UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For The Quarterly Period Ended November 23, 2002
Commission File No. 0-18348
BE AEROSPACE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1209796
(State of Incorporation) (I.R.S. Employer Identification No.)
1400 Corporate Center Way
Wellington, Florida 33414
(Address of principal executive offices)
(561) 791-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES[X] NO[ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES[X] NO[ ]
The registrant has one class of common stock, $0.01 par value, of which
__________ shares were outstanding as of January 2, 2003.
1
BE AEROSPACE, INC.
FORM 10-Q for the Quarter Ended November 23, 2002
Table of Contents
Page
----
Part I Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited)
a) Condensed Consolidated Balance Sheets
at November 23, 2002 and February 23, 2002.............................3
b) Condensed Consolidated Statements of Operations for the
three and nine months ended November 23, 2002 and November 24, 2001....4
c) Condensed Consolidated Statements of Cash Flows for the
nine months ended November 23, 2002 and November 24, 2001..............5
d) Notes to Condensed Consolidated Financial Statements...................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................15
Item 3. Quantitative and Qualitative Disclosures About Market Risk............25
Item 4. Controls and Procedures...............................................25
Part II Other Information
Item 1. Legal Proceedings.....................................................26
Item 2. Changes in Securities and Use of Proceeds.............................26
Item 3. Defaults Upon Senior Securities.......................................26
Item 4. Submission of Matters to a Vote of Security Holders...................26
Item 5. Other Information.....................................................26
Item 6. Exhibits and Reports on Form 8-K......................................26
Signatures............................................................27
Certifications........................................................28
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BE AEROSPACE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in millions, except share data)
November 23, February 23,
2002 2002
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 130.4 $ 159.5
Accounts receivable - trade, less allowance for doubtful
accounts of $4.1 (November 23, 2002)
and $4.9 (February 23, 2002) 92.8 93.3
Inventories, net 167.5 157.0
Other current assets 52.6 46.6
--------- ---------
Total current assets 443.3 456.4
Property and equipment, net 119.7 142.7
Goodwill 346.2 333.1
Identifiable intangible assets, net 165.9 172.9
Other assets, net 24.7 23.2
--------- ---------
$ 1,099.8 $ 1,128.3
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 61.9 $ 48.1
Accrued liabilities 69.5 102.2
Current maturities of long-term debt 1.9 1.3
--------- ---------
Total current liabilities 133.3 151.6
Long-term debt 851.4 853.5
Other non-current liabilities 7.9 2.1
Stockholders' equity:
Preferred stock, $0.01 par value; 1.0 million shares
authorized; no shares outstanding -- --
Common stock, $0.01 par value; 100.0 million shares
authorized; 35.1 (November 23, 2002) and
34.4 million (February 23, 2002) shares issued
and outstanding 0.4 0.3
Additional paid-in capital 409.8 405.3
Accumulated deficit (288.8) (258.7)
Accumulated other comprehensive loss (14.2) (25.8)
--------- ---------
Total stockholders' equity 107.2 121.1
--------- ---------
$ 1,099.8 $ 1,128.3
========= =========
See accompanying notes to condensed consolidated financial statements.
3
BE AEROSPACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in millions, except per share data)
Three Months Ended Nine Months Ended
------------------------------------ --------------------------------------
November 23, November 24, November 23, November 24,
2002 2001 2002 2001
------------------ ----------------- ------------------- ------------------
Net sales $ 145.5 $ 172.8 $ 454.6 $ 528.7
Cost of sales 108.5 217.5 315.6 438.5
-------- -------- -------- --------
Gross profit (loss) 37.0 (44.7) 139.0 90.2
Operating expenses:
Selling, general and administrative 28.9 35.0 86.3 100.6
Research, development and engineering 11.0 10.5 29.7 33.6
-------- -------- -------- --------
Total operating expenses 39.9 45.5 116.0 134.2
-------- -------- -------- --------
Operating (loss) earnings (2.9) (90.2) 23.0 (44.0)
Interest expense, net 16.8 16.0 50.4 43.7
-------- -------- -------- --------
Loss before income taxes and extraordinary item (19.7) (106.2) (27.4) (87.7)
Income taxes 2.7 -- 2.7 1.9
-------- -------- -------- --------
Loss before extraordinary item (22.4) (106.2) (30.1) (89.6)
Extraordinary item, net of tax -- -- -- 9.3
-------- -------- -------- --------
Net loss $ (22.4) $ (106.2) $ (30.1) $ (98.9)
======== ======== ======== ========
Basic net loss per common share:
Loss before extraordinary item $ (0.64) $ (3.08) $ (0.86) $ (2.79)
Extraordinary item -- -- -- (0.29)
-------- -------- -------- --------
Net loss per common share $ (0.64) $ (3.08) $ (0.86) $ (3.08)
======== ======== ======== ========
Diluted net loss per common share:
Loss before extraordinary item $ (0.64) $ (3.08) $ (0.86) $ (2.79)
Extraordinary item -- -- -- (0.29)
-------- -------- -------- --------
Net loss per common share $ (0.64) $ (3.08) $ (0.86) $ (3.08)
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
4
BE AEROSPACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in millions)
NINE MONTHS ENDED
-----------------------------------------
November 23, November 24,
2002 2001
---------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (30.1) $ (98.9)
Adjustments to reconcile net loss to net cash flows
provided by operating activities:
Extraordinary item -- 9.3
Depreciation and amortization 22.1 35.8
Non-cash employee benefit plan contributions 1.7 1.9
Loss on disposal of property and equipment 1.4 --
Impairment of property and equipment, inventories and
other assets 7.0 62.9
Impairment of intangible assets -- 20.4
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable 3.2 10.8
Inventories (13.4) 6.7
Other current assets (5.3) 0.7
Accounts payable 11.9 (14.1)
Accrued liabilities (33.4) 5.5
------- ------
Net cash flows (used in) provided by operating activities (34.9) 41.0
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (6.5) (265.2)
Capital expenditures (16.2) (11.0)
Proceeds from real estate sales 28.7 --
Change in intangible and other assets (3.9) (19.7)
------- -------
Net cash flows provided by (used in) investing activities 2.1 (295.9)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) borrowings under bank credit facilities (1.0) 78.2
Proceeds from issuances of common stock, net of expenses 2.9 106.5
Principal payments on long-term debt (0.8) (102.0)
Proceeds from long-term debt -- 248.5
------- -------
Net cash flows provided by financing activities 1.1 331.2
------- -------
Effect of exchange rate changes on cash flows 2.6 (0.9)
------- -------
Net (decrease) increase in cash and cash equivalents (29.1) 75.4
Cash and cash equivalents, beginning of period 159.5 60.3
------- -------
Cash and cash equivalents, end of period $ 130.4 $ 135.7
======= =======
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest, net $ 66.7 $ 55.1
Income taxes, net $ 1.8 $ 2.0
See accompanying notes to condensed consolidated financial statements.
5
BE AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Note 1. Basis of Presentation
---------------------
The accompanying condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and are unaudited
pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. All adjustments, which,
in the opinion of management, are considered necessary for a fair
presentation of the results of operations for the periods shown, are of a
normal recurring nature and have been reflected in the condensed
consolidated financial statements. The results of operations for the periods
presented are not necessarily indicative of the results expected for the
full fiscal year or for any future period. The information included in these
condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and accompanying notes included
in the BE Aerospace, Inc. (the "Company" or "B/E") Annual Report on Form
10-K/A for the year ended February 23, 2002.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts and related disclosures. Actual results could differ from those
estimates.
Certain reclassifications have been made for consistent presentation.
In October 2002, the Company changed its fiscal year end from the last
Saturday in February to December 31, effective with the transition period
ending on December 31, 2002. The Company will report the transition period
in the Company's Annual Report on Form 10-K for the period ended December
31, 2002. Prospectively, the Company's fiscal quarters will conform to
calendar periods ending March 31, June 30 and September 30.
