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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
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: 1-10434
THE READER'S DIGEST ASSOCIATION, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-1726769
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Pleasantville, New York 10570-7000
(Address of principal executive offices) (Zip Code)
(914) 238-1000
(Registrant's telephone number, including area code)
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 [ ]
As of October 31, 2002, the following shares of the registrant's
common stock were outstanding:
Class A Nonvoting Common Stock, $0.01 par value: 88,296,559 shares
Class B Voting Common Stock, $0.01 par value:12,432,164 shares
Page 1 of 25 pages.
THE READER'S DIGEST ASSOCIATION, INC. AND SUBSIDIARIES
Index to Form 10-Q
September 30, 2002
Part I - Financial Information Page No.
Item 1. Financial Statements 3
The Reader's Digest Association, Inc. and Subsidiaries
Consolidated Condensed Financial Statements (unaudited):
Consolidated Condensed Statements of Income
for the three-month periods ended September 30, 2002 and 2001 3
Consolidated Condensed Balance Sheets
as of September 30, 2002 and June 30, 2002 4
Consolidated Condensed Statements of Cash Flows
for the three-month periods ended September 30, 2002 and 2001 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 14
Item 4. Controls and Procedures 21
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 22
The Reader's Digest Association, Inc. and Subsidiaries
Consolidated Condensed Statements of Income
Three-month periods ended September 30, 2002 and 2001
(In millions, except per share data)
(unaudited)
Three-month periods ended
September 30,
2002 2001
Revenues $ 517.1 $ 497.5
Product, distribution and editorial expenses (215.9) (207.5)
Promotion, marketing and administrative expenses (302.0) (287.2)
Other operating items, net 2.8 --
--------- ---------
Operating profit 2.0 2.8
Other expense, net (10.1) (4.5)
--------- ---------
Loss before provision for income taxes (8.1) (1.7)
Provision for income taxes 2.9 0.6
--------- ---------
Net loss $ (5.2) $ (1.1)
========= =========
Basic and diluted loss per share:
Weighted average common shares outstanding 99.8 101.9
Basic and diluted loss per share $ (0.05) $ (0.01)
========= =========
Dividends per common share $ 0.05 $ 0.05
========= =========
See accompanying Notes to Consolidated Condensed Financial Statements.
The Reader's Digest Association, Inc. and Subsidiaries
Consolidated Condensed Balance Sheets
As of September 30, 2002 and June 30, 2002
(In millions)
(unaudited)
September 30, June 30,
2002 2002
Assets
Cash and cash equivalents $ 56.0 $ 107.6
Accounts receivable, net 334.2 306.0
Inventories 208.7 156.0
Prepaid and deferred promotion costs 145.9 140.9
Prepaid expenses and other current assets 162.1 153.2
---------- ----------
Total current assets 906.9 863.7
Property, plant and equipment, net 164.0 168.1
Goodwill 1,004.0 1,004.0
Other intangible assets, net 237.5 240.6
Other noncurrent assets 419.8 426.3
---------- ----------
Total assets $ 2,732.2 $ 2,702.7
========== ==========
Liabilities and stockholders' equity
Loans and notes payable $ 179.7 $ 132.7
Accounts payable 125.5 102.8
Accrued expenses 248.1 283.2
Income taxes payable 17.6 28.4
Unearned revenue 467.2 426.9
Other current liabilities 6.8 6.8
---------- ----------
Total current liabilities 1,044.9 980.8
Long-term debt 810.0 818.0
Unearned revenues 132.3 134.8
Other noncurrent liabilities 289.6 297.2
---------- ----------
Total liabilities 2,276.8 2,230.8
Capital stock 13.0 25.5
Paid-in capital 218.3 224.6
Retained earnings 1,250.8 1,261.2
Accumulated other comprehensive loss (97.0) (89.7)
Treasury stock, at cost (929.7) (949.7)
---------- ----------
Total stockholders' equity 455.4 471.9
---------- ----------
Total liabilities and stockholders' equity $ 2,732.2 $ 2,702.7
========== ==========
See accompanying Notes to Consolidated Condensed Financial Statements.
The Reader's Digest Association, Inc. and Subsidiaries
Consolidated Condensed Statements of Cash Flows
Three-month periods ended September 30, 2002 and 2001
(In millions)
(unaudited)
Three-month periods ended
September 30,
2002 2001
Cash flows from operating activities
Net loss $ (5.2) $ (1.1)
Depreciation and amortization 16.0 8.2
Net gain on the sales of a business, certain
assets and certain investments (1.4) (0.7)
Changes in current assets and liabilities,
net of effects of acquisitions and dispositions
Accounts receivables, net (32.0) (45.5)
Inventories (54.0) (34.4)
Unearned revenues 44.0 11.8
Accounts payable and accrued expenses (9.2) 29.2
Other, net (27.0) (36.9)
Changes in noncurrent assets and liabilities, net
of effects of acquisitions and dispositions (7.1) (21.0)
-------- --------
Net change in cash due to operating activities (75.9) (90.4)
-------- --------
Cash flows from investing activities
Proceeds from maturities and sales of marketable
securities and short-term investments 1.5 0.1
Purchases of marketable securities, licensing
agreement and other investments (7.6) (0.1)
Proceeds from other long-term investments -- 2.2
Proceeds from sales of property, plant and equipment 0.1 0.1
Capital expenditures (3.6) (6.2)
-------- --------
Net change in cash due to investing activities (9.6) (3.9)
-------- --------
Cash flows from financing activities
Short-term borrowings, net 38.6 143.5
Dividends paid (5.3) (5.5)
Common stock repurchased -- (28.7)
Proceeds from employee stock purchase plan and
exercise of stock options -- 0.5
Other, net 1.2 0.4
-------- --------
Net change in cash due to financing activities 34.5 110.2
-------- --------
Effect of exchange rate changes on cash (0.6) 0.9
-------- --------
Net change in cash and cash equivalents (51.6) 16.8
Cash and cash equivalents at beginning of period 107.6 35.4
-------- --------
Cash and cash equivalents at end of period $ 56.0 $ 52.2
======== ========
See accompanying Notes to Consolidated Condensed Financial Statements.
