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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Quarterly Report under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the six months ended April 30, 2003 Commission file number 0-13880
ENGINEERED SUPPORT SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
Missouri 43-1313242
(State of Incorporation) (IRS Employer Identification Number)
201 Evans Lane, St. Louis, Missouri 63121
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (314) 553-4000
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the Registrant is an accelerated filer
(as defined by Rule 12b-2 of the Exchange Act). Yes X No
--- ---
The number of shares of the Registrant's common stock, $.01 par value,
outstanding at May 30, 2003 was 16,123,957.
1
ENGINEERED SUPPORT SYSTEMS, INC.
INDEX
Page
----
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of April 30, 2003 and
October 31, 2002....................................................... 3
Condensed Consolidated Statements of Income for the three and six
months ended April 30, 2003 and 2002................................... 4
Condensed Consolidated Statements of Cash Flows for the six
months ended April 30, 2003 and 2002................................... 5
Notes to Condensed Consolidated Financial Statements................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................................13
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......19
Item 4. Controls and Procedures..........................................19
Part II - Other Information
Items 1-6 ................................................................20
Signatures .....................................................................21
Exhibits .......................................................................24
2
ENGINEERED SUPPORT SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
April 30 October 31
2003 2002
------------- -------------
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 14,943 $ 4,793
Accounts receivable 46,357 47,407
Contracts in process and inventories 23,290 42,182
Deferred income taxes 6,660 6,660
Other current assets 6,798 5,010
Current assets of discontinued operations 10,079
------------- -------------
Total Current Assets 98,048 116,131
Property, plant and equipment, less accumulated
depreciation of $28,000 and $25,464 44,963 43,105
Goodwill 108,452 103,444
Deferred income taxes 6,885 6,885
Other assets 21,481 19,274
Long-term assets of discontinued operations 1,308
------------- -------------
Total Assets $ 279,829 $ 290,147
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable $ 15,000 $ 13,000
Current maturities of long-term debt 21,000
Accounts payable 29,548 28,439
Other current liabilities 40,001 32,323
Current liabilities of discontinued operations 3,793
------------- -------------
Total Current Liabilities 84,549 98,555
Long-term debt 21,000
Additional minimum pension liability 20,334 20,334
Other liabilities 14,723 15,401
Shareholders' Equity
Common stock, par value $.01 per share; 30,000
shares authorized; 17,021 and 16,991 shares issued 170 170
Additional paid-in capital 100,330 95,569
Retained earnings 101,887 84,961
Accumulated other comprehensive loss (14,098) (14,275)
------------- -------------
188,289 166,425
Less treasury stock at cost, 903 and 1,171 shares 28,066 31,568
------------- -------------
160,223 134,857
------------- -------------
Total Liabilities and Shareholders' Equity $ 279,829 $ 290,147
============= =============
See notes to condensed consolidated financial statements.
3
ENGINEERED SUPPORT SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Three Months Ended Six Months Ended
April 30 April 30
---------------------------------- --------------------------------
2003 2002 2003 2002
-------------- ------------- -------------- --------------
Net revenues $ 125,057 $ 91,780 $ 246,720 $ 183,066
Cost of revenues 95,274 70,018 189,791 141,392
-------------- ------------- -------------- --------------
Gross profit 29,783 21,762 56,929 41,674
Selling, general and administrative expense 14,467 10,305 27,374 19,699
Restructuring expense 1,193 1,193
-------------- ------------- -------------- --------------
Operating income from continuing operations 14,123 11,457 28,362 21,975
Interest expense (271) (756) (727) (1,619)
Interest income 48 60 97 82
Gain on sale of assets 6 3
-------------- ------------- -------------- --------------
Income from continuing operations 13,900 10,761 27,738 20,441
Income tax provision 5,421 4,197 10,818 7,975
-------------- ------------- -------------- --------------
Net income from continuing operations 8,479 6,564 16,920 12,466
Discontinued operations:
Income (loss) from discontinued operations,
net of income tax 157 (143) 294 (524)
Estimated loss on disposal, net of
income tax (3,145) (3,145)
-------------- ------------- -------------- --------------
Net income $ 8,636 $ 3,276 $ 17,214 $ 8,797
============== ============= ============== ==============
Basic earnings per share:
Continuing operations $ 0.53 $ 0.42 $ 1.06 $ 0.81
Discontinued operations:
Income (loss) from discontinued
operations, net of income tax 0.01 (0.01) 0.02 (0.04)
Estimated loss on disposal, net of
income tax (0.20) (0.20)
-------------- ------------- -------------- --------------
Total $ 0.54 $ 0.21 $ 1.08 $ 0.57
============== ============= ============== ==============
Diluted earnings per share:
Continuing operations $ 0.50 $ 0.41 $ 1.00 $ 0.78
Discontinued operations:
Income (loss) from discontinued
operations, net of income tax 0.01 (0.01) 0.02 (0.03)
Estimated loss on disposal, net of
income tax (0.20) (0.20)
-------------- ------------- -------------- --------------
Total $ 0.51 $ 0.20 $ 1.02 $ 0.55
============== ============= ============== ==============
See notes to condensed consolidated financial statements.
