<PAGE>
SECURITIES EXCHANGE COMMISSION
WASHINGTON, DC 20549
10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1997 Commission File No. 1-7215
PEERLESS TUBE COMPANY
New Jersey 22-1191280 (IRS Identification)
58-76 LOCUST AVENUE
BLOOMFIELD, NEW JERSEY 07003
TELEPHONE: 973-743-5100
Securities registered pursuant to section 12(g) of the act:
Title of Class Exchange
-------------- --------
Common stock $1.33-1/3 par value Over the counter (PLSU)
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed under Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such report), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
On March 31, 1998, the aggregate market value of the voting stock held by non
affiliates of the Registrant was approximately $640,373. The market value is
based on the bid price of $.2600 as of March 31, 1998. Over the last 52 weeks,
actual trades of relatively small amounts of the Company's shares of stock have
ranged in transaction price from $.3000 - $.4375.
The Hill, Thompson, Magi & Company are 17% stockholders in the Peerless Tube
Company.
Common Stock, Par Value $1.33-1/3
Outstanding at March 31, 1998. 2,462,973 shares
Documents incorporated by reference:
Part I and II: Annual Report to the Shareholders for the Year Ended December 31,
1997.
PEERLESS Tube Company 1997 Annual Report Form 10-K
1
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C> <C>
Part I. 1 Business 3
2 Properties 6
3 Legal Proceedings 6
4 Submission of Matters to a Vote of Security Holders 6
Part II 5 Market for the Registrant's Common Stock and Related Stockholder Matters 8
6 Selected Financial Data
7 Managements Discussion and Analysis of Financial Conditions and Results of 8
Operations
8 Financial Statements and Supplementary Data 8
9 Changes in the Disagreements with Accounts on Accounting and Financial Disclosure 9
Part III 10 Directors and Executive Officers of the Registrant 10
11 Executive Compensation 10
12 Security Ownership of Certain Beneficial Owners and Management 10
13 Certain Relationship and Related Transactions 10
Part IV 14 Exhibits, Financial Statements Schedules and Reports on Form 8-K 11
</TABLE>
Signatures
PEERLESS Tube Company 1997 Annual Report Form 10-K
2
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PART I
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ITEM 1: BUSINESS
The Company's primary product shipped in the United States is Aluminum Aerosol
pressurized cans. The market size is an estimated 3.0 billion units. Major
product groups include personal products, household products, and automotive and
industrials, paints and finishes, insect sprays, and food products. Aluminum
containers, as opposed to time plate, historically comprise 10% of the aerosol
market with personal products and hair sprays comprising the largest segments.
The "tube" industry is comprised of plastic, laminate, and metal products. The
major markets are pharmaceutical, dentifrice, cosmetic, and personal care. It
is estimated the annual tube volume is 2.95 billion units. The metal tube
market, which represents the Company's segment of the market, has become a small
part of the Company's overall sales mix.
The Company does not fill any containers that it manufactures. The other product
lines mentioned previously are of relatively minor importance, are in a highly
competitive market, and are sold to a small number of specialty customers.
The industry in which the Company competes is extremely price competitive. The
Company continues to offer a high quality product, meet customer demands, and at
the same time remain price competitive. However, the Company sustained operating
losses during fiscal year, 1997, that required a restructuring of parts of its
debt with the Company's secured lender.
SALES 1995 - 1997
DESCRIPTION 1997 1996 1995
- ----------------------------------------------------------------
Seamless aerosol cans $15,152,000 $17,921,000 $19,627,000
Collapsible metal tubes 844,000 5,175,000 9,739,000
Miscellaneous 292,000 520,000 427,000
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Total $16,288,000 $23,616,000 $29,793,000
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The Company supplies approximately 100 customers. However, the Company focuses
on approximately 15 - 20 major accounts. In 1997 two customers accounted for 61%
(27% and 34%) of the Company's sales. The change in sales mix in 1997 reflects
the decision by the Company not to actively compete in the Collapsible metal
tube market. In 1996, sales to three customers accounted for 55% ( 22%, 21%, and
12%) of the Company's consolidated sales. In 1995, sales to four customers
accounted for 68% (24%, 16%, 15%, and 13%) of the Company's sales.
Excess capacity in the industry has had an adverse effect on the Company.
However steps are currently being taken to implement operational changes and
reduce costs in order to offset the loss in volume
PEERLESS Tube Company 1997 Annual Report Form 10-K
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The current sales backlog of production orders and inventory on hand is
approximately $2.4 million which is less than last year. The Company's
production is against firm orders and subject of firm and final pricing.
THE MANUFACTURING PROCESS
While production lines for aluminum aerosols and tubes can be dissimilar,
automatic production machinery and equipment perform each of the following steps
in a continuous process:
Extruding the can or tube:
1. Trimming the can or tube to is proper length.
2. Heating and cleaning the can or tube shell.
3. Coating or lining the interior and/or exterior of the shell.
4. Decorating and over lacquering the container.
5. Necking or forming the orifice or shoulders of the can or tube.
6. Packaging the product.
Solid aluminum slugs are first fed through a hopper into an impact extrusion
press 250-400 tons pressure at impact point. Then the containers, now
recognizable as such, are fed by conveyors, during which time a micrometer and
other tests are made periodically to check wall and bottom thickness, into a
trimmer that shears the side wall to correct lengths. After the container
shells have been trimmed, the containers are conveyed through one or more ovens
and washing tanks. Then they are fed back onto a production line where they are
spun on spindles or other transfer devices, and sprayed with coats of the
desired internal resin liner. To "set" these resins for maximum resistance to
certain product corrosivity, the containers are preheated and baked in an oven
at very high temperatures (over 500 degrees F). A vinyl or epoxy-type base coat
of the desired color is then sprayed on the outside of the container. After
going through another drying oven, the containers are positioned for lithography
(of up to six colors) on an offset press and then dried. If specifications call
for a high degree of protection of the container finish against possible marring
by product spray or drip, the containers are then given a coating with an
external clear lacquer, usually of the epoxy type. After final drying, a
"rolling" machining turns the neck inward or outward, so that the lip touches
the inside of the neck to form a continuous interior circumerential bead leaving
the mounth circular. In addition to product compatibility discussed below, this
neck process, plus the seamless construction and the exceptionally high bursting
strength, gives the aerosol its chief sellign appeal from a technical
standpoint; while the seamless construction combined with the printing
capability provides the aesthetic appeal and marketability. The finished
products, at a rate of 150 per minute, are packed for shipment to the customer.
Though each container has the same physical characteristics, they may differ
widely as to "special features". Selection of internal liners, lithographic
printing inks, base coat formulations and external lacquers are all conditioned
by the chemical characteristics of product and propellant and how each reacts
with the other. Also acting to differentiate the containers of one customer from
those of another are the form of product dispersal, the type of metal or plastic
overcap, and possible corrosive characteristics of the valve components intended
for a particular product. The Company obtains samples of all the components
after the custom filler or marketer has achieved product and propellant
compatibility, and parallel tests are conducted to evolve the right liners and
coatings to use so that they fit the particular product. Frequently, the
customer changes his source of supply, and seemingly changes his source of
supply, and seemingly minor changes may throw out all the formulation
specifications.
PEERLESS Tube Company 1997 Annual Report Form 10-K
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Some of the external coating problems are ameliorated by the use of aluminum,
which has a surface especially suited to receive coatings. Aerosol cans contain
99.4% aluminum (or slightly less than metal tubes to impart greater rigidity),
and under a microscope, the aluminum surface looks like a series of raw teeth
which readily pick up high quality coatings and inks with good hard adhesive
qualities.
