SECURITIES AND EXCHANGE COMMISSION
                          WASHINGTON, D.C.  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, 2002March 31, 2003

[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
      SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _________.

                        Commission file number 1-8729


                             UNISYS CORPORATION
            (Exact name of registrant as specified in its charter)

               Delaware                            38-0387840
       (State or other jurisdiction             (I.R.S. Employer
       of incorporation or organization)        Identification No.)

               Unisys Way
        Blue Bell, Pennsylvania                          19424
       (Address of principal executive offices)        (Zip Code)

Registrant's telephone number, including area code:  (215) 986-4011


     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 in Rule 12b-2 of the Exchange Act).  YES [X]    NO [ ]

     Number of shares of Common Stock outstanding as of September 30, 2002:
324,475,589.March 31, 2003:
327,776,062.





 2
Part I - FINANCIAL INFORMATION
Item 1.  Financial Statements.

                             UNISYS CORPORATION
                         CONSOLIDATED BALANCE SHEETSHEETS
                                (Millions)
September 30, 2002March 31, 2003 December 31, (Unaudited) 20012002 ----------- ------------ Assets - ------ Current assets Cash and cash equivalents $ 166.2433.1 $ 325.9301.8 Accounts and notes receivable, net 901.7 1,093.7 Inventories862.7 955.6 Inventories: Parts and finished equipment 172.8 201.6156.9 165.3 Work in process and materials 84.7 144.2133.3 127.5 Deferred income taxes 345.1 342.6312.3 311.3 Other current assets 85.8 96.197.4 84.5 -------- -------- Total 1,756.3 2,204.11,995.7 1,946.0 -------- -------- Properties 1,478.3 1,460.41,576.0 1,542.7 Less-Accumulated depreciation 891.6 910.8and amortization 958.2 932.9 -------- -------- Properties, net 586.7 549.6617.8 609.8 -------- -------- Investments at equity 176.9 212.3111.8 111.8 Marketable software, net 302.8 287.9 Prepaid pension cost 1,375.8 1,221.0322.1 311.8 Deferred income taxes 747.8 747.81,476.0 1,476.0 Goodwill 158.5 159.0161.7 160.6 Other long-term assets 375.7 387.4367.8 365.4 -------- -------- Total $5,480.5 $5,769.1$5,052.9 $4,981.4 ======== ======== Liabilities and stockholders' equity - ------------------------------------ Current liabilities Notes payable $ 112.678.6 $ 78.977.3 Current maturities of long-term debt 1.9 2.22.5 4.4 Accounts payable 455.8 694.9434.9 532.5 Other accrued liabilities 1,159.3 1,302.91,152.9 1,341.4 Income taxes payable 241.6 234.6235.0 228.9 -------- -------- Total 1,971.2 2,313.51,903.9 2,184.5 -------- -------- Long-term debt 748.9 745.01,046.3 748.0 Accrued pension liabilities 715.1 727.7 Other long-term liabilities 548.8 597.9486.0 465.2 Stockholders' equity Common stock, shares issued: 2003, 329.7; 2002, 326.4; 2001,322.5328.1 3.3 3.23.3 Accumulated deficit ( 762.6)635.0) ( 896.5)673.5) Other capital 3,750.7 3,712.83,775.9 3,763.1 Accumulated other comprehensive loss ( 779.8) ( 706.8)(2,242.6) (2,236.9) -------- -------- Stockholders' equity 2,211.6 2,112.7901.6 856.0 -------- -------- Total $5,480.5 $5,769.1$5,052.9 $4,981.4 ======== ========
See notes to consolidated financial statements. 3 UNISYS CORPORATION CONSOLIDATED STATEMENTSTATEMENTS OF INCOME (UNAUDITED)(Unaudited) (Millions, except per share data)
Three Months Nine Months Ended September 30 Ended September 30 ------------------ ------------------March 31 --------------------------- 2003 2002 2001 2002 2001 -------- -------- -------- -------- Revenue $1,332.3 $1,376.0 $4,054.6 $4,461.2Services $1,107.0 $1,049.2 Technology 291.9 313.3 -------- -------- -------- --------1,398.9 1,362.5 Costs and expenses Cost of revenue 929.3 996.1 2,857.8 3,256.3revenue: Services 882.5 802.4 Technology 129.3 170.8 -------- -------- 1,011.8 973.2 Selling, general and administrative 241.3 262.7 732.2 784.4243.7 245.4 Research and development expenses 65.5 73.4 192.6 224.666.8 65.1 -------- -------- -------- -------- 1,236.1 1,332.2 3,782.6 4,265.3 -------- --------1,322.3 1,283.7 -------- -------- Operating income 96.2 43.8 272.0 195.976.6 78.8 Interest expense 17.6 16.5 53.2 50.015.7 17.5 Other income (expense), net 9.5 3.9 ( 18.9) 32.6 -------- --------(3.4) (12.4) -------- -------- Income before income taxes 88.1 31.2 199.9 178.557.5 48.9 Provision for income taxes 29.1 10.3 66.0 59.0 -------- -------- -------- -------- Income before extraordinary item 59.0 20.9 133.9 119.5 Extraordinary item ( 17.2) -------- --------19.0 16.2 -------- -------- Net income $ 59.038.5 $ 20.9 $ 133.9 $ 102.3 ======== ========32.7 ======== ======== Earnings per share Basic Before extraordinary item $ .18.12 $ .07 $ .41 $ .37 Extraordinary item (.05) -------- -------- -------- -------- Total $ .18 $ .07 $ .41 $ .32 ======== ========.10 ======== ======== Diluted Before extraordinary item $ .18.12 $ .07 $ .41 $ .37 Extraordinary item (.05) -------- -------- -------- -------- Total $ .18 $ .07 $ .41 $ .32 ======== ========.10 ======== ========
See notes to consolidated financial statements. 4 UNISYS CORPORATION CONSOLIDATED STATEMENTSTATEMENTS OF CASH FLOWS (UNAUDITED)(Unaudited) (Millions)
NineThree Months Ended September 30March 31 ------------------ 2003 2002 2001 -------- -------- Cash flows from operating activities Income before extraordinary itemNet income $ 133.938.5 $ 119.5 Add (deduct)32.7 Add(deduct) items to reconcile net income before extraordinary item to net cash (used for) provided by (used for) operating activities: Extraordinary item ( 17.2) Depreciation 111.7 100.6and amortization of properties 42.2 36.0 Amortization: Marketable software 90.1 88.329.7 29.7 Deferred outsourcing contract costs 14.1 9.5 Goodwill 12.5cost 7.8 3.9 (Increase) in deferred income taxes, net ( 2.5)1.0) ( 3.5)1.5) Decrease in receivables, net 208.0 161.091.9 147.6 Decrease in inventories 88.2 27.02.6 32.2 (Decrease) in accounts payable and other accrued liabilities ( 375.8) ( 522.5)(267.8) (199.1) Increase (decrease) in income taxes payable 7.06.1 ( 21.0)5.8) Increase(decrease) in other liabilities 4.5 ( 33.3) 202.719.4) (Increase) in other assets ( 178.8)20.3) ( 225.8)77.0) Other 7.4 4.2 --------.9 30.3 ------- ------ Net cash (used for) provided by (used for) operating activities 70.0 ( 64.7) --------64.9) 9.6 ------- ------ Cash flows from investing activities Proceeds from investments 2,360.1 1,976.61,279.1 701.7 Purchases of investments (2,384.0) (1,967.5)(1,292.7) (699.1) Investment in marketable software ( 105.0)40.0) ( 100.0)36.3) Capital additions of properties ( 151.8)49.4) ( 134.8)39.4) Purchases of businesses ( 4.8) ( 2.2) --------.8) - ------- ------ Net cash used for investing activities ( 285.5)103.8) ( 227.9) --------73.1) ------- ------ Cash flows from financing activities Net proceeds from short-term borrowings 33.8 68.9 Proceeds from employee stock plans 21.9 26.2 Payments of long-term debt ( 1.6) ( 354.3) Proceeds from issuance of long-term debt 389.9 --------293.3 - Net proceeds from short-term borrowings 1.3 15.9 Proceeds from employee stock plans 6.3 7.4 Payments of long-term debt ( 2.4) ( .5) ------- ------ Net cash provided by financing activities 54.1 130.7 --------298.5 22.8 ------- ------ Effect of exchange rate changes on cash and cash equivalents 1.7 3.6 --------1.5 ( 1.9) ------- Decrease------ Increase (decrease) in cash and cash equivalents 131.3 ( 159.7) ( 158.3)42.6) Cash and cash equivalents, beginning of period 301.8 325.9 378.0 -------- --------------- ------- Cash and cash equivalents, end of period $ 166.2433.1 $ 219.7 ======== ========283.3 ======= =======
See notes to consolidated financial statements. 5 UNISYS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) In the opinion of management, the financial information furnished herein reflects all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods specified. These adjustments consist only of normal recurring accruals. Because of seasonal and other factors, results for interim periods are not necessarily indicative of the results to be expected for the full year. a. The following table shows how earnings per share were computed for the three and nine months ended September 30,March 31, 2003 and 2002 and 2001 (dollars in millions, shares in thousands): Three Months Ended Nine Months Ended September 30 September 30 ------------------ ------------------March 31, ---------------------------- 2003 2002 2001 2002 2001 ------- ------- ------- ------------------ ---------- Basic Earnings Per Share Income before extraordinary item $ 59.0 $ 20.9 $ 133.9 $ 119.5 Extraordinary item ( 17.2) ------- ------- ------- ------- Net income $ 59.038.5 $ 20.9 $ 133.9 $ 102.3 ======= ======= ======= =======32.7 ========= ========= Weighted average shares 324,075 318,761 322,792 317,576 ======= ======= ======= =======327,208 321,469 ========= ========= Basic earnings per share Before extraordinary item $ .18.12 $ .07 $ .41 $ .37 Extraordinary item (.05) ------- ------- ------- ------- Total $ .18 $ .07 $ .41 $ .32 ======= ======= ======= =======.10 ========= ========= Diluted Earnings Per Share Income before extraordinary item $ 59.0 $ 20.9 $ 133.9 $ 119.5 Extraordinary item ( 17.2) ------- ------- ------- ------- Net income $ 59.038.5 $ 20.9 $ 133.9 $ 102.3 ======= ======= ======= =======32.7 ========= ========= Weighted average shares 324,075 318,761 322,792 317,576327,208 321,469 Plus incremental shares from assumed exerciseconversions of employee stock plans 594 1,394 1,287 1,951 ------- ------- ------- -------1,616 1,838 --------- --------- Adjusted weighted average shares 324,669 320,155 324,079 319,527 ======= ======= ======= =======328,824 323,307 ========= ========= Diluted earnings per share Before extraordinary item $ .18.12 $ .07 $ .41 $ .37 Extraordinary item (.05) ------- ------- ------- ------- Total $ .18 $ .07 $ .41 $ .32 ======= ======= ======= ======= At September 30, 2002, 36.6.10 ========= ========= During the three months ended March 31, 2003, 35.2 million shares related to employee