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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --------- EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --------- EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO
________________.
Commission File Number 0-5214
PEERLESS MFG. CO.
(Exact Name of Registrant as Specified in Its Charter)
TEXAS 75-0724417
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
2819 WALNUT HILL LANE, DALLAS, TEXAS 75229
---------------------------------------- ---------
(Address of principal executive offices) (Zip code)
(214) 357-6181
--------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check 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 past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--------- ---------
Indicate by check whether registrant is an accelerated filer (as defined in
Rule 12b-2 of the Act). Yes No X
-------- ---------
As of May 13, 2003 there were 2,998,534 shares of the registrant's common
stock outstanding.
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1
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2003
TABLE OF CONTENTS
PAGE
NUMBER
------
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at March 31, 2003 (unaudited)
and June 30, 2002................................................................. 3
Unaudited Consolidated Statements of Operations for the three and
nine months ended March 31, 2003 and 2002......................................... 4
Unaudited Consolidated Statements of Cash Flows for
the nine months ended March 31, 2003 and 2002..................................... 5
Notes to the Consolidated Financial Statements.................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................................... 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ............. 26
ITEM 4. CONTROLS AND PROCEDURES ................................................ 26
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS....................................................... 27
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............................... 27
ITEM 3. DEFAULTS UPON SENIOR SECURITIES......................................... 27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................... 27
ITEM 5. OTHER INFORMATION....................................................... 27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................................ 27
SIGNATURES............................................................................. 28
CERTIFICATIONS......................................................................... 29
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEERLESS MFG. CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
March 31, June 30,
2003 2002
---------- --------
(unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 6,451 $ 1,386
Short term investments 314 307
Accounts receivable - principally trade - net of
allowance of uncollectible accounts of $770 at
March 31, 2003 and $354 at June 30, 2002 14,734 25,506
Inventories 3,348 3,671
Costs and earnings in excess of billings on
uncompleted contracts 5,701 9,218
Deferred income taxes 933 933
Other current assets 1,616 725
------- -------
Total current assets 33,097 41,746
Property, plant and equipment, net 3,658 4,152
Other assets 550 608
------- -------
Total assets $37,305 $46,506
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable 9,702 12,545
Billings in excess of costs and earnings on
uncompleted contracts 2,406 4,231
Commissions payable 854 1,556
Income taxes payable - 766
Product warranties 762 750
Accrued liabilities and other payables 2,724 4,143
------- -------
Total current liabilities 16,448 23,991
Shareholders' equity
Common stock 2,999 2,991
Additional paid-in capital 1,757 1,720
Other (58) (98)
Retained earnings 16,159 17,902
------- -------
Total shareholders' equity 20,857 22,515
------- -------
Total liabilities and shareholders' equity $37,305 $46,506
======= =======
See accompanying notes to the consolidated financial statements.
3
PEERLESS MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------- ---------------------
2003 2002 2003 2002
------- ------- ------- -------
Revenues $13,564 $29,087 $48,760 $80,640
Cost of goods sold 10,185 21,080 37,769 58,769
------- ------- ------- -------
Gross profit 3,379 8,007 10,991 21,871
Operating expenses
Sales and marketing 1,452 2,122 4,616 6,163
Engineering and project management 1,320 2,204 4,327 6,038
General and administrative 1,259 1,870 4,425 5,353
Restructuring expense - - 483 -
------- ------- ------- -------
4,031 6,196 13,851 17,554
------- ------- ------- -------
Operating income (loss) (652) 1,811 (2,860) 4,317
Other income (expense)
Interest expense - - - (21)
Foreign exchange gain (loss) 11 - (81) 38
Other, net 55 74 172 274
------- ------- ------- -------
66 74 91 291
------- ------- ------- -------
Earnings (loss) before income taxes (586) 1,885 (2,769) 4,608
Income tax expense (benefit) (211) 698 (1,025) 1,705
------- ------- ------- -------
Net earnings (loss) $ (375) $ 1,187 $(1,744) $ 2,903
======= ======= ======= =======
Basic earnings (loss) per share $ (0.13) $ 0.40 $ (0.58) $ 0.98
======= ======= ======= =======
Diluted earnings (loss) per share $ (0.13) $ 0.38 $ (0.58) $ 0.94
======= ======= ======= =======
See accompanying notes to the consolidated financial statements.
4
PEERLESS MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(UNAUDITED)
Nine Months Ended
March 31,
---------------------
2003 2002
------- -------
Cash flows from operating activities:
Net earnings (loss) $(1,744) $ 2,903
Adjustments to reconcile net earnings (loss)
to net cash provided by operating activities:
Depreciation and amortization 578 480
Gain on sale of property - (267)
Bad debt expense 490 31
Other 61 -
Changes in operating assets and liabilities
Accounts receivable 10,264 2,197
Inventories 322 (1,184)
Costs and earnings in excess of billings on
uncompleted contracts 3,517 (3,896)
Other current assets (892) (280)
Other assets 58 133
Accounts payable (2,854) 8,137
Billings in excess of costs and earnings on
uncompleted contracts (1,825) (2,890)
Commissions payable (702) 22
Product warranties 12 343
Accrued liabilities, taxes and other payables (2,189) 11
------- -------
6,840 2,837
------- -------
Net cash provided by operating activities 5,096 5,740
Cash flow from investing activities:
Net purchases of short term investments (7) -
Net purchases of property and equipment (72) (1,298)
Proceeds from sale of property - 405
------- -------
Net cash used in investing activities (79) (893)
Cash flows from financing activities:
Net change in borrowings - (1,600)
Proceeds from issuance of common stock 64 189
------- -------
Net cash provided by (used in) financing activities 64 (1,411)
Effect of exchange rate changes on
cash and cash equivalents (16) 3
------- -------
Net increase in cash and cash equivalents 5,065 3,439
Cash and cash equivalents at beginning of period 1,386 2,577
------- -------
Cash and cash equivalents at end of period $ 6,451 $ 6,016
======= =======
See accompanying notes to the consolidated financial statements.
5
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2003
1. BASIS OF PRESENTATION.
The accompanying consolidated financial statements of Peerless Mfg.
Co. and Subsidiaries (hereafter referred to as the "Company", "we", "us",
"our") have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information. The consolidated financial statements of the Company as of
March 31, 2003, and for the three and nine months ended March 31, 2003 and
2002 are unaudited and, in the opinion of management, contain all
adjustments necessary for the fair presentation of the financial position
and results of operations of the Company for the interim periods. These
consolidated financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended June 30, 2002. The results of
operations for the three and nine months ended March 31, 2003 are not
necessarily indicative of the results to be expected for the entire year
(see Item 2 - "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Restructuring and Organizational Realignment"
and - "Factors That May Affect Our Operating Results and Other Risk
Factors" following). The Company's fiscal year ends on June 30th.
References herein to fiscal 2002 and fiscal 2003 refer to our fiscal years
ended June 30, 2002 and 2003, respectively. Certain fiscal year 2002 items
have been reclassified to conform with the fiscal year 2003 presentation.
All dollar and share amounts are in thousands, except per share amounts and
Notes 9 and 11.
2. NEW ACCOUNTING STANDARDS.
In July 2002, the Financial Accounting Standards Board ("FASB") issued
Statement No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." The Statement 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. FASB Statement No. 146 is
to be applied prospectively to exit or disposal activities initiated after
December 31, 2002. The Company does not expect the adoption of this
pronouncement to have a material impact on its financial condition or
results of operations.
In November 2002, FASB reached a consensus on EITF Issue 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." The
guidance in this Issue is effective for revenue arrangements entered into
in fiscal years beginning after June 15, 2003. The Issue addresses certain
aspects of the accounting by a vendor for arrangements under which it will
perform multiple revenue-generating activities and whether, as a result,
there is embedded more than one earnings process for revenue recognition
purposes. The Company does not expect the adoption of this pronouncement to
have a material impact on its financial condition or results of operations.
