e10vq

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

As of February 12, 2004, there were 3,002,784 shares of the registrant’s common stock outstanding.

PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003

PEERLESS MFG. CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)

PEERLESS MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)

PEERLESS MFG. CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)

PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


	The accompanying consolidated financial statements of Peerless Mfg. Co. and Subsidiaries (hereafter referred to as the “Company”, “we”, “us”, “our”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. The consolidated financial statements of the Company as of December 31, 2003, and for the three and six months ended December 31, 2003 and 2002 are unaudited and, in the opinion of management, contain all adjustments necessary for the fair presentation of the financial position and results of operations of the Company for the interim periods. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2003. The results of operations for the three and six months ended December 31, 2003 are not necessarily indicative of the results to be expected for the entire year (see Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Factors That May Affect Our Operating Results and Other Risk Factors”). The Company’s fiscal year ends on June 30th. References herein to fiscal 2002, fiscal 2003 and fiscal 2004 refer to our fiscal years ended June 30, 2002, 2003 and 2004, respectively.

	In connection with the sale of our Boiler operations (see Note 4 – “Discontinued Operations”), the current year financial information has been presented, and the prior year financial information has been restated, to report the discontinued operation in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

	Certain fiscal 2003 items have been reclassified to conform to the fiscal 2004 presentation. All dollar and share amounts are in thousands, except per share amounts.


	Inventories are stated at the lower of cost (first-in, first-out) or market. Principal components of inventories are as follows:

PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003


	The Company warrants that its products will be free from defects in materials and workmanship and will conform to agreed upon specifications, typically for a period of 12 months from installation or 18 months after shipment, whichever occurs first, depending upon the specific product and terms of the customer agreement. Typical warranties require the Company to repair or replace defective products during the warranty period at no cost to the customer. The Company attempts to obtain back-up concurrent warranties for major component parts from our suppliers. The Company provides for the estimated cost of product warranties, based upon historical experience by product type, expectation of future conditions and the extent of back-up concurrent supplier warranties in place, at the time the product revenue is recognized. If these factors, or other factors affecting warranty costs differ from our estimates, revisions to the estimated product warranty liability are made accordingly.

	Product warranty activity for the three and six months ended December 31, 2003 and 2002 is as follows:

During the first quarter of fiscal 2004, the Board of Directors authorized the divestiture and the Company sold its Boiler business unit. In connection with the sale, the Company sold assets with a net book value of approximately $110, for $250, resulting in a gain on disposal of $140. Please see Item 2 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Restructuring and Organizational Realignment” of this Report.

PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003


	The following represents a summary of operating results and the gain on disposition of the Boiler segment presented as discontinued operations:


	The current and non-current assets and liabilities of the discontinued Boiler segment as of December 31, 2003 and June 30, 2003 are as follows:

PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003


	Included in our discontinued operations is a $2.2 million receivable (before allowance for doubtful accounts) due from a customer that filed a plan of reorganization under Chapter 11 of the United States Bankruptcy Code. The Company has been classified as an unsecured creditor under such filing. However, the customer has reportedly assigned all its rights, claims, duties and defenses under our contract to the project’s owner. The Company has obtained outside counsel to help with the collection of this receivable and have filed a statutory lien on the refinery where our equipment was installed. In addition, the Company has filed a lawsuit to perfect our lien interest against the owner of the refinery, and also to pursue our contractual claims against the owner as assignee of the customer. The Company has also been informed that the owner/assignee intends to allege counterclaims in the lawsuit. While the Company believes its lien and its contractual claims will be found to be valid, no assurances can be given. The Company intends to continue to vigorously pursue the collection of this receivable and believes that it will be collected.

	During the quarter, the Company has had negotiations with the owner to resolve this matter, and based on these negotiations, expects to have this matter resolved by the end of its third quarter of fiscal 2004. In addition, the Company does not expect to have to provide any additional reserve with respect to this receivable. However, as the matter has not been finalized, the disclosure of the following risks are still appropriate: In the event that our lien is held to be invalid, or if the receivable or a significant portion thereof is deemed to be not collectible; and/or if the owner/assignee is able to successfully assert counterclaims, we will be required to write down the receivable to its net realizable value. To the extent that our existing allowance for doubtful accounts is not adequate to cover this write down, the additional reserve required will be a charge against the Company’s results of discontinued operations.


	Comprehensive income (loss) is defined as all changes in equity during a period, except those resulting from investments by owners and distributions to owners. The components of comprehensive income (loss) were as follows:

PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003

Basic earnings (loss) per share have been computed by dividing net earnings (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share reflect the potential dilution that could occur if options or other contracts to issue common shares were exercised or converted into common stock. The following table sets forth the computation for basic and diluted earnings (loss) per share for the periods indicated. Certain earnings per share amounts may not total due to rounding.

The weighted average common shares outstanding-diluted computation excluded 101 outstanding stock options for the three and six months ended December 31, 2003, because their impact would be anti-dilutive. Likewise, the weighted average common shares outstanding-diluted computation excluded 62 and 193 outstanding stock options for the three and six months ended December 31, 2002, respectively, because their impact would be anti-dilutive.

On October 31, 2003, the Company entered into a $12.5 million revolving credit facility that expires on October 31, 2006. The facility carries a floating interest rate based on the prime or Euro rate plus or minus an applicable margin (Euro plus 1.75% at December 31, 2003), and is secured by substantially all the Company’s domestic assets. At December 31, 2003, we had $4.1 million outstanding under letters of credit and no outstanding loans, leaving us $8.4 million of availability under our facility.

The facility contains financial covenants, certain restrictions on capital expenditures, acquisitions, asset dispositions, dividends and additional debt, as well as other customary covenants. As of December 31, 2003, the Company was in compliance with all financial and other covenants under this credit facility.

PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003

In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (SFAS 148) which amends Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123). SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and requires disclosures in annual and interim financial statements of the effects of stock-based compensation as reflected below.

The Company continues to account for its stock options under the recognition and measurement principles of Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees,” and related Interpretations. No stock-based employee compensation expense related to the Company’s stock options is reflected in the net earnings (loss), as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net earnings (loss) and earnings (loss) per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based compensation.

Net cash flows from operating activities reflects cash payments for interest and income taxes as follows:

PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003

The Company identifies reportable segments based on management responsibility within the corporate structure. The Company has two reportable industry segments: Environmental Systems and Separation Filtration Systems. The main product of the Environmental Systems segment is its Selective Catalytic Reduction Systems, referred to as “SCR Systems”. These environmental control systems are used for air pollution abatement and convert nitrogen oxide (NOx) emissions from exhaust gases caused by burning hydrocarbon fuels such as coal, gasoline, natural gas and oil. Along with the SCR Systems, this segment also offers systems to reduce other pollutants such as carbon monoxide (CO) and particulate matter. The Company combines these systems with other components, such as instruments, controls and related valves and piping, to offer its customers a totally integrated system. The Separation Filtration Systems segment produces specialized products known as “separators” or “filters” which are used for a variety of purposes in cleaning gases and liquids as they move through piping systems. These products are used primarily to remove solid and liquid contaminants from natural gas and saltwater aerosols from combustion intake air of shipboard gas turbine and diesel engines. In addition, Separators are also used in nuclear power plants to remove water from saturated steam. The Company previously had three-reportable segments, its third segment – Boilers was suspended during the first quarter of fiscal 2003 and discontinued during the first quarter of fiscal 2004. Please see Item 2 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Restructuring and Organizational Realignment” and Note 4 – “Discontinued Operations” of this Report.

Segment profit and loss is based on revenue less direct expenses of the segment before allocation of general and administrative costs. All inter-company transfers between segments have been eliminated. Segment information and reconciliation to operating profit (loss) for the three and six months ended December 31, 2003 and 2002 are presented below. Note that the Company does not allocate general and administrative and restructuring expenses (“unallocated overhead”), assets, expenditures for assets or depreciation expense on a segment basis for internal management reporting, and therefore such information is not presented. Certain information for the first and second quarters of fiscal 2003 has been restated to be on a comparable basis with the first and second quarters of fiscal 2004 presentation.

PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

From time to time, we make oral and written statements that may constitute “forward-looking statements” (rather than historical facts) as defined in the Private Securities Litigation Reform Act of 1996 or by the Securities and Exchange Commission in its rules, regulations and releases, including statements regarding our expectations, hopes, beliefs, intentions or strategies regarding the future. We desire to take advantage of the “safe harbor” provisions in the Private Securities Litigation Reform Act of 1996 for forward-looking statements made from time to time, including, but not limited to, the forward-looking statements made in this Report on Form 10-Q, as well as those made in our other filings with the SEC. Forward-looking statements contained in this Report are based on management’s current plans and expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. In the preparation of this Report, where such forward-looking statements appear, we have sought to accompany such statements with meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those described in the forward-looking statements. Such factors include, but are not limited to, the “Factors That May Affect Our Operating Results and Other Risk Factors,” as set forth starting on page 22 of this Report.

All forward-looking statements included in this Report are based on information available to us on the date hereof, and we expressly disclaim any obligation to release publicly any updates or changes in the forward-looking statements, whether as a result of changes in events, conditions, or circumstances on which any forward-looking statement is based.

