-----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, QVaMoXsHFWnBtDusYX7BN22XRH5IOXc1fXbshiEz4c3chmrpKKKr/vTn91YdFP8R C4AoZiV8HfNsc3rm4MasbA== 0000926236-99-000094.txt : 19991227 0000926236-99-000094.hdr.sgml : 19991227 ACCESSION NUMBER: 0000926236-99-000094 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990928 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-K405 SEC ACT: SEC FILE NUMBER: 000-05214 FILM NUMBER: 99718746 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-K405 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, 1999 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 21, 1999, Peerless Mfg. Co. had 1,452,492 shares of common stock, $1.00 par value outstanding. The aggregate market value of the registrant's common stock on September 21, 1999 (based upon the closing price of these shares on Nasdaq) held by non-affiliates was approximately $13,200,000. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for Annual Meeting of Shareholders to be held on or about November 18, 1999 (to be filed) are incorporated by reference into Part III of this Form 10-K. TABLE OF CONTENTS Item Page ---- ---- PART I 1 Business..............................................1 2 Properties............................................5 3 Legal Proceedings.....................................5 4 Submission of Matters to a Vote of Security Holders ................................5 PART II 5 Market for Registrant's Common Equity and Related Stockholder Matters ........................5 6 Selected Financial Data...............................6 7 Management's Discussion and Analysis of Financial Condition and Results of Operations ................6 8 Financial Statements and Supplementary Data..........12 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ............43 PART III 10 Directors and Executive Officers of the Registrant ....................................43 11 Executive Compensation...............................43 12 Security Ownership of Certain Beneficial Owners and Management .............................43 13 Certain Relationships and Related Transactions ......................................43 PART IV 14 Exhibits, Financial Statement Schedule, and Reports on Form 8-K ...........................44 PART I ITEM 1. BUSINESS. Peerless Mfg. Co. (the "Registrant", "Peerless" or "we," "us" or "our") was organized in 1933 as a proprietorship and was incorporated as a Texas corporation in 1946. We have wholly-owned subsidiaries in the Netherlands, the United Kingdom and Barbados. Products and Operations We are 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. We package 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. We also design, engineer, manufacture and sell 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. Our 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, we sell gas odorization equipment, quick-opening closures, parts for our products and other miscellaneous items and render certain engineering services. Although we manufacture and stock a limited number of items of equipment for immediate delivery, the vast majority of our products are designed and constructed for specific customer requirements or specifications. In certain cases, our products and components are designed by us but produced by subcontractors under our supervision. We market our products worldwide through manufacturers' representatives, who sell on a commission basis under the general direction of an officer of Peerless. We also sell 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. We are not dependent upon any single customer or group of customers. The custom-designed nature of our business and the nature of the products cause year to year variance in our major customers. No customer accounted for 10% or more of our revenues during fiscal years 1999 and 1998. During fiscal 1997, one customer accounted for 12% of revenues. Sales to international customers have been a part of our business for more than forty years. During fiscal 1999, foreign sales amounted to $18 million, or 44% of total consolidated revenue, compared to sales of $27 million, or 63% of total consolidated revenue, during fiscal 1998. Sales in Asia were approximately $2 million, or 5% of net sales in fiscal 1999, compared to approximately $7 million or 17% of net sales in fiscal 1998. The custom-designed and project-specific nature of our products enables us to sell to any geographic region. Our 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 us and the U.S. and/or foreign governments may impose regulatory burdens upon exports and imports of our products. We also incur greater expenses on foreign sales because of added selling expenses incurred in other countries. To date, we have not incurred substantial expenses related to these risks. We have reduced our 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, we generally require progress payments or an appropriate guarantee of payment, such as a letter of credit from a banking institution. We attempt to minimize the risks of fluctuating currency exchange rates by requiring payment in U.S. dollars (or in the functional currency of our foreign subsidiaries) for most of our foreign product sales. We hedge against substantial exposures that we may have to currency fluctuations. Backlog Our backlog of incomplete orders at June 30, 1999 was approximately $29 million compared to approximately $22 million at June 30, 1998. Backlog has been calculated under our 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 us, 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 our markets. We believe that we strongly compete in these areas and have become a world leader in sales of custom-built separators, filters and pulsation dampeners. Patents, Licenses and Product Development We consider our company to be a world leader in the technology required to design and apply our high efficiency vapor/liquid separation and filtration equipment. We believe that we are 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. Our expenditures for new product development and improvements were approximately $667,000 in fiscal 1999 and $580,000 in fiscal 1998. We expect product development expenditures to be approximately $650,000 in fiscal 2000. We have existing patents and patent applications pending on some of our products and processes that are