-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RsX1Q9Ch2XxhvzJPqyA5hMgX93Bh9uPNI7HecKYcFs5HN6UNqJwJzqgHjA42bTqg kd/0Q4ZfM2RONoZK1aHq+Q== 0000205303-97-000002.txt : 19970728 0000205303-97-000002.hdr.sgml : 19970728 ACCESSION NUMBER: 0000205303-97-000002 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970430 FILED AS OF DATE: 19970725 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENGINEERING MEASUREMENTS CO CENTRAL INDEX KEY: 0000205303 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL INSTRUMENTS FOR MEASUREMENT, DISPLAY, AND CONTROL [3823] IRS NUMBER: 840572936 STATE OF INCORPORATION: CO FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-09880 FILM NUMBER: 97645066 BUSINESS ADDRESS: STREET 1: 600 DIAGONAL HWY CITY: LONGMONT STATE: CO ZIP: 80501 BUSINESS PHONE: 3036510550 MAIL ADDRESS: STREET 1: 600 DIAGONAL HWY CITY: LONGMONT STATE: CO ZIP: 80501 10KSB 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-KSB X Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [Fee required] For the Fiscal Year ended: April 30, 1997 or Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] for the transition period from to . Commission File No.: 0-9880 ENGINEERING MEASUREMENTS COMPANY (Exact name of Registrant as specified in its charter) Colorado 84-0572936 (State or other jurisdiction of (I.R.S. Identification No.) incorporation or organization) 600 Diagonal Highway, Longmont, Colorado 80501 (Address of principal executive offices) (Zip Code) Issuer's telephone number: (303) 651-0550 Securities registered under Section 12(b) of the Act: None Securities registered under Section 12(g) of the Act: Common Stock par value $.01 (Title of Class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Check if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. X Issuer's revenues for its most recent fiscal year: $9,910,047 The aggregate market value of the voting stock held by non-affiliates of the Registrant as of July 22, 1997 was $17,487,825 The number of shares outstanding of Registrant's $.01 par value common stock, as July 22, 1997 was 2,798,052 No documents are incorporated by reference into the text of this report. Transitional Small Business Disclosure Format : Yes ; No X Exhibit Index on Pages 35-38 Page 1 of 39 PART I ITEM 1. BUSINESS General Engineering Measurements Company ("EMCO" or the "Company") is a Colorado corporation which was incorporated on January 4, 1967. The Company's executive offices and factory are located at 600 Diagonal Highway, Longmont, Colorado 80501. Its telephone number is (303) 651-0550. The Company designs, manufactures, and markets electronic and electro-mechanical instruments (flowmeters) for measuring the flow of liquids, steam and gases. The Company operates within the flow measurement devices and systems industry segment (S.I.C. Code No. 3823). The Company generates its revenues from the sales of flowmeter hardware, as well as from royalty income related to technological licensing arrangements, both foreign and domestic. With its 30 years experience in the field of flow measurement, Engineering Measurements Company is able to provide its customers with a family of products capable of measuring almost any kind of fluid or gas flow. While the Company has historically been strongest in energy utility flow measurement (particularly steam metering) it has products capable of measuring most types of process fluids, as well as fuel oils and natural gas. Utilizing a network of distributors and commissioned sales representatives, the Company markets flowmeters worldwide. A new contract was signed with Danfoss in October 1995, to extend the marketing agreement through May 1, 1998. Terms of the alliance with Danfoss A/S allow the Company to be the exclusive distributor for Danfoss' MAG and MASS flowmeters in the U.S. industrial market under the "EMCO" label. In turn, Danfoss is allowed to market and distribute EMCO's Vortex PhD flowmeter on a non-exclusive basis under the "Danfoss" label in Europe. The marketing agreement signed with Danfoss A/S completes the Company's "family of flowmeters". This family features five types of flowmeters capable of handling a broad spectrum of applications (steam, gas and liquid) as well as a large range of line sizes. It also positions the Company to compete on a product level with any flowmeter manufacturer in the world. Products The Company has developed, and markets a series of products to measure the flow of steam, chilled and hot water, natural gas, compressed gases and other fluids in a pipeline. Also included are products which support the primary flow measurements, such as pressure and temperature measurements and supporting electronics. The Company has two major technologies used in its product lines. The sales contribution by each technology as a percent of sales for fiscal years 1997 and 1996 are as follows: Technology FY 1997 FY 1996 Volumetric 70% 76% Mass 30% 24%
Volumetric technologies include the following products: insertion, vortex shedding, and positive displacement meters. Mass technologies include the following products: electromagnetic, coriolis, flow processors and digital valves. The Company manufactures a series of insertion meters for various applications of steam, liquids and compressed gas measurement. The insertion meters offer customers solutions for metering flows in large size pipes. Each is available with an assortment of options allowing for extremes in flow range, pressure and temperature, with adaptation to various output requirements which provide mass and energy measurement for totalizing or computer input. The Company introduced a line of vortex shedding flowmeters in fiscal year 1992. The Vortex PhD has no moving parts, provides high reliability, has low maintenance requirements and is capable of operating with dirty fluids. Page 2 of 39 The Company also develops, manufactures and markets a series of positive displacement meters which provide accurate measurements of fluid flow rates. The products' primary applications relate to the measurement of viscous fluids, such as crude oil, as well as applications requiring a high degree of accuracy. As a result of the marketing agreement with Danfoss A/S of Denmark, EMCO serves as the exclusive distributor for Danfoss' electromagnetic (MAG) flowmeters and coriolis (MASS) flowmeters in the U.S. industrial marketplace. These two Danfoss meters are marketed and distributed under the "EMCO" label in the U.S., establishing EMCO as one of the few companies in the world to offer a complete line of flowmetering technologies. Digital valves are digitally actuated control valves providing industry with a unique means of controlling and measuring the flow of fluids. Because of their accuracy and speed of response, these products are capable of providing a high degree of control that cannot easily be matched by other valves. In addition, this product can be configured as a metering valve, thus providing both measurement and control. All Company products utilize a family of digital flow processors to provide a wide range of measurement processing. The flow processors provide the desired outputs in engineering units, such as gallons, liters, etc., with provisions for computing density, mass flow and enthalpy. The Company introduced a new commercial water flowmeter in March 1997. The product is in the beginning of the sales cycle, and no significant revenues have been recognized at this time. Product Distribution The Company uses a network of distributors and commissioned sales representatives to market the Company's flowmeters worldwide. The Company also markets the Vortex PhD through Danfoss' network of wholly owned subsidiaries, primarily in Western Europe. Competition The Company encounters various levels of competition in its different product lines. The flow products face somewhat less competition when the application is large size steam lines. Here, the product is sold primarily on the basis of quality, performance and return on investment, with little price competition. In smaller sized steam lines, as well as applications where other energy utilities or process fluids are being measured, the Company faces a greater level of competition and price is often a factor. However, no one company is a major force in this market segment. The positive displacement meter products encounter direct competition in most of their markets. Two companies, one utilizing the same technology and the other employing a different technological approach, comprise most of the competition. Quality, performance and selling price are all important competitive factors. Digital Valve products offer unique performance characteristics as regards speed, accuracy and direct digital control. Where the application requires these characteristics, the Company experiences no direct competition and price is generally not a factor. In less demanding installations, the Company faces direct competition from the manufacturers of more traditional control valves. In such cases, price does become a competitive factor. Raw Materials The Company purchases electronic components, printed circuit boards, fabricated sheet metal parts, machined components, raw steel and aluminum, metallic castings, various other materials and electrical energy from various suppliers. These purchased components are generally available and the loss of any one supplier would not have a material adverse impact on the Company's operations. Customers For Fiscal Year 1997, no customers accounted for more than 10% of the Company's reported revenues. Page 3 of 39 Patents EMCO has acquired, or is currently pursuing, patent protection on a number of its