1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended MARCH 31, 2001
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _______to________
Commission file number 333-43157
NORTHLAND CABLE TELEVISION, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
STATE OF WASHINGTON 91-1311836
- ---------------------------------------------- ------------------------------------
(State or other jurisdiction of incorporation) (I.R.S. Employer Identification No.)
AND SUBSIDIARY GUARANTOR:
NORTHLAND CABLE NEWS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
STATE OF WASHINGTON 91-1638891
- ---------------------------------------------- ------------------------------------
(State or other jurisdiction of incorporation) (I.R.S. Employer Identification No.)
1201 THIRD AVENUE, SUITE
3600 SEATTLE, WASHINGTON 98101
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (206) 621-1351
--------------
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. Yes [X] No [ ]
This filing contains _____ pages. Exhibits index appears on page _____.
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PART 1 -- FINANCIAL INFORMATION
ITEM 1. Financial Statements
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland Telecommunications Corporation)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
March 31, December 31,
2001 2000
------------- -------------
(unaudited)
ASSETS
Current Assets:
Cash $ 3,079,389 $ 2,551,425
Due from affiliates 1,470,149 1,160,446
Accounts receivable 2,067,444 2,187,586
Prepaid expenses 614,057 571,020
------------- -------------
Total current assets 7,231,039 6,470,477
Investment in Cable Television Properties:
Property and equipment, net of accumulated
depreciation of $50,055,380
and $48,199,085, respectively 57,870,775 56,038,530
Franchise agreements, net of accumulated
amortization of $42,645,680
and $40,107,541, respectively 60,744,906 63,283,045
Goodwill, net of accumulated
amortization of $2,436,771 and $2,393,494,
respectively 4,487,662 4,530,939
Other intangible assets, net of accumulated
amortization of $5,102,484 and $5,706,249,
respectively 5,344,056 5,674,683
------------- -------------
Total investment in cable television properties 128,447,399 129,527,197
------------- -------------
Total assets $135,678,438 $135,997,674
============= =============
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current Liabilities:
Accounts payable $ 84,344 $ 754,908
Accrued expenses 8,141,596 6,951,496
Converter deposits 129,813 122,674
Subscriber prepayments 2,050,803 1,549,945
Due to affiliates 644,538 103,098
Interest rate derivative 1,485,846 --
------------- -------------
Total current liabilities 12,536,940 9,482,121
Notes payable 183,540,000 182,540,000
------------- -------------
Total liabilities $ 196,076,940 $ 192,022,121
------------- -------------
Shareholder's Deficit:
Common stock (par value $1.00 per share,
authorized 50,000 shares; 10,000 shares issued
and outstanding) and additional paid-in capital 11,560,527 11,560,527
Accumulated deficit (71,959,029) (67,584,974)
------------- -------------
Total shareholder's deficit (60,398,502) (56,024,447)
------------- -------------
Total liabilities and shareholder's deficit $ 135,678,438 $ 135,997,674
============= =============
The accompanying notes are an integral part of these balance sheets.
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NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland Telecommunications Corporation)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS -- (Unaudited)
For the three months ended
March 31,
2001 2000
------------ ------------
(unaudited)
Revenues:
Service revenues $ 15,405,655 $ 14,732,100
Programming and production revenues
from affiliates -- 107,909
------------ ------------
Total Revenues 15,405,655 14,840,009
------------ ------------
Expenses:
Cable system operations (including
$85,016 and $77,611, net paid to affiliates
in 2001 and 2000, respectively) 5,494,858 5,150,059
General and administrative (including
$1,602,852 and $1,323,936, net paid to
affiliates in 2001 and 2000, respectively) 2,356,208 2,698,890
Management fees paid to parent 769,649 733,397
Depreciation and amortization 5,063,473 4,851,334
------------ ------------
Total operating expenses 13,684,188 13,433,680
------------ ------------
Income from operations 1,721,467 1,406,329
Other income (expense):
Interest expense (4,642,614) (4,411,080)
Other income (expense) (2,141,908) 44,786
------------ ------------
(6,784,522) (4,366,294)
------------ ------------
Net loss before cumulative effect of a change $ (5,063,055) $ (2,959,965)
in accounting principle ============ ============
Cumulative effect of a change in
accounting principle $ 689,000 --
------------ ------------
Net loss $ (4,374,055) $ (2,959,965)
============ ============
The accompanying notes are an integral part of these statements.
