-----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, T31rxSstbP6CVCGBG1+Hfac8lXzdNHcegiJ4mxFM5jJpST9LvprNwtHMMdzmHrEK cAUUBd7XpQI2nT3sZPgftA== 0000926236-98-000088.txt : 19980929 0000926236-98-000088.hdr.sgml : 19980929 ACCESSION NUMBER: 0000926236-98-000088 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980928 SROS: NASD 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-K SEC ACT: SEC FILE NUMBER: 000-05214 FILM NUMBER: 98716398 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-K 1 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 EX-27 2
5 YEAR JUN-30-1998 JUN-30-1998 428,482 268,065 15,047,236 806,200 2,419,845 19,795,296 8,248,585 5,911,280 22,756,221 9,321,875 0 0 0 1,457,492 11,938,311 22,756,221 43,455,136 43,455,136 28,215,330 28,215,330 8,932,180 158,984 27,430 3,522,138 1,072,577 2,449,561 0 0 0 2,449,561 1.68 1.68
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