The Reader's Digest Association, Inc. and Subsidiaries
Notes to Consolidated Condensed Financial Statements
(In millions, except per share data)
(unaudited)
Unless indicated otherwise, references in Notes to Consolidated
Condensed Financial Statements to "we," "our" and "us" are to The
Reader's Digest Association, Inc. and its subsidiaries. All
references to 2003 and 2002, unless otherwise indicated, are to
fiscal 2003 and fiscal 2002, respectively. Our fiscal year
represents the period from July 1 through June 30.
(1) Basis of Presentation and Use of Estimates
The accompanying consolidated condensed financial statements include
the accounts of The Reader's Digest Association, Inc. and its
majority-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation. These
statements and accompanying notes have not been audited but, in the
opinion of management, have been prepared in conformity with
accounting principles generally accepted in the United States
applying certain assumptions and estimates, including all
adjustments considered necessary to present such information
fairly. All such adjustments are of a normal recurring nature.
Although these estimates are based on management's knowledge of
current events and actions that we may undertake in the future,
actual results may ultimately differ from those estimates.
We report on a fiscal year beginning July 1. The three-month
periods ended September 30, 2002 and 2001 are the first fiscal
quarters of 2003 and 2002, respectively. Operating results for any
interim period are not necessarily indicative of the results for an
entire year due to the seasonality of our business.
New Accounting Standards
The Financial Accounting Standards Board (FASB) has issued
Statement of Financial Accounting Standards (SFAS) No. 143,
Accounting for Asset Retirement Obligations; SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets;
SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections;
and SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities.
SFAS No. 143 requires the recording of an asset and a liability
equal to the present value of the estimated costs associated
with the retirement of long-lived assets where a legal or
contractual obligation exists. The asset is required to be
depreciated over the life of the related equipment or facility,
and the liability is required to be accreted each year based on
a present value interest rate. This statement was effective for
us on July 1, 2002.
SFAS No. 144 supersedes both SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, and the accounting and reporting provisions for the
disposal of a segment of a business of Accounting Principles
Board (APB) Opinion No. 30, Reporting the Results of Operations
- Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. SFAS No. 144 retains the fundamental provisions
in SFAS No. 121 for recognizing and measuring impairment losses
on long-lived assets held for use and long-lived assets to be
disposed of by sale; it also resolves significant implementation
issues associated with SFAS No. 121.
SFAS No. 144 also retains the basic provisions of APB Opinion
No. 30 on how to present discontinued operations in the income
statement but broadens that presentation to include a component
of an entity (rather than a segment of a business). Unlike SFAS
No. 121, an impairment assessment under SFAS No. 144 will never
result in a write-down of goodwill. Rather, goodwill is
evaluated for impairment under SFAS No. 142. This statement was
effective for us on July 1, 2002.
SFAS No. 145 changes the income statement classification of debt
extinguishments, amends the existing literature regarding the
accounting for modifications of leases that result in the same
economic transaction as a sale-leaseback and makes technical
corrections to other existing pronouncements. This statement
was effective for us on July 1, 2002.
Adoption of SFAS No. 143, No. 144 and No. 145 did not to have a
material impact on our operating results.
SFAS No. 146 supersedes Emerging Issues Task Force Issue No.
94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs To Exit and Activity (Including Certain
Costs Associated with a Restructuring), and requires that a
liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred, as
opposed to when management is committed to an exit plan. Such
liabilities should be recorded based on their fair value, as
defined. This statement is effective for exit or disposal
activities initiated after December 31, 2002 (the second half of
fiscal 2003). We are currently evaluating the impact of
adopting this statement.
(2) Basic and Diluted Earnings Per Share
Basic earnings per share is computed by dividing net income less
preferred stock dividend requirements by the weighted average number
of common shares outstanding during the period. The preferred stock
dividend requirements were $0.3 for each of the three-month periods
ended September 30, 2002 and 2001.
Diluted earnings per share is computed in the same manner except
that the weighted average number of common shares outstanding
assumes the exercise and conversion of certain stock options and
vesting of certain restricted stock. For the three-month period
ended September 30, 2002 and 2001, the assumed exercise, conversion
and vesting totaled 0.7 million shares and 0.4 million shares,
respectively. Because including these shares in our calculation
of earnings per share results in a smaller loss per share, they are
considered anti-dilutive. Accordingly, our earnings per share is
calculated using the basic number of shares.
(3) Revenues and Operating Profit by Reporting Segments
Reportable segments were modified during the fourth quarter of 2002
to reflect our new internal management organization. The former New
Business Development segment was redistributed geographically,
primarily between North America Books and Home Entertainment and
International Businesses. In addition, the results for Reiman Media
Group, which was acquired in the fourth quarter of 2002, are
included in our U.S. Magazines segment. The accounting policies of
our segments are the same as those described in Note 1 to the
consolidated financial statements included in our 2002 Annual Report
to Stockholders. In addition, we allocate all corporate
administrative costs to our reporting segments.