stock plans were not included in the computation of diluted earnings per share because the option prices are above the average market price of the company's common stock.to do so would have been antidilutive. b. Effective January 1, 2002, the company adopted Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets." SFAS No. 142 no longer permits the amortization of goodwill and indefinite- 6 lived intangible assets. Instead, these assets must be reviewed annually for impairment in accordance with this statement. SFAS 142 requires the company to perform a transitional impairment test of its goodwill as of January 1, 2002, as well as perform impairment tests on an annual basis and whenever events or circumstances occur indicating that the goodwill may be impaired. The company performed the transitional impairment test of goodwill as of January 1, 2002, which indicated that the company's goodwill was not impaired. During the nine months ended September 30, 2002, there was an increase in goodwill of $3.0 million related to an immaterial acquisition. All other changes were attributable to foreign currency translation adjustments. Goodwill as of September 30, 2002 was allocated by segment as follows: Technology - $117.2 million; Services - $41.3 million. The company's net income and earnings per share for the three and nine months ended September 30, 2002 and 2001, adjusted to exclude goodwill amortization, was as follows (in millions of dollars, except per share amounts): Three Months Ended Nine Months Ended September 30 September 30 ------------------ ------------------ 2002 2001 2002 2001 ------ ------ ------ ------ Reported income before extraordinary item $ 59.0 $ 20.9 $133.9 $119.5 Add back goodwill amortization, net of tax 3.3 10.6 ------ ------ ------ ------ Adjusted income before extraordinary item $ 59.0 $ 24.2 $133.9 $130.1 ====== ====== ====== ====== Reported net income $ 59.0 $ 20.9 $133.9 $102.3 Add back goodwill amortization, net of tax 3.3 10.6 ------ ------ ------ ------ Adjusted net income $ 59.0 $ 24.2 $133.9 $112.9 ====== ====== ====== ====== Earnings per share before extraordinary item Basic and diluted earnings per share as reported $ .18 $ .07 $ .41 $ .37 Goodwill amortization .01 .03 ------ ------ ------ ------ Basic and diluted earnings per share as adjusted $ .18 $ .08 $ .41 $ .40 ====== ====== ====== ====== Earnings per share Basic and diluted earnings per share as reported $ .18 $ .07 $ .41 $ .32 Goodwill amortization .01 .03 ------ ------ ------ ------ Basic and diluted earnings per share as adjusted $ .18 $ .08 $ .41 $ .35 ====== ====== ====== ====== 7 The company's net income and earnings per share for the three years ended December 31, 2001 adjusted to exclude goodwill amortization was as follows (in millions of dollars, except per share amounts): Years Ended December 31, ---------------------------- 2001 2000 1999 ---- ---- ---- Reported income (loss) available to common stockholders before extraordinary items $(49.9) $244.8 $486.1 Add back goodwill amortization, net of tax 14.1 20.1 20.9 ------ ------ ------ Adjusted income (loss) available to common stockholders before extraordinary items $(35.8) $264.9 $507.0 ====== ====== ====== Reported income (loss) on common shares $(67.1) $225.0 $474.0 Add back goodwill amortization, net of tax 14.1 20.1 20.9 ------ ------ ------ Adjusted income (loss) on common shares $(53.0) $245.1 $494.9 ====== ====== ====== Earnings (loss) per share before extraordinary items Basic As reported $ (.16) $ .78 $ 1.69 Goodwill amortization .04 .06 .07 ------ ------ ------ As adjusted $ (.12) $ .84 $ 1.76 ====== ====== ====== Diluted As reported $ (.16) $ .77 $ 1.63 Goodwill amortization .04 .06 .07 ------ ------ ------ As adjusted $ (.12) $ .83 $ 1.70 ====== ====== ====== Earnings (loss) per share Basic As reported $ (.21) $ .72 $ 1.65 Goodwill amortization .04 .06 .07 ------ ------ ------ As adjusted $ (.17) $ .78 $ 1.72 ====== ====== ====== Diluted As reported $ (.21) $ .71 $ 1.59 Goodwill amortization .04 .06 .07 ------ ------ ------ As adjusted $ (.17) $ .77 $ 1.66 ====== ====== ====== c. The company has two business segments: Services and Technology. Revenue classifications by segment are as follows: Services - systems integration, and consulting, outsourcing, networkinfrastructure services, and core maintenance; Technology - enterprise-class servers and specialized technologies. The accounting policies of each business segment are the same as those followed by the company as a whole. Intersegment sales and transfers are priced as if the sales or transfers were to third parties. Accordingly, the Technology segment recognizes intersegment revenue and manufacturing profit on hardware and software shipments to customers under Services contracts. The Services segment, in turn, recognizes customer revenue and marketing profits on such shipments of company hardware and software to customers. The Services segment also includes the sale of hardware and software products sourced from third parties that are sold to customers through the company's Services channels. In the company's consolidated statements of income, the manufacturing costs of products sourced from the Technology segment and sold to Services customers are reported in cost of revenue for Services. Also included in the Technology segment's sales and operating profit are sales of hardware and software sold to the Services segment for internal use in Services engagements. The amount of such profit included in operating income of the Technology segment for the three months ended March 31, 2003 and 2002 was $3.1 million and $5.6 million, respectively. The profit on these transactions is eliminated in Corporate. The company evaluates business segment performance on operating income exclusive of restructuring charges and unusual and nonrecurring items, which are included in Corporate. All other corporate and centrally incurred costs are allocated to the business segments based principally on assets, revenue, employees, square footage or usage. 86 A summary of the company's operations by business segment for the three and nine monththree-month periods ended September 30,March 31, 2003 and 2002 and 2001 is presented below (in millions of dollars): Total Corporate Services Technology Three Months Ended March 31, 2003 ------------------ Customer revenue $1,398.9 $1,107.0 $291.9 Intersegment $( 70.0) 5.6 64.4 -------- --------- -------- ---------- September 30,-------- ------ Total revenue $1,398.9 $( 70.0) $1,112.6 $356.3 ======== ======== ======== ====== Operating income $ 76.6 $ 2.6 $ 34.4 $ 39.6 ======== ======= ======== ====== Three Months Ended March 31, 2002 ------------------ Customer revenue $1,332.3 $1,016.3 $ 316.0$1,362.5 $1,049.2 $313.3 Intersegment $( 69.4) 6.5 62.980.7) 11.5 69.2 -------- ------- -------- -------------- Total revenue $1,332.3$1,362.5 $( 69.4) $1,022.8 $ 378.980.7) $1,060.7 $382.5 ======== ======= ======== ============== Operating income (loss)income(loss) $ 96.278.8 $( 3.1) $ -52.4 $ 57.9 $ 38.329.5 ======== ======= ======== ======== Three Months Ended September 30, 2001 ------------------ Customer revenue $1,376.0 $1,051.3 $ 324.7 Intersegment $(102.0) 20.3 81.7 -------- ------- -------- -------- Total revenue $1,376.0 $(102.0) $1,071.6 $ 406.4 ======== ======= ======== ======== Operating income(loss) $ 43.8 $( 10.0) $ 23.5 $ 30.3 ======== ======= ======== ======== Nine Months Ended September 30, 2002 ---------------- Customer revenue $4,054.6 $3,104.8 $ 949.8 Intersegment $(233.0) 32.2 200.8 -------- ------- -------- -------- Total revenue $4,054.6 $(233.0) $3,137.0 $1,150.6 ======== ======= ======== ======== Operating income (loss) $ 272.0 $( 15.0) $ 171.5 $ 115.5 ======== ======= ======== ======== Nine Months Ended September 30, 2001 ------------------ Customer revenue $4,461.2 $3,311.7 $1,149.5 Intersegment $(267.0) 51.8 215.2 -------- ------- -------- -------- Total revenue $4,461.2 $(267.0) $3,363.5 $1,364.7 ======== ======= ======== ======== Operating income (loss) $ 195.9 $( 29.6) $ 60.4 $ 165.1 ======== ======= ======== ============== Presented below is a reconciliation of total business segment operating income to consolidated income before taxes (in millions of dollars): Three Months Ended Nine Months Ended September 30, September 30, ------------------ -----------------March 31 --------------------------- 2003 2002 2001 2002 2001 ---- ---- ---- ---- Total segment operating income $ 96.274.0 $ 53.8 $287.0 $225.581.9 Interest expense (17.6) (16.5) (53.2) (50.0)(15.7) (17.5) Other income (expense), net 9.5 3.9 (18.9) 32.6( 3.4) (12.4) Corporate and eliminations (10.0) (15.0) (29.6) ------ ------2.6 ( 3.1) ------ ------ Total income before income taxes $ 88.157.5 $ 31.2 $199.9 $178.548.9 ====== ====== ====== ======Customer revenue by classes of similar products or services, by segment, is presented below (in millions of dollars): Three Months Ended March 31 --------------------------- 2003 2002 ---- ---- Services Systems integration $ 356.4 $ 363.9 Outsourcing 409.3 342.3 Infrastructure services 200.8 204.5 Core maintenance 140.5 138.5 -------- -------- 1,107.0 1,049.2 Technology Enterprise-class servers 217.8 228.7 Specialized technologies 74.1 84.6 -------- -------- 291.9 313.3 -------- -------- Total $1,398.9 $1,362.5 ======== ======== 9 d.7 c. Comprehensive income for the three and nine months ended September 30,March 31, 2003 and 2002 and 2001 includes the following components (in millions of dollars): Three Months Ended Nine Months Ended September 30, September 30, ------------------ -----------------2003 2002 2001 2002 2001 ---- ---- ---- ---- Net income $ 59.038.5 $ 20.9 $133.9 $102.332.7 Other comprehensive income (loss) Cumulative effect of change in accounting principle (SFAS No. 133), net of tax of $1.8 3.3 Cash flow hedges Income (loss), net of tax of $.5, $(2.3), $(1.9)$- and $2.1 .8$1.1 ( 4.2) ( 3.6) 3.9.1) 2.0 Reclassification adjustments, net of tax of $.2, $(.9), $(.4)$1.0 and $(3.5) .4 ( 1.6) ( .9) ( 6.5)$(1.8) 2.1 (3.5) Foreign currency translation adjustments, net of tax of $0 (50.2) ( 6.2) (68.5) (67.0) ------ ------$- and $- (7.7) 8.1 ------ ------ Total other comprehensive income (loss) (49.0) (12.0) (73.0) ( 66.3) ------ ------(5.7) 6.6 ------ ------ Comprehensive income $ 10.032.8 $ 8.9 $ 60.9 $ 36.0 ====== ======39.3 ====== ====== Accumulated other comprehensive income (loss) as of December 31, 20012002 and September 30, 2002March 31, 2003 is as follows (in millions of dollars): Cash Minimum Translation Flow Pension Total Adjustments Hedges Liability ----- ----------- ------ Balance at December 31, 2000 $(643.7) $(643.7) Change during period ( 63.1) ( 67.5) $ 4.4 ------- ------- --------------- Balance at December 31, 2001 $ (706.8) (711.2)$(711.2) $ 4.4 $ - Change during period (1,530.1) ( 33.8) ( 5.9) (1,490.4) -------- ------- ------ --------- Balance at December 31, 2002 (2,236.9) (745.0) ( 1.5) (1,490.4) Change during period ( 73.0)5.7) ( 68.5) ( 4.5) -------7.7) 2.0 - -------- ------- ------ --------- Balance at September 30, 2002 $(779.8) $(779.7) $( .1) =======March 31, 2003 $(2,242.6) $(752.7) $ .5 $(1,490.4) ======== ======= ====== e. In response========= d. The amount credited to stockholders' equity for the weak economic environment in 2001, the company took actions to reduce its cost structure. In the fourth quarter of 2001, the company recorded a pretax charge of $276.3 million, or $.64 per share, primarily for a work-force reduction of approximately 3,750 people (1,700 in the United States and 2,050 outside the United States). Of the total, 1,910 people left the company in 2001, which included 764 people who accepted an early retirement program in the United States. For those employees who accepted the early retirement program, cash requirements were provided through the company's pension plan. Cash expenditures in 2001income tax benefit related to the involuntary reductions were $23.3 million. These activities didcompany's stock plans for the three months ended March 31, 2003 and 2002 was $1.3 million and $2.0 million, respectively. The company expects to realize these tax benefits on future Federal income tax returns. e. For equipment manufactured by the company, the company warrants that it will substantially conform to relevant published specifications for twelve months after shipment to the customer. The company will repair or replace, at its option and expense, items of equipment that do not significantlymeet this warranty. For company software, the company warrants that it will conform substantially to then-current published functional specifications for ninety days from customer's receipt. The company will provide a workaround or correction for material errors in its software that prevents its use in a production environment. The company estimates the costs that may be incurred under its warranties and records a liability in the amount of such costs at the time revenue is recognized. Factors that affect the company's operations while they were ongoing. A furtherwarranty liability include the number of units sold, historical and anticipated rates of warranty claims and cost per claim. The company quarterly assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. Presented below is a reconciliation of the aggregate product warranty liability (in millions of dollars): Three Months Ended March 31, ---------------------------- 2003 2002 ---- ---- Balance at December 31 $19.2 $16.1 Accruals for warranties issued during the period 4.9 2.9 Settlements made during the period (4.7) (3.5) Changes in liability for pre-existing warranties during the period, including expirations ( .1) .8 ----- ----- Balance at March 31 $19.3 $16.3 ===== ===== 8 f. The company applies the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock-based employee compensation plans. For stock options, no compensation expense is reflected in net income as all stock options granted had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant. In addition, no compensation expense is recognized for common stock purchases under the Employees Stock Purchase Plan. Pro forma information regarding net income and earnings per share is required by Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," and has been determined as if the company had accounted for its stock plans under the fair value method of SFAS No. 123. For purposes of the pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The following table illustrates the effect on net income and earnings per share if the company had applied the fair value recognition provisions of SFAS No. 123 (in millions of dollars): Three Months Ended March 31, ---------------------------- 2003 2002 ------ ------ Net income as reported $ 38.5 $ 32.7 Deduct total stock-based employee compensation expense determined under fair value method for all awards, net of tax (14.5) (12.7) ------ ------ Pro forma net income $ 24.0 $ 20.0 ====== ====== Earnings per share Basic - as reported $ .12 $ .10 Basic - pro forma $ .07 $ .06 Diluted - as reported $ .12 $ .10 Diluted - pro forma $ .07 $ .06 g. Following is a breakdown of the individual components of these costs follows: 10the 2001 fourth- quarter charge (in millions of dollars): Work-Force Reductions(1) ---------- Idle Lease ($ in Millions) Headcount Total U.S. Int'l Costs --------------------------------------------------------------- Balance at Dec. 31, 2002 631 $ 67.6 $ 7.4 $ 43.7 $ 16.5 Additional Provisions 4 2.1 - .8 1.3 Utilized (435) (28.4) ( 3.6) (22.4) ( 2.4) Reversal of excess reserves ( 82) ( 2.4) ( 1.7) ( .7) - Other(2) ------------------------------------------------------------------------ Work-force reductions(1) Early retirement 764 $ 58.8 $ 58.8 Involuntary reductions 3,001 145.9 18.8 $127.1 ----- ------ ------ ------ Subtotal 3,765 204.7 77.6 127.1 Other 71.6 $ 29.5 $ 42.1 ------ ------ ------ ------ ------ ------ Total charge 3,765 276.3 77.6 127.1 29.5 42.1 Utilized (1,910) (127.2)1.3 .1 2.6 ( 62.5) ( 22.6) ( 42.1) ------1.4) ------ ------ ------ ------ ------ Balance at Dec.March 31, 2001 1,855 149.1 15.1 104.5 29.5 - Utilized (1,698) ( 79.9) (12.6) (62.7) ( 4.6) Additional provisions 568 20.2 1.7 17.1 1.4 Reversal of excess reserves ( 306) ( 15.9) ( 4.3) ( 8.4) ( 3.2) Other(3) 14.4 2.3 14.2 ( 2.1) ------ ------ ------ ------ ------ ------ Balance at Sept. 30, 2002 4192003 118 $ 87.940.2 $ 2.2 $ 64.724.0 $ 21.0 $ - ======14.0 ====== ====== ====== ====== ====== Expected future cash utilization: 2002 fourth quarter2003 remaining nine months 118 $ 28.731.1 $ 2.02.2 $ 23.122.3 $ 3.6 20036.6 2004 and thereafter 59.2 .2 41.6 17.4 ------ ------ ------ ------9.1 - 1.7 7.4 (1)Includes severance, notice pay, medical and other benefits. (2)Includes product and program discontinuances, principally representing a provision for asset write-offs. (3)Changes in estimates and translation adjustments. Most of the 2001 fourth-quarter charges were related to work-force reductions ($204.7 million), principally severance costs. Other employee- related costs are not significant. Approximately $58.8 million of this total was funded from the company's U.S. pension plan. The remainder of the cost related to work-force reductions as well as idle lease costs, discussed below, is being funded from the company's operating cash flow. The charge related to idle lease costs was $29.5 million and relates to contractual obligations (reduced by estimated sublease income) existing under long-term leases of vacated facilities. Estimates of the amounts and timing of sublease income were based on discussions with real estate brokers that considered the marketability of the individual property involved. The charge for product and program discontinuances was $42.1 million and principally represented capitalized marketable software and inventory related to products or programs that were discontinued at December 31, 2001. These actions have lowered the company's cost base (principally employee-related costs), thereby making the company better able to compete in the marketplace. Cash expenditures related to the 2001 and prior-year restructuring charges were approximately $87$31 million in the ninethree months ended September 30, 2002March 31, 2003 compared to $41$35 million for the prior-year period, and are expected to be approximately $31$35 million (which includes approximately $2$4 million related to restructuring charges taken prior to 2001) for the remainder of 20022003 and $69$14 million (which includes approximately $10$5 million related to restructuring charges taken prior to 2001) in total for all subsequent years, principally for work-force reductions and idle lease costs. Personnel reductions in the first nine months of 2002 related to these restructuring actions were 1,698 and are expected to be 323 for the remainder of the year. 11 During the nine months ended September 30, 2002,9 h. Effective January 1, 2003, the company reduced its accrued workforce reserve by $12.7 million. This reduction related to 306 employees who were designated for involuntary termination but were retained as a result of job positions that became available due to voluntary terminations or acceptance of alternative positions within the company. In addition, given the continuing weak economic environment, the company identified new restructuring activities and recorded, in the second quarter of 2002, an additional provision of $20.2 million, principally for a workforce reduction of 568 people. f. The amount credited to stockholders' equity for the income tax benefit related to the company's stock plans for the nine months ended September 30, 2002 and 2001 was $3.1 million and $4.1 million, respectively. The company expects to realize these tax benefits on future Federal income tax returns. g. In April 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS")adopted SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds SFAS No. 4, which required that all gains and losses from extinguishment of debt be reported as an extraordinary item. SFAS No. 145 also amends SFAS No. 13, Accounting for Leases," in respect to sale-leaseback transactions. The provisions of SFAS No. 145 related toPreviously recorded losses on the rescission of SFAS No. 4 must be applied in fiscal years beginning after May 15, 2002. The company