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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1998
OR
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 (IRS Employer
Incorporation or Organization) Identification No.)
2819 Walnut Hill Lane, Dallas, Texas 75229
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (214) 357-6181
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of Each Exchange on Which Registered
Common Stock, par value $1.00 The Nasdaq Stock Market's National Market
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes x No
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. x
At September 18, 1998, Peerless Mfg. Co. had 1,457,492 shares of common
stock, $1.00 par value outstanding. The Company estimates that the
aggregate market value of the common stock on September 18, 1998 (based
upon the closing price of these shares on Nasdaq) held by non-affiliates
was approximately $17,300,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for Annual Meeting of
Shareholders to be held on or about November 25, 1998 (to be filed) are
incorporated by reference into Part III of this Form 10-K.
TABLE OF CONTENTS
Item Page
PART I
1 Business..............................................2
2 Properties............................................6
3 Legal Proceedings.....................................6
4 Submission of Matters to a Vote
of Security Holders ................................6
PART II
5 Market for Registrant's Common Equity and
Related Stockholder Matters ........................7
6 Selected Financial Data...............................8
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations ................8
8 Financial Statements and Supplementary Data..........15
9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ............36
PART III
10 Directors and Executive Officers of
the Registrant ....................................36
11 Executive Compensation...............................36
12 Security Ownership of Certain Beneficial
Owners and Management .............................36
13 Certain Relationships and Related
Transactions ......................................36
PART IV
14 Exhibits, Financial Statement Schedule,
and Reports on Form 8-K ...........................37
PART I
ITEM 1. BUSINESS.
Peerless Mfg. Co. (the "Company" or "Registrant") was organized in
1933 as a proprietorship and was incorporated as a Texas corporation in
1946. The Company has wholly-owned subsidiaries in the Netherlands, the
United Kingdom and Barbados.
Products and Operations
The Company is engaged in the business of designing, engineering,
manufacturing and selling highly specialized products, referred to as
"separators" or "filters," which are used for a variety of purposes in
cleaning gases and liquids as they move through a piping system. The
Company packages these products on skids complete with instruments,
controls and related valves and piping. These products are used
primarily to remove solid and liquid contaminants from natural gas, and
salt water aerosols from the combustion intake air of ship board gas
turbine and diesel engines.
The Company also designs, engineers, manufactures and sells
specialized products known as "pulsation dampeners," which are used
primarily to reduce or eliminate vibrations caused by acoustical
pulsations commonly found in piping connected to reciprocating
compressors. Pulsation dampeners reduce noise levels, improve
efficiency and prolong the life of piping systems.
The Company's products are also used as components in selective
catalytic reduction systems. Selective catalytic reduction equipment is
used to separate nitrogen oxide (NOx) emissions from exhaust gases
caused by burning hydrocarbon fuels such as gasoline, natural gas and
oil. Additionally, the Company sells gas odorization equipment,
quick-opening closures, parts for its products and other miscellaneous
items and renders certain engineering services.
Although the Company manufactures and stocks a limited number of
items of equipment for immediate delivery, the vast majority of its
products are designed and constructed for specific customer requirements
or specifications. In certain cases, the Company's products and
components are designed by the Company but produced by subcontractors
under Company supervision.
The Company markets its products worldwide through manufacturers'
representatives, who sell on a commission basis under the general
direction of an officer of the Company. The Company also sells products
directly to customers.
Customers and Export Sales
Gas separators and filters are sold to gas producers and gas
gathering, transmission and distribution companies, and to chemical
manufacturers and oil refineries, either directly or through contractors
engaged to build plants and pipelines, and to manufacturers of
compressors, turbines and nuclear and conventional steam generating
equipment. Marine separation/filtration systems are sold primarily to
ship builders. Pulsation dampeners are purchased by customers in the
same industries as purchasers of separators and filters (except ship
builders and steam generating equipment manufacturers). Selective
catalytic reduction equipment is sold to gas turbine operators,
refineries and others who desire or may be required to reduce nitrogen
oxide (NOx) emissions.
The Company is not dependent upon any single customer or group of
customers. The custom-designed nature of the Company's business and the
nature of the products cause year to year variance in its major
customers. No customer accounted for 10% or more of Company revenues
during fiscal years 1998 and 1996. During fiscal 1997, one customer
accounted for 12% of revenues.
Sales to international customers have been a part of the Company's
business for more than forty years. During fiscal 1998, foreign sales
amounted to $27 million, or 63% of total consolidated revenue. Sales in
Asia were approximately $7 million, or 17% of and $11 million, or 27% of
net sales in fiscal 1998 and 1997 respectively. The custom-designed and
project-specific nature of its products enables the Company to sell to
any geographic region. Please see Note J of the Notes to Consolidated
Financial Statements for a breakdown of the Company's international
sales by geographic area during fiscal 1998 and 1997.
The Company's international sales involve certain risks. Foreign
purchasers may default in the payment of amounts due, causing collection
on an international account to be more difficult than for a domestic
account. Foreign exchange rates may fluctuate adversely affecting the
Company and the U.S. and/or foreign governments may impose regulatory
burdens upon exports and imports of the Company's products. The Company
also incurs greater expenses on foreign sales because of added
selling expenses incurred in other countries. To date, the Company has
not incurred substantial expenses related to these risks.
The Company has reduced its credit and collection risks because a
substantial part of foreign sales are made to large, well-established
international companies and/or to international operations of domestic
companies. When sales are made to smaller international enterprises,
the Company generally requires progress payments or an appropriate
guarantee of payment, such as a letter of credit from a banking
institution. The Company attempts to minimize the risks of fluctuating
currency exchange rates by requiring payment in U.S. dollars (or in the
functional currency of its foreign subsidiaries) for most of its foreign
product sales. The Company hedges against substantial exposures that it
may have to currency fluctuations.
Backlog
The Company's backlog of incomplete orders at June 30, 1998 was
approximately $22 million compared to approximately $20 million at June
30, 1997. Backlog has been calculated under the Company's normal
practice of including incomplete orders for products that are
deliverable in future periods but that may be changed or cancelled.
Competition
There are many competitors, both larger and smaller than the
Company, in the manufacturing and selling of separators, filters and
pulsation dampeners. Management believes that performance, reliability
and warranty service are the prime competitive factors in the Company's
markets. The Company believes that it strongly competes in these areas
and has become a world leader in sales of custom-built separators,
filters and pulsation dampeners.
Patents, Licenses and Product Development
The Company considers itself to be a world leader in the technology
required to design and apply its high efficiency vapor/liquid separation
and filtration equipment. The Company believes that it is also a leader
in the design, manufacture and application of high efficiency pulsation
dampeners for reciprocating compressors, and in the production of
selective catalytic reduction component equipment. The Company's
expenditures for new product development and improvements were
approximately $580,000 in fiscal 1998 and $554,000 in fiscal 1997. The
Company expects product development expenditures to be approximately
$500,000 in fiscal 1999.
The Company has existing patents and patent applications pending on
some of its products and processes that are important to its business.
These include patents on vane designs, separator profiles,
marine/separator filtration systems and pressure testing capabilities.
In addition, most of the Company's products are proprietary and are
sold utilizing the Company's proven technology and knowledge of the
applications. However, other companies are marketing competitive
products that may not infringe upon the Company's patents and there
can be no assurance that other companies won't sell products similar
to the Company's proprietary products.