Note 2. Recent Accounting Pronouncements
--------------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting
for Retirement Obligations" ("SFAS No. 143"). SFAS No. 143 establishes
accounting standards for the recognition and measurement of an asset
retirement obligation and its associated asset retirement cost. It also
provides accounting guidance for legal obligations associated with the
retirement of tangible long-lived assets. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002, with early adoption permitted.
The Company plans to adopt SFAS No. 143 on January 1, 2003. The Company is
currently evaluating the provisions of SFAS No. 143 but expects that the
provisions of SFAS No. 143 will not have a material impact on its
consolidated results of operations and financial position upon adoption.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," ("SFAS No. 144") which
addresses the financial accounting and reporting for the impairment or
disposal of long-lived assets. This statement supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to
Be Disposed Of" and became effective on February 24, 2002. The adoption of
SFAS No. 144 did not have a material impact on the Company's consolidated
results of operations and financial position.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145, among other things, requires gains and
losses on extinguishment of debt to be classified as part of continuing
operations rather than treated as extraordinary, as previously required in
accordance with SFAS 4. SFAS No. 145 also modifies accounting for subleases
where the original lessee remains the secondary obligor and requires certain
modifications to capital leases to be treated as sale-leaseback
transactions. The Company adopted SFAS No. 145 on April 1, 2002 with no
material impact to its consolidated financial statements.
6
BE AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED - DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 nullifies the
guidance previously provided under Emerging Issues Task Force Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." Among other things, SFAS No. 146 requires that a liability
for a cost associated with an exit or disposal activity be recognized when
the liability is incurred as opposed to when there is a commitment to a
restructuring plan as set forth under the nullified guidance. The Company
plans to adopt SFAS No. 146 on January 1, 2003 for future restructurings,
but expects no material impact on its consolidated financial statements.
Note 3. Industry Conditions
-------------------
The September 11, 2001 terrorist attacks have severely impacted
conditions in the airline industry. For the first time in the history of
commercial aviation, all domestic airlines were grounded for a period of
three days. According to industry sources, since resuming service, most
major U.S. carriers have substantially reduced their flight schedules.
Airlines worldwide have parked or retired approximately 2,200 aircraft or
15% of their fleets. The airlines have further responded by decreasing
domestic airfares to levels not seen since 1988. Domestic airline revenues
are down 14% for the first nine months of calendar 2002 compared to the same
period last year. As a result of the double-digit decline in both traffic
and airfares following the September 11, 2001 terrorist attacks, and their
aftermath, as well as other factors, such as the weakening economy, the U.S.
airline industry incurred the largest loss in its history in calendar 2001,
totaling in excess of $7 billion. Industry experts now expect that the U.S.
airline industry losses in calendar 2002 will exceed those realized in 2001.
The airline industry crisis caused two major domestic airlines, US Airways
and United Airlines, to file for protection under Chapter 11 of the United
States Bankruptcy Act. In addition, at least one smaller domestic carrier,
National Airlines, has ceased operations entirely. In this environment, the
airlines are seeking to conserve cash in part by deferring or eliminating
cabin interior refurbishment programs and canceling or deferring aircraft
purchases. This has caused a substantial contraction in the Company's
business, the extent and duration of which cannot be determined at this
time.
Increases in pilot and other airline wages, coupled with higher fuel
prices and the softening of the global economy were already negatively
impacting airline profitability prior to the events of September 11, 2001.
The combined impact of the recent recession and the events of September 11,
2001 has negatively impacted discretionary airline spending for cabin
interior refurbishments and upgrades and new aircraft purchases. The Company
expects that this will have a material adverse impact on its results of
operations and financial condition until such time as conditions in the
airline industry improve. While management has developed and begun to
implement what it believes is an aggressive cost reduction plan to counter
these difficult conditions, it cannot guarantee that the plans are adequate
or will be successful.
The airline industry is also undergoing a process of consolidation and
significantly increased competition. Such consolidation could result in a
reduction of future aircraft orders as overlapping routes are eliminated and
airlines seek greater economies through higher aircraft utilization.
Note 4. Facility Consolidation and Acquisition-Related Expenses
-------------------------------------------------------
The industry conditions described above have caused the Company to
implement a facility consolidation plan designed to re-align its capacity
and cost structure with changed conditions in the airline industry. In
November 2001, the Company began implementing a facility consolidation plan
that consisted of closing five principal facilities and reducing its
workforce by about 1,000 employees. As a result, the Company recorded a
charge of $98.9, which included cash expenses of approximately $15.6 during
the quarter ended November 24, 2001.
7
BE AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED - DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
The cash charges relate to involuntary severance and benefit programs for
approximately 1,000 employees, lease termination costs and preparing
facilities for disposal and sale. As of November 23, 2002, the Company had
terminated more than 1,000 employees. Through November 23, 2002, the Company
paid approximately $10.5 related to severance, termination benefits and
other cash costs related to this consolidation program.
Industry conditions continued to worsen during the fall of 2002 as the
airlines deferred retrofit programs and continued to lower their purchases
of spare parts. In addition, the business jet manufacturers announced
further production cuts and additional plant shutdowns. In response to these
worsening conditions, the Company recorded an additional $6.0 of costs
associated with a revised consolidation plan that will encompass a total
personnel reduction of 1,400 employees. Also during the current quarter, the
Company recorded a $7.0 charge related to inventories that became obsolete
due to the increase in parked aircraft that are not expected to return to
active service.
During the three months and nine months ended November 23, 2002, the
Company incurred a total of approximately $17.8 and $35.3, respectively, of
charges and transition costs associated with the facilities and personnel
consolidation program, which have been expensed as incurred as a component
of cost of sales. Cash requirements related to facility consolidation
activities were funded from cash in banks.
The Company has recorded $112.0 in charges and $28.0 in transition costs
since the third quarter of last year. The Company expects that it will incur
$8.0 of additional transition costs during the first six months of calendar
2003. The total estimated cost of the consolidation effort is expected to be
approximately $150.0, of which approximately $60.0 are cash costs.
The following table summarizes the facility consolidation costs activity
during the nine months ended November 23, 2002:
Balance at
February Balance at
23, Dispositions/ Paid November
2002 Additions Reclassifications In Cash 23, 2002
------------- ------------- --------------------- ------------- --------------
Accrued liability for severance,
lease termination and other costs $ 12.5 $ 6.0 $ 1.7 $ (14.7) $ 5.5
Impaired inventories, property
and equipment 12.1 7.0 (16.6) -- 2.5
------------- ------------- --------------------- ------------- --------------
$ 24.6 $ 13.0 $(14.9) $ (14.7) $ 8.0
============= ============= ===================== ============= ==============
Note 5. Acquisitions and Disposition
----------------------------
Effective May 8, 2001, the Company acquired the outstanding common stock
of Nelson Aero Space, Inc. for approximately $20.0. Effective July 18, 2001,
the Company acquired the outstanding common stock of Denton Jet Interiors,
Inc. for approximately $16.0. Both of the transactions have been accounted
for using purchase accounting. The assets purchased and liabilities assumed
have been reflected in the accompanying balance sheet as of February 23,
2002.
8
BE AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED - DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
On September 14, 2001, the Company acquired M & M Aerospace Hardware,
Inc. ("M & M") for $184.7. M & M is a leading distributor of aftermarket
aerospace fasteners. The M & M acquisition was completed by issuing to the
former shareholders a total of approximately 1.9 million shares of B/E stock
valued at $32.7, and paying them $152.0 in cash, which included the
assumption of current liabilities of approximately $8.8. The Company
financed this acquisition through cash on hand and approximately $100.0 of
borrowings under its bank credit facility. This transaction has been
accounted for using purchase accounting and has been included in the
Company's operations since the date of acquisition.