products, although management believes that the protection afforded by patenting is generally not important to the success of the Company. Patents are prevalent in the flow metering industry and, since the Company has not conducted exhaustive infringement searches on all of its products, it is possible that one or more of its products may infringe upon the patents of others. Depending on the product involved, a lawsuit against the Company for patent infringement could result in damages in a material amount being assessed against the Company which would have an adverse effect on the financial condition of the Company. At this time the Company is not aware of any litigation regarding matters involving the Company and its products. Seasonal and Other Conditions The Company's sales and production are affected by slight seasonality caused by the Company's emphasis on steam energy measurement. However, the Company's marketing initiatives designed to increase the importance of the Process Control market (a nonseasonal market), should mitigate against the effect of seasonality in the future. Sales are also affected by the capital budgeting plans of large industrial firms, as well as by other economic and political conditions. Working Capital Requirements The Company is not required to carry significant amounts of inventory to meet rapid delivery requirements of customers or to assure itself of a continuous allotment of goods from suppliers. In addition, the Company's working capital of approximately $3,190,000 as of April 30, 1997 is adequate to meet its current obligations. The Company believes it has adequate cash flows from operations to fund future operations and capital expenditure requirements for the next twelve months. Backlog At April 30, 1997, the total order backlog was approximately $986,000 as compared to $1,889,000 at April 30, 1996. It is anticipated that the entire backlog outstanding at April 30, 1997 will be shipped in the fiscal year ending April 30, 1998. Government Approvals and Regulation The Company's principal products and services are not subject to government approvals. The Company does not expect any significant effect on its business from existing or probable government regulations. No material portion of the Company's sales is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the government. Research and Development The Company maintains research and development programs on a continuing basis. Research activities are primarily directed toward flow measurement and control. The Company spent approximately $621,000 for research and development in the fiscal year ending April 30, 1997, and about $427,000 in the fiscal year ending April 30, 1996. Research and development (R&D) expenses were approximately $194,000 higher in fiscal year 1997 due to expenses incurred trying to develop new products. There is no assurance that the R&D efforts will result in additional sales for the Company. In 1997, the emphasis of research and development was new product development. Management believes that research and development expenses will continue at the Page 4 of 39 current levels in the future due to further new product development and enhancements. The intent of the Company's research and development is twofold: 1) Develop new flowmeter products including for industries and applications for which it has not historically provided products, and 2) Continue to lower product cost and improve quality. Effects of Environmental Regulations Compliance with present federal, state and local regulations regarding the discharge of materials into the environment or otherwise relating to the protection of the environment should not have any material adverse effect on the capital expenditures, earnings and competitive position of the Company. The Company does not plan any capital expenditures for environmental control facilities during the current and succeeding fiscal year. Employees At April 30, 1997, EMCO had 83 full-time employees, of which 8 are employed in administrative duties, 9 in sales and marketing duties, 7 in research and development and 59 in production, customer service and application engineering. This compares with 72 full-time employees at April 30, 1996. The Company had 4 part time employees at April 30, 1997. Foreign Sales In fiscal year 1997, the Company had foreign sales of approximately $3,639,000, or 36.7% of sales in fiscal year 1997, compared to approximately $2,420,000 or 27.9% of sales in fiscal year 1996. The increase of sales for fiscal year 1997 in Europe is due primarily to one major project which accounted for approximately $800,000 in sales. The growth in Asia and Other is due to higher activity, rather than a single large project. The breakdown of foreign sales for fiscal years 1997 and 1996, in dollars and percent of total sales are: FY 1997 FY 1996 Europe $2,429,000 24.5% $1,579,000 18.2% Asia 544,000 5.5% 306,000 3.5% Other 666,000 6.7% 535,000 6.2%
All foreign sales are exports from domestic operations. ITEM 2. PROPERTIES The Company maintains its executive offices and factory at 600 Diagonal Highway, Longmont, Colorado in a 44,800 square foot brick, concrete and cinder block facility. The purchase of this facility by the Company was financed through the sale of tax exempt industrial development revenue bonds in 1981. The bonds were paid off in their entirety during fiscal year 1997. In Management's opinion, the current executive offices and factory space are more than adequate for the Company's current operations and should provide enough space through Fiscal Year 1998 or later. Management also believes the building is in adequate condition for office and factory use, and will require no substantial improvements through Fiscal Year 1998 or later. ITEM 3. LEGAL PROCEEDINGS Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. Page 5 of 39 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS Market Information The Company's common stock is traded over-the-counter and is quoted on the NASDAQ National Market (Symbol EMCO). The table below represents the high and low bid prices of the Company's common stock for its two most recent fiscal years. Such prices reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions. Quarters Ended in Fiscal Year 1997 07/31/96 10/31/96 01/31/97 04/30/97 High $3.38 $3.25 $4.00 $4.13 Low $2.88 $2.75 $2.75 $3.31
Quarters Ended in Fiscal Year 1996 07/31/95 10/31/95 01/31/96 04/30/96 High $2.63 $2.81 $3.13 $3.63 Low $2.19 $2.06 $2.31 $2.81
Approximate Number of Holders of Common Stock The number of holders of record of the Company's common stock as of June 25, 1997, was 540. Company Dividend Policy Disclosure The Company has never paid cash dividends on its common stock and currently has no plans to do so in the foreseeable future. The Company has no restrictions on the ability to pay dividends. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain oral and written statements of management of the Company included in the Form 10-KSB and elsewhere may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created thereby. These statements include the plans and objectives of management for future operations. The forward-looking statements included herein and elsewhere are based on current expectations and involve judgments which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements will prove to be accurate. In light of the significant uncertainties inherent in the forward- looking statements, the inclusion of such information should not be regarded as representation by the Company or any other person that the objectives and plans of the Company will be achieved. Page 6 of 39 DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION: Liquidity, Capital Resources and Cash Flows Net working capital decreased approximately $250,000 during the fiscal year ended April 30, 1997, primarily due to higher accounts payable, and higher current maturities of long-term debt. The working capital ratio for fiscal year 1997 decreased to 3.1 from 3.9 the previous fiscal year. The Company does not have any lines of credit with any lenders. Currently the Company pays approximately $9,000 (principal and interest) a month to pay off the loans from a stockholder. The loans from a stockholder mature in April 1997, at that time the Company expects the stockholder to convert the $353,790 loans into 345,766 shares of EMCO common stock. The Company expects to make the payments out of normal operating cash flow. As indicated by the financial statements, the Company's short-term borrowings, leases, and loans from stockholder have decreased from approximately $556,000 at April 30, 1996, to approximately $418,000 at April 30, 1997. The Company uses excess cash to invest in high grade securities until the cash is needed for operations. As of April 30, 1997, the Company has invested approximately $905,000 in high grade investment securities. Cash and cash equivalents increased approximately $15,000, due to management's desire to fund future capital expenditures out of operations. Management believes it has adequate cash to support operations. This belief is supported by the fact that positive cash flow from operating activities of approximately $870,000 were offset by investing activities of approximately $777,000, and debt and lease obligations of approximately $78,000. The Company will continue to manage cash in order to support operations. Net accounts receivable increased by approximately $245,000, due to higher sales volume. Collections of accounts receivable increased significantly and are reflected by the 5.5 day decrease of the Company's Days Sales Outstanding (DSO) from 59.7 days to 54.1 days in fiscal years 1996 and 1997, respectively. Short-term investments increased approximately $197,000 due to the Company selling the investment in common stock of Marcum Natural Gas Services, Inc. during the year and investing the proceeds in more liquid investments. The impact of recording investments at market value decreased the cost by approximately $50,000. Inventories decreased approximately $318,000, and the inventory turn ratio increased from 1.45 in 1996 to 2.03 in 1997. The decrease in inventory is due primarily to greater inventory usage; the result of sales being approximately $1,244,000 higher. Income taxes receivable of approximately $161,000 are the result of payments of estimated taxes and capital loss carrybacks. Accounts payable increased approximately $151,000 due to higher material purchases resulting from higher sales volume. The Company does not have any material commitments for capital expenditures. All proposed capital expenditures can be financed from the Company's cash flow. Page 7 of 39 Net working capital and the working capital ratio for the last two fiscal years were: As of April 30 1997 1996 Working capital $3,191,593 $3,441,931 Working capital ratio 3.3 3.9