4
ENGINEERED SUPPORT SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(UNAUDITED)
Six Months Ended
April 30
------------------------------
2003 2002
------------ -------------
From operating activities:
Net income from continuing operations $ 16,920 $ 12,466
Depreciation and amortization 4,371 2,678
Gain on sale of assets (6) (3)
------------ -------------
Cash provided before changes in operating
assets and liabilities 21,285 15,141
Net decrease in non-cash current assets 17,571 14,524
Net increase (decrease) in non-cash current liabilities 8,253 (1,565)
Decrease in other assets 2,097 927
------------ -------------
Net cash provided by continuing operations 49,206 29,027
Net cash provided by discontinued operations 1,885 552
------------ -------------
Net cash provided by operating activities 51,091 29,579
------------ -------------
From investing activities:
Contingent consideration paid for purchase of UPSI (5,008)
Additions to property, plant and equipment (5,314) (1,739)
Proceeds from sale of property, plant and equipment 22 3
------------ -------------
Net cash used in continuing operations (10,300) (1,736)
Net cash provided by discontinued operations 3,696 1
------------ -------------
Net cash used in investing activities (6,604) (1,735)
------------ -------------
From financing activities:
Net payments under line-of-credit agreement 2,000 (700)
Payments of long-term debt (42,000) (10,519)
Purchase of treasury stock (557)
Exercise of stock options 6,508 3,842
Cash dividends (288) (185)
------------ -------------
Net cash used in continuing operations (34,337) (7,562)
Net cash used in discontinued operations
------------ -------------
Net cash used in financing activities (34,337) (7,562)
------------ -------------
Net increase in cash and cash equivalents 10,150 20,282
Cash and cash equivalents at beginning of period 4,793 1,015
------------ -------------
Cash and cash equivalents at end of period $ 14,943 $ 21,297
============ =============
See notes to condensed consolidated financial statements.
5
ENGINEERED SUPPORT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except per share amounts)
APRIL 30, 2003
NOTE A - BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have
been prepared by the Company without audit. In the opinion of management,
all adjustments (including normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the three
and six month periods ended April 30, 2003 are not necessarily indicative of
the results to be expected for the entire fiscal year.
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial statements and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report to shareholders
for the year ended October 31, 2002.
NOTE B - EARNINGS PER SHARE
Average diluted common shares outstanding include common stock
equivalents, which represent common stock options as computed based on the
treasury stock method. Average basic and diluted common shares outstanding
have been restated to reflect a three-for-two stock split effected by the
Company on October 31, 2002 in the form of a stock dividend.
Basic earnings per share for the three months ended April 30, 2003
and 2002 is based on average basic common shares outstanding of 16,078 and
15,476, respectively. Diluted earnings per share for the three months ended
April 30, 2003 and 2002 is based on average diluted common shares
outstanding of 17,010 and 16,055, respectively.
Basic earnings per share for the six months ended April 30, 2003
and 2002 is based on average basic common shares outstanding of 15,995 and
15,408, respectively. Diluted earnings per share for the six months ended
April 30, 2003 and 2002 is based on average diluted common shares
outstanding of 16,926 and 15,989, respectively.
NOTE C - STOCK-BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for all stock option plans. Accordingly, no compensation expense
has been recognized for stock option awards. The following table illustrates
the effect on net income from continuing operations and earnings per share
had the Company applied the fair value recognition provisions of Statement
of
6
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-
Based Compensation," to stock option awards.
Three Months Ended Six Months Ended
April 30 April 30
-------------------- ----------------------
2003 2002 2003 2002
-------- -------- --------- ---------
Reported net income from continuing operations $8,479 $6,564 $16,920 $12,466
Total stock-based employee compensation expense
determined under the fair value method for all stock
option awards, net of income tax 648 184 653 184
-------- -------- --------- ---------
Pro forma net income from continuing operations $7,831 $6,380 $16,267 $12,282
======== ======== ========= =========
Earnings per share from continuing operations:
Basic - as reported $ 0.53 $ 0.42 $ 1.06 $ 0.81
======== ======== ========= =========
Basic - pro forma $ 0.49 $ 0.41 $ 1.02 $ 0.80
======== ======== ========= =========
Diluted - as reported $ 0.50 $ 0.41 $ 1.00 $ 0.78
======== ======== ========= =========
Diluted - pro forma $ 0.46 $ 0.40 $ 0.96 $ 0.77
======== ======== ========= =========
The fair value of options at the grant date was estimated using the
Black-Scholes model with the following weighted average assumptions for the
three and six months ended April 30, 2003 and 2002: an expected life of 1.5
years, volatility of 51%, a dividend yield of 0.16% and a risk-free interest
rate of 3.74%. The weighted average fair value of options granted in the
three and six months ended April 30, 2003 and 2002 was $7.66.
NOTE D - ACQUISITIONS
On May 10, 2002, the Company acquired all of the outstanding common
stock of Radian, Inc., a supplier of engineering, logistics support and
systems integration services to the U.S. Department of Defense. The purchase
price was approximately $42.0 million, which included consideration of $2.0
million in the common stock of the Company. The purchase price is net of
$0.4 million of cash acquired. The fair value of the assets acquired,
including goodwill of $26.6 million and customer-related intangibles of
$15.3 million, was $58.3 million and liabilities assumed totaled $16.3
million. (Acquired customer-related intangibles, less $2.8 million of
amortization to date, are included on the April 30, 2003 Condensed
Consolidated Balance Sheet in Other Assets.) The cash portion of the
purchase price was financed with available cash resources and short-term
borrowings under the Company's revolving credit facility.
