UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1034
For the quarterly period ended March 30, 1996
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or
[_] TRANSITION REPORT PURSUANT OF SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________________ to ______________________
Commission File Number: 0 - 20242
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CENTRAL GARDEN & PET COMPANY
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Delaware 68-0275553
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3697 Mt. Diablo Blvd., Suite 310, Lafayette, California 94549
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(Address of principle executive offices)
(510) 283-4573
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(Registrant's telephone number, including area code)
(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 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. [_] No
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. [_]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock Outstanding as of March 30, 1996 9,453,463
Class B Stock Outstanding as of March 30, 1996 2,166,075
CENTRAL GARDEN & PET COMPANY FORM 10-Q
Part 1- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENTRAL GARDEN & PET COMPANY
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CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, MARCH 30,
1995 1996
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(UNAUDITED)
(IN THOUSANDS)
ASSETS
Current Assets:
Cash $ 143 $ 139
Accounts receivable (less allowance for
doubtful accounts of $4,161 and $4,212) 41,315 90,848
Inventories 69,425 110,151
Prepaid expenses and other assets 5,751 5,130
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Total current assets 116,634 206,268
Land, Buildings, Improvements and Equipment:
Land 982 431
Buildings and Improvements 6,031 3,386
Transportation equipment 2,174 2,224
Warehouse equipment 6,106 6,662
Office furniture and equipment 6,631 8,125
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Total 21,924 20,828
Less accumulated depreciation
and amortization 9,846 10,995
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Land, buildings, improvements and
equipment - net 12,078 9,833
Goodwill 11,013 10,995
Other Assets 2,955 2,680
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Total $ 142,680 $ 229,776
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 37,971 $ 20,829
Accounts payable 45,120 111,398
Accrued expenses 6,528 10,881
Current portion of long-term debt 1,699 1,622
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Total current liabilities 91,318 144,730
Long-Term Debt 11,130 8,635
Deferred Income Taxes and Other Long-Term
Obligations 1,830 1,836
Commitments and Contingencies
Shareholders' Equity:
Preferred stock, $.01 par value: 100 shares
outstanding September 30, 1995 and
December 30, 1995 --- ---
Class B stock, $.01 par value: 2,178,874 shares
outstanding September 30, 1995; 2,166,075 shares
outstanding March 30, 1996 22 22
Common stock, $.01 par value: 3,606,964 shares
outstanding September 30, 1995; 9,451,780 shares
outstanding March 30, 1996 38 95
Additional paid-in capital 28,267 63,917
Retained earnings 10,330 10,758
Restricted stock deferred compensation (253) (217)
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Total shareholders' equity 36,402 74,575
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Total $ 142,680 $ 229,776
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See notes to consolidated financial statements
CENTRAL GARDEN & PET COMPANY
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
MARCH 26, MARCH 30,
1995 1996
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Cash Flows From Operating Activities:
Net Income $ (2,279) $ 428
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,222 1,616
Gain on sale of land, building and improvements 0 (305)
Change in assets and liabilities:
Receivables (24,587) (49,533)
Inventories (35,775) (40,726)
Prepaid expenses and other assets (3,132) 483
Accounts payable 58,503 66,278
Accrued expenses 3,290 4,353
Deferred income taxes and other long-term
obligations (4) 6
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Net cash used in operating activities (2,762) (17,400)
Cash Flows From Investing Activities:
Additions to land, buildings, improvements and
equipment (1,534) (2,199)
Proceeds from sale of land, building and
improvements 400 3,600
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Net cash provided (used) by investing activities (1,134) 1,401
Cash Flows From Financing Activities:
Proceeds from (repayments of) notes payable - net 5,442 (17,142)
Payments on long-term debt (1,039) (2,572)
Proceeds from issuance of stock - net 27 35,709
Payments to reacquire stock (537) 0
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Net cash provided by financing activities 3,893 15,995
