FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
- --------------------------------------------------------------------------------
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
- --------------------------------------------------------------------------------
For Quarter ended November 30, 2002
Commission File Number 1-4304
COMMERCIAL METALS COMPANY
- --------------------------------------------------------------------------------
(Exact Name of registrant as specified in its charter)
Delaware 75-0725338
- --------------------------- ------------------------
(State or other Jurisdiction of (I.R.S. Employer
incorporation of organization) Identification Number)
7800 Stemmons Freeway
Dallas, Texas 75247
-----------------------------------
(Address of principal executive offices)
(Zip Code)
(214) 689-4300
-------------
(Registrant's telephone number, including area code)
---------------------------------------------------
Former name, former address and former
fiscal year, If changed since last report
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 No
X
------- -------
As of January 3, 2003 there were 28,328,357 shares of the Company's common stock
issued and outstanding excluding 3,936,809 shares held in the Company's
treasury.
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
INDEX
<Table>
<Caption>
PAGE NO.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
November 30, 2002 and August 31, 2002 2-3
Consolidated Condensed Statements of Earnings -
Three months ended November 30, 2002 and 2001 4
Consolidated Condensed Statements of Cash Flows -
Three months ended November 30, 2002 and 2001 5
Consolidated Condensed Statement of Stockholders' Equity -
Three months ended November 30, 2002 6
Notes to Consolidated Condensed Financial Statements 7 - 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11 - 18
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 19
Item 4. Controls and Procedures 20
PART II - OTHER INFORMATION 21
SIGNATURES 22
SECTION 302 CERTIFICATIONS 23 - 24
</Table>
1
ITEM 1 - FINANCIAL STATEMENTS
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (unaudited)
ASSETS
(In thousands except share data)
<Table>
<Caption>
November 30, August 31,
2002 2002
-------------- --------------
CURRENT ASSETS:
Cash $ 25,201 $ 33,245
Temporary investments 34,498 91,068
Accounts receivable (less allowance for
collection losses of $5,861 and $5,958) 208,153 207,844
Notes receivable from affiliate 141,693 143,041
Inventories 293,577 268,040
Other 54,920 50,914
-------------- --------------
TOTAL CURRENT ASSETS 758,042 794,152
PROPERTY, PLANT AND EQUIPMENT:
Land 31,668 29,099
Buildings 119,661 119,592
Equipment 731,546 727,650
Leasehold improvements 34,807 34,637
Construction in process 13,573 10,801
-------------- --------------
931,255 921,779
Less accumulated depreciation
and amortization (558,445) (543,624)
-------------- --------------
372,810 378,155
OTHER ASSETS 55,797 57,769
-------------- --------------
$ 1,186,649 $ 1,230,076
============== ==============
</Table>
See notes to consolidated condensed financial statements.
2
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands except share data)
<Table>
<Caption>
November 30, August 31,
2002 2002
-------------- --------------
CURRENT LIABILITIES:
Short-term borrowings $ -- $ --
Accounts payable 265,605 275,209
Accrued expenses and other payables 99,342 133,631
Income taxes payable 4,925 5,676
Current maturities of long-term debt 621 631
-------------- --------------
TOTAL CURRENT LIABILITIES 370,493 415,147
DEFERRED INCOME TAXES 32,914 32,813
OTHER LONG-TERM LIABILITIES 27,069 24,841
LONG-TERM DEBT 256,189 255,969
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Capital stock:
Preferred stock -- --
Common stock, par value $5.00 per share:
Authorized 40,000,000 shares; issued
32,265,166 shares;
outstanding 28,420,735 and 28,518,453
shares 161,326 161,326
Additional paid-in capital 170 170
Accumulated other comprehensive loss (1,122) (1,458)
Retained earnings 391,928 392,004
-------------- --------------
552,302 552,042
Less treasury stock,
3,844,431 and 3,746,713 shares at cost (52,318) (50,736)
-------------- --------------
499,984 501,306
-------------- --------------
$ 1,186,649 $ 1,230,076
============== ==============
</Table>
See notes to consolidated condensed financial statements.
3
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(In thousands except share data)
(Unaudited)
<Table>
<Caption>
Three months ended
November 30,
-----------------------------
As restated,
See Note J
2002 2001
------------ ------------
NET SALES $ 629,059 $ 564,880
COSTS AND EXPENSES:
Cost of goods sold 567,999 486,785
Selling, general and administrative expenses 50,271 55,627
Employees' retirement plans 2,955 3,807
Interest expense 4,335 4,961
------------ ------------
625,560 551,180
------------ ------------
EARNINGS BEFORE INCOME TAXES 3,499 13,700
INCOME TAXES 1,294 5,218
------------ ------------
NET EARNINGS $ 2,205 $ 8,482
============ ============
Basic earnings per share $ 0.08 $ 0.32
Diluted earnings per share $ 0.08 $ 0.32
Cash dividends per share $ 0.08 $ 0.065
Average basic shares outstanding 28,486,578 26,207,026
Average diluted shares outstanding 28,963,733 26,648,662
</Table>
See notes to consolidated condensed financial statements.
