American Eagle Outfitters 2007 Annual Report Download

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
¥ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended February 2, 2008
OR
nTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-33338
American Eagle Outfitters, Inc.
(Exact name of registrant as specified in its charter)
Delaware No. 13-2721761
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
77 Hot Metal Street, Pittsburgh, PA
(Address of principal executive offices)
15203-2329
(Zip Code)
Registrant’s telephone number, including area code:
(724) 776-4857
Securities registered pursuant to Section 12(b) of the Act:
Common Shares, $0.01 par value
(Title of Class)
New York Stock Exchange
(Name of Each Exchange on Which Registered)
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. YES ¥NO n
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Sections 15(d) of the
Act. YES nNO ¥
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, and (2) has been subject to the filing requirements for at the past
90 days. YES ¥NO n
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. n
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated filer ¥Accelerated filer nNon-accelerated filer n
(Do not check if a smaller reporting company)
Smaller reporting Company n
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES nNO ¥
The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of August 4, 2007
was $4,430,898,398.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:
204,899,265 Common Shares were outstanding at March 14, 2008.
DOCUMENTS INCORPORATED BY REFERENCE
Part III — Proxy Statement for 2008 Annual Meeting of Stockholders, in part, as indicated.

Table of contents

  • Page 1
    ... Employer Identification No.) 77 Hot Metal Street, Pittsburgh, PA (Address of principal executive offices) 15203-2329 (Zip Code) Registrant's telephone number, including area code: (724) 776-4857 Securities registered pursuant to Section 12(b) of the Act: Common Shares, $0.01 par value New York...

  • Page 2
    ... ...Item 9A. Controls and Procedures ...Item 9B. Other Information ...PART III Directors, Executive Officers and Corporate Governance ...Executive Compensation ...Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...Certain Relationships and Related...

  • Page 3
    ...the aerie brand offers AE customers a new way to express their personal style everyday, from the dormroom to the coffee shop to the classroom. We also introduced MARTIN + OSA during Fiscal 2006, a concept targeting 28 to 40 year-old women and men, which offers refined casual clothing and accessories...

  • Page 4
    ... of Columbia, Puerto Rico and Canada. During Fiscal 2007, we opened 80 new stores, consisting of 27 U.S. AE stores, three Canadian AE stores, 36 aerie stores (including one Canadian aerie store) and 14 MARTIN + OSA stores. These store openings, offset by four U.S. AE store closings, increased our...

  • Page 5
    ... we do not currently have store locations. We are continuing to focus on the growth of AEO Direct through various initiatives, including improved site efficiency and faster checkout, expansion of sizes and styles, unique online content and targeted marketing strategies. In Fiscal 2008, we plan on...

  • Page 6
    ...on a selling square foot basis. As of February 2, 2008, we operated 987 stores in the United States and Canada under the American Eagle Outfitters, aerie and MARTIN + OSA brands as shown below: United States, including the District of Columbia and the Commonwealth of Puerto Rico - 911 stores Alabama...

  • Page 7
    ... party vendor for its fulfillment services. The second phase of the expansion will be completed in Fiscal 2008 and is designed to enhance our operating efficiency. Additionally, the expansion is central to our plans for supporting future growth, especially in areas such as AEO Direct, aerie, MARTIN...

  • Page 8
    ... in-store credit through use of our proprietary credit card promotes incremental sales and encourages customer loyalty. Our credit card holders receive special promotional offers and advance notice of all American Eagle in-store sales events. Our customers in the U.S. and Canada may also pay for...

  • Page 9
    ... website at www.ae.com. These presentations are available as soon as reasonably practicable after they are presented at investor conferences. Certifications As required by New York Stock Exchange ("NYSE") Corporate Governance Standards Section 303A.12(a), on July 1, 2007 our Chief Executive Officer...

  • Page 10
    ... goals, manage our growth effectively, successfully integrate the planned new stores into our operations or operate our new and remodeled stores profitably. Our ability to grow through the internal development of new brands We launched our new brand concepts, MARTIN + OSA and aerie by American Eagle...

  • Page 11
    ... house our Canadian distribution center, which we plan to place into service in May 2008. Failure to comply with regulatory requirements As a public company, we are subject to numerous regulatory requirements. Our policies, procedures and internal controls are designed to comply with all applicable...

