UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
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or
[ ] TRANSITION REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 1-11692
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ETHAN ALLEN INTERIORS INC.
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(Exact name of registrant as specified in its charter)
Delaware 06-1275288
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(State or other jurisdiction of incorporation (I.R.S. Employer ID No.)
or organization)
Ethan Allen Drive, Danbury, Connecticut 06811
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(Address of principal executive offices)
(203) 743-8000
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[X] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
[ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of September 30, 2002, there were 37,760,257 shares
of Common Stock, par value $.01 outstanding.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
TABLE OF CONTENTS
ITEM PAGE
- ---- ----
PART I - FINANCIAL INFORMATION
1. Consolidated Financial Statements as of September 30, 2002
(unaudited) and June 30, 2002 and for the three months
ended September 30, 2002 and 2001 (unaudited)
Consolidated Balance Sheets 2
Consolidated Statements of Operations 3
Consolidated Statements of Cash Flows 4
Consolidated Statements of Shareholders' Equity 5
Notes to Consolidated Financial Statements 6
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
3. Quantitative and Qualitative Disclosures About Market Risk 17
4. Controls and Procedures 17
PART II - OTHER INFORMATION
1. Legal Proceedings 18
2. Changes in Securities and Use of Proceeds 18
3. Defaults Upon Senior Securities 18
4. Submission of Matters to a Vote of Security Holders 18
5. Other Information 18
6. Exhibits and Reports on Form 8-K 18
Signatures 19
Certification of Principal Executive Officer and Principal 20
Financial Officer as Required by Section 302 of the
Sarbanes-Oxley Act of 2002
-1-
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30,
2002 June 30,
(unaudited) 2002
----------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 65,260 $ 75,688
Accounts receivable, less allowance for doubtful
accounts of $1,567 at September 30, 2002 and
$2,019 at June 30, 2002 28,972 32,845
Inventories, net (note 3) 177,907 174,147
Prepaid expenses and other current assets 22,073 18,731
Deferred income taxes 16,576 17,345
-------- --------
Total current assets 310,788 318,756
Property, plant and equipment, net 300,778 293,626
Intangible assets, net (note 5) 77,791 69,708
Other assets 4,752 6,665
-------- --------
Total assets $ 694,109 $ 688,755
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and capital
lease obligations $ 206 $ 107
Customer deposits 53,553 42,966
Accounts payable 37,002 38,027
Accrued compensation and benefits 27,658 30,190
Accrued expenses (note 4) 17,838 17,838
-------- --------
Total current liabilities 136,257 129,128
Long-term debt 10,205 9,214
Other long-term liabilities 2,535 2,066
Deferred income taxes 38,301 37,158
-------- --------
Total liabilities 187,298 177,566
Shareholders' equity:
Class A common stock, par value $.01, 150,000,000 shares
authorized; 45,276,067 shares issued at September 30,
2002 and 45,252,880 shares issued at June 30, 2002 453 453
Class B common stock, par value $.01, 600,000 shares
authorized; no shares issued and outstanding at
September 30, 2002 and June 30, 2002 - -
Preferred stock, par value $.01, 1,055,000 shares
authorized; no shares issued and outstanding at
September 30, 2002 and June 30, 2002 - -
Additional paid-in capital 277,564 277,694
-------- --------
278,017 278,147
Less: Treasury stock (at cost), 7,515,810 shares at
September 30, 2002 and 6,794,510 shares at June 30, 2002 (183,809) (161,428)
Retained earnings 412,286 394,470
Accumulated other comprehensive income (note 8) 317 -
-------- --------
Total shareholders' equity 506,811 511,189
-------- --------
Total liabilities and shareholders' equity $ 694,109 $ 688,755
======== ========
See accompanying notes to consolidated financial statements.
-2-
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share data)
Three Months
Ended September 30,
2002 2001
-------- --------
Net sales $216,529 $206,725
Cost of sales 109,814 112,756
------- -------
Gross profit 106,715 93,969
Operating expenses:
Selling 42,890 38,838
General and administrative 31,982 28,596
------- -------
Total operating expenses 74,872 67,434
------- -------
Operating income 31,843 26,535
Interest and other miscellaneous income, net 616 512
Interest and other related financing costs 173 149
------- -------
Income before income taxes 32,286 26,898
Income tax expense 12,204 10,167
------- -------
Net income $ 20,082 $ 16,731
======= =======
PER SHARE DATA (NOTE 7):
Basic earnings per common share:
Net income per basic share $ 0.53 $ 0.43
======= =======
Basic weighted average common shares 37,986 39,214
Diluted earnings per common share:
Net income per diluted share $ 0.52 $ 0.42
======= =======
Diluted weighted average common shares 38,915 40,271
See accompanying notes to consolidated financial statements.