4
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<Table>
<Caption>
Three months ended
November 30,
------------------------------
As restated,
see Note J
2002 2001
------------ ------------
CASH FLOWS FROM (USED BY) OPERATING ACTIVITIES:
Net earnings $ 2,205 $ 8,482
Adjustments to earnings not requiring cash:
Depreciation and amortization 15,226 15,765
Provision for losses on receivables 369 1,094
Net loss (gain) on sale of property 211 (59)
Deferred income taxes 101 --
Tax benefits from stock plans 5 156
------------ ------------
Cash flows from operations before changes in
operating assets and liabilities 18,117 25,438
Changes in operating assets and liabilities, net of effect of Coil Steels
Group acquisition:
Decrease (increase) in accounts receivable (13,639) 15,735
Funding from accounts receivable sold, net change 12,961 (21,806)
Decrease (increase) in inventories (25,537) (19,927)
Decrease (increase) in other assets (558) 4,582
Increase (decrease) in accounts payable,
accrued expenses, other payables and income taxes (44,644) (110)
Increase in other long-term liabilities 2,228 659
------------ ------------
Net Cash Flows From (Used By) Operating Activities (51,072) 4,571
CASH FLOWS FROM (USED BY) INVESTING ACTIVITIES:
Purchases of property, plant and equipment (9,658) (8,624)
Acquisition of Coil Steels Group, net of cash received -- (6,834)
Sales of property, plant and equipment -- 59
Temporary investments - net change 56,570 15,000
------------ ------------
Net Cash From (Used By) Investing Activities 46,912 (399)
CASH FLOWS FROM (USED BY) FINANCING ACTIVITIES:
Short-term borrowings - net change -- (5,989)
Payments on long-term debt (16) (5)
Stock issued under incentive and purchase plans 26 1,402
Treasury stock acquired (1,613) --
Dividends paid (2,281) (1,703)
------------ ------------
Net Cash Used by Financing Activities (3,884) (6,295)
------------ ------------
Decrease in Cash (8,044) (2,123)
Cash at Beginning of Year 33,245 32,921
------------ ------------
Cash at End of Period $ 25,201 $ 30,798
============ ============
</Table>
See notes to consolidated condensed financial statements.
5
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands except share data)
(Unaudited)
<Table>
<Caption>
Common Stock Accumulated
------------------------------- Add'l Other
Number of Paid-in Comprehensive Retained
Shares Amount Capital Loss Earnings
-------------- -------------- -------------- -------------- --------------
Balance September 1, 2002: 32,265,166 $ 161,326 $ 170 $ (1,458) $ 392,004
Comprehensive income:
Net earnings for three months
ended November 30, 2002 2,205
Other comprehensive income:
Foreign currency translation
adjustment, net of taxes of $181 336
Comprehensive income
Cash dividends (2,281)
Stock issued under incentive and
purchase plans (5)
Tax benefits from stock plans 5
Treasury stock acquired
-------------- -------------- -------------- -------------- --------------
Balance November 30, 2002 32,265,166 $ 161,326 $ 170 $ (1,122) $ 391,928
============== ============== ============== ============== ==============
<Caption>
Treasury Stock
-------------------------------
Number of
Shares Amount Total
-------------- -------------- --------------
Balance September 1, 2002: (3,746,713) $ (50,736) $ 501,306
Comprehensive income:
Net earnings for three months
ended November 30, 2002 2,205
Other comprehensive income:
Foreign currency translation
adjustment, net of taxes of $181 336
--------------
Comprehensive income 2,541
Cash dividends (2,281)
Stock issued under incentive and
purchase plans 2,282 31 26
Tax benefits from stock plans 5
Treasury stock acquired (100,000) (1,613) (1,613)
-------------- -------------- --------------
Balance November 30, 2002 (3,844,431) $ (52,318) $ 499,984
============== ============== ==============
</Table>
See notes to consolidated condensed financial statements.
6
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - QUARTERLY FINANCIAL DATA
In the opinion of management, the accompanying unaudited consolidated
condensed financial statements contain all adjustments (consisting of only
normal recurring accruals, except for the restatement referred to in Note J,
Restatement of Prior Period) necessary to present fairly the financial position
as of November 30 and August 31, 2002 and the results of operations and cash
flows for the three months ended November 30, 2002 and 2001. The results of
operations for the three month periods are not necessarily indicative of the
results to be expected for a full year. These interim financial statements
should be read in conjunction with the Company's consolidated financial
statements for the year ended August 31, 2002 included in its Form 10-K filed
with the Securities and Exchange Commission.
NOTE B - ACCOUNTING POLICIES
Effective September 1, 2002, functional currency for the majority of the
Company's subsidiaries in Europe changed to the Euro from the U.S. dollar. This
change had no significant impact on the Company's financial condition at
November 30, 2002 or its results of operations for the quarter then ended.
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 142, Goodwill and Other Intangible Assets effective September 1, 2002. This
Statement was applied to all goodwill and other intangible assets recognized on
the balance sheet, regardless of when those assets were initially recorded.
Effective September 1, 2002, goodwill was no longer amortized. Goodwill was $
6.8 million at November 30 and August 31, 2002. The impact of the implementation
of SFAS 142 and comparison to the prior year period was as follows (in
thousands):
<Table>
<Caption>
Three months ended
November 30,
-------------------------------
2002 2001
------------ ------------
Reported net earnings $ 2,505 $ 8,482
Add: goodwill amortization -- 256
------------ ------------
Adjusted net earnings $ 2,505 $ 8,738
============ ============
</Table>
The goodwill amortization was $0.01 per basic and diluted share for the
three months ended November 30, 2001.