Three-month periods ended
September 30,
2002 2001
Revenues:
North America Books and Home Entertainment $ 115.0 $ 140.5
U.S. Magazines 173.8 115.3
International Businesses 228.3 241.7
-------- --------
Total revenues $ 517.1 $ 497.5
======== ========
Operating Profit (Loss):
North America Books and Home Entertainment $ 3.1 $ (11.1)
U.S. Magazines (1.5) 1.0
International Businesses (2.4) 12.9
-------- --------
Segment operating profit (loss) (0.8) 2.8
Other operating items, net 2.8 --
-------- --------
Total operating profit $ 2.0 $ 2.8
======== ========
(4) Comprehensive Loss
Accumulated other comprehensive loss as reported in the balance
sheet as of September 30, 2002 and September 30, 2001, primarily
represents unrealized losses on certain investments and foreign
currency translation adjustments. The components of comprehensive
loss, net of related tax, for the three-month periods ended
September 30, 2002 and 2001 were as follows:
Three-month periods ended
September 30,
2002 2001
Net loss $ (5.2) $ (1.1)
Change in:
Foreign currency translation adjustments (4.4) 2.5
Net unrealized losses on certain investments (1) (2.3) (3.6)
Net unrealized losses on certain derivative
transactions(2) (0.6) (0.6)
------- ------
Total comprehensive loss $ (12.5) $ (2.8)
======= ======
(1) Net unrealized losses on certain investments, net of related tax,
principally represents our investment in the voting common shares of
LookSmart, Ltd. For the three-month period ended September 30,
2002 and 2001, this amount is net of deferred tax assets of $1.2
and $1.9, respectively.
(2) Net unrealized losses on certain derivative transactions in 2003,
net of related tax, principally represent gains and losses on the
value of our interest rate caps. For the three-month period
ended September 30, 2002, this amount is net of deferred tax
assets of $0.3. Net unrealized losses on derivative instruments
in 2002 represent losses on derivative instruments used to hedge
our exposure to foreign currency risk associated with forecasted
royalty payments. For the three-month period ended September 30,
2001, this amount is net of deferred tax assets of $0.3. See
Note 10, Derivative Instruments, for additional information.
(5) Other Operating Items
During the three-month period ended September 30, 2002, we recorded
other operating income of $2.8 comprised primarily of net
adjustments to litigation-related accrual balances, established in
previous years, following settlement of a lawsuit in the first
quarter of 2003.
Other operating items recorded in previous periods also represents
charges related to the streamlining of our organizational structure
and the strategic repositioning of certain businesses. The
components of our restructuring charges included in accrued expenses
on our balance sheets are described in further detail below:
- Severance Costs - These accruals represent the cost to separate
employees from our operations as a result of actions taken to
streamline the organizational structure. This separation is
accomplished through a combination of voluntary and involuntary
severance programs. The positions to be separated were
identified when the charge was recorded.
- Contract Terminations - These accruals represent anticipated
costs to terminate contractual obligations in connection with
streamlining activities.
The table below reflects changes for the three-month period ended
September 30, 2002 to accruals recorded in previous periods. A
majority of the reserves remaining relate to severance costs. Of
the 289 employees identified to be separated under the charge
recorded in the fourth quarter of 2002, approximately 70% have been
separated as of September 30, 2002. The $8.6 charged against the
reserve in the first quarter of 2003 primarily relates to severance
and asset write-downs related to Gifts.com.
Initial Year Balance at Balance at
of charge June 30, 2002 Spending Adjustments September 30, 2002
Fiscal 2000 $ 0.7 $ (0.3) $ -- $ 0.4
Fiscal 2001 8.3 (1.8) -- 6.5
Fiscal 2002 22.3 (6.5) -- 15.8
------- ------ ---- -------
Total $ 31.3 $ (8.6) $ -- $ 22.7
======= ====== ==== =======
(6) Inventories
September 30, June 30,
2002 2002
Raw materials $ 12.6 $ 14.7
Work-in-progress 8.3 8.7
Finished goods 187.8 132.6
------- -------
Total inventories $ 208.7 $ 156.0
======= =======
The method used to value our inventories is the first-in, first-out
(FIFO) method.
(7) Investments
Available-for-Sale Marketable Securities
Marketable securities included in other noncurrent assets on the
balance sheet primarily represents the fair market value (based on
quoted market prices) of our investment in LookSmart, Ltd. These
securities are accounted for and classified as available-for-sale
securities. As of September 30, 2002, the market value of these
shares totaled $1.6 ($5.7 as of June 30, 2002).
During the three-month period ended September 30, 2002,
we sold 1.3 million shares of LookSmart, and recorded
a pre-tax gain of $1.4 in other expense, net on the income
statement.
(8) Goodwill and Other Intangible Assets, Net
We have adopted of SFAS No. 141, Business Combinations and SFAS No.
142, Goodwill and Other Intangible Assets. Accordingly, we have not
recorded any goodwill amortization in 2002 and in 2003. There were
no changes in the carrying amount of goodwill during the three-month
period ended September 30, 2002. The carrying amount of goodwill as
of September 30, 2002 was $1,004.0 - North America Books and Home
Entertainment, $322.3 and U.S. Magazines, $681.7. We tested our
goodwill for impairment in the third quarter of 2002 (our designated
annual period) and determined that no impairment existed with
respect to our holdings at that time. We will evaluate the carrying
amount of goodwill for recoverability during the third quarter of
2003 and, if necessary, adjust the carrying value of our goodwill.
