-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GJ1ykA6vTagbAdQ29iHKA3DB+xw9MvYKJ6lNg0oglWWxVfnkP+n2wJ1USUcuZ7Yu PbzJzjwSzHEFi2JDUtlF0Q== 0000950134-02-014318.txt : 20021114 0000950134-02-014318.hdr.sgml : 20021114 20021114121858 ACCESSION NUMBER: 0000950134-02-014318 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEERLESS MANUFACTURING CO CENTRAL INDEX KEY: 0000076954 STANDARD INDUSTRIAL CLASSIFICATION: GENERAL INDUSTRIAL MACHINERY & EQUIPMENT, NEC [3569] IRS NUMBER: 750724417 STATE OF INCORPORATION: TX FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-05214 FILM NUMBER: 02823100 BUSINESS ADDRESS: STREET 1: 2819 WALNUT HILL LN CITY: DALLAS STATE: TX ZIP: 75229 BUSINESS PHONE: 2143576181 MAIL ADDRESS: STREET 1: P.O. BOX 540667 CITY: DALLAS STATE: TX ZIP: 75354 10-Q 1 d01225e10vq.txt FORM 10-Q ================================================================================ 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. ================================================================================ 1 PEERLESS MFG. CO. AND SUBSIDIARIES FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002 TABLE OF CONTENTS
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
2 PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS PEERLESS MFG. CO. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
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 ============== ==============
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)
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 ============ ============
See accompanying notes to consolidated financial statements. 4 PEERLESS MFG. CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED)
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 ========== ==========
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.
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
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:
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 ============ ============
4. SUPPLEMENTAL CASH FLOW INFORMATION. Net cash flow from operating activities reflects cash payments for interest and income taxes as follows:
Three Months Ended September 30, ---------------------------- 2002 2001 ------------ ------------- Interest paid $ 3 $ 114 Income taxes paid $ 461 $ 1,550
5. INVENTORIES. Inventories are stated at the lower of cost (first-in, first-out) or market. Principal components of inventories are as follows:
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 ============ ============
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
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
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:
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% ============ ============
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
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.**
- --------------- * 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 EX-10.(N) 3 d01225exv10wxny.txt AMENDMENT TO EMPLOYMENT AGREEMENT - R L TRAVIS JR EXHIBIT 10(n) August 12, 2002 Mr. Richard L. Travis, Jr. 7067 Inwood Road Dallas, Texas 75209 Re: Amendment to Employment Agreement Dear Mr. Travis: Reference is hereby made to the Employment Agreement (the "Agreement"), dated to be effective as of February 4, 2002, between Peerless Mfg. Co. (the "Company") and Richard L. Travis, Jr. ("Executive") regarding Executive's employment with the Company. Capitalized terms used herein and not otherwise defined have the meanings given such terms in the Agreement. In consideration of Executive's service to the Company as the Company's Chief Financial Officer and as an inducement for Executive to remain in the employ of the Company, the Company and Executive desire to amend the Agreement to increase the severance compensation Executive would receive if his employment with the Company was terminated without Cause. The Company and Executive hereby agree that effective as of the date hereof, Section 4.1 of the Agreement entitled "Termination by Employer" is hereby amended by deleting the reference to "one hundred percent (100%)" therein and inserting "one hundred fifty percent (150%)" in lieu thereof. Sincerely, PEERLESS MFG. CO. /s/ Sherrill Stone --------------------------------------------- Sherrill Stone, Chairman of Board and Chief Executive Officer Agreed and Acknowledged this 15th day of August 2002. /s/ Richard L. Travis, Jr. - -------------------------- Richard L. Travis, Jr. EX-10.(O) 4 d01225exv10wxoy.txt AGREEMENTWITH RICHARD L TRAVIS EXHIBIT 10(o) AGREEMENT THIS AGREEMENT (this "Agreement") is made and entered into to be effective as of the 12th day of August, 2002, by and between PEERLESS MFG. CO. (the "Company"), and RICHARD L. TRAVIS, JR. ("Executive"), and amends in part and restates and supersedes in its entirety that certain Agreement between the Company and Executive dated February 4, 2002. WHEREAS, the Board of Directors of the Company (the "Board") believes Executive has contributed substantially to the Company and wishes to offer an inducement to Executive to remain in the employ of the Company; WHEREAS, the parties desire to enter into this Agreement to set forth the benefits which the Company will pay to Executive in the event of a "Sale of the Company" or termination of Executive's employment following a "Change in Control" of the Company, except as a result of death, disability, voluntary resignation or termination by the Company for Cause (in each case as such terms or events are defined or discussed herein); NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements of the parties herein contained the parties agree as follows: 1. Term. The term of this Agreement shall continue until the earliest of (i) subject to the proviso at the end of this sentence, the expiration of the third anniversary of the occurrence of a Change in Control, (ii) Executive's death, or (iii) Executive's earlier voluntary resignation (except for those events described in Section 3(a)(2)); provided, however, that during the term of this Agreement, on each anniversary of a Change in Control, the three year period referenced in clause (i) above shall automatically be extended for an additional 12 months unless, not later than 60 calendar days prior to such anniversary date, the Company shall have given written notice to Executive that it does not wish to have the term extended. 