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NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland Telecommunications Corporation)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
For the three months ended
March 31,
2001 2000
----------- -----------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,374,055) $(2,959,965)
Adjustments to reconcile net loss to
cash provided by operating activities:
Depreciation and amortization 5,063,473 4,851,334
Cumulative effect of a change in accounting
principle ($689,000) --
Amortization of loan costs 167,995 230,946
Mark-to-market of interest rate derivative 2,174,846 --
Loss (gain) on disposal of assets 3,189 (5,366)
(Increase) decrease in operating assets:
Accounts receivable 120,142 253,571
Prepaid expenses (43,037) (69,830)
Due from affiliates (309,703) (53,792)
Increase (decrease) in operating liabilities
Accounts payable and accrued expenses 519,536 797,906
Due to affiliates 541,440 720,085
Converter deposits 7,139 871
Subscriber prepayments 500,858 524,637
----------- -----------
Net cash from operating activities 3,682,823 4,290,397
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of cable systems -- (3,100,000)
Investment in cable television properties (4,135,974) (902,426)
Proceeds from disposal of assets 3,856 12,100
Franchise fees and other intangibles (22,741) (1,800)
----------- -----------
Net cash used in investing activities (4,154,859) (3,992,126)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 1,000,000 3,100,000
Principal payments on borrowings, net -- (750,000)
----------- -----------
Net cash provided by financing activities 1,000,000 2,350,000
----------- -----------
INCREASE IN CASH 527,964 2,648,271
CASH, beginning of period 2,551,425 1,366,050
----------- -----------
CASH, end of period $ 3,079,389 $ 4,014,321
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 2,050,607 $ 1,645,247
=========== ===========
Cash paid during the period for state income taxes $ 5,651 $ 15,924
=========== ===========
The accompanying notes are an integral part of these statements.
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NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland Telecommunications Corporation)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 2001
(Unaudited)
(1) BASIS OF PRESENTATION:
These unaudited financial statements are being filed in conformity with Rule
10-01 of Regulation S-X regarding interim financial statement disclosure and do
not contain all of the necessary footnote disclosures required for a fair
presentation of the balance sheets, statements of operations and statements of
cash flows in conformity with generally accepted accounting principles. However,
in the opinion of management, this data includes all adjustments, consisting
only of normal recurring accruals, necessary to present fairly the Company's
financial position at March 31, 2001, its statements of operations and cash
flows for the three months ended March 31, 2001 and 2000. Results of operations
for these periods are not necessarily indicative of results to be expected for
the full year. These financial statements and notes should be read in
conjunction with the Company's Annual Report on Form 10-K for the year ended
December 31, 2000.
(2) NORTHLAND CABLE NEWS:
Northland Cable News, Inc. ("NCN"), a wholly owned subsidiary of the Company,
develops and distributes local news, sports and information programming to
Northland Cable Television, Inc. and certain of the Company's affiliates. The
Company's payment obligations under the $100 million of senior notes are fully
and unconditionally, jointly and severally guaranteed on a senior subordinated
basis by NCN. The guarantee of NCN is subordinated to the prior payment in full
of all senior debt of NCN (as of March 31, 2001, NCN had no senior debt
outstanding) and the amounts for which NCN will be liable under the guarantee
issued from time to time with respect to senior debt. Separate financial
statements of NCN have not been presented because management has determined that
they would not be material to financial statement readers. Summary financial
information of NCN is presented below.
FOR THE THREE MONTHS ENDED MARCH 31,
2001 2000
--------- ---------
INCOME STATEMENT
INFORMATION:
Revenues from affiliates $ 0 $ 213,434
Less: intercompany revenue (0) (105,525)
--------- ---------
Total revenues 0 107,909
Operating expenses 2,552 179,290
Other, net 0 10,882
--------- ---------
Net loss $ (2,552) $ (82,263)
========= =========
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MARCH 31, DECEMBER 31,
2001 2000
----------- -----------
BALANCE SHEET
INFORMATION:
Current assets $ 2,156,548 $ 2,229,287
Less: intercompany elimination (1,971,763) (2,018,237)
----------- -----------
Total Assets $ 184,785 $ 211,050
=========== ===========
Current and total liabilities $ 0 $ 70,188
=========== ===========
(3) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133) and in
June 2000 issued SFAS No. 138, amendment of SFAS 133. These statements
establish accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded on the balance sheet as either an asset or liability
measured at its fair value. These statements require that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met.
