SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Period Ended March 31, 2005 Commission File Number 0-10763
Atrion Corporation
(Exact Name of Registrant as Specified in its Charter)
Delaware 63-0821819
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
One Allentown Parkway, Allen, Texas 75002
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(Address of Principal Executive Offices) (Zip Code)
(972) 390-9800
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(Registrant's Telephone Number, Including Area Code)
Indicate by check whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--------- ---------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of Shares Outstanding at
Title of Each Class May 3, 2005
- ---------------------------------------- ------------------------------------
Common stock, Par Value $0.10 per share 1,807,407
ATRION CORPORATION AND SUBSIDIARIES
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TABLE OF CONTENTS
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PART I. Financial Information 2
Item 1. Financial Statements
Consolidated Statements of Income (Unaudited)
For the Three Months Ended
March 31, 2005 and 2004 3
Consolidated Balance Sheets
March 31, 2005 (Unaudited) and December 31, 2004 4
Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended
March 31, 2005 and 2004 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
PART II. Other Information 13
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on
Form 8-K 13
SIGNATURES 14
1
PART I
FINANCIAL INFORMATION
2
Item 1. Financial Statements
ATRION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31
----------------------------------
2005 2004
----------------- ----------------
Revenues $ 18,645 $ 16,789
Cost of goods sold 11,024 10,834
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Gross profit 7,621 5,955
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Operating expenses:
Selling 1,405 1,428
General and administrative 2,217 2,081
Research and development 581 545
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4,203 4,054
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Operating income 3,418 1,901
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Other income:
Interest income 15 11
Interest expense (21) (27)
Other income 8 6
-------------- --------------
2 (10)
-------------- --------------
Income before provision for income taxes 3,420 1,891
Provision for income taxes (1,126) (604)
-------------- --------------
Net income $ 2,294 $ 1,287
============== ==============
Income per basic share $ 1.33 $ 0.76
============== ==============
Weighted average basic shares outstanding 1,723 1,703
Income per diluted share $ 1.23 $ 0.70
============== ==============
Weighted average diluted shares outstanding 1,865 1,843
The accompanying notes are an integral part of these statements.
3
ATRION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, December 31,
2005 2004
Assets (unaudited)
- ------ --------------------- --------------------
Current assets:
Cash and cash equivalents $ 1,083 $ 255
Accounts receivable 8,535 7,588
Inventories 15,094 14,013
Deposit on land purchase 3,750 3,750
Prepaid expenses 957 1,028
Other 1,039 1,039
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30,458 27,673
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Property, plant and equipment 51,643 50,402
Less accumulated depreciation and amortization 25,978 25,071
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25,665 25,331
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Other assets and deferred charges:
Patents 1,654 1,714
Goodwill 9,730 9,730
Other 3,602 2,960
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14,986 14,404
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$ 71,109 $ 67,408
============== ==============
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable and accrued liabilities $ 6,891 $ 7,146
Accrued income and other taxes 1,548 1,321
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8,439 8,467
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Line of credit 4,127 2,936
Other non-current liabilities 5,570 5,402
Stockholders' equity:
Common shares, par value $0.10 per share; authorized
10,000 shares, issued 3,420 shares 342 342
Paid-in capital 10,245 10,013
Retained earnings 76,532 74,479
Treasury shares,1,690 at March 31, 2005 and 1,712
at December 31, 2004, at cost (34,146) (34,231)
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Total stockholders' equity 52,973 50,603
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$ 71,109 $ 67,408
============== ==============
The accompanying notes are an integral part of these statements.