In November 2002, FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees of
Indebtedness of Others." This Interpretation clarifies the requirements of
SFAS No. 5, "Accounting for Contingencies," relating to the guarantor's
accounting for, and disclosure of, the issuance of certain types of
guarantees. The Interpretation's provision for initial recognition and
measurement are required on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure requirements are required
for financial statements of
6
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 1O-Q
FOR THE PERIOD ENDED MARCH 31, 2003
interim or annual reports that end after December 15, 2002. The Company has
adopted FIN No. 45 and has included the new disclosure requirements in
Note 4 - "Product Warranties" to the Notes to the Consolidated Financial
Statements.
In January 2003, FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities." This Interpretation of Accounting Research Bulletin No.
51, "Consolidated Financial Statements," addresses consolidation by
business enterprises of variable interest entities which possess certain
characteristics. The Interpretation requires that if a business enterprise
has a controlling financial interest in a variable interest entity, the
assets, liabilities, and results of the activities of the variable interest
entity must be included in the consolidated financial statements with those
of the business enterprise. This Interpretation applies immediately to
variable interest entities created after January 31, 2003 and to variable
interest entities in which an enterprise obtains an interest after that
date. The Company did not have any ownership interest in any variable
interest entities as of March 31, 2003.
In April 2003, FASB issued Statement No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." FASB Statement No.
149 requires that contracts with comparable characteristics be accounted
for similarly. The Statement clarifies the circumstances in which a
contract with an initial net investment meets the characteristics of a
derivative, and when a derivative contains a financing component and amends
certain other existing pronouncements. This Statement is effective for
contracts entered into or modified after June 30, 2003. The Company does
not expect the adoption of this pronouncement to have a material impact on
its financial condition or results of operations.
3. INVENTORIES.
Inventories are stated at the lower of cost (first-in, first-out) or
market. Principal components of inventories are as follows:
March 31, June 30,
2003 2002
--------- --------
Raw materials $2,596 $2,201
Work in process 397 1,085
Finished goods 355 385
------ ------
Total inventories $3,348 $3,671
====== ======
7
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 1O-Q
FOR THE PERIOD ENDED MARCH 31, 2003
4. PRODUCT WARRANTIES
The Company warrants that its products will be free from defects in
materials and workmanship and will conform to agreed upon specifications at
the time of delivery and typically for a period of 18 to 36 months from the
date of customer acceptance, depending upon the specific product and terms
of the customer agreement. Typical warranties require the Company to repair
or replace defective products during the warranty period at no cost to the
customer. The Company attempts to obtain back-up concurrent warranties for
major component parts from our suppliers. The Company provides for the
estimated cost of product warranties, based on historical experience by
product type, expectation of future conditions and the extent of back-up
concurrent supplier warranties in place, at the time the product revenue is
recognized. Should these factors, or other factors affecting warranty costs
differ from our estimates, revisions to the estimated product warranty
liability are made.
Product warranty activity for the three months and nine months ended
March 31, 2003 and 2002, are as follows:
Three Months Ended Nine Months Ended
March 31, March 31,
------------------ -----------------
2003 2002 2003 2002
----- ----- ------- -----
Balance at the beginning of the period $ 813 $ 639 $ 750 $ 446
Accruals for warranties issued during the period 264 419 1,169 840
Changes in liability for pre-existing warranties
during the period - - - -
Settlements made during the period (315) (269) (1,157) (497)
----- ----- ------- -----
Balance at the end of the period $ 762 $ 789 $ 762 $ 789
===== ===== ======= =====
5. CONTINGENCIES
Included in the Company's financial statements is a $2.2 million
receivable due from a customer that recently filed a plan of reorganization
under Chapter 11 of the United States Bankruptcy Code (original amount of
the contract was approximately $6.1 million). The Company has been
classified as an unsecured creditor under such filing. The Company has
obtained outside counsel to help with the collection of this receivable and
has filed a statutory lien on the refinery where its equipment was
installed. In addition, the Company has filed a lawsuit to perfect its lien
interest against the owner of the refinery. While the Company has reason to
believe that its lien will be found to be valid, no assurances can be
given. The Company intends to vigorously pursue its collection and believes
that this receivable will be collected. In the event that the Company's
lien is held to be invalid, or if the receivable or a significant portion
thereof is deemed to be not collectible, the Company will be required to
write down the receivable to its net realizable value. To the extent that
the Company's existing allowance for doubtful accounts is not adequate to
cover this write down, the additional reserve required will be a charge
against the Company's operating results. See Item 2 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" of this Report.
8
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 1O-Q
FOR THE PERIOD ENDED MARCH 31, 2003
6. EARNINGS (LOSS) PER SHARE.
Basic earnings (loss) per share have been computed by dividing net
earnings (loss) by the weighted average number of common shares outstanding
during the period. Diluted earnings (loss) per share reflect the potential
dilution that could occur if options or other contracts to issue common
shares were exercised or converted into common stock. The following table
sets forth the computation for basic and diluted earnings (loss) per share
for the periods indicated.
Three Months Ended Nine Months Ended
March 31, March 31,
------------------- -------------------
2003 2002 2003 2002
------ ------ ------- ------
Net earnings (loss) $ (375) $1,187 $(1,744) $2,903
====== ====== ======= ======
Basic weighted average common
shares outstanding 2,999 2,983 2,995 2,976
Effect of dilutive options - 103 - 112
------ ------ ------- ------
Diluted weighted average common
shares outstanding 2,999 3,086 2,995 3,088
====== ====== ======= ======
Net earnings (loss) per share - basic $(0.13) $ 0.40 $ (0.58) $ 0.98
Net earnings (loss) per share - diluted $(0.13) $ 0.38 $ (0.58) $ 0.94
The weighted average common shares outstanding-diluted computation
excluded 190,581 and 198,505 outstanding stock options for the three and
nine months ended March 31, 2003 because their impact would be
anti-dilutive. Likewise, the weighted average common shares
outstanding-diluted computation excluded 60,500 and 24,352 outstanding
stock options for the three and nine months ended March 31, 2002 because
their impact would be anti-dilutive.
7. COMPREHENSIVE INCOME (LOSS).
Comprehensive income (loss) is defined as all changes in equity during
a period, except those resulting from investments by owners and
distributions to owners. The components of comprehensive income (loss) were
as follows:
Three Months Ended Nine Months Ended
March 31, March 31,
------------------ -------------------
2003 2002 2003 2002
----- ------ ------- ------
Net earnings (loss) $(375) $1,187 $(1,744) $2,903
Foreign currency translation
adjustment (21) (13) 28 (74)
----- ------ ------- ------
Comprehensive income (loss) $(396) $1,174 $(1,716) $2,829
===== ====== ======= ======
9
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 1O-Q
FOR THE PERIOD ENDED MARCH 31, 2003
8. STOCK-BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" (SFAS 148) which
amends Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123). SFAS 148 provides alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation and requires disclosures
in annual and interim financial statements of the effects of stock-based
compensation as reflected below.
The Company continues to account for its stock options under the
recognition and measurement principles of Accounting Principles Board
Opinion No. 25 "Accounting for Stock Issued to Employees," and related
Interpretations. No stock based employee compensation expense related to
the Company's stock options is reflected in the net earnings (loss), as all
options granted under the plan had an exercise price equal to the market
value of the underlying common stock on the date of grant. The following
table illustrates the effect on net earnings (loss) and earnings (loss) per
share if the Company had applied the fair value recognition provisions of
SFAS 123 to stock-based compensation.
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------- -----------------------
2003 2002 2003 2002
------ ------ ------- ------
Net earnings (loss), as reported $ (375) $1,187 $(1,744) $2,903
Deduct: Total stock-based employee
compensation expense determined
using the fair value based method for
all awards, net of related tax effects (31) (30) (104) (85)
------ ------ ------- ------
Pro forma net earnings (loss) $ (406) $1,157 $(1,848) $2,818
====== ====== ======= ======
Earnings per share:
Basic - as reported $(0.13) $ 0.40 $ (0.58) $ 0.98
Basic - pro forma $(0.14) $ 0.39 $ (0.62) $ 0.95
Diluted - as reported $(0.13) $ 0.38 $ (0.58) $ 0.94
Diluted - pro forma $(0.14) $ 0.37 $ (0.62) $ 0.91
10
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 1O-Q
FOR THE PERIOD ENDED MARCH 31, 2003
9. DEFAULT OF CREDIT FACILITY
The Company maintains a $10 million revolving line of credit facility
that expires in October 2003. The credit line carries a floating interest
rate based on the prime or Euros rate plus or minus an applicable margin
(prime less .25%, Euros plus 2.65%), and is secured by substantially all of
our assets. The margin factor is subject to a reduction schedule based on
the Company's attainment of certain financial performance criteria. As of
March 31, 2003, the Company had no outstanding balances under the credit
line, and $3.6 million outstanding under letters of credit, leaving us with
$6.4 million of availability under the facility. The facility contains
financial covenants, restrictions on capital expenditures, acquisitions,
asset dispositions, and additional debt, as well as other customary
covenants.
