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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
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: 0-20732
COMPUTER INTEGRATION CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 65-0506623
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) Identification No.)
7900 GLADES ROAD, BOCA RATON, FLORIDA 33434
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (407) 482-6678
Check 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
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES NO
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APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 6,953,038 shares of
common stock outstanding as of October 30, 1996.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The condensed, consolidated financial statements included herein have
been prepared by the Registrant, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been consolidated
or omitted pursuant to such rules and regulations; however, the Registant
believes that the disclosures are adequate to make the information presented
not misleading. It is suggested that these condensed, consolidated financial
statements be read in conjunction with the financial statements, and the notes
thereto, included in the Registrant's consolidated financial statements for the
year ended June 30, 1996.
The condensed, consolidated financial statements for the interim
periods included herein, which are unaudited, include, in the opinion of
management, all adjustments (consisting only of normal recurring accruals)
necessary to present fairly the financial position and results of operations of
the Registrant for the periods presented. The results of operations for
interim periods should not be considered indicative of results to be expected
for the full year.
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Computer Integration Corp.
and Subsidiary
Condensed Consolidated Balance Sheets
SEPTEMBER 30, JUNE 30,
1996 1996
-------------------------------------
(Unaudited) (Note)
ASSETS
Current assets:
Cash $ 2,011,459 $ 7,599,051
Accounts receivable, net 65,943,932 62,743,319
Inventories 31,991,249 23,705,565
Deferred income taxes 1,843,283 1,843,283
Prepaid expenses and other current assets 887,719 658,247
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Total current assets 102,677,642 96,549,465
Property and equipment, net 5,401,638 5,010,690
Other assets:
Goodwill, net 12,277,287 12,446,491
Other 588,800 658,279
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Total other assets 12,866,087 13,104,770
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Total assets $ 120,945,367 $ 114,664,925
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Continued on next page.
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Computer Integration Corp.
and Subsidiary
Condensed Consolidated Balance Sheets (continued)
SEPTEMBER 30, JUNE 30,
1996 1996
--------------------------------
(Unaudited) (Note)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable under line-of-credit $ 22,754,390 $ 18,746,703
Accounts payable 49,379,147 46,171,003
Accrued expenses 3,664,597 5,994,832
Restructuring accrual 2,300,000 2,300,000
Current portion of subordinated notes payable 302,440 302,440
Current portion of capital lease obligations 292,591 265,625
Other 1,550,078 619,872
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Total current liabilities 80,243,243 74,400,475
Noncurrent liabilities:
Term note payable 27,500,000 27,500,000
Subordinated notes payable, less current portion 1,610,560 1,610,560
Capital lease obligations, less current portion 438,713 508,392
Other 400,000 400,000
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Total noncurrent liabilities 29,949,273 30,018,952
COMMITMENTS
Shareholders' equity:
Preferred stock, $.001 par value, total authorized 2,000,000 shares,
issued and outstanding as follows:
Series A, 9% cumulative, convertible, redeemable preferred stock;
40,000 shares authorized, -0- issued and outstanding in both
periods -
Series B, 9% cumulative, convertible, redeemable preferred stock;
250 shares authorized, -0- issued and outstanding in both periods -
Series C, 9% cumulative, convertible, redeemable preferred stock;
250 shares authorized, -0- issued and outstanding in both periods -
Series D, 9% cumulative, convertible, redeemable preferred stock;
40,000 shares authorized, 19,250 issued and outstanding in both
periods 19 19
Series E, 9% cumulative, convertible, redeemable preferred stock;
250 shares authorized, 125 issued and outstanding in both periods -
Common Stock, $.001 par value, authorized 20,000,000 shares, issued
and outstanding 6,953,038 and 6,944,700 shares at September 30,
1996 and June 30, 1996, respectively 6,953 6,945
Additional paid-in capital 9,818,065 9,809,736
Retained earnings 927,814 428,798
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Total shareholders' equity 10,752,851 10,245,498
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Total liabilities and shareholders' equity $120,945,367 $114,664,925
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Note: The balance sheet at June 30, 1996 has been derived from the audited
financial statements at that date, but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes.