important to our business. These include patents on vane designs, separator profiles, marine/separator filtration systems and pressure testing capabilities. In addition, most of our products are proprietary and are sold utilizing our proven technology and knowledge of the applications. However, other companies are marketing competitive products that may not infringe upon our patents and there can be no assurance that other companies won't sell products similar to our proprietary products. In 1992, we shifted our emphasis from licensing our foreign sales to a strategy of focusing on direct international marketing through our Singapore sales branch and European subsidiaries, Peerless Europe B.V. and Peerless Europe Ltd. We also derive 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. No royalty or engineering fees were received in fiscal 1999. Employees At June 30, 1999, Peerless and its subsidiaries had approximately 190 employees. Raw Materials We purchase raw materials and component parts essential to our business from established sources and have not experienced any unusual problems in purchasing required materials and parts. We believe that raw materials and component parts will be available in sufficient quantities to meet anticipated demand. However, there can be no assurance that we will continue to find our raw materials in quantities or at prices satisfactory to us. Environmental Regulation We do not believe that our 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 our competitive position. Our 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 our component parts for selective catalytic reduction equipment. Market Risk Although we generally require payment in U.S. dollars on our international projects, we sometimes conduct business in foreign currencies and are subject to foreign currency exchange rate risk on cash flows related to such transactions. We make 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 Our executive officers on September 16, 1999 are listed below. Each of these officers has been employed by Peerless for at least five years in the same position or a similar capacity, except as noted: Name and Age Position ------------ -------- Sherrill Stone, 62 Chairman of the Board, President and Chief Executive Officer (1) G. D. Cornwell, 55 Sr. Vice President (2) Paul W. Willey, 61 Chief Financial Officer, Treasurer and Secretary (3) Ray Muzyka, 61 Vice President (4) ____________________ (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 on March 31, 1993. (2) Mr. Cornwell is responsible for purchasing, estimating, and quality control operations. (3) Mr. Willey is responsible for financial administration and has been employed by us since March 25, 1998. He was Treasurer of Dresser Industries, Inc. from 1983 to 1997. (4) Mr. Muzyka is responsible for the pressure product vessel sales effort in Canada and the United States. ITEM 2. PROPERTIES. We own our 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 35,000 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 is leased to a third party. We own approximately 21,600 additional square feet of manufacturing facilities in Denton, Texas, approximately 29,000 square feet of manufacturing facilities in Carrollton, Texas, and approximately 80,000 square feet of manufacturing facilities in Dallas, Texas. We believe that our office and manufacturing facilities are adequate and suitable for our 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. We are involved in various legal proceedings arising in the ordinary course of business that are not material to our 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. Our Common Stock is listed on the Nasdaq Stock Market's National Market under the symbol PMFG. Our Board of Directors reviews our financial position 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 our Common Stock as reported by Nasdaq Stock Market's National Market and cash dividends paid per share. Quarter Ended: Closing Bid Prices Cash Dividends High Low Per Share ------ ------ ----- 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 Fiscal 1999 September 30, 1998 $15-3/8 $10 $.125 December 31, 1998 13 9 .125 March 31, 1999 11-1/4 9-5/16 .125 June 30, 1999 11-1/8 8-3/4 .125 There were 198 record holders of our Common Stock on August 13, 1999. We estimate 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 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- Net sales $40,568,443 $43,455,136 $41,486,492 $33,643,998 $32,089,132 Gross profit 14,271,719 15,239,806 11,525,289 10,213,237 10,583,128 Earnings before income taxes 2,845,570 3,522,138 537,996 1,182,148 1,908,661 Net earnings $ 1,849,570 $ 2,449,561 $ 537,416 $ 789,721 $ 1,226,246 ========== ========== ========== ========== ========== Earnings per common share- basic and diluted $1.27 $1.68 $.37 $.55 $.85 ==== ==== === === === Total assets $23,478,772 $23,756,221 $19,046,720 $18,191,426 $17,156,055 ========== ========== ========== ========== ========== 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 We believe that we maintain 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 our position as a market leader and to promote planned internal growth and profitability. We have historically financed, and continue 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 our consolidated balance sheet. In addition to retained earnings, we have used short term bank credit lines of $7,000,000 to supplement working capital. We believe that these sources will be sufficient to satisfy our needs in the foreseeable future. During fiscal 1999 and fiscal 1998, it was necessary for us to use our short-term bank credit lines in order to finance a temporary shortfall in working capital. At June 30, 1999, we had no debt outstanding under our credit lines. We pay an annual commitment fee of 0.25% of the unused balance under the credit lines. We have no material commitments for capital expenditures other than replacing equipment and maintaining our existing plants and equipment. During fiscal 1999 we purchased fixed assets totaling $233,000, consisting primarily of replacement manufacturing equipment, computer hardware and software, office equipment and building improvements. This is compared to purchases of $262,000 during fiscal 1998. Working capital was $11,500,000 at June 30, 1999, up from $10,500,000 at June 30, 