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 JUNE 30, 1998.
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 0-18592
MERIT MEDICAL SYSTEMS, INC.
---------------------------
(Exact name of Registrant as specified in its charter)
Utah 87-0447695
---- ----------
(State or other jurisdiction of (I.R.S. Identification No.)
incorporation or organization)
1600 West Merit Park Way, South Jordan UT, 84095
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(Address of Principal Executive Offices)
(801) 253-1600
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(Registrant's telephone number, including area code)
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 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 Registrant's
classes of common stock, as of the latest practicable date.
Common Stock 7,445,968
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TITLE OR CLASS Number of Shares Outstanding at
August 12, 1998
MERIT MEDICAL SYSTEMS, INC.
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INDEX TO FORM 10-Q
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PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1998
and December 31, 1997..............................................1
Consolidated Statements of Operations for the three and six months
ended June 30, 1998 and 1997.......................................3
Consolidated Statements of Cash Flows for the six months
ended June 30, 1998 and 1997.......................................4
Notes to Consolidated Financial Statements.........................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................7
PART II. OTHER INFORMATION
Item 5. Other Information.
If a shareholder desiring to raise a proposal at the next annual
meeting of shareholders does not seek inclusion of the proposal in
the Company's proxy statement and fails to notify the Company at
least 45 days prior to the month and day of mailing of the prior
year's proxy statement, management proxies will be allowed to use
their discretionary voting authority when the proposal is raised at
the annual meeting, without any discussion of the proposal in the
proxy statement.
Item 6. Exhibits and Reports on Form 8-K...................................9
SIGNATURES....................................................................10
PART I - FINANCIAL INFORMATION
ITEM 1: Financial Statements
MERIT MEDICAL SYSTEMS, INC.
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CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
- -----------------------------------
June 30, December 31,
ASSETS 1998 1997
- ------ ------------ -------------
(Unaudited)
CURRENT ASSETS:
Cash $ 737,728 $ 976,692
Trade receivables - net 9,710,611 9,599,443
Employee and related
party receivables 483,485 288,812
Irish Development Agency grant receivable 175,588 747,888
Inventories 15,494,397 14,535,440
Prepaid expenses other assets 703,297 538,259
Deferred income tax assets 631,189 782,435
------------ ------------
Total current assets 27,936,295 27,468,969
------------ ------------
PROPERTY AND EQUIPMENT:
Land 1,065,985 1,101,544
Building 932,448
Manufacturing equipment 12,652,460 10,909,529
Automobiles 112,486 112,633
Furniture and fixtures 5,076,290 4,817,738
Leasehold improvements 4,757,350 4,483,071
Construction-in-progress 2,650,260 2,747,414
------------ ------------
Total 26,314,831 25,104,377
Less accumulated depreciation
and amortization (10,784,082) (9,648,746)
------------ ------------
Property and equipment - net 15,530,749 15,455,631
------------ ------------
OTHER ASSETS:
Intangible assets - net 2,196,247 2,024,050
Deposits 61,142 46,612
Cost in excess of the fair value of assets of acquired-net 158,268 167,273
Prepaid royalty 64,286 107,143
------------ ------------
Total other assets 2,479,943 2,345,078
------------ ------------
TOTAL $ 45,946,987 $ 45,269,678
============ ============
Continued on Page 2
See Notes to Consolidated Financial Statements
1
CONSOLIDATED BALANCE SHEETS (Continued)
JUNE 30, 1998 AND DECEMBER 31, 1997
- ------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' June 30, December 31,
EQUITY 1998 1997
- ----------------------------- ---- ----
(Unaudited)
CURRENT LIABILITIES:
Line of credit $ 5,236,337 $ 4,624,727
Current portion of long-term debt 1,701,296 1,802,932
Trade payables 2,992,174 3,438,349
Accrued expenses 2,928,013 2,414,050
Advances from employees 84,696 81,245
Income taxes payable 233,776 369,695
------------ ------------
Total current liabilities 13,176,292 12,730,998
DEFERRED INCOME TAX LIABILITIES 875,134 883,002
LONG-TERM DEBT 3,163,959 3,913,686
DEFERRED CREDITS 1,302,091 1,543,151
------------ ------------
Total Liabilities 18,517,476 19,070,837
------------ ------------
MINORITY INTEREST IN SUBSIDIARY 470,313 396,692
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock- 5,000,000 shares authorized as of
June 30, 1998 and December 31, 1997, respectively,
no shares issued
Common stock- no par value; 20,000,000 and 10,000,000
shares authorized, respectively; 7,427,542 and 7,395,091
shares issued at June 30, 1998 and December 31, 1997,
respectively 17,410,635 17,178,971
Foreign currency translation adjustment (579,420) (490,591)
Retained earnings 10,127,983 9,113,769
------------ ------------
Total stockholders' equity 26,959,198 25,802,149
------------ ------------
TOTAL $ 45,946,987 $ 45,269,678
------------ ------------
See Notes to Consolidated Financial Statements
MERIT MEDICAL SYSTEM, INC.
