<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
<TABLE>
<S> <C>
For the fiscal year ended December 31, 1998 Commission File No. 1-7215
PEERLESS TUBE COMPANY
New Jersey (State of Jurisdiction) 22-1191280 (FEI#)
</TABLE>
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 4, 1999, the aggregate market value of the voting stock held by non
affiliates of the Registrant was approximately $923,615. The market value is
based on the bid price of $ .3750 as of March 4, 1999. Over the last 52 weeks,
actual trades of relatively small amounts of the Company's shares of stock have
ranged in transaction price from $ .0900 - $ .5200.
The Hill, Thompson, Magi & Company are 18% stockholders in the Peerless Tube
Company.
Common Stock, Par Value $1.33-1/3
Outstanding at March 4, 1999. 2,462,973 shares
Documents incorporated by reference:
Part I and II: Annual Report to Shareholders for the Year Ended December 31,
1998.
1
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<TABLE>
<CAPTION>
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TABLE OF CONTENTS
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Item Page
<S> <C> <C> <C>
Part I. 1 Business 3
2 Properties 6
3 Legal Proceedings 6
4 Submission of Matters to a Vote of Security Holders 7
Part II. 5 Market for the Registrant's Common Stock and Related Stockholder Matters. 9
6 Selected Financial Data 10
7 Management's Discussion and Analysis of Financial Condition and Results 11
of Operations
8 Financial Statements and Supplementary Data 15
9 Changes in and Disagreements with Accountants on Accounting and 15
Financial Disclosure
Part III. 10 Directors and Executive Officers of the Registrant 16*
11 Executive Compensation 16*
12 Security Ownership of Certain Beneficial Owners and Management 16*
13 Certain Relationships and Related Transactions 16*
Part IV. 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 17
Signatures
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</TABLE>
*These items are omitted since the Registrant has simultaneously filed with the
Securities and Exchange Commission a definitive Proxy Statement pursuant to
Regulation 14A involving the election of directors. Certain information relating
to the Executive Officers of the Registrant appears on page 8 and 16 of this
report.
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, automotive and
industrials, paints and finishes, insect sprays, and food products. Aluminum
containers 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. The
estimated 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 manufacturers. 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 product
demands, and at the same time remain price competitive.
<TABLE>
<CAPTION>
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SALES 1996-1998
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Description 1998 1997 1996
<S> <C> <C> <C>
Seamless aerosol cans $14,300,000 $15,152,000 $17,921,000
Collapsible metal tubes 782,000 844,000 5,175,000
Miscellaneous 475,000 292,000 520,000
----------------- ------------------- ----------------
Total $15,557,000 $16,288,000 $23,616,000
================= =================== ================
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</TABLE>
3
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The Company supplies approximately 100 customers including 15-20 major accounts.
In 1998, two customers accounted for 60% (48% and 12%) of the Company's sales.
In 1997, two customers accounted for 61% (34% and 27%) 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.
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.
The current sales backlog of production orders and inventory on hand is
approximately $2.6 million which is less than last year. This position can
change rapidly as customers "release" new orders or adjust desired quantities.
The Company's production is against firm orders and subject to 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 its 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 length. 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" 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"
machine turns the neck inward or outward, so that the lip touches the inside of
the neck to form a continuous interior circumferential bead leaving the mouth
circular. In addition to product compatibility discussed below, this necking
process, plus the seamless construction and the exceptionally high bursting
strength, gives
4
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the aerosol its chief selling 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 up to
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
print inks, base coat formulation 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 minor changes may throw out
all the formulation specifications.
Some of the external coating problems are ameliorated by the use of aluminum,
which has 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 coating 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 marketer 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.
5
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ENVIRONMENT
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 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
law 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.
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.
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, which 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.
6
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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, of which $60,000 was paid upon execution of the
agreement. The remaining balance has been reflected as a liability in the
accompanying consolidated financial statements to be paid as follows:
$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. Counsel 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 at the annual meeting, expected to be held in September, will
be asked to elect the Board of Directors and ratify the Company's independent
auditors.
7
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EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
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Name, position Officer Age Business Background
since
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<S> <C> <C> <C>
Frederic Remington, Chairman of the 1965 69 Elected to the Board of
Board, Chief Executive Officer Directors in 1965. Joined the
Company in 1950 after attending
Temple University and New
Jersey Institute of Technology,
formerly Newark College of
Engineering. Vice President,
Operations in 1968, Vice
President, Engineering in 1977,
Senior Vice President,
Engineering in 1986 and
Chairman of the Board and Chief
Executive Officer in 1989.