We are a global company providing environmental, separation and filtration products for the abatement of air pollution and the removal of contaminants from gases and liquids through our two business segments – Environmental Systems and Separation Filtration Systems. During the first quarter of fiscal 2003, we suspended the operations of our Boiler business and in connection with its sale, we discontinued this business unit during the first quarter of fiscal 2004. See “Restructuring and Organizational Realignment” following for additional discussion on the suspension and discontinuance of this business unit.

Environmental Systems. In this business segment, which represented 57.2% of our consolidated year-to-date revenues from continuing operations, we design, engineer, manufacture and sell highly specialized environmental control systems, which are used for air pollution abatement. Our main product, Selective Catalytic Reduction systems, referred to as “SCR Systems,” is used to convert nitrogen oxide (NOx) emissions from exhaust gases, caused by burning hydrocarbon fuels, such as coal, gasoline, natural gas and oil, into harmless nitrogen and water vapor. These systems are totally integrated, complete with instruments, controls and related values and piping. In this segment, we also offer systems to reduce other pollutants, such as carbon monoxide (CO) and particulate matter.

PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003

Separation Filtration Systems. In this business segment, which represented 42.8% of our consolidated year-to-date revenues from continuing operations, we 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 piping systems. These products are used primarily to remove solid and liquid contaminants from natural gas and saltwater aerosols from combustion intake air of shipboard gas turbine and diesel engines. Separators are also used in nuclear power plants to remove water from saturated steam.

During fiscal 2002, the construction of new merchant power plants in the United States slowed considerably, as doubts emerged regarding the actual demand for electricity began to surface, coupled with the continued weakness in the United States economy. In addition, regulatory uncertainties caused NOx reduction initiatives relating to retrofit projects to be delayed. As a response to the slowdown of new merchant power plants, continued weakness in the United States and global economies, and regulatory and political uncertainties, in July 2002 we initiated a “restructuring and organizational realignment initiative.” The goal of this initiative was to reduce costs, streamline operations, and identify and exit certain non-critical, marginally performing operating activities, thereby positioning us with a more competitive cost structure vital for our overall long-term success. In connection therewith, we identified our Boiler unit as a non-critical, marginally performing business segment and suspended new orders during fiscal 2003. This unit was sold during the first part of fiscal 2004, and in connection therewith the financial information has been restated to present this operation as a discontinued business unit.

We believe that the result of these initiatives, including the redirection of our resources and focus on our two principal segments, has positioned us to maximize our current operational efficiencies and allow us the flexibility to meet our customers’ current and anticipated needs, without sacrificing our ability to expand our business to meet future demand. While the initial phase of our restructuring and organizational realignment initiatives have been completed, we continue to look for ways to improve our operational efficiencies and performance.

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our estimates, judgments and assumptions are continually evaluated based on available information and experience. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates.

Certain of our accounting policies require a higher degree of judgment than others in their application. These include revenue recognition on long-term contracts, accrual for estimated warranty costs and allowance for doubtful accounts. Our policies and related procedures for revenue recognition on long-term contracts, accrual of warranty costs and allowance for doubtful accounts are summarized below.

Revenue Recognition. We provide products under long-term, generally fixed-priced, contracts that may extend up to 18 months, or longer, in duration. In connection with these contracts, we follow the guidance contained in AICPA Statement of Position (“SOP”) 81-1, “Accounting for Performance of

PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003

Construction-Type and Certain Production-Type Contracts.” SOP 81-1 requires the use of percentage-of-completion accounting for long-term contracts that contain enforceable rights regarding services to be provided and received by the contracting parties, consideration to be exchanged, and the manner and terms of settlement, assuming reasonably dependable estimates of revenues and expenses can be made. The percentage-of-completion methodology generally results in the recognition of reasonably consistent profit margins over the life of a contract. Amounts recognized in revenue are calculated using the percentage of construction cost completed, generally on a cumulative cost to total cost basis. Cumulative revenues recognized may be less or greater than cumulative costs and profits billed at any point in time during a contract’s term. The resulting difference is recognized as “costs and earnings in excess of billings on uncompleted contracts” or “billings in excess of costs and earnings on uncompleted contracts.”

When using the percentage-of-completion method, we must be able to accurately estimate the total costs we expect to incur on a project in order to record the proper amount of revenues for that period. We continually update our estimates of costs and status of each project with our subcontractors and our manufacturing plants. If it is determined that a loss will result from the performance of a contract, the entire amount of the loss is charged against income when it is determined. The impact of revisions in contract estimates are recognized on a cumulative basis in the period in which the revisions are made. In addition, significant portions of our costs are subcontracted under fixed-price arrangements, thereby reducing the risk of significant cost overruns on any given project. However, a number of internal and external factors, including labor rates, plant utilization factors, future material prices, customer change specifications and other factors can affect our cost estimates. While we attempt to reduce the risk relating to revenue and cost estimates in percentage-of-completion models through corporate policy and approval and monitoring processes, any estimation process, including that used in preparing contract accounting models, involves inherent risk.

Product Warranties. We offer warranty periods of various lengths to our customers depending upon the specific product and terms of the customer agreement, typically for a period of 12 months from installation or 18 months after shipment, whichever occurs first. We negotiate varying terms regarding warranty coverage and length of warranty dependent upon the product involved and customary practices. In general, our warranties require us to repair or replace defective products during the warranty period at no cost to the customer. We attempt to obtain back-up concurrent warranties for major component parts from our suppliers. As of each balance sheet date, we record an estimate for warranty related costs for products sold based on historical experience, expectation of future conditions and the extent of back-up concurrent supplier warranties in place. While we believe that our estimated warranty reserve is adequate and the judgment applied is appropriate, due to a number of factors, our estimated liability for product warranties could differ from future actual warranty costs incurred.

Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts to reflect estimated losses resulting from the inability of customers to make required payments. On an ongoing basis, we evaluate the collectibility of accounts receivable based upon historical collection trends, current economic factors and the assessment of the collectibility of specific accounts. We evaluate the collectibility of specific accounts using a combination of factors, including the age of the outstanding balances, evaluation of customers’ current and past financial condition and credit scores, recent payment history, current economic environment and discussions with our project managers and with the customers directly.

PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003

The following table displays our statements of operations as a percentage of net revenues:

Three Months Ended December 31, 2003 Compared to Three Months Ended December 31, 2002

Revenues. Net revenues from continuing operations decreased by approximately $3.6 million, or 18.0%, from $20.0 million for the three months ended December 31, 2002 to $16.4 million for the three months ended December 31, 2003. The decrease in revenues during the period related primarily to a decrease in our Environmental Systems revenues, which decreased from $12.5 million to $8.9 million, or 28.8%.

Gross Profit. Our gross profit increased approximately $70,000, or 1.6%, from $4.48 million for the three months ended December 31, 2002 to $4.55 million for the three months ended December 31, 2003. Our gross profit, as a percentage of sales, increased from 22.4% for the three months ended December 31, 2002 to 27.7% for the three months ended December 31, 2003. Our reported margins, during a particular period, may be impacted by three primary factors: (i) sales volume, (ii) lower start-up and warranty costs and (iii) shifts in our product mix. As we manufacture a significant portion of our products, fluctuations in revenues, from quarter to quarter or year to year, may impact our manufacturing absorption factors, which will directly impact our reported margins. During the quarter, in comparison to the same quarter last year and as a percentage of revenue, we experienced an unfavorable variance in our manufacturing absorption of approximately 3%, and a favorable variance in our start-up and warranty costs of approximately 5%. In addition to the foregoing, as noted earlier, our reported margins in any given quarter can be impacted by shifts in our product mix. Certain of our products historically have higher margins than others, and certain of our products historically have a much higher internally manufactured cost component; as a result, shifts in the composition of our sales can have a significant impact on our reported margins either at the selling margin level or through a negative or positive impact on our manufacturing absorption. All of these factors, to some degree, impacted our margins in the current quarter.

PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003

Operating Expenses. For the second quarter of fiscal 2004, operating expenses from continuing operations decreased by approximately $100,000, or 2.6%, to approximately $3.7 million, compared to $3.8 million for the second quarter of fiscal 2003. Operating expenses, as a percentage of sales, were 22.7% for the second quarter of fiscal 2004, compared to 19.0% for the second quarter of fiscal 2003. The decrease in the amount of operating expenses during the quarter was due to our continued initiative to look for ways to improve our operational efficiencies and performance during these challenging times. The increase as a percentage of sales is due to the decrease in revenues in the current quarter compared to the same quarter last year. See also Item 2 - “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Restructuring and Organizational Realignment” of this Report.

Other Income and Expense. Other income and expense items increased by approximately $46,000, from income of approximately $63,000 for the second quarter of fiscal 2003, to income of $109,000 for the second quarter of fiscal 2004. We realized foreign currency exchange gains of approximately $94,000 during the current quarter, compared to exchange losses of $28,000 for the same quarter last year, or a positive impact on our operation of approximately $122,000. This was offset by a decrease in rental, interest and other miscellaneous income of approximately $76,000.

Income Taxes. The Company’s effective income tax rate was approximately 34% and 37% for the three months ended December 31, 2003 and 2002, respectively. The decrease in our effective tax rate for the current quarter, compared to the same quarter last year, resulted from an increased portion of our income subject to either a lower foreign tax rate or foreign sales income exclusions.