In 1992, the Company shifted its emphasis from licensing its
foreign sales to a strategy of focusing on direct international
marketing through its Singapore sales branch and European subsidiaries,
Peerless Europe B.V. and Peerless Europe Ltd. The Company also derives
royalty income from license arrangements in France and England and
engineering fees on certain projects. Royalty and engineering fee
revenues, which are included in net sales, were $1,828,000 in fiscal
1998 and $359,000 in fiscal 1997.
Employees
At June 30, 1998, the Company and its subsidiaries had
approximately 175 employees.
Raw Materials
The Company purchases raw materials and component parts essential
to its business from established sources and has not experienced any
unusual problems in purchasing required materials and parts. The
Company believes that raw materials and component parts will be
available in sufficient quantities to meet anticipated demand. However,
there can be no assurance that the Company will continue to find its raw
materials in quantities or at prices satisfactory to the Company.
Environmental Regulation
The Company does not believe that its compliance with federal,
state or local statutes or regulations relating to the protection of the
environment has had any material effect upon capital expenditures,
earnings or the competitive position of the Company. The Company's
manufacturing processes do not emit substantial foreign substances into
the environment. Regulations related to nitrogen oxide (NOx) emissions
have in the past resulted in increased sales of the Company's component
parts for selective catalytic reduction equipment.
Market Risk
Although the Company generally requires payment in U.S. dollars on
its international projects, the Company sometimes conducts business in
foreign currencies and is subject to foreign currency exchange rate risk
on cash flows related to such transactions. The Company makes very
limited use of currency exchange contracts to reduce the risk of adverse
foreign currency movements related to certain foreign currency
transactions. Exposure from market rate fluctuations related to these
contracts is not material.
Executive Officers of the Company
The executive officers of the Company on September 23, 1998 are
listed below. Each of these officers has been employed by the Company
for at least five years in the same position or a similar capacity,
except as noted:
Name and Age Position
Sherrill Stone, 61 Chairman of the Board,
President and Chief
Executive Officer (1)
G. D. Cornwell, 54 Sr. Vice President (2)
Paul W. Willey, 60 Chief Financial Officer,
Treasurer and Secretary (3)
Edward Perry, 60 Sr. Vice President (4)
Kent J. Van Houten, 44 Comptroller (5)
Ken Fewel, 45 Vice President (6)
Ray Muzyka, 60 Vice President (7)
____________________
(1) Mr. Stone is responsible for formulation of corporate policy,
investment and new business opportunities. Mr. Stone assumed the
duties of Chairman of the Board and Chief Executive Officer of the
Company on March 31, 1993.
(2) Mr. Cornwell is responsible for sales, manufacturing and
engineering.
(3) Mr. Willey is responsible for financial administration and has been
employed by the Company since March 25, 1998. He was Treasurer of
Dresser Industries, Inc. from 1983 to 1997.
(4) Mr. Perry is responsible for the general administrative functions.
(5) Mr. Van Houten is responsible for accounting operations, and has
been employed by the company since May 22, 1995. He was Manager of
Financial Accounting at The Austin Company from 1987 to 1994.
(6) Mr. Fewel is responsible for the research and development
activities.
(7) Mr. Muzyka is responsible for the sales effort.
ITEM 2. PROPERTIES.
The Company owns its principal executive offices located in Dallas,
Texas, which include office, warehouse and manufacturing facilities.
Approximately 4,000 square feet of space is used for executive and sales
offices, 3,600 square feet used for research and development and 20,000
square feet of a 40,000 square foot building located on the same site is
used for administrative, engineering and drafting offices. The
remaining portion of this building and another 80,000 square feet for a
manufacturing facility are leased to third parties. The Company owns
approximately 21,600 additional square feet of manufacturing facilities
in Denton, Texas, and approximately 29,000 square feet of manufacturing
facilities in Carrollton, Texas. The Company believes that its office
and manufacturing facilities are adequate and suitable for its present
requirements. Future needs can be met by building manufacturing
facilities at the Denton, Texas location, where space is available for
expansion.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in various legal proceedings arising in the
ordinary course of business that are not material to the Company's
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock is listed on the Nasdaq Stock Market's
National Market under the symbol PMFG. The Company's Board of Directors
reviews the financial position of the Company periodically to determine
the advisability of paying dividends. The following table sets forth,
for the periods indicated, the range of the daily high and low closing
bid prices for the Company's Common Stock as reported by Nasdaq Stock
Market's National Market and cash dividends paid per share.
Quarter Ended: Closing Bid Cash Dividends
Prices
High Low Per Share
------ ----- ---------
Fiscal 1997
September 30, 1996 $13-3/4 $9-1/4 $.125
December 31, 1996 14-7/8 11-5/8 .125
March 31, 1997 13-1/4 9-1/2 .125
June 30, 1997 11 9-1/8 .125
Fiscal 1998
September 30, 1997 $15-1/2 $12 $.125
December 31, 1997 13-5/8 9-7/8 .125
March 31, 1998 12-1/2 10-1/8 .125
June 30, 1998 13-1/2 11-3/8 .125
There were 197 record holders of the Company's Common Stock on
August 14, 1998. The Company estimates that approximately 700
additional shareholders own shares in broker names.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with Consolidated Financial Statements and related Notes included in
this report.
Year ended June 30
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
Net sales $43,455,136 $41,486,492 $33,643,998 $32,089,132 $25,567,560
Gross profit 15,239,806 11,525,289 10,213,237 10,583,128 9,038,606
Earnings before 3,522,138 537,996 1,182,148 1,908,661 1,227,959
income taxes
Net earnings $2,449,561 $537,416 $789,721 $1,226,246 $780,275
========= ======= ======= ========= =======
Earnings per
common share- basic $1.68 $.37 $.55 $.85 $.54
and diluted ===== ==== ==== ==== ====
Total assets $23,756,221 $19,046,720 $18,191,426 $17,156,055 $18,022,466
========== ========== ========== ========== ==========
Long-term --- --- --- --- ---
obligations
Cash dividend per
common share $ .50 $ .50 $ .50 $ .50 $ .50
========== ========== ========== ========== ==========
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Liquidity And Capital Resources
The Company believes that it maintains corporate liquidity adequate
to support existing operations and planned growth, as well as continue
operations during reasonable periods of unanticipated adversity.
Management directs additional resources to strategic new product
development, market expansion and continuing improvement of existing
products to enhance the Company's position as a market leader and to
promote planned internal growth and profitability.
The Company has historically financed and continues to finance
working capital requirements, expansion, equipment purchases or
acquisitions primarily through the retention of earnings, which is
reflected by the absence of long-term debt on the Company's consolidated
balance sheet. In addition to retained earnings, the Company has used
short term bank credit lines of $7,500,000 to supplement working
capital. The Company believes that these sources will be sufficient to
satisfy its needs in the foreseeable future. During fiscal 1998 and
fiscal 1997, it was necessary for the Company to use its short-term bank
credit lines in order to finance a temporary shortfall in working
capital. At June 30, 1998, the Company had $200,000 outstanding under
its credit lines. The Company pays an annual commitment fee of 0.25% of
the unused balance under the credit lines. The Company has no material
commitments for capital expenditures other than replacing equipment and
maintaining its existing plants and equipment. During fiscal 1998 the
Company purchased fixed assets totaling $262,000, consisting primarily
of replacement manufacturing equipment, computer hardware and software,
office equipment and building improvements. This is compared to
purchases of $596,000 during fiscal 1997.
Working capital was $10,000,000 at June 30, 1998, up from
$8,600,000 at June 30, 1997, an increase of 16%. This increase was due
primarily to increased receivables resulting from higher fourth quarter
sales.