SEGMENT DATA
The Company has one segment of business which is the manufacture of containers,
either aluminum cans or tubes. All of its major product lines are sold to the
same market and/or manufacturing industries for highly similar end uses. All
products are fabricated by the extrusion method of forming metal. and many
customers are buying all product lines for sale to essentially the same markets.
The products are manufactured under the same roof with overlapping labor forces
and overhead, and on similar machinery.
RAW MATERIALS
The basic raw materials essential to the operation of the Company are aluminum
ingot,. paint, ink, and paper products for packaging and shipping containers.
All necessary supplies are readily available. The Company has a supply
agreement for aluminum slugs that expires in the year 2000. The Company may
terminate this supply agreement upon thirty days written notice to the buyer
provided the buyer's selling price to the Company is not competitive with market
quotes obtained from at least three other vendors for aluminum.
ENVIRONMENT
The Company is subject to federal, state, and local requirements regulating the
discharge of materials into the environment or otherwise relating to protection
of the environment. It is the Company's policy to comply with these
requirements, and the Company believes that as a general matter its policies,
practices and procedures are properly designed to prevent unreasonable risk of
environmental damage, and of resulting financial liability, in connection with
its business. Some risk of environmental damage is however, inherent in
particular operations and products of the Company, as in the case with other
companies engaged in similar businesses.
The Company is and has been engaged in handling, manufacture, use or disposal
of several substances which are classified as hazardous or toxic by one or more
regulatory agencies. The Company believes that its handling, manufacturing, use
and disposal of such substances have been in accord with environmental laws and
regulations. It is possible, however, that future knowledge or other
developments, such as improved capability to detect such substances in the
environment, increasingly strict environmental laws and standards and
enforcement policies thereunder, could bring into question the Company's
handling, manufacturing, use, or disposal of such substances.
EMPLOYEES
The Company presently employs approximately 130-150 persons at its facility
located in Bloomfield, New Jersey. The Company is a non union organization and
management's relationship with its employees is considered excellent.
PEERLESS Tube Company 1997 Annual Report From 10-K
5
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ITEM 2: PROPERTIES
The Company's facility is located in Bloomfield, New Jersey.
The land, building, and equipment are pledged as collateral under various loan
agreements with the Company's secured working capital lender, who has a security
interest in substantially all the Company's assets.
The executive, administrative, marketing and engineering offices along with the
manufacturing and warehouse facilities are contained in three (3) buildings, a
total of 261,000 square feet. There is adequate space to expand the operations
if required.
ITEM 3: LEGAL PROCEEDINGS
In January 1998, a jury verdict was rendered against the Company in a lawsuit
filed by a former employee alleging age discrimination and breach of contract.
The amount of damages and attorney's fees awarded to the employee approximated
$638,000. On June 5, 1998, a settlement agreement with the former employee was
reached whereby the Company will pay, over a two year period, a total of
$700,000 including interest (which has been reflected as a liability in the
accompanying consolidated financial statements) paid as follows:
$60,000 payable upon excution of the agreement;
$60,000 payable on or before June 1, 1999;
$300,000 payable on or before December 1, 1999; and
$280,000 payable on or before May 31, 2000.
Under the terms of the agreement, the former employee was granted a lien
subordinated in priority to the Company's asset based lender on substantially
all of the Company's assets.
There are several other suits arising in the normal course of business. The
Company believes these suits are without merit and is vigorously defending its
position in each suit. Council for the Company cannot offer an opinion as to
the probable outcome of such cases.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Shareholders annual meeting, expected to be held in September, will be asked
to elect the Board of Directors and ratify the Company's independent auditors.
PEERLESS Tube Company 1997 Annual Report Form 10-K
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<CAPTION>
EXECUTIVE OFFICERS OF THE REGISTRANT
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NAME, POSITION OFFICER SINCE AGE BUSINESS BACKGROUND
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<S> <C> <C> <C>
Frederic Remington, Chairman of the 1965 68 Elected to the Board of Directors in 1965. Joined
Board, Chief Executive Officer the Company in 1950 after attending Temple
University and New Jersey Institute of
Technology, formerly Newark College of Eng-
ineering. Vice President, Operation in 1968, Vice
President, Engineering in 1977, Senior Vice
President, Engineering in 1986 and Chairman of
Board and Chief Executive officer in 1989.
- ----------------------------------------------------------------------------------------------------------------------------
Richard W. Potts 1970 61 Elected to the Board of Directors in 1970.
President and Director Bachelor of Science degree from Rensselaer
Polytechnic Institute and a Master's Degree from
Newark College of Engineering (NJIT). Joined
the Company in 1963. Vice President, Manufact-
uring since 1968. Senior Vice President, Product-
ion in 1986. President and Chief Operating
Officer in 1989. Member of the Executive
Committee of the Board.
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George J. Blumenschein, Vice 1996 56 Joined the Company in January 1991. Bachelor of
President, Finance Science from Rutgers University and MBA in
Finance. 1974-1978 Manager of Cost and
Budgets/Assistant Controller, Lesney Product
"MATCHBOX TOYS", 1979-1990 Director of
Cost & Budget, Controller U.S. Division and
European Division, Brand Rex Corporation.
- ----------------------------------------------------------------------------------------------------------------------------
Ann Gaccione, Corporate Secretary 1992 60 Joined the Company in 1978. Secretary,
1978-1988; assistant corporate secretary,
1989-1991; and executive secretary and admin-
istrative assistant to the Chairman of the Board,
1989 to present.
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</TABLE>
NOTES:
Not listed is Mr. Christopher C.H. Graber, Vice President, Operations who
resigned effective September 10, 1997.
PEERLESS Tube Corporation 1997 Annual Report Form 10-K
7
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PART II
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ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED SECURITY HOLDER MATTERS
The Peerless Tube Company Corporation Common Stock is traded over-the-counter.
The Company is traded under the symbol PLSU. There has been a relatively small
number of trades during 1997.
The range of the high and low common stock sale's prices as reported by the NASD
bulletin board over the counter for each of the quarters for the years ended
December 31, 1997, 1996, and 1995 are listed as follows:
QUARTER 1997 1996 1995
- ------------------------------------
1 $0.6250 $0.4400 $0.7500
$0.4375 $0.3750 $0.3120
2 $0.3750 $0.4400 $0.6250
$0.3125 $0.4400 $0.1250
3 $0.5000 $0.6250 $1.0310
$0.3125 $0.5000 $0.5000
4 $0.3750 $0.6600 $0.5000
$0.3000 $0.3750 $0.3750
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There were no stock or cash dividends declared or paid since 1989. Under the
Company's loan agreement, the Company is restricted from the payment of
dividends.
The approximate number of record holders of the Company's Common Stock, at
December 31, 1997 was 1,200.
ITEM 6: SELECTED FINANCIAL DATA
The information is included under the caption "Selected Financial Data Five
Years Ended December 31, 1997" at page 12 of the Company's 1997 Annual Report to
shareholders.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS
"Management's Discussion and Analysis" at pages 4-11, management section, of the
Company's 1997 Annual Report to Shareholders is incorporated herein by
reference.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements, together with the reports therein of
Goldstein Golub Kessler & Company, P.C. dated March 13, 1998, except for the
second paragraph of Note 2, as to which the date is June 5, 1998, appearing on
pages 1-14, auditor's section, of the Company's 1997 Annual Report to
shareholders.
PEERLESS Tube Company 1997 Annual Report 10-K
8
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ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There were no disagreements on any auditing, accounting or financial disclosure
in 1997.