1998, an increase of 9.5%. This increase was due primarily to increased cost and earnings in excess of billings in fiscal 1999 compared to fiscal 1998. The following table sets forth certain information related to working capital for our last three fiscal years: 1999 1998 1997 ---- ---- ---- Average working capital as a percentage of net sales 25.9% 20.5% 20.8% Annual accounts receivable turnover(1) 3.8 5.0 4.3 Annual inventory turnover(2) 6.2 6.3 6.6 (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 increased as a function of increased working capital of approximately $1,000,000 and a decreased sales volume of approximately $2,900,000 reported in fiscal 1999 over fiscal 1998. The decrease in annual accounts receivable turnover was caused primarily by international customers who slowed payments to us. We are intensifying our efforts to improve collection. Average inventory turnover has stabilized at 6.2 in fiscal 1999. Peerless management continues to monitor and streamline our 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 our last three fiscal years, as well as our effective income tax rate for the same periods: 1999 1998 1997 ---- ---- ---- Gross profit margin 35.2% 35.1% 27.8% Operating expenses 27.8% 26.7% 26.8% Earnings before income taxes 7.0% 8.1% 1.3% Effective income tax rate 35.0% 30.5% 0.1% Inflation did not have a material impact on our operating results during the last three fiscal years. Comparison of Fiscal 1999 to Fiscal 1998 Net Sales Our net sales decreased approximately $2,887,000, or 6.6%, from $43,455,000 to $40,568.000. Domestic sales increased 39.6% from $16,181,000 in fiscal 1998 to $22,593,000 in fiscal 1999. Foreign sales decreased 34.1% from $27,274,000 in fiscal 1998 to $17,975,000 in fiscal 1999. The decrease in international sales resulted primarily from reduced sales realized in Asia. Our backlog of unfilled orders increased from $22,000,000 at June 30, 1998 to $29,000,000 at June 30, 1999. Gross Profit Margin Our gross profit margin increased slightly from 35.1% of net sales in fiscal 1998 to 35.2% of net sales in fiscal 1999. Operating Expenses Operating Expenses decreased 2.6% from $11,595,000 in fiscal 1998 to $11,293,000 in fiscal 1999. This decrease in operating expense was primarily due to decreased sales in fiscal 1999. However, operating expenses as a percent of sales increased slightly from 26.7% in fiscal 1998 compared to 27.8% in fiscal 1999. Income Tax Our effective tax rate was 35.0% in fiscal 1999 compared to 30.5% in fiscal 1998. For a further discussion of our federal income taxes, see Note H to our Financial Statements. Comparison of Fiscal 1998 to Fiscal 1997 Net Sales Our net sales increased approximately $1,969,000, or 4.7%, from $41,486,000 in fiscal 1997 to $43,455,000 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. Our backlog of unfilled orders increased from $20,000,000 at June 30, 1997 to $22,000,000 at June 30, 1998. Gross Profit Margin Our 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 profit 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 Our effective income tax rate was 30.5% in fiscal 1998 compared to 0.1% in fiscal 1997. Foreign deferred tax benefits, which offset domestic tax expenses, were not available to us in fiscal 1998 as they were in fiscal 1997. For a further discussion of our federal income taxes, see Note H to our 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 the case with most other companies using computers in their operations, we are in the process of addressing the Year 2000 Compliance issue. We began converting our information systems in 1996 through the purchase of a new information system that is already Year 2000 compliant. We have incurred and expensed approximately $150,000 through June 30, 1999 for remediation costs associated with our Year 2000 compliance activities and we expect to incur and expense an additional $20,000 in the future to remediate our information systems and to write off unamortized costs for systems replaced. In addition to these remediation costs expensed, we have also capitalized approximately $340,000 of capital expenditures through June 30, 1999 for the replacement and upgrading of purchased software and hardware for our existing systems. Our new system was implemented during the quarter ending March 31, 1999, and was successfully tested. Time sensitive schedules, purchase orders and invoices were successfully generated. We purchase computer hardware and software products from third parties for incorporation into our products and these third-party products may be affected by the Year 2000 problem. There can be no guarantee that these products or the systems of other companies on which our systems and operations rely will be timely converted or that the failure of these systems would not have an adverse effect on our systems. We have advised our customers inquiring about this issue to contact our vendors for Year 2000 information. We are in the process of consulting with such vendors in an effort to ascertain whether they have addressed the risk of Year 2000 problems in the systems we currently use. We believe that all Year 2000 remediation efforts for our businesses will be completed on time and within budget estimates. Should any critical service providers, suppliers or customers be unable to achieve timely compliance, there may be an adverse impact on our operations. Our current assessment of risks, based on the most reasonable worst case scenario, is that there will be no significant adverse impact on our operations or financial performance. We believe that if any disruption to operations does occur, it will be isolated and/or short-term in duration. Sales in Southeast Asia Demand for our products in Southeast Asia has declined as a result of the recent financial situation there. However, economic reports indicate business activity may be improving 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 our 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. We do not undertake to update any forward-looking statements. Competition. We operate in highly competitive markets worldwide. We compete with manufacturers and sellers of separators, filters and pulsation dampeners, some of which are larger than us and have greater financial resources. In addition, several smaller manufacturers also produce custom-designed equipment