SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-Q QUARTERLY REPORT Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter ended June 30, 2002 Commission file number: 1-12162 BORGWARNER INC. (Exact name of registrant as specified in its charter) Delaware 13-3404508 State or other jurisdiction of (I.R.S. Employer Incorporation or organization Identification No.) 200 South Michigan Avenue, Chicago, Illinois 60604 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (312) 322-8500 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 On June 30, 2002 the registrant had 26,680,164 shares of Common Stock outstanding. BORGWARNER INC. FORM 10-Q SIX MONTHS ENDED JUNE 30, 2002 INDEX Page No. PART I. Financial Information Item 1. Financial Statements Introduction 2 Condensed Consolidated Balance Sheets at June 30, 2002 and December 31, 2001 3 Consolidated Statements of Operations for the three months ended June 30, 2002 and 2001 4 Consolidated Statements of Operations for the six months ended June 30, 2002 and 2001 5 Consolidated Statements of Cash Flows for the six months ended June 30, 2002 and 2001 6 Notes to the Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Item 3. Quantitative and Qualitative Disclosures About Market Risks 22 PART II. Other Information Item 1. Legal Proceedings 23 Item 4. Submission of Matters to a Vote of Security Holders 23 Item 6. Exhibits and Reports on Form 8-K 24 SIGNATURES 25 BORGWARNER INC. FORM 10-Q SIX MONTHS ENDED JUNE 30, 2002 PART I. ITEM 1. BorgWarner Inc. and Consolidated Subsidiaries' Financial Statements The financial statements of BorgWarner Inc. and Consolidated Subsidiaries (the "Company") have been prepared in accordance with the instructions to Form 10-Q under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The statements are unaudited but include all adjustments, consisting only of recurring items, except as noted, which the Company considers necessary for a fair presentation of the information set forth herein. The results of operations for the three and six months ended June 30, 2002 are not necessarily indicative of the results to be expected for the entire year. The following financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001. BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (millions of dollars except share data) June 30, December 31, 2002 2001 ASSETS Cash and cash equivalents $ 30.2 $ 32.9 Receivables 295.6 203.7 Inventories 156.0 143.8 Deferred income tax asset 23.6 23.6 Investments in businesses held for sale 13.1 12.2 Prepayments and other current assets 25.6 25.1 ---- ----- Total current assets 544.1 441.3 Property, plant, and equipment at cost 1,446.3 1,347.7 Less accumulated depreciation (588.0) (509.5) ------- ----- Net property, plant and equipment 858.3 838.2 Tooling, net of amortization 87.9 84.1 Investments and advances 142.3 137.4 Goodwill, net 822.4 1,160.6 Deferred income tax asset 54.9 5.7 Other non-current assets 105.9 103.6 ------- ----- Total other assets 1,213.4 1,491.4 --------- -------- $2,615.8 $2,770.9 ========= ============ LIABILITIES & STOCKHOLDERS' EQUITY Notes payable $ 16.5 $ 35.6 Accounts payable and accrued expenses 457.1 410.6 Income taxes payable 27.9 8.8 -------- ------ Total current liabilities 501.5 455.0 Long-term debt 651.1 701.4 Long-term retirement-related liabilities 399.8 393.0 Other long-term liabilities 116.4 105.9 ------- --------- Total long-term liabilities 516.2 498.9 Minority Interest 10.8 11.4 Capital stock: Preferred stock, $.01 par value; authorized 5,000,000 shares; none issued - - Common stock, $.01 par value; authorized 50,000,000 shares; issued shares of 27,168,546 in 2002 and outstanding shares of 26,680,164 in 2002 0.3 0.3 Non-voting common stock, $.01 par value; authorized 25,000,000 shares; none issued and outstanding in 2002 - - Capital in excess of par value 724.7 715.7 Retained earnings 271.1 470.9 Management shareholder note (2.0) (2.0) Accumulated other comprehensive income (loss)(37.9) (53.1) Common stock held in treasury, at cost: 488,382 shares in 2002 (20.0) (27.6) ------ ------ Total stockholders' equity 936.2 1,104.2 ------ -------- $2,615.8 $2,770.9 ======== ======== See accompanying Notes to Consolidated Financial Statements BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (millions of dollars except share data) Three Months Ended June 30, 2002 2001 Net sales $ 712.4 $ 602.0 Cost of sales 530.8 452.5 Amortization of tooling 7.2 5.9 ----- ----- Total cost of sales 538.0 458.4 Gross profit 174.4 143.6 Depreciation 27.2 25.7 Selling, general and administrative expenses 72.7 59.3 Minority interest 1.6 0.7 Goodwill amortization - 10.3 Equity in affiliate earnings, net of tax and other income (5.9) (4.6) ----- ------- Earnings before interest expense, finance charges and income taxes 78.8 52.2 Interest expense and finance charges 9.5 12.4 Earnings before income taxes 69.3 39.8 Provision for income taxes 23.6 15.1 ---- ------ Net earnings $45.7 $ 24.7 ======== ======= Net earnings per share - Basic $ 1.72 $ 0.94 ======== ====== Net earnings per share - Diluted $ 1.70 $ 0.93 ====== ======= Average shares outstanding (thousands) Basic 26,618 26,309 Diluted 26,918 26,457 Dividends declared per share $ 0.15 $ 0.15 ======== ======== See accompanying Notes to Consolidated Financial Statements BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (millions of dollars except share data) Six Months Ended June 30, 2002 2001 Net sales $ 1,346.3 $ 1,208.8 Cost of sales 1,005.4 917.5 Amortization of tooling 13.7 12.1 ----- ------- Total cost of sales 1,019.1 929.6 Gross profit 327.2 279.2 Depreciation 54.2 52.8 Selling, general and administrative expenses143.3 114.9 Minority interest 3.1 1.4 Goodwill amortization - 20.9 Equity in affiliate earnings, net of tax and other income (9.8) (9.3) ----- -------- Earnings before interest expense, finance charges and income taxes 136.4 98.5 Interest expense and finance charges 19.4 25.2 ------ ------ Earnings before income taxes 117.0 73.3 Provision for income taxes 39.8 27.5 ----- ------ Net earnings before cumulative effect of accounting change 77.2 45.8 ======= ======= Cumulative effect of change in accounting principle, net of tax (269.0) - --------- --------- Net earnings/(loss) $(191.8) $ 45.8 ======== ========== Net earnings/(loss) per share - Basic Net earnings per share before cumulative effect of accounting change $ 2.91 $ 1.74 Cumulative effect of accounting change (10.15) - ======= ======== Net earnings/(loss) per share $(7.24) $ 1.74 ======= ======== Net