PEERLESS Tube Company 1997 Annual Report Form 10-K
9
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PART III
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ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information, relating to the directors of the Registrant, as well as information
relating to compliance with section 16(a) of the Securities Exchange Act of 1934
is contained in a definitive Proxy statement primarily involving election of
directors and appointment of independent accountants. The Registrant is
simultaneously filing this document with the Securities and Exchange pursuant to
Regulation 14a, and such information is incorporated by reference. Certain
other information relating to the Executive Officers of the Registrant appears
on page 8.
ITEM 11: EXECUTIVE COMPENSATION
Information relating to executive compensation is also contained in the Proxy
statement referred to above in "Item 10: Directors and Executive Officers of the
Registrant," and such information is incorporated by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to security ownership of certain beneficial owners and
management is also contained in the Proxy statement referred to above in "Item
10: Directors and Executive Officers of the Registrant," and such information is
incorporated by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to certain relationships and related transactions can be
found in Note 15 to the consolidated financial statements on page 13, management
section, of the Company's 1997 Annual Report to stockholders and incorporated
herein by reference.
PEERLESS Tube Company 1997 Annual Report Form 10-K
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ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as part of this report:
Annual Report
to
Description Shareholder
Page
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(1) Consolidated Financial Statements*
a) Report of Independent Auditors 1
Balance Sheet as of December 31, 1997 2
And 1996
Statement of Operations and Accumulated Deficit 3
For the Years Ended December 31, 1997,
1996 and 1995.
Statement of Cash Flows for the Years Ended 4
December 31, 1997, 1996 and 1994
Notes to the Financial Statements
(2) Financial Statement Schedules: 5-14
None Required
b) No reports on Form 8-K were filed during the last
quarter covered by this report.
c) All other documents have been filed and are
incorporated by reference.
- ------------------------------------------------------------------------------
*The financial statement schedules should be read in conjunction with the
Financial Statements incorporated by reference in Item 8 of the Form 10-K Annual
Report. Schedules other than those listed above have been omitted because of
the absence of the conditions under which they are required or because
information required is shown in the financial statements or the notes thereto.
PEERLESS Tube Company 1997 Annual Report Form 10-K
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<TABLE>
<CAPTION>
PEERLESS TUBE COMPANY
SELECTED FINANCIAL DATA
FIVE YEARS ENDED DECEMBER 31, 1997 1996 1995 1994 1993
------------ ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
NET SALES $ 16,288,000 $23,616,000 $ 29,793,000 $ 33,085000 $ 33,993,000
NET INCOME (LOSS) ($2,739,000) $ 766,000 ($1,775,000) ($604,000) ($1,120,000)
WEIGHTED AVERAGE NUMBER OF SHARES 2,462,973 2,462,973 2,462,973 2,462,973 2,462,973
OUTSTANDING
NET INCOME (LOSS) PER SHARE ($1.11) $0.31 ($0.72) ($.025) ($0.45)
CASH DIVIDENDS DECLARED $ 0 $ 0 $ 0 $ 0 $ 0
WORKING CAPITAL (DEFICIT) ($153,000) ($225,00) $ 31,000 $ 888,000 $ 879,000
CURRENT RATIO (1.0) (1.0) 1.0 1.1 1.3
PROPERTY, PLANT AND EQUIPMENT - AT COST $ 19,700,000 $19,638,000 $ 24,490,000 $28,343,000 $ 27,985,000
ACCUMULATED DEPRECIATION $ 16,714,000 $15,514,000 $ 6,407,000 $18,879,000 $ 17,987,000
PROPERTY, PLANT AND EQUIPMENT - NET $ 2,986,000 $ 4,124,000 $ 8,083,000 $ 9,464,000 $ 9,998,000
TOTAL ASSETS $ 6,429,000 $10,030,000 $ 15,443,000 $17,500,000 $ 18,533,000
LONG TERM DEBT $ 891,000 484,000 $ 4,009,000 $ 4,287,000 $ 3,852,000
TOTAL LIABILITIES $ 5,140,000 $ 6,002,000 $ 12,181,000 $12,927,000 $ 13,252,000
STOCKHOLDERS EQUITY $ 1,289,000 $ 4,028,000 $ 3,262,000 $ 4,573,000 $ 5,281,000
DEBT TO EQUITY RATIO 4.1 1.5 3.7 2.8 2.5
</TABLE>
*FOR THE YEAR ENDED DECEMBER 31, 1996, THE NET INCOME INCLUDED A RECOGNIZED GAIN
OF $1,555,000, NET OF PUERTO RICO CAPITAL GAINS TAX, IN CONNECTION WITH THE
TERMINATION OF THE SALE LEASEBACK OF THE PUERTO RICO FACILITY.
PEERLESS TUBE COMPANY 1997 ANNUAL REPORT
12
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SIGNATURES
- ----------
Pursuant ot 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 in its
behalf by the undersigned thereunto duly authorized.
PEERLESS TUBE COMANY
Registrant
By:
Frederic Remington, Jr.
Chairman of the Baord and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on behalf of the Registrant and in the capacities and on
the dates indicated below.
- ------------------------- -------------------------
Frederic Remington, Jr Richard W. Potts
Chairman of the Board and Chief Executive President and
Director
Officer
- ------------------------- -------------------------
S. Jervis Brinton, Jr Frank Leo
Director Director
- ------------------------- -------------------------
Frank McDermott Leonard Felzenberg
Director Director
- -------------------------
John Remington
Director
13
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MANAGEMENT DISCUSSION AND ANALYSIS
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BUSINESS AND FINANCIAL RESTRUCTURE
- ----------------------------------
In 1997, the Company's operation was impacted by the closing of its Puerto Rico
facility in November 1996. This resulted in a decrease in aluminum tube sales
of $4,331,000. This decrease was a result of managements decision not to
pursue or invest substantial capital into the contracting aluminum tube market.
Also impacting the Company's business was the excess capacity in the aerosol
industry. As a result, sales volume in aerosols also decreased $2,769,000.
The Company has been focusing on how to maximize revenues, profits, and manage
it operating cost in general.
To assist in preforming the above an experienced outside management consulting
firm has been retained to work with the company. The goal of the company and the
management consulting firm is to reduce production costs, improve inventory
management, and preserve cash and increase liquidity.
With the anticipated co-operation of the Company's secured lender, the
consolidation of plant assets, and an expected increase in sales volume will
help minimize the financial losses and enable the company to continue to
function as a going concern.
Continuing improvement in operating efficiencies from better management and
process procedures would create additional capacity and profitability, but the
Company also needs new equipment to meet both the current and future customer
demands. However, the Company's ability to purchase such equipment at this time
is highly speculative
PEERLESS TUBE COMPANY 1997 ANNUAL REPORT
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SALES AND RESULTS OF OPERATIONS 1997 COMPARED TO 1996
- -----------------------------------------------------
SALES
Net sales for the year ended december 31, 1997 decreased $7,328,000 or 31% on
sales of $16,288,000 when compared to 1996 net sales of $23,616,000. Aerosol
volume for 1997 was $15,152,000 as compared with sales for 1996 of 17,921,000 or
a decrease of 15%. Aluminum tube sales for 1997 was $844,000 as compared with
1996 Tube sales of $5,175,000 or a decrease of 84%. Miscellaneous sales for
1997 totaled $292,000 as compared to $520,000. The decrease in 1997 vs 1996 in
the Aerosol and Tube product liness was a result of excess capacity in the
aerosol markets and the Company's decision not to activity persue the Aluminumn
Tube market.
In 1997, the Company's sales to two customers accounted for 61%(27% and 34%) of
the company's total sales. In 1996. Three customers accounted for 55% (22%,
21%, and 12%) of the Company's sales.
The Company's sales of aluminum aerosols are approximately 93% of the 1997 sales
as compared to 76% in 1996. The mix change is a result of the closing of the
Puerto Rico facility in 1996. The Puerto Rico facility produced solely Aluminum
Tube Product.