The following pro forma unaudited financial data for the nine months
ended November 24, 2001 is presented to illustrate the estimated effects of
the fiscal 2002 acquisitions, which includes Nelson Aero Space, Inc., Denton
Jet Interiors, Inc., and M & M Aerospace Hardware, Inc., as if the
transactions had occurred as of the beginning of the period:
NINE MONTHS ENDED
--------------------
November
24, 2001
--------------------
Net sales $ 589.6
Net loss before extraordinary item (81.8)
Net loss (91.1)
Diluted net loss per share before extraordinary item (2.55)
Diluted loss per share (2.84)
On February 25, 1999, the Company completed the sale of a 51% interest in
its In-Flight Entertainment ("IFE") business to Sextant Avionique, Inc.
("Sextant"), a wholly-owned subsidiary of Sextant Avionique, S.A. (the "IFE
Sale"). The Company sold its 51% interest in IFE for $62.0 in cash. Terms of
the purchase agreement provided for the final price for the 51% interest to
be determined on the basis of operating results for the IFE business over
the two-year period ending February 28, 2001. The Company used substantially
all of the proceeds from the IFE Sale to repay a portion of its bank line of
credit. On October 5, 1999, the Company completed the sale of its remaining
49% equity interest in IFE to Sextant and this sale did not result in a
significant gain. Total consideration for 100% of its equity interest in
IFE, intra-entity obligations and the provision of marketing, product and
technical consulting services will range from a minimum of $93.6 up to
$123.3 (inclusive of the $62.0 received in February 1999 for the sale of a
51% interest in IFE). Terms of the agreement provided for the Company to
receive payments of $15.7 on October 5, 2000 and 2001 (the "IFE
obligations"). A third and final payment will be based on the actual sales
and booking performances over the period from March 1, 1999 to December 31,
2001. The IFE obligations, which aggregate approximately $38.2, are
guaranteed by Thomson-CSF, a parent company of Sextant Avionique, S.A.
Sextant has not made any of the payments due to BE Aerospace, Inc. under the
terms of the purchase and sale agreement. As a result, the IFE obligations
are included in other current assets in the accompanying financial
statements as of November 23, 2002 and February 23, 2002. The Company has
initiated arbitration proceedings to compel payment. Sextant has
counterclaimed against the Company, claiming various breaches of the IFE
Sale agreements. The Company expects that this will be resolved and the
amount collected during 2003.
9
BE AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED - DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Note 6. Goodwill and Intangible Assets
------------------------------
Effective February 24, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets." As a result of adopting SFAS No. 142, the Company's goodwill and
certain intangible assets are no longer amortized, but are subject to an
annual impairment test. In accordance with the implementation of SFAS No.
142, the historical cost and accumulated amortization of certain developed
technologies were reset with no impact to the consolidated financial
statements. The following sets forth the intangible assets by major asset
class, all of which were acquired during acquisition transactions:
November 23, 2002 February 23, 2002
------------ -------------------------------------- -------------------------------------
Net Net
Useful Life Original Accumulated Book Original Accumulated Book
(Years) Cost Amortization Value Cost Amortization Value
------------ ---------- ---------------- ---------- ----------- -------------- ----------
Acquired technologies 4-30 $ 93.1 $ 14.2 $ 78.9 $ 108.7 $ 27.2 $ 81.5
Trademarks and patents 7-30 25.7 8.2 17.5 24.6 6.8 17.8
Trademarks (nonamortizing) 19.4 -- 19.4 19.4 -- 19.4
Technical qualifications,
plans and drawings 3-30 26.0 12.6 13.4 25.5 11.5 14.0
Replacement parts annuity
and product approvals 3-30 38.9 17.9 21.0 37.6 15.9 21.7
Covenant not to compete and
other identified intangibles 3-10 25.1 9.4 15.7 30.6 12.1 18.5
------- ------ ------- ------- ------ -------
$ 228.2 $ 62.3 $ 165.9 $ 246.4 $ 73.5 $ 172.9
======= ====== ======= ======= ====== =======
Aggregate amortization expense on intangible assets was approximately
$2.2 and $6.6 for the three and nine months ended November 23, 2002,
respectively. In accordance with SFAS No. 142, the Company has completed
step one of the transitional impairment tests and fair value analysis for
goodwill and other intangible assets, respectively, and there were no
impairment or impairment indicators present and no loss was recorded during
the respective three and nine month periods. Amortization expense is
expected to be approximately $8.9 in each of the next five fiscal years.
Changes to the original cost basis of intangible assets during the nine
months ended November 23, 2002 were due to the reclassification of assembled
workforce to goodwill and foreign currency fluctuations. The changes in the
carrying amount of goodwill for the nine months ended November 23, 2002 are
as follows:
Total
--------------------
Balance as of February 23, 2002 $ 333.1
Additions 2.0
Reclassification of assembled workforce 8.5
Impairment losses --
Effect of foreign currency translation 2.6
--------
Balance as of November 23, 2002 $ 346.2
========
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10
BE AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED - DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
A reconciliation of reported earnings before extraordinary item to
earnings before extraordinary item adjusted to reflect the adoption of SFAS
No. 142 in the three and nine months ended November 24, 2001 is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------- ---------------------
November 24, 2001 November 24, 2001
----------------------- ---------------------
Earnings before extraordinary item:
As reported $ (106.2) $ (89.6)
Goodwill amortization, net of taxes 2.3 6.6
--------- --------
As adjusted $ (103.9) $ (83.0)
========= ========
Basic earnings per share before extraordinary item:
As reported $ (3.08) $ (2.79)
As adjusted $ (3.01) $ (2.59)
Diluted earnings per share before extraordinary item:
As reported $ (3.08) $ (2.79)
As adjusted $ (3.01) $ (2.59)
A reconciliation of reported net earnings to net earnings adjusted to
reflect the adoption of SFAS No. 142 in the three and nine months ended
November 24, 2001 is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------- ----------------------
November 24, 2001 November 24, 2001
----------------------- ----------------------
Net earnings:
As reported $ (106.2) $ (98.9)
Goodwill amortization, net of taxes 2.3 6.6
--------- --------
As adjusted $ (103.9) $ (92.3)
========= ========
Basic earnings per share:
As reported $ (3.08) $ (3.08)
As adjusted $ (3.01) $ (2.88)
Diluted earnings per share:
As reported $ (3.08) $ (3.08)
As adjusted $ (3.01) $ (2.88)
Note 7. Long-Term Debt
--------------
On April 17, 2001 the Company sold $250.0 of 8 7/8% Senior Subordinated
Notes (the "8 7/8% Notes") due 2011. The proceeds from this offering, net of
debt issue costs, were approximately $242.8. Approximately $105.0 of the
proceeds were used to redeem the Company's 9 7/8% Senior Subordinated Notes
(the "9 7/8% Notes") due 2006 and approximately $66.7 of the proceeds were
used to repay balances outstanding under the Company's bank credit facility,
which was then terminated.
11
BE AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED - DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
On April 17, 2001 the Company called for redemption its 9 7/8% Notes due
2006. The 9 7/8% Notes were redeemed at a price equal to 104.97% of the
principal amount, together with the accrued interest through the redemption
date. The Company deposited with the trustee on April 17, 2001 funds in an
amount sufficient to redeem the 9 7/8% Notes on the redemption date. Upon
deposit of these funds, the indenture governing the 9 7/8% Notes was
discharged. The Company incurred an extraordinary charge of $9.3 (net of
tax) for unamortized debt issue costs, redemption premiums and fees and
expenses related to the repurchase of the 9 7/8% Notes.
In August 2001, the Company established a new bank credit facility
consisting of a $150.0 revolving credit facility that expires in August
2006. The bank credit facility is collateralized by the Company's accounts
receivable, inventories and by substantially all of its other personal
tangible property. On November 23, 2002, indebtedness under the existing
bank credit facility consisted of outstanding borrowings of $144.0 (bearing
interest at LIBOR plus 3.0%) and letters of credit aggregating approximately
$5.6. The bank credit facility requires no principal payments until 2006.