- --------------------------
2
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 and 1997 (Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
SALES $ 17,974,170 $15,326,070 $ 34,440,185 $ 29,159,213
COST OF SALES 11,161,429 9,423,324 21,464,283 7,875,177
------------- ------------- ------------- -------------
GROSS PROFIT 6,812,741 5,902,746 12,975,902 11,284,036
------------- ------------- ------------- -------------
OPERATING EXPENSES:
Selling, general and administrative 4,571,952 3,928,977 8,738,917 7,768,415
Research and development 858,561 1,165,286 1,746,754 2,075,339
------------- ------------- ------------- -------------
TOTAL 5,430,513 5,094,263 10,485,671 9,843,754
------------- ------------- ------------- -------------
INCOME FROM OPERATIONS 1,382,228 808,483 2,490,231 1,440,282
OTHER EXPENSE 198,316 230,772 394,976 410,305
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAX EXPENSE 1,183,912 577,711 2,095,255 1,029,977
INCOME TAX EXPENSE 548,306 296,470 1,007,421 545,556
MINORITY INTEREST IN (INCOME)
LOSS OF SUBSIDIARY (49,048) 2,719 (73,621) (8,394)
------------- ------------- ------------- -------------
NET INCOME $ 586,558 $ 283,960 $ 1,014,213 $ 476,027
============= ============= ============= =============
EARNINGS PER COMMON SHARE -
Basic and diluted $ 0.08 $ 0.04 $ 0.14 $ 0.07
============= ============= ============= =============
AVERAGE COMMON SHARES -
Basic and diluted 7,551,761 7,334,727 7,489,150 7,194,421
============= ============= ============= =============
See Notes to Consolidated Financial Statements
MERIT MEDICAL SYSTEMS, INC.
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3
MERIT MEDICAL SYSTEMS, INC.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (Unaudited)
- --------------------------------------------------------------------------------
June 30, June 30,
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,014,213 $ 476,027
---------- ----------
Adjustments to reconcile net income to net
cash provided by (used in) in operating activities:
Depreciation and amortization 1,376,866 1,242,618
Bad debt expense 164,740 61,130
Losses/(Gains) on sales and abandonment of
property and equipment 18,128 (3,477)
Amortization of deferred credits (45,602) (20,972)
Deferred income taxes 143,378 12,368
Minority interest in income of subsidiary 73,621 8,394
Changes in operating assets and liabilities
net of effects from purchase of
UMI:
Trade receivables (275,908) (1,130,098)
Employee and related party receivables (158,216) 36,322
Irish Development Agency grant receivable 397,791 (164,437)
Inventories (958,957) 116,521
Prepaid expenses and other assets (189,993) (279,779)
Deposits (14,530) (71,340)
Trade payables (446,175) (406,597)
Accrued expenses 513,963 (220,470)
Advances from employees 3,451 (30,460)
Income taxes payable (135,919) 409,936
Total adjustments 466,638 (440,341)
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Net cash provided by operating activities 1,480,851 35,686
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for:
Property and equipment (1,808,735) (1,044,906)
Cash payments in connection with assets purchased from UMI (59,736)
Intangible assets (268,709) (112,854)
Proceeds from sale of property and equipment 521,805 18,588
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Net cash used in investing activities (1,555,639) (1,198,908)
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Continued on page 5
See Notes to Consolidated Financial Statements
MERIT MEDICAL SYSTEMS, INC.