GROSS MARGIN TRENDS AND DISCUSSION
The gross profit for the year ended December 31, 1997 and December 31, 1996 was
$228,000 or 1% of sales and $2,115,000 or 9% of sales respectively. The
decrease in gross margin is primarily due to current excess capacity which the
Company has available. A large part of the Company's costs are "fixed" rather
than variable and the decreased demand for product in 1997 had a sufficient
impact on the companies ability to absorb the high amount of fixed costs. While
the Company has been successful in reducing costs, it must increase its machine
hour leverage and "value added" hours, in order to be profitable. The Company
must increase its sales level inorder to accomplish the above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the year ended December 31,
1997 were $2,778,000 or 17% of sales as compared to $2,528,000 or 11% for the
year ended December 1996. The increase in SG&A in relation to net sales is a
result of the decrease in sales volume.
INTEREST EXPENSE, AND OTHER INCOME, NET
Interest expense for the year ended December 31, 1997 was $278,000 as compared
to $607,000
PEERLESS TUBE COMPANY 1997 ANNUAL REPORT
5
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in 1996. The decrease of $329,000 was a result of the termination of the
sales/leaseback agreement with the Block Drug Company.
Other income for the year ended December 31 1997 was $89,000 as compared to
$1,786,000 for the year ended December 31, 1996. The decrease is largely
attributed to the Sale/Leaseback of Puerto Rico being terminated in November
1996. (See note 10, of notes to the Financial Statements).
Liquidity and Capital Resources
The Company has a negative working capital of ($153,000) at December 31, 1997.
This was approximately a $72,000 increase from the working capital of ($225,000)
at December 31, 1996.
Net cash at December 31, 1997 was $190,000 or a decrease of $37,000 when
compared to the same period in 1996. The Company in order to meet cash
requirements during 1997 was required to increase its equipment loan in order to
minimize the drain in working capital and help in the net repayment of debt. The
increase to the equipment loan was $552,000.
The debt-equity-ratio at December 31, 1997 was 4:1 as compared to 1.5:1 at
December 31, 1996.
The Company has a working capital loan secured by the Company's accounts
receivable and inventories.
Management must monitor its cash resources very closely. Operational
improvements, aggressive marketing, and favorable aluminum pricing will be
required in order to improve cash availability and management.
PEERLESS TUBE COMPANY 1997 ANNUAL REPORT
6
<PAGE>
DESCRIPTION OF BUSINESS
- -------------------------
PEERLESS TUBE COMPANY, a publicly owned corporation, manufactures collapsible
metal tubes and seamless extruded aerosol containers for the pharmaceutical,
drug, cosmetic, toiletries, and house hold product industries. The
manufacturing facility is located in Bloomfield, New Jersey.
FINANCIAL HIGHLIGHTS
YEAR ENDED DECEMBER 31, 1997
1997 1996 1995
------------ ----------- ------------
Net Sales $ 16,288,000 $23,616,000 $ 29,793,000
Net Income (Loss) ($2,739,000) $ 766,000 ($1,775,000)
Weighted Average shares outstanding 2,462,973 2,462,973 2,462,973
Net (loss) income per share ($1.11) $ 0.31 ($0.72)
Cash/stock dividends None None None
Working Capital (Defict) ($153,000) ($225,000) $ 31,000
Book value per outstanding share of $ 0.52 $ 1.63 $ 1.32
common stock
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PEERLESS TUBE COMPANY 1997 ANNUAL REPORT
1
<PAGE>
We will be one of the leaders in the
OUR VISION packaging industry, successful in
everything we do.
- --------------------------------------------------------------------------------
We will achieve our Vision by being
OUR a Total Quality Company,
COMMITMENT continuously improving our internal
and external customers.
- -------------------------------------------------------------------------------
CUSTOMERS - Our first priority is to
OUR VALUES satisfy our customers.
PEOPLE - We help our employees
improve their skills, encourage them
to take risks, treat them fairly, and
recognize their accomplishments,
asking them to approach their jobs
with passion and commitment.
TEAMWORK - We build trust and
teamwork with open, candid com-
munciations. We work together and
share technologies and best prac-
tices with our supplies and custom-
ers.
INNOVATION - We accept change as
the rule, not the exception, and drive
it by encouraging creativity.
PERFORMANCE - We encourage the
highest expectations, set ambitious
goals, and quite simply strive to be
the best.
- -------------------------------------------------------------------------------
<PAGE>
CHAIRMAN'S LETTER
- -----------------
In 1997, the Company's sales decreased as a result of excess capacity in the
aerosol industry and the Company's decision to not actively pursue the aluminum
tube market. The Company's decision was based on the high cost of capital
equipment and the lack of payback on invested capital in a shrinking aluminum
tube market
1997 was a difficult year. Net sales totaled $16,288,000, a decrease of
$7,328,000 or 31% when compared with Net Sales of $23,616,000 for 1996. The
Company was able to react to the excess industry capacity and adjust its
operating levels. However, being faced with high fixed cost there are no quick
solutions. We must first achieve our short term goals. Once this has been
accomplished we can pursue the Company's long term goals..
During the last quarter of 1997, Peerless introduced its new Slim-Top can.
This can is slim, stylish, and sophisticated. It is eye-catching with
substantial shelf appeal. We at Peerless are most excited about this elegant
new can and we expect to win consumer appeal.
Looking ahead, 1998 should be a much better year. Peerless is entering the new
year with the nation's economy up and aerosol market indicators, acceptance of
the Slim-Top can, are such that we should have an improvement is sales this
coming year.
The Peerless Tube Company, despite its losses, continues to emphasize the
importance of a quality product, satisfied customers, and loyal and hard working
employees. After all, the heart of our Company continues to be its operating
strength and a unified effort to succeed.
Sincerely,
Frederic Remington, Jr.
Chairman and Chief Executive Officer
PEERLESS TUBE COMPANY 1997 ANNUAL REPORT
3
<PAGE>
<TABLE>
<CAPTION>
PEERLESS TUBE COMPANY
SELECTED FINANCIAL DATA
FIVE YEARS ENDED DECEMBER 31, 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
NET SALES $ 16,288,000 $23,616,000 $ 29,793,000 $ 33,085000 $ 33,993,000
NET INCOME (LOSS) ($2,739,000) $ 766,000 ($1,775,000) ($604,000) ($1,120,000)
WEIGHTED AVERAGE NUMBER OF SHARES 2,462,973 2,462,973 2,462,973 2,462,973 2,462,973
OUTSTANDING
NET INCOME (LOSS) PER SHARE ($1.11) $0.31 ($0.72) ($.025) ($0.45)
CASH DIVIDENDS DECLARED $ 0 $ 0 $ 0 $ 0 $ 0
WORKING CAPITAL (DEFICIT) ($153,000) ($225,00) $ 31,000 $ 888,000 $ 879,000
CURRENT RATIO (1.1) (1.0) 1.0 1.1 1.3
PROPERTY, PLANT AND EQUIPMENT - AT COST $ 19,700,000 $19,638,000 $ 24,490,000 $28,343,000 $ 27,985,000
ACCUMULATED DEPRECIATION $ 16,714,000 $15,514,000 $ 6,407,000 $18,879,000 $ 17,987,000
PROPERTY, PLANT AND EQUIPMENT - NET $ 2,986,000 $ 4,124,000 $ 8,083,000 $ 9,464,000 $ 9,998,000
TOTAL ASSETS $ 6,429,000 $10,030,000 $ 15,443,000 $17,500,000 $ 18,533,000
LONG TERM DEBT $ 891,000 484,000 $ 4,009,000 $ 4,287,000 $ 3,852,000
TOTAL LIABILITIES $ 5,140,000 $ 6,002,000 $ 12,181,000 $ 12,927,00 $ 13,252,000
STOCKHOLDERS EQUITY $ 1,289,000 $ 4,028,000 $ 3,262,000 $ 4,573,000 $ 5,281,000
DEBT TO EQUITY RATIO 4.1 1.5 3.7 2.8 2.5
</TABLE>
*FOR THE YEAR ENDED DECEMBER 31, 1996, THE NET INCOME INCLUDED A RECOGNIZED GAIN
OF $1,555,000, NET OF PUERTO RICO CAPITAL GAINS TAZ, IN CONNECTION WITH THE
TERMINATION OF THE SALE LEASEBACK OF THE PUERTO RICO FACILITY.
