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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2005
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 001-09097
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REX STORES CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware 31-1095548
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2875 Needmore Road, Dayton, Ohio 45414
(Address of principal executive offices) (Zip Code)
(937) 276-3931
(Registrant's telephone number, including area code)
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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 ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes (X) No ( )
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes ( ) No (X)
At the close of business on December 7, 2005 the registrant had 10,271,046
shares of Common Stock, par value $.01 per share, outstanding.
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REX STORES CORPORATION AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Condensed Balance Sheets ..................................................... 3
Consolidated Condensed Statements of Income ............................................... 4
Consolidated Condensed Statements of Shareholders' Equity ................................. 5
Consolidated Condensed Statements of Cash Flows ........................................... 6
Notes to Consolidated Condensed Financial Statements ...................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................................................ 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk ............................... 21
Item 4. Controls and Procedures .................................................................. 21
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds .............................. 22
Item 6. Exhibits ................................................................................. 22
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REX STORES CORPORATION AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
October 31 January 31 October 31
2005 2005 2004
---- ---- ----
(In Thousands)
Unaudited Unaudited
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,254 $ 4,671 $ 1,075
Accounts receivable, net 4,460 5,460 5,088
Synthetic fuel receivable 2,930 1,675 1,848
Merchandise inventory 135,220 124,188 152,215
Prepaid expenses and other 1,555 1,230 2,897
Future income tax benefits 10,929 10,929 8,703
--------- --------- ---------
Total current assets 156,348 148,153 171,826
PROPERTY AND EQUIPMENT, NET 127,626 129,723 130,487
ASSETS HELD FOR SALE 1,669 1,986 2,569
OTHER ASSETS 823 841 612
FUTURE INCOME TAX BENEFITS 27,978 27,978 16,082
RESTRICTED INVESTMENTS 2,300 2,270 2,265
--------- --------- ---------
Total assets $ 316,744 $ 310,951 $ 323,841
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ - $ - $ 15,169
Current portion of long-term debt 2,958 2,897 2,939
Current portion of deferred income
and deferred gain on sale and leaseback 10,609 10,432 10,378
Accounts payable, trade 38,919 32,842 49,259
Accrued income taxes 418 1,567 -
Accrued payroll and related items 5,777 6,303 5,101
Other current liabilities 6,596 6,152 7,454
--------- --------- ---------
Total current liabilities 65,277 60,193 90,300
--------- --------- ---------
LONG-TERM LIABILITIES:
Long-term mortgage debt 27,774 30,501 31,633
Deferred income 11,349 11,703 11,522
--------- --------- ---------
Total long-term liabilities 39,123 42,204 43,155
--------- --------- ---------
SHAREHOLDERS' EQUITY:
Common stock 293 290 287
Paid-in capital 134,985 133,474 130,705
Retained earnings 234,332 212,629 195,830
Treasury stock (157,266) (137,839) (136,436)
--------- --------- ---------
Total shareholders' equity 212,344 208,554 190,386
--------- --------- ---------
Total liabilities and shareholders' equity $ 316,744 $ 310,951 $ 323,841
========= ========= =========
The accompanying notes are an integral part of these unaudited consolidated
condensed financial statements.
3
REX STORES CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements Of Income
Unaudited
Three Months Ended Nine Months Ended
October 31 October 31
---------- ----------
2005 2004 2005 2004
---- ---- ---- ----
(In Thousands, Except Per Share Amounts)
NET SALES $ 94,321 $ 90,502 $ 267,011 $ 259,172
COSTS AND EXPENSES:
Cost of merchandise sold 68,465 66,138 192,073 186,165
--------- --------- --------- ---------
Gross profit 25,856 24,364 74,938 73,007
Selling, general and administrative expenses 24,689 24,846 71,284 71,359
--------- --------- --------- ---------
Operating income (loss) 1,167 (482) 3,654 1,648
INVESTMENT INCOME 23 7 155 152
INTEREST EXPENSE (690) (719) (2,020) (2,437)
LOSS ON EARLY TERMINATION OF DEBT - - - (614)
GAIN ON SALE OF REAL ESTATE 253 121 253 121
INCOME FROM SYNTHETIC FUEL INVESTMENTS 8,433 5,219 24,813 13,798
--------- --------- --------- ---------
Income from continuing operations before provision
for income taxes and discontinued operations 9,186 4,146 26,855 12,668
PROVISION FOR INCOME TAXES 2,203 564 4,900 1,251
--------- --------- --------- ---------
Income from continuing operations 6,983 3,582 21,955 11,417
Loss from discontinued operations, net of tax (101) (201) (377) (667)
Gain on disposal of discontinued operations, net of tax - - 125 -
--------- --------- --------- ---------
Net Income $ 6,882 $ 3,381 $ 21,703 $ 10,750
========= ========= ========= =========
WEIGHTED AVERAGE SHARES
OUTSTANDING - BASIC 10,532 10,897 10,850 11,092
========= ========= ========= =========
Basic income per share from continuing operations $ 0.66 $ 0.33 $ 2.02 $ 1.03
Basic loss per share from discontinued operations (0.01) (0.02) (0.03) (0.06)
Basic income per share on disposal of discontinued
operations - - 0.01 -
--------- --------- --------- ---------
BASIC NET INCOME PER SHARE $ 0.65 $ 0.31 $ 2.00 $ 0.97
========= ========= ========= =========
WEIGHTED AVERAGE SHARES
OUTSTANDING - DILUTED 11,865 12,610 12,353 12,778
========= ========= ========= =========
Diluted income per share from continuing operations $ 0.59 $ 0.29 $ 1.78 $ 0.89
Diluted loss per share from discontinued operations (0.01) (0.02) (0.03) (0.05)
Diluted income per share on disposal of discontinued
operations - - 0.01 -
--------- --------- --------- ---------
DILUTED NET INCOME PER SHARE $ 0.58 $ 0.27 $ 1.76 $ 0.84
========= ========= ========= =========
The accompanying notes are an integral part of these unaudited consolidated
condensed financial statements.