The following table sets forth certain information related to
working capital for the Company's last three fiscal years:
1998 1997 1996
------ ------ ------
Average working capital as
a percentage of net sales 20.5% 20.8% 25.6%
Annual accounts receivable
turnover(1) 5.0 4.3 3.8
Annual inventory 6.3 6.6 5.7
turnover(2)
(1) Annual accounts receivable turnover is computed by dividing annual
net sales by the average monthly accounts receivable.
(2) Annual inventory turnover is computed by dividing the cost of goods
sold by the average monthly inventory and contract costs.
The average working capital as a percentage of net sales decreased
slightly because of the increased sales volume of approximately
$2,000,000 reported in fiscal 1998 over fiscal 1997. The increase in
annual accounts receivable turnover reflects improved collection methods
used by the Company in fiscal 1998. Average inventory turnover has
stabilized at 6.3 in fiscal 1998. Peerless management continues to
monitor and streamline the Company's receivable collection and inventory
purchasing procedures to maximize cash flow.
Results of Operations
The following table sets forth various measures of performance
expressed as percentages of net sales for the Company's last three
fiscal years, as well as the Company's effective income tax rate for the
same periods:
1998 1997 1996
------ ------ ------
Gross profit margin 35.1% 27.8% 30.4%
Operating expenses 26.7% 26.8% 26.8%
Earnings before income taxes 8.1% 1.3% 3.5%
Effective income tax rate 30.5% 0.1% 33.2%
Inflation did not have a material impact on the Company's operating
results during the last three fiscal years.
Comparison of Fiscal 1998 to Fiscal 1997
Net Sales
The Company's net sales increased approximately $1,968,644, or
4.7%, from $41,486,492 in fiscal 1997 to $43,455,136 in fiscal 1998.
Domestic sales increased 1.9% from $15,881,000 in fiscal 1997 to
$16,181,000 in fiscal 1998. Foreign sales increased 6.5% from
$25,605,000 in fiscal 1997 to $27,274,000 in fiscal 1998. The increase
in international sales resulted primarily from additional sales realized
in Canada and South America.
The Company's backlog of unfilled orders increased from $20,000,000
at June 30, 1997 to $22,000,000 at June 30, 1998. Approximately 85% of
the backlog at June 30, 1998 is expected to ship in fiscal 1999.
Gross Profit Margin
The Company's gross profit margin increased from 27.8% of net sales
in fiscal 1997 to 35.1% of net sales in fiscal 1998. The increase
resulted from a relative increase in engineering revenues in fiscal 1998
versus fiscal 1997. Such revenues provide a higher gross profit margin.
Revenues from engineering fees with higher gross profits margins
increased approximately 400% from $359,000 in fiscal 1997 to $1,828,000
in fiscal 1998.
Operating Expenses
Operating expenses increased 4.3% from $11,118,000 in fiscal 1997
to $11,595,000 in fiscal 1998. This increase in operating expenses was
primarily due to increased sales in fiscal 1998. However, operating
expenses as a percent of sales were comparable at 26.8% in fiscal 1997
compared to 26.7% in fiscal 1998.
Income Tax
The Company's effective income tax rate was 30.5% in fiscal 1998
compared to .1% in fiscal 1997. Foreign deferred tax benefits, which
offset domestic tax expenses, were not available to the Company in
fiscal 1998 as they were in Fiscal 1997. For a further discussion of
the Company's federal income taxes, see Note H to the Company's
Consolidated Financial Statements.
The Company's effective income tax rate decreased from 33.2% in
fiscal 1996 to 0.1% in fiscal 1997. This decrease resulted from foreign
deferred tax benefits, which offset domestic tax expenses in fiscal
1997.
Comparison of Fiscal 1997 to Fiscal 1996
Net Sales
The Company's net sales increased approximately $7,842,000, or
23.3%, to $41,486,000 in fiscal 1997 from $33,644,000 in fiscal 1996.
Domestic sales increased by 11.5% from $14,244,000 in fiscal 1996 to
$15,886,000 in fiscal 1997. Foreign sales increased 32.0% from
$19,400,000 in fiscal 1996 to $25,600,000 in fiscal 1997. The increase
resulted primarily from additional sales realized in Asia.
The Company's backlog of unfilled orders increased 32.0% from
$15,300,000 at June 30, 1996 to $20,200,000 at June 30, 1997.
Gross Profit Margin
The Company's gross profit margin decreased from 30.4% of net sales
in fiscal 1996 to 27.8% of net sales in fiscal 1997. The decrease
resulted from a change in product mix of orders completed in fiscal 1997
and adverse effects of a one-time cost overrun related to a major
international project in the Company's environmental equipment division
in the third quarter of fiscal 1997. The Company has increased its
controls on cost estimates and does not expect to encounter such cost
overruns in the future.
Operating Expenses
Operating expenses increased 23.4% from $9,009,000 in fiscal 1996
to $11,118,000 in fiscal 1997. This increase in operating expenses was
primarily due to increased sales and additional personnel hired to
support the increased level of sales anticipated by the Company.
However, operating expenses as a percent of sales remained the same at
26.8% in both fiscal 1996 and fiscal 1997.
Income Tax
The Company's effective income tax rate decreased from 33.2% in
fiscal 1996 to 0.1% in fiscal 1997. This decrease resulted from the
Company's use of foreign deferred tax benefits, which offset domestic
tax expenses. For a further discussion of the Company's federal income
taxes, see Note H to the Company's Consolidated Financial Statements.
Year 2000 Compliance
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing
a two-digit year is commonly referred to as the Year 2000 Compliance
issue. As the Year 2000 approaches, such systems may be unable to
accurately process certain date-based information.
As is the case with most other companies using computers in their
operations, the Company is in the processing of addressing the Year 2000
Compliance issue. The Company began converting its information systems
in 1996 through the purchase of a new information system that is already
Year 2000 compliant. The Company has incurred approximately $450,000 to
date in implementing this new system and expects to incur an additional
$50,000 for future modifications, testing and services. Planned
implementation is expected by January 1, 1999 with testing of the new
system for a three- to six-month period. The vendor has assured
management that the new system will be Year 2000 compliant. These cost
and timing estimates are based on management's best estimates, which
were derived utilizing numerous assumptions regarding future events,
including the continued availability of certain resources and the
accuracy of third-party representations. However, there can be no
guarantee that the estimates will be achieved, and actual results could
differ from those plans.
The Company purchases computer hardware and software products from
third parties for incorporation into the Company's products and such
third-party products may be affected by the Year 2000 problem. There
can be no guarantee, however, that these products or the systems of
other companies on which the Company's systems and operations rely will
be timely converted or that the failure of these systems would not have
an adverse effect on the Company's systems. The Company has advised its
customers inquiring about this issue to contact the Company's vendors
for Year 2000 information. The Company has consulted with such vendors
in an effort to assure that the vendors have minimized the risk of Year
2000 problems in the systems currently used by the Company.
Sales in Southeast Asia
The Company markets a significant portion of its products in
Southeast Asia. See Note J to the Company's consolidated Financial
Statements. Southeast Asia has recently experienced economic decline,
and the Company expects that revenues derived in the region will remain
flat or decline slightly in the future. However, a worsening of the
region's economic condition or in the oil and gas industry (in which the
Company derives most of its Asian revenues) could materially and
adversely affect the Company. The Company's Asian revenues declined
$3,710,000, or 33.7%, from fiscal 1997 to fiscal 1998. This decline was
exaggerated by additional revenues of approximately $5,000,000 derived
in fiscal 1997 that were related to a one-time unprofitable project in
the region. The Company believes that its fiscal 1996 and fiscal 1998
revenues better reflect the Company's performance in the region.
