-----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, DVXfeH6OoLkbMCEdQcgVAQ8iYqUK0NrhviNboWPssYAObi6VyfMS5nB8n5+wvoTL 0LNFASKEI0QPu0CSlKjD7A== /in/edgar/work/0000926236-00-000126/0000926236-00-000126.txt : 20000930 0000926236-00-000126.hdr.sgml : 20000930 ACCESSION NUMBER: 0000926236-00-000126 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000928 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEERLESS MANUFACTURING CO CENTRAL INDEX KEY: 0000076954 STANDARD INDUSTRIAL CLASSIFICATION: [3569 ] IRS NUMBER: 750724417 STATE OF INCORPORATION: TX FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-05214 FILM NUMBER: 731343 BUSINESS ADDRESS: STREET 1: 2819 WALNUT HILL LN CITY: DALLAS STATE: TX ZIP: 75229 BUSINESS PHONE: 2143576181 MAIL ADDRESS: STREET 1: P.O. BOX 540667 CITY: DALLAS STATE: TX ZIP: 75354 10-K405 1 0001.txt ============================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ============================================================================ FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal year ended June 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ ============================================================================ Commission File Number 0-5214 PEERLESS MFG. CO. ============================================================================ (Exact name of registrant as specified in its charter) Texas 75-0724417 ------------------------------- ------------------ (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) 2819 Walnut Hill Lane, Dallas, Texas 75229 ---------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (214) 357-6181 Securities registered pursuant to Section 12(g) of the Act: Title of each class Name of Each Exchange on Which Registered ------------------- ----------------------------------------- Common Stock, par value $1.00 The Nasdaq Stock Market's National Market Securities registered pursuant to Section 12(b) of the Act: None ============================================================================ Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K. [X] At September 21, 2000, Peerless Mfg. Co. had 1,467,992 shares of common stock, $1.00 par value outstanding. The aggregate market value of the registrant's common stock on September 21, 2000 (based upon the closing price of these shares on Nasdaq) held by non-affiliates (excludes officers, directors and shareholders holding 5% or greater of the registrant's common stock) was approximately $22,700,000. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for Annual Meeting of Shareholders to be held on or about November 16, 2000 (to be filed) are incorporated by reference into Part III of this Form 10-K. TABLE OF CONTENTS Item Page PART I 1 Business.............................................. 1 2 Properties............................................ 5 3 Legal Proceedings..................................... 5 4 Submission of Matters to a Vote of Security Holders ................................ 5 PART II 5 Market for Registrant's Common Equity and Related Stockholder Matters ........................ 5 6 Selected Financial Data............................... 6 7 Management's Discussion and Analysis of Financial Condition and Results of Operations ................ 6 8 Financial Statements and Supplementary Data.......... 12 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ............ 37 PART III 10 Directors and Executive Officers of the Registrant .................................... 37 11 Executive Compensation............................... 37 12 Security Ownership of Certain Beneficial Owners and Management ............................. 37 13 Certain Relationships and Related Transactions ...................................... 37 PART IV 14 Exhibits, Financial Statement Schedule, and Reports on Form 8-K ........................... 38 PART I ITEM 1. BUSINESS. Peerless Mfg. Co. (the "Registrant", "Peerless" or "we," "us" or "our") was organized in 1933 as a proprietorship and was incorporated as a Texas corporation in 1946. We have wholly-owned subsidiaries in Texas, Netherlands, United Kingdom, and Barbados. Products and Operations We are engaged in the business of designing, engineering, manufacturing and selling highly specialized products referred to as "Selective Catalytic Reduction Systems" (we refer to these products as "SCR Systems") used to separate nitrogen oxide (NOx) emissions from exhaust gases caused by burning hydrocarbon fuels such as coal, gasoline, natural gas and oil. We combine these products with other components as totally integrated systems. Many of the company's components are packaged on skids complete with instruments, controls and related valves and piping. We also design, engineer, manufacture and sell specialized products known as "separators" or "filters" which are used for a variety of purposes in cleaning gases and liquids as they move through a piping system. These products are used primarily to remove solid and liquid contaminants from natural gas and salt water aerosols from the combustion intake air of ship board gas turbine and diesel engines. Separators are also used in nuclear power plants to remove water from saturated steam. We likewise design, engineer, manufacture and sell packaged boilers and other steam generating equipment through our subsidiary, ABCO Industries, Inc. This equipment is used to produce steam which is used in processes, heating, drying, driving steam turbines and a variety of other applications. ABCO Industries, Inc. is also used to support the manufacturing needs of other Peerless products. We also design, engineer, manufacture and sell specialized products known as "pulsation dampeners" which are used primarily to reduce or eliminate vibrations caused by acoustical pulsations commonly found in piping connected to reciprocating compressors. Pulsation dampeners reduce noise levels, improve efficiency and prolong the life of piping systems. Additionally, we sell gas odorization equipment, quick-opening closures, parts for our products and other miscellaneous items and render certain engineering services. Although we manufacture and stock a limited number of items of equipment for immediate delivery, the vast majority of our products are designed and constructed for specific customer requirements or specifications. In certain cases, our products and components are designed by us but produced by subcontractors under our supervision. We market our products worldwide through manufacturers' representatives who sell on a commission basis under the general direction of an officer of Peerless. We also sell products directly to customers. Our business activity and revenues are not seasonal. Customers and Export Sales Environmental control products, principally SCR Systems, are sold to independent power producers, heat recovery steam generator suppliers, boiler manufacturers, refineries, petrochemical plants and others who desire or may be required to reduce nitrogen oxide (NOx) emissions. Gas separators and filters are sold to gas producers and gas gathering, transmission and distribution companies, chemical manufacturers and oil refineries, either directly or through contractors engaged to build plants and pipelines, and to manufacturers of compressors, turbines, and nuclear and conventional steam generating equipment. Marine separation/filtration systems are sold primarily to shipbuilders. Pulsation dampeners are purchased by customers in the same industries as purchasers of separators and filters (except shipbuilders and steam generating equipment manufacturers). Boilers as supplied by ABCO Industries, Inc. are sold to industrial, process and utility customers. These products are sold through a number of sales channels including direct to users of the equipment, consulting engineers and OEM's. We are not dependent upon any single customer or group of customers. The custom-designed nature of our business and the nature of the products cause year to year variance in our major customers. During Fiscal year 2000, one customer, Pacific Gas & Electric Disbursed Generating, accounted for 19% of revenues. No customer accounted for 10% or more of our revenues during Fiscal years 1999 and 1998. Sales to international customers have been a part of our business for more than forty years. During our Fiscal year 2000, foreign sales amounted to $13.6 million, or 23% of total consolidated revenue, compared to sales of $18 million, or 44% of total consolidated revenue, during our Fiscal year 1999. The custom-designed and project-specific nature of our products enables us to sell to any geographic region. Our international sales involve certain risks. Foreign purchasers may default in the payment of amounts due, causing collection on an international account to be more difficult than for a domestic account. Foreign exchange rates may fluctuate, adversely affecting us. Also, the U.S. and foreign governments may impose regulatory burdens upon exports and imports of our products. We also incur greater expenses on foreign sales because of added selling expenses incurred in other countries. To date, we have not incurred substantial expenses related to these risks. We have reduced our credit and collection risks because a substantial part of foreign sales are made to large, well-established international companies and/or to international operations of domestic companies. When sales are made to smaller international enterprises, we generally require progress payments or an appropriate guarantee of payment, such as a letter of credit from a banking institution. We attempt to minimize the risks of fluctuating currency exchange rates by requiring payment in U.S. dollars (or in the functional currency of our foreign subsidiaries) for most of our foreign product sales. Backlog Our backlog of uncompleted orders at June 30, 2000 was approximately $29 million, which was unchanged from orders at June 30, 1999. Backlog has been calculated under our normal practice of including incomplete orders for products that are deliverable in future periods but that may be changed or cancelled. Of the $29 million backlog as of June 30, 2000 approximately 90% is scheduled to be complete by the end of the current Fiscal year. Competition There are many competitors, both larger and smaller than us, in the manufacturing and selling of SCR systems, separators, filters and pulsation dampeners. Management believes that performance, reliability and warranty service are the prime competitive factors in our markets. We believe that we strongly compete in these areas and have become a world leader in sales of these custom-built products. Patents, Licenses and Product Development We believe that we are a leader in the design, manufacturing and application of efficient, dependable SCR systems. We also consider our ourselves to be a world leader in the technology required to design and apply our high efficiency vapor/liquid separation and filtration equipment. In addition, we believe that we are also a leader in the design, manufacture and application of high efficiency pulsation dampeners for reciprocating compressors. Our expenditures for new product development and improvements were approximately $848,000 in Fiscal 2000 and $667,000 in Fiscal 1999. We expect product development expenditures to be approximately $792,000 in Fiscal 2001. We have existing patents and patent applications pending on some of our products and processes that are important to our business. These include patents on vane designs, separator profiles, marine/separator filtration systems and pressure testing capabilities. In addition, most of our products are proprietary and are sold utilizing our proven technology and knowledge of the applications. However, other companies are marketing competitive products that may not infringe upon our patents and there can be no assurance that other companies won't sell products similar to our proprietary products. Employees At June 30, 2000, Peerless and its subsidiaries had approximately 265 employees. Raw Materials We purchase raw materials and component parts essential to our business from established sources and have not experienced any unusual problems in purchasing required materials and parts. We believe that raw materials and component parts will be available in sufficient quantities to meet anticipated demand. However, there can be no assurance that we will continue to find our raw materials in quantities or at prices satisfactory to us. Environmental Regulation We do not believe that our compliance with federal, state or local statutes or regulations relating to the protection of the environment has had any material effect upon capital expenditures, earnings or our competitive position. Our manufacturing processes do not emit substantial foreign substances into the environment. Regulations related to NOx emissions have in the past resulted in increased sales of our component parts for SCR systems. Market Risk Although we generally require payment in U.S. dollars on our international projects, we sometimes conduct business in foreign currencies and are subject to foreign currency exchange rate risk on cash flows related to such transactions. We make very limited use of currency exchange contracts to reduce the risk of adverse foreign currency movements related to certain foreign currency transactions. Exposure from market rate fluctuations related to these contracts is not material. Executive Officers Our executive officers on September 21, 2000 are listed below. Name and Age Position ------------------ ------------------------------------ Sherrill Stone, 63 Chairman of the Board, President and Chief Executive Officer (1) Roy C. Cuny, 47 Executive Vice President and Chief Operating Officer (2) Thomas J. Reeve, 44 Chief Financial Officer, Treasurer and Secretary (3) G. D. Cornwell, 56 Sr. Vice President (4) ____________________ (1) Mr. Stone is responsible for formulation of corporate policy, investment and new business opportunities. Mr. Stone assumed the duties of Chairman of the Board and Chief Executive Officer on March 31, 1993. (2). Mr. Cuny is responsible for marketing, manufacturing and engineering operations of the company. Mr. Cuny joined the company on May 16, 2000 after twenty years with Foster Wheeler Corporation. (3) Mr. Reeve is responsible for financial administration and has been employed by us since January 3, 2000. He was formerly employed by Trinity Industries from 1996 to 1999 as Chief Financial Officer for the Transportation Products Division. (4) Mr. Cornwell is responsible for manufacturing, purchasing, estimating, and quality control operations. ITEM 2. PROPERTIES. We own our principal executive offices located in Dallas, Texas, which include office, warehouse and manufacturing facilities. Approximately 4,000 square feet of space is used for executive and sales offices, 3,600 square feet is used for research and development and a 40,000 square foot building located on the same site is used for administrative, engineering and drafting offices. We own four manufacturing facilities consisting of approximately 21,600 square feet in Denton, Texas, approximately 29,000 square feet in Carrollton, Texas, approximately 80,000 square feet in Dallas, Texas and approximately 77,700 square feet in Abilene, Texas. Only approximately 35,000 square feet of the manufacturing facility in Dallas is currently usable for manufacturing. We believe that our office and manufacturing facilities are adequate and suitable for its present requirements. Future needs can be met by building, modernizing or expanding manufacturing facilities at the Denton, Texas, Dallas, Texas or Abilene, Texas locations, where space is available for expansion. The manufacturing facility in Abilene, Texas is pledged as collateral for a bank loan used to purchase the property. ITEM 3. LEGAL PROCEEDINGS. We are involved in various legal proceedings and claims arising in the ordinary course of business. On the basis of information presently available, it is the opinion of management that such legal proceedings and claims are not material to our financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Our Common Stock is listed on the Nasdaq Stock Market's National Market under the symbol "PMFG". Our Board of Directors reviews our financial position periodically to determine the advisability of paying dividends. The following table sets forth, for the periods indicated, the range of the daily high and low closing bid prices for our Common Stock as reported by Nasdaq and cash dividends paid per share. Quarter Ended: Closing Bid Prices Cash Dividends -------------- ------------------ -------------- High Low Per Share ------ ------- ---- Fiscal 1999 September 30, 1998 $15-3/8 $10 $.125 December 31, 1998 13 9 .125 March 31, 1999 11-1/4 9-5/16 .125 June 30, 1999 11-1/8 8-3/4 .125 Fiscal 2000 September 30, 1999 $14-1/8 $10-1/2 $.125 December 31, 1999 13 9-7/8 .125 March 31, 2000 15-13/16 12 .125 June 30, 2000 17-7/8 12 .125 There were 178 record holders of our Common Stock on September 19, 2000. We estimate that approximately 700 additional shareholders own shares in broker names. We intend to pay cash dividends on our common stock as our Board deems appropriate, after consideration of our operating results, financial condition, cash requirements, compliance with financial covenants in our credit facilities and such other factors as the Board deems appropriate. ITEM 6. SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with, and is qualified in its entirety by, "Managements Discussion and Analysis of Financial Condition and results of Operations" and the Consolidated Financial Statements and related Notes included in this report. Year ended June 30 ------------------------------------------------------------- 2000 1999 1998 1997 1996 ---------- ---------- ---------- ---------- ---------- Net sales $58,561,396 $40,568,443 $43,455,136 $41,486,492 $33,643,998 Gross profit 15,657,989 14,271,719 15,239,806 11,525,289 10,213,237 Earnings before 1,578,363 2,845,570 3,522,138 537,996 1,182,148 income taxes Net earnings $930,777 $1,849,570 $2,449,561 $537,416 $789,721 ========== ========== =========== ========== ========== Earnings per common share - basic $.64 $1.27 $1.68 $.37 $.55 ========== ========== =========== ========== ========== Earnings per common share - diluted $.63 $1.27 $1.68 $.37 $.55 ========== ========== =========== ========== ========== Total assets $32,120,953 $23,478,772 $23,756,221 $19,046,720 $18,191,426 ========== ========== =========== ========== ========== Long-term obligations 1,406,144 --- --- --- --- Cash dividend per common share $ .50 $ .50 $ .50 $ .50 $ .50 ========== ========== =========== ========== ==========