4
REX STORES CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements Of Shareholders' Equity
Unaudited
Common Shares
Issued Treasury Total
------ -------- Paid-in Retained Shareholders'
Shares Amount Shares Amount Capital Earnings Equity
------ ------ ------ ------ ------- -------- ------
(In Thousands)
Balance at January 31, 2005 29,038 $ 290 17,865 $(137,839) $133,474 $212,629 $208,554
Net income 21,703 21,703
Treasury stock acquired 1,697 (24,383) (24,383)
Stock options exercised
And related tax effects 289 3 (627) 4,956 1,511 6,470
--------- ----- --------- --------- -------- -------- --------
Balance at October 31, 2005 29,327 $ 293 18,935 $(157,266) $134,985 $234,332 $212,344
========= ===== ========= ========= ======== ======== ========
The accompanying notes are an integral part of these unaudited consolidated
condensed financial statements.
5
REX STORES CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements Of Cash Flows
Unaudited
Nine Months Ended
October 31
2005 2004
---- ----
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 21,703 $ 10,750
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization, net 3,330 3,051
Income from limited partnerships (24,813) (13,798)
(Gain) loss on disposal of fixed assets (46) 246
Loss on early termination of debt - 273
Deferred income (177) (1,106)
Deferred income tax - (1,437)
Changes in assets and liabilities:
Accounts receivable 1,000 (282)
Merchandise inventory (11,032) (35,460)
Prepaid expenses and other (325) (1,689)
Other long term assets 18 2,865
Accounts payable, trade 6,077 16,514
Other current liabilities (1,231) (2,067)
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (5,496) (22,140)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,390) (5,438)
Proceeds from sale of partnership interest 23,558 15,048
Proceeds from sale of real estate and fixed assets 1,520 194
Proceeds from sale of investments - 7,000
Restricted investments (30) (8)
-------- --------
NET CASH PROVIDED BY INVESTING ACTIVITIES 22,658 16,796
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes payable - 15,169
Payments of long-term debt (2,666) (24,234)
Stock options exercised 4,598 4,061
Treasury stock acquired (22,511) (8,357)
-------- --------
NET CASH USED IN FINANCING ACTIVITIES (20,579) (13,361)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,417) (18,705)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,671 19,780
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,254 $ 1,075
======== ========
The accompanying notes are an integral part of these unaudited consolidated
condensed financial statements.
6
REX STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
October 31, 2005
Note 1. Consolidated Condensed Financial Statements
The consolidated condensed financial statements included in this report
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission and include, in the
opinion of management, all adjustments necessary to state fairly the information
set forth therein. Any such adjustments were of a normal recurring nature.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. It is suggested that these
unaudited consolidated condensed financial statements be read in conjunction
with the consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended January 31, 2005 (fiscal
2004). The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the year.
Note 2. Reclassifications
As a result of a previous reclassification of investments in auction
rate securities from cash and cash equivalents to investments available for
sale, there was an increase in sales of investments and an increase in cash
provided by investing activities of $7 million in the nine months ended
October 31, 2004 Consolidated Condensed Statement of Cash Flows. The Company
reclassified $2.9 million of in transit credit card and finance contract
settlements from cash to accounts receivable as of October 31, 2004.
Note 3. Accounting Policies
The interim consolidated condensed financial statements have been
prepared in accordance with the accounting policies described in the notes to
the consolidated financial statements included in the Company's 2004 Annual
Report on Form 10-K. While management believes that the procedures followed in
the preparation of interim financial information are reasonable, the accuracy of
some estimated amounts is dependent upon facts that will exist or calculations
that will be accomplished at fiscal year end. Examples of such estimates include
management bonuses and the provision for income taxes. Any adjustments pursuant
to such estimates during the quarter were of a normal recurring nature. The
provision for income taxes could vary based upon full year synthetic fuel
production levels, federal income tax law changes, the price of certain fuel
products adjusted for inflation and Internal Revenue Service audits.
7
The following table reflects the approximate percent of net sales for
each major product group for the periods presented.
Three Months Ended Nine Months Ended
October 31 October 31
---------- ----------
Product Category 2005 2004 2005 2004
- ------------------ ---- ---- ---- ----
Televisions........................... 56.6% 57.2% 53.7% 52.2%
Appliances............................ 24.2 19.5 24.6 21.6
Audio................................. 7.6 9.9 9.2 11.8
Video................................. 4.5 5.6 4.9 6.3
Other................................. 7.1 7.8 7.6 8.1
------ ------ ------ ------
100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
The Company accounts for vendor allowances in accordance with Emerging
Issues Task Force (EITF) 02-16 "Accounting by a Customer for Certain
Consideration Received from a Vendor," which addresses how and when to reflect
consideration received from vendors in the consolidated financial statements.
Vendors often fund, up front, certain advertising costs and exposure to general
changes in pricing to customers due to technological change. Allowances are
deferred as received from vendors and recognized into income as an offset to the
cost of merchandise sold when the related product is sold or expense incurred.
Advertising costs are expensed as incurred.
Cost of merchandise sold includes the cost of merchandise, markdowns
and inventory shrink, receiving, warehousing and freight charges to deliver
merchandise to retail stores, service repair bills as well as cash discounts and
rebates. The Company classifies purchasing costs as selling, general and
administrative expenses. As a result of this classification, the Company's gross
margins may not be comparable to those of other retailers that include costs
related to their distribution network in selling, general and administrative
expense.
The Company includes stores expenses (such as payroll and occupancy
costs), advertising, purchasing, depreciation, insurance and overhead costs in
selling, general and administrative expenses.