The financial covenants, among other things, require that the Company
not incur losses in three consecutive quarters and that any losses (before
taxes and extraordinary items) incurred over this period not exceed
$750,000. The quarter ending March 31, 2003 represents the third
consecutive quarterly loss for the Company, and for the nine months then
ended the Company incurred losses (before taxes and extraordinary items) of
approximately $2.8 million. As such, the Company is in default of its loan
agreement as of March 31, 2003. The Company has obtained a temporary waiver
from the bank with respect to this default and anticipates being in
compliance with the aforementioned covenant upon completion of its fourth
quarter. However, no assurances can be given that the Company will in fact
be in compliance with this covenant upon the completion of its fourth
quarter, or that the bank will be willing to grant further waivers if the
Company is not in compliance with this covenant upon the completion of its
fourth quarter, or in the event of further defaults. See Item 2 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" of this Report.
10. SUPPLEMENTAL CASH FLOW INFORMATION
Net cash flow from operating activities reflects cash payments for
interest and income taxes as follows:
Nine Months Ended
March 31,
-----------------
2003 2002
---- ------
Interest paid $ - $ 114
Income taxes paid $421 $2,561
11. SUBSEQUENT EVENT
On April 22, 2003, the Company closed on the sale of 33 acres of
undeveloped land located in Wylie, Texas for $575,000. In connection with
this transaction, the Company will recognize a gain in its results of
operations for its fourth quarter of fiscal 2003 of approximately $475,000.
11
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 1O-Q
FOR THE PERIOD ENDED MARCH 31, 2003
12. SEGMENT INFORMATION
The Company identifies reportable segments based on management
responsibility within the corporate structure. The Company has three
reportable industry segments: SCR Systems, Separation & Filtration and
Boilers. For a discussion of these various segments, see Item 2 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Overview" following.
Segment profit and loss is based on revenue less direct costs of the
segment before allocation of general, administrative, research and
development costs. All inter-company transfers between segments have been
eliminated. Segment information and reconciliation to operating income
(loss) for the three and nine months ended March 31, 2003 and 2002 are
presented below. The Company does not allocate general and administrative
expenses and restructuring expenses ("unallocated overhead"), assets,
expenditures for assets or depreciation expense on a segment basis for
internal management reporting, and therefore such information is not
presented.
SEPARATION UNALLOCATED
SCR & FILTRATION BOILERS OVERHEAD CONSOLIDATED
------- ------------ ------- ----------- ------------
THREE MONTHS ENDED
MARCH 31, 2003
Revenue from customers $ 6,173 $ 6,649 $ 742 $13,564
Segment profit (loss) 443 512 (348) (1,259) (652)
THREE MONTHS ENDED
MARCH 31, 2002
Revenue from customers $17,350 $ 7,196 $ 4,541 $29,087
Segment profit (loss) 3,174 666 (408) (1,621) 1,811
NINE MONTHS ENDED
MARCH 31, 2003
Revenue from customers $25,622 $20,488 $ 2,650 $48,760
Segment profit (loss) 651 2,333 (936) (4,908) (2,860)
NINE MONTHS ENDED
MARCH 31, 2002
Revenue from customers $48,611 $21,119 $10,910 $80,640
Segment profit (loss) 8,877 1,206 (662) (5,104) 4,317
12
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 1O-Q
FOR THE PERIOD ENDED MARCH 31, 2003
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
From time to time, we make oral and written statements that may constitute
"forward-looking statements" (rather than historical facts) as defined in the
Private Securities Litigation Reform Act of 1996 or by the Securities and
Exchange Commission in its rules, regulations and releases, including statements
regarding our expectations, hopes, beliefs, intentions or strategies regarding
the future. We desire to take advantage of the "safe harbor" provisions in the
Private Securities Litigation Reform Act of 1996 for forward-looking statements
made from time to time, including, but not limited to, the forward-looking
statements made in this Report on Form 10-Q, as well as those made in our other
filings with the SEC. Forward-looking statements contained in this Report are
based on management's current plans and expectations and are subject to a number
of risks and uncertainties that could cause actual results to differ materially
from those described in the forward-looking statements. In the preparation of
this Report, where such forward-looking statements appear, we have sought to
accompany such statements with meaningful cautionary statements identifying
important factors that could cause actual results to differ materially from
those described in the forward-looking statements. Such factors include, but are
not limited to, the "Factors That May Affect Our Operating Results and Other
Risk Factors," as set forth starting on page 22 of this Report.
All forward-looking statements included in this Report are based on
information available to us on the date hereof, and we expressly disclaim any
obligation to release publicly any updates or changes in the forward-looking
statements, whether as a result of changes in events, conditions, or
circumstances on which any forward-looking statement is based.
OVERVIEW
Peerless Mfg. Co. is a global company which provides environmental,
separation & filtration and boiler products for the abatement of air pollution,
the removal of contaminants from gases and liquids, and the production of steam
through its three principal business segments - SCR Systems, Separation &
Filtration and Boilers.
SCR Systems. In this business segment, our largest, we design, engineer,
manufacture and sell highly specialized environmental control systems, which are
used for air pollution abatement. These systems convert nitrogen oxide (NOx)
emissions from exhaust gases, caused by burning hydrocarbon fuels, such as coal,
gasoline, natural gas and oil, into harmless nitrogen and water vapor. These
systems are totally integrated systems, complete with instruments, controls and
related valves and piping, and are packaged on skids.
Separation & Filtration. In this business segment, our traditional and
second principal segment, we design, engineer, manufacture and sell specialized
products known as "separators" or "filters" which are used for a variety of
purposes in cleaning gases and liquids as they move through piping systems.
These products are used primarily to remove solid and liquid contaminants from
natural gas and saltwater aerosols from combustion intake air of gas turbine and
diesel engines.
Boilers. In our third business segment, we design, engineer, manufacture
and sell packaged boilers and other steam generating equipment. This equipment
is used to produce steam used for
13
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 1O-Q
FOR THE PERIOD ENDED MARCH 31, 2003
heating, drying, driving steam engines and a variety of other applications.
During the first quarter of fiscal 2003, we suspended this business segment. See
"Restructuring and Organizational Realignment" for additional discussion on the
suspension of this business.
RESTRUCTURING AND ORGANIZATIONAL REALIGNMENT
During the latter part of fiscal 2002, the construction of new merchant
power plants in the United States slowed considerably, as doubts emerged
regarding the actual demand for electricity began to surface, coupled with the
continued weakness in the United States economy. In addition, recent regulatory
uncertainties have caused NOx reduction initiatives relating to retro-fit
projects to be delayed. These factors resulted in a downturn of new SCR Systems
orders during the second half of fiscal 2002, as well as a decrease in new
packaged boiler orders, which impacted our backlog at June 30, 2002.
In response to the slowdown of new merchant power plants, continued
weakness in the United States and global economies, and recent regulatory and
political uncertainties, in July 2002 we initiated our "restructuring and
organizational realignment initiative." The goal of this initiative was to
reduce costs, streamline operations, and identify and exit certain non-critical,
marginally performing operating activities, thereby positioning us with a more
competitive cost structure vital for our overall long-term success. The plan
included, among other things, the consolidation of manufacturing facilities and
processes, the scaling down of capacities at the remaining facilities to meet
anticipated market requirements and current economic conditions, suspension of
non-strategic business units, and the realignment of the organization to focus
on our two primary business segments: SCR Systems and Separation & Filtration.