-3-
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Three Months
Ended September 30,
2002 2001
-------- --------
Operating activities:
Net income $ 20,082 $ 16,731
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 5,033 4,679
Compensation expense related to restricted
stock award (430) (404)
Provision for deferred income taxes 1,912 1,859
Other non-cash expense (income) (426) 34
Change in assets and liabilities, net of the
effects of acquired and divested businesses:
Accounts receivable 3,354 580
Inventories 5,125 7,731
Prepaid and other current assets (2,383) (1,505)
Other assets 668 633
Customer deposits 6,746 4,425
Accounts payable (5,251) (6,329)
Income taxes payable 9,426 6,442
Accrued expenses (2,489) (3,896)
Other liabilities (57) (438)
------- -------
Net cash provided by operating activities 41,310 30,542
------- --------
Investing activities:
Proceeds from the disposal of property, plant
and equipment 2,367 3
Capital expenditures (9,309) (8,131)
Acquisitions (9,930) (10,366)
Other 147 62
------- -------
Net cash used in investing activities (16,725) (18,432)
------- -------
Financing activities:
Borrowings on revolving credit facility - -
Payments on revolving credit facility - -
Other payments on long-term debt and capital
leases (3,345) (32)
Net proceeds from issuance of common stock 219 232
Dividends paid (2,309) (1,571)
Payments to acquire treasury stock (29,578) (20,557)
------- -------
Net cash used in financing activities (35,013) (21,928)
------- -------
Net decrease in cash and cash equivalents (10,428) (9,818)
Cash and cash equivalents - beginning of period 75,688 48,112
------- -------
Cash and cash equivalents - end of period $ 65,260 $ 38,294
======= =======
See accompanying notes to consolidated financial statements.
-4-
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THREE MONTHS ENDED SEPTEMBER 30, 2002
(Unaudited)
(In thousands, except share data)
Accumulated
Additional Other
Common Paid-in Treasury Comprehensive Retained
Stock Capital Stock Income Earnings Total
----- ------- ----- ------ -------- -----
Balance at June 30, 2002 $ 453 $277,694 $(161,428) $ - $394,470 $511,189
Issuance of 23,187 shares of common
stock upon the exercise of stock
options - (211) - - - (211)
Purchase of 721,300 shares of
treasury stock - - (22,381) - - (22,381)
Tax benefit associated with exercise
of employee stock options - 81 - - - 81
Dividends declared on common stock - - - - (2,266) (2,266)
Other comprehensive income (note 8) - - - 317 - 317
Net income - - - - 20,082 20,082
------
Total comprehensive income 20,399
---- ------- -------- ----- ------- -------
Balance at September 30, 2002 $ 453 $277,564 $(183,809) $ 317 $412,286 $506,811
==== ======= ======== ===== ======= =======
See accompanying notes to consolidated financial statements.
-5-
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(unaudited)
(1) BASIS OF PRESENTATION
Ethan Allen Interiors Inc. (the "Company") is a Delaware corporation
incorporated on May 25, 1989. The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiary Ethan
Allen Inc. ("Ethan Allen") and Ethan Allen's subsidiaries. All of Ethan
Allen's capital stock is owned by the Company. The Company has no other
assets or operating results other than those associated with its
investment in Ethan Allen.
(2) INTERIM FINANCIAL PRESENTATION
All intercompany accounts and transactions have been eliminated in the
consolidated financial statements. In the opinion of the Company, all
adjustments, consisting only of normal recurring accruals necessary for
fair presentation, have been included in the financial statements. The
results of operations for the three months ended September 30, 2002 are
not necessarily indicative of results for the fiscal year. It is suggested
that the interim consolidated financial statements be read in conjunction
with the consolidated financial statements and accompanying notes included
in the Company's Annual Report on Form 10-K for the year ended June 30,
2002.
Certain reclassifications have been made to prior year financial
information in order to conform to the current year's presentation. These
changes were made for disclosure purposes only and did not have an impact
on previously reported results of operations or shareholders' equity.
(3) INVENTORIES
Inventories at September 30, 2002 and June 30, 2002 are summarized as
follows (in thousands):
September 30, June 30,
2002 2002
------------ ---------
Finished goods $128,625 $123,906
Work in process 14,646 15,418
Raw materials 34,636 34,823
------- -------
$177,907 $174,147
======= =======
(4) RESTRUCTURING AND IMPAIRMENT CHARGE
During each of the last two fiscal years, the Company developed and
executed plans to consolidate its manufacturing operations as part of an
overall strategy to maximize production efficiencies and maintain its
competitive advantage. In the fourth quarter of fiscal 2002, the Company
initiated a plan which involved the closure of one of its manufacturing
facilities as well as the rough mill operation of a separate facility.
Closure of these facilities resulted in the elimination of approximately
220 employees; 150 employees effective June 29, 2002, and 70 employees
terminated during the first quarter of fiscal 2003. A pre-tax
restructuring and impairment charge of $5.1 million was recorded for costs
associated with these plant closings, of which $2.0 million principally
relates to employee severance and benefits costs and plant exit costs, and
$3.1 million relates to a fixed asset impairment charge, primarily for
properties and machinery and equipment of the closed facilities.
-6-
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(unaudited)
In the fourth quarter of fiscal 2001, the Company announced the closure of
three of its manufacturing facilities and the elimination of approximately
350 employees effective August 6, 2001. A pre-tax restructuring and
impairment charge of $6.9 million was recorded for costs associated with
the plant closings, of which $3.3 million principally relates to employee
severance and benefits costs and plant exit costs, and $3.6 million
relates to a fixed asset impairment charge, primarily for properties and
machinery and equipment of the closed facilities.
As of September 30, 2002, remaining restructuring reserves totaling $0.3
million were included in the Consolidated Balance Sheet as an accrued
expense in current liabilities. In addition, total impairment charges of
$6.7 million ($3.1 million and $3.6 million in 2002 and 2001,
respectively) were recorded to reduce certain property, plant and
equipment to net realizable value.