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Computer Integration Corp.
and Subsidiary
Condensed Consolidated Statements of Income (Unaudited)
THREE MONTHS ENDED
SEPTEMBER 30
1996 1995
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Net sales $108,332,196 $120,910,198
Cost of goods sold 96,619,063 109,736,904
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Gross profit 11,713,133 11,173,294
Selling, general and administrative expenses:
Salaries and benefits 6,952,025 5,942,002
Other selling and administrative 1,576,525 917,005
Occupancy costs 526,883 471,087
Depreciation and amortization 461,568 391,620
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9,517,001 7,721,714
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Income from operations 2,196,132 3,451,580
Interest expense 1,149,145 1,142,640
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Income before income taxes 1,046,987 2,308,940
Income taxes 439,736 969,755
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Net income 607,251 1,339,185
Less required payments on convertible preferred stock (55,010) (54,562)
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Income applicable to common stock $ 552,241 $ 1,284,623
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Net income per share:
Primary $ .08 $ .18
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Fully diluted $ .07 $ .16
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Common shares and common stock equivalents outstanding:
Primary 7,192,415 7,133,864
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Fully diluted 8,462,415 8,403,864
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See accompanying notes.
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Computer Integration Corp.
and Subsidiary
Condensed Consolidated Statements of
Cash Flows (Unaudited)
THREE MONTHS ENDED
SEPTEMBER 30
1996 1995
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OPERATING ACTIVITIES
Net income $ 607,251 $1,339,185
Adjustments to reconcile net income to net cash (used) provided by
operating activities:
Depreciation and amortization 461,568 391,620
Changes in operating assets and liabilities, exclusive of effects of
acquisitions:
Accounts receivable (3,200,613) 1,474,971
Inventory (8,285,684) 4,526,968
Prepaid expenses (229,472) 74,053
Other assets 8,219 (287,914)
Accounts payable 3,208,144 (5,160,045)
Accrued expenses and other current liabilities (1,400,029) 1,472,688
Other noncurrent liabilities - (310,260)
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Net cash (used) provided by operating activities (8,830,616) 3,521,266
INVESTING ACTIVITIES
Acquisition of property and equipment (622,052) (13,221)
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Net cash used in investing activities (622,052) (13,221)
FINANCING ACTIVITIES
Proceeds from exercise of stock options 8,337 -
Net advances (repayments) on line of credit 4,007,687 (1,189,616)
Principal payments on subordinated notes payable - (19,839)
Repayments of capital lease obligations (42,713) (12,333)
Preferred stock dividends paid (108,235) -
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Net cash provided (used) by financing activities 3,865,076 (1,221,788)
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Net (decrease) increase in cash (5,587,592) 2,286,257
Cash at beginning of period 7,599,051 797,678
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Cash at end of period $2,011,459 $3,083,935
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SUPPLEMENTAL INFORMATION
Interest paid $1,119,955 $1,075,892
===========================
Taxes paid $ 9,062 $ 386,694
===========================
See accompanying notes.
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Computer Integration Corp.
and Subsidiary
Notes to Condensed Consolidated
Financial Statements (Unaudited)
September 30, 1996
1. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
Computer Integration Corp. (the Company) and its wholly-owned operating
subsidiary, CIC Systems, Inc. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information. Certain information and footnote disclosures
required by generally accepted accounting principles for complete financial
statements have been condensed or omitted. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary to
present fairly the financial position, results of operations and cash flows
have been included. The results of operations for the three months ended
September 30, 1996 are not necessarily indicative of the results that may be
expected for fiscal year 1997. It is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's consolidated financial
statements for the year ended June 30, 1996.
2. BORROWINGS
On September 30, 1996, the Company amended its financing agreement with its
primary lender, effective June 30, 1996, which included an increase in the
available credit from $70 million to $77 million and modification of certain
financial covenants.
3. RESTRUCTURING CHARGE
During the fourth quarter of 1996, the Company recorded a special charge of
$2.3 million for restructuring costs associated with a planned relocation and
consolidation of the Company's headquarters, sales and distribution facilities
in Atlanta. These costs include approximately $1.7 million for severance
benefits for approximately 125 affected employees, $400,000 for the write-off
of property and equipment, and approximately $200,000 for lease extension
and termination costs and other activities to close existing facilities. As
of September 30, 1996, none of the charge has been utilized (See Note 4).
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Computer Integration Corp.
and Subsidiary
Notes to Condensed Consolidated
Financial Statements (Unaudited) (continued)
4. SUBSEQUENT EVENT
On October 30, 1996 the Company decided not to proceed with the relocation and
consolidation of the Company's headquarters, sales and distribution facilities
to Atlanta. It will instead consolidate these functions into its existing
facilities in Boston, MA and Charlotte, NC. This decision primarily reflects
the Company's desire to retain certain key personnel for whom relocation was
not a viable option, as well as other cost considerations. Accordingly, the
Company will reverse a significant portion of the $2.3 million special charge
for restructuring costs recorded in the fourth quarter of 1996 (see Note 3).