PEERLESS TUBE COMPANY 1997 ANNUAL REPORT
12
<PAGE>
PEERLESS TUBE COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
<PAGE>
PEERLESS TUBE COMPANY
CONTENTS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
Independent Auditor's Report 1
CONSOLIDATED FINANCIAL STATEMENTS:
Balance Sheet 2
Statement of Operations and Accumulated Deficit 3
Statement of Cash Flows 4
Notes to Consolidated Financial Statements 5 - 14
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Peerless Tube Company
We have audited the accompanying consolidated balance sheets of Peerless Tube
Company as of December 31, 1997 and 1996, and the related consolidated
statements of operations and accumulated deficit, and cash flows for each of the
three years in the period ended December 31, 1997. 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 that 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 financial position of Peerless Tube Company as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Note 2 of the notes
to consolidated financial statements, the Company has suffered recurring losses
from operations and negative cash flows. These conditions raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 2. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
GOLDSTEIN GOLUB KESSLER & COMPANY, P.C.
New York, New York
March 13, 1998, except for the second paragraph of
Note 2, as to which the date is June 5, 1998
<PAGE>
<TABLE>
<CAPTION>
PEERLESS TUBE COMPANY
CONSOLIDATED BALANCE SHEET
- ----------------------------------------------------------------------------------------------
DECEMBER 31, 1997 1996
- ----------------------------------------------------------------------------------------------
(rounded to nearest thousand)
<S> <C> <C>
ASSETS (Note 8)
Current Assets:
Cash (Note 1) $ 190,000 $ 227,000
Accounts receivable, less allowance for doubtful
accounts of $210,000 and $235,000, respectively (Note 3) 983,000 2,195,000
Inventories (Notes 1 and 4) 2,214,000 2,660,000
Prepaid expenses 12,000 78,000
Other current assets 34,000 63,000
- ----------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 3,433,000 5,223,000
- ----------------------------------------------------------------------------------------------
Property, Plant and Equipment, net (Notes 1, 5 and 10) 2,986,000 4,124,000
Other Assets (Note 11) 10,000 683,000
Deferred Tax Assets, net of valuation allowance of $4,956,000
and $4,143,000, respectively (Note 7)
- ----------------------------------------------------------------------------------------------
TOTAL ASSETS $ 6,429,000 $ 10,030,000
==============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,990,000 $ 2,573,000
Accrued liabilities (Notes 2 and 6) 767,000 1,489,000
Revolving credit line (Notes 1 and 8) 597,000 1,119,000
Current portion of long-term debt (Notes 1 and 9) 232,000 267,000
- ----------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 3,586,000 5,448,000
- ----------------------------------------------------------------------------------------------
Long-term Debt (Notes 1 and 9) 891,000 484,000
Other Liabilities (Notes 2 and 13) 663,000 70,000
- ----------------------------------------------------------------------------------------------
TOTAL LIABILITIES 5,140,000 6,002,000
- ----------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 16)
Stockholders' Equity:
Common stock - $1.33-1/3 par value; authorized
5,000,000 shares; issued 2,536,935 shares 3,382,000 3,382,000
Additional paid-in capital 14,439,000 14,439,000
Accumulated deficit (16,188,000) (13,449,000)
Less 73,962 shares of stock in treasury, at cost (344,000) (344,000)
- ----------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY 1,289,000 4,028,000
- ----------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,429,000 $ 10,030,000
==============================================================================================
</TABLE>
The accompanying notes and indepenent auditor's report should
be read in conjunction with the consolidated financial statements
2
<PAGE>
<TABLE>
<CAPTION>
PEERLESS TUBE COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
- -----------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
(rounded to nearest thousand except per share amounts)
<S> <C> <C> <C>
Net sales (Notes 1 and 14) $ 16,288,000 $ 23,616,000 $ 29,793,000
Cost of sales 16,060,000 21,501,000 28,331,000
- -----------------------------------------------------------------------------------------------------
Gross profit 228,000 2,115,000 1,462,000
Selling, general and administrative expenses 2,778,000 2,528,000 2,825,000
- -----------------------------------------------------------------------------------------------------
Loss from operations (2,550,000) (413,000) (1,363,000)
- -----------------------------------------------------------------------------------------------------
Other income (expense):
Interest expense (278,000) (607,000) (816,000)
Impairment loss on property and plant (350,000)
Gain on termination of sale/leaseback
agreement (Note 10) 1,555,000
Other income, net 89,000 231,000 754,000
(189,000) 1,179,000 (412,000)
- -----------------------------------------------------------------------------------------------------
Net income (loss) (2,739,000) 766,000 (1,775,000)
Accumulated deficit at beginning of year (13,449,000) (14,215,000) (12,440,000)
- -----------------------------------------------------------------------------------------------------
Accumulated deficit at end of year $(16,188,000) $(13,449,000) $(14,215,000)
=====================================================================================================
Basic income (loss) per share $(1.11) $.31 $(.72)
=====================================================================================================
Weighted-average shares outstanding 2,462,973 2,462,973 2,462,973
=====================================================================================================
</TABLE>
The accompanying notes and indepenent auditor's report should
be read in conjunction with the consolidated financial statements
3
<PAGE>
<TABLE>
<CAPTION>
PEERLESS TUBE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
(rounded to nearest thousand)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(2,739,000) $ 766,000 $(1,775,000)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,200,000 1,010,000 1,067,000
Pension costs 625,000
Gain on termination of sale/leaseback agreement (1,675,000)
Loss (gain) on sale of property, plant and equipment 17,000 (531,000)
Provision for bad debts (25,000) 95,000 63,000
Deferred gain (99,000) (119,000)
Other, net (363,000) 366,000
(Increase) decrease in operating assets:
Accounts receivable 1,237,000 1,407,000 (20,000)
Inventories 446,000 (235,000) 1,075,000
Prepaid expenses 66,000 (52,000) 42,000
Other current assets 29,000 (9,000) 56,000
Other assets 48,000
Increase (decrease) in operating liabilities:
Accounts payable (583,000) (443,000) (345,000)
Accrued liabilities (722,000) 74,000 120,000
Other liabilities 593,000 (50,000)
- -----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES 175,000 443,000 (1,000)
- -----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from termination of sale/leaseback 329,000
Proceeds from sale of assets, net 70,000 531,000
Purchases of property, plant and equipment (49,000) (5,000)
- -----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY 350,000 526,000
INVESTING ACTIVITIES
- -----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from long-term debt 552,000 319,000
Net (repayments) borrowings under credit line (598,000) (99,000)
Reduction of long-term (242,000) (628,000) (645,000)
debt and current maturities
- -----------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN (212,000) (1,226,000) (425,000)
FINANCING ACTIVITIES
- -----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in (37,000) (433,000) 100,000
cash
Cash at beginning of year 227,000 660,000 560,000
Cash at end of year $ 190,000 $ 227,000 $ 660,000
=============================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year $ 278,000 $ 607,000 $ 807,000
for interest
=============================================================================================================================
SUPPLEMENTAL SCHEDULE OF
NONCASH FINANCING AND
INVESTING ACTIVITIES:
Capital lease obligations
incurred for acquisition
of property and equipment $ 62,000 $ 17,000 $ 113,000
=============================================================================================================================
Write-off of capital $ 3,330,000
lease obligation
=============================================================================================================================
Write-off of fixed assets $ 2,995,000
=============================================================================================================================
</TABLE>
The accompanying notes and independent auditor's report should
be read in conjuction with the consolidated financial statements
4
<PAGE>
<TABLE>
<CAPTION>
PEERLESS TUBE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C>
1. BUSINESS ORGANIZATION Peerless Tube Company ("Peerless") and its subsidiary (collectively the "Company") supply
AND SIGNIFICANT collapsible metal tubes and seamless aluminum aerosol containers to national marketers primarily in
ACCOUNTING POLICIES: the pharmaceutical, cosmetic and toiletry industries. Manufacturing facilities are located in
Bloomfield, NJ.
