Back to GetFilings.com

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 29, 2003

OR

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

For the transition period from                      to                     

Commission File Number: 001-16501

GLOBAL POWER EQUIPMENT GROUP INC.

6120 South Yale, Suite 1480, Tulsa, Oklahoma
(Address of principal executive offices)

74136
(Zip Code)

(918) 488-0828
(Registrant’s telephone number, including area code)

	Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

	Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No o

The number of shares of the Registrant’s common stock, $.01 par value, outstanding at May 6, 2003 was 43,988,489.

Table of Contents

GLOBAL POWER EQUIPMENT GROUP INC.

FORM 10-Q
March 29, 2003

INDEX

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS
GLOBAL POWER EQUIPMENT GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share data)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

1

Table of Contents

GLOBAL POWER EQUIPMENT GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except per share amounts)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

2

Table of Contents

GLOBAL POWER EQUIPMENT GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3

Table of Contents

GLOBAL POWER EQUIPMENT GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. BUSINESS AND ORGANIZATION

Global Power Equipment Group Inc. and Subsidiaries (the Company or GPEG) designs, engineers and manufactures heat recovery and auxiliary power equipment. Our products include:

The Company’s corporate headquarters are located in Tulsa, Oklahoma, with operating facilities in Plymouth, Minnesota; Tulsa, Oklahoma; Auburn, Massachusetts; Clinton, South Carolina; Monterrey, Mexico; Toluca, Mexico; San Antonio, Mexico; and Heerlen, Netherlands.

2.     INTERIM FINANCIAL STATEMENTS

The unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. The information furnished in the condensed consolidated financial statements, in the opinion of management, include normal recurring adjustments and reflect all adjustments which are necessary for a fair presentation of such financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Although the Company believes that the disclosures are adequate to make the information presented not misleading, these condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended December 28, 2002, filed with the Securities and Exchange Commission. The quarterly results are not necessarily indicative of the actual results that may occur for the entire fiscal year.

3.     GOODWILL

There were no changes in the carrying amount of goodwill during the first quarter of fiscal 2003. Additionally, the Company has also completed its annual impairment testing and no changes were made to the carrying value of goodwill with respect to this testing. The balances by operating segment are as follows (in thousands):

4

Table of Contents

4.     EARNINGS PER SHARE

Basic and diluted earnings per common share are calculated as follows (in thousands, except share and per share data):

5.     DERIVATIVE FINANCIAL INSTRUMENTS

The Company adopted SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” effective December 31, 2000. This standard establishes accounting and reporting standards requiring that every derivative instrument be recorded on the balance sheet as either an asset or a liability measured at fair value. SFAS 133 requires that changes in a derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative’s gains and losses to be deferred in other comprehensive income until the transaction occurs (“cash flow hedge”) or to offset related results on the hedged item in the income statement (“fair value hedge”). Hedge accounting requires that a company formally document, designate and assess the effectiveness of transactions that receive hedge accounting treatment. The impact of adopting SFAS 133 was not material.

Periodically, the Company uses derivative financial instruments in the management of its foreign currency exchange and interest rate exposures. As of March 29, 2003, notional amounts outstanding under foreign currency forward exchange agreements were approximately $12.8 million with varying amounts due through July 2003. Currently, the Company recognizes changes in the fair values of the forward agreements through earnings. The Company recorded unrealized gains on the forward agreements of approximately $0.4 million for the period ended March 29, 2003 in earnings. No foreign currency forward exchange contracts amounts were outstanding under such contracts at March 30, 2002.

6.     LITIGATION

The Company is involved in legal actions which arise in the ordinary course of its business. Although the outcomes of any such legal actions cannot be predicted, in the opinion of management, the resolution of any currently pending or threatened actions will not have a material adverse effect upon the consolidated financial position or results of operations of the Company.