On June 27, 2002, the Company acquired all of the outstanding
common stock of Universal Power Systems, Inc. (UPSI), a provider of
uninterruptible power supply systems for the U.S. Department of Defense,
intelligence agencies and commercial customers. The purchase price was
approximately $5.5 million plus certain contingent cash consideration based
upon UPSI's net revenue levels through two measurement dates, December 31,
2002 and October 31, 2003. Based upon UPSI's net revenue through the
December 31, 2002 measurement date, $5.0 million of cash consideration was
added to the purchase price and paid during the quarter ended April 30,
2003. (The Company estimates the maximum amount of contingent cash
consideration related to the October 31, 2003 measurement date to be $0.6
7
million). The fair value of the assets acquired, including goodwill of $10.4
million, was $11.6 million and liabilities assumed totaled $1.2 million. The
purchase price was financed with short-term borrowings under the Company's
revolving credit facility.
Both companies are included in the Light Military Support Equipment
segment.
NOTE E - OTHER COMPREHENSIVE INCOME (LOSS)
The Company's other comprehensive income (loss) for the three
months ended April 30, 2003 and 2002 was $0 and $188, respectively. The
Company's other comprehensive income (loss) for the six months ended April
30, 2003 and 2002 was $177 and $338, respectively. The components of other
comprehensive income (loss) include a minimum pension liability adjustment
and an adjustment to the fair value of derivatives.
NOTE F - GOODWILL AND INTANGIBLE ASSETS
The following disclosure presents certain information on the
Company's acquired intangible assets as of April 30, 2003 and October 31,
2002. All acquired intangible assets are being amortized over their
estimated useful lives with no estimated residual values. These amounts are
included in Other Assets in the Condensed Consolidated Balance Sheets.
Weighted Average
Amortization Gross Accumulated Net
Period Amount Amortization Amount
---------------- ------ ------------ ------
Customer-related intangibles:
April 30, 2003 5.4 years $ 15,309 $ 2,840 $ 12,469
October 31, 2002 5.4 years 15,309 1,420 13,889
The amortization expense related to acquired intangible assets was
$710 for the three months ended April 30, 2003 and $1,420 for the six months
ended April 30, 2003. Related estimated amortization expense is $2,840
annually through the year ended October 31, 2006, and $2,529 for the year
ended October 31, 2007. There was no amortization expense related to
acquired intangible assets for the three and six months ended April 30,
2002.
NOTE G - OPERATIONAL RESTRUCTURING
During the quarter ended July 31, 2002, the Company announced a
restructuring plan to improve both plant utilization and long-term
profitability. Under the plan, the Company's Blue Ash, Ohio and Olivette,
Missouri manufacturing locations will be closed during the year ending
October 31, 2003 with related production efforts being relocated to other
existing Company facilities. Emerging Issues Task Force No. 94-3 (ETIF
94-3), which was effective through December 31, 2002, provided specific
requirements as to the appropriate recognition of restructuring costs
associated with employee termination benefits and other exit costs. Employee
termination costs are recognized when benefit arrangements are communicated
to affected employees in sufficient detail to enable the employees to
determine the amount of benefits to be received upon termination. Other
costs resulting from the restructuring plan that
8
are not associated with or that do not benefit activities that will be
continued are recognized at the date of commitment to the plan subject to
certain conditions. For the cost to be accrued, it must not be associated
with or incurred to generate revenues after the commitment date, and must be
either incremental to other costs incurred prior to the commitment date or
represent amounts under a contractual obligation that existed prior to the
commitment date that will either continue after the plan is completed with
no economic benefit or which will result in a penalty to cancel the
obligation. Other costs directly related to the restructuring plan which are
not eligible for recognition at the commitment date, such as relocation and
other integration costs, are expensed as incurred. The plan will involve
terminating 113 employees, 60 of which had been terminated as of April 30,
2003.
During the six months ended April 30, 2003, the Company recorded
the following costs in connection with this restructuring plan.
Accrued at Accrued at
October 31, Expensed Utilized April 30,
2002 2003
----------- -------- -------- ----------
Severance and related benefits $ 789 $ $ 384 $ 405
Other cash restructuring costs 153 153
-------- -------- -------- --------
Restructuring costs, excluding non-cash items $ 942 $ $ 384 $ 558
======== ======== ======== ========
During the quarter ended April 30, 2003, the Company announced an
additional restructuring plan under which the electronics assembly work
currently performed at the Company's Sanford, Florida facility of its
Systems & Electronics Inc. (SEI) subsidiary will be relocated to alternate
SEI facilities. Statement of Financial Accounting Standards No. 146 (SFAS
146), "Accounting for Costs Associated with Exit or Disposal Activities",
applies to all disposal activities initiated after December 31, 2002 and
prospectively nullifies EITF 94-3. SFAS 146 requires that a liability for
employee termination costs associated with an exit or disposal activity be
recognized when the liability is incurred. (EITF 94-3 had previously
required that a liability for such costs be recognized at the date of the
Company's commitment to an exit or disposal plan). In accordance with SFAS
146, the Company recorded restructuring expense of $1.2 million in the
quarter ended April 30, 2003 and anticipates that it will record an
additional $1.8 million of restructuring expense related to this plan,
substantially all of which will be recorded during the year ending October
31, 2003. The plan will involve terminating 147 employees, none of which had
been terminated as of April 30, 2003.
During the three months ended April 30, 2003, the Company recorded
the following costs in connection with this restructuring plan.