that is competitive with our specialized products and services. There can be no assurance that we will be able to compete successfully with current or future competitors. International Operations. We derive a significant portion of revenues from international sales, particularly in Asia. Economic conditions across international regions could materially and adversely affect us. Our operations and earnings throughout the world have been, and may in the future be, affected from time to time in varying degrees 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 us 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 us and the U.S. and/or foreign governments may impose regulatory burdens upon exports and imports of our products. We also incur greater expenses on foreign sales because of added selling expense incurred in other countries. The occurrence of any one or more of the foregoing could adversely affect our operations. Concentrations of Credit Risk. We continue to closely monitor the creditworthiness of our customers and have not experienced significant credit losses to date. A significant portion of our sales are to customers whose activities are related to the oil and gas industry, including some who are located in other countries. We generally extend credit to these customers. Our exposure to credit risk is affected by conditions within the oil and gas industry. When sales are made to smaller international enterprises, we generally require progress payments or an appropriate guarantee of payment, such as a letter of credit from a banking institution. Backlog. Our backlog represents incomplete customer orders. We have historically completed and shipped virtually all of the backlog. However, customers may cancel outstanding orders prior to their completion. In such cases, we would not recognize revenues for canceled orders. We have contractual protection to recover from our customers our costs related to canceled orders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Index to Financial Statements Page REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ........................................... 17 CONSOLIDATED BALANCE SHEETS AT JUNE 30, 1999 AND 1998....... 18 CONSOLIDATED STATEMENTS OF EARNINGS FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997..................... 20 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997.......................................... 21 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997..................... 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997............... 25 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE............................................ 36 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS............. 37 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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended June 30, 1999, in conformity with generally accepted accounting principles. GRANT THORNTON LLP Dallas, Texas September 10, 1999 Peerless Mfg. Co. and Subsidiaries CONSOLIDATED BALANCE SHEETS June 30, ASSETS 1999 1998 ---------- ---------- CURRENT ASSETS Cash and cash equivalents $ 210,866 $ 428,482 Short-term investments 273,343 268,065 Accounts receivable - principally trade, net of allowance for uncollectible accounts of $685,330 and $806,200 in 1999 and 1998, respectively 12,195,037 14,241,036 Inventories 3,730,970 2,419,845 Costs and earnings in excess of billings on uncompleted contracts 3,268,181 1,838,641 Deferred income taxes - 433,596 Other 777,635 165,631 ---------- ---------- Total current assets 20,456,032 19,795,296 PROPERTY, PLANT AND EQUIPMENT - AT COST, less accumulated depreciation 2,102,546 2,268,405 DEFERRED INCOME TAXES 59,613 - OTHER ASSETS 860,581 692,520 ---------- ---------- $23,478,772 $22,756,221 ========== ==========
Peerless Mfg. Co. and Subsidiaries CONSOLIDATED BALANCE SHEETS - CONTINUED June 30, LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998 ---------- ---------- CURRENT LIABILITIES Accounts payable - trade $ 5,626,058 $ 5,566,068 Notes payable - 200,000 Billings in excess of costs and earnings on uncompleted contracts 572,970 49,977 Commissions payable 1,204,584 1,205,391 Accrued expenses Compensation 1,188,165 1,499,443 Warranty reserve 313,773 434,588 Deferred income taxes 42,736 - Other 38,669 366,408 ---------- ---------- Total current liabilities 8,986,955 9,321,875 DEFERRED INCOME TAXES - 38,543 COMMITMENTS - - STOCKHOLDERS' EQUITY Common stock - authorized, 10,000,000 shares of $1 par value; issued and outstanding, 1,452,492 and 1,457,492 shares in 1999 and 1998, respectively 1,452,492 1,457,492 Additional paid-in capital 2,539,951 2,583,701 Unamortized value of restricted stock grants (4,719) (51,385) Accumulated other comprehensive income (loss) (103,824) (79,849) Retained earnings 10,607,917 9,485,844 ---------- ---------- 14,491,817 13,395,803 ---------- ---------- $23,478,772 $22,756,221 ========== ========== The accompanying notes are an integral part of these statements.
Peerless Mfg. Co. and Subsidiaries CONSOLIDATED STATEMENTS OF EARNINGS Year ended June 30, 1999 1998 1997 ---------- ---------- ---------- Net sales $40,568,443 $43,455,136 $41,486,492 Cost of goods sold 26,296,724 28,215,330 29,961,203 ---------- ---------- ---------- Gross profit 14,271,719 15,239,806 11,525,289 Operating expenses Marketing and engineering 8,630,962 8,932,180 9,129,347 General and administrative 2,662,289 2,662,725 1,988,618 ---------- ---------- ---------- 11,293,251 11,594,905 11,117,965 ---------- ---------- ---------- Operating profit 2,978,468 3,644,901 407,324 Other income (expense) Interest income 58,987 34,055 24,687 Interest expense (23,696) (27,430) (55,475) Foreign exchange gains (losses) (118,866) (90,050) 103,583 Other, net (49,323) (39,338) 57,877 ---------- ---------- ---------- (132,898) (122,763) 130,672 ---------- ---------- ---------- Earnings before income taxes 2,845,570 3,522,138 537,996 Income tax expense (benefit) Current 617,824 1,262,998 65,766 Deferred 378,176 (190,421) (65,186) ---------- ---------- ---------- 996,000 1,072,577 580 ---------- ---------- ---------- NET EARNINGS $ 1,849,570 $ 2,449,561 $ 537,416 ========== ========== ========== Earnings per common share - basic and diluted $1.27 $1.68 $.37 ==== ==== === The accompanying notes are an integral part of these statements.