The following categories of acquired intangible assets are included
in other intangible assets, net as of September 30, 2002 and June
30, 2002:
September 30, 2002 June 30, 2002
Gross Net Gross Net
Intangible assets with indefinite lives:
Tradenames $ 89.7 $ 89.7 $ 89.7 $ 89.7
Intangible assets with finite lives:
Licensing agreement 50.6 40.5 43.5 34.6
Customer lists 137.8 107.3 137.8 116.3
Other tradenames and
noncompete agreements 3.0 -- 3.0 --
-------- -------- -------- --------
Total intangible assets $ 281.1 $ 237.5 $ 274.0 $ 240.6
======== ======== ======== ========
Amortization related to intangible assets with finite lives amounted
to $9.8 and $1.7 for the three-month period ended September 30, 2002
and 2001, respectively. Our licensing agreement is principally
amortized over the initial 10-year contract term, with some
amounts being amortized over the remaining 18-year term of our amended
agreement. Customer lists are being amortized principally between
three and six years. Estimated fiscal year amortization expense,
for intangible assets with finite lives, is as follows: fiscal 2003
- $39.3; fiscal 2004 - $38.8; fiscal 2005 - $36.0; fiscal 2006 -
$15.2 and fiscal 2007 - $9.7.
Licensing Agreement
In May 2000, QSP, Inc. entered into a long-term licensing agreement with
World's Finest Chocolate, Inc. The cost associated with the agreement was
assigned to distribution rights and is included in intangible assets on
the balance sheet. In September 2002, this agreement was amended. The
amendment extended the term of the original agreement by ten years,
reduced the annual minimum tonnage purchase requirements, favorably
adjusted pricing, and permitted QSP to sell World's Finest Chocolate
products through marketing channels other than fundraising, under
specified circumstances. In connection with these amended terms, QSP
agreed to pay World's Finest Chocolate $10.5, of which $7.5 was paid
as of September 30, 2002. The amount paid in May 2000 to consummate the
initial agreement is being amortized over the original 10-year license
term. Amounts paid to amend the agreement have been assigned to various
amortization periods ranging from 8 to 18 years (remaining period of
the amended agreement). The approximate annual minimum purchase
amounts under the amended agreement are: fiscal 2003 - $50.0, fiscal
2004 - $55.0, fiscal 2005 - $59.0, fiscal 2006 - $61.0, fiscal
2007 - $62.0 and from fiscal 2008 to fiscal 2020 - approximately
$69.0 per year. The amounts are estimates based on minimum tonnage
requirements and nominal price increases as stipulated in the amended
agreement.
(9) Debt
As described in Note 11 to the consolidated financial statements
included in our 2002 Annual Report to Stockholders, on May 20, 2002,
we restructured our borrowings. We entered into a $950.0 Term Loan
Agreement (Term Loan) with a syndicate of banks and other financial
institutions, we amended and restated our Five-Year Revolving Credit
and Competitive Advance Facility Agreement (Five-Year Facility), and
we terminated our 364-Day Revolving Credit and Competitive Advance
Facility Agreement. (The Term Loan and the Five-Year Facility are
collectively referred to as the 2002 Credit Agreements). The
maximum borrowing allowed under the Five-Year Facility is $192.5.
The 2002 Credit Agreements are secured by substantially all of our
assets and are subject to various financial and non-financial
covenants.
During the first quarter of 2003, we repaid $8.0 of principal related
to the Term Loan. The Term Loan agreement requires us to make
principal payments of $8.0 per quarter during 2003 and continuing into
fiscal 2004, and increasing principal payments thereafter. As of
September 30, 2002, we had $942.0 of outstanding borrowings under the
Term Loan and $47.0 of outstanding borrowings under the Five-Year
Facility. These amounts are included in long-term debt and loans
and notes payable, respectively, on the balance sheet.
As of September 30, 2002, we were in compliance with our covenants.
Interest expense for the three-month periods ended September 30,
2002 and 2001 was $12.9 and $4.0, respectively. The weighted
average interest rate on our borrowings for each of the three-month
periods ended September 30, 2002 and 2001 was 4.3%.
(10) Derivative Instruments
Risk Management and Objectives
In the 2002 Credit Agreements (referred to in Note 9, Debt), we are
required to enter into interest rate protection agreements to fix or
limit the interest cost with respect to at least one-third of the
outstanding borrowings under the Term Loan. Accordingly, in July of
2002 we entered into agreements to cap at 6% the LIBOR interest rate
component of $400.0 of our borrowings for a period of three years.
Our interest rate cap agreements qualify as cash flow hedges, the
effect of which is described below.
In the normal course of business, we are exposed to market risk from
the effect of foreign exchange rate fluctuations on the U.S. dollar
value of our foreign subsidiaries' results of operations and
financial condition. We purchase foreign currency option and
forward contracts to minimize the effect of fluctuating foreign
currencies on specifically identifiable anticipated transactions.
During the fourth quarter of 2002, we ceased our practice of
purchasing foreign currency option and forward contracts to minimize
the effect of fluctuating foreign currencies on our foreign
subsidiaries' earnings and to minimize the effect of fluctuating
foreign currency exchange rates on certain foreign currency
denominated assets and liabilities. Accordingly, gains and losses
on derivative instruments are comprised of different instruments in
2002 when compared with 2003.
As a matter of policy, we do not speculate in financial markets and,
therefore, we do not hold financial instruments for trading
purposes. We continually monitor foreign currency risk and the use
of derivative instruments.
Cash Flow Hedges - For the three-month period ended September 30,
2002 the fair value of our interest rate cap decreased, resulting in
a loss of $(0.6), net of deferred taxes of $0.3. For the three-month
period ended September 30, 2001, changes in the spot value of the
foreign currencies associated with option contracts designated and
qualifying as cash flow hedges of forecasted intercompany royalty
payments amounted to a loss of $(0.6), net of deferred taxes of
$0.3. These changes are reported in accumulated other comprehensive
loss included in stockholders' equity on the balance sheet. The
gains and losses are deferred until the underlying transaction is
recognized in earnings.
The ineffective portion of the change in market value of our option
contracts, specifically the time-value component of $(0.1), was
recognized as a loss in other expense, net on the income statement
for the three-month period ended September 30, 2001.
There were no cash flow hedges discontinued during the three-month
period ended September 30, 2002 and 2001.
