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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended 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: 0-22635
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Racing Champions Ertl Corporation
-----------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 36-4088307
-------- ----------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
800 Roosevelt Road, Building C, Suite 320, Glen Ellyn, IL 60137
---------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: 630-790-3507
------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by sections 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
--- ---
On November 8, 2002, there were outstanding 16,463,351 shares of the
Registrant's $0.01 par value common stock.
RACING CHAMPIONS ERTL CORPORATION
FORM 10-Q
September 30, 2002
INDEX
PART I - FINANCIAL INFORMATION
Item Description Page
Item 1. Condensed Consolidated Balance Sheets as of September 30,
2002 (Unaudited) and December 31, 2001 . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Earnings for the Three
Months Ended September 30, 2002 and 2001 and for the Nine Months
Ended September 30, 2002 and 2001 (Unaudited) . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2002 and 2001 (Unaudited). . . . . . . 5
Notes to Condensed Consolidated Financial Statements (Unaudited). 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . . 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk. . . . 18
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . . . . 19
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . 19
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . 19
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . 20
Signatures and Certifications . . . . . . . . . . . . . . . . . . 21
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RACING CHAMPIONS ERTL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
September 30, December 31,
2002 2001
------------- ------------
(Unaudited)
ASSETS:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . $ 18,757 $ 16,510
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . 46,044 37,168
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,703 17,544
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . 10,920 9,986
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . 33,739 32,925
Goodwill, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,278 120,278
Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . 536 1,112
------------ --------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 255,977 $235,523
============ ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable and accrued expenses. . . . . . . . . . . . . . . . . $ 46,536 $ 36,298
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . 2,501 2,518
Bank term loans . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 62,000
Line of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,000 --
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . 15,079 16,946
------------ --------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . $ 91,116 $117,762
Stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . 164,861 117,761
------------ --------
Total liabilities and stockholders' equity. . . . . . . . . . . . . $ 255,977 $235,523
============ ========
See accompanying notes to condensed consolidated financial statements.
3
RACING CHAMPIONS ERTL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
For the three months For the nine months
ended September 30, ended September 30,
-------------------- -------------------
2002 2001 2002 2001
-------- -------- --------- ---------
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $70,944 $65,819 $159,466 $145,352
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,450 30,837 76,010 70,080
-------- -------- --------- ---------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,494 34,982 83,456 75,272
Selling, general and administrative expenses . . . . . . . . . . . . . 20,831 20,434 52,642 49,704
Amortization of goodwill . . . . . . . . . . . . . . . . . . . . . . . --- 830 --- 2,532
-------- -------- --------- ---------
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,663 13,718 30,814 23,036
Interest expense, net. . . . . . . . . . . . . . . . . . . . . . . . . 194 1,571 1,849 5,491
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (53) (486) (562) (20)
-------- -------- --------- ---------
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . 16,522 12,633 29,527 17,565
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . 6,609 5,306 11,811 7,377
-------- -------- --------- ---------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,913 $ 7,327 $ 17,716 $ 10,188
======== ======== ========= =========
Net income per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.60 $ 0.50 $ 1.12 $ 0.69
======== ======== ========= =========
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.58 $ 0.48 $ 1.06 $ 0.67
======== ======== ========= =========
Weighted average shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,460 14,682 15,818 14,679
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,234 15,216 16,745 15,133
See accompanying notes to condensed consolidated financial statements.
4
RACING CHAMPIONS ERTL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
For the nine months
ended September 30,
-------------------
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,716 $ 10,188
Depreciation and amortization . . . . . . . . . . . . . . . . . . . 6,713 9,338
Deferred taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . -- 3,798
Amortization of deferred financing costs . . . . . . . . . . . . . 688 421
(Gain)/loss on sale of assets . . . . . . . . . . . . . . . . . . . (314) 24
Changes in operating assets and liabilities . . . . . . . . . . . . (9,373) (2,198)
--------- ---------
Net cash provided by operating activities . . . . . . . . . . . . 15,430 21,571
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment . . . . . . . . . . . . . . . . (7,667) (4,228)
Proceeds from disposal of property and equipment . . . . . . . . . 457 123
Increase in other non-current assets . . . . . . . . . . . . . . . (112) (119)
--------- ---------
Net cash used in investing activities . . . . . . . . . . . . . . (7,322) (4,224)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments to/from bank for term loan, net . . . . . . . . . . . . . (62,000) (20,075)
Payments to/from bank for line of credit, net . . . . . . . . . . . 27,000 --
Issuance of common stock upon option exercise . . . . . . . . . . . 133 --
Issuance of common stock upon warrant exercise . . . . . . . . . . 3,634 --
Issuance of treasury stock . . . . . . . . . . . . . . . . . . . . 59 68
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . -- (321)
Net cash proceeds from public stock offering . . . . . . . . . . . 24,730 --
Expense recognized under option grants . . . . . . . . . . . . . . -- 17
--------- ---------
Net cash used in financing activities . . . . . . . . . . . . . . (6,444) (20,311)
Effect of exchange rate on cash . . . . . . . . . . . . . . . . . 583 420
--------- ---------
Net increase (decrease) in cash and cash equivalents . . . . . . 2,247 (2,544)
--------- ---------
Cash and cash equivalents, beginning of period . . . . . . . . . . . 16,510 12,582
--------- ---------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . $ 18,757 $ 10,038
========= =========
Supplemental information:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,606 $ 5,331
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,707 $ 897
Income tax refunds received . . . . . . . . . . . . . . . . . . . . $ 185 $ 5,967
See accompanying notes to condensed consolidated financial statements.