Effective September 1, 2002, the Company adopted SFAS No. 143, Accounting
for Asset Retirement Obligations, which requires entities to record the fair
value of a liability for an asset retirement obligation when it is incurred by
increasing the carrying amount of the related long-lived asset. The liability is
accreted to its present value each period, and the capitalized cost is
depreciated over the useful lives of the assets. The Company has asset
retirement obligations relating to landfills, which were no longer in use at
September 1, 2002. The Company had previously recorded environmental liabilities
relating to the capping, closure and monitoring costs required for these
landfills. Therefore, the transition to SFAS 143 did not have a significant
impact on the Company's net earnings and related per share amounts. At November
30 and August 31, 2002, respectively, the Company had recorded $1.8 million and
$1.7 million relating to the landfill obligations.
In September 2002, the Company adopted SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. The adoption of SFAS No. 144 did
not significantly affect the Company's financial position or results of
operations.
7
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees on Indebtedness of Others. This
Interpretation clarifies disclosures to be made by a guarantor in its financial
statements and requires the guarantor to recognize at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The Company must apply the Interpretation to all
guarantees issued or modified after December 31, 2002. The Company has not
entered into or modified any significant guarantees since December 31, 2002.
NOTE C - SALES OF ACCOUNTS RECEIVABLE
As a cost effective short-term financing program, the Company and several
of its subsidiaries periodically sell trade accounts receivable substantially to
the Company's wholly-owned unconsolidated special purpose affiliate. Depending
on the level of financing needs, the affiliate receives funds from third party
financial institutions. The key components were as follows as of November 30,
2002 (in thousands):
<Table>
<Caption>
November 30, August 31,
2002 2002
------------ ------------
Total accounts receivable sold $ 159,687 $ 148,101
Less notes receivable from affiliate 144,585 145,960
------------ ------------
Net proceeds from financial institutions $ 15,102 $ 2,141
============ ============
</Table>
The notes receivable from affiliate are presented in the consolidated balance
sheets net of allowance of $2.9 million at November 30 and August 31, 2002.
These notes represent amounts withheld for credit and other reserves, as well as
excess funding capacity not currently needed by the Company. Discounts (which
aggregated $123 thousand and $347 thousand for the three months ended November
30, 2002 and 2001, respectively) represented primarily the costs of funds and
were included in selling, general and administrative expenses.
NOTE D - LONG TERM DEBT
Long-term debt (in thousands) was as follows:
<Table>
<Caption>
November 30, August 31,
2002 2002
------------ ------------
7.20% notes due 2005 $ 105,000 $ 104,775
6.80% notes due 2007 50,000 50,000
6.75% notes due 2009 100,000 100,000
Other 1,810 1,825
------------ ------------
256,810 256,600
Less current maturities 621 631
------------ ------------
$ 256,189 $ 255,969
============ ============
</Table>
On April 9, 2002, the Company entered into two interest rate swaps to convert a
portion of the Company's long term debt from a fixed interest rate to a floating
interest rate. The impact of these swaps is to adjust the amount of fixed rate
and floating rate debt and to reduce overall financing costs. The swaps
effectively convert the interest rate on the $100 million debt due July 2005
from the fixed rate of 7.20% to six month LIBOR (determined in arrears) plus a
spread of 2.02%. The Company locked the rate at 3.61% for the next reset date of
January 15, 2003. The total fair value of both swaps was $5,000,000 and
$4,775,000 at November 30 and August 31, 2002, respectively and is recorded in
other long-term assets, with a corresponding increase in the 7.20% long-term
notes, representing the change in fair value of the hedged debt.
8
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE E - EARNINGS PER SHARE
On May 20, 2002, the Company's Board of Directors declared a
two-for-one stock split in the form of a 100% stock dividend on its common
stock. All 2001 per share and weighted average share amounts in the accompanying
consolidated condensed financial statements have been restated to reflect this
stock split.
In calculating earnings per share, there were no adjustments to net
earnings to arrive at income for the three months ended November 30, 2002 or
2001. The reconciliation of the denominators of earnings per share calculations
are as follows:
<Table>
<Caption>
Three months ended
November 30,
-------------------------------
2002 2001
------------ ------------
Shares outstanding for basic earnings per share 28,486,578 26,207,026
Effect of dilutive securities-stock options/purchase plans 477,155 441,636
------------ ------------
Shares outstanding for diluted earnings per share 28,963,733 26,648,662
</Table>
Some of the stock options granted in February 2002 and all of those granted in
June 2002 were anti-dilutive at November 30, 2002 based on the average share
price for the quarter of $17.48. All stock options expire by 2009.
NOTE F - DERIVATIVES AND RISK MANAGEMENT
The Company's worldwide operations and product lines expose it to risks
from fluctuations in foreign currency exchange rates and metals commodity
prices. The objective of the Company's risk management program is to mitigate
these risks using futures or forward contracts (derivative instruments). The
Company enters into metal commodity forward contracts to mitigate the risk of
unanticipated declines in gross margin due to the volatility of the commodities'
prices, and enters into foreign currency forward contracts which match the
expected settlements for purchases and sales denominated in foreign currencies.
The Company designates only those contracts as hedges for accounting purposes
which closely match the terms of the underlying transaction. These hedges
resulted in substantially no ineffectiveness in the statements of earnings for
quarters ended November 30, 2002 and 2001. Certain of the foreign currency and
all of the commodity contracts were not designated as hedges for accounting
purposes, although management believes they are essential economic hedges. The
changes in fair value of these instruments resulted in a $339 thousand decrease
and a $129 thousand increase in cost of goods sold for the quarters ended
November 30, 2002 and 2001, respectively. All of the instruments are highly
liquid, and none are entered into for trading purposes or speculation.
See Note D, Long-Term Debt, regarding the Company's interest rate risk
management strategy.