earnings/(loss) per share - Diluted Net earnings per share before cumulative effect of accounting change $ 2.88 $ 1.73 Cumulative effect of accounting change (10.04) - --------- -------- Net earnings/(loss) per share $(7.16) $ 1.73 ======== ======== Average shares outstanding (thousands) Basic 26,525 26,279 Diluted 26,825 26,427 Dividends declared per share $ 0.30 $ 0.30 ======= ======= See accompanying Notes to Consolidated Financial Statements BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (millions of dollars) Six Months Ended June 30, 2002 2001 Operating Net earnings $(191.8) $ 45.8 Non-cash charges to operations: Depreciation 54.2 52.8 Amortization of tooling 13.7 12.1 Goodwill amortization - 20.9 Cumulative effect of change in accounting principle, net of tax 269.0 - Employee retirement benefits 7.8 - Other, principally equity in affiliate earnings, net of tax (8.3) (6.0) ----- ------ Net earnings adjusted for non-cash charges 144.6 125.6 ------- -------- Changes in assets and liabilities, net of effects of acquisitions and divestitures: Increase in receivables (78.1) (44.7) (Increase) decrease in inventories (8.3) 10.5 (Increase) decrease in prepayments and other current assets 0.7 (2.3) Increase (decrease) in accounts payable and accrued expenses 35.5 (8.0) Increase in income taxes payable 19.0 20.8 Net change in other long-term assets and liabilities 7.9 7.0 ------ ------- Net cash provided by operating activities 121.3 108.9 Investing Capital expenditures (55.3) (50.6) Tooling outlays, net of customer reimbursements (16.1) (10.3) Net proceeds from asset disposals 8.3 1.0 Proceeds from sale of businesses 0.5 12.8 Tax refunds related to divestitures 20.5 - ------- ------- Net cash used in investing activities (42.1) (47.1) Financing Net decrease in notes payable (20.1) (25.0) Additions to long-term debt 0.4 15.2 Reductions in long-term debt (62.7) (42.1) Proceeds from stock options exercised 7.6 2.4 Dividends paid (8.0) (7.9) ------ -------- Net cash used in financing activities (82.8) (57.4) Effect of exchange rate changes on cash and cash equivalents 0.9 (2.2) ------- -------- Net increase (decrease) in cash and cash equivalents (2.7) 2.2 Cash and cash equivalents at beginning of period 32.9 21.4 ------- ------- Cash and cash equivalents at end of period $30.2 $23.6 ====== ======= Supplemental Cash Flow Information Net cash paid (received) during the period for: Interest $21.1 $26.0 Income taxes (12.5) 13.1 Non-cash financing transactions: Issuance of common stock for Executive Stock Performance Plan 1.2 1.0 See accompanying Notes to Consolidated Financial Statements BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) Research and development costs charged to expense for the three and six months ended June 30, 2002 were $28.2 million and $57.7 million. Research and development costs charged to expense for the three and six months ended June 30, 2001 were $29.7 million and $56.9 million. (2) Inventories consisted of the following (millions of dollars): June 30, December 31, 2002 2001 Raw materials $ 66.0 $ 69.7 Work in progress 65.4 44.5 Finished goods 24.6 29.6 --------- --------- Total inventories $ 156.0 $ 143.8 ========= ========= (3) The Company has a 50% interest in NSK-Warner K.K. (NSK-Warner), a joint venture based in Japan that manufactures automatic transmission components and systems. The Company's share of the earnings or losses reported by NSK-Warner is accounted for using the equity method of accounting. NSK-Warner has a fiscal year-end of March 31. The Company's investment in NSK-Warner was $134.7 million at June 30, 2002 and $128.8 million at December 31, 2001. Following are summarized financial data for NSK-Warner. Balance sheet data is presented as of June 30, 2002 and March 31, 2002 and statement of income data is presented for the three months ended June 30, 2002 and 2001. The Company's results include its share of NSK-Warner's results for the three and six months ended May 31, 2002 and May 31, 2001. June 30, March 31, 2002 2002 (in millions) Balance Sheet Current assets $ 161.5 $ 147.2 Non-current assets 149.9 133.8 Current liabilities 90.0 83.1 Non-current liabilities 4.9 4.4 The equity as of June 30, 2002 and March 31, 2002 was $214.2 million and $191.4 million, respectively. There was no debt as of June 30, 2002 and March 31, 2002. Three Months Ended June 30, 2002 2001 (in millions) Net sales $ 74.1 $ 69.9 Gross profit 16.4 14.4 Net income 6.9 5.8 (4) The Company's provision for income taxes is based upon estimated annual tax rates for the year applied to federal, state and foreign income. The effective rate for 2002 differed from the U.S. statutory rate primarily due to a)state income taxes, b)foreign rates which differ from those in the U.S. and c)realization of certain business tax credits, including foreign tax credits and research and development credits. In 2002, the Company completed a change in the ownership structure of its foreign operations for strategic business purposes. An indirect result of this change was lower tax rates on the income of certain of the Company's foreign operations. The Company expects its effective tax rate for 2002 to be 34%. (5) Following is a summary of notes payable and long-term debt: June 30, 2002 December 31,2001 Current Long-Term Current Long-Term DEBT (millions of dollars) Bank borrowings $ 10.9 $ 58.5 $30.6 $69.4 Term loans due through 2011 (at an average rate of 3.0% at June, 2002 and 3.0% at December, 2001) 5.6 32.2 5.0 31.2 7% Senior Notes due 2006, net of unamortized discount ($100 million converted to floating rate of 2.9% by interest rate swap)- 139.3 - 141.8 6.5% Senior Notes due 2009, net of unamortized discount ($25 million converted to floating rate of 2.4% by interest rate swap)- 164.8 - 164.7 8% Senior Notes due 2019, net of unamortized discount - 134.2 - 134.2 7.125% Senior Notes due 2029, net of unamortized discount - 122.0 - 159.9 Capital lease liability - 0.1 - 0.2 ----- ----- --- ----- Total notes payable and long-term debt $ 16.5 $651.1 $35.6 701.4 ======== ======= ======== ====== The Company has a revolving credit facility that provides for borrowings up to $350 million through July, 2005. At June 30, 2002, there were no borrowings outstanding under the facility and the Company had $7.3 million of obligations under standby letters of credit. At December 31, 2001, $20.0 million of borrowings under the facility were outstanding in addition to $6.5 million of obligations under standby letters of credit. The credit agreement