Accrued
at April 30,
Expensed Utilized 2003
-------- -------- ------------
Severance and related benefits $ 268 $ $ 268
======= ========
Pension curtailment costs 35
Estimated loss on asset disposal 890
---------
Total Restructuring Costs $ 1,193
=========
9
NOTE H - DISCONTINUED OPERATIONS
During the second quarter of 2002, the Company formally adopted a
plan to dispose of Engineered Specialty Plastics, Inc. (ESP), a wholly-owned
subsidiary representing the entirety of the Plastic Products business
segment. The Company completed the sale of ESP in the quarter ended April
30, 2003 to a private equity group. Consideration received by the Company
included $4.1 million of cash, a $3.3 million two-year note from the buyers
secured by the real property of ESP, and contingent consideration based upon
ESP's future revenues, net of a $0.3 million working capital adjustment
payable by the Company. In conjunction with the intended disposition of ESP,
the Company had previously recorded an estimated loss on disposal of
discontinued operations of $4.2 million to reduce the carrying value of
ESP's net assets to their estimated fair value less estimated selling costs.
The completion of the sale resulted in no adjustment to this $4.2 million
loss. The Company has reported the results of operations of ESP as
discontinued operations for the three and six months ended April 30, 2003
and 2002 in the Condensed Consolidated Statements of Income. All assets and
liabilities associated with ESP have been reclassified as assets and
liabilities of discontinued operations on the October 31, 2002 Condensed
Consolidated Balance Sheet. Certain information with respect to the
discontinued operations of ESP for the three and six month periods ended
April 30, 2003 and 2002 is as follows:
Three Months Ended Six Months Ended
April 30 April 30
--------------------------- ----------------------------
2003 2002 2003 2002
------------ ----------- ----------- -----------
Net revenues $ 4,010 $ 3,266 $ 9,136 $ 6,096
============ =========== =========== ===========
Income (loss) from operations, net of income tax $ 157 $ (143) $ 294 $ (524)
Estimated loss on disposal, net of income tax (3,145) (3,145)
------------ ----------- ----------- -----------
Income (loss) on discontinued operations, net of income tax $ 157 $(3,288) $ 294 $(3,669)
============ =========== =========== ===========
Certain information with respect to the assets and liabilities of ESP is
summarized as follows:
October 31
2002
------------
Accounts receivable $ 4,750
Inventories 5,329
Property, plant and equipment 1,308
------------
Assets of Discontinued Operations $11,387
============
Accounts payable $ 3,354
Accrued expenses and other liabilities 439
------------
Liabilities of Discontinued Operations $ 3,793
============
10
NOTE I - NOTES PAYABLE
Effective April 23, 2003, the Company retired all borrowings under
its existing credit facility and entered into a new bank agreement which
provided a $125 million unsecured, revolving credit facility. Borrowings
under the new agreement, which expires April 23, 2007, are subject to
interest, at the Company's option, at either the Eurodollar rate plus an
applicable margin or at the prime rate plus an applicable margin. The margin
applicable to the Eurodollar rate varies from 0.875% to 1.625% and the
margin applicable to the prime rate varies from 0.0% to 0.25% depending upon
the Company's ratio of total indebtedness to earnings before interest,
taxes, depreciation and amortization (leverage ratio). As of April 30, 2003,
the Company had borrowings of $15.0 against the new revolving credit
facility.
NOTE J - CONTRACTS IN PROCESS AND INVENTORIES
Contracts in process and inventories of certain of the Company's
operating subsidiaries (Systems & Electronics Inc., Engineered Air Systems,
Inc., Keco Industries, Inc., Engineered Electric Company and Radian, Inc.)
represent accumulated contract costs, estimated earnings thereon based upon
the percentage of completion method and contract inventories reduced by the
contract value of delivered items. Inventories of Engineered Coil Company
and Universal Power Systems, Inc. are valued at the lower of cost or market
using the first-in, first-out method. Contracts in process and inventories
are comprised of the following:
April 30, 2003 October 31, 2002
------------------- ------------------
Raw materials $ 3,011 $ 3,662
Work-in-process 1,250 2,368
Finished goods 108 178
Inventories substantially applicable to
government contracts in process, less
Progress payments of $55,060 and
$55,809 18,921 35,974
------------------- ------------------
$ 23,290 $ 42,182
=================== ==================
NOTE K - SEGMENT INFORMATION
The Company operates in three business segments: Light Military
Support Equipment, Heavy Military Support Equipment, and Electronics and
Automation Systems. The Light Military Support Equipment segment engineers
and manufactures a broad range of military support equipment primarily for
the DoD, as well as related heat-transfer and air-handling equipment for
domestic commercial and industrial users. The segment also provides
engineering services and asset protection / security systems to the DoD and
other government customers. Segment products include environmental control
systems, generator sets and related power generation and distribution
systems, chemical and biological protection systems, petroleum and water
systems and other multipurpose military support equipment. The Heavy
Military Support Equipment segment engineers and manufactures load
management and
11
transport systems primarily for the DoD. The Electronics and Automation
Systems segment engineers and manufactures airborne radar systems,
reconnaissance, surveillance and target acquisition systems and avionics
test equipment primarily for the DoD. The segment also engineers and
manufactures material-handling equipment primarily for the U.S. Postal
Service. Inter-segment revenues for the three and six months ended April 30,
2003 and 2002, respectively, were not significant. Total assets by segment
as disclosed in the Company's annual report for the year ended October 31,
2002 have not changed materially since that date. Goodwill by segment as of
October 31, 2002 totaled $53,725 for Light Military Support Equipment,
$23,086 for Heavy Military Support Equipment and $26,633 for Electronics and
Automation Systems. Goodwill by segment as of April 30, 2003 totaled $58,733
for Light Military Support Equipment, $23,086 for Heavy Military Support
Equipment and $26,633 for Electronics and Automation Systems. In addition,
there have been no changes in either the basis of segmentation or the
measurement of segment income since October 31, 2002. Information by segment
is as follows:
Three Months Ended Six Months Ended
April 30 April 30
------------------------- --------------------------
2003 2002 2003 2002
---------- --------- ---------- ----------
Net revenues:
Light military support equipment $ 68,556 $37,379 $137,493 $ 76,962
Heavy military support equipment 31,494 34,421 62,643 65,445
Electronics and automation systems 25,007 19,980 46,584 40,659
---------- --------- ---------- ----------
Total $125,057 $91,780 $246,720 $183,066
========== ========= ========== ==========
Operating income from continuing operations:
Light military support equipment $ 7,556 $ 4,350 $ 13,674 $ 9,700
Heavy military support equipment 4,316 5,664 9,653 8,951
Electronics and automation systems 2,251 1,443 5,035 3,324
---------- --------- ---------- ----------
14,123 11,457 28,362 21,975
Interest expense (271) (756) (727) (1,619)
Interest income 48 60 97 82
Gain on sale of assets 6 3
---------- --------- ---------- ----------
Income from continuing operations
before income taxes $ 13,900 $10,761 $ 27,738 $ 20,441
========== ========= ========== ==========
NOTE L - SUBSEQUENT EVENT
Effective May 1, 2003, the Company acquired all of the outstanding
stock of Technical and Management Services Corporation (TAMSCO), a provider
of information technology logistics and digitization services and a designer
and integrator of telecommunication systems primarily for the U.S.
