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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended September 30, 2002
-----------------
Commission File Number 1-8036
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WEST PHARMACEUTICAL SERVICES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1210010
- -------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number
101 Gordon Drive, PO Box 645,
Lionville, PA 19341-0645
- -------------------------------- -------------------------------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code 610-594-2900
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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 twelve months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No .
--- ---
September 30, 2002 -- 14,463,808
- --------------------------------------------------------------------------------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Page 2
Index
Form 10-Q for the
Quarter Ended September 30, 2002
Page
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Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Income for the
Three Months and Nine Months ended September 30, 2002
and September 30, 2001 3
Condensed Consolidated Balance Sheets at
September 30, 2002 and December 31, 2001 4
Consolidated Statement of Shareholders' Equity
for the Nine Months ended September 30, 2002 5
Condensed Consolidated Statements of Cash Flows
for the Nine Months ended September 30, 2002
and September 30, 2001 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosure
About Market Risk 21
Item 4. Controls and Procedures 21
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
CERTIFICATIONS 23,
24
Index to Exhibits F-1,
F-2
Page 3
Part I. Financial Information
Item 1. Financial Statements
West Pharmaceutical Services, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in thousands, except per share data)
Quarter Ended Nine Months Ended
Sept. 30, 2002 Sept. 30, 2001 Sept. 30, 2002 Sept. 30, 2001
-------------- -------------- -------------- -------------
Net sales ........................................ $104,900 100% $ 96,500 100% $316,300 100% $296,300 100%
Cost of goods and services sold .................. 78,200 75 69,900 72 227,200 72 210,600 71
-------------- -------------- -------------- -------------
Gross profit .................................. 26,700 25 26,600 28 89,100 28 85,700 29
Selling, general and administrative expenses ..... 19,300 18 18,300 19 61,600 19 54,500 18
Restructuring charge (credit)..................... 9,700 9 (1,600) (2) 9,700 3 2,900 1
Other (income) expense, net ...................... 400 - (300) - (2,000) (1) 200 -
-------------- -------------- -------------- --------------
Operating profit (loss)........................ (2,700) (3) 10,200 11 19,800 6 28,100 9
Interest expense, net............................. 2,200 2 3,000 3 7,000 2 9,300 3
-------------- -------------- -------------- --------------
Income (loss) before income taxes
and minority interests ....................... (4,900) (5) 7,200 7 12,800 4 18,800 6
Provision for income taxes ....................... (3,000) (3) 1,500 2 3,200 1 5,400 2
Minority interests ............................... - - - - - - 100 -
-------------- -------------- -------------- --------------
Income (loss) from consolidated operations..... (1,900) (2)% 5,700 6% 9,600 3% 13,300 4%
--- --- --- ---
Equity in net income (loss) of affiliated companies (400) - (100) 500
--------- -------- -------- --------
Income (loss) from continuing operations....... (2,300) 5,700 9,500 13,800
Earnings from discontinued operations,
net of tax..................................... 5,900 200 5,500 600
--------- -------- -------- --------
Net income .................................... $ 3,600 $ 5,900 $ 15,000 $ 14,400
--------- -------- -------- --------
Net income (loss) per share:
Basic
Continuing operations....................... $ (0.16) $ 0.40 $ 0.66 $ 0.96
Discontinued operations..................... $ 0.41 $ 0.01 $ 0.38 $ 0.04
--------- -------- -------- --------
$ 0.25 $ 0.41 $ 1.04 $ 1.00
Assuming Dilution
Continuing operations....................... $ (0.16) $ 0.40 $ 0.66 $ 0.96
Discontinued operations..................... $ 0.41 $ 0.01 $ 0.38 $ 0.04
--------- -------- -------- --------
$ 0.25 $ 0.41 $ 1.04 $ 1.00
Average common shares outstanding................. 14,463 14,343 14,420 14,333
Average shares assuming dilution.................. 14,463 14,353 14,443 14,346
Dividends declared per common share............... $ 0.20 $ 0.19 $ 0.58 $ 0.55
See accompanying notes to condensed consolidated financial statements.
Page 4
West Pharmaceutical Services, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
Unaudited
Sept. 30, Dec. 31,
2002 2001
--------- --------
ASSETS
Current assets:
Cash, including equivalents ................... $ 35,700 $ 42,100
Accounts receivable ........................... 63,200 61,800
Inventories ................................... 40,400 34,300
Income tax refundable.......................... 3,500 5,700
Deferred income tax benefits .................. 2,700 2,400
Other current assets .......................... 9,200 12,200
-------- --------
Total current assets .............................. 154,700 158,500
-------- --------
Property, plant and equipment ..................... 490,000 459,500
Less accumulated depreciation and amortization..... (272,700) (249,200)
-------- --------
217,300 210,300
Investments in affiliated companies ............... 18,900 20,800
Goodwill .......................................... 35,100 32,600
Prepaid pension asset.............................. 51,800 48,300
Deferred income tax benefits ...................... 19,400 21,400
Intangible assets.................................. 7,700 7,900
Other assets....................................... 11,500 11,500
-------- --------
Total Assets ...................................... $516,400 $511,300
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ............. $ 500 $ 4,300
Notes payable ................................. 5,600 4,400
Accounts payable .............................. 19,700 22,600
Accrued expenses:
Salaries, wages, benefits ................... 17,600 16,000
Income taxes payable ........................ 7,700 5,400
Restructuring costs.......................... 1,500 2,200
Deferred income taxes........................ 1,500 1,600
Other ....................................... 21,000 18,800
-------- --------
Total current liabilities ......................... 75,100 75,300
-------- --------
Long-term debt, excluding current portion.......... 172,000 184,300
Deferred income taxes ............................. 47,900 46,800
Other long-term liabilities ....................... 27,700 28,100
Shareholders' equity............................... 193,700 176,800
-------- --------
Total Liabilities and Shareholders' Equity......... $516,400 $511,300
-------- --------
-------- --------
See accompanying notes to condensed consolidated financial statements.
