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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 SEPTEMBER 30, 2002
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 (I.R.S. Employer Identification No.)
Incorporation or Organization)
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 by Rule 12b-2 of the Securities and Exchange Act of 1934).
Yes No X
------ ------
As of November 13, 2002, there were 2,993,484 shares of the
Registrant's common stock outstanding.
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1
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
NUMBER
------
PART I: FINANCIAL INFORMATION.
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets at September 30, 2002
and June 30, 2002....................................................................... 3
Consolidated Statements of Operations for the
three months ended September 30, 2002 and 2001.......................................... 4
Consolidated Statements of Cash Flows for
the three months ended September 30, 2002 and 2001...................................... 5
Notes to the Consolidated Financial Statements.......................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................................................... 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .................. 19
ITEM 4. CONTROLS AND PROCEDURES ..................................................... 20
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................. 20
SIGNATURES....................................................................................... 22
CERTIFICATIONS................................................................................... 23
</Table>
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
PEERLESS MFG. CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
September 30, June 30,
2002 2002
-------------- --------------
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents $ 3,647 $ 1,386
Short term investments 310 307
Accounts receivable - principally trade-net 19,034 25,506
Inventories 3,358 3,671
Costs and earnings in excess of billings 4,618 9,218
Deferred income taxes 933 933
Other 1,091 725
-------------- --------------
Total current assets 32,991 41,746
Property, plant and equipment - net 4,035 4,152
Other assets 590 608
-------------- --------------
$ 37,616 $ 46,506
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Account payable - trade $ 7,903 $ 12,545
Billings in excess of costs and earnings 3,449 4,231
Commissions payable 1,302 1,556
Income taxes payable -- 766
Accrued liabilities and other 3,746 4,893
-------------- --------------
Total current liabilities 16,400 23,991
Shareholders' equity
Common stock 2,993 2,991
Additional paid-in capital 1,731 1,720
Other (67) (98)
Retained earnings 16,559 17,902
-------------- --------------
Total shareholders' equity 21,216 22,515
-------------- --------------
Total liabilities and shareholders' equity $ 37,616 $ 46,506
============== ==============
</Table>
See accompanying notes to consolidated financial statements.
3
PEERLESS MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
Three Months Ended
September 30,
2002 2001
------------ ------------
Revenues $ 14,454 $ 24,509
Cost of goods sold 11,131 17,606
------------ ------------
Gross profit 3,323 6,903
Operating expenses
Sales and marketing 1,667 2,113
Engineering and project
management 1,788 1,835
General and administrative 1,477 1,732
Restructuring expenses 483 --
------------ ------------
5,415 5,680
------------ ------------
Operating income (loss) (2,092) 1,223
Other income (expense)
Interest income (expense), net 17 --
Foreign exchange gain (loss) (63) 68
Other, net 6 (72)
------------ ------------
(40) (4)
------------ ------------
Earnings (loss) before income taxes (2,132) 1,219
Income tax expense (benefit) (789) 451
------------ ------------
Net earnings (loss) $ (1,343) $ 768
============ ============
Basic earnings (loss) per share $ (0.45) $ 0.26
============ ============
Diluted earnings (loss) per share $ (0.45) $ 0.25
============ ============
</Table>
See accompanying notes to consolidated financial statements.
4
PEERLESS MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED
SEPTEMBER 30,
2002 2001
---------- ----------
Cash flows from operating activities:
Net earnings (loss) $ (1,343) $ 768
Adjustments to reconcile net earnings (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 198 143
Other 101 --
Changes in operating assets and liabilities
Accounts receivable 6,430 (2,959)
Inventories 313 (168)
Costs and earnings in excess of billings 4,595 679
Other current assets 109 (481)
Other assets 18 24
Accounts payable (4,644) 2,385
Billings in excess of costs and earnings (782) (174)
Commissions payable (254) 68
Accrued expenses and other (2,399) (669)
---------- ----------
3,685 (1,152)
---------- ----------
Net cash provided by (used in) operating activities 2,342 (384)
Cash flow from investing activities
Net purchases of short-term investments (3) (2)
Purchases of property and equipment (81) (529)
---------- ----------
Net cash used in investing activities (84) (531)
Cash flows from financing activities
Sale of common stock 13 137
Net changes in lines of credit -- (1,600)
---------- ----------
Net cash provided by (used in) financing activities 13 (1,463)
Effect of exchange rate changes on
cash and cash equivalents (10) 28
---------- ----------
Net increase (decrease) in cash and cash equivalents 2,261 (2,350)
Cash and cash equivalents at beginning of period 1,386 2,577
---------- ----------
Cash and cash equivalents at end of period $ 3,647 $ 227
========== ==========
</Table>
See accompanying notes to consolidated financial statements.