The bank credit facility contains customary affirmative covenants, negative
covenants and conditions of borrowing, all of which were met as of November
23, 2002. The Company has initiated discussions with the bank group to amend
its financial covenants to provide additional flexibility and anticipates
that it will complete this process during the first quarter of 2003. The
interest rate margin on the bank credit facility may increase or decrease in
the event of certain changes to the Company's financial leverage ratios.
Note 8. Sale-Leaseback
--------------
During the third quarter of 2002, the Company entered into two
sale-leaseback transactions involving four of its facilities. Under the
transactions, the facilities were sold for $28.7, net of transaction costs
and have been leased back for periods ranging from 15 to 20 years. The
leasebacks have been accounted for as operating leases. A gain of $4.8
resulting from the sale has been deferred and will be amortized to rent
expense over the initial term of the leases. (See Note 9.)
Note 9. Off-Balance Sheet Arrangements - Lease Arrangements
---------------------------------------------------
The Company finances its use of certain facilities and equipment under
committed lease arrangements provided by various institutions. Since the
terms of these arrangements meet the accounting definition of operating
lease arrangements, the aggregate sum of future minimum lease payments is
not reflected on our consolidated balance sheet. At November 23, 2002,
future minimum lease payments under these arrangements approximated $55.0.
We also have various other agreements whose future minimum lease payments
approximated $26.8 at November 23, 2002.
Note 10. Segment Reporting
-----------------
The Company is organized based on the products and services it offers.
Under this organizational structure, the Company has three reportable
segments: Commercial Aircraft Products, Business Jet Products and Fastener
Distribution. The Company's Commercial Aircraft Products segment consists of
eight principal operating units while the Business Jet Products and Fastener
Distribution segments consist of two and one principal operating units,
respectively. The Company evaluates segment performance based on segment
operating income (loss) excluding facility and personnel transition costs,
restructuring charges and acquisition-related expenses.
Each segment reports its results of operations and makes requests for
capital expenditures and acquisition funding to the Company's chief
operational decision-making group. This group is presently comprised of the
Chairman, the President and Chief Executive Officer, and the Corporate
Senior Vice President of Administration and Chief Financial Officer. Each
operating segment has separate management teams and infrastructures
dedicated to providing a full range of products and services to their
commercial, business jet and aircraft-manufacturing customers.
12
BE AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED - DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
The following table presents net sales and other financial information
by business segment:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------- ---------------------------------
November November November November
23, 2002 (A) 24, 2001 (B) 23, 2002 (A) 24, 2001 (B)
----------------- ------------------- ----------------- ---------------
Commercial Aircraft Products
Net sales $ 102.0 $ 128.2 $ 319.6 $ 436.9
Operating earnings 8.2 11.3 33.8 51.3
Business Jet Products
Net sales 20.6 21.5 64.5 68.8
Operating earnings 2.8 1.8 12.2 7.1
Fastener Distribution
Net sales 22.9 23.1 70.5 23.0
Operating earnings 3.9 3.4 12.3 4.3
Consolidated
Net sales 145.5 172.8 454.6 528.7
Operating earnings 14.9 16.5 58.3 62.7
(A) Amounts exclude facility and personnel transition costs of $17.8 and
$35.3 for the three and nine months ended November 23, 2002,
respectively. Including the transition costs, operating earnings (loss)
for the Commercial Aircraft Products, Business Jet Products and
Fastener Distribution business segments were $(8.4), $1.6 and $3.9,
respectively, for the three months ended November 23, 2002, and $0.7,
$10.0 and $12.3, respectively, for the nine months ended November 23,
2002. The Company's operating (loss) earnings, including transition
costs, were $(2.9) and $23.0 for the three months and nine months ended
November 23, 2002, respectively.
(B) Amounts exclude restructuring, facility and personnel transition costs
and acquisition-related expenses of $106.7 for both the three and nine
month periods ended November 24, 2001. Including the consolidation
costs and acquisition-related costs, operating earnings (loss) for the
Commercial Aircraft Products, Business Jet Products and Fastener
Distribution business segments were $(83.9), $(7.0) and $0.7,
respectively, for the three months ended November 24, 2001, and
$(45.7), $(1.7) and $3.4, respectively, for the nine months ended
November 24, 2001. The Company's operating loss, including these
consolidation costs and acquisition-related costs, was $(90.2) and
$(44.0) for the three months and nine months ended November 24, 2001,
respectively.
Note 11. Net Loss Per Common Share
-------------------------
Basic net loss per common share is computed using the weighted average
common shares outstanding during the period. Diluted net loss per common
share is computed by using the average share price during the period when
calculating the dilutive effect of stock options. Shares outstanding for the
periods presented were as follows (in millions):
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------- ------------------------------
November November November November
23, 2002 24, 2001 23, 2002 24, 2001
---------------- -------------- --------------- --------------
Weighted average common shares outstanding 35.0 34.5 34.8 32.1
Dilutive effect of employee stock options -- -- -- --
---- ---- ---- ----
Diluted shares outstanding 35.0 34.5 34.8 32.1
==== ==== ==== ====
13
BE AEROSPACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED - DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Note 12. Comprehensive Loss
------------------
Comprehensive loss is defined as all changes in a company's net assets
except changes resulting from transactions with shareholders. It differs
from net loss in that certain items currently recorded to equity would be a
part of comprehensive loss. The following table sets forth the computation
of comprehensive loss for the periods presented:
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------- ------------------------------
November November November November
23, 2002 24, 2001 23, 2002 24, 2001
---------------- --------------- -------------- ---------------
Net loss $ (22.4) $(106.2) $ (30.1) $ (98.9)
Other comprehensive earnings (loss):
Foreign exchange translation adjustment 2.7 (3.7) 11.6 (4.4)
-------- ------- ------- -------
Comprehensive loss $ (19.7) $(109.9) $ (18.5) $ 103.3)
======= ======= ======= =======
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14
BE AEROSPACE, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
The following discussion and analysis addresses the results of the
Company's operations for the three months ended November 23, 2002, as
compared to the Company's results of operations for the three months ended
November 24, 2001. The discussion and analysis then addresses the results of
the Company's operations for the nine months ended November 23, 2002, as
compared to the Company's results of operations for the nine months ended
November 24, 2001. The discussion and analysis also addresses the liquidity
and financial condition of the Company and other matters.
The following discussion and analysis includes financial information
stated on a proforma basis. Proforma figures treat companies acquired during
fiscal 2002 as though acquired at the beginning of fiscal 2002. Results from
companies acquired during fiscal 2002 are already included in figures for
the entire period in fiscal 2003. The proforma figures are presented for
informational purposes only in order to enhance comparability and are not
necessarily indicative of the operating results that would have occurred had
the transactions actually occurred at the beginning of fiscal 2002, nor are
they necessarily indicative of future operating results.
AIRLINE INDUSTRY CRISIS AND IMPACT ON THE COMPANY
The airline industry was severely impacted by the events of September 11,
2001 (See "Dependence Upon Conditions in the Airline Industry" below). In
November 2001, the Company began to implement a facility consolidation plan
designed to re-align its capacity and cost structure with changed conditions
in the airline industry. This plan consisted of closing five principal
facilities and reducing its workforce by about 1,000 employees. As a result,
the Company recorded a charge of $98.9, which included cash expenses of
approximately $15.6 during the quarter ended November 24, 2001.
Industry conditions continued to worsen during the fall of 2002 as the
airlines continued to lower their purchases of spare parts and defer
retrofit programs. In addition, the business jet manufacturers announced
further production cuts and further plant shutdowns. The Company revised its
consolidation plan during the current quarter to encompass 1,400 employees
in response to the change in conditions, and to provide for inventories that
were impaired due to the growing number of parked aircraft that are not
expected to return to the active fleet.
The Company has recorded $112.0 in charges and $28.0 in transition costs
since October 2001. Future transition costs of $8.0 are expected to be
incurred through June 2003. The total estimated cost of the consolidation
effort is approximately $150.0 (approximately $60.0 are cash costs).