5

Table of Contents

7.     COMMITMENTS AND CONTINGENCIES

Estimated costs related to product warranty are accrued as revenue is recognized and included in cost of sales. Estimated costs are based upon past warranty claims and sales history. Warranty terms vary by contract but generally provide for a term of 12 to 18 months after shipment. We manage our exposure to warranty claims by having our field service and quality assurance personnel regularly monitor our projects and maintain ongoing and regular communications with the customer.

A reconciliation of the changes to our warranty accrual for the first quarter of 2003 and the first quarter of 2002 is as follows:

Also, at March 29, 2003 we had a contingent liability for stand-by letters of credit totaling $51.4 million that have been issued and are outstanding that generally were issued to secure performance on customer contracts. Currently, there are no amounts drawn upon these letters of credit.

Finally, under a management agreement with Harvest Partners, Inc. we are contractually committed to annual payments of certain fees for financial advisory and strategic planning services to Harvest of $1.25 million per year through July 2003. Following July 2003, the terms of the management agreement provide for automatic renewals of additional one-year periods unless terminated for cause or by Harvest.

8.     SEGMENT INFORMATION

The “management approach” called for by SFAS 131, “Disclosures about Segments of an Enterprise and Related Information” has been used by GPEG management to present the segment information which follows. GPEG considered the way its management team organizes its operations for making operating decisions and assessing performance and considered which components of its enterprise have discrete financial information available. Management makes decisions using a product group focus and its analysis resulted in two operating segments, Heat Recovery Equipment and Auxiliary Power Equipment. The Company evaluates performance based on net income or loss not including certain items as noted below. Intersegment revenues and transactions were not significant. Corporate assets consist primarily of cash and deferred tax assets. Interest income has not been allocated as cash management activities are handled at a corporate level. During the period ended March 29, 2003, there have been no changes in the Company’s basis for segmentation or the measurement of segment income.

6

Table of Contents

The following table presents information about segment income and assets (in thousands):

The following tables present information which reconciles segment information to consolidated totals (in thousands):

7

Table of Contents

The following table represents revenues by product group (in thousands):

The following table presents revenues by geographic region (in thousands):

8

Table of Contents

9.     MAJOR CUSTOMERS

The Company has certain customers that represent more than 10 percent of consolidated revenues. The revenue for these customers, as well as corresponding accounts receivable, as a percentage of the consolidated revenues and accounts receivable balances, at and for the three months ended March 29, 2003 and March 30, 2002 are as follows:

10.     SUPPLEMENTAL CASH FLOW INFORMATION

Changes in current operating items were as follows (in thousands):

Supplemental cash flow disclosures are as follows (in thousands):

11.     RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the FASB issued SFAS 143, “Accounting for Asset Retirement Obligations”. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. SFAS 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The adoption of SFAS 143 did not have a material impact on the Company’s consolidated financial statements.

In May 2002, the FASB issued SFAS 145, “Rescission of FASB Statements 4, 44, and 64, Amendment of FASB Statement 13 and Technical Corrections” which is effective for fiscal years beginning after May 15, 2002. This statement provides guidance with

9

Table of Contents

respect to the accounting for gain or loss on capital leases that were modified to become operating leases. The statement also eliminates the requirement that gains and losses on the early extinguishment of debt be classified as extraordinary items and provides guidance when the gain or loss on the early retirement of debt should or should not be reflected as an extraordinary item. The Company is evaluating whether it will be required to reclassify the extraordinary losses recognized in prior years as ordinary loss upon adoption of this standard when it becomes effective in fiscal year 2003.

In December 2002, the FASB issued SFAS 148, “Accounting for Stock-Based Compensation— Transition and Disclosure”, which amends SFAS 123, “Accounting for Stock-Based Compensation”. SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. Additionally, SFAS 148 amends the disclosure requirements of SFAS 123 to require more prominent and more frequent disclosures in financial statements of the effects of stock-based compensation. SFAS 148 is effective for fiscal years ending after December 15, 2002 with interim disclosure provisions being effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The Company does not currently plan to change to the fair value method of accounting for its stock based compensation. Therefore, the Company anticipates that the adoption of this statement will not have a material impact on its financial condition or results of operations.