Pursuant to SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB No. 133 - an Amendment to
FASB Statement No. 133," the effective date of SFAS No. 133 has been deferred
until fiscal years beginning after January 15, 2000. SFAS No. 133 cannot be
applied retroactively. SFAS No. 133 must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid contracts
that were issued, acquired, or substantively modified after December 31, 1998
(and, at the Company's election, before January 1, 1999).
The Company has elected not to designate its derivatives as hedges under SFAS
133. Accordingly, the Company has recorded an asset equal to the fair market
value of its derivatives, and a corresponding credit in its statement of
operations related to the cumulative effect of the implementation of SFAS 133.
Each quarter the change in the market value of the Company's derivatives will be
recorded as other income or expense.
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PART I (continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
MARCH 31, 2001 AND 2000
As of March 31, 2001, the Company's cable systems served 123,243 basic
subscribers, 40,134 premium subscribers, 69,775 expanded basic subscribers and
passed approximately 201,000 homes.
Revenues increased approximately $700,000 or 4.8%, from $14.7 million to $15.4
million for the three months ended March 31, 2001. The operations of NCN were
completely discontinued during the first quarter of 2001. Taking this into
account, revenues for the three months ended March 31, 2001 would have increased
approximately $800,000 or 5.4% over the same period in 2000. Of these revenues,
approximately $10.6 million (68.8%) was derived from basic services, $1.0
million (6.5%) from premium services, $2.1 million (13.6%) from expanded basic
services, $316,000 (2.1%) from service maintenance contracts, $637,000 (4.1%)
from advertising, and $727,000 (4.7%) from other sources. The increase in
revenues was primarily attributable to: (i) rate increases implemented in a
majority of the Company's systems (ii) revenue from the higher penetration of
new product tiers; and approximately $45,000 in revenues from the Kingston,
Washington system which was acquired on March 31, 2000. Average monthly revenue
per basic subscriber increased $2.36 or 6.0%, from $39.25 to $41.61 for the
three months ended March 31, 2001. Average basic revenue per basic subscriber
decreased $0.15 or 0.5% from $28.75 to $28.60 for the three months ended March
31, 2001.
Cable system operations, which include costs related to programming, technical
personnel, repairs and maintenance and advertising sales, increased
approximately $300,000 or 5.8%, from $5.2 million to $5.5 million for the three
months ended March 31, 2001. Taking into account the discontinuation of NCN
operations in the first quarter of 2001, operating expenses would have increased
approximately $500,000 or 10% over first quarter 2000 results. This increase is
primarily attributable to: (i) annual cost of living wage and benefit increases;
and (ii) higher programming costs resulting from rate increases by certain
programming vendors and the launch of new programming services in various
systems.
General and administrative expenses, which include on-site office and customer
service personnel costs, customer billing, postage, marketing expenses and
franchise fees, decreased approximately $300,000 or 11.1%, from $2.7 million to
$2.4 million for the three months ended March 31, 2001. This decrease is
primarily attributable to reductions in administrative salaries offset by: (i)
increased franchise fees resulting from increases in revenue as previously
noted; and (ii) increased property taxes due to higher assessments in property
values.
Management fees increased approximately $37,000 or 5%, from approximately
$733,000 to $770,000 for the three months ended March 31, 2001. This increase
was directly attributable to the aforementioned revenue increases. Management
fees are calculated at 5.0% of gross revenues.
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Depreciation and amortization expenses increased approximately $200,000 or 4.4%,
from $4.9 million to $5.1 million for the three months ended March 31, 2001.
Such increase is attributable to depreciation of recent equipment purchases in
upgrading plant & equipment, offset by assets becoming fully depreciated.