Net Decrease in Cash (3) (4)
Cash at Beginning of Period 190 143
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Cash at End of Period $ 187 $ 139
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Supplemental Information:
Cash paid for interest $ 2,694 $ 1,542
Cash paid for income taxes 255 17
See notes to consolidated financial statements
CENTRAL GARDEN & PET COMPANY
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CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIX MONTHS ENDED THREE MONTHS ENDED
MARCH 28, MARCH 30, MARCH 26, MARCH 30,
1995 1996 1995 1996
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Net Sales $ 181,214 $ 260,132 $ 117,925 $ 182,020
Cost of Goods Sold and Occupancy 153,046 227,006 99,564 160,214
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Gross Profit 28,168 33,126 18,361 21,806
Selling, General and
Administrative Expenses 27,881 29,783 14,772 15,931
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Income from operations 287 3,343 3,589 5,875
Interest Expense - Net (3,430) (2,452) (1,949) (1,076)
Other Income (Expense) - Net (604) (139) (332) 27
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Income (loss) before income taxes (3,747) 752 1,308 4,826
Income Taxes (1,468) 324 561 2,035
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Net Income (Loss) $ (2,279) $ 428 $ 747 $ 2,791
========= ========= ========= =========
Weighted Average Shares
Outstanding 5,865 10,381 5,785 11,803
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Net Income (Loss) Per Share $ (0.39) $ 0.04 $ 0.13 $ 0.24
========= ========= ========= =========
See notes to consolidated financial statements
Central Garden & Pet Company
Notes to Consolidated Financial Statements
Three Months and Six Months Ended March 30, 1996
(Unaudited)
1. Basis of Presentation
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The consolidated balance sheet as of March 30, 1996, the consolidated statements
of income and cash flows for both the three months and six months ended March
30, 1996 and March 26, 1995 have been prepared by the Company without audit. In
the opinion of management, all adjustments (which include only normal recurring
adjustments) considered necessary to present fairly the financial position,
results of operations and cash flows of the Company for the periods mentioned
above, have been made.
Due to the seasonal nature of the Company's business, the results of operations
for the three months ended March 30, 1996 are not indicative of the operating
results that may be expected for the year ending September 28, 1996.
2. Common Stock Offering
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On November 15, 1995, the Company completed an offering of 5,750,000 shares of
its common stock at $6.75 per share before deduction for underwriting
commissions and expenses related to the offering. The net proceeds were used to
reduce the Company's borrowings under its principal line of credit.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
The Company entered into a long-term agreement, effective October 1, 1995, with
Solaris, its largest supplier, whereby the Company serves as master agent and
master distributor for sales of Solaris products within the United States. The
agreement also provides for the Company to perform a wide range of value added
services including logistics, order processing and fulfillment, inventory
management and merchandising, principally for Solaris' direct sales accounts.
The Company expects that as a result of the Solaris Agreement, a majority of its
sales of Solaris products will be derived from servicing Solaris direct
accounts, whereas historically, a majority of such sales were made by the
Company as a traditional distributor.
A substantial portion of these sales are expected to consist of large shipments
to customer distribution centers. This type of sale is characterized by lower
gross margins as a percent of sales and lower associated operating costs. The
collective impact of these factors is expected to substantially increase the
Company's sales of Solaris products, increase gross profit and lower gross
margins as a percent of sales.
The Solaris Agreement provides for the Company to be reimbursed for costs
incurred in connection with the services provided to Solaris' direct sales
accounts and to receive payments based on the sales growth of Solaris products.
The Company will also share with Solaris in the economic benefits of certain
cost reductions, to the extent realized. As a result, management believes that
the Company's profitability will be more directly attributable to the success of
Solaris than it has been in the past.
In 1995 the Company changed its fiscal year to the last Saturday in September.
As a result, the Company's first quarter of Fiscal 1996 ended on December 30,
1995 and its second quarter ended on March 30, 1996.