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Richard W. Potts, President and Director 1970 62 Elected to the Board of
Directors in 1970. 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, Manufacturing
since 1968. Senior Vice
President, Production in 1986.
President and Chief Operating
Officer in 1989. Member of the
Executive Committee of the
Board.
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Ann Gaccione, Corporate Secretary 1992 61 Joined the Company in 1978.
Secretary, 1978-1988; assistant
corporate secretary, 1989-1991;
and executive secretary and
administrative assistant to the
Chairman of the Board, 1989 to
present.
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</TABLE>
Notes:
Not listed is George J. Blumenschien, Vice President, Finance, who resigned
effective July 31, 1998
8
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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, 1998, 1997, and 1996 are listed as follows:
<TABLE>
<CAPTION>
QUARTER 1998 1997 1996
------------------------------------------------
<S> <C> <C> <C>
1 $0.3125 $0.6250 $0.4400
$0.2600 $0.4375 $0.3750
2 $0.4375 $0.3750 $0.4400
$0.2800 $0.3125 $0.4400
3 $0.2800 $0.5000 $0.6250
$0.1250 $0.3125 $0.5000
4 $0.2500 $0.3750 $0.6600
$0.0625 $0.3000 $0.3750
------------------------------------------------
</TABLE>
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, 1998, was 1,100.
9
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ITEM 6: SELECTED FINANCIAL DATA
Peerless Tube Company Selected
Financial Data Five Years Ended
December 31,
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $ 15,557,000 $ 16,288,000 $23,616,000 $ 29,793,000 $33,085,000
Net income (loss) ($1,840,000) ($2,739,000) $ 766,000 ($1,775,000) ($604,000)
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 ($0.75) ($1.11) $ 0.31 ($0.72) ($0.25)
Cash dividends declared $ 0 $ 0 $ 0 $ 0 $ 0
Working capital (deficit) ($1,735,000) ($153,000) ($225,000) $ 31,000 $ 888,000
Current ratio 0.6 1.0 1.0 1.0 1.1
Property, plant and equipment - at $ 19,700,000 $ 19,700,000 $19,638,000 $ 24,490,000 $28,343,000
cost
Accumulated depreciation $ 17,562,000 $ 16,714,000 $15,514,000 $ 16,407,000 $18,879,000
Property, plant and equipment - net $ 2,138,000 $ 2,986,000 $ 4,124,000 $ 8,083,000 $ 9,464,000
Total assets $ 4,656,000 $ 6,429,000 $10,030,000 $ 15,443,000 $17,500,000
Long-term debt $ 651,000 $ 891,000 $ 484,000 $ 4,009,000 $ 4,287,000
Total liabilities $ 5,207,000 $ 5,140,000 $ 6,002,000 $ 12,181,000 $12,927,000
Stockholders equity (deficit) ($551,000) $ 1,289,000 $ 4,028,000 $ 3,262,000 $ 4,573,000
Debt to equity ratio N/A 4.1 1.5 3.7 2.8
</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.
10
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ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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MANAGEMENT DISCUSSION AND ANALYSIS
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BUSINESS AND FINANCIAL RESTRUCTURE
During 1998, while the sales of the Company decreased $731,000, approximately
4%, the Company reduced it's net loss by $899,000, largely through a reduction
in selling, general and administrative expenses. The Company will continue to
monitor these expenses and will strive further to reduce expenses which are
included as part of the cost of sales group.
On January 8, 1999, the Company announced that it has reached a long term supply
agreement with the Joseph Company, to supply aluminum containers to be used in
the manufacturing of a self-chilling beverage can known as the "Chill Can".
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SALES AND RESULTS OF OPERATIONS 1998 COMPARED TO 1997
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SALES
Net sales for the year ended December 31, 1998 decreased $731,000 or 4% on sales
of $15,557,000 when compared to 1997 net sales of $16,288,000. Aerosol volume
for 1998 was $14,300,000 as compared with sales for 1997 of $15,152,000 or a
decrease of 6%. Aluminum tube sales for 1998 were $782,000 as compared with
1997 tube sales of $844,000 or a decrease of 7%. Miscellaneous sales for 1998
totaled $475,000 as compared to $292,000 in 1997. The decrease in sales was a
result of a slight decrease in sales to a major customer.