5
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
1. BASIS OF PRESENTATION.
The accompanying consolidated financial statements of the
Company 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 September 30, 2002, and for the three months ended
September 30, 2002 and 2001 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 months ended
September 30, 2002 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" of this Report).
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.
2. 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 presents the calculation of earnings
(loss) per share for the periods indicated.
<Table>
<Caption>
Three Months Ended
September 30,
----------------------------
2002 2001
------------ ------------
Net earnings (loss) $ (1,343) $ 768
============ ============
Basic weighted average common
shares outstanding 2,992 2,968
Effect of dilutive options -- 121
------------ ------------
Diluted weighted average common
shares outstanding 2,992 3,089
============ ============
Net earnings (loss) per share - basic $ (0.45) $ 0.26
Net earnings (loss) per share - diluted $ (0.45) $ 0.25
</Table>
The weighted average common shares outstanding-diluted
computation excluded 209,950 and 0 outstanding stock options for the
three months ended September 30, 2002 and 2001, respectively, because
their impact would be anti-dilutive.
6
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
3. 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:
<Table>
<Caption>
Three Months Ended
September 30,
----------------------------
2002 2001
------------ ------------
Net earnings (loss) $ (1,343) $ 768
Foreign currency translation adjustment 23 (55)
------------ ------------
Comprehensive income (loss) $ (1,320) $ 713
============ ============
</Table>
4. SUPPLEMENTAL CASH FLOW INFORMATION.
Net cash flow from operating activities reflects cash payments
for interest and income taxes as follows:
<Table>
<Caption>
Three Months Ended
September 30,
----------------------------
2002 2001
------------ -------------
Interest paid $ 3 $ 114
Income taxes paid $ 461 $ 1,550
</Table>
5. INVENTORIES.
Inventories are stated at the lower of cost (first-in,
first-out) or market. Principal components of inventories are as
follows:
<Table>
<Caption>
September 30, June 30,
2002 2002
------------- ------------
Raw materials $ 2,112 $ 2,201
Work in process 762 1,085
Finished goods 484 385
------------ ------------
Total inventories $ 3,358 $ 3,671
============ ============
</Table>
7
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
6. 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. The SCR Systems segment produces selective catalytic reduction
systems ("SCR") used to separate nitrogen oxide (NOx) emissions from
exhaust gases caused by burning hydrocarbon fuels such as coal,
gasoline, natural gas and oil. We combine these systems with other
components as totally integrated systems. Many of the Company's SCR
Systems are packaged on skids complete with instruments, controls and
related valves and piping. The separation & filtration segment produces
various types of separators and filters used for removing liquids and
solids from gases and air. The segment also provides engineering design
and services, pulsation dampeners, natural gas odorizers, quick-opening
closures and parts for its products. The boiler segment provides
packaged boilers used to produce steam, used for heating, drying,
driving steam engines and a variety of other applications.