Management believes that increased sales to Canada and Latin America
will continue to make up for declines in Southeast Asia.
Outlooks and Uncertainties
This Annual Report on Form 10-K contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. Such statements refer to events that could occur in
the future or may be identified by the use of words such as "expect,"
"intend," "plan," "believe," correlative words, and other expressions
indicating that future events are contemplated and may be included in
the Company's business description or in Management's Discussion and
Analysis of Results of Operations and Financial Condition, among other
places. Such statements are subject to inherent risks and
uncertainties, and actual results could differ materially from those
projected in the forward-looking statements as a result of certain of
the risk factors set forth below and elsewhere in this Annual Report on
Form 10-K. In addition to the other information contained in this
Annual Report on Form 10-K, investors should carefully consider the
following risk factors. The Company does not undertake to update any
forward-looking statements.
Competition. The Company operates in highly competitive markets
worldwide. The Company competes with manufacturers and sellers of
separators, filters and pulsation dampeners, some of which are larger
than the Company and have greater financial resources. In addition,
several smaller manufacturers also produce custom-designed equipment
that is competitive with the Company's specialized products and
services. There can be no assurance that the Company will be able to
compete successfully with current or future competitors.
International Operations. The Company derives a significant
portion of its revenues from international sales, particularly in Asia.
Economic conditions across international regions could materially and
adversely affect the Company. The operations and earnings of the
Company throughout the world have been and may in the future be,
affected from time to time in varying degree by, political developments
and foreign laws and regulations, such as forced divestiture of assets,
restrictions on production, imports and exports, price controls, tax
cancellation of contract rights and environmental regulations. The
likelihood of such occurrences and their overall effect upon the Company
vary greatly from country to country and are not predictable.
Further, foreign purchasers may default in the payment of amounts
due, causing collection on an international account to be more difficult
than for a domestic account. Foreign exchange rates may fluctuate
adversely affecting the Company and the U.S. and/or foreign governments
may impose regulatory burdens upon exports and imports of the Company's
products. The Company also incurs greater expenses on foreign sales
because of added selling expenses incurred in other countries. The
occurrence of any one or more of the foregoing could adversely affect
the Company's operations.
Concentrations of Credit Risk. The Company continues to closely
monitor the creditworthiness of its customers and has not experienced
significant credit losses to date. A significant portion of the
Company's sales are to customers whose activities are related to the oil
and gas industry, including some who are located in other countries.
The Company generally extends credit to these customers. Its exposure
to credit risk is affected by conditions within the oil and gas
industry. When sales are made to smaller international enterprises, the
Company generally requires progress payments or an appropriate guarantee
of payment, such as a letter of credit from a banking institution.
Backlog. The Company's backlog represents incomplete customer
orders. The Company has historically completed and shipped virtually
all of its backlog. However, customers may cancel outstanding orders
prior to their completion. In such cases, the Company would not
recognize revenues for canceled orders. The Company has contractual
protection to recover from its customers the Company's costs related to
canceled orders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Financial Statements
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS ........................................... 16
CONSOLIDATED BALANCE SHEETS AT JUNE 30, 1998 AND 1997....... 17
CONSOLIDATED STATEMENTS OF EARNINGS FOR THE YEARS
ENDED JUNE 30, 1998, 1997 AND 1996..................... 19
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS'
EQUITY FOR THE YEARS ENDED JUNE 30, 1998,
1997 AND 1996.......................................... 20
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS
ENDED JUNE 30, 1998, 1997 AND 1996..................... 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED JUNE 30, 1998, 1997 AND 1996............... 23
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON SCHEDULE............................................ 34
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNT.............. 35
Report of Independent Certified Public Accountants
Board of Directors
Peerless Mfg. Co.
We have audited the accompanying consolidated balance sheets of Peerless
Mfg. Co. and Subsidiaries as of June 30, 1998 and 1997, and the related
consolidated statements of earnings, changes in stockholders' equity,
and cash flows for each of the three years in the period ended June 30,
1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present
fairly, in all material respects, the consolidated financial position of
Peerless Mfg. Co. and Subsidiaries as of June 30, 1998 and 1997, and the
consolidated results of their operations and their consolidated cash
flows for each of the three years in the period ended June 30, 1998, in
conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Dallas, Texas
September 2, 1998
Peerless Mfg. Co. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
June 30,
ASSETS 1998 1997
---------- ----------
CURRENT ASSETS
Cash and cash equivalents $ 428,482 $ 772,553
Short-term investments 268,065 259,007
Accounts receivable - principally trade
- net of allowance for uncollectible
accounts of $806,200 and $312,450 in
1998 and 1997, respectively 14,241,036 9,671,067
Inventories 2,419,845 2,993,855
Costs and earnings in excess of billings
on uncompleted contracts 1,838,641 1,871,817
Deferred income taxes 433,596 269,721
Other 165,631 298,605
---------- ----------
Total current assets 19,795,296 16,136,625
PROPERTY, PLANT AND EQUIPMENT - AT COST,
less accumulated depreciation 1,506,465 1,527,856
PROPERTY HELD FOR INVESTMENT - AT COST,
less accumulated depreciation 830,840 888,383
OTHER ASSETS 623,620 493,856
---------- ----------
$22,756,221 $19,046,720
========== ==========
Peerless Mfg. Co. and Subsidiaries
CONSOLIDATED BALANCE SHEETS - CONTINUED
June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
---------- ----------
CURRENT LIABILITIES
Accounts payable - trade $ 5,566,068 $ 5,054,532
Notes payable 200,000 -
Billings in excess of costs and
earnings on uncompleted contracts 49,977 363,257
Commissions payable 1,205,391 779,474
Accrued expenses
Compensation 1,499,443 656,082
Warranty reserve 434,588 406,903
Other 366,408 291,953
---------- ----------
Total current liabilities 9,321,875 7,552,201
DEFERRED INCOME TAXES 38,543 65,089
COMMITMENTS - -
STOCKHOLDERS' EQUITY
Common stock - authorized, 10,000,000 and
4,000,000 shares of $1 par value in 1998
and 1997, respectively; issued and
outstanding, 1,457,492 and 1,451,992
shares in 1998 and 1997, respectively 1,457,492 1,451,992
Additional paid-in capital 2,583,701 2,535,221
Unamortized value of restricted
stock grants (51,385) (44,625)
Cumulative foreign currency
translation adjustment (79,849) (93,944)
Retained earnings 9,485,844 7,580,786
---------- ----------
13,395,803 11,429,430
---------- ----------
$22,756,221 $19,046,720
========== ==========
The accompanying notes are an integral part of these statements.
Peerless Mfg. Co. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended June 30,
1998 1997 1996
---------- ---------- ----------
Net sales $43,455,136 $41,486,492 $33,643,998
Cost of goods sold 28,215,330 29,961,203 23,430,761
---------- ---------- ----------
Gross profit 15,239,806 11,525,289 10,213,237
Operating expenses
Marketing and engineering 8,932,180 9,129,347 7,524,363
General and administrative 2,662,725 1,988,618 1,485,113
---------- ---------- ----------
11,594,905 11,117,965 9,009,476
---------- ---------- ----------
Operating profit 3,644,901 407,324 1,203,761
Other income (expense)
Interest income 34,055 24,687 45,559
Interest expense (27,430) (55,475) (16,858)
Foreign exchange gains (losses) (90,050) 103,583 (28,628)
Other, net (39,338) 57,877 (21,686)
---------- ---------- ----------
(122,763) 130,672 (21,613)
Earnings before income taxes 3,522,138 537,996 1,182,148
Income tax expense (benefit)
Current 1,262,998 65,766 397,023
Deferred (190,421) (65,186) (4,596)
---------- ---------- ----------
1,072,577 580 392,427
NET EARNINGS $ 2,449,561 $ 537,416 $ 789,721
========= ========= =========
Earnings per common share - basic
and diluted $1.68 $.37 $.55
==== === ===
The accompanying notes are an integral part of these statements.