Department of Defense. The purchase price was $66.5 million in cash, which
the Company financed with short-term borrowings under its revolving credit
facility.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
CRITICAL ACCOUNTING POLICIES
Revenues on long-term contracts performed within the Company's
Light Military Support Equipment, Heavy Military Support Equipment and
Electronics and Automation Systems segments, substantially all of which are
with the U.S. Government, are recognized under the percentage-of-completion
method and include a proportion of the earnings that are expected to be
realized on the contract in the ratio that production measures, primarily
labor, incurred bear to the estimated production measures for the contract.
Earnings expectations are based upon estimates of contract values and costs
at completion. Contracts in process are reviewed on a periodic basis.
Adjustments to revenues and earnings are made in the current accounting
period based upon revisions in contract values and estimated costs at
completion. Amounts representing contract change orders, claims and other
items are included in revenues, as recognized under the
percentage-of-completion method, only when these amounts can be reliably
estimated and realization is probable. Provisions for estimated losses on
contracts are recorded when identified.
During the second quarter of 2002, the Company formally adopted a
plan to dispose of Engineered Specialty Plastics, Inc. (ESP), a wholly-owned
subsidiary representing the entirety of the Plastic Products business
segment. In conjunction with this plan, the Company recorded an estimated
loss on disposal to reduce the carrying value of ESP's net assets to their
estimated fair value less estimated selling costs. Accordingly, the Company
has reported the results of operations of ESP as discontinued operations for
the three and six months ended April 30, 2003 and 2002 in the Condensed
Consolidated Statements of Income. Additionally, all depreciation on the
property, plant and equipment of ESP was suspended as of the end of the
second quarter of 2002. The Company completed the sale of ESP in the second
quarter of 2003 with no resulting adjustment to the estimated loss on
disposal.
During the third quarter of 2002, the Company announced a
restructuring plan to improve both plant utilization and long-term
profitability. Under the plan, the Company's Blue Ash, Ohio and Olivette,
Missouri manufacturing locations will be closed during the year ending
October 31, 2003 with related production efforts being relocated to other
existing Company facilities. Emerging Issues Task Force No. 94-3 (EITF 94-3)
provided specific requirements as to the appropriate recognition of
restructuring costs associated with employee termination benefits and other
exit costs. Employee termination costs are recognized when benefit
arrangements are communicated to affected employees in sufficient detail to
enable the employees to determine the amount of benefits to be received upon
termination. Other costs resulting from the restructuring plan that are not
associated with or that do not benefit activities that will be continued are
recognized at the date of commitment to the plan subject to certain
conditions. For the cost to be accrued, it must not be associated with or
incurred to generate revenues after the commitment date and must be either
incremental to other costs incurred prior to the commitment date, or
represent amounts under a contractual obligation that existed prior to the
commitment date that will either continue after the plan is completed with
no economic benefit or which will result in a penalty to cancel the
obligation. Other costs directly
13
related to the restructuring plan which are not eligible for recognition at
the commitment date, such as relocation and other integration costs, are
expensed as incurred.
During the quarter ended April 30, 2003, the Company announced an
additional restructuring plan under which the electronics assembly work
currently performed at the Company's Sanford, Florida facility of its
Systems & Electronics Inc. (SEI) subsidiary will be relocated to alternate
SEI facilities. Statement of Financial Accounting Standards No. 146 (SFAS
146), "Accounting for Costs Associated with Exit or Disposal Activities",
applies to all disposal activities initiated after December 31, 2002 and
prospectively nullifies EITF 94-3. SFAS 146 requires that a liability for
employee termination costs associated with an exit or disposal activity be
recognized when the liability is incurred. (EITF 94-3 had previously
required that a liability for such costs be recognized at the date of the
Company's commitment to an exit or disposal plan).
The following analysis should be read in this context.
RESULTS OF OPERATIONS
Consolidated net revenues from continuing operations increased
$33.3 million, or 36.3%, to $125.1 million in the second quarter of 2003
compared to $91.8 million in the second quarter of 2002. This increase was
primarily the result of $26.4 million of net revenues from Radian, Inc.