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 profit (loss) for the three months ended September 30, 2002
and 2001 are presented below. Note that 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
<Table>
<Caption>
SEPARATION & UNALLOCATED
SCR FILTRATION BOILERS OVERHEAD CONSOLIDATED
------------ ------------ ------------ ------------ ------------
THREE MONTHS ENDED
SEPTEMBER 30, 2002
Revenue from customers $ 6,943 $ 6,333 $ 1,178 -- $ 14,454
Segment profit (loss) (507) 687 (312) (1,960) (2,092)
THREE MONTHS ENDED
SEPTEMBER 30, 2001
Revenue from customers $ 15,247 $ 6,241 $ 3,021 -- $ 24,509
Segment profit (loss) 2,901 98 (44) (1,732) 1,223
</Table>
8
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
From time to time, the Company makes 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 (the "Act") or
by the Securities and Exchange Commission ("SEC") in its rules, regulations and
releases, including statements regarding our expectations, hopes, beliefs,
intentions or strategies regarding the future. The Company desires to take
advantage of the "safe harbor" provisions in the Act 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 (this "Report"), as
well as those made in other filings by the Company 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, the Company has 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 15 of this Report.
All forward-looking statements included in this Report are based on
information available to us on the date hereof, and the Company expressly
disclaims 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 is a global company providing environmental and separation and
filtration products for the abatement of air pollution, the removal of
contaminants from gases and liquids, and the cogeneration of electricity, and
the manufacturing and sale of packaged boilers 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 shipboard gas
turbine and diesel engines.
9
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
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 heating, drying, driving steam
engines and a variety of other applications. See "Restructuring and
Organizational Realignment" following 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 this country 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 slow down of new merchant power plants, continued
weakness in the United States and global economies, and recent regulatory and
political uncertainties, the Company in July 2002 initiated its "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 the Company with
a more competitive cost structure vital for its 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, divesture
of non-strategic business units, and the realignment of the organization to
focus on the Company's two primary business segments: SCR Systems and separation
& filtration. The following actions have taken place through November 13, 2002:
o The Company has realigned its organizational
structure to improve the efficiency and utilization
of its manufacturing, engineering and design
organizations. As a result, the Company has reduced
its workforce by approximately 136 employees, or
approximately 42% of its domestic workforce, and
plans to continue to monitor its resources in
connection with the execution of this initiative
during the remainder of fiscal 2003.
o In October 2002, the Company closed its Dallas, Texas
manufacturing facility and transferred the majority
of the operational activities of this plant to its
Abilene, Texas facility.
o The capacities at the Company's remaining two
manufacturing facilities (Denton and Abilene, Texas)
have been scaled down to be in line with the
anticipated market requirements and current economic
conditions.
o The Company has identified various cost components
that can be more economically outsourced.
o The Company has suspended its boiler operations and
redirected these resources to our other two segments.
o The Company has redeployed research and development
activities to focus on its critical business units.
We expect that the result of these initiatives, anticipated to be
completed in the later part of this calendar year, will be a reduction in our
annual operating expenses of approximately $ 7.1 million. We believe that
redirecting our resources to focus on our more profitable segments will
10
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
give us the flexibility to meet our customers' current and anticipated needs,
without sacrificing our ability to expand our business to meet future demand,
while at the same time positioning the Company to maximize its current
operational efficiencies. The Company plans to continue to look for ways to
improve efficiencies and its operational performance.
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 at
the date 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 higher degree of judgment
than others in their application. These include revenue recognition on long-term
contracts, and accrual for estimated warranty costs. Our policy and related
procedures for revenue recognition on long-term contracts and accrual of
warranty costs are summarized below.
Revenue Recognition. We provide products under long-term, generally
fixed-priced, contracts that may extend up to 18 months 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. The Company continually
updates its estimates of costs and status of each process with its
subcontractors and its manufacturing plants. When it is determined that a loss
will result from the performance of a contract, the entire amount of the loss is
charged against income. The impact of revisions in contract estimates are
recognized on a cumulative catch up basis in the period in which the revisions
are made. In addition, significant portions of the Company's 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,
11
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
approval and monitoring processes, any estimation process, including that used
in preparing contract accounting models, involves inherent risk.
Product Warranty. We offer warranties of various lengths to our
customers depending upon the specific product and terms of the customer product
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 product 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.