Peerless Mfg. Co. and Subsidiaries CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY Unamortized Accumulated Additional value of other Common paid-in restricted comprehensive Retained stock capital stock grants income (loss) earnings Total --------- --------- ------- --------- ----------- ---------- Balances as of July 1, 1996 1,446,742 $2,489,879 $(33,750) $ 23,842 $ 7,953,143 $11,879,856 Comprehensive income Net earnings - - - - 537,416 537,416 Foreign currency translation adjustment - - - (117,786) - (117,786) Total comprehensive income 419,630 Issuance of 8,000 shares of common stock 8,000 72,250 (80,250) - - - Forfeiture of 4,000 shares of common stock (4,000) (38,750) 42,750 - - - Stock options exercised 1,250 10,312 - - - 11,562 Cash dividends paid ($.50 per share) - - - - (727,149) (727,149) Cash dividends declared ($.125 per share) - - - - (182,624) (182,624) Amortization of restricted stock grants - - 26,625 - - 26,625 Income tax benefit related to restricted stock plans - 1,530 - - - 1,530 --------- --------- ------- --------- ----------- ---------- Balances as of June 30, 1997 1,451,992 2,535,221 (44,625) (93,944) 7,580,786 11,429,430 Comprehensive income Net earnings - - - - 2,449,561 2,449,561 Foreign currency translation adjustment - - - 14,095 - 14,095 ---------- Total comprehensive income 2,463,656 Issuance of 3,000 shares of common stock 3,000 28,875 (31,875) - - - Stock options exercised 2,500 20,625 - - - 23,125 Cash dividends ($.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
Peerless Mfg. Co. and Subsidiaries CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - CONTINUED Unamortized Accumulated Additional value of other Common paid-in restricted comprehensive Retained stock capital stock grants income (loss) earnings Total --------- --------- ------- --------- ----------- ---------- Comprehensive income Net earnings - $ - $ - $ - $ 1,849,570 $ 1,849,570 Foreign currency translation adjustment - - - (23,975) (23,975) ---------- Total comprehensive income 1,825,595 Cash dividends paid ($.50 per share) - - - - (727,497) (727,497) Forfeiture of restricted stock grant (5,000) (43,750) 29,250 - - (19,500) Amortization of restricted stock grants - - 17,416 - - 17,416 --------- --------- ------- --------- ----------- ---------- Balance at June 30, 1999 1,452,492 $2,539,951 $ (4,719) $ (103,824) $ 10,607,917 $14,491,817 ========= ========= ======= ========= =========== ========== The accompanying notes are an integral part of this statement.
Peerless Mfg. Co. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended June 30, 1999 1998 1997 ---------- ---------- ---------- Cash flows from operating activities Net earnings $ 1,849,570 $ 2,449,561 $ 537,416 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities Depreciation and amortization 413,026 379,752 370,526 Deferred income taxes 378,176 (190,421) (65,186) Foreign exchange loss (gain) 118,886 90,050 (103,583) Other (34,160) (1,020) 1,530 Changes in operating assets and liabilities Accounts receivable 1,949,880 (4,703,504) (1,586,991) Inventories (1,301,720) 544,993 (11,463) Cost and earnings in excess of billings on uncompleted contracts (1,429,540) 33,176 (468,618) Other current assets (612,004) 132,974 (59,501) Other assets (186,421) (231,004) (40,466) Accounts payable 59,008 837,205 791,364 Billings in excess of costs and earnings on uncompleted contracts 522,993 (353,174) 363,257 Commissions payable (807) 425,917 212,708 Accrued expenses (788,479) 985,395 22,497 ---------- ---------- ---------- (911,162) (2,049,661) (573,926) ---------- ---------- ---------- Net cash provided by (used in) operating activities 938,408 399,900 (36,510) Cash flows from investing activities Net purchases of short-term investments (5,278) (9,058) (12,348) Proceeds from sale of property and equipment 30,850 - - Purchase of property and equipment (233,323) (262,362) (596,395) ---------- ---------- ---------- Net cash used in investing activities (207,751) (271,420) (608,743)
Peerless Mfg. Co. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED Year ended June 30, 1999 1998 1997 ---------- ---------- ---------- Cash flows from financing activities Sale of common stock $ - $ 23,125 $ 11,562 Advances on short-term borrowings - 200,000 - Net payments on short-term borrowings (200,000) - - Dividends paid (727,497) (727,127) (727,149) ---------- ---------- ---------- Net cash used in financing activities (927,497) (504,002) (715,587) Effect of exchange rate changes on cash and cash equivalents (20,776) 31,451 51,064 ---------- ---------- ---------- Net decrease in cash and cash equivalents (217,616) (344,071) (1,309,776) Cash and cash equivalents at beginning of year 428,482 772,553 2,082,329 ---------- ---------- ---------- Cash and cash equivalents at end of year $ 210,866 $ 428,482 $ 772,553 ========== ========== ========== Supplemental information on cash flows: Interest paid $ 21,170 $ 29,956 $ 55,475 Income taxes paid $ 900,814 $ 957,860 $ 379,347 The accompanying notes are an integral part of these statements.