Peerless Mfg. Co. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Cumulative
Unamortized foreign
Additional value of currency
Common paid-in restricted translation Retained
stock capital stock grants adjustment earnings Total
--------- --------- --------- -------- --------- ----------
<
Balances as of July 1, 1995 $1,446,742 $2,493,428 $ (97,107) $ 56,110 $7,886,806 $11,785,979
Net earnings - - - - 789,721 789,721
Translation adjustment - - - (32,268) - (32,268)
Cash dividends ($.50 per share) - - - - (723,384) (723,384)
Amortization of restricted stock
grants - - 63,357 - - 63,357
Income tax expense related to
restricted stock plans - (3,549) - - - (3,549)
--------- --------- --------- -------- --------- ----------
Balances as of June 30, 1996 1,446,742 2,489,879 (33,750) 23,842 7,953,143 11,879,856
Net earnings - - - - 537,416 537,416
Issuance of 8,000 shares of
common stock 8,000 72,250 (80,250) - - -
Forfeiture of 4,000 shares of
common stock (4,000) (38,750) 42,750 - - -
Stock options exercised 1,250 10,312 - - - 11,562
Translation adjustment - - - (117,786) - (117,786)
Cash dividends paid ($.50 per share) - - - - (727,149) (727,149)
Cash dividends declared ($.125
per share) - - - - (182,624) (182,624)
Amortization of restricted
stock grants - - 26,625 - - 26,625
Income tax benefit related to
restricted stock plans - 1,530 - - - 1,530
--------- --------- --------- -------- --------- ----------
Balances as of June 30, 1997 1,451,992 2,535,221 (44,625) (93,944) 7,580,786 11,429,430
Net earnings - - - - 2,449,561 2,449,561
Issuance of 3,000 shares of
common stock 3,000 28,875 (31,875) - - -
Stock options exercised 2,500 20,625 - - - 23,125
Translation adjustment - - - 14,095 - 14,095
Cash dividends ($.375 per share) - - - - (544,503) (544,503)
Amortization of restricted
stock grants - - 25,115 - - 25,115
Income tax expense related to
restricted stock plans - (1,020) - - - (1,020)
--------- --------- --------- -------- --------- ----------
Balances as of June 30, 1998 $1,457,492 $2,583,701 $ (51,385) $ (79,849) $9,485,844 $13,395,803
========= ========= ========= ======== ========= ==========
The accompanying notes are an integral part of this statement.
Peerless Mfg. Co. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended June 30,
1998 1997 1996
---------- ---------- ---------
Cash flows from operating activities
Net earnings $ 2,449,561 $ 537,416 $ 789,721
Adjustments to reconcile net
earnings to net cash provided
by (used in) operating activities
Depreciation and amortization 379,752 370,526 416,207
Deferred income taxes (190,421) (65,186) (4,596)
Foreign exchange loss (gain) 90,050 (103,583) 28,628
Other (1,020) 1,530 (2,342)
Changes in operating assets
and liabilities
Accounts receivable (4,703,504) (1,586,991) 508,764
Inventories 544,993 (11,463) (154,231)
Cost and earnings in excess
of billings on
uncompleted contracts 33,176 (468,618) (1,287,644)
Other current assets 132,974 (59,501) (285,196)
Other assets (231,004) (40,466) 156,025
Accounts payable 837,205 791,364 1,240,661
Billings in excess of costs
and earnings
on uncompleted contracts (353,174) 363,257 (197,010)
Commissions payable 425,917 212,708 57,254
Accrued expenses 985,395 22,497 266,563
---------- ---------- ---------
(2,049,661) (573,926) 743,083
Net cash provided by (used
in) operating activities 399,900 (36,510) 1,532,804
Cash flows from investing activities
Net purchases of short-term
investments (9,058) (12,348) (24,691)
Purchase of property and equipment (262,362) (596,395) (273,593)
---------- ---------- ---------
Net cash used in investing activities (271,420) (608,743) (298,284)
Peerless Mfg. Co. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year ended June 30,
1998 1997 1996
---------- ---------- ---------
Cash flows from financing activities
Sale of common stock $ 23,125 $ 11,562 $ -
Advances on short-term borrowings 200,000 - -
Dividends paid (727,127) (727,149) (723,384)
---------- ---------- ---------
Net cash used in financing
activities (504,002) (715,587) (723,384)
Effect of exchange rate changes
on cash and cash equivalents 31,451 51,064 9,446
---------- ---------- ---------
Net increase (decrease) in cash
and cash equivalents (344,071) (1,309,776) 520,582
Cash and cash equivalents at
beginning of year 772,553 2,082,329 1,561,747
---------- ---------- ---------
Cash and cash equivalents at
end of year $ 428,482 $ 772,553 $2,082,329
========= ========= =========
Supplemental information on cash flows:
Interest paid $ 29,956 $ 55,475 $ 16,858
Income taxes paid $ 957,860 $ 379,347 $ 138,018
The accompanying notes are an integral part of these statements.
Peerless Mfg. Co. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature of Operations
Peerless Mfg. Co. designs, engineers, and manufactures specialized
products for the removal of contaminants from gases and liquids and
for air pollution abatement. The Company's products are manufactured
principally at plants located in Dallas, Texas and are sold worldwide
with the principal markets located in the United States and Europe.
Primary customers are equipment manufacturers, engineering contractors
and operators of power plants.
A summary of the significant accounting policies consistently applied
in the preparation of the accompanying consolidated financial
statements follows.
Consolidation
The Company consolidates the accounts of its wholly-owned
subsidiaries, all of which are foreign. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market.
Depreciable Assets
Depreciation is provided for in amounts sufficient to relate the cost
of depreciable assets to operations over their estimated service
lives, principally by the straight-line method.
Revenue Recognition
The Company generally recognizes sales of custom-contracted products
at the completion of the manufacturing process. The percentage-of-
completion method is used for significant long-term contracts.
Percentage-of-completion is generally determined based upon labor
hours incurred.
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - Continued
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123 (SFAS 123),
Accounting for Stock-Based Compensation, encourages, but does not
require, companies to record compensation cost for stock-based
employee compensation plans at fair value. The Company has chosen to
account for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25 (APB 25),
Accounting for Stock Issued to Employees, and related interpretations.
Earnings Per Common Share
Statement of Financial Accounting Standards No. 128 (SFAS 128),
Earnings Per Share, is effective for financial statements issued after
December 15, 1997. The new standard requires presentation of basic
and diluted earnings per share. The provisions of SFAS 128 have been
applied retroactively to all periods presented.
Basic earnings per common share is computed by dividing net earnings
by the weighted average number of common shares outstanding during
each year presented. Diluted earnings per common share give effect to
the assumed issuance of shares pursuant to outstanding stock option
plans, when dilutive.
Foreign Currency
All balance sheet accounts of foreign operations are translated into
U.S. dollars at the year-end rate of exchange and statements of
earnings items are translated at the weighted average exchange rates
for the year. The resulting translation adjustments are made directly
to a separate component of stockholders' equity. Gains and losses
from foreign currency transactions, such as those resulting from the
settlement of foreign receivables or payables, are included in the
consolidated statements of earnings.