will adopt this statement effective January 1, 2003. Any gain or loss onearly extinguishment of debt that waswere classified as an extraordinary item in prior periods that does not meet the criteria of Opinion 30 for classification as an extraordinary item will behave been reclassified from extraordinary item to other income (expense), net. AdoptionThe adoption of SFAS No. 145 will havehad no effect on the company's consolidated financial position, consolidated net incomeresults of operations, or liquidity. In June 2002,Effective January 1, 2003, the FASB issuedcompany adopted SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 replaces previous accounting guidance provided by EITFEmerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)" and will beis effective for the company for exit or disposal activities initiated after December 31, 2002. Adoption of this statement had no impact on the company's consolidated financial position, consolidated results of operations, or liquidity. Effective January 1, 2003, the company adopted FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34" ("FIN No. 45"). The interpretation requires that upon issuance of a guarantee, the entity must recognize a liability for the fair value of the obligation it assumes under that guarantee. In addition, FIN No. 45 requires disclosures about the guarantees that an entity has issued, including a roll forward of the entity's product warranty liabilities. This interpretation is intended to improve the comparability of financial reporting by requiring identical accounting for guarantees issued with separately identified consideration and guarantees issued without separately identified consideration. Adoption of this Interpretation had no impact on the company's consolidated financial position, consolidated results of operations, or liquidity. In November 2002, the Financial Accounting Standards Board("FASB") issued EITF Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." This issue addresses how to account for arrangements that may involve the delivery or performance of multiple products, services, and/or rights to use assets. The final consensus of this issue is applicable to agreements entered into in fiscal periods beginning after June 15, 2003. Additionally, companies will be permitted to apply the consensus guidance in this issue to all existing arrangements as the cumulative effect of a change in accounting principle in accordance with APB Opinion No. 20, "Accounting Changes." The company does not believe that adoption of this statementissue will have a material impact on its consolidated financial position, consolidated results of operations, or liquidity. h. Certain prior-year amountsIn January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN No. 46"). This interpretation clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have been reclassifiedthe characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to conformfinance its activities without additional subordinated financial support from other parties. FIN No. 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. The company has one such variable interest entity under a facility lease that expires in March 2005. The owner of the property is a special-purpose entity in which unrelated third parties made and have maintained an equity capital investment. The company has no debt or equity interest in this entity. At March 31, 2003, the company did not consolidate this entity. Effective July 1, 2003, in accordance with FIN No. 46, the 2002 presentation.company will be required to consolidate this entity. Assets and debt are expected to increase by approximately $30 million; however, the change in the company's results of operations is expected to be immaterial. 1210 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Results of Operations - --------------------- For the three months ended September 30, 2002,March 31, 2003, the company reported net income of $59.0$38.5 million, or $.18$.12 per share, compared to $20.9$32.7 million, or $.07$.10 per share, for the three months ended September 30, 2001.March 31, 2002. Total revenue for the quarter ended September 30, 2002March 31, 2003 was $1.33$1.40 billion, downup 3% from revenue of $1.38$1.36 billion for the quarter ended September 30, 2001. Both Services revenue of $1.02 billion and Technology revenue of $316 million declined 3% from the prior-year period. U.S. revenue increased 3% in the third quarter to $619 million from $599 million in the year-ago period, while revenue in international markets decreased 8% to $713 million from $777 million in the year-ago period. Currency changesMarch 31, 2002. Foreign currency translations had a negligible4% positive impact on revenue in the quarter when compared to the prior-yearyear-ago period. In the current quarter, with currencyServices revenue increased 6% and Technology revenue declined 7%. U.S. revenue increased 17% in the first quarter compared to the year-ago period driven principally by strength in Europe offsetting currency weaknessthe U.S. Federal government business, and revenue in international markets decreased 7% driven by declines in Latin America.America and Europe. Total gross profit margin was 30.3%27.7% in the thirdfirst quarter of 20022003 compared to 27.6%28.6% in the year-ago period. The increase wasperiod, principally due to the company's focus on higher value-added business opportunities and continued tight cost controls.reflecting a decline in pension income. For the three months ended September 30, 2002,March 31, 2003, selling, general and administrative expenses were $241.3$243.7 million (18.1%(17.4% of revenue) compared to $262.7$245.4 million (19.1%(18.0% of revenue) for the three months ended September 30, 2001. The decline in selling, general and administrative expenses was principally driven by the company's cost reduction actions.March 31, 2002. Research and development ("R&D") expense was $65.5$66.8 million compared to $73.4$65.1 million a year earlier.ago. The lower level of R&D reflects changes that the company has made to improve efficiencies, to consolidate R&D activities in systems integration to improve synergies, and to make use of lower-cost offshore resources for software support. Although the amount of R&D is down, the company continues to invest in high-end CMPCellular MultiProcessing server technology and in key programs within its industry practices. For the thirdfirst quarter of 2002,2003, the company reported an operating income percent of 7.2%5.5% compared to 3.2%5.8% for the thirdfirst quarter of 2002, principally reflecting lower pension income. Pension income for the three months ended March 31, 2003 was approximately $6 million compared to approximately $38 million for the three months ended March 31, 2002. At the beginning of each year, accounting rules require that the company establish an expected long-term rate of return on its pension plan assets. One of the reasons for the decline in pension income was that, effective January 1, 2003, the company reduced its expected long-term rate of return on plan assets for its U.S. pension plan to 8.75% from 9.50%. In addition, the discount rate used for the U.S. pension plan declined to 6.75% at December 31, 2002, from 7.50% at December 31, 2001. The remaining reasons for the decline in pension income were lower expected returns on U.S. plan assets due to asset declines, the company's recent change to a cash balance plan in the U.S., and for international plans, declines in discount rates, lower expected long-term rates of return on plan assets, and currency translation. The company records pension income or expense, as well as other employee-related costs such as FICA and medical insurance costs, in operating income in the following income statement categories: cost of sales; selling, general and administrative expenses; and research and development expenses. The amount allocated to each income statement line is based on where the salaries of the active employees are charged. Interest expense for the three months ended March 31, 2003 was $15.7 million compared to $17.5 million for the three months ended March 31, 2002 principally due to lower average interest rates. Other income (expense), net was an expense of $3.4 million in the current quarter compared to an expense of $12.4 million in the year-ago quarter. The decrease in expense was principally due to foreign exchange losses of $4.4 million in the current quarter compared to losses of $9.7 million in the prior- year period (principally relating to Latin America). Income before income taxes was $57.5 million in the first quarter of 2003 compared to $48.9 million last year. The provision for income taxes was $19.0 million in the current period compared to $16.2 million in the year-ago period. The effective tax rate in both periods was 33%. 