Page 5
West Pharmaceutical Services, Inc. and Subsidiaries
Consolidated Statement of Shareholders' Equity (unaudited)
(in thousands)
Capital in Other
Common excess of Retained comprehensive Treasury
Stock par value Earnings income (loss) stock Total
-------------------------------------------------------------------
Balance, December 31, 2001 $ 4,300 $ 31,600 $254,000 $ (27,400) $ (85,700) $ 176,800
Net income 15,000 15,000
Shares issued under stock option plans (400) 3,600 3,200
Cash dividends declared (8,400) (8,400)
Foreign currency translation adjustment 7,400 7,400
Minimum pension liability adjustment (200) (200)
Fair value of financial instruments adjustment (100) (100)
--------------------------------------------------------------------
Balance, September 30, 2002 $ 4,300 $ 31,200 $260,600 $ (20,300) $ (82,100) $ 193,700
--------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
Page 6
West Pharmaceutical Services, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
Nine Months Ended
Sept. 30, Sept. 30,
2002 2001
-------- --------
Cash flows provided by operating activities:
Income from continuing operations............ $ 9,500 $ 13,800
Depreciation and amortization................ 24,400 23,900
Other non-cash items, net.................... 5,800 (6,600)
Changes in assets and liabilities ........... 4,000 (12,100)
-------- --------
Net cash provided by operating activities ...... 43,700 19,000
-------- --------
Cash flows used in investing activities:
Property, plant and equipment acquired ........ (30,200) (33,700)
Loan to affiliate.............................. (1,000) -
Proceeds from sale of assets................... 300 3,100
Customer advances, net of repayments .......... (1,300) (2,600)
-------- --------
Net cash used in investing activities ............. (32,200) (33,200)
-------- --------
Cash flows(used in)provided by financing activities:
Net (repayments) borrowings under revolving
credit agreements ............................ (7,900) 21,200
Repayment of industrial revenue bond............ (6,100) -
Repayment of other long term debt............... (4,700) (300)
Repayments of notes payable..................... (1,100) -
Dividend payments .............................. (8,200) (7,700)
Sale of common stock............................ 3,300 800
Purchase of treasury stock...................... (100) (100)
-------- --------
Net cash (used in) provided by financing activities (24,800) 13,900
-------- --------
Net cash provided by discontinued operations....... 6,100 500
-------- --------
Effect of exchange rates on cash .................. 800 (1,300)
-------- --------
Net(decrease)in cash, including equivalents........ (6,400) (1,100)
Cash and cash equivalents at beginning of period... 42,100 42,700
-------- --------
Cash and cash equivalents at end of period......... $ 35,700 $ 41,600
-------- --------
See accompanying notes to condensed consolidated financial statements
Page 7
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In thousands, except share and per share data)
1. The interim consolidated financial statements for the three and nine-month
period ended September 30, 2002 should be read in conjunction with the
consolidated financial statements and notes thereto of West Pharmaceutical
Services, Inc.(the Company), appearing in the Company's 2001 Annual Report
on Form 10-K. The year-end condensed consolidated balance sheet data was
derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles. Interim
results are based on the Company's unaudited accounts.
Interim Period Accounting Policy
--------------------------------
In the opinion of management, the unaudited Condensed Consolidated Balance
Sheet, the unaudited Consolidated Statement of Shareholders Equity, the
unaudited Consolidated Statements of Income and the unaudited Condensed
Consolidated Statement of Cash Flows as of and for the periods ended
September 30, 2002 and for the comparative periods in 2001 contain all
adjustments, consisting only of normal recurring accruals and adjustments,
necessary for a fair presentation of the financial position as of September
30, 2002 and the results of operations and cash flows for the respective
periods. The results of operations for any interim period are not
necessarily indicative of results for the full year.
Reclassification
----------------
Certain items have been reclassified to conform to current classifications.
In particular, beginning in 2002 interest expense is recorded net of
interest income. Interest income was previously recorded in other (income)
expense. Prior periods have been restated to reflect the reclassification.
The impact of the reclassification decreased previously reported third
quarter and nine-months 2001 other (income) expense and decreased interest
expense by $300 and $1,100, respectively.
Income Taxes
-------------
The tax rate used for interim periods is the estimated annual effective
consolidated tax rate, based on the current estimate of full year results,
except that taxes applicable to prior year adjustments, if any, are
recorded as identified.
Excluding the $2,400 tax benefit associated with the restructuring charge
(see footnote #7) and the $2,500 unusual tax benefit (see footnote #12),
the effective tax rate for the third quarter of 2002 was 38.2%, compared
with the 28.3% used in the third quarter of 2001. The estimated annual tax
rate for 2002, excluding non-recurring items, is 34.2%, compared with the
32.8% estimated rate used for the nine-month period of 2001. The estimated
annual rate for 2002 increased from the estimate used in the first half of
2002 due to a change in the expected full year geographic mix of earnings.
The increase in the estimated annual rate resulted in additional tax
expense of $200 in the third quarter of 2002. The full year 2001 effective
tax rate, excluding unusual items, was 33%.