In 1998, the Company's sales to two customers accounted for 60% (48% and 12%) of
the Company's total sales. In 1997, two customers accounted for 61% (34% and
27%) of the Company's sales.
GROSS MARGIN TRENDS AND DISCUSSION
The gross profit for the years ended December 31, 1998 and December 31, 1997 was
$303,000 or 2.0% of sales and $228,000 or 1.0% of sales respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the year ended December 31,
1998 were $1,874,000 or 12% of sales as compared to $2,778,000 or 17% for the
year ended December 1997.
INTEREST EXPENSE, AND OTHER INCOME, NET
Interest expense for the year ended December 31, 1998 was $270,000 as compared
to $278,000 in 1997.
Other income for the year ended December 31, 1998 was $1,000 as compared to
$89,000 for the year ended December 31, 1997. Most of the other income in 1997
related to the surrender of life insurance policies.
11
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LIQUIDITY AND CAPITAL RESOURCES
The Company had a negative working capital of $1,735,000 at December 31, 1998.
This was a $1,582,000 decrease from the negative working capital of $153,000 at
December 31, 1997.
Cash at December 31, 1998 was $15,000 or a decrease of $175,000 when compared to
the same date in 1997. In order to meet cash requirements during 1998, the
Company was required to increase its line of credit in order to minimize the
drain in working capital and help in the net repayment of debt. The increase
to the line of credit was $271,000.
The Company has a working capital loan secured by the Company's accounts
receivables 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.
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SALES AND RESULTS OF OPERATIONS 1997 COMPARED TO 1996
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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 lines was a result of excess capacity in the
aerosol markets and the closing of the Puerto Rico facility.
In 1997, the Company's sales to two customers accounted for 61% (34% and 27%) 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 1.0% of sales and $2,115,000 or 9.0% 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 Company's 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 in order to accomplish the above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
12
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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 is due to non-recurring legal
expenses.
INTEREST EXPENSE, AND OTHER INCOME, NET
Interest expense for the year ended December 31, 1997 was $278,000 as compared
to $607,000 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 had a negative working capital of ($153,000) at December 31, 1997.
This was approximately a $72,000 increase from the negative 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. In order to meet cash requirements during
1997, the Company 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
receivables 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.
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SALES AND RESULTS OF OPERATIONS 1996 COMPARED TO 1995
- --------------------------------------------------------------------------------
SALES
Net sales for the year ended December 31, 1996 decreased $6,177,000 or 21% on
sales of $ 23,616,000 when compared to 1995 net sales of 29,793,000. Aerosol
volume for 1996 was $17,921,000 as compared with sales for 1995 of $19,627,000
or a decrease of 9%. Aluminum Tube sales for 1996 was $5,175,000 as compared
with 1995 tube sales of $9,739,000 or a decrease of 47%. Miscellaneous sales
for 1996 totaled $520,000 as compared to 1995 of $427,000. The decrease in 1996
vs. 1995 for both aerosols and tube sales was due almost entirely to the loss of
a major account in March 1996 and the closing of the tube facility in Puerto
Rico.
13
<PAGE>
In 1996, the Company's sales to 3 customers accounted for 55% (22%, 21%, and
12%) of the Company's total sales. In 1995, four customers accounted for 68%
(24%, 16%, 15% and 13%) of the Company's sales. (See note 14, of notes to the
Financial Statements).
The overall aerosol market continues to make packaging decisions for new product
introduction between those that favor aluminum containers as to compatibility
with environmentally acceptable formulations, and alternatives that are less
expensive. Aggressive marketing of the products that are "alcohol free" also
helps counter some consumer perception that aerosols are harmful to the ozone
layer. The Company hopes to attract new sales as it works with industry and
public relation groups to dispel this perception. While the industry forecasts
growth, excess industry capacity may slow this growth, and will be slow in
coming.
The Company's sales of aluminum aerosols are approximately 76% of the 1996 sales
as compared to 69% in 1995. This mix change is a result of the loss of a major
customer in 1996, the closing of the Puerto Rico facility in 1996 and most
importantly the increased consumer demand for plastic tubes opposed to aluminum
tubes.
