U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
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|X| Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended September 30, 1996.
|_| Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from __________ to __________
Commission file number 0-13826
PEERLESS INDUSTRIAL GROUP, INC.
(Exact name of small business issuer as specified in its charter)
MINNESOTA 41-1456350
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2430 METROPOLITAN CENTRE
333 SOUTH SEVENTH STREET
MINNEAPOLIS, MINNESOTA 55402
(Address, including zip code, of principal executive offices)
(612) 371-9650
(Issuer's telephone number, including area code)
DISCUS ACQUISITION CORPORATION
(Former name)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes |X| No |_|
State the number of shares outstanding of each of the issuer's classes
of common equity, as of November 1, 1996: 5,045,151 shares of Common Stock and
1,227,273 shares of Class B Common Stock.
Transitional Small Business Disclosure Format
Yes |_| No |X|
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
PEERLESS INDUSTRIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
---------------- --------------- --------------- ----------------
Net sales.................................. $ 11,583 $ 32,154
Cost of sales.............................. 8,930 26,981
---------- -----------
Gross profit........................... 2,653 5,173
Selling, general and administrative
expenses .............................. 1,678 $ 86 5,385 $ 265
---------- ---------- ----------- ----------
Operating income (loss)................ 975 (86) (212) (265)
Interest expense........................... 386 1,165
Other income............................... (28) (21) (93)
---------- ---------- ----------- ----------
Income (loss) before income taxes...... 589 (58) (1,356) (172)
Provision for income taxes................. 7 21
---------- ---------- -----------
Net income (loss)...................... $ 582 $ (58) $ (1,377) $ (172)
========== ========== =========== ==========
Net income (loss) per share............ $ .09 $ (.02) $ (.22) $ (.07)
========== ========== =========== ==========
Weighted average number of shares
outstanding............................ 6,262,424 2,356,140 6,176,334 2,356,140
========== ========== =========== ==========
See accompanying notes to unaudited consolidated financial statements.
PEERLESS INDUSTRIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, 1996 DECEMBER 31, 1995
-------------------- --------------------
Unaudited
ASSETS
Current assets
Cash and cash equivalents................................... $ 108
Accounts receivable, net.................................... $ 6,880 6,091
Inventories................................................. 10,950 13,646
Other current assets........................................ 292 510
-------- --------
Total current assets..................................... 18,122 20,355
Deferred tax assets............................................ 153 153
Property and equipment, net.................................... 13,123 12,586
Intangible assets, net......................................... 5,529 6,403
-------- --------
Total assets............................................. $ 36,927 $ 39,497
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt........................... 10,040 11,300
Accounts payable............................................ 2,791 2,823
Accrued liabilities......................................... 2,801 3,770
Current portion of accrued postretirement healthcare
benefit liability....................................... 904 670
-------- --------
Total current liabilities................................ 16,536 18,563
Long-term debt, less current portion........................... 7,257 7,767
Accrued pension benefit liability.............................. 990 1,687
Accrued postretirement healthcare benefit
liability, less current portion............................. 7,032 6,386
-------- --------
Total liabilities........................................ 31,815 34,403
-------- --------
Shareholders' equity:
Common stock Class A, no par value;......................... 6,675 6,629
30,000,000 shares authorized; 5,035,151 and 4,971,174
issued and outstanding at September 30, 1996 and
December 31, 1995, respectively
Common stock Class B, no par value;......................... 1,350
1,227,273 issued and outstanding at September 30, 1996
Accumulated deficit......................................... (2,913) (1,535)
-------- --------
Total shareholders' equity............................... 5,112 5,094
-------- --------
Total liabilities and shareholders' equity.......... $ 36,927 $ 39,497
======== ========
See accompanying notes to unaudited consolidated financial statements.