THREE MONTHS ENDED NOVEMBER 23, 2002, AS COMPARED TO THE RESULTS OF
OPERATIONS FOR THE THREE MONTHS ENDED NOVEMBER 24, 2001
Revenues, which were negatively impacted by the severe decline in
industry conditions following the terrorist attacks of September 11, 2001,
declined even further during the quarter ended November 23, 2002 due to
program deferrals by our customers, actions by business jet manufacturers to
shut down several production lines by up to four months and a reduction in
demand for our spare parts. Net sales for the three months ended November
23, 2002, were $145.5, which is $27.3 or 15.8% less than net sales of $172.8
for the same period in the prior year. Sales within the commercial aircraft
products segment were $102.0 or 20.4% lower than sales in the same period in
the prior year. Sales from the business jet products and fastener
distribution segments were not as significantly impacted during the period
as the commercial aircraft products segment. This was due to market share
gains and an expansion of product offerings. However, as noted above,
recently the business jet manufacturers announced further production cuts
and further plant shutdowns which we expect will negatively impact our sales
of such products until conditions improve.
15
BE AEROSPACE, INC.
Gross profit (loss) was $37.0, or 25.4% of net sales, for the quarter
ended November 23, 2002 compared to $(44.7) in the same period of the prior
year, including current period charges in the current period and facility
consolidation and acquisition-related costs in the prior period. Gross
profit was $54.8, or 37.7% of net sales for the quarter ended November 23,
2002, excluding current period charges aggregating $17.8. Gross profit
before facility consolidation and acquisition-related costs in the same
period in the prior year of $106.7 was $62.0 or 35.9% of net sales. The
period over period increase in gross margin before charges occurred despite
a 15.8% decrease in revenues and was due to the impact of our facility
consolidation efforts, lean manufacturing and continuous improvement
programs. The current period charges of $17.8 consist of a $7.0 provision
for inventories that became obsolete due to the growing number of parked
aircraft which are not expected to return to the active fleet, $6.0 related
to the expansion of the facility consolidation program to encompass 1,400
employees, and facility transition expenses of $4.8. Restructuring charges
and transition costs ($99.9) and acquisition-related expenses ($6.8)
incurred in the prior year aggregated $106.7, the cash portion of which was
$23.4 related to severance, lease buyouts and related costs and
acquisition-related expenses. Non-cash charges in the prior year of $83.3
consisted of write-downs of property, plant and equipment, inventories and
impaired intangible assets. Transition costs are the expenses of operating
facilities scheduled for closure and integrating transferred operations into
the remaining facilities. Under generally accepted accounting principles,
such costs must be treated as normal expenses until plant shutdown has been
completed.
Selling, general and administrative expenses were $28.9 or 19.9% of net
sales for the three-month period as compared to $35.0 or 20.3% of net sales
during the same period in the prior year. The year over year decrease in
selling, general and administrative expenses resulted from savings realized
from facility closures and austerity measures and a reduction in
amortization of $4.1 resulting from the adoption of SFAS No. 142.
Research, development and engineering expenses were $11.0 or 7.6% of net
sales for the three months ended November 23, 2002, as compared with $10.5
or 6.1% of sales for the same period in the prior year. Management has
continued to invest in research, development and engineering spending to
support its market shares.
The Company generated operating earnings of $14.9 or 10.2% of net sales
for the current quarter, excluding the before mentioned charges for the
provision for inventories, the facility consolidation program and facility
transition expenses aggregating $17.8. This was $1.6 or 9.7% lower than
operating earnings of $16.5 or 9.5% of net sales for the same period in the
prior year, excluding restructuring charges, transition costs and
acquisition-related costs. Including such costs in the respective periods,
the operating loss was ($2.9) for the current quarter, an $87.3 improvement
over the prior year's $90.2 operating loss. The $27.3 year over year
decrease in revenues resulted in $7.2 less gross profit, excluding charges
and facility transition expenses. Our austerity measures and the impact of
SFAS No. 142 generated a $5.6 reduction in operating expenses; as a result,
despite a $7.2 reduction in gross profit, operating earnings before charges
and transition costs declined by only $1.6.
Interest expense, net was $16.8 for the quarter ended November 23, 2002,
or $0.8 greater than interest expense of $16.0 for the same period in the
prior year. The increase in interest expense is due to higher interest rates
on our bank borrowings.
Income tax expense for the current three-month period was $2.7 as
compared to no expense in the same period in the prior year. The increase
was due foreign earnings that cannot be offset with domestic tax loss
carryforwards.
Net loss before special charges and transition costs was ($3.6) (net of
income taxes of $1.7), or ($0.10) per share for the current quarter.
Including such costs, our net loss for the current quarter was ($22.4) or
($0.64) per share as compared to a net loss of ($106.2) or ($3.08) per share
(diluted) last year.
16
BE AEROSPACE, INC.
NINE MONTHS ENDED NOVEMBER 23, 2002, AS COMPARED TO THE RESULTS OF
OPERATIONS FOR THE NINE MONTHS ENDED NOVEMBER 24, 2001
Revenues were negatively impacted by the severe decline in industry
conditions following the terrorist attacks of September 11, 2001. Net sales
for the nine months ended were $454.6, which is $74.1 or 14.0% less than net
sales of $528.7 for the same period in the prior year. However, on a
proforma basis, revenues for the current year declined by approximately
$135.0 or 22.9% from last year's revenues of $589.6. The decline in revenue
is due to the recession in the airline and business jet industries following
the events of September 11, 2001. Reported sales within the commercial
aircraft products segment were $319.6 or 26.8% lower than reported sales in
the same period in the prior year. Sales from the business jet products
segment were not as significantly impacted during the period as the
commercial aircraft products segment. This was due to market share gains and
an expansion of product offerings. However, as noted above, recently the
business jet manufacturers announced further production cuts and further
plant shutdowns which we expect will negatively impact our sales of such
products until conditions improve. We acquired M & M, which now constitutes
our fastener distribution segment, on September 14, 2001 and accounted for
this acquisition using purchase accounting. Our current period's results
include a full nine months sales whereas the prior year only includes the
results from M & M since the date of acquisition.
Gross profit was $139.0 or 30.6% of net sales for the nine months ended
November 23, 2002 compared to $90.2 or 17.1% of net sales in the same period
of the prior year, including current period charges in the current period
and facility consolidation and acquisition-related costs in the same period
in the prior year. Gross profit was $174.3, or 38.3% of net sales for the
nine months ended November 23, 2002, excluding current period charges
aggregating $35.3. Gross profit before facility consolidation and
acquisition-related costs of $106.7 in the same period in the prior year was
$196.9 or 37.2% of net sales. The period over period increase in gross
margin before charges occurred despite the aforementioned decrease in
revenues and was due to the impact of our facility consolidation efforts,
lean manufacturing and continuous improvement programs. The current period
charges of $35.3 consist of a $7.0 provision for inventories that became
obsolete due to the growing number of parked aircraft which are not expected
to return to the active fleet, $6.0 related to the expansion of the facility
consolidation program to encompass 1,400 employees, and facility transition
expenses of $22.3. Restructuring charges and transition costs ($99.9) and
acquisition-related expenses ($6.8) incurred in the prior year aggregated
$106.7, the cash portion of which was $23.4 related to severance, lease
buyouts and related costs and acquisition-related expenses. Non-cash charges
in the prior year of $83.3 consisted of write-downs of property, plant and
equipment, inventories and impaired intangible assets.
Selling, general and administrative expenses were $86.3 or 19.0% of net
sales for the nine-month period as compared to $100.6 or 19.0% of net sales
during the same period in the prior year. On a proforma basis, such costs
would have been $111.1, a decrease of $24.8, or 22.3%. The year over year
decrease is comprised of $9.8 of savings realized from facility closures and
austerity measures and reduction in amortization of $15.0 resulting
from the adoption of SFAS No. 142.
