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 quarterly period ended September 27, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 33-26987
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CONSOLIDATED CIGAR CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3148462
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5900 NORTH ANDREWS AVENUE, FORT LAUDERDALE, FLORIDA 33309-2369
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(Address of principal executive offices) (Zip code)
(954) 772-9000
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(Registrant's telephone number, including area code)
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(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 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 No X
--- ---
There were no shares of common stock held by non-affiliates. The
number of shares outstanding of the registrant's common stock $1.00 par value,
is 1,000 shares as of November 4, 1997.
CONSOLIDATED CIGAR CORPORATION AND SUBSIDIARIES
INDEX
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Page
Number
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Part I. FINANCIAL INFORMATION
Item 1. Interim Financial Statements
Condensed Consolidated Balance Sheets at September 27, 1997
(unaudited) and December 31, 1996 ..........................................3
Condensed Consolidated Statements of Operations
for the Thirteen Weeks Ended September 27, 1997 (unaudited)
and September 28, 1996 (unaudited) .........................................5
Condensed Consolidated Statements of Operations for
the Thirty-Nine Weeks Ended September 27, 1997 (unaudited)
and September 28, 1996 (unaudited) .........................................6
Condensed Consolidated Statements of Stockholder's Equity
for the Thirty-Nine Weeks Ended September 27, 1997 (unaudited)
and September 28, 1996 (unaudited) .........................................7
Condensed Consolidated Statements of Cash Flows
for the Thirty-Nine Weeks Ended September 27, 1997 (unaudited)
and September 28, 1996 (unaudited) .........................................8
Notes to Unaudited Condensed Consolidated Financial Statements.............10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations .......................................................12
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K .................................15
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CONSOLIDATED CIGAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31, September 27,
1996 1997
(Unaudited)
ASSETS ------------ -------------
Current assets:
Cash and cash equivalents $1,906 $3,018
Accounts receivable, less allowances
of $5,604 and $6,310, respectively 19,498 32,592
Inventories 45,957 74,208
Prepaid expenses and other 5,591 10,079
-------- --------
Total current assets 72,952 119,897
Property, plant and equipment, net of accumulated depreciation 37,224 39,231
Trademarks, less accumulated amortization
of $3,319 and $3,969, respectively 31,155 31,096
Goodwill, less accumulated amortization
of $6,593 and $7,830, respectively 59,723 69,893
Other intangibles and assets, less accumulated
amortization of $3,406 and $4,134, respectively 4,457 4,170
-------- --------
Total assets $205,511 $264,287
======== ========
See notes to unaudited consolidated financial statements.
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CONSOLIDATED CIGAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - (Continued)
(Dollars in thousands)
December 31, September 27,
1996 1997
(Unaudited)
------------ -------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt $ -- $ 1,090
Accounts payable 7,197 11,077
Accrued expenses 21,812 22,998
-------- --------
Total current liabilities 29,009 35,165
Long-term debt 97,500 113,400
Deferred taxes 5,851 6,479
Other liabilities 1,796 4,076
-------- --------
Total liabilities 134,156 159,120
-------- --------
Commitments and contingencies -- --
Stockholder's equity:
Common stock, $1.00 par value,
1,000 shares authorized, issued and outstanding 1 1
Additional paid-in capital 34,834 34,834
Retained earnings 36,520 70,332
-------- --------
Total stockholder's equity 71,355 105,167
-------- --------
Total liabilities and stockholder's equity $205,511 $264,287
======== ========
See notes to unaudited consolidated financial statements.
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CONSOLIDATED CIGAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
(Unaudited)
Thirteen Thirteen
Weeks Ended Weeks Ended
September 28, September 27,
1996 1997
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Net sales $60,620 $82,642
Cost of sales 34,975 45,736
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Gross profit 25,645 36,906
Selling, general
and administrative expenses 9,018 9,065
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Operating income 16,627 27,841
------- -------
Other expenses:
Interest expense, net 2,660 2,455
Miscellaneous 256 619
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2,916 3,074
------- -------
Income before provision for
income taxes 13,711 24,767
Provision for income taxes 4,134 7,935
------- -------
Net income $ 9,577 $16,832
======= =======
See notes to unaudited consolidated financial statements.