From time to time, the Company enters into forward exchange contracts
in anticipation of future movements in certain foreign exchange rates
and to hedge against foreign currency fluctuations. Realized and
unrealized gains and losses on these contracts are included in net
income, except that gains and losses on contracts to hedge specific
foreign currency commitments are deferred and accounted for as part of
the underlying transaction.
Financial Instruments
The carrying amounts of cash and cash equivalents and short-term
investments approximate fair value because of the short-term nature of
these items.
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - Continued
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
NOTE B - CONCENTRATIONS OF CREDIT RISK
A significant portion of the Company's sales are to customers whose
activities are related to the oil and gas industry, including some who
are located in foreign countries. The Company generally extends
credit to these customers. Its exposure to credit risk is affected by
conditions within the oil and gas industry. Also, with respect to
foreign sales, collection may be more difficult in the event of a
default.
However, the Company closely monitors extensions of credit and has
never experienced significant credit losses. Substantially all
foreign sales are made to large, well-established companies. The
Company generally requires collateral or guarantees on foreign sales
to smaller companies.
Sales to one customer accounted for approximately 12.3% of revenues
for the year ended June 30, 1997. No single customer accounted for
more than 10% of revenues in the years ended June 30, 1998 or 1996.
NOTE C - INVENTORIES
Principal components of inventories are as follows:
June 30,
1998 1997
--------- ---------
Raw materials $ 973,906 $1,084,890
Work in process 1,114,524 1,586,213
Finished goods 331,415 322,752
--------- ---------
$2,419,845 $2,993,855
========= =========
At June 30, 1998 and 1997, progress payments of $100,472 and $318,043,
respectively, have been offset against inventories and costs of
uncompleted contracts.
NOTE D - PROPERTY, PLANT AND EQUIPMENT AND PROPERTY HELD FOR INVESTMENT
Property, plant and equipment is summarized as follows:
June 30,
1998 1997
---------- -----------
Buildings $ 1,387,406 $ 1,380,241
Equipment 2,683,630 2,432,792
Furniture and fixtures 1,587,383 1,585,930
---------- -----------
5,658,419 5,398,963
Less accumulated depreciation (4,412,170) (4,131,323)
---------- -----------
1,246,249 1,267,640
Land 260,216 260,216
---------- -----------
$ 1,506,465 $ 1,527,856
========== ===========
Property held for investment is
summarized as follows:
June 30,
1998 1997
---------- ----------
Buildings $ 1,641,769 $ 1,641,769
Equipment 158,771 158,171
---------- ----------
1,800,540 1,799,940
Less accumulated depreciation (1,499,110) (1,440,967)
---------- ----------
301,430 358,973
Land 529,410 529,410
---------- ----------
$ 830,840 $ 888,383
========== ==========
NOTE E - CREDIT ARRANGEMENT
The Company has banking agreements for unsecured revolving lines of
credit in the combined amount of $7,500,000 due upon demand, with
interest at the banks' prime lending rate (8.5% at June 30, 1998),
payable monthly. The banks charge usage fees at an annual rate of
.25% of the average daily unused portion of the line. At June 30,
1998, $200,000 was outstanding under the lines of credit. The Company
had letters of credit outstanding under separate arrangements of
$3,027,911 and $3,597,646 at June 30, 1998 and 1997, respectively.
Other assets with a cost of approximately $526,000 and $566,000 were
pledged against the letters of credit outstanding at June 30, 1998 and
1997, respectively.
NOTE F - STOCKHOLDERS' EQUITY
The Company has a 1985 restricted stock plan (the 1985 Plan) under
which 75,000 shares of common stock were reserved for awards to
employees. Restricted stock grants made under the 1985 Plan generally
vest ratably over a three-year period. The Company awarded 8,000
shares (fair value at date of grant of $80,250), of which 3,000
shares were subsequently forfeited, in fiscal 1997, and 3,000
shares (fair value at date of grant of $31,875) in fiscal 1998.
Compensation expense for stock grants is charged to earnings over the
restriction period and amounted to $25,115, $26,625 and $63,357 in
fiscal 1998, 1997, and 1996, respectively. The tax effect of
differences between compensation expense for financial statement and
income tax purposes is charged or credited to additional paid-in
capital.
In December 1995, the Company adopted a stock option and restricted
stock plan (the 1995 Plan), which provides for a maximum of 100,000
shares of common stock to be issued. Stock options are granted at
market value, generally vest ratably over four years, and expire ten
years from date of grant.
At June 30, 1998, 43,250 shares of common stock were available for
issuance under the 1995 Plan, and 1,750 shares were available under
the 1985 Plan.
The Company has adopted the disclosure provisions of SFAS 123. It
applies APB 25 and related interpretations in accounting for stock
options issued and, therefore, does not recognize compensation expense
for stock options granted at or greater than market value. If the
Company had elected to recognize compensation expense based upon the
fair value at the grant date for awards under this plan consistent
with the methodology prescribed by SFAS 123, the effect on net
earnings and earnings per share would have been as follows:
Year ended
-------------------------------------------
June 30, 1998 June 30, 1997 June 30, 1996
------------- ------------- -------------
Net earnings - as reported $2,449,561 $537,416 $789,721
Net earnings - pro forma 2,440,327 527,012 784,896
Basic earnings per share
As reported 1.68 .37 .55
Pro forma 1.68 .36 .54
Diluted earnings per share
As reported 1.68 .37 .55
Pro forma 1.67 .36 .54
The fair value of these options was estimated at the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions: expected volatility of 41% for fiscal
1998 and 45% for fiscal 1997 and 1996; risk-free interest rates
ranging from 4.6% to 5.6%; dividend yield of 5.6%, 3.8% and 5.4% in
fiscal 1998, 1997 and 1996, respectively; and expected lives of five
to seven years.
NOTE F - STOCKHOLDERS' EQUITY - Continued
Additional information with respect to options outstanding under the
plan is as follows:
Number of Weighted
shares average
underlying exercise
Stock options options price
------- --------
Outstanding at July 1, 1995 - $ -
Granted 34,000 9.25
------
Outstanding at June 30, 1996 34,000 9.25
Granted 2,500 13.33
Exercised (1,250) 9.25
Canceled/forfeited (3,750) 9.25
------
Outstanding at June 30, 1997 31,500 9.57
Granted 24,000 10.73
Exercised (2,500) 9.25
------ -----
Outstanding at June 30, 1998 53,000 10.11
====== =====
Options exercisable at June 30, 1996 -
======
Options exercisable at June 30, 1997 9,250
======
Options exercisable at June 30, 1998 16,125
======
Weighted average fair value of options granted:
Year ended June 30, 1997 $3.22
Year ended June 30, 1998 $1.39
NOTE F - STOCKHOLDERS' EQUITY - Continued
The following table summarizes information about the Plan's stock
options at June 30, 1998:
Options outstanding
Weighted average
Range of Number remaining contractual Weighted average
Exercise Prices outstanding life (in years) exercise price
--------------- ------------ --------------- --------------
$9.25 26,500 7.6 $ 9.25
$13.125-$13.375 2,500 8.5 13.325
$10.625-$11.875 24,000 9.6 10.729
------
53,000
Options exercisable
Range of Number Weighted average
Exercise Prices exercisable exercise price
---------------- ----------- --------------
$9.25 12,000 $ 9.25
$13.125-$13.375 2,125 13.360
$11.875 2,000 11.875
------
16,125
On May 21, 1997, the Board of Directors declared a dividend of one
common share purchase right for each outstanding share of common stock
to shareholders of record at the close of business on June 2, 1997.
