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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1998
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 #0-8707
NATURE'S SUNSHINE PRODUCTS, INC.
--------------------------------
(Exact Name of Registrant)
Utah 87-0327982
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(State of Incorporation) (I.R.S. Employer Identification Number)
75 East 1700 South
Provo, Utah 84606
(Address of Principal Executive Offices)
(801) 342-4370
(Registrant's Telephone Number, including Area Code)
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 such shorter period that the
Registrant was required to file such report(s), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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The number of shares of common stock, without par value, outstanding as of
May 13, 1998, was 18,460,029.
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Amounts In Thousands)
(UNAUDITED)
March 31 December 31
1998 1997
--------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 37,402 $27,813
Accounts receivable, net 8,852 7,465
Inventories 19,145 19,555
Prepaid expenses and other 10,989 11,197
--------- -----------
Total Current Assets 76,388 66,030
PROPERTY, PLANT AND
EQUIPMENT, net 24,754 23,711
LONG-TERM INVESTMENTS 3,220 3,468
OTHER ASSETS 2,844 2,587
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$107,206 $95,796
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The accompanying notes to the financial statements are an
integral part of these consolidated condensed financial statements.
2
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED)
(Amounts In Thousands)
(UNAUDITED)
March 31 December 31
1998 1997
--------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt $ 2,513 $ 2,665
Accounts payable 5,455 5,094
Accrued volume incentives 12,216 9,531
Accrued liabilities 11,387 7,223
Income taxes payable 3,879 2,946
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Total Current Liabilities 35,450 27,459
--------- -----------
DEFERRED INCOME TAXES 1,701 1,480
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SHAREHOLDERS' EQUITY:
Common stock, no par value, 20,000 shares
authorized; 19,446 shares issued 37,974 37,896
Retained earnings 55,438 51,190
Treasury stock, at cost, 880 and 861
shares at March 31, 1998 and December 31,
1997, respectively (18,323) (17,278)
Receivables due from related parties (77) (77)
Accumulated other comprehensive income (4,957) (4,874)
--------- -----------
Total Shareholders' Equity 70,055 66,857
--------- -----------
$107,206 $ 95,796
--------- -----------
The accompanying notes to the financial statements are an
integral part of these consolidated condensed financial statements.
3
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Amounts In Thousands, Except Per-Share Information)
(Unaudited)
Three Months Ended
March 31
-----------------------
1998 1997
-------- --------
SALES REVENUE $75,283 $67,825
-------- --------
COSTS AND EXPENSES:
Cost of goods sold 13,542 12,060
Volume incentives 35,199 31,404
Selling, general and administrative 18,684 17,951
-------- --------
67,425 61,415
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OPERATING INCOME 7,858 6,410
-------- --------
OTHER INCOME (EXPENSE):
Interest and other income 459 467
Interest expense (18) (11)
Foreign exchange loss (241) (166)
Minority interest 129 71
-------- --------
329 361
-------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES 8,187 6,771
PROVISION FOR INCOME TAXES 3,320 2,761
-------- --------
NET INCOME $ 4,867 $ 4,010
-------- --------
BASIC NET INCOME PER COMMON SHARE $ 0.26 $ 0.21
-------- --------
WEIGHTED AVERAGE BASIC SHARES 18,587 18,982
-------- --------
DILUTED NET INCOME PER COMMON SHARE $ .26 $ .21
-------- --------
WEIGHTED AVERAGE DILUTED SHARES 18,950 19,364
-------- --------
The accompanying notes to the financial statements are an integral
part of these consolidated condensed financial statements.