Peerless Mfg. Co. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1999, 1998 and 1997 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 engineering work performed, materials purchased and manufacturing 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 ------------------------- 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. 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 A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Reclassification ---------------- Certain reclassifications of prior year amounts have been made to conform to the current year presentation. 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. No single customer accounted for more than 10% of revenues in the years ended June 30, 1999 or 1998. Sales to one customer accounted for approximately 12.3% of revenues for the year ended June 30, 1997. NOTE C - INVENTORIES Principal components of inventories are as follows: June 30, 1999 1998 ---------- ---------- Raw materials $ 961,450 $ 973,906 Work in process 2,522,182 1,114,524 Finished goods 247,338 331,415 ---------- ---------- $ 3,730,970 $ 2,419,845 ========== ========== At June 30, 1999 and 1998, progress payments of $1,237,771 and $100,472, respectively, have been offset against inventories and costs of uncompleted contracts. NOTE D - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is summarized as follows: June 30, 1999 1998 ---------- ---------- Buildings $ 3,096,993 $ 3,029,175 Equipment 2,670,878 2,842,401 Furniture and fixtures 1,815,592 1,587,383 ---------- ---------- 7,583,463 7,458,959 Less accumulated depreciation (6,201,643) (5,911,280) ---------- ---------- 1,381,820 1,547,679 Land 720,726 720,726 ---------- ---------- $ 2,102,546 $ 2,268,405 ========== ========== NOTE E - CREDIT ARRANGEMENT The Company has banking agreements for unsecured revolving lines of credit in the combined amount of $7,000,000 due upon demand, with interest at the banks' prime lending rate (7.75% at June 30, 1999), payable monthly. The banks charge usage fees at an annual rate of .25% of the average daily unused portion of the line. No amounts were borrowed under these arrangements at June 30, 1999. At June 30, 1998, $200,000 was outstanding under the lines of credit. The Company had letters of credit outstanding under separate arrangements of $3,246,567 and $3,027,911 at June 30, 1999 and 1998, respectively. Other assets with a cost of approximately $635,000 and $526,000 were pledged against the letters of credit outstanding at June 30, 1999 and 1998, 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) in fiscal 1997, of which 5,000 and 3,000 shares were subsequently forfeited, in fiscal 1999 and 1997, respectively, and awarded 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 $17,416, $25,115, and $26,625 in fiscal 1999, 1998, and 1997, 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. NOTE F - STOCKHOLDERS' EQUITY - Continued 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, 1999, 36,250 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, 1999 1998 1997 --------- --------- ------- Net earnings - as reported $1,849,570 $2,449,561 $537,416 Net earnings - pro forma 1,813,141 2,440,327 527,012 Basic earnings per share As reported 1.27 1.68 .37 Pro forma 1.25 1.68 .36 Diluted earnings per share As reported 1.27 1.68 .37 Pro forma 1.24 1.67 .36 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 43% for fiscal 1999, 41% for fiscal 1998 and 45% for fiscal 1997; risk-free interest rates ranging from 4.6% to 5.6%; dividend yield of 3.7%, 5.6%, and 3.8% in fiscal 1999, 1998 and 1997, 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, 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 Granted 7,000 13.64 ------ Outstanding at June 30, 1999 60,000 10.52 ====== Options exercisable at June 30, 1997 9,250 10.14 ====== Options exercisable at June 30, 1998 16,125 10.12 ====== Options exercisable at June 30, 1999 31,000 10.15 ====== Weighted average fair value of options granted: Year ended June 30, 1997 $3.22 Year ended June 30, 1998 $3.24 Year ended June 30, 1999 $4.72 NOTE F - STOCKHOLDERS' EQUITY - Continued The following table summarizes information about the Plan's stock options at June 30, 1999: Options outstanding --------------------------------------------------- Weighted average Range of Number remaining contractual Weighted average Exercise Prices outstanding life (in years) exercise price --------------- ----------- --------------- -------------- $9.25 26,500 6.6 $ 9.25 $10.625-$11.875 24,000 8.6 10.73 $12.125-$14.25 9,500 8.7 13.56 ------ 60,000 ====== Options exercisable ----------------------------------- Range of Number Weighted average Exercise Prices exercisable exercise price --------------- --------------- --------------- $9.25 19,250 $ 9.25 $10.625-$11.875 7,500 10.96 $12.125-$14.25 4,250 12.77 ------ 31,000 ====== 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, 1999, 1998 and 1997 was approximately $157,000, $128,000, and $119,500, respectively. NOTE H - 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, 1999 1998 -------- -------- Deferred tax assets Restricted stock grants $ 6,083 $ 10,760 Inventories 80,597 22,349 Foreign subsidiaries' net operating loss