The gain on the reversal of the charge will be recognized in the second quarter
of fiscal 1997.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Computer Integration Corp. (the "Registrant") is one of the largest
volume resellers of microcomputers, workstations and related products to large
and medium-sized corporations, federal, state and local governmental entities
and colleges and universities in the United States. The Registrant, through
its wholly-owned subsidiary, CIC Systems, Inc. ("CIC"), distributes a broad
range of microcomputer-related products from major hardware manufacturers and
software developers such as Hewlett-Packard Company ("HP"), Compaq Computer
Corporation, Sun Microsystems Corporation, Toshiba America Information Systems,
Inc., International Business Machines, Lexmark International, Epson America,
Inc., NEC Technologies, Inc., 3COM, Inc., Canon Computer Systems, Inc., Novell,
Inc. and Microsoft Corporation. The Registrant is one of the largest resellers
of computer products manufactured by HP in the United States.
The Registrant began operations in 1992 with the organization of CIC
and acquired Copley Systems Corporation, a Massachusetts corporation, in March
1993. The Registrant acquired all of the outstanding capital stock of
Dataprint, Inc., a North Carolina corporation, effective July 1, 1994.
Effective July 1, 1995, the Registrant acquired substantially all of the assets
of Cedar Computer Center, Inc., an Iowa corporation ("Cedar"), which, at the
time of the acquisition, was one of the largest dealers of HP computer products
in the midwestern and western United States.
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Results of Operations
THREE MONTHS ENDED SEPTEMBER 30, 1996 and 1995
Net sales for the three months ended September 30, 1996 (the "1997
Quarter") were $108,332,196 compared to $120,910,198 for the three months ended
September 30, 1995 (the "1996 Quarter"), a decrease of $12,578,002 or 10.4%.
This decrease was primarily due to the combined effect of a shift in the
Registrant's sales strategy away from high volume, marginally profitable
transactions, and less than anticipated sales volumes from the Midwest sales
offices acquired through the Cedar acquisition.
Gross profit increased to $11,713,133 in the 1997 Quarter from
$11,173,294 in the 1996 Quarter as a result of the increase in gross profit
margin to 10.81% of sales in the 1997 Quarter compared to 9.24% in the 1996
Quarter. This increase was primarily due to increased emphasis by the
Registrant's sales organization on transactions involving products with
relatively higher profit margins and decreased reliance on high volume, low
profit transactions.
Selling, general and administrative expenses ("SG&A") were $9,517,001
in the 1997 Quarter as compared to $7,721,714 in the 1996 Quarter, an increase
of $1,795,287 or 23.2%. The primary component of the Registrant's SG&A is
salaries and benefits. Salaries and benefits were $6,952,025 in the 1997
Quarter, an increase of $1,010,023, or 17.0% from the 1996 Quarter. As a
percentage of net sales, salaries and benefits increased 30.8% from 4.91% to
6.42%. The majority of the increase was related to increased commissions on
the higher gross profit margins and the addition of new executive positions.
In addition, in January 1996, the Company began offering health and other
benefits to employees acquired in connection with the Cedar acquisition.
Other selling and administrative expenses increased $659,520 to
$1,576,525 in the 1997 Quarter. As a percentage of net sales, other selling
and administrative expenses were 1.46% in the 1997 Quarter compared to .76% in
the 1996 Quarter. The increase was due to costs associated with an enhanced
telecommunication system, increased marketing efforts, and additional travel
by the sales force and management.
Occupancy costs, which consist of rent and related utility costs,
increased $55,796 to $526,883 for the 1997 Quarter as a result of an increase
in the size of its distribution facilities and increased rental cost on
existing facilities in the 1997 Quarter.
Depreciation and amortization increased $69,948 to $461,568 for the
1997 Quarter. The increase is attributable to increased depreciation expenses
related to additions to property and equipment, along with additional goodwill
amortization during the 1997 Quarter.
Interest expense remained constant at $1,149,145 for the 1997 Quarter
compared to $1,142,640 during the 1996 Quarter.
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As a result of the factors discussed above, the Registrant had net
income of $552,241 in the 1997 Quarter compared to net income of $1,284,623 in
the 1996 Quarter.
Financial Condition
The Registrant's total assets increased $6,280,442 to $120,945,367 as
of September 30, 1996, compared to $114,664,925 as of June 30, 1996. The
primary components of that increase were additional accounts receivable of
$3,200,613 and additional inventory of $8,285,684, offset by a $5,587,592
decrease in cash.
Total current liabilities increased $5,842,768 to $80,243,243 as of
September 30, 1996 from $74,400,475 at June 30, 1996. The most significant
components of that increase, which relate to the increase in inventory
previously discussed, were the notes payable under a line of credit, which
increased by $4,007,687, and accounts payable, which increased by $3,208,144.