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CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
4
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (Unaudited)
- ---------------------------------------------------------------
June 30, June 30,
1998 1997
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit 611,610 272,771
Proceeds from issuance of common stock 231,664 1,118,754
Principal payments on:
Long-term debt (883,887) (659,821)
Deferred credits (34,734) (17,367)
-------------- --------------
Net cash provided by (used in) financing activities (75,347) 714,337
-------------- --------------
NET DECREASE IN CASH (150,135) (448,885)
EFFECT OF EXCHANGE RATES ON CASH (88,829) (277,401)
CASH AT BEGINNING OF PERIOD 976,692 1,262,950
-------------- --------------
CASH AT END OF PERIOD $ 737,728 $ 536,664
============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for interest (including
capitalized interest of $68,727 and $63,338, respectively) $ 381,248 $ 461,352
============== ==============
Income taxes $ 999,962 $ 123,252
============== ==============
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
During the six months ended June 30, 1998 and 1997, the Company issued notes
payable totaling $355,404 and $278,216, respectively, for manufacturing
equipment and furniture and fixtures.
During the six months ended June 30, 1997, the Company acquired substantially
all of the operating assets of Universal Medical Instrument Corporation for
152,424 shares of Merit restricted common stock. In connection with this
acquisition, the Company recorded the following as of the acquisition date:
Assets Acquired $ 863,198
Cost in excess of fair market value 182,288
------------
Total purchase price $1,045,486
============
See Notes to Consolidated Financial Statements
5
MERIT MEDICAL SYSTEMS, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
1. Basis of Presentation. In the opinion of management, the accompanying
consolidated financial statements contain all adjustments, consisting only of
normal recurring accruals, necessary for a fair presentation of financial
position of the Company as of June 30, 1998 and December 31, 1997, and the
results of its operations and cash flows for the three and six months ended June
30, 1998 and 1997. The results of operations for the three and six months ended
June 30, 1998 and 1997 are not necessarily indicative of the results for a full
year period.
2. Inventories. Inventories at June 30, 1998 and December 31, 1997 consisted of
the following:
June 30, December 31,
1998 1997
------------ ------------
Raw materials $ 5,401,150 $ 4,635,593
Work-in-process 4,835,699 4,305,202
Finished goods 6,005,383 6,261,203
Less reserve for obsolete inventory (747,835) 666,558)
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Total $15,494,397 $14,535,440
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3. Income Taxes. The Company has not fully allocated income tax expense between
current and deferred for the quarters ended June 30, 1998 and 1997. The
effective tax rate for the three and six months ended June 30, 1998 and 1997 is
higher than the federal statutory tax rate largely due to losses incurred by the
Company's Irish subsidiary for which a tax benefit was recorded at a rate of 10%
vs. a 35% federal statutory tax rate.
4. Reporting Comprehensive Income - In June 1997, the Financial Accounting
Standards Board (FASB) issued SFAS No.130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. This statement requires that an
enterprise (a) classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in-capital in the equity section of a statement of financial position.
Effective January 1, 1998, the Company adopted the provisions of SFAS No. 130.
Accordingly, the Company determined that the only transaction considered to be
an additional component of comprehensive income is the cumulative effect of
foreign currency translation adjustments. As of June 30, 1998 and December 31,
1997, the cumulative effect of such transactions reduced stockholders' equity by
approximately $579,420 and $490,591, respectively. The net impact to operations
for the three months ended June 30, 1998 and 1997 would increase/(reduce)
comprehensive income by approximately $99,517 and ($121,801), respectively. The
net impact to operations for the six months ended June 30, 1998 and 1997 would
reduce comprehensive income by approximately $88,829 and $277,401, respectively.