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Liquidity And Capital Resources We believe that we maintain corporate liquidity adequate to support existing operations and planned growth, as well as continue operations during reasonable periods of unanticipated adversity. Management directs additional resources to strategic new product development, market expansion and continuing improvement of existing products to enhance our position as a market leader and to promote planned internal growth and profitability. We have historically financed, and continue to finance, working capital requirements, expansion, and equipment purchases primarily through the retention of earnings and the use of a short-term bank credit line. During Fiscal 2000 we increased our short-term line of credit to $11,000,000. It was necessary for us to use our short-term bank credit lines in order to finance a temporary shortfall in working capital during Fiscal 2000 and Fiscal 1999. On June 30, 2000 we had $5,821,000 outstanding and as of June 30, 1999, we had no debt outstanding under our credit lines. We pay an annual commitment fee of 0.25% of the unused balance under the credit lines. The ABCO acquisition was made on February 25, 2000 and was financed with a 5 year fully amortized term note that will be repaid with equal quarterly principle installments plus accrued interest. The assets of the ABCO acquisition secure the term note. The balance on the term note as of June 30, 2000 was $1,806,000. We have no material commitments for capital expenditures other than replacing equipment and maintaining our existing plants and equipment. During Fiscal 2000 we purchased fixed assets totaling $327,000, consisting primarily of replacement manufacturing equipment, computer hardware and software, office equipment and building improvements. This is compared to purchases of $233,000 during Fiscal 1999. Working capital was $11,900,000 at June 30, 2000, an increase of less than 4% from $11,500,000 at June 30, 1999. The following table sets forth certain information related to working capital for our last three Fiscal years: 2000 1999 1998 ---- ---- ---- Average working capital as a percentage of net sales 18.5% 25.9% 20.5% Annual accounts receivable turnover(1) 5.3 3.8 5.0 Annual inventory turnover(2) 9.4 6.2 6.3 (1) Annual accounts receivable turnover is computed by dividing annual net sales by the average monthly accounts receivable. (2) Annual inventory turnover is computed by dividing the cost of goods sold by the average monthly inventory and contract costs. The average working capital as a percentage of net sales declined from 25.9% in Fiscal 1999 to 18.5% in Fiscal 2000. The decrease in Fiscal 2000 was the result of average working capital increasing $300,000 or 3% offset by an increase in sales volume of 44% or approximately $17,993,000 over Fiscal 1999. The increase in annual accounts receivable turnover from 3.8 in Fiscal 1999 to 5.3 in Fiscal 2000 was caused by improved collections. The average account receivable balance increased approximately $468,000 from Fiscal 1999 to Fiscal 2000, while sales increased $17,993,000 for the same time period. Average inventory turnover has improved from 6.2 in Fiscal 1999 to 9.4 in Fiscal 2000. The average inventory level increased $316,000, from $4,254,000 in Fiscal 1999 to $4,570,000 in Fiscal 2000. This combined with an approximately $16,600,000 increase in cost of sales increased the inventory turnover. The higher inventory turnover is primarily due to increased sub-contracting and SCR specialty components purchased and shipped direct to the customer. Results of Operations The following table sets forth various measures of performance expressed as percentages of net sales for our last three Fiscal years, as well as our effective income tax rate for the same periods: 2000 1999 1998 ---- ---- ---- Gross profit margin 26.7% 35.2% 35.1% Operating expenses 23.5% 27.8% 26.7% Earnings before income taxes 2.7% 7.0% 8.1% Effective income tax rate 41.0% 35.0% 30.5% Inflation did not have a material impact on our operating results during the last three Fiscal years. Comparison of Fiscal 2000 to Fiscal 1999 Net Sales Our net sales increased approximately $17,993,000, or 44%, from $40,568,000 to $58,561,000. Domestic sales increased 99% from $22,593,000 in Fiscal 1999 to $44,978,000 in Fiscal 2000. Domestic sales growth was caused primarily by a significant increase in the sales of environmental products (SCR systems) from $6,132,000 in Fiscal 1999 to $28,533,000 in Fiscal 2000. Foreign sales decreased 24.4% from $17,975,000 in Fiscal 1999 to $13,583,000 in Fiscal 2000. Our backlog of unfilled orders remained unchanged at $29,000,000 as of June 30, 1999 and June 30, 2000. Gross Profit Margin Our gross profit increased $1,386,000 from $14,272,000 in Fiscal 1999 to $15,658,000 in Fiscal 2000. However the gross profit margin decreased from 35.2% of net sales in Fiscal 1999 to 26.7% of net sales in Fiscal 2000. The lower gross profit margin is primarily due to cost overruns on a significant order and lower margins inherent with specialty components purchased and shipped direct to customers associated with environmental products. Operating Expenses Operating expenses increased 22.1% from $11,293,000 in Fiscal 1999 to $13,791,000 in Fiscal 2000. This increase in operating expenses is primarily due to increased implementation cost for an ERP system, costs associated with integration of ABCO Industries and the addition of personnel to support the higher sales volume. However, operating expenses as a percent of sales decreased from 27.8% in Fiscal 1999 to 23.5% in Fiscal 2000. Income Tax Our effective tax rate was 41.0% in Fiscal 2000 compared to 35.0% in Fiscal 1999. For a further discussion of our federal income taxes, see Note J to our Financial Statements. Comparison of Fiscal 1999 to Fiscal 1998 Net Sales Our net sales decreased approximately $2,887,000, or 6.6%, from $43,455,000 to $40,568.000. Domestic sales increased 39.6% from $16,181,000 in Fiscal 1998 to $22,593,000 in Fiscal 1999. Foreign sales decreased 34.1% from $27,274,000 in Fiscal 1998 to $17,975,000 in Fiscal 1999. Our backlog of unfilled orders increased from $22,000,000 at June 30, 1998 to $29,000,000 at June 30, 1999. Gross Profit Margin Our gross profit margin increased slightly from 35.1% of net sales in Fiscal 1998 to 35.2% of net sales in Fiscal 1999. Operating Expenses Operating Expenses decreased 2.6% from $11,595,000 in Fiscal 1998 to $11,293,000 in Fiscal 1999. This decrease in operating expense was primarily due to decreased sales in Fiscal 1999. However, operating expenses as a percent of sales increased slightly from 26.7% in Fiscal 1998 compared to 27.8% in Fiscal 1999. Income Tax Our effective tax rate was 35.0% in Fiscal 1999 compared to 30.5% in Fiscal 1998. For a further discussion of our federal income taxes, see Note J to our Financial Statements. Outlooks and Uncertainties This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements refer to events that could occur in the future or may be identified by the use of words such as "expect," "intend," "plan," "believe," correlative words, and other expressions indicating that future events are contemplated and may be included in our business description or in Management's Discussion and Analysis of Results of Operations and Financial Condition, among other places. Such statements are subject to inherent risks and uncertainties, and actual results could differ materially from those projected in the forward-looking statements as a result of certain of the risk factors set forth below and elsewhere in this Annual Report on Form 10-K. In addition to the other information contained in this Annual Report on Form 10-K, investors should carefully consider the following risk factors. We do not undertake to update any forward-looking statements. Quantitative and Qualitative Disclosures about Market Risk. The company is exposed to market risk from changes in interest rates. The company's cash equivalents and short-term investments and its outstanding debt bear variable interest rates. The company has not used derivative instruments to offset the exposure to changes in interest rates. Changes in interest rates are not expected to have a material impact on the company's results of operations. Competition. We operate in highly competitive markets worldwide. We compete with manufacturers and sellers of selective catalytic reduction systems, separators, filters, and pulsation dampeners, some of which are larger than us and have greater financial resources. In addition, several smaller manufacturers also produce custom-designed equipment that is competitive with our specialized products and services. There can be no assurance that we will be able to compete successfully with current or future competitors. International Operations. We derive a significant portion of revenues from international sales. Economic conditions across international regions could materially and adversely affect us. Our operations and earnings throughout the world have been, and may in the future be, affected from time to time in varying degrees by political developments and foreign laws and regulations, such as forced divestiture of assets, restrictions on production, imports and exports, price controls, tax cancellation of contract rights and environmental regulations. The likelihood of such occurrences and their overall effect upon us vary greatly from country to country and are not predictable. Further, foreign purchasers may default in the payment of amounts due, causing collection on an international account to be more difficult than for a domestic account. Fluctuations in foreign exchange rates may have an adverse affect. Also, U.S. and foreign governments may impose regulatory burdens upon exports and imports of our products. We also incur greater expenses on foreign sales because of added selling expense incurred in other countries. The occurrence of any one or more of the foregoing could adversely affect our operations. Concentrations of Credit Risk. We continue to closely monitor the creditworthiness of our customers and have not experienced significant credit losses to date. A significant portion of our sales are to customers whose activities are related to the oil and gas industry, including some who are located in other countries. We generally extend credit to these customers. Our exposure to credit risk is affected by conditions within the oil and gas industry. When sales are made to smaller international enterprises, we generally require progress payments or an appropriate guarantee of payment, such as a letter of credit from a banking institution. Backlog. Our backlog represents incomplete customer orders. We have historically completed and shipped virtually all of the backlog. However, customers may cancel outstanding orders prior to their completion. In such cases, we would not recognize revenues for canceled orders. We have contractual protection to recover from our customers our costs related to canceled orders. Potential Cost Overruns. From time to time we enter into contracts for custom designed, engineered and manufactured products that contain a fixed price. In the event of a cost over run, the additional cost may not be recoverable from the customer. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Index to Financial Statements Page ---- REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ........................................... 14 CONSOLIDATED BALANCE SHEETS AT JUNE 30, 2000 AND 1999....... 15 CONSOLIDATED STATEMENTS OF EARNINGS FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998..................... 17 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998.......................................... 18 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998..................... 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998............... 21 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE............................................ 34 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS............. 35 Report of Independent Certified Public Accountants Board of Directors Peerless Mfg. Co. We have audited the accompanying consolidated balance sheets of Peerless Mfg. Co. and Subsidiaries as of June 30, 2000 and 1999, and the related consolidated statements of earnings, changes in stockholders' equity, and cash flows for each of the three years in the period ended June 30, 2000. 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 auditing standards generally accepted in the United States of America. 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 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 consolidated financial position of Peerless Mfg. Co. and Subsidiaries as of June 30, 2000 and 1999, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended June 30, 2000, in conformity with accounting principles generally accepted in the United States of America. GRANT THORNTON LLP Dallas, Texas September 15, 2000 Peerless Mfg. Co. and Subsidiaries CONSOLIDATED BALANCE SHEETS June 30, ASSETS 2000 1999 ---------- ---------- CURRENT ASSETS Cash and cash equivalents $ 561,017 $ 210,866 Short-term investments 273,343 273,343 Accounts receivable - principally trade, net of allowance for uncollectible accounts of $777,546 and $685,330 in 2000 and 1999, respectively 12,319,171 12,195,037 Inventories 3,287,957 3,730,970 Costs and earnings in excess of billings on uncompleted contracts 9,911,587 3,268,181 Deferred income taxes 470,884 - Other 704,118 777,635 ---------- ---------- Total current assets 27,528,077 20,456,032 PROPERTY, PLANT AND EQUIPMENT - AT COST, less accumulated depreciation 3,509,846 2,102,546 DEFERRED INCOME TAXES - 59,613 OTHER ASSETS 1,083,030 860,581 ---------- ---------- $32,120,953 $23,478,772 ========== ==========
Peerless Mfg. Co. and Subsidiaries CONSOLIDATED BALANCE SHEETS - CONTINUED June 30, LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999 ---------- ---------- CURRENT LIABILITIES Accounts payable - trade $ 6,471,280 $ 5,626,058 Lines of credit 5,800,000 - Current maturities of long-term debt 421,212 - Billings in excess of costs and earnings on uncompleted contracts 363,577 572,970 Commissions payable 984,784 1,204,584 Accrued expenses Compensation 745,911 1,188,165 Warranty reserve 354,534 313,773 Deferred income taxes - 42,736 Other 448,194 38,669 ---------- ---------- Total current liabilities 15,589,492 8,986,955 LONG-TERM DEBT, net of current maturities 1,406,000 - DEFERRED INCOME TAXES 376,061 - COMMITMENTS - - STOCKHOLDERS' EQUITY Common stock - authorized, 10,000,000 shares of $1 par value; issued and outstanding, 1,467,992 and 1,452,492 shares in 2000 and 1999, respectively 1,467,992 1,452,492 Additional paid-in capital 2,692,099 2,539,951 Unamortized value of restricted stock grants (71,096) (4,719) Accumulated other comprehensive income (loss) (148,954) (103,824) Retained earnings 10,809,359 10,607,917 ---------- ---------- 14,749,400 14,491,817 ---------- ---------- $32,120,953 $23,478,772 ========== ========== The accompanying notes are an integral part of these statements.
Peerless Mfg. Co. and Subsidiaries CONSOLIDATED STATEMENTS OF EARNINGS Year ended June 30, 2000 1999 1998 ---------- ---------- ---------- Net sales $58,561,396 $40,568,443 $43,455,136 Cost of goods sold 42,903,407 26,296,724 28,215,330 ---------- ---------- ---------- Gross profit 15,657,989 14,271,719 15,239,806 Operating expenses Marketing and engineering 10,035,579 8,630,962 8,932,180 General and administrative 3,755,087 2,662,289 2,662,725 ---------- ---------- ---------- 13,790,666 11,293,251 11,594,905 ---------- ---------- ---------- Operating profit 1,867,323 2,978,468 3,644,901 Other income (expense) Interest income 38,413 58,987 34,055 Interest expense (180,128) (23,696) (27,430) Foreign exchange gains (losses) (6,710) (118,866) (90,050) Other, net (140,535) (49,323) (39,338) ---------- ---------- ---------- (288,960) (132,898) (122,763) ---------- ---------- ---------- Earnings before income taxes 1,578,363 2,845,570 3,522,138 Income tax expense (benefit) Current 725,532 617,824 1,262,998 Deferred (77,946) 378,176 (190,421) ---------- ---------- ---------- 647,586 996,000 1,072,577 ---------- ---------- ---------- NET EARNINGS $ 930,777 $ 1,849,570 $ 2,449,561 ========== ========== ========== Earnings per common share - basic $ .64 $1.27 $1.68 ==== ==== ==== Earnings per common share - diluted $ .63 $1.27 $1.68 ==== ==== ==== The accompanying notes are an integral part of these statements.