5
RACING CHAMPIONS ERTL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of Racing
Champions Ertl Corporation and its wholly-owned subsidiaries ("the Company").
All intercompany transactions and balances have been eliminated.
The accompanying condensed consolidated financial statements have been prepared
by management and, in the opinion of management, contain all adjustments,
consisting of normal recurring adjustments, necessary to present fairly the
financial position of the Company as of September 30, 2002 and 2001, the results
of operations for the three-month and nine-month periods ended September 30,
2002 and 2001 and the cash flows for the nine-month periods ended September 30,
2002 and 2001.
Certain information and note disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been omitted. It is suggested that these condensed
consolidated financial statements be read in conjunction with the consolidated
financial statements and related notes included in the Company's Form 10-K, as
amended, for the year ended December 31, 2001.
The results of operations for the three-month and nine-month periods ended
September 30, 2002 are not necessarily indicative of the operating results
expected for the full year.
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS
On June 30, 2001, the Financial Accounting Standards Board issued Statement
No.142, "Goodwill and Other Intangible Assets" ("Statement No. 142"). Under
Statement No. 142, goodwill and intangible assets that have indefinite useful
lives will not be amortized but rather will be tested at least annually for
impairment. Intangible assets that have finite useful lives will continue to be
amortized over their useful lives. The Company adopted Statement No. 142 on
January 1, 2002. As of September 30, 2002, goodwill, net of accumulated
amortization, is approximately $120.3 million. The Company has completed the
transitional goodwill impairment test, which resulted in no goodwill impairment.
The following pro forma financial information reflects net income and basic and
diluted earnings per share as if goodwill was not subject to amortization for
the three months and nine months ended September 30, 2001 (dollars in thousands,
except per share data).
6
Three months ended Nine months ended
September 30, 2001 September 30, 2001
------------------ ------------------
Reported net income. . . . . . . . . . . . . . . . $ 7,327 $ 10,188
Add back: Goodwill amortization, net of income tax 604 1,855
------------------- -------------------
Adjusted net income. . . . . . . . . . . . . . . . $ 7,931 $ 12,043
Basic net income per share:
Reported net income per share. . . . . . . . . . . $ 0.50 $ 0.69
Goodwill amortization per share. . . . . . . . . . 0.04 0.13
------------------- ------------------
Adjusted net income per share. . . . . . . . . . . $ 0.54 $ 0.82
Diluted net income per share:
Reported net income per share. . . . . . . . . . . $ 0.48 $ 0.67
Goodwill amortization per share. . . . . . . . . . 0.04 0.13
------------------- -------------------
Adjusted net income per share. . . . . . . . . . . $ 0.52 $ 0.80
In August 2001, the Financial Accounting Standards Board issued Statement
No.144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
("Statement No. 144"), which supercedes Statement 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 of APB Opinion No. 30, "Reporting
Results of Operations--Reporting the Effects of Disposal of a Segment of a
Business and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of segments of a business. Statement No. 144
creates a single accounting model for long-lived assets to be disposed of by
sale, whether previously held and used or newly acquired. Statement No. 144
requires that those long-lived assets be measured at the lower of carrying
amount or fair value less cost to sell, whether included in continuing
operations or in discontinued operations. The provisions of Statement No. 144
are effective for financial statements issued for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years. The Company
does not expect Statement No. 144 to have a material impact on its financial
condition or results of operations and there was no impact for the nine months
ended September 30, 2002.
In April 2002, the Financial Accounting Standards Board issued Statement No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." During the second quarter, the
Company elected early adoption of this Statement and accordingly included
approximately $545,000 of financing fees related to the Company's previous
credit facility in interest expense in the accompanying condensed consolidated
statement of earnings. In addition, in connection with the refinancing of the
Company's credit facility, the Company incurred approximately $284,000 in
financing fees on the new credit facility which was also included in interest
expense in the accompanying condensed consolidated statement of earnings for the
nine months ended September 30, 2002.