  • Page 12
    ... near our headquarters, which are used primarily for store and corporate support services, totaling approximately 68,000 square feet. These leases expire with various terms through 2022. We own a 490,000 square foot building located in a suburban area near Pittsburgh, Pennsylvania, which houses...

  • Page 13
    ...Fiscal 2007 for a new flagship store in the Time Square area of New York, New York. The 25,000 square foot location has an initial term of 15 years with three options to renew for five years each. We anticipate this store to open in late Fiscal 2009. All of our stores in the United States and Canada...

  • Page 14
    ... accounts under street name, we estimate the stockholder base at approximately 90,000. The following information reflects the December 2006 three-for-two stock split. For the Quarters Ended Market Price High Low Cash Dividends per Common Share February 2, 2008 ...November 3, 2007 ...August 4, 2007...

  • Page 15
    ...in our common stock and the respective index on February 1, 2003 and includes reinvestment of all dividends. The plotted points are based on the closing price on the last trading day of the fiscal year indicated. COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN Among American Eagle Outfitters, Inc., The...

  • Page 16
    ... table provides information regarding our repurchases of our common stock during the three months ended February 2, 2008. Total Number of Shares Purchased (1) Average Price Paid per Share (2) Total Number of Shares Purchased as Part of Publicly Announced Programs (1)(3) Maximum Number of Shares that...

  • Page 17
    ... 2, 2008 For the Years Ended(1) February 3, January 28, January 29, January 31, 2007 2006 2005 2004 (In thousands, except per share amounts, ratios and other financial information) Summary of Operations(2) Net sales(3) ...Comparable store sales increase (decrease)(4) ...Gross profit ...Gross profit...

  • Page 18
    ... concerning future events, including the following: • the planned opening of approximately 40 American Eagle stores in the United States and Canada, approximately 80 aerie stand-alone stores and approximately 15 MARTIN + OSA stores in the United States during Fiscal 2008; • the selection of...

  • Page 19
    ... redemption data and the time when there is a remote likelihood that a gift card will be redeemed. During Fiscal 2006, we reviewed our accounting policies related to revenue recognition and determined that shipping and handling amounts billed to customers, which were historically recorded as...

  • Page 20
    ... loss is recorded in selling, general and administrative expenses. Our impairment loss calculations require management to make assumptions and to apply judgment to estimate future cash flows and asset fair values, including forecasting useful lives of the assets and selecting the discount rate that...

  • Page 21
    ... certain promotional costs and buying, occupancy and warehousing costs. Buying, occupancy and warehousing costs consist of: compensation, employee benefit expenses and travel for our buyers; rent and utilities related to our stores, corporate headquarters, distribution centers and other office space...

  • Page 22
    ...the U.S. and Canada, the expansion of our Ottawa, Kansas distribution center, the construction of our new Pittsburgh, Pennsylvania corporate headquarters, information technology upgrades at our home office and investments in our new aerie and MARTIN + OSA stores. Additionally, during Fiscal 2007, we...

  • Page 23
    ... information regarding merchandise sell-offs. Buying, occupancy and warehousing expenses increased 90 basis points as a percent to net sales primarily due to higher rent, as well as delivery costs related to our AEO Direct business. Share-based payment expense included in gross profit increased...

  • Page 24
    ... period, incentive compensation (including stock options), MARTIN + OSA expenses, and costs for branded packaging increased as a percent to net sales. These increases were partially offset by an improvement in store salaries as a percent to net sales. Share-based payment expense included in selling...

  • Page 25
    ... higher cash and investment balances, as well as improved investment returns. Beginning in the second quarter of Fiscal 2006, we recorded gift card service fee income in other income, net. Prior to this time, these amounts were recorded as a reduction to selling, general, and administrative expenses...

  • Page 26
    ... data center to support our information technology needs; development of MARTIN + OSA; and development of aerie by American Eagle. In the future, we expect that our uses of cash will also include new brand concept development, including development of 77 kids by american eagle. Our growth strategy...

  • Page 27
    ... to support our infrastructure growth by investing in the expansion and improvement of our distribution centers ($47.6 million), construction of our new corporate headquarters in Pittsburgh, Pennsylvania ($37.3 million), information technology upgrades at our home office ($22.1 million), and the...