2. Definitions. (a) Acquiring Person. An "Acquiring Person" shall mean any person that, together with all Affiliates and Associates of such person, is the beneficial owner of 15% or more of the outstanding Common Stock. The term "Acquiring Person" shall not include the Company, any subsidiary of the Company, any employee benefit plan of the Company (or trust with respect thereto) or subsidiary of the Company, any person holding Common Stock of the Company for or pursuant to the terms of any such plan, or Donald A. Sillers, Jr. or members of his immediate family. (b) Affiliate and Associate. "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended (the "Exchange Act") in effect on the date of this Agreement. 1 (c) Cause. For "Cause" shall mean any of the following shall have occurred: (i) The conviction of Executive, by a court of competent jurisdiction, of any felony; (ii) Commission by Executive of an intentional material act of fraud to his pecuniary benefit in connection with his duties or in the course of his employment with the Company, as reasonably determined by the Board; or (iii) The intentional and continued failure by Executive to substantially perform his duties hereunder, or the intentional wrongdoing by Executive resulting in material injury to the Company. No act, or failure to act, on the part of Executive shall be deemed "intentional" unless done, or omitted to be done, by Executive not in good faith and without reasonable belief that his action or omission was in the best interests of the Company. (d) Change in Control. A "Change in Control" of the Company shall have occurred if at any time during the term of this Agreement any of the following events shall occur: (i) The Company is merged, consolidated or reorganized into or with another corporation or other legal person and as a result of such merger, consolidation or reorganization less than 50.1% of the combined voting power to elect Directors of the then outstanding securities of the remaining corporation or legal person or its ultimate parent immediately after such transaction is available to be received by all stockholders on a pro rata basis and is actually received in respect of or exchange for voting securities of the Company pursuant to such transaction; (ii) The Company sells all or substantially all of its assets to any other corporation or other legal person not controlled by or under common control with the Company; (iii) Any person or group (including any "person" as such term is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of securities which when added to any securities already owned by such person would represent in the aggregate 50% or more of the then outstanding securities of the Company which are entitled to vote to elect Directors; (iv) If at any time, the Continuing Directors then serving on the Board cease for any reason to constitute at least a majority thereof; 2 (v) Any occurrence that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A or any successor rule or regulation promulgated under the Exchange Act; or (vi) Such other events that cause a change in control of the Company, as determined by the Board in its sole discretion; provided, however, a Change in Control of the Company shall not be deemed to have occurred as the result of any transaction having one or more of the foregoing effects if such transaction is both (1) proposed by, and (2) includes a significant equity participation of, executive officers of the Company as constituted immediately prior to the occurrence of such transaction or any Company employee stock ownership plan or pension plan. (e) Code. The "Code" shall mean the Internal Revenue Code of 1986, as amended. (f) Continuing Director. A "Continuing Director" shall mean a Director of the Company who (i) is not an Acquiring Person, an Affiliate or Associate, a representative of an Acquiring Person or nominated for election by an Acquiring Person, and (ii) was either a member of the Board of Directors of the Company on the date of this Agreement or subsequently became a Director of the Company and whose initial election or initial nomination for election by the Company's stockholders was approved by a majority of the Continuing Directors then on the Board of Directors of the Company. (g) Disabled. "Disabled" means any mental or physical impairment lasting more than 180 consecutive or non-consecutive calendar days that prevents Executive from performing the essential functions of his position with or without reasonable accommodation, as determined by a physician mutually agreeable to Executive and the Company. Executive agrees to submit to appropriate medical examinations and authorize his physicians to release medical information necessary to determine whether Executive is "Disabled" for purposes of this Agreement. (h) Employment Term. The "Employment Term" shall be the period of employment under this Agreement commencing on the day immediately prior to a Change in Control and continuing until the expiration of this Agreement. (i) Purchase Price. "Purchase Price" means the gross value of all cash, securities and other property paid directly or indirectly by an acquiror to a seller or sellers in connection with a Sale of the Company. The value of any securities (whether debt or equity) or other property shall be determined as follows: (i) the value of securities that are freely tradeable in an established public market will be determined