Interest expense of $2,020,000 for the nine months ended October 31,
2005 is net of approximately $15,000 of interest capitalized. Interest expense
of $2,437,000 for the nine months ended October 31, 2004 is net of approximately
$30,000 of interest capitalized. Cash paid for interest for the nine months
ended October 31, 2005 and 2004 was approximately $1,907,000 and $2,320,000,
respectively.
During the first nine months of fiscal 2004, the Company completed the
early payoff of mortgages for 42 retail locations totaling approximately $21.6
million. The scheduled payment on these notes included approximately $0.5
million for the last three months of fiscal 2004, $6.2 million for fiscal 2005,
$6.9 million for fiscal 2006, $1.6 million for fiscal 2007, $1.4 million for
fiscal 2008 and $4.3 million thereafter. The Company incurred a charge of
approximately $614,000, including cash payments of approximately $341,000 for
the first nine months of fiscal 2004 related to this termination of debt.
8
During the first nine months of fiscal 2005 the Company received
132,271 shares of common stock into treasury with a market value of
approximately $1.9 million as payment for the exercise of options for 422,775
shares of treasury and common stock.
The Company applies an effective tax rate to interim periods that is
consistent with the Company's estimated annual tax rate. The tax credits
generated from synthetic fuel operations reduce the Company's overall effective
tax rate. As discussed in Note 6, the Company has divested itself of all
ownership interests in facilities that produce synthetic fuel which qualifies
for Section 29 tax credits. Thus, the Company will not receive any additional
Section 29 tax credits from synthetic fuel production subsequent to October 1,
2005. Estimates of the effective tax rate may change based upon the level of
federal income tax credits generated by the limited partnerships (and the
resulting income), which the Company does not control, any limitations on those
credits under the Internal Revenue Code and the level of income from the
Company's retail operations.
The Company provides for deferred tax liabilities and assets for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis and operating loss and tax credit carryforwards. The
Company provides for a valuation allowance if, based on the weight of available
evidence, it is more likely than not that some or all of the deferred tax assets
will not be realized.
The Company paid income taxes of approximately $4.5 million and $2.4
million for the nine months ended October 31, 2005 and 2004, respectively.
Recently Issued Accounting Standards
In December 2004, The Financial Accounting Standards Board ("FASB")
issued a revision to Statement of Financial Accounting Standards 123,
"Share-Based Payment ("SFAS 123(R)"). The revision requires all entities to
recognize compensation expense in an amount equal to the fair value of
share-based payments granted to employees. SFAS 123(R) eliminates the
alternative method of accounting for employee share-based payments previously
available under Accounting Principles Board Opinion No. 25 ("APB 25"). In April
2005, the Securities and Exchange Commission delayed the effective date of SFAS
123(R) to fiscal years beginning after June 15, 2005. As a result, SFAS 123(R)
will be effective for the Company beginning in the first quarter of fiscal 2006.
The Company has not completed its evaluation of the impact that adopting SFAS
123(R) will have on the financial statements.
In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting
for Conditional Asset Retirement Obligations -- an Interpretation of FASB
Statement No. 143" ("FIN 47"). FIN 47 clarifies that the term "conditional
asset retirement obligation" as used in FASB Statement No. 143, "Accounting for
Asset Retirement Obligations," refers to a legal obligation to perform an asset
retirement activity in which the timing and (or) method of settlement are
conditional on a future event that may or may not be within the control of the
entity. Accordingly, an entity is required to recognize a liability for the fair
value of a conditional asset retirement obligation if the fair value of the
liability can be reasonably estimated. FIN 47 is effective at the end of the
Company's fiscal year ending January 31, 2006. The impact of FIN 47 is not
expected to have a material effect on the Company's consolidated financial
statements.
9
In May 2005, the FASB issued SFAS 154, "Accounting Changes and Error
Corrections - A Replacement of Accounting Principles Board (APB) Opinion No. 20
and SFAS 3." SFAS 154 requires retrospective application to prior periods'
financial statements for a change in accounting principle, unless it is
impracticable to determine either the period-specific effects or the cumulative
effect of the change. Additionally, retrospective application is not required
when explicit transition requirements specific to newly adopted accounting
principles exist. Retrospective application requires the cumulative effect of
the change on periods prior to those presented to be reflected in the carrying
amounts of assets and liabilities as of the beginning of the first period
presented and the offsetting adjustments to be recorded to opening retained
earnings. SFAS 154 retains the guidance contained in APB No. 20 for reporting
both the correction of an error in previously issued financial statements and a
change in accounting estimate. SFAS 154 will become effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005. The Company is required to adopt the provisions of SFAS 154, as
applicable, beginning in the first quarter of fiscal 2006.
In July of 2005, the FASB issued a proposed interpretation of SFAS 109,
"Accounting for Income Taxes", to clarify certain aspects of accounting for
uncertain tax positions, including issues related to the recognition and
measurement of those tax positions. The interpretation, which is not yet
finalized, would be effective in the first quarter of fiscal 2006. Any
adjustments required to be recorded as a result of adopting the interpretation
would be reflected as a cumulative effect from a change in accounting principle.
The Company is in the process of determining the impact this proposed
interpretation will have on the Company's consolidated financial statements.
Note 4. Stock Option Plans
The Company has stock-based compensation plans under which stock
options have been granted to directors, officers and key employees at the market
price on the date of the grant.
The following summarizes options granted, exercised and canceled or
expired during the nine months ended October 31, 2005:
Outstanding at January 31, 2005 ($3.61 to $16.04 per share)............. 5,751,308
Exercised ($3.61 to $14.745 per share).................................. (915,403)
Canceled or expired ($8.01 to $16.04 per share)......................... (58,534)
---------
Outstanding at October 31, 2005 ($3.61 to $16.04 per share)............. 4,777,371
=========
Pursuant to SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company has elected to account for its employee stock option plans under APB
Opinion No. 25, "Accounting for Stock Issued to Employees," which recognizes
expense based on the intrinsic value at date of grant. As stock options have
been issued with exercise prices equal to grant date fair value, no compensation
cost has resulted.