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CONSOLIDATED CIGAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
(Unaudited)
Thirty-Nine Thirty-Nine
Weeks Ended Weeks Ended
September 28, September 27,
1996 1997
------------- -------------
Net sales $152,820 $214,907
Cost of sales 88,391 119,929
-------- --------
Gross profit 64,429 94,978
Selling, general
and administrative expenses 26,596 29,050
-------- --------
Operating income 37,833 65,928
-------- --------
Other expenses:
Interest expense, net 7,961 7,618
Miscellaneous 841 1,567
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8,802 9,185
-------- --------
Income before provision for
income taxes 29,031 56,743
Provision for income taxes 8,277 18,167
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Net income $ 20,754 $ 38,576
======== ========
See notes to unaudited consolidated financial statements.
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CONSOLIDATED CIGAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(Dollars in thousands)
(Unaudited)
Additional
Common Paid-in Retained
Stock Capital Earnings Total
--------- --------- --------- ---------
Balance at December 31, 1995 $ 1 $ 34,834 $ 19,493 $ 54,328
Net income for the thirty-nine weeks -- -- 20,754 20,754
Dividends paid -- -- (12,768) (12,768)
--------- --------- --------- ---------
Balance at September 28, 1996 $ 1 $ 34,834 $ 27,479 $ 62,314
========= ========= ========= =========
Balance at December 31, 1996 $ 1 $ 34,834 $ 36,520 $ 71,355
Net income for the thirty-nine weeks -- -- 38,576 38,576
Dividends paid -- -- (4,764) (4,764)
--------- --------- --------- ---------
Balance at September 27, 1997 $ 1 $ 34,834 $ 70,332 $ 105,167
========= ========= ========= =========
See notes to unaudited consolidated financial statements.
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CONSOLIDATED CIGAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Thirty-Nine Thirty-Nine
Weeks Ended Weeks Ended
September 28, September 27,
1996 1997
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Cash flows from operating activities:
Net income $ 20,754 $ 38,576
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 5,499 5,834
Gain on the Sale of Fixed Assets
Deferred income (153) (115)
Changes in assets and liabilities, net of
assets and liabilities acquired:
Increase in:
Accounts receivable (4,351) (12,220)
Inventories (8,043) (24,862)
Prepaid expenses and other (751) (4,628)
Increase (decrease) in:
Accounts payable 6,484 3,214
Accrued expenses and
other liabilities 744 3,961
-------- --------
Net cash provided by operating activities 20,183 9,760
-------- --------
Cash flows used for investing activities:
Capital expenditures (4,376) (4,578)
Acquisition, net of cash acquired -- (14,420)
Investment in joint venture (482) --
(Increase) decrease in other assets (16) 9
-------- --------
Net cash used for investing activities (4,874) (18,989)
-------- --------
See notes to unaudited consolidated financial statements
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CONSOLIDATED CIGAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Dollars in thousands)
(Unaudited)
Thirty-Nine Thirty-Nine
Weeks Ended Weeks Ended
September 28, September 27,
1996 1997
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Cash flows provided by (used for) financing activities:
(Repayment) borrowings of revolving loan, net ($600) $24,399
Due to affiliates (459) (6,394)
Other debt -- (2,900)
Dividends paid (12,768) (4,764)
-------- --------
Net cash provided by (used for) financing activities (13,827) 10,341
-------- --------
Increase in cash and cash equivalents 1,482 1,112
Cash and cash equivalents, beginning of period 1,145 1,906
-------- --------
Cash and cash equivalents, end of period $2,627 $3,018
======== ========
Supplemental disclosures of cash flow information:
Interest paid during the period $10,548 $10,246
Income taxes paid during the period 8,362 16,709
See notes to unaudited consolidated financial statements.
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CONSOLIDATED CIGAR CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
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On March 3, 1993, Consolidated Cigar Corporation (the "Company"),
became a direct wholly-owned subsidiary of Consolidated Cigar Holdings Inc.
("Consolidated Cigar Holdings"), a holding company with no business operations
of its own that was formed as a Delaware corporation on January 6, 1993 to
hold all of the outstanding capital stock of the Company. The results of
operations and financial position of the Company therefore do not reflect the
consolidated results of operations and financial position of Consolidated
Cigar Holdings. Unless the context otherwise requires, all references in these
notes to the consolidated financial statements of the Company shall mean
Consolidated Cigar Corporation and its subsidiaries.
On August 21, 1996, Consolidated Cigar Holdings, then a direct
wholly-owned subsidiary of Mafco Consolidated Group Inc. ("Mafco Consolidated
Group"), completed an initial public offering (the "IPO") in which it issued
and sold 6,075,000 shares of its Class A Common Stock for $23.00 per share.