Activity in the Company's restructuring reserves is summarized as follows
(in thousands):
FISCAL 2002 RESTRUCTURING
Original Cash Non-cash
Charges Payments Utilized Total
-------- -------- -------- -----
Employee severance and other
related payroll and benefit
costs $ 1,847 $(1,750) $ - $ 97
Plant exit costs and other 171 (24) - 147
Write-down of long-lived assets 3,105 - (3,105) -
------ ------ ------ ------
Balance as of September 30, 2002 $ 5,123 $(1,774) $(3,105) $ 244
====== ====== ====== ======
FISCAL 2001 RESTRUCTURING
Original Cash Non-cash
Charges Payments Utilized Total
-------- -------- -------- -----
Employee severance and other
related payroll and benefit
costs $ 2,974 $(2,916) $ (58) $ -
Plant exit costs and other 332 (258) (34) 40
Write-down of long-lived assets 3,600 - (3,600) -
------ ------ ------ ------
Balance as of September 30, 2002 $ 6,906 $(3,174) $(3,692) $ 40
====== ====== ====== ======
(5) BUSINESS ACQUISITIONS
During the quarter, the Company acquired thirteen Ethan Allen retail
stores for total consideration of approximately $10.5 million. As a result
of these acquisitions, the Company (i) recorded additional inventory of
$8.9 million and other assets of $5.5 million, and (ii) assumed customer
deposits of $3.9 million, third-party debt of $4.4 million and other
liabilities of $3.6 million. As of September 30, 2002, $3.3 million of the
third-party debt had been fully repaid by the Company. Goodwill associated
with these acquisitions totaled $8.0 million and represents the premium
paid to the sellers related to the acquired book of business, including
outstanding order backlog of approximately $9.0 million, and other fair
value adjustments to the assets acquired and liabilities assumed.
As of September 30, 2002, the Company had goodwill, including product
technology, (net of accumulated amortization) of $58.0 million and other
identifiable intangible assets (net of accumulated amortization) of $19.7
million. Comparable balances as of June 30, 2002 were $50.0 million and
$19.7 million, respectively.
-7-
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(unaudited)
Goodwill in the wholesale and retail segments was $27.5 million and $30.5
million, respectively, at September 30, 2002 and $27.5 million and $22.5
million, respectively, at June 30, 2002. The wholesale segment, at both
dates, includes additional intangible assets of $19.7 million. These
assets consist of Ethan Allen trade names which, prior to the Company's
adoption of SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, on July 1,
2001, were being amortized over 40 years. In connection with the adoption
of Statement 142, the Company reassessed the useful lives of goodwill and
other intangible assets and both were determined to have indefinite useful
lives. As such, amortization ceased on that date. No impairment losses
were recorded on these intangible assets due to the adoption of Statement
142.
(6) CONTINGENCIES
The Company has been named as a potentially responsible party ("PRP") for
the cleanup of three active sites currently listed or proposed for
inclusion on the National Priorities List ("NPL") under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA").
The Company has resolved its liability at one of the sites by completing
remedial action activities. With regard to the other two sites, the
Company does not anticipate incurring significant cost as it believes that
it is not a major contributor based on the very small volume of waste
generated by the Company in relation to total volume at the sites.
However, liability under CERCLA may be joint and several. Additionally,
the Company has recently been notified by the State of New York that it
may be a PRP in a separate, unrelated matter. As a result, the extent of
any adverse effect on the Company's financial condition, results of
operations, or cash flows with respect to this matter cannot be reasonably
estimated at this time.
(7) EARNINGS PER SHARE
Basic and diluted earnings per share are calculated using the following
weighted average share data (in thousands):
Three Months Ended
September 30,
2002 2001
------ ------
Weighted average common shares outstanding
for basic calculation 37,986 39,214
Add: Dilutive effect of stock options and
warrants 929 1,057
------ ------
Weighted average common shares outstanding,
adjusted for diluted calculation 38,915 40,271
====== ======
As of September 30, 2002 and 2001, stock options to purchase 88,825 shares
and 19,000 shares of common stock, respectively, had exercise prices which
exceeded the average market price for the corresponding period. These
options have been excluded from the respective diluted earnings per share
calculation as their impact is anti-dilutive.
-8-
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(unaudited)
(8) COMPREHENSIVE INCOME
Total comprehensive income represents the sum of net income and items of
"other comprehensive income or loss" that are reported directly in equity.
Such items may include foreign currency translation adjustments, minimum
pension liability adjustments, fair value adjustments on certain
derivative instruments, and unrealized gains and losses on certain
investments in debt and equity securities. The Company has reported its
total comprehensive income in the Consolidated Statement of Shareholders'
Equity.
The Company's other comprehensive income, which is attributable solely to
foreign currency translation adjustments, was $317 for the three-month
period ended September 30, 2002. This amount, as well as the Company's
accumulated other comprehensive income included in equity, are the result
of changes in foreign currency exchange rates related to the operations of
7 Ethan Allen-owned retail stores located in Canada. Foreign currency
translation adjustments exclude income tax expense (benefit) given that
the earnings of non-U.S. subsidiaries are deemed to be reinvested for an
indefinite period of time.