contains numerous financial and operating covenants including, among others, covenants requiring the Company to maintain certain financial ratios and restricting its ability to incur additional indebtedness. The Company has entered into interest rate and currency swaps to manage interest rate and foreign currency risk. A summary of these instruments outstanding at June 30, 2002 follows (currency in millions): Notional Interest rates(b) Floating interest Hedge Type Amount Receive Pay rate basis Interest Rate Swaps(a) (Millions) Fixed to floating Fair value $100 7.0% 2.9% 6 month LIBOR+.98% Fixed to floating Fair value $ 25 6.5% 2.4% 6 month LIBOR+.45% Cross Currency Swap (matures in 2006) Floating $ Net to floating Yen investment Yen6,430 1.3% 6 mo. JPY LIBOR+1.18% $50 2.9% - 6 mo. USD LIBOR+.98% a) The maturity of the swaps corresponds with the maturity of the hedged item as noted in the debt summary, unless otherwise indicated. b) Interest rates are as of June 30, 2002. The ineffective portion of the swap was not material. There is no income statement impact due to changes in the fair value of these swaps. (6) The Company and certain of its current and former direct and indirect corporate predecessors, subsidiaries and divisions have been identified by the United States Environmental Protection Agency and certain state environmental agencies and private parties as potentially responsible parties (PRPs) at various hazardous waste disposal sites under the Comprehensive Environmental Response, Compensation and Liability Act (Superfund) and equivalent state laws and, as such, may presently be liable for the cost of clean-up and other remedial activities at 43 such sites. Responsibility for clean-up and other remedial activities at a Superfund site is typically shared among PRPs based on an allocation formula. Based on the information available to the Company, which in most cases, includes: an estimate of allocation of liability among PRPs; the probability that other PRPs, many of whom are large solvent public companies, will fully pay the cost apportioned to them; currently available information from PRPs and/or federal or state environmental agencies concerning the scope of contamination and estimated remediation costs; remediation alternatives; estimated legal fees; and other factors, the Company has established a reserve for indicated environmental liabilities with a balance at June 30, 2002 of approximately $23.2 million. The Company expects this amount to be expended over the next three to five years. BorgWarner believes that none of these matters, individually or in the aggregate, will have a material adverse effect on its financial condition or future operating results, generally either because estimates of the maximum potential liability at a site are not large or because liability will be shared with other PRPs, although no assurance can be given with respect to the ultimate outcome of any such matter. In connection with the sale of Kuhlman Electric Corporation, the Company agreed to indemnify the buyer and Kuhlman Electric for certain environmental liabilities relating to the past operations of Kuhlman Electric. During 2000, Kuhlman Electric notified the Company that it discovered potential environmental contamination at its Crystals Springs, Mississippi plant while undertaking an expansion of the plant. The Company has been working with the Mississippi Department of Environmental Quality and Kuhlman Electric to investigate the extent of the contamination. The investigation has revealed the presence of PCBs in portions of the soil at the plant and neighboring areas. Kuhlman Electric and others, including the Company, have been sued in several related lawsuits, which claim personal and property damage. The Company has moved to be dismissed from some of these lawsuits. The Company's lawsuit against Kuhlman Electric seeking declaration of the scope of the Company's contractual indemnity has been amicably resolved and dismissed. The Company believes that its reserve for environmental liabilities is sufficient to cover any potential liability associated with these matters. Patent infringement actions have been filed against the Company's turbocharger unit in Europe in late 2001 and in 2002 by Honeywell International. The Dusseldorf District Court in Germany entered a preliminary injunction against the Company on July 9 limiting the Company's ability to manufacture and sell a certain variable turbine geometry turbocharger in Germany until a patent hearing currently scheduled for December 18, 2002. In order to continue the uninterrupted service to its customer, the Company paid Honeywell $25 million in July so that it could continue to make and ship disputed car turbochargers through June of 2003. The agreement with Honeywell partially settles litigation, suspends the July preliminary injunction and provides for a license to ship until June 2003. As part of the agreement, Honeywell agreed to not seek damages for shipments occurring before June 30, 2003. The Company is appealing the July preliminary injunction. The Company continues to believe that its current production designs do not violate the Honeywell patents and are not covered by their lawsuit. A hearing on the turbocharger model currently in dispute is still scheduled for December. The Company has and will recognize expense of the $25 million license payment as it ships the affected products from January 2002 to June 2003. In support of a new product that will be launched in 2002, a third party has purchased $29.7 million of fixed assets. Upon release of the new product, the Company intends to lease these assets under an operating lease. (7) Comprehensive income (loss) is a measurement of all changes in stockholders' equity that result from transactions and other economic events other than transactions with stockholders. For the Company, this includes foreign currency translation adjustments, changes in the minimum pension liability adjustment and net earnings. The amounts presented as other comprehensive income (loss), net of related taxes, are added to net income resulting in comprehensive income (loss). The following summarizes the components of other comprehensive income (loss) on a pretax and after-tax basis for the periods ended June 30, (in millions) Three Months Ended 2002 2001 Income Income Tax After- Tax After- Pretax Effect tax Pretax Effect tax Foreign currency translation adjustments $ 50.0 $(12.7)$ 37.3 $(20.6) $7.8 $(12.8) Net income as reported 45.7 24.7 ----- ------- Total comprehensive income (loss)$ 83.0 $11.9 ====== ======= (in millions) Six Months Ended 2002 2001 Income Income Tax After- Tax After- Pretax Effect tax Pretax Effect tax Foreign currency translation adjustments $ 20.4 $ (5.2) $15.2 $(23.7)$8.9 $(14.8) Net income as reported (191.8) 45.8 ------- ----- Total comprehensive income (loss)$(176.6) $31.0 ====== ====== The components of accumulated other comprehensive income (loss),net of tax, in the Consolidated Balance Sheets are as follows: (in millions) June 30, December 31, 2002 2001 Foreign currency translation adjustments $(19.0) $(34.2) Minimum pension liability adjustment (18.9) (18.9) Total comprehensive income (loss) $ (37.9) $(53.1) ======== ======== The following tables show sales, earnings before interest and taxes and total assets for each of the Company's five reportable business segments (in millions of dollars). Sales Three Months Ended June 30, 2002 2001 Inter- Inter- Customer segment Net Customer segment Net ------- --------- ----- --------- ------- ------ Air/Fluid Systems $ 102.1 $3.2 $105.3 $92.6 $2.0 $94.6 Cooling Systems 62.5 - 62.5 58.0 0.1 58.1 Morse TEC 264.1 7.0 271.1 215.4 5.8 221.2 TorqTransfer Systems159.9 0.8 160.7 129.1 0.2 129.3 Transmissions Systems123.8 5.1 128.9 106.9 2.9 109.8 Divested Operations - - - - - - Inter-segment eliminations - (16.1) (16.1) - (11.0) (11.0) ------ ------ ------- ------ -------- ------- Consolidated $712.4 $ - $712.4 $602.0 $ - $602.0 ====== ======= ======= ========= ====== ======== Sales Six Months Ended June 30, 2002 2001 Inter- Inter- Customer segment Net Customer segment Net Air/Fluid Systems $199.2 $6.2 $205.4 $181.6 $3.9 $185.5 Cooling Systems 115.8 - 115.8 116.3 0.1 116.4 Morse TEC 499.0 13.2 512.2 430.6 11.3 441.9 TorqTransfer Systems296.1 1.4 297.5 254.1 10.6 254.7 Transmissions Systems236.2 8.4 244.6 208.2 5.6 213.8 Divested Operations - - - 18.0 - 18.0 Inter-segment eliminations - (29.2) (29.2) - (21.5)(21.5) ---- ------- ------- ------- ------ -------- Consolidated $ 1,346.3 $- $1,346.3 $ 1,208.8 $ - $1,208.8 ======= ======= ======= ======== ======= ======= Earnings Before Earnings Before Interest & Taxes Interest & Taxes Three Months Ended Six Months Ended June 30, June 30, 2001 2001 2002 2001 As Adjusted 2002 2001 As Adjusted Air/Fluid Systems $10.0 $6.1 $7.7 $17.5 $9.0 $12.3 Cooling Systems 8.0 2.1 6.5 13.4 4.0 13.0 Morse TEC 40.4 30.9 33.8 75.3 58.9 64.9 TorqTransfer Systems10.8 6.2 6.2 17.7 10.2 10.2 Transmission Systems19.9 11.9 13.3 33.8 23.9 26.7 Divested operations - - - - (0.2) (0.2) ----- ------ ------ ------ ----- ------ Total 89.1 57.2 67.5 157.7 105.8 126.9 Corporate, including equity in affiliates (10.3) (5.0) (5.0) (21.3) (7.3) (7.5) -------- ------- ------- -------- ------- ------ EBIT $78.8 $ 52.2 $ 62.5 $136.4 $98.5 $119.4 ======= ======= ======= ======= ====== ====== The 2001 as adjusted columns show the 2001 reported EBIT by segment, excluding goodwill amortization. This is to be comparable to the 2002 presentation, which requires that goodwill not be amortized. Total Assets June 30, December 31, 2002 2001 Air/Fluid Systems $ 318.8 $ 382.1 Cooling Systems 245.4 510.1 Morse TEC 1,160.1 1,066.4 TorqTransfer Systems 280.8 266.6 Transmission Systems 381.1 359.6 -------- ---------- Total 2,386.2 2,584.8 Corporate, including equity in affiliates 229.6 186.1 -------- --------- Consolidated $2,615.8 $2,770.9 ======== ========= (9) Other non-recurring charges of $28.4 million were incurred in the fourth quarter of 2001. These charges primarily include adjustments to the carrying value of certain assets and liabilities related to businesses acquired and disposed of over the past three years. These charges are primarily non-employee related exit costs for certain non-production facilities the Company has previously sold or no longer needs and non-recurring product quality related charges. The 2001 non-recurring charges include $8.4 million of environmental remediation costs related to sold businesses and $12 million of product quality costs for issues with products that were sold by acquired businesses prior to acquisition, all of which have been fixed in the currently produced products. Of the $28.4 million of pretax charges, $5.0 million represents non-cash charges. Approximately $3.3 million was spent in 2001, $8.4 million was transferred to environmental reserves in 2001, $3.0 million was spent in the six months ended June 30, 2002, and the remaining $8.7 million is expected to be spent over the next eighteen months. The Company expects to fund the total cash outlay of these actions with cash flow from operations. The roll-forward for the balance of the other exit costs and non-recurring charges are detailed in the following table. Other Exit Costs and Non-Recurring Charges (in millions of dollars) Balance, December 31, 2001 $ 11.7 Incurred 3.0 Balance, June 30, 2002 $ 8.7 (10) In April 2001, the Company completed the sale of its fuel systems business to an investor group led by TMB Industries, a private equity group. The transaction did not have a significant impact on the Company's results of operations, financial condition or cash flows. (11) The Company securitizes and sells certain receivables through third party financial institutions without recourse. The amount sold can vary each month based on the amount of underlying receivables, up to a maximum of $120 million. During the six months ended June 30, 2002, the amount of receivables sold ranged from $119 million to $120 million. There are no gains or losses booked as a result of these transactions. At June 30, 2002, the Company had sold $120 million of receivables under a $122.4 million Receivables Transfer Agreement for face value without recourse. (12) In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," SFAS No. 142, effective January 1, 2002, which specifies that goodwill and certain intangible assets will no longer be amortized but instead will be subject to periodic impairment testing. SFAS No. 142 also requires that, upon adoption, goodwill be allocated to the Company's reporting units and a two-step impairment analysis be performed. The Company adopted SFAS No. 142 effective January 1, 2002. Under the transitional provisions of the SFAS, the Company allocated goodwill to its reporting units and performed the two-step impairment analysis. The fair value of the Company's businesses used in determination of the goodwill impairment was computed using the expected present value of associated future cash flows. As a result