The proceeds, net of underwriters' discount and related fees and expenses, of
$127.8 million, were paid as a dividend to Mafco Consolidated Group. On March
20, 1997 Consolidated Cigar Holdings completed a secondary offering (the
"Offering"), of 5,000,000 shares of Class A Common Stock sold by Mafco
Consolidated Group, reducing its ownership in Consolidated Cigar Holdings to
approximately 63.9%. Neither Consolidated Cigar Holdings nor the Company
received any of the proceeds from the Offering.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and
accordingly include all adjustments (consisting only of normal recurring
accruals) which, in the opinion of management, are necessary for a fair
statement of the operations for the periods presented. Accordingly, they do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The fiscal
year of the Company is comprised of four quarters with each quarter consisting
of thirteen weeks ending on a Saturday except the last quarter which ends on
December 31st. The statements should be read in conjunction with the
consolidated financial statements of the Company and notes thereto for the
fiscal year ended December 31, 1996, as filed with Form 10-K. The results of
operations for the thirty-nine week periods ended September 27, 1997 and
September 28, 1996 are not necessarily indicative of the results for the
entire year.
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CONSOLIDATED CIGAR CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - INVENTORIES
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The components of inventory are as follows:
(In thousands)
December 31, 1996 September 27, 1997
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Raw materials and supplies $34,469 $50,784
Work in process 1,974 4,282
Finished goods 9,514 19,142
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$45,957 $74,208
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NOTE C - ACQUISITION
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On August 26, 1997, the Company entered into a stock purchase agreement
with certain shareholders of Fabrica de Tabacos La Flor de Copan, S.A. de C.V.
("La Flor"), a Honduran corporation, to acquire 75% of La Flor's outstanding
capital stock for $14.4 million, net of cash acquired. La Flor is a
manufacturer of handmade premium cigars located in Santa Rosa, Honduras. The
acquisition was accounted for as a purchase with the purchase price allocated
to tangible and intangible assets acquired and liabilities assumed based upon
initial fair value estimates. The La Flor acquisition was funded through
borrowings under the credit agreement, as amended, with The Chase Manhattan
Bank, as the agent (the "Credit Agreement.")
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CONSOLIDATED CIGAR CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
COMPARISON OF THE THIRTEEN WEEKS ENDED SEPTEMBER 27, 1997 AND SEPTEMBER 28,
1996 AND THE THIRTY-NINE WEEKS ENDED SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996
Net sales were $82.6 million and $60.6 million for the thirteen weeks
ended September 27, 1997 (the "1997 Quarter") and September 28, 1996 (the
"1996 Quarter"), respectively, an increase of $22.0 million or 36.3%. Net
sales were $214.9 million and $152.8 million for the thirty-nine weeks ended
September 27, 1997 (the "1997 Period") and September 28, 1996 (the "1996
Period"), respectively, an increase of $62.1 million or 40.6%. The increases
in net sales were primarily due to higher sales of cigars. Cigar sales
increased as a result of both a shift in the sales mix to higher priced cigars
and price increases on certain cigar brands and, to a lesser extent, an
increase in cigar unit volume, particularly in the premium market.
Gross profit was $36.9 million and $25.6 million for the 1997 Quarter
and the 1996 Quarter, respectively, an increase of $11.3 million or 43.9%.
Gross profit was $95.0 million and $64.4 million for the 1997 Period and the
1996 Period, respectively, an increase of $30.6 million or 47.4%. The
increases in gross profit for the 1997 Quarter and 1997 Period were due to the
increases in sales, especially of higher margin premium cigars, partially
offset by increases in the costs of raw materials. As a percentage of net
sales, gross profit increased to 44.7% for the 1997 Quarter and 44.2% for the
1997 Period from 42.3% and 42.2% for the 1996 Quarter and 1996 Period,
respectively, primarily due to the impact of price increases and fixed
manufacturing costs spread over increased production volume.
Selling, general and administrative ("SG&A") expenses were $9.1 million
and $9.0 million for the 1997 Quarter and 1996 Quarter, respectively. SG&A
expenses were $29.1 million and $26.6 million for the 1997 Period and the 1996
Period, respectively, an increase of $2.5 million or 9.2%. The increases were
primarily due to increases in selling expenses and professional fees. As a
percentage of net sales, SG&A expenses decreased to 11.0% for the 1997 Quarter
from 14.9% for the 1996 Quarter and to 13.5% for the 1997 Period from 17.4%
for the 1996 Period. The decreases were primarily due to SG&A expenses
increasing at a lower rate relative to the increase in net sales.
Operating income was $27.8 million and $16.6 million for the 1997
Quarter and 1996 Quarter, respectively, an increase of $11.2 million or 67.4%.