(9) RELATED PARTY TRANSACTION
On August 31, 2001, the Company acquired certain assets associated with
the retail operations of 6 Ethan Allen stores from two entities owned and
controlled by Mr. Edward Teplitz. The total purchase price for the assets
was $10.1 million, net of the assumption of certain liabilities and
subject to post-closing adjustments. Approximately $3.5 million of the
purchase price was allocated to two real estate properties acquired in the
transaction with the remaining $6.6 million allocated to other assets. The
purchase price was determined by mutual negotiation, based upon the fair
value of net assets acquired and supported, as appropriate, by independent
third-party appraisals. Subsequent to the closing, Mr. Teplitz joined the
Company as Vice President of Finance. In August 2002, Mr. Teplitz was
named Chief Financial Officer of the Company.
(10) SEGMENT INFORMATION
The Company's reportable segments are strategic business areas that are
managed separately and offer different products and services. The
Company's operations are classified into two main segments: wholesale and
retail.
The wholesale segment is principally involved in the manufacture, sale and
distribution of home furnishing products to a network of
independently-owned and Ethan Allen-owned stores. Wholesale profitability
includes the wholesale gross margin, which is earned on wholesale sales to
all retail stores, including Ethan Allen-owned stores.
The retail segment sells home furnishing products through a network of
Ethan Allen-owned stores. Retail profitability includes the retail gross
margin, which represents the difference between retail sales price and the
cost of goods purchased from the wholesale segment.
The Company evaluates performance of the respective segments based upon
revenues and operating income. Inter-segment eliminations primarily
consist of the wholesale sales and profit on the transfer of inventory
between segments. Inter-segment eliminations also include items not
allocated to reportable segments.
-9-
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(unaudited)
The following table presents segment information for the three months
ended September 30, 2002 and 2001 (in thousands):
Three Months Ended
September 30,
2002 2001
-------- ---------
NET SALES:
Wholesale segment $157,846 $154,884
Retail segment 120,479 98,840
Elimination of inter-company sales (61,796) (46,999)
------- -------
Consolidated Total $216,529 $206,725
======= =======
OPERATING INCOME:
Wholesale segment $ 28,877 $ 23,264
Retail segment 3,047 3,002
Elimination (1) (81) 269
------- -------
Consolidated Total $ 31,843 $ 26,535
======= =======
CAPITAL EXPENDITURES:
Wholesale segment $ 3,963 $ 4,254
Retail segment 5,346 3,877
Acquisitions (2) 9,930 10,366
------- -------
Consolidated Total $ 19,239 $ 18,497
======= =======
September 30, June 30,
2002 2002
--------- ---------
TOTAL ASSETS:
Wholesale segment $438,161 $459,311
Retail segment 287,131 259,770
Inventory profit elimination (3) (31,183) (30,326)
------- -------
Consolidated Total $694,109 $688,755
======= =======
(1) The adjustment reflects the change in the elimination entry for
profit in ending inventory.
(2) Acquisitions include the purchase of (i) 13 retail stores
during the three months ended September 30, 2002 and (ii) 10
retail stores during the three months ended September 30,
2001.
(3) Inventory profit elimination reflects the embedded wholesale
profit in the Ethan Allen-owned store inventory that has not
been realized. These profits will be recorded when shipped to
the retail customer.
At September 30, 2002, there are 29 Ethan Allen retail stores located
outside the United States, of which 22 are independently-owned.
Approximately 2% of the Company's net sales for the three months ended
September 30, 2002 and 2001 were derived from sales to non-domestic,
independently-owned retail stores.
-10-
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussions set forth in this form 10-Q should be read in conjunction with
the financial information included herein and the Company's Annual Report on
Form 10-K for the year ended June 30, 2002. Management's discussion and analysis
of financial condition and results of operations and other sections of this
quarterly report contain forward-looking statements relating to future results
of the Company. Such forward-looking statements are identified by use of
forward-looking words such as "anticipates", "believes", "plans", "estimates",
"expects", and "intends" or words or phrases of similar expression. These
forward-looking statements are subject to various assumptions, risk and
uncertainties, including but not limited to, changes in political and economic
conditions, demand for the Company's products, acceptance of new products,
conditions in the various geographical markets where the Company does business,
technology developments affecting the Company's products and to those matters
discussed in the Company's filings with the Securities and Exchange Commission.
Accordingly, actual results could differ materially from those contemplated by
the forward-looking statements.
CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America which require that certain estimates and assumptions be made that affect
the amounts and disclosures reported in the those financial statements and the
related accompanying notes. Actual results could differ from these estimates and
assumptions. Management uses its best judgment in valuing these estimates and
may, as warranted, solicit external advice. Estimates are based on current facts
and circumstances, prior experience and other assumptions believed to be
reasonable. The following critical accounting policies, some of which are
impacted significantly by judgments, assumptions and estimates, affect the
Company's consolidated financial statements.
RETAIL STORE ACQUISITIONS - The Company accounts for the acquisition of
retail stores and related assets in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 141, BUSINESS COMBINATIONS, which requires
application of the purchase method for all business combinations initiated after
June 30, 2001. Accounting for these transactions as purchase business
combinations requires the allocation of purchase price paid to the assets
acquired and liabilities assumed based on their fair values as of the date of
the acquisition. The amount paid in excess of the fair value of net assets
acquired is accounted for as goodwill.
IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL - The Company periodically
evaluates whether events or circumstances have occurred that indicate that
long-lived assets may not be recoverable or that the remaining useful life may
warrant revision. When such events or circumstances are present, the Company
assesses the recoverability of long-lived assets by determining whether the
carrying value will be recovered through the expected undiscounted future cash
flows resulting from the use of the asset. In the event the sum of the expected
undiscounted future cash flows is less than the carrying value of the asset, an
impairment loss equal to the excess of the asset's carrying value over its fair
value is recorded. The long-term nature of these assets requires the estimation
of its cash inflows and outflows several years into the future and only takes
into consideration technological advances known at the time of the impairment
test.
In accordance with SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS,
which was adopted by the Company on July 1, 2001, goodwill and other intangible
assets are to be evaluated for impairment at the reporting unit level on an
annual basis and between annual tests whenever events or circumstances indicate
that the carrying value of a reporting unit may exceed its fair value. A
discounted cash flow model is used to estimate the fair value of a reporting
unit. This model requires the use of long-term planning forecasts and
assumptions regarding industry-specific economic conditions that are outside the
control of the Company.
-11-
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
ALLOWANCE FOR DOUBTFUL ACCOUNTS - The Company maintains an allowance
for doubtful accounts for estimated losses resulting from the inability of its
customers to make required payments. The allowance for doubtful accounts is
based on a review of specifically identified accounts in addition to an overall
aging analysis. Judgments are made with respect to the collectibility of
accounts receivable based on historical experience and current economic trends.
Actual losses could differ from those estimates.
INVENTORIES - Inventories (finished goods, work in process and raw
materials) are stated at the lower of cost, determined on a first-in, first-out
basis, or market. The Company estimates an inventory reserve for excess
quantities and obsolete items based on specific identification and historical
write-offs, taking into account future demand and market conditions. If actual
demand or market conditions in the future are less favorable than those
estimated, additional inventory write-downs may be required.
REVENUE RECOGNITION - Revenue is recognized when the risks and rewards
of ownership and title to the product have transferred to the buyer. This
generally occurs upon the shipment of goods to independent dealers or, in the
case of Ethan Allen-owned retail stores, upon delivery to the customer. Recorded
sales provide for estimated returns and allowances. The Company permits retail
customers to return defective products and incorrect shipments for credit
against other purchases. Terms offered by the Company are standard for the
industry.
BUSINESS INSURANCE RESERVES - The Company has insurance programs in
place to cover workers' compensation and property/casualty claims. The insurance
programs, which are funded through self-insured retention, are subject to
various stop-loss limitations. The Company accrues estimated losses using
actuarial models and assumptions based on historical loss experience. Although
management believes that the insurance reserves are adequate, the reserve
estimates are based on historical experience, which may not be indicative of
current and future losses. In addition, the actuarial calculations used to
estimate insurance reserves are based on numerous assumptions, some of which are
subjective. The Company adjusts insurance reserves, as needed, in the event that
future loss experience differs from historical loss patterns.
OTHER LOSS RESERVES - The Company has a number of other potential loss
exposures incurred in the ordinary course of business such as environmental
claims, product liability, litigation, restructuring charges, and the
recoverability of deferred income tax benefits. Establishing loss reserves for
these matters requires management's estimate and judgment with regard to maximum
risk exposure and ultimate liability or realization. As a result, these
estimates are often developed with the Company's counsel, or other appropriate
advisors, and are based on management's current understanding of the underlying
facts and circumstances. Because of uncertainties related to the ultimate
outcome of these issues or the possibilities of changes in the underlying facts
and circumstances, additional charges related to these issues could be required
in the future.
RESULTS OF OPERATIONS:
The Company's revenues are comprised of wholesale sales to dealer-owned
and Ethan Allen-owned retail stores and retail sales of Ethan Allen-owned
stores. See Note 10 to the Company's Consolidated Financial Statements for the
three months ended September 30, 2002 and 2001. The components of consolidated
revenues and operating income are as follows (in millions):
Three Months Ended
September 30,
2002 2001
------ ------
REVENUE:
Wholesale segment $157.8 $154.9
Retail segment 120.5 98.8
Elimination of inter-segment sales (61.8) (47.0)
----- -----
Consolidated Revenue $216.5 $206.7
===== =====
-12-
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Three Months Ended
September 30,
2002 2001
------ ------
OPERATING INCOME:
Wholesale segment $ 28.9 $ 23.2
Retail segment 3.0 3.0
Eliminations (0.1) 0.3
----- -----
Consolidated Operating Income $ 31.8 $ 26.5
===== =====
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2001
Consolidated revenue for the three months ended September 30, 2002
increased by $9.8 million, or 4.7%, to $216.5 million from $206.7 million for
the three months ended September 30, 2001. Net sales have increased due to the
continued expansion of the Company's retail segment offset slightly by delays
experienced related to certain off-shore sourced product lines and a relative
softness in consumer spending caused by a sluggish economy. Subsequent to the
end of the quarter, the Company announced that it would be selectively reducing
prices by up to 20% on certain items within four collections: British Classics;
Country French; Horizons by Ethan Allen; and Country Crossings. The objectives
of the price reductions are to increase sales volume within some of the more
popular collections while continuing to expand the Company's consumer reach. As
the reduced prices just recently became effective, the impact on future revenues
and earnings cannot be reasonably estimated at this time. However, it is not
anticipated that such price reductions will have a material adverse effect on
the Company's consolidated operations.