Material changes in cash flows are summarized as follows: As of April 30 1997 1996 Net cash provided by operating activities $869,635 $582,783 Net cash (used in) investing activities ($776,961) ($173,219) Net cash (used in) financing activities ($77,558) ($189,026) Net increase in cash and cash equivalents $15,116 $220,538
Management believes EMCO will enjoy improved results in the future. The basis of management's belief is that the Company has a strong foundation upon which to grow. The Company has accomplished the following: A. The Company introduced a new commercial water flowmeter in March 1997. The product is currently at the beginning of the sales cycle, and no significant revenues have been recognized to date. B. The Company will continue to conduct R&D activity for new products to be introduced in coming years. There is no assurance that the R&D activity will result in additional sales for the Company. The Company will also emphasize value engineering to sustain margin despite increasing price competition. C. The Company continues to make improvements in overall production efficiency; through increased investments in equipment. The Company is now capable of greater production capacity at little or no increased fixed cost. All equipment purchases were paid from the Company's cash flow. D. The Company's balance sheet remains strong with the primary emphasis on the elimination of debt. The significant reduction in debt will reduce the amount of interest payments, which management believes will directly improve profitability. The Company also recognized approximately $78,000 in interest and dividend income from investments during the fiscal year ended April 30, 1997. Management is not aware of any known trends, events or uncertainties that have had, or are likely to have an impact on short-term or long-term liquidity of the Company. RESULTS OF OPERATIONS: Sales Revenues Sales revenues for the Company increased approximately $1,244,000 or 14.4% in fiscal year 1997 as compared to fiscal year 1996. The primary reason for the increase in sales was due to a large international project which resulted in sales of approximately $800,000. Mag meter sales increased approximately $497,000 over the previous year. The Mag market is the largest market where EMCO meters are sold; higher market volume means more product sale opportunities. The Company continues to place a high priority on product quality and customer satisfaction. Management believes this emphasis will have long-term positive impacts on sales. Finally, the Company continues to make major investments in new product development, including the introduction of a commercial water meter in March 1997. The water meter is in the Page 8 of 39 beginning of the sales cycle, and no significant revenues have been recognized at this time. The Company will continue to maintain a healthy product development program. Net Income In fiscal year 1997, the Company recognized net income of $271,792, as compared to net income of $400,049 for fiscal year 1996. The decrease in income in 1997 can be attributed to the following: 1997 1996 Gross Margin on Sales $4,283,103 $3,813,683 Income from Operations $405,123 $485,643 Gain/(Loss) on Sale of Stock (79,865) 34,524 Royalty and other income 169,974 141,771 Interest Expense (39,246) (56,185) Income tax provision (184,194) (205,704)
The Company's decrease in net income in 1997 is due to the following reasons: The gross margin on sales in 1997 was 43.2% as compared to 44.0% in 1996, which is attributable to higher material, labor and overhead costs, offset by lower warranty costs. Income from operations in 1997 are 4.1% compared to 5.6% in 1996. The lower income from operations is due to increased product development costs. Gain/(Loss) on sale of stock is approximately $115,000 lower in fiscal year 1997, primarily due to losses from the sale of 152,000 shares of Marcum Natural Gas Services, Inc. common stock at a loss of approximately $117,000. Royalty and other income is approximately $28,000 higher in fiscal year 1997. Interest expense decreased by approximately $17,000 due to the reduction of corporate debt. Gross Margins Overall gross margins for the past two years are reflected as follows: As of April 30 1997 1996 Gross margin 43% 44%
The decrease in gross margin from 1997 to 1996 was due to higher material (1.1%) costs due to an unfavorable product mix, higher labor and overhead (0.9%), partially offset by lower warranty costs (1.2%). Management believes investments made in 1997 will make manufacturing more efficient in the future. Selling Expense The Company incurred the following selling expenses as a percent of sales: As of April 30 1997 1996 Selling expense 24% 24%
Selling expense as a percent to sales remained relatively flat. The Company increased expenses by approximately $364,000 due to increased volume, in-field sales management and promotion of the new product line. Management in the Page 9 of 39 future will continue to promote the Company's products through increased in- field sales management, advertising in trade journals, industry trade shows and telemarketing. General and Administrative General and administrative expense for the Company as a percent of sales for the past two years is as follows: As of April 30 1997 1996 General and administrative expense 9% 10%
General and administrative expenses as a percent of sales in fiscal year 1997 were slightly lower than the prior year. Actual expenses were approximately $8,000 lower in fiscal year 1997. Management intends in the future for general and administration expenses not to increase as quickly as sales. Research and Development Research and development expense as a percent of the Company's sales over the past two years is: As of April 30 1997 1996 Research and development expense 6% 5%
Research and development expenses increased approximately $194,000 in 1997 due to higher new product development activities. Management intends in the future to continue product development activities; while continuing to perform value engineering to lower the product cost and improve product quality. There is no assurance that the new product development activities will result in additional sales for the Company. Gains/(Losses) on Sale/Exchange of Stock The Company recognized losses from the sale of stock in fiscal year 1997 from the following activities: 1) Loss on the sale of 154,000 shares of Marcum Natural Gas Services, Inc. (MGAS) common stock of approximately $117,000; 2) Gain on sales of high grade investments of approximately $37,000. In fiscal year 1996, the Company recognized gains on sales of high grade investments of approximately $30,000 and gain on the sale of 50,000 shares of MGAS common stock of $5,000. Page 10 of 39 Interest Rates The outstanding borrowed amounts, the interest expense, and the effective interest rates, are shown below for the past two years: As of April 30 1997 1996 Amount Borrowed $418,382 $555,940 Interest Expense $37,813 $56,214 Interest Rates 7.8% 8.4%
The borrowed amounts have decreased due to paying off debt. The interest rate is lower in fiscal year 1997 because the mortgage on the building with higher interest rates were paid off. Management believes the Company's interest rates in the future will continue to stay at the same relative rate. The loan will mature at the end of fiscal year 1998. Management expects the stockholder to convert the $353,790 loan balance into 345,766 shares of EMCO common stock. Income Taxes Income taxes as a percentage of pre-tax income are depicted below: As of April 30 1997 1996 Income tax expense 40% 34%