Operating income was $65.9 million and $37.8 million for the 1997 Period and
the 1996 Period, respectively, an increase of $28.1 million or 74.3%. As a
percentage of net sales, operating income increased to 33.7% for the 1997
Quarter from 27.4% for the 1996 Quarter and 30.7% for the 1997 Period from
24.8% for the 1996 Period, primarily due to higher gross profit margins and a
decrease in SG&A expenses as a percentage of net sales.
Interest expense, net was $2.5 million and $2.7 million for the 1997
Quarter and 1996 Quarter, respectively. Interest expense, net was $7.6 million
and $8.0 million for the 1997 Period and the 1996 Period, respectively. The
decreases were primarily due to a lower amount of debt due to third parties
outstanding during 1997.
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CONSOLIDATED CIGAR CORPORATION AND SUBSIDIARIES
The provision for income taxes as a percentage of income before income
taxes was 32.0% and 30.2% for the 1997 Quarter and 1996 Quarter, respectively,
and 32.0% and 28.5% for the 1997 Period and 1996 Period, respectively. The
increase in the effective rate is primarily due to an increase in income
subject to United States taxation during the 1997 Quarter and 1997 Period
partially offset by tax benefits associated with the Company's operations in
Puerto Rico. Income tax expense for all periods reflects provisions for
federal income taxes, Puerto Rico tollgate taxes, and taxes on Puerto Rico
source income, together with state and franchise taxes.
As a result of the foregoing, net income was $16.8 million and $9.6
million for the 1997 Quarter and 1996 Quarter, respectively, an increase of
$7.2 million or 75.8%. Net income was $38.6 million and $20.8 million for the
1997 Period and the 1996 Period, respectively, an increase of $17.8 million or
85.9%.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows provided by operating activities were $9.8 million for
the 1997 Period and $20.2 million for the 1996 Period. The decrease in cash
flows of $10.4 million between the two periods was due primarily to a
significant increase in working capital requirements, partially offset by an
increase in net income.
Cash flows used for investing activities were $19.0 million for the
1997 Period and $4.9 million for the 1996 Period. The 1997 Period includes
$14.4 million invested in the La Flor acquisition. For the 1996 Period, $0.5
million of cash flows were invested, as part of an equity investment in the
Jamaica joint venture. Capital expenditures in the 1997 and 1996 Periods
amount to $4.6 million and $4.4 million respectively, primarily relating to
investments in the Company's manufacturing facilities to meet the increased
demand for the Company's premium cigars. Capital expenditures for the
remainder of 1997 are expected to be approximately $.9 million.
Cash flows provided by financing activities for the 1997 Period were
$10.3 million and consist primarily of net borrowings under the Credit
Agreement, net of dividends paid to Consolidated Cigar Holdings and payments
due to affiliates. Cash flows used for financing activities for the 1996
Period were $13.8 million and were primarily used to pay dividends to Mafco
Consolidated Group.
In December 1993 and January 1994, the Company entered into two
five-year interest rate swap agreements in an aggregate notional amount of
$85.0 million. Under the terms of the agreements, the Company received a fixed
interest rate averaging 5.8% and paid a variable interest rate equal to the
six month London inter-bank offered rate (LIBOR). In October 1997, the Company
paid $0.5 million to terminate the swap agreements upon completion of their
current coupon periods, which end in December 1997 and January 1998. The
termination payment will be amortized over the remaining original term of the
swap agreements.
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CONSOLIDATED CIGAR CORPORATION AND SUBSIDIARIES
The Company's principal sources of working capital for the current year
will be generated from operations and borrowings under the Credit Agreement.
The availability for borrowings under the Credit Agreement was $49.9 million
as of September 27, 1997, of which the Company had borrowed $29.4 million
(including letters of credit issued). The amounts available for borrowing
under the Credit Agreement were increased by $15.0 million, effective with the
La Flor acquisition, and will remain constant for the term of the Credit
Agreement which expires on April 3, 1999.
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CONSOLIDATED CIGAR CORPORATION AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K
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(a) Exhibits
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*10.1 (m) Amendment No. 13 to the Credit Agreement dated as
of July 29, 1997.
*27.0 Financial Data Schedule.
(b) Reports on Form 8-K
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Consolidated Cigar Corporation filed no reports on Form 8-K
during the fiscal quarter ended September 27, 1997.
* Filed herein.
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CONSOLIDATED CIGAR CORPORATION AND SUBSIDIARIES
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.
Consolidated Cigar Corporation
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(Registrant)
DATE: November 4, 1997 /s/ Theo W. Folz
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Theo W. Folz
Chief Executive Officer
DATE: November 4, 1997 /s/ Gary R. Ellis
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Gary R. Ellis
Chief Financial Officer
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