September 1 loomed large in Hibernia’s history. The company was founded in 1870 on that date, and coincidentally, it was to be the date in 2005 on which it would merge into Capital One. Interestingly, each date – 135 years apart – fell on the same day of the week, Thursday. If the closing had occurred as planned, it would have created tidy “bookends” for Hibernia’s rich banking history.
But the disasters, coupled with three dreaded words — “material adverse effect” — foreclosed on that symmetrical finale.
When the contract for Hibernia’s merger was inked on March 6, 2005, no one could have foreseen what would transpire. It was just too improbable.
Hibernia’s management spent the next busy five months getting ready for the historic combination — an old southern bank with a muscular young credit card company. Many areas had work to do to prepare for the consummation, but none more than the corporate secretary’s office. Cathy Chessin – Hibernia’s chief legal officer, corporate secretary and adviser to the board of directors for five years – played a pivotal role. She came to Hibernia in 2000, moving from a distinguished private practice of 19 years.
A diminutive woman with a towering intellect and unshakable ethical standard, she guided Hibernia through a reformation in corporate governance driven by new national regulations. She was on top of her game when the Capital One transaction was inked. By mid-summer, however, she learned there would not be a meaningful role for her after the merger, because Capital One had a general counsel and a fully staffed corporate secretary’s department. Despite this, she toiled through difficult days, nights and weekends to finalize the complex legal details needed for a successful deal.
Getting ready for merger
She and her small staff – Susan Klein, assistant corporate secretary; Margie Galloway, director of shareholder relations; Lisa Belsom, special projects assistant; and Mary Huber, administrative assistant – were responsible for communicating with shareholders, the Securities and Exchange Commission and the New York Stock Exchange, among others.
They had to prepare a proxy statement; set up and manage shareholder votes; plan and conduct a shareholders’ meeting; make sure the board of directors had executed all appropriate documents, resolutions and contracts; and generally make sure the corporation had dotted and crossed all of its legal I’s and T’s.
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All those legal details
Cathy Chessin, 50, was executive vice president and chief legal officer, a role she filled for five years. Married to Andy Podolnick for 21 years, the couple had three sons, 20, 18 and 15.
They evacuated first to Utica, MS, then to Jackson, MS, Bastrop, LA, and finally to Houston, where they stayed for several months while Chessin and her staff worked out of borrowed space at the bank’s Westheimer office.
When she returned to New Orleans temporarily so that her middle son could finish school there, she lived on the West Bank, because the couple’s Lakeview home near the London Avenue Canal was destroyed.
Chessin’s position was eliminated in the merger with Capital One, and, in 2006, she left the company and rejoined her husband in Houston, where they expected to continue living. She re-entered private law practice there.
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Although the time to do all this was short, things fell into place under Chessin’s close watch. On Aug. 3, at a special shareholders’ meeting, the transaction was endorsed by a favorable vote. Thirteen days later, the Federal Reserve gave its stamp of approval. By this time, also, shareholders had received forms that would allow them to choose how they wanted to be compensated for their shares.
As the important consummation date approached, Chessin was not particularly focused on weather. There were so many last minute details to make sure the deal went through, that shareholders would get their payments and that the corporations would be legally merged.
A complicated formula
The deal was somewhat more complicated than some. It provided for a “consideration” to shareholders comprised of:
- Cash, in the amount of $15.35 per share, for a total of $2.3 billion, and
- A quantity of Capital One shares that would produce a value equal to 0.2262 times the average of the final five trading days’ closing price of Capital One stock.
Got that? Well, it wasn’t quite as complicated as it sounded. The total value from this formula, based on Capital One’s share price before March 6, the date of the agreement, would have been $33.00 per share, or about $5.3 billion. This represented a premium of about 25% on Hibernia’s share price at the time, and it was more than two times the company’s book value.
Theoretically, shareholders could say whether they wanted to receive either cash, stock or a combination of the two. But eventually they would get a combination because of another feature in the pricing arrangement — a pro-ration calculation which assured that the fixed-cash portion would be achieved. If either cash or shares were under- or over-subscribed when shareholders made their choices, the pro-ration would come into play, which eventually it did.