on the basis of the average closing market price on the last five trading days preceding one business day prior to the closing of a Sale of the Company and (ii) the value of securities that are not freely tradeable or have no established public market and the 3 value of consideration that consists of other property, will be the fair market value thereof, as reasonably determined by the Company no later than one business day prior to the closing of a Sale of the Company. The Purchase Price will not be deemed to include the principal amount of any indebtedness for borrowed money assumed or acquired, directly or indirectly, by the acquiring party or any of its affiliates in a Sale of the Company or retired, defeased or otherwise cancelled in connection with a Sale of the Company. (j) Sale Bonus. Shall have the meaning set forth in Section 4(a). (k) Sale of the Company. A "Sale of the Company" means the consummation of a sale by the Company to any entity not affiliated with or controlled by the Company of (i) 51% or more of the outstanding capital stock of the Company through purchase, merger, consolidation, combination or otherwise or (ii) all or substantially all of the assets of the Company. (l) Severance Compensation. The "Severance Compensation" shall be: (i) A lump sum amount equal to 299% of Executive's average annual compensation reported on his Form W-2 paid by the Company includable in gross income for the five most recent full calendar years that Executive has been an employee of the Company (or such fewer full calendar years if Executive has been an employee less than five full calendar years) prior to the Change in Control; provided, however, that if on the date of determination, Executive has not been an employee of the Company for a full calendar year, such lump sum amount will equal 299% of Executive's then current base salary (excluding bonus and incentive compensation) annualized; and (ii) For a period of 36 months, provide Executive with benefits substantially similar to those which Executive was entitled to receive immediately prior to the date of termination under all of the Company's "employee welfare benefit plans" within the meaning of Section 3(1) of The Employee Retirement Income Security Act of 1974, as amended. (m) Termination Date. The "Termination Date" shall be the effective date upon which Executive or the Company terminates the employment of Executive with the Company. 3. Rights of Executive Upon Change in Control and Subsequent Termination. (a) The Company shall provide Executive, within ten days following the Termination Date, Severance Compensation, but without affecting the rights of Executive or the Company at law or in equity, if, following the occurrence of a Change in Control, any of the following two events shall occur: 4 (1) the Company terminates Executive's employment during the Employment Term except for any of the following reasons: (i) Executive dies; (ii) Executive becomes Disabled; or (iii) for Cause; or (2) Executive terminates his employment after such Change in Control and the occurrence of at least one of the following events: (i) an adverse change in the positions held by Executive or an adverse change in the nature or scope of the authorities, functions or duties attached to the positions with the Company that Executive had immediately prior to the Change in Control, any reduction in Executive's base salary (excluding bonus and incentive compensation) during the Employment Term or any adverse change in the calculation of the annual bonus or incentive compensation or a significant reduction in scope or value of the aggregate other monetary or nonmonetary benefits to which Executive was entitled from the Company immediately prior to the Change in Control, any of which is not remedied within ten calendar days after receipt by the Company of written notice from Executive of such change, reduction, alteration or termination, as the case may be; (ii) a determination by Executive made in good faith that as a result of a Change in Control and a change in circumstances thereafter significantly affecting his position, changes in the composition or policies of the Board, or of other events of material effect, he has been rendered substantially unable to carry out, or has been substantially hindered in the performance of, the authorities, functions or duties attached to his position immediately prior to the Change in Control, which situation is not remedied within ten calendar days after receipt by the Company of written notice from Executive of such determination; (iii) the relocation of the Company's principal executive offices, or the requirement by the Company that Executive have as his principal location of work any location not within the greater Dallas, Texas metropolitan area or that he travel away from his office in the course of discharging his duties hereunder significantly more (in terms of either consecutive days or aggregate days in any calendar year) than required of him prior to the Change in Control; or 5 (iv) the Company commits any breach (including under Section 6 below) of this Agreement, which is not cured within ten calendar days after receipt by the Company of written notice from Executive of such breach. (b) In the event that the total compensation paid to Executive as severance in the event of a Change in Control, taking into account all cash payments, shares of stock, accelerated vesting of stock options, and bonuses, if any, is found to constitute "an excess parachute payment" within the meaning of Section 280G of the Code, then the Company will pay to Executive, in addition to the Severance Compensation, an additional amount which, after reduction for income taxes and excise taxes on such additional amount, is sufficient to provide for the payment of any excise tax that may be due by Executive on the total compensation amount. (c) Upon written notice given by