Peerless Mfg. Co. and Subsidiaries CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY Unamortized Accumulated Additional value of other Common paid-in restricted comprehensive Retained stock capital stock grants income (loss) earnings Total --------- --------- ------- --------- ----------- ---------- Balances as of June 30, 1997 1,451,992 $2,535,221 $(44,625) $ (93,944) $ 7,580,786 $11,429,430 Comprehensive income Net earnings - - - - 2,449,561 2,449,561 Foreign currency translation adjustment - - - 14,095 - 14,095 ---------- Total comprehensive income 2,463,656 Issuance of 3,000 shares of common stock 3,000 28,875 (31,875) - - - Stock options exercised 2,500 20,625 - - - 23,125 Cash dividends ($.375 per share) - - - - (544,503) (544,503) Amortization of restricted stock grants - - 25,115 - - 25,115 Income tax expense related to restricted stock plans - (1,020) - - - (1,020) --------- --------- ------- --------- ----------- ---------- Balances as of June 30, 1998 1,457,492 2,583,701 (51,385) (79,849) 9,485,844 13,395,803 Comprehensive income Net earnings - $ - $ - $ - $ 1,849,570 $ 1,849,570 Foreign currency translation adjustment - - - (23,975) (23,975) ---------- Total comprehensive income 1,825,595 Cash dividends paid ($.50 per share) - - - - (727,497) (727,497) Forfeiture of restricted stock grant (5,000) (43,750) 29,250 - - (19,500) Amortization of restricted stock grants - - 17,416 - - 17,416 --------- --------- ------- --------- ----------- ---------- Balance at June 30, 1999 1,452,492 $2,539,951 $ (4,719) $ (103,824) $ 10,607,917 $14,491,817 Comprehensive income Net earnings - - - - 930,777 930,777 Foreign currency translation adjustment - - - (45,130) - (45,130) ---------- Total comprehensive income 885,647 Cash dividends paid ($.50 per share) - - - - (729,335) (729,335) Stock options exercised 9,000 74,937 - - - 83,937 Issuance of stock grants 6,500 73,711 (80,211) - - - Amortization of restricted stock grants - - 13,834 - - 13,834 Income tax expense related to restricted stock plans - 3,500 - - - 3,500 --------- --------- ------- --------- ----------- ---------- Balance at June 30, 2000 1,467,992 $2,692,099 $(71,096) $ (148,954) $ 10,809,359 $14,749,400 ========= ========= ======= ========= =========== ========== The accompanying notes are an integral part of this statement.
Peerless Mfg. Co. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended June 30, 2000 1999 1998 ---------- ---------- ---------- Cash flows from operating activities Net earnings $ 930,777 $ 1,849,570 $ 2,449,561 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities Depreciation and amortization 489,739 413,026 379,752 Deferred income taxes (77,946) 378,176 (190,421) Foreign exchange loss 6,710 118,886 90,050 Other (671) (34,160) (1,020) Changes in operating assets and liabilities, net of effect of acquisitions Accounts receivable (124,134) 1,949,880 (4,703,504) Inventories 443,013 (1,301,720) 544,993 Cost and earnings in excess of billings on uncompleted contracts (6,643,406) (1,429,540) 33,176 Other current assets 73,517 (612,004) 132,974 Other assets (222,449) (186,421) (231,004) Accounts payable 845,222 59,008 837,205 Billings in excess of costs and earnings on uncompleted contracts (209,393) 522,993 (353,174) Commissions payable (219,800) (807) 425,917 Accrued expenses 8,032 (788,479) 985,395 ---------- ---------- ---------- (5,631,566) (911,162) (2,049,661) ---------- ---------- ---------- Net cash provided by (used in) operating activities (4,700,789) 938,408 399,900 Cash flows from investing activities Net purchases of short-term investments - (5,278) (9,058) Proceeds from sale of property and equipment 88,000 30,850 - Purchase of property and equipment (1,967,034) (233,323) (262,362) ---------- ---------- ---------- Net cash used in investing activities (1,879,034) (207,751) (271,420)
Peerless Mfg. Co. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED Year ended June 30, 2000 1999 1998 ---------- ---------- ---------- Cash flows from financing activities Sale of common stock $ 83,937 $ - $ 23,125 Net changes in lines of credit 5,800,000 - - Advances on short-term borrowings 2,827,212 - 200,000 Payments on short-term borrowings (1,000,000) (200,000) - Dividends paid (729,335) (727,497) (727,127) ---------- ---------- ---------- Net cash provided by (used in) financing activities 6,981,814 (927,497) (504,002) Effect of exchange rate changes on cash and cash equivalents (51,840) (20,776) 31,451 ---------- ---------- ---------- Net decrease in cash and cash equivalents 350,151 (217,616) (344,071) Cash and cash equivalents at beginning of year 210,866 428,482 772,553 ---------- ---------- ---------- Cash and cash equivalents at end of year $ 561,017 $ 210,866 $ 428,482 ========== ========== ========== Supplemental information on cash flows: Interest paid $ 150,183 $ 21,170 $ 29,956 Income taxes paid $ 780,945 $ 900,814 $ 957,860 The accompanying notes are an integral part of these statements.
Peerless Mfg. Co. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000, 1999 and 1998 NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations -------------------- Peerless Mfg. Co. designs, engineers, and manufactures specialized products for the removal of contaminants from gases and liquids and for air pollution abatement. The Company's products are manufactured principally at plants located in Dallas, Texas and are sold worldwide with the principal markets located in the United States and Europe. Primary customers are equipment manufacturers, engineering contractors and operators of power plants. A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows. Consolidation ------------- The Company consolidates the accounts of its subsidiaries, all of which are whole-owned. All significant intercompany accounts and transactions have been eliminated in consolidation. Cash Equivalents ---------------- For purposes of the statement of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Inventories ----------- Inventories are stated at the lower of cost (first-in, first-out) or market. Depreciable Assets ------------------ Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives, principally by the straight-line method. Revenue Recognition ------------------- The Company generally recognizes sales of custom-contracted products at the completion of the manufacturing process. The percentage-of-completion method is used for significant long-term contracts. Percentage-of- completion is generally determined based upon engineering work performed, materials purchased and manufacturing labor hours incurred. NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Stock-Based Compensation ------------------------ The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees, and related interpretations. Earnings Per Common Share ------------------------- Basic earnings per common share is computed by dividing net earnings by the weighted average number of common shares outstanding during each year presented. Diluted earnings per common share give effect to the assumed issuance of shares pursuant to outstanding stock option plans, when dilutive. Foreign Currency ---------------- All balance sheet accounts of foreign operations are translated into U.S. dollars at the year-end rate of exchange and statements of earnings items are translated at the weighted average exchange rates for the year. The resulting translation adjustments are made directly to a separate component of stockholders' equity. Gains and losses from foreign currency transactions, such as those resulting from the settlement of foreign receivables or payables, are included in the consolidated statements of earnings. From time to time, the Company enters into forward exchange contracts in anticipation of future movements in certain foreign exchange rates and to hedge against foreign currency fluctuations. Realized and unrealized gains and losses on these contracts are included in net income, except that gains and losses on contracts to hedge specific foreign currency commitments are deferred and accounted for as part of the underlying transaction. Financial Instruments --------------------- The carrying amounts of cash and cash equivalents and short-term investments approximate fair value because of the short-term nature of these items. The carrying amount of debt approximates fair value because all debt has interest rates tied to market. Use of Estimates ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Reclassification ---------------- Certain reclassifications of prior year amounts have been made to conform to the current year presentation. NOTE B - BUSINESS COMBINATION On February 25, 2000, the Company purchased substantially all of the assets of ABCO Industries, Inc. (ABCO) for approximately $1,700,000. No goodwill resulted from the acquisition. ABCO is in the business of designing and manufacturing industrial boilers. Following is unaudited pro forma data assuming that the acquisition of ABCO had occurred on July 1, 1998: Year ended June 30, ------------------------- 2000 1999 ---------- ---------- Sales $69,316,000 $55,569,000 Net loss before extraordinary credit (13,000) (327,000) Net earnings (loss) 2,109,000 (327,000) Per share - basic Net loss before extraordinary credit (.01) (.22) Net earnings (loss) 1.44 (.22) Per share - diluted Net loss before extraordinary credit (.01) (.22) Net earnings (loss) 1.43 (.22) NOTE C - CONCENTRATIONS OF CREDIT RISK A significant portion of the Company's sales are to customers whose activities are related to the oil and gas industry, including some who are located in foreign countries. The Company generally extends credit to these customers. Its exposure to credit risk is affected by conditions within the oil and gas industry. Also, with respect to foreign sales, collection may be more difficult in the event of a default. However, the Company closely monitors extensions of credit and has never experienced significant credit losses. Substantially all foreign sales are made to large, well-established companies. The Company generally requires collateral or guarantees on foreign sales to smaller companies. For the year ended June 30, 2000, sales to one customer amounted to approximately 19% of revenues. For the years ended June 30, 1999 and 1998, no single customer accounted for more than 10% of revenues. NOTE D - INVENTORIES Principal components of inventories are as follows: June 30, ----------------------- 2000 1999 --------- --------- Raw materials $1,252,111 $ 961,450 Work in process 1,669,348 2,522,182 Finished goods 366,498 247,338 --------- --------- $3,287,957 $3,730,970 ========= ========= At June 30, 2000 and 1999, progress payments of $261,374 and $1,237,771, respectively, have been offset against inventories and costs of uncompleted contracts. NOTE E - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is summarized as follows: June 30, ------------------------- 2000 1999 ---------- ---------- Buildings $ 3,783,724 $ 3,096,993 Equipment 3,449,821 2,670,878 Furniture and fixtures 2,044,660 1,815,592 Land improvements 5,169 - ---------- ---------- 9,283,374 7,583,463 Less accumulated depreciation (6,609,254) (6,201,643) ---------- ---------- 2,674,120 1,381,820 Land 835,726 720,726 ---------- ---------- $ 3,509,846 $ 2,102,546 ========== ========== NOTE F - LINES OF CREDIT The Company has unsecured revolving lines of credit in the amount of $11.0 million due in December 2000, with interest at the banks' prime lending rate (9.5% at June 30, 2000), payable monthly. The bank charges usage fees at an annual rate of .25% of the average daily unused portion of the line. At June 30, 2000, $5.8 million was outstanding under the lines of credit. The Company had letters of credit outstanding under these arrangements of $4,094,479 and $3,246,567 at June 30, 2000 and 1999, respectively. Other assets with a cost of approximately $649,000 and $635,000 were pledged against the letters of credit outstanding at June 30, 2000 and 1999, respectively. NOTE G - LONG-TERM DEBT 2000 1999 --------- --------- Note payable, due June 30, 2005, principal due in 19 quarterly installments of $100,000 beginning June 30, 2000, interest at the bank's prime rate (9.5% at June 30, 2000) $1,827,212 $ - Less current maturities (421,212) - --------- --------- $1,406,000 $ - ========= ========= The aggregate annual maturities of long-term debt at June 30, 2000 are as follows: Year ended June 30, -------- 2001 $ 421,212 2002 400,000 2003 400,000 2004 400,000 2005 206,000 --------- $1,827,212 ========= NOTE H - STOCKHOLDERS' EQUITY The Company has a 1985 restricted stock plan (the 1985 Plan) under which 75,000 shares of common stock were reserved for awards to employees. Restricted stock grants made under the 1985 Plan generally vest ratably over a three to five-year period. The Company awarded 3,000 shares (fair value at date of grant of $31,875) in fiscal 1998 and 6,500 shares (fair value at date of grant of $80,211) in fiscal 2000. Compensation expense for stock grants is charged to earnings over the restriction period and amounted to $13,835, $17,416, and $25,115 in fiscal 2000, 1999 and 1998, respectively. The tax effect of differences between compensation expense for financial statement and income tax purposes is charged or credited to additional paid-in capital. In December 1995, the Company adopted a stock option and restricted stock plan (the 1995 Plan), which provides for a maximum of 120,000 shares of common stock to be issued. Stock options are granted at market value, generally vest ratably over four years, and expire ten years from date of grant. At June 30, 2000, 27,450 shares of common stock were available for issuance under the 1995 Plan, and 250 shares were available under the 1985 Plan. NOTE H - STOCKHOLDERS' EQUITY - Continued The Company has adopted the disclosure provisions of SFAS 123. It applies APB 25 and related interpretations in accounting for stock options issued and, therefore, does not recognize compensation expense for stock options granted at or greater than market value. If the Company had elected to recognize compensation expense based upon the fair value at the grant date for awards under this plan consistent with the methodology prescribed by SFAS 123, the effect on net earnings and earnings per share would have been as follows: Year ended June 30, 2000 1999 1998 ------- --------- --------- Net earnings - as reported $930,777 $1,849,570 $2,449,561 Net earnings - pro forma 836,372 1,813,141 2,440,327 Basic earnings per share As reported .64 1.27 1.68 Pro forma .57 1.25 1.68 Diluted earnings per share As reported .63 1.27 1.68 Pro forma .57 1.24 1.67 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: expected volatility of 41% to 44% for fiscal 2000, 43% for fiscal 1999 and 41% for fiscal 1998; risk-free interest rates ranging from 4.6% to 6%; dividend yield of 4.2%, 3.7%, and 5.6% in fiscal 2000, 1999 and 1998, respectively; and expected lives of five to seven years. NOTE H - STOCKHOLDERS' EQUITY - Continued Additional information with respect to options outstanding under the plan is as follows: Number of Weighted shares average underlying exercise Stock options options price ------- ------ Outstanding at July 1, 1997 31,500 $ 9.57 Granted 24,000 10.73 Exercised (2,500) 9.25 ------ Outstanding at June 30, 1998 53,000 10.11 Granted 7,000 13.64 ------ Outstanding at June 30, 1999 60,000 10.52 Granted 42,800 12.00 Exercised (9,000) 9.33 Canceled (14,000) 12.12 ------ Outstanding at June 30, 2000 79,800 11.17 ====== ===== Options exercisable at June 30, 1998 16,125 10.12 ====== ===== Options exercisable at June 30, 1999 31,000 10.15 ====== ===== Options exercisable at June 30, 2000 63,175 11.14 ====== ===== Weighted average fair value per share of options granted: Year ended June 30, 1998 $3.24 Year ended June 30, 1999 $4.72 Year ended June 30, 2000 $3.94 NOTE H - STOCKHOLDERS' EQUITY - Continued The following table summarizes information about the Plan's stock options at June 30, 2000: Options outstanding -------------------------------------------------- Weighted average Range of Number remaining contractual Weighted average Exercise Prices outstanding life (in years) exercise price --------------- ----------- -------------- -------------- $9.25 16,000 5.6 $ 9.25 $10.625-$11.875 22,500 7.8 10.79 $12.00-$13.375 41,300 9.0 12.12 ------ 79,800 ====== Options exercisable Range of Number Weighted average Exercise Prices exercisable exercise price --------------- ----------- -------------- $9.25 16,000 $ 9.25 $10.625-$11.875 12,000 10.83 $12.00-$13.375 35,175 12.10 ------ 63,175 ====== On May 21, 1997, the Board of Directors declared a dividend of one common share purchase right for each outstanding share of common stock to shareholders of record at the close of business on June 2, 1997. Each Right entitles the registered holder to purchase from the Company one common share at a price of $30.00, subject to adjustment, as more fully set forth in a Rights Agreement dated May 22, 1997. The Rights will become exercisable only in the event that any person or group of affiliated persons acquires, or obtains the right to acquire, beneficial ownership of 20% or more of the outstanding common shares or commences a tender or exchange offer, the consummation of which would result in the beneficial ownership by a person or group of 20% or more of such outstanding common shares. The rights are redeemable under certain circumstances at $.01 each and expire in May 2007. NOTE I - EMPLOYEE BENEFIT PLANS The Company has a 401(k) Plan to provide eligible employees with a retirement savings plan. All employees are eligible to participate in the plan upon completing 90 days of service. Company contributions are voluntary and at the discretion of the Board of