Other Derivatives - For the three-month period ended September 30,
2002 we did not have any outstanding "other derivative" contracts.
For the three-month period ended September 30, 2001, changes in the
spot value of the foreign currencies and contract settlements
associated with option and forward contracts amounted to a loss of
$(3.0). These changes are reported in gain (loss) on foreign
exchange included in other expense, net on the income statement.
This effect would generally be offset by the translation of the
assets, liabilities and future operating cash flows being hedged.
(11) Recapitalization Agreement
On October 15, 2002, we entered into a revised agreement with the
DeWitt Wallace-Reader's Digest Fund, Inc. and the Lila Wallace
Reader's Digest Fund, Inc. (the Funds) providing for a series of
actions that will result in all shares of our Class B Voting Common
Stock (Class B Stock) and Class A Nonvoting Common Stock (Class A
Stock) being recapitalized into a single class of common stock with
one vote per share. The October 15, 2002 recapitalization agreement
replaces the recapitalization agreement that we entered into with
the Funds on April 12, 2002. The October recapitalization agreement
provides that:
- We will repurchase approximately 4.6 million shares of Class B
Stock from the Funds for $100.0 in cash in the aggregate;
- Each share of Class A Stock will be recapitalized into one share
of common stock having one vote per share; and
- Each remaining share of Class B Stock will be recapitalized into
1.22 shares of common stock; and
In addition, the recapitalization agreement provides for the
amendment of our charter to, among other things, reflect the
reclassification of the stock, divide our board of directors into
three classes and eliminate action by written consent of our
stockholders. The recapitalization transactions are subject to
stockholder approval and other customary closing conditions.
As previously disclosed, Reader's Digest, its directors and the
Funds are defendants in four actions challenging the
recapitalization transaction announced in April. Three of the four
actions are purported class actions; the fourth action was brought
by individual stockholders. The parties in the three class actions
have entered into memoranda of understanding setting forth
agreements in principle with respect to the settlement of those
actions. The plaintiffs in the fourth action have agreed to
voluntarily dismiss it. Completion of the revised recapitalization
transactions is not contingent upon final court approval of the
settlements.
In order to complete the recapitalization transactions we borrowed
$100.0 under the Term Loan. However, since the recapitalization has
not yet taken place, we have used the monies borrowed for general
corporate purposes.
If the recapitalization transactions are completed by December 31,
2002, the $100.0 of principal borrowed under the Term Loan would be
used to finance these transactions. As a result, $100.0 included in
loans and notes payable on our balance sheets would be reclassified
to long-term debt. If the recapitalization transactions are
not completed by December 31, 2002, we will have to obtain an
amendment to or waiver under the 2002 Credit Agreements from our lenders
to purchase shares from the Funds. In the event the recapitalization
transactions are not completed by December 31, 2002, we will have to repay
on that date the $100.0 borrowed to repurchase shares from the Funds unless
repayment is waived or not required under an amendment to the 2002 Credit
Agreements.
(12) Share Repurchase Authorization
As of September 30, 2002, under various share repurchase
authorizations (announced during 2000, 2001 and 2002), we have
repurchased 8.6 million shares of our Class A nonvoting common stock
for approximately $231.7. As of September 30, 2002, we had $186.0
remaining under a $250.0 share repurchase authorization announced in
May 2001. We have not repurchased any shares during the three-month
period ended September 30, 2002 and, with the exception of the
planned repurchase of shares from the DeWitt Wallace-Reader's Digest
Fund, Inc. and the Lila Wallace Reader's Digest Fund, Inc., do not
expect to repurchase additional shares during any period when
repurchases are prohibited under the 2002 Credit Agreements.
The Reader's Digest Association, Inc. and Subsidiaries
Management's Discussion and Analysis
of Financial Condition and Results of Operations
(Dollars in millions, except per share data)
Unless indicated otherwise, references in Management's Discussion
and Analysis to "we," "our" and "us" are to The Reader's Digest
Association, Inc. and its subsidiaries. All references to 2003 and
2002, unless otherwise indicated, are to fiscal 2003 and fiscal
2002, respectively. Our fiscal year represents the period from July
1 through June 30.
The following discussion and analysis provides information that we
believe is relevant to an assessment and understanding of our
consolidated results of operations and financial condition and has
been written excluding the effect of foreign currency translation.
This discussion should be read in conjunction with the Consolidated
Condensed Financial Statements and related notes. Certain amounts
and percentages do not recalculate due to rounding.
To analyze results on a comparable basis, Management's Discussion
and Analysis of operating profit has been written excluding the net
effect of other operating items, net income of $3, in 2003. Other
operating items, net consist primarily of net adjustments to
litigation-related accrual balances following settlement of a
lawsuit in the first quarter of 2003.
Three-Month Period Ended September 30, 2002, Compared With
Three-Month Period Ended September 30, 2001
Results of Operations: Company-Wide
Revenues
Revenues for the first quarter of 2003 increased 4% to $517,
compared with $498 in the first quarter of 2002. Excluding the
favorable effect of foreign currency translation, revenues increased
2%. The increase in revenues is attributable to increased revenues
in U.S. Magazines (driven by additional revenues as a result of the
acquisition of Reiman), partially offset by reduced mailing activity
in North America Books and Home Entertainment and weaker performance
in International Businesses.
The decline in revenues for North America Books and Home
Entertainment was driven by a 32% decline in revenues for U.S. Books
and Home Entertainment, partially offset by a 13% increase in
revenues at Books Are Fun. The revenue decline in our U.S. Books
and Home Entertainment business was principally attributable to the
elimination of unprofitable mailings and was also attributable to
the elimination of unprofitable product lines and businesses that
were announced in the fourth quarter of 2002. The increase in
revenues at Books Are Fun was driven by an increase in the number of
events.