We believe that the result of these initiatives, including the redirection
of our resources to suspend the boiler business and focus on our two remaining
more profitable segments, will position us to maximize our current operational
efficiencies and allow us the flexibility to meet our customers' current and
anticipated needs, without sacrificing our ability to expand our business to
meet future demand. While the initial phase of our restructuring and
organizational realignment initiatives have been completed, we continue to look
for ways to improve our operational efficiencies and performance during these
trying times.
CRITICAL ACCOUNTING POLICIES
The preparation of our financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Our estimates, judgments and assumptions are
continually evaluated based on available information and experience. Because of
the use of estimates inherent in the financial reporting process, actual results
could differ from those estimates.
Certain of our accounting policies require a higher degree of judgment than
others in their application. These include revenue recognition on long-term
contracts, accrual for estimated warranty costs and allowance for doubtful
accounts. Our policies and related procedures for revenue recognition on
long-term contracts, accrual of warranty costs and allowance for doubtful
accounts are summarized below.
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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 1O-Q
FOR THE PERIOD ENDED MARCH 31, 2003
Revenue Recognition. We provide products under long-term, generally
fixed-priced, contracts that may extend up to 18 months, or longer, in duration.
In connection with these contracts, we follow the guidance contained in AICPA
Statement of Position ("SOP") 81-1, "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts." SOP 81-1 requires the
use of percentage-of-completion accounting for long-term contracts that contain
enforceable rights regarding services to be provided and received by the
contracting parties, consideration to be exchanged, and the manner and terms of
settlement, assuming reasonably dependable estimates of revenues and expenses
can be made. The percentage-of-completion methodology generally results in the
recognition of reasonably consistent profit margins over the life of a contract.
Amounts recognized in revenue are calculated using the percentage of
construction cost completed, generally on a cumulative cost to total cost basis.
Cumulative revenues recognized may be less or greater than cumulative costs and
profits billed at any point in time during a contract's term. The resulting
difference is recognized as "costs and earnings in excess of billings on
uncompleted contracts" or "billings in excess of costs and earnings on
uncompleted contracts."
When using the percentage-of-completion method, we must be able to
accurately estimate the total costs we expect to incur on a project in order to
record the proper amount of revenues for that period. We continually update our
estimates of costs and status of each project with our subcontractors and our
manufacturing plants. If it is determined that a loss will result from the
performance of a contract, the entire amount of the loss is charged against
income when it is determined. The impact of revisions in contract estimates are
recognized on a cumulative basis in the period in which the revisions are made.
In addition, significant portions of the our costs are subcontracted under
fixed-price arrangements, thereby reducing the risk of significant cost overruns
on any given project. However, a number of internal and external factors,
including labor rates, plant utilization factors, future material prices,
customer change specifications, and other factors can affect our cost estimates.
While we attempt to reduce the inherent risk relating to revenue and cost
estimates in percentage-of-completion models through corporate policy, approval
and monitoring processes, any estimation process, including that used in
preparing contract accounting models, involves inherent risk.
Product Warranties. We offer warranty periods of various lengths to our
customers depending upon the specific product and terms of the customer
agreement. We typically negotiate varying terms regarding warranty coverage and
length of warranty dependent upon the product involved and customary practices.
Our typical warranties require us to repair or replace defective products during
the warranty period at no cost to the customer. We attempt to obtain back-up
concurrent warranties for major component parts from our suppliers. As of the
balance sheet date, we record an estimate for warranty related costs for
products sold based on historical experience, expectation of future conditions
and the extent of back-up concurrent supplier warranties in place. While we
believe that our estimated warranty reserve is adequate and the judgment applied
is appropriate, the estimated liability for product warranties could differ from
future actual warranty costs due to a number of factors.
Allowance for Doubtful Accounts. We maintain an allowance for doubtful
accounts to reflect estimated losses resulting from the inability of customers
to make required payments. On an ongoing basis, we evaluate the collectibility
of accounts receivable based upon historical collection trends, current economic
factors, and the assessment of the collectibility of specific accounts. We
evaluate the collectibility of specific accounts using a combination of factors,
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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 1O-Q
FOR THE PERIOD ENDED MARCH 31, 2003
including the age of the outstanding balances, evaluation of customers' current
and past financial condition and credit scores, recent payment history, current
economic environment, and discussions with our project managers and with the
customers directly. See Item 2 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
of this Report.
RESULTS OF OPERATIONS
The following table displays our statements of operations as a percentage of net
revenues:
Three Months Ended Nine Months Ended
March 31, March 31,
------------------ -----------------
2003 2002 2003 2002
----- ----- ----- -----
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 75.1 72.5 77.5 72.9
----- ----- ----- -----
Gross profit 24.9 27.5 22.5 27.1
Operating expenses 29.7 21.3 27.4 21.7
Restructuring expense 0.0 0.0 1.0 0.0
----- ----- ----- -----
29.7 21.3 28.4 21.7
----- ----- ----- -----
Operating income (loss) (4.8) 6.2 (5.9) 5.4
Interest expense 0.0 0.0 0.0 0.0
Other income (expense) 0.4 0.3 0.2 0.4
----- ----- ----- -----
Earnings (loss) before income taxes (4.4) 6.5 (5.7) 5.8
Income tax expense (benefit) (1.6) 2.4 (2.1) 2.2
----- ----- ----- -----
Net earnings (loss) (2.8)% 4.1% (3.6)% 3.6%
===== ===== ===== =====
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
Revenue for the third quarter of fiscal 2003 was $13.6 million, a decrease
of $15.5 million, or 53.3%, over the third quarter revenues of $29.1 million for
fiscal 2002. For the quarter, revenue related to our SCR Systems segment
decreased $11.2 million, or 64.4%, from $17.4 million for the third quarter of
fiscal year 2002 to $6.2 million for the same quarter of fiscal 2003. Our
Separation & Filtration segment revenue declined approximately $500,000, or
6.9%, from $7.2 million for the third quarter of fiscal year 2002 to $6.7
million for the same quarter of fiscal 2003. Our Boiler segment revenues
decreased $3.8 million, or 84.4%, from $4.5 million to approximately $700,000
over the same periods. We feel that the decline in the construction of new power
plants, recent environmental regulatory uncertainties, and the current economic
climate have all contributed to the decline in sales in our SCR Systems and
Separation & Filtration segments. The decrease in Boiler segment revenues has
resulted primarily from our decision to suspend this operation during our
current fiscal year. See Item 2 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Restructuring and Organizational
Realignment" of this Report.
Our backlog of unfilled orders was approximately $46 million at March 31,
2003, compared to $63 million at March 31, 2002, $45 million at December 31,
2002 and $38 million at September 30, 2002. We believe that the decrease in our
backlog compared with the prior year is
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FORM 1O-Q
FOR THE PERIOD ENDED MARCH 31, 2003
primarily due to the reduction in the construction of new power plants, recent
environmental regulatory uncertainties, and the current economic climate. All of
these factors have contributed to planned projects being placed on hold or
production rescheduled, and new environmental and gas treatment projects being
canceled or delayed. These factors resulted in the reduction in SCR Systems
orders booked during the second half of fiscal 2002, which is impacting our
reported revenues during this fiscal year. Regulations related to NOx emissions
have in the past resulted in increased sales of our SCR Systems, either through
new-source or retro-fit applications, and we anticipate that this trend will
continue in the future. However, current regulatory uncertainties have made the
ability to forecast these anticipated revenue streams extremely difficult. In
addition, while the construction of new power plants has seen a significant
decline over the past 12 months, there is expected to be a continued demand for
SCR Systems as new power plants are built to replace older, less efficient
plants, and as regulatory compliance projects are commenced, which has
attributed to some degree to the improvement in our backlog since September 30,
2002.
Our gross profit decreased $4.6 million, or 57.5%, from $8.0 million to
$3.4 million for the three months ended March 31, 2002 and 2003, respectively.
Gross profit, as a percentage of sales, decreased to 24.9% for the three months
ended March 31, 2003, compared to 27.5% for the same period last year. Our
reported margins during the period were impacted, and in the future can be
expected to be impacted to some degree, by increased competitive market
pressures on our SCR Systems and by the general lower volume of sales which
impacts our manufacturing plant utilization. Because we manufacture a
significant portion of our products, fluctuations in revenues, from quarter to
quarter or period to period, will impact our manufacturing absorption
utilization factors which directly impacts our reported margins. In addition to
the foregoing, because certain products historically have higher margins than
others, our margins are impacted by shifts in the composition of our sales. This
was a factor in the current quarter where our SCR Systems revenues represented
only 45.5% of our total revenues, versus 59.7% of our total revenues for the
same quarter in fiscal 2002. Because we generally realize a higher margin on our
environmental products, a shift, as experienced this quarter, will have a
negative impact on our reported margins.