Directors of the Company. The Company's contribution expense for the years ended June 30, 2000, 1999 and 1998 was approximately $151,000, $157,000, and $128,000, respectively. NOTE J - INCOME TAXES Deferred taxes are provided for the temporary differences between the financial reporting bases and the tax bases of the Company's assets and liabilities. The temporary differences that give rise to the deferred tax assets or liabilities are as follows: June 30, 2000 1999 --------- --------- Deferred tax assets Restricted stock grants $ 7,264 $ 6,083 Inventories 126,175 80,597 Foreign subsidiaries' net operating loss carryforwards 115,421 232,122 Accrued expenses 229,712 164,317 Accounts receivable 91,684 108,285 Other 25,727 29,461 --------- --------- 595,983 620,865 Deferred tax liabilities Property, plant and equipment (122,359) (100,088) Uncompleted contracts (375,297) (500,396) Other (3,504) (3,504) --------- --------- (501,160) (603,988) --------- --------- Net deferred tax asset $ 94,823 $ 16,877 ========= ========= Deferred tax assets and liabilities included in the balance sheet are as follows: June 30, 2000 1999 --------- --------- Current deferred tax asset (liability) $ 470,884 $ (42,736) Noncurrent deferred tax asset (liability) (376,061) 59,613 --------- --------- $ 94,823 $ 16,877 ========= ========= NOTE J - INCOME TAXES - Continued The provision for income taxes consisted of the following: Years ended June 30, --------------------------------- 2000 1999 1998 ------- ------- --------- Federal Current $599,431 $552,824 $1,157,345 Deferred (77,946) 378,176 (190,421) State 126,101 65,000 105,653 ------- ------- --------- $647,586 $996,000 $1,072,577 ======= ======= ========= The Company had provided a valuation allowance at June 30, 1997 related to deferred tax assets of foreign subsidiaries. These assets are recoverable only from future income of the respective foreign subsidiaries. Because of a recapitalization and a reorganization of European operations, the Company concluded at June 30, 1997 that it was more likely than not that certain of the deferred tax assets are recoverable. The valuation allowance was reduced in 1997 and eliminated in 1998. Utilization of foreign net operating carryforwards reduced income tax expense by approximately $12,000 for 1998. The effective income tax rate varies from the statutory rate due to the following: As a percentage of pretax earnings -------------------- 2000 1999 1998 ---- ---- ---- Income tax expense at statutory rate 34.0% 34.0% 34.0% Increase (decrease) in income taxes resulting from State tax, net of federal benefits 3.8 1.5 2.0 Foreign sales corporation exclusions (2.5) (2.9) (6.7) Change in valuation allowance - - (0.8) Adjustment to prior year taxes 5.4 - - Effect of lower foreign tax rate (1.4) - - Other 1.7 2.4 2.0 ---- ---- ---- Income tax expense at effective rate 41.0% 35.0% 30.5% ==== ==== ==== NOTE K - EARNINGS PER SHARE Summarized basic and diluted earnings per common share for each of the three years ended June 30, 2000 is as follows: 2000 1999 1998 ---------------------------- --------------------------- --------------------------- Per Per Per Net share Net share Net share earnings Shares amount earnings Shares amount earnings Shares amount --------- --------- ---- --------- --------- ---- --------- --------- ---- Basic earnings per share $ 930,777 1,459,590 $ .64 $1,849,570 1,455,396 $1.27 $2,449,561 1,454,277 $1.68 Effect of dilutive options - 10,753 - - 4,751 - - 2,698 - --------- --------- ---- --------- --------- ---- --------- --------- ---- Diluted earnings per share $ 930,777 1,470,343 $ .63 $1,849,570 1,460,147 $1.27 $2,449,561 1,456,975 $1.68 ========= ========= ==== ========= ========= ==== ========= ========= ====
For fiscal 2000, 1999, and 1998, stock options covering 2,500, 11,500, and 2,500 shares, respectively were excluded in the computations of diluted earnings per share because their effect was antidilutive. NOTE L - INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION The Company identifies reportable segments based on management responsibility within the corporate structure. The Company has two reportable industry segments: gas/liquid filtration and catalytic reduction systems. The gas/liquid filtration segment produces various types of separators and filters used for removing liquids and solids from gases and air. The segment also provides engineering design and services, pulsation dampeners, natural gas odorizers, quick-opening closures and parts for its products. The catalytic reduction systems segment produces "Selective Catalytic Reduction Systems (SCR)" used to separate nitrogen oxide (NOx) emissions from exhaust gases caused by burning hydrocarbon fuels such as coal, gasoline, natural gas and oil. We combine these products with other components as totally integrated systems. Many of the Company's components are packaged on skids complete with instruments, controls and related valves and piping. NOTE L - INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION - Continued Segment profit and loss is based on revenue less direct costs of the segment before allocation of general, administrative, research and development costs. There were no sales or transfers between segments. Segment information and a reconciliation to operating profit for the years ended June 30, 2000, 1999, and 1998 are presented below. Note that the Company does not allocate assets, expenditures for assets or depreciation expense on a segment basis for internal management reporting, and therefore such information is not presented. Catalytic Unallocated Gas/liquid reduction corporate Filtration Systems overhead Consolidated ---------- ---------- ---------- ---------- 2000 ---- Revenues from customers $30,028,000 $28,533,000 $ - $58,561,000 Segment profit (loss) 2,634,000 3,793,000 (4,560,000) 1,867,000 1999 ---- Revenues from customers $34,436,000 $ 6,132,000 $ - $40,568,000 Segment profit (loss) 5,580,000 849,000 (3,451,000) 2,978,000 1998 ---- Revenues from customers $39,234,000 $ 4,221,000 $ - $43,455,000 Segment profit (loss) 6,708,000 84,000 (3,147,000) 3,645,000
The Company attributes revenues from external customers to individual geographic areas based on the country where the sale is originated. Information about the Company's operations in different geographic areas as of and for the years ended June 30, 1999, 1998 and 1997 is as follows: United States Europe Eliminations Consolidated ---------- --------- ---------- ---------- 2000 ---- Net sales to unaffiliated customers $51,917,000 $6,644,000 $ - $58,561,000 Transfers between geographic areas 1,750,000 - (1,750,000) - ---------- --------- ---------- ---------- Total $53,667,000 $6,644,000 $(1,750,000) $58,561,000 ========== ========= ========== ========== Identifiable assets $31,744,000 $3,094,000 $(2,717,000) $32,121,000 ========== ========= ========== ========== United States Europe Eliminations Consolidated ---------- --------- ---------- ---------- 1999 ---- Net sales to unaffiliated customers $34,707,000 $5,861,000 $ - $40,568,000 Transfers between geographic areas 726,000 - (726,000) - ---------- --------- ---------- ---------- Total $35,433,000 $5,861,000 $ (726,000) $40,568,000 ========== ========= ========== ========== Identifiable assets $21,723,000 $4,285,000 $(2,529,000) $23,479,000 ========== ========= ========== ========== 1998 ---- Net sales to unaffiliated customers $37,357,000 $6,098,000 $ - $43,455,000 Transfers between geographic areas 1,847,000 1,000 (1,848,000) - ---------- --------- ---------- ---------- Total $39,204,000 $6,099,000 $(1,848,000) $43,455,000 ========== ========= ========== ========== Identifiable assets $20,736,000 $4,521,000 $(2,501,000) $22,756,000 ========== ========= ========== ==========
Transfers between the geographic areas primarily represent intercompany export sales and are accounted for based on established sales prices between the related companies. Identifiable assets of geographic areas are those assets related to the Company's operations in each area. United States assets consist of all other operating assets of the Company. Report of Independent Certified Public Accountants on Schedules Board of Directors Peerless Mfg. Co. In connection with our audit of the consolidated financial statements of Peerless Mfg. Co. and Subsidiaries referred to in our report dated September 15, 2000, which is included in Part II of this form, we have also audited Schedule II for each of the three years in the period ended June 30, 2000. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. GRANT THORNTON LLP Dallas, Texas September 15, 2000 Peerless Mfg. Co. and Subsidiaries SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS June 30, Balance at Additions beginning of Charged to Charged to Balance at Description period expenses other accounts Deductions end of period ----------- ------- -------- -------------- ---------- ------------- 2000 ---- Allowance for uncollectible accounts $685,330 $162,727 $ - $ 70,511 (1) $777,546 ======= ======= ======= ======= ======= 1999 ---- Allowance for uncollectible accounts $806,200 $184,471 $ - $305,341 (1) $685,330 ======= ======= ======= ======= ======= 1998 ---- Allowance for uncollectible accounts $312,450 $621,560 $ - $127,810 (1) $806,200 ======= ======= ======= ======= ======= Deferred tax valuation allowance $ 29,710 $ - $ - $ 29,710 (2) $ - ======= ======= ======= ======= ======= (1) Write offs. (2) Utilization and/or revaluation of deferred tax assets.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. For information concerning our Directors, we refer to the information set forth under the caption "Election of Directors" and "Common Stock Ownership of Management and Certain Beneficial Owners" in our Proxy Statement for the Annual Meeting of Shareholders to be held November 16, 2000 (we refer to it as the "2000 Proxy Statement"), which information is incorporated herein by reference. For information concerning our Executive Officers, see Item 1, "Business - Executive Officers." ITEM 11. EXECUTIVE COMPENSATION. For information concerning our executive compensation, we refer to the information set forth under the caption "Executive Compensation" in the 2000 Proxy Statement, which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. For information concerning the security ownership of certain beneficial owners and management, reference is made to the information set forth under the caption "Election of Directors" and "Common Stock Ownership of Management and Certain Beneficial Owners" in the 2000 Proxy Statement, which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. For information concerning certain relationships and related transactions, reference is made to the information set forth under the caption "Compensation Committee Interlocks and Insider Participation" in the 2000 Proxy Statement, which information is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K. (a) 1. All Financial Statements: see Item 8 "Financial Statements and Supplementary Data" in Part II of this Report. 2. Financial Statement Schedule and Exhibits filed in Part IV of this report are as follows: SCHEDULES*: II - Valuation and Qualifying Accounts - Years Ended June 30, 2000, 1999 and 1998 *All other schedules are omitted because the required information is inapplicable or the information is presented in the financial statements and the related notes. (b) Reports on Form 8-K: None (c) Exhibits: see Index to Exhibits, pages 41-42. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PEERLESS MFG. CO. (Registrant) By: /s/ Sherrill Stone ---------------------------------- Sherrill Stone, Chairman, President, and Chief Executive Officer Date: September 28, 2000. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: September 28, 2000 /s/ Sherrill Stone ---------------------------------- Sherrill Stone, Chairman of the Board, President, Director and Chief Executive Officer September 28, 2000 /s/ Thomas J. Reeve ---------------------------------- Thomas J. Reeve, Principal Financial Officer, September 28, 2000 /s/ Donald A. Sillers ---------------------------------- Donald A. Sillers, Jr., Director September 28, 2000 /s/ J. V. Mariner, Jr. ---------------------------------- J. V. Mariner, Jr. Director September 28, 2000 /s/ Bernard S. Lee ---------------------------------- Bernard S. Lee, Director September 28, 2000 /s/ D. D. Battershell ---------------------------------- D. D. Battershell, Director INDEX TO EXHIBITS 3(a) Articles of Incorporation, as amended to date (filed as Exhibit 3(a) the registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997, and incorporated herein by reference) 3(b) Bylaws, as amended to date (filed as Exhibit 3(b) to the registrant's Annual Report on Form 10-K for the year ended June 30, 1997, and incorporated herein by reference) 4(a) Specimen of common stock certificate (filed as Exhibit __ to the registrant's Form 8-A registration statement (File No. 0-05214), dated October 29, 1970 and incorporated herein by reference) 4(b) Rights Agreement between Peerless Mfg. Co. and ChaseMellon Shareholder Services, L.L.C., adopted by the Board of Directors on May 21, 1997 (filed as Exhibit 1 to the registrant's Registration Statement on Form 8-A (File No. 0-05214), dated May 22, 1997 and incorporated herein by reference) 10(a) Incentive Compensation Plan effective January 1, 1981, as amended January 23, 1991 (filed as Exhibit 10(b) to the registrant's Annual Report on Form 10-K for the year ended June 30, 1991 and incorporated herein by reference) 10(b) 1985 Restricted Stock Plan for Peerless Mfg. Co., effective December 13, 1985 (filed as Exhibit 10(b) to the registrant's Annual Report on Form 10-K for the year ended June 30, 1993 and incorporated herein by reference) 10(c) 1991 Restricted Stock Plan for Non-Employee Directors of Peerless Mfg. Co., adopted subject to shareholder approval on May 24, 1991, and approved by shareholders on November 20, 1991 (filed as Exhibit 10(e) to the registrant's Annual Report on Form 10-K for the year ended June 30, 1991 and incorporated herein by reference) 10(d) Employment Agreement, dated as of April 29, 1994, by and between Peerless Mfg. Co. and Sherrill Stone (filed as Exhibit 10(d) to the registrant's Annual Report on Form 10-K for the year ended June 30, 1994 and incorporated herein by reference) 10(e) Agreement, dated as of April 29, 1994 by and between Peerless Mfg. Co. and Sherrill Stone (filed as Exhibit 10(e) to the registrant's Annual Report on Form 10-K for the year ended June 30, 1994 and incorporated herein by reference) 10(f) Eighth Amended and Restated Loan Agreement, dated as of December 12, 1999, between Bank of America, N.A. and Peerless Mfg. Co. (filed as Exhibit 10(f) to the registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1999 and incorporated herein by reference) 10(g) Second Amended and Restated Loan Agreement, dated as of December 12, 1999, and Waiver and First Amendment to Second Amended and Restated Loan Agreement, dated as of December 12, 1999, by and between Chase Bank of Texas and Peerless Mfg. Co. (filed as Exhibit 10(g) to the registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1999 and incorporated herein by reference) 10(h) Peerless Mfg. Co. 1995 Stock Option and Restricted Stock Plan, adopted by the Board of Directors on December 31, 1995 and approved by the shareholders on November 21, 1996 (filed as Exhibit 10(h) to the registrant's Annual Report on Form 10-K for the year ended June 30, 1997 and incorporated herein by reference) 10(i) Asset Purchase Agreement, dated February 25, 2000, by and between PMC Acquisition, Inc. and ABCO Industries, Inc. (filed as Exhibit 2.1 to the registrant's Current Report on Form 8-K dated February 25, 2000 and incorporated herein by reference) 10(j) Employment Agreement, dated as of July 23, 1999, by and between Peerless Mfg. Co. and G.D. Cornwell (filed as exhibit 10(j) to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 and incorporated herein by reference) 10(k) Agreement dated as of July 23, 1999 by and between Peerless Mfg. Co. and G.D. Cornwell (filed as exhibit 10(k) to the registrant's Quarterly Report Form 10-Q, for the quarter ended September 30, 1999 and incorporated herein by reference) 10(l) Employment Agreement, dated as of May 16, 2000, by and between Peerless Mfg. Co. and Roy C. Cuny* 10(m) The Term Note with Bank of America date May 30th of 2000 by and between Bank of America, N.A. and Peerless Mfg. Co.* 21 Subsidiaries of Peerless* 23 Consent of Grant Thorton LLP* 27 Financial Data Schedule* ______________ * Filed herewith EX-10.L 2 0002.txt EXHIBIT 10(l) EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT is made this 16th day of May, 2000, between PEERLESS MFG. CO. ("Employer"), and ROY C. CUNY ("Employee"). Employment 1.1 Employment and Term. Employer agrees to employ Employee as a senior executive pursuant to this Agreement from the date hereof until such employment is terminated as provided herein. This Agreement shall survive any termination of Employee's employment. 1.2 Duties. Employee agrees to devote his time, attention and energies to perform the duties of the offices he holds as may be prescribed from time to time by The Board of Directors and/or the Chief Executive Officer of Employer. 1.3 Supervision. Employee shall perform the duties of employment under the direction and supervision of Employer's Chief Executive Officer. Non-Competition 2.1 During Term. During the period of his employment under this Agreement, Employee shall be employed only by Employer and shall not engage in any activity in competition with Employer. 