Research, development and engineering expenses were $29.7 or 6.5% of net
sales for the nine months ended November 23, 2002, as compared with $33.6 or
6.4% of sales for the same period in the prior year. The period over period
decrease in research, development and engineering expenses is primarily
attributable to the lower revenue level during the current period.
The Company generated operating earnings of $58.3 or 12.8% of net sales
for the nine months ended November 23, 2002, excluding the before mentioned
charges for the provision for inventories, the facility consolidation
program and facility transition expenses aggregating $35.3. This was $4.4 or
7.0% lower than operating earnings before facility consolidation and
acquisition-related costs of $62.7 or 11.9% of net sales in the prior year.
Including such costs in the respective periods, operating earnings were
$23.0 or 5.1% of net sales for the current period, a $67.0 improvement over
the prior year operating loss of ($44.0). The $74.1 decrease in revenues
resulted in $22.6 less gross profit this year as compared with the same
period last year, excluding charges and facility transition expenses. Our
austerity measures and the impact of SFAS No. 142 generated an $18.2
reduction in operating expenses; as a result, despite the $22.6 decrease in
gross profit before charges, operating earnings before charges decreased by
only $4.4.
17
BE AEROSPACE, INC.
Interest expense, net was $50.4 for the nine months ended November 23,
2002, or $6.7 greater than interest expense of $43.7 for the same period in
the prior year. The increase in interest expense is due to the increase in
outstanding debt due to last year's financing activities and acquisitions
and an increase in the interest rate on our bank borrowings.
Income tax expense for the current nine month period was $2.7 as compared
to $1.9 in the same period in the prior year.
Earnings before charges and facility transition expenses were $5.2 (net
of income taxes of $2.7), or $0.15 per share for the nine-month period.
Including such costs, our net loss for the nine months was ($30.1) or
($0.86) per share.
The Company incurred an extraordinary charge of $9.3 (net of tax) during
the quarter ended May 26, 2001 related to the early redemption of its 9 7/8%
senior subordinated notes and repayment of its bank credit facility. As a
result, the Company reported net earnings before extraordinary item of $17.1
or $0.53 per share (diluted) or $7.8 or $0.24 per share (diluted) after
extraordinary item for the nine-month period ended November 24, 2001.
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18
BE AEROSPACE, INC.
LIQUIDITY AND CAPITAL RESOURCES
Current Financial Condition
Our liquidity requirements consist of working capital needs, cash
requirements for our facility consolidation and personnel reduction program,
ongoing capital expenditures and payments of interest and principal on our
indebtedness. Our primary requirements for working capital are directly related
to the level of our operations; working capital, primarily accounts receivable
and inventories, fluctuate with the demand for our products. Our working capital
was $310.0 as of November 23, 2002, as compared to $304.8 as of February 23,
2002.
At November 23, 2002, our cash and cash equivalents were $130.4, as compared
to $159.5 at February 23, 2002. This decrease in cash is primarily attributable
to the 14.0% lower level of revenues that resulted in $22.6 in lower gross
profit before all consolidation and acquisition-related costs, all of which was
partially offset by an $18.2 reduction in operating expenses following our
aggressive cost reduction programs and lower amortization. The timing of
interest payments on our public notes which provide for semiannual payments of
approximately $30 in our first and third fiscal quarters also contributed to the
decline in cash.
We hold a promissory note from Thomson -- CSF Holding Corporation, a
subsidiary of The Thales Group (a publicly traded French Company with over $9
billion in sales). We are currently involved in a dispute with Thales over
certain terms of a purchase and sale agreement in connection with our sale in
Fiscal 2000 of our in-flight entertainment business. Thomson -- CSF Holding
Corporation failed to make payments on the promissory notes issued to us in
connection with the sale when due, and in December 2000 we initiated arbitration
proceedings against Thales and its parent Thomson. These obligations to us are
guaranteed by Thomson -- CSF Sextant, Inc. The arbitration against Thales and
Thomson is expected to be resolved during 2003.
Cash Flows
At November 23, 2002, our cash and cash equivalents were $130.4, as compared
to $159.5 at February 23, 2002. Cash used in operating activities was $34.9 for
the nine months ended November 23, 2002. The primary use of cash was a net loss
of $30.1 offset by non-cash charges from amortization and depreciation of $22.1,
an $11.9 increase in accounts payable, offset by a reduction in accrued
liabilities of $33.4 (principally accrued interest).
Capital Spending
During the nine months ended November 23, 2002, we used $6.5 of cash for
business acquisitions. Our capital expenditures were $16.2 and $11.0 during the
nine months ended November 23, 2002 and November 24, 2001, respectively. The
year over year increase in capital expenditures is in line with our expectation
for annual capital expenditures of approximately $15.0-$17.5 for the next
several years. We have no material commitments for capital expenditures. We
have, in the past, generally funded our capital expenditures from cash from
operations and funds available to us under our bank credit facility. We expect
to fund future capital expenditures from cash on hand, from operations and
from funds available to us under our bank credit facility. In addition, since
1989, we have completed 23 acquisitions for an aggregate purchase price of
approximately $975.5. In addition, following these acquisitions, we have
rationalized the businesses, reducing headcount by nearly 4,400 employees and
eliminating 22 facilities. The cost of these actions through November 23, 2002
was approximately $320, the cash portion of which was approximately $190. We
have financed these acquisitions primarily through issuances of debt and equity
securities, including our outstanding 8% Notes due 2008, 8 7/8% Notes due 2011
and the 9 1/2% Notes due 2008 and the bank credit facility.
19
BE AEROSPACE, INC.
Outstanding Debt and Other Financing Arrangements
In August 2001, we established a new bank credit facility consisting of a
$150.0 revolving credit facility that expires in August 2006. The bank credit
facility is collateralized by our accounts receivable, inventories and by
substantially all of our other personal property. At November 23, 2002,
indebtedness under the existing bank credit facility consisted of revolving
credit facility outstanding borrowings of $144.0 (bearing interest at LIBOR plus
3.0%) and letters of credit aggregating approximately $5.6. The bank credit
facility requires no principal payments until 2006. The bank credit facility
contains customary affirmative covenants, negative covenants and conditions of
borrowing, which were met as of November 23, 2002. The interest rate margin on
the bank credit facility may increase or decrease in the event of certain
changes to our financial leverage ratios.
Long-term debt consists principally of our 8% Notes, 8 7/8% Notes and 9 1/2%
Notes (the "Notes"). The $250.0 of 8% Notes mature on March 1, 2008, the $250.0
of 8 7/8% Notes mature on May 1, 2011 and the $200.0 of 9 1/2% Notes mature on
November 1, 2008. The Notes are unsecured senior subordinated obligations and
are subordinated to all of our senior indebtedness. Each of the Notes contain
restrictive covenants, including limitations on future indebtedness, restricted
payments, transactions with affiliates, liens, dividends, mergers and transfers
of assets, which were met by us as of November 23, 2002. A breach of such
covenants, or the covenants under our bank credit facility, that continues
beyond any grace period can constitute a default, which can limit the ability to
borrow and can give rise to a right of the lenders to terminate the applicable
facility and/or require immediate repayment of any outstanding debt. The Company
has initiated discussions with the bank group to amend its financial covenants
to provide additional flexibility and anticipates that it will complete this
process during the first quarter of 2003.
Contractual and Other Obligations
The following charts reflect our contractual obligations and commercial cash
commitments as of November 23, 2002. Commercial commitments include lines of
credit, guarantees and other potential cash outflows resulting from a contingent
event that requires performance by us or our subsidiaries pursuant to a funding
commitment.