The reasons income taxes have varied are shown in Note 6 of the Notes to Financial Statements. Page 11 of 39 Trends Most of the Company's sales (approximately 63%) are generated in the United States. Therefore, the health of the U.S. economy has a significant impact on the Company. However, the Company has such a small share of the total market currently that management believes the Company can continue to grow despite the fluctuations in the domestic economy. While the Company generates approximately 37% of sales internationally, management believes that the Danfoss marketing agreement (in which Danfoss markets and distributes the Company's Vortex PhD flowmeter in Europe and around the world), along with continued sales emphasis in developing nations, will cause international sales to increase beyond the current 37% in the near future. The Company has a diverse product mix. Therefore, it is unlikely that any single competitor can have a decidedly negative impact on EMCO. The Company is able to address a number of different markets with a variety of products and technologies. Therefore, the Company's product market risk is also lower than many companies. The Company has developed a new product line for the commercial water market. Sales of the new product are at the beginning of the sales cycle, and no significant revenues have been recognized to date. The Company will continue to devote resources to new product development. However, there are no assurances that the new product development costs will result in additional sales for the Company. Finally, the Company has eliminated bank debt altogether and will be out of debt by the end of fiscal year 1998. As such, management feels relatively insulated from any developments which might impact capital markets. The Company does not anticipate any events to cause material changes in the revenue/cost relationship in the foreseeable future. Page 12 of 39 ITEM 8. FINANCIAL STATEMENTS The following financial statements of Engineering Measurements Company are found on Pages 15 through 28. Page Report of Independent Certified Public Accountants 14 Balance Sheets-April 30, 1997 and 1996 15,16 Statements of Operations-Years Ended April 30, 1997, and 1996 17 Statements of Changes in Stockholders' Equity-Years Ended April 30, 1997, and 1996 18 Statements of Cash Flows-Years Ended April 30, 1997, and 1996 19 Notes to Financial Statements 20-29 Page 13 of 39 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of Engineering Measurements Company We have audited the accompanying balance sheets of Engineering Measurements Company (a Colorado corporation) as of April 30, 1997 and 1996, and the related statements of income, stockholders' equity and cash flows for each of the years then ended. 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 Engineering Measurements Company as of April 30, 1997 and 1996, and the results of its operations and its cash flows for each of the years then ended, in conformity with generally accepted accounting principles. /s/ GRANT THORNTON LLP GRANT THORNTON LLP Denver, Colorado June 13, 1997 Page 14 of 39 ENGINEERING MEASUREMENTS COMPANY BALANCE SHEETS ASSETS April 30, 1997 1996 Current assets: Cash and cash equivalents $547,837 $532,721 Accounts receivable, net of allowance for doubtful accounts and allowance for sales returns of $61,104 April 30, 1997 and $101,979 at April 30, 1996 1,557,566 1,313,033 Short-term investments 904,724 708,042 Inventories 1,256,597 1,574,547 Prepaid expenses 23,845 75,892 Income taxes receivable 160,848 -- Other receivables 62,602 50,141 Deferred income taxes 224,342 380,969 --------- --------- Total current assets 4,738,361 4,635,345 --------- --------- Property and equipment, at cost: Land 568,940 568,940 Building & improvements 1,619,595 1,627,634 Vehicles 22,196 16,791 Machinery and equipment 3,106,342 2,741,535 Office furniture and fixtures 950,271 990,787 --------- --------- 6,267,344 5,945,687 Less accumulated depreciation (3,981,412) (4,032,724) --------- --------- Net property and equipment 2,285,932 1,912,963 --------- --------- Other 109,335 90,237 Investment in common stock of Marcum Natural Gas Services, Inc. 0 197,312 --------- --------- Total other assets 109,335 287,549 --------- --------- TOTAL ASSETS: $7,133,628 $6,835,857 ========== ==========
The accompanying notes are an integral part of these statements. Page 15 of 39 ENGINEERING MEASUREMENTS COMPANY BALANCE SHEETS - CONTINUED LIABILITIES AND STOCKHOLDERS' EQUITY April 30, 1997 1996 Current liabilities: Current portion of long-term debt $418,382 $137,558 Accounts payable 612,538 462,332 Accrued liabilities 515,848 593,524 --------- --------- Total current liabilities 1,546,768 1,193,414 --------- --------- Long-term liabilities: Loans from stockholder less current maturities 0 418,382 Deferred income taxes 188,100 183,100 --------- --------- Total long-term liabilities 188,100 601,482 --------- --------- Stockholders' equity: Common stock, $.01 par value; 5,000,000 shares authorized; 2,988,452 shares issued at April 30, 1997, 2,943,452 shares issued at April 30, 1996, 2,798,052 shares outstanding at April 30, 1997, 2,753,052 shares outstanding at April 30, 1996 29,885 29,435 Capital in excess of par value 2,047,877 1,988,327 Unrealized holding losses, net of taxes (30,409) (56,416) Retained earnings 3,981,106 3,709,314 Treasury stock at cost; 190,400 shares at April 30, 1997 and April 30, 1996 (629,699) (629,699) --------- --------- Total stockholders' equity 5,398,760 5,040,961 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY: $7,133,628 $6,835,857 ========== ==========
The accompanying notes are an integral part of these statements. Page 16 of 39 ENGINEERING MEASUREMENTS COMPANY STATEMENTS OF OPERATIONS Year Ended April 30, 1997 1996 Sales $9,910,047 $8,665,808 Cost of sales 5,626,944 4,852,125 ---------- ---------- Gross margin on sales 4,283,103 3,813,683 ---------- ---------- Operating expenses: Selling 2,404,919 2,040,468 General and administrative 852,130 860,540 Research and development 620,931 427,032 ---------- ---------- Total operating expenses 3,877,980 3,328,040 ---------- ---------- Income from operations 405,123 485,643 ---------- ---------- Other income/(expense): Gain/(loss) on sale of stock (79,865) 34,524 Interest expense (39,246) (56,185) Royalty and other income 169,974 141,771 ---------- ---------- Total other income 50,863 120,110 Income from operations before income taxes 455,986 605,753 Income tax provision 184,194 205,704 ---------- ---------- Net income $271,792 $400,049 ========== ========== Net earnings per share $0.10 $0.15 Net earnings per share on a fully diluted basis $0.09 $0.13 ===== ===== Weighted average number of shares outstanding 2,774,719 2,741,385 ========= =========
The accompanying notes are an integral part of these statements. Page 17 of 39 ENGINEERING MEASUREMENTS COMPANY STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Capital in Unrealized Common Stock excess of Holding Retained Treasury Shares Par Value Par value Losses Earnings Stock Balance at May 1, 1995 2,923,452 $29,235 $1,956,927 $(18,555) $3,309,265 $(629,699) Net income 400,049 Stock Options Exercised 20,000 200 31,400 Unrealized holding losses, net of tax (37,861) --------- ------- ---------- --------- --------- --------- Balance at April 30, 1996 2,943,452 29,435 1,988,327 (56,416) 3,709,314 (629,699) Net income 271,792 Stock Options Exercised 45,000 450 59,550 Unrealized holding gains, net of tax 26,007 --------- ------- ---------- --------- --------- --------- Balance at April 30, 1997 2,988,452 $29,885 $2,047,877 $(30,409) $3,981,106 $(629,699) ========= ======= ========== ========= ========== ==========
The accompanying notes are an integral part of these statements. Page 18 of 39 ENGINEERING MEASUREMENTS COMPANY STATEMENTS OF CASH FLOWS
INCREASE/(DECREASE) IN CASH Year Ended April 30, Cash flows from operating activities: 1997 1996 Net income $271,792 $400,049 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization 348,739 311,955 Deferred tax provision/(benefit) 145,000 96,306 Provision for doubtful accounts (40,876) (60,226) (Gain)/Loss on sales of investments 79,865 (34,524) Gain on disposal of assets (446) - Changes in assets and liabilities- Receivables (203,657) 36,553 Inventories 317,950 (95,163) Income taxes receivable and prepaid expenses (108,801) (41,596) Accounts payable and accrued liabilities 72,530 (30,571) -------- -------- Net cash provided by operating activities 869,635 582,783 -------- -------- Cash flows from investing activities: Capital expenditures, net (705,028) (305,311) Expenditures for intangible assets (38,129) (36,684) Investment purchases (1,365,254) (236,721) Proceeds from sale of investments 1,328,652 405,497 Proceeds from sale of fixed assets 2,798 - ---------- -------- Net cash provided by/(used) in investing activities (776,961) (173,219) -------- -------- Cash flows from financing activities: Payments of long and short term debt (126,020) (203,797) Proceeds from exercise of stock options 60,000 31,600 Principal payment under capital lease obligations (11,538) (16,829) -------- -------- Net cash used in financing activities (77,558) (189,026) -------- -------- Net increase/(decrease) in cash and cash equivalents 15,116 220,538 Cash and cash equivalents at beginning of period 532,721 312,183 -------- -------- Cash and cash equivalents at end of period $547,837 $532,721 ======== ======== Supplemental disclosure of cash flow information: Cash paid during period for-- Interest $39,848 $56,185 Income taxes 347,495 24,084