2.2 After Termination; Non-Competition. Employee agrees that for a period of one (1) year following termination of employment, without regard to the reason for termination, Employee shall not, directly or indirectly, compete with Employer or perform any services for a competitor of Employer, including as an employee, consultant, advisor, owner, partner, participant in a joint venture or corporation, or otherwise. Employee specifically acknowledges that Employer's products are sold in a world market, and that Employee has been engaged with regard to Employer's products and Employer's customers throughout the world without geographic limitation, and accordingly that the non-competition agreement contained in this section shall apply without geographic limitation. Confidentiality 3.1 Confidentiality. All written material (including but not limited to engineered designs, formulas, drawings, studies, reports, calculations, product designs, product specifications, engineering specifications, customer specifications, customers names and customer contacts) of any type pertaining to the business of Employer (the "Material"), the use or application of such Material, or other information with respect to customers of Employer, is confidential, and the sole and exclusive property of Employer without regard to authorship, and shall not be duplicated or removed from Employer's office except as required in connection with performance of Employee's duties hereunder. Upon termination of employment, Employee agrees to return all such Material and all copies thereof (including electronic documents and copies) to Employer and Employee shall not retain any copies (including electronic copies) thereof. Employee further agrees that the design and application of Employee's products is confidential and that during Employee's term of employment and during the non-competition period following termination of employment pursuant to Section 2 of this Agreement, not to divulge any confidential matters or confidential written material to any person not subject to a confidentiality agreement with Employer, except as may be legally required or required by a customer of Employer in connection with the customer's use of Employer's products. Termination 4.1 Termination by Employer. (a) Employer may terminate Employee's employment hereunder without cause or reason with thirty (30) days written notice of termination to Employee. Employer and Employee agree that in the event of any such termination, both parties will use reasonable efforts to determine a mutually acceptable continuing relationship (e.g., retention as an outside consultant). (b) If a mutually acceptable alternative agreement cannot be reached within sixty (60) days after termination, Employee shall receive as severance compensation for a period of one (1) year following termination, a lump sum annual payment in an amount equal to 90% of his then current base salary, plus dividends payable under share grants pursuant to the Employer's Stock Grant Plan, and the full range of Employer benefits. 4.2 Termination by Employee. Employee may terminate Employee's employment hereunder upon thirty (30) days written notice to Employer. 4.3 Termination on Death of Employee. This Employment Agreement shall terminate upon the death of Employee. 4.4 Termination by Disability. Employment may terminate as a result of Employee becoming permanently disabled, mentally or physically, and unable to perform the duties hereunder. Employee shall be paid a minimum of six (6) months salary plus all other existing Employer disability benefits upon such termination. Employee and Employer agree to binding arbitration in the event of disagreements regarding the meaning or intent of this clause. 4.5 Termination by Retirement. Retirement of Employee is anticipated at age 65. Retirement prior to age 65 may occur at the option of Employee. Retirement after age 65 will be at the annual option of the Board of Directors. Retirement benefits shall be all normal benefits provided by the Company. Severance benefits defined by Section 4.1(b) are not to be interpreted as retirement benefits. Miscellaneous 5.1 This Agreement and that certain Agreement of even date herewith between Employer and Employee regarding certain agreements effective upon a change-in-control (as defined therein) are the only agreements in force between Employer and Employee regarding the subject matter hereof and the same supersede all prior agreements. 5.2 This Agreement may only be amended by written amendment signed by Employer and Employee. 5.3 This Agreement shall be governed by the laws of the State of Texas. PEERLESS MFG. CO. _______________________________________ CHAIRMAN BOARD OF DIRECTORS BY ORDER OF THE BOARD OF DIRECTORS EMPLOYEE _______________________________________ Roy C. Cuny AGREEMENT THIS AGREEMENT (the "Agreement") is made and entered into as of the 16th day of May, 2000, by and between PEERLESS MFG. CO. (the "Company"), and ROY C. CUNY (the "Executive"). WHEREAS, the Executive serves as a senior executive of the Company; WHEREAS, the Executive possesses knowledge of the business and affairs of the Company, its policies, methods, personnel and plans for the future; and WHEREAS, the Board of Directors of the Company (the "Board") recognizes that the Executive's contribution to the growth and success of the Company has been substantial and wishes to offer an inducement to the Executive to remain in the employ of the Company; NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements of the parties herein contained, this Agreement sets forth benefits which the Company will pay to Executive in the event of termination of Executive's employment, except as a result of death, disability, retirement or termination by the Company for Cause, following a "Change in Control" of the Company (in each case as such terms or events are defined or discussed herein): 1. Term. The term of this Agreement shall continue until the earlier of (i) the expiration of the third anniversary of the occurrence of a Change in Control, (ii) the Executive's death, or (iii) the Executive's earlier voluntary retirement (except for those events described in Section 3(a)(2)); provided, however, that on each anniversary of the Change in Control, the period referenced in Section (i) above shall automatically be extended for an additional year unless, not later than 90 calendar days prior to such anniversay date, the Company shall have given written notice to the Executive that it does not wish to have the term extended. 2. Definitions. (a) Affiliate and Associate. "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended (the "Exchange Act") in effect on the date of this Agreement. (b) Cause. For "Cause" shall mean that the Executive shall have committed: (i) The conviction of Executive, by a court of competent jurisdiction, of any felony; (ii) Commission by Executive of an intentional material act of fraud to his pecuniary benefit in connection with his duties or in the course of his employment with the Company, as reasonably determined by the Board; (iii) The intentional and continued failure by Executive to substantially perform his duties hereunder, or the intentional wrongdoing by Executive resulting in material injury to the Company. No act, or failure to act, on the part of Executive shall be deemed "intentional" unless done, or omitted to be done, by Executive not in good faith and without reasonable belief that his action or omission was in the best interests of the Company. (c) Change in Control. A "Change in Control" of the Company shall have occurred if at any time during the term of this Agreement any of the following events shall occur: (i) The Company is merged, consolidated or reorganized into or with another corporation or other legal person and as a result of such merger, consolidation or reorganization less than 50.1% of the combined voting power to elect Directors of the then outstanding securities of the remaining corporation or legal person or its ultimate parent immediately after such transaction is available to be received by all stockholders on a pro rata basis and is actually received in respect of or exchange for voting securities of the Company pursuant to such transaction; (ii) The Company sells all or substantially all of its assets to any other corporation or other legal person not controlled by or under common control with the Company; (iii) Any person or group (including any "person" as such term is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of securities which when added to any securities already owned by such person would represent in the aggregate 50% or more of the then outstanding securities of the Company which are entitled to vote to elect Directors; (iv) If at any time, the Continuing Directors then serving on the Board cease for any reason to constitute at least a majority thereof; (v) Any occurrence that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A or any successor rule or regulation promulgated under the Exchange Act; or (vi) Such other events that cause a change in control of the Company, as determined by the Board in its sole discretion; provided, however, that a Change in Control of the Company shall not be deemed to have occurred as the result of any transaction having one or more of the foregoing effects if such transaction is proposed by, and includes a significant equity participation of, executive officers of the Company as constituted immediately prior to the occurrence of such transaction or any Company employee stock ownership plan or pension plan. (d) Code. The "Code" shall mean the Internal Revenue Code of 1986, as amended. (e) Continuing Director. A "Continuing Director" shall mean a Director of the Company who (i) is not an Acquiring Person, an Affiliate or Associate, a representative of an Acquiring Person or nominated for election by an Acquiring Person, and (ii) was either a member of the Board of Directors of the Company on the date of this Agreement or subsequently became a Director of the Company and whose initial election or initial nomination for election by the Company's stockholders was approved by a majority of the Continuing Directors then on the Board of Directors of the Company. (f) Acquiring Person: An "Acquiring Person" shall mean any person (as defined in Section 2(d)(iii) of this Agreement) that, together with all Affiliates and Associates of such person, is the beneficial owner of 15% or more of the outstanding Common Stock. The term "Acquiring Person" shall not include the Company, any subsidiary of the Company, any employee benefit plan of the Company or subsidiary of the Company, any person holding Common Stock for or pursuant to the terms of any such plan, or Donald A. Sillers, Jr. or members of his immediate family. (g) Employment Term. The "Employment Term" shall be the period of employment under this Agreement commencing on the day prior to a Change in Control and continuing until the expiration of this Agreement. (h) Severance Compensation. The "Severance Compensation" shall be: (i) A lump sum amount equal to 299% of Executive's average annual compensation reported on his Form W-2 paid by the Company includable in gross income during the five most recent full calendar years prior to the Change in Control; provided, however, that in no event shall the Company pay or be obligated to pay that portion of the amount due which would result in any payment to or for the benefit of Executive being an "excess parachute payment" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), in the opinion of tax counsel selected by the Company's independent accountants and acceptable to Executive, and which would result in the imposition of an excise tax under Section 4999 of the Code ("Excess Parachute Payment"). Any payment made pursuant to this Section shall be reduced only in the amount necessary to avoid characterization of such payment as an Excess Parachute Payment and only after reduction, to the extent necessary, of any other payments (other than payments made under this Agreement) which when aggregated with the payments hereunder result in the imposition of such excise tax under Section 4999 of the Code; and (ii) For a period of three years, provide Executive with benefits substantially similar to those which Executive was entitled to receive immediately prior to the date of termination under all of the Company's "employee welfare benefit plans" within the meaning of Section 3(1) of The Employee Retirement Income Security Act of 1974, as amended. Notwithstanding the foregoing provisions of this Section, no benefits shall be provided or payments made pursuant to this subsection to the extent that the effect thereof would result in a reduction of the Severance Payment under subsection (h)(i). (i) Termination Date. The "Termination Date" shall be the date upon which the Executive or the Company effectively terminates the employment of the Executive. 3. Rights of Executive Upon Change in Control Termination (a) The Company shall provide the Executive, within ten days following the Termination Date, Severance Compensation in lieu of compensation to the Executive for periods subsequent to the Termination Date, but without affecting the rights of the Executive at law or in equity, if, following the occurrence of a Change in Control, any of the following events shall occur: (1) the Company terminates the Executive's employment during the Employment Term other than for any of the following reasons: (i) the Executive dies: (ii) the Executive becomes permanently disabled and is unable to work for a period of 180 consecutive days; or (iii) for Cause. (2) the Executive terminates his employment after such Change in Control and the occurrence of at least one of the following events: (i) a change in the positions held by Executive or an adverse change in the nature or scope of the authorities, functions or duties attached to the positions with the Company that the Executive had immediately prior to the Change in Control, any reduction in the Executive's salary during the Employment Term or any reduction in bonus or incentive compensation (based upon the dollar amount of bonus or incentive compensation that the Executive received from the Company for the fiscal year preceding the year in which the Change in Control occurred or for the fiscal year preceding the year in which the Termination Date occurs, whichever is the larger amount) or a significant reduction in scope or value of the aggregate other monetary or nonmonetary benefits to which the Executive was entitled from the Company immediately prior to the Change in Control, any of which is not remedied within ten calendar days after receipt by the Company of written notice from the Executive of such change, reduction, alteration or termination, as the case may be; (ii) a determination by the Executive made in good faith that as a result of a Change in Control and a change in circumstances thereafter significantly affecting his position, changes in the composition or policies of the Board, or of other events of material effect, he has been rendered substantially unable to carry out, or has been substantially hindered in the performance of, the authorities, functions or duties attached to his position immediately prior to the Change in Control, which situation is not remedied within ten calendar days after receipt by the Company of written notice from the Executive of such determination; (iii) a change in the positions held by Executive or the occurrence, as determined by Executive in good faith, of an adverse change in the nature or scope of his authorities, powers, functions, responsibilities or duties as the Chairman of the Board, President and Chief Executive Officer of the Company; any reduction in Salary; any reduction in Executive's bonus or incentive compensation (based upon the greater of the dollar amount of bonus and other incentive compensation that Executive received for the year preceding the Change in Control or the average yearly amount of bonus and incentive compensation that Executive received during the five years preceding the Change in Control); a termination, reduction or alteration of the disability policies or life or disability insurance benefits maintained for Executive, any alteration or reduction of expense allowances or reimbursement policies; or a reduction in scope or value of the aggregate other benefits to which Executive was entitled prior to the Change in Control; (iv) the liquidation, dissolution, merger, consolidation or reorganization of the Company or transfer of all or substantially all of its business and/or assets, unless the successor or successors (by liquidation, merger, consolidation, reorganization or otherwise) to which all or substantially all of its business and/or assets have been transferred (directly or by operation of law) shall have specifically assumed all duties and obligations of the Company under this Agreement pursuant to Section 16; (v) the relocation of the Company's principal executive offices, or the requirement by the Company that Executive have as his principal location of work any location not within the greater Dallas, Texas metropolitan area or that he travel away from his office in the course of discharging his duties hereunder significantly more (in terms of either consecutive days or aggregate days in any calendar year) than required of him prior to the Change in Control; or (vi) the Company commits any breach of this Agreement. (b) Notwithstanding the above section or any other provision of this Agreement, in no event shall the Company pay or be obligated to pay the Executive an amount which would be an Excess Parachute Payment. For purposes of this Agreement, the term "Excess Parachute Payment" shall mean any payment or any portion thereof which would be an "excess parachute payment" within the meaning of Section 280G