The consolidated financial statements of the Company include the accounts of Peerless and its wholly
owned inactive subsidiary, Peerless Tube Company of Puerto Rico, Inc. All significant intercompany
accounts and transactions have been eliminated.
Inventories are stated at the lower of cost (first-in, first-out method) or market.
Depreciation of property, plant and equipment is provided for by the straight-line and the
declining-balance methods over the estimated useful lives of the related assets.
Maintenance and repair expenditures are charged to appropriate expense accounts in the period
incurred. Major replacements, renewals and betterments are capitalized.
Property, plant and equipment is stated at the lower of cost, less accumulated depreciation, or net
realizable value.
Revenue from sales of products is recognized at the date of shipment to customers.
The Company maintains its cash in bank accounts which, at times, may exceed federally insured
limits. The Company has not experienced any losses on these accounts.
In 1997, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings
per Share. SFAS No. 128 requires dual presentation of basic earnings per share ("EPS") and diluted
EPS on the face of all statements of earnings issued after December 15, 1997 for all entities with
complex capital structures. Basic EPS is computed as net earnings divided by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur from common shares issuable through stock-based compensation including stock
options, restricted stock awards and warrants. Diluted EPS is not presented since the effect would
be antidilutive.
The preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those estimates.
The Company reviews long-lived assets and identifiable intangibles for impairment whenever events or
changes in circumstance indicate that the carrying value of an asset may not be fully recoverable.
The Company performs nondiscounted cash flow analyses to determine if an impairment exists.
Impairment losses on assets are determined based on the present value of cash flows using discount
rates which reflect the inherent risk of the underlying business. Impairment losses on assets to be
disposed of are based on the estimated proceeds to be received less costs of disposal.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
PEERLESS TUBE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C>
SFAS No. 107, Disclosures About Fair Value of Financial Instruments, requires management to disclose
the estimated fair value of certain assets and liabilities defined by SFAS No. 107 as financial
instruments. Financial instruments are generally defined by SFAS No. 107 as cash, evidence of
ownership interest in equity, or a contractual obligation that both conveys to one entity a right to
receive cash or other financial instruments from another entity and imposes on the other entity the
obligation to deliver cash or other financial instruments to the first entity. At December 31, 1997
and 1996, management believes that the carrying amount of the revolving credit line approximates
fair value because of the short maturity of this financial instrument. The carrying value of the
Company's long-term debt is considered to approximate fair value based upon current borrowing rates
offered to the Company.
2. BUSINESS AND DEBT The accompanying consolidated financial statements have been prepared in conformity with generally
RESTRUCTURING: accepted accounting principles, which contemplate continuation of the Company as a going concern.
Since 1988, however, the Company has suffered recurring losses from operations and negative cash
flows. These conditions raise substantial doubt about its ability to continue as a going concern.
Additionally, in January 1998, a jury verdict was rendered against the Company in a lawsuit filed by
a former employee alleging age discrimination and breach of contract. The amount of damages and
attorney's fees awarded to the employee approximated $638,000. On June 5, 1998, a settlement
agreement with the former employee was reached whereby the Company will pay, over a two-year period,
a total of $700,000 including interest (which has been reflected as a liability in the accompanying
consolidated financial statements) as follows:
$60,000 payable upon execution of the agreement;
$60,000 payable on or before June 1, 1999;
$300,000 payable on or before December 1, 1999; and
$280,000 payable on or before May 31, 2000.
Under the terms of the agreement the former employee was granted a lien subordinated in priority to
the Company's asset-based lender on substantially all of the Company's assets (see Note 8).
The Company's management has continually evaluated and reshaped its business to improve the
operational results of the Company and respond to the changes in the economic and competitive market
in which the Company operates. Major cost and head count reduction programs previously implemented
focused on reduction of pension and employee benefits, particularly changes to healthcare benefits.
Except for periodic additions to meet peaks in sales demand, the Company has reduced its workforce,
both salaried and hourly. Management introduced and implemented new programs to improve its
production, inventory management and management cost accounting systems.
With the anticipated cooperation of its secured lender and the additional consolidation of plant
assets, management believes that actions presently being taken to improve the Company's operating
performance including reductions of staffing levels and stabilization of raw material prices will
provide adequate
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
PEERLESS TUBE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C>
working capital, help minimize the financial losses, and create the opportunity for
the Company to continue as a going concern.
3. ALLOWANCE Information relating to the allowance for doubtful accounts is as follows:
FOR DOUBTFUL
ACCOUNTS: December 31, 1997 1996
-----------------------------------------------------------------------------------------
Balance at beginning of year $ 235,000 $ 140,000
Charged to costs and expenses 146,000
Deductions or write-off of uncollectible
accounts receivable (25,000) (51,000)
-----------------------------------------------------------------------------------------
BALANCE AT END OF YEAR $ 210,000 $ 235,000
=========================================================================================
4. INVENTORIES: Inventories are comprised of the following:
December 31, 1997 1996
-----------------------------------------------------------------------------------------
Raw materials $1,156,000 $1,724,000
Work-in-process 52,000 29,000
Finished goods 1,006,000 907,000
-----------------------------------------------------------------------------------------
$2,214,000 $2,660,000
=========================================================================================
5. PROPERTY, Property, plant and equipment is comprised of the following:
PLANT AND
EQUIPMENT:
Estimated
December 31, 1997 1996 Useful Life
-----------------------------------------------------------------------------------------
Land $ 462,000 $ 462,000
Buildings and improvements 4,348,000 4,348,000 10 to 45 years
Machinery and equipment 13,276,000 13,214,000 7 to 13 years
Furniture, fixtures
and office
equipment 1,614,000 1,614,000 5 to 10 years
-----------------------------------------------------------------------------------------
19,700,000 19,638,000
Less accumulated
depreciation
and amortization (16,714,000) (15,514,000)
-----------------------------------------------------------------------------------------
$ 2,986,000 $ 4,124,000
=========================================================================================
Substantially all of the Company's equipment serves as collateral for short- and long-
term borrowings (see Notes 8 and 9).
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
PEERLESS TUBE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
6. ACCRUED Accrued liabilities are comprised of the following:
LIABILITIES:
December 31, 1997 1996
------------------------------------------------------------------------------------------
Payroll, payroll taxes and payroll-related costs $202,000 $ 437,000
Health benefits 60,000 180,000
Professional fees 70,000 233,000
Environmental 100,000 120,000
All other 335,000 519,000
------------------------------------------------------------------------------------------
$767,000 $1,489,000
==========================================================================================
7. INCOME TAXES: The deferred tax assets less a valuation allowance are
comprised of the following at December 31, 1997 and
1996:
The Company recognizes deferred tax liabilities and
assets for the expected future tax consequences of
temporary differences between the carrying amounts and
the tax bases of assets and liabilities.