Had compensation cost for all options granted been determined based on
the fair value at grant
10
date consistent with SFAS No. 123, the Company's net earnings and earnings per
share would have been as follows (in thousands, except per share amounts):
Three Months Nine Months
Ended Ended
October 31 October 31
---------- ----------
2005 2004 2005 2004
---- ---- ---- ----
Net Income As Reported $6,882 $3,381 $21,703 $10,750
Compensation Cost, net of tax 625 821 2,965 2,361
Pro forma 6,257 2,560 18,738 8,389
Basic net income per share
As Reported $ 0.65 $ 0.31 $ 2.00 $ 0.97
Compensation Cost, net of tax 0.06 0.08 0.27 0.21
Pro forma 0.59 0.23 1.73 0.76
Diluted net income per share
As Reported $ 0.58 $ 0.27 $ 1.76 $ 0.84
Compensation Cost, net of tax 0.05 0.07 0.24 0.18
Pro forma 0.53 0.20 1.52 0.66
The compensation cost, net of tax for the nine months ended October 31,
2005 includes approximately $766,000 related to the accelerated vesting of
certain options, effective May 26, 2005 which were granted to non-director
employees on April 30, 2002.
The assumptions used to calculate the fair value of options granted are
evaluated and revised, as necessary, to reflect market conditions and
experience.
11
Note 5. Income Per Share from Continuing Operations
The following table reconciles the basic and diluted net income per
share from continuing operations computation for each period presented (in
thousands, except per share amounts):
Three Months Ended Nine Months Ended
October 31, 2005 October 31, 2005
---------------- ----------------
Per Per
Income Shares Share Income Shares Share
------ ------ ----- ------ ------ -----
Basic income per share from continuing
operations $6,983 10,532 $0.66 $21,955 10,850 $2.02
===== =====
Effect of stock options 1,333 1,503
------ ------ ------- ------
Diluted income per share from continuing
operations $6,983 11,865 $0.59 $21,955 12,353 $1.78
====== ====== ===== ======= ====== =====
Three Months Ended Nine Months Ended
October 31, 2004 October 31, 2004
---------------- ----------------
Per Per
Income Shares Share Income Shares Share
------ ------ ----- ------ ------ -----
Basic income per share from continuing
operations $3,582 10,897 $0.33 $11,417 11,092 $1.03
===== =====
Effect of stock options 1,713 1,686
------ ------ ------- ------
Diluted income per share from continuing
operations $3,582 12,610 $0.29 $11,417 12,778 $0.89
====== ====== ===== ======= ====== =====
For the three and nine months ended October 31, 2005, a total of
303,502 shares subject to outstanding options were not included in the common
equivalent shares outstanding calculation as the exercise prices were above the
average trading price of the Company's comon stock for that period. For the
three and nine months ended October 31, 2004, a total of 333,536 shares subject
to outstanding options were not included in the common equivalent shares
outstanding calculation as the exercise prices were above the average trading
price of the Company's common stock for that period.
Note 6. Synthetic Fuel
Income from continuing operations for the third quarter and first nine
months of fiscal 2005 includes approximately $6.0 million and $18.2 million,
respectively, of pre-tax investment income from the sales of the Company's
entire partnership interest in Colona SynFuel Limited Partnership, L.L.L.P., a
synthetic fuel limited partnership. Because the purchase price is based on the
value of Section 29 tax credits generated, it is subject to production levels
and to possible reduction or elimination to the extent the credit is limited. Of
the $18.2 million for the first nine months of fiscal 2005, approximately
$448,000 relates to a payment received for 2004 production. The 2004 production
payments made to the Company were based upon estimated income tax credits per
ton of coal produced. The $448,000 payment was made to the Company after the
Internal Revenue Service published the 2004 inflation rate used for the income
tax credit per ton calculation in April 2005.
12
On March 30, 2004, the Company also sold its entire ownership interest
in a limited liability company that owned a synthetic fuel facility in Gillette,
Wyoming. The Company received $2.8 million at closing along with a secured
contingent payment note that could provide additional investment income to the
Company. The facility resumed commercial operations during the second quarter of
fiscal 2005; as such, the Company received $3.5 million as a one-time payment
per the terms of the purchase agreement. In addition, the Company is eligible to
receive $1.50 per ton of "qualified production" produced and sold by the
facility through 2007. Because the purchase price is based on the value of
Section 29 tax credits generated, it is subject to production levels and to
possible reduction or elimination to the extent the credit is limited. During
the third quarter and first nine months of fiscal 2005, the Company recognized
approximately $1.2 million and $5.5 million (inclusive of the $3.5 million one
time payment), respectively, of pre-tax investment income from this sale.
Effective October 1, 2005, the Company sold its entire ownership
interest in a limited partnership, Somerset SynFuel, L.P., that owned two
synthetic fuel facilities. The Company received $1.2 million, net of
commissions, at closing along with a secured contingent payment note that could
provide additional investment income to the Company. The Company expects to
receive quarterly payments through 2007 equal to 80% of the Section 29 tax
credits attributable to the ownership interest sold, once such amount exceeds
$1.2 million. Because the purchase price is based on the value of Section 29 tax
credits generated, it is subject to production levels and to possible reduction
or elimination to the extent the credit is limited. During the third quarter and
first nine months of fiscal 2005, the Company recognized approximately $1.2
million, net of commissions, of pre-tax investment income from this sale. With
this sale, the Company has divested itself of all ownership interests in
facilities that produce synthetic fuel which qualifies for Section 29 tax
credits.