If you’ve followed this so far, you’ll have realized that shareholders would not know definitely either the final value of their “consideration” or how much of it would be in cash or stock, until the deal was completed. Trying to explain this to hundreds of shareholders fell largely on Chessin and her people.
Immersed in merger work
On the Saturday before the storm and the scheduled act of sale, Chessin went to her Baronne Street office, nervous about getting the final merger papers ready. She was far less focused on the storm than on the act of sale. Many documents needed to be organized, signed over the weekend by the CEO and CFO — and by Chessin herself — then sent to New York City for a formal closing at the law offices of Capital One’s counsel on the following Thursday, Sept. 1 Altogether, these documents formed a two-volume package, each about two inches thick.
Where was everyone?
“The problem was, I didn’t know where Herb (Boydstun) or Marsha (Gassan) were,” Chessin recalled. Eventually, she learned that Boydstun was in Baton Rouge, expecting to ride out the storm at his home. Chessin found she could email documents to his computer there. His wife, Nan, recalled later that her husband printed them, and then went in search of a notary public that afternoon. He chanced upon one at a convenience store. Boydstun signed the multibillion-dollar deal, and then searched out another place that would courier the documents overnight.
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Herb Boydstun, 58, was educated at Ole Miss and LSU. He began his banking career in 1972 with Guaranty Bank in Alexandria. Then after a brief stint at Bossier Bank, he settled in at First National Bank of West Monroe for 18 years, eventually as CEO, before that $250-million-asset institution was purchased by Hibernia in 1994. Married for 34 years, he and Nan had three adult children, 30, 28 and 26.
Recognized for his leadership, Boydstun rose rapidly at Hibernia and was named CEO in 2000. In his five years at the helm, the company prospered and began an ambitious Texas expansion plan, the stock price hit records and assets grew to more than $22 billion.
The Boydstuns evacuated to their Baton Rouge home, which operated for a week on a small generator they purchased just before Katrina. From there, Boydstun made many crucial, lonely decisions related to the future of the company. He was buoyed by Hibernia’s people.
“I was so impressed by their resilience … their innate ability to do the right thing, to work through the most difficult times … and to do it in an exemplary fashion.”
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Chessin also found Gassan in Dallas, attending a new branch opening while her husband, Mark, was at home, preparing to evacuate their family. Chessin was able to email the papers to him, and Mark printed the files on his home computer. When Marsha returned later, she signed her name and shipped them out before leaving town.
Ran out of time
As the day wore on, Chessin ran out of time to complete her own package that included such things as the company’s articles of incorporation and by-laws, as well as certificates that needed her signature as corporate secretary. For the next two days, as she and her family retreated from the storm, she carried these weighty tomes — and worried about how she could get them to the New York attorneys in time. It was unthinkable that the deal, worth billions, might be held up by their exodus, but there it was.
Meanwhile, her husband, Andy, prepared their home, close to the London Avenue canal near Lake Pontchartrain – bringing in patio furniture, cleaning out the fridge, closing things up. When Chessin joined him late in the day, the couple decided to head out Sunday for a camp in remote Utica, MS. The rustic facility was a familiar one to which they had escaped in other storms.
It seemed like the “middle of the night” when they left New Orleans around 4 a.m. The contra-flow worked well, and a little over three hours later, they arrived at their small cabin in the woods, with two of their sons and sheepdog. They knew some of the other families there, and, during the day, pitched in around the camp and in the kitchen.
Venturing out ahead of the storm
Chessin continued to fret about how she would get her important merger package to New York. Finally, early Monday, as the storm moving ominously in their direction, she ventured out and found a small Post Office still open. With a sigh of relief, she dropped the documents in the mail. Later that day, the hurricane passed through Utica as a Category 1 storm and the camp lost electricity and water.
Not really “roughing it types,” her family drove to Jackson, MS, Tuesday, expecting to stay briefly with friends. By then, Jackson also had felt Katrina’s sting. With no electricity, the family who had offered lodging now decided to evacuate.
Back on the road, the Chessins drove west to Bastrop, LA, running low on gasoline along the way. They found a hotel as well as a local vet who would board their dog. Chessin immediately got in touch with Leo Nelson, Hibernia’s local bank executive, who opened his office for her use.
