition,
development, construction and marketing of its residential projects.
Historically, these activities have been financed through internally generated
operating results and external sources of debt and equity financing.
At March 31, 1997, the Company's financial position remained strong. The
Company's debt to equity ratio was 1.08 to 1.00 at March 31, 1997, while debt to
total capital was 52%. Cash and cash equivalents totaled $18.3 million at the
end of the first quarter. The Company has the financial flexibility to continue
to execute its growth strategy which focuses on maximizing the potential of its
existing operations and further expanding into other attractive markets outside
of California.
At March 31, 1997, approximately $65 million was available for future use
under the provisions of the $100 million unsecured revolving credit facility
(the "Facility"). The Notes and the Facility, as well as other construction and
development loans, contain certain restrictive covenants including limitations
on additional indebtedness, minimum liquidity and net worth requirements and
limitations on the amount of debt to equity. The indentures with respect to the
Notes limit the ability of Greystone to pay cash dividends or make loans and
advances to the Company. At March 31, 1997, under the terms of the indentures,
Greystone could pay cash dividends or make loans or advances to the Company in
an amount of $53.1 million. The Notes are fully and unconditionally guaranteed
by the Company.
11
The Company has received a letter of intent from its lead lender to
increase its unsecured bank credit facility to $150 million, of which $125
million has been committed by its lenders. The Company expects to finalize the
new agreement during the second quarter of 1997. The new agreement will provide
for lower borrowing costs and administrative costs, as well as less restrictive
covenants. Interest on outstanding borrowings will be based on the bond rating
on the Notes. In April 1997, the bond rating on the Notes was upgraded to Ba3
and B+ by Moody's Investors Service and Standard & Poor's Corporation,
respectively.
The Company has utilized, and will continue to utilize, options as a method
of controlling and subsequently acquiring land. By controlling land, through
options on the future discretionary purchase of land, the Company attempts to
minimize its cash outlays and reduce its risk from changing market conditions.
While the Company attempts to prudently manage its acquisition and development
of residential lots, the development of such projects can have a negative impact
on liquidity due to the timing of acquisition and development activities. The
Company believes that cash on hand, cash generated from operations and funds
available under the Facility will be sufficient to meet the Company's working
capital and capital expenditure requirements for at least the next 18 months.
Currently, the Company does not have any material commitments for capital
expenditures.
BACKLOG
Backlog at March 31, 1997 consisted of 814 units with an aggregate sales
value of $196.8 million, representing 59% and 95% increases, respectively, over
comparable figures at March 31, 1996. The Company's Northern California
operations continue to provide strong growth in backlog levels with the sales
value increasing by 158% to $96.5 million on 292 units at March 31, 1997 from
$37.4 million on 143 units at March 31, 1996. At March 31, 1997, the Company's
operations outside of California accounted for 38% and 20% of the backlog units
and sales value, respectively. The Company experienced construction delays as a
result of the inclement weather conditions in California in late 1996 and early
1997, which may impact home closings throughout the remaining quarters in 1997.
INTEREST RATES AND INFLATION
The residential homebuilding industry is affected by changes in general
economic factors, particularly by the impact of inflation and its effect on
interest rates. Inflation can adversely affect the rates on funds borrowed by
the Company and the affordability of mortgage financing available to prospective
customers.
Increased construction costs, rising interest rates, as well as increased
material and labor costs, may reduce gross margins in the short-term, however,
the Company attempts to recover the increased costs through increased sales
prices without reducing sales volume. Inflation has not had a significant
adverse effect on the Company's results of operations presented herein. However,
there can be no assurance that inflation will not have a material adverse impact
on the Company's future results of operations.
12
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
27 Financial Data Schedule.
REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 1997.
13
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.
PACIFIC GREYSTONE CORPORATION
April 30, 1997 /s/ Jack R. Harter
----------------------------
Jack R. Harter
Chairman, President and Chief Executive Officer
April 30, 1997 /s/ Antonio B. Mon
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Antonio B. Mon
Vice Chairman and Chief Financial Officer
14