In November 2002 the FASB issued Interpretation 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” The Interpretation expands disclosure requirements for certain guarantees and requires the recognition of a liability for the fair value of an obligation assumed under a guarantee. The liability recognition provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002, and the disclosure provisions apply to fiscal years ending after December 15, 2002. We do not believe the adoption of this Interpretation will have a material impact on our financial position or results of operations.

12.     COMPREHENSIVE INCOME

The table below presents comprehensive income for all applicable periods (in thousands):

10

Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Statements contained in this section include “forward-looking statements” within the meaning of U.S. federal securities laws, which are intended to be covered by the safe harbors created thereby. These forward-looking statements include, in particular, the statements about the Company’s plans, strategies and prospects. Although the Company believes that its plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, it may not achieve its plans, intentions or expectations.

Investors are cautioned that all forward-looking statements involve risks and uncertainties, including without limitation, the ability of the Company to develop markets and sell its products and the effects of competition and pricing. Information concerning some of the factors that could cause actual results to differ materially from those in, or implied by, the forward-looking statements are set forth under “Risk Factors” in the Company’s Form 10-K for the fiscal year ended December 28, 2002, filed with the U.S. Securities and Exchange Commission. Although the Company believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements included herein will prove to be accurate.

We design, engineer and fabricate a comprehensive portfolio of heat recovery and auxiliary power equipment and provide related services. The Company’s corporate headquarters are located in Tulsa, Oklahoma, with operating facilities in Plymouth, Minnesota; Tulsa, Oklahoma; Auburn, Massachusetts; Clinton, South Carolina; Monterrey, Mexico; Toluca, Mexico; San Antonio, Mexico; and Heerlen, Netherlands.

During the first quarter of fiscal year 2002, we informed the workforce at our Ft. Smith, Arkansas plant that we would close that facility permanently effective April 30, 2002. The decision was based entirely on the cost structure of that facility and we had already secured replacement capacity to offset that closure in other lower-cost locations around the globe. The Auxiliary Power Equipment segment recorded $875,000 of severance costs related to the elimination of approximately 100 employee positions at the Fort Smith plant during the first quarter of 2002. During 2002 we also scaled back operations at other locations in our efforts to continually seek to further our use of low-cost subcontractor fabrication as well as manage our costs due to the downturn in the U.S. market. Additional workforce reductions taking place in fiscal year 2002 in the Auxiliary Power Equipment segment either through lay-offs or attrition were 199, with severance costs of $125,000. The Heat Recovery Equipment segment reductions totaled 213, with total severance costs of $340,000.

11

Table of Contents

Results of Operations

The table below represents the operating results of the Company for the periods indicated (in thousands):

Our fiscal year ends on the last Saturday in December. As a result, references in this quarterly report to fiscal year 2003 refer to the fiscal year ending December 27, 2003, and to fiscal year 2002 refer to the fiscal year ended December 28, 2002. References to the first quarter of fiscal year 2003 refer to the three months ended March 29, 2003 and references to the first quarter of fiscal year 2002 refer to the three months ended March 30, 2002.

Three months ended March 29, 2003 compared to three months ended March 30, 2002

Revenues

Revenues decreased 62.2% to $77.0 million for the first quarter of fiscal year 2003 from $203.5 million for the first quarter of fiscal year 2002. This decrease is primarily the result of lower revenue recognition, in the current quarter, due to a continued decline in new orders for both Heat Recovery and Auxiliary Power equipment. Demand in the gas turbine power generation equipment industry began to decrease during the latter half of 2001 and that trend has continued into 2003. Consequently, the development of domestic gas turbine power plants has slowed considerably from September of 2001. We anticipate that revenues in fiscal 2003 will be lower than revenues in 2002 due to the downturn in the domestic power market.