They weren’t sure what had happened to their home, but they were not feeling good about it. Eventually, their son in college found aerial photos on the internet. Their two-story home looked submerged in 12 feet of water from a breach in the nearby London Avenue canal. “It was sad … very, very sad,” she recalled.
By this time, her assistance was urgently needed because Hibernia and Capital One had decided to delay the merger a week. All of her previous closing work was in vain, and she had to start on a new tack.
Instead of going to New York, as she’d planned, she and her family headed to Houston, where Andy, also an attorney, had an office. They thought they could find lodging and temporary schools there for their sons.
‘The deal’s off’
Back in Baton Rouge, shortly after 8 a.m., Tuesday, Sept. 6, Herb Boydstun joined a meeting of his executive team, already in progress. The few members who had made it there were using borrowed offices at the bank’s main office.
Boydstun seemed agitated. “The deal’s off. Capital One wants to renegotiate,” he said tersely. Those in the room – Cindy Collins, Randy Bryan, Rob Stuart and this writer – grew quiet. In swift, abrupt strokes, he painted details of a phone call he had just taken from Rich Fairbank, Capital One’s CEO. Fairbank wanted a change in terms in light of the likely impact of the hurricane and flood, especially the uncertainty about New Orleans’ future.
When Boydstun paused, there was a hush before discussion erupted, focused on options and alternatives. The meeting was brief, considering the weighty issues — a $5-billion deal hung in the balance.
In those few minutes, Boydstun decided to call a special meeting of the board of directors for later that day to determine how to proceed. It would be hard to locate the 12-member board and find a way to teleconference them together for a 1 p.m. meeting. In Houston, Chessin and her staff began organizing for it. A hurried call to the company’s outside merger counsel was set up for Boydstun. Questions to be considered:
- Would Capital One consider an additional short delay for further assessment rather than re-opening the contract?
- Wasn’t the number of branches actually affected only a small part of the office network?
- With an early estimate of the impact on the loan portfolio, wasn’t it becoming clear that it would not constitute a material loss?
- Could Capital One be persuaded how important it was to close – to shareholders of both companies, and to customers and employees?
- Could Hibernia buy some time by asking Capital One to more formally outline its list of concerns and provide the company with an opportunity to address them?
- What could the company do, short of renegotiating, to make Capital One feel more comfortable about the storm’s impact and the deal as originally written?
- Was it really worth opening up the deal when all approvals had been received, shareholder votes recorded and many legal and operational details already taken?
Not a position of strength
As Boydstun and his advisers worked through these, it became evident that his was not a position of great strength. The credit team had given their best estimate of loan losses, but it was done without benefit of a customary in-depth analysis. Some of it was educated guesswork, albeit by very seasoned bankers.
Boydstun already had a good field report on the number of buildings damaged, but the cost of repairs was still rudimentary, and it wasn’t entirely clear yet how much would be covered by insurance. News coming out of New Orleans, if anything, was more negative than the first few days. Images beaming around the world showed conditions at the Superdome, victims being lifted into helicopters and looters in the streets. Various officials were making wild predictions about how long it would take to “de-water” the city, ranging from 30-90 days.
‘Adverse material effect’
The 56-page contract that governed the merger, while very detailed, left a lot unsaid about what might constitute a “material adverse effect.” It was clear, however, that it would require such a development for Capital One to break the deal. The agreement also provided that, if challenged, Hibernia had the right and obligation to warrant that there was no such adversity.
Boydstun began a whirlwind of activity to figure out what to do. He involved his management team, board members, Chessin, outside attorneys, investment bankers and others. With only hours to decide, his mood and direction shifted several times – from trying to save the deal to going it alone and back again.
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Adverse material effect?
‘I don’t desire this.
It breaks my heart’
from other storms
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At the same time, Chessin and her staff worked furiously in borrowed space at Hibernia’s main Houston office to track down board members, some of whom had evacuated and were as scattered as other residents.
Besides setting up a spur-of-the-moment telephone meeting in an region where telephone service was spotty, they also had to review legal documents, prepare an agenda and an outline of steps needed to repeat the shareholder approval process should a modified deal be struck. Chessin also began to think about when they might set a new closing date. It needed to be far enough out so that all of the legal hurdles could be cleared at appropriate times, but as short as possible to avoid any more unforeseen impediments to closing.