In July 2002, the Financial Accounting Standards Board issued Statement No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities." Commitment
to a plan to exit an activity or dispose of long-lived assets will no longer be
enough to record a one-time charge for most anticipated costs. Instead,
companies will record exit or disposal costs when they are incurred and can be
measured at fair value, and they will subsequently adjust the recorded liability
for changes in estimated cash flows. The statement is effective for
restructuring activities that are initiated after December 31, 2002.
7
NOTE 3 - BUSINESS SEGMENTS
The Company has no separately reportable segments in accordance with Financial
Accounting Standards Board Statement No. 131, "Disclosure About Segments of an
Enterprise and Related Information" ("Statement No. 131"). Under the enterprise
wide disclosure requirements of Statement No. 131, the Company reports net sales
by each group of product lines and by distribution channel. Amounts for the
quarters ended September 30, 2002 and 2001 are as shown in the table below.
(amounts in thousands) 2002 2001
------- -------
Agricultural, construction and outdoor
sports vehicle replicas . . . . . . . . . . . . . . . $23,763 $23,536
Automotive, high performance and
racing vehicle replicas . . . . . . . . . . . . . . . 21,719 20,662
Sports trading cards and racing apparel and souvenirs. 8,399 6,140
Pre-teen vehicles and role play activity toys. . . . . 14,225 13,588
Collectible figures. . . . . . . . . . . . . . . . . . 2,838 1,893
------- -------
Net sales. . . . . . . . . . . . . . . . . . . . . . . $70,944 $65,819
======= =======
Mass retailers . . . . . . . . . . . . . . . . . . . . $31,674 $29,844
OEM dealers. . . . . . . . . . . . . . . . . . . . . . 13,259 13,465
Specialty and hobby wholesalers and retailers. . . . . 15,947 12,454
Corporate promotional. . . . . . . . . . . . . . . . . 5,926 6,927
Direct to consumers. . . . . . . . . . . . . . . . . . 4,138 3,129
------- -------
Net sales. . . . . . . . . . . . . . . . . . . . . . . $70,944 $65,819
======= =======
8
Amounts for the nine months ended September 30, 2002 and 2001 are as shown in
the table below.
(amounts in thousands) 2002 2001
-------- --------
Agricultural, construction and outdoor
sports vehicle replicas . . . . . . . . . . . . . . . $ 41,939 $ 42,063
Automotive, high performance and
racing vehicle replicas . . . . . . . . . . . . . . . 59,568 54,036
Sports trading cards and racing apparel and souvenirs. 24,499 20,303
Pre-teen vehicles and role play activity toys. . . . . 27,932 25,030
Collectible figures. . . . . . . . . . . . . . . . . . 5,528 3,920
-------- --------
Net sales. . . . . . . . . . . . . . . . . . . . . . . $159,466 $145,352
======== ========
Mass retailers . . . . . . . . . . . . . . . . . . . . $ 61,038 $ 58,991
OEM dealers. . . . . . . . . . . . . . . . . . . . . . 26,451 23,166
Specialty and hobby wholesalers and retailers. . . . . 45,731 37,272
Corporate promotional. . . . . . . . . . . . . . . . . 15,385 17,748
Direct to consumers. . . . . . . . . . . . . . . . . . 10,861 8,175
-------- --------
Net sales. . . . . . . . . . . . . . . . . . . . . . . $159,466 $145,352
======== ========
Information for the quarters ended September 30, 2002 and 2001 by geographic
area is set forth in the table below.
(amounts in thousands) 2002 2001
-------- --------
Net sales:
United States . . . . . . . . . . . . . . . . $65,930 $61,345
Non-United States . . . . . . . . . . . . . . 5,178 4,723
Sales and transfers between geographic areas (164) (249)
-------- --------
Total. . . . . . . . . . . . . . . . . . . . . $70,944 $65,819
======== ========
Operating income:
United States . . . . . . . . . . . . . . . . $15,741 $12,510
Non-United States . . . . . . . . . . . . . . 922 1,208
-------- --------
Total. . . . . . . . . . . . . . . . . . . . . $16,663 $13,718
======== ========
9
Information for the nine months ended September 30, 2002 and 2001 by geographic
area is set forth in the table below.