carryforwards 232,122 115,473 Accrued expenses 164,317 253,012 Accounts receivable 108,285 148,983 Other 29,461 - -------- -------- 620,865 550,577 Deferred tax liabilities Property, plant and equipment (100,088) (111,762) Uncompleted contracts (500,396) (40,258) Other (3,504) (3,504) -------- -------- (603,988) (155,524) -------- -------- Net deferred tax asset $ 16,877 $ 395,053 ======== ======== Deferred tax assets and liabilities included in the balance sheet are as follows: June 30, 1999 1998 -------- -------- Current deferred tax asset (liability) $ (42,736) $ 433,596 Noncurrent deferred tax asset (liability) 59,613 (38,543) -------- -------- $ 16,877 $ 395,053 ======== ======== NOTE H - INCOME TAXES - Continued The provision for income taxes consisted of the following: Years ended June 30, 1999 1998 1997 ------- --------- -------- Federal Current $552,824 $1,157,345 $ 41,765 Deferred 378,176 (190,421) (65,185) State 65,000 105,653 24,000 ------- --------- -------- $996,000 $1,072,577 $ 580 ======= ========= ======== 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 and $130,000 for 1998 and 1997, respectively. The effective income tax rate varies from the statutory rate due to the following: As a percentage of pretax earnings 1999 1998 1997 ----- ----- ----- 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 1.5 2.0 2.9 Foreign sales corporation exclusions (2.9) (6.7) (10.2) Change in valuation allowance - (0.8) (24.3) Other 2.4 2.0 (2.3) ----- ----- ----- Income tax expense at effective rate 35.0% 30.5% 0.1% ===== ===== ===== NOTE I - EARNINGS PER SHARE Summarized basic and diluted earnings per common share for each of the three years ended June 30, 1999 is as follows: 1999 1998 1997 ---------------------------- --------------------------- ------------------------- Per Per Per Net share Net share Net share earnings Shares amount earnings Shares amount earnings Shares amount --------- --------- ---- --------- --------- ---- ------- --------- --- Basic earnings per share $1,849,570 1,455,396 $1.27 $2,449,561 1,454,277 $1.68 $537,416 1,454,045 $.37 Effect of dilutive options - 4,751 - - 2,698 - - 1,034 - --------- --------- ---- --------- --------- ---- ------- --------- --- Diluted earnings per share $1,849,570 1,460,147 $1.27 $2,449,561 1,456,975 $1.68 $537,416 1,455,079 $.37 ========= ========= ==== ========= ========= ==== ======= ========= ===
For fiscal 1999, 1998 and 1997, stock options covering 11,500, 2,500, and 2,500 shares, respectively were excluded in the computations of diluted earnings per share because their effect was antidilutive. NOTE J - INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION The Company identifies reportable segments based on management responsibility within the corporate structure. The Company has two reportable industry segments: gas/liquid filtration and catalytic reduction systems. The gas/liquid filtration segment produces various types of separators and filters used for removing liquids and solids from gases and air. The segment also provides engineering design and services, pulsation dampeners, natural gas odorizers, quick-opening closures and parts for its products. The catalytic reduction systems segment produces selective catalytic reduction systems used for air pollution abatement to reduce nitrogen oxide emissions. NOTE J - INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION - Continued Segment profit and loss is based on revenue less direct costs of the segment before allocation of general, administrative, research and development costs. There were no sales or transfers between segments. Segment information and a reconciliation to operating profit for the years ended June 30, 1999, 1998 and 1997 are presented below. Note that the Company does not allocate assets, expenditures for assets or depreciation expense on a segment basis for internal management reporting, and therefore such information is not presented. Catalytic Unallocated Gas/liquid reduction corporate Filtration Systems overhead Consolidated ---------- ---------- ---------- ---------- 1999 Revenues from customers $34,849,000 $ 5,719,000 $ - $40,568,000 Segment profit (loss) 4,891,000 1,538,000 (3,451,000) 2,978,000 1998 Revenues from customers 39,234,000 4,221,000 - 43,455,000 Segment profit (loss) 6,708,000 84,000 (3,147,000) 3,645,000 1997 Revenues from customers 31,854,000 9,632,000 - 41,486,000 Segment profit (loss) 4,207,000 (1,038,000) (2,762,000) 407,000 The Company attributes revenues from external customers to individual geographic areas based on the country where the sale is originated. Information about the Company's operations in different geographic areas as of and for the years ended June 30, 1999, 1998 and 1997 is as follows: United States Europe Eliminations Consolidated ---------- --------- ---------- ---------- 1999 Net sales to unaffiliated customers $34,707,000 $5,861,000 $ - $40,568,000 Transfers between geographic areas 726,000 - (726,000) - ---------- --------- ---------- ---------- Total $35,433,000 $5,861,000 $ (726,000) $40,568,000 ========== ========= ========== ========== Identifiable assets $21,723,000 $4,285,000 $(2,529,000) $23,479,000 ========== ========= ========== ==========