Page 8
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(continued)
2. Inventories at September 30, 2002 and December 31, 2001 were
as follows:
9/30/02 12/31/01
------- --------
Finished goods $18,300 $15,700
Work in process 7,400 6,300
Raw materials 14,700 12,300
------- -------
$40,400 $34,300
------- -------
------- -------
3. Comprehensive income for the three and nine-months ended September 30,
2002 and September 30, 2001 was as follows:
Three Months Ended Nine Months Ended
9/30/02 9/30/01 9/30/02 9/30/01
-------- -------- -------- --------
Net income ......................... $ 3,600 $ 5,900 $ 15,000 $ 14,400
Foreign currency
translation adjustments............ (700) 6,900 7,400 (7,500)
Minimum pension liability
adjustments........................ - - (200) -
Fair value of derivative
financial instruments adjustments.. (100) (200) (100) (400)
-------- -------- -------- --------
Comprehensive income................ $ 2,800 $ 12,600 $ 22,100 $ 6,500
-------- -------- -------- --------
-------- -------- -------- --------
Page 9
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Continued)
4. Net sales to external customers and operating profit (loss) by
operating segment for the three and nine-months ended September 30,
2002 and September 30, 2001 were as follows:
Three Months Ended Nine Months Ended
September 30 September 30
Net Sales: 2002 2001 2002 2001
---------- -------- -------- -------- --------
Pharmaceutical Systems.......... $102,900 $ 92,300 $306,300 $282,800
Drug Delivery Systems........... 2,000 4,200 10,000 13,500
-------- -------- -------- --------
Consolidated Total ............. $104,900 $ 96,500 $316,300 $296,300
-------- -------- -------- --------
-------- -------- -------- --------
Three Months Ended Nine Months Ended
September 30 September 30
Operating Profit (Loss): 2002 2001 2002 2001
----------------------- -------- -------- -------- --------
Pharmaceutical Systems.......... $ 13,500 $ 12,600 $ 50,000 $ 42,700
Drug Delivery Systems........... (4,100) (1,500) (10,200) (4,900)
Corporate and unallocated....... (12,100) (900) (20,000) (9,700)
-------- -------- -------- --------
Consolidated Total ............. $ (2,700) $ 10,200 $ 19,800 $ 28,100
-------- -------- -------- --------
-------- -------- -------- --------
For the nine months ended September 30, 2002 Corporate and unallocated
operating profit (loss) includes a $9,700 restructuring charge and a
$1,700 foreign currency exchange gain. The restructuring charge was
recorded in the third quarter of 2002.
For the nine months ended September 30, 2001 Corporate and unallocated
operating profit (loss) includes a $2,900 restructuring charge. A
$1,600 restructuring credit was recorded in the third quarter of 2001.
Certain costs previously reported as Corporate and unallocated have
been allocated to the respective segment that they support. These
costs consist principally of rent, information services and human
resource functions incurred at the North American headquarters
facility. All prior period information has been restated to reflect
these allocations.
Compared with December 31, 2001, there were no material changes in the
amount of assets as of September 30, 2002 in the Pharmaceutical
Systems and Drug Delivery Systems operating segments. As a result of
the third quarter 2002 restructuring charge, Corporate and unallocated
assets were reduced by $8,600.
5. Common stock issued at September 30, 2002 was 17,165,141 shares, of
which 2,701,333 shares were held in treasury. Dividends of $.19 per
common share were paid in the third quarter of 2002 and a dividend of
$.20 per share payable November 6, 2002 to holders of record on
October 23, 2002 was declared on July 30, 2002.
Page 10
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Continued)
6. The Company has accrued the estimated cost of environmental compliance
expenses related to soil or ground water contamination at current and
former manufacturing facilities. In the third quarter of 2002, the
Company reduced its accrued liability by $400 to reflect the
acceptance of finalized remediation plans by relevant state regulatory
agencies at two sites. Based on consultants' estimates of the costs of
remediation in accordance with applicable regulatory requirements, the
Company believes the accrued liability of $1,000 at September 30, 2002
is sufficient to cover the future costs of these remedial actions,
which will be carried out over the next several years. The Company has
not anticipated any possible recovery from insurance or other sources.
7. The following table details the activity related to the Company's
restructuring reserve, which consists of accrued severance, benefits,
contract termination costs and non-cash write-offs:
Severance
and benefits Other Total
------------ ------------ ------------
Balance, December 31,2001 $ 2,200 $ - $ 2,200
2002 restructuring charge - 9,700 9,700
Non-cash write-off - (9,200) (9,200)
Cash payments (1,200) - (1,200)
------------ ------------ ------------
Balance, September 30, 2002 $ 1,000 $ 500 $ 1,500
------------ ------------ ------------
In the third quarter of 2002 the Company recorded a pre-tax
restructuring charge of $9,700. The charge includes a $5,800 write-off
of construction-in-progress and a $500 accrual for contract
termination fees related to the discontinuance of the Company's
information systems implementation project, a $2,800 impairment of its
investment in a genetic research technology company and a $600
impairment of the Company's consumer healthcare research business (see
footnote #10). These restructuring items generated a $2,400 tax
benefit.
The remaining restructuring accrual balance relates principally to
restructuring programs announced in 2001 and 2000. Terminations under
these programs are complete and totaled 215 employees. The Company
expects to complete all remaining payments, principally consisting of
pre-retirement medical benefits, within the next two years.
8. During the third quarter of 2002 the Company recorded an $800 charge,
included in equity in net income (loss) of affiliated companies, for
its share of the costs related to the consolidation of two rubber
molding operations for one of its equity investments in Mexico. The
charge represents severance costs for approximately 123 employees. As
of September 30, 2002, 10 employees have been terminated with the
remaining terminations expected to occur in the fourth quarter. The
Company expects all remaining payments to be made in the fourth
quarter of 2002.
Page 11
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Continued)
9. In November 2001, the Company sold its contract manufacturing and
packaging business located in Lakewood, NJ. The results of this
business have been reflected as discontinued operations in the
accompanying consolidated financial statements.
In the third quarter of 2002, the Company recorded a tax benefit in
income from discontinued operations of $5,900 principally related to a
tax refund on the disposal of the facility. See footnote #12.
At December 31, 2001, the Company was required to hold $4,300 of the
sales proceeds in trust for the repayment of certain debentures issued
by the contract manufacturing and packaging business, which became due
and payable upon the sale. These debentures were repaid in the first
quarter of 2002 resulting in a $400, net of tax charge, which was
included in the loss on disposal of discontinued operations.
10. Effective January 1, 2002, the Company adopted Financial Accounting
Standards Statement No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"). SFAS 142 eliminated the previous requirement to amortize
goodwill and indefinite-lived intangible assets. Instead, goodwill and
intangible assets with indefinite lives are tested for impairment on
at least an annual basis or sooner if an event occurs which indicates
that there could be an impairment. The Company has determined its
reporting units to be each of the four geographic regions in the
Pharmaceutical Systems Segment, the drug delivery business unit, and
the clinical services business unit. The first step of the impairment
test compares the fair value of a reporting unit to its carrying
amount, including goodwill. If the carrying amount of the reporting
unit exceeds its fair value, the second step is performed. The second
step compares the carrying amount of the goodwill to its implied fair
value. The implied fair value is determined by allocating the fair
value of the reporting unit to all of the assets and liabilities of
that unit as if the reporting unit had been acquired in a business
combination and the fair value of the reporting unit was the purchase
price paid to acquire the reporting unit. The excess of the fair value
of the reporting unit over the amounts assigned to its assets and
liabilities is the implied fair value of goodwill. If the fair value
of the goodwill is less than the carrying amount, an impairment loss
is recorded. The Company performed an impairment test of its goodwill
as of January 1, 2002 and determined that no impairment of the
recorded goodwill existed. As required by the statement, the Company
did not record amortization expense for goodwill in 2002 as compared
to the $300 and $900, net of tax, recorded in the prior year three and
nine-month periods.
