U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
|X| Quarterly report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31,
1997.
|_| 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 |_|
The number of shares outstanding of each of the issuer's classes of common
equity, as of April 30, 1997: 5,045,151 shares of Common Stock and 1,227,273
shares of Class B Common Stock.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEERLESS INDUSTRIAL GROUP, INC.
Consolidated Balance Sheets
Unaudited
(Dollars in thousands)
March 31, December 31,
1997 1996
-------- --------
ASSETS
Current assets:
Accounts receivable $ 5,099 $ 7,671
Inventories 12,475 11,138
Deferred tax asset 619 619
Other current assets 303 472
Total current assets 18,496 19,900
Property and equipment, net 12,257 12,372
Intangible assets, net 6,033 6,123
Total assets $ 36,786 $ 38,395
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 9,145 $ 9,870
Accounts payable 2,807 3,488
Accrued liabilities 2,614 2,752
Current portion of accrued postretirement 985 577
healthcare benefit liability
Total current liabilities 15,551 16,687
Long-term debt, less current portion 6,465 6,861
Accrued pension benefit liability 1,018 1,359
Accrued postretirement healthcare benefit
liability, less current portion 7,109 7,022
Deferred tax liability 188 188
Total liabilities 30,331 32,117
-------- --------
Shareholders' equity:
Common stock, no par value; 30,000,000 shares
authorized Common stock; 5,045,151 issued and
outstanding at March 31, 1997 and 6,465 6,678
December 31, 1996
Common stock Class B; 1,227,273 issued and 1,350 1,350
outstanding at March 31, 1997 and
December 31, 1996
Accumulated deficit (1,573) (1,750)
Total shareholders' equity 6,455 6,278
-------- --------
Total liabilities and shareholders' equity $ 36,786 $ 38,395
======== ========
See accompanying notes to unaudited consolidated financial statements
PEERLESS INDUSTRIAL GROUP, INC.
Consolidated Statements of Operations Unaudited
(Dollars in thousands, except per share data)
Three months Three months
ended ended
March 31, 1997 March 31, 1996
-------------- --------------
Net sales $ 10,106 $ 10,681
Cost of sales 7,393 9,855
Gross profit 2,713 826
Selling, general and administrative expenses 2,048 1,857
Operating income (loss) 665 (1,031)
Interest expense (373) (405)
Other income 3 21
Income (loss) from operations before income taxes 295 (1,415)
Provision for income taxes (118) (7)
Net income (loss) $ 177 ($ 1,422)
=========== ===========
Net income (loss) per share $ 0.03 ($ 0.24)
=========== ===========
Weighted average number of shares outstanding 6,718,469 6,023,782
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
PEERLESS INDUSTRIAL GROUP, INC.
Consolidated Statements of Cash Flows Unaudited
(Dollars in thousands)
Three months Three months
ended ended
March 31, March 31,
1997 1996
-------- --------
Cash flows from operating activities:
Net income (loss) $ 177 ($ 1,422)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 588 526
Gain on disposal of property
and equipment (3) (21)
Changes in operating assets and
liabilities 739 1,790
-------- --------
Net cash provided by
operating activities 1,501 873
-------- --------
Cash flows from investing activities:
Acquisitions of property and equipment,
net of proceeds (380) (307)
-------- --------
Net cash used in
investing activities (380) (307)
-------- --------
Cash flows from financing activities:
Long-term debt:
Borrowings 12,450 12,469
Payments (13,571) (14,387)
Proceeds from issuance of stock and
exercise of stock options 1,386
Net cash used in
financing activities: (1,121) (532)
-------- --------
Increase in cash and cash
equivalents $ 34
Cash and cash equivalents:
Beginning of year 108
End of year $ $ 142
======== ========
Changes in operating assets and liabilities:
Accounts receivable $ 2,572 $ 495
Inventories (1,337) 1,866
Other current assets 169 144
Accounts payable (681) (108)
Accrued liabilities (138) (778)
Accrued pension benefit and postretirement
healthcare benefit liabilities 154 171
$ 739 $ 1,790
======== ========
See accompanying notes to unaudited consolidated financial statements.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
1. Basis of Presentation:
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 (the "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, 1996.