Total wholesale revenue for the first quarter of fiscal year 2003
increased by $2.9 million, or 1.9%, to $157.8 million from $154.9 million in the
first quarter of fiscal year 2002. The wholesale segment continues to be
challenged by the state of the U.S. economy and was further adversely affected
during the quarter by the inability to service backlog associated with certain
imported product lines as a result of higher-than-anticipated sales volume and
the closure of selected West Coast ports.
Total retail revenue from Ethan Allen-owned stores for the three months
ended September 30, 2002 increased by $21.7 million, or 21.9%, to $120.5 million
from $98.8 million for the three months ended September 30, 2001. The increase
in retail sales by Ethan Allen-owned stores was attributable to an increase in
sales generated by newly opened or acquired stores of $28.5 million, partially
offset by a decrease in comparable store delivered sales of $3.3 million, or
3.6%, and a decrease resulting from sold and closed stores, which generated $3.5
million fewer sales in fiscal year 2003 as compared to fiscal year 2002. The
number of Ethan Allen-owned stores increased to 116 as of September 30, 2002 as
compared to 93 as of September 30, 2001. During that twelve month period, the
Company acquired 23 stores from independent dealers, sold 1 to an independent
dealer, relocated 2 stores, and opened 1 new store. Of the 10 stores acquired
during the quarter ended September 30, 2001, 6 stores were purchased from Mr.
Edward D. Teplitz, who subsequently joined the Company as Vice President of
Finance (see Part II, Item 5 of the Form 10-Q filed on November 15, 2001). In
August 2002, Mr. Teplitz was named Chief Financial Officer of the Company.
Comparable stores are those which have been operating for at least 15
months. Minimal net sales, derived from the delivery of customer ordered
product, are generated during the first three months of operations of newly
opened stores. Stores acquired from dealers by Ethan Allen are included in
comparable store sales in their 13th full month of Ethan Allen-owned operations.
Total booked orders, which include wholesale orders and written
business of Ethan Allen-owned retail stores, increased from the prior year
quarter by 9.9%, reflecting the continued expansion of the Company's retail
segment and the success of recent off-shore sourced product introductions,
partially offset by the effects of a relative softness in consumer spending.
Comparing the current quarter to the prior year
-13-
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
quarter, wholesale orders increased 3.6% while Ethan Allen-owned store orders
increased 32.7%. Comparable store written business increased 4.8% over that same
period.
Gross profit increased during the quarter to $106.7 million from $94.0
million in the first quarter of the prior year. The $12.7 million, or 13.6%,
increase in gross profit was primarily attributable to (i) a higher
proportionate share of retail sales to total sales (56% in the current quarter
compared to 48% in the prior year quarter), (ii) lower manufacturing costs
resulting from efficiencies gained as a result of plant closures implemented in
fiscal 2001 and fiscal 2002, and (iii) the Company's continued focus on quality
and cost savings within all facets of its operations. Consolidated gross margin
increased to 49.3% in the first quarter of fiscal year 2003 from 45.5% in the
prior year first quarter. The gross margin was positively impacted as a result
of the factors identified previously.
During the quarter, it was determined that certain stock unit awards
previously expensed by the Company would not be issued to Mr. Farooq Kathwari,
Chairman and Chief Executive Officer. The granting and vesting of such stock
unit awards was governed by the provisions of Mr. Kathwari's 1997 Employment
Agreement (the "1997 Agreement") which provided for an initial five-year term of
employment through June 30, 2002 and the option of two additional one-year
extensions. The Company and Mr. Kathwari entered into a new employment agreement
effective July 1, 2002 (the "New Agreement"). Despite Mr. Kathwari's continued
employment subsequent to June 30, 2002, the Company determined that certain
stock unit awards contemplated under the performance provisions of the 1997
Agreement would not be granted as a result of Mr. Kathwari's performance being
governed, effective July 1, 2002, by the terms of the New Agreement. As such,
the related stock units were canceled and $0.5 million ($0.3 million, after-tax)
of previously recognized compensation expense was reversed.
Operating expenses increased $7.4 million, or 11.0%, to $74.8 million,
or 34.6% of net sales, in the current year quarter from $67.4 million, or 32.6%
of net sales, in the prior year quarter. This increase is primarily attributable
to further expansion of the retail segment and the higher proportionate share of
retail sales to total sales in the current quarter as compared to the prior year
quarter. The addition of 23 net new Ethan Allen-owned stores since September
2001 has resulted in higher costs associated with warehousing and delivery,
occupancy, advertising, healthcare and design consultant salaries. These
increases were partially offset by a decrease in distribution costs resulting
from a decline in the volume of wholesale shipments.
Operating income for the three months ended September 30, 2002 was
$31.8 million, or 14.7% of net sales, compared to $26.5 million, or 12.8% of net
sales, for the three months ended September 30, 2001. This represents an
increase of $5.3 million, or 20.0%, which is primarily attributable to a higher
gross margin and lower wholesale distribution costs, both of which were noted
above, partially offset by increased operating expenses resulting from the
continued expansion of the retail segment.
Total wholesale operating income for the first quarter of fiscal year
2003 was $28.9 million, or 18.3% of net sales, compared to $23.3 million, or
15.0% of net sales, in the first quarter of fiscal year 2002. The increase of
$5.6 million, or 24.1%, is primarily attributable to (i) lower manufacturing
costs resulting from efficiencies gained as a result of plant closures
implemented in fiscal 2001 and fiscal 2002, (ii) lower distribution costs, and
(iii) the Company's continued focus on quality and cost savings, partially
offset by lower wholesale sales volume.