Executive to the Company prior to the receipt of Severance Compensation, Executive, at his sole option, may elect to have all or any part of any such amount paid to him, without interest, on an installment basis selected by him. (d) The payment of Severance Compensation by the Company to Executive shall not affect any rights and benefits which Executive may have pursuant to any other agreement, policy, plan, program or arrangement with the Company prior to the Termination Date, which rights shall be governed by the terms thereof, except that payments hereunder after termination shall reduce by an equal amount any sums payable after termination of employment under the Employment Agreement, dated February 4, 2002, by and between the Company and Executive, as may be amended, restated or modified. (e) The Company shall have no right of set-off or counterclaim in respect of any claim, debt or obligation against any payment or benefit to or for the benefit of Executive provided for in this Agreement. (f) Without limiting the rights of Executive at law or in equity, if the Company fails to make any payment required to be made hereunder on a timely basis, the Company shall pay interest on the amount thereof on demand at an annualized rate of interest equal to 120% of the then applicable Federal rate determined under Section 1274(d) of the Code, compounded semi-annually (but in no event shall such interest exceed the highest lawful rate). (g) If any of the events set forth in Section 3(a)(1) or 3(a)(2) occurs prior to a Change in Control but following the commencement of any discussion authorized by the Board with a third person that ultimately results in a Change in Control involving that person or a different third party, such event shall be deemed to be a termination or removal of Executive after a Change in Control for purposes of this Agreement and shall entitle Executive to all benefits under this Agreement. 6 4. Sale Bonus. (a) If a Sale of the Company occurs on or before July 1, 2003, in addition to any other payments, bonuses or amounts that Executive may be entitled to under any other agreements with the Company, Executive will be entitled to a cash payment in an amount equal to (i) the Purchase Price divided by the number of issued and outstanding shares of capital stock of the Company as of the closing of the Sale of the Company, times (ii) 20,000, minus (iii) $260,000 (such amount being, the "Sale Bonus"). The Sale Bonus will be subject to deduction and withholding authorized or required by applicable law. The Sale Bonus will be payable by the Company in full in cash at the closing of a Sale of the Company. However, the Company will have no obligation to pay Executive the Sale Bonus under this Section 4 if (1) a Sale of the Company does not occur on or before July 1, 2003, or (2) even though a Sale of the Company occurs on or before July 1, 2003, prior to the closing of the Sale of the Company, (x) Executive voluntarily terminates his employment with the Company, dies or becomes Disabled, (y) the Company terminates Executive for Cause, or (z) Executive breaches any of the material terms of this Agreement or the terms of the Employment Agreement, dated February 4, 2002, by and between the Company and Executive. The calculation of the Sale Bonus is based in part on the number of issued and outstanding shares of the Company's common stock (clause (ii)) as well as historical trading prices of such shares (clause (iii)) as of the date hereof. Clauses (ii) and/or (iii) of the calculation of the Sale Bonus will be adjusted as is necessary to reflect the same economic terms in the event of a stock dividend on, or a subdivision, combination or reclassification of, the Company's common stock after the date hereof, but will not be adjusted upon the occurrence of any other dilutive event. (b) In the event that the total compensation paid to Executive in the event of a Sale of the Company, taking into account all cash payments, shares of stock, accelerated vesting of stock options, and bonuses, if any, is found to constitute "an excess parachute payment" within the meaning of Section 280G of the Code, then the Company will pay to Executive, in addition to the compensation paid as the Sale Bonus, an additional amount which, after reduction for income taxes and excise taxes on such additional amount, is sufficient to provide for the payment of any excise tax that may be due by Executive on the total compensation amount received by Executive. 5. No Mitigation Required. In the event that this Agreement or the employment of Executive hereunder is terminated, Executive shall not be obligated to mitigate his damages nor the amount of any payment provided for in this Agreement by seeking other employment or otherwise, and the acceptance of employment elsewhere after termination shall in no way reduce the amount of Severance Compensation payable hereunder. 6. Successors; Binding Agreement. 7 (a) The Company will require any successor and any corporation or other legal person which is in control of such successor (as "control" is defined in Regulation 230.405 or any successor rule or regulation promulgated under the Securities Act of 1933, as amended) to all or substantially all of the business and/or assets of the Company (by purchase, merger, consolidation or otherwise), by agreement in form and substance reasonably satisfactory to Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a material breach of this Agreement by the Company. Notwithstanding the foregoing, any such assumption shall not, in any way, affect or limit the liability of the Company under the terms of this Agreement or release the Company from any obligation hereunder. As used in this Agreement, "Company" shall mean the Company as herein before defined and any successor to its business and/or all or a substantial part of its assets as aforesaid which executes and delivers the agreement provided for in this Section 6 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (b) This Agreement and all rights of Executive hereunder shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 7. Notice. The Company shall give written notice to Executive within ten days after any Change in Control. Failure to give such notice shall constitute a material breach of this Agreement. For purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or received after being mailed by United States registered mail, return receipt requested, postage prepaid, addressed as follows: If to Executive: Richard L. Travis, Jr. 7067 Inwood Road Dallas, Texas 75209 If to the Company: Peerless Mfg. Co. 2819 Walnut Hill Lane Dallas, Texas 75229 Attn: Chairman of the Board or to such other address as any party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 8 8. Miscellaneous. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, unless specifically referred to herein, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. 9. Validity. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 10. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 11. Employment Rights. Nothing expressed or implied in this Agreement shall create any right or duty on the part of the Company or Executive to have Executive remain in the employment of the Company prior to any Change in Control. 12. Withholding of Taxes. The Company may withhold from any amounts payable under this Agreement all federal, state, city or other taxes as shall be required pursuant to any law or government regulation or ruling. 13. Enforcement Fees. All costs of litigation necessary for Executive to defend the validity of this Agreement are to be paid by the Company or its successors or assigns. The Company shall pay and be solely responsible for any and all attorneys' and related fees and expenses incurred by Executive as a result of the Company's failure to perform this Agreement or any provision thereof or as a result of the Company or any person contesting the validity or enforceability of this Agreement or any provision thereof as aforesaid. 14. Rights and Remedies Cumulative. No right or remedy herein conferred upon or reserved to Executive is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, including with respect to Executive's rights under that certain Employment Agreement, dated February 4, 2002, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. 15. Governing Law. This Agreement will be governed by and construed in accordance with the internal laws of the State of Texas, without giving effect to any conflicts of law rule or principle that might require the application of the laws of another jurisdiction. 9 16. Disputes. The parties to this Agreement agree that in the event there is a dispute or controversy between them that cannot be settled through direct discussions, it is in the best interests of all for such dispute or controversy to be resolved in the shortest time and with the lowest cost of resolution as practicable. Consequently, any such dispute, controversy or claim between the parties to this Agreement will not be litigated, but instead will be resolved by arbitration in accordance with Title 9 of the U.S. Code (United States Arbitration Act) and the Commercial Arbitration Rules of the American Arbitration Association (the "Rules"), and judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The arbitration will be before one neutral arbitrator and will proceed under the Expedited Procedures of said Rules. The arbitration will be held in Dallas, Texas, or such other place as may be selected by mutual agreement. The arbitrator will have the discretion to order a prehearing exchange of information by the parties, and to set limits for both the scope and time period of such exchange. All issues regarding exchange requests will be decided by the arbitrator. Neither party nor the arbitrator may disclose the existence, content or results of any arbitration hereunder, unless required to do so by court or regulatory order, without the prior written consent of both parties. Fees and expenses of the arbitration itself will be borne by the parties equally; provided, however, the arbitrator will also be authorized to award to the prevailing party all or that fraction of its reasonable costs and fees as is deemed equitable. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 10 IN WITNESS WHEREOF, the parties have executed this Agreement effective on the date and year first above written. PEERLESS MFG. CO. /s/ SHERRILL STONE --------------------------------------- Sherrill Stone, Chairman of the Board and Chief Executive Officer EXECUTIVE /s/ RICHARD L. TRAVIS, JR. --------------------------------------- Richard L. Travis, Jr. 11 EX-99.1 5 d01225exv99w1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 99.1 PEERLESS MFG. CO. AND SUBSIDIARIES FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Form 10-Q of Peerless Mfg. Co.. (the "Company") for the quarter ended September 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Sherrill Stone, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended, and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Sherrill Stone ------------------------------- Sherrill Stone Chief Executive Officer Date: November 14, 2002 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. EX-99.2 6 d01225exv99w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 99.2 PEERLESS MFG. CO. AND SUBSIDIARIES FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Form 10-Q of Peerless Mfg. Co. (the "Company") for the quarter ended September 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Richard L. Travis, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Richard L. Travis ------------------------ Richard L. Travis Chief Financial Officer Date: November 14, 2002 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. -----END PRIVACY-ENHANCED MESSAGE-----