The accompanying notes are an integral part of these statements. Page 19 of 39 ENGINEERING MEASUREMENTS COMPANY Notes to Financial Statements 1. Organization and Business Engineering Measurements Company (EMCO or the Company) designs, manufactures, and markets electronic and electro-mechanical instruments (flowmeters) for measuring the flow of liquids, steam and gases. The Company sells products for energy utility flow measurement (particularly steam metering), but it also has products capable of measuring most types of process fluids, as well as fuel oils and natural gas. Utilizing a network of distributors and commissioned sales representatives, the Company markets flowmeters worldwide. (See Note 7 to the Financial Statements). 2. Summary of Significant Accounting Policies Principles of Consolidation For the fiscal year ended April 30, 1996, the financial statements include the accounts of the company and its wholly owned subsidiary General Metrology Corporation. All significant intercompany accounts and transactions have been eliminated in consolidation. General Metrology Corporation was liquidated during fiscal year 1997. Therefore, the financial statements for the fiscal year ended April 30, 1997, are not consolidated. Inventories Inventories are stated at the lower of cost or market determined by the first-in, first-out method. Investments Investments in debt and qualifying equity securities are classified as either held-to-maturity, trading or available-for-sale. Held-to-maturity investments are debt securities that the Company has the positive intent and ability to hold to maturity. These investments are recorded at amortized cost. Debt and equity securities purchased for the purpose of resale in the near term are classified as trading investments and are recorded at fair value. Unrealized gains or losses on these investments are included in earnings of the current period. Other debt and equity securities that are not categorized as held-to-maturity or trading are classified as available-for-sale and reported at fair value. Unrealized gains or losses on these securities are reported as a separate component of stockholders' equity, net of applicable income tax expense or benefit. All of the debt and qualifying equity securities of the company are considered available-for-sale. Depreciation and Amortization Depreciation of property and equipment is provided on the straight-line method over the following estimated useful lives: Building and improvements 10-25 years Vehicles 3-8 years Machinery and equipment 5-8 years Office furniture and fixtures 4-8 years
Warranty An estimated liability for warranty costs, based on Management's estimate of future warranty costs, is recorded in the year in which sales are made. Page 20 of 39 Earnings Per Share Earnings per share is computed by dividing net income by the weighted average number of shares outstanding during the period. Pursuant to the terms of a loan agreement, a stockholder may convert up to $353,790 in principal and accrued interest into 345,766 shares of common stock at an average price of $1.02 per share. Also during fiscal year 1997, there were a total of 215,275 shares outstanding under the Company's stock option plans. Any dillutive effect of the outstanding options and conversion right to purchase the 561,041 shares as of April 30, 1997 is reflected in the financial statements. The FASB issued Statements of Financial Accounting Standards (SFAS) 128, Earnings per Share, which will be effective for periods ending after December 15, 1997. Early application is not permitted. Had SFAS 128 been adopted, the following table illustrates the Basic and Diluted EPS for fiscal year 1997:
For the Year Ended April 30, 1997 Income Shares Per-Share (Numerator) (Denominator) Amount Net Income $271,792 ======== Basic EPS Net Income available to common stockholders $271,792 2,774,719 $0.10 Effective of Dilutive Securities Options and convertible debt 23,057 267,456 -------- --------- Diluted EPS Income available to stockholders plus assumed conversions $294,849 3,042,175 $0.09 ======== ========= =====
Options to purchase 20,000 shares of common stock at $3.75 per share were outstanding during the year. They were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares. The options which expire on April 1, 2002, were still outstanding at April 30, 1997. Cash Equivalents For purpose of the statements of cash flows, the Company considers all highly liquid cash investments with original maturity dates of three months or less to be cash equivalents. Reclassifications Certain reclassifications have been made to conform prior year's information with the current year presentation. Use of Estimates In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. Investments The Company classifies debt and equity securities as available-for-sale securities. Available-for-sale securities are measured at fair value, with net unrealized gains and losses reported in equity. Page 21 of 39 The amortized cost, unrealized gains and losses, and fair values of the Company's available-for-sale securities held at April 30, 1996 and 1997 are amortized as follows:
Gross Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value Available-for-sale securities Equity securities $763,665 $57,640 $706,025 Debt securities 234,174 34,845 199,329 -------- ------- -------- April 30, 1996 $997,839 $92,485 $905,354 ======== ======= ======== Available-for-sale securities Equity securities $225,590 $7,221 $218,369 Debt securities 728,985 42,630 686,355 -------- ------- -------- April 30, 1997 $954,575 $49,851 $904,724 ======== ======= ========
The following table lists the maturities of debt securities held at April 30, 1997 classified as available-for sale:
Estimated Amortized Fair Cost Value Due in one year or less $264,050 $265,967 Due after one year through five years 464,935 420,388 -------- -------- $728,985 $686,355 ======== ========
Proceeds on sales of securities classified as available-for-sale were $1,328,652 in fiscal year 1997, compared to $405,497 for fiscal year 1996. Gains of $78,052 and losses of $157,917 were realized on these sales for 1997, and $63,092 in gains and $28,568 in losses for 1996. The Company uses the specific identification method to determine cost of securities sold. During fiscal year 1997, the Company sold all of its 154,000 shares of Marcum Natural Gas Services, Inc. (MGAS) stock, which resulted in a loss of approximately $117,000. The market value of the MGAS common stock was approximately $197,000 at April 30, 1996. During fiscal year 1996, the Company sold 50,000 shares of Marcum Natural Gas Services, Inc. (MGAS) stock, which resulted in a gain of approximately $5,000. At April 30, 1996, the Company held 154,000 shares of MGAS common stock at a cost of $234,624. Page 22 of 39 4. Inventories Inventories are as follows:
April 30 1997 1996 Raw material and work-in-process $1,081,823 $1,272,573 Finished goods 174,774 301,974 ---------- ---------- $1,256,597 $1,574,547 ========== ==========
5. Long-term debt
Long-term debt consists of the following: April 30 1997 1996 Loans from Charles E. Miller, an officer, director and stockholder of the Company: Prime plus 2% note (a) $298,664 $348,982 Prime plus 2% note (b) 119,718 139,864 Industrial revenue bonds (c) 0 55,556 -------- -------- 418,382 544,402 Obligations under capital leases 0 11,538 -------- -------- Total $418,382 $555,940 ======== ========
(a) The note is collateralized by inventory, accounts and notes receivable and fixed assets. In addition, up to 40% of the loan advances can be converted into the Company's common stock at the option of the note holder. The conversion prices are at 75% of the bid price for the Company's common stock on the date of each advance under the loan agreement and range from $.61 to $2.25 per share. At April 30, 1997, $252,538 of the loan could be converted into 280,674 shares of common stock. While the note has been a demand note, the stockholder has requested payment of the nonconvertible 60% portion of the note over a five year period ending April 1998 resulting in monthly principal payments of $4,193 plus interest on the outstanding balance. The 40% convertible portion is due April 1998. (b) The note is collateralized by inventory, accounts and notes receivable and fixed assets. Up to 40% of the loan advances can be converted into the Company's common stock at the option of the note holder. The conversion prices are at 100% of the bid price for the Company's common stock on the date of each advance under the loan agreement and range from $1.38 to $2.13 per share. At April 30, 1997, $101,252 of the loan could be converted into 65,092 shares of common stock through 1998. The nonconvertible 60% portion of the note is due over a five year period ending April 1998 resulting in monthly principal payments of $1,679 plus accrued interest on the outstanding balance. The 40% convertible portion is due April 1998. (c) These bonds were payable at 70% of prime rate with a maximum of 15% and a minimum of 9%, collateralized by real estate, inventory, accounts receivable and equipment. They were payable at $11,111 per month until October 1, 1996, when the balance was paid. In August 1992, Mr. Miller purchased these bonds from an unrelated third party. The prime rate at April 30, 1997, was 8.50%. Page 23 of 39 The following is a schedule of annual maturities of long-term debt. Year Ending April 30 1998 $418,382 ======== 6. Income Taxes The Company accounts for income taxes under the liability method. Deferred taxes are provided based upon the tax rate at which items of income and expense are expected to be settled in the Company's tax return. The following is a summary of the provision for income taxes:
Year Ended April 30 1997 1996 Current provision (benefit) Federal $34,873 $130,200 State 4,694 (20,802) ------- -------- $39,567 $109,398 Deferred provision (benefit) Federal $126,127 $92,000 State 18,500 4,306 -------- ------- $144,627 $96,306 ======== ======= Total provision (benefit) Federal $161,000 $222,200 State 23,194 (16,496) -------- -------- $184,194 $205,704 ======== ========
Page 24 of 39 The provision for income taxes differs from the amount determined by applying the statutory rate to income before taxes, due to the following reasons:
Year Ended April 30 1997 1996 Income taxes at statutory rate $178,000 $236,000 Change in estimate of state income taxes - (41,000) Other 6,194 10,704 -------- -------- Income tax expense $184,194 $205,704 ======== ========
Components of deferred tax assets and liabilities.