4
ATRION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
------------------- -------------------
2005 2004
------------------- -------------------
Cash flows from operating activities:
Net income $ 2,294 $ 1,287
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,072 1,391
Deferred income taxes 184 (70)
Tax benefit related to stock plans 83 24
Other 11 1
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3,644 2,633
Changes in operating assets and liabilities:
Accounts receivable (946) (2,236)
Inventories (1,081) (297)
Prepaid expenses 71 829
Other non-current assets (642) 50
Accounts payable and current liabilities (255) (678)
Accrued income and other taxes 228 185
Other non-current liabilities (16) 20
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1,003 506
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Cash flows from investing activities:
Property, plant and equipment additions (1,364) (684)
Property, plant and equipment sales 6 -
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(1,358) (684)
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Cash flows from financing activities:
Net change in line of credit 1,191 169
Issuance of common stock 234 134
Dividends (242) (205)
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1,183 98
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Net change in cash and cash equivalents 828 (80)
Cash and cash equivalents at beginning of period 255 298
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Cash and cash equivalents at end of period $ 1,083 $ 218
============= =============
Cash paid for:
Interest $ 21 $ 28
Income taxes $ 454 $ -
The accompanying notes are an integral part of these statements.
5
ATRION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
In the opinion of management, all adjustments necessary for a fair
presentation of results of operations for the periods presented have
been included in the accompanying unaudited consolidated financial
statements of Atrion Corporation (the "Company"). Such adjustments
consist of normal recurring items. The accompanying financial
statements have been prepared in accordance with the instructions to
Form 10-Q and include the information and notes required by such
instructions. Accordingly, the consolidated financial statements and
notes thereto should be read in conjunction with the financial
statements and notes included in the Company's 2004 Annual Report on
Form 10-K.
(2) Inventories
Inventories are stated at the lower of cost or market. Cost is
determined by using the first-in, first-out method. The following table
details the major components of inventories (in thousands):
March 31, December 31,
2005 2004
- ---------------------------------- ------------------ -------------------------
Raw materials $ 5,472 $ 5,665
Finished goods 5,686 4,595
Work in process 3,936 3,753
- ---------------------------------- ------------------ -------------------------
Total inventories $ 15,094 $ 14,013
- ---------------------------------- ------------------ -------------------------
(3) Income per share
The following is the computation for basic and diluted income per
share:
Three months ended March 31,
2005 2004
-------------------------------------------
(in thousands, except per share
amounts)
Net Income $ 2,294 $ 1,287
===========================================
Weighted average basic shares outstanding
1,723 1,703
Add: Effect of dilutive securities (options)
142 140
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Weighted average diluted shares outstanding
1,865 1,843
===========================================
Income per share:
Basic $ 1.33 $ 0.76
===========================================
Diluted $ 1.23 $ 0.70
===========================================
There were no outstanding options to purchase shares of common stock
that were not included in the diluted income per share calculation
because their effect would be anti-dilutive for the three-month period
ended March 31, 2005. There were options to purchase 52,000 shares of
common stock that were not included in the diluted income per share
calculation because their effect would be anti-dilutive for the
three-month period ended March 31, 2004.
6
ATRION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4) Stock-Based Compensation
At March 31, 2005, the Company had two stock-based employee
compensation plans. The Company accounts for those plans under the
recognition and measurement provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. No stock-based employee compensation cost is reflected
in net income, as all options granted under those plans had an exercise
price equal to the market value of the underlying common stock on the
date of grant.
In December 2004, the Financial Accounting Standards Board issued a
revision of FASB Statement No. 123, "Accounting for Stock-based
Compensation" ("SFAS No. 123R"). SFAS No. 123R supersedes APB Opinion
No. 25, "Accounting for Stock Issued to Employees" and requires a
public entity to measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date
fair value of the award, and recognize that cost over the vesting
period. SFAS 123R is effective for annual report periods beginning
after June 15, 2005. The Company will begin recognizing option expense
starting January 1, 2006. Since most of the Company's outstanding
options will have vested prior to January 1, 2006, the amount of
expense to be recognized for options starting in the first quarter of
2006 is not expected to be significant.