NOTE G - CONTINGENCIES
There were no material developments relating to the Company's
construction disputes or other contingencies since August 31, 2002. See Note 10,
Commitments and Contingencies, to the consolidated financial statements for the
year ended August 31, 2002.
NOTE H - RECLASSIFICATIONS
Certain reclassifications have been made in the 2001 financial statements
to conform to the classifications used in the current year.
9
COMMERCIAL METALS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE I - BUSINESS SEGMENTS
The following is a summary of certain financial information by reportable
segment (in thousands):
<Table>
<Caption>
Three months ended November 30, 2002
------------------------------------------------------------------------------
Marketing & Corp. &
Manufacturing Recycling Distribution Elim. Consolidated
------------ ------------ ------------ ------------ ------------
Net sales - unaffiliated customers $ 288,410 $ 89,707 $ 250,736 $ 206 $ 629,059
Inter-segments sales 800 6,649 5,627 (13,076) --
------------ ------------ ------------ ------------ ------------
289,210 96,356 256,363 (12,870) 629,059
Earnings (loss) before income taxes 3,670 1,385 4,371 (5,927) 3,499
Total assets - November 30, 2002 707,307 95,342 293,264 90,736 1,186,649
</Table>
<Table>
<Caption>
Three months ended November 30, 2001
-------------------------------------------------------------------------------
Marketing & Corp. &
Manufacturing Recycling Distribution Elim. Consolidated
------------ ------------ ------------ ------------ ------------
Net sales - unaffiliated customers $ 330,504 $ 77,881 $ 156,405 $ 90 $ 564,880
Inter-segments sales 804 4,750 2,788 (8,342) --
------------ ------------ ------------ ------------ ------------
331,308 82,631 159,193 (8,252) 564,880
Earnings (loss) before income taxes 19,934 (1,295) 1,653 (6,592) 13,700
Total assets - November 30, 2001 738,398 88,213 225,487 51,916 1,104,014
</Table>
NOTE J - RESTATEMENT OF PRIOR PERIOD
In August 2002, the Company uncovered a theft and accounting fraud which
had occurred over four years at a rebar fabrication facility in South Carolina.
The total adjustment required to restate the accounting records to their proper
balances was $2.7 million pre-tax. This incident resulted in a $900 thousand
pre-tax expense in fiscal 2002, of which $545 thousand was attributed to the
first quarter ended November 30, 2001. The effects of the restatement were as
follows (in thousands, except per share):
<Table>
<Caption>
2001
----------------------------
As previously As
reported restated
------------ ------------
At November 30:
Cash $ 31,339 $ 30,798
Total assets 1,106,794 1,104,014
Three months ended November 30:
Selling, general and administrative expenses $ 55,082 $ 55,627
Earnings before income taxes 14,245 13,700
Net earnings 8,832 8,482
Basic EPS 0.34 0.32
Diluted EPS 0.33 0.32
</Table>
10
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CONSOLIDATED RESULTS OF OPERATIONS
(in millions)
As discussed in Note J, Restatement of Prior Period, to the consolidated
condensed financial statements, we have restated our financial statements for
the three months ended November 30, 2001. Our management's discussion and
analysis includes the effect of the restatement.
<Table>
<Caption>
Three Months Ended
November 30,
-------------------------------
2002 2001
------------ ------------
Net sales $ 629 $ 565
Net earnings 2.2 8.5
Cash flows* 18.1 25.4
EBITDA** 23.1 34.4
Ending LIFO reserve 7.9 5.9
</Table>
* Before changes in operating assets and liabilities.
** Earnings before income taxes plus interest expense plus depreciation and
amortization.
The following financial events were significant during the first quarter ended
November 30, 2002:
- - Key markets in the manufacturing segment deteriorated further for most
products.
- - Steel group earnings decreased due to lower selling prices, both for the
minimills and fabrication operations, and higher scrap costs.
- - The copper tube division reported lower gross margins due to lower selling
prices and higher copper scrap purchase costs.
- - The recycling segment continued to be profitable with improvements in both
ferrous and nonferrous scrap markets over last year.
- - Marketing and distribution's operating profit was more than double last
year's first quarter, with most of the improvement in international
markets.
- - We reduced our bonuses, contributions and employee's retirement plan
expenses in line with our lower earnings.
- - Our financial position remained strong, with excess cash and no short-term
debt at November 30, 2002.
11
CONSOLIDATED DATA -
The LIFO method of inventory valuation increased net earnings by $143 thousand
and $437 thousand (1 cent and 2 cents per diluted share) for the three months
ended November 30, 2002 and 2001, respectively. We have restated the prior
year's per share numbers to reflect the stock split referred to in Note E,
Earnings per Share, to the consolidated condensed financial statements.
SEGMENT OPERATING DATA -
(in thousands)
Unless otherwise indicated, all dollars below are before income taxes.
The following table shows net sales and operating profit (loss) by business
segment. Our operating profit (loss), as presented below, is the sum of our
earnings (loss) before income taxes, interest expense owed to third parties and
discounts on the sales of accounts receivable.