  • Page 28
    ... and fourth quarters of Fiscal 2007. Subsequent to the fourth quarter of Fiscal 2007, our Board declared a quarterly cash dividend of $0.10 per share, payable on April 11, 2008 to stockholders of record at the close of business on March 28, 2008. The payment of future dividends is at the discretion...

  • Page 29
    ... within one year. The balance of the uncertain tax benefits are included in the "More than 5 Years" column as we are not able to reasonably estimate the timing of the potential future payments. (3) Purchase obligations primarily include binding commitments to purchase merchandise inventory as well...

  • Page 30
    ... invest in long-term agency bonds. Due to the fact that our investments are primarily fixed rate instruments, the effects of interest rate changes are limited to VRDNs and auction rate securities. If our current portfolio average yield rate decreases by 10% in Fiscal 2008, our income before taxes...

  • Page 31
    ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Index to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm ...Consolidated Balance Sheets ...Consolidated Statements of Operations ...Consolidated Statements of Comprehensive Income ...Consolidated ...

  • Page 32
    ..., in accordance with the standards of the Public Company Accounting Oversight Board (United States), American Eagle Outfitters, Inc.'s internal control over financial reporting as of February 2, 2008, based on criteria established in Internal Control - Integrated Framework issued by the Committee of...

  • Page 33
    AMERICAN EAGLE OUTFITTERS, INC. CONSOLIDATED BALANCE SHEETS February 2, February 3, 2008 2007 (In thousands, except per share amounts) ASSETS Current assets: Cash and cash equivalents ...Short-term investments ...Merchandise inventory...Accounts and note receivable...Prepaid expenses and other ......

  • Page 34
    AMERICAN EAGLE OUTFITTERS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended February 2, February 3, January 28, 2008 2007 2006 (In thousands, except per share amounts) Net sales ...$3,055,419 Cost of sales, including certain buying, occupancy and warehousing expenses (exclusive of ...

  • Page 35
    AMERICAN EAGLE OUTFITTERS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Years Ended February 2, February 3, January 28, 2008 2007 2006 (In thousands) Net income ...Other comprehensive income: Unrealized gain (loss) on investments, net of tax ...Reclassification adjustment for losses...

  • Page 36
    ... February 4, 2007 ...Stock awards ...Repurchase of common stock as part publicly announced programs ...Repurchase of common stock from employees ...Reissuance of treasury stock ...Net income ...Other comprehensive loss, net of tax Cash dividends ($0.38 per share)...of ... Balance at February 2, 2008...

  • Page 37
    ... as part of publicly announced programs ...Repurchase of common stock from employees ...Cash paid for fractional shares in connection with three-for-two stock split . Net proceeds from stock options exercised ...Excess tax benefit from share-based payments ...Cash dividends paid ...Net cash used for...

  • Page 38
    ..., aerie by American Eagle and MARTIN + OSA brands. American Eagle Outfitters designs, markets and sells its own brand of laidback, current clothing targeting 15 to 25 year-olds, providing high-quality merchandise at affordable prices. The Company opened its first American Eagle Outfitters store in...

  • Page 39
    ... and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, our management reviews its estimates based on currently available information. Changes in facts and circumstances may result in revised estimates. Recent Accounting Pronouncements...

  • Page 40
    ...average cost or market, utilizing the retail method. Average cost includes merchandise design and sourcing costs and related expenses. The Company records merchandise receipts at the time merchandise is delivered to the foreign shipping port by the manufacturer (FOB port). This is the point at which...

  • Page 41
    ... 144, management evaluates the ongoing value of the Company's property and equipment, including but not limited to leasehold improvements and store fixtures associated with retail stores which have been open longer than one year. Impairment losses are recorded on long-lived assets used in operations...

  • Page 42
    ... 2005, the Company repurchased 0.5 million shares from certain employees at market prices totaling $10.5 million. These shares were repurchased for the payment of taxes in connection with the vesting of share-based payments as permitted under the 2005 Stock Award and Incentive Plan and the 1999...