April 30, 1997 1996 Assets Reserve for bad debt $24,000 $40,000 Inventory cost capitalization 11,000 54,000 Reserve for obsolete inventory 85,000 83,000 Book basis of stock less than tax basis - 112,000 Accrued compensation 15,000 9,000 Investments stated at market 19,000 36,000 Reserve for warranty costs 16,000 16,000 Vacation accrual 43,000 30,969 Other 11,342 - ------- ------- $224,342 $380,969 Liabilities Accelerated depreciation (188,100) (183,100) ------- ------- Net Asset $36,242 $197,869 ======= ========
Included in the Company's balance sheets as follows: April 30, 1997 1996 Current assets $224,342 $380,969 Long-term liabilities (188,100) (183,100) -------- -------- Net Asset $36,242 $197,869 ======== ========
Page 25 of 39 7. Foreign Sales The Company had foreign sales of 36.7% and 27.9% of total sales in the fiscal years ended April 30, 1997 and 1996 respectively. The breakdown of foreign sales for fiscal years 1997 and 1996, in dollars and percent of total sales are:
FY 1997 FY1996 Europe $2,429,000 24.5% $1,579,000 18.2% Asia 544,000 5.5% 306,000 3.5% Other 666,000 6.7% 535,000 6.2%
8. Stock Option Plans The 1991 Nonemployee Director Stock Plan authorized 200,000 shares, while the 1991 Incentive Plan authorized 600,000 shares. A summary of stock option transactions follows:
1997 1996 Weighted Weighted average average exercise exercise Shares price Shares price Options outstanding May 1, 197,275 $2.48 207,275 $2.39 Granted 63,000 $3.32 12,500 $2.53 Canceled 0 (2,500) $2.63 Exercised (45,000) $1.33 (20,000) $1.58 Options ------- ------- outstanding April 30, 215,275 $2.96 197,275 $2.48 ======= =======
Weighted average fair value of options granted during the year ended April 30, 1997 and April 30, 1996 is $ 1.17 and $ 0.73 per share respectively. Page 26 of 39 The following information applies to options outstanding at April 30, 1997:
Options Outstanding Options Exercisable Weighted average Weighted Weighted remaining average average Number contractual exercise Number exercise outstanding life(years) price exercisable price Range of exercise prices $1.00 - $1.50 8,000 0.66 $1.00 8,000 $1.00 $1.51 - $2.27 33,230 0.93 $1.92 33,230 $1.92 $2.28 - $3.42 154,045 3.03 $3.18 114,045 $3.12 $3.43 - $3.75 20,000 4.92 $3.75 20,000 $3.75 ------- ------- 215,275 175,275 ======= =======
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. Had compensation cost for the plan been determined based on the fair value of the options at the grant dates consistent with the method of SFAS No. 123, the Company's net earnings and earnings per share would have been: 1997 1996 Net income As reported 271,792 400,049 Pro forma 197,778 393,582 Primary earnings per share As reported $0.10 $0.15 Pro forma $0.07 $0.14
These pro forma amounts may not be representative of future disclosures because they do not take into effect pro forma compensation expense related to grants made before the fiscal year ended April 30, 1996. In addition, potential deferred tax benefits of approximately $29,606 in 1997 and $3,525 in 1996 have not been reflected in the pro forma amounts due to the uncertainty of realizing any benefit. The fair value of these options was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for 1997 and 1996: Expected life (years) 3.801 Risk-free interest rate 5.500% Volatility 34.680%
Page 27 of 39 The Black Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. In addition to the above, at April 30, 1997 pursuant to the terms of the loans from a stockholder, a portion of the loans and accrued interest could be converted to a total of 345,766 shares of common stock. (See Note 5) 9. Related Party Transactions Charles E. Miller, the Chairman and Chief Executive Officer of the Company, resigned as a director of MGAS in the fiscal year ended April 30, 1997. The 154,000 shares of MGAS common stock which were sold by the Company represented approximately 2% of MGAS's outstanding common stock. On June 11, 1991, DVCO, Inc. ("DVCO"), a wholly owned subsidiary of MGAS entered into a Sale and License Agreement with EMCO. Pursuant to that agreement, DVCO acquired the compressed natural gas (CNG) Dispenser and certain licenses to the underlying digital valve technology from EMCO. EMCO and DVCO also entered into a Manufacturing and Lease Agreement, pursuant to which EMCO agreed to manufacture the digital valve (a key component of the CNG Dispenser) for up to 25 CNG Dispensers for DVCO. The agreement has been amended and renewed by the parties for additional digital valves, and may be renewed in the future by mutual agreement. Sales from the Company to DVCO was approximately $29,000 for the fiscal year ending 1997 and $61,000 for the fiscal year ending April 30, 1996. The Company recorded $50,000 royalty income from DVCO in fiscal year ending 1997 and $50,000 in fiscal year ending 1996. The royalty agreement expired April 30, 1997. 10. Employee Benefit Plan The Company implemented a 401(k) Retirement Plan in July 1993. Employees may join the plan after one year of service, providing they are 21 years or older. The Company has a 5 year vesting schedule on the plan. The Company match for the fiscal years ending 1997 and 1996 was $15,857 and $12,425 respectively. 11. Major Customer The Company sells a significant portion of its product to one customer. During fiscal years 1997 and 1996, sales to that customer aggregated $974,450 and $933,361, respectively. 12. Fair Market Value of Financial Instruments Estimated fair value of financial instruments held for purposes other than trading are as follows as of April 30:
1997 1996 Carrying Fair Carrying Fair Value Value Value Value Cash and cash equivalents $547,837 $547,837 $532,721 $532,721 Short-term investments 904,724 904,724 708,042 708,042 Investment in common stock of MGAS 0 0 197,312 197,312
Page 28 of 39 The following methods and assumptions were used to estimate the fair market value of each class of financial instruments for which it is practicable to estimate that value. Cash and Cash Equivalents The carrying amount approximates fair value because of the short maturity of those instruments. Short-term Investments/Investment in MGAS Carrying amount materially approximates fair value because of the type of these investments. Loans from Stockholders In the opinion of management, the fair value cannot be estimated due to the related party nature and conversion privileges of the notes payable. 14. Fourth Quarter Adjustments During the fourth quarter of the fiscal year ended April 30, 1997, the Company made an adjustment to cost of sales for $115,000. This adjustment resulted from the physical counts performed at April 30, 1997 and updating the Company's bill of materials during the fourth quarter. Also in the fourth quarter, the Company sold 154,000 shares of Marcum Natural Gas Services, Inc. (MGAS) stock, which resulted in a loss of approximately $117,000. Page 29 of 39 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None Page 30 of 39 PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The following table sets forth the name and age of each Director and Executive Officer of the Company, indicating all positions and offices with the Company presently held by him, and the period during which he has served as such: Year Position, Date first held Name of Elected and Principal Occupation Director as or Officer Age Director (For Past Five Years) Charles E. 59 1967 Chief Executive Officer, President, Director Miller and Chairman of the Board, previously President from 1967 to 1987; Member of the Compensation, and Non-Employee Director Stock Plan Committees. Saeid 34 1995 Vice President of Sales and Marketing. Previously Hosseini National Sales Manager, Product Line Manager, and Manager of Applications Engineering. Employed by the Company for more than five years prior to this report. Ken 35 1997 Vice President of Operations. Previously Director Teegardin of Manufacturing since February 1995. Employed in a manufacturing management capacity at Johnson Yokogawa Corporation, Newnan, Georgia, which is not an affiliate of the Company, for more than five years prior to the date of this report. William A. 63 1978 Director, Member of the Audit and Compensation Ringer Committees; President of Granville Phillips Company, Boulder, Colorado, which is not an affiliate of the Company. Employed by Granville Phillips in an executive capacity for more than five years prior to the date of this report. Thomas G. 50 1995 Director, Member of the Incentive Plan Committee; Miller CEO and physician of College Park Family Care Center of Overland Park, Kansas, which is not an affiliate of the Company. Employed by College Park Family Care Center in an executive capacity for more than five years prior to the date of this report. Walter 69 1995 Director, Member of the Audit, Compensation, and Kluck Incentive Plan Committees; CEO of Industrial Representatives, Inc. of Clifton, New Jersey, which is not an affiliate of the Company. Employed by Industrial Representatives, Inc. in an executive capacity for more than five years prior to the date of this report.