11 Segment results - --------------- The company has two business segments: Services and Technology. Revenue classifications by segment are as follows: Services - systems integration, and consulting, outsourcing, networkinfrastructure services, and core maintenance; Technology - enterprise-class servers and specialized technologies. The accounting policies of each business segment are the same as those followed by the company as a whole. Intersegment sales and transfers are priced as if the sales or transfers were to third parties. Accordingly, the Technology segment recognizes intersegment revenue and manufacturing profit on hardware and software shipments to customers under Services contracts. The Services segment, in turn, recognizes customer revenue and marketing profit on such shipments of company hardware and software to customers. The Services segment also includes the sale of hardware and software products sourced from third parties that are sold to customers through the company's Services channels. In the company's consolidated statements of income, the manufacturing costs of products sourced from the Technology segment and sold to Services customers are reported in cost of revenue for Services. Also included in the Technology segment's sales and operating profit are sales of hardware and software sold to the Services segment for internal use in Services engagements. The amount of such profit included in operating income of the Technology segment for the three months ended March 31, 2003 and 2002, was $3.1 million and $5.6 million, respectively. The profit on these transactions is eliminated in Corporate. The company evaluates business segment performance on operating income exclusive of restructuring charges and unusual and nonrecurring items, which are included in Corporate. All other corporate and centrally incurred costs are allocated to the business segments based principally on assets, revenue, employees, square footage or usage. The following grossInformation by business segment is presented below (in millions of dollars): Elimi- Total nations Services Technology ------- ------- -------- ---------- Three Months Ended March 31, 2003 - ------------------ Customer revenue $1,398.9 $1,107.0 $291.9 Intersegment $( 70.0) 5.6 64.4 -------- ------- -------- ------ Total revenue $1,398.9 $( 70.0) $1,112.6 $356.3 ======== ======= ======== ====== Gross profit percent 27.7% 18.7% 50.0% ======== ======== ====== Operating income percent 5.5% 3.1% 11.1% ======== ======== ====== Three Months Ended March 31, 2002 - ------------------ Customer revenue $1,362.5 $1,049.2 $313.3 Intersegment $( 80.7) 11.5 69.2 -------- ------- -------- ------ Total revenue $1,362.5 $( 80.7) $1,060.7 $382.5 ======== ======= ======== ====== Gross profit percent 28.6% 21.7% 42.5% ======== ======== ====== Operating income percent 5.8% 4.9% 7.7% ======== ======== ====== Gross profit percent and operating income percent are as a percent of total revenue. 13 Information by business segment is presented below (in millions): Elimi- Total nations Services Technology ------- ------- -------- ---------- Three Months Ended September 30, 2002 - ------------------ Customer revenue $1,332.3 $1,016.3 $ 316.0 Intersegment $( 69.4) 6.5 62.9 -------- ------- -------- ------ Total revenue $1,332.3 $( 69.4) $1,022.8 $ 378.9 ======== ======= ======== ====== Gross profit percent 30.3% 22.5% 46.4% ======== ======== ====== Operating income percent 7.2% 5.7% 10.1% ======== ======== ====== Three Months Ended September 30, 2001 - ------------------ Customer revenue $1,376.0 $1,051.3 $324.7 Intersegment $(102.0) 20.3 81.7 -------- ------- -------- ------ Total revenue $1,376.0 $(102.0) $1,071.6 $406.4 ======== ======= ======== ====== Gross profit percent 27.6% 20.8% 42.1% ======== ======== ====== Operating income percent 3.2% 2.2% 7.5% ======== ======== ======12 In the Services segment, customer revenue was $1.02$1.1 billion down 3% from $1.05for the three months ended March 31, 2003, up 6% compared to $1.0 billion for the three months ended March 31, 2002. The increase in the year-ago period, asServices revenue was due to a 12%20% increase in outsourcing ($371409 million in the third quarter of 20022003 compared to $332$342 million in the prior period) was more than offset by a 12% decline in network services ($199 million in the current period compared to $227 million in the prior-year period), a 12% decline in systems integration ($308 million in the current period compared to $348 million in the prior period),2002) and a 4% decline1% increase in core maintenance revenue ($139141 million in the current period2003 compared to $145$139 million in the prior period)2002), offset in part by a 2% decrease in systems integration ($356 million in 2003 compared to $364 million in 2002) and a 2% decrease in infrastructure services ($201 million in 2003 compared to $205 million in 2002). Within the Services segment, the year-over- year change in revenue in the first quarter of 2003 compared to the first quarter of 2002 reflects current market conditions. Market demand in the Services segment currently varies by revenue classification. Demand for services that drive short-term cost and process efficiencies (outsourcing) remains strong, while market demand for project-based work (systems integration and networkinfrastructure services) remains weak. The growth in outsourcing revenue, which was particularly driven by growth in business process outsourcing, as well asand the decline in both systems integration and networkinfrastructure services in the quarter were reflective of these market conditions. Additionally,Services gross profit was 18.7% for the core maintenance declinethree months ended March 31, 2003 compared to 21.7% in the quarter is reflective ofyear-ago period, and Services operating income percent was 3.1% for the long-term industry trendthree months ended March 31, 2003 compared to 4.9% last year. The reason for reduction in maintenance, as the underlying equipment reliability has improved over time. The Services segment gross profit percent increased to 22.5% in the current quarter from 20.8% in the prior period. The Services segment's operating profit percent increased to 5.7%these declines was principally lower pension income in the current quarter compared to 2.2% in the year-ago period. The company achieved theseperiod as well as a lower content of higher- margin improvements by executing its strategy of selective pursuit of higher value-added business opportunities, growing its annuity-based outsourcing business and resizing its workforce to meet the market demand.systems integration revenue. In the Technology segment, customer revenue declined 3%was $292 million for the three months ended March 31, 2003 compared to $316$313 million infor the third quarter of 2002 from $325 million in the prior-year period.three months ended March 31, 2002. Demand in the Technology segment remained weak industry-wide as customers deferredcontinue to defer spending on new computer hardware and software. Sales of enterprise-class servers declinedThe 7% decline in revenue was due to $206 million from $222 milliona 12% decrease in the year-ago quarter, primarily reflecting lower ClearPath server sales. Salessales of specialized technology products increased 8% to $110($74 million in the third quarter of 2002 from $1032003 compared to $85 million in the third quarter2002) and a 5% decline in sales of 2001, principally driven by the payment systems business. 14 Theenterprise-class servers ($218 million in 2003 compared to $228 million in 2002). Technology gross profit percent was 50.0% for the three months ended March 31, 2003 compared to 42.5% in the year-ago period, and Technology segmentoperating income percent was 46.4% in11.1% for the current quarterthree months ended March 31, 2003 compared to 42.1% in the prior period, and operating profit in this segment increased to 10.1% in the current quarter from 7.5% in 2001,7.7% last year. The margin improvements primarily reflecting, within ClearPath revenue,reflected a higher proportion of high-end, higher marginhigher-margin products as well as increased demand for high-end payment systems products. Interest expense forwithin the three months ended September 30, 2002 was $17.6 million compared to $16.5 million for the three months ended September 30, 2001. Other income (expense), net was income of $9.5 millionClearPath product line and continued tight cost controls, offset in the current quarter compared to income of $3.9 million in the year-ago quarter. The principal reason for the increase was foreign exchange gains, principally in Latin America, of $9.6 million in the current period compared to $3.1 million of foreign exchange gains in the year-ago period. Income before income taxes was $88.1 million in the third quarter of 2002 compared to $31.2 million last year. The provision for income taxes was $29.1 million in the current period compared to $10.3 million in the year-ago period. The effective tax rate in both periods was 33%. Pension income for the three months ended September 30, 2002 was approximately $37 million compared to approximately $42 million for the three months ended September 30, 2001. At the beginning of each year, accounting rules require thatpart by lower pension income. New Accounting Pronouncements - ----------------------------- Effective January 1, 2003, the company establish an expected long-term rateadopted SFAS No. 145, "Rescission of return on its pension plan assets. The principal reason for the decline in pension income wasFASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds SFAS No. 4, which required that effective January 1, 2002, the company reduced its expected long-term rateall gains and losses from extinguishment of return on plan assets for its U.S. pension plan to 9.5% from 10.0%. This change will cause 2002 pension income in the U.S. to decline by approximately $24 million from the 2001 amount. The company records pension income or expense,debt be reported as well as other employee-related costs such as FICA and medical insurance costs, in operating income in the following income statement categories: cost of sales, selling, general and administrative expenses, and research and development expenses. The amount allocated to each line is based on where the salaries of the active employees are charged. For the nine months ended September 30, 2002, net income was $133.9 million, or $.41 per share, compared to net income of $102.3 million, or $.32 per share, last year. The prior-year period included an extraordinary item foritem. Previously recorded losses on the early extinguishment of debt that were classified as an extraordinary item in prior periods have been reclassified to other income (expense), net. The adoption of $17.2 million,SFAS No. 145 had no effect on the company's consolidated financial position, consolidated results of operations, or $.05 per share. Excludingliquidity. Effective January 1, 2003, the company adopted SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of commitment to an exit or disposal plan. SFAS No. 146 replaces previous accounting guidance provided by Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)" and is effective for the company for exit or disposal activities initiated after December 31, 2002. Adoption of this item, incomestatement had no impact on the company's consolidated financial position, consolidated