Net Earnings (Loss) from Continuing Operations. Net earnings from continuing operations were approximately $609,000, or 3.7% of sales for the three months ended December 31, 2003, compared to approximately $468,000, or 2.4% sales for the same period last year. Basic earnings per share from continuing operations increased from earnings of $0.16 per share for the three months ended December 31, 2002, to earnings of $0.20 per share for three months ended December 31, 2003. Diluted earnings per share from continuing operations increased from earnings of $0.15 per share for the three months ended December 31, 2002, to earnings of $0.20 per share for the three months ended December 31, 2003.

Discontinued Operations. Net loss from discontinued operations for the three months ended December 31, 2003 was $142,000, compared to a net loss of $494,000 for the same period last year. Loss per basic share from discontinued operations was ($0.05) per share for the three months ended December 31, 2003, compared to a loss of ($0.17) per share for the same period last year. Diluted loss per share from discontinued operations was ($.05) per share for the three months ended December 31, 2003, compared to a loss of ($0.16) per share for the same period last year.

Net Earnings (Loss). As a result of the above factors, net earnings were approximately $467,000, or 2.8% of sales, for the three months ended December 31, 2003, compared to a net loss of approximately $26,000, or (0.1%) sales for the same period last year. Basic earnings per share increased from a loss of ($0.01) per share for the three months ended December 31, 2002, to earnings of $0.16 per share for the same quarter this fiscal year. Diluted earnings per share increased from a loss of ($0.01) per share, for the three months ended December 31, 2002, to earnings of $0.15 per share for the same quarter this fiscal year.

PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003

Six Months Ended December 31, 2003 Compared to Six Months Ended December 31, 2002

Revenues. Net revenues from continuing operations decreased by approximately $100,000, or 0.3%, from $33.3 million for the six months ended December 31, 2002, to $33.2 million for the six months ended December 31, 2003. The decrease in revenues during the period related primarily to a decrease in our Environmental Systems revenues, which decreased from $19.4 million to $19.0 million, or 2.1%. This was offset by an increase in our Separation Filtration Systems revenue, which increased from $13.8 million to $14.2 million, or 2.9%.

Gross Profit. Our gross profit increased $1.7 million, or 22.1%, from $7.7 million for the six months ended December 31, 2002, to $9.4 million for the six months ended December 31, 2003. Our gross profit, as a percentage of sales, increased from 23.3% for the six months ended December 31, 2002 to 28.1% for the six months ended December 31, 2003. Our reported margins during the current period were impacted by three primary factors: (i) sales volume, (ii) lower start-up and warranty costs and (iii) shifts in our product mix. As we manufacture a significant portion of our products, fluctuations in revenues, from quarter to quarter or year to year, may impact our manufacturing absorption factors, which will directly impact our reported margins. During the period, in comparison to the same quarter last year and as a percentage of sales, we experienced an unfavorable variance in our manufacturing absorption of approximately 2%, and a favorable variance in our start-up and warranty costs of 4%. In addition to the foregoing, as noted earlier, our reported margins in any given period can be impacted by shifts in our product mix. Certain of our products historically have higher margins than others, and certain of our products historically have a much higher internally manufactured cost component; as a result, shifts in the composition of our sales can have a significant impact on our reported margins either at the selling margin level or through a negative or positive impact on our manufacturing absorption. All of these factors, to some degree, impacted our margins in the current quarter.

Operating Expenses. For the six months ended December 31, 2003, operating expenses from continuing operations decreased by $1.3 million, or 14.9%, to $7.4 million, compared to $8.7 million for the same period last year. Operating expenses, as a percentage of sales, were 22.2% for the six months ended December 31, 2003, compared to 26.2% for the same period last year. The decrease in the amount of operating expenses during the current fiscal year was due to the implementation of our restructuring and organization realignment initiative, which began during fiscal 2003. As a result of this initiative, our sales and marketing expenses remained constant at 9%, our engineering and project management expenses decreased from 8.2% to 6.4%, and our general, administrative and restructuring expenses decreased from 9.0% to 6.7% for the six months ended December 31, 2002 and 2003, respectively. See also Item 2 - - “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Restructuring and Organizational Realignment” of this Report.

Other Income and Expense. Other income and expense items increased by approximately $38,000, from income of approximately $41,000 for the six months ended December 31, 2002, to income of $79,000 for the six months ended December 31, 2003. We realized foreign currency exchange gains of approximately $47,000 during the current fiscal year, compared to exchange losses of $91,000 for the same period last year, or a positive impact on our operations of $138,000. This was offset by a decrease in rental, interest and miscellaneous income of approximately $100,000.

Income Taxes. The Company’s effective income tax rate was approximately 34% and 37% for the six months ended December 31, 2003 and 2002, respectively. The decrease in our effective tax rate for the current period, compared to the same period last year, resulted from an increased portion of our income subject to either a lower foreign tax rate or foreign sales income exclusions.

PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003

Net Earnings (Loss) from Continuing Operations. Net income from continuing operations was approximately $1.3 million, or 4.0% of sales, for the six months ended December 31, 2003, compared to a net loss of approximately $587,000, or (1.8%) sales, for the same period last year. Basic earnings per share from continuing operations increased from a loss of ($0.20) per share for the six months ended December 31, 2002, to earnings of $0.45 per share for six months ended December 31, 2003. Diluted earnings per share from continuing operations increased from a loss of ($0.20) per share for the six months ended December 31, 2002, to earnings of $0.44 per share for the six months ended December 31, 2003.

Discontinued Operations. Net loss from discontinued operations for the six months ended December 31, 2003 was $77,000, compared to a net loss of $782,000 for the same period last year. Included in our net loss for the six months ended December 31, 2003 was a net gain related to the disposal of our boiler operations of approximately $92,000 ($140,000 gain less taxes of $48,000). Basic and diluted loss per share from discontinued operations was ($0.03) per share for the period ended December 31, 2003, compared to a loss of ($0.26) per share for the same period last year.

Net Earnings (Loss). As a result of the above factors, net earnings were approximately $1.3 million, or 3.8% of sales, for the six months ended December 31, 2003, compared to a net loss of approximately $1.4 million, or (4.1%) sales, for the same period last year. Basic earnings per share increased from a loss of ($0.46) per share for the six months ended December 31, 2002, to earnings of $0.42 per share for the same period this fiscal year. Diluted earnings per share increased from a loss of ($0.46) per share for the six months ended December 31, 2002, to earnings of $0.42 per share for the same period this fiscal year.

Currently we are organized on a global basis along two lines of business: Environmental Systems, and Separation Filtration Systems. The Company had three reportable segments for fiscal 2003: Environmental Systems, Separation Filtration Systems and Boilers for fiscal 2003. The Boiler operation was sold during the first quarter of fiscal 2004 and has therefore been classified as a discontinued operation in the Company’s financial statements.

Revenues. The following table displays revenues by reportable segment (dollars in thousands):

Revenues from our Environmental Systems decreased by approximately $3.6 million, or 28.8%, from $12.5 million for the three months ended December 31, 2002, to $8.9 million for the three months ended December 31, 2003. Revenues from our Environmental Systems decreased by approximately $400,000, or 2.1%, from $19.4 million for the six months ended December 31, 2002, to $19.0 million for the six months ended December 31, 2003.

PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003

Revenues from our Separation Filtration Systems for the three months ended December 31, 2003 were in line with our revenues for the same period last year, both at approximately $7.5 million. Revenues from our Separation Filtration Systems for the six months increased by approximately $389,000 million, or 2.8%, from $13.8 million for the six months ended December 31, 2002 to $14.2 million for the six months ended December 31, 2003. On a comparative basis, we saw our international sales increase by approximately 19.5% and our domestic sales decrease by approximately 6.4% for the six months ended December 31, 2003, respectively. A lack of new or refurbishments to existing natural gas pipelines in North America continues to have a major impact on our domestic sales.

Segment Profit (Loss). Management uses segment profits (loss), which consists of segment revenues less segment costs and expenses before allocation of general and administrative costs to measure segment profits or loss. The Company does not allocate its general and administrative expenses to its individual segments. The following table displays segment profits (loss) by reportable segment (dollars in thousands).

Environmental Systems profits in the second quarter of fiscal 2004 increased by $692,000, from a profit of $802,000 for the three months ended December 31, 2002, to a profit of approximately $1.5 million for the same quarter this fiscal year. As a percentage of Environmental Systems revenue, our operational performance increased from a segment profit of 6.4%, to a segment profit of 16.7%, for the three months ended December 31, 2002 and 2003, respectively. Environmental Systems profits for the six months ended December 31, 2003 increased by approximately $2.9 million, from a profit of approximately $376,000 for the six months ended December 31, 2002, to a profit of approximately $3.2 million for the same period this fiscal year. As a percentage of Environmental Systems revenue, our operational performance increased from a segment profit of 1.9% for the six months ended December 31, 2002, to a segment profit of 17.0% for the same period in fiscal 2004. The increase in our Environmental Systems operational performance during the current fiscal year related primarily to the decrease in start-up and commissioning costs of SCR projects, and a reduction in this segment’s operational expenses in connection with our restructuring and organizational realignment initiative.