Temporary differences and carryforwards which give rise
to deferred tax assets and liabilities are as follows:
December 31, 1997 1996
-------------------------------------------------------------------------------------------
Deferred tax assets:
Postretirement benefits other than pensions $ 20,000 $ 24,000
Accrual differences 231,000 285,000
Accounts receivable and inventory valuation
allowances 362,000 408,000
Net operating loss carryforward 4,085,000 3,185,000
Investment tax credit carryforward 346,000 346,000
-------------------------------------------------------------------------------------------
5,044,000 4,248,000
Deferred tax liabilities:
Property, plant and equipment basis differences (88,000) (105,000)
-------------------------------------------------------------------------------------------
Net deferred tax asset 4,956,000 4,143,000
Valuation allowance (4,956,000) (4,143,000)
-------------------------------------------------------------------------------------------
$ - 0 - $ - 0 -
===========================================================================================
At December 31, 1997, Peerless had cumulative net
operating loss carryforwards of approximately
$11,673,000 available to offset future taxable income.
These carryforwards will expire in various years through
2012.
At December 31, 1997 and 1996, the Company had
investment tax credit carryforwards of approximately
$346,000 available to be carried forward to
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
PEERLESS TUBE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C>
offset future taxes payable. A substantial portion of these carryforwards will expire in the
year 2001.
No regular income tax expense was recorded in 1997, 1996 or 1995 as income, if any, before
income taxes was fully offset by previously existing net operating loss carryforwards. No
deferred tax assets or liabilities are recognized for any of the years presented.
8. REVOLVING The Company has a revolving credit facility with an asset-based working capital
CREDIT lender expiring in January 1999. Borrowings are based on specified levels of
FACILITY: accounts receivable and inventories of the Company and bear interest at the prime
rate (8.5% at December 31, 1997) plus 3-1/2% to 4% on the outstanding balance. There
are minimum borrowing requirements of $1,500,000 under this line of credit. The
maximum amount available under the line of credit is $4,750,000 less the principal
balance of the equipment term loan ($1,009,000 at December 31, 1997) (see Note 9).
Certain of the terms of the revolving credit agreement, as amended, require the
pledge of substantially all the Company's assets as collateral. In addition, this
agreement requires the Company to comply with various financial covenants, including
restrictions on the amounts of capital expenditures and a prohibition on the payment
of dividends on the Company's common stock. The Company was in compliance with the
covenants at December 31, 1997.
9. LONG-TERM Long-term debt is comprised of the following:
DEBT:
December 31, 1997 1996
------------------------------------------------------------------------------------------
Equipment term loan (the Company received additional advances
during 1997 amounting to $552,000) payable in monthly
installments of $15,625 plus interest through January 1, 2000
with a final balloon payment of $809,650 on February 1, 2000.
The loan bears interest at the prime rate (8.5% at December 31,
1997) plus 4%. $1,009,000 $ 639,000
Various purchase money capital leases for manufacturing
and office equipment, final payment due in 2000,
with interest rates ranging from 11% to 18%. 114,000 112,000
------------------------------------------------------------------------------------------
1,123,000 751,000
Less current portion (232,000) (267,000)
------------------------------------------------------------------------------------------
LONG-TERM DEBT $ 891,000 $ 484,000
==========================================================================================
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
PEERLESS TUBE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
Long-term debt of $891,000 matures as follows:
Year ending December 31,
1999 $225,000
2000 666,000
----------------------------------------------------------------------------------
$891,000
==================================================================================
10. SALE/LEASEBACK OF In 1991, the Company entered into a sale/leaseback agreement for its Puerto Rico
PUERTO RICO office and production facility. Under the agreement, the Company sold the facility
FACILITY: at an aggregate price of $6,000,000. Concurrently, the Company entered into an
agreement to lease back the facility for 181 months at an average annual rental of
approximately $750,000. The transaction resulted in a gain of approximately
$1,800,000 which was deferred and was being amortized over the term of the related
lease.
Effective November 1, 1996, the lease agreement was terminated by the buyer thereby
eliminating the annual leaseback payment of $750,000. As a result Peerless Tube
Company of Puerto Rico has ceased operations and the remaining production
requirements of this facility will be met by utilizing the excess capacity at the
Bloomfield, NJ, facility. For the year ended December 31, 1996, the Company
recognized a gain of $1,555,000, net of Puerto Rico capital gain taxes of $120,000,
in connection with the termination of this lease as follows:
Write-off of machinery and equipment $(2,995,000)
Write-off of capital lease obligation 3,330,000
Recognition of deferred gain 1,123,000
Termination payment received pursuant to the agreement 329,000
Puerto Rico capital gain taxes (120,000)
Other (112,000)
----------------------------------------------------------------------------------
NET GAIN ON TERMINATION OF SALE/LEASEBACK TRANSACTION $1,555,000
==================================================================================
11. PENSION PLANS: The Company maintained a noncontributory defined benefit plan covering most of its
domestic employees. In 1990, the Company amended its benefit plan to provide for
the suspension of benefit accruals for future services. The benefit for the plan
is based primarily on years of service and employees' pay through the date that
benefit plan accruals were suspended. The Company's funding policy required
contributions to the plan consistent with the funding requirements under the
Employee Retirement Income Security Act of 1974. Plan assets consist of a balanced
common stock and fixed income portfolio with two investment managers.
In 1994, the Company amended its plan, as required, to be in compliance with the
Tax Reform Act of 1986 and subsequent legislation. In addition, the Company
adopted the provisions of the Retirement Protection Act of 1994 enacted under
the General Agreement on Tariffs and Trade legislation effective December 31,
1994 for all retirements effective March 1, 1995.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
PEERLESS TUBE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Net periodic pension income is as follows:
December 31, 1996 1995
--------------------------------------------------------------------------------------------------
Interest cost on projected benefit obligation $ 984,000 $ 1,006,000
Actual (return) on assets (1,608,000) (3,227,000)
Net amortization and deferral 438,000 2,212,000
--------------------------------------------------------------------------------------------------
NET PERIODIC PENSION INCOME $ (186,000) $ (9,000)
==================================================================================================
The plan's funded status and amounts recognized in the Company's balance sheet at December
31, 1996 are as follows:
Actuarial present value of projected benefit obligation (all vested) $13,644,000
Plan assets at fair value 15,580,000
--------------------------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation 1,936,000
Unrecognized net (gain) loss (1,311,000)
--------------------------------------------------------------------------------------------------
PREPAID PENSION COST $ 625,000
==================================================================================================
The assumptions used in the accounting were as follows:
Discount rate used to compute projected benefit obligation 7.4%
Expected long-term rate of return on plan assets 8
--------------------------------------------------------------------------------------------------
Benefit accruals under the plan had been discontinued in 1990. On April 23, 1997, funds were
transferred from the plan to the AIG Life Insurance Company for the purchase of nonparticipating
annuity contracts and other irrevocable commitments for substantially all of the participants.
The plan was formally terminated effective August 1, 1997. On or about October 15, 1997, lump-sum
payments were made to the remaining participants in complete settlement of all benefit obligations
under the plan. There were residual assets remaining in the plan subsequent to these lump-sum payments.
The overfunded amount, less termination charges, taxes and other required costs, is not expected to be
material and will revert to the Company. Therefore, the prepaid cost of $625,000 has been charged to
operations in 1997.