6
MERIT MEDICAL SYSTEMS, INC.
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ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------
Operations. The Company achieved significant increases in sales and income for
the three and six months ended June 30, 1998 compared to the same periods in
1997. The following table sets forth certain operational data as a percentage of
sales for the three and six months ended June 30, 1998 and 1997:
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1998 1997 1998 1997
-------- -------- -------- --------
Sales 100.0 % 100.0% 100.0% 100.0%
Gross Profit 37.9 38.5 37.7 38.7
Selling, general and administrative 25.4 25.6 25.4 26.6
Research and development 4.8 7.6 5.1 7.1
Income from Operations 7.7 5.3 7.2 4.9
Other Expense 1.1 1.5 1.1 1.4
Net Income 3.3 1.9 2.9 1.6
Sales. Sales for the second quarter of 1998 ended June 30 were $17,974,170
compared to $15,326,070 for the same period last year, which represents an
increase of 17 percent. The Company's custom kit business grew by 24 percent
during the most recent three-month period compared to the quarter ended June 30,
1997, while sales of other devices, including syringes, manifolds and needles,
grew by 14 percent. Growth in all segments reflects continued market share gains
and acceptance of the Company's products, as well as procedural growth. Sentir,
the Company's sensor subsidiary, had gains in revenue of $278,465 for the
quarter ended June 30, 1998 compared to the same quarter of 1997, an increase of
427%. International sales were up 18 percent for the three months ended June 30,
1998 over the prior year's period and accounted for 23 percent of the Company's
total revenue mix. For the six-month period ended June 30, 1998 total sales were
$34,440,185 compared with $29,159,213 for the same period in 1997, an increase
of 18 percent. In addition, OEM sales for the six months ended June 30, 1998
increased 90% or $544,542, over the same period a year ago.
Gross Margin. Gross margin as a percentage of sales for the second quarter of
1998 was 37.9% compared to 38.5% for the same period in 1997. For the six months
ended June 30, 1998 gross margin was 37.7% as compared to 38.7% for the same
period in 1997. The decrease in gross margin for the three and six months ended
June 30, 1998 was primarily due to price competition affecting several products,
especially in European markets, and a strong U.S. dollar affecting the
translation of its direct European sales into U.S. dollars. Although gross
margins were down for three and six months ended June 30, 1998, from a year to
year comparison, the gross margin of 37.9% for the most recent quarter is the
fourth consecutive quarter of gross margin improvement in this area.
7
MERIT MEDICAL SYSTEMS, INC.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
- --------------------------------------------------------------
Operating Expenses. Operating expenses were 30.2% of sales for the three months
ended June 30, 1998 compared to 33.2% for the second quarter of 1997. For the
first six months of 1998 operating expenses decreased to 30.4% as compared to
33.8% for the same period in 1997. Selling, general and administrative expenses
as a percentage of sales declined to 25.4% for the three and six months ended
June 30, 1998 compared to 25.6% and 26.6% for the same periods in 1997. The
improvement was primarily due to economies of scale associated with increasing
sales volumes. Research and development costs have also declined to 4.8% of
sales for the second quarter of 1998 compared to 7.6% for the same period in
1997. For the six months ended June 30, 1998 research and development decreased
to 5.1% of sales down from 7.1% of sales for the first half of 1997. The
decrease in R&D expenditures is primarily due to the completion of the Tomcat
guide wire project and conversion of resources from R&D to production of the
guide wire in Ireland.
Operating Income. During the quarter ended June 30, 1998, the Company reported
income from operations of $1.4 million compared to $808,483 for the comparable
period in 1997. Operating income for the first six months of 1998 was $2.5
million compared to $1.4 million for the same period in 1997. The increase in
earnings for the three and six months ended June 30, 1998 was attributable to
higher sales, lower research and development expenses, slower growth in SG&A
expenses, and a lower effective tax rate.