THREE MONTHS ENDED MARCH 30, 1996
COMPARED WITH THREE MONTHS ENDED MARCH 26, 1995
Net sales for the three months ended March 30, 1996 increased by 54.4% or $64.1
million to $182.0 million from $117.9 million during the three months ended
March 26, 1995. Of the $64.1 million increase, approximately $45.3 million is
attributable to sales generated under the new Solaris Agreement, principally to
retail distribution centers. The balance of the increase in net sales, $18.8
million is attributable to (i) expanded product listings and new store openings
with existing customers, (ii) addition of approximately 244 Wal-Mart stores in
the midwest region previously serviced by a competitor, (iii) more favorable
weather patterns in the California market, and (iv) increased sales in the pet
supplies operations.
Gross profit increased by 18.8% or $3.4 million from $18.4 million during the
three months ended March 26, 1995 to $21.8 million for the comparable 1996
period. Gross profit as a percentage of net sales decreased from 15.6% in the
three months ended March 26, 1995 to 12.0% for the similar period
in 1996. The decline in the gross profit percentage relates principally to a
substantial increase in sales of Solaris products to retail distribution
centers. As noted in the Overview section above, this type of sale generally is
characterized by lower gross margins as a percent of sales. Additionally, the
current quarter gross profit percentage was adversely impacted by the
elimination of certain discounts and rebates which historically had been part of
the Solaris marketing programs.
As part of the Company's responsibility under the Solaris Agreement, sales,
principally to retail distribution centers, are to be sourced from a centralized
warehouse to be staffed and managed by the Company. A portion of the total fee
for servicing these retailers from this location is designed to cover the
Company's actual costs for warehousing and shipping. Due to a delay in
transitioning the operations of the warehouse from Solaris to the Company, these
costs have been incurred by Solaris; consequently both the fee and related
expenses are not included as part of the Company's operating results. The
Company now expects to commence operating this facility in the early part of the
fourth quarter. Gross profit will be positively impacted in the fourth quarter
and in the future by centralized warehouse fees because the fees will be
recorded as revenue while the related costs will be reflected as operating
expenses.
Selling, general and administrative expenses increased by $1.2 million during
the three months ended March 30, 1996 from $14.7 million for the comparable 1995
period. As a percentage of net sales, these expenses decreased from 12.5% in
1995 to 8.8% in 1996. This percentage decrease in expenses relates principally
to the fixed operating expenses being spread over a substantially higher sales
volume.
Interest expense decreased from $1.9 million during the second quarter of 1995
to $1.1 million for the comparable 1996 period. The decrease of $.8 million is
attributed to lower average outstanding borrowings as a result of applying the
proceeds from the sale of 5,750,000 shares of common stock which was completed
in November 1995 coupled with the termination of a financing agreement with the
Company's major supplier. Average short-term borrowings for the three months
ended March 30, 1996 were $24.8 million compared to $62.0 million for the
comparable 1995 period. The average interest rates were 10.0% and 10.6%,
respectively.
The Company's effective income tax rate for the three months ended March 30,
1996 decreased to 42.2% compared with 42.9% for the similar 1995 period.
SIX MONTHS ENDED MARCH 30, 1996
COMPARED WITH SIX MONTHS ENDED MARCH 26, 1995
Net sales for the first half of fiscal year 1996 increased by 43.5% or $78.9
million to $260.1 million from $181.2 million for the first half of 1995. Of
the $78.9 million increase, approximately $60.4 million is attributable to sales
resulting from the Solaris Agreement, principally to retail distribution
centers. The increase in sales from existing operations, $18.5 million, was due
principally to the addition of stores previously serviced by a competitor,
expanded product placements and new store openings with existing customers, as
well as an increase in sales of pet supplies.
Gross profit increased by 17.6% or $4.9 million from $28.2 million during the
six months ended March 26, 1995 to $33.1 million for the comparable 1996 period.