Operating expenses decreased by $2.2 million, or 35.5%, from $6.2 million
for the three months ended March 31, 2002 to $4.0 million for the three months
ended March 31, 2003. The decrease in our operating expenses during the period
was due to the implementation of the our restructuring and organizational
realignment initiatives that began during the first quarter of fiscal 2003 (See
Item 2 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Restructuring and Organizational Realignment" of this
Report). However, as operating expenses tend to be generally fixed in nature,
their relationship to revenues will be significantly impacted by fluctuations in
revenues due to seasonality factors, delays in production, etc. As a result, our
operating expenses, as a percentage of revenues, increased from 21.3% for the
three months ended March 31, 2002 to 29.7% for the three months ended March 31,
2003. While our operating expense, as a percentage of revenues, increased this
quarter, we feel our current operating structure is appropriate given our
current backlog. However, we will continue to monitor our operational levels in
relation to changes in our backlog and changes in the marketplace.
Interest expense remained unchanged for the three months ended March 31,
2003 and March 31, 2002, because we had no outstanding debt during either of
these reporting periods.
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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 1O-Q
FOR THE PERIOD ENDED MARCH 31, 2003
Other income (expense) remained relatively constant, reflecting income of
$66,000 for the three months ended March 31, 2003 compared to $74,000 for the
three months ended March 31, 2002. The decline in other income (expense) related
primarily to a decrease in interest income earned during this period compared to
the same period last year, which directly correlates to lower effective yields
being earned by us on our investments. Our invested cash over the current period
was approximately $5.7 million compared to approximately $4.8 million for the
same period last year.
As a result of the factors discussed above, we recorded a net loss for the
three months ended March 31, 2003 of approximately $375,000, or $0.13 per
diluted share compared to net earnings of approximately $1.2 million, or $0.38
per diluted share, for the three months ended March 31, 2002.
NINE MONTHS ENDED MARCH 31, 2003 COMPARED TO NINE MONTHS ENDED MARCH 31, 2002
Revenue for the nine months ended March 31, 2003 was $48.8 million, a
decrease of $31.8 million, or 39.5%, over the corresponding period last year.
For the period, revenue related to our SCR Systems segment decreased $23.0
million, or 47.3%. Our Separation & Filtration segment revenue remained
relatively stable decreasing approximately $600,000, from $21.1 million for the
nine months ended March 31, 2002 to $20.5 million for the nine months ended
March 31, 2003. Our Boilers segment revenues decreased $8.2 million, or 75.2%,
from $10.9 million for the nine months ended March 31, 2002 to $2.7 million for
the nine months ended March 31, 2003. We believe that the decline in the
construction of new power plants, recent environmental regulatory uncertainties,
and the current economic climate have all contributed to the decline in revenues
in our SCR Systems segment and to some extent to the lack of growth in our
Separation & Filtration segment. The drop in Boiler segment revenues has
resulted primarily from our decision to suspend this operation during fiscal
2003. See Item 2 - "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Restructuring and Organizational Realignment" of
this Report.
Our gross profit decreased $10.9 million, or 49.8%, from $21.9 million for
the nine months ended March 31, 2003 to $11.0 million for the nine months ended
March 31, 2003. As a percentage of revenues our gross profit margin decreased
from 27.1% for the nine months ended March 31, 2002 to 22.5% for the nine months
ended March 31, 2003. Our margin decline during this period was partially due to
shifts in our product mix, competitive market pressures, and lower revenues, as
discussed previously in our discussion of our gross profit margins for the three
months ended March 31, 2003 and 2002. In addition to these factors, our margins
for the nine months March 31, 2003 were directly impacted by certain
unanticipated costs associated with the start-up and commissioning of several
SCR Systems projects during our second quarter of fiscal 2003 (reference is made
to our Form 10-Q for the period ended December 31, 2002 for further discussion
on this topic). Excluding these additional project costs, our reported margin,
as a percentage of revenues, for the nine months ended March 31, 2003, would
have been 24.5%.
Operating expenses decreased by $3.7 million, or 21.0%, from $17.6 million
for the nine months ended March 31, 2002 to $13.9 million for the nine months
ended March 31, 2003. The decrease in operating expenses during the period was
due primarily to the implementation of our restructuring and organizational
realignment initiatives that began during the first three months of our current
fiscal year. In connection with these initiatives we have incurred, to date,
approximately $483,000 in severance and related benefits expenses. In addition,
during the
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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 1O-Q
FOR THE PERIOD ENDED MARCH 31, 2003
second quarter of this fiscal year, we added an additional $400,000 to our
provision for doubtful accounts which we felt was necessary given the current
economic environment and uncertainties surrounding certain receivables. However,
as previously discussed, operating expenses tend to be generally fixed in
nature, and as such their relationship to revenues can be significantly impacted
by declines in revenues. As a result, operating expenses increased, as a
percentage of revenues, from 21.7% for the nine months ended March 31, 2002 to
28.4% for the nine months ended March 31, 2003. (26.6% excluding restructuring
charges and the additional provision for doubtful accounts). While our operating
expenses, as a percentage of revenues, have increased this year, we feel our
current operating structure is appropriate given our current backlog. However,
we will continue to monitor our operational levels in relation to changes in our
backlog and changes in the marketplace.
Other income (expense), decreased by approximately $200,000 from income of
$291,000 for the nine months ended March 31, 2002 to $91,000 for the nine months
ended March 31, 2003. The decrease related primarily to a gain on the sale of
our Carrollton, Texas facility of approximately $267,000, which was included in
the operational results for the quarter ended December 31, 2001, offset by
additional interest and rental income in this year.
As a result of the factors discussed above, we recorded a net loss for the
nine months ended March 31, 2003, of approximately $1.7 million, or $0.58 per
diluted share compared to net earnings of approximately $2.9 million, or $0.94
per diluted share, for the nine months ended March 31, 2002. Excluding the
impact of the additional project costs and provision for allowance for doubtful
accounts, during the second quarter of this fiscal year, we would have incurred
a net loss for the nine months ended March 31, 2003 of approximately $900,000,
or $.30 per diluted share.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents were approximately $6.5 million and $1.4
million as of March 31, 2003 and June 30, 2002, respectively. Cash provided by
operating activities was approximately $5.1 million for the nine months ended
March 31, 2003, compared to approximately $5.7 million for the same period last
year.
Because we are engaged in the business of manufacturing custom systems, our
progress billing practices are event-oriented rather than date-oriented, and
vary from contract to contract. We customarily bill our customers after the
occurrence of certain project milestones. Billings to customers affect the
balance of billings in excess of costs and earnings or the balance of cost and
earnings in excess of billings, as well as the balance of accounts receivable.
Consequently, we focus on the net amount of these accounts, along with accounts
payable, to manage working capital. At March 31, 2003, the balance of these
working capital accounts was $8.3 million compared to $17.9 million at June 30,
2002, reflecting a reduction of our investment in these working capital items of
$9.6 million. This reduction in the working capital accounts was offset by our
net loss of approximately $1.7 million, an increase in other current assets of
approximately $.9 million, and a decrease in accrued liabilities, commissions,
and other payables of approximately $2.9 million.
Cash used in investing activities was approximately $79,000 for the nine
months ended March 31, 2003, compared to approximately $893,000 for the same
period last year. The
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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 1O-Q
FOR THE PERIOD ENDED MARCH 31, 2003
decrease in cash used during the current fiscal year related to a decrease in
capital expenditures during this period in connection with our cost containment
initiatives.
We had approximately $64,000 of cash provided by financing activities
during the current period compared to approximately $1.4 million in cash used in
our financing activities during the period ended March 31, 2002. The prior year
usage related to the payoff of our installment debt on our Abilene, Texas
facility of approximately $1.6 million, offset by the proceeds from the issuance
of common stock, pursuant to employee stock options, of approximately $189,000.