Separation Filtration Systems profits decreased in the second quarter of fiscal year 2004 by approximately $585,000, or 49.2%, from a profit of approximately $1.2 million for the second quarter of fiscal 2003, to a profit of $605,000 for the same quarter this fiscal year. As a percentage of Separation Filtration Systems revenue, our operational performance decreased from a segment profit of 15.9%, to a segment profit of 8.1%, for the three months ended December 31, 2002 and 2003, respectively. Separation Filtration Systems profits decreased in the six months ended December 31, 2003 by

PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003

approximately $651,000, or 39.9%, from a profit of approximately $1.6 million for six months ended December 31, 2003, to a profit of $979,000 for the same period this fiscal year. As a percentage of Separation Filtration Systems revenue, our operational performance decreased from a segment profit of 11.8%, to a segment profit of 6.9%, for the six months ended December 31, 2002 and 2003, respectively. The decrease in our Separation Filtration Systems operational performance during this period relates to the increased component of international sales, where we tend to realize a lower profit margin than domestically, and the general softness in the North American market.

The Company’s backlog of unfilled orders was approximately $40 million at December 31, 2003, compared to $45 million at December 31, 2002, and $38 million at September 30, 2003. Our backlog at December 31, 2003 when compared to our backlog at December 31, 2002 has been impacted by two main factors: (i) the suspension of our boiler business, which impacted our backlog by approximately $1.5 million, and (ii) the completion of a substantial contract, approximately $14 million, during the later part of fiscal 2003 and the first part of fiscal 2004. While we are beginning to see some stability in our backlog, we feel that the reduction in the construction of new power plants, environmental regulatory uncertainties, the lack of new natural gas pipeline construction in North America, and the on-going economic climate all continue to have an impact on our sales and backlog. The adoption of regulations related to NOx emissions have in the past resulted in increased sales of our Environmental Systems, either through new-source or retrofit applications, and we would anticipate that this trend will continue in the future as compliance dates approach and regulatory uncertainties are resolved. In addition, while the construction of new power plants has seen a significant decline from the levels 24 months ago, there is expected to be a continued demand for our Environmental Systems as new power plants are built to replace older, less efficient plants, and as regulatory compliance projects are commenced.

Assets. Total assets decreased by approximately $1.5 million, or 3.5%, from $42.6 million at June 30, 2003 to $41.1 million at December 31, 2003. The decrease in our assets during this period resulted primarily from a decrease in our receivables, which can be attributed to improved collections (approximate turnover in days has decreased from 80 days to 60 days). At December 31, 2003, we held cash and short-term investments of $8.3 million, had working capital of $19.5 million, and had current ratio of 2.12-to-1.0. This compares with cash and short-term investments of $7.0 million, $17.8 million in working capital, and a current ratio of 1.88-to-1.0 at June 30, 2003. The increase in our current ratio was a result of a 3.0% decrease in our current assets, compared to a 14.2% decrease in our current liabilities.

Liabilities and Shareholders’ Equity. Total liabilities decreased by approximately $2.8 million, or 13.9%, from $20.2 million at June 30, 2003 to $17.4 million at December 31, 2003. This related primarily to a decrease in our accounts payable of approximately $1.6 million, and a decrease in our accrued liabilities of approximately $600,000, which related to the reduction in our operational expenses. The increase in our equity of approximately $1.5 million, or 6.7%, from $22.3 million at June 30, 2002, to $23.8 million at December 31, 2003, resulted primarily from our earnings for the period. As a result, our debt-to-equity ratio decreased from .91-to-1.0 at June 30, 2003, to ..73-to-1.0 at December 31, 2003.

PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003

Our cash and cash equivalents were $8.0 million as of December 31, 2003, compared to $6.7 million at June 30, 2003. Cash provided by continuing operating activities for the period ended December 31, 2003 was approximately $1.2 million, compared to $4.2 million for the same period last year.

Because we are engaged in the business of manufacturing custom systems, our progress billing practices are event-oriented rather than date-oriented, and vary from contract to contract. We customarily bill our customers after the occurrence of project milestones. Billings to customers affect the balance of billings in excess of costs and earnings or the balance of cost and earnings in excess of billings, as well as the balance of accounts receivable. Consequently, we focus on the net amount of these accounts along with accounts payable, to determine our management of working capital. The balance of these working capital accounts was approximately $9.4 million at December 31, 2003 and $7.8 million at June 30, 2003, representing an increase in our investment in these working capital items of approximately $1.6 million. In addition, operational cash was provided from our earnings from continuing operations and reductions in our receivables and inventories. We used cash for operational purposes during the period to decrease our payables and accrued expenses.

Cash used in investing activities was approximately $222,000 for the period ended December 31, 2003, compared to approximately $96,000 for the same period last year. The increase in cash used during the current fiscal year related to an increase in capital expenditures, which related principally to the purchase of a new trade booth and plant refurbishments.

We had approximately $35,000 of cash provided by financing activities during the current period, and $50,000 during the same period last year. The cash provided by financing activities, during both these periods, related to the cash received from the issuance of common stock pursuant to our employee stock options.

On October 31, 2003, we entered into a $12.5 million revolving credit facility that expires on October 31, 2006. The facility carries a floating interest rate based on the prime or Euro rate plus or minus an applicable margin (Euro plus 1.75% at December 31, 2003), and is secured by substantially all our domestic assets. At December 31, 2003, we had $4.1 million outstanding under letters of credit and no loans outstanding, leaving us $8.4 million of availability under our facility. The facility contained financial covenants, certain restrictions on capital expenditures, acquisitions, asset dispositions, dividends and additional debt, as well as other customary covenants. As of December 31, 2003, the Company was in compliance with all financial and other covenants under the credit facility.

We believe that we maintain adequate liquidity to support our existing operations and our planned growth, as well as to continue operations during reasonable periods of adversity.

Investing in our common stock involves a high degree of risk. Any of the following risks could have a material adverse effect on our financial condition, liquidity and results of operations or prospects, financial or otherwise. Reference to these factors in the context of a forward-looking statement or statements shall be deemed to be a statement that any one or more of the following factors may cause actual results to differ materially from those in such forward-looking statement or statements. See Item 2

PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003

- “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Forward-Looking Statements” of this Report.

Changes in the power generation industry and/or the economy could have an adverse impact on our sales of Environmental Systems and our operating results.

The demand for our Environmental Systems depends to an extent on the continued construction of power generation plants and the upgrade of existing power plants. The power generation industry has experienced cyclical periods of slow growth or decline. Any change in the power plant industry that results in a decline in the construction of power plants or a decline in the upgrading of existing power plants could have a materially adverse impact on our Environmental Systems revenues and our results of operations. See Item 2 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Report.

Changes in current environmental legislation could have an adverse impact on the sale of our Environmental Systems and on our operating results.

Our Environmental Systems business is primarily regulatory driven. Laws and regulations governing the discharge of pollutants into the environment or otherwise relating to the protection of the environment or human health have played a significant part in the increased use of Environmental Systems in the United States. These laws include U.S. federal statutes such as the Resource Conservation and Recovery Act of 1976, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, or CERCLA, the Clean Water Act and the Clean Air Act, and the regulations implementing them, as well as similar laws and regulations at state and local levels and in other countries. These laws and regulations may change or other jurisdictions may not adopt similar laws and regulations. This business will be adversely impacted to the extent that current regulations requiring the reduction of NOx and Ozone emissions are repealed, amended or implementation dates delayed or to the extent that regulatory authorities minimize enforcement. See Item 2 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Report.

We operate in highly competitive markets worldwide. Competition could result in not only a reduction in our sales, but also a reduction in the prices we charge for our products. To remain competitive we must be able to not only anticipate or respond quickly to our customers’ needs and enhance and upgrade our existing products and services to meet those needs, but also continue to price our products competitively. Our competitors may develop cheaper, more efficient products or may be willing to charge lower prices for strategic marketing or to increase market share. Some of our competitors have more capital and resources than we do and may be better able to take advantage of acquisition opportunities or adapt more quickly to changes in customer requirements.

We enter into fixed-priced contracts. If our actual costs exceed our original estimates, our profits will be reduced.

The majority of our contracts are on a fixed-price basis. Although we benefit from cost savings, we have limited ability to recover cost overruns. Because of the large scale and long duration of our contracts, unanticipated cost increases may occur as a result of several factors, including, but not limited to, increases in the cost, or shortages of components, materials or labor; unanticipated technical problems,

PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003

required project modifications not initiated by the customer, and suppliers’ or subcontractors’ failure to perform. These factors could delay delivery of our products and our contracts often provide for liquidated damages for late delivery. Unanticipated costs that we cannot pass on to our customers or the payment of liquidated damages under fixed contracts would negatively impact our profits.

Customers may cancel or delay projects for reasons beyond our control. Our orders normally contain cancellation provisions, which permit us to recover only our costs and a portion of our anticipated profit in the event a customer cancels an order. If a customer elects to cancel, we may not realize the full amount of revenues included in our backlog. If projects are delayed, the timing of our revenues could be affected and projects may remain in our backlog for extended periods of time. Revenue recognition occurs over long periods of time and is subject to unanticipated delays. If we receive relatively large orders in any given quarter, fluctuations in the levels of our quarterly backlog can result because the backlog in that quarter may reach levels that may not be sustained in subsequent quarters. Our backlog may not be indicative of our future revenues. See Item 2 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Report.

Our ability to conduct business outside the United States may be adversely affected by factors outside of our control and our revenues and profits from international sales could be adversely impacted.

Our operations and earnings throughout the world have been, and may in the future be, affected from time to time in varying degrees by war, political developments and foreign laws and regulations, such as regional economic uncertainty, political instability, restrictions, customs and tariffs, changing regulatory environments, fluctuations in foreign currency exchange rates and adverse tax consequences. The likelihood of such occurrences and their overall effect upon us vary greatly from country to country and are not predictable. These factors may result in a decline in revenues or profitability and could adversely affect our ability to expand our business outside of the United States.