NOTE J - INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION - Continued United States Europe Eliminations Consolidated ---------- --------- ---------- ---------- 1998 Net sales to unaffiliated customers $37,357,000 $6,098,000 $ - $43,455,000 Transfers between geographic areas 1,847,000 1,000 (1,848,000) - ---------- --------- ---------- ---------- Total $39,204,000 $6,099,000 $(1,848,000) $43,455,000 ========== ========= ========== ========== Identifiable assets $20,736,000 $4,521,000 $(2,501,000) $22,756,000 ========== ========= ========== ========== United States Europe Eliminations Consolidated ---------- --------- ---------- ---------- 1997 Net sales to unaffiliated customers $35,553,000 $5,933,000 $ - $41,486,000 Transfers between geographic areas 889,000 4,000 (893,000) - ---------- --------- ---------- ---------- Total $36,442,000 $5,937,000 $ (893,000) $41,486,000 ========== ========= ========== ========== Identifiable assets $17,374,000 $3,817,000 $(2,144,000) $19,047,000 ========== ========= ========== ==========
Transfers between the geographic areas primarily represent intercompany export sales and are accounted for based on established sales prices between the related companies. 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. 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 10, 1999, 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, 1999. 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 10, 1999 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 ----------- ------- -------- -------------- ---------- ------------- 1999 Allowance for uncollectible accounts $806,200 $184,471 $ - $305,341 $685,330 ======= ======= ===== ======= ======= 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 ======= ======= ===== ======= ======= (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 our Directors, we refer to the information set forth under the caption "Election of Directors" and "Common Stock Ownership of Management and Certain Beneficial Owners" in our Proxy Statement for the Annual Meeting of Shareholders to be held November 18, 1999 (the "Proxy Statement"), which information is incorporated herein by reference. For information concerning our Executive Officers, see Item 1, "Business - Executive Officers." ITEM 11. EXECUTIVE COMPENSATION. For information concerning our executive compensation, we refer 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, 1999, 1998 and 1997 * 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, 1999. 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, 1999 /s/ Sherrill Stone Sherrill Stone, Chairman of the Board, President, Director and Chief Executive Officer September 28, 1999 /s/ Paul W. Willey Paul W. Willey, Principal Financial Officer, September 28, 1999 /s/ Kent J. Van Houten Kent J. Van Houten, Principal Accounting Officer Donald A. Sillers, Jr., Director September 28, 1999 /s/ J. V. Mariner, Jr. J. V. Mariner, Jr. Director September 28, 1999 /s/ Bernard S. Lee Bernard S. Lee, Director September 28, 1999 /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, 1999, 1998 and 1997 (included in Item 8) EXHIBITS: 3(a) Our Articles of Incorporation, as amended to date (filed as Exhibit 3(a) our Quarterly Report on Form 10-Q, dated December 31, 1997, and incorporated herein by reference). 3(b) Our Bylaws, as amended to date (filed as Exhibit 3(b) to our 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 our 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 our 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 our 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 Peerless and Sherrill Stone (filed as Exhibit 10(d) to our 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 Peerless and Sherrill Stone (filed as Exhibit 10(e) to our Annual Report on Form 10-K dated June 30, 1994 and incorporated herein by reference). 10(f) Seventh Amended and Restated Loan Agreement, dated as of December 12, 1998, between NationsBank, N.A. and Peerless (filed as Exhibit 10(f) to our Quarterly Report on Form 10-Q for the quarter ended December 31, 1998 and incorporated herein by reference). 10(g) Amended and Restated Loan Agreement, dated as of December 12, 1998, by and between Chase Bank of Texas and us (filed as Exhibit 10(g) to our Quarterly Report on Form 10-Q for the quarter ended December 31, 1998 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 Peerless November 21, 1996 (filed as Exhibit 10(h) to our 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 our Registration Statement on Form 8-A (File No. 0- 05214) and incorporated herein by reference). 21 Subsidiaries of Peerless* 27 Financial Data Schedule.* ______________ * Filed herewith EX-21 2 EXHIBIT 21 Subsidiaries of Peerless Company Domicile Ownership Peerless Europe B.V. Netherlands 100% Peerless Europe Ltd. The United Kingdom 100% Peerless (Barbados) Barbados 100% Inc. EX-27 3
5 1 12-MOS JUN-30-1999 JUN-30-1999 210,866 273,343 12,880,367 685,330 3,730,970 20,456,032 8,304,190 6,201,644 23,478,772 8,986,955 0 0 0 1,452,492 13,039,325 23,478,772 40,568,443 40,568,443 26,296,724 26,296,724 8,630,962 184,471 23,696 2,845,570 996,000 1,849,570 0 0 0 1,849,570 1.27 1.27
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