  • Page 43
    ... approved a three-for-two stock split. This stock split was distributed on December 18, 2006, to stockholders of record on November 24, 2006. All share amounts and per share data presented herein reflect this stock split. Income Taxes Effective February 4, 2007, the Company adopted FIN 48. FIN 48...

  • Page 44
    ... certain promotional costs. Buying, occupancy and warehousing costs consist of: compensation, employee benefit expenses and travel for our buyers and certain senior merchandising executives; rent and utilities related to our stores, corporate headquarters, distribution centers and other office space...

  • Page 45
    ... in advertising expense during Fiscal 2007, Fiscal 2006 and Fiscal 2005, respectively. Design Costs The Company has certain design costs, including compensation, rent, travel, supplies and samples, which are included in cost of sales as the respective inventory is sold. Store Pre-Opening Costs Store...

  • Page 46
    ...stores, American Eagle Canadian retail stores, aerie by American Eagle retail stores, MARTIN + OSA retail stores and AEO Direct) that reflect the basis used internally to review performance and allocate resources. All of the operating segments have been aggregated and are presented as one reportable...

  • Page 47
    ...144,429 177,533 $2,321,962 (1) Amounts represent sales from American Eagle's Canadian retail stores, as well as AEO Direct sales, that are billed to and/or shipped to foreign countries. February 2, February 3, 2008 2007 (In thousands) Long-lived assets, net: United States ...Foreign ...Total long...

  • Page 48
    AMERICAN EAGLE OUTFITTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) February 3, 2007 Unrealized Unrealized Holding Gains Holding Losses (In thousands) Balance Cash and cash equivalents: Cash ...Money-market ...Total cash and cash equivalents ...Short-term investments: Treasury...

  • Page 49
    AMERICAN EAGLE OUTFITTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The following tables present the length of time available-for-sale securities were in continuous unrealized loss positions but were not deemed to be other-than-temporarily impaired: Greater Than or Less Than 12 ...

  • Page 50
    ...The proceeds from the PIDA loan were restricted for construction costs related to the Company's new corporate headquarters in Pittsburgh, Pennsylvania. During the three months ended October 28, 2006, the Company received approximately $2.0 million of the proceeds. During the fourth quarter of Fiscal...

  • Page 51
    ... event related to credit facilities. 7. Leases The Company leases all store premises, some of its office space and certain information technology and office equipment. The store leases generally have initial terms of ten years. Most of these store leases provide for base rentals and the payment...

  • Page 52
    ... $0.5 million for Fiscal 2007 and Fiscal 2006, respectively. 9. Share-Based Payments At February 2, 2008, the Company had awards outstanding under three share-based compensation plans, which are described below. Prior to Fiscal 2006, the Company accounted for these plans under the recognition and...

  • Page 53
    ...date fair value estimated using the Black-Scholes option pricing model. The Company recognizes compensation expense for stock option awards and time-based restricted stock awards on a straight-line basis over the requisite service period of the award (or to an employee's eligible retirement date, if...

  • Page 54
    ... and conditions of these awards. The 2005 Plan provides for grants to directors who are not officers or employees of the Company, which are not to exceed 20,000 shares per year (not to be adjusted for stock splits). Through February 2, 2008, 5,635,247 non-qualified stock options, 2,046,111 shares of...

  • Page 55
    AMERICAN EAGLE OUTFITTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Stock Option Grants A summary of the Company's stock option activity under all plans for Fiscal 2007 follows: For the Year Ended February 2, 2008(1) Weighted-Average Remaining Weighted-Average Contractual Life ...

  • Page 56
    ...2008 ... (1) Nonvested time-based restricted stock at February 4, 2007 includes 45,000 shares issued under the 1999 Plan. Under the 1999 Plan, awards were valued using the average of the high and low market price of the Company's common stock on the date of grant. For the Year Ended February 2, 2008...

  • Page 57
    AMERICAN EAGLE OUTFITTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Contributions are determined by the employee, with the Company matching 15% of the investment up to a maximum investment of $100 per pay period. These contributions are used to purchase shares of Company stock ...

  • Page 58
    ... 2008 2007 (In thousands) Deferred tax assets (liabilities): Current: Rent ...Employee Compensation and Benefits ...Inventories ...Other ...Total current deferred tax assets...Non-current: Deferred compensation ...Property and equipment ...Foreign and State Income Taxes ...Tax Credits ...Valuation...