The increase in revenues in U.S. Magazines was primarily
attributable to the acquisition of Reiman in the fourth quarter of
2002, as well as an increase in revenues at QSP, Inc. These
increases were partially offset by a decline in revenues from the
discontinuation in 2002 of New Choices and Walking magazines, lower
overall circulation, and shift in a mailing of a special interest
magazine to the second quarter of 2003.
The decline in revenues for International Businesses was primarily
driven by lower sales for music and video products and general books
due to planned reductions in marketing activities in many European
markets. The impact of severe floods in the Czech Republic,
Hungary and Germany further reduced this segments results.
Segment operating profit decreased to a loss of $(1) in the first
quarter of 2003, compared with a profit of $3 in the first quarter
of 2002. The operating loss is a direct result of the revenue
changes described above and continued investments in new marketing
channels in some of our international businesses.
Other Expense, Net
Other expense, net increased significantly to $(10) in the first
quarter of 2003, compared with $(5) in the first quarter of 2002.
The primary changes were:
- Higher net interest expense of $9, compared with the comparable
period in the prior year, primarily attributable to the
additional borrowings to consummate the Reiman acquisition.
- Gains on the sales of LookSmart, Ltd. shares totaling $1. There
were no sales of marketable securities in the prior period.
- Lower losses from foreign currency transactions of $1, partially
due to discontinuance of our hedging program.
Income Taxes
The effective tax rate for both the first quarter of 2003 and 2002 was
consistent at approximately 36%.
Net Loss and Loss Per Share
For the first quarter of 2003, the net loss was $(5), or $(0.05) for
both basic and diluted loss per share, compared with a net loss of
$(1), or $(0.01) for both basic and diluted loss per share in the
first quarter of 2002. For both the first quarter of 2003 and 2002,
the effect of potentially dilutive shares was not considered in the
calculation of loss per share because such shares would have been
anti-dilutive.
Results of Operations: Operating Segments
North America Books and Home Entertainment
Revenues for North America Books and Home Entertainment decreased
18% to $115 in the first quarter of 2003, compared with $141 in the
first quarter of 2002. The decline in revenues was driven by lower
sales of music and video products, Select Editions, general books,
and the absence of revenues from the closure of Gifts.com, Inc.
Specifically, revenues were lower primarily because of changes in
our U.S. Books and Home Entertainment business due to (1)
exiting certain unprofitable video products, the catalog
business, and certain continuity series, (2) a 52% reduction in mail
quantities, and (3) a focus on more efficient investments in outside
mailing lists and telemarketing. Revenues declined 16% in Canada
due to lower response rates to mailings. These declines were
partially offset by a 13% increase in revenues for Books Are Fun,
due to a 34% increase in business events and an 18% increase in
school and daycare events.
Operating profit improved $14 to $3 in the first quarter of 2003
primarily due to our U.S. Books and Home Entertainment business.
Specifically, the elimination of unprofitable products and business,
lower overhead and promotion costs related to these products and
businesses, more efficient investments, better customer performance
and management of inventories increased profitability.
U.S. Magazines
Revenues for U.S. Magazines increased 51% to $174 in the first
quarter of 2003, compared with $115 in the first quarter of 2002.
The improvement was largely driven by revenues of $68 from Reiman,
which was acquired in the fourth quarter of 2002, as well as an
increase in revenues at QSP, Inc. Revenues for QSP, Inc. improved
due to increased rates for magazine subscriptions. These increases
were partially offset by a 9% decline in revenues for our special
interest magazines and Reader's Digest magazine. The decline in
revenues for our special interest magazines was primarily
attributable the discontinuation of New Choices and Walking
magazines in 2002. The decline in revenues for Reader's Digest
magazine was primarily attributable to lower circulation revenues
due to declining renewal pools, partially offset by new subscribers
at lower introductory rates.
Operating loss was $(2) in the first quarter if 2003, compared with
operating profit of $1 in the first quarter of 2002. The decline in
profits was driven principally by our discontinuation of the special
interest magazines New Choices and Walking in 2002 and by lower
circulation revenues at Reader's Digest magazine. These declines
were partially offset by profits of $2 as a result of the addition
of Reiman and cost reductions at QSP, Inc.
International Businesses
Revenues in our International Businesses decreased 6% to $228 in the
first quarter of 2003, compared with $242 in the first quarter of
2002. Excluding the favorable effects of foreign currency
translation, revenues decreased 10%. The principal factors
contributing to this weaker performance were planned reductions in
mail quantities to reduce the unfavorable effect of the intensity of our
mailings on our response rates, the elimination of unprofitable mailings
and some softness in response rates. These events were primarily in Europe
namely the United Kingdom, Germany and Poland. In addition, in the United
Kingdom and Germany we shifted the timing of some music mailings from the
first to the second quarter of 2003. Revenue percent declines were in the
mid to high teens in the named countries primarily related to our music
and video products and general books. Also adversely affecting
revenues during the quarter were the severe floods in the Czech
Republic, Hungary and Germany.
In our Latin America and Asia-Pacific regions revenues declined
principally in Mexico and Brazil and related primarily to the
elimination of unprofitable mailings and some softness in response
rates. These declines in revenue were partially offset by favorable
performance in Australia due to the timing of certain mailings,
increased mail quantities and improved response rates to mailings
for some music and video products.
Operating loss was $(2) in the first quarter of 2003, compared with
a profit of $13 in the first quarter of 2002, principally due to the
revenue changes described above. In addition, the loss of a postal
discount on mailings in France, the impact of the floods in Eastern
Europe and continued investments in new marketing channels,
including telemarketing and outside mailing list programs
contributed to the decline.