12

Table of Contents

The following table sets forth our segment revenues for the first quarter of fiscal years 2003 and 2002 (dollars in thousands):

The Heat Recovery Equipment segment revenues decreased 69.5% to $36.7 million for the first quarter of fiscal year 2003. Revenues for HRSGs decreased 68.2% to $28.0 million. The volume and size of orders booked into backlog decreased dramatically during 2002, which results in lower recognition of revenues in the following periods. Revenues for specialty boilers decreased by 72.9% to $8.7 million. This decrease was due primarily to a lower level of revenue recognized for selective catalytic reduction (SCR) units. The large decrease in SCR units was expected, and is due to one-time environmental compliance-related investments made in the U.S.

The Auxiliary Power Equipment segment revenues decreased 51.6% to $40.3 million for the first quarter of fiscal year 2003. Revenues for exhaust systems decreased by 13.2 % to $17.7 million. This decline is primarily due the downturn of the domestic power market resulting in a significantly lower level of orders. Revenues for inlet systems and other equipment decreased by 71.3% to $12.0 million and 49.9% to $10.7 million, respectively. The significant decrease this quarter is also due to a significantly lower level of orders booked during 2002.

The demand for our products and services depends, to a significant degree, on the continued construction of gas turbine power generation plants. In the first quarter of fiscal year 2003, approximately 89% of our revenues were from sales of equipment and provision of services for gas turbine power plants. The power generation equipment industry has experienced cyclical periods of growth or decline. In periods of decreased demand for new gas turbine power plants or difficulty in raising capital to finance new power plants, our customers may be more likely to decrease expenditures on the types of products and systems that we supply and, as a result, our sales may decrease. In addition, the gas turbine power industry depends on natural gas. A rise in the price or shortage of natural gas could reduce the profitability of gas turbine power plants, which could adversely affect our sales. Liquidity concerns in 2002 and continuing into 2003 in the merchant power production sector have reduced the availability of financing for power plant development in the United States and have caused the market for our products to decline. While it is believed that the long-term need for gas fired power plants on a world-wide basis is substantial, lower demand in the United States during 2002 and into the first quarter of 2003, has negatively impacted our bookings and revenue. Demand for new power plants outside of the United States will continue to be a good market for our products.

13

Table of Contents

The following table presents our revenues by geographic region (dollars in thousands):

Revenues in North America comprised 70.3% of our revenues for the first quarter of fiscal year 2003 and 88.5% for the first quarter of fiscal year 2002. Revenues in North America decreased 70.0% to $54.1 million for the first quarter of fiscal year 2003, primarily as a result of a significant decrease in the volume of products sold. This volume decrease was caused primarily by the decrease in the development of gas turbine power plants in the U.S. gas turbine power generation equipment industry beginning in the latter half of 2001 and continuing into 2003. A number of factors have contributed to this situation such as debt and liquidity issues of several merchant power producing companies. While it is believed that the long-term need for power plants on a world-wide basis is substantial, the current demand, in the United States, has slowed considerably.

Revenues in Asia increased 2.4% for the first quarter of fiscal year 2003 to $3.5 million. The Company believes Asia will account for an increasingly larger proportion of the Company’s revenues over the next several years that will partially offset the expected decline in U.S. sales. Revenues in Europe decreased by 29.1% to $6.7 million due to several larger projects being sold last year compared to this year.

Other revenues increased to $11.7 million for the first quarter of fiscal year 2003 primarily as a result of an increase in the number of projects in the Middle East.