(Radian), which was acquired May 10, 2002, and from Universal Power Systems,
Inc. (UPSI), which was acquired June 27, 2002. Radian's most significant
contract, the Deployable Power Generation and Distribution System (DPGDS)
for the U.S. Air Force and U.S. Army contributed $13.3 million in revenues
during the quarter ended April 30, 2003. All other operating subsidiaries
contributed a combined 7.5% increase in net revenues during the quarter.
Gross profit from continuing operations for the three months ended April 30,
2003 increased $8.0 million, or 36.9%, to $29.8 million (23.8% of
consolidated net revenues) from $21.8 million (23.7% of consolidated net
revenues) in the comparable 2002 period. The increase in gross profit was a
result of the significant increase in net revenues. Selling, general and
administrative expense from continuing operations increased $4.2 million, or
40.4%, in the second quarter of 2003 to $14.5 million (11.6% of consolidated
net revenues) from $10.3 million (11.3% of consolidated net revenues) in the
second quarter of 2003. In addition, the Company recorded a restructuring
expense of $1.2 million in the quarter ended April 30, 2003 related to its
announced plan to relocate electronics assembly work currently performed at
the Company's Sanford, Florida facility of its Systems & Electronics Inc.
(SEI) subsidiary to alternate SEI facilities. As a result of the above,
income from continuing operations increased $2.7 million or 23.3% in the
quarter ended April 30, 2003 to $14.1 million from $11.5 million in the
second quarter of 2002.
Consolidated net revenues from continuing operations increased
$63.6 million, or 34.8%, to $246.7 million in the six months ended April 30,
2003 compared to $183.1 million in the first half of 2002. This increase was
primarily the result of $55.3 million of net revenues from Radian and UPSI.
All other operating subsidiaries contributed a combined 4.5% increase in net
revenues during the six month period. Gross profit from continuing
operations for the six
14
months ended April 30, 2003 increased $15.2 million, or 36.6%, to $56.9
million (23.1% of consolidated net revenues) from $41.7 million (22.8% of
consolidated net revenues) in the comparable 2002 period. Selling, general
and administrative expense from continuing operations increased $7.7
million, or 39.0%, in the first half of 2003 to $27.4 million (11.1% of
consolidated net revenues) from $19.7 million (10.8% of consolidated net
revenues) in the prior year. As a result of the above and of the $1.2
million restructuring expense discussed above, income from continuing
operations increased $6.4 million, or 29.1%, in the six months ended April
30, 2003 to $28.4 million from $22.0 million in the first half of 2002.
LIGHT MILITARY SUPPORT EQUIPMENT. Net revenues for the Light
Military Support Equipment segment increased by $31.2 million, or 83.4%, to
$68.6 million in the second quarter of 2003 from $37.4 million in the second
quarter of 2002 primarily due to the addition of $26.4 million in net
revenues from Radian and UPSI. All other operating subsidiaries within the
segment contributed a combined 12.8% increase in net revenues during the
quarter. For the six months ended April 30, 2003, net revenues for the
segment increased by $60.5 million, or 78.7%, to $137.5 million from $77.0
million in the first half of 2002. Radian and UPSI accounted for $55.3
million of this increase. Gross profit for the segment increased by $7.3
million, or 88.5%, in the second quarter of 2003 to $15.6 million (22.8% of
segment net revenues) from $8.3 million (22.2% of segment net revenues) in
the second quarter of 2002. Likewise, gross profit for the segment increased
by $12.1 million, or 69.1%, in the six months ended April 30, 2003 to $29.5
million (21.4% of segment net revenues) from $17.4 (22.6% of segment net
revenues) in the first half of 2002. Income from operations increased by
$3.2 million, or 73.7%, in the second quarter of 2003 to $7.6 million from
$4.4 million in the second quarter of 2002, and increased by $4.0 million,
or 41.0%, in the first half of 2003 to $13.7 million from $9.7 million in
the first half of 2002.
HEAVY MILITARY SUPPORT EQUIPMENT. Net revenues for the Heavy
Military Support Equipment segment decreased by $2.9 million, or 8.5%, to
$31.5 million in the second quarter of 2003 from $34.4 million in the second
quarter of 2002. This decrease was primarily due to the completion of
deliveries for the M1000 semi-trailer in March 2003. M1000 contract revenues
totaled $4.1 million in the second quarter of 2003 compared to $7.0 million
in the quarter ended April 30, 2002. For the six months ended April 30,
2003, net revenues for the segment decreased by $2.8 million, or 4.3%, to
$62.6 million from $65.4 million in the first half of 2002, also due to
completion of the M1000 contract. Gross profit for the segment decreased by
$1.8 million, or 18.2%, in the second quarter of 2003 to $7.9 million (25.2%
of segment net revenues) from $9.7 million (28.2% of segment net revenues)
in the second quarter of 2002. For the six months ended April 30, 2003,
gross profit for the segment was $16.4 million (26.2% of segment net
revenues), which was unchanged from $16.4 million (25.0% of segment
revenues) in the first six months of 2002. Income from operations decreased
by $1.4 million, or 23.8%, to $4.3 million in the second quarter of 2003
from $5.7 million in the second quarter of 2002, and increased by $0.7
million, or 7.8%, in the first half of 2003 to $9.7 million from $9.0
million in the first half of 2002.