As provided by the current Internal Revenue Code, the Code Section 29
tax credit program is expected to continue through December 31, 2007. Recent
increases in the price of oil could limit the amount of those credits or
eliminate them altogether for 2005 and one or more of the years following fiscal
2005. This possibility is due to a provision of Section 29 that provides that if
the average wellhead price per barrel for unregulated domestic crude oil for the
year (the "Annual Average Price") exceeds a certain threshold value (the
"Threshold Price"), the Section 29 tax credits are subject to phase out. For
calendar year 2004, the Threshold Price was $51.34 per barrel and the Phase Out
Price was $64.47 per barrel. The Threshold Price and the Phase Out Price are
adjusted annually as a result of inflation and are published by the Internal
Revenue Service in April of the following year.
The Company cannot predict with any certainty the Annual Average Price
for 2005 or beyond. Therefore, it cannot predict whether the price of oil will
have a material effect on its synthetic fuel business after 2004. However, if
during 2005, or in subsequent years, oil prices remain at historically high
levels or increase, such that the Annual Average Price exceeds the Threshold
Price, the Company's synthetic fuel business may be adversely affected for those
years, and, depending on the magnitude of such increases in oil prices, the
adverse affect for those years could be material and could have an impact on the
Company's synthetic fuel results of operations.
13
Note 7. Discontinued Operations and Assets Held for Sale
During the first nine months of fiscal 2005 the Company closed seven
stores in which the Company vacated the market or will not have a further
continuing involvement with the related property. Those stores and certain other
stores closed in previous periods or scheduled to be closed in the next twelve
months were classified as discontinued operations for all periods presented. Two
of the closed stores are classified as held for sale. The net assets of those
stores at October 31, 2005 were approximately $1.7 million. The Company expects
to sell the assets related to these stores within the next 12 months through
normal real estate channels. No loss has been recognized as the estimated net
realizable values exceed the carrying values of these assets.
Below is a table reflecting certain items of the income statement that
were reclassified as discontinued operations for the period indicated.
Three Months Ended Nine Months Ended
October 31 October 31
---------- ----------
2005 2004 2005 2004
---- ---- ---- ----
(In Thousands)
Net sales...................................................... $819 $3,875 $4,003 $12,631
Cost of merchandise sold ...................................... 673 2,957 3,242 9,576
Loss before benefit for income taxes .......................... 155 309 580 1,026
Benefit for income taxes....................................... 54 108 203 359
Net loss....................................................... $101 $201 $377 $667
Note 8. Storm Damage
On August 30, 2005, Hurricane Katrina caused damage to three stores.
The Company has substantially completed the evaluation of the related damage.
The impact of business interruption or required repairs to damaged stores did
not have a material impact on results of operations or require material capital
expenditures. All stores were open and in operation as of October 31, 2005.
Note 9. Subsequent Event
On November 28, 2005, the Company entered into an agreement to purchase
a $5 million convertible secured promissory note. The proceeds of the note will
be used to capitalize a limited liability company that intends to construct, and
subsequently, operate an ethanol producing facility. The purchase of the note is
expected to occur before June 1, 2006, subject to the limited liability company
obtaining additional financing and certain other conditions. The note purchase
agreement requires the Company to obtain a $5 million irrevocable letter of
credit to secure the Company's obligation to purchase the note. The note will
allow the Company, at its sole discretion, to convert the note into an equity
interest in the limited liability company. The $5 million letter of credit will
reduce the borrowing availability under the Company's revolving line of credit.
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
We are a specialty retailer in the consumer electronics/appliance
industry. As of October 31, 2005 we operated 226 stores in 37 states,
predominantly in small to medium-sized markets under the trade name "REX".
Fiscal Year
All references in this report to a particular fiscal year are to REX's
fiscal year ended January 31. For example, "fiscal 2005" means the period
February 1, 2005 to January 31, 2006.
Results of Operations
The following table sets forth, for the periods indicated, the relative
percentages that certain income and expense items bear to net sales:
Three Months Nine Months
Ended Ended
October 31 October 31
---------- ----------
2005 2004 2005 2004
---- ---- ---- ----
Net sales ...................................... 100.0% 100.0% 100.0% 100.0%
Cost of merchandise sold ....................... 72.6 73.1 71.9 71.8
----- ----- ----- -----
Gross profit ................................... 27.4 26.9 28.1 28.2
Selling, general and administrative expenses ... 26.2 27.4 26.7 27.6
----- ----- ----- -----
Operating income (loss) ........................ 1.2 (0.5) 1.4 0.6
Investment income .............................. - - 0.1 0.1
Interest expense ............................... (0.7) (0.8) (0.8) (0.9)
Loss on early termination of debt .............. - - - (0.2)
Gain on sale of real estate .................... 0.3 0.1 - -
Income from synthetic fuel investments ......... 8.9 5.7 9.3 5.3
----- ----- ----- -----
Income from continuing operations before
provision for income taxes and discontinued
operations ................................. 9.7 4.5 10.0 4.9
Provision for income taxes ..................... 2.3 0.6 1.8 0.5
----- ----- ----- -----
Income from continuing operations .............. 7.4 3.9 8.2 4.4
Loss from discontinued operations, net of tax .. (0.1) (0.2) (0.1) (0.3)
Gain on disposal of discontinued operations, net
of tax .................................. - - - -
----- ----- ----- -----
Net income ..................................... 7.3% 3.7% 8.1% 4.1%
===== ===== ===== =====
15
Comparison of Three Months and Nine Months Ended October 31, 2005 and 2004
Net sales in the quarter ended October 31, 2005 were $94.3 million
compared to $90.5 million in the prior year's third quarter, representing an
increase of $3.8 million or 4.2%. Net sales do not include sales from stores
classified in discontinued operations.