Gross Profit

Gross profit decreased 42.2% to $21.2 million for the first quarter of fiscal year 2003 from $36.7 million for the first quarter of fiscal year 2002. Gross profit as a percentage of revenues increased to 27.5% in the first quarter of fiscal year 2003 from 18.0% in the first quarter of fiscal year 2002. Gross profit as a percentage of revenues increased each quarter in 2002 from 18.0% in the first quarter to 28.2% in the fourth quarter. This is primarily due to the continued benefit of concentrating increased production in lower cost countries as well as improved product quality that has substantially reduced rework costs and, to a lesser degree, a change in the product mix within our two operating segments. While we will continue to manage costs by focusing on lower cost countries and maximizing product quality, the gross margin percentage experienced this quarter is not expected to continue during the coming quarter or the next fiscal year. Due to the increasingly competitive market, our gross margin percentages will likely be reduced to more historic levels experienced during the last several years.

As a result of our focus to lower cost countries, in March 2002, management approved and executed a plan to shut down our facility in Fort Smith, Arkansas, effective April 30, 2002. The assets, which are included in our Auxiliary Power Equipment segment, are in the final process of being disposed. An analysis of the carrying value of the facility and related equipment indicated that the assets are not impaired and, as such, the Company continues to carry the remaining assets at their book value until disposition. Additionally, in connection with the announcement of the plan to the employees, the Auxiliary Power Equipment segment recorded $875,000 of severance costs (included as a component of cost of goods sold), related to the elimination of approximately 100 employee positions at the Fort Smith plant, during the first quarter of 2002.

14

Table of Contents

Selling and Administrative Expenses

Selling and administrative expenses decreased 9.5% to $9.5 million for the first quarter of fiscal year 2003 from $10.5 million for the first quarter of fiscal year 2002. Not including approximately $0.9 million related to our strategic acquisition efforts incurred in the first quarter of fiscal year 2003, selling and administrative costs decreased approximately $1.9 million. This decrease is due to decreases in sales and administrative personnel occurring in the latter part of 2002 as well as other cost savings measures implemented as a result of the downturn in the U.S. power market. As a percentage of revenues, selling and administrative expenses increased to 12.3% for the first quarter of fiscal year 2003 from 5.1% for the comparable period of fiscal year 2002 as a result of our decreasing revenues.

Operating Income

Operating income decreased to $11.8 million for the first quarter of fiscal year 2003 from $26.3 million in the first quarter of fiscal year 2002. The decrease in revenues and associated gross profit were the main contributors to this decrease.

Interest Expense

Interest expense decreased to $0.5 million for the first quarter of fiscal year 2003 from $1.3 million for the first quarter of fiscal year 2002. This decrease is due primarily to a reduction in debt as a result of mandatory principal payments and voluntary prepayments totaling $57.5 million, including a net reduction of $27.6 million to our revolving credit facility. Additionally, our borrowing interest rate has decreased by approximately 180 basis points due to general market interest rate reductions. At March 29, 2003 our term debt bore interest at an average rate of 2.45%.

Income Taxes

The Company is currently reflecting a 39.0% effective tax rate in the tax provision. Also, the reduction of the deferred tax asset related to the amortization of goodwill will allow us to reduce cash paid for future taxes by approximately $5.6 million annually, but will not reduce future income tax expense. We did not have any net operating loss carryforwards at March 29, 2003.

Backlog

Backlog decreased to approximately $258.3 million at March 29, 2003, compared to $487.5 million at March 30, 2002. Based on production and delivery schedules we believe that up to approximately $232 million or 90% of our backlog at March 29, 2003 will be recognized as a portion of our revenues during the next 12 months. Our backlog consists of firm orders from our customers for projects in progress. Backlog does not include preliminary or speculative projects. Bookings of projects can only be reflected in the backlog when the customers have made a firm commitment. To date, we have experienced minimal cancellations because of this conservative policy. Backlog may vary significantly from quarter to quarter due to the timing of that commitment.

Liquidity and Capital Resources

Our primary sources of cash are net cash flow from operations and borrowings under our credit facilities. Our primary uses of this cash are principal and interest payments on indebtedness, capital expenditures and general corporate purposes.