The goodwill balance as of September 30, 2002 was $35,100 compared to
$32,600 as of December 31, 2001. The increase is due to positive
foreign currency translation adjustments of $3,100 offset by an
impairment loss of $600. Based on a third party offer to purchase the
business, the Company recorded an impairment loss in the third quarter
of 2002 on its consumer healthcare research business, a division of
the clinical services business unit.
Page 12
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Continued)
Goodwill by reportable segment as of September 30, 2002 and December
31, 2001 was as follows:
9/30/02 12/31/01
-------- --------
Pharmaceutical Systems 31,800 28,700
Drug Delivery Systems 3,300 3,900
-------- --------
35,100 32,600
The cost and respective accumulated amortization for the Company's
intangible assets, mainly patents, was $11,600 and $3,900,
respectively, as of September 30, 2002, and $11,200 and $3,300,
respectively, as of December 31, 2001. The cost basis of intangibles
includes the effects of foreign currency translation adjustments.
There were no intangibles purchased or acquired during 2002.
Intangible amortization expense for the three and nine-month periods
ended September 30, 2002 was $200 and $600, respectively, and is
estimated to be $800 for the full year. Estimated amortization for
each of the subsequent five fiscal years will be approximately $700
per year.
The following reconciles the reported net income and earnings per
share to that which would have resulted had the non-amortization
provisions of SFAS No. 142 been applied to the three and nine-month
periods ended September 30, 2001.
Three Months Nine Months
Ended Ended
9/30/01 9/30/01
As reported
Income from continuing operations $ 5,700 $13,800
Discontinued operations 200 600
------- -------
Net income 5,900 14,400
Goodwill amortization, net of tax 300 900
------- -------
As adjusted $ 6,200 $15,300
------- -------
------- -------
As reported basic earnings per share
Continuing operations $ 0.40 $ 0.96
Discontinued operations 0.01 0.04
------- -------
$ 0.41 $ 1.00
------- -------
------- -------
As adjusted $ 0.43 $ 1.07
------- -------
------- -------
As reported diluted earnings per share
Continuing operations $ 0.40 $ 0.96
Discontinued operations 0.01 0.04
------- -------
$ 0.41 $ 1.00
------- -------
------- -------
As adjusted $ 0.43 $ 1.07
------- -------
------- -------
Page 13
West Pharmaceutical Services, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Continued)
11. During the first quarter of 2002, the Company's subsidiary in
Argentina recorded a foreign currency exchange gain of $1,700 on net
assets denominated in non-peso currencies due to the devaluation of
the Argentine peso. The foreign currency gain was subject to both
Argentine federal income taxes and US dividend withholding taxes. The
devaluation of assets denominated in the Argentine peso totaled $3,200
as of September 30, 2002 and is recorded as a cumulative translation
adjustment to other comprehensive income in shareholder's equity.
12. In the third quarter of 2002, the Company recorded an $8,400 tax
benefit associated with the 2001 disposition of its contract
manufacturing and packaging business and the shutdown of a plastic
device manufacturing facility. Of the $8,400 benefit, $5,900 was
recorded in discontinued operations with the remaining $2,500 benefit
reflected in continuing operations. The tax benefit and the related
tax refund were a result of a change in U.S. tax law in 2002 related
to loss disallowance rules.
Page 14
Item 2.
Management's Discussion and Analysis of Financial Condition and
- ----------------------------------------------------------------
Results of Operations for the Three Months and Nine Months ended
- ---------------------------------------------------------------
September 30, 2002 versus September 30, 2001
- --------------------------------------------
Net Sales
- ---------
Net sales for the third quarter of 2002 were $104.9 million compared to $96.5
million in the third quarter of 2001. At constant exchange rates, sales for the
third quarter 2002 increased 7% from the prior year quarter.
Third quarter 2002 sales for the Pharmaceutical Systems segment were $102.9
million, a $10.6 million increase from prior year reported sales of $92.3
million. At constant exchange rates, sales increased by 10%. International
markets continued to grow significantly resulting in 19% sales growth at
constant exchange rates. Sales in domestic markets increased 3% from the prior
year quarter. The increase in both international and domestic markets is
primarily due to volume increases in pharmaceutical components, including ready
to sterilize products in domestic markets and prefilled syringe systems in
international markets.
The Drug Delivery Systems segment had third quarter 2002 revenues of $2.0
million compared to prior year third quarter sales of $4.2 million. The decline
in revenues is attributed to an overall industry slowdown in the clinical
services business unit and the absence of current period licensing revenues in
the drug delivery business unit.
Net sales for the nine months of 2002 were $316.3 million compared to $296.3
million in the prior year period. At constant exchange rates, sales increased
7%. Excluding exchange rate variances, Pharmaceutical Systems segment sales were
9% higher than the prior year, led primarily by increased sales in international
markets. Prefilled syringe systems and a variety of stopper products are the
main contributors to increased international sales. Drug Delivery Systems
revenues decreased $3.5 million solely due to lower licensing revenues in the
drug delivery business unit. Year-to-date 2002 revenues in the clinical services
business unit are consistent with those in 2001.
Gross Profit
- ------------
The consolidated gross margin for the third quarter was 25.4%, compared with
27.6% in the third quarter of 2001. Pharmaceutical Systems margins decreased to
25.7% compared to 26.8% in the prior year quarter. Margins in Europe decreased
primarily because of losses at the Company's plastic device facility, which are
due to production delays and lower-than-anticipated demand for its principal
product. Margins in the North America region are consistent with the prior year
quarter. Drug Delivery Systems segment margins declined significantly from the
third quarter of 2001 due to decreased sales in the clinical services business
unit and lower licensing revenues in the drug delivery business unit.