  • Page 59
    ... how the American Jobs Creation Act of 2004 (the "Act") affects a company's accounting for the deferred tax liabilities on un-remitted foreign earnings. The Act provides for a special one-time deduction of 85% of certain foreign earnings that are repatriated and that meet certain requirements...

  • Page 60
    ... result from these years. The Company placed the second phase of its Ottawa distribution center into service in May 2007. As a result, the Company is eligible for approximately $2.5 million of nonrefundable incentive tax credits in Kansas. These credits can be utilized to offset future Kansas income...

  • Page 61
    ... and financial condition. Credit Facilities Subsequent to Fiscal 2007, we reinstated the $40.0 million line and increased the amount available to $75.0 million as part of the facility. Additionally, we borrowed $75.0 million on this line and used the proceeds to increase our cash position to add...

  • Page 62
    ... Act"), is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the management of American Eagle Outfitters, Inc. (the "Management"), including our Principal Executive Officer and our...

  • Page 63
    ... accompanying Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting...

  • Page 64
    ...Executive Officers," "Section 16(a) Beneficial Ownership Reporting Compliance," "Corporate Governance Information," and "Board Committees" in our Proxy Statement relating to our 2008 Annual Meeting of Stockholders is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. The information...

  • Page 65
    ...(9) Profit Sharing and 401(k) Plan(10) Employment Agreement between the Registrant and Roger S. Markfield, dated March 21, 2007(11) Deferred Compensation Plan(12) 2005 Stock Award and Incentive Plan(13) Employment Agreement between the Registrant and Thomas DiDonato, dated June 29, 2005(14) Form of...

  • Page 66
    ... by reference. (7) Previously files as Exhibit 10.5 to the Form 10-K dated February 3, 2007, filed April 4, 2007 and incorporated herein by reference. (8) Previously filed as Appendix A to the Definitive Proxy Statement for the 2003 Annual Meeting of Stockholders held on May 27, 2003, filed April 14...

  • Page 67
    ...Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN EAGLE OUTFITTERS, INC. By: /s/ James V. O'Donnell James V. O'Donnell Chief Executive Officer Dated April 2, 2008 Pursuant to the requirements of the Securities...

  • Page 68
    Signature Title * J. Thomas Presby * Gerald E. Wedren *By: /s/ Joan Holstein Hilson Joan Holstein Hilson, Attorney-in-Fact Director Director 67

  • Page 69
    ... Corporation American Eagle Outfitters Asia Limited, a Hong Kong Corporation American Eagle Outfitters Canada Corporation, a Canadian Corporation Blue Heart Enterprises LLC, a Delaware Limited Liability Company Blue Star Imports Ltd., a Delaware Corporation Blue Star Imports, L.P., a Pennsylvania...

  • Page 70
    ... 1994 Stock Option Plan (Registration Nos. 333-44759, 33-79358, and 333-12661), • Stock Fund of American Eagle Outfitters, Inc. Profit Sharing and 401(k) Plan (Registration No. 33-84796), and • 2005 Stock Award and Incentive Plan (Registration No. 333-126278) of our reports dated March 26, 2008...

  • Page 71
    ...the "Commission"), the Corporation's Annual Report on Form 10-K (the "Form 10-K") for the year ended February 2, 2008, and likewise to sign and file with the Commission any and all amendments to the Form 10-K, and the Corporation hereby appoints such persons as its attorneys-in-fact and each of them...

  • Page 72
    ...to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ James V. O'Donnell James V. O'Donnell Chief Executive...

  • Page 73
    ... management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Joan Holstein Hilson Joan Holstein Hilson Executive Vice President and Chief Financial Officer, AE Brand (Principal Financial Officer and Principal Accounting Officer...

  • Page 74
    ... with the Annual Report of American Eagle Outfitters, Inc. (the "Company") on Form 10-K for the period ended February 2, 2008 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James V. O'Donnell, Principal Executive Officer of the Company, certify to...

  • Page 75
    ... with the Annual Report of American Eagle Outfitters, Inc. (the "Company") on Form 10-K for the period ended February 2, 2008 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Joan Holstein Hilson, Principal Financial Officer of the Company, certify to...