The cash provided by financing activities, during the current period, related to
the cash received related to the issuance of common stock pursuant to our
employee stock options.
We maintain a $10 million revolving line of credit facility that expires in
October 2003. The credit line carries a floating interest rate based on the
prime or Euros rate plus or minus an applicable margin (prime less .25%, Euros
plus 2.65%), and is secured by substantially all of our assets. The margin
factor is subject to a reduction schedule based on our attainment of certain
financial performance criteria. As of March 31, 2003, we had no outstanding
balances under the credit line, and $3.6 million outstanding under letters of
credit, leaving us with $6.4 million of availability under the facility. The
facility contains financial covenants, restrictions on capital expenditures,
acquisitions, asset dispositions, and additional debt, as well as other
customary covenants.
The financial covenants, among other things, require that we not incur
losses in three consecutive quarters and that any losses (before taxes and
extraordinary items) incurred over this period not exceed $750,000. The quarter
ending March 31, 2003 represents the third consecutive quarterly loss, and for
the nine months then ended we incurred losses (before taxes and extraordinary
items) of approximately $2.8 million. As such, as of March 31, 2003, we are in
default of our loan agreement. We have obtained a temporary waiver from the bank
with respect to our default and anticipate we will be in compliance with the
aforementioned covenant upon completion of our fourth quarter. However, no
assurances can be given that we will in fact be in compliance with this covenant
upon the completion of our fourth quarter, or that the bank will be willing to
grant further waivers if we are not in compliance with this covenant upon
completion of our fourth quarter or in the event of further defaults. While we
believe that we maintain adequate liquidity to support our existing operations
and our planned growth, as well as to continue operations during reasonable
periods of unanticipated adversity, our inability to issue letters of credit
could negatively impact our ability to enter into certain contracts requiring
such instruments. While we feel that we would be able to substitute some other
form of guarantee, such as a performance/warranty/surety bonds, no assurances
can be given that we would be successful in this endeavor, or that such
instruments would be acceptable to our customers.
Included in our financial statements is a $2.2 million receivable due from
a customer that recently filed a plan of reorganization under Chapter 11 of the
United States Bankruptcy Code (original amount of the contract was approximately
$6.1 million). We have been classified as an unsecured creditor under such
filing. We have obtained outside counsel to help with the collection of this
receivable and have filed a statutory lien on the refinery where our equipment
was installed. In addition, we have filed a lawsuit to perfect our lien interest
against the owner of the refinery. While we have reason to believe that our lien
will be found to be valid, no assurances can be given. We intend to vigorously
pursue the collection of this receivable and believe that it will be collected.
In the event that our lien is held to be invalid, or if the
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FORM 1O-Q
FOR THE PERIOD ENDED MARCH 31, 2003
receivable or a significant portion thereof is deemed to be not collectible, we
will be required to write down the receivable to its net realizable value. To
the extent that our existing allowance for doubtful accounts is not adequate to
cover this write down, the additional reserve required will be a charge against
our operating results. Such an event could have a material adverse impact on our
financial condition and reported results of its operations, and in addition,
could potentially trigger a violation of our loan covenants. While we would
attempt, and have reason to believe that we would be able, to obtain a waiver
for such violations, or find other lending alternatives, no assurances can be
given that we would be successful in such endeavors.
NEW ACCOUNTING STANDARDS
In July 2002, the Financial Accounting Standards Board ("FASB") issued
Statement No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." The Statement 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. FASB Statement No. 146 is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
We do not expect the adoption of this pronouncement to have a material impact on
our financial condition or results of operations.
In November 2002, FASB reached a consensus on EITF Issue 00-21, "Accounting
for Revenue Arrangements with Multiple Deliverables". The guidance in this Issue
is effective for revenue arrangement entered into in fiscal years beginning
after June 15, 2003. The Issue addresses certain aspects of the accounting by a
vendor for arrangements under which it will perform multiple revenue-generating
activities and whether, as a result, there is embedded more than one earnings
process for revenue recognition purposes. We do not expect the adoption of this
pronouncement to have a material impact on our financial condition or results of
operations.
In November 2002, FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees of
Indebtedness of Others." This Interpretation clarifies the requirements of SFAS
No. 5, "Accounting for Contingencies," relating to the guarantor's accounting
for, and disclosure of, the issuance of certain types of guarantees. The
Interpretation's provision for initial recognition and measurement are required
on a perspective basis to guarantees issued or modified after December 31, 2002.
The disclosure requirements are required for financial statements of interim or
annual reports that end after December 15, 2002. We have adopted FIN No. 45 and
have included the new disclosure requirements in Note 4 - "Product Warranties"
to the Notes to the Consolidated Financial Statements.
In January 2003, FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities." This Interpretation of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," addresses consolidation by business
enterprises of variable interest entities which possess certain characteristics.
The Interpretation requires that if a business enterprise has a controlling
financial interest in a variable interest entity, the assets, liabilities, and
results of the activities of the variable interest entity must be included in
the consolidated financial statements with those of the business enterprise.
This interpretation applies immediately to variable interest entities created
after January 31, 2003 and to variable interest entities in which an enterprise
obtains an interest after that date. We did not have any ownership interest in
any variable interest entities as of March 31, 2003.
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FORM 1O-Q
FOR THE PERIOD ENDED MARCH 31, 2003
In April 2003, FASB issued Statement No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." FASB Statement No. 149
requires that contracts with comparable characteristics be accounted for
similarly. The Statement clarifies the circumstances in which a contract with an
initial net investment meets the characteristics of a derivative, and when a
derivative contains a financing component and amends certain other existing
pronouncements. This Statement is effective for contracts entered into or
modified after June 30, 2003. We do not expect the adoption of this
pronouncement to have a material impact on our financial condition or results of
operations.
FACTORS THAT MAY AFFECT OUR OPERATING RESULTS AND OTHER RISK FACTORS
Investing in our common stock involves a high degree of risk. Any of the
following risks could have a material adverse effect on our financial condition,
liquidity, results of operations or prospects, financial or otherwise. Reference
to these factors in the context of a forward-looking statement or statements
shall be deemed to be a statement that any one or more of the following factors
may cause actual results to differ materially from those in such forward-looking
statement or statements. See Item 2 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Forward-Looking Statements" of
this Report.
CHANGES IN THE POWER GENERATION INDUSTRY AND/OR THE ECONOMY COULD HAVE AN
ADVERSE IMPACT ON OUR SALES OF SCR SYSTEMS AND OUR OPERATING RESULTS.
The demand for our SCR Systems depends to an extent on the continued
construction of power generation plants and upgrade of existing power plants. In
the current year, approximately 52.5% of our consolidated revenues were derived
from sales of SCR Systems for new and refurbished power plants versus
approximately 60.3% for the same period last year. The power generation industry
has experienced cyclical periods of slow growth or decline. Any change in the
power plant industry that results in a decline in the construction of power
plants or a decline in the upgrading of existing power plants could have a
materially adverse impact on our SCR Systems segment revenues and our results of
operations. See Item 2 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations" of this Report.
CHANGES IN CURRENT ENVIRONMENTAL LEGISLATION COULD HAVE AN ADVERSE IMPACT
ON THE SALE OF OUR SCR SYSTEMS AND ON OUR OPERATING RESULTS.
Laws and regulations governing the discharge of pollutants into the
environment or otherwise relating to the protection of the environment or human
health have played a part in the increased use of SCR Systems in the United
States. These laws include U.S. federal statutes such as the Resource
Conservation and Recovery Act of 1976, the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, or CERCLA, the Clean Water Act and the
Clean Air Act, and the regulations implementing them, as well as similar laws
and regulations at state and local levels and in other countries. These laws and
regulations may change or other jurisdictions may not adopt similar laws and
regulations. Our SCR Systems business is primarily regulatory driven. This
business will be adversely impacted to the extent that current regulations
requiring the reduction of NOx emissions are repealed, amended or implementation
dates delayed
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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 1O-Q
FOR THE PERIOD ENDED MARCH 31, 2003
or to the extent that regulatory authorities minimize enforcement.
See Item 2 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations" of this Report.
COMPETITION COULD RESULT IN LOWER SALES AND DECREASED MARGINS.