RESULTS OF OPERATIONS
The following table displays the Company's statements of operations as a
percentage of net revenues:
<Table>
<Caption>
Three Months Ended
September 30,
-----------------------------
2002 2001
------------ ------------
Net revenues 100.0% 100.0%
Cost of goods sold 77.0 71.8
------------ ------------
Gross profit 23.0 28.2
Operating expenses 34.1 23.2
Restructuring expenses 3.4 --
------------ ------------
Operating income(loss) (14.5) 5.0
Interest income(expense), net 0.1 0.0
Other, net (0.4) (0.0)
------------ ------------
Earnings(loss) before income taxes (14.8) 5.0
Income tax expense(benefit) (5.5) 1.9
------------ ------------
Net earnings(loss) (9.3)% 3.1%
============ ============
</Table>
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2001
Revenue for the first quarter of fiscal 2003 was $14.4 million, a
decrease of $10.1 million, or 41%, over the first quarter of fiscal 2002. For
the quarter, revenue related to our SCR Systems decreased $8.3 million, or 54%,
as a result of the decline in the construction of new power plants, recent
environmental regulatory uncertainties, and the current economic climate. Our
separation & filtration segment revenue remained flat from year to year
increasing only $0.1 million to $6.3 million. The boiler and other steam
generating equipment product sales decreased
12
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
$1.8 million or 61% as a result of the drop in demand for all boiler products,
which prompted the Company to suspend the operations of its boiler business.
The Company's backlog of unfilled orders was approximately $38 million
at September 30, 2002, compared to $69 million at September 30, 2001. The
decrease in our backlog is 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 new environmental projects being canceled or delayed.
These factors resulted in the reduction in SCR Systems orders booked during the
second half of fiscal 2002, as well as a decrease in new packaged boiler orders,
which impacted our revenues during the reported period. The Company has recently
started to see an increase in the level of new orders which has resulted in our
backlog at October 31, 2002 increasing to approximately $50 million. While the
primary contributor to this increase was a significant Houston refinery
retro-fit SCR Systems order the Company recently was awarded, we have seen a
general increase in the level of activity across all product lines. 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. 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.
The Company's gross profit decreased $3.6 million, or 52%, to $3.3
million for the three months ended September 30, 2002, compared to $6.9 million
for the same period a year ago. Gross profit, as a percentage of sales,
decreased to 23.0% for the three months ended September 30, 2002, compared to
28.2% for the same period last year. The margin decline is due primarily to a
shift in the Company's product mix as the Company's SCR Systems sales declined
in the period in relation to its total consolidated sales. As the Company
traditionally recognizes a higher margin on its SCR Systems sales versus the
margins recognized on sales of its other two business segments any shift in the
Company's product mix in a particular period could have an impact on the
Company's reported margins for that period. For the three months ended September
30, 2002 the SCR Systems revenue represented 48% of the Company's revenue
compared to 62% in the same period a year ago. In addition, the Company's gross
margin during the period was impacted by the significant drop in the Company's
revenue during the period which increased the Company's under absorption factor
associated with its manufacturing resources. During the period and subsequent
thereto, the Company has taken corrective steps to align its manufacturing
resources with its anticipated requirements. For discussion of these steps and
other actions taken, see Item 2 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Restructuring and Organizational
Realignment" of this Report.
Operating expenses decreased by $0.3 million, or 5%, from $5.7 million
for the three months ended September 30, 2001, to $5.4 million for the three
months ended September 30, 2002. The decrease in operating expenses during the
period was due to the implementation of the Company's restructuring and
organizational realignment initiatives that were started during the period.
While these resulted in operating expenses being reduced, the timing of these
reductions did not result in these expenses being proportionate with the
reduction in the Company's reported revenues. As a result, operating expenses
increased, as a percentage of sales, from 23.2% for the three months ended
September 30, 2001 to 37.5% for the three months ended September 30, 2002. In
connection with the Company's restructuring and realignment initiatives the
Company
13
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
incurred approximately $.5 million in severance and related benefits expenses
during the period. The Company has continued to make reductions in these costs
as part of its restructuring and organizational realignment initiatives. It
believes that once the initiatives have been fully implemented, its operational
expenses, as a percentage of sales, will be comparable to fiscal year 2002.
Net interest expense remained unchanged for the periods ending
September 30, 2002 and September 30, 2001, as we had no outstanding balances
under our credit facilities.