Each Right entitles the registered holder to purchase from the Company
one common share at a price of $30.00, subject to adjustment, as more
fully set forth in a Rights Agreement dated May 22, 1997.
The Rights will become exercisable only in the event that any person
or group of affiliated persons acquires, or obtains the right to
acquire, beneficial ownership of 20% or more of the outstanding common
shares or commences a tender or exchange offer, the consummation of
which would result in the beneficial ownership by a person or group of
20% or more of such outstanding common shares. The rights are
redeemable under certain circumstances at $.01 each and expire in May
2007.
NOTE G - EMPLOYEE BENEFIT PLANS
The Company has a 401(k) Plan to provide eligible employees with a
retirement savings plan. All employees are eligible to participate in
the plan upon completing 90 days of service. Company contributions
are voluntary and at the discretion of the Board of Directors of the
Company. The Company's contribution expense for the years ended June
30, 1998, 1997 and 1996 was approximately $128,000, $119,500, and
$109,000, respectively.
NOTE H - FEDERAL INCOME TAXES
Deferred taxes are provided for the temporary differences between the
financial reporting bases and the tax bases of the Company's assets
and liabilities. The temporary differences that give rise to the
deferred tax assets or liabilities are as follows:
June 30,
1998 1997
-------- --------
Deferred tax assets
Restricted stock grants $ 10,760 $ 13,938
Inventories 22,349 28,362
Foreign subsidiaries' net
operating loss carryforwards 115,473 145,157
Accrued expenses 253,012 243,090
Other 148,983 52,701
-------- --------
550,577 483,248
Less valuation allowance - (29,710)
-------- --------
550,577 453,538
Deferred tax liabilities
Property, plant and equipment (111,762) (110,396)
Uncompleted contracts (40,258) (135,006)
Other (3,504) (3,504)
-------- --------
(155,524) (248,906)
-------- --------
Net deferred tax asset $ 395,053 $ 204,632
======== ========
Deferred tax assets and liabilities included
in the balance sheet are as follows:
June 30,
1998 1997
-------- --------
Current deferred tax asset $433,596 $269,721
Noncurrent deferred tax liability (38,543) (65,089)
-------- --------
$395,053 $204,632
======= =======
NOTE H - FEDERAL INCOME TAXES - Continued
The provision for income taxes consisted of the following:
1998 1997 1996
--------- ------- -------
Federal
Current $1,157,345 $ 41,765 $348,830
Deferred (190,421) (65,185) (4,596)
State 105,653 24,000 48,193
--------- ------- -------
$1,072,577 $ 580 $392,427
========= ======= =======
The Company had provided a valuation allowance at June 30, 1997 related
to deferred tax assets of foreign subsidiaries. These assets are
recoverable only from future income of the respective foreign
subsidiaries. Because of a recapitalization and a reorganization of
European operations, the Company concluded at June 30, 1997 that it
was more likely than not that certain of the deferred tax assets
are recoverable. The valuation allowance was reduced in 1997 and
eliminated in 1998. Utilization of foreign net operating carryforwards
reduced income tax expense by approximately $12,000, $130,000 and
$19,000 for 1998, 1997 and 1996, respectively.
The effective income tax rate varies from the statutory rate due to
the following:
As a percentage
of pretax earnings
1998 1997 1996
----- ----- -----
Income tax expense at statutory rate 34.0% 34.0% 34.0%
Increase (decrease) in income taxes
resulting from State tax, net of
federal benefits 2.0 2.9 2.8
Foreign sales corporation exclusions (6.7) (10.2) (1.5)
Change in valuation allowance (0.8) (24.3) 3.5
Other 2.0 (2.3) (5.6)
----- ----- -----
Income tax expense at effective rate 30.5% 0.1% 33.2%
===== ===== =====
NOTE I - EARNINGS PER SHARE
Summarized basic and diluted earnings per common share for each of the three years ended June 30, 1998 is as follows:
1998 1997 1996
Per Per Per
Net share Net share Net share
earnings Shares amount earnings Shares amount earnings Shares amount
--------- --------- ---- ------- -------- ---- ------- --------- ----
Basic earnings
per share $2,449,561 1,454,277 $1.68 $537,416 1,454,045 $.37 789,721 1,446,742 $.55
Effect of
dilutive
options - 2,698 - 1,034 - -
--------- --------- ------- -------- ------- ---------
Diluted earnings
per share $2,449,561 1,456,975 $1.68 $537,416 1,455,079 $.37 $789,721 1,446,742 $.55
========= ========= ==== ======= ========= === ======= ========= ===
NOTE J - INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
The Company's operations consist of a dominant industry segment, the
designing and manufacturing of specialized products for the removal of
contaminants from gases and liquids and for air pollution abatement,
principally in the United States and the United Kingdom.
Information about the Company's operations in different geographic
areas as of and for the years ended June 30, 1998, 1997 and 1996 is as
follows:
United United
States Kingdom Other Eliminations Consolidated
---------- --------- --------- ---------- ----------
1998
Net sales to unaffiliated
customers $37,357,000 $5,011,000 $1,087,000 $ - $43,455,000
Transfers between
geographic areas 1,847,000 1,000 - (1,848,000) -
---------- --------- --------- ---------- ----------
Total $39,204,000 $5,012,000 $1,087,000 $(1,848,000) $43,455,000
========== ========= ========= ========== ==========
Operating profit (loss) $ 3,630,000 $ 5,000 $ 10,000 $ - $ 3,645,000
========== ========= ========= ========== ==========
Identifiable assets $20,736,000 $3,793,000 $ 728,000 $(2,501,000) $22,756,000
========== ========= ========= ========== ==========
1997
Net sales to unaffiliated
customers $35,553,000 $4,601,000 $1,332,000 $ - $41,486,000
Transfers between
geographic areas 889,000 4,000 - (893,000) -
---------- --------- --------- ---------- ----------
Total $36,442,000 $4,605,000 $1,332,000 $ (893,000) $41,486,000
========== ========= ========= ========== ==========
Operating profit (loss) $ 549,000 $ (129,000) $ (12,000) $ (1,000) $ 407,000
========== ========= ========= ========== ==========
Identifiable assets $18,129,000 $2,790,000 $1,027,000 $(2,144,000) $19,082,000
========== ========= ========= ========== ==========
1996
Net sales to unaffiliated
customers $26,775,000 $4,764,000 $2,105,000 $ - $33,644,000
Transfers between
geographic areas 984,000 630,000 - (1,614,000) -
---------- --------- --------- ---------- ----------
Total $27,759,000 $5,394,000 $2,105,000 $(1,614,000) $33,644,000
========== ========= ========= ========== ==========
Operating profit (loss) $ 1,119,000 $ 145,000 $ (39,000) $ (21,000) $ 1,204,000
========== ========= ========= ========== ==========
Identifiable assets $17,244,000 $2,112,000 $1,599,000 $(2,764,000) $18,191,000
========== ========= ========= ========== ==========
Transfers between the geographic areas primarily represent intercompany
export sales and are accounted for based on established sales prices
between the related companies. In computing operating profit (loss),
no allocations of general corporate expenses have been made.
Identifiable assets of geographic areas are those assets related to
the Company's operations in each area. United States assets consist
of all other operating assets of the Company.
Export sales account for a significant portion of the Company's
revenues and are summarized by geographic area as follows:
1998 1997 1996
---------- ---------- -----------
North and South America
(excluding U.S.A.) $ 9,923,000 $ 5,899,000 $ 5,864,000
Europe 5,972,000 5,213,000 6,627,000
Asia 7,313,000 11,023,000 5,188,000
Other 4,066,000 3,470,000 1,756,000
---------- ---------- -----------
$27,274,000 $25,605,000 $19,435,000
========== ========== ==========
Report of Independent Certified Public Accountants on Schedules
Board of Directors
Peerless Mfg. Co.