GROSS MARGIN TRENDS AND DISCUSSION
The gross profit for the year ended December 31, 1996 and December 31, 1995 was
$2,115,000 or 9% of sales and $1,462,000 or 5% of sales respectively. The
increase in gross margin is primarily do to the decrease in aluminum prices
during 1996. In general, a large part of the Company's costs are "fixed" rather
than variable. While the Company has been successful in reducing costs, with
the forecasted reduction in sales in 1997, it must continue to successfully
leverage its machine hours in order to be profitable. However, an increase
level of sales is also required.
Management believes it can continue to improve its gross margins in 1997 beyond
what was achieved in 1996. However, the overall improvement in gross margin and
operating results is expected to be gradual. The Company's management continues
to make gains operationally because of the favorable price of aluminum, labor
reductions and operational improvements.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the year ended December 31,
1996 were $2,528,000 or 11% of sales as compared to December 1995 SG&A of
$2,825,000 or 9.5%. Selling, general and administrative expense increased in
1996 in relation to sales because of the loss of a major account in 1996 and the
closing of the Puerto Rico facility November 1996.
INTEREST EXPENSE, AND OTHER INCOME, NET
Interest expense for the year ended December 31, 1996 was approximately $607,000
as compared to $816,000 in 1995. In 1996 interest decreased approximately
$209,000, as compared to 1995, because of the decrease in the prime rate and
lower average borrowing.
Other income for the year ended December 31, 1996 was $1,786,000 as compared to
$754,000 for the year ended December 31, 1995. The increase was attributable to
the gain on the termination of the Sale Lease Back agreement of $1,555,000.(see
note 10, of notes to the Financial Statements). Other income for 1996 and 1995
was also realized from the sale of substantially depreciated production lines
not needed for current operations.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCE
The Company had a negative working capital of ($225,000) at December 31, 1996.
This was approximately a $256,000 decrease from the working capital of $31,000
at December 31, 1995. While many factors effect the components of working
capital, the primary reason for the decrease in working capital relates to the
Company's continuing losses.
Net cash at December 31, 1996 was $227,000 or a decrease of $433,000 when
compared to the same time period in 1995. The decrease in cash in 1996 was
primarily related to Company losses. However , the Company was provided with
cash of $70,000 from the sale of certain obsolete production equipment and
additional proceeds of $329,000 was realized form the termination of the
sale/leaseback.
The debt -equity- ratio at December 31, 1996 was 1.5:1 compared to 3.7:1 at
December 31, 1995. The change in this financial ratio was adversely impacted by
the Company's operating loss in 1996.
The Company has a working capital loan of up $4,000,000 secured by the Company's
account receivable and inventories. As of December 31, 1996 the Company had
cash and cash equivalents of approximately $227,000 and an availability under
the line of credit of approximately another $600,000.
Management must continue to monitor its cash resources very closely.
Operational improvements, favorable aluminum pricing in the market, and an
aggressive marketing approach will be required in 1997 in-order to improve cash
management.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements, together with the reports
therein of Goldstein Golub Kessler LLP dated March 4, 1999 appear on pages 1-14,
auditor's section, of the Company's 1998 annual report to shareholders.
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 1998.
15
<PAGE>
- --------------------------------------------------------------------------------
PART III.
- --------------------------------------------------------------------------------
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 Commission
pursuant to Regulation 14a, and such information is incorporated by reference.
Certain other information relating to the Executive Officers of the Registrant
appears at pages 8 and 13 of this Form 10-K Annual Report.
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
None.
16
<PAGE>
- --------------------------------------------------------------------------------
PART 1V.
- --------------------------------------------------------------------------------
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as part of this report:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Form 10-K Annual Report
Annual to Shareholders
Description Report Page Page
<S> <C> <C> <C> <C>
(1) Consolidated Financial Statements*:
a.) Report of Independent Auditors 1
Consolidated Balance Sheets as of December 31, 1998 2
and 1997
Consolidated Statements of Operations and Accumulated 3
Deficit For the Years Ended December 31, 1998,
1997, and 1996
Consolidated Statements of Cash Flows for the Years 4
Ended
December 31, 1998, 1997 and 1996.
Notes to the Consolidated Financial Statements
(2) Consolidated 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.
- ------------------------------------------------------------------------------------------------------
</TABLE>
*The consolidated financial statement schedules should be read in conjunction
with the Consolidated 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 consolidated financial
statements or the notes thereto.
17
<PAGE>
SIGNATURES
Pursuant to the requirements 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 TUBE COMPANY
Registrant
By:
____________________________
Frederic Remington, Jr.
Chairman of the Board 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.