The Board of Directors has standing Audit, Compensation, and Incentive Plan Committees. Mr. Ringer and Mr. Kluck constitute the members of the Audit Committee, and Messrs. Charles Miller, Ringer, and Kluck serve on the Compensation Committee. Mr. Kluck and Mr. Thomas Miller serve on the Incentive Plan Committee. The Audit Committee reviews financial statements. The Audit Committee met once during the fiscal year ending April 30, 1997. The Compensation Committee meets informally as required to recommend to the Board of Directors the compensation to be paid to the officers of the Company and to recommend to the Board of Directors any other profit sharing and bonus issues that may come before the Board of Directors. The Compensation Committee met once during fiscal year 1997. The Incentive Plan Committee and the Non-Employee Page 31 of 39 Director Stock Plan Committee administer the respective Plans. Such Committees did not meet formally during the last fiscal year. The Board of Directors held four meetings during the fiscal year ending April 30, 1997. All Directors attended all meetings. All Directors hold office until the next annual meeting of the shareholders of the Company or until their successors have been elected and qualified. Officers serve at the discretion of the Board of Directors and are elected annually. None of the Directors have been involved in any litigation or bankruptcy during the past five years. Charles E. Miller, Thomas G. Miller and David S. Miller are brothers. Compliance with Section 16(a) of the Securities Exchange Act of 1934 Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and directors, and persons who own more than ten percent of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and greater than ten-percent shareholders are required by SEC regulation to furnish the Company with the copies of all Section 16(a) forms they file. Based solely on review of the copies of such forms furnished to the Company, or written representations that no Forms 5 were required, the Company believes that during the last fiscal year, all Section 16(a) filing requirements applicable to its officers, directors and greater than ten-percent beneficial owners were complied with. Except for Mr. Hosseini who filed late on the exercise of 20,000 options. Page 32 of 39 ITEM 10. EXECUTIVE COMPENSATION The following table sets forth all cash compensation awarded to, earned by, or paid to the Company's Officer for services in all capacities to the Company during the fiscal year ended April 30, 1997:
SUMMARY COMPENSATION TABLE Annual Compensation Long Term Compensation Awards Payouts (a) (b) (c) (d) (e) (f) (g) (h) (i) Other Securities All Name and Annual Restricted Underlying LTIP Other Principal Compen- Stock Options/ Pay- Compen- Position Year Salary($) Bonus($) sation($) Awards($) SAR's(#) outs($) sation($) Charles E. 1995 $86,874 0 0 0 10,875 0 $1,098 Miller, 1996 $121,644 $7,133 0 0 0 0 $1,217 CEO and 1997 $133,688 $2,651 0 0 10,000 0 $1,408 Chairman of the Board
Other Compensation for Mr. Miller reflects the matching portion of the Company's 401K plan. Page 33 of 39 Option/SAR Grants in Last Fiscal Year None.
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values (a) (b) (c) (d) (e) Number of Securities Underlying Value of Unexercised Unexercised In-the-Money Options/SAR's Options/SAR's at at FY-End (#) FY-End ($) Shares Acquired Name On Exercise Value Exercisable/ Exercisable/ (#) Realized ($) Unexercisable Unexercisable Charles E. Miller 0 0 20,000/0 $45,000/$0 10,875/0 $6,743/$0 5,000/0 $4,350/$0 5,000/0 $1,250/$0
Long-Term Incentive Plans - Awards in Last Fiscal Year None. Page 34 of 39 Compensation of Directors Directors who are not employees of the Company received an annual Director's fee of $3,000. This fee is paid whether or not the Director attends meetings of the Board and its Committees. Under the 1988 Non-Statutory Stock Option Plan, options to purchase 40,000 shares were granted to directors, 20,000 shares each to William A. Ringer, and Charles E. Miller, in fiscal year 1993 exercisable at $1.75 per share from July 1, 1993 to December 31, 1997. Under the 1991 Non-Employee Director Stock Plan, in fiscal year 1995 options to purchase 60,000 shares were granted, 20,000 each to William A. Ringer, Walter Kluck, and Thomas G. Miller, exercisable at $3.40 per share from October 14, 1995 through October 14, 1998. Employment Contracts and Termination of Employment and Change in Control Arrangements. None Reporting on Repricing of Options/SAR's. None ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth as of July 2, 1997, the number and percentage of the Company's shares of Common Stock owned of record and beneficially by each person owning more than five percent (5%) of such Common Stock and by all individual directors and officers as a group:
Name of Amount and Nature Percent Title of Class Beneficial Owner of Ownership of Class Common Stock Charles E. Miller 1,255,721 (1) 39.7 Common Stock William A. Ringer 98,900 (2) 3.5 Common Stock Saeid Hosseini 61,400 (3) 2.2 Common Stock David S. Miller 397,027 (4) 14.3 Common Stock Walter Kluck 22,750 (5) 0.8 Common Stock Thomas G. Miller 282,450 (6) 10.1 Common Stock Ken Teegardin 20,000 (7) 0.7
All Directors and Officers as a Group (Six Persons) 1,741,171 53.1 (1) Record and Beneficial; includes 869,080 shares of common stock owned directly; an option to purchase 20,000 shares of common stock under the 1988 Non-statutory Stock Option Plan; an option to purchase 20,875 shares of common stock under the 1991 Incentive Plan; and the right to convert a portion of a loan balance into 345,766 shares of common stock pursuant to loan agreements (See Note 4 to the Consolidated Financial Statements). Mr. Miller has sole voting and investing power on 857,080 of the owned shares; the remaining 12,000 shares have shared voting and investment power. Charles E. Miller's business address is 600 Diagonal Highway, Longmont, CO 80501. (2) Record and Beneficial; includes 78,900 shares of common stock owned with sole voting and investment power; and an option to purchase 20,000 shares of common stock pursuant to the 1991 Non-Employee Director Stock Plan. William A. Ringer's business address is 5675 Arapahoe Avenue, Boulder, CO 80303. Page 35 of 39 (3) Record and Beneficial; includes 25,000 shares of common stock owned with sole voting and investment power; and an option to purchase 36,400 shares of common stock under the 1991 Incentive Plan. Saeid Hosseini's business address is 600 Diagonal Highway, Longmont, CO 80501. (4) Record and Beneficial; includes 397,027 shares of common stock owned. David Miller has sole voting and investment power for 379,432 of the shares; the remaining 17,595 shares have shared voting and investment power. David S. Miller's business address is 420 E. Armour, N. Kansas City, MO 64166. (5) Record and Beneficial; includes 2,750 shares of common stock owned with sole voting and investment power; and an option to purchase 20,000 shares of common stock under the 1991 Non-Employee Director Stock Plan. Walter Kluck's business address is P.O. Box 421, Clifton, NJ 07015. (6) Record and Beneficial; includes 262,400 shares of common stock owned directly; and an option to purchase 20,000 shares of common stock under the 1991 Non-Employee Director Stock Plan. Thomas Miller has sole voting and investment power for 259,400 owned shares; the remaining 3,000 shares have shared voting and investment powers. Thomas G. Miller's business address is 11725 W. 112th St., Overland Park, KS 66210. (7) Record and Beneficial; includes an option to purchase 20,000 shares of common stock under the 1991 Incentive Plan. Ken Teegardin's business address is 600 Diagonal Highway, Longmont, CO 80501. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The related party transactions between the Company and Marcum Natural Gas are set forth in Item 1 of this Form 10-KSB. Other related party transactions include the sales from the Company to DVCO of approximately $29,000 in fiscal year ended April 30, 1997 and $61,000 in fiscal year ended April 30, 1996. The Company also recognized $50,000 of royalty income from DVCO during fiscal year ended April 30, 1997 and $50,000 for fiscal year 1996. The royalty agreement expired April 30, 1997. PART IV ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. (A) Exhibits Exhibit No. Item 3 Articles of Incorporation and By-laws filed as Exhibits 2.1 and 2.2, respectively, to Registrant's Registration No. 2-69601 filed with the Commission and hereby incorporated by reference. 3-1 Articles of amendment to Articles of Incorporation as filed as Exhibit 3-1 to Registrant's 10-K for the fiscal year ended April 30, 1988 filed with the commission and hereby incorporated by reference. 10-1 Loan agreement between the Registrant and the Colorado National Bank of Denver, dated September 1, 1989, filed as Exhibit 10-2 to Registrant's 10-K for the year ended April 30, 1990 filed with the Commission and hereby incorporated by reference. Page 36 of 39 10-2 Financing Agreement, Mortgage and Security Agreement, Pledge Agreement, UCC Financing Statement and Specimen Bond among County of Boulder, Colorado, as issuer, the Colorado National Bank of Denver, as Lender, and Engineering Measurements Company, as Borrower, all dated as of September 1, 1981, used in connection with the issue and sale of $2,000,000 in face value of Boulder County, Colorado, Industrial Development Revenue Bonds (Engineering Measurements Company Project), Series of 1981 filed as exhibits to the Company's report on Form 10-K for the fiscal year ended April 30, 1982 and hereby incorporated herein by reference. 10-4 Loan agreement between the Registrant and Charles E. Miller, dated April 9, 1990, filed as Exhibit 10-4 to the Company's Report on Form 10-K for the year ended April 30, 1992 and hereby incorporated by reference. 10-5 Voting Agreement, Agreement and Plan of Merger, Voting Trust Agreement, Sale and Licensing Agreement, Amendment to Sale and Licensing Agreement, Manufacturing and Lease Agreement, and Agreement by and between the Company, Measurement Auditors Company, Marcum Natural Gas Services, Inc., and Colorado National Bank of Denver incorporated herein by reference to Exhibits 2.1, 2.2, 2.3, 2.4, 2.5, 2.6, and 2.7, respectively, to registrant's Form 8-K dated June 25, 1991. 10-6 1988 Non-Statutory Stock Option Plan, filed as Exhibit 10-7 to Registrant's Annual Report on Form 10-K for fiscal year ended April 30, 1991 and incorporated herein by reference. 10-7 1991 Non-Employee Director Stock Plan, filed as Exhibit 10-7 to the Company's Report on Form 10-K for the year ended April 30, 1992 and hereby incorporated by reference. 10-8 Stock Purchase Agreement, dated May 20, 1992 by and among Registrant, General Metrology Corporation, Patrick Petroleum Company and Patrick Petroleum Corporation of Michigan; filed as Exhibit 10-8 to the Company's Report on Form 10-K for the year ended April 30, 1992 and hereby incorporated by reference. 10-9 Delivery Contract EMCO - Danfoss, Delivery Contract Danfoss EMCO, and License Agreement, dated May 3, 1991; filed as Exhibit 10-9 to the Company's Report on Form 10-K for the year ended April 30, 1992 and hereby incorporated by reference. 10-10 Loan agreement between the Registrant and Charles E. Miller, 10 dated June 10, 1993; filed as Exhibit 10-10 to the Company's Report on Form 10-KSB for the year ended April 30, 1993, and hereby incorporated by reference. 10-11 1991 Incentive Plan filed as Exhibit 10-11 to the Company's 11 Report on Form 10-KSB for the year ended April 30, 1993, and hereby incorporated by reference. 10-12 Agreement, dated July 9, 1993, among Patrick Petroleum Corporation of Michigan, the Company and General Metrology Company, filed as Exhibit 10-12 to the Company's Report on Form 10-Q for the quarter ended October 31, 1993, and hereby incorporated by reference. 10-13 Amendment to License Agreement, and Delivery Contract between 13 Danfoss and EMCO, dated June 13, 1995, filed herewith. 10-14 Termination agreement between Registrant and Douglas J. Collier, dated January 30, 1995, filed herewith. 21 List of Registrant's Subsidiaries; filed as Exhibit 22 to the Company's Report on Form 10-K for year ended April 30, 1992 and hereby incorporated by reference. Page 37 of 39 23 Consent of Grant Thornton to incorporate auditors report into the Registrant's S-8. (B) REPORTS ON FORM 8-K No reports on Form 8-K were filed during the quarter ended April 30, 1997. Page 38 of 39 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, Engineering Measurements Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ENGINEERING MEASUREMENTS COMPANY By: /s/ Charles E. Miller Charles E. Miller (President) Date: July 24, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been duly signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Charles E. Miller /s/ William A. Ringer Charles E. Miller William A. Ringer (Director, Principal Executive Officer, (Director) Principal Financial Officer and July 24, 1997 Principal Accounting Officer) July 24, 1997 /s/ Walter Kluck /s/ Thomas G. Miller Walter Kluck Thomas G. Miller (Director) (Director) July 24, 1997 July 24, 1997 Page 39 of 39 July 24, 1997 ENGINEERING MEASUREMENTS COMPANY (NASDAQ SYMBOL: EMCO) Fiscal Year 1997 Results Corporate Contact: Charles E. Miller (303) 651-0550 Longmont, Colorado: Engineering Measurements Company announced today net income of $271,792 ($.10 per share) for the fiscal year ended April 30, 1997. This compares to net income for the fiscal year ended April 30, 1996 of $400,049 ($.15 per share). Sales for fiscal year 1997 were approximately $9.9 million a 14% increase over the comparable period last year. Income from operations for fiscal year 1997 were approximately $405,000, compared to approximately $486,000 for the same period last year. The increase in revenue was offset by new product marketing and development costs. Other Income for fiscal year 1997 was approximately $51,000. This compares to other income for fiscal year 1996 of approximately $120,000. The decrease in other income is primarily due to the sale of 154,000 shares of Marcum Natural Gas Services, Inc. common stock at a loss of approximately $117,000.
E N G I N E E R I N G M E A S U R E M E N T S C O M P A N Y Operating Results Year ended April 30, 1997 1997 1996 Net Sales $9,910,047 $8,665,808 Income from operations 405,123 485,685 Other income 50,863 120,110 Income taxes 184,194 205,704 Net income $271,792 $400,049 Net earnings per share $.10 $.15 Number of shares outstanding 2,798,052 2,753,052
EX-27 2 ART. 5 FDS FOR 10-KSB
5 This schedule contains summary financial information extrated from the Balance Sheet and statement of operations found on pages 15, 16 and 17 of the company's form 10-KSB for the year-to-date, and is qualified in its entirety by reference to such financial statements. 1000 Year APR-30-1997 APR-30-1997 548 905 1,619 61 1,257 4,738 6,267 3,981 7,134 1,547 0 30 0 0 5,369 7,134 9,910 9,910 5,627 5,627 3,788 0 39 456 184 272 0 0 0 272 .10 .09
-----END PRIVACY-ENHANCED MESSAGE-----