Contractual Obligations Fiscal Fiscal Fiscal Fiscal Fiscal
Total 2003 2004 2005 2006 2007 Thereafter
------------- ------------ ------------ --------- ---------- ----------- -------------
Long-term debt $853.3 $1.9 $ 4.3 $0.6 $0.1 $147.8 $698.6
Operating leases 81.8 5.2 9.5 7.0 6.3 5.8 48.0
Capital lease obligations 0.1 0.1 -- -- -- -- --
------ ---- ----- ---- ---- ------ ------
Total $935.2 $7.2 $13.8 $7.6 $6.4 $153.6 $746.6
====== ==== ===== ==== ==== ====== ======
Commercial Commitments
Letters of Credit $ 5.6 $5.6 $ -- $ -- $ -- $ -- $ --
We believe that cash flow from operations, which provides us with our
ability to fund our operations, make planned capital expenditures, make
scheduled payments and refinance our indebtedness, depends on our future
operating performance, which, in turn, is subject to prevailing economic
conditions and to financial, business and other factors, some of which are
beyond our control.
Sale-Leaseback
During the third quarter of 2002, the Company entered into two
sale-leaseback transactions involving four of our facilities. Under the
transactions, the facilities were sold for $28.7, net of transaction costs and
have been leased back for periods ranging from 15 to 20 years. The leasebacks
have been accounted for as operating leases. The future lease payments have been
included in the above tables. A gain of $4.8 resulting from the sale has been
deferred and will be amortized to rent expense over the initial term of the
leases.
20
BE AEROSPACE, INC.
Off-Balance Sheet Arrangements - Lease Arrangements
The Company finances our use of certain equipment under committed lease
arrangements provided by various institutions. Since the terms of these
arrangements meet the accounting definition of operating lease arrangements, the
aggregate sum of future minimum lease payments is not reflected on our
consolidated balance sheet. At November 23, 2002, future minimum lease payments
under these arrangements approximated $55.0. We also have various other
agreements whose future minimum lease payments approximated $26.8 at November
23, 2002.
Deferred Tax Assets
We established a valuation allowance related to the utilization of our
deferred tax assets because of uncertainties that preclude us from determining
that it is more likely than not that it will be able to generate taxable income
to realize such assets during the federal operating loss carryforward period,
which begins to expire in 2012. Such uncertainties include recent cumulative
losses, the highly cyclical nature of the industry in which we operate, risks
associated with our facility consolidation plan, our high degree of financial
leverage, risks associated with new product introductions, recent increases in
the cost of fuel and its impact on our airline customers, and risks associated
with the integration of acquired businesses. We monitor these uncertainties, as
well as other positive and negative factors that may arise in the future, as we
assess the necessity for a valuation allowance for our deferred tax assets.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Retirement
Obligations" ("SFAS No. 143"). SFAS No. 143 establishes accounting standards for
the recognition and measurement of an asset retirement obligation and its
associated asset retirement cost. It also provides accounting guidance for legal
obligations associated with the retirement of tangible long-lived assets. SFAS
No. 143 is effective for fiscal years beginning after June 15, 2002, with early
adoption permitted. The Company plans to adopt SFAS No. 143 on January 1, 2003.
The Company is currently evaluating the provisions of SFAS No. 143 but expects
that the provisions of SFAS No. 143 will not have a material impact on its
consolidated results of operations and financial position upon adoption.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," ("SFAS No. 144") which addresses the
financial accounting and reporting for the impairment or disposal of long-lived
assets. This statement supercedes SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and Long-Lived Assets to Be Disposed Of" and became
effective on February 24, 2002. The adoption of SFAS No. 144 did not have a
material impact on the Company's consolidated results of operations and
financial position.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145, among other things, requires gains and losses on
extinguishments of debt to be classified as part of continuing operations rather
than treated as extraordinary, as previously required in accordance with SFAS 4.
SFAS No. 145 also modifies accounting for subleases where the original lessee
remains the secondary obligor and requires certain modifications to capital
leases to be treated as sale-leaseback transactions. The Company adopted SFAS
No. 145 on April 1, 2002 with no material impact to its consolidated financial
statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 nullifies the guidance
previously proved under Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
and Activity (including Certain Costs Incurred in a Restructuring)." Among other
things, SFAS No. 146 requires that a liability for a cost associated with an
exit or disposal activity be recognized when the liability is incurred as
opposed to when there is commitment to a restructuring plan as set forth under
the nullified guidance. The Company plans to adopt SFAS No. 146 on January 1,
2003 for future restructurings, but expects no material impact on its
consolidated financial statements.
21
BE AEROSPACE, INC.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amount of assets and
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities at the date of our financial statements. Actual results may
differ from these estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. We believe that
our critical accounting policies are limited to those described below. For a
detailed discussion on the application of these and other accounting policies,
see Note 1 in the Notes to the Consolidated Financial Statements included in the
Company's Annual Report on Form 10-K/A for the fiscal year ended February 23,
2002.
Revenue Recognition
Sales of products are recorded on the date of shipment and passage of title,
or if required, upon acceptance by the customer. Service revenues are recorded
when services are performed. Revenues and costs under certain long-term
contracts are recognized using contract accounting under the
percentage-of-completion method. The Company sells its products primarily to
airlines and aircraft manufacturers worldwide, including occasional sales
collateralized by letters of credit. The Company performs ongoing credit
evaluations of its customers and maintains reserves for estimated credit losses.
Actual losses have been within management's expectations.
We apply judgment to ensure that the criteria for recognizing sales are
consistently applied and achieved for all recognized sales transactions.
Accounts Receivable
We perform ongoing credit evaluations of our customers and adjust credit
limits based upon payment history and the customer's current credit worthiness,
as determined by our review of their current credit information. We continuously
monitor collections and payments from our customers and maintain a provision for
estimated credit losses based upon our historical experience and any specific
customer collection issues that we have identified. While such credit losses
have historically been within our expectations and the provisions established,
we cannot guarantee that we will continue to experience the same credit loss
rates that we have in the past.
Inventories
We value our inventories at the lower of cost or market. We regularly review
inventory quantities on hand and record a provision for excess and obsolete
inventories based primarily on our estimated forecast of product demand and
production requirements. As demonstrated during fiscal 2002, demand for our
products can fluctuate significantly. Our estimates of future product demand may
prove to be inaccurate, in which case we may have understated or overstated the
provision required for excess and obsolete inventories. In the future, if our
inventories are determined to be overvalued, we would be required to recognize
such costs in our cost of goods sold at the time of such determination.
Likewise, if our inventories are determined to be undervalued, we may have
over-reported our costs of goods sold in previous periods and would be required
to recognize such additional operating income at the time of sale.
22
BE AEROSPACE, INC.
Long-Lived Assets (including Tangible and Intangible Assets and Goodwill)
To conduct our global business operations and execute our strategy, we
acquire tangible and intangible assets, which affect the amount of future period
amortization expense and possible impairment expense that we may incur. The
determination of the value of such intangible assets requires management to make
estimates and assumptions that affect our consolidated financial statements. We
assess potential impairment to intangible assets of a reporting unit on an
annual basis or when there is evidence that events or changes in circumstances
indicate that the carrying amount of an asset may not be recovered. Our
judgments regarding the existence of impairment indicators and future cash flows
related to intangible assets are based on operational performance of our
acquired businesses, market conditions and other factors. Future events could
cause us to conclude that impairment indicators exist and that goodwill or other
acquired tangible or intangible assets associated with our acquired businesses
is impaired. Any resulting impairment loss could have an adverse impact on our
results of operations.
Accounting for Income Taxes
As part of the process of preparing our consolidated financial statements we
are required to estimate our income taxes in each of the jurisdictions in which
we operate. This process involves us estimating our actual current tax exposure
together with assessing temporary differences resulting from differing treatment
of items, such as deferred revenue, for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which are included
within our consolidated balance sheets. We must then assess the likelihood that
our deferred tax assets will be recovered from future taxable income and to the
extent we believe that recovery is not likely, we must establish a valuation
allowance. To the extent we establish a valuation allowance or increase this
allowance in a period, we must include an expense within the tax provision in
the consolidated statements of operations.