Forward-Looking Information
Fiscal 2003 Results
We anticipate earnings in the range of $0.88 to $1.00 per share for
the second quarter of 2003 and $1.20 to $1.30 for full-year 2003.
These estimates exclude the one-time costs related to our pending
recapitalization. The earnings forecast for the second quarter of
2003 includes $25 in revenues and $16 in operating profits ($0.10
per share), related to a shift in revenue recognition for certain
book-marketing programs of Reiman, from the forecast for the first
quarter of 2003 to the forecast for the second quarter of 2003.
Liquidity and Capital Resources
Three-month
period ended
September 30, 2002
Cash and cash equivalents at June 30, 2002 $ 108
Net change in cash due to:
Operating activities (76)
Investing activities (10)
Financing activities 35
Effect of exchange rate changes on cash and cash equivalents (1)
-----
Net change in cash and cash equivalents (52)
Cash and cash equivalents at September 30, 2002 $ 56
=====
Cash and cash equivalents decreased 48% to $56 as of September 30,
2002, compared with $108 as of June 30, 2002. The primary reason
for the decline in cash was changes in working capital due to the
seasonal nature of our business. We generally use cash in the first
quarter to build inventories at QSP, Inc. and Books Are Fun. Other
reasons for the change in working capital include:
- Management incentive payouts in 2003 that were absent in 2002.
- Settlement of a lawsuit in the first quarter of 2003.
- Cash payments related to our restructuring program announced in
the fourth quarter of 2002.
- Larger build up of inventory at Books Are Fun in the first
quarter of 2003, compared with 2002 in anticipation of the
dockworkers strike on the west coast of the United States.
Debt
As described in Note 11 to the consolidated financial statements
included in our 2002 Annual Report to Stockholders, on May 20, 2002,
we restructured our borrowings. We entered into a $950 Term Loan
Agreement (Term Loan) with a syndicate of banks and other financial
institutions, we amended and restated our Five-Year Revolving Credit
and Competitive Advance Facility Agreement (Five-Year Facility)
(collectively referred to as the 2002 Credit Agreements), and we
terminated the 364-Day Revolving Credit and Competitive Advance
Facility Agreement. The maximum borrowing allowed under the
Five-Year Facility is $192.5. During the first quarter of 2003, we
repaid $8 of principal related to the Term Loan. The Term Loan
requires us to make principal payments of $8 per quarter
during 2003 and continuing into fiscal 2004, and increasing principal
payments thereafter. In addition, during the first quarter, we
borrowed $47 under the Five-Year Facility. The weighted average
interest rate on our borrowings for the three-month period ended
September 30, 2002 was 4.3%. As of September 30, 2002 we were in
compliance with all covenants.
Under the 2002 Credit Agreements, we are required to hedge at least
one-third of borrowings outstanding under the Term Loan. In July
2002, we entered into agreements to cap at 6% the LIBOR interest
rate component of $400 of our borrowings under the Term Loan for a
period of three years.
In the second quarter of 2002, we filed a shelf registration
statement with the Securities and Exchange Commission allowing us to
issue up to $500 of public debt securities. As of September 30,
2002, there were no securities outstanding under this registration
statement.
Recapitalization Agreement
On October 15, 2002, we entered into a revised agreement
with the DeWitt Wallace-Reader's Digest Fund, Inc. and the Lila
Wallace Reader's Digest Fund, Inc. (the Funds) providing for a
series of actions that will result in all shares of our Class B
Voting Common Stock (Class B Stock) and Class A Nonvoting Common
Stock (Class A Stock) being recapitalized into a single class of
common stock with one vote per share. The October 15, 2002
recapitalization agreement replaces the recapitalization agreement
that we entered into with the Funds on April 12, 2002. The
October recapitalization agreement provides that:
- We will repurchase approximately 4.6 million shares of Class B
Stock from the Funds for $100 in cash in the aggregate;
- Each share of Class A Stock will be recapitalized into one share
of common stock having one vote per share; and
- Each remaining share of Class B Stock will be recapitalized into
1.22 shares of common stock; and
In addition, the recapitalization agreement provides for the
amendment of our charter to, among other things, reflect the
reclassification of the stock, to divide our board of directors into
three classes and to eliminate action by written consent of our
stockholders. The recapitalization transactions are subject to
stockholder approval and other customary closing conditions.
As previously disclosed, Reader's Digest, its directors and the
Funds are defendants in four actions challenging the
recapitalization transactions announced in April. Three of the four
actions are purported class actions; the fourth action was brought
by individual stockholders. The parties in the three class actions
have entered into memoranda of understanding setting forth
agreements in principle with respect to the settlement of those
actions. The plaintiffs in the fourth action have agreed to
voluntarily dismiss it. Completion of the revised recapitalization
transactions is not contingent upon final court approval of the
settlements.
In order to complete the recapitalization transactions, we borrowed
$100 under the Term Loan. However, since the recapitalization has
not taken place, we have used the monies borrowed for general
corporate purposes. We expect to finance the repurchase of shares
from the Funds entirely through operating cash flow generated in the
second quarter of 2003. If the recapitalization transactions are
completed by December 31, 2002, the $100 of principal borrowed under
the Term Loan would be used to finance these transactions. As a
result, $100 included in loans and notes payable on our balance
sheets would be reclassified to long-term debt. If the
recapitalization transactions are not completed after December 31, 2002,
we will have to obtain an amendment to or waiver under the 2002 Credit
Agreements from our lenders to purchase shares from the Funds. In the event
the recapitalization transactions are not completed by December 31, 2002,
we will have to repay on that date the $100 borrowed to repurchase shares
from the Funds, unless repayment is waived or not required under an
amendment to the 2002 Credit Agreements.