of this analysis, the Company determined that goodwill associated with its Cooling Systems and Air/Fluid Systems operating businesses was impaired due to fundamental changes in their served markets, particularly the medium and heavy truck markets, and weakness at a major customer. As a result a charge of $269 million, net of taxes of $76 million, was recorded. The impairment loss was recorded in the first quarter of 2002 as a cumulative effect of change in accounting principle. The changes in the carrying amount of goodwill (in millions of dollars) for the six months ended June 30, 2002, are as follows: Torq- Air/Fluid Cooling Morse Transmission Transfer Systems Systems TEC Systems Systems Total Balance at 12/31/2001 $228.9 $417.3 $385.4 $129.0 $0.0 $1,160.6 Translation adjustments 0.3 1.3 5.2 6.8 Change in accounting principle (73.5) (271.5) - - - (345.0) ------- -------- -------- ------- ------ ------ Balance at 6/30/2002 $155.7 $147.1 $390.6 $129.0 $0.0 $822.4 ======= ======== ======= ======== ==== ======= Also as a result of the adoption of SFAS 142, the Company did not amortize goodwill in 2002. The following table provides adjusted net income and earnings per share data for the quarters ended June 20, 2002 and 2001 as if goodwill had not been amortized during these periods: For the Quarter Ended June 30, 2002 2001 (in millions of dollars) Reported net earnings $45.7 $24.7 Goodwill amortization, net of tax - 6.5 ------- ---------- Adjusted net earnings (loss) $45.7 $31.2 ======= ========== Basic earnings (loss) per share: Reported net earnings $1.72 $0.94 Goodwill amortization - 0.25 -------- --------- Adjusted net earnings (loss) $1.72 $1.19 ========= ========== Diluted earnings (loss) per share: Reported net earnings $1.70 $0.93 Goodwill amortization - 0.25 -------- --------- Adjusted net earnings (loss) $1.70 $1.18 ======== ========= For the Six Months Ended June 30, 2002 2001 (in millions of dollars) Reported net earnings before cumulative effect of change in accounting principle $77.2 $45.8 Goodwill amortization, net of tax - 13.2 ------- -------- Adjusted net earnings before cumulative effect of change in accounting principle $77.2 $59.0 ======== ========= Cumulative effect of change in accounting principle, net of tax (269.0) - ------- ----------- Adjusted net earnings (loss) ($191.8) $59.0 ========= ========= Basic earnings (loss) per share: Reported net earnings before cumulative effect of change in accounting principle $2.91 $1.74 ======== ========== Goodwill amortization - 0.50 Adjusted net earnings before cumulative effect of change in accounting p principle $2.91 $2.24 ======== ========== Cumulative effect of change in accounting principle, net of tax ($10.15) - --------- --------- Adjusted net earnings (loss) ($7.24) $2.24 ========= ======== Diluted earnings (loss) per share: Reported net earnings before cumulative effect of change in accounting principle $2.88 $1.73 Goodwill amortization - 0.50 ------- ---------- Adjusted net earnings before cumulative effect of accounting change $2.88 $2.23 ======== ========== Cumulative effect of change in accounting principle, net of tax ($10.04) - -------- -------- Adjusted net earnings (loss) ($7.16) $2.23 ======== ======= (13)In August 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company adopted SFAS No. 144 effective January 1, 2002. The adoption of SFAS No. 144 had no impact on the Company's results of operations, financial position or cash flows. 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." This statement eliminates the automatic classification of gain or loss on extinguishment of debt as an extraordinary component of income and requires that such gain or loss be evaluated for extraordinary classification under the guidelines of Accounting Principles Board No. 30 "Reporting Results of Operations." This statement also requires sales-leaseback accounting for certain lease modifications that have economic effects that are similar to sales-leaseback transactions and makes various other technical corrections to the existing pronouncements mentioned above. The adoption of SFAS No. 145 had no impact on the Company's results of operations, financial position or cash flows. In June 2002, the FASB issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The standard 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. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company does not expect that the adoption of SFAS No. 146 will have a material impact on the Company's results of operations, financial position or cash flows. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION BorgWarner Inc. and Consolidated Subsidiaries (the "Company") is a leading global supplier of highly engineered systems and components for powertrain applications. Its products help improve vehicle performance, fuel efficiency, handling and air quality. Its products are manufactured and sold worldwide, primarily to original equipment manufacturers (OEMs) of passenger cars, sport utility vehicles, trucks, and commercial transportation products. The Company operates manufacturing facilities serving customers in the Americas, Europe and Asia, and is an original equipment supplier to every major OEM in the world. RESULTS OF OPERATIONS The Company's products fall into five reportable operating segments: Air/Fluid Systems, Cooling Systems, Morse TEC, TorqTransfer Systems and Transmission Systems. The following tables present net sales and earnings before interest and taxes (EBIT) by segment for the three and six months ended June 30, 2002 and 2001 in millions of dollars. Three Months Six Months Net Sales June 30, June 30, 2002 2001 2002 2001 Air/Fluid Systems $ 105.3 $ 94.6 205.4 185.5 Cooling Systems 62.5 58.1 115.8 116.4 Morse TEC 271.1 221.2 512.2 441.9 TorqTransfer Systems 160.7 129.3 297.5 254.7 Transmission Systems 128.9 109.8 244.6 213.8 Divested operations - - - 18.0 ---------- -------- --------- ---------- 728.5 613.0 1,375.5 1,230.3 Inter-segment eliminations(16.1) (11.0) (29.2) (21.5) ---------- ------- --------- -------- Net sales $ 712.4 $ 602.0 $1,346.3 $1,208.8 ========= ======== ========= ======== Three Months Six Months EBIT June 30, June 30, 2001 2001 2002 2001 As Adjusted 2002 2001 As Adjusted Air/Fluid Systems $ 10.0 $ 6.1 $ 7.7 $ 17.5 $ 9.0 $ 12.3 Cooling Systems 8.0 2.1 6.5 13.4 4.0 13.0 Morse TEC 40.4 30.9 33.8 75.3 58.9 64.9 TorqTransfer Systems 10.8 6.2 6.2 17.7 10.2 10.2 Transmission Systems 19.9 11.9 13.3 33.8 23.9 26.7 Divested operations - - - - (0.2) (0.2) ------- ------- --------- -------- -------- --------- EBIT $ 89.1 $ 57.2 $ 67.5 $ 157.7 $ 105.8 $ 126.9 ======== ====== ======== ========= ======== =========== The 2001 as adjusted columns show the 2001 reported EBIT by segment, excluding goodwill amortization. This is to be comparable to the 2002 presentation, which required that goodwill not be amortized. Consolidated sales for the second quarter ended June 30, 2002 totaled $712.4 million, an 18% increase over the second quarter of 2001. This increase was favorable compared to the total North American automotive market, which experienced production increases of 7%. Geographically, the Company's sales increase was most significant in North America and Europe with lesser amounts coming from Asia. Sales would have increased an additional $2.2 million except for weaker currencies, primarily in Japan and the Americas. Appreciation of European and other currencies did not have a significant impact on the Company's results as the average rates for the first six months of 2002 were generally slightly lower than for the same time period in 2001. The Morse TEC and Transmission Systems' businesses are the most affected by currency fluctuations in Europe, Asia, and the Americas. Second quarter net income increased from $24.7 million, to $45.7 million, an 85% increase. The increase in operating income was positively impacted by the elimination of goodwill amortization in accordance with SFAS 142, which the Company adopted January 1, 2002. If goodwill amortization were removed from the 2001 results, the increase in income would have been 46%. Moreover, the increase in income was due to higher revenue, better gross margins, lower interest expense and a lower tax rate, and was partially offset by higher selling, general and administrative (SG&A) expenses. For better comparability, all segment EBIT discussions will use adjusted 2001 figures as if they did not contain goodwill amortization. The Air/Fluid Systems business' revenue increased 11% and EBIT increased $2.3 million, or 30% from 2001. The increase in revenue was due to higher sales to the major OEM customer of this business as well as the ramp-up in production volume of a European customer. The Cooling Systems business' second quarter 2002 sales and EBIT increased 8% and 23% from second quarter 2001, respectively as a result of the stabilization of the medium and heavy truck market, especially in North America, and penetration into Asian markets. EBIT improved due to volume increases and cost controls. The Morse TEC business had a sales increase of 23%. Contributing to the sales increase were strong sales of engine timing chains, increased usage of turbochargers, and continued strength in sales of sport utility vehicles, many of which utilize the Company's chain products for their four-wheel drive systems. EBIT increased 20% due to the increased volumes. The increase would have been greater except for the prorated portion of costs related to the Honeywell settlement disclosed more fully in Note 6. The TorqTransfer Systems' business experienced a 24% sales increase and a 74% EBIT increase. This business has a relatively high fixed cost structure, which causes larger swings in earnings when production volume changes. This benefited the group during the second quarter of 2002 where revenue increased due to volume gains in four-wheel drive transfer case programs with Ford and Korean OEMs, and increased sales of the Company's new InterActive Torque Management (ITM) all-wheel drive system to Honda. Transmission Systems had a 17% sales increase and 50% increase in EBIT. Sales growth was strong in all regions for this business. The EBIT increase was driven by a combination of increased volume and cost controls. Consolidated gross margin for the first quarter of 2002 was 24.5%, up 0.6 percentage points from the 2001 margin of 23.9%. The gross margin increase resulted from increased volumes as well as the benefit of productivity gains and cost control efforts. SG&A expenses increased $13.4 million and also increased as a percentage of sales from 9.9% to 10.2% of sales. This is due to higher health care and retiree costs, and higher risk management costs. Additionally, the SG&A category includes substantially all the Company's spending on R&D. For the second quarter of 2002, R&D spending totaled $28.2 million, or 4.0% of sales versus $29.7 million, or 4.9% of sales for the second quarter of 2001. There was no goodwill amortization in 2002, compared to $20.9 million year-to-date in 2001, due to the change in accounting standards where goodwill is no longer amortized, but rather is periodically reviewed for impairment. The Company began breaking-out tooling amortization as a component of cost of sales. This was due to increases in the amount of tooling outlays as a result of lower customer reimbursements and increases in new customer projects. Tooling amortization has always been a part of the Company's cost of sales. Second quarter interest expense decreased $2.9 million from second quarter 2001 as a result of debt reductions throughout 2001 and 2002 as well as lower interest rates. At June 30, 2002, the amount of debt with fixed interest rates was 60% of total debt. Affiliate earnings, which consist primarily of the Company's 50% share of NSK-Warner in Japan, were up $1.3 million due to a strengthening in their business. The Company's provision for income taxes is based on estimated annual tax rates for the year applied to federal, state and foreign income. The effective rate for 2002 differed from the U.S. statutory rate primarily due to a) state income taxes, b) foreign rates which differ from those in the U.S. and c) realization of certain business tax credits, including foreign tax credits and research and development credits. In 2002, the Company completed a change in the ownership structure of its foreign operations for strategic business purposes. An indirect result of this change was lower tax rates on the income of certain of the Company's foreign operations. The Company expects its effective tax rate for 2002 to be 34%. Net income was $45.7 million for the second quarter, or $1.70 per diluted share, an increase of 85% over the previous year's second quarter. If last year's goodwill amortization were not included, the percentage of net income to sales would have been 5.2% for the second quarter of 2001 and the increase in income for the 2002 second quarter would have been 46%. Shares outstanding increased due to the exercise of options and