ELECTRONICS AND AUTOMATION SYSTEMS. Net revenues for the
Electronics and Automation Systems segment increased by $5.0 million, or
25.2%, to $25.0 million in the second quarter of 2003 from $20.0 million in
the second quarter of 2002. This increase was
15
primarily due to additional revenues from the Knight reconnaissance /
surveillance / target acquisition program and higher demand for the
segment's MSTAR radar product. For the six months ended April 30, 2003, net
revenues for the segment increased by $5.9 million, or 14.6%, to $46.6
million from $40.7 million in the first half of 2002. Gross profit for the
segment increased $2.4 million, or 65.2%, in the second quarter of 2003 to
$6.2 million (24.9% of segment net revenues) from $3.8 million (18.9% of
segment net revenues) in the second quarter of 2002. For the six months
ended April 30, 2003, gross profit for the segment increased $3.2 million,
or 40.5%, to $11.1 million (23.8% of segment net revenues) from $7.9 million
(19.4% of segment net revenues) in the first half of 2002. Increases in
gross profit and gross margin for the segment were a result of higher
revenue levels and a more favorable product mix. Income from operations
increased by $0.8 million, or 56.0%, in the second quarter of 2003 to $2.3
million from $1.5 million in the second quarter of 2002, and increased by
$1.7 million, or 51.5%, in the first half of 2003 to $5.0 million from $3.3
million in the first half of 2002. Increases in income from operations were
a result of significant gains in gross profit, offset by a $1.2 million
restructuring expense in both the quarter and six months ended April 30,
2003.
Net interest expense decreased by $0.5 million to $0.2 million in
the second quarter of 2003 and by $0.9 million to $0.6 million in the six
months ended April 30, 2003. These decreases were a result of lower
outstanding borrowings, as well as the impact of lower interest rates. The
effective income tax rate was 39.0% for the three and six month periods
ended April 30, 2003 and 2002. As a result of the foregoing, net income from
continuing operations increased 29.2% to $8.5 million (6.8% of consolidated
net revenues) in the quarter ended April 30, 2003 as compared to $6.6
million (7.2% of consolidated net revenues) in the second quarter of 2002.
For the six months ended April 30, 2003, net income from continuing
operations increased 35.7% to $16.9 million (6.9% of consolidated net
revenues) from $12.5 million (6.8% of consolidated net revenues) for the
first half of 2002.
During the second quarter of 2002, the Company formally adopted a
plan to dispose of ESP. The Company completed the sale of ESP in the quarter
ended April 30, 2003 to a private equity group. In conjunction with the
intended disposition of ESP, the Company had previously recorded an
estimated loss on disposal of discontinued operations of $4.2 million, $3.2
million of which was recorded in the quarter ended April 30, 2002. The
completion of the sale resulted in no adjustment to this $4.2 million loss.
In addition, the Company realized income (loss) from ESP operations, net of
income tax, of $0.2 million and $(0.1) million in the second quarter of 2003
and 2002, respectively, and of $0.3 million and $(0.5) million in the six
months ended April 30, 2003 and 2002, respectively.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 144 addresses the
financial accounting and reporting for the impairment or disposal of
long-lived assets and supersedes SFAS 121. The Company adopted SFAS 144
effective November 1, 2001. The Company has accounted for the disposition
through sale of ESP as discontinued operations in accordance with SFAS 144.
16
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS 146 provides direction
for accounting and disclosure regarding specific costs related to an exit or
disposal activity. These include, but are not limited to, costs to terminate
a contract that is not a capital lease, costs to consolidate facilities or
relocate employees, and certain termination benefits provided to employees
that are involuntarily terminated under the terms of a one-time benefit
arrangement. The Company adopted SFAS 146 effective January 1, 2003.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock
Based Compensation - Transition and Disclosure - an Amendment of SFAS 123."
SFAS 148 provides additional transition guidance for those entities that
elect to voluntarily adopt the provisions of SFAS 123, "Accounting for Stock
Based Compensation." Furthermore, SFAS 148 mandates new disclosures in both
interim and year-end financial statements within the Company's Significant
Accounting Policies footnote. The Company adopted these disclosure
requirements for the year ended October 31, 2002 and has applied them to its
interim financial statements in 2003.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45 clarifies
disclosures regarding certain guarantees to be made by a guarantor in its
interim and annual financial statements. FIN 45 also clarifies that a
guarantor is required to recognize, at the inception of certain guarantees,
a liability for the fair value of the obligation undertaken in issuing the
guarantee, but does not prescribe a specific approach for subsequently
measuring the liability over its life. Recognition provisions of FIN 45 are
to be applied prospectively for guarantees issued or modified after December
31, 2002. The related disclosure requirements are effective for periods
ending after December 15, 2002. The Company adopted FIN 45 for the quarter
ended January 31, 2003.
LIQUIDITY AND CAPITAL RESOURCES
On April 16, 2003, the Company completed the sale of ESP to a
private equity group. Consideration received by the Company included $4.1
million of cash, a $3.3 million two-year note from the buyers secured by the
real property of ESP, and contingent consideration based upon ESP's future
revenues, net of a $0.3 million working capital adjustment payable by the
Company.
Effective April 23, 2003, the Company retired all borrowings under
its existing credit facility and entered into a new bank agreement which
provided a $125 million unsecured, revolving credit facility. Borrowings
under the new agreement, which expires April 23, 2007, are subject to
interest, at the Company's option, at either the Eurodollar rate plus an
applicable margin or at the prime rate plus an applicable margin. The margin
applicable to the Eurodollar rate varies from 0.875% to 1.625% and the
margin applicable to the prime rate varies from 0.0% to 0.25% depending upon
the Company's ratio of total indebtedness to earnings before interest,
taxes, depreciation and amortization (leverage ratio). As of April 30, 2003,
the Company had borrowings of $15.0 million against the new revolving credit
facility and a cash balance of $14.9 million.