Operating Activities

Net cash used by operations decreased to $0.9 million for the first quarter of fiscal year 2003 from $8.3 million for the first quarter of fiscal year 2002. While earnings in the first quarter of 2002 were higher than 2003 it was offset with a larger increase in working capital compared to the first quarter of fiscal 2003. The large increase in working capital in 2002 was primarily due to large progress billings to customers for two large Heat Recovery projects of approximately $44 million. These projects comprised a significant portion of the fabrication schedule for the third and fourth quarters of 2001, and were part of an advantageous multiple unit arrangement with progress billings less favorable than our normal terms. Two related projects with similar billing terms have also negatively impacted working capital in the first quarter of 2003, albeit to a smaller degree. Planned fluctuations in our cash requirements for projects such as these will occur from time to time. Our $75 million revolving credit facility is available to accommodate these fluctuations.

15

Table of Contents

Investing Activities

Net cash used for investing activities decreased to $0.1 million for the first quarter of fiscal year 2003 from $0.8 million for the first quarter of fiscal year 2002.

Financing Activities

Net cash used by financing activities was $.01 million in the first quarter of fiscal year 2003 and net cash provided by financing activities was $11.9 million in the first quarter of fiscal year 2002. Long-term debt payments and proceeds from issuance of common stock make up the activity for the first quarter of 2003. Activity in 2002 consists of an increase to our revolving credit facility of $19.1 million partially offset by payments on our term debt of $7.2 million.

At March 29, 2003, the Company had $60.0 million outstanding under the term loan and no balance was outstanding under the revolver. Letters of credit totaling $51.4 million were issued and outstanding at March 29, 2003. Currently, there are no amounts drawn upon these letters of credit.

At the Company’s option, amounts borrowed under the amended and restated senior credit facility will bear interest at either the Eurodollar rate or an alternate base rate, plus, in each case, an applicable margin. The applicable margin will range from 1.0% to 2.25% in the case of a Eurodollar based loan and from 0% to 1.25% in the case of a base rate loan, in each case, based on a leverage ratio. At March 29, 2003 the term debt of $60.0 million bore interest at an average rate of approximately 2.45%.

     The Company’s amended and restated senior credit facility:

	•		is guaranteed by all of its domestic subsidiaries;
	•		is secured by a lien on all its and its domestic subsidiaries’ property and assets, including, without limitation, a pledge of all capital stock owned by it and its domestic subsidiaries, subject to a limitation of 65% of the voting stock of any foreign subsidiary;
	•		requires the Company to maintain minimum interest and fixed charge coverage ratios and limit its maximum leverage; and
	•		among other things, restricts the Company’s ability to (1) incur additional indebtedness, (2) sell assets other than in the ordinary course of business, (3) pay dividends in excess of 25% of its cumulative net income from January 1, 2001 through the most recent fiscal quarter end, subject to leverage and liquidity thresholds and other customary restrictions, (4) make capital expenditures in excess of $13 million in fiscal year 2001 or $10 million in any fiscal year, thereafter, with adjustments for carry-overs from the previous year, (5) make investments and acquisitions and (6) enter into mergers, consolidations or similar transactions.

Because our financial performance is impacted by various economic, financial, and industry factors, we cannot say with certainty whether we will satisfy these covenants in the future. Noncompliance with these covenants would constitute an event of default, allowing the lenders to accelerate the repayment of any borrowings outstanding under the related amended and restated senior credit facility. While no assurances can be given, we believe that we would be able to successfully negotiate amended covenants or obtain waivers if an event of default were imminent; however, we might be required to make certain financial concessions. Our business, results of operations and financial condition may be adversely affected if we were unable to successfully negotiate amended covenants or obtain waivers on acceptable terms.

Cash Obligations

Under various agreements, we are obligated to make future cash payments in fixed amounts. These include payments under our amended and restated senior credit facility and rent payments required under operating lease agreements.

16

Table of Contents

The following table summarizes our fixed cash obligations as of March 29, 2003 over various future periods (in thousands):