contributions to benefit plans. For the remainder of 2002, the Company remains concerned about production rates, particularly in North America. While it appears that short-term production rates in 2002 will be higher than 2001, there is uncertainty regarding the second half of the year. This holds true for both the light vehicle market and the heavy truck market. As a result, the Company is continuing to be cautious in its capital investment plans and other spending. Despite these issues, the Company maintains a positive long-term outlook for its business and is committed to ongoing strategic investments in capital and new product development to enhance its product leadership strategy. FINANCIAL CONDITION AND LIQUIDITY As of June 30, 2002, debt declined from year-end 2001 by $69.4 million, while cash and cash equivalents decreased by $2.7 million. Cash from operations contributed to the majority of the debt reduction. Capital spending for the three months was $29.2 million compared with $33.4 million last year. Careful capital spending remains an area of focus for the Company. The Company expects to spend less than $130 million on capital in 2002, but this expectation is subject to ongoing review based on market conditions. The Company expects that approximately 67% of its capital spending will be for new and expanded product programs, and the Company's new Powertrain Technical Center. The remaining spending is expected to be directed at cost reduction and productivity enhancement programs in order to maintain the Company's operating margins. As of June 30, 2002 and December 31, 2001, the Company had sold $120 million of receivables under a Receivables Transfer Agreement for face value without recourse. Since December 31, 2001, goodwill declined $338 million primarily due to the implementation of Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." This SFAS requires goodwill to be periodically reviewed for impairment at a level of detail at or below the reporting segment level. The Company had a goodwill write down of $345 million ($269 million after tax) as a result of the implementation of SFAS No. 142. The Company believes that the combination of cash from operations and available credit facilities will be sufficient to satisfy its cash needs for the current level of operations and planned operations for the remainder of 2002. OTHER MATTERS Sale of fuel systems In April 2001, the Company sold its fuel systems business. This business was acquired as part of the acquisition of Kuhlman Corporation in March 1999. After evaluating its business, metal fuel tanks and related components for the heavy and medium truck markets, the Company determined this business to be non-core. The proceeds were used for general corporate purposes, including the repayment of indebtedness. This business has been included in the divested operations category for business segment reporting since acquisition. The transaction did not have a significant impact on the Company's results of operations, financial condition or cash flows. Litigation As discussed more fully in Note 6 to the Consolidated Financial Statements, various claims and suits seeking money damages arising in the ordinary course of business and involving environmental liabilities have been filed against the Company. In each of these cases, the Company believes it has a defendable position and has made adequate provisions to protect the Company from material losses. The Company believes that it has established adequate provisions for litigation liabilities in its financial statements in accordance with generally accepted accounting principles in the United States of America. In connection with the sale of Kuhlman Electric Corporation, the Company agreed to indemnify the buyer and Kuhlman Electric for certain environmental liabilities relating to the past operations of Kuhlman Electric. During 2000, Kuhlman Electric notified the Company that it discovered potential environmental contamination at its Crystal Springs, Mississippi plant while undertaking an expansion of the plant. The Company has been working with the Mississippi Department of Environmental Quality and Kuhlman Electric to investigate the extent of the contamination. The investigation has revealed the presence of PCBs in portions of the soil at the plant and neighboring areas. Kuhlman Electric and others, including the Company, have been sued in several related lawsuits, which claim personal and property damage. The Company has moved to be dismissed from some of these lawsuits. The Company's lawsuit against Kuhlman Electric seeking declaration of the scope of the Company's contractual indemnity has been amicably resolved and dismissed. The Company believes that the reserve for environmental liabilities is sufficient to cover any potential liability associated with these matters. Patent infringement actions have been filed against the Company's turbocharger unit in Europe in late 2001 and in 2002 by Honeywell International. The Dusseldorf District Court in Germany entered a preliminary injunction against the Company on July 9 limiting the Company's ability to manufacture and sell a certain variable turbine geometry turbocharger in Germany until a patent hearing currently scheduled for December 18, 2002. In order to continue the uninterrupted service to its customer, the Company paid Honeywell $25 million in July so that it could continue to make and ship disputed car turbochargers through June of 2003. The agreement with Honeywell partially settles litigation, suspends the July preliminary injunction and provides for a license to ship until June 2003. As part of the agreement, Honeywell agreed to not seek damages for shipments occurring before June 30, 2003. The Company is appealing the July preliminary injunction. The Company continues to believe that its current production designs do not violate the Honeywell patents and are not covered by their lawsuit. A hearing on the turbocharger model currently in dispute is still scheduled for December. The Company will recognize expense of the $25 million license payments as it ships the affected products from January 2002 to June 2003. Other Commitments and Contingencies In support of a new product that will be launched in 2002, a third party has purchased $29.7 million of fixed assets. Upon release of the new product, the Company intends to lease these assets under an operating lease. Dividends On July 18, 2002, the Company declared a $0.15 per share dividend to be paid on August 15, 