17
Effective May 1, 2003, the Company acquired all of the outstanding
stock of Technical and Management Services Corporation (TAMSCO), a provider
of information technology logistics and digitization services and a designer
and integrator of telecommunication systems primarily for the U.S.
Department of Defense. The purchase price was $66.5 million in cash, which
the Company financed with short-term borrowings under its revolving credit
facility.
At April 30, 2003, the Company's working capital and ratio of
current assets to current liabilities were $13.5 million and 1.16 to 1 as
compared with $17.6 million and 1.18 to 1 at October 31, 2002. The Company
generated cash flow from continuing operations of $49.2 million in the six
months ended April 30, 2003 as compared to $29.0 million in the first six
months of 2002. Investment in property, plant and equipment totaled $5.3
million and $1.7 million for the first six months of 2003 and 2002,
respectively. $3.4 million of total capital expenditures for the six months
ended April 30, 2003 were incurred at the Company's Keco Industries, Inc.
subsidiary and relate to the Company's previously discussed restructuring
plan. The Company anticipates that capital expenditures in 2003 should not
exceed $7.0 million. Management believes that cash flow generated from
operations, together with the available line of credit, will provide the
necessary resources to meet the needs of the Company in the foreseeable
future.
There have been no material changes in the total contractual and
contingent obligations included in the Company's annual report to
shareholders for the year ended October 31, 2002.
BUSINESS AND MARKET CONSIDERATIONS
Approximately 95% of consolidated net revenues from continuing
operations for the six months ended April 30, 2003 were directly or
indirectly derived from defense orders by the U.S. government and its
agencies. As of April 30, 2003, the Company's funded backlog of orders
totaled $431.0 million, with related customer options of an additional
$658.3 million.
Management continues to pursue potential acquisitions, primarily of
those companies providing strategic consolidation within the defense
industry such as TAMSCO.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this report includes certain
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, which are intended to be covered by the
safe harbors created thereby. The forward-looking statements involve certain
risks and uncertainties, including, but not limited to acquisitions,
additional financing requirements, the decision of any of the Company's key
customers (including the U.S. government) to reduce or terminate orders with
the Company, cutbacks in defense spending by the U.S. government and
increased competition in the Company's markets, which could cause the
Company's actual results to differ materially from those projected in, or
inferred by, the forward-looking statements.
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.
At October 31, 2002, the Company's derivative contracts consisted
only of interest rate swaps used by the Company to convert a portion of its
variable rate long-term debt to fixed rates. These contracts expired in
November 2002. At April 30, 2003, the Company had no derivative contracts.
ITEM 4. CONTROLS AND PROCEDURES.
Within the 90 days prior to the filing 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 Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures as
defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Based upon the evaluation, the
Company's Chief Executive Officer and Chief Financial Officer concluded that
the Company's disclosure controls and procedures are effective. Disclosure
controls and procedures are controls and procedures that are designed to
ensure that information required to be disclosed in Company reports filed or
submitted under the Exchange Act 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 the Company's internal
controls or in other factors that could significantly affect those controls
subsequent to the date this evaluation was carried out, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
19
PART II
OTHER INFORMATION
Items 1-5 Not applicable.
Item 6 Exhibits and Reports on Form 8-K.
(a) Exhibits
4. Credit Agreement dated as of April 23, 2003 among
Engineered Support Systems, Inc., Bank of
America, N.A. and the Other Lenders Party Hereto
10. Employment Agreement with Gerald E. Daniels dated
April 1, 2003
11. Statement Re: Computation of Earnings Per Share
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
(b) During the quarter ended April 30, 2003, the Company filed
the following reports on Form 8-K:
(1) Form 8-K dated March 6, 2003 regarding announcement
of a non-binding letter of intent to purchase all of
the outstanding stock of Technical and Management
Services Corporation (TAMSCO).
(2) Form 8-K dated April 2, 2003 regarding the Company's
restructuring plan for its Sanford, Florida
facility.
(3) Form 8-K dated April 21, 2003 regarding completion
of of the sale of Engineered Specialty Plastics,
Inc.
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.
ENGINEERED SUPPORT SYSTEMS, INC.
Date: June 16, 2003 By: /s/ Gerald E. Daniels
----------------------- -------------------------------
Gerald E. Daniels
Vice Chairman and
Chief Executive Officer
Date: June 16, 2003 By: /s/ Gary C. Gerhardt
----------------------- -------------------------------
Gary C. Gerhardt
Vice Chairman and Chief
Financial Officer
21
CERTIFICATIONS
I, Gerald E. Daniels, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Engineered
Support Systems, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statements 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
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 and finance committee of the registrant's board of directors (or
persons performing the equivalent functions):
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 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: June 16, 2003
/s/ Gerald E. Daniels
- ------------------------------------------
Gerald E. Daniels
Vice Chairman and Chief Executive Officer
22
CERTIFICATIONS
I, Gary C. Gerhardt, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Engineered
Support Systems, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statements 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
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 and finance committee of the registrant's board of directors (or
persons performing the equivalent functions):
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 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: June 16, 2003
/s/ Gary C. Gerhardt
- -----------------------------
Gary C. Gerhardt
Vice Chairman and Chief
Financial Officer
23