The following table illustrates the effect on net income and income per
share if the Company had applied the fair value recognition provisions
of SFAS No. 123R to stock-based employee compensation:
Three Months ended March 31,
-------------------------------
2005 2004
------------- -------------
(in thousands, except per share
amounts)
Net income, as reported $ 2,294 $ 1,287
Deduct: Total stock-based employee compensation expense
determined under fair value-based methods for all awards,
net of tax effects 102 146
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Pro forma net income $ 2,192 $ 1,141
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Income per share:
Basic - as reported $ 1.33 $ 0.76
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Basic - pro forma $ 1.27 $ 0.67
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Diluted - as reported $ 1.23 $ 0.70
============= =============
Diluted - pro forma $ 1.18 $ 0.62
============= =============
7
ATRION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(5) Pension Benefits
The components of net periodic pension cost are as follows for the
three months ended March 31, 2005 and March 31, 2004 (in thousands):
Three Months ended
March 31,
-------------------------------
2005 2004
------------- -------------
Service cost $ 67 $ 60
Interest cost 80 78
Expected return on assets (114) (106)
Prior service cost amortization (9) (9)
Actuarial loss 27 26
Transition amount amortization (11) (11)
------------- -------------
Net periodic pension cost $ 40 $ 38
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8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The Company designs, develops, manufactures, sells and distributes
products and components, primarily for the medical and health care
industry. The Company markets components to other equipment
manufacturers for incorporation in their products and sells finished
devices to physicians, hospitals, clinics and other treatment centers.
The Company's medical products primarily range from ophthalmology and
cardiovascular products to fluid delivery devices. The Company's other
medical and non-medical products include obstetrics products,
instrumentation and disposables used in dialysis, contract
manufacturing and valves and inflation devices used in marine and
aviation safety products.
The Company's products are used in a wide variety of applications by
numerous customers. The Company encounters competition in all of its
markets and competes primarily on the basis of product quality, price,
engineering, customer service and delivery time.
For the three months ended March 31, 2005, the Company reported
revenues of $18.6 million, operating income of $3.4 million and net
income of $2.3 million, up 11 percent, 80 percent and 78 percent,
respectively, from the three months ended March 31, 2004.
Results for the three months ended March 31, 2005
Consolidated net income totaled $2.3 million, or $1.33 per basic and
$1.23 per diluted share, in the first quarter of 2005. This is compared
with consolidated net income of $1.3 million, or $0.76 per basic and
$0.70 per diluted share, in the first quarter of 2004. The income per
basic share computations are based on weighted average basic shares
outstanding of 1,723,199 in the 2005 period and 1,703,153 in the 2004
period. The income per diluted share computations are based on weighted
average diluted shares outstanding of 1,864,695 in the 2005 period and
1,843,310 in the 2004 period.
Consolidated revenues of $18.6 million for the first quarter of 2005
were higher than revenues of $16.8 million for the first quarter of
2004. This 11 percent increase in revenues for the first quarter of
2005 over the first quarter of 2004 was primarily attributable to an
approximate 23 percent increase in the revenues of the Company's fluid
delivery products, an approximate 19 percent increase in the revenues
of the Company's cardiovascular products and an approximate 11 percent
increase in the revenues of the Company's other products. These
increases, which are generally attributable to higher sales volumes,
were partially offset by an approximate 10 percent decrease in the
revenues of the Company's ophthalmic products.
Cost of goods sold of $11.0 million for the first quarter of 2005 was 2
percent higher than in the comparable 2004 period. An improved mix of
product sales toward products with lower costs coupled with favorable
manufacturing efficiencies brought on by increased volumes and
continued manufacturing cost improvement projects held the increase in
cost of goods sold to 2 percent.
9
Gross profit of $7.6 million in the first quarter of 2005 was $1.7
million, or 28 percent, higher than in the comparable 2004 period. The
Company's gross profit percentage in the first quarter of 2005 was 40.8
percent of revenues compared with 35.5 percent of revenues in the first
quarter of 2004. The increase in gross profit percentage in the 2005
period compared to the 2004 period is primarily related to a favorable
change in the mix of products sold and the previously mentioned
manufacturing efficiencies and cost improvement projects.