2002 to shareholders of record as of August 1, 2002. New Accounting Pronouncements In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets." SFAS No. 142, effective January 1, 2002, specifies that goodwill and certain intangible assets will no longer be amortized but instead will be subject to periodic impairment testing. SFAS No. 142 also requires that, upon adoption, goodwill be allocated to the Company's reporting units and a two-step impairment analysis be performed. The Company adopted SFAS No. 142 effective January 1, 2002. Under the transitional provisions of the SFAS, the Company allocated goodwill to its reporting units and performed the two-step impairment analysis. The fair value of the Company's businesses used to determine the goodwill impairment was computed using the expected present value of associated future cash flows. As a result of this analysis, the Company determined that goodwill associated with its Cooling Systems and Air/Fluid Systems operating businesses was impaired due to fundamental changes in their served markets, particularly the medium and heavy truck markets, and weakness at a major customer. As a result a charge of $269 million, net of taxes of $76 million, was recorded. The impairment loss was recorded in the first quarter of 2002 as a cumulative effect of change in accounting principle. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company adopted SFAS No. 144 effective January 1, 2002. The adoption of SFAS No. 144 had no impact on the Company's results of operations, financial position or cash flows. 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." This statement eliminates the automatic classification of gain or loss on extinguishment of debt as an extraordinary component of income and requires that such gain or loss be evaluated for extraordinary classification under the guidelines of Accounting Principles Board No. 30 "Reporting Results of Operations". This statement also requires sales-leaseback accounting for certain lease modifications that have economic effects that are similar to sales-leaseback transactions and makes various other technical corrections to the existing pronouncements mentioned above. The adoption of SFAS No. 145 had no impact on the Company's results of operations, financial position or cash flows. In June 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities. The standard 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. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company does not expect that the adoption of SFAS No. 146 will have a material impact on the Company's results of operations, financial position or cash flows. DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS Statements contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations may contain forward-looking statements as contemplated by the 1995 Private Securities Litigation Reform Act that are based on management's current expectations, estimates and projections. Words such as "expects," "anticipates," "intends," "plans," "believes," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements. Forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those projected or implied in the forward-looking statements. Such risks and uncertainties include: fluctuations in domestic or foreign vehicle production, the continued use of outside suppliers, fluctuations in demand for vehicles containing the Company's products, general economic conditions, as well as other risks detailed in the Company's filings with the Securities and Exchange Commission, including the Cautionary Statements filed as Exhibit 99.1 to the Form 10-K for the fiscal year ended December 31, 2001. Item 3. Quantitative and Qualitative Disclosure about Market Risks There have been no material changes to our exposures to market risk since December 31, 2001. PART II Item 1. Legal Proceedings There have been no significant developments in the legal proceedings disclosed in the Company's Form 10-Q for the quarter ended March 31, 2001. With respect to the patent infringement lawsuit filed by Honeywell International and previously disclosed in the Company's form 10-Q for the quarter ended March 31, 2002, the Dusseldorf District Court in Germany entered a preliminary injunction against the Company on July 9 limiting the Company's ability to manufacture and sell a certain variable turbine geometry turbocharger in Germany until a patent hearing currently scheduled for December 18, 2002. In order to continue the uninterrupted service to its customer, the Company paid Honeywell $25 million in July so that it could continue to make and ship disputed car turbochargers through June of 2003. The agreement with Honeywell partially settles litigation, suspends the July preliminary injunction and provides for a license to ship until June 2003. The Company is appealing the July preliminary injunction. The Company continues to believe that its current production designs do not violate the Honeywell patents and are not covered by their lawsuit. A hearing on the turbocharger model currently in dispute is still scheduled for December. Item 4. Submission of Matters to a Vote of Security Holders On April 24, 2002, the Company held its annual meeting of stockholders. At such meeting, William E. Butler, Paul E. Glaske and John Rau were elected as directors to serve for a term expiring in 2005. Each of Phyllis O. Bonanno, Andrew F. Brimmer, Jere A. Drummond, John F. Fiedler, Ivan W. Gorr, Timothy M. Manganello and Alexis P. Michas continued to serve as directors following the meeting. At such meeting, the following votes were cast in the election of directors: For Withheld ------- ------ William E. Butler 22,489,647 278,441 Paul E. Glaske 17,121,580 277,116 John Rau 17,142,248 267,968 At such meeting, the selection of Deloitte & Touche LLP as independent auditors was approved by the following votes: For Against Abstain Not-Voted ---------- ------- --------- --------- 22,080,662 677,440 9,985 0 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 10.1 Employment and Retirement Agreement dated July 1, 2002 between BorgWarner Inc. and Ronald M. Ruzic. Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. Exhibit 99.2 Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. (b) Reports on Form 8-K None 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, hereunto duly authorized. BorgWarner Inc. (Registrant) By /s/ William C. Cline (Signature) William C. Cline Vice President and Controller (Principal Accounting Officer) Date: August 14, 2002