These increases were partially offset by a decrease in accrued expenses of
$2,330,235.
The Registrant's total noncurrent liabilities decreased to $29,949,273
as of September 30, 1996 from $30,018,952 as of June 30, 1996 due to principal
payments on capital lease obligations.
Additional paid in capital increased by $8,329 to $9,818,065 as of
September 30, 1996 due to proceeds from the exercise of stock options. During
the 1997 Quarter, retained earnings increased to $927,814 from $428,798 as a
result of earnings from operations, net of dividends paid on the Registrant's
Preferred Stock.
On March 12, 1996, the Registrant's Board of Directors approved a
restructuring plan which involved a relocation of the Registrant's corporate
headquarters, located in Boca Raton, Florida, to Atlanta, Georgia. In
connection with that restructuring, the Registrant signed a five year lease for
a new headquarters and sales and distribution facility in Atlanta and
recognized a restructuring charge of $2.3 million in the fourth quarter of
fiscal 1996. At the annual meeting of the Registrant's directors held on
October 30, 1996, the Board of Directors determined not to proceed with the
relocation of its headquarters and distribution facilities to Atlanta and,
instead, decided to consolidate those functions into existing facilities in
Boston, Massachusetts and Charlotte, North Carolina. That decision resulted
from the Registrant's desire to retain certain key executives who had declined
offers to relocate to Atlanta, as well as other cost considerations.
Accordingly, the Registrant will reverse a significant portion of the
restructuring charge in the second quarter of fiscal 1997. In addition, the
Registrant will attempt to sublet the facility which it has leased in Atlanta.
Liquidity and Capital Resources
Historically, the Registrant has funded its activities through the
private sale of equity securities and borrowings under its revolving line of
credit, and, during certain periods, through cash flow from operations. As of
September 30, 1996, the Registrant had cash of $2,011,459,
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net accounts receivable of $65,943,932, working capital of $22,434,399 and
available funds under its credit facility of approximately $8.0 million.
Net cash used in operating activities during the 1997 Quarter was
$7,841,719 primarily as a result of a $8,285,684 million increase in inventory.
Net cash used in investing activities during the 1997 Quarter was
$1,610,947, which was related to the acquisition of office and computer
equipment. Financing activities for the 1997 Quarter provided cash of
$3,865,074 primarily as a result of net advances from the Registrant's Credit
Facility.
On September 30, 1996, the Registrant amended its financing agreement
with its primary lender, Congress Financial Corporation ("Congress"), effective
June 30, 1996, which included an increase in the available credit from $70
million to $77 million and modification of certain financial covenants. The
Credit Facility is collateralized by CIC's accounts receivable and inventory
and consists of a $27.5 million, 3-year term loan and a $49.5 million revolving
line of credit. Interest on the Credit Facility accrues at 1.0% over the prime
rate of CoreStates Bank, N.A. (effective rate of 9.25% at September 30, 1996).
The Credit Facility, which is used for inventory financing and working capital,
will expire in July 1998 and will be automatically renewable for one year at
the option of Congress, upon certain terms and conditions. The Credit Facility
requires that CIC maintain, at all times, certain net worth and working capital
levels and restricts acquisition of property and the payment of dividends by
the Registrant and CIC. The Credit Facility is guaranteed by the Registrant.
The Registrant believes that cash flow from the operations of CIC and
borrowings under the Credit Facility will provide sufficient cash to fund its
operations and meet current obligations for the next 12 months. Should the
Registrant expand its operations or make acquisitions that would require funds
in addition to its existing liquid assets, cash flows or borrowings under
Credit Facility, it may have to seek additional debt or equity financing.
There can be no assurance that the Registrant could obtain such financing or
that such financing would be available on terms acceptable to the Registrant.
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PART II - OTHER INFORMATION
Item 5. Other Events
Effective October 3, 1996, the employment agreement of Frank J.
Slovenec, President of CIC, was terminated and Mr. Slovenec
entered into a one-year consulting agreement with CIC. Effective
November 4, 1996, Steven Wright became the Chief Operating Officer
of CIC. Mr. Wright was previously employed by CIC as Vice
President of Logistics.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11 - Statement Re: Computation of Per Share Earnings
Exhibit 27 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which
this report is being filed.
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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.
COMPUTER INTEGRATION CORP.
By: /s/ JOHN CHISTE
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John Chiste
Chief Financial Officer (Principal Financial
and Principal Accounting Officer)
Dated: November 13, 1996
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EXHIBIT INDEX
Page
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Exhibit 11 - Statement Re: Computation of Per Share Earnings 16
Exhibit 27 - Financial Data Schedule (for SEC use only) 17
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