The financial statements presented herein as of March 31, 1997 and 1996, and for
the three months then ended reflect, in the opinion of management, all
adjustments, consisting only of normal recurring adjustments, 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.
2. Selected Financial Statement Information:
The following provides additional information for selected consolidated balance
sheet accounts as of March 31, 1997 and December 31, 1996:
March 31, 1997 December 31, 1996
Inventories:
Raw materials $2,005 $2,277
Work-in-process 3,365 3,054
Finished goods 6,559 5,266
Supplies 546 541
------- -------
Total $12,475 $11,138
======= =======
3. Restatement:
The consolidated balance sheet as of March 31, 1996, was restated to add $447 of
inventory costs previously classified as intangible assets as of December 31,
1995. The consolidated statement of operations for the quarter ended March 31,
1996, has been restated to add the $447 increase in first quarter costs of goods
sold related to the increase in inventory as of December 31, 1995, and the $11
decrease in amortization of intangible assets for the quarter ended March 31,
1996. The consolidated statement of cash flows for the quarter ended March 31,
1996, has also been restated as a result of the aforementioned adjustments.
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, now Peerless Industrial
Group, Inc., (the "Company" or "Discus") 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.
R-B Acquisition Corporation, a Minnesota corporation (the "Purchaser") and a
wholly owned subsidiary of R-B Capital Corporation, a Delaware corporation
("Parent"), commenced a tender offer to purchase all outstanding shares of the
Common Stock and Class B Common Stock of the Company (collectively, the
"Shares") at a price of $1.67 per Share, net to the seller thereof in cash, upon
the terms and subject to the conditions set forth in the Purchaser's Offer to
Purchase dated April 17, 1997 and the related Letter of Transmittal. The tender
offer and the terms of the Merger Agreement (as defined herein) are more fully
described in the Purchaser's Tender Offer Statement on Schedule 14D-1 dated
April 17, 1997, filed with the Commission. See "Part II, Item 5" of this Form
10-QSB.
The following is a discussion and analysis of the Company's results of
operations for the three months ended March 31, 1997, compared with the results
of operations for the three months ended March 31, 1996.
RESULTS OF OPERATIONS:
The following table sets forth selected operating statement data for the
Company.
Three months ended Three months ended
March 31, 1997 March 31, 1996
Net sales $ 10,106 $ 10,681
Cost of sales 7,393 9,855
Gross profit 2,713 826
Selling, general and
administrative expenses 2,048 1,857
Operating income (loss) 665 (1,031)
Interest expense (373) (405)
Other income 3 21
Income (loss) from operations before
income taxes 295 (1,415)
Provision for income taxes (118) (7)
Net income (loss) $ 177 ($ 1,422)
Net income (loss) per share $ 0.03 ($ 0.24)
Weighted average number of
shares outstanding 6,718,469 6,023,482
Net Sales:
Net sales decreased slightly to $10,106 in the first quarter of 1997 compared to
net sales of $10,681 for the same period in 1996. The Company experienced a
strong decrease in traction chain sales during the first quarter of 1997 as that
quarter experienced a normal pattern of winter season sales compared to sales
during the first quarter of 1996, which were abnormally high due to an extremely
late 1995 winter season. The other product lines of chain, wire forms, and
cordage experienced increases.
Cost of Sales:
Cost of sales decreased to $7,393 or 73.2% of net sales in the first quarter of
1997 compared to cost of sales of $9,855 or 92.3% of net sales for the same
period in 1996. Margins remained stable against competitive pricing pressures.
The first quarter of 1996 reflected an inventory valuation write-up amortization
of $1,350 related to the Dec. 15, 1995 acquisition. The write-up was amortized
over the estimated inventory turns and was fully amortized in the second quarter
of 1996. Excluding the effect of the inventory write-up amortization, cost of
sales would have been $8,505 or 79.6% of net sales in the first quarter of 1996.
Improved manufacturing productivity and costs accounted for the remaining cost
of sales reductions. This was achieved by the Company successfully reducing
certain production costs in the latter half of 1996 and in the first quarter of
1997 by reducing headcount.