We believe that our liquidity, capital resources, cash flows and
borrowing capacity are sufficient to fund normal capital
expenditures, working capital requirements, the payment of
dividends, the execution of our share repurchase program, and the
implementation of our strategic initiatives.
Recent Accounting Standards
The Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards (SFAS) No. 146 supersedes
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 Associated with a
Restructuring), and requires that a liability for a cost
associated with an exit or disposal activity be recognized when
the liability is incurred, as opposed to when management is
committed to an exit plan. Such liabilities should be recorded
based on their fair value, as defined. This statement is
effective for exit or disposal activities initiated after
December 31, 2002. We are currently evaluating the impact of
adopting this statement.
*****
This report contains "forward-looking statements" within the meaning
of the U.S. federal securities laws. Forward-looking statements
include any statements that address future results or occurrences.
These forward-looking statements inherently involve risks and
uncertainties that could cause actual future results and occurrences
to differ materially from the forward-looking statements.
Some of these risks and uncertainties include factors relating to:
- the effects of potentially more restrictive privacy and other
governmental regulation relating to our marketing methods;
- the effects of modified and varied promotions;
- our ability to identify customer trends;
- our ability to continue to create and acquire a broadly appealing
mix of new products;
- our ability to attract and retain new and younger magazine
subscribers and product customers in view of the maturing of an
important portion of our customer base;
- our ability to attract and retain subscribers and customers in an
economically efficient manner;
- the effects of selective adjustments in pricing;
- our ability to expand and more effectively utilize our customer
database;
- our ability to expand into new international markets and to
introduce new product lines into new and existing markets;
- our ability to expand into new channels of distribution;
- our ability to negotiate and implement productive acquisitions
(including the Reiman acquisition), strategic alliances and
joint ventures;
- our ability to successfully integrate newly acquired and newly
formed businesses (including the Reiman business);
- the strength of relationships of newly acquired and newly formed
businesses (including the Reiman business) with their
employees, suppliers and customers;
- the accuracy of the basis of forecasts relating to newly acquired
and newly formed businesses (including the Reiman business);
- our ability to achieve financial savings related to restructuring
programs;
- our ability to contain and reduce costs, especially through
global efficiencies;
- the cost and effectiveness of our re-engineering of business
processes and operations;
- the accuracy of our management's assessment of the current status
of our business;
- the evolution of our organizational and structural capabilities;
- our ability to respond to competitive pressures within and
outside the direct marketing industry, including the Internet;
- the effects of worldwide paper and postage costs;
- the effects of possible postal disruptions on deliveries of
promotions, products and payments;
- the effects of foreign currency fluctuations;
- the accuracy of our management's assessment of the future
effective tax rate and the effects of initiatives to reduce the
rate;
- the adequacy of our financial resources;
- the effects of the terms of, and increased leverage resulting
from additional borrowings under, our credit facilities;
- the effects of interest rate fluctuations;
- the effects of ratings downgrades resulting from our increased
leverage;
- the effects of unforeseen economic and political changes in the
markets where we compete;
- the effects of weather in limiting access to consumers;
- the economic effects of terrorist activity and subsequent related
events, especially those limiting access to consumers and
otherwise affecting the direct marketing industry; and
- the effects and pace of our stock repurchase program.
We do not undertake to update any forward-looking statements.
Item 4. CONTROLS AND PROCEDURES
Within 90 days prior to the filing date of this report, under the
supervision of our Chief Executive Officer and Chief Financial
Officer, we evaluated our disclosure controls and procedures (as
defined in rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934). Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were sufficient to provide
reasonable assurances that the information required to be disclosed
by us in the reports that we file or submit 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 have been no significant changes in our internal controls or
in other factors that could significantly affect those internal
controls subsequent to the date of our evaluation thereof.
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(b) Reports on Form 8-K
During the three-month period ended September 30, 2002, we
filed the following Current Reports on Form 8-K.
- Current Report on Form 8-K dated July 26, 2002 including a copy
of a complaint from a shareholder seeking to enjoin the
recapitalization.
- Current Report on Form 8-K dated July 31, 2002 including a press
release and conference call transcript relating to the fourth
quarter of fiscal 2002 earnings release.
- Current Report on Form 8-K dated August 8, 2002 including
recently available information that was incorporated by
reference in our Registration Statement on Form S-4.
- Current Report on Form 8-K dated August 9, 2002 including press
release regarding Delaware Court of Chancery denial of motion
to enjoin pending recapitalization transaction.
- Current Report on Form 8-K dated August 14, 2002 including press
release regarding postponed shareholder meeting on
recapitalization.
- Current Report on Form 8-K dated August 27, 2002 including
presentation regarding the company's modified reporting
segments for the first, second, third and fourth quarters of
fiscal 2002, 2001 and 2000.
- Current Report on Form 8-K dated August 28, 2002 including (1)
Ruling of the Delaware Court of Chancery, (2) Opinion of the
Supreme Court of Delaware, (3) Complaint of Bobby Adams, (4)
Complaint of Curtis Denison, and (5) Levco Stipulation of
Dismissal.
- Current Report on Form 8-K dated September 24, 2002 including
Statements Under Oath of the Principal Executive Officer and
the Principal Financial Officer.
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.
The Reader's Digest
Association, Inc.
(Registrant)
Date: November 14, 2002 By: /s/THOMAS D. BARRY
Thomas D. Barry
Vice President and Corporate Controller
(chief accounting officer and
authorized signatory)
I, Thomas O. Ryder, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Reader's
Digest Association, 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 officers 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 officers 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 officers 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/THOMAS O. RYDER
Chief Executive Officer
I, Michael S. Geltzeiler, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Reader's
Digest Association, 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 officers 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 officers 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 officers 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/MICHAEL S. GELTZEILER
Chief Financial Officer