<Table>
<Caption>
Three months ended
November 30,
--------------------------------
2002 2001
------------ ------------
NET SALES:
Manufacturing $ 289,210 $ 331,308
Recycling 96,356 82,631
Marketing and Distribution 256,363 159,193
Corporate and Eliminations (12,870) (8,252)
------------ ------------
$ 629,059 $ 564,880
============ ============
OPERATING PROFIT (LOSS):
Manufacturing $ 3,744 $ 20,200
Recycling 1,404 (1,222)
Marketing and Distribution 4,772 2,280
Corporate and Eliminations (1,963) (2,251)
------------ ------------
$ 7,957 $ 19,007
============ ============
</Table>
MANUFACTURING -
We include our steel group and our copper tube division in our manufacturing
segment. Our manufacturing operating profit for the three months ended November
30, 2002 decreased $16.5 million (81%) as compared to 2001 on $42.1 million
(13%) less net sales. Our steel group's minimills and our copper tube mill
reported lower profits because lower selling prices combined with higher scrap
purchase costs resulted in compressed gross margins. Our steel group's
downstream fabrication operations were less profitable due to much lower selling
prices and shipments. Lower private non-residential construction and the slower
industrial economy in the United States contributed to lower selling prices in
our manufacturing segment, as domestic supply plus imports exceeded demand. On
the other hand, tariffs levied by other countries on their steel scrap exports
caused the U.S. scrap market to tighten, and purchase prices for scrap
increased. These conditions resulted in a significant reduction in gross
margins.
12
The table below reflects steel and scrap prices per ton:
<Table>
<Caption>
Three months ended
November 30,
-------------------------------
2002 2001
------------ ------------
Average mill selling price (total sales) $ 272 $ 277
Average mill selling price (finished goods) 281 282
Average fabrication selling price 558 634
Average ferrous scrap purchase price 89 73
</Table>
Operating profit for our four steel minimills decreased 77% for the three months
ended November 30, 2002 compared to 2001, due to falling selling prices and
higher scrap costs. Profits at all four mills were significantly lower, although
total shipments were up. The largest declines in profitability were at SMI Texas
and SMI South Carolina. Profits at SMI Texas decreased $3.0 million (51%) for
the three months ended November 30, 2002 as compared to 2001. SMI South Carolina
lost $2.3 million for the three months ended November 30, 2002 as compared to a
$1.2 million profit in 2001. The mills shipped 505,000 tons in the current
quarter compared to 476,000 last year, an increase of 6%. Mill production
decreased slightly with tons rolled down 1% to 480,000. Tons melted decreased 2%
to 514,000. The average total mill selling price at $272 per ton was $5 (2%)
below last year primarily because we shipped more semi-finished billets, a
product with a lower selling price than our average. Our mill selling price for
finished goods decreased $1 per ton. Average scrap purchase costs were $16 per
ton higher than last year, resulting in lower gross margins. Utility expenses
increased by $1.1 million as compared to last year; both natural gas and
electricity costs were higher.
Operating profit in the steel group's fabrication and other businesses decreased
by $8.0 million (85%) for the three months ended November 20, 2002 as compared
to 2001. Excluding SMI-Owen (which was sold in March 2002), operating profits
decreased by $3.9 million. Near the end of fiscal 2002, we uncovered an
accounting fraud and a theft, which occurred over four years at our rebar
fabrication plant in South Carolina. The total adjustment required to restate
the accounting records to their proper balances was $2.7 million, including a
$900 thousand expense in fiscal 2002. Earnings before income taxes for the three
months ended November 30, 2001 have been restated by $545,000. See Note J,
Restatement of Prior Period, to the consolidated condensed financial statements.
Fabrication plant shipments totaled 217,000 tons, 15% less than last year's
first quarter shipments of 255,000 tons. Excluding SMI Owen, shipments decreased
by 29,000 tons (12%). The average fabrication selling price for the three months
ended November 30, 2002 decreased $76 per ton (12%). Rebar fabrication, concrete
related products, joist and structural steel fabrication markets were all
weaker, with several plants reporting losses. Only our steel fence post plants
together with our heat treating plant generated the same profitability during
the three months ended November 30, 2002 as compared to 2001. In general, our
continued cost reduction efforts and initiatives to improve productivity were
not enough to offset the drop in gross margins. In spite of the current poor
market conditions, our strategy remains to continue both internal growth and
acquisitions to expand our downstream businesses.
Our Copper tube division's operating profit decreased $1.9 million (87%) with 7%
less net sales. Copper tube shipments increased 3% to 15.6 million pounds.
Production increased 13% to 15.3 million pounds. However, the average selling
price dropped 12 cents per pound (10%). The average copper scrap price increased
3 cents per pound (5%) during the three months ended November 30, 2002 as
compared to 2001. Although sales and construction of new homes held up
relatively well, more imported tubing and an over-supply of water and
refrigeration tubing put pressure on selling prices. The division continued to
expand its sales of line sets.
13
RECYCLING -
Our recycling segment reported an operating profit of $1.4 million for the three
months ended November 30, 2002 as compared with an operating loss of $1.2
million in 2001. Net sales for the three months ended November 30, 2002 were 17%
higher at $96 million. Gross margins were 23% higher than the same period last
year. The segment processed and shipped 390,000 tons of ferrous scrap during the
three months ended November 30, 2002, 13% more than 2001. Ferrous sales prices
were on average $89 per ton, or 25% higher than 2001. Nonferrous shipments were
flat at 56,000 tons. The average nonferrous scrap sales price of $963 per ton
for the three months ended November 30, 2002 was 9% higher than in 2001. The
total volume of scrap processed, including the steel group's processing plants,
was 669,000 tons, an increase of 15% from the 584,000 tons processed in 2001.
MARKETING AND DISTRIBUTION -
Net sales in the three months ended November 30, 2002 for our marketing and
distribution segment increased 61% as compared to 2001 to $256 million.
Operating profit for the three months ended November 30, 2002 was $4.8 million,
more than double from 2001, mostly due to better results from our international
operations. Sales to and within Asia, especially China, were up significantly.