results of operations, or liquidity. Effective January 1, 2003, the company adopted FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, and Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34" ("FIN No. 45"). The interpretation requires that upon issuance of a guarantee, the entity must recognize a liability for the fair value of the obligation it assumes under that guarantee. In addition, FIN No. 45 requires disclosures about the guarantees that an entity has issued, including a roll forward of the entity's product warranty liabilities. This interpretation is intended to 13 improve the comparability of financial reporting by requiring identical accounting for guarantees issued with separately identified consideration and guarantees issued without separately identified consideration. Adoption of this Interpretation had no impact on the company's consolidated financial position, consolidated results of operations, or liquidity. In November 2002, the FASB issued EITF Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." This issue addresses how to account for arrangements that may involve the delivery or performance of multiple products, services, and/or rights to use assets. The final consensus of this issue is applicable to agreements entered into in fiscal periods beginning after June 15, 2003. Additionally, companies will be permitted to apply the consensus guidance in this issue to all existing arrangements as the cumulative effect of a change in accounting principle in accordance with APB Opinion No. 20, "Accounting Changes." The company does not believe that adoption of this issue will have a material impact on its consolidated financial position, consolidated results of operations, or liquidity. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN No. 46"). This interpretation clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN No. 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. The company has one such variable interest entity under a facility lease that expires in March 2005. The owner of the property is a special- purpose entity in which unrelated third parties made and have maintained an equity capital investment. The company has no debt or equity interest in this entity. At March 31, 2003, the company did not consolidate this entity. Effective July 1, 2003, in accordance with FIN No. 46, the company will be required to consolidate this entity. Assets and debt are expected to increase by approximately $33 million; however, the change in the prior-year period was $119.5 million, or $.37 per share. Revenue for the nine months ended September 30, 2002 was $4.05 billion, down 9% from $4.46 billion for the nine months ended September 30, 2001. Other income (expense), net for the nine months ended September 30, 2002 was an expensecompany's results of $18.9 million comparedoperations is expected to income of $32.6 million for the nine months ended September 30, 2001. The decline was principally due to foreign exchange losses in the current period of $1.5 million compared to foreign exchange gains of $25.2 million in the prior year and equity losses of $12.8 million in the current period compared to equity gains of $13.0 million last year.be immaterial. Financial Condition - ------------------- Cash and cash equivalents at September 30, 2002March 31, 2003 were $166.2$433.1 million compared to $325.9$301.8 million at December 31, 2001. For2002. During the ninethree months ended September 30, 2002,March 31, 2003, cash used for operations was $64.9 million compared to cash provided by operations was $70.0 million compared to cash used of $64.7$9.6 million for the ninethree months ended September 30, 2001.March 31, 2002. The change in operating cash flow principally reflected lower levels of customer prepayments in the current period compared to the prior-year period and the payment in the first quarter of 2003 of 2002 incentive compensation compared to no payments of incentive compensation in the prior-year period. Cash expenditures in the nine months ended September 30, 2002current quarter related to prior-yearprior- year restructuring charges (which are included in operating activities) were approximately $87$31 million compared to $41$35 million infor the prior-year period. These expendituresquarter, and are expected to be approximately $31$35 million for the remainder of 20022003 and $69$14 million in total for all subsequent years, principally for work-force reductions and idle lease costs. Personnel reductions in the first nine months of 2002 relatingcurrent quarter related to these restructuring actions were 1,698approximately 400 and are expected to be 323approximately 100 for the remainder of the year. See Note e of the Notes to Consolidated Financial Statements. Cash used for investing activities for the ninethree months ended September 30, 2002March 31, 2003 was $285.5$103.8 million compared to $227.9$73.1 million during the ninethree months ended September 30, 2001. The increase was principally due to netMarch 31, 2002. During 2003, both proceeds from investments and purchases of investments, (derivativewhich represent derivative financial instruments used to manage the company's 15 exposure to market risks from changes in foreign currency exchange rates)rates, increased from the prior year as a result of $23.9an increase in the company's exposures, principally related to intercompany accounts. The increase in cash used was principally due to net purchases of investments of $13.6 million forin the nine months ended September 30, 2002current quarter compared to net proceeds from investments of $9.1$2.6 million in the prior-year period, as well as higherperiod. 14 In addition, the current period investment in marketable software was $40.0 million compared to $36.3 million in the prior-year, and capital additions to properties principally relatedwas $49.4 million for the three months ended March 31, 2003 compared to $39.4 million in the outsourcing business.prior-year period. Cash provided by financing activities during the nine months ended September 30, 2002current quarter was $54.1$298.5 million compared to cash provided of $130.7$22.8 million in the prior year. The decrease was due to lower net proceeds from short-term borrowings for the nine months ended September 30, 2002 of $33.8 million, compared to net proceeds from short-term borrowings of $68.9 million in the prior-year period. In addition, during the nine months ended September 30, 2001, the company hadcurrent period includes net proceeds from issuance of long-term debt of $35.6$293.3 million, compared to a net paymentas described below. In March 2003, the company issued $300 million of $1.6 million in the current period.6 7/8% senior notes due 2010. At September 30, 2002,March 31, 2003, total debt was $863.4 million,$1.13 billion, an increase of $37.3$297.7 million from December 31, 2001. The debt to capital ratio was 28% at September 30, 2002 and December 31, 2001.2002. The company has a $450 million credit agreement that expires in March 2004. As of September 30, 2002,March 31, 2003, there were no borrowings under this facility. Borrowings under the agreement bear interest based on the then currentthen-current LIBOR or prime rates and the company's credit rating. The credit agreement contains financial and other covenants, including maintenance of certain financial ratios, a minimum level of net worth and limitations on certain types of transactions, which could reduce the amount the company is able to borrow. Events of default under the credit agreement include failure to perform covenants, material adverse change, change of control and default under other debt aggregating at least $25 million. If an event of default were to occur under the credit agreement, the lenders would be entitled to declare all amounts borrowed under it immediately due and payable. The occurrence of an event of default under the credit agreement could also cause the acceleration of obligations under certain other agreements and the termination of the company's U.S. trade accounts receivable facility described below. TheIn addition, the company and certain international subsidiaries have access to certain uncommitted lines of credit from various banks. Other sources of short-term funding are operational cash flows, including customer prepayments, and the company's U.S. trade accounts receivable facility. Using this facility, the company sells, on an on-going basis, up to $225 million of its eligible U.S. trade accounts receivable through a wholly owned subsidiary, Unisys Funding Corporation I. At September 30, 2002, receivables of $177 million were sold and therefore removed from the accompanying consolidated balance sheet. The facility is renewable annually at the purchasers' option and expires in December 2003. At September 30, 2002,March 31, 2003, the company has met all of the covenants and conditions under its various lending and funding agreements. Since the company believes that it will continue to meet these covenants and conditions, the company believes that it has adequate sources and availability of short-term funding to meet its expected cash requirements. The company may, from time to time, redeem, tender for, or repurchase its securities in the open market or in privately negotiated transactions depending upon availability, market conditions and other factors. The company has on file with the Securities and Exchange Commission an effectivea registration statement covering $1.5$1.2 billion of debt or equity securities, which enables the company to be prepared for future market opportunities. At September 30, 2002,March 31, 2003, the company had deferred tax assets in excess of deferred tax liabilities of $1,384$2,187 million. For the reasons cited below, management determined that it is more likely than not that $1,037$1,727 million of such assets will be realized, therefore resulting in a valuation allowance of $347$460 million. The company evaluates quarterly the realizability of its deferred tax assets and adjusts the amount of the related valuation allowance, if necessary. The factors used to assess the likelihood