Interest expense increased approximately $294,000 (7.1%) for the three months
ended March 31, 2001 compared to the same period in 2000. Average outstanding
indebtedness increased $6.7 million from $176.3 million to $183.0 million for
the three months ended March 31, 2000 and 2001, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The cable television business generally requires substantial capital for the
construction, expansion and maintenance of the signal distribution system. In
addition, the Company has pursued, and intends to pursue, a business strategy
which includes selective acquisitions. The Company has financed these
expenditures through a combination of cash flow from operations, borrowings
under the revolving credit and term loan facility provided by a variety of banks
and the issuance of senior subordinated notes. The Company's debt service
obligations for the year ended December 31, 2001 are expected to be
approximately $18 million. The Company anticipates that cash flow from
operations will be sufficient to service its debt through December 31, 2001. The
Company believes that cash flow from operations will be adequate to meet the
Company's long-term liquidity requirements, excluding acquisitions and certain
levels of capital expenditures, prior to the maturity of its long-term
indebtedness, although no assurance can be given in this regard.
Net cash provided by operating activities was $3.7 million for the three months
ended March 31, 2001. Adjustments to the $2.9 million net loss for the period to
reconcile to net cash provided by operating activities consisted primarily of
$5.2 million of depreciation and amortization and increases in operating
liabilities of $1.6 million.
Net cash used in investing activities was $4.2 million for the three months
ended March 31, 2001, and consisted of $4.2 million in capital expenditures and
the addition of intangible assets.
Net cash provided by financing activities was approximately $1.0 million for the
three months ended March 31, 2001. The Company had $1.0 million in borrowings of
long term debt to finance planned capital expenditures.
Earnings before charges for interest, taxes, depreciation and
amortization ("EBITDA") increased approximately $500,000 or 7.9%, from $6.3
million to $6.8 million for the three months ended March 31, 2001. Had the
operations of NCN been discontinued in the first quarter of 2000, EBITDA would
have increased approximately $400,000 or 6.3%, from $6.4 million to $6.8
million for the three months ended March 31, 2001. EBITDA as a percentage of
revenues ("EBITDA Margin") increased from 42.6% to 44.1% for the three months
ended March 31, 2001. Assuming NCN operations were discontinued in the first
quarter of 2000, EBITDA as a percentage of revenue would have increased from
approximately 43.2% to 44.1% for the three months ended March 31, 2001. These
changes were attributable primarily to the aforementioned increases in revenue
as well as decreases in general and administrative expenses. Industry analysts
generally consider EBITDA to be an appropriate measure of the performance of
multi-channel television operations. EBITDA is not
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presented in accordance with generally accepted accounting principles and should
not be considered an alternative to, or more meaningful than, operating income
or operating cash flow as an indication of the Company's operating performance.
Net cash provided by operating activities was $4.3 million for the three months
ended March 31, 2000. Adjustments to the $3.0 million net loss for the period to
reconcile to net cash provided by operating activities consisted primarily of
$5.1 million of depreciation and amortization and an increase in operating
liabilities of $2.0 million.
Net cash used in investing activities was $4.0 million for the three months
ended March 31, 2000, and consisted of $3.1 million used in the acquisition of
the Kingston, Washington system and approximately $900,000 in capital
expenditures.
Net cash provided by financing activities was approximately $2.4 million for the
three months ended March 31, 2000. The Company had $3.1 million in borrowings of
long term debt to finance the Kingston, Washington acquisition and made $750,000
of principal payments on notes payable.
On August 14, 2000, the Company refinanced its existing senior bank
indebtedness. The original indebtedness was repaid with borrowings under the
Revised Senior Credit Facility. The Revised Senior Credit Facility establishes a
$35 million 364-day revolving credit loan. At the end of the 364-day period, the
revolver converts to a term loan due on June 30, 2007. The other two components
consist of a seven-year revolving term loan in aggregate principal amount of $40
million and a seven-year term loan in the aggregate principal amount of $35
million. Amounts outstanding under the Revised Senior Credit Facility mature on
June 30, 2007. The Revised Senior Credit Facility is collateralized by a first
lien position on all present and future assets and stock of the Company.
Interest rates vary based on certain financial covenants; currently 9.54%
(weighted average). Graduated principal and interest payments are due quarterly,
beginning September 30, 2003, until maturity on June 30, 2007. The estimated
fair value of the revolving credit and term loan facility is equal to its
carrying value because of its variable interest rate nature. As of March 31,
2001, $26,460,000 was available to borrow by the Company under the revolving
credit facility.