Selling, General and Administrative Expenses:
Selling, general and administrative expenses (SG&A) increased to $2,048 or 20.3%
of net sales in the first quarter of 1997 compared to an expense of $1,857 or
17.4% of net sales for the same period in 1996. SG&A was consistent between the
two periods except for increases in operating costs at the Company associated
with higher marketing costs for new products in cordage and traction. In 1997,
SG&A was also slightly higher as the Company had certain expenditures in its
search for potential buyers.
Interest Expense:
Interest expense was $32 lower at $373 for the first quarter of 1997 compared to
interest expense of $405 for the same period in 1996. Interest expense was lower
during the first quarter of 1997 due to a lower amount of borrowing to support
working capital in 1997.
Other Income:
Other income was $18 lower at $3 in the first quarter of 1997 compared to other
income of $21 in the same period in 1996. Other income is primarily gain on
fixed asset disposals and there was minimal activity in the first quarter 1997.
Income Taxes:
Income taxes was $111 higher at $118 in for the first quarter of 1997 compared
to an income tax expense of $7 in the same period in 1996. The tax provision for
first quarter 1997 is based on statutory rates, whereas the tax provision for
first quarter 1996 represents only minimum state tax fees.
LIQUIDITY AND CAPITAL RESOURCES:
As described in greater detail in the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1996, the Company acquired Peerless on
December 15, 1995, in a leveraged transaction, utilizing approximately $2.3
million of existing cash and cash equivalents that were acquired in June 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 $13.1 million at
March 31, 1997 and bears interest payable monthly that floats at rates ranging
from 0.5% to 2.5% over the prime rate. Accordingly, the Company is subject to
interest rate fluctuations. At March 31, 1997, the Company had outstanding $2.5
million of seller financing which carried a fixed interest rate (8%) payable
monthly. 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.
Cash flow from operations was $1,501 during the first quarter of 1997. Cash flow
of $739 was provided by changes in operating assets and liabilities during that
period.
Net cash used in investing activities was $380 for capital expenditures in the
first quarter of 1997.
Net cash used in financing activities represents total reduction in debt of
$1,121. Under the terms of its lending agreement with CIT, the Company makes
monthly principal payments on its term loans. The CIT revolver is paid down with
collections on receivables and additional amounts are borrowed thereunder by the
Company as needed to finance operations.
Based on an evaluation of operating needs, market conditions and cash flows of
the Company, the Company expects to expend approximately $2.4 million in capital
expenditures during 1997. All of these expenditures are expected to be funded by
operations, which are largely supported by the CIT revolving credit facility.
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 or will be available if so required.
The Company did not pay dividends in the first quarter of 1997 or 1996, and
restrictive covenants in the CIT revolving credit facility significantly limit
the Company's ability to pay dividends.
Effects of Tender Offer on the Market for the Shares:
Upon successful completion of the tender offer, assuming the purchase of at
least 90% of the Shares and the completion of the subsequent merger, all of the
Shares will have been purchased or converted into the right to receive $1.67 in
cash per Share. In such event, there will be no public market for the Shares. If
the tender offer is consummated but less than 90% of the Shares are purchased,
the Purchaser has expressed its intention to convene a special meeting of the
Company's shareholders to approve a merger in which the remaining Shares would
be converted into the right to receive $1.67 in cash per Share. The tender of
Shares pursuant to the tender offer will reduce the number of Shares that might
otherwise trade publicly and will reduce the number of holders of Shares, which
will adversely affect the liquidity of the remaining Shares held by the public.
The elimination of a public market for the Shares will reduce the Company's
opportunities to sell equity to generate working capital.
The shares of Common Stock are currently registered under the Securities
Exchange Act of 1934 (the "Exchange Act"). Such registration may be terminated
by the Company upon application to the Commission if the outstanding shares of
Common Stock are not listed on a national securities exchange and if there are
fewer than 300 holders of record of such shares. The Purchaser intends to seek
to cause the Company to apply for termination of registration of the shares of
Common Stock as soon as possible after consummation of the tender offer and the
subsequent merger if the requirements for termination of registration are met.
Termination of registration would eliminate the requirement of the Company to
make filings under the Exchange Act.
PART II
OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
On March 28, 1997, the Company announced that it was negotiating with a
potential buyer regarding the purchase of all of the Company's outstanding
common stock and all shares subject to options, warrants and other purchase
rights, for $1.67 per share in cash. On April 14, 1997, the Company announced
that its Board of Directors had unanimously approved a definitive merger
agreement with R-B Acquisition Corporation (the "Purchaser") and R-B Capital
Corporation (the "Parent").