At 1 p.m., directors dialed in. Boydstun conducted the impromptu call from an office belonging to Mike Wack, head of commercial banking in Baton Rouge. Those with him huddled around a small speakerphone.
Boydstun briefly described his call from Fairbank. He outlined the preliminary picture of storm damage. He covered an estimate of potential loan losses, what was known about damaged branches, an estimate of employee welfare costs and what the expense might be for running various operations away from New Orleans for an indefinite period.
Outside experts – attorneys and investment bankers – who were invited into the call were asked to opine on what the board might do. Virtually every option was discussed. Various discounts were kicked around. The ability of Hibernia to “go it alone” was explored. Litigation issues, both between the two companies and from shareholders, were considered. The impact of each potential avenue on both short- and long-term share value was calculated.
Directors asked pointed and pertinent questions. They voiced opinions candidly. The day before the proposed close, already delayed a week, Capital One wanted to re-open the deal? Were they trying to take advantage of Hibernia in a time of distress? Was it fair to ask the board to make such an important decision on less than a day’s notice?
As the meeting continued, a reasoned plan took shape. They would authorize Boydstun to would propose a discount of 5% and push to close the deal the next day, as planned. They would re-convene in a few hours to hear the result.
Boydstun, Chessin and others spent the next two hours conferring with advisers. They wanted to have a coherent set of options at the next telephone board meeting.
Boydstun called Fairbank back shortly before 3 p.m. It was a brief conversation. He played his cards. Fairbank stood pat, saying he was prepared to ask his own board to declare that a material adverse effect had occurred and let the chips fall where they may. By 6 p.m., he said he would provide Hibernia with a precise counteroffer related to the cash and stock formula.
Deal or no deal
It was clear now that a showdown was imminent. By the morning, there was either going to be an altered transaction with Capital One or none at all.
When the 5 p.m. board meeting convened, there was an air of expectancy. It felt as if there were one chance – one chance only – to save or sink the deal. Advisers again presented scenarios. Boydstun and his team huddled around the phone.
He told Bryan to go to a nearby office to wait for Fairbank’s call. Since the storm, Bryan had been playing an informal but important role as intermediary between the two companies. Miles Reidy, Capital One’s merger coordinator, and Bryan had a good relationship. They had taken a helicopter tour of New Orleans a few days earlier and had a first-hand picture of damage to the city’s infrastructure. They worked well together, and during the day of renegotiation, they had several conversations that proved helpful.
The call comes in
Fairbank telephoned at 6:07 p.m., according to hastily scrawled notes Bryan made as he talked to the Capital One CEO. He was engaged in a conversation he probably would never forget. He remembered that Fairbank seemed apologetic. “I don’t desire this,” the CEO said. “It breaks my heart.”
Nevertheless, Fairbank believed it was the right thing to do for his shareholders and his company. He described his offer as “threading the needle” and spelled out a pricing formula, proposing less cash, $13.95, and a lower stock value exchange, 0.2005. Alternatively, if Hibernia’s directors preferred to keep the cash portion unchanged at $15.35, Capital One would offer a lower stock value exchange of 0.1877.
Using the price of his company’s stock that day, the first alternative would have totaled $30.492 per Hibernia share, compared to the March deal value of $33.55. If the second alternative – same cash, less stock – were more appealing, it theoretically totaled $30.459 per share.
Either way, the proposed terms represented a discount of about 9% from the original deal.
Hibernia’s board thought about and discussed options. They could reject the offer outright and demand to close the next day. They could counter-offer. They could try to buy time to get a better handle on the disaster’s economic impact or just to work on re-pricing scenarios.
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Kept a disaster notebook
Randy Bryan, 38, was executive vice president in charge of sales. With Hibernia 11 years, he was to step up to the executive management committee when the company merged. He and his wife, Rae, had been married for 11 years and had three daughters — twins, 9, and another, 2.
Before the storm, Bryan took his family to their Florida condo, but seeing the surf building on the beach there, he thought, “Maybe this isn’t such a great place to be.”
Next, they then went to Nashville, then Dallas. Eventually back to Baton Rouge, he stayed with Herb and Nan Boydstun.