We operate in highly competitive markets worldwide. Competition could
result in not only a reduction in our sales, but also a reduction in the prices
that we can charge for our products. To remain competitive we must be able to
not only anticipate or respond quickly to our customers' needs and enhance and
upgrade our existing products and services to meet those needs, but also
continue to price our products competitively. Our competitors may develop
cheaper, more efficient products or may be willing to charge lower prices for
strategic marketing or to increase market share. Some of our competitors have
more capital and resources than we do and may be better able to take advantage
of acquisition opportunities or adapt more quickly to changes in customer
requirements. See Item 2 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations" of this Report.
WE ENTER INTO FIXED-PRICED CONTRACTS. IF OUR ACTUAL COSTS EXCEED OUR
ORIGINAL ESTIMATES, OUR PROFITS WILL BE REDUCED.
The majority of our contracts are on a fixed-price basis. Although we
benefit from cost savings, we have limited ability to recover cost overruns.
Because of the large scale and long duration of our contracts, unanticipated
cost increases may occur as a result of several factors, including, but not
limited to, (1) increases in the cost, or shortages of components, materials or
labor; (2) unanticipated technical problems; (3) required project modifications
not initiated by the customer; and (4) suppliers' or subcontractors' failure to
perform. These factors may also delay delivery of our products and our contracts
often provide for liquidated damages for late delivery. Unanticipated costs that
we cannot pass on to our customers or the payment of liquidated damages under
fixed contracts will negatively impact our profits. See Item 2 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations" of
this Report.
OUR BACKLOG MAY NOT BE INDICATIVE OF OUR FUTURE REVENUE.
Customers may cancel or delay projects for reasons beyond our control. Our
orders normally contain cancellation provisions, which permit us to recover only
our costs and a portion of our anticipated profit in the event a customer
cancels its order. If a customer elects to cancel, we may not realize the full
amount of revenues included in our backlog. If projects are delayed, the timing
of our revenues could be affected and projects may remain in our backlog for
extended periods of time. Revenue recognition occurs over long periods of time
and is subject to unanticipated delays. If we receive relatively large orders in
any given quarter, fluctuations in the levels of our quarterly backlog can
result because the backlog in that quarter may reach levels that may not be
sustained in subsequent quarters. Our backlog may not be indicative of our
future revenues.
OUR ABILITY TO CONDUCT BUSINESS OUTSIDE THE UNITED STATES MAY BE ADVERSELY
AFFECTED BY FACTORS OUTSIDE OF OUR CONTROL AND OUR REVENUES AND PROFITS FROM
INTERNATIONAL SALES COULD BE ADVERSELY IMPACTED.
In fiscal 2002, approximately 14.5% of our revenue was derived from sales
outside the United States. For fiscal 2003, revenue outside the United States
represented approximately
23
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 1O-Q
FOR THE PERIOD ENDED MARCH 31, 2003
19.5% of our consolidated revenues. Our operations and earnings throughout the
world have been, and may in the future be, affected from time to time in varying
degrees by war, political developments and foreign laws and regulations, such as
regional economic uncertainty, political instability, restrictions, customs and
tariffs, changing regulatory environments, fluctuations in foreign currency
exchange rates and adverse tax consequences. The likelihood of such occurrences
and their overall effect upon us vary greatly from country to country and are
not predictable. These factors may result in a decline in revenues or
profitability and could adversely affect our ability to expand our business
outside of the United States.
OUR FINANCIAL PERFORMANCE MAY VARY SIGNIFICANTLY FROM QUARTER TO QUARTER,
MAKING IT DIFFICULT FOR US TO ESTIMATE FUTURE REVENUE.
Our quarterly revenues and earnings have varied in the past and are likely
to vary in the future. Our SCR Systems contracts generally stipulate customer
specific delivery terms and may have contract cycles of a year or more, which
subjects them to many factors beyond our control. In addition, these contracts
are significantly larger in size than our typical Separation & Filtration
contracts, which tends to intensify their impact on our quarterly operating
results. Furthermore, as a significant portion of our operating costs are fixed,
an unanticipated decrease in our SCR Systems revenues, a delay or cancellation
of orders in backlog, or a decrease in the demand for our SCR Systems products,
may have a significant impact on our quarterly operating results. Therefore, our
quarterly operating results may be subject to significant variations and our
operating performance in one quarter may not be indicative of our future
performance. See Item 2 - "Management's Discussion and analysis of Financial
Condition and Results of Operation" of this report.
OUR PRODUCTS ARE COVERED BY WARRANTIES. UNANTICIPATED WARRANTY COSTS OR
PRODUCT LIABILITY CLAIMS NOT COVERED BY INSURANCE COULD ADVERSELY AFFECT OUR
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
We provide warranties on our products generally for terms of three years or
less. These warranties require us to repair or replace faulty products and meet
certain performance standards, among other customary warranty provisions. While
we continually monitor our warranty claims and provide a reserve for our
estimate of potential warranty issues on an on-going basis, an unanticipated
claim could have a material adverse impact on our operations. In some cases, we
may be able to subrogate a claim back to a subcontractor, if the subcontractor
supplied the defective product or performed the service, but this may not always
be possible. The need to repair or replace products with design or manufacturing
defects could temporarily delay the sale of new products and could adversely
affect our reputation.
In addition, we may be subject to product liability claims involving claims
of personal injury or property damage. While we maintain product liability
insurance coverage to protect us in the event of such a claim, such coverage may
not be adequate to cover the cost of our defense and the potential award in the
event of a claim. Also, a well-publicized actual or perceived problem could
adversely affect our reputation and reduce the demand for our products.
24
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 1O-Q
FOR THE PERIOD ENDED MARCH 31, 2003
LARGE CONTRACTS REPRESENT A SIGNIFICANT PORTION OF OUR ACCOUNTS RECEIVABLE,
WHICH INCREASES OUR EXPOSURE TO CREDIT RISK.
We continue to closely monitor the credit worthiness of our customers and
have not, to date, experienced any significant credit losses. Significant
portions of our sales are to customers who place large orders for custom
products and whose activities are related to the power industry. As such, our
exposure to credit risk is affected to some degree by conditions within the
power industry and governmental and/or political conditions. We try to mitigate
our exposure to credit risk, to some extent, by requiring progress payments and
letters of credit. However, as some of our exposure is outside of our control,
unanticipated events could have a materially adverse impact on our operating
results. See Item 2 - "Management's Discussion and Analysis of Financial
Condition and Results of Operation - Liquidity and Capital Resources" of this
Report.
THE TERMS AND CONDITIONS OF OUR CREDIT FACILITY IMPOSE RESTRICTIONS ON OUR
OPERATIONS. WE MAY NOT BE ABLE TO RAISE ADDITIONAL CAPITAL, IF NEEDED.
The terms and conditions of our current $10 million revolving credit
facility impose restrictions that affect, among other things, our ability to
incur debt, make capital expenditures, merge, sell assets, make distributions,
or create or incur liens. Availability of our credit facility is also subject to
certain financial covenants, amongst others, a prohibition against losses in any
three consecutive quarters or aggregate losses (before taxes and extraordinary
items) in any three consecutive quarters exceeding $750,000. Our ability to
comply with the covenants may be affected by events beyond our control and we
cannot assure you that we will achieve operating results that meet the
requirements of the credit agreement. A breach of any of these covenants could
result in a default under our credit facility. In the event of a default, the
bank could elect to declare the outstanding principal amount of our credit
facility, all interest thereon, and all other amounts payable under our credit
facility to be immediately due and payable. As of March 31, 2003 we are in
default of our credit agreement. See Item 2 - "Management's Discussion and
Analysis of Financial Condition and Results of Operation - Liquidity and Capital
Resources" of this Report.
Our ability to satisfy any debt obligations will depend upon our future
operating performance, which will be affected by prevailing economic, financial
and business conditions and other factors, some of which are beyond our control.
We anticipate that borrowings from our existing revolving credit facility, or
the refinancing of our revolving credit facility, and cash provided by operating
activities, would provide sufficient funds to finance capital expenditures,
working capital and otherwise meet our operating expenses and service our debt
requirements as they become due. However, in the event that we require
additional capital, there can be no assurance that we will be able to raise such
capital when needed or on satisfactory terms, if at all. See Item 2 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operation - Liquidity and Capital Resources" of this Report.