As reported in the Company's Current Report on Form 8-K, filed on April 22,
1997, Purchaser and Parent commenced a tender offer to purchase all outstanding
shares of the Common Stock and Class B Common Stock of the Company at a price of
$1.67 per share, net to the seller thereof in cash, upon the terms and subject
to the conditions set forth in the Purchaser's Offer to Purchase dated April 17,
1997 and the related Letter of Transmittal. Parent and Purchaser are
corporations formed by Ridge Capital Corporation, Pandora Capital Corporation
and their affiliates and William Blair Mezzanine Capital Fund II, L.P. in
connection with the tender offer and the transactions contemplated thereby. The
tender offer is being made pursuant to the terms of the Agreement and Plan of
Merger dated as of April 11, 1997 (the "Merger Agreement"), among the Company,
Parent and the Purchaser. The Merger Agreement provides, among other things,
that after completion of the tender offer, subject to the terms and conditions
of the Merger Agreement, the Purchaser and the Company will be merged and each
outstanding share of the Company (other than those held by Parent, the
Purchaser, any other direct or indirect subsidiary of Parent or by shareholders
of the Company who dissent from the merger and comply with all of the provisions
of the Minnesota Business Corporation Act concerning dissenters' rights) will be
converted at the effective time of the merger into the right to receive $1.67 in
cash, without interest. The tender offer and the terms of the Merger Agreement
are more fully described in the Purchaser's Tender Offer Statement on Schedule
14D-1 dated April 17, 1997, filed with the Commission.
The purpose of the tender offer and the merger is for Parent to acquire the
entire equity interest in the Company. The tender offer is intended to increase
the likelihood that such acquisition will be effected and to permit Parent to
acquire control of the Company at the earliest practicable date. The purpose of
the merger is to permit Parent to acquire all outstanding shares not tendered
and purchased pursuant to the tender offer. The tender offer is conditioned
upon, among other things, at least a majority of the shares and a number of
outstanding shares entitled to elect a majority of the Company's Board of
Directors, in each case on a fully-diluted basis (or, if the Purchaser so elects
in its sole discretion, on the basis of the number of shares outstanding at the
expiration date of the tender offer) being validly tendered and not withdrawn
prior to the expiration of the tender offer.
In connection with the Merger Agreement, certain shareholders of the Company
have executed and delivered a Tender and Stock Option Agreement, pursuant to
which such shareholders have (1) agreed to tender in the tender offer an
aggregate of approximately 4.45 million shares (approximately 71% of the shares
outstanding on April 17, 1997), together with additional shares under certain
circumstances and (2) granted to Purchaser an option to purchase, under certain
circumstances, shares equal to 19.9% of the outstanding shares.
At a special meeting held on April 7, 1997, the Board of Directors of the
Company and a special committee of the Board of Directors unanimously approved
the Merger Agreement and the transactions contemplated thereby and determined
that the Merger Agreement and the transactions contemplated thereby, including
the tender offer and the merger, are fair to and in the best interests of the
holders of shares. Reference is made to the Company's Schedule 14D-9
Solicitation/Recommendation Statement dated April 17, 1997, filed with the
Commission.
The Company has prepared and filed with the Commission an Information Statement
pursuant to Section 14(f) which provides information about certain persons who
may be designated to the Company's Board of Directors by the Purchaser pursuant
to the terms of the Merger Agreement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
Current Report on Form 8-K filed on March 31, 1997, reporting
that the Company was negotiating with a potential buyer who
may purchase all of the outstanding common stock of the
Company, and all shares subject to options, warrants and other
purchase rights, at a price of $1.67 per share in cash.
Current Report on Form 8-K filed on April 22, 1997, relating
to a tender offer for all of the Company's outstanding Common
Stock and Class B Common Stock by R-B Acquisition Corporation.
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 May
7, 1997.
PEERLESS INDUSTRIAL GROUP, INC.
By: /s/ Robert E. Deter
Robert E. Deter
Chief Financial Officer
(Principal Financial and Accounting Officer)
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
27 Financial Data Schedule