4
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(Amounts In Thousands)
(Unaudited)
Three Months Ended
March 31
-----------------------
1998 1997
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from sales revenue $ 73,537 $ 66,182
Cash paid as volume incentives (32,513) (29,085)
Cash paid to suppliers and employees (25,480) (24,906)
Interest paid (18) (11)
Interest received 577 503
Income taxes paid (2,167) (1,519)
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Net Cash Provided by Operating Activities 13,936 11,164
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,028) (783)
Sale (Purchase) of long-term investments 123 (21)
Payments received on long-term receivables 18 53
Purchase of other assets (429) (132)
Minority interest elimination (129) 38
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Net Cash Used in Investing Activities (2,445) (845)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of cash dividends (619) (630)
Purchase of treasury stock (2,072) (6,837)
Repayments of short-term debt (152) (412)
Proceeds from exercise of stock options 853 733
Tax benefit from stock option exercise 252 --
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Net Cash Used in Financing Activities (1,738) (7,146)
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EFFECT OF EXCHANGE RATES ON CASH (164) (115)
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NET INCREASE IN CASH AND CASH
EQUIVALENTS 9,589 3,058
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 27,813 27,879
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CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 37,402 $ 30,937
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The accompanying notes to the financial statements are an integral
part of these consolidated condensed financial statements.
5
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)
Reconciliation of Net Income to Net Cash Provided by Operating Activities
(Amounts In Thousands)
(UNAUDITED)
Three Months Ended
March 31
------------------
1998 1997
-------- --------
NET INCOME $ 4,867 $ 4,010
-------- --------
Bad debt expense 1 66
Depreciation and amortization 1,139 1,092
Increase in accounts receivable (1,388) (1,506)
Decrease in inventories 410 2,099
Decrease in prepaid expenses & other assets 336 596
Increase in income taxes payable 932 1,193
Increase in accrued liabilities and volume incentives 6,849 2,228
Increase in accounts payable 362 1,445
Increase in deferred income taxes 221 49
Cumulative translation adjustments 207 (108)
-------- --------
Total Adjustments 9,069 7,154
-------- --------
Net Cash Provided by Operating Activities $13,936 $11,164
-------- --------
The accompanying notes to the financial statements are an integral
part of these consolidated condensed financial statements.
6
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Dollar Amounts In Thousands)
(UNAUDITED)
Three Months Ended
March 31
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1998 1997
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NET INCOME $4,867 $4,010
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OTHER COMPREHENSIVE INCOME
Foreign currency translation adjustments 42 (223)
Unrealized holding losses arising during the period (125) --
-------- -------
Total other comprehensive income 83 (223)
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COMPREHENSIVE INCOME, net of tax $4,784 $3,787
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The accompanying notes to the financial statements are an integral
part of these consolidated condensed financial statements.
7
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Amounts In Thousands, Except Per-Share Information)
(UNAUDITED)
(1) INTERIM FINANCIAL STATEMENT POLICIES AND DISCLOSURES
The unaudited, consolidated condensed financial statements of Nature's
Sunshine Products, Inc. and subsidiaries included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally required in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations, although the Company believes that the following disclosures
are adequate to make the information presented not misleading.
These consolidated condensed financial statements reflect all
adjustments, which in the opinion of management, are necessary to present
fairly the financial position as of March 31, 1998, and the results of
operations for the periods presented. All of the adjustments which have been
made in these consolidated condensed financial statements are of a normal
recurring nature. Operating results for the three months ended March 31,
1998, are not necessarily indicative of the results that may be expected for
the year ending December 31, 1998.
It is suggested that these consolidated condensed financial statements
be read in conjunction with the consolidated financial statements and the
notes thereto included in the Company's latest Annual Report on Form 10-K for
the year ended December 31, 1997.
8
NATURE'S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(2) INVENTORIES
Inventories consist of:
March 31 December 31
1998 1997
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Raw materials $ 7,190 $ 5,912
Work in process 1,043 1,455
Finished goods 10,912 12,188
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$ 19,145 $ 19,555
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(3) NET INCOME PER SHARE
Basic net income per common share (Basic EPS) excludes dilution and is
computed by dividing net income by the weighted-average number of common
shares outstanding during the period. Diluted net income per common share
(Diluted EPS) reflects the potential dilution that could occur if stock
options or other contracts to issue common stock were exercised or converted
into common stock. The computation of Diluted EPS does not assume exercise or
conversion of securities that would have an anti-dilutive effect on net
income per common share. Net income per common share amounts and share data
have been restated for all periods presented to reflect basic and diluted per
share presentations.