Operating income for the retail segment during the current quarter
remained unchanged from the prior year quarter at $3.0 million. Operating income
as a percentage of net sales, however, decreased to 2.5% for the three months
ended September 30, 2002 from 3.0% for the three months ended September 30,
2001. The level of retail operating income generated by Ethan Allen-owned stores
is primarily attributable to a 3.6% decline in comparable store sales and higher
operating expenses related to the addition of 23 net new stores since September
2001, partially offset by increased sales volume associated with new stores.
-14-
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Interest and other miscellaneous income for the current quarter was
$0.6 million, an increase of $0.1 million from the prior year quarter. The
increase is due, primarily, to additional income recognized in connection with
the sale of real estate, partially offset by a decrease in interest income
associated with the Company's investment portfolio as a result of a decline in
interest rates during that same period.
Income tax expense was $12.2 million for the quarter ended September
30, 2002 as compared to $10.2 million for the comparable quarter in the prior
year. The Company's effective tax rate was 37.8% in both periods.
For the three months ended September 30, 2002, the Company recorded net
income of $20.1 million, an increase of $3.4 million, or 20.0%, from $16.7
million recorded for the three months ended September 30, 2001. Earnings per
diluted share were $0.52 for the current quarter representing an increase of
$0.10, or 23.8%, from $0.42 per diluted share in the prior year quarter.
FINANCIAL CONDITION AND LIQUIDITY
The Company's principal sources of liquidity are cash flow from
operations and borrowing capacity under a revolving credit facility. Net cash
provided by operating activities totaled $41.3 million for the quarter ended
September 30, 2002, compared to $30.5 million for the quarter ended September
30, 2001. The quarter-over-quarter increase of $10.8 million in net cash
provided by operating activities was principally the result of an increase in
net income, a greater decline in accounts receivable and increases in customer
deposits and income taxes payable. In addition, there were other less
significant changes within selected working capital balances as compared to the
prior year quarter. The decrease in accounts receivable is primarily
attributable to a further decline in the number of dealer-owned retail stores.
The increase in customer deposits is a result of additional retail store
acquisitions completed during the last twelve months and written sales in excess
of delivered sales for the period.
During the current quarter, net cash used in investing activities
decreased $1.7 million to $16.7 million from $18.4 million in the prior year
quarter. Of that amount, $9.9 million was used to finance acquisitions during
the quarter compared to $10.4 million in the prior year. During the three months
ended September 30, 2002, capital spending, exclusive of acquisitions, totaled
$9.3 million as compared to $8.1 million for the three months ended September
30, 2001. The current level of capital spending is principally attributable to
(i) new store development and renovation and (ii) technology improvements.
Capital expenditures for fiscal year 2003, exclusive of acquisitions, are
anticipated to be approximately $35.0 million. In addition, the Company expects
to incur expenditures for retail and other acquisitions totaling $35.0 million
during fiscal year 2003. The Company anticipates that cash from operations will
be sufficient to fund such capital expenditures and acquisitions.
Net cash used in financing activities totaled $35.0 million in the
current quarter as compared to $21.9 million in the prior year quarter, an
increase of $13.1 million. The increase in net cash used in financing activities
is primarily the result of an increase in payments related to the acquisition of
treasury stock and the repayment of debt. Total debt outstanding at September
30, 2002 was $10.4 million. At September 30, 2002, there were no revolving loans
outstanding and $20.0 million of trade and standby letters of credit outstanding
under the Company's credit facility. The Company had $105.0 million available
under its revolving credit facility at September 30, 2002.
The Company has been authorized by its Board of Directors to repurchase
its common stock, from time to time, either directly or through agents, in the
open market at prices and on terms satisfactory to the Company. The Company also
retires shares of unvested restricted stock and, prior to June 30, 2002,
repurchased shares of common stock from terminated or retiring employee's
accounts in the Ethan Allen Retirement
-15-
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Savings Plan. All of the Company's common stock repurchases and retirements are
recorded as treasury stock and result in a reduction of shareholders' equity.
During the first quarter of fiscal year 2003 and 2002, the Company repurchased
the following shares of its common stock:
Three Months Ended
September 30,
2002 2001
--------- -----------
Common shares repurchased 721,300 727,680
Cost to repurchase common shares $22,381,598 $20,556,471
Average price per share $31.03 $28.25
The Company funded its common stock repurchases through available cash
and cash from operations. As of September 30, 2002, the Company had a remaining
Board authorization to purchase approximately 1.0 million shares.
As of September 30, 2002, aggregate scheduled maturities of long-term
debt for each of the next five fiscal years are $0.1 million, $0.7 million, $4.7
million, $0.2 million and $0.1 million, respectively. Management believes that
its cash flow from operations, together with its other available sources of
liquidity, will be adequate to make all required payments of principal and
interest on its debt, to permit anticipated capital expenditures and to fund
working capital and other cash requirements over the next twelve months. As of
September 30, 2002, the Company had working capital of $174.5 million and a
current ratio of 2.28 to 1.
-16-
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As of September 30, 2002, the Company was essentially debt-free. Cash
and short-term investments totaled $65.3 million and there were no revolving
loans outstanding under the Company's credit facility. Current debt as of
September 30, 2002 was $0.2 million and total long-term debt outstanding was
$10.2 million.