The consolidated gross profit margin for the nine-month period was 28.2%
compared with 28.9% in the same period of 2001. Higher margins in the North
America region due to increased sales volumes, favorable material yields, and
lower lab and engineering costs, were offset by lower margins in Europe. Lower
margins in the U.K. plastic device facility, as well as production
inefficiencies caused by capacity constraints at other plants contributed to the
decreased margins in Europe. The production efficiencies are expected to improve
as additional capacity comes on-line during fourth quarter 2002 and in mid-2003.
Page 15
Management's Discussion and Analysis of Financial Condition and
- ----------------------------------------------------------------
Results of Operations for the Three Months and Nine Months ended
- ---------------------------------------------------------------
September 30, 2002 versus September 30, 2001, continued
- -------------------------------------------------------
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses were $19.3 million, a $1.0 million
(5%) increase from the $18.3 million incurred in the third quarter of 2001. A
$1.3 million decrease in pension income and higher research and development
expenses in the drug delivery business unit were partially offset by a decrease
in incentive and stock-based compensation costs and lower information systems
costs.
For the nine-month period ending September 30, 2002, selling, general and
administrative expenses increased $7.1 million (13%) to $61.6 million. Lower
pension income, increased research and development costs in the drug delivery
business unit and higher information systems costs contributed to the increase.
Restructuring charge (credit)
- -----------------------------
In the third quarter of 2002 the Company recorded a pre-tax restructuring charge
of $9.7 million ($7.3 million, or $0.50 per share, net of tax). The charge
includes a $5,800 write-off of construction-in-progress and a $500 accrual for
contract termination fees related to the discontinuance of the Company's
information systems implementation project, a $2.8 million impairment of an
investment in a genetic research technology company, and a $0.6 million
impairment of the Company's consumer healthcare research business.
For the nine-month period of 2001, the Company recorded a net pre-tax
restructuring charge of $2.9 million ($1.1 million, or $0.08 per share, net of
tax). The charge consisted of a second quarter $4.5 million restructuring charge
for the elimination of several mid- and senior level management positions and a
third quarter $1.6 million restructuring credit principally related to the sale
of a manufacturing facility held for sale from the 2000 restructuring program.
Other (income) expense
- ----------------------
Other (income) expense consists principally of foreign exchange transaction
items and miscellaneous equipment sales. Third quarter 2002 other income
decreased from the prior year quarter, primarily due to current period foreign
exchange transaction losses versus prior period gains in the Company's European
subsidiaries.
The nine-month period for 2002 contains the first quarter $1.7 million
non-recurring foreign currency exchange gain on net assets denominated in
non-peso currencies due to the devaluation of the Argentine peso.
Page 16
Management's Discussion and Analysis of Financial Condition and
- ----------------------------------------------------------------
Results of Operations for the Three Months and Nine Months ended
- ---------------------------------------------------------------
September 30, 2002 versus September 30, 2001, continued
- -------------------------------------------------------
Operating Profit (Loss)
- -----------------------
The Company recorded an operating loss for the third quarter of 2002 of $2.7
million compared to a $10.2 million operating profit in the third quarter 2001.
Excluding non-recurring items, operating profit for the third quarter 2002 was
$7.0 million compared to $8.6 million in the third quarter of 2001.
Pharmaceutical Systems operating profit was $13.5 million compared to $12.6
million in 2001. The increase in operating profit was due to increased sales in
domestic and international markets, partially offset by production
inefficiencies in one of the Company's U.K. facilities. Drug Delivery Systems
operating losses of $4.1 million in the third quarter of 2002 compared to losses
of $1.5 million in 2001. The absence of licensing revenues and increased
research and development spending in the drug delivery unit were the main
contributors to the additional operating losses. Corporate and unallocated
operating losses were $12.1 million in 2002 compared to $0.9 million in 2001.
Excluding non-recurring items, Corporate and unallocated operating losses for
2002 were $2.4 million compared to $2.5 million in 2001. The decrease in
Corporate and unallocated operating losses was a result of decreased information
technology and incentive compensation costs partially offset by a decrease in
pension income.
For the nine-month period, 2002 operating profit was $19.8 million compared to
$28.1 million for the same period of 2001. Excluding non-recurring items,
operating profit was $27.8 million in 2002 and $31.0 million in 2001. Operating
profit for the nine-month period decreased due to lower pension income,
increased research and development costs in the drug delivery business unit and
an increase in information technology expenses.
The following table reconciles reported operating profit (loss) to operating
profit (loss) excluding unusual items:
Three Months Ended Nine Months Ended
September 30 September 30
($ in millions) 2002 2001 2002 2001
-------- -------- -------- --------
Operating profit (loss), as reported $ (2.7) $ 10.2 $ 19.8 $ 28.1
Restructuring charge (credit) 9.7 (1.6) 9.7 2.9
Foreign currency exchange gain - - (1.7) -
-------- -------- -------- --------
Operating profit, excluding unusual items $ 7.0 $ 8.6 $ 27.8 $ 31.0
Interest expense, net
- ---------------------
Net interest costs declined by $0.8 million compared to the third quarter of
2001 and $2.3 million for the nine-month period. The decrease in both periods
was mainly due to the decrease in 2002 debt levels as well as lower interest
rates.
Page 17
Management's Discussion and Analysis of Financial Condition and
- ----------------------------------------------------------------
Results of Operations for the Three Months and Nine Months ended
- ---------------------------------------------------------------
September 30, 2002 versus September 30, 2001, continued
- -------------------------------------------------------
Provision for income taxes
- --------------------------
In the third quarter of 2002, the Company recorded net tax benefits of $8.4
million associated with the 2001 disposition of its contract manufacturing and
packaging business and the shutdown of a plastic device manufacturing plant. Of
the total benefit, $2.5 million ($0.17 per share) was recorded in continuing
operations and the remaining $5.9 million ($0.41 per share) in discontinued
operations. The tax benefit and related tax refund resulted from a change in
U.S. tax law in 2002 related to loss disallowance rules.