Our financial performance may vary significantly from quarter to quarter, making it difficult to estimate future revenue.

Our quarterly revenues and earnings have varied in the past and are likely to vary in the future. Our Environmental Systems contracts generally stipulate customer specific delivery terms and may have contract cycles of a year or more, which subjects them to many factors beyond our control. In addition, these contracts are significantly larger in size than our typical Separation Filtration Systems contracts, which tend to intensify their impact on our quarterly operating results. Furthermore, as a significant portion of our operating costs are fixed, an unanticipated decrease in our Environmental Systems revenues, a delay or cancellation of orders in backlog, or a decrease in the demand for our Environmental Systems products, may have a significant impact on our quarterly operating results. Therefore, our quarterly operating results may be subject to significant variations and our operating performance in one quarter may not be indicative of our future performance.

Certain of our products have higher margins than others. Consequently, changes in the composition of our sales between products from quarter-to-quarter or from period-to-period can have a significant impact on our reported margins. Certain of our products also have a higher internally manufactured cost component, and therefore changes from quarter-to-quarter or from period-to-period can com

PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003

Our products are covered by warranties. Unanticipated warranty costs for defective products could adversely affect our financial condition and results of operations and reputation.

We provide warranties on our products generally for a period of 12 months from installation or 18 months from shipment, whichever occurs first. These warranties require us to repair or replace faulty products and meet certain performance standards, among other customary warranty provisions. While we continually monitor our warranty claims and provide a reserve for estimated warranty issues on an on-going basis, an unanticipated claim could have a material adverse impact on our operations. In some cases, we may be able to subrogate a claim back to a subcontractor, if the subcontractor supplied the defective product or performed the service, but this may not always be possible. The need to repair or replace products with design or manufacturing defects could temporarily delay the sale of new products, reduce our profits and could adversely affect our reputation. See Note 3 – “Product Warranties” of this Report for further discussion and analysis of our product warranties.

Product liability claims not covered by insurance could adversely affect our financial condition and results of operations.

We may be subject to product liability claims involving claims of personal injury or property damage. While we maintain product liability insurance coverage to protect us in the event of such a claim, our coverage may not be adequate to cover the cost of defense and the potential award in the event of a claim. Also, a well-publicized actual or perceived problem could adversely affect our reputation and reduce the demand for our products.

Large contracts represent a significant portion of our accounts receivable, which increases our exposure to credit risk.

We continue to closely monitor the credit worthiness of our customers. Significant portions of our sales are to customers who place large orders for custom products and whose activities are related to the power industry. As such, our exposure to credit risk is affected to some degree by conditions within the power industry and governmental and/or political conditions. We try to mitigate our exposure to credit risk, to some extent, by requiring progress payments and letters of credit. However, as some of our exposure is outside of our control, unanticipated events could have a materially adverse impact on our operating results.

The terms and conditions of our credit facility impose restrictions on our operations. We may not be able to raise additional capital, if needed.

The terms and conditions of our $12.5 million revolving credit facility impose certain restrictions on our ability to incur debt, make capital expenditures, merge, sell assets, make distributions, or create or incur liens, among other things. Availability of our credit facility is also subject to certain financial covenants, including a minimum level of shareholders’ equity. Our ability to comply with the covenants may be affected by events beyond our control and we cannot assure that we will achieve operating results meeting the requirements of the credit agreement. A breach of any of these covenants could result in a default under our credit facility. In the event of a default, the bank could elect to declare the outstanding principal amount of our credit facility, all interest thereon, and all other amounts payable under our credit facility to be immediately due and payable.

Our ability to satisfy any debt obligations will depend upon our future operating performance, which will be affected by prevailing economic, financial and business conditions and other factors, some of which are beyond our control. We anticipate that borrowings from our existing revolving credit facility, or the refinancing of our revolving credit facility, and cash provided by operating activities, should

PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003

provide sufficient funds to finance capital expenditures, working capital and otherwise meet our operating expenses and service our debt requirements as they become due. However, in the event that we require additional capital, there can be no assurance that we will be able to raise such capital when needed or on satisfactory terms, if at all.

Terrorist acts and acts of war may disrupt our operations, as well as our customers operations. Such acts have created, and continue to create, economic and political uncertainties and have contributed to the global economic instability that we are currently facing. Any future terrorist activities, or any continued military or security operations could further weaken the global economy and create additional uncertainties forcing our customers to further reduce their capital spending, or cancel or delay already planned construction projects, which could have a material adverse impact on our business, operating results and financial condition.

The daily trading volume of our common stock is relatively low and therefore the liquidity and appreciation in our stock may not meet our shareholders’ expectations. The market price of our common stock could be adversely impacted as a result of sales by our existing shareholders of a large number of shares of our common stock in the market, or the perception that such sales could occur.

Our primary market risk exposures are in the areas of interest rate risk and foreign currency exchange rate risk. We feel our risk to interest rate fluctuations is nominal, as our investments are short-term in nature and we are currently not in a borrowing position. Our exposure to currency exchange rate fluctuations has been, and is expected to continue to be, modest as foreign contracts payable in currencies other than US dollars are performed, for the most part, in the local currency and therefore provide a “natural hedge” against currency fluctuations. We, on occasion, will purchase derivative transactions with respect to foreign contracts that do not contain a “natural hedge,” but the impact of any fluctuation in the exchange rates in these hedged currencies would be expected to have an immaterial impact on our financial operations. The impact of currency exchange rate movements on inter-company transactions has been, and is expected to continue to be, immaterial. We did not have any material derivative transactions outstanding as of December 31, 2003.

The Company, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2003 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “1934 Act”) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003

There were no changes in the Company’s internal control over financial reporting during the Company’s fiscal quarter ended December 31, 2003 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

From time to time we are involved in various litigation matters arising in the ordinary course of our business. We do not believe the disposition of any current matter will have a material adverse effect on our consolidated financial position or results of operations.

The following matters were submitted to a vote of securities holders at the Annual Meeting of Shareholders held on November 20, 2003. A total of 2,884,851 shares (approximately 96% of all shares entitled to vote) were represented by proxy or ballot at the meeting.

The shareholders’ elected the following Class III Directors to serve for a three-year term expiring at the annual meeting of shareholders in 2006, or until their successors are elected and qualified.

The shareholders’ ratified the selection of Grant Thornton LLP to serve as the Company’s independent accountants for the fiscal year ending June 30, 2004. A vote of 2,872,814 FOR, 8,937 AGAINST, and 3,100 ABSTAINING approved the matter.

PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003


	On November 10, 2003, the Registrant filed a Report on Form 8-K to file a press release announcing its financial results for the first quarter of fiscal year ending June 30, 2004, which information was “furnished” and not “filed” with the Commission.


	On February 11, 2004, the Registrant filed a Report on Form 8-K to file a press release announcing its financial results for the second quarter of fiscal year ending June 30, 2004, which information was “furnished” and not “filed” with the Commission.

PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2003

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

30 EX-3.(B) 3 d12159exv3wxby.txt BYLAWS, AS AMENDED TO DATE EXHIBIT 3(b) AMENDED AND RESTATED BYLAWS OF PEERLESS MFG. CO. As Adopted and in Effect on May 21, 1997 ARTICLE I OFFICES Section 1. The registered office shall be located in the City of Dallas, County of Dallas, State of Texas. Section 2. The corporation may also have offices at such other places, either within or without the State of Texas, as the board of directors may from time to time determine or as the business of the corporation may require. ARTICLE II MEETINGS OF SHAREHOLDERS Section 1. All annual meetings of shareholders shall be held at such place, within or without the State of Texas, as may be designated by the board of directors and stated in the notice of the meeting or in a duly executed waiver of notice thereof. Special meetings of shareholders may be held at such place, within or without the State of Texas, and at such time as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2. The annual meetings of shareholders shall be held on a date to be determined from time to time by the board of directors. At the annual meeting the shareholders shall elect a board of directors and transact such other business as may properly be brought before the meeting. In order to properly submit any business to an annual meeting of shareholders, including, without limitation, a nomination for the election to the board of directors by a shareholder, a shareholder must give timely notice in writing to the secretary of the corporation. To be considered timely, a shareholder's notice must be delivered either in person or by United States certified mail, postage prepaid, and received at the principal executive offices of the corporation (a) not less than one hundred twenty (120) days nor more than one hundred fifty (150) days before the first anniversary date of the corporation's proxy statement in connection with the last annual meeting of shareholders or (b) if no annual meeting has been called after the expiration of more than thirty (30) days from the date for such meeting contemplated at the time of the previous year's proxy statement, not less than a reasonable time, as determined by the board of directors, prior to the date of the applicable annual meeting. 1 The secretary of the corporation will deliver any shareholder proposals and nominations received in a timely manner for review by the board of directors or a committee designated by the board of directors. A shareholder's notice to submit business to an annual meeting of shareholders will set forth (i) the name and address of the shareholder, (ii) the class and number of shares of stock beneficially owned by such shareholder, (iii) the name in which such shares are registered on the stock transfer books of the corporation, (iv) a representation that the shareholder intends to appear at the meeting in person or by proxy to submit the business specified in such notice, (v) any material interest of the shareholder in the business to be submitted, and (vi) a brief description of the business desired to be submitted to the annual meeting, including the complete text of any resolutions to be presented at the annual meeting, and the reasons for conducting such business at the annual meeting. In addition, the shareholder making such proposal will promptly provide any other information reasonably requested by the corporation. Notwithstanding the foregoing provisions of this bylaw, a shareholder who seeks to have any proposal included in the corporation's proxy statement will comply with the requirements of Regulation 14A under the Securities Exchange Act of 1934, as amended. Section 3. Special meetings of shareholders may be called by (a) the president or the board of directors or (b) the holders of at least ten percent (10%) of all shares entitled to vote at a special meeting, unless the articles of incorporation provide for a number of shares greater than or less than ten percent (10%), in which event a special meeting may be called by the holders of at least the percentage of shares specified in the articles of incorporation. Section 4. Written or printed notice stating the place, day and hour of a meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) nor more than sixty (60) days before the day of the meeting, except in the case of a special meeting called by the requsite number shareholders as provided in Section 3 of this Article, in which case the notice must be given not less than fifty (50) nor more than sixty (60) days before the day of such meeting, either personally or by mail, by or at the direction of the president, the secretary or the officer or person calling the meeting, to each shareholder entitled to vote at such. When a meeting of shareholders is adjourned for thirty (30) days or more, notice of the adjourned meeting shall be given as in the case of an original meeting. When a meeting is adjourned for less than thirty (30) days, it shall not be necessary to give any notice of the time and place of the adjourned meeting or of the business to be transacted thereat, other than by announcement at the meeting at which the adjournment is taken. Section 5. Any notice required to be given to any shareholder, under any provision of the Texas Business Corporation Act, as amended (the "TBCA"), or the articles of incorporation or bylaws, need not be given to the shareholder if (a) notice of two (2) consecutive annual meetings and all notices of meetings held during the period between those annual meetings, if any, or (b) all (but in no event less than two) payments (if sent by first class mail) of distributions or interest on securities during a 12-month period have been mailed to that person, addressed at 2 his address as shown on the share transfer records of the corporation, and have been returned undeliverable. Any action or meeting taken or held without notice to such a person shall have the same force and effect as if the notice had been duly given, and if the action taken by the corporation is reflected in any articles or document filed with the Secretary of State, such articles or document may state that notice was duly given to all persons to whom notice was required to be given. If such a person delivers to the corporation a written notice setting forth his then current address, the requirement that notice be given to that person shall be reinstated. Section 6. Business transacted at any special meeting shall be confined to the purposes stated in the notice thereof. Section 7. The holders of a majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum at meetings of shareholders except as otherwise provided in the articles of incorporation. If, however, a quorum shall not be present or represented at any meeting of shareholders, the shareholders present in person or represented by proxy shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified and called. The shareholders present at a duly organized meeting may continue to transact business notwithstanding the withdrawal of some shareholders prior to adjournment, but in no event shall a quorum consist of the holders of less than one-third of the shares entitled to vote and thus represented at such meeting. Section 8. The vote of the holders of a majority of the shares entitled to vote and thus represented at a meeting at which a quorum is present shall be the act of the meeting of shareholders, unless the vote of a greater number is required by law, the articles of incorporation or bylaws. Section 9. Each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders, except to the extent that the voting rights of the shares of any class are limited or denied by the articles of incorporation or the TBCA. At any election for directors, every shareholder entitled to vote at any such election shall have the right to vote, in person or proxy, the number of shares owned by him for as many persons as there are directors to be elected and for whose election he has a right to vote, and shareholders of the corporation are expressly prohibited from cumulating their votes in any election for directors of the corporation. Section 10. A shareholder may vote in person or by proxy executed in writing by the shareholder. A telegram, telex, cablegram or similar transmission by the shareholder, or a photographic, photostatic, facsimile or similar reproduction of a writing executed by the shareholder, shall be treated as an execution in writing for the purposes of this section. No proxy shall be valid after eleven (11) months from the date of its execution unless otherwise provided in the proxy. Each proxy shall be revocable unless the proxy form conspicuously states that the proxy is irrevocable and the proxy is coupled with an interest. 3 Section 11. The officer or agent having charge of the stock transfer books shall make, at least ten (10) days before each meeting of shareholders, a complete list of the shareholders entitled to vote at such meeting or any adjournment thereof, arranged in alphabetical order, with the address of and number of shares held by each, which list, for a period of ten (10) days prior to such meeting, shall be kept on file at the registered office or principal place of business of the corporation and shall be subject to inspection by any shareholder at any time during the usual business hours. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting. The original stock transfer book shall be prima facie evidence as to who are the shareholders entitled to examine such list or transfer book or to vote at any such meeting of shareholders. However, failure to prepare and to make available such list in the manner provided above shall not affect the validity of any action taken at the meeting. Section 12. Any action required by law to be taken at a meeting of shareholders, or any action which may be taken at a meeting of shareholders, may be taken without a meeting, without prior notice, and without a vote, if a consent in writing, setting forth the action so taken shall be signed and bear the date of the signature by shareholders having not less than the minimum number of votes that would be necessary to take such action at a meeting at which the holders of all shares entitled to vote on the action were present and voted with respect to the subject matter thereof. Section 13. In advance of any meeting of shareholders, the board of directors may appoint any persons, other than nominees for office, as inspectors of election to act at such meeting or any adjournment thereof. If inspectors of election are not so appointed, the chairman of any such meeting may, and on the request of any shareholder or his proxy shall, appoint inspectors of election at the meeting. The number of inspectors shall be either one (1) or three (3). If appointed at a meeting on the request of one or more shareholders or proxies, the majority of shares present shall determine whether one or three inspectors are to be appointed. In case any person appointed as inspector fails to appear or fails or refuses to act, the vacancy may be filled by appointment by the board of directors in advance of the meeting, or at the meeting by the person acting as chairman. The inspectors of election shall (a) determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity and effect of proxies; (b) receive votes, ballots or consents; (c) hear and determine all challenges and questions in any way arising in connection with the right to vote; (d) count and tabulate all votes or consents and determine the result; and (e) do such acts as may be proper to conduct the election or vote with fairness to all shareholders. The inspectors of election shall perform their duties impartially, in good faith, to the best of their ability and as expeditiously as is practical. If there are three inspectors of election, the decision, act or certificate of a majority is effective in all respects as the decision, act or certificate of all. On request of the chairman of the meeting or of any shareholder or his proxy, the inspectors shall make a report in writing of any challenge or question or matter determined by them and execute a certificate of any fact found by them. Any report or certificate made by them is prima facie evidence of the facts stated therein. At every meeting of the shareholders, the chairman of the board, or in his absence, or in the event that the board of directors has not designated a chairman 4 of the board, the president, or in his absence, the vice president designated by the president, or, in the absence of such designation, a chairman (who shall be one of the vice presidents, if any is present) chosen by a majority in interest of the shareholders present in person or by proxy and entitled to vote, shall act as chairman. The secretary of the corporation, or in his absence, an assistant secretary, shall act as secretary of all meetings of the shareholders. In the absence at such meeting of the secretary or assistant secretary, the chairman may appoint another person to act as secretary of the meeting. Section 14. Subject to the provisions required herein for notice of meetings, shareholders may participate in and hold a meeting of shareholders, by means of conference by telephone or similar communications equipment, provided all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 14 shall constitute presence in person at such meeting, except where a person participates in a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. ARTICLE III DIRECTORS Section 1. The number of directors of the corporation shall be five (5). Directors need not be residents of the State of Texas or shareholders of the corporation. No decrease in the number of directors shall have the effect of reducing the term of any incumbent director. A director may only be removed from office for "cause" (as defined below), at a meeting of shareholders called expressly for that purpose by the affirmitive vote of shareholders holding sixty six and two-thirds percent (66 2/3%) or more of the issued and outstanding shares then entitled to vote at any election of the directors. For purposes of this Section, "cause" shall mean the willful engaging by the director in illegal conduct or gross misconduct which is materially and demonstrably injurious to the corporation. For purpose of this provision, no act or failure to act, on the part of the director, shall be considered willful unless it is done, or omitted to be done, by the director in bad faith or without reasonable belief that the director's action or omission was in the best interests of the corporation. The directors will be divided into three classes designated as Class I, Class II, and Class III. Class I will consist of one director, and each of Class II and Class III will consist of two directors. Each Class of directors will stand for election at the 1997 annual shareholders' meeting for the following terms: Class I director will be elected for a one-year term; Class II directors will be elected for a two-year term; and Class III directors will be elected for a three-year term. At each following annual shareholders' meeting, commencing with the 1998 annual stockholders' meeting, each of the successors to the directors of the Class whose term will expire at such annual meeting will be elected for a term running until the third annual meeting succeeding his or her election and until his or her successor has been duly elected and qualified. 