Other expenses increased by approximately $36,000 from $4,000 for the
three months ended September 30, 2001 to $40,000 for the three months ended
September 30, 2002. This related primarily to the impact of foreign currency
exchange rates, offset by interest income earned during the current period.
As a result of the factors discussed above, we recorded a net loss for
the three months ended September 30, 2002, of $1,343,000 compared to net
earnings of $768,000 for the same period a year ago.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents were approximately $3.6 million and $1.4
million as of September 30, 2002 and June 30, 2002, respectively. Cash provided
by operating activities was approximately $2.3 million for the three months
ended September 30, 2002, compared to cash used in operating activities of
approximately $384,000 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 September 30, 2002, the balance of these
working capital accounts was $12.3 million compared to $17.9 million at June 30,
2002, reflecting a reduction of our investment in these working capital items of
$5.6 million. This reduction in the working capital accounts was offset by a net
loss of $1.3 million, and by the cash used to decrease our accrued liabilities
by $2.4 million.
Cash used in investing activities was $84,000 for the three months
ended September 30, 2002, compared to $531,000 for the same period last year.
The decrease in cash used for the period related to a net decrease in purchases
of property and equipment during fiscal 2003.
We had $13,000 of cash provided by financing activities during the
current period compared to using approximately $1.5 million in cash related to
our financing activities during the period ended September 30, 2001. The prior
year usage related to the $1.6 million payment in full of our installment debt
on our Abilene, Texas facility, offset by the proceeds from the issuance of
common stock, pursuant to employee stock options, of $137,000. The cash provided
during the current period related to the issuance of stock pursuant to employee
stock options.
14
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
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 eurodollar rate plus or minus an applicable margin (prime less
..25%, eurodollar 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 September 30, 2002,
we had no outstanding balances under the credit line, and $4.2 million
outstanding under letters of credit, leaving us with $5.8 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.
We believe we maintain adequate liquidity to support existing
operations and planned growth, as well as to continue operations during
reasonable periods of unanticipated adversity.
NEW ACCOUNTING STANDARDS
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of
FASB Statement No. 13, and Technical Corrections." Most significantly, this
Statement eliminates the requirement under Statement No. 4 to aggregate all
gains and losses from extinguishments of debt, and if material, be classified as
an extraordinary item. As a result, gains and losses from extinguishments of
debt should be classified as extraordinary items only if they meet the criteria
in APB Opinion No. 30. Applying the provisions of APB Opinion No. 30 will
distinguish transactions that are part of an entity's recurring operations from
those that are unusual or infrequent or that meet the criteria for
classification as an extraordinary item. There is no current impact to the
Company's financial statements upon the adoption of this statement.
In July 2002, The FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
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.
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" above).
15
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
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 48% of our consolidated revenues were from sales
of SCR Systems for new and refurbished power plants versus approximately 62% 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" section 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 materials 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 or to the extent that regulatory authorities minimize enforcement.
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.
WE FREQUENTLY 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
16
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
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.
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 OUR CONTROL AND OUR REVENUES AND PROFITS
FROM INTERNATIONAL SALES COULD BE ADVERSELY IMPACTED.
In fiscal 2002, approximately 15% of our revenue was derived from sales
outside the United States. For fiscal 2003, revenue outside the United States
represented approximately 15% 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 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 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 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 and filtration
contracts, which tend 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 revenues, a delay or cancellation of orders
in backlog, or a decrease in the demand for our SCR 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.
17
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
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.
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.
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. 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.
18
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
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" section 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. The recent terrorist attacks on September 11, 2001,
have created economic and political uncertainties and have intensified 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 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.
We are exposed to foreign currency and interest rate risk. We currently
have not entered into any derivative transactions as a means of hedging our
exposure to interest rate risks. In addition, we have not, in the past, entered
into derivative transactions to hedge our foreign balance sheet accounts or
anticipated revenues. As a result, these assets and revenues are currently
subject to foreign currency fluctuations. Although we are not currently in a
borrowing position, and the assets and anticipated revenues which are subject to
foreign currency fluctuations are relatively immaterial ($3.6 million in assets
and $7.2 million in backlog at September 30, 2002), and in currencies
historically not subject to significant fluctuations, the Company will continue
to monitor its exposure in these areas.