In connection with our audit of the consolidated financial statements of
Peerless Mfg. Co. and Subsidiaries referred to in our report dated
September 2, 1998, which is included in Part II of this form, we have
also audited Schedule II for each of the three years in the period ended
June 30, 1998. In our opinion, this schedule presents fairly, in all
material respects, the information required to be set forth therein.
GRANT THORNTON LLP
Dallas, Texas
September 2, 1998
Peerless Mfg. Co. and Subsidiaries
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
June 30,
Balance at Additions
beginning of Charged to Charged to Balance at
Description period expenses other accounts(1) Deductions(2) end of period
1998
Allowance for uncollectible
accounts $312,450 $621,560 $ - $ 127,810 (2) $806,200
======= ======= ======= ======== =======
Deferred tax valuation allowance $ 29,710 $ - $ - $ 29,710 (3) $ -
======= ======= ======= ======== =======
1997
Allowance for uncollectible
accounts $100,000 $249,612 $ - $ 37,162 (2) $312,450
======= ======= ======= ======== =======
Deferred tax valuation allowance $160,405 $ - $ - $ 130,695 (3) $ 29,710
======= ======= ======= ======== =======
1996
Allowance for uncollectible
accounts $ 99,082 $ 44,307 $ 852 $ 44,241 (2) $100,000
======= ======= ======= ======== =======
Deferred tax valuation allowance $121,091 $ 39,314 $ - $ - $160,405
======= ======= ======= ======== =======
(1) Collections on accounts previously written off.
(2) Write offs.
(3) Utilization and/or revaluation of deferred tax assets.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
For information concerning the Company's Directors, reference is
made to the information set forth under the caption "Election of
Directors" and "Common Stock Ownership of Management and Certain
Beneficial Owners" in the Company's Proxy Statement for the Annual
Meeting of Shareholders to be held November 25, 1998 (the "Proxy
Statement"), which information is incorporated herein by reference.
For information concerning the Company's Executive Officers, see
Item 1, "Business - Executive Officers of the Company."
ITEM 11. EXECUTIVE COMPENSATION.
For information concerning the Company's executive compensation,
reference is made to the information set forth under the caption
"Executive Compensation" in the Proxy Statement, which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
For information concerning the security ownership of certain
beneficial owners and management, reference is made to the information
set forth under the caption "Election of Directors" and "Common Stock
Ownership of Management and Certain Beneficial Owners" in the Proxy
Statement, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
For information concerning certain relationships and related
transactions, reference is made to the information set forth under the
caption "Compensation Committee Interlocks and Insider Participation" in
the Proxy Statement, which information is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM
8-K.
(a) 1. All Financial Statements: see Item 8 "Financial Statements
and Supplementary Data" in Part II of this Report.
2. Financial Statement Schedule and Exhibits filed in Part IV of
this report are as follows:
SCHEDULES*:
II - Valuation and Qualifying Account - Years Ended June
30, 1998, 1997 and 1996
*All other schedules are omitted because the required
information is inapplicable or the information is presented in
the financial statements and the related notes.
(b) Reports on Form 8-K: None
(c) Exhibits: see Index to Exhibits, pages 41-42.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
(Registrant)
By: /s/ Sherrill Stone
Sherrill Stone, Chairman,
President, and Chief Executive Officer
Date: September 28, 1998.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
Date:
September 28, 1998 /s/ Sherrill Stone
Sherrill Stone, Chairman of the
Board, President, Director and
Chief Executive Officer
September 28, 1998 /s/ Paul W. Willey
Paul W. Willey,
Principal Financial Officer,
September 28, 1998 /s/ Kent J. Van Houten
Kent J. Van Houten,
Principal Accounting Officer
September 28, 1998 /s/ Donald A. Sillers, Jr.
Donald A. Sillers, Jr., Director
September 28, 1998 /s/ J. V. Mariner, Jr.
J. V. Mariner, Jr. Director
September 28, 1998 /s/ Bernard S. Lee
Bernard S. Lee, Director
September 28, 1998 /s/ D. D. Battershell
D. D. Battershell, Director
INDEX TO EXHIBITS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
FINANCIAL STATEMENT SCHEDULES:
II Valuation and Qualifying Accounts - Years Ended
June 30, 1998, 1997 and 1996 (included in Item 8)
EXHIBITS:
3(a) The Company's Articles of Incorporation, as amended
to date (filed as Exhibit 3(a) to the Company's
Quarterly Report on Form 10-Q, dated December 31,
1997, and incorporated herein by reference).
3(b) The Company's Bylaws, as amended to date (filed as
Exhibit 3(b) to the Company's Annual Report on Form
10-K, dated June 30, 1997, and incorporated herein
by reference.)
10(a)Incentive Compensation Plan effective January 1,
1981, as amended January 23, 1991 (filed as Exhibit
10(b) to the Company's Annual Report on Form 10-K,
dated June 30, 1991, and incorporated herein by
reference).
10(b)1985 Restricted Stock Plan for Peerless Mfg. Co.,
effective December 13, 1985 (filed as Exhibit 10(b)
to the Company's Annual Report on Form 10-K, dated
June 30, 1993, and incorporated herein by
reference).
10(c)1991 Restricted Stock Plan for Non-Employee
Directors of Peerless Mfg. Co., adopted subject to
shareholder approval May 24, 1991, and approved by
shareholders November 20, 1991 (filed as Exhibit
10(e) to the Company's Annual Report on Form 10-K
dated June 30, 1991, and incorporated herein by
reference).
10(d)Employment Agreement, dated as of April 29, 1994,
by and between the Company and Sherrill Stone
(filed as Exhibit 10(d) to the Company's Annual
Report on Form 10-K for the Fiscal year ended June
30, 1994, and incorporated herein by reference).
10(e)Agreement, dated as of April 29, 1994 by and
between Company and Sherrill Stone (filed as
Exhibit 10(e) to the Company's Annual Report on
Form 10-K dated June 30, 1994 and incorporated
herein by reference).
10(f)Sixth Amended and Restated Loan Agreement, dated as
of January 12, 1998 between NationsBank of Texas,
N.A. and the Company (filed as Exhibit 10(f) to the
Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1997 and incorporated
herein by reference).
10(g)Amended and Restated Loan Agreement, dated as of
January 12, 1998 by and between Texas Commerce Bank
National Association and the Company (filed as
Exhibit 10(g) to the Company's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1997
and incorporated herein by reference).
10(h)Peerless Mfg. Co. 1995 Stock Option and Restricted
Stock Plan, adopted by the Board of Directors
December 31, 1995 and approved by the Shareholders
of the Company November 21, 1996 (filed as Exhibit
10(h) to the Company's Annual Report on Form 10-K
for the year ended June 30, 1997 and incorporated
herein by reference).
10(i) Rights Agreement between Peerless Mfg. Co. and
ChaseMellon Shareholder Services, L.L.C., adopted
by the Board of Directors May 21, 1997 (filed as
Exhibit 1 to the Company's Registration Statement
on Form 8-A (File No. 0-05214) and incorporated
herein by reference).
21 Subsidiaries of the Company (filed as Exhibit 21 to
the Company's Annual Report on Form 10-K for the
year ended June 30, 1997 and incorporated herein by
reference).
27 Financial Data Schedule.*
______________
* Filed herewith