Gross profit as a percentage of net sales
decreased from 15.5% in the six months ended March 26, 1995 to 12.7% for the
similar 1996 period. The decrease in gross profit as a percentage of net sales
is primarily due to the increase in sales to high volume, low service retail
distribution centers principally in the second quarter of 1996. Additionally,
the gross profit percentage was adversely impacted by the elimination of certain
discounts and rebates which historically had been part of the Solaris marketing
programs.
As part of the Company's responsibility under the Solaris Agreement, sales,
principally to retail distribution centers, are to be sourced from a centralized
warehouse to be staffed and managed by the Company. A portion of the total fee
for servicing these retailers from this location is designed to cover the
Company's actual costs for warehousing and shipping. Due to a delay in
transitioning the operations of the warehouse from Solaris to the Company, these
costs have been incurred by Solaris; consequently both the fee and related
expenses are not included as part of the Company's operating results. The
Company now expects to commence operating this facility in the early part of the
fourth quarter. Gross profit will be positively impacted in the fourth quarter
and in the future by centralized warehouse fees because the fees will be
recorded as revenue while the related costs will be reflected as operating
expenses.
For the six months ended March 30, 1996, selling, general and administrative
expenses increased by $1.9 million from $27.9 million for the comparable 1995
period. As a percentage of net sales, these expenses decreased from $15.4%
during the first half of 1995 to 11.4% for the same period in 1996. The
increase of $1.9 million is associated principally with the increase in net
sales.
Interest expense for the six months ended March 30, 1996 decreased by 28.5% or
$1.0 million from $3.4 million for the six months ended March 26, 1995. The
decrease is due principally to lower average outstanding borrowing as a result
of applying the proceeds from the sale of 5,750,000 shares of the Company's
stock in November 1995 and the termination of the Monsanto trade financing
agreement. Average short-term borrowings for the six months ended March 30,
1996 were $33.8 million compared to $81.5 million for the comparable 1995
period. The outstanding borrowings include amounts due to Solaris under the
Monsanto trade financing agreement which ended in November 1995. Purchases of
Solaris products are currently handled on typical credit terms with extended due
dates.
The Company's effective income tax rate for the first half of fiscal 1996
increased to 43.1% compared with 39.2% for the comparable 1995 period,
principally due to the impact of non-deductible goodwill amortization.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995: The statements contained in this report which are not historical facts
are forward-looking statements that are subject to risks and uncertainties that
could cause actual results to differ materially from those set forth in or
implied by forward-looking statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its growth through a combination of bank
borrowings, supplier credit and internally generated funds. In addition, the
Company received net proceeds (after offering expenses) of approximately $54.0
million from its two public offerings.
The Company's business is highly seasonal and its working capital requirements
and capital resources track closely to this seasonal pattern. During the first
fiscal quarter accounts receivables reach their lowest level while inventory,
accounts payable, and short-term borrowings begin to increase. Since the
Company's short-term credit line fluctuates based upon a specified asset
borrowing base, this quarter is typically the period when the asset borrowing
base is at its lowest and consequently the Company's ability to borrow is at its
lowest. During the second quarter, receivables, accounts payable and short-term
borrowings begin to increase, reflecting the build-up of inventory and related
payables in anticipation of the peak selling season. During the third quarter,
inventory levels decrease while accounts receivable peak and short-term
borrowings start to decline as cash collections are received during the peak
selling season. During the fourth quarter, inventory levels are at their
lowest, and accounts receivable and payables are substantially reduced through
conversion of receivables to cash.
For the six months ended March 30, 1996, the Company used cash in operating
activities of $17.4 million reflecting the normal cycle of inventory and
receivables build up. Net cash generated from investing activities of $1.4
million resulted from the sale of the Visalia, California warehouse. This
facility had been leased to a third party since February, 1995, and was not
considered necessary for future requirements. Cash generated from financing
activities of $16.0 million consisted of net proceeds from the sale of 5,750,000
shares of the Company's stock less repayment of debt.