The Company's first quarter 2005 operating expenses of $4.2 million
were $149,000 higher than the operating expenses for the first quarter
of 2004, resulting primarily from a $137,000 increase in general and
administrative (G&A) expenses. The increase in G&A expenses for the
first quarter of 2005 was principally attributable to increased
compensation costs. Operating income in the first quarter of 2005
increased $1.5 million, or 80 percent, to $3.4 million from $1.9
million in the first quarter of 2004. Operating income was 18.3 percent
of revenues in the first quarter of 2005 compared to 11.3 percent of
revenues in the first quarter of 2004. The improvement in operating
income was primarily attributable to the previously mentioned gross
profit improvement partially offset by the increase in G&A expenses.
Income tax expense for the first quarter of 2005 was $1.1 million
compared to income tax expense of $604,000 for the same period in the
prior year. The effective tax rate for the first quarter of 2005 was
32.9 percent compared with 31.9 percent for the first quarter of 2004.
Liquidity and Capital Resources
At March 31, 2005, the Company had cash and cash equivalents of $1.1
million compared with $255,000 at December 31, 2004. The Company
had outstanding borrowings of $4.1 million under its $25 million
revolving credit facility ("Credit Facility") at March 31, 2005
and $2.9 million at December 31, 2004. The increase in the
outstanding balance under the Credit Facility in the first three
months of 2005 was primarily attributable to borrowings to fund
planned capital expenditures and increases in working capital. The
Credit Facility, which expires November 12, 2006, and may be
extended under certain circumstances, contains various
restrictive covenants, none of which is expected to impact the
Company's liquidity or capital resources. At March 31, 2005, the
Company was in compliance with all financial covenants.
As of March 31, 2005, the Company had working capital of $22.0
million, including $1.1 million in cash and cash equivalents. The
$2.8 million increase in working capital during the first three
months of 2005 was primarily related to an increase in cash,
inventories and accounts receivable. The increase in cash was
primarily related to collections of customer accounts that could
not be applied toward the outstanding Credit Facility until after
March 31, 2005. The increase in accounts receivable during the
first three months of 2005 was primarily related to the increase
in revenues for the first quarter of 2005 as compared to the
fourth quarter of 2004. The increase in inventories was primarily
attributable to increased stocking levels necessary to improve
customer service and support increased revenues. Cash flows from
operating activities generated $1.0 million for the three months
ended March 31, 2005 as compared to $506,000 for the three months
ended March 31, 2004. The increase in net income was the primary
contributor to this change. During the first three months of
2005, the Company expended $1.4 million for the addition of
property and equipment. The Company received net proceeds of
$234,000 from the exercise of employee stock options during the
first three months of 2005. During the first quarter of 2005 the
Company paid dividends totaling $242,000 to its stockholders.
10
During the first quarter of 2005, the Company and Filtertek settled
their pending litigation. Terms of the settlement required the Company
to make a one-time payment to Filtertek in exchange for a paid-up
license to manufacture and sell swabable valves that were the subject
of the litigation. The cost of the settlement was apportioned to past
and future licensing periods. No charges were made against the first
quarter of 2005 income for this settlement because the reserves
previously established for the cost of litigation were sufficient to
cover the liability for past sales as well as expenses incurred to
date. The cost of the settlement associated with the future licensing
period will be amortized on a straight-line basis over the remaining
life of the patent which is approximately seven years.
In May 2005, the Company completed the purchase of ten acres of land to
be used for the construction of a new facility for its Halkey-Roberts
operation. The Company had made a $3.75 million deposit on the land in
2004 which was equal to the purchase price for the land. The Company
anticipates spending an additional $12.0 to $14.0 million for the
construction of a new facility at this site. The Company expects to
complete the construction of this new facility and move the
Halkey-Roberts operation into the new facility around mid-year 2006.