5 Section 2. Vacancies in the board of directors shall exist in the case of the happening of any of the following events: (a) the death, resignation or removal of any director; (b) the authorized number of directors is increased or (c) at any annual or special meeting of shareholders at which any director is elected, the shareholders fail to elect the full authorized number of directors to be voted for at that meeting. The board of directors may declare vacant the office of a director in either of the following cases: (a) if he is adjudged incompetent by an order of court, or finally convicted of a felony or (b) if within sixty (60) days after notice of his election, he does not accept the office either in writing or by attending a meeting of the board of directors. Any vacancy occurring in the board of directors may be filled by election at an annual meeting or at a special meeting of shareholders called for that purpose or by the affirmative vote of a majority of the remaining directors though less than a quorum of the board of directors, or by a sole remaining director. Any directorship to be filled by reason of an increase in the number of directors may be filled by election at an annual meeting or at a special meeting of shareholders called for that purpose, or may be filled by the board of directors for a term of office continuing only until the next election of one or more directors by the shareholders; provided that the board of directors may not fill more than two such directorships during the period between any two successive annual meetings of shareholders. A director elected to fill a vacancy shall be elected to the unexpired term of his predecessor in office. Section 3. The business and affairs of the corporation shall be managed by its board of directors, which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the articles of incorporation or by these bylaws directed or required to be exercised and done or authorized or approved by the shareholders. MEETINGS OF THE BOARD OF DIRECTORS Section 4. Meetings of the board of directors, regular or special, may be held either within or without the State of Texas. Any regular or special meeting is valid, wherever held, if held on written consent of all members of the board given either before or after the meeting and filed with the secretary of the corporation. Section 5. The first meeting of each newly elected board of directors shall be held at such time and place as shall be fixed by the vote of the shareholders at the annual meeting, and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present. In the event of the failure of the shareholders to fix the time and place of such first meeting of the newly elected board of directors, or in the event such meeting is not held at the time and place so fixed by the shareholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the board of directors, or as shall be specified in a written waiver signed by all of the directors. Section 6. Regular meetings of the board of directors may be held without notice at such time and at such place as shall from time to time be determined by the board of directors. 6 Section 7. Special meetings of the board of directors may be called by the president and shall be called by the secretary on the written request of two (2) directors. Written notice of special meetings of the board of directors shall be given personally, or sent by mail or by other form of written communication, to each director at least three (3) days before the date of the meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the board of directors need be specified in the notice or waiver of notice of such meeting. Section 8. A majority of the authorized number of directors shall constitute a quorum for the transaction of business and the act of the majority of the directors present at a meeting duly held at which a quorum is present shall be the act of the board of directors, unless a greater number is required by law or the articles of incorporation or as otherwise set forth in these bylaws. Each director present at a meeting will be deemed to have assented to any action taken at the meeting unless his dissent to the action is entered in the minutes of the meeting, or unless he shall file his written dissent thereto with the secretary of the meeting or shall forward such dissent by registered mail to the secretary of the corporation immediately after such meeting. If a quorum shall not be present at any meeting of the board of directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. At such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified and called. Section 9. Any action required or permitted to be taken at a meeting of the board of directors or any committee thereof may be taken without a meeting if a consent in writing, setting forth the action taken, is signed by all of the members of the board of directors or the committee, as the case may be, and such consent shall have the same force and effect as a unanimous vote at a meeting. Subject to the provisions required herein for notice of meetings, members of the board of directors or members of any committee designated by the board of directors may participate in and hold a meeting of such board or committee by means of conference by telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 9 shall constitute presence in person at such meeting, except where a person participates in a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. Section 10. No director shall be disqualified from holding his office or be liable to the corporation or to any shareholder or creditor thereof for any loss incurred by this corporation under or by reason of any contract, transaction or act, or be accountable for any gains or profits he may have realized therein as a result of any contract or transaction between this corporation and such director or between this corporation and any other corporation, partnership, association or other organization in which such director or officer is a director or officer or has a financial interest. 7 COMMITTEES OF DIRECTORS Section 11. The board of directors, by resolution adopted by a majority of the full board, may designate from among its members one or more committees, each of which, to the extent provided in such resolution, shall have and may exercise all of the authority of the board of directors, except that no such committee shall have the authority of the board of directors in reference to amending the articles of incorporation (except that a committee may exercise the authority of the board of directors vested in accordance with Article 2.13 of the TBCA); proposing a reduction of the stated capital of the corporation in the manner permitted by Article 4.12 of TBCA; approving a plan of merger or share exchange of the corporation; recommending to the shareholders the sale, lease or exchange of all or substantially all of the property and assets of the corporation otherwise than in the usual and regular course of its business; recommending to the shareholders a voluntary dissolution of the corporation or a revocation thereof; amending, altering or repealing the bylaws of the corporation or adopting new bylaws of the corporation; filling vacancies in the board of directors or any such committee; filling any directorship to be filled by reason of an increase in the number of directors; electing or removing officers of the corporation or members of any such committee, fixing the compensation of any member of such committee; or altering or repealing any resolution of the board of directors that, by its terms, provides that it shall not be amended or repealed. Unless the resolution designating a particular committee so provides, no committee of the board of directors shall have the authority to authorize a distribution or to authorize the issuance of shares of the corporation. Vacancies in the membership of any such committee shall be filled by the board of directors at a regular or special meeting of the board of directors. Any such committee shall keep regular minutes of its proceedings and report the same to the board of directors when required. The designation of a committee of the board of directors and the delegation thereto of authority shall not operate to relieve the board of directors, or any member thereof, of any responsibility imposed by law. Each director shall be deemed to have assented to any action of the executive committee or any other committee, unless he shall, within seven (7) days after receiving actual or constructive notice of such action, deliver his written dissent thereto to the secretary of the corporation. Members of such committee shall serve at the pleasure of the board of directors. COMPENSATION OF DIRECTORS Section 12. The directors may be paid their expenses, if any, of attendance at each meeting of the board of directors and may be paid a fixed sum for attendance at each meeting of the board of directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. CHAIRMAN OF THE BOARD Section 13. The board of directors may, in its discretion, choose a chairman of the board who shall preside at meetings of shareholders and of the directors and shall be an ex officio member of all standing committees. The chairman of the board shall have such other powers and 8 shall perform such other duties as shall be designated by the board of directors. The chairman of the board shall be a member of the board of directors, but no other officers of the corporation need be a director. The chairman of the board shall serve until his successor is chosen and qualified, but he may be removed at any time by the affirmative vote of a majority of the board of directors. ARTICLE IV NOTICES AND REQUESTS Section 1. Notices and requests to directors, officers or shareholders shall be in writing and delivered personally or mailed to the directors, officers or shareholders at their addresses appearing on the books of the corporation. Notice or request by mail shall be deemed to be given and received at the time when deposited in the United States mail, addressed to the addressee at his address as it appears on the records of the corporation, with adequate postage thereon prepaid; notice or request by personal delivery shall be deemed to be given and received at the time when same shall be actually received by the person to whom addressed. Notices and requests to directors and officers may also be given by telegram, and shall be deemed delivered when same shall be deposited at a telegraph office for transmission and all appropriate fees therefor have been paid. Section 2. Whenever any notice is required to be given to any shareholder or director under the provisions of the statutes or of the articles of incorporation or of these bylaws, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be equivalent to the giving of such notice. Section 3. Attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. ARTICLE V OFFICERS Section 1. The officers of the corporation shall consist of a president and a secretary and such other officers as may be elected or appointed by the board of directors. Any two or more offices may be held by the same person. Section 2. The board of directors, at its first meeting after each annual meeting of shareholders, shall choose a president, a secretary and such other officers as they deem appropriate, none of whom need be a member of the board. 9 Section 3. Such other officers and assistant officers and agents as may be deemed necessary may be elected or appointed by the board of directors to hold office for such period, have such authority and perform such duties as are provided by the bylaws or as the board of directors may determine. Section 4. The salaries of all officers and agents of the corporation shall be fixed from time to time by the board of directors. Section 5. Each officer of the corporation shall hold office until he shall resign or shall be removed or otherwise disqualified to serve, or his successor shall be chosen and qualified. Any officer or agent may be removed by the board of directors, with or without cause, whenever in its judgment the best interest of the corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Any vacancy occurring in any office of the corporation by death, resignation, removal or otherwise shall be filled by the board of directors. THE PRESIDENT Section 6. The president shall be the chief executive officer of the corporation, shall have general and active management of the business of the corporation and shall see that all orders and resolutions of the board of directors are carried into effect. In the absence of the chairman of the board or in the event the board of directors shall not have designated a chairman of the board, the president shall preside at meetings of shareholders and the board of directors. Section 7. He shall execute bonds, mortgages and other contracts except where the signing and execution thereof shall be expressly delegated by the board of directors to some other officer or agent of the corporation. THE VICE PRESIDENTS Section 8. The vice presidents in the order of their seniority, or otherwise, as determined by the board of directors, shall, in the absence or disability of the president, perform the duties and exercise the powers of the president. They shall perform such other duties and have such other powers as the board of directors shall prescribe. THE SECRETARY AND ASSISTANT SECRETARIES Section 9. The secretary shall attend all meetings of the board of directors and all meetings of shareholders and record all the proceedings of the meetings of the corporation and of the board of directors in a book to be kept for that purpose