(amounts in thousands) 2002 2001
--------- ---------
Net sales:
United States . . . . . . . . . . . . . . . . $147,385 $134,073
Non-United States . . . . . . . . . . . . . . 12,749 12,215
Sales and transfers between geographic areas (668) (936)
--------- ---------
Total. . . . . . . . . . . . . . . . . . . . . $159,466 $145,352
========= =========
Operating income:
United States . . . . . . . . . . . . . . . . $ 28,285 $ 20,386
Non-United States 2,529 2,650
--------- ---------
Total. . . . . . . . . . . . . . . . . . . . . $ 30,814 $ 23,036
========= =========
NOTE 4 - COMPREHENSIVE INCOME
The Company reports comprehensive income in accordance with Financial Accounting
Standards Board Statement No. 130, "Reporting Comprehensive Income" ("Statement
No. 130"). Statement No. 130 requires companies to report all changes in equity
during a period, except those resulting from investment by owners and
distributions to owners, in a financial statement for the period in which they
are recognized.
Comprehensive income for the nine months ended September 30, 2002 and 2001 is
calculated as follows:
(amounts in thousands) 2002 2001
------- -------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17,716 $10,188
Other comprehensive income-foreign currency translation adjustments 828 145
------- -------
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . $18,544 $10,333
======= =======
10
NOTE 5 - COMMON STOCK
Authorized and issued shares and par values of the Company's voting common stock
are as follows:
Shares outstanding at Shares outstanding at
Authorized shares Par Value September 30, 2002 December 31, 2001
----------------- --------- --------------------- ---------------------
Voting Common Stock 28,000,000 $ 0.01 16,463,351 14,617,408
In September 1999, the Company's board of directors authorized a stock
repurchase program for a term of one year and up to an aggregate amount of $10.0
million. Under this program, the Company purchased 1,783,100 shares of its
outstanding common stock for approximately $7.6 million. In July 2001, the
Company's board of directors authorized a stock repurchase program for a term of
one year and up to an aggregate amount of $5.0 million. Under this program, the
Company repurchased 75,000 shares for approximately $321,000. In 2001, the
Company sold 24,000 shares out of treasury to two of the Company's executive
officers for $67,500 and in April 2002 the Company sold 3,805 shares out of
treasury to three of the Company's executive officers for $59,073.
NOTE 6 - DEBT
In April 2002, the Company completed a public offering of 1,545,000 shares of
common stock and certain selling stockholders sold 3,975,000 shares of common
stock at a price of $17.25 per share. The Company received proceeds of $25.2
million from the offering, net of underwriting discount, and used $24.0 million
of the proceeds to repay outstanding debt.
Upon the closing of the public offering, the Company entered into a new credit
facility to replace its previous credit facility. The credit facility is a
three-year $50.0 million unsecured revolving loan that bears interest, at the
Company's option, at a base rate or at a LIBOR rate plus a margin that varies
between 0.75% and 1.40%. The applicable margin is based on the Company's ratio
of consolidated debt to consolidated EBITDA (earnings before interest, taxes,
depreciation and amortization). At September 30, 2002, the margin in effect was
0.75% for LIBOR loans. The Company is also required to pay a commitment fee on
the average unused revolver of 0.20% to 0.30%, determined by the ratio of
consolidated debt to consolidated EBITDA. At September 30, 2002, the commitment
fee was 0.20% per annum on the average daily unused portion of the revolving
loan. Under the terms of the new credit facility, the Company is required to
comply with certain financial and non-financial covenants. Among other
restrictions, the Company is restricted from paying dividends, incurring
additional debt, entering into an acquisition, sale or merger transaction above
certain levels and repurchasing stock in excess of certain levels. The key
financial covenants include leverage and interest coverage ratios. At September
30, 2002, the amount outstanding under this facility was $27.0 million and the
Company was in compliance with all covenants.
11
NOTE 7 - INTEREST RATE COLLAR
The Company's previous credit agreement required that the Company maintain an
interest rate protection agreement. Effective June 3, 1999, the Company entered
into an interest rate collar transaction covering $35.0 million of its debt,
with a cap based on 30-day LIBOR rates of 8.0% and floor of 5.09%. The
agreement, which had quarterly settlement dates, expired on June 3, 2002. For
the nine-month periods ended September 30, 2002 and 2001, the Company paid
approximately $548,000 and $98,000, respectively, on the agreement, which is
included in interest expense on the accompanying condensed consolidated
statements of earnings.
Effective January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities." As a result of the adoption of this statement, the Company recorded
a one-time transition adjustment of approximately $85,000, in the accompanying
condensed consolidated statement of earnings for the period ended March 31,
2001. Additionally, a benefit of approximately $542,000 and a charge of
approximately $507,000 were recorded in interest expense related to the change
in fair value of the interest rate collar during the nine-month periods ended
September 30, 2002 and 2001, respectively. For the quarter ended September 31,
2001, a charge of $238,000 was included in interest expense related to the
change in fair market value of the interest rate collar during the quarter. The
fair value of the interest rate collar at September 30, 2001 of approximately
$592,000 is included in other long-term liabilities in the condensed
consolidated balance sheet as of September 30, 2001.