19
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the Company's
reports and filings under the Securities and Exchange Act of 1934, as amended
(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 the Company's management, including its 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 recognized 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 was required to apply judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
Within 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and the
Company's Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. Based on the
foregoing, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were effective.
There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect the internal
controls subsequent to the date the Company completed its evaluation and as of
the date of the filing of this Form 10-Q.
PART II. OTHER INFORMATION
ITEMS 1, 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED
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 the report of the
Company 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 the report of the Company on Form 10-K,
for the fiscal year ended June 30, 1997, and
incorporated herein by reference).
20
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
4(a) Rights Agreement as of May 22, 1997 between
Peerless Mfg. Co. and Mellon Investor Services,
LLC (formerly ChaseMellon Shareholder Services,
LLC) (filed as Exhibit 1 to the Registration
Statement of the Company on Form 8-A dated May
22, 1997, and incorporated herein by
reference).
4(b) First Amendment to Rights Agreement as of
August 23, 2001 between Peerless Mfg. Co. and
Mellon Investor Services, LLC (filed as Exhibit
2 to the Registration Statement of the Company
on Form 8-A dated August 30, 2001, and
incorporated herein by reference).
10(n) Amendment dated August 12, 2002 to Employment
Agreement dated February 4, 2002, by and
between Peerless Mfg. Co. and Richard L.
Travis, Jr. (filed as Exhibit 10 (n) to our
Quarterly Report on Form 10-Q, for the fiscal
year ended March 31, 2002).*
10(o) Agreement dated August 12, 2002, by and between
Peerless Mfg. Co. and Richard L. Travis.*
99.1 Certification of Mr. Sherrill Stone, Chief
Executive Officer.**
99.2 Certification of Mr. Richard L. Travis, Chief
Financial Officer.**
- ----------------------
* Filed herewith
** 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 the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the quarter
ended September 30, 2002.
21
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
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.
Dated: November 14, 2002 /s/ Sherrill Stone
-------------------------------------------
Sherrill Stone, Chairman and Chief
Executive Officer
/s/ Richard Travis
-------------------------------------------
Richard L. Travis, Chief Financial Officer
(Principal Financial and Accounting Officer)
22
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
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 officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Sherrill Stone
------------------------------------
Sherrill Stone
Chairman and Chief Executive Officer
23
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Richard 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 officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Richard Travis
----------------------------------
Richard Travis
Chief Financial Officer
24
PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
INDEX TO EXHIBITS
<Table>
<Caption>
Exhibit
Number Exhibit
------ -------
3(a) Articles of Incorporation, as amended to date (filed as
Exhibit 3 (a) to the report of the Company 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 the
report of the Company on Form 10-K, for the fiscal year
ended June 30, 1997, and incorporated herein by reference).
4(a) Rights Agreement as of May 22, 1997 between Peerless Mfg.
Co. and Mellon Investor Services, LLC (formerly ChaseMellon
Shareholder Services, LLC) (filed as Exhibit 1 to the
Registration Statement of the Company on Form 8-A dated May
22, 1997, and incorporated herein by reference).
4(b) First Amendment to Rights Agreement as of August 23, 2001
between Peerless Mfg. Co. and Mellon Investor Services, LLC
(filed as Exhibit 2 to the Registration Statement of the
Company on Form 8-A dated August 30, 2001, and incorporated
herein by reference).
10(n) Amendment dated August 12, 2002 to Employment Agreement
dated February 4, 2002, by and between Peerless Mfg. Co. and
Richard L. Travis, Jr. (filed as Exhibit 10 (n) to our
Quarterly Report on Form 10-Q, for the fiscal year ended
March 31, 2002).*
10(o) Agreement dated August 12, 2002, by and between Peerless
Mfg. Co. and Richard l. Travis.*
99.1 Certification of Mr. Sherrill Stone, Chief Executive
Officer.**
99.2 Certification of Mr. Richard L. Travis, Chief Financial
Officer.**
</Table>
- ---------------
* Filed herewith
** 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 the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.
25