Significant management judgment is required in determining our provision for
income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets. We have recorded a
valuation allowance of $106.3 million as of November 23, 2002, due to
uncertainties related to our ability to utilize some of our deferred tax assets,
primarily consisting of certain net operating income losses carried forward,
before they expire. The valuation allowance is based on our estimates of taxable
income by jurisdiction in which we operate and the period over which our
deferred tax assets will be recoverable. In the event that actual results differ
from these estimates or we adjust these estimates in future periods we may need
to establish additional valuation allowance which could materially impact our
financial position and results of operations.
DEPENDENCE UPON CONDITIONS IN THE AIRLINE INDUSTRY
The September 11, 2001 terrorist attacks have severely impacted conditions
in the airline industry. For the first time in the history of commercial
aviation, all domestic airlines were grounded for a period of three days.
According to industry sources, since resuming service, most major U.S. carriers
have substantially reduced their flight schedules. Airlines worldwide have
parked or retired approximately 15% of their fleets. During 2002, several U.S.
airlines announced further fleet downsizing, workforce reductions and other cost
reduction initiatives. The airlines have further responded by decreasing
domestic airfares to levels not seen since 1988. Domestic airline revenues are
down 14% for the first nine months of calendar 2002 compared to the same period
last year. As a result of the double-digit decline in both traffic and airfares
following the September 11, 2001 terrorist attacks, and their aftermath, as well
as other factors, such as the weakening economy, the U.S. airline industry
incurred the largest loss in its history in calendar 2001, totaling in excess of
$7 billion, net of a $5 billion cash infusion from the federal government to
offset these losses stemming from the shutdown of the nation's airspace
following the events of September 11, 2001. Industry experts now expect that the
U.S. airline industry losses in calendar 2002 may exceed those realized in 2001.
Accordingly, the airlines are seeking to conserve cash in part by deferring or
eliminating cabin interior refurbishment programs and canceling or deferring
aircraft purchases. This has caused a substantial contraction in the Company's
business, the extent and duration of which cannot be determined at this time.
23
BE AEROSPACE, INC.
The Company's principal customers are the world's commercial airlines.
During the six years ended with calendar 2000, the airlines significantly
strengthened their balance sheets and enhanced their liquidity as a result of
improved profitability, debt and equity financings and closely managed fleet
expansion. However, increases in pilot and other airline wages, coupled with
higher fuel prices and the softening of the global economy were already
negatively impacting airline profitability prior to the events of September 11,
2001. The combined impact of the recent recession and the events of September
11, 2001 has negatively impacted discretionary airline spending for cabin
interior refurbishments and upgrades and new aircraft purchases. The Company
expects that this will have a material adverse impact on its results of
operations and financial condition until such time as conditions in the airline
industry improve. While management has developed and begun to implement what it
believes is a sound plan to counter these difficult conditions, it cannot
guarantee that the plans are adequate or will be successful.
The airline industry is also undergoing a process of consolidation and
significantly increased competition. Such consolidation could result in a
reduction of future aircraft orders as overlapping routes are eliminated and
airlines seek greater economies through higher aircraft utilization.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including statements regarding implementation and expected
benefits of lean manufacturing and continuous improvement programs, the
Company's dealings with customers and partners, the consolidation of facilities,
reduction of our workforce, integration of acquired businesses, ongoing capital
expenditures, the impact of the large number of indefinitely grounded aircraft
on demand for our products and our underlying assets, the adequacy of funds to
meet the Company's capital requirements, the ability to refinance our
indebtedness, if necessary, the reduction of debt, the potential impact of new
accounting pronouncements, the impact on our business from the September 11,
2001 terrorist attacks and the resolution of the Company's arbitration against
Thales. These forward-looking statements include risks and uncertainties, and
the Company's actual experience may differ materially from that anticipated in
such statements. Factors that might cause such a difference include those
discussed in the Company's filings with the Securities and Exchange Commission,
including its most recent proxy statement and Form 10-K/A, as well as future
events that may have the effect of reducing the Company's available operating
income and cash balances, such as unexpected operating losses, the impact of
rising fuel prices on our airline customers, delays in, or unexpected costs
associated with, the integration of our acquired businesses, conditions in the
airline industry, problems meeting customer delivery requirements, the Company's
success in winning new or expected refurbishment contracts from customers,
capital expenditures, cash expenditures related to possible future acquisitions,
facility closures, product transition costs, labor disputes involving us, our
significant customers or airframe manufacturers, the possibility of a write-down
of intangible assets, delays or inefficiencies in the introduction of new
products or fluctuations in currency exchange rates.
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24
BE AEROSPACE, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to a variety of risks, including foreign currency
fluctuations and changes in interest rates affecting the cost of our
variable-rate debt.
Foreign currency - We have direct operations in Europe that receive
revenues from customers in various currencies and purchase raw materials
and components parts from foreign vendors in various currencies.
Accordingly, we are exposed to transaction gains and losses that could
result from changes in foreign currency exchange rates relative to the
U.S. dollar. The largest foreign currency exposure results from activity
in British pounds and Euros.
From time to time, the Company and its foreign subsidiaries may enter
into foreign currency exchange contracts to manage risk on transactions
conducted in foreign currencies. At November 23, 2002, we had no
outstanding forward currency exchange contracts. We did not enter into
any other derivative financial instruments.
Interest rates - At November 23, 2002, we had adjustable rate debt of
$144.0 and fixed rate debt of $699.7. The weighted average interest rate
for the adjustable and fixed rate debt was approximately 4.8% and 8.7%,
respectively, at November 23, 2002. If interest rates were to increase by
10% above current rates, the estimated impact on our financial statements
would be to reduce pretax income annually by approximately $0.5. We do
not engage in transactions to hedge our exposure to changes in interest
rates.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures - The Company's
principal executive officer and its principal financial officer, after
evaluating the effectiveness of the Company's disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c))
within 90 days of this report, have concluded that, as of such date, the
Company's disclosure controls and procedures were adequate and effective
to ensure that material information relating to the Company and its
consolidated subsidiaries would be made known to them by others within
those entities.
Change in internal controls - There were no significant changes in the
Company's internal controls or in other factors that could significantly
affect the Company's disclosure controls and procedures subsequent to the
date of their evaluation, nor were there any significant deficiencies or
material weaknesses in the Company's internal controls. As a result, no
corrective actions were required or undertaken.
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25
BE AEROSPACE, INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings Not applicable.
Item 2. Changes in Securities and Use of Proceeds Not applicable.
Item 3. Defaults Upon Senior Securities Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders Not applicable.
Item 5. Other Information Not applicable.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits - None.
b. Reports
Form 8-K, dated and filed October 7, 2002, includes the certification
of the chief executive officer and chief financial officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Form 8-K, dated October 24, 2002 and filed October 29, 2002, includes
a press release containing earnings information and information
regarding a change in fiscal year-end.
Form 8-K, dated and filed December 17, 2002, includes a press release
containing earnings information, including certain unaudited financial
information.
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26
BE AEROSPACE, INC.
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.
BE AEROSPACE, INC.
Date: January 7, 2003 By: /s/ Robert J. Khoury
--------------------
Robert J. Khoury
President and
Chief Executive Officer
Date: January 7, 2003 By: /s/ Thomas P. McCaffrey
-----------------------
Thomas P. McCaffrey
Corporate Senior Vice President of
Administration and Chief Financial Officer
27
BE AEROSPACE, INC.
CERTIFICATIONS
--------------
I, Robert J. Khoury, certify that:
1. I have reviewed this quarterly report on Form 10-Q of BE Aerospace, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrants as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect the internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: January 7, 2003 By: /s/ Robert J. Khoury
--------------------
Robert J. Khoury
President and
Chief Executive Officer
28
BE AEROSPACE, INC.
CERTIFICATIONS
--------------
I, Thomas P. McCaffrey, certify that:
1. I have reviewed this quarterly report on Form 10-Q of BE Aerospace, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect the internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: January 7, 2003 By: /s/ Thomas P. McCaffrey
-----------------------
Thomas P. McCaffrey
Corporate Senior Vice
President of Administration
and Chief Financial Officer
29