Excluding the $2.4 million tax benefit associated with the restructuring charge
and the unusual tax benefit noted above, the effective tax rate for the third
quarter of 2002 was 38.2%, compared with the 28.3% used in the third quarter of
2001. The estimated annual tax rate for 2002, excluding non-recurring items, is
34.2%, compared with the 32.8% estimated rate used for the nine-month period of
2001. The estimated annual rate for 2002 increased from the estimate used in the
first half of 2002 due to a change in the expected full year geographic mix of
earnings. The increase in the estimated annual rate resulted in additional tax
expense of $0.2 million in the third quarter of 2002. The full year 2001
effective tax rate, excluding non-recurring items, was 33%.
Equity in net income (loss) of affiliated companies
- ---------------------------------------------------
Equity in net income (loss) of affiliated companies was a $0.4 million loss in
the third quarter of 2002 compared to breakeven results for the prior year
quarter. The decrease is mainly due to the $0.8 million (or $0.06 per share)
charge recorded by the Company for restructuring costs of one of its 49% owned
Mexican affiliates. The charge represented severance costs for the termination
of approximately 123 people. This charge was partially offset by increased
earnings from Daikyo Seiko, Ltd., a Japanese company in which the Company has a
25% ownership interest. Earnings from Daikyo for the three and nine-month
periods of 2002 were up as a result of increased sales growth in European and
U.S. markets. Excluding the impact of the severance charge, results from the
Company's Mexican affiliates were consistent with those in the third quarter and
nine-month periods of 2001.
Discontinued Operations
- -----------------------
In November 2001, the Company sold its contract manufacturing and packaging
business located in Lakewood, NJ. The results of this business have been
reflected as discontinued operations in the accompanying consolidated financial
statements.
As noted above, a 2002 change in U.S. tax loss disallowance rules generated a
$5.9 million ($0.41 per share) tax benefit connected with the sale of the
contract manufacturing and packaging business. This tax benefit was recorded in
discontinued operations in the third quarter of 2002.
At December 31, 2001 the Company was required to hold $4.3 million of the sales
proceeds in trust for the repayment of certain debentures issued by the contract
manufacturing and packaging business, which became due and payable upon the
sale. These debentures were repaid in the first quarter of 2002 resulting in a
$0.4 million ($0.03 per share) net of tax charge, which was included in loss on
disposal of discontinued operations.
Page 18
Management's Discussion and Analysis of Financial Condition and
- ----------------------------------------------------------------
Results of Operations for the Three Months and Nine Months ended
- ---------------------------------------------------------------
September 30, 2002 versus September 30, 2001, continued
- -------------------------------------------------------
Net Income
- ----------
Net income for the third quarter of 2002 was $3.6 million ($.25 per share),
compared to $5.9 million ($.41 per share), in the third quarter 2001. Net income
for the nine-month period of 2002 was $15.0 million ($1.04 per share), compared
to $14.4 million ($1.00 per share)for the 2001 nine-month period. The following
table reconciles reported earnings per share to earnings per share excluding
unusual items:
Three Months Ended Nine Months Ended
September 30 September 30
2002 2001 2002 2001
------- ------- ------- -------
Earnings per share, as reported $ 0.25 $ 0.41 $ 1.04 $ 1.00
Restructuring charge (credit) $ 0.50 $(0.12) $ 0.50 $ 0.08
Foreign currency exchange gain - - $(0.05) -
Non-recurring charge of equity affiliate $ 0.06 - $ 0.06 -
Unusual tax benefit $(0.17) - $(0.17) -
Discontinued operations $(0.41) $(0.01) $(0.38) $(0.04)
------- ------- ------- -------
Earnings per share, excluding unusual items $ 0.23 $ 0.28 $ 1.00 $ 1.04
Average common shares outstanding were 14.5 million in the third quarter of 2002
compared to 14.3 million in the third quarter of 2001. The increase in shares
outstanding is mainly the result of employee stock option exercises. Average
common shares outstanding for the nine-month period of 2002 were 14.4 million,
compared to 14.3 million in 2001.
FINANCIAL CONDITION
- -------------------
Working capital at September 30, 2002 was $79.6 million compared to $83.2
million at December 31, 2001. The working capital ratio at September 30, 2002
was 2.1 to 1. Accounts receivable increased slightly, reflecting the increase in
September 2002 sales levels versus December 2001. Days sales outstanding were
consistent with 2001. Cash flows from operations for the nine-month period
increased from the prior year due to improved sales as well as the receipt of
significant tax refunds. Low fourth quarter 2000 sales negatively impacted 2001
cash flows.
For the nine-month period, capital spending was $30.2 million, primarily for
facility expansions at two European plants, expenditures for tooling projects,
new equipment purchases and equipment upgrades used in the production of new
products, and costs associated with the information technology system
implementation. Full year 2002 capital spending is projected to be approximately
$40.0 million. The Company paid cash dividends totaling $8.2 million ($0.57 per
share) during the nine-month period of 2002.
Debt as a percentage of total invested capital (debt plus shareholders' equity)
at September 30, 2002 was 47.9% compared to 52.2% at December 31, 2001. Debt
levels decreased by $14.9 million due to improved internal utilization of cash
as well as the receipt of the previously mentioned tax refund.
Page 19
Management's Discussion and Analysis of Financial Condition and
- ----------------------------------------------------------------
Results of Operations for the Three Months and Nine Months ended
- ---------------------------------------------------------------
September 30, 2002 versus September 30, 2001, continued
- -------------------------------------------------------
Total shareholders' equity was $193.7 million at September 30, 2002 compared to
$176.8 million at December 31, 2001. The increase in equity was due to current
year net income, positive currency translation adjustments and employee stock
option exercises, partially offset by dividend payments.
The Company believes that its financial condition, capitalization structure and
expected income from operations will be sufficient to meet the Company's future
expected cash requirements, at least through 2005, at which time the Company's
revolving credit facility becomes due. The Company fully expects to obtain
similar credit facilities at that time.