As of March 31, 1998, the Company had a total of 1,180 options
outstanding. The options were all granted at market prices, with a weighted
average exercise price of $13.41.
9
Following is a reconciliation of the numerator and denominator of Basic
EPS to the numerator and denominator of Diluted EPS for all periods:
Net Income Shares Per Share
(Numerator) (Denominator) Amount
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March 31, 1998
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Basic EPS $4,867 18,587 $ .26
Effect of options -- 363
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Diluted EPS $4,867 18,950 $ .26
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March 31, 1997
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Basic EPS $4,010 18,982 $ .21
Effect of options -- 382
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Diluted EPS $4,010 19,364 $ .21
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At March 31, 1998 and 1997, there were outstanding options to purchase
11,066 and 279,600 shares of common stock, respectively, that were not
included in the computation of Diluted EPS, as there effect would have been
anti-diluted.
(4) QUARTERLY CASH DIVIDENDS
The Company has declared 39 consecutive quarterly cash dividends. The
most recent quarterly cash dividend of 3 1/3 cents per common share was
declared May 5, 1998, to shareholders of record on May 18, 1998, which is
payable May 29, 1998.
(5) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131 "Disclosures about Segments of an Enterprise and Related Information".
SFAS No. 131 establishes new standards for public companies to report
information about their operating segments, products and services, geographic
areas and major customers. This statement is effective for financial
statements issued for years beginning after December 15, 1997. Accordingly,
the Company will adopt SFAS No. 131 in its December 31, 1998 consolidated
financial statements.
10
(6) ACCUMULATED OTHER COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for the reporting
and display of comprehensive income and its components.
The composition of accumulated other comprehensive income is as follows:
Total
Accumulated
Foreign Currency Unrealized Gains Other Comprehensive
Items on Securities Income
---------------- ---------------- -------------------
Balance as of December 31, 1997 $(5,290) $ 416 $(4,874)
Current period change 42 (125) (83)
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Balance as of March 31, 1998 $(5,248) $ 291 $(4,957)
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11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
Financial Statements, the Notes there to and Management's Discussion and
Analysis included the Company's Annual Report for the year ended December 31,
1997.
RESULTS OF OPERATIONS
The following table identifies (i) the relationship that net income items
disclosed in the consolidated condensed financial statements have to total
sales, and (ii) amount and percent of change of such items compared to the
corresponding prior period.
(Dollar Amounts in Thousands)
(Unaudited)
(i)
Income and Expense (ii)
Items as a Percent of Sales Three Months Ended March 31
--------------------------- 1998 to 1997
Three Months Ended ---------------------------
March 31 Amount of Percent
-------------------------- Income and Increase/ of
1998 1997 Expense Items (Decrease) Change
------ ------- ------------- ----------- -------
100.00% 100.00% Sales revenue $7,458 11.00%
------ ------- ----------- -------
17.99 17.78 Cost of sales 1,482 12.29
46.76 46.30 Volume incentives 3,795 12.08
24.82 26.47 SG&A expenses 733 4.08
------ ------- ----------- -------
89.57 90.55 6,010 9.79
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10.43 9.45 Operating income 1,448 22.59
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0.61 0.67 Interest and other income (80) (1.71)
(0.02) -- Interest expense (7) (63.64)
(0.32) (0.25) Foreign exchange gain (loss) (75) (45.18)
0.17 0.11 Minority interest 58 81.69
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0.44 0.53 (32) (8.86)
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Income before provision
10.87 9.98 for income taxes 1,416 20.91
4.41 4.07 Provision for income taxes 559 20.25
------ ------- ----------- -------
6.46% 5.91% Net income $ 857 21.37%
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12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SALES REVENUE:
The Company reported record consolidated sales revenue for the three
months ended March 31, 1998. Sales revenue for the three months ended March
31, 1998, was $75.3 million compared to $67.8 million in the same period the
prior year, an increase of 11 percent.