Also, the economy in Australia was still strong. In September 2001, we completed
our acquisition of Coil Steels Group, in which we already owned a 22% share. In
September 2002, we acquired the sheet and coil business of Horans in Australia,
which we merged into our Coil Steels Group's Sydney operation. The increased
profitability in marketing and distribution was largely due to our strategy in
recent years to build up our regional business around the world and to increase
our downstream presence. Our U.S. divisions were also more profitable for the
three months ended November 30, 2002 as compared to 2001.
OTHER -
Selling, general and administrative as well as employee's retirement plan
expenses were lower for the three months ended November 30, 2002 as compared to
2001, mostly due to discretionary items, such as bonuses, contributions and
profit sharing. Interest expense was lower due to two interest rate swaps, (see
Note D, Long Term Debt, to the consolidated condensed financial statements)
which resulted in interest expense savings.
CONTINGENCIES -
See Note G, Contingencies, to the consolidated condensed financial statements.
In the ordinary course of conducting our business, we become involved in
litigation, administrative proceedings, governmental investigations including
environmental matters, and contract disputes. We may incur settlements, fines,
penalties or judgments because of some of these matters. While we are unable to
estimate precisely the ultimate dollar amount of exposure to loss in connection
with these matters, we make accruals as we deem necessary. The amounts we accrue
could vary substantially from amounts we pay due to several factors including
the following: evolving remediation technology, changing regulations, possible
third-party contributions, the inherent shortcomings of the estimation process,
and the uncertainties involved in litigation. Accordingly, we cannot always
estimate a meaningful range of possible exposure. We believe that we have
adequately provided in our financial statements for the estimable potential
impact of these contingencies. We also believe that the outcomes will not
significantly affect the long-term results of operations or our financial
position. However, they may have a material impact on earnings for a particular
period.
We are subject to federal, state and local pollution control laws and
regulations in all locations we have operating facilities. We anticipate that
compliance with these laws and regulations will involve continuing capital
expenditures and operating costs.
14
OUTLOOK -
We expect our second quarter to be weak for the following reasons:
o our second quarter is seasonally our weakest
o conditions in our markets continue to be very challenging
o we will be taking some downtime at the minimills to manage
inventories.
Although we believe that commercial construction will remain soft, we expect the
second half of our fiscal year ending August 31, 2003 to be more profitable due
to increased production and shipments and some price increases in most of our
businesses. We anticipate that public construction will hold steady despite
tighter budgets at the state and local level, because it typically increases in
the spring. We are expecting institutional building activities to continue as
well. We are presuming that import levels will be lower in our more favorable
prognosis for steel volume and pricing in the second half of our fiscal 2003. We
think that imports will decrease because of the very low domestic prices for our
products. We also plan to make further cost reductions during the remainder of
2003, which should increase our profits. We believe that the ferrous scrap
market will improve because of more demand for scrap overseas and less domestic
supply. As a result, we are expecting ferrous scrap prices to improve. Also, we
think that nonferrous prices will increase. The recycling segment should
continue to improve its profitability under these conditions. We believe that
our marketing and distribution markets will have mixed results.
We believe that our 2004 fiscal year will be much more profitable, and that we
will experience stronger demand for construction-related products and services.
We are also expecting that various end-use markets around the world will
improve, especially manufacturing activity. We think that emerging markets will
show a disproportionate increase in the consumption of steel and nonferrous
metals.
This outlook section contains forward-looking statements regarding the outlook
for our financial results including net earnings, product pricing and demand,
production rates, interest rates, inventory levels, results of litigation and
general market conditions. These forward-looking statements can generally be
identified by phrases such as we "expect", "anticipate", "believe", "presume",
"think", "plan to", "should", "likely", "appear", "projects", or other similar
words or phrases of similar impact. There is inherent risk and uncertainty in
any forward-looking statements. Variances will occur and some could be
materially different from our current opinion. Developments that could impact
our expectations include the following:
o interest rate changes
o construction activity
o litigation claims and settlements
o difficulties or delays in the execution of construction contracts
resulting in cost overruns or contract disputes
o metals pricing over which we exert little influence
o increased capacity and product availability from competing steel
minimills and other steel suppliers including import quantities and
pricing
o court decisions
o industry consolidation or changes in production capacity or
utilization
o global factors including credit availability
o currency fluctuations
o energy and insurance prices
o decisions by governments impacting the level of steel imports and pace
of overall economic activity.
LIQUIDITY AND CAPITAL RESOURCES -
We discuss liquidity and capital resources on a consolidated basis. Our
discussion includes the sources and uses of our three operating segments and
centralized corporate functions. We have a centralized treasury function and use
inter-company loans to efficiently manage the short-term cash needs of our
operating divisions. We invest any excess funds centrally.
15
We rely upon cash flows from operating activities, and to the extent necessary,
external short-term financing sources. Our short-term financing sources include
the issuance of commercial paper, sales of accounts receivable and borrowing
under our bank credit facilities. From time to time, we have issued long-term
public debt and private placements. Our investment grade credit ratings and
general business conditions affect our access to external financing on a
cost-effective basis. Depending on the price of our common stock, we may realize
significant cash flows from the exercise of stock options.
Moody's Investors Service (P-2), Standard & Poor's Corporation (A-2) and Fitch
(F-2) rate our $174.5 million commercial paper program in the second highest
category. To support our commercial paper program, we have unsecured
contractually committed revolving credit agreements with a group of eight banks.
Our $129.5 million facility expires in August 2003, and our $45 million facility
expires in August 2004. We plan to continue our commercial paper program and the
revolving credit agreements in comparable amounts to support the commercial
paper program.