Accounting Changes
- ------------------
Effective January 1, 2002, the Company adopted Financial Accounting Standards
Statement No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142
eliminated the previous requirement to amortize goodwill and indefinite-lived
intangible assets. Instead, goodwill and intangible assets with indefinite lives
are tested for impairment on at least an annual basis or sooner if an event
occurs which indicates that there could be impairment. The Company has
determined its reporting units to be each of the four geographic regions in the
Pharmaceutical Systems Segment, the drug delivery business unit and the clinical
services business unit. The first step of the impairment test compares the fair
value of a reporting unit to its carrying amount, including goodwill. If the
carrying amount of the reporting unit exceeds its fair value, the second step is
performed. The second step compares the carrying amount of the goodwill to its
implied fair value. The implied fair value is determined by allocating the fair
value of the reporting unit to all of the assets and liabilities of that unit as
if the reporting unit had been acquired in a business combination and the fair
value of the reporting unit was the purchase price paid to acquire the reporting
unit. The excess of the fair value of the reporting unit over the amounts
assigned to its assets and liabilities is the implied fair value of goodwill. If
the fair value of the goodwill is less than the carrying amount, an impairment
loss is recorded. The Company performed an impairment test of its goodwill as of
January 1, 2002 and determined that no impairment of the recorded goodwill
existed. As required by the statement, the Company did not record amortization
expense for goodwill in 2002 compared to the $0.3 million and $0.9 million, net
of tax, recorded in the prior year quarter and nine-month periods.
New Accounting Standards
- -----------------------
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
("SFAS 145"). SFAS 145, clarifies and simplifies existing accounting
pronouncements. Statement No. 145 rescinds SFAS 4, "Reporting Gains and Losses
from Extinguishment of Debt", which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of the related income tax effect. As a result, the
criteria in APB Opinion 30 will now be used to classify those gains and losses.
SFAS 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements",
amended SFAS 4, and is no longer necessary because SFAS 4 has been rescinded.
SFAS 145 amends SFAS 13, "Accounting for Leases", to require that certain lease
modifications that have economic effects similar to sale-leaseback transactions
be accounted for in the same manner as sale-leaseback transactions. Certain
provisions of SFAS. 145 are effective for fiscal years beginning after May 15,
2002, while other provisions are effective for transactions occurring after May
15, 2002. The adoption of SFAS 145 is not expected to have a significant impact
on the Company's results of operations, financial position or cash flows.
Page 20
Management's Discussion and Analysis of Financial Condition and
- ----------------------------------------------------------------
Results of Operations for the Three Months and Nine Months ended
- ---------------------------------------------------------------
September 30, 2002 versus September 30, 2001, continued
- -------------------------------------------------------
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS 146"), which addresses the recognition,
measurement, and reporting of costs associated with exit or disposal activities,
and supercedes Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)" ("EITF 94-3"). The
principal difference between SFAS 146 and EITF 94-3 relates to the requirements
for recognition of a liability for a cost associated with an exit or disposal
activity. SFAS 146 requires that a liability for a cost associated with an exit
or disposal activity, including those related to employee termination benefits
and obligations under operating leases and other contracts, be recognized when
the liability is incurred, and not necessarily the date of an entity's
commitment to an exit plan, as under EITF 94-3. SFAS 146 also establishes that
the initial measurement of a liability recognized under SFAS 146 be based on
fair value. The provisions of SFAS 146 are effective for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. The Company expects to adopt SFAS 146, effective January 1, 2003.
Market Risk
- -----------
The Company is exposed to various market risk factors such as fluctuating
interest rates and foreign currency rate fluctuations. These risk factors can
impact results of operations, cash flows and financial position. These risks are
managed periodically with the use of derivative financial instruments such as
interest rate swaps and forward exchange contracts. In accordance with Company
policy, derivative financial instruments are not used for speculation or trading
purposes.
Forward-Looking Information
- ---------------------------
Certain statements in this report, including management's discussion and
analysis, that are not historical are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. The words
"estimate", "expect", "intend", "believe" and similar expressions are intended
to identify forward-looking statements. These forward-looking statements involve
known and unknown risks and uncertainties. The Company's actual results may
differ materially from those expressed in any forward looking statement and are
dependent on a number of factors including, but not limited to (1)sales demand,
(2)timing of customers' projects, (3) successful development of proprietary drug
delivery technologies and systems, (4)regulatory, licensee and/or market
acceptance of products based on those technologies, (5)competitive pressures,
(6)the strength or weakness of the U.S. dollar, (7)inflation, (8)the cost of raw
materials,(9)the availability of credit facilities and (10)statutory tax rates.
Page 21
Item 3. Quantitative and Qualitative Disclosure About Market Risk
---------------------------------------------------------
The information called for by this item is included in the text
appearing in Item 2 "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Market Risk".
Item 4. Controls and Procedures
-----------------------
(a) In September 2002 the Company formed a Disclosure Committee whose
members include the Chief Executive Officer and Chief Financial
Officer, among other members of management. The Disclosure
Committee's procedures are considered by the Chief Executive
Officer and Chief Financial Officer in performing their
evaluations of the Company's disclosure controls and procedures
and in assessing the accuracy and completeness of the Company's
disclosures.
(b) The Company's Chief Executive Officer and Chief Financial Officer
have evaluated the effectiveness of the design and operation of
the Company's disclosure controls and procedures (as defined
under Rules 13a-14 and 15d-14 of the Securities Exchange Act of
1934, as amended) as of a date within ninety days prior to the
filing date of this report. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that
the Company's disclosure controls and procedures are adequate and
effective.
(c) There were no significant changes in internal controls or in
other factors that could significantly affect the Company's
internal controls subsequent to the date of the evaluation
referenced above.
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) See Index to Exhibits on pages F-1 and F-2 of this Report.
(b) On August 29, 2002, the Company filed a Current Report on Form
8-K. Under Item 9 of that Report, the Company disclosed pursuant
to Regulation FD that the Company's President and Chief Executive
Officer and the Company's Vice President and Chief Financial
Officer delivered to the Securities and Exchange Commission a
certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act. Copies of
those certifications were filed as Exhibits to the Report.