Commencing in 1995, the Company offered a 401(k) retirement savings plan to all nonunion full-time
employees who have completed one year of employment. Employees may contribute a percentage of their
gross salaries as defined in the plan, subject to limits prescribed by the Internal Revenue Service.
The Company's contributions are at the discretion of the board of directors. Participants are fully
vested upon entering the plan. Officers of the Company serve as trustees of the plan. Contributions for
the year ended December 31, 1997 and 1996 were approximately $13,000 in each year. For the year ended
December 31, 1995, the Company made a provision of $40,000 for contributions and administrative
expenses related to the start-up and administration of this plan.
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
PEERLESS TUBE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C>
12. STOCK OPTION SFAS No. 123, Accounting for Stock-Based Compensation, encourages but does not
PLANS: require companies to record compensation cost for employee stock option grants. The
Company has chosen to continue to account for employee option grants using Accounting
Principles Board Opinion No. 25. Accordingly, no compensation expense has been
recognized for employee stock option grants and the Company has elected to adopt the
disclosure provisions only of SFAS No. 123.
No stock options were granted by the Company during the three-year period ended
December 31, 1997. Accordingly, no pro forma disclosures are presented.
In 1992, the Company adopted a stock option plan under which incentive stock options
may be granted to officers and key employees to purchase up to a maximum of 250,000
shares of common stock. The options granted to employees under the plan are to vest
and become exercisable at the rate of 25% per year following the grant of such
options provided that certain conditions are satisfied. The stock options are
exercisable at a price of not less than 100%, or 110% in the case of a 10%
stockholder, of the market value at date of grant. Exercise prices of
options issued range from $1.65 to $6.50 per share. All options are exercisable over
a 10-year period, except for 10% stockholders, in which case the period is 5 years.
Activity in stock options during the years was as follows:
Weighted-
Average
Exercise Price
1996 and
Year ended December 31, 1997 1996 1995 1997 1995
----------------------------------------------------------------------------------
Outstanding at beginning of year 124,200 234,200 234,200 $2.50 $1.92
Expired during the year (14,400) (110,000) 5.75 1.25
----------------------------------------------------------------------------------
OUTSTANDING AT END OF YEAR 109,800 124,200 234,200 $2.08 $2.50
==================================================================================
Options exercisable at year-end 84,800 99,200 132,500
==================================================================================
Number of
Options Exercisable
at December 31, 1997 Exercise Price Expiration Date
----------------------------------------------------------------------------------
75,000 $ 1.65 1998
9,800 6.50 1998
==================================================================================
13. OTHER POST- The Company provides healthcare and life insurance benefits to certain active and
RETIREMENT retired employees. In 1992, the Company adopted SFAS No. 106, Employer's Accounting
BENEFITS: for Post-Retirement Benefits Other Than Pensions. SFAS No. 106 requires the Company
to accrue the estimated cost of retiree benefit payments during an employee's active
service life. The Company previously expensed these costs as paid. The retiree medical
and life insurance programs are not funded.
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
PEERLESS TUBE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C>
Claims and expenses are paid from the general assets of the Company. The balance of
this accrual is adjusted based on actuarial adjustments and employment activity during
the periods involved. The activity of this liability is as follows:
December 31, 1997 1996 1995
-------------------------------------------------------------------------------------
Beginning of year $ 70,000 $120,000 $175,000
Adjustment to recognize the cost
of benefits, net (47,000) (50,000) (55,000)
-------------------------------------------------------------------------------------
END OF YEAR $ 23,000 $ 70,000 $120,000
=====================================================================================
14. MAJOR CUST- In 1997, sales to two customers accounted for 61% of the Company's sales. In 1996,
OMERS AND three customers accounted for 55% (22%, 21% and 12%) of the Company's sales. In
CONCENTRA- 1995, four customers accounted for 68% (24%, 16%, 15% and 13%) of the Company's
TION OF CREDIT sales. In November 1996, the customer representing 12% of the Company's sales
RISK: changed its product line, and as a result ceased doing business with the Company. In
March 1996, the Company's largest account chose not to renew its contract with the
Company.
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash and accounts receivable. At December 31, 1997,
in management's opinion, there is no significant risk of loss on these instruments
and management believes its allowance for losses are adequate. One customer
accounted for approximately 41% of net accounts receivable at December 31, 1997.
15. RELATED PARTY A former director of the Company, who resigned in March 1995, has an ownership
TRANSACTIONS: interest in a company that supplied paint to the Company. Amounts paid by the
Company to this supplier during 1995, the year prior to his resignation from the
board of directors, approximated $347,000.
16. COMMITMENTS In January 1992, the Company entered into a supply agreement with a vendor for the
AND purchase of aluminum slugs for a period of eight years. The Company may terminate
CONTINGENCIES: this supply agreement upon 30 days' written notice to the buyer provided the buyer's
selling price to the Company is not competitive with market quotes obtained from at
least 3 other vendors for aluminum.
At December 31, 1997, the Company had purchase commitments outstanding of
approximately $405,000 for raw aluminum through December 1998. These are
substantially offset by firm purchase orders on contracts from customers.
The Company is a defendant in several lawsuits arising in the normal course of
business. Counsel for the Company cannot offer an opinion as to the probable
outcomes of such cases. The Company believes these suits are without merit and is
vigorously defending its position in each suit.
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
PEERLESS TUBE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C>
The Company is subject to federal, state and local requirements regulating the
discharge of materials into the environment or otherwise relating to the protection
of the environment. It is the Company's policy to comply with these requirements,
and the Company believes that as a general matter its policies, practices and
procedures are properly designed to prevent unreasonable risk of environmental
damage, and of resulting financial liability, in connection with its business. Some
risk of environmental damage is, however, inherent in particular operations and
products of the Company, as is the case with other companies engaged in similar
businesses.
The Company is and has been engaged in the handling, manufacture, use or disposal of
several substances which are classified as hazardous or toxic by one or more
regulatory agencies. The Company believes that its handling, manufacture, use and
disposal of such substances have generally been in accord with environmental laws and
regulations. It is possible, however, that future knowledge or other developments,
such as improved capability to detect such substances in the environment,
increasingly strict environmental laws and standards and enforcement policies
thereunder, could bring into question the Company's handling, manufacture, use or
disposal of such substances.
The Company has and will continue to incur operating costs for environmental
compliance. In connection with the removal of several underground storage tanks, the
Company is monitoring several wells to ensure appropriate action is taken with
respect to any ground water contamination. Future modifications and capital
additions to existing equipment may also be required as regulations are enacted. At
the present time, management is unable to fully estimate the amount of potential
expenditures in these areas for future years, but believes the Company has acted
prudently in its environmental practices and responsibilities.
</TABLE>
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 202,000
<SECURITIES> 10,000
<RECEIVABLES> 1,307,000
<ALLOWANCES> (290,000)
<INVENTORY> 2,214,000
<CURRENT-ASSETS> 3,443,000
<PP&E> 22,927,000
<DEPRECIATION> (19,941,000)
<TOTAL-ASSETS> 6,429,000
<CURRENT-LIABILITIES> 3,586,000
<BONDS> 1,554,000
0
(344,000)
<COMMON> 3,382,000
<OTHER-SE> (1,749,000)
<TOTAL-LIABILITY-AND-EQUITY> 6,429,000
<SALES> 16,288,000
<TOTAL-REVENUES> 16,288,000
<CGS> 16,060,000
<TOTAL-COSTS> 16,060,000
<OTHER-EXPENSES> 2,778,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 278,000
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (89,000)
<CHANGES> 0
<NET-INCOME> (2,739,000)
<EPS-PRIMARY> (1.11)
<EPS-DILUTED> 0
</TABLE>