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In addition, shouldn’t they try to protect the company from a future attempt to re-open the terms, if more information surfaced about Katrina’s adverse impact? And what if there were more storms before the deal closed? Shouldn’t they seek protection from such future events? Finally, if they did agree to amended terms, how soon could they close?
Clearly, they did not want to “convey that Hibernia was damaged goods,” in the words of one director. Whatever they did, and whatever the press release would say, it had to communicate that Hibernia was a strong, viable company, capable of recovering.
Eventually, the board agreed to the new pricing formula, subject to another shareholder vote, so long as there was an explicit exclusion in the agreement related to further consequences of Katrina or other storms. And, if the new closing date were after the end of the third quarter on Sept. 30, Hibernia wanted to pay a full final dividend to its shareholders.
Back home to wait
The meeting over, Boydstun went home and waited for Fairbank’s call. When it came, he began talking about his board – how they had to “feel comfortable” with any new terms. He noted a number of positive things about Hibernia – the deposit growth that was likely to occur with an influx of insurance and government payments (that, in fact, had already started). He emphasized the depth of experience of Hibernia’s management – how they had handled the storm’s potential impact and were already engineering recovery solutions.
He reminded Fairbank of Hibernia’s good financial position – a solid reserve coverage of potential losses and a strong overall capital position, with shareholders’ equity of about $1.5 billion. He said he and the directors did not believe a material adverse effect had occurred. Then he outlined the terms the board had authorized, emphasizing that they would not agree to a discount unless there were some protections.
Fairbank listened. He seemed amenable, Bryan recalled. He would get back to Boydstun as soon as he had discussed the counterproposal with his own directors.
Whiskey on the veranda
Boydstun then relaxed on his veranda with Bryan (who was staying with him for a few days while trying to find lodging). They sipped a glass of whiskey.
“He was very cool,” Bryan recalled, “sitting in his rocking chair.”
Meanwhile, Chessin and the outside counsel for both companies, as well as corporate communications people, worked on alternate press releases to be prepared for either outcome – an amended deal or an impasse. It would have to be issued before the stock market opened the next morning.
They have a deal
It wasn’t long afterward that Fairbank called back and said they had a deal.
Now it would be up to the lawyers to re-draft the contract and write the communications. Exhausted, Boydstun went to bed around 11 p.m., asking Bryan to run interference if any calls came in, and to wake him if needed.
Chessin stayed up through the night conferring with attorneys and representatives of Capital One to finalize how they would frame the amended terms in a press release.
Around 2:20 a.m., Capital One’s press office called Boydstun’s home. A draft was ready. Bryan got it off the computer and knocked on his boss’ bedroom door. In his pajamas, Boydstun read it — twice. He told Bryan it was okay and went back to bed. About an hour later, an attorney called with some suggested changes. Bryan said he wasn’t going to wake Boydstun again, that the boss was satisfied.
Early in the morning, the news release went out over the wires. Boydstun held another telephone board meeting at 9 a.m. to report the night’s activities and discuss reactions to the amended deal.
The stock market responded rationally. Instead of criticizing the deal, market analysts said they had expected as much. Apparently, they had feared the storm damage might be worse than the new terms implied. So, in the calculus of the financial market, although a discounted price wasn’t good news, neither was it particularly bad. Employees took the announcement in stride and stayed focused on recovery. Customers appeared indifferent, probably pre-occupied with their own recovery issues.
At the end of the day, Capital One stock closed at $79.45, down 1.3%, and Hibernia stock closed at $29.86, down 4.9%.
Much later, reflecting on that 18-hour period when the merger hung in the balance, Reidy concluded, “Herb played poker with an incredibly crappy hand.”
When the special – and last – meeting of Hibernia shareholders convened at 9 a.m., Monday, Nov. 14, at the Houstonian Hotel in Houston, Hibernia’s chairman Bo Campbell had this to say:
“I want to express my appreciation to Herb Boydstun … his management team and all of Hibernia’s employees for their heroic efforts to serve each other, our customers and our communities during and following hurricanes Katrina and Rita.
“This has been – and remains – a challenging time. But I have been amazed at the character and resilience of our leadership and employees in the face of such adversity.