On August 29, 2002, the Company filed a Current Report on Form
8-K. Under Item 5 of that Report the Company provided five-year
summary financial information that reflected disclosures required
by paragraph 61 of SFAS 142.
Page 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.
WEST PHARMACEUTICAL SERVICES,INC.
-----------------------------------
(Registrant)
November 14, 2002 /s/ Linda R. Altemus
- ----------------- -----------------------------------------
Date Linda R. Altemus
Vice President and Chief Financial Officer
Page 23
CERTIFICATION
I, Donald E. Morel, Jr. Ph.D, certify that:
1. I have reviewed this quarterly report on Form 10-Q of West Pharmaceutical
Services, Inc.;
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 registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, 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;
b) evaluated the effectiveness of the registrant'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
c) 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. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I 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.
Date: November 14, 2002 /s/ Donald E. Morel, Jr. Ph.D
----------------- --------------------------------------
Donald E. Morel, Jr. Ph.D.
President and Chief Executive Officer
Page 24
CERTIFICATION
I, Linda R. Altemus, certify that:
1. I have reviewed this quarterly report on Form 10-Q of West Pharmaceutical
Services, Inc.;
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 registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, 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;
b) evaluated the effectiveness of the registrant'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
c) 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. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I 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.
Date: November 14, 2002 /s/ Linda R. Altemus
------------------ ------------------------------------------
Linda R. Altemus
Vice President and Chief Financial Officer
INDEX TO EXHIBITS
Exhibit
Number
(3) (a) Amended and Restated Articles of Incorporation of the Company
through January 4, 1999 incorporated by reference to Exhibit
(3)(a) of the Company's Annual Report on Form 10-K for the year
ended December 31, 1998 (File No. 1-8036).
(3) (b) Bylaws of the Company, as amended through October 27, 1998,
incorporated by reference to Exhibit (3)(b) to the Company's Form
10-Q for the quarter ended September 30, 1998 (File No. 1-8036).
(4) Miscellaneous long term debt instruments and credit facility
agreements of the Company, under which the underlying authorized
debt is equal to less than ten percent of the total assets of the
Company and its subsidiaries on a consolidated basis, may not be
filed as exhibits to this report pursuant to Section (b) (4)
(iii) A of Item 601 of Reg S-K. The Company agrees to furnish to
the Commission, upon request, copies of any such unfiled
instruments (File No. 1-8036).
(4) (a) Form of stock certificate for common stock incorporated by
reference to Exhibit (4) (a) of the Company's Annual Report on
Form 10-K for the year ended December 31, 1998 (File No. 1-8036).
(4)(a)(1) Article 5, 6, 8(c) and 9 of the Amended and Restated Articles of
Incorporation of the Company, incorporated by reference to
Exhibit (3)(a) of the Company's Annual Report on Form 10-K for
the year ended December 31, 1998 (File No. 1-8036).
(4)(a)(2) Article I and V of the Bylaws of the Company, as amended,
incorporated by reference to Exhibit (3)(b) to the Company's Form
10-Q for the quarter ended September 30, 1998 (File No. 1-8036).
(4) (b) Note Purchase Agreement dated as of April 8, 1999 among
the Company and the insurance companies identified on a schedule
thereto, incorporated by reference to Exhibit (4)(b) of the
Company's Form 10-Q for the quarter ended September 30, 2000
(File No. 1-8036).
(4) (c) Credit Agreement, dated as of July 26, 2000 among the Company,
the banks and other financial institutions identified on a
schedule thereto, and PNC Bank, N.A., as agent for the banks (the
"Credit Agreement"), incorporated by reference to Exhibit (4) (c)
of the Company's Form 10-Q for the quarter ended September 30,
2000 (File No. 1-8036).
(4) (c) (1) First Amendment dated as of September 14, 2000, to the Credit
Agreement, incorporated by reference to Exhibit(4) (c) (1) of the
Company's Annual Report on Form 10-K for the year ended December
31, 2001 (File No. 1-8036).
(4) (c) (2) Second Amendment dated as of November 17, 2000, to the Credit
Agreement, incorporated by reference to Exhibit (4) (c) (2) of
the Company's Annual Report on Form 10-K for the year ended
December 31, 2001 (File No. 1-8036).
F - 1
INDEX TO EXHIBITS
Exhibit
Number
(4) (c) (3) Joinder and Assumption Agreement dated as of February 28, 2001,
with respect to the Credit Agreement, incorporated by reference
to Exhibit (4) (c) (3) of the Company's Annual Report on Form
10-K for the year ended December 31, 2001 (File No. 1-8036).
(4) (c) (4) Third Amendment dated as of February 28, 2001 to the Credit
Agreement, incorporated by reference to Exhibit (4) (c) (4) of
the Company's Annual Report on Form 10-K for the year ended
December 31, 2001 (File No. 1-8036).
(4) (c) (5) Fourth Amendment dated as of July 13, 2001 to the Credit
Agreement, incorporated by reference to Exhibit (10) (a) of the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001.
(4) (c) (6) Extension Agreement dated as of January 5, 2001 to the Credit
Agreement, incorporated by reference to Exhibit (4) (c) (6) of
the Company's Annual Report on Form 10-K for the year ended
December 31, 2001 (File No. 1-8036).
(4) (c) (7) Fifth Amendment dated as of July 17, 2002 to the Credit
Agreement.
(10) (a) Amendment to Amended and Restated Employment Agreement, dated as
of April 30, 2002, between the Company and William G. Little.
(10) (b) Non-Competition Agreement, dated as of April 30, 2002, between
the Company and William G. Little.
(10) (c) Employment Agreement, dated as of April 30, 2002, between the
Company and Donald E. Morel, Jr.
(10) (d) Non-Qualified Stock Option Agreement, dated as of April 30, 2002
between the Company and Donald E. Morel, Jr.
(11) Not Applicable.
(15) None.
(18) None.
(19) None.
(22) None.
(23) Not Applicable.
(99) (a) Certification by Donald E. Morel, Jr., pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(99) (b) Certification by Linda R. Altemus, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
F - 2