PEERLESS INDUSTRIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
UNAUDITED
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
---------------- ---------------
Cash flows from operating activities:
Net loss............................... $ (1,377) $ (172)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization...... 3,204 26
(Gain) loss on disposal of property
and equipment..................... (21) 43
Changes in operating assets and
liabilities....................... (269) (61)
-------- ------
Net cash provided by (used in)
operating activities............... 1,537 (164)
======== ======
Cash flows from investing activities:
Acquisition costs...................... (283)
Purchase (sale) of property
and equipment...................... (988) 446
Deferred acquisition costs incurred
in connection with proposed
acquisition........................ (111)
-------- ------
Net cash provided by (used in)
investing activities................... (1,271) 335
======== ======
Cash flows from financing activities:
Long-term debt:
Borrowings......................... 33,939
Payments........................... (35,709) (513)
Proceeds from issuance of stock and
exercise of stock options.......... 1,396 6
-------- ------
Net cash used in financing
activities............................. (374) (507)
======== ======
Decrease in cash and cash
equivalents........................ (108) (336)
Cash and cash equivalents:
Beginning of year.................. 108 2,608
-------- ------
End of year........................ $ $2,272
======== ======
Changes in operating assets and liabilities:
Accounts receivable.................... $ (790)
Inventories............................ 1,121
Other current assets................... 218
Accounts payable....................... (32) $ 92
Accrued liabilities.................... (969) (153)
Accrued pension benefit liability...... 183
-------- ------
$ (269) $ (61)
======== ======
PEERLESS INDUSTRIAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)
1. Basis of Presentation of Interim Financial Statements:
The financial statements included in this Form 10-QSB have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed, or omitted,
pursuant to such rules and regulations. These financial statements should be
read in conjunction with the financial statements and related notes included in
the Company's Form 10-KSB for the year ended December 31, 1995.
The financial statements presented herein as of September 30, 1996 and
for the three and nine months then ended reflect, in the opinion of management,
all adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of financial position and the results of operations for the periods
presented. The results of operations for any interim period are not necessarily
indicative of results for the full year.
Effective July 25, 1995, the Board of Directors of the Company voted to
change the Company's fiscal year end from the last Sunday in December of each
year to December 31. This change in financial reporting is reflected starting in
the first quarter ended March 31, 1996. This change in financial reporting did
not have a material impact on the Company's reported results of operations or
cash flows for the quarter and nine month period ended September 30, 1996.
2. Acquisition:
The Company purchased all outstanding shares of common stock of
Peerless Chain Company (Peerless) on December 15, 1995, for approximately
$23,178 plus $1,268 in related acquisition costs. An additional $248 was
incurred in acquisition related costs in the second quarter of 1996. The
acquisition was accounted for under the purchase method of accounting.
Accordingly, the results of operations of the acquired company have been
included in the consolidated statement of operations since the date of
acquisition.
The following table presents unaudited pro forma results of operations
as if the Peerless acquisition had occurred at the beginning of fiscal 1995.
These pro forma results have been prepared for informational purposes only and
do not purport to be indicative of what would have occurred had the acquisition
actually been made at January 1, 1995 or of results which may occur in the
future.
3RD QTR. 1995
3RD QTR. 1996 PRO FORMA
----------------- ---------------------
Net sales $ 11,583 $ 10,807
Income from operations before income taxes 589 70
Net income $ 582 $ 62
Net income per share $ .09 $ .01
3. Selected Balance Sheet Information:
The following provides additional information for selected consolidated
balance sheet accounts as of September 30, 1996 and December 31, 1995:
SEPTEMBER 30, 1996 DECEMBER 31, 1995
--------------------- ----------------------
Inventories:
Raw materials $1,952 $ 1,688
Work-in-process 3,353 5,362
Finished goods 5,092 6,062
Supplies 553 534
--------- --------
Total $10,950 $13,646
4. Shareholders' Equity:
In January and May 1996, the Company granted 579,000 options and
warrants at an exercise price of $1.10 under the 1994 Plan to employees,
consultants, advisers and Board of Directors of the Company, subject to
shareholder approval increasing the number of shares available for grant under
the 1994 Plan from 600,000 to 1,000,000 shares. These options principally vest
20% per year over five years. During the second quarter, the shareholders of the
Company approved the increase in the number of shares in the 1994 Plan from
600,000 to 1,000,000 shares.
In January 1996, the Company issued 1,260,000 total shares of combined
class A and class B common stock at $1.10 per share for $1,386.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial accounting Standards No. 123 (SFAS No. 123), a new
standard of accounting and reporting for stock-based compensation plans. The
Company has not determined whether it will adopt the expense recognition
provisions of SFAS No. 123 for stock-based compensation or the alternative
expanded disclosures including pro forma disclosures as if the fair value based
method of accounting had been followed.
5. Business and Credit Concentration:
The Company performs ongoing credit evaluations of its customers'
financial condition and, generally, does not require collateral from its
customers. The Company establishes an allowance for doubtful accounts based on
factors surrounding the credit risk of specific customers and other information.