NOTE 8 - NET INCOME PER SHARE
The Company computes net income per share in accordance with SFAS No. 128,
"Earnings Per Share." Under the provisions of SFAS No. 128, basic net income
per share is computed by dividing the net income for the period by the weighted
average number of common shares outstanding during the period. Diluted net
income per share is computed by dividing the net income for the period by the
weighted average number of common and common equivalent shares outstanding
during the period. Certain options and warrants were not included in the
weighted average share calculation in 2001 as their exercise price was greater
than the average market price of the common shares during the period.
NOTE 9 - LEGAL PROCEEDINGS
In August 1999, a purported class action lawsuit was filed against the Company
in the U.S. District Court for the Southern District of California, in a case
entitled Dumas, et al. v. Racing Champions Corporation. The complaint alleged
----------------------------------------------
that the defendants have violated RICO and the California Unfair Competition Law
by selling packs of sports trading cards containing random assortments of cards
of varying values. This lawsuit has been dismissed by the trial court and the
Ninth Circuit Court of Appeals has affirmed the dismissal of the lawsuit.
12
A purported class action lawsuit was filed on August 21, 2000, in California
state court against Racing Champions South, Inc. and several other defendants in
a case entitled Chaset v. The Upper Deck Company, et al. The lawsuit purports
---------------------------------------
to include a proposed class of all U.S. residents who purchased sports cards
manufactured, licensed, marketed, sold or distributed by any defendant within a
time period of up to four years. The complaint alleges that the defendants have
violated the California unfair trade practices and consumer protection laws by
selling packs of sports trading cards containing random assortments of varying
values. The plaintiffs seek actual damages, attorneys' fees, pre- and
post-judgment interest, exemplary damages, and injunctive relief. In May 2001,
the defendants' motion for summary judgment was denied. In September 2001, the
California Supreme Court denied permission to the defendants to appeal the
denial of their motion for summary judgment. On March 7, 2002, the court
certified a class on the plaintiff's claim for false advertising under
California's consumer protection laws but declined to certify a class for the
claims relating to unfair trade practices. The defendants have moved to dismiss
the false advertising claim. The Company disputes these claims and intends to
vigorously defend its position, although no assurance can be given as to the
outcome of this matter.
The Company has certain contingent liabilities resulting from litigation and
claims incident to the ordinary course of business. Management believes that
the probable resolution of such contingencies will not materially affect the
financial position or the results of the Company's operations.
NOTE 10 - USE OF ESTIMATES
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
NOTE 11 - SUBSEQUENT EVENT
On October 1, 2002, the Company implemented the Racing Champions Ertl
Corporation Employee Stock Purchase Plan to provide employees of the Company
with an opportunity to purchase common stock of the Company through accumulated
payroll deductions. The plan allows eligible employees to purchase shares of
the Company's common stock through quarterly offering periods commencing on each
January 1, April 1, July 1 and October 1 with the first offering period
commencing on October 1, 2002. The option price for each share of common stock
purchased will equal 90% of the last quoted sales price of a share of the
Company's common stock as reported by the NASDAQ National Market on the first
day of the quarterly offering period or the last day of the quarterly offering
period, whichever is lower. The Company has reserved 500,000 shares of common
stock held in treasury for issuance under the plan. The Plan will terminate on
July 1, 2007, unless sooner terminated by the Board.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis of the Company's financial condition,
results of operations, liquidity and capital resources. The discussion and
analysis should be read in conjunction with the Company's unaudited condensed
consolidated financial statements and notes thereto included elsewhere herein.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2001
Net sales. Net sales increased $5.1 million, or 7.8%, to $70.9 million for the
three months ended September 30, 2002 from $65.8 million for the three months
ended September 30, 2001. Sales in the Company's sports trading cards and racing
apparel and souvenirs category were up 36.8% with very strong performance by
racing apparel programs and also sports trading cards. Sales in the Company's
automotive, high performance and racing vehicle replicas category were up 5.1%,
primarily due to strong performance by custom and classic vehicles. Sales in
the Company's pre-teen vehicles and role play activity toys category were up
4.7% driven by new product introductions in the third quarter, consisting of
Hometown Roadway, Stackers and Dr. Seuss. The Company's smallest product
category, collectible figures, grew by 49.9%, due to the introduction during the
third quarter of JoyRide Studios collectible video game figures and vehicles.
Sales in the Company's agricultural, construction and outdoor sports vehicle
replicas category were up approximately 1.0%.
Gross profit. Gross profit increased $2.5 million, or 7.1%, to $37.5 million for
the three months ended September 30, 2002 from $35.0 million for the three
months ended September 30, 2001. The gross profit margin (as a percentage of net
sales) decreased to 52.9% in 2002 compared to 53.2% in 2001. The decrease in the
gross profit margin was attributable to product mix and increased direct
shipments from China which can have price discounts of approximately 15% to 25%.