of realization are the company's forecast of future taxable income, and available tax planning strategies that could be implemented to realize deferred tax assets. Approximately $3.2$5.2 billion of future 16 taxable income (predominantly U.S.) is needed to realize all of the net deferred tax assets. Failure to achieve forecasted taxable income might affect the ultimate realization of the net deferred tax assets. See "Factors that may affect future results"That May Affect Future Results" below. Accounting rules require that 15 Stockholders' equity increased $45.6 million during the three months ended March 31, 2003, principally reflecting net income of $38.5 million, $11.4 million for issuance of stock under stock option and other plans, $1.3 million of tax benefits related to employee stock plans offset in part by currency translation of $7.7 million. In March 2003, the company signed a company determine the fair value of its pension plan assets as well as the discount ratelease commitment in Reston, VA. The facility is to be used to calculateconsolidate the present valuecompany's expanding U.S. Federal government business. The initial lease period runs from April 2003 to July 2018 and the lease provides for two five-year extensions. The rent over the initial lease term is approximately $110 million. At December 31st of plan liabilities as of the end of its fiscaleach year, or if used consistently from year to year, as of a date not more than three months prior to that date. The company has chosen December 31 as its measurement date. The discount rate is an estimate of the interest rate at which the pension benefits could be effectively settled. In estimating the discount rate, the company looks to rates of return on high quality, fixed income investments currently available and expected to be available during the period to maturity of the pension benefits. The company specifically uses a portfolio of fixed-income securities, which receive at least the second highest rating given by a recognized rating agency. The discount rate is used to calculate the present value of the pension obligation (the accumulated benefit obligation, or "ABO") at a point in time. Each year, at its normal measurement date (December 31st for the company), accounting rules further require a company to recognize a liability on its balance sheet for each pension plan if the fair value of the assets of that pension plan is less than the ABO.present value of the pension obligation (the accumulated benefit obligation, or "ABO"). This liability is called a "minimum pension liability" and isliability." Concurrently, any existing prepaid pension asset for the pension plan must be removed. These adjustments are recorded as a charge in "accumulated other comprehensive income (loss)" in stockholders' equity. In addition, any prepaid pension assets related to pension plans with a minimum pension liability must be reclassified to stockholders' equity. Due to declines in the market value of equity securities during the quarter ended September 30, 2002, the ABO (estimated as of December 31, 2002) of the company's U.S. defined benefit pension plan, as well as certain foreign defined benefit pension plans, exceeded the fair value of plan assets by approximately $600 million. Should the actual ABO at December 31, 2002 exceed the fair market value of plan assets at December 31, 2002, the company would be required to record an additional minimum pension liability to the extent of such difference. However, if the fair value of plan assets were to increase or long-term interest rates were to increase to the extent that the fair value of the assets for such defined benefit pension plans exceeded the ABO at December 31, 2002, no additional minimum pension liability would be required. Assuming that the December 31, 2002 pension asset and liability amounts were the same as at September 30, 2002, the company would record a charge to stockholders' equity, of approximately $1.3 billion, representing the net of tax impact of recording the minimum pension liability for the U.S. and certain foreign pension plans and reclassifying the prepaid pension assets related to these plans. This accounting would have no effect on the company's net income, liquidity or cash flows. Financial covenants in the company's credit agreement specifically exclude the effects of the charge to stockholders' equity caused by recording a minimum pension liability. If at the followingany future year-end, (December 31, 2003), the fair value of the pension plan assets exceeds the ABO, the charge to stockholders' equity would be reversed. Stockholders'reversed for such plan. Alternatively, if the fair market value of pension plan assets experiences further declines or the company reduces the discount rate, additional charges to accumulated other comprehensive income (loss) may be required at a future year-end. At December 31, 2002, for all of the company's defined benefit pension plans, as well as the defined benefit pension plan of Nihon Unisys, Ltd. (an equity increased $98.9investment), the ABO exceeded the fair value of pension plan assets. As a result, as previously disclosed, the company was required to do the following: remove from its assets $1.4 billion of prepaid pension plan assets; increase its accrued pension liabilities by approximately $700 million; reduce its investments at equity by approximately $80 million duringrelating to the nine months ended September 30, 2002, principally reflectingcompany's share of NUL's minimum pension liability; and offset these changes by a charge to other comprehensive loss in stockholders' equity of $2.2 billion, or $1.5 billion net of tax. This accounting had no effect on the company's net income, liquidity or cash flows. Financial ratios and net worth covenants in the company's credit agreements and debt securities are unaffected by the charge to stockholders' equity caused by recording a minimum pension liability. In accordance with regulations governing contributions to U.S. defined benefit pension plans, the company is not required to fund its U.S. defined benefit plan in 2003. The company expects to make cash contributions of $133.9approximately $60 million $34.8 million for issuance of stock under stock option andto its other defined benefit pension plans and $3.1 million of tax benefits related to employee stock plans, partially offset by currency translation of $68.6 million.during 2003. Factors That May Affect Future Results - -------------------------------------- From time to time, the company provides information containing "forward- looking""forward-looking" statements, as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations of future events and include any statement that does not directly relate to any historical or current fact. Words such as "anticipates," "believes," "expects," "intends," "plans," "projects" and similar expressions may identify such forward-looking statements. All forward-looking statements rely on assumptions and are subject to risks, uncertainties and other factors that could cause the company's actual results to differ materially from expectations. These other factors include, but are not limited to, those discussed below. Any forward- looking statement speaks only as of the date on which that statement is made. The company assumes no obligation to update any forward-looking statement to reflect events or circumstances that occur after the date on which the statement is made. The company's business is affected by changes in general economic and business conditions. It also could be affected by acts of war, terrorism or natural disasters. During 2002, theThe company is facing a very challenging economic environment. In this environment, many organizations are delaying planned 17 purchases of information technology products and services. If the level of demand for the company's products and services declines in the future, the company's business could be adversely affected. The company's business could also be affected by acts of war, terrorism or natural disasters. Current world tensions could 16 escalate and this could have unpredictable consequences on the world economy and on our business. The information services and technology markets in which the company operates include a large number of companies vying for customers and market share both domestically and internationally. The company's competitors include computer hardware manufacturers, software providers, systems integrators, consulting and other professional services firms, outsourcing providers, and networkinfrastructure services providers. Some of the company's competitors may develop competing products and services that offer better price-performance or that reach the market in advance of the company's offerings. Some competitors also have or may develop greater financial and other resources than the company, with enhanced ability to compete for market share, generally, in some instances through significant economic incentives to secure contracts. Some may also be better able to compete for skilled professionals. Any of this could have an adverse effect on the company's business. Future results will depend on the company's ability to mitigate the effects of aggressive competition on revenues, pricing and margins and on the company's ability to attract and retain talented people. The company operates in a highly volatile industry characterized by rapid technological change, evolving technology standards, short product life-cycleslife cycles and continually changing customer demand patterns. Future success will depend in part on the company's ability to anticipate and respond to these market trends and to design, develop, introduce, deliver or obtain new and innovative products and services on a timely and cost-effective basis. The company may not be successful in anticipating or responding to changes in technology, industry standards or customer preferences, and the market may not demand or accept its services and product offerings. In addition, products and services developed by competitors may make the company's offerings less