This increase was primarily caused by an increase in comparable store
sales of 4.6% for the third quarter of fiscal 2005. We consider a store to be
comparable after it has been open six full fiscal quarters. Comparable store
sales do not include sales of extended service contracts. We had a net reduction
of 13 stores (11 of which were classified as discontinued operations) since the
end of the third quarter of fiscal 2004.
Our strongest product category for the third quarter of fiscal 2005 was
the appliance category which positively impacted comparable store sales by 6.3%.
This increase is partially related to higher demand for air conditioners and an
increased promotional effort. Additionally, our stores serving the Gulf Coast
region experienced higher demand for appliances as a result of the recent
hurricanes. The television category positively impacted comparable store sales
by 1.6% as we continue to experience growth in light engine and plasma sets. The
audio category negatively impacted comparable store sales by 2.0%. The video
category negatively impacted comparable store sales by 1.1%. Both the audio and
video categories have been impacted by lower price points of their respective
products, as these products are becoming more of a commodity item with very high
levels of competition.
Net sales for the first nine months of fiscal 2005 were $267.0 million
compared to $259.2 million for the first nine months of fiscal 2004. This
represents an increase of $7.8 million or 3.0%. Comparable store sales increased
by approximately 3.7% for the first nine months of fiscal 2005.
The television and appliance product categories positively impacted
comparable store sales for the first nine months of fiscal 2005 with the
appliance category impact being 4.3% and the television category impact being
3.2%. Strong air conditioner demand and promotional efforts accounted for a
majority of the increase in the appliance comparable store sales performance and
demand for light engine and plasma televisions contributed to the television
category increase. The appliance category has also recently benefited from
strong demand for appliances in the Gulf Coast region as a result of the recent
hurricane related damage to markets we serve. The audio and video categories
negatively impacted comparable store sales for the first nine months of fiscal
2005 by 2.3% and 1.5%, respectively, reflecting a continuing trend of lower
price points of the respective products, as these products are becoming more of
a commodity item with very high levels of competition.
16
The following table reflects the approximate percent of net sales for
each major product group for the periods presented.
Three Months Ended Nine Months Ended
October 31 October 31
---------- ----------
Product Category 2005 2004 2005 2004
- ------------------ ---- ---- ---- ----
Televisions............................................... 56.6% 57.2% 53.7% 52.2%
Appliances................................................ 24.2 19.5 24.6 21.6
Audio..................................................... 7.6 9.9 9.2 11.8
Video..................................................... 4.5 5.6 4.9 6.3
Other..................................................... 7.1 7.8 7.6 8.1
------ ------ ------ ------
100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
As of October 31, 2005, we operated 226 stores compared to 238 stores
one year earlier. We did not open any stores and closed eight stores during the
first nine months of fiscal 2005. We did not open any stores and closed ten
stores during the first nine months of fiscal 2004. As of October 31, 2005, we
also own six properties that are leased, under operating leases, to tenants. At
October 31, 2004, we owned four properties that were leased, under operating
leases, to tenants.
Gross profit of $25.9 million (27.4% of net sales) in the third quarter
of fiscal 2005 was approximately $1.5 million higher than the $24.4 million
(26.9% of net sales) recorded in the third quarter of fiscal 2004. Gross profit
for the first nine months of fiscal 2005 was $74.9 million (28.1% of net sales)
compared to $73.0 million (28.2% of net sales) for the first nine months of
fiscal 2004. Gross profit margin for the third quarter and first nine months of
fiscal 2005 was positively impacted by air conditioner sales which tend to have
higher gross profit margins than our other core products and benefited from
opportunistic buys in the current year. Gross profit margin for the first nine
months of fiscal 2005 was negatively impacted by recognition of a lower amount
of extended service contract sales which generally have a higher gross profit
margin associated with it. Extended service contract revenue recognized was
$8.8 million for the first nine months of fiscal 2005, a decrease of $0.9
million (9.4%) from $9.7 million for the first nine months of fiscal 2004.
Selling, general and administrative expenses for the third quarter of
fiscal 2005 were $24.7 million (26.2% of net sales), a decrease of $0.1 million
or 0.6% from $24.8 million (27.4% of net sales) for the third quarter of fiscal
2004. Selling, general and administrative expenses were $71.3 million (26.7% of
net sales) for the first nine months of fiscal 2005 representing a decrease of
$0.1 million or 0.1% from $71.4 million (27.6% of net sales) for the first nine
months of fiscal 2004. The decrease in expenditures was primarily a result of
lower advertising expenditures. This decrease was partially offset by a
corresponding increase in payroll costs associated with higher commissions paid
to sales personnel as well as accruals for executive incentive pay associated
with higher corporate profitability.
Operating income in the third quarter of fiscal 2005 was $1.2 million
(1.2% of net sales), an increase of $1.7 million (342.1%) from the loss of $0.5
million (0.5% of net sales) for the third quarter of fiscal 2004. Operating
income in the first nine months of fiscal 2005 was $3.7 million
17
(1.4% of net sales), an increase of $2.1 million (121.7%) over the $1.6 million
(0.6% of net sales) for the first nine months of fiscal 2004.
Investment income was $23,000 and $7,000 for the third quarter of
fiscal 2005 and 2004, respectively. Investment income for the first nine months
of fiscal 2005 was $155,000 (0.1% of net sales), compared to $152,000 for the
first nine months of fiscal 2004.
Interest expense was $0.7 million (0.7% of net sales) for the third
quarter of fiscal 2005 compared to $0.7 million (0.8% of net sales) for the
third quarter of fiscal 2004. Interest expense was $2.0 million (0.8% of net
sales) for the first nine months of fiscal 2005 compared to $2.4 million (0.9%
of net sales) for the first nine months of fiscal 2004. Interest expense for the
current year has been lowered due to lower average borrowings on the line of
credit and the pay-off of approximately $25.4 million in mortgage debt in the
prior year.