Management believes the increase in sales for the three-month period is
attributable to the expansion of the Company's independent sales force, a
continued increase of consumer awareness and interest in natural health and
nutritional products and incentives the Company offers to its independent
sales force. Sales revenue in the Company's domestic operations was $49.5
million for the three months ended March 31, 1998, an increase of 11 percent
over the same period the prior year. Domestic sales revenue was impacted by
decreased sales in the Hispanic market.
The Company's international operations reported sales revenue of $25.8
million for the three-month period ended March 31, 1998, an increase of 10
percent compared to the same period in 1997. However, the Company
experienced a decrease in sales revenue in its Asia Pacific markets,
primarily due to the devaluation in the Japanese yen. Price increases are
planned in this market to adjust for the devaluation that has taken place.
Management believes that the price increases will be acceptable to its sales
force and will result in increased sales revenue. The Company also had a
decrease in operating income which resulted primarily from losses associated
with the Company's new subsidiary in South Korea, which began operations in the
fourth quarter of 1997.
The Company's independent sales force consists of Managers and
Distributors. A Distributor interested in earning additional income by
committing more time and effort to selling the Company's products may attain
the rank of "Manager." Appointment as a Manager is dependent upon attaining
certain purchase volume levels and demonstrating leadership abilities. The
number of Managers was
13
15,758 at March 31, 1998, compared to 13,946 at March 31, 1997, an increase
of 13 percent. The number of Distributors at March 31, 1998, was
approximately 552,000 compared to 523,040 at March 31, 1997.
COST OF GOODS SOLD:
The Company experienced a slight increase in cost of goods sold, as a
percentage of sales, for the three months ended March 31, 1998, compared to
the same period last year. The increase in cost of goods sold, as a
percentage of sales, was primarily related to freight and duty costs in
the Company's international operations. Management expects cost of goods sold
to decrease slightly as a percent of sales during the remainder of 1998 as
the result of efficiencies expected to be obtained in the Company's
manufacturing operations.
VOLUME INCENTIVES:
Volume incentives are an integral part of the Company's direct sales
marketing program and are payments to independent sales force members for
reaching certain levels of sales performance and organizational development.
Volume incentives vary slightly, on a percentage basis, by product due to the
Company's pricing policies. The increase in volume incentives, as a percent
of sales, for the three months ended March 31, 1998, is primarily related
to the development of the sales leader organizations in Brazil, Mexico and
Venezuela.
Management expects volume incentives to remain relatively constant, as a
percent of sales, during the remainder of 1998.
14
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
The Company experienced decreased selling, general and administrative
expenses (SG&A), as a percent of sales, during the period ended March 31,
1998. The decrease, as a percent of sales, was the result of improved
budgetary and cost controls.
Management expects SG&A to decrease, as a percent of sales, for the year
ended December 31, 1998.
SEGMENT INFORMATION:
Segment information for the three months ended March 31, 1998, compared
to the previous year are as follows:
SALES REVENUE (Dollars in Thousands)
(Unaudited)
1998 1997
-------- -------
DOMESTIC SALES REVENUE $ 49,496 $44,428
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INTERNATIONAL SALES REVENUE:
Americas 22,316 19,489
Asia Pacific 2,432 2,914
Other 1,039 994
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TOTAL INTERNATIONAL 25,787 23,397
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TOTAL SALES REVENUE $ 75,283 $67,825
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OPERATING INCOME (Dollars in Thousands)
(Unaudited)
1998 1997
-------- -------
DOMESTIC OPERATING INCOME $ 6,000 $ 4,935
-------- -------
INTERNATIONAL OPERATING INCOME:
Americas 2,276 1,396
Asia Pacific (559) (17)
Other 141 96
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TOTAL INTERNATIONAL 1,858 1,475
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TOTAL OPERATING INCOME $ 7,858 $ 6,410
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15
(Dollars in Thousands)
(Unaudited)
1998 1997
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ASSETS
DOMESTIC ASSETS $ 67,431 $57,611
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INTERNATIONAL ASSETS:
Americas 33,890 31,474
Asia Pacific 5,269 3,881
Other 616 588
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TOTAL INTERNATIONAL 39,775 35,943
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TOTAL ASSETS $107,206 $93,554
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BALANCE SHEET
ACCOUNTS RECEIVABLE
Accounts receivable increased approximately $1.4 million during the
three months ended March 31, 1998. The increase in receivables is primarily
related to the Company's domestic operation. During the month of March the
Company extended credit to certain high level domestic independent
distributors, associated with certain promotions.