The Company believes that its existing cash and cash equivalents, cash
flows from operations, borrowings available under the Company's credit
facility, supplemented, if necessary, with equity or debt financing,
which the Company believes would be available, will be sufficient to
fund the Company's cash requirements for the foreseeable future.
Forward-Looking Statements
The statements in this Management's Discussion and Analysis that are
forward-looking are based upon current expectations, and actual results
may differ materially. Therefore, the inclusion of such forward-looking
information should not be regarded as a representation by the Company
that the objectives or plans of the Company would be achieved. Such
statements include, but are not limited to, the Company's expectations
regarding future liquidity and capital resources. Words such as
"anticipates," "believes," "expects," "estimated" and variations of
such words and similar expressions are intended to identify such
forward-looking statements. Forward-looking statements contained herein
involve numerous risks and uncertainties, and there are a number of
factors that could cause actual results or future events to differ
materially, including, but not limited to, the following: changing
economic, market and business conditions; acts of war or terrorism; the
effects of governmental regulation; the impact of competition and new
technologies; slower-than-anticipated introduction of new products or
implementation of marketing strategies; implementation of new
manufacturing processes or implementation of new information systems;
the Company's ability to protect its intellectual property; changes in
the prices of raw materials; changes in product mix; intellectual
property and product liability claims and product recalls; the ability
to attract and retain qualified personnel and the loss of any
significant customers. In addition, assumptions relating to budgeting,
marketing, product development and other management decisions are
subjective in many respects and thus susceptible to interpretations and
periodic review which may cause the Company to alter its marketing,
capital expenditures or other budgets, which in turn may affect the
Company's results of operations and financial condition.
11
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For the quarter ended March 31, 2005, the Company did not experience
any material changes in market risk exposures that affect the
quantitative and qualitative disclosures presented in the Company's
2004 Annual Report on Form 10K.
Item 4. Controls and Procedures
With the participation of management, the Company's Chief Executive
Officer and its Chief Financial Officer evaluated the effectiveness of
the Company's disclosure controls and procedures as of March 31, 2005.
Based upon this evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material
information relating to the Company (including its consolidated
subsidiaries) required to be disclosed by the Company in the reports
that the Company files with the Securities and Exchange Commission.
There has been no change in the Company's internal controls over
financial reporting during the Company's most recent fiscal quarter
that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
12
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 31, 2005, Halkey-Roberts Corporation, a subsidiary of the
Company ("Halkey-Roberts"), settled its litigation with Filtertek, Inc.
that had been pending in the United States District Court for the
Middle District of Florida, Tampa Division. Under the terms of the
settlement agreement, Halkey-Roberts made a one-time payment to
Filtertek, Inc. in exchange for a non-exclusive, worldwide, fully paid
up, non-royalty-bearing license to manufacture and sell swabable valves
within the scope of certain patents that were the subject of such
litigation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Sarbanes-Oxley Act Section 302 Certification of
Chief Executive Officer
31.2 Sarbanes-Oxley Act Section 302 Certification of
Chief Financial Officer
32.1 Certification Pursuant To 18 U.S.C. Section 1350,
As Adopted Pursuant To Section 906 of The
Sarbanes - Oxley Act Of 2002
32.2 Certification Pursuant To 18 U.S.C. Section 1350,
As Adopted Pursuant To Section 906 of The
Sarbanes - Oxley Act Of 2002
(b) Reports on Form 8-K
On February 28, 2005, the Company filed a report on Form
8-K with the SEC regarding the public dissemination of a
press release announcing its financial results for the
fourth quarter and year ended December 31, 2004 (Item 12).
13
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.
Atrion Corporation
------------------
(Registrant)
Date: May 13, 2005 /s/ Emile A. Battat
-----------------------------------
Emile A. Battat
Chairman, President and
Chief Executive Officer
Date: May 13, 2005 /s/ Jeffery Strickland
-----------------------------------
Jeffery Strickland
Vice President and
Chief Financial Officer
14