“I also want to express my gratitude to Capital One. From the moment hurricane Katrina’s impact became clear, and continuing through today, Capital One has been ready and willing to help us in our recovery efforts. Their assistance has been a vivid demonstration of the commitment we both share to doing the right thing in the face of adversity.”
Next, Campbell introduced the board of directors, all of whom were present except Sidney Lassen and Richard Freeman, who could not attend.
This was to be the board’s last official function after he declared a quorum and the meeting convened. In the way of such things, Campbell followed a prescribed script, announcing the matters to be voted, asking for a motion and second, then asking for the already counted shares to be reported:
On the matter of the amended agreement, director Bill O’Malley rose to make the motion, followed by Paul Candies, with the second. Another matter dealt with the possibility the meeting might need to be postponed to solicit additional shareholder proxies, in the event where was not a quorum. This time Elton King move it and Dick Hearin offered the second.
“We have now completed consideration of all of the matters to be voted upon at this meeting,” Campbell intoned, and asked Mary DeLaat, Hibernia’s general auditor, to announce the results. While the final vote count was checked, Boydstun rose to thank everyone for coming. He did not speak about the hurricanes or their impact on the merger. It was, in his mind, past time to do that.
DeLaat returned with the tally. The deal was approved by 91,670,617 votes, or 57.3% of outstanding shares. Another 2,739,218 votes, or 1.7%, were against; and 384,222 votes, or 0.2%, abstained. Campbell thanked her and declared for the record that the merger had been approved.
History is made
With these formalities, history was made. Hibernia shareholders had joined their 135-year-old institution with 17-year-old Capital One. However, the curtain wasn’t completely down. Mindful of the moment, Campbell offered this:
“Before we go, I would like to express my thanks – first to Hibernia’s 6,500 employees for their hard work and determination. I also want to thank and congratulate Hibernia’s management team for its vision. And, I wish to thank my fellow directors for the leadership and courage they have demonstrated.
“I also want to congratulate our Capital One colleagues for their vote of confidence in Hibernia. We always knew that this merger was about joining two great companies. The achievements of the past few weeks have reinforced to me that our companies belong together.”
Then Hibernia’s last chairman gaveled the company’s final shareholder meeting to a close.
Two days later, on Nov. 16, 2005, some $5 billion in cash and stock changed hands, and the merger was consummated. The share price of Capital One was virtually flat that day on the New York Stock Exchange, rising only 0.6% to an $81.74 close, and in the last technical trading of Hibernia shares, the price closed at $30.45, down 0.5%.
It is unlikely any corporate board in recent times has faced such a challenging confluence of events, as did Hibernia’s directors after Aug. 29, 2005. Besides the obvious and significant problems of recovery, the directors had successfully renegotiated a high-stakes merger.
And, then, another hurricane struck at Hibernia’s important western front. Hurricane Rita came ashore in the early hours of Sept. 24, with 120 m.p.h. winds and storm surge of 15 feet and more at Holly Beach, LA and Sabine Pass, TX. It devastated parts of Cameron Parish and did significant damage in Lake Charles.
Hibernia’s board members were themselves impacted by the disasters. One lost a home in Metairie. Others were displaced just as thousands of other Louisianans were.
It was, at minimum, a difficult time, and it came when directors had been preparing to be “out of business” on Sept. 1. The board – responsible to thousands of shareholders for the governance of the company – was to “retire.” It would be dissolved with the merger. The new November closing date only briefly extended their temporary role.
This group of 11 men and one woman exercised remarkable wisdom while navigating the final storm-swept miles of their company’s 135-year business journey. Hibernia’s last board of directors included chairman E. R. ‘Bo’ Campbell; vice chairman Sidney W. Lassen; inside directors J. Herbert Boydstun and Randall E. Howard; and outside directors Paul Candies, Richard W. Freeman, Jr., Dick H. Hearin, Elton R. King, Janee “Gee” Mercadel-Tucker, Ray B. Nesbitt, William C. O’Malley and Robert T. Ratcliff.
 The Executive Management Committee at the time consisted of Herb Boydstun, Paul Bonitatibus, Cindy Collins, Marsha Gassan, Russell Hoadley, Randy Howard, Bob Kottler, Ron Samford and Rob Stuart. Randy Bryan, who was added to the team in November, also participated.