There were no major changes in the components of cost of sales.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $0.4 million, or 2.0%, to $20.8 million for
the three months ended September 30, 2002 from $20.4 million for the three
months ended September 30, 2001. As a percentage of net sales, selling, general
and administrative expenses decreased to 29.3% for the three months ended
September 30, 2002 from 31.0% for the three months ended September 30, 2001.
Operating income. Operating income increased $3.0 million, or 21.9%, to $16.7
million for the three months ended September 30, 2002 from $13.7 million for the
three months ended September 30, 2001. As a percentage of net sales, operating
income increased to 23.6% for the three months ended September 30, 2002 from
20.8% for the three months ended September 30, 2001.
Net interest expense. Net interest expense of $0.2 million for the three months
ended September 30, 2002 and $1.6 million for the three months ended September
30, 2001 relates primarily to bank term loans and line of credit borrowings.
Additionally, a charge of approximately $238,000 was recorded in net interest
expense related to the change in fair value of the Company's interest rate
collar during the third quarter of 2001. For the quarter ended September 30,
2001, the Company paid $98,000 on the agreement, which is also included in
interest expense.
Income tax. Income tax expense for the three months ended September 30, 2002
and 2001 includes provisions for federal, state and foreign income taxes at an
effective rate of 40.0% and 42.0%, respectively. The reduction in the effective
income tax rate is a result of generating higher income before income taxes
combined with a reduction in non-deductible and foreign tax items.
14
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2001
Net sales. Net sales increased $14.1 million, or 9.7%, to $159.5 million for the
nine months ended September 30, 2002 from $145.4 million for the nine months
ended September 30, 2001. Sales in the Company's automotive, high performance
and racing vehicle replica category increased 10.2% driven primarily by custom
and classic vehicles. Sales in the Company's sports trading cards and racing
apparel and souvenirs category increased 20.7% driven by increases in apparel
and souvenirs as well as trading cards. Sales in the Company's pre-teen vehicles
and role play activity toys category increased 11.6% driven by the John Deere
Ride-on's and new product introductions during 2002. Sales in the Company's
collectible figures category were up 41.0% primarily driven by the introduction
of Joyride Studios collectible figures and vehicles. Sales in the Company's
agricultural, construction and outdoor sports vehicle replicas category were
down 0.3%.
Gross profit. Gross profit increased $8.2 million, or 10.9%, to $83.5 million
for the nine months ended September 30, 2002 from $75.3 million for the nine
months ended September 30, 2001. The gross profit margin (as a percentage of net
sales) increased to 52.4% in 2002 compared to 51.8% in 2001. The increase in
the gross profit margin was due to improved product margins on die-cast vehicles
and the more favorable mix of higher margin product sales that was experienced
in the first two quarters of 2002. There were no major changes in the
components of cost of sales.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $2.9 million, or 5.8%, to $52.6 million for
the nine months ended September 30, 2002 from $49.7 million for the nine months
ended September 30, 2001. Included in selling, general and administrative
expenses in 2001 is an adjustment to reduce the Company's estimate of its
pension funding liability of approximately $613,000 based on an updated
actuarial valuation. As a percentage of net sales, selling, general and
administrative expenses decreased to 33.0% for the nine months ended September
30, 2002 from 34.2% for the nine months ended September 30, 2001.
Operating income. Operating income increased $7.8 million, or 33.9%, to $30.8
million for the nine months ended September 30, 2002 from $23.0 million for the
nine months ended September 30, 2001. As a percentage of net sales, operating
income increased to 19.3% for the nine months ended September 30, 2002 from
15.8% for the nine months ended September 30, 2001.
Net interest expense. Net interest expense of $1.8 million for the nine months
ended September 30, 2002 and $5.5 million for the nine months ended September
30, 2001 relates primarily to bank term loans and line of credit borrowings.
Additionally, a benefit of approximately $542,000 and a charge of approximately
$507,000 were recorded in interest expense related to the change in fair value
of the Company's interest rate collar during the nine months ended September 30,
2002 and 2001, respectively. For the nine-month periods ended September 30,
2002 and 2001, the Company paid $548,000 and $98,000, respectively, on the
agreement, which is also included in interest expense. In conjunction with the
closing of the Company's public offering in April 2002, the Company refinanced
its debt by entering into a new three-year $50.0 million unsecured revolving
credit facility. In April 2002 the Financial Accounting Standards Board issued
Statement No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections." During the second quarter
of 2002, the Company elected early adoption of this Statement and accordingly
included approximately $545,000 in financing fees related to the Company's
previous credit facility in interest expense. In addition, in connection with
the refinancing of the Company's credit facility, the Company incurred
approximately $284,000 in financing fees on the new credit facility which is
also included in interest expense for the first nine months of 2002.