The Company has a $75 million line of credit with Congress Financial Corporation
(Western). The available amount under the line of credit fluctuates based upon
a specific asset borrowing base. The line of credit, which bears interest at a
rate equal to the prime rate plus 3/4% per annum, is secured by substantially
all of the Company's assets. At March 30, 1996, the Company had outstanding
borrowings of approximately $19.8 million and had an additional $55.2 million of
available borrowing capacity under this line. The Company's line of credit
contains certain financial covenants such as minimum net worth and minimum
working capital requirements. The line also requires the lender's prior written
consent to any acquisition of a business.
The Company had a financing arrangement with a financing affiliate of Monsanto
Company pursuant to which Monsanto permitted the Company to borrow up to $81.0
million for the purchase of Solaris products. Such borrowings were secured by a
first priority lien on the Company's inventory of Solaris products and a second
priority lien on all other inventories and receivables and bore interest at a
rate 1-1/2% below the prime rate. This arrangement expired on November 15, 1995.
Subsequent to that date financing arrangements with Monsanto have been on
extended credit terms.
The Company believes that cash flow from operations, funds available under its
line of credit, arrangements with suppliers and net proceeds received from its
sale of common stock in November 1995 will be adequate to fund its presently
anticipated working capital requirements for the foreseeable future. The
Company anticipates that its capital expenditures will not exceed $2.8 million
for the next 12 months.
As part of its growth strategy, the Company has engaged in acquisition
discussions with a number of companies in the past and it anticipates it will
continue to evaluate potential acquisition candidates. If one or more potential
acquisition opportunities, including those that would be material, become
available in the near future, the Company may require additional external
capital. In addition, such acquisitions would subject the Company to the
general risks associated with acquiring companies, particularly if the
acquisitions are relatively large.
CENTRAL GARDEN & PET COMPANY FORM 10-Q
II. OTHER INFORMATION
4. Submission of Matters to a Vote of Security Holders
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(a) The annual meeting of shareholders was held on February
20, 1996.
(b) The following directors were elected at the meeting:
William E. Brown
Glenn W. Novotny
Lee D. Hines, Jr.
Daniel Hogan
The foregoing constitute all members of the Board of Directors of
the Company.
(c) At the annual meeting, the shareholders voted to approve a
proposal to amend the 1993 Omnibus Equity Incentive Plan and to
increase the number of authorized common shares by 29,000,000.
Set forth below is a tabulation with respect to the matters voted
on at the meeting:
AGAINST BROKER
FOR OR WITHHELD ABSTENTIONS NON-VOTES
Proposal to amend 1993 Omnibus Equity
Incentive Plan
Common Stock 4,061,164 2,307,190 11,761 1,662,030
Class B Stock 2,088,732 - 0 - - 0 - - 0 -
Proposal to increase
authorized Common
Stock by 29,000,000 shares
Common Stock 7,278,204 752,180 11,761 - 0 -
Class B Stock 2,088,732 - 0 - - 0 - - 0 -
AGAINST BROKER
FOR OR WITHHELD ABSTENTIONS NON-VOTES
ELECTION OF DIRECTORS
William E. Brown
Common 7,985,094 57,051
Class B 2,043,184 45,548
Glenn W. Novotny
Common 7,985,744 56,401
Class B 2,043,184 45,548
Lee D. Hines, Jr.
Common 7,985,244 56,901
Class B 2,043,184 45,548
Daniel P. Hogan, Jr.
Common 7,985,444 56,701
Class B 2,043,184 45,548
(d) Inapplicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) No reports on Form 8-K were filed during the quarter ended
March 30, 1996.
CENTRAL GARDEN & PET COMPANY FORM 10-Q
SIGNATURES
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Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunder
duly authorized.
CENTRAL GARDEN & PET COMPANY
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Registrant
Dated: May 8, 1996
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William E. Brown, Chairman of the Board and
Chief Executive Officer
/s/ Robert B. Jones
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Robert B. Jones, Vice President-Finance and
Chief Financial Officer