Liquidity and Capital Resources. At June 30, 1998, the Company's working capital
was $14.8 million which represented a current ratio of 2.1 to 1. During 1997,
the Company increased an available secured bank line of credit to $10.5 million.
The line of credit bears interest at the bank's prime rate and contains various
conditions and restrictions. At June 30, 1998, the outstanding balance under the
line of credit was $5.2 million. Historically, the Company has incurred
significant expenses in connection with product development and introduction of
new products. Substantial capital has also been required to finance growth in
inventories and receivables. The Company's principal source of funding for these
and other expenses has been the sale of equity and cash generated from
operations, secured loans on equipment and bank lines of credit. The Company
believes that its present sources of liquidity and capital are adequate for its
current operations. In April 1998, the Company sold its land, building, and
improvements in Castlerea, Ireland to a third party. In connection with the sale
the Company received approximately $520,00 in cash for the building improvements
and the buyer's assumption of its note payable with the Irish Development Agency
for the land and building. This transaction resulted in an immaterial loss to
the Company.
Market Risk Disclosures. The Company does not engage in significant derivative
financial instruments. The Company does experience risk associated with foreign
currency fluctuations, and interest rate risk associated with its variable rate
debt; however, such risks have not been material to the Company and,
accordingly, the Company has not deemed it necessary to enter into agreements to
hedge such risks. The Company may enter into such agreements in the event that
such risks become material in the future.
Year 2000. In 1996 the Company began the conversion its principal computer
software systems to a new integrated system to support future growth and improve
productivity. Management believes that an additional benefit of the conversion
will be compliant with Year 2000 requirements without material additional
expenditures or a material adverse effect on the Company's financial position,
results of operations or liquidity. The Company also has third-party customers,
financial institutions, vendors and others with which it conducts business.
While the Company believes that these third-party vendors and customers will
successfully address Year 2000 issues in a timely manner, it is possible that a
series of failures by third parties could have a material adverse effect on the
Company's results of operations in future years.
8
MERIT MEDICAL SYSTEMS, INC.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
- --------------------------------------------------------------
Statements contained in this release which are not purely historical are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These encompass Merit's beliefs, expectations,
hopes or intentions regarding the future. All forward-looking statements
included in this release are made as of the date hereof and are based on
information available to Merit as of such date. Merit assumes no obligation to
update any forward- looking statement. It is important to note that actual
outcomes and Merit's actual results could differ materially from those in such
forward-looking statements. Factors that could cause actual results to differ
materially include risks and uncertainties related to future market growth such
as product acceptance, product recalls, competition and the overall regulatory
environment.
PART II - OTHER INFORMATION
Item: 4 Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders (the "Annual
Meeting") on May 27, 1998 in South Jordan, Utah. The following items of business
were considered at the Annual Meeting:
A: Election of Directors
Two persons were elected as members of the Board of Directors to
serve a three year term. They are as follows:
Shares
Voted For
---------
James Ellis 6,101,436
Michael Stillabower 6,101,436
B. Selection of Auditors.
A proposal to ratify the appointment of Deloitte & Touche LLP as
the independent auditor of the Company for 1998 was presented at the Annual
Meeting and such proposal was approved by the shareholders of the Company. The
number of shares voted for the proposal was 6,094,611. The number of shares
voted against such proposal was 3,862. The number of shares abstaining from
voting was 12,907.
9
MERIT MEDICAL SYSTEMS, INC.
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PART II - OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K - none
(b) Exhibits
S - K No. Description Exhibit No.
27 Financial Data Schedule 2
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.
MERIT MEDICAL SYSTEMS, INC.
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REGISTRANT
Date: AUGUST 12, 1998 ------------------------------------------
--------------- FRED P. LAMPROPOULOS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: AUGUST 12, 1998
--------------- ------------------------------------------
KENT W. STANGER
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
10