Under the revolving credit and term loan agreement, the Company has agreed to
restrictive covenants which require the maintenance of certain ratios, including
a Pro Forma Debt Service ratio not less than 1.25 to 1.0 and a Leverage Ratio
of no greater than 6.75 to 1.0, among other restrictions. The Company submits
quarterly debt compliance reports to its creditor under this arrangement. As of
March 31, 2001, the Company was in compliance with the terms of the loan
agreement.
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of Operating Cash Flow to Fixed Charges (as defined)) of 1.05 to 1.00. As of the
date of this filing, the Company was in compliance with the covenants of the
Revised Senior Credit Facility.
At March 31, 2001, the outstanding balance under the Senior Credit Facility was
$83.5 million. As of the date of this filing, interest rates on the Senior
Credit Facility were as follows: $20 million fixed at 9.54% under the terms of
an interest rate swap agreement with the Company's lender expiring August 20,
2002, $20 million fixed at 9.62% under the terms of an interest rate swap
agreement with the Company's lender expiring August 17, 2002, $42,540,000 fixed
at 7.92% under the terms of an interest rate swap agreement with the Company's
lender expiring February 2, 2002; and $1 million fixed at a LIBOR based rate of
7.77% expiring June 18, 2001. The above rates include a margin paid to the
lender based on overall leverage and may increase or decrease as the Company's
overall leverage fluctuates.
CAPITAL EXPENDITURES
For the three months ended March 31, 2001, the Company incurred capital
expenditures of approximately $4.1 million. Capital expenditures included: (i)
new product digital launches, (ii) expansion and improvements of cable
properties; (iii) additions to plant and equipment; and (iv) line drops,
extensions and installations of cable plant facilities.
The Company plans to invest approximately $5.8 million in capital expenditures
for the remainder of 2001 and approximately $10.9 million in 2002. This
represents anticipated expenditures for upgrading and rebuilding certain
distribution facilities, new product digital launches, extensions of
distribution facilities to add new subscribers and general maintenance. To fund
planned 2001 capital expenditures the Company plans to borrow approximately $3.0
million in 2001 from its Senior Credit Facility.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risks arising from changes in interest rates.
The Company's primary interest rate exposure results from changes in LIBOR or
the prime rate which are used to determine the interest rate applicable to the
Company's debt facilities. As of the date of this filing, the Company had
entered into three interest rate swap agreements for $20,000,000, $20,000,000,
and $42,540,000 of these borrowings, to partially hedge interest rate exposure.
Interest rate swaps have the effect of converting the applicable variable rate
obligations to fixed or other variable rate obligations. Had the Company not
entered into these fixed rate agreements, the potential loss over
one year that would result from a hypothetical, instantaneous and unfavorable
change of 100 basis points in the interest rate of all the Company's variable
rate obligations would be approximately $825,000.
The Company does not use financial instruments for trading or other speculative
purposes.
Cautionary statement for purposes of the "Safe Harbor" provisions of the Private
Litigation Reform Act of 1995. Statements contained or incorporated by reference
in this document that are not based on historical fact are "forward-looking
statements" within the meaning of the Private Securities Reform Act of 1995.
Forward-looking statements may be identified by use of forward-looking
terminology such as "believe", "intends", "may", "will", "expect", "estimate",
"anticipate", "continue", or similar terms, variations of those terms or the
negative of those terms.
11
PART II -- OTHER INFORMATION
ITEM 1 Legal proceedings
The Company is a party to ordinary and routine litigation proceedings that are
incidental to the Company's business. Management believes that the outcome of
all pending legal proceedings will not, individually or in the aggregate, have a
material adverse effect on the Company, its financial condition, prospects and
debt service ability.
ITEM 2 Changes in securities
None
ITEM 3 Defaults upon senior securities
None
ITEM 4 Submission of matters to a vote of security holders
None
ITEM 5 Other information
None
ITEM 6 Exhibits and Reports on Form 8-K
(a) No reports on Form 8-K have been filed during the quarter ended March 31,
2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Northland Cable Television, Inc. and Subsidiary
SIGNATURES CAPACITIES DATE
---------- ---------- ----
/s/ Richard I. Clark Executive Vice President, Treasurer 5/15/01
- ------------------------------- and Assistant Secretary ------------
Richard I. Clark
5/15/01
/s/ Gary S. Jones President ------------
- ------------------------------
Gary S. Jones