Income tax. Income tax expense for the nine months ended September 30, 2002 and
September 30, 2001 includes provisions for federal, state and foreign income
taxes at an effective rate of 40.0% and 42.0%, respectively. The reduction in
the effective income tax rate is a result of generating higher income before
income taxes combined with a reduction in non-deductible and foreign tax items.
15
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations provided net cash of $15.4 million during the nine
months ended September 30, 2002. Capital expenditures for the nine months ended
September 30, 2002 were approximately $7.7 million, of which approximately $4.0
million was for molds and tooling.
In April 2002, the Company completed a public offering of 1,545,000 shares of
common stock and certain selling stockholders sold 3,975,000 shares of common
stock at a price of $17.25 per share. The Company received proceeds of $25.2
million from the offering, net of underwriting discount, and used $24.0 million
of the proceeds to repay outstanding debt.
Upon the closing of the public offering, the Company entered into a new credit
facility to replace its previous credit facility. The credit facility is a
three-year $50.0 million unsecured revolving loan that bears interest, at the
Company's option, at a base rate or at a LIBOR rate plus a margin that varies
between 0.75% and 1.40%. The applicable margin is based on the Company's ratio
of consolidated debt to consolidated EBITDA. At September 30, 2002, the margin
in effect was 0.75% for LIBOR loans. The Company is also required to pay a
commitment fee on the average unused revolver of 0.20% to 0.30%, determined by
the ratio of consolidated debt to consolidated EBITDA. At September 30, 2002,
the commitment fee was 0.20% per annum on the average daily unused portion of
the revolving loan. Under the terms of the new credit facility, the Company is
required to comply with certain financial and non-financial covenants. Among
other restrictions, the Company is restricted from paying dividends, incurring
additional debt, entering into an acquisition, sale or merger transaction above
certain levels and repurchasing stock in excess of certain levels. The key
financial covenants include leverage and interest coverage ratios. At September
30, 2002, the amount outstanding under this facility was $27.0 million and the
Company was in compliance with all covenants.
The Company has met its working capital needs through funds generated from
operations and available borrowings under the credit agreement. The Company's
working capital requirements fluctuate during the year based on the seasonality
related to sales. Due to seasonal increases in demand for the Company's
products, working capital financing requirements are usually highest during the
third and fourth quarters. The Company expects that capital expenditures during
2002, principally for molds and tooling, will be approximately $9.5 million.
The Company believes that its cash flow from operations, cash on hand and
borrowings under the credit agreement will be sufficient to meet its working
capital and capital expenditure requirements and provide the Company with
adequate liquidity to meet anticipated operating needs for 2002. However, if
the Company's capital requirements vary materially from those currently planned,
the Company may require additional debt or equity financing. There can be no
assurance that financing, if needed, would be available on terms acceptable to
the Company, if at all.
16
FORWARD-LOOKING STATEMENTS
Certain statements in this report contain "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. These
statements may be identified by the use of forward-looking words or phrases such
as "anticipate," "believe," "could," "expect," "intend," "may," "planned,"
"potential," "should," "estimate," "predict," "continue," "future," "will,"
"would" or the negative of those terms or other words of similar meaning. Such
forward-looking statements are inherently subject to known and unknown risks and
uncertainties. The Company's actual results and future developments could differ
materially from the results or developments expressed in, or implied by, these
forward-looking statements. Factors that may cause actual results to differ
materially from those contemplated by such forward-looking statements include,
but are not limited to, the following: (1) the Company may not be able to
manufacture, source and ship new and continuing products on a timely basis and
customers and consumers may not accept those products at prices sufficient for
the Company to profitably recover development, manufacturing, marketing, royalty
and other costs; (2) the Company is dependent on the timely shipping of product
and unloading of product through West Coast ports as well as timely rail or
truck delivery to the Company's warehouse or customers' warehouses; (3) the
inventory policies of retailers, together with increased reliance by retailers
on quick response inventory management techniques, may increase the risk of
underproduction of popular items, overproduction of less popular items and
failure to achieve tight shipping schedules; (4) competition in the markets for
the Company's products may increase significantly; (5) the Company is dependent
upon continuing licensing arrangements with vehicle manufacturers, agricultural
equipment manufacturers, major race sanctioning bodies, race team owners,
drivers, sponsors, agents and other licensors; (6) the Company may experience
unanticipated negative results of litigation; (7) the Company relies upon a
limited number of independently owned factories located in China to manufacture
a significant portion of its vehicle replicas and certain other products; (8)
the Company is dependent upon the continuing willingness of leading retailers to