<TABLE>
_________________________________________________ ____________________________________________
<S> <C>
Frederic Remington, Jr. Richard W. Potts
Chairman of the Board and Chief Executive Officer President and Director
_________________________________________________ ____________________________________________
S. Jervis Brinton, Jr. Frank Leo
Director Director
_________________________________________________ ____________________________________________
Frank McDermott Leonard Felzenberg
Director Director
_________________________________________________
John Remington
Director
</TABLE>
18
<PAGE>
PEERLESS TUBE COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
<PAGE>
PEERLESS TUBE COMPANY
CONTENTS
DECEMBER 31, 1998
================================================================================
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>
[LETTERHEAD OF GOLDSTEIN GOLUB KESSLER LLP APPEARS HERE]
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, 1998 and 1997, 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, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe 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, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998 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, negative cash flows and has a stockholders' deficiency. 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.
/s/ Goldstein Golub Kessler LLP
- -----------------------------------
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
March 4, 1999
<PAGE>
PEERLESS TUBE COMPANY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
=============================================================================================
DECEMBER 31, 1998 1997
- ---------------------------------------------------------------------------------------------
(rounded to nearest thousand)
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 15,000 $ 190,000
Accounts receivable, less allowance for doubtful
accounts of $100,000 and $210,000, respectively 1,184,000 983,000
Inventories 1,233,000 2,214,000
Prepaid expenses and other current assets 86,000 46,000
- ---------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 2,518,000 3,433,000
Property, Plant and Equipment, net 2,138,000 2,986,000
Other Assets 10,000
Deferred Tax Assets, net of valuation allowance of $5,862,000
and $4,956,000, respectively
- ---------------------------------------------------------------------------------------------
TOTAL ASSETS $ 4,656,000 $ 6,429,000
=============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Accounts payable $ 2,004,000 $ 1,990,000
Accrued liabilities 1,145,000 767,000
Revolving credit line 868,000 597,000
Current portion of long-term debt 236,000 232,000
- ---------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 4,253,000 3,586,000
Long-term Debt 651,000 891,000
Other Liabilities 303,000 663,000
- ---------------------------------------------------------------------------------------------
TOTAL LIABILITIES 5,207,000 5,140,000
- ---------------------------------------------------------------------------------------------
Commitments and Contingencies
Stockholders' Equity (Deficiency):
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 (18,028,000) (16,188,000)
Less 73,962 shares of stock in treasury, at cost (344,000) (344,000)
- ---------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIENCY) (551,000) 1,289,000
- ---------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) $ 4,656,000 $ 6,429,000
=============================================================================================
</TABLE>
The accompanying notes and independent auditor's report should be
read in conjunction with the consolidated financial statements
2
<PAGE>
PEERLESS TUBE COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
================================================================================
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------
(rounded to nearest thousand except per share amounts)
<S> <C> <C> <C>
Net sales $ 15,557,000 $ 16,288,000 $ 23,616,000
Cost of sales 15,254,000 16,060,000 21,501,000
- -----------------------------------------------------------------------------------------------------
Gross profit 303,000 228,000 2,115,000
Selling, general and administrative expenses 1,874,000 2,778,000 2,528,000
- -----------------------------------------------------------------------------------------------------
Loss from operations (1,571,000) (2,550,000) (413,000)
- -----------------------------------------------------------------------------------------------------
Other income (expense):
Interest expense (270,000) (278,000) (607,000)
Gain on termination of sale/leaseback
agreement 1,555,000
Other income, net 1,000 89,000 231,000
- -----------------------------------------------------------------------------------------------------
(269,000) (189,000) 1,179,000
- -----------------------------------------------------------------------------------------------------
Net income (loss) (1,840,000) (2,739,000) 766,000
Accumulated deficit at beginning of year (16,188,000) (13,449,000) (14,215,000)
- -----------------------------------------------------------------------------------------------------
Accumulated deficit at end of year $(18,028,000) $(16,188,000) $(13,449,000)
=====================================================================================================
Basic income (loss) per share $ (.75) $ (1.11) $ .31
=====================================================================================================
Weighted-average shares outstanding 2,462,973 2,462,973 2,462,973
=====================================================================================================
</TABLE>
The accompanying notes and independent auditor's report should be
read in conjunction with the consolidated financial statements
3
<PAGE>
PEERLESS TUBE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
===============================================================================================
YEAR ENDED DECEMBER 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------
(rounded to nearest thousand)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(1,840,000) $(2,739,000) $ 766,000
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 848,000 1,200,000 1,010,000
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