During the third quarter and nine months ended October 31, 2005, we
sold one parcel of land attached to an owned property for a gain of
approximately $0.3 million. During the third quarter and nine months ended
October 31, 2004, we sold two parcels of land attached to owned properties for a
gain of approximately $0.1 million.
During the first nine months of fiscal 2004 we completed the early
payoff of mortgages for 42 retail locations totaling approximately $21.6
million. We incurred a charge of approximately $0.6 million including cash
payments of approximately $0.3 million, for the first nine months of fiscal 2004
related to this termination of debt. There were no early terminations of debt
that resulted in additional charges in fiscal 2005.
Results for the third quarter and first nine months of fiscals 2005 and
2004 reflect the impact of the sales of our investment in Colona SynFuel Limited
Partnership, L.L.L.P. (Colona), which produces synthetic fuels. We sold our
ownership interest in the Colona limited partnership through a series of three
sales. We expect to receive payments from the sales on a quarterly basis through
2007, which will range from 74.25% to 82.5% of the federal income tax credits
attributable to the interest sold.
Below is a table summarizing the income from the sales of our
investment in Colona, net of certain expenses. The higher income for the current
year generally reflects higher production levels compared to the previous year.
Three Months Ended Nine Months Ended
October 31 October 31
---------- ----------
2005 2004 2005 2004
---- ---- ---- ----
(In Thousands)
February 1, 1999 sale....................................... $2,148 $2,083 $6,670 $5,260
July 31, 2000 sale.......................................... 2,058 1,660 6,079 4,298
May 31, 2001 sale........................................... 1,829 1,476 5,403 3,772
------ ------ ------- -------
$6,035 $5,219 $18,152 $13,330
====== ====== ======= =======
18
Income from synthetic fuel investments for the third quarter and first
nine months of fiscal 2005 also includes income related to our sale of our
membership interest in the limited liability company that owned a synthetic fuel
facility in Gillette, Wyoming. We received $2.8 million (resulting in $0.5
million in pre tax investment income) at the time of sale on March 30, 2004
along with a secured contingent payment note that could provide additional
investment income to the Company. The facility resumed commercial operations
during the second quarter of fiscal 2005; as such, we received $3.5 million as a
one-time payment per the terms of the purchase agreement. In addition, we are
eligible to receive $1.50 per ton of "qualified production" produced by the
facility and sold through 2007. During the third quarter and first nine months
of fiscal 2005, we recognized approximately $1.2 million and $5.5 million,
respectively, of pre-tax investment income.
Effective October 1, 2005, we sold our entire ownership interest in a
limited partnership, Somerset SynFuel, L.P. that owned two synthetic fuel
facilities. We received $1.2 million, net of commissions, at closing along with
a secured contingent payment note that could provide additional investment
income. We expect to receive quarterly payments through 2007 equal to 80% of the
Section 29 tax credits attributable to the ownership interest sold, once such
amount exceeds $1.2 million. Because the purchase price is based on the value of
Section 29 tax credits generated, it is subject to production levels and to
possible reduction or elimination to the extent the credit is limited. During
the third quarter and first nine months of fiscal 2005, we recognized
approximately $1.2 million, net of commissions, of pre-tax investment income
from this sale. With this sale, we have divested all of our ownership interests
in facilities that produce synthetic fuel which qualifies for Section 29 tax
credits.
Our effective tax rate was 24.0% and 13.6% for the third quarter of
fiscals 2005 and 2004, respectively, after reflecting our share of federal
income tax credits earned by the limited partnerships under Section 29 of the
Internal Revenue Code. Our effective tax rate was 18.2% and 9.9% for the first
nine months of fiscals 2005 and 2004, respectively. Our effective tax was
reduced for the nine months ended October 31, 2004 as a result of a $1.4 million
reduction in our valuation allowance for the alternative minimum tax credit
carryforwards resulting from the June, 2004 conclusion of the Internal Revenue
Service audit of the Somerset partnership for certain years. The audit resulted
in no change to the tax credits for the period audited. The effective tax rate
for the remainder of fiscal 2005 could fluctuate depending upon the level of
federal income tax credits generated by the limited partnerships (and the
resulting income), which we do not control, any limitations on those credits
under the Internal Revenue Code and the level of income from our retail
operations. We expect our effective tax rate to increase for periods subsequent
to fiscal 2005, as we no longer receive Section 29 federal income tax credits as
a result of our sale of the Somerset partnership described above.
During the quarter and nine months ended October 31, 2005 we closed or
committed to close two and seven stores, respectively, that were classified as
discontinued operations. As a result of these closings and certain other store
closings from prior periods, we had a loss from discontinued operations, net of
tax benefit, of $0.1 million for the third quarter of fiscal 2005, compared to a
loss of $0.2 million for the third quarter of fiscal 2004. We had a loss from
discontinued operations, net of tax benefit, of $0.4 million for the first nine
months of fiscal 2005 compared to $0.7 million for the first nine months of
fiscal 2004.
19
We sold one property during the first nine months of fiscal 2005 that
had been previously closed. As a result, we had a gain, net of tax expense, of
$0.1 million.
As a result of the foregoing, net income for the third quarter of
fiscal 2005 was $6.9 million, a 103.5% increase from $3.4 million for the third
quarter of fiscal 2004. Net income for the first nine months of fiscal 2005 was
$21.7 million, a 101.9% increase from $10.8 million for the first nine months of
fiscal 2004.
Three of our stores were damaged by Hurricane Katrina. We have
substantially completed the evaluation of the related damage and the impact of
business interruption or required repairs to damaged stores did not have a
material impact on results of operations or required material capital
expenditures. All of our damaged stores were open and in operation as of October
31, 2005.