The Company's most significant customer accounted for 24% and 29% of
net sales in the quarter ended September 30, 1996 and September 30, 1995,
respectively, and 20% of net sales in the nine month periods ending September
30, 1996 and 1995, and 19% of accounts receivable at September 30, 1996.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. (Dollars in Thousands)
THIS DISCUSSION AND ANALYSIS CONTAINS CERTAIN FORWARD-LOOKING
TERMINOLOGY SUCH AS "BELIEVES," "ANTICIPATES," "EXPECTS," AND "INTENDS," OR
COMPARABLE TERMINOLOGY. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
PROJECTED. POTENTIAL PURCHASERS OF THE COMPANY'S SECURITIES ARE CAUTIONED NOT TO
PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS WHICH ARE QUALIFIED IN
THEIR ENTIRETY BY THE CAUTIONS AND RISKS DESCRIBED HEREIN.
General: On December 15, 1995, Discus Acquisition Corporation, which
subsequently changed its name to Peerless Industrial Group, Inc. (the Company),
completed the acquisition of Peerless Chain Company (Peerless) from Bridgewater
Resources Corp. Peerless, a Minnesota-based company, is a manufacturer and
distributor of long-standing branded consumer and industrial chain and other
products throughout the United States. Peerless represents the "continuing
operations" of the Company.
Prior to June 7, 1994, the Company operated ten Fuddruckers restaurants
located in Minnesota, Missouri, Nebraska and Wisconsin. The Company sold or
discontinued these operations in 1994 and 1995.
Effective July 25, 1995, the Company changed its fiscal year end from
the last Sunday in December of each year to December 31. This change in
financial reporting was reflected in the first quarter ended March 31, 1996.
This change in financial reporting did not have a material impact on the
Company's reported results of operations or cash flows for the quarter or nine
month period ended September 30, 1996.
The following is a discussion and analysis of the Company's historical
results of operations for the three months and nine months ended September 30,
1996 compared with the pro forma results of operations for the three months and
nine months ended September 30, 1995, as if the acquisition of Peerless had
occurred on January 1, 1995.
RESULTS OF OPERATIONS: The following table sets forth selected
historical and pro forma operating statement data for the Company.
3rd Qtr.
3RD QTR. Percent 1995 Percent 3rd Qtr.
1996 of Sales Pro Forma of Sales YTD 1996
-------- -------- ---------- -------- ---------
Net sales $ 11,583 $ 10,807 $ 32,154
Cost of sales 8,930 77.10% 8,509 78.74% 26,981
Gross profit 2,653 22.90% 2,298 21.26% 5,173
Selling, general and 1,678 14.49% 1,866 17.27% 5,385
administrative expenses
Operating income (loss) 975 8.42% 432 4.00% (212)
Interest expense 386 3.33% 362 3.35% 1,165
Other income (21)
Income (loss) from 589 5.09% 70 0.65% (1,356)
operations before
income taxes
Provision for income taxes 7 -0.06% 8 -0.07% 21
Net income (loss) $ 582 5.02% $ 62 0.57% $( 1,377)
(WIDE TABLE CONTINUED FROM ABOVE)
3rd Qtr.
YTD
Percent 1995 Pro PERCENT
of Sales Forma OF SALES
-------- -------- --------
Net sales $ 31,251
Cost of sales 83.91% 25,987 83.16%
Gross profit 16.09% 5,264 16.84%
Selling, general and 16.75% 5,702 18.25%
administrative expenses
Operating income (loss) -0.66% (438) -1.40%
Interest expense 3.62% 1,052 3.37%
Other income -0.07% (247) -0.79%
Income (loss) from -4.22% (1,243) -3.98%
operations before
income taxes
Provision for income taxes -0.07% 22 -0.07%
Net income (loss) -4.28% $( 1,265) -4.05%
Net Sales: Net sales increased to $11,583 in the third quarter of 1996
compared to pro forma net sales of $10,807 for the same period in 1995. The
Company experienced weaker pre-season traction sales during the third quarter of
1996 compared to the same period in 1995, but this was offset by a stronger
quarter for the wire form business. The Company continued to realize new sales
from the introduction of its cordage product line (rope). This new product line,
which is sold through existing distribution channels, will complement the
Company's core chain product line. An increase in the core chain product line
reflected the recovery of the chain industry from the weakness that occurred in
the first half of 1996.