Provision for bad debts (110,000) (25,000) 95,000
Deferred gain (99,000)
Other, net (363,000)
(Increase) decrease in operating assets:
Accounts receivable (91,000) 1,237,000 1,407,000
Inventories 981,000 446,000 (235,000)
Prepaid expenses and other current assets (40,000) 95,000 (61,000)
Other assets 10,000 48,000
Increase (decrease) in operating liabilities:
Accounts payable 14,000 (583,000) (443,000)
Accrued liabilities 378,000 (722,000) 74,000
Other liabilities (360,000) 593,000 (50,000)
- -----------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES (210,000) 175,000 443,000
- -----------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from termination of sale/leaseback 329,000
Proceeds from sale of assets, net 70,000
Purchases of property, plant and equipment (49,000)
- -----------------------------------------------------------------------------------------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 350,000
- -----------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from long-term debt 552,000
Net (repayments) borrowings under credit line 271,000 (522,000) (598,000)
Reduction of long-term debt and current
maturities (236,000) (242,000) (628,000)
- -----------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 35,000 (212,000) (1,226,000)
- -----------------------------------------------------------------------------------------------
Net decrease in cash (175,000) (37,000) (433,000)
Cash at beginning of year 190,000 227,000 660,000
- -----------------------------------------------------------------------------------------------
Cash at end of year $ 15,000 $ 190,000 $ 227,000
===============================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for interest $ 270,000 $ 278,000 $ 607,000
===============================================================================================
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING AND
INVESTING ACTIVITIES:
Capital lease obligations incurred for
acquisition of property and equipment $ 62,000 $ 17,000
===============================================================================================
Write-off of capital lease obligation $ 3,330,000
===============================================================================================
Write-off of fixed assets $ 2,995,000
===============================================================================================
</TABLE>
The accompanying notes and independent auditor's report should be
read in conjunction with the consolidated financial statements
4
<PAGE>
PEERLESS TUBE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
================================================================================
1. BUSINESS ORGANIZATION Peerless Tube Company ("Peerless") and its
AND SIGNIFICANT subsidiary (collectively the "Company") supply
ACCOUNTING POLICIES: collapsible metal tubes and seamless aluminum
aerosol containers to national marketers primarily
in 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.
5
<PAGE>
PEERLESS TUBE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
================================================================================
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.
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,
1998 and 1997, 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.
For comparability, certain 1997 amounts have been
reclassified, where appropriate, to conform to the
1998 presentation.
2. BUSINESS AND DEBT The accompanying consolidated financial statements
RESTRUCTURING: have been prepared in conformity with generally
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 and currently has a stockholders' deficiency.
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
of which $60,000 has been paid upon execution of
the agreement. The remaining balance has been
reflected as a liability in the accompanying
consolidated financial statements to be paid as
follows:
$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
6
<PAGE>
PEERLESS TUBE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
================================================================================
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 working capital, help minimize the
financial losses, and create the opportunity for
the Company to continue as a going concern.
<TABLE>
<CAPTION>
3. ALLOWANCE Information relating to the allowance for doubtful accounts is as follows:
FOR DOUBTFUL
ACCOUNTS: December 31, 1998 1997
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 210,000 $ 235,000
Deductions or write-off of uncollectible
accounts receivable (110,000) (25,000)
-----------------------------------------------------------------------------
BALANCE AT END OF YEAR $ 100,000 $ 210,000
=============================================================================
4. INVENTORIES: Inventories are comprised of the following:
December 31, 1998 1997
-----------------------------------------------------------------------------
Raw materials $ 648,000 $ 1,156,000
Work-in-process 27,000 52,000
Finished goods 558,000 1,006,000
-----------------------------------------------------------------------------
$ 1,233,000 $ 2,214,000
=============================================================================
</TABLE>
7
<PAGE>
PEERLESS TUBE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
================================================================================
5. PROPERTY, Property, plant and equipment is comprised of the following:
PLANT AND
EQUIPMENT:
<TABLE>
<CAPTION>
Estimated
December 31, 1998 1997 Useful Life
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Land $ 462,000 $ 462,000
Buildings and improvements 4,348,000 4,348,000 10 to 45 years
Machinery and equipment 13,276,000 13,276,000 7 to 13 years
Furniture, fixtures and office
equipment 1,614,000 1,614,000 5 to 10 years
---------------------------------------------------------------------------------------
19,700,000 19,700,000
Less accumulated depreciation
and amortization (17,562,000) (16,714,000)
---------------------------------------------------------------------------------------
$ 2,138,000 $ 2,986,000
=======================================================================================
</TABLE>
Substantially all of the Company's equipment serves as
collateral for short- and long-term borrowings (see Notes 8
and 9).