Liquidity and Capital Resources
Net cash used in operating activities was approximately $5.5 million
for the first nine months of fiscal 2005, compared to $22.1 million used in
operating activities for the first nine months of fiscal 2004. For the first
nine months of fiscal 2005, cash was provided by net income of $21.7 million,
adjusted for the impact of $24.8 million for gains on our installment sales of
the limited partnership interests, non-cash items of $3.8 million, which
consisted of depreciation and amortization, accounts receivable, deferred
income, prepaid expenses and gain or loss on disposal of fixed assets. In
addition, accounts payable provided cash of $6.1 million, primarily a result of
changes in inventory levels. The primary use of cash was an increase in
inventory of $11.0 million primarily due to seasonal fluctuations. The inventory
decline from October 31, 2004 primarily results from lower television and air
conditioner levels. The other use of cash was a decrease in other current
liabilities of $1.2 million.
At October 31, 2005, working capital was $91.1 million compared to
$88.0 million at January 31, 2005. This increase is primarily a result of
greater cash proceeds from our synthetic fuel investments and retail operations.
The ratio of current assets to current liabilities was 2.4 to 1 at October 31,
2005 and 2.5 to 1 at January 31, 2005.
During the first nine months of fiscal 2005, we received proceeds of
$23.6 million from installment sales of our ownership interests in synthetic
fuel entities. We had capital expenditures of approximately $2.4 million during
the first nine months of fiscal 2005, primarily related to the relocation of a
store, the purchase of a store previously leased and improvements to a
distribution center. We received proceeds of approximately $1.5 million from the
sale of a store previously closed and reported as discontinued operations and
the sale of one parcel of land attached to an owned property.
Cash used in financing activities totaled approximately $20.6 million
for the first nine months of fiscal 2005. Cash was provided by stock option
activity of $4.6 million. We also recorded a tax benefit of approximately $1.8
million during the first nine months of fiscal 2005 from the exercise of
non-qualified stock options as an increase in additional paid-in capital. Cash
of $2.7 million was used for scheduled payments of mortgage debt. Cash of
approximately $22.5 million was also used to acquire approximately 1.6 million
shares of our common stock. On August 30, 2005, our Board of
20
Directors increased our share repurchase authorization by an additional 1
million shares. We currently have approximately 747,000 authorized shares
remaining available for purchase under the stock buy-back program.
Forward-Looking Statements
This Form 10-Q contains or may contain forward-looking statements as
defined in the Private Securities Litigation Reform Act of 1995. The words
"believes", "estimates", "plans", "expects", "intends", "anticipates" and
similar expressions as they relate to the Company or its management are intended
to identify such forward-looking statements. Forward-looking statements are
inherently subject to risks and uncertainties. These risks and uncertainties
include among other things: the highly competitive nature of the consumer
electronics retailing industry, changes in the national or regional economies,
weather, the effects of terrorism or acts of war on consumer spending patterns,
the availability of certain products, technological changes, new regulatory
restrictions or tax law changes relating to the Company's synthetic fuel
investments, the fluctuating amount of quarterly payments received by the
Company with respect to sales of its partnership interests in synthetic fuel
investments, the uncertain amount of synthetic fuel production and tax credits
received from time to time from the Company's synthetic fuel investments, and
the potential for Section 29 tax credits to phase out based on the price of
crude oil adjusted for inflation. Other factors that could cause actual results
to differ materially from those in the forward-looking statements are set forth
in Exhibit 99(a) to the Company's Annual Report on Form 10-K for the fiscal year
ended January 31, 2005 (File No. 001-09097).
Item 3. Quantitative and Qualitative Disclosures About Market Risk
No material changes since January 31, 2005.
Item 4. Controls and Procedures
The Company's management evaluated, with the participation of the
Company's Chief Executive Officer and Chief Financial Officer, the effectiveness
of the Company's disclosure controls and procedures, as of the end of the period
covered by this report. Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in the reports that it files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms.
There were no changes in the Company's internal control over financial
reporting that occurred during the Company's last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
21
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Total Number of Maximum Number
Shares Purchased of Shares that May
Total Number Average Price as Part of Publicly Yet Be Purchased
of Shares Paid per Announced Plans Under the Plans
Period Purchased (1) Share or Programs (2) or Programs (2)
- ------ ------------- ----- ---------------- ---------------
August 1-31, 2005 87,700 $14.78 87,700 1,255,945
September 1-30, 2005 166,275 $13.97 124,100 1,131,845
October 1-31, 2005 243,500 $13.26 243,500 888,345
------- ------ ------- -------
Total 497,475 $ 13.77 455,300 888,345
======= ======= ======= =======
- ------------------------
(1) A total of 42,175 shares of common stock were purchased by the
Company other than through a publicly announced plan or
program. These shares were acquired on September 30, 2005 in
payment of the exercise price of stock options exercised by
Stuart A. Rose, Chairman and Chief Executive Officer of the
Company pursuant to the Company's Stock-for-Stock and Cashless
Option Exercise Rules and Procedures, adopted on June 4, 2001.
The purchase price was $13.10 per share.
(2) On August 30, 2005, the Company's Board of Directors increased
the Company's share repurchase authorization by an additional
1,000,000 shares. At October 31, 2005, a total of 888,345
shares remained available to purchase under this plan. There
are currently 747,000 shares remaining available to purchase
under this plan after reflecting shares purchased subsequent
to the end of the fiscal 2005 third quarter.
Item 6. Exhibits.
The following exhibits are filed with this report:
31 Rule 13a-14(a)/15d-14(a) Certifications
32 Section 1350 Certifications
22
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.
REX STORES CORPORATION
Registrant
Signature Title Date
--------- ----- ----
/s/ Stuart A. Rose Chairman of the Board December 8, 2005
------------------ (Chief Executive Officer)
(Stuart A. Rose)
/s/ Douglas L. Bruggeman Vice President, Finance and Treasurer December 8, 2005
------------------------ (Chief Financial Officer)
(Douglas L. Bruggeman)
23