For added flexibility, we may secure financing through sales of certain accounts
receivable in an amount not to exceed $130 million. We continually sell accounts
receivable on an ongoing basis to replace those receivables that have been
collected from our customers. Our long-term public debt was $255 million at
November 30, 2002 and is investment grade rated by Standard & Poors' Corporation
(BBB), Fitch (BBB) and by Moody's Investors Services (Baa1). We have access to
the public markets for potential refinancing or the issuance of additional
long-term debt. Also, we have numerous informal, uncommitted credit facilities
available from domestic and international banks. These credit facilities are
priced at bankers' acceptance rates on a cost of funds basis.
Credit ratings affect our ability to obtain short- and long-term financing and
the cost of such financing. If the rating agencies were to reduce our credit
ratings, we would pay higher financing costs and probably would have less
availability of the informal, uncommitted facilities. In determining our credit
ratings, the rating agencies consider a number of both quantitative and
qualitative factors. These factors include earnings, fixed charges such as
interest, cash flows, total debt outstanding, off balance sheet obligations and
other commitments, total capitalization and various ratios calculated from these
factors. The rating agencies also consider predictability of cash flows,
business strategy, industry condition and contingencies. We are committed to
maintaining our investment grade ratings.
Certain of our financing agreements include various covenants. The most
restrictive of these covenants requires us to maintain an interest coverage
ratio of greater than three times and a debt to capitalization ratio of 55%, as
defined in the financing agreement. A few of the agreements provide that if we
default on the terms of another financing agreement, it is considered a default
under these agreements. We have complied with the requirements, including the
covenants of our financing agreements as of and for the three months ended
November 30, 2002.
Our revolving credit agreements and accounts receivable securitization agreement
include ratings triggers. The trigger in the revolving credit agreements is
solely a means to reset pricing for facility fees and, if a borrowing occurs, on
loans. Within the accounts receivable securitization agreement, the ratings
trigger is contained in a "termination event", but the trigger is set at
catastrophic levels. The trigger requires a combination of ratings actions on
behalf of two independent rating agencies and is set at levels seven ratings
categories below our current rating.
Our manufacturing and recycling businesses are capital intensive. Our capital
requirements include construction, purchases of equipment and maintenance
capital at existing facilities. We plan to invest in new operations. We also
plan to invest in working capital to support the growth of our businesses,
maintain our ability to repay maturing long-term debt when due at its earliest
maturity in 2005 and pay dividends to our stockholders.
We continue to assess alternative means of raising capital, including potential
dispositions of under-performing or non-strategic assets. Any potential future
major acquisitions could require additional financing from external sources such
as the issuance of common stock.
16
Cash Flows
Our cash flows from operating activities primarily result from sales of steel
and related products, and to a lesser extent, sales of nonferrous metal
products. We have a diverse and generally stable customer base. We use futures
or forward contracts as needed to mitigate the risks from fluctuations in
foreign currency exchange rates and metals commodity prices. See Note F,
Derivatives and Risk Management, to the consolidated condensed financial
statements.
The volume and pricing of orders from our U.S. customers in the manufacturing
and construction sectors affect our cash flows from operating activities. Our
international marketing and distribution operations also significantly affect
our cash flows from operating activities. The weather can influence the volume
of products we ship in any given period. Also, the general economy, the strength
of the U.S. dollar, governmental action, and various other factors beyond our
control influence our volume and prices. Periodic fluctuations in our prices and
volumes can result in variations in cash flows from operations. Despite these
fluctuations, we have historically relied on operating activities as a steady
source of cash.
Cash flows from operations before changes in operating assets and liabilities
for the three months ended November 30, 2002 decreased to $18.1 million from
$25.4 million in 2001 due mostly to lower earnings. Our provision for losses on
receivables was also lower.
We used $51.1 million of net cash flows in our operating activities for the
three months ended November 30, 2002 as compared with the $4.6 million of net
cash flows provided from our operating activities for the three months ended
November 30, 2001. During the three months ended November 30, 2002, we paid more
expenses, which had been accrued at the fiscal year ended August 31, 2002, than
we did for 2001. These payments were higher because bonuses and other
discretionary items were more for fiscal 2002 than 2001 based on our higher
profits. Net working capital increased only slightly to $388 million at November
30, 2002 from $379 million at August 31, 2002 because we used funds from
temporary investments to pay the accrued expenses as warranted. The current
ratio was 2.0 at November 30, 2002, up from 1.9 at August 31, 2002.
We invested $9.7 million in property, plant and equipment during the three
months ended November 30, 2002, which was comparable to 2001. In 2001, we
acquired the remaining shares of the Coil Steels Group (CSG) for $6.8 million.
We expect our capital spending for fiscal 2003 to be $87 million, including both
new construction and acquisitions to expand our downstream businesses. We assess
our capital spending each quarter and reevaluate our requirements based upon
current and expected results.
Our short-term financing needs were still minimal during the three months ended
November 30, 2002 mostly due to continued management of working capital and our
significant amount of temporary investments. We had no short-term borrowings at
November 30, 2002 or 2001. We have no significant amounts due on our long-term
debt until July 2005.
At November 30, 2002, 28,420,735 common shares were issued and outstanding, with
3,844,431 held in our treasury. We paid dividends of $2.3 million during the
three months ended November 30, 2002, slightly more than the $1.7 million paid
during 2001. During the three months ended November 30, 2002, we purchased
100,000 shares of our common stock at an average price of $16.13 per share.