6. ACCRUED Accrued liabilities are comprised of the following:
LIABILITIES:
<TABLE>
<CAPTION>
December 31, 1998 1997
---------------------------------------------------------------------------------------
<S> <C> <C>
Payroll, payroll taxes and payroll-related costs $ 208,000 $202,000
Health benefits 60,000
Professional fees 110,000 70,000
Deferred revenue 105,000
Environmental 100,000 100,000
Legal settlement 360,000
All other 262,000 335,000
---------------------------------------------------------------------------------------
$1,145,000 $767,000
=======================================================================================
</TABLE>
7. INCOME TAXES: 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.
8
<PAGE>
PEERLESS TUBE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
================================================================================
Temporary differences and carryforwards which give rise to
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31, 1998 1997
-----------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Postretirement benefits other than pensions $ 8,000 $ 20,000
Accrual differences 385,000 231,000
Accounts receivable and inventory valuation
allowances 123,000 362,000
Net operating loss carryforward 5,000,000 4,085,000
Investment tax credit carryforward 346,000 346,000
-----------------------------------------------------------------------------
5,862,000 5,044,000
Deferred tax liabilities:
Property, plant and equipment basis differences (88,000)
-----------------------------------------------------------------------------
Net deferred tax asset 5,862,000 4,956,000
Valuation allowance (5,862,000) (4,956,000)
-----------------------------------------------------------------------------
$ - 0 - $ - 0 -
=============================================================================
</TABLE>
At December 31, 1998, Peerless had cumulative net operating
loss carryforwards of approximately $14,285,000 available to
offset future taxable income. These carryforwards will
expire in various years through 2013.
At December 31, 1998 and 1997, the Company had investment
tax credit carryforwards of approximately $346,000 available
to be carried forward to offset future taxes payable. A
substantial portion of these carryforwards will expire in
the year 2001.
No regular income tax expense was recorded in 1998, 1997 or
1996 as income, if any, before income taxes was fully offset
by previously existing net operating loss carryforwards. No
deferred tax assets or liabilities were recognized for any
of the years presented.
8. REVOLVING The Company has a revolving credit facility with an asset-
CREDIT based working capital lender expiring in January 2000.
FACILITY: Borrowings are based on specified levels of accounts
receivable and inventories of the Company and bear interest
at the prime rate (7.75% at December 31, 1998) 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 ($822,000 at December 31, 1998) (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,
9
<PAGE>
PEERLESS TUBE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
================================================================================
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, 1998.
9. LONG-TERM Long-term debt is comprised of the following:
DEBT:
<TABLE>
<CAPTION>
December 31, 1998 1997
-----------------------------------------------------------------------------------------
<S> <C> <C>
Equipment term loan payable in monthly installments of
$15,625 plus interest through January 1, 2000 with a final
balloon payment of $624,750 on February 1, 2000. The loan
bears interest at the prime rate (7.75% at December 31,
1998) plus 4% . $ 822,000 $1,009,000
Various purchase money capital leases for manufacturing and
office equipment, final payment due in 2000, with interest
rates ranging from 11% to 18%. 65,000 114,000
-----------------------------------------------------------------------------------------
887,000 1,123,000
Less current portion (236,000) (232,000)
-----------------------------------------------------------------------------------------
LONG-TERM DEBT $ 651,000 $ 891,000
=========================================================================================
</TABLE>
Long-term debt of $651,000 matures in the year ending
December 31, 2000.