On a year-to-date basis, net sales increased to $32,154 compared to pro
forma net sales of $31,251 for the same period in 1995. The Company experienced
a strong increase in traction chain sales during the first quarter of 1996 as a
result of the severe winter which was offset by lower sales in the wire form
business as the Company discontinued sales of certain product lines with low
margins. The core chain product line has shown stable growth over the period
from January 1, 1995 to the present date.
Cost of Sales: Cost of sales increased to $8,930 or 77.1% of net sales
in the third quarter of 1996 compared to pro forma cost of sales of $8,509 or
78.74% of net sales for the same period in 1995. Price increases were difficult
to accomplish due to competitive markets, but efforts by management to reduce
costs resulted in improved gross profit margins. Eight support staff positions
were eliminated during the second quarter of 1996. The favorable profit impact
of those cost eliminations is now being realized in the second half of 1996.
On a year-to-date basis, cost of sales increased to $26,981 or 83.91%
of net sales compared to pro forma cost of sales of $25,987 or 83.16% for the
same period in 1995. The year-to-date cost of sales reflects an inventory
valuation write-up amortization related to the acquisition. The write-up was
amortized over estimated inventory turns and was fully amortized in the first
half of 1996. The year-to-date 1996 cost of sales reflects $1,575 of
amortization while the pro forma year-to-date 1995 cost of sales reflects $1,800
of amortization. The 1995 pro forma results assume the acquisition took place on
January 1, 1995, while the 1996 results reflect the actual December 15, 1995
acquisition date. Excluding the effect of the inventory write- up amortization,
cost of sales would have been $25,406 or 79.0% of net sales for the nine months
of 1996 and $24,187 or 77.4% of pro forma net sales in the same period in 1995.
Selling, General and Administrative expenses: Selling, general and
administrative expenses (SG&A) decreased to $1,678 or 14.49% of net sales in the
third quarter of 1996 compared to a pro forma expense of $1,866 or 17.27% of net
sales for the same period in 1995. On a year-to-date basis, SG&A expenses
decreased to $5,385 or 16.75% of net sales compared to pro forma SG&A of $5,702
or 18.25% for the same period in 1995. SG&A was consistent between the two
periods except for reductions in operating costs at the Company resulting from
concluding the acquisition of Peerless. In 1995, SG&A was slightly higher as the
Company incurred certain expenditures in its search for potential acquisition
candidates.
Interest Expense: Interest expense increased by $24 to $386 in the
third quarter of 1996 compared to pro forma interest expense of $362 in the same
period in 1995. On a year-to-date basis, interest expense increased by $113 to
$1,165 compared to pro forma interest expense of $1,052 in the same period in
1995. Interest expense was higher due to a higher amount of borrowing to support
a higher level of working capital in 1996.
Other Income: In the second quarter of 1995, the Company recognized a
$247 gain on the sale of a wire forming machine. No similar fixed asset sales
occurred in 1996.
Income Taxes: Income taxes for the third quarter and year-to-date 1996
and for pro forma 1995 were minimum taxes due to various taxing authorities. As
stated earlier, the Company had amortization of valuation write-ups of $1,575
for the nine month period ending September 30, 1996, which resulted in the
Company having a pre-tax loss for the nine month period, accordingly, the
amortization of various valuation write-ups in 1996, primarily the inventory
write-up, is expected to cause the Company to break even for the year resulting
in an effective tax rate of zero.
LIQUIDITY AND CAPITAL RESOURCES: As described in greater detail in the
Company's Annual Report for 1995 on Form 10-KSB, the Company acquired Peerless
on December 15, 1995 in a leveraged transaction, utilizing approximately $2.3
million of existing cash and cash equivalents that originated in June of 1994
from the sale of its discontinued restaurant operations, $4.2 million in equity
raised in late 1995 and early 1996, and approximately $16.5 million in lender
and seller financing.
The Company's CIT floating rate financing totaled approximately $14.8
million at September 30, 1996 and bears interest payable monthly that floats at
rates ranging from .5% to 2.5% over the prime rate. Accordingly, the Company is
subject to interest rate fluctuations. At September 30, 1996, only the seller
financing of $2.5 million carries a fixed interest rate (8%) accrued quarterly,
which represents a relatively minor portion of the overall debt incurred to
acquire and operate Peerless. In addition, $6.7 million of the original CIT term
financing requires monthly scheduled principal repayments. The Company believes
the cash flows from continuing operations are adequate to fund debt service at
current interest rate levels.
