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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
<TABLE>
Peerless Mfg. Co. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
June 30,
ASSETS 1999 1998
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>
<PAGE>
<TABLE>
Peerless Mfg. Co. and Subsidiaries
CONSOLIDATED BALANCE SHEETS - CONTINUED
June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
---------- ----------
<S> <C> <C>
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.
</TABLE>
<PAGE>
<TABLE>
Peerless Mfg. Co. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended June 30,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
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.
</TABLE>
<PAGE>
<TABLE>
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
--------- --------- ------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
<PAGE>
<TABLE>
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
--------- --------- ------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
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.
</TABLE>
<PAGE>
<TABLE>
Peerless Mfg. Co. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended June 30,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
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)
</TABLE>
<PAGE>
<TABLE>
Peerless Mfg. Co. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year ended June 30,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
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.
</TABLE>
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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
======== ========
<PAGE>
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%
===== ===== =====
<PAGE>
NOTE I - EARNINGS PER SHARE
<TABLE>
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
--------- --------- ---- --------- --------- ---- ------- --------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
========= ========= ==== ========= ========= ==== ======= ========= ===
</TABLE>
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.
<PAGE>
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.
<TABLE>
Catalytic Unallocated
Gas/liquid reduction corporate
Filtration Systems overhead Consolidated
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
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
========== ========= ========== ==========
</TABLE>
<PAGE>
NOTE J - INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION - Continued
<TABLE>
United
States Europe Eliminations Consolidated
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
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
========== ========= ========== ==========
</TABLE>
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.
<PAGE>
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
<PAGE>
<TABLE>
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
----------- ------- -------- -------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
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.
</TABLE>
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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).
<PAGE>
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
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.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 210,866
<SECURITIES> 273,343
<RECEIVABLES> 12,880,367
<ALLOWANCES> 685,330
<INVENTORY> 3,730,970
<CURRENT-ASSETS> 20,456,032
<PP&E> 8,304,190
<DEPRECIATION> 6,201,644
<TOTAL-ASSETS> 23,478,772
<CURRENT-LIABILITIES> 8,986,955
<BONDS> 0
0
0
<COMMON> 1,452,492
<OTHER-SE> 13,039,325
<TOTAL-LIABILITY-AND-EQUITY> 23,478,772
<SALES> 40,568,443
<TOTAL-REVENUES> 40,568,443
<CGS> 26,296,724
<TOTAL-COSTS> 26,296,724
<OTHER-EXPENSES> 8,630,962
<LOSS-PROVISION> 184,471
<INTEREST-EXPENSE> 23,696
<INCOME-PRETAX> 2,845,570
<INCOME-TAX> 996,000
<INCOME-CONTINUING> 1,849,570
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,849,570
<EPS-BASIC> 1.27
<EPS-DILUTED> 1.27
</TABLE>