purchase and provide shelf space for the Company's products; (9) the Company may
not be able to collect outstanding accounts receivable from its major retail
customers; (10) the Company is subject to risks related to doing business in
foreign markets, including currency exchange rate fluctuations, economic and
political instability, restrictive actions by foreign governments, and
complications in complying with trade and foreign tax laws; (11) based upon the
timing of order receipt, the availability of products and the shipment date and
location, there may be some shifting of sales and profits between quarters as
compared to the comparable prior year periods; and (12) general economic
conditions in the Company's markets. The Company undertakes no obligation to
make any revisions to the forward-looking statements contained in this report or
to update them to reflect events or circumstances occurring after the date of
this report.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's previous credit agreement required that the Company maintain an
interest rate protection agreement. Effective June 3, 1999, the Company entered
into an interest rate collar transaction covering $35.0 million of its debt,
with a cap based on 30-day LIBOR rates of 8.0% and floor of 5.09%. The
agreement, which had quarterly settlement dates, expired on June 3, 2002. For
the nine-month periods ended September 30, 2002 and 2001, the Company paid
$548,000 and $98,000, respectively, which is included in interest expense on the
accompanying condensed consolidated statements of earnings. Additionally, a
benefit of approximately $542,000 and a charge of approximately $507,000 were
recorded in interest expense related to the change in fair value of the
Company's interest rate collar during the nine months ended September 30, 2002
and 2001,
respectively.
Based on the Company's interest rate exposure on variable rate borrowings at
September 30, 2002, a one-percentage-point increase in average interest rates on
the Company's borrowings would increase future interest expense by approximately
$22,500 per month.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and the Company's
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on this evaluation, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective. It should be noted
that in designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect the internal controls subsequent
to the date the Company completed its evaluation.
18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company has certain contingent liabilities resulting from litigation and
claims incident to the ordinary course of business. Management believes that
the probable resolution of such contingencies will not materially affect the
financial position or the results of the Company's operations.
In August 1999, a purported class action lawsuit was filed against the Company
in the U.S. District Court for the Southern District of California, in a case
entitled Dumas, et al. v. Racing Champions Corporation. The complaint alleged
----------------------------------------------
that the defendants have violated RICO and the California Unfair Competition Law
by selling packs of sports trading cards containing random assortments of cards
of varying values. This lawsuit has been dismissed by the trial court and the
Ninth Circuit Court of Appeals has affirmed the dismissal of the lawsuit.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 of the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
2002 (File No. 0-22635) filed by the Company with the Securities
and Exchange Commission on May 14, 2002).
3.2 First Amendment to the Amended and Restated Certificate of
Incorporation of the Company (incorporated by reference to
Exhibit 3.2 of the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2002 (File No. 0-22635) filed by the
Company with the Securities and Exchange Commission on May 14,
2002).
3.3 Certificate of Ownership and Merger changing the Company's name
to Racing Champions Ertl Corporation (incorporated by reference
to Exhibit 3.3 of the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2002 (File No. 0-22635) filed by the
Company with the Securities and Exchange Commission on May 14,
2002).
3.4 Amended and Restated By-Laws of the Company (incorporated by
reference to Exhibit 3.3 of the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998 (File No.
0-22635) filed by the Company with the Securities and Exchange
Commission on August 14, 1998).
10.1 Employment Agreement, dated as of July 29, 2002, between the
Company and Peter J. Henseler.
10.2 Employment Agreement, dated as of July 29, 2002, between the
Company and Curtis W. Stoelting.
10.3 Employment Agreement, dated as of July 29, 2002, between the
Company and Jody L. Taylor.
10.4 Racing Champions Ertl Corporation Employee Stock Purchase Plan,
as amended.
10.5 Racing Champions Ertl Corporation Stock Incentive Plan, as
amended.
(b) Reports on Form 8-K:
None in the third quarter of 2002.
20
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.
Dated this 11th day of November, 2002.
RACING CHAMPIONS ERTL CORPORATION
By /s/ Robert E. Dods
Robert E. Dods, Chief Executive Officer
By /s/ Jody L. Taylor
Jody L. Taylor, Chief Financial
Officer and Secretary
21
CERTIFICATIONS
I, Robert E. Dods, Chief Executive Officer of Racing Champions Ertl
Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Racing Champions Ertl
Corporation;
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 11, 2002
/s/ Robert E. Dods
----------------------------
Robert E. Dods
Chief Executive Officer
22
I, Jody L. Taylor, Chief Financial Officer of Racing Champions Ertl
Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Racing Champions Ertl
Corporation;
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 11, 2002
/s/ Jody L. Taylor
----------------------------
Jody L. Taylor
Chief Financial Officer
23