of the Code, and would result in the imposition of an excise tax under Section 4999 of the Code, in the opinion of tax counsel selected by the Company's independent accountants and acceptable to the Executive. If it is established pursuant to a final determination of a court or an Internal Revenue Service administrative appeals proceeding that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Agreement, a payment (or portion thereof) made is an Excess Parachute Payment, then, except as hereafter provided, the Executive shall have an obligation to repay the Company upon demand an amount equal to the minimum amount (but without interest) necessary to ensure that no payment made or to be made by the Company pursuant to this Agreement is an Excess Parachute Payment; provided, however, that if, in the opinion of tax counsel selected by the Company's independent accountants and acceptable to the Executive, such repayment will not ensure that no Excess Parachute Payment would be made hereunder, then (1) no such repayment obligation will exist and (2) the Company shall pay to the Executive an additional amount in cash equal to the amount necessary to cause the amount of the aggregate after-tax cash compensation and benefits otherwise receivable by the Executive to be equal to the aggregate after-tax cash compensation and benefits he would have received as if Sections 280G and 4999 of the Code had not been enacted. (c) Upon written notice given by the Executive to the Company prior to the receipt of Severance Compensation, the Executive, at his sole option, may elect to have all or any part of any such amount paid to him, without interest, on an installment basis selected by him. (d) The payment of Severance Compensation by the Company to the Executive shall not affect any rights and benefits which the Executive may have pursuant to any other agreement, policy, plan, program or arrangement of the Company providing benefits to the Executive prior to the Termination Date, which rights shall be governed by the terms thereof, except that payments hereunder after termination shall reduce by an equal amount any sums payable after termination under the Employment Agreement, dated the date hereof, by and between the Company and the Executive. The Company shall provide to the Executive throughout the Employment Term benefits substantially similar to those which the Executive was receiving or entitled to receive immediately prior to the Termination Date. Such benefits as provided by the Company, however, shall be reduced to the extent comparable benefits are actually received by the Executive during the Employment Term as a result of employment other than with the Company. (e) The Company shall have no right of set-off or counterclaim in respect of any claim, debt or obligation against any payment or benefit to or for the benefit of the Executive provided for in this Agreement. (f) Without limiting the rights of the Executive at law or in equity, if the Company fails to make any payment required to be made hereunder on a timely basis, the Company shall pay interest on the amount thereof on demand at an annualized rate of interest equal to 120% of the then applicable Federal rate determined under Section 1274(d) of the Code, compounded semi-annually (but in no event shall such interest exceed the highest lawful rate). (g) Any termination of Executive's employment or removal of Executive as an elected officer of the Company following the commencement of any discussion authorized by the Board with a third person that ultimately results in a Change in Control involving that person or a different third party shall be deemed to be a termination or removal of Executive after a Change in Control for purposes of this Agreement and shall entitle Executive to all benefits under this Agreement. 4. No Mitigation Required. In the event that this Agreement or the employment of the Executive hereunder is terminated, the Executive shall not be obligated to mitigate his damages nor the amount of any payment provided for in this Agreement by seeking other employment or otherwise, and except for the termination of benefits pursuant to Section 3(d), the acceptance of employment elsewhere after termination shall in no way reduce the amount of Severance Compensation payable hereunder. 5. Successors; Binding Agreement. (a) The Company will require any successor and any corporation or other legal person (including any "person" as defined in Section 2(d)(iii) of this Agreement) which is in control of such successor (as "control" is defined in Regulation 230.405 or any successor rule or regulation promulgated under the Securities Act of 1933, as amended) to all or substantially all of the business and/or assets of the Company (by purchase, merger, consolidation or otherwise), by agreement in form and substance satisfactory to the Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a material breach of this Agreement by the Company. Notwithstanding the foregoing, any such assumption shall not, in any way, affect or limit the liability of the Company under the terms of this Agreement or release the Company from any obligation hereunder. As used in this Agreement, "Company" shall mean the Company as herein before defined and any succcssor to its business and/or all or part of its assets as aforesaid which executes and delivers the agreement provided for in this Section 5 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (b) This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 6. Notice. The Company shall give written notice to Executive within ten days after any Change in Control. Failure to give such notice shall constitute a material breach of this Agreement. For purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or received after being mailed by United States registered mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Roy C. Cuny 2819 Walnut Hill Lane Dallas, TX 75229 If to the Company: Peerless Mfg. Co. Attn: Secretary 2819 Walnut Hill Lane Dallas, TX 75229 or to such other address as any party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 7. Miscellaneous. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, unless specifically referred to herein, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the substantive laws of the State of Texas, without regard to principles of conflicts of law. 8. Validity. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 9. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 10. Employment Rights. Nothing expressed or implied in this Agreement shall create any right or duty on the part of the Company or the Executive to have the Executive remain in the employment of the Company prior to any Change in Control; provided, however, that any termination of employment of the Executive or removal of the Executive as Chairman of the Board and an elected officer of the Company following the commencement of any discussion authorized by the Board of Directors of the Company with a third person that ultimately results in a Change in Control shall be deemed to be a termination or removal of the Executive after a Change in Control for purposes of this Agreement and shall entitle the Executive to all Severance Compensation. Notwithstanding any other provision hereof to the contrary, the Executive may, at any time during the Employment Term, upon the giving of 30 days prior written notice, terminate his employment with the Company. If this Agreement or the employment of the Executive is terminated under circumstances in which the Executive is not entitled to any Severance Compensation, the Executive shall have no further obligation or liability to the Company hereunder or otherwise with respect to his prior or any future employment by the Company. 11. Withholding of Taxes. The Company may withhold from any amounts payable under this Agreement all federal, state, city or other taxes as shall be required pursuant to any law or government regulation or ruling; provided, however, that no withholding pursuant to Section 4999 of the Code shall be made unless, in the opinion of tax counsel selected by the Company's independent accountant and acceptable to the Executive, such withholding relates to payments which result in the imposition of an excise tax pursuant to Section 4999 of the Code. 12. Enforcement Fees. All costs of litigation necessary for Executive to defend the validity of this Agreement are to be paid by Employer or its successors or assigns. The Company shall pay and be solely responsible for any and all attorneys' and related fees and expenses incurred by the Executive as a result of the Company's failure to perform this Agreement or any provision thereof or as a result of the Company or any person contesting the validity or enforceability of this Agreement or any provision thereof as aforesaid. 13. Rights and Remedies Cumulative. No right or remedy herein conferred upon or reserved to the Executive is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, including with respect to Executive's rights under that certain Employment Agreement of even date herewith, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. IN WITNESS WHEREOF, the parties have executed this Agreement effective on the date and year first above written. PEERLESS MFG. CO. _______________________________________ Sherrill Stone Chairman of the Board By Order of the Board of Directors EXECUTIVE _______________________________________ Roy C. Cuny EX-10.M 3 0003.txt EXHIBIT 10(m) Bank of America, N.A. TERM NOTE Date May 30, 2000 [X] New [_] Renewal Amount $2,000,000.00 Initial Maturity Date June 30, 2005 Bank: Borrower: Bank of America, N.A. PMC Acquisition, Inc. dba ABCO Banking Center: Dallas Industries 901 Main Street, 7th Floor 2819 Walnut Hill Lane Dallas, Dallas County, Texas 75202 Dallas, Dallas County, Texas 75229 (Street address including county) (Name and street address, including county) FOR VALUE RECEIVED, the undersigned Borrower unconditionally (and jointly and severally, if more than one) promises to pay to the order of Bank, its successors and assigns, without setoff, at Bank's offices identified above or at any other place Bank designates, the principal amount of TWO MILLION AND 00/100 DOLLARS ($2,000,000.00) (or so much thereof as may have been advanced), in immediately available funds, together with interest computed daily on the outstanding principal balance at an annual interest rate, and in accordance with the payment schedule, indicated below. 1. Borrowings, Rate, and Payment of Interest. A. Procedure for Borrowing. The loan shall be made in a single advance by Bank to Borrower in the amount specified by Borrower not to exceed Two Million Dollars ($2,000,000). Whenever Borrower desires the advance hereunder, Borrower shall give Bank notice in a form acceptable to Bank (a "Borrowing Request") specifying (a) the date (which shall be a Business Day if the entire borrowing is to accrue interest at the Prime Rate or a Eurodollar Business Day if any portion of the advance is to bear interest at the Eurodollar Rate) of the proposed borrowing, (b) the amount to be borrowed, (c) the portion of the borrowing constituting a Prime Rate Loan and/or a Eurodollar Loan (which Eurodollar Loan may only be in Incremental Portions), and (d) if any portion of the proposed borrowing constitutes a Eurodollar Loan, the initial Eurodollar Interest Period selected by Borrower (thirty days, sixty days , or ninety days). Such notice shall be given by 10 a.m. (Dallas, Texas time) on the date of the proposed borrowing if the entire borrowing is to accrue interest at the Prime Rate, and by 10 a.m. (Dallas, Texas time) two (2) Business Days prior to the date of the proposed borrowing if any portion of the advance is to bear interest at the Eurodollar Rate. The notice required may be given telephonically by Borrower to Bank, but upon giving such telephonic notice Borrower shall immediately thereafter provide Bank with the written notice required herein. All notices given under this Section shall be irrevocable. Not later than 12 noon (Dallas, Texas time) on the date of the proposed borrowing and upon fulfillment of all other conditions required by this Note, Bank will make the advance available to Borrower by crediting the amount thereof to Borrower's account with Bank or otherwise disbursing it as Borrower shall request in writing. B. Prime Rate Loans. Borrower agrees to pay interest (calculated on the basis of the actual days elapsed in a year consisting of 360 days) with respect to the unpaid principal amount of each Prime Rate Loan from the date the proceeds thereof are made available to Borrower or are converted by Borrower from a Eurodollar Loan until maturity (whether by acceleration or otherwise) at a varying rate per annum equal to the lesser of (i) the Maximum Rate or (ii) the Prime Rate. The interest in respect of a Prime Rate Loan shall be payable on the last day of each Prime Rate Interest Period. C. Eurodollar Loans. Borrower agrees to pay interest (calculated on the basis of actual days elapsed in a year consisting of 360 days) with respect to the unpaid principal amount of each Eurodollar Loan from the date the proceeds thereof are made available to Borrower or are converted by Borrower from a Prime Rate Loan until maturity (whether by acceleration or otherwise) at a rate per annum equal to the lesser of (i) the Maximum Rate or (ii) the Eurodollar Rate applicable to such Eurodollar Loan. Subject to the provisions of this Note as to prepayment, interest with respect to each Eurodollar Loan shall be payable on the last day of each Eurodollar Interest Period. Subject to the provisions of this Note as to prepayment, the principal of each Eurodollar Loan shall be paid or renewed on the last day of each applicable Eurodollar Interest Period or shall automatically be converted to a Prime Rate Loan on the last day of such Eurodollar Interest Period as hereinafter provided. If no default exists hereunder and Borrower desires to renew such Eurodollar Loan and the amount thereof is at least an Incremental Portion, Borrower shall deliver a notice and designate whether the Eurodollar Interest Period to commence on the expiration date of the prior Eurodollar Interest Period shall be a thirty day, sixty day, or ninety day period. If Bank has not received timely permissible notice of designation of such Eurodollar Interest Period as herein provided, Borrower shall be deemed to have elected to convert such maturing Eurodollar Loan to a Prime Rate Loan. D. Interest Rate Determination. Bank shall determine each interest rate applicable hereunder and shall give prompt notice (which need not be in writing) to Borrower of each rate of interest so determined. E. Conversion Option: Prime Rate Loans to Eurodollar Loans. Borrower may convert a Prime Rate Loan (or an Incremental Portion thereof) to Eurodollar Loans by giving Bank irrevocable written notice of such election at least two (2) Eurodollar Business Days prior to the proposed conversion date. The notice of conversion to a Eurodollar Loan shall include (1) the amount of the Prime Rate Loan to be converted (which must be converted in Incremental Portions), and (2) the duration of the Eurodollar Interest Period selected (thirty days, sixty days, or ninety days). If no default exists hereunder, such conversion shall be made on the requested conversion date or, if such requested conversion date is not a Eurodollar Business Day, on the next succeeding Eurodollar Business Day, but if a default exists hereunder, no conversion may occur. Notwithstanding the foregoing, Borrower shall maintain a sufficient portion of the unpaid principal balance hereof as a Prime Rate Loan so that Borrower will not be required to prepay any Eurodollar Loan in making the principal payments when due hereunder. F. Conversion Option: Eurodollar Loans to Prime Rate Loans. Borrower may convert all or any part of its Eurodollar Loans (so long as the portion not converted is an Incremental Portion) to a Prime Rate Loan by giving Bank irrevocable written notice of such election prior to 10 a.m. (Dallas, Texas time) on the conversion date, if such conversion date is the last day of a Eurodollar Interest Period with respect thereto, or at least two (2) Eurodollar Business Days prior written notice if the conversion date is a day other than the last day of the Eurodollar Interest Period with respect thereto. Such conversion shall be made on the requested conversion date or, if such requested conversion date is not a Business Day, on the next succeeding Business Day. A conversion of a Eurodollar Loan to a Prime Rate Loan on a day other than the last day of the Eurodollar Interest Period for the Eurodollar Loan in question shall constitute a prepayment which may require the payment of the breakage fee described in Section 6 of Schedule II attached hereto. All conversion notices given hereunder shall be irrevocable. G. Prepayment of Loans. Borrower may at any time and from time to time prepay any Prime Rate Loan, in whole or in part without premium or penalty. Borrower may at any time and from time to time prepay any Eurodollar Loan in whole or in part, without premium or penalty except as provided in Section 6 of Schedule II, provided that Borrower first complies with the conditions hereinafter set forth. Borrower shall give Bank at least two (2) Eurodollar Business Days prior written notice of (i) its intent to prepay a Eurodollar Loan, (ii) the amount of principal which will be prepaid, and (iii) the date on which the prepayment will be made. Each prepayment of principal of a Eurodollar Loan shall be in a minimum amount of $100,000 (or the aggregate principal amount outstanding, if less) plus accrued interest thereon to the date of prepayment. Borrower