The Company is exposed to interest rate risk primarily through its
borrowing activities. The Company's policy has been to utilize United States
dollar denominated borrowings to fund its working capital and investment needs.
Short term debt, if required, is used to meet working capital requirements and
long-term debt is generally used to finance long-term investments. There is
inherent roll-over risk for borrowings as they mature and are renewed at current
market rates. The extent of this risk is not quantifiable or predictable because
of the variability of future interest rates and the Company's future financing
requirements.
The Company has one long-term debt instrument outstanding with a
variable interest rate. This debt instrument has a principal balance of $4.6
million, which matures in 2004. Based on the principal balance outstanding, a
one percentage point increase in the variable interest rate would not have had a
significant impact on the Company's interest expense.
Currently, the Company does not enter into financial instrument
transactions for trading or other speculative purposes or to manage foreign
currency exchange, commodity price or interest rate exposure.
ITEM 4. CONTROLS AND PROCEDURES
Ethan Allen management, including the Chairman of the Board and Chief
Executive Officer ("CEO") and the Chief Financial Officer ("CFO"), conducted an
evaluation of the effectiveness of disclosure controls and procedures (as such
term is defined in Rules 13a-14 and 15d-14 under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) as of a date within 90 days prior to the
filing of this quarterly report (the "Evaluation Date"). Based on such
evaluation, the CEO and CFO have concluded that, as of the Evaluation Date, the
Company's disclosure controls and procedures are effective in ensuring that
material information relating to the Company (including its consolidated
subsidiaries), which is required to be included in the Company's periodic
filings under the Exchange Act, has been made known to them in a timely fashion.
There have been no significant changes in internal controls, or in
factors that could significantly affect internal controls, nor were any
corrective actions required with regard to significant deficiencies and material
weaknesses, subsequent to the Evaluation Date.
-17-
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There has been no change to matters discussed in Part I, Item 3 - Legal
Proceedings in the Company's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on September 30, 2002.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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) Exhibits
Exhibit 10(k)-3; Third Amendment to Amended and Restated
Consumer Credit Card Program Agreement dated July 26, 2002,
by and among the Company and Monogram Credit Card Bank of
Georgia.
(b) Reports on Form 8-K
On September 30, 2002, the Company filed its annual report on
Form 10-K for the year ended June 30, 2002 with the Securities
and Exchange Commission. Accompanying such report was a
certification, filed on Form 8-K, of the Company's Chief
Executive Officer and Chief Financial Officer, pursuant to 18
U.S.C. Section 1350 adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and attached thereto as Exhibit 99.1.
-18-
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
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.
ETHAN ALLEN INTERIORS INC.
(Registrant)
DATE: November 12, 2002 BY: /s/ M. Farooq Kathwari
---------------------------------
M. Farooq Kathwari
Chairman of the Board, President
and Chief Executive Officer
(Principal Executive Officer)
DATE: November 12, 2002 BY: /s/ Edward D. Teplitz
---------------------------------
Edward D. Teplitz
Vice President and Chief Financial Officer
(Principal Financial Officer)
-19-
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AS REQUIRED BY SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, M. Farooq Kathwari, do hereby certify that:
(1) I have reviewed the September 30, 2002 quarterly report on Form 10-Q
filed by Ethan Allen Interiors Inc. (the "Company");
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Company as of, and for, the periods presented in this
quarterly report;
(4) I and the other certifying officers are responsible for establishing
and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Company and have:
(i) Designed such disclosure controls and procedures to
ensure that material information relating to the
Company, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
(ii) Evaluated the effectiveness of the Company's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(iii) Presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
(5) I and the other certifying officers have disclosed, based on our most
recent evaluation, to the Company's auditors and the Audit Committee of
the Board of Directors (or persons fulfilling the equivalent function):
(i) All significant deficiencies in the design or
operation of internal controls which could adversely
affect the Company's ability to record, process,
summarize and report financial data and have
identified for the Company's auditors any material
weaknesses in internal controls; and
(ii) Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the Company's internal controls; and
(6) I and the other certifying officers have indicated in this quarterly
report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ M. Farooq Kathwari Chairman, Chief Executive
- ------------------------------------------- Officer and Director
(M. Farooq Kathwari)
-20-
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER AS REQUIRED BY SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Edward D. Teplitz, do hereby certify that:
(1) I have reviewed the September 30, 2002 quarterly report on Form 10-Q
filed by Ethan Allen Interiors Inc. (the "Company");
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Company as of, and for, the periods presented in this
quarterly report;
(4) I and the other certifying officers are responsible for establishing
and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Company and have:
(i) Designed such disclosure controls and procedures to
ensure that material information relating to the
Company, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
(ii) Evaluated the effectiveness of the Company's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(iii) Presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
(5) I and the other certifying officers have disclosed, based on our most
recent evaluation, to the Company's auditors and the Audit Committee of
the Board of Directors (or persons fulfilling the equivalent function):
(i) All significant deficiencies in the design or
operation of internal controls which could adversely
affect the Company's ability to record, process,
summarize and report financial data and have
identified for the Company's auditors any material
weaknesses in internal controls; and
(ii) Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the Company's internal controls; and
(6) I and the other certifying officers have indicated in this quarterly
report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ Edward D. Teplitz Chief Financial Officer
- -----------------------------------------
(Edward D. Teplitz)
-21-