10. SALE/ In 1991, the Company entered into a sale/leaseback agreement
LEASEBACK OF for its Puerto Rico office and production facility. Under
PUERTO RICO the agreement, the Company sold the facility at an aggregate
FACILITY: 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,
10
<PAGE>
PEERLESS TUBE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
================================================================================
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:
<TABLE>
<S> <C>
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
===========================================================================
</TABLE>
11. PENSION The Company maintained a noncontributory defined benefit
PLANS: 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>
<CAPTION>
Net periodic pension income is as follows:
December 31, 1996
--------------------------------------------------------------------------
<S> <C>
Interest cost on projected benefit obligation $ 984,000
Actual (return) on assets (1,608,000)
Net amortization and deferral 438,000
--------------------------------------------------------------------------
NET PERIODIC PENSION INCOME $ (186,000)
==========================================================================
</TABLE>
The plan's funded status and amounts recognized in the
Company's balance sheet at December 31, 1996 are as follows:
<TABLE>
<S>
Actuarial present value of projected benefit obligation <C>
(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
==========================================================================
</TABLE>
11
<PAGE>
PEERLESS TUBE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
================================================================================
The assumptions used in the accounting were as follows:
<TABLE>
<S> <C>
Discount rate used to compute projected benefit obligation 7.4%
Expected long-term rate of return on plan assets 8
-------------------------------------------------------------------
</TABLE>
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, 1998 and 1997 were approximately $13,000 in
each year.
12. STOCK OPTION SFAS No. 123, Accounting for Stock-based Compensation,
PLANS: encourages but does not 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, 1998. 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
12
<PAGE>
PEERLESS TUBE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
================================================================================
which case the period is 5 years. Activity in stock options
during the years was as follows:
<TABLE>
<CAPTION>
Weighted-
Average
Exercise Price
Year ended December 31, 1998 1997 1996 1998 1997 1996
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 109,800 124,200 234,200 $2.08 $2.50 $1.92
Expired during the year (109,800) (14,400) (110,000) 2.50 5.75 1.25
--------------------------------------------------------------------------------------------------
OUTSTANDING AT END OF YEAR 109,800 124,200 $2.08 $2.50
==================================================================================================
Options exercisable at year-end 84,800 99,200
==================================================================================================
</TABLE>
In January 1999, options to purchase 150,000 shares of
common stock at $.45 per share were granted under the plan.
13. OTHER POST- The Company provides healthcare and life insurance benefits
RETIREMENT to certain active and retired employees. In 1992, the
BENEFITS: Company adopted SFAS No. 106, Employer's Accounting 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.
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:
<TABLE>
<CAPTION>
December 31, 1998 1997 1996
---------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning of year $23,000 $ 70,000 $120,000
Adjustment to recognize the cost
of benefits, net (47,000) (50,000)
---------------------------------------------------------------------------------
END OF YEAR $23,000 $ 23,000 $ 70,000
=================================================================================
</TABLE>
14. MAJOR CUST- In 1998, two customers accounted for 60% (48% and 12%) of
OMERS AND the Company's sales. In 1997, sales to two customers
CONCENTRA- accounted for 61% (34% and 27%) of the Company's sales. In
TION OF CREDIT 1996, three customers accounted for 55% (22%, 21% and 12%)
RISK: of the Company's sales.
Financial instruments that potentially subject the Company
to concentrations of credit risk consist primarily of cash
and accounts receivable. At December 31, 1998, in
management's opinion, there is no significant risk of loss
on these
13
<PAGE>
PEERLESS TUBE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
================================================================================
instruments and management believes its allowance for
losses are adequate. Two customers accounted for
approximately 40% of net accounts receivable at December
31, 1998.
15. COMMITMENTS In January 1992, the Company entered into a supply
AND agreement with a vendor for the purchase of aluminum slugs
CONTINGENCIES: for a period of eight years. The Company may terminate 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, 1998, the Company had purchase commitments
outstanding of approximately $1,200,000 for raw aluminum
through December 1999. 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.
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.
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 15,000
<SECURITIES> 0
<RECEIVABLES> 1,284,000
<ALLOWANCES> (100,000)
<INVENTORY> 1,233,000
<CURRENT-ASSETS> 2,518,000
<PP&E> 19,700,000
<DEPRECIATION> (17,562,000)
<TOTAL-ASSETS> 4,656,000
<CURRENT-LIABILITIES> 4,253,000
<BONDS> 0
0
0
<COMMON> 3,382,000
<OTHER-SE> (3,933,000)
<TOTAL-LIABILITY-AND-EQUITY> 4,656,000
<SALES> 15,557,000
<TOTAL-REVENUES> 15,557,000
<CGS> 15,254,000
<TOTAL-COSTS> 1,874,000
<OTHER-EXPENSES> (1,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 270,000
<INCOME-PRETAX> (1,840,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,840,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,840,000)
<EPS-PRIMARY> (.75)
<EPS-DILUTED> 0
</TABLE>