Covenants associated with the senior debt require Peerless to maintain
certain financial levels and ratios, including net worth and net income (loss)
levels and fixed charge coverage and leverage ratios. Peerless is required to
achieve budgeted performance at each month-end in 1996 and future years, as well
as annual budgeted performance to remain in compliance with its financial ratio
covenants. At September 30, 1996, the Company was not in compliance with certain
financial covenants associated with the senior debt agreement. Management has
held discussions with the lender and these events of noncompliance have been
waived. Accordingly, the term loans continue to be classified as long-term. Cash
flow from operations continues to be positive and cost reductions implemented in
the second quarter have had a favorable impact in the third quarter and are
expected to continue to have a favorable impact in the fourth quarter allowing
the Company to comply with all covenant ratios, however, there can be no
assurance that the Company will be able to fully comply with all covenant
ratios.
Actual cash flows could materially differ from those expressed in the
foregoing forward-looking statements. Actual sales are influenced by many
factors including the weather and its corresponding effect on the Company's
current estimates of net product shipments in 1996 and selling prices and could
be negatively impacted by any downturn in demand for the Company's products.
Such a downturn in demand could result if interest rates increase and, in turn,
increase the costs to customers of maintaining their historical investment in
inventories of the Company's products for resale to consumers or end users.
Cash flow from operations was $1,537 for the nine month period ending
September 30, 1996. A significant amount of these cash flows are due to
amortization of the inventory valuation write-up associated with the
acquisition, including a total charge of $1,575 for such nine month period. Cash
flow of $269 was used from changes in operating assets and liabilities during
the nine month period ending September 30, 1996.
Net cash used in investing activities was $1,271 for the nine month
period ending September 30, 1996. The Company had capital expenditures of $1,050
offset by $62 of proceeds from the sale of capital assets for the nine month
period ending September 30, 1996. The Company also had additions to intangible
assets resulting from additional acquisition related costs in the second quarter
of 1996. As discussed below, the Company expects to expend approximately $1.5
million in capital expenditures in 1996.
Net cash used in financing activities represents total reduction of
debt of $1,770 offset by equity proceeds of $1,396. Under terms of its lending
agreement with CIT, the Company has a monthly principal payment requirement on
its term loans. The CIT revolver is paid down with collections on receivables.
Additional amounts are borrowed under the line by the Company as needed to
finance operations. During the second quarter, the Company drew down $750 of its
CAPEX line of credit with CIT.
Based on an evaluation of operating needs, market conditions and cash
flows of the Company, the Company expects to expend approximately $1.5 million
in capital expenditures during 1996. Approximately 50% of this amount has been
funded under the CAPEX line of credit with CIT. The remainder of the
expenditures will be funded by operations, which are largely supported by the
CIT revolving credit facility. Actual capital expenditures are influenced by
many factors, including product demand discussed under the caption "Net Sales"
above and, as a result, actual capital expenditures could materially differ from
those expressed in the foregoing forward-looking statements.
Management believes that cash generated from operations and amounts
available under its CIT revolving credit facility and CAPEX line of credit will
be sufficient to fund its anticipated capital expenditures and required debt
repayments for the foreseeable future. Funding availability under the CIT
financing agreement is dependent on the Company's maintenance of adequate levels
of borrowing base (inventory and receivables) as well as compliance with
financial and technical covenants. There can be no assurance that additional
financing will not be required. In addition, there can be no assurance that
additional financing will be available. Actual financing needs could materially
differ from that expressed in the foregoing forward- looking statements.
The Company did not pay dividends in the third quarters of 1996 or
1995, and restrictive covenants in the CIT credit facility significantly limit
the Company's ability to pay dividends in the future.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security-Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit Number Description
27 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which
this report is filed.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Minneapolis, State of Minnesota on November 11, 1996.
PEERLESS INDUSTRIAL GROUP, INC.
By: /s/ William H. Spell
William H. Spell
Chief Executive Officer
(Principal Executive Officer)
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant, and in
the capacities and on the date indicated.
SIGNATURES TITLE DATE
- ------------------------------------------ ------------------------------------------ ----------------------
/s/ William H. Spell Chief Executive Officer and Director November 11, 1996
William H. Spell (Principal Executive Officer)
/s/ Robert E. Deter Chief Financial Officer (Principal November 11, 1996
Robert E. Deter Financial and Accounting Officer)