may also be required to pay Bank the breakage fee described in Section 6 of Schedule II attached hereto because such payment is made on a date other than the last day of the applicable Eurodollar Interest Period. H. Schedules I and II. Reference is made to Schedule I attached hereto for definitions applicable to the interest pricing options hereunder and to Schedule II attached hereto for special provisions relating to Eurodollar Loans. I. Loan Documents. As used herein, the term "Loan Documents" means this Note, the Deed of Trust, the Security Agreement, the Guaranty, and all other documents, instruments, guarantees, certificates and agreements executed and/or delivered by Borrower, any guarantor or third party in connection with the loan evidenced by this Note. Notwithstanding any provision of this Note or any other agreement or commitment between Borrower and Bank, whether written or oral, express or implied, Bank shall never be entitled to charge, receive, or collect, nor shall amounts received hereunder be credited so that Bank shall be paid, as interest a sum greater than interest at the Maximum Rate. It is the intention of the parties that the Note, and all instruments securing the payment of the Note or executed or delivered in connection therewith, shall comply with applicable law. If Bank ever contracts for, charges, receives or collects anything of value which is deemed to be interest under applicable law, and if the occurrence of any circumstance or contingency, whether acceleration of maturity of the Note, prepayment of the Note, delay in advancing proceeds of the Note, or any other event, should cause such interest to exceed the maximum lawful amount, any amount which exceeds interest at the Maximum Rate shall be applied to the reduction of the unpaid principal balance of the Note or any other indebtedness owed to Bank by Borrower, and if the Note and such other indebtedness are paid in full, any remaining excess shall be paid to Borrower. In determining whether the interest exceeds interest at the Maximum Rate, the total amount of interest shall be spread, prorated and amortized throughout the entire term of the Note until its payment in full. The term "Maximum Rate" as used in this Note means the maximum nonusurious rate of interest per annum permitted by whichever of applicable United States federal law or Texas law permits the higher interest rate, including to the extent permitted by applicable law, any amendments thereof hereafter or any new law hereafter coming into effect to the extent a higher Maximum Rate is permitted thereby. To the extent, if any, that Chapter 303 of the Texas Finance Code, as amended, (the "Act") is relevant to the Bank for purposes of determining the Maximum Rate, the parties elect to determine the Maximum Rate under the Act pursuant to the "weekly ceiling" from time to time in effect, as referred to and defined in '303.001-303.016 of the Act; subject, however, to any right the Bank subsequently may have under applicable law to change the method of determining the Maximum Rate. 2. Accrual Method. Except when interest is calculated with reference to the Maximum Rate, interest will be calculated by the 365/360 day method (a daily amount of interest is computed for a hypothetical year of 360 days; that amount is multiplied by the actual number of days for which any principal is outstanding hereunder). Interest calculated at the Maximum Rate shall be calculated on the actual days elapsed and a year of 365 or, if appropriate, 366 days. 3. Note Term and Payment Schedule. Principal is due in nineteen (19) quarterly installments of $100,000, the first such installment being due on June 30, 2000, and subsequent installments being due on the last day of each September, December, March, and June thereafter until June 30, 2005, on which day the twentieth (20th) installment of the entire remaining unpaid principal balance shall be due and payable. Total or partial prepayments may be made at any time (subject to any charges elsewhere provided herein). If Borrower is in default under this Note or any of the Loan Documents, Bank may demand payment of the balance outstanding under this Note in full immediately. All payments will be applied first to any expense or charge due under this Note or any other Loan Document or any other documents executed in connection with this Note, then to interest due and payable; and then to principal, or in such other order as Bank determines, at its option. 4. No Revolving Feature. Borrowing hereunder may occur only in one advance, and any principal sum repaid by Borrower may not be thereafter re- borrowed. Bank and Borrower expressly agree that Chapter 346 ("Chapter 346") of the Texas Finance Code shall not apply to this Note or to any advances under this Note and that neither this Note or any such advances shall be governed by or subject to the provisions of Chapter 346 in any manner whatsoever. 5. Automatic Payment. Borrower has elected to authorize Bank to effect payment of sums due under this Note by means of debiting Borrower's account number 1252079666. This authorization shall not affect the obligation of Borrower to pay such sums when due, without notice if there are insufficient funds in such account to make such payment in full on the due date thereof, or if Bank fails to debit the account. 6. Delinquency Charge. To the extent permitted by law, a delinquency charge will be imposed in an amount not to exceed four percent (4%) of any payment that is more than fifteen days late. 7. Waivers, Consents and Covenants. Borrower, and any endorser or any other party to this Note jointly and severally: (a) waive presentment, demand, protest, and any notice required to be given under the law in connection with the delivery, acceptance, performance, default or enforcement of this Note; (b) consent to all delays, extensions, renewals or other modifications of this Note or the other Loan Documents, or waivers of any provisions of the Note or the other Loan Documents, or Bank's release or discharge of any such party, or release, substitution or exchange of any security for the payment of this Note, or Bank's failure to act, or any indulgence shown by Bank and agree that no such action, failure to act or failure to exercise any right or remedy by Bank shall in any way affect the obligations of any such party or be construed as a waiver by Bank of, or otherwise affect, any of Bank's rights under this Note, or under any of the other Loan Documents; and (c) agree to pay, on demand, all costs and expenses of collection or defense of this and/or the enforcement or defense of Bank's rights with respect to, or the administration, supervision, preservation, or protection of, or realization upon, any property securing payment hereof, including, without limitation, reasonable attorney's fees related to any suit, mediation or arbitration proceeding, out of court payment agreement, trial, appeal, bankruptcy proceedings or other proceeding, in such amount as may be determined reasonable by an arbitrator or court as appropriate. 8. Events of Default. The following are events of default under this Note: (a) the failure of Borrower, any endorser or guarantor of this Note, or any other party executing a Loan Document that supports the loan evidenced by this Note (individually an "Obligor" and collectively "Obligors") to pay or perform any obligation, liability or indebtedness owed to Bank, or to any affiliate of Bank of America Corporation, under this Note, any other Loan Document, or any other agreement between Borrower and Bank or such affiliate, as and when due (whether upon demand, at maturity or by acceleration); (b) the failure of any Obligor to pay or perform any other obligation, liability or indebtedness owed to any other party; (c) the death of any Obligor (if an individual); (d) the resignation or withdrawal of any partner or a material owner/guarantor of Borrower, as determined by Bank in its sole discretion; (e) the commencement of a proceeding against any Obligor for dissolution or liquidation, the voluntary or involuntary termination or dissolution of any Obligor or the merger or consolidation of any Obligor with or into another entity; (f) the insolvency of, the business failure of, the appointment of a custodian, trustee, liquidator or receiver for or for any of the property of, the assignment for the benefit of creditors by, or the filing of a petition under bankruptcy, insolvency or debtor's relief law or the filing of a petition for any adjustment of indebtedness, composition or extension by or against any Obligor; (g) the determination by Bank that any representation or warranty made to it by any Obligor in any Loan Document, any other agreement between Borrower and Bank, or otherwise is or was, when it was made, untrue or materially misleading; (h) the failure of any Obligor to timely deliver such financial statements, including tax returns, other statements of condition or other information, as Bank shall request from time to time; (i) the entry of a judgment against any Obligor which Bank in its sole discretion deems material in nature; (j) the seizure or forfeiture of, or the issuance of any writ of possession, garnishment or attachment, or any turnover order for any property of any Obligor; (k) the determination by Bank that it is insecure for any reason; (l) the determination by Bank that a material adverse change has occurred in the financial condition of any Obligor; (m) the failure of Borrower's business to comply with any law or regulation controlling its operation; (n) the occurrence of any default under any other Loan Document; or (o) the occurrence of any default under the Peerless Loan Documents. As used herein, the term "Peerless Loan Documents" means the Eighth Amended and Restated Loan Agreement between Peerless Mfg. Co. ("Peerless") dated as of December 12, 1999, as amended by that certain Amendment A to Eighth Amended and Restated Loan Agreement dated as of February 25, 2000 between Peerless and Bank, as further amended by that certain Amendment B to Eighth Amended and Restated Loan Agreement of even date herewith between Peerless and Bank (as so amended, the "Peerless Loan Agreement"), any and all promissory notes executed by Peerless in favor of Bank pursuant to the Peerless Loan Agreement, each application for issuance of a Letter of Credit (as defined in the Peerless Loan Agreement), and all other documents, instruments, guarantees, certificates and agreements executed and/or delivered by Peerless, any guarantor or third party in connection with the Peerless Loan Agreement. 9. Remedies upon Default. Whenever there is a default under this Note (a) the entire balance outstanding under this Note and all other obligations of any Obligor to Bank shall, at the option of Bank, become immediately due and payable, and/or (b) to the extent permitted by law, the rate of interest on the unpaid principal shall be increased at Bank's discretion up to the maximum rate allowed by law, or if none, 25% per annum (the applicable rate being the "Default Rate"). Imposition of a Default Rate shall not extend the time for any payment on this Note. At Bank's option, any accrued and unpaid interest, fees or charges may, for purposes of computing and accruing interest on a daily basis after the due date of this Note or any installment thereof, be deemed to be a part of the principal balance, and, to the extent such would not cause the interest hereunder to exceed the Maximum Rate, interest shall accrue on a daily compounded basis after such date at the Default Rate provided in this Note until the entire outstanding balance of principal and interest is paid in full. Whenever there is a default under this Note, Bank is authorized at any time, at its option and without notice or demand, to set off and charge against any deposit accounts of any Obligor (and against any money, instruments, securities, documents, chattel paper, credits, claims, demands, income and any other property, rights and interests of any Obligor), which come into the possession or custody or under the control of Bank or any of its agents, affiliates or correspondents, any and all obligations due under this Note. Additionally, Bank shall have all rights and remedies available under each of the Loan Documents, as well as all rights and remedies available at law or in equity. 10. Non-Waiver. Bank's failure to exercise any option or any other right under this Note is not a waiver of that right or option and will not bar Bank's exercise of any options or rights at a later date. All rights and remedies of Bank are cumulative and may be pursued singly, successively or together, at Bank's option. Bank's acceptance of any partial payment is not a waiver of any default or of any of Bank's rights under this Note. Any waiver of Bank's rights and any modification of this Note must be in writing and duly signed on behalf of Bank; any such waiver shall apply only to the specific instance involved, and will not impair the rights of Bank or the obligations of Obligors to Bank in any other respect or at any other time. 11. Applicable Law, Venue and Jurisdiction. Borrower agrees that this Note shall be deemed to have been made in the State of Texas at Bank's address indicated at the beginning of this Note and shall be governed by, and construed in accordance with, the laws of the State of Texas and is performable in the City and County of Texas indicated at the beginning of this Note. In any litigation in connection with or to enforce this Note or any indorsement or guaranty of this Note or any other Loan Document, Obligors, and each of them, irrevocably consent to and confer personal jurisdiction on the courts of the State of Texas or the United States courts located within the State of Texas. Nothing contained herein shall, however, prevent Bank from bringing any action or exercising any rights within any other state or jurisdiction or from obtaining personal jurisdiction by any other means available under applicable law. 12. Partial Invalidity. The unenforceability or invalidity of any provision of this Note shall not affect the enforceability or validity of any other provision of this Note and the invalidity or unenforceability of any provision of this Note to any person or circumstance shall not affect the enforceability or validity of such provision to any other persons or circumstances. 13. Binding Effect. This Note shall be binding upon and inure to the benefit of Borrower, Obligors and Bank and their respective successors, assigns, heirs and personal representatives, but no obligations of Borrower or Obligors hereunder can be assigned without prior written consent of Bank. 14. Controlling Document. To the extent that this Note conflicts with or is in any way incompatible with any other document related specifically to the loan evidenced by this Note, this Note shall control over any other such document, and if this Note does not address an issue, then each other such document shall control to the extent that it deals most specifically with that issue. 15. Collateral. This Note is secured the liens and security interests granted in, and is entitled to the benefits of, (a) that certain Deed of Trust (with Security Agreement, Assignment of Rents and Leases and Financing Statement) of even date herewith executed by Borrower to Michael F. Hord, Trustee for the benefit of Bank (the "Deed of Trust"), (b) that certain Security Agreement of even date herewith executed by Borrower to Bank. Further, this Note is guaranteed pursuant to, and is entitled to the benefits of, that certain the Unconditional Guaranty of Peerless Mfg. Co. of even date herewith (the "Guaranty"). 16. ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT OR ANY RELATED INSTRUMENTS, AGREEMENTS OR DOCUMENTS, INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW), THE RULES OF PRACTICE AND PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OF J.A.M.S./ENDISPUTE OR ANY SUCCESSOR THEREOF ("J.A.M.S."), AND THE "SPECIAL RULES" SET FORTH BELOW. IN THE EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THIS NOTE APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH ACTION. A. SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN THE COUNTY OF ANY BORROWER'S DOMICILE AT THE TIME OF THE EXECUTION OF THIS INSTRUMENT, AGREEMENT OR DOCUMENT AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AN ARBITRATOR; IF J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE ARBITRATION, THEN THE AMERICAN ARBITRATION ASSOCIATION WILL SERVE. ALL ARBITRATION HEARINGS WILL BE COMMENCED WITHIN 90 DAYS OF THE DEMAND FOR ARBITRATION; FURTHER, THE ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE, BE PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR UP TO AN ADDITIONAL 60 DAYS. B. RESERVATION OF RIGHTS. NOTHING IN THIS ARBITRATION PROVISION SHALL BE DEEMED TO (I) LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE STATUTES OF LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED IN THIS INSTRUMENT, AGREEMENT OR DOCUMENT; OR (II) BE A WAIVER BY BANK OF THE PROTECTION AFFORDED TO IT BY 12 U.S.C. SEC. 91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW; OR (III) LIMIT THE RIGHT OF BANK HERETO (A) TO EXERCISE SELF HELP REMEDIES SUCH AS (BUT NOT LIMITED TO) SETOFF, OR (B) TO FORECLOSE AGAINST ANY REAL OR PERSONAL PROPERTY COLLATERAL, OR (C) TO OBTAIN FROM A COURT PROVISIONAL OR ANCILLARY REMEDIES SUCH AS (BUT NOT LIMITED TO) INJUNCTIVE RELIEF, WRIT OF POSSESSION OR THE APPOINTMENT OF A RECEIVER. BANK MAY EXERCISE SUCH SELF HELP RIGHTS, FORECLOSE UPON SUCH PROPERTY, OR OBTAIN SUCH PROVISIONAL OR ANCILLARY REMEDIES BEFORE, DURING OR AFTER THE PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT. NEITHER THIS EXERCISE OF SELF HELP REMEDIES NOR THE INSTITUTION OR MAINTENANCE OF AN ACTION FOR FORECLOSURE OR PROVISIONAL OR ANCILLARY REMEDIES SHALL CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE CLAIMANT IN ANY SUCH ACTION, TO ARBITRATE THE MERITS OF THE CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH REMEDIES. Borrower represents to Bank that the proceeds of this loan are to be used primarily for business, commercial or agricultural purposes. Borrower acknowledges having read and understood, and agrees to be bound by, all terms and conditions of this Note and hereby executes this Note under seal as of the date here above written. NOTICE OF FINAL AGREEMENT. THIS WRITTEN PROMISSORY NOTE REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. BANK: BANK OF AMERICA, N.A. BORROWER: PMC ACQUISITION, INC dba ABCO INDUSTRIES By: By: Larry Holden, Name: Senior Vice President Title: SCHEDULE I INTEREST RATE PRICING DEFINITIONS The definitions set forth on this Schedule I are those which relate solely to the interest rate pricing options under the Note. "Business Day" means the normal banking hours during any day (other than Saturdays or Sundays or legal holidays) that banks are legally open for business in Dallas, Texas. "Eurocurrency Reserve Requirement" means, at any time, the maximum rate at which reserves (including, without limitation, any marginal, special, supplemental or emergency reserves) are required to be maintained under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) by member banks of the Federal Reserve System against "Eurocurrency liabilities" (as such term is used in Regulation D). Without limiting the effect of the foregoing, the Eurocurrency Reserve Requirement shall reflect any other reserves required to be maintained by such member banks with respect to (i) any category of liabilities which includes deposits by reference to which the Eurodollar Rate is to be determined, or (ii) any category of extensions of credit or other assets which include Eurodollar Loans. The Eurodollar Rate shall be adjusted automatically on and as of the effective date of any change in the Eurocurrency Reserve Requirement. "Eurodollar Business Day" means a Business Day on which dealings in U.S. Dollar deposits are carried on in the Eurodollar market. "Eurodollar Interest Period" means, with respect to any Eurodollar Loan: (a) initially, the period commencing on the date such Eurodollar Loan is made and ending on the numerically corresponding day in the calendar month that is thirty days, sixty days, or ninety days thereafter, as selected by Borrower, and (b) thereafter, each period commencing on the day following the last day of the next preceding Interest Period applicable to such Eurodollar Loan and ending thirty days, sixty days, or ninety days thereafter, as selected by Borrower; provided, however, that (A) if any Eurodollar Interest Period would otherwise expire on a day that is not a Eurodollar Business Day, such Interest Period shall expire on the next succeeding Eurodollar Business Day, and (B) any Eurodollar Interest Period that commences on the last Eurodollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the last calendar month of such Eurodollar Interest Period) shall end on the last Eurodollar Business Day of the last calendar month of such Eurodollar Interest Period, and (C) any Eurodollar Interest Period that would otherwise expire after the Maturity Date shall end on the Maturity Date. "Eurodollar Loan" means each portion of the unpaid principal balance that bears interest at a Eurodollar Rate. "Eurodollar Margin" means two and one-half percent (2.5%) per annum. "Eurodollar Rate" means, with respect to each Eurodollar Loan, a rate per annum (rounded upward, if necessary, to the nearest 1/10 of 1%) determined by Bank as follows: Interbank Market Rate + Eurodollar Margin 1 - Eurocurrency Reserve Requirement "Interbank Market Rate" means, for any Eurodollar Loan for any Eurodollar Interest Period therefor, the rate of interest per annum (rounded upward, if necessary, to the nearest 1/100th of 1%) appearing on Telerate Page 3750 (or any successor page) as the London interbank offered rate for deposits in dollars at approximately 11:00 .a.m., London time, two (2) Eurodollar Business Days prior to the first day of such Eurodollar Interest Period, for a term comparable to such Eurodollar Interest Period. If for any reason such rate is not available, the term "Interbank Market Rate" shall mean, for any Eurodollar Loan for any Eurodollar Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100th of 1%) appearing on Reuters Screen LIBO Page as the London interbank offered rate for deposits in dollars at approximately 11:00 a.m., London time, two (2) Eurodollar Business Days prior to the first day of such Eurodollar Interest Period for a term comparable to such Eurodollar Interest Period; provided however, if more than one rate is specified on Reuters Screen LIBO Page, the applicable rate shall be the arithmetic mean of all such rates (rounded upwards, if necessary, to the nearest 1/100th of 1%). "Incremental Portion" means any amount which is $100,000 or amounts in excess thereof in integral multiples of $100,000. "Interest Period" means any Prime Rate Interest Period or Eurodollar Interest Period, as is applicable. "Prime Rate" means the variable rate of interest per annum established from time to time by Bank as its Prime Rate (which rate of interest may or may not be the lowest rate or best charged by Bank on similar loans, and Bank may make various commercial or other loans at rates of interest having no relationship to such rate). Each change in the Prime Rate shall become effective without prior notice to Borrower automatically as of the opening of business on the date of such change in the Prime Rate. "Prime Rate Interest Period" means, with respect to any Prime Rate Loan, the period ending on the last day of each calendar quarter, provided, however, that (i) if any Prime Rate Interest Period would end on a day that is not a Business Day, such Interest Period shall end on the next succeeding Business Day, and (ii) if any Prime Rate Interest Period would otherwise end after the Maturity Date, such Interest Period shall end on the Maturity Date. "Prime Rate Loan" means that portion of the unpaid principal balance that bears interest at the Prime Rate. "Regulation D" means Regulation D of the Board of Governors of the Federal Reserve System as amended or supplemented from time to time. SCHEDULE II SPECIAL PROVISIONS RELATING TO EURODOLLAR LOANS The following provisions shall apply to all Eurodollar Loans under this Note. 1. Increased Cost and Reduced Return. (a) If, after the date hereof, the adoption of any applicable law, rule, or regulation, or any change in any applicable law, rule, or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank, or comparable agency charged with the interpretation or administration thereof, or compliance by Bank with any request or directive (whether or not having the force of law) of any such governmental authority, central bank, or comparable agency: (i) shall subject Bank to any tax, duty, or other charge with respect to any Eurodollar Loan, the Note, or Bank's obligation to make Eurodollar Loans, or change the basis of taxation of any amounts payable to Bank under this Note in respect of any Eurodollar Loan (other than taxes imposed on the overall net income of Bank by the jurisdiction in which Bank has its principal office or its applicable lending office); (ii) shall impose, modify, or deem applicable any reserve, special deposit, assessment, or similar requirement (other than the Eurocurrencies Reserve Requirement utilized in the determination of the Eurodollar Rate) relating to any extensions of credit or other assets of, or any deposits with or other liabilities or commitments of, Bank, including the commitment of Bank hereunder; or (iii) shall impose on Bank or on the London interbank market any other condition affecting this Note or any of such extensions of credit or liabilities or commitments; and the result of any of the foregoing is to increase the cost to Bank of making, converting into, continuing, or maintaining any Eurodollar Loan or to reduce any sum received or receivable by Bank under this Note with respect to any Eurodollar Loan, then Borrower shall pay to Bank on demand such amount or amounts as will compensate Bank for such increased cost or reduction. If Bank requests compensation by Borrower under this Section 1, Borrower may, by notice to Bank, suspend the obligation of Bank to make or continue Eurodollar Loans or to convert all or an Incremental Portion of a Prime Rate Loan into Eurodollar Loans until the event or condition giving rise to such request ceases to be in effect (in which case the provisions of Section 4 shall be applicable); provided that such suspension shall not affect the right of Bank to receive the compensation so requested. (b) If, after the date hereof, Bank shall have determined that the adoption of any applicable law, rule, or regulation regarding capital adequacy or any change therein or in the interpretation or administration thereof by any governmental authority, central bank, or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such governmental authority, central bank, or comparable agency, has or would have the effect of reducing the rate of return on the capital of Bank or any corporation controlling Bank as a consequence of Bank's obligations hereunder to a level below that which Bank or corporation could have achieved but for such adoption, change, request, or directive (taking into consideration its policies with respect to capital adequacy), then from time to time upon demand the Borrower shall pay to Bank such additional amount or amounts as will compensate Bank for such reduction. (c) Bank shall promptly notify Borrower of any event of which it has knowledge, occurring after the date hereof, which will entitle Bank to compensation pursuant to this Section and will designate a different applicable lending office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of Bank, be otherwise disadvantageous to it. Bank shall furnish to Borrower a statement setting forth the additional amount or amounts to be paid to it hereunder which shall be conclusive in the absence of manifest error. In determining such amount, Bank may use any reasonable averaging and attribution methods. (d) The obligations of Borrower under this Section 1 shall survive payment in full of the Note. 2. Limitation on Eurodollar Loans. If on or prior to the first day of any Eurodollar Interest Period for any Eurodollar Loan: (a) Bank determines (which determination shall be conclusive) that by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the Eurodollar Rate for such Eurodollar Interest Period; or (b) Bank determines (which determination shall be conclusive) that the Eurodollar Rate will not adequately and fairly reflect the cost to the Banks of funding Eurodollar Loans for such Eurodollar Interest Period; then Bank shall give Borrower prompt notice thereof specifying the relevant amounts or periods as is applicable, and so long as such condition remains in effect, Bank shall be under no obligation to make additional Eurodollar Loans, continue Eurodollar Loans, or to convert the Prime Rate Loan into Eurodollar Loans, and Borrower shall, on the last day(s) of the then current Eurodollar Interest Period(s) for the outstanding Eurodollar Loans, either prepay such Eurodollar Loans or convert such Eurodollar Loans into a Prime Rate Loan in accordance with the terms of this Note. 3. Illegality. Notwithstanding any other provision of this Note, in the event that it becomes unlawful for Bank or maintain, or fund Eurodollar Loans hereunder, then Bank shall, promptly notify Borrower thereof and Bank's obligation to make or continue Eurodollar Loans and to convert any portion of the Prime Rate Loan into Eurodollar Loans shall be suspended until such time as Bank may again make, maintain, and fund Eurodollar Loans (in which case the provisions of Section 4 shall be applicable). 4. Treatment of Affected Loans. If the obligation of Bank to make Eurodollar Loans or to continue Eurodollar Loans or to convert any portion of the Prime Rate Loan into Eurodollar Loans shall be suspended pursuant to Section 1 or Section 3 hereof (the "Affected Loans"), the Affected Loans shall be automatically converted into a Prime Rate Loan on the last day(s) of the then current Eurodollar Interest Period(s) for Affected Loans (or, in the case of a conversion required by Section 3 hereof, on such earlier date as Bank may specify to Borrower) and, unless and until Bank gives notice as provided below that the circumstances specified in Section 1 or Section 3 hereof that gave rise to such conversion no longer exist: (a) to the extent that the Affected Loans have been so converted, all payments and prepayments of principal that would otherwise be applied to the Affected Loans shall be applied instead to Prime Rate Loans; and (b) all Loans that would otherwise be made or continued by Bank as Eurodollar Loans shall be made or continued instead as a Prime Rate Loan, and all Loans of Bank that would otherwise be converted into Eurodollar Loans shall be converted instead into (or shall remain as) a Prime Rate Loan. 5. Taxes. (a) Any and all payments by Borrower to or for the account of Bank hereunder or under any other Loan Document shall be made free and clear of and without deduction for any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of Bank taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction under the laws of which Bank (or its applicable lending office) is organized or any political subdivision thereof (all such non-excluded taxes, duties, levies, imposts, deductions, charges, withholdings, and liabilities being hereinafter referred to as "Taxes"). If Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable under this Note or any other Loan Document to Bank (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 5) Bank receives an amount equal to the sum it would have received had no such deductions been made, (ii) Borrower shall make such deductions, (iii) Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law, and (iv) Borrower shall furnish to Bank the original or a certified copy of a receipt evidencing payment thereof. (b) In addition, Borrower agrees to pay any and all present or future stamp or documentary taxes and any other excise or property taxes or charges or similar levies which arise from any payment made under this Note or any other Loan Document or from the execution or delivery of, or otherwise with respect to, this Note or any other Loan Document (hereinafter referred to as "Other Taxes"). (c) The Borrower agrees to indemnify Bank for the full amount of Taxes and Other Taxes (including, without limitation, any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section 5) paid by Bank and any liability (including penalties, interest, and expenses) arising therefrom or with respect thereto. (d) If the Borrower is required to pay additional amounts to or for the account of Bank pursuant to this Section 5, then Bank will agree to use reasonable efforts to change the jurisdiction of its applicable lending office so as to eliminate or reduce any such additional payment which may thereafter accrue if such change, in the judgment of Bank, is not otherwise disadvantageous to Bank. (e) Within thirty (30) days after the date of any payment of Taxes, Borrower shall furnish to Bank the original or a certified copy of a receipt evidencing such payment. (f) Without prejudice to the survival of any other agreement of Borrower hereunder, the agreements and obligations of the Borrower contained in this Section 5 shall survive the payment in full of the Note. 6. Compensation. Upon the request of Bank, Borrower shall pay to Bank such amount or amounts as shall be sufficient (in the reasonable opinion of Bank) to compensate it for any loss, cost, or expense (including loss of anticipated profits) incurred by it as a result of: (a) any payment, prepayment, or conversion of a Eurodollar Loan for any reason (including, without limitation, the acceleration of the Loans) on a date other than the last day of the Eurodollar Interest Period for such Eurodollar Loan; or (b) any failure by Borrower for any reason to borrow, convert, continue, or prepay a Eurodollar Loan on the date for such borrowing, conversion, continuation, or prepayment specified in the relevant notice of borrowing, prepayment, continuation, or conversion under this Note. EX-21 4 0004.txt EXHIBIT 21 Subsidiaries of Peerless Company Domicile Ownership --------------------------- ------------------ --------- Peerless Europe B.V. Netherlands 100% Peerless Europe Ltd. The United Kingdom 100% Peerless (Barbados) Inc. Barbados 100% PMC Acquisition Inc. d/b/a Texas 100% ABCO Industries EX-23 5 0005.txt Exhibit 23 Consent of Independent Certified Public Accountants We have issued our report dated September 15, 2000, accompanying the consolidated financial statements included in the Annual Report of Peerless Mfg. on Form 10-K for the year ended June 30, 2000. We hereby consent to the incorporation by reference of said report in the Registration Statements of Peerless Mfg. Company on Form S-8 (File No. 333-17229 effective November 11, 1999). GRANT THORNTON LLP Dallas, Texas September 15, 2000 EX-27 6 0006.txt
5 1 12-MOS JUN-30-2000 JUN-30-2000 561,017 273,343 13,096,717 777,546 3,287,957 27,528,077 10,119,100 6,609,254 32,120,953 15,589,492 1,406,000 0 0 1,467,992 13,281,408 32,120,953 58,561,396 58,561,396 42,903,407 42,903,407 10,035,579 167,814 180,128 1,578,363 647,586 930,777 0 0 0 930,777 0.64 0.63
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