competitive. The company's future results will depend in part on its ability to continue to accelerate growth in outsourcing and managedinfrastructure services. The company's outsourcing contracts are multi-yearmultiyear engagements under which the company takes over management of a client's technology operations, business processes or networks. The company will need to maintain a strong financial position in order to grow its outsourcing business. In a number of these arrangements, the company hires certain of its clients' employees and may become responsible for the related employee obligations, such as pension and severance commitments. In addition, system development activity on outsourcing contracts may require the company to make significant up-frontupfront investments. As long-term relationships, these outsourcing contracts provide a base of recurring revenue. However, in the early phases of these contracts, gross margins may be lower than in later years when the work force and facilities have been rationalized for efficient operations, and an integrated systems solution has been implemented. Future results will depend on the company's ability to effectively complete these rationalizations and solution implementations. Future results will also depend in part on the company's ability to drive profitable growth in systems integration and consulting. The company's systems integration and consulting business has been adversely affected by the current economic slowdown. In this economic environment, customers have been delaying systems integration projects. The company's ability to grow profitably in this business will depend in part on an improvement in economic conditions and a pick-up in demand for systems integration projects. It will also depend on the success of the actions the company has taken to enhance the skills base and management team in this business and to refocus the business on integrating best-of-breed, standards-based solutions to solve client needs. In addition, profit margins in this business are largely a function of the rates the company is able to charge for services and the chargeability of its professionals. If the company is not ableunable to maintain the rates it charges, or appropriate chargeability, for its professionals, profit margins will suffer. The rates the company is able to charge for services are affected by a number of factors, including:including clients' perception of the company's ability to add value through its services; introduction of new services or products by the company or its competitors; pricing policies of competitors; and general economic conditions. Chargeability is also affected by a number of factors, including:including the company's ability to transition employees from completed projects to new engagements; and its ability to forecast demand for services and thereby maintain an appropriate head count. 1817 Future results will also depend in part on market acceptance of the company's high-end enterprise servers. In its technology business, the company is focusing its resources on high-end enterprise servers based on its Cellular MultiProcessing (CMP) architecture. The company's CMP servers are designed to provide mainframe-class capabilities with compelling price-performance by making use of standards-based technologies such as Intel chips and Microsoft operating system software. Recently theThe company has transitioned both its legacy ClearPath servers and its Intel-based ES7000s to the CMP platform, creating a common platform for all the company's high-end server lines. Future results will depend, in part, on customer acceptance of the new CMP-based ClearPath Plus systems and the company's ability to maintain its installed base for ClearPath, which continues to provide the majority of operating profit in the company's technology business.ClearPath. In addition, future results will depend, in part, on the company's ability to generate new customers and accelerateincrease sales of the lower-margin Intel-based ES7000 line. The company believes there is significant growth potential in the developing market for high-end, Intel-based servers running Microsoft operating system software. However, competition in this new market is likely to intensify in coming years, and the company's ability to succeed will depend on its ability to compete effectively against enterprise server competitors with more substantial resources and its ability to achieve market acceptance of the ES7000 technology by clients, systems integrators, and independent software vendors. A number of the company's long-term contracts for networkinfrastructure services, outsourcing, help desk and similar services do not provide for minimum transaction volumes. As a result, revenue levels are not guaranteed. In addition, some of these contracts may permit termination or may impose other penalties if the company does not meet the performance levels specified in the contracts. Some of the company's systems integration contracts are fixed-priced contracts under which the company assumes the risk for delivery of the contracted services and products at an agreed-upon fixed price. At times the company has experienced problems in performing some of these fixed-price contracts on a profitable basis and has provided periodically for adjustments to the estimated cost to complete them. Future results will depend on the company's ability to perform these services contracts profitably. The company frequently enters into contracts with governmental entities. Risks and uncertainties associated with these government contracts include the availability of appropriated funds and contractual provisions that allow governmental entities to terminate agreements at their discretion before the end of their terms. The success of the company's business is dependent on strong, long-term client relationships and on its reputation for responsiveness and quality. As a result, if a client is not satisfied with the company's services or products, its reputation could be damaged and its business adversely affected. In addition, if the company fails to meet its contractual obligations, it could be subject to legal liability, which could adversely affect its business, operating results and financial condition. The company has commercial relationships with suppliers, channel partners and other parties that have complementary products, services or skills. Future results will depend in part on the performance and capabilities of these third parties, on the ability of external suppliers to deliver components at reasonable prices and in a timely manner, and on the financial condition of, and the company's relationship with, distributors and other indirect channel partners. Approximately 56%52% of the company's total revenue derives from international operations. The risks of doing business internationally include foreign currency exchange rate fluctuations, changes in political or economic conditions, trade protection measures, import or export licensing requirements, multiple and possibly overlapping and conflicting tax laws, and weaker intellectual property protections in some jurisdictions. The company cannot be sure that its services and products do not infringe on the intellectual property rights of third parties, and it may have infringement claims asserted against it or against its clients. These claims could cost the company money, prevent it from offering some services or products, or damage its reputation. 1918 Item 4. Controls and Procedures Within 90 days prior to the date of filing of this report, the company carried out an evaluation, under the supervision and with the participation of the company's management, including the Chief Executive Officer and the Chief Financial Officer, 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 are effective for gathering, analyzing and disclosing the information the company is required to disclose in the reports it files under the Securities Exchange Act of 1934, within the time periods specified in the SEC's rules and forms. There have been no significant changes in the company's internal controls or in other factors that could significantly affect internal controls subsequent to the date of this evaluation. 20 Part II - OTHER INFORMATION - ------- ----------------- Item 6. Exhibits and Reports on Form 8-K - ------- -------------------------------- (a) Exhibits See Exhibit Index (b) Reports on Form 8-K During the quarter ended September 30, 2002,March 31, 2003, the company filed one Current Report on Form 8-K, dated August 13, 2002,March 12, 2003, to report under items 5 and 7 and 9 of that Form.such form. 2119 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. UNISYS CORPORATION Date: October 31, 2002May 2, 2003 By: /s/ Janet M. Brutschea Haugen ----------------------------- Janet M. Brutschea Haugen Senior Vice President and Chief Financial Officer (Principal Financial Officer) By: /s/ Carol S. Sabochick ---------------------- Carol S. Sabochick Vice President and Corporate Controller (Chief Accounting Officer) CERTIFICATION I, Lawrence A. Weinbach, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Unisys 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 officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: October 31, 2002May 2, 2003 /s/ Lawrence A. Weinbach ------------------------ Name: Lawrence A. Weinbach Title: Chairman, President and Chief Executive Officer CERTIFICATION I, Janet Brutschea Haugen, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Unisys 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 officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: October 31, 2002May 2, 2003 /s/ Janet Brutschea Haugen -------------------------- Name: Janet Brutschea Haugen Title: Senior Vice President and Chief Financial Officer EXHIBIT INDEX Exhibit Number Description - ------- ----------- 12 Statement of Computation of Ratio of Earnings to Fixed Charges 99.1 Certification of Lawrence A. Weinbach pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 99.2 Certification of Janet B. Haugen pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350