ACCRUED VOLUME INCENTIVES
Accrued volume incentives increased approximately $2.7 million during
the month of March as a direct result of increased sales revenue.
ACCRUED LIABILITIES
Accrued liabilities increased approximately $4.2 million during the
three months ended March 31, 1998. The increase is primarily the result of
accruals associated with the Company's sales conventions and travel programs.
16
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased approximately $9.6 million for the
three months ended March 31, 1998. The increase in cash is primarily the
result of the increased sales and net income as well as increases in accrued
liabilities.
Management believes the Company's stock is an attractive investment and,
from time to time pursuant to its recently announced 500,000 share stock
buyback program, may utilize a portion of its available cash to purchase up
to the remaining balance of approximately 416,000 shares of its stock as
market conditions warrant. During the first quarter of 1998, the Company
acquired $2.1 million, or approximately 84,000 shares, of treasury stock as
part of the 500,000 share buyback program.
During 1997, the Company began expansion of its domestic manufacturing
and warehouse facilities. The Company paid approximately $1.5 million during
the three months ended March 31, 1998, for continued construction costs. The
new facility will be completed during the second quarter of 1998. Management
expects to fund the remaining $1.8 million of the project from working
capital.
The Company is a defendant in various lawsuits which are incidental to
the Company's business. Management, after consultation with its legal
counsel, believes that the ultimate disposition of these matters will not
have a material affect upon the Company's consolidated results of operations
or financial position.
Management believes that working capital requirements can be met through
the Company's available cash and cash equivalents and internally-generated
funds for the foreseeable future; however, a prolonged economic downturn or a
decrease in the demand for the Company's products could adversely affect the
long-term liquidity of the Company. In the event of a significant decrease
in cash provided by the Company's operations, it may be necessary for the
Company to obtain external sources of funding. The Company does not
currently maintain a credit facility or any other external sources of
17
long-term funding; however, Management believes that such funding could be
obtained on competitive terms in the event additional sources of funds became
necessary.
THE YEAR 2000 ISSUE
The Company believes that it will not incur any material additional
costs to modify computer hardware or software to make the Company's
internal-use software application systems "Year 2000" compliant.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations and other items of this Form
10-Q may contain forward-looking statements. Such forward-looking statements
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Such statements may related but not be
limited to projections of revenues, income or loss, capital expenditures, the
expected development schedule of existing real estate projects, plans for
growth and future operations, financing needs, as well as assumptions
relating to the foregoing. Forward-looking statements are inherently subject
to risks and uncertainties, some of which cannot be predicted or quantified.
When used in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations", and elsewhere in this Form 10-Q the
words "estimates", "expects", "anticipates", "forecasts", "plans", "intends"
and variations of such words and similar expressions are intended to identify
forward-looking statements that involve risks and uncertainties. Future
events and actual results could differ materially from those set forth in,
contemplated by or underlying the forward-looking statements.
18
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) No exhibits are required to be filed by Item 601 of Regulation S-K.
b) No reports were filed on Form 8-K during the quarter for which this
report is filed.
OTHER ITEMS
There were no other items to be reported under Part II of this report.
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.
NATURE'S SUNSHINE PRODUCTS, INC.
Date: May 13, 1998 /s/ Daniel P. Howells
------------------------------------------------------
Daniel P. Howells, President & Chief Executive Officer
Date: May 13, 1998 /s/ Craig D. Huff
------------------------------------------------------
Craig D. Huff, Chief Financial Officer
19