OUR BUSINESS IS SUBJECT TO RISKS OF TERRORIST ACTS AND ACTS OF WAR.
Terrorist acts and acts of war may disrupt our operations, as well as our
customers operations. Such acts have created, and continue to create, economic
and political uncertainties and have contributed to the global economic downturn
that we are currently facing. Any future terrorist activities, or any continued
military or security operations could further weaken the global economy and
create additional uncertainties forcing our customers to further reduce their
25
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 1O-Q
FOR THE PERIOD ENDED MARCH 31, 2003
capital spending, or cancel or delay already planned construction projects,
which could have a material adverse impact on our business, operating results
and financial condition.
OUR COMMON STOCK IS THINLY TRADED, WHICH MAY RESULT IN LOW LIQUIDITY.
The daily trading volume of our common stock is relatively low and
therefore the liquidity and appreciation in our stock may not meet our
shareholders' expectations. The market price of our common stock could be
adversely impacted as a result of sales by our existing shareholders of a large
number of shares of our common stock in the market, or the perception that such
sales could occur.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our primary market risk exposures are in the areas of interest rate risk
and foreign currency exchange rate risk. We feel our risk to interest rate
fluctuations is nominal, as our investments are short-term in nature and we are
currently not, nor do we expected to be, in a borrowing position. Our exposure
to currency exchange rate fluctuations has been, and is expected to continue to
be, modest due to the fact that the operations of our UK subsidiary are almost
exclusively conducted in their local currency. The impact of currency exchange
rate movements on inter-company transactions has been, and is expected to
continue to be, immaterial. We, on occasion, will purchase derivative
transactions with respect to contracts entered into by our domestic operations
which have been sold in currencies other than US dollars, but the impact of any
fluctuation in the exchange rates in these hedged currencies, would be expected
to have an immaterial impact on our financial operations.
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our reports and filings under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms. The disclosure controls and
procedures also are designed to ensure that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding
disclosure based closely on the definition of "disclosure controls and
procedure" in Rule 13a-14(c) of the Exchange Act. In designing and evaluating
the disclosure controls and procedures, management recognizes that any controls
and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily is required to apply judgment in evaluating the cost-benefit
relationship of possible controls and procedures (as defined in Exchange Act
Rules 13a-14(c) and 15d-14(c)).
Within 90 days prior to the date of this Report on Form 10-Q, we carried
out an evaluation, under the supervision and with the participation of the our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)). Based on
the foregoing, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective.
26
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 1O-Q
FOR THE PERIOD ENDED MARCH 31, 2003
There have been no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date we
completed our evaluation and as of the date of the filing of this Report on Form
10-Q.
PART II. OTHER INFORMATION
ITEMS 1, 2, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
We maintain a $10 million revolving line of credit facility that
expires in October 2003. As of March 31, 2003, we had no outstanding
balances under the credit line, and $3.6 million outstanding under letters
of credit, leaving us with $6.4 million of availability under the facility.
The facility contains financial covenants, restrictions on capital
expenditures, acquisitions, asset dispositions, and additional debt, as
well as other customary covenants. The financial covenants, among other
things, require that we not incur losses in three consecutive quarters and
that any losses (before taxes and extraordinary items) incurred over this
period not exceed $750,000. The quarter ending March 31, 2003 represents
the third consecutive quarterly loss for us and for the nine months then
ended we incurred losses (before taxes and extraordinary) of approximately
$2.8 million. As such we are in default of our loan agreement as of March
31, 2003. We have obtained a temporary waiver from the bank with respect to
this default and we anticipate being in compliance with the aforementioned
covenant upon completion of our fourth quarter. However, no assurances can
be given that we will in fact be in compliance with this covenant upon the
completion of our fourth quarter, or that the bank will be willing to grant
further waivers if we are not in compliance with the covenant upon the
completion of our fourth quarter or in the event of further defaults.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as part of this report.
Exhibit
Number Exhibit
------- -------
3 (a) Articles of Incorporation, as amended to date
(filed as Exhibit 3 (a) to our report on Form
10-Q for the fiscal quarter ended December 31,
1997, and incorporated herein by reference).
3 (b) Bylaws, as amended to date (filed as Exhibit 3 (b)
to our report on Form 10-K for the fiscal year
ended June 30, 1997, and incorporated herein by
reference).
27
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 1O-Q
FOR THE PERIOD ENDED MARCH 31, 2003
Exhibit
Number Exhibit
------- -------
4 (a) Rights Agreement dated May 22, 1997 between
Peerless Mfg. Co. and Mellon Investor Services, LLC
(formerly ChaseMellon Shareholder Services, LLC),
as Rights Agent (filed as Exhibit 1 to our
Registration Statement on Form 8-A dated May 22,
1997, and incorporated herein by reference).
4 (b) Amendment to Rights Agreement dated August 23,
2001, between Peerless Mfg. Co. and Mellon Investor
Services, LLC, as Rights Agent (filed as Exhibit 2
to our Registration Statement on Form 8-A/A dated
August 30, 2001, and incorporated herein by
reference).
99.1 Certification of Mr. Sherrill Stone, Chief
Executive Officer.*
99.2 Certification of Mr. Richard L. Travis, Chief
Financial Officer.*
- ----------
* This certification accompanies this report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed filed, except to the extent
required by the Sarbanes-Oxley Act of 2002, by us for purposes of Section 18 of
the Securities Exchange Act of 1934, as amended.
(b) Reports on Form 8-K.
We did not file any reports on Form 8-K during the quarter ended
March 31, 2003.
We filed a report on Form 8-K on May 14, 2003 reporting our
financial results for the quarter ended March 31, 2003.
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.
PEERLESS MFG. CO.
Date: May 15, 2003 /s/ SHERRILL STONE
-------------------- --------------------------------------------
Sherrill Stone
Chairman and Chief Executive Officer
/s/ RICHARD L. TRAVIS
--------------------------------------------
Richard L. Travis, Chief Financial Officer
(Principal Financial and Accounting Officer)
28
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 1O-Q
FOR THE PERIOD ENDED MARCH 31, 2003
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Sherrill Stone, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Peerless Mfg. Co.;
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 function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
------------------------------
/s/ SHERRILL STONE
------------------------------
Sherrill Stone
Chairman and Chief Executive Officer
29
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 1O-Q
FOR THE PERIOD ENDED MARCH 31, 2003
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Richard L. Travis, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Peerless Mfg. Co.;
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 function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
------------------------------------
/s/ RICHARD L. TRAVIS
------------------------------------
Richard L. Travis
Chief Financial Officer
30
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 1O-Q
FOR THE PERIOD ENDED MARCH 31, 2003
INDEX TO EXHIBITS
Exhibit
Number Exhibit
- ------- -------
3 (a) Articles of Incorporation, as amended to date (filed as Exhibit
3 (a) to our report Form 10-Q for the fiscal quarter ended
December 31, 1997, and incorporated herein by reference).
3 (b) Bylaws, as amended to date (filed as Exhibit 3 (b) to our report
on Form 10-K for the fiscal year ended June 30, 1997, and
incorporated herein by reference).
4 (a) Rights Agreement dated May 22, 1997 between Peerless Mfg. Co.
and Mellon Investor Services, LLC (formerly ChaseMellon
Shareholder Services, LLC), as Rights Agent (filed as Exhibit 1
to our Registration Statement on Form 8-A dated May 22, 1997,
and incorporated herein by reference).
4 (b) Amendment to Rights Agreement dated August 23, 2001, between
Peerless Mfg. Co. and Mellon Investor Services, LLC, as Rights
Agent (filed as Exhibit 2 to our Registration Statement on Form
8-A/A dated August 30, 2001, and incorporated herein by
reference).
99.1 Certification of Mr. Sherrill Stone, Chief Executive Officer.*
99.2 Certification of Mr. Richard L. Travis, Chief Financial Officer.*
- -----------------
* This certification accompanies this report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed filed, except to the extent
required by the Sarbanes-Oxley Act of 2002, by us for purposes of Section 18 of
the Securities Exchange Act of 1934, as amended.
31