These shares were held in our treasury.
We believe that we have sufficient liquidity for fiscal 2003 and the foreseeable
future.
17
CONTRACTUAL OBLIGATIONS
The following table represents our contractual obligations as of November 30,
2002 below (dollars in thousands):
<Table>
<Caption>
Payments Due Within *
---------------------------------------------------------------
2-3 4-5 After
Total 1 Year Years Years 5 Years
------------ ------------ ------------ ------------ ------------
Contractual Obligations:
Long-term Debt (1) $ 256,810 $ 621 $ 106,080 $ 50,033 $ 100,076
Operating Leases (2) 56,158 7,345 13,311 10,262 25,240
Unconditional Purchase
Obligations (3) 87,340 31,639 31,724 6,983 16,994
------------ ------------ ------------ ------------ ------------
Total Contractual Cash
Obligations $ 400,308 $ 39,605 $ 151,115 $ 67,278 $ 142,310
============ ============ ============ ============ ============
</Table>
* Cash obligations herein are not discounted.
(1) Total amounts are included in the November 30, 2002 consolidated balance
sheet. See Note D, Long-Term Debt, to the consolidated condensed financial
statements.
(2) Includes minimum lease payment obligations for noncancelable equipment and
real-estate leases in effect as of November 30, 2002.
(3) About 57% of these purchase obligations are for inventory items to be sold
in the ordinary course of business; most of the remainder are for supplies
associated with normal revenue-producing activities.
At November 30, 2002, we received $15,102,000 of net funding from the sales of
accounts receivable. See Note C, Sales of Accounts Receivable, to the
consolidated condensed financial statements. If we terminated the accounts
receivable program on November 30,2002, we would have to pay the first
$15,102,000 of collections from these accounts to third party financial
institutions. We have complied with the terms of this program as of, and for the
three months ended November 30, 2002.
Other Commercial Commitments
We maintain stand-by letters of credit to provide support for certain
transactions that our customers and suppliers request. At November 30, 2002, we
had committed $19.5 million under these arrangements. A cash deposit of $10.2
million included in current other assets on the consolidated condensed balance
sheet collateralized a portion of these commitments. All of the commitments
expire within one year.
At the request of a customer and its surety bond issuer, we have agreed to
indemnify the surety against all costs the surety may incur should our customer
fail to perform its obligations under construction contracts covered by payment
and performance bonds issued by the surety. We are the customer's primary
supplier of steel, and steel is a substantial portion of our customer's cost to
perform the contracts. We believe we have adequate controls to monitor the
customer's performance under the contracts including payment for the steel we
supply. As of November 30, 2002, the surety had issued bonds in the total amount
(without reduction for the work performed to date) of $12.2 million which are
subject to our guaranty obligation under the indemnity agreement.
ACCOUNTING POLICIES-
See Note B, Accounting Policies, to the consolidated condensed financial
statements.
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required hereunder for the Company is not significantly
different from the information set forth in Item 7a. Quantitative and
Qualitative Disclosures About Market Risk included in the Company's Annual
Report of Form 10-K for the year ended August 31, 2002, filed with the
Securities Exchange Commission, and is therefore not presented herein.
Also, see Note F, Derivatives and Risk Management, to the consolidated
condensed financial statements.
19
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. The term
"disclosure controls and procedures" is defined in Rule 13a-14(c) of the
Securities Exchange Act of 1934, or the Exchange Act. This term refers to the
controls and procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files
under the Exchange Act is recorded, processed, summarized and reported within
required time periods. Our Chief Executive Officer and our Chief Financial
Officer have evaluated the effectiveness of our disclosure controls and
procedures as of a date within 90 days before the filing of this quarterly
report and they have concluded that as of that date, our disclosure controls and
procedures were effective at ensuring that required information will be
disclosed on a timely basis in our reports filed under the Exchange Act.
(b) Changes in Internal Controls. There were no significant changes to
our internal controls or in other factors that could significantly affect our
internal controls subsequent to the date of their evaluation by our Chief
Executive Officer and our Chief Financial Officer, including any corrective
actions with regard to significant deficiencies and material weaknesses.
20
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the information incorporated by reference from
Item 3. Legal Proceedings in the Company's Annual Report on Form 10-K for the
year ending August 31, 2002, filed November 26, 2002, with the Securities and
Exchange Commission.
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 required by Item 601 of Regulation S-K.
99.1 Certification of Principal Executive Officer
Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Principal Financial Officer
Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
B. The Registrant filed a report on Form 8-K on November
26, 2002, to report the timely submission to the
Securities and Exchange Commission of sworn
statements of Registrant's Principal Executive
Officer and Principal Financial Officer required
pursuant to the Commission's June 27, 2002, order.
21
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.
COMMERCIAL METALS COMPANY
/s/ WILLIAM B. LARSON
--------------------------------------
January 13, 2003 William B. Larson
Vice President
& Chief Financial Officer
/s/ MALINDA G. PASSMORE
--------------------------------------
January 13, 2003 Malinda G. Passmore
Controller
22
SECTION 302 CERTIFICATIONS
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Stanley A. Rabin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Commercial Metals
Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: January 10, 2003
/s/ STANLEY A. RABIN
----------------------------------------
Stanley A. Rabin
Chairman of the Board, President and
Chief Executive Officer
23
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, William B. Larson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Commercial Metals
Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: January 10, 2003
/s/ WILLIAM B. LARSON
----------------------------------------
William B. Larson
Vice President and Chief Financial Officer
24
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
99.1 Certification of Principal Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Principal Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
</Table>