and shall perform like duties for the standing committees, when required. Except as may be otherwise provided in these bylaws, he shall give, or cause to be given, notice of all meetings of shareholders and special meetings of the board of directors, and shall perform such other duties as may be prescribed by the board of directors or president, under whose supervision he shall be. 10 Section 10. The assistant secretaries in the order of their seniority, or if there be none, the treasurer, acting as assistant secretary, or otherwise, as determined by the board of directors, shall, in the absence or disability of the secretary, perform the duties and exercise the powers of the secretary. They shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. Assistant secretaries may be appointed by the president without prior approval of the board of directors. THE TREASURER AND ASSISTANT TREASURERS Section 11. The treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all monies and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the board of directors. Section 12. He shall disburse the funds of the corporation as may be ordered by the board of directors, taking proper vouchers for such disbursements, and shall render to the president and the board of directors at its regular meetings or when the board of directors so requires an account of all his transactions as treasurer and of the financial condition of the corporation. Section 13. If required by the board of directors, he shall give the corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the board of directors for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation. Section 14. The assistant treasurers in the order of their seniority, or otherwise, as determined by the board of directors, or the secretary acting as assistant treasurer shall, in the absence or disability of the treasurer, perform the duties and exercise the powers of the treasurer. They shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. ARTICLE VI CERTIFICATES FOR SHARES Section 1. The corporation shall deliver certificates representing all shares to which shareholders are entitled. Certificates representing shares shall be signed by the president or any vice president and the secretary or any assistant secretary of the corporation, or any other officers of the corporation so authorized by the board of directors and may be sealed with the seal of the corporation, if any, or a facsimile thereof. No certificate shall be issued for any share until the consideration therefor has been fully paid. Each certificate representing shares shall state upon the face thereof that the corporation is organized under the laws of the State of Texas, the name 11 of the person to whom issued, the number and class and the designation of the series, if any, which said certificate represents, and the par value of each share represented by such certificate or a statement that the shares are without par value. If the corporation is authorized to issue shares of more than one class, each certificate representing shares issued by the corporation (a) shall conspicuously set forth on the face or back of the certificate a full statement of all of the designations, preferences, limitations and relative rights of the shares of each class authorized to be issued and if the corporation is authorized to issue shares of any preferred or special class in series, the variations in the relative rights and preferences of the shares of each such series to the extent that they have been fixed and determined and the authority of the board of directors to fix and determine the relative rights and preferences of subsequent series; or (b) shall conspicuously state on the face or back of the certificate that such a statement is set forth in the articles of incorporation on file in the office of the Secretary of State, and the corporation will furnish a copy of such statement to the record holder of the certificate without charge on written request to the corporation at its principal place of business or registered office. Each certificate representing shares issued by the corporation (a) shall conspicuously set forth on the face or back of the certificate a full statement of the limitation or denial of preemptive rights contained in the articles of incorporation, or (b) shall conspicuously state on the face or back of the certificate that (i) such a statement is set forth in the articles of incorporation on file in the office of the Secretary of State and (ii) the corporation will furnish a copy of such statement to the record holder of the certificate without charge on request to the corporation at its principal place of business or registered office. Each certificate representing shares restricted as to transfer or registration of the transfer, as permitted by the TBCA (a) shall conspicuously contain a full or summary statement of the restriction on the face of the certificate, or (b) shall contain such statement on the back of the certificate and conspicuously refer to the same on the face of the certificate, or (c) shall conspicuously state on the face of or back of the certificate that such a restriction exists pursuant to a specified document and (i) that the corporation will furnish to the record holder of the certificate, without charge, upon written request to the corporation at its principal place of business or registered office a copy of the specified document, or (ii) if such document is one required or permitted to be and has been filed under the TBCA, that such specified document is on file in the office of the Secretary of State and contains a full statement of such restriction. The definitions of the terms "conspicuous" and "conspicuously" are set forth in the TBCA. Section 2. The signatures of the authorized officers of the corporation upon a certificate may be facsimiles. In case any officer who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer at the date of the issuance. Section 3. Where a certificate has been lost, apparently destroyed or wrongfully taken and the owner fails to notify the corporation of that fact within a reasonable time after he has notice of it, and the corporation registers a transfer of the shares represented by the certificate before receiving such a notification, the owner is precluded from asserting against the 12 corporation any claim for registering the transfer or any claim to a new certificate. The board of directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, destroyed or wrongfully taken, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost or destroyed. When authorizing such issuance of a new certificate or certificates, the board of directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost or destroyed and/or to satisfy any other reasonable requirements imposed by the board of directors. If, after the issuance of a new certificate as a replacement for a lost, destroyed or wrongfully taken certificate, a bona fide purchaser of the original certificate presents it for registration of transfer, the corporation must register the transfer unless registration would result in over-issue. In addition to any rights on the indemnity bond, the corporation may recover the new certificate from the person to whom it was issued or any person taking under him except a bona fide purchaser. Section 4. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. When a transfer of shares is requested and there is reasonable doubt as to the right of the person seeking the transfer, the corporation or its transfer agent, before recording the transfer of the shares on its books or issuing any certificate therefor, may require from the person seeking the transfer reasonable proof of his right to the transfer. If there remains a reasonable doubt of the right to the transfer, the corporation may refuse a transfer unless the person gives adequate security or a bond of indemnity executed by a corporate surety or by two individual sureties satisfactory to the corporation as to form, amount and responsibility of sureties. The bond shall be conditioned to protect the corporation, its officers, transfer agents and registrars, or any of them, against any loss, damage, expense or other liability to the owner of the shares by reason of the recordation of the transfer or the issuance of a new certificate for shares. CLOSING OF TRANSFER BOOKS AND RECORD DATE Section 5. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or entitled to receive a distribution by the corporation (other than a distribution involving a purchase or redemption by the corporation of any of its own shares) or a share dividend, or in order to make a determination of shareholders for any other proper purposes (other than determining shareholders entitled to consent to action by shareholders proposed to be taken without a meeting of shareholders), the board of directors may provide that the share transfer records shall be closed for a stated period not to exceed, in any case, sixty (60) days. If the share transfer records shall be closed for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders, such records shall be closed for at least ten (10) days immediately preceding such meeting. In lieu of 13 closing the share transfer records, the board of directors may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than sixty (60) days, and, in case of a meeting of shareholders, not less than ten (10) days prior to the date on which the particular action requiring such determination of shareholders is to be taken. If the share transfer records are not closed and no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive a distribution (other than a distribution involving a purchase or redemption by the corporation of any of its own shares) or a share dividend, the date on which the notice of the meeting is mailed or the date on which the resolutions of the board of directors declaring such distribution or share dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment thereof, except where the determination has been made through the closing of share transfer records and the stated period of closing has expired, in which case the board of directors shall make a new determination, as hereinbefore provided. Section 6. Distributions made by the corporation, whether in liquidation or from earnings, profits, assets or capital, including all distributions payable but not paid to the holder of the shares, his heirs, successors or assigns but that have been held in suspense by the corporation or that were paid or delivered by it into an escrow account or to a trustee or custodian, shall be payable by the corporation, escrow agent, trustee or custodian to the holder of the shares as of the record date determined for that distribution as provided in Section 5 of this Article, or to his heirs, successors or assigns. CORPORATE RECORDS AND REPORTS Section 7. The corporation shall keep books and records of account and shall keep minutes of the proceedings of its shareholders, its board of directors and each committee of its board of directors. The corporation shall keep at its registered office or principal place of business, or at the office of its transfer agent or registrar, a record of the original issuance of shares issued by the corporation and a record of each transfer of those shares that have been presented to the corporation for registration of transfer. Such records shall contain the names and addresses of all past and current shareholders of the corporation and the number and class of shares issued by the corporation and held by each of them. Any books, records, minutes, and share transfer records may be in written form or in any other form capable of being converted into written form within a reasonable time. Any person who shall have been a shareholder for at least six (6) months immediately preceding his demand, or shall be the holder of at least five percent (5%) of all the outstanding shares of the corporation, upon written demand stating the purpose thereof, shall have the right to examine, in person or by agent, accountant or attorney, at any reasonable time or times, for any proper purpose, its relevant books and records of account, minutes and share transfer records, and to make extracts therefrom. 14 REGISTERED SHAREHOLDERS Section 8. The corporation shall be entitled to recognize the exclusive rights of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the State of Texas. ARTICLE VII GENERAL PROVISIONS Section 1. The board of directors may authorize and the corporation may make distributions, and pay share dividends, subject to any restrictions in the articles of incorporation and limitations set forth in the TBCA. Section 2. The board of directors may by resolution create a reserve or reserves out of surplus or designate or allocate any and all of its surplus in any manner for any proper purpose or purposes, and may increase, decrease or abolish any such reserve in the same manner. Section 3. When shares are registered on the books of the corporation in the names of two (2) or more persons as joint owners with the right of survivorship, after the death of a joint owner and before the time that the corporation receives actual written notice that parties other than the surviving joint owner or owners claim an interest in the shares or any distributions thereon, the corporation may record on its books and otherwise effect the transfer of those shares to any person, firm or corporation (including the surviving joint owner, individually) and pay any distributions made in respect of those shares, in each case as if the surviving joint owner or owners were the absolute owners of the shares. In permitting such a transfer by and making any distributions to such a surviving joint owner or owners before the receipt of written notice from other parties claiming an interest in those shares or distributions, the corporation shall be discharged from all liability for the transfer or payment so made; provided, however, that the discharge of the corporation from liability and the transfer of full legal and equitable title of the shares in no way shall affect, reduce or limit any cause of action existing in favor of any owner of an interest in those shares or distributions against the surviving owner or owners. CHECKS Section 4. All checks, drafts or other orders for payment of money, notes or other evidences of indebtedness issued in the name of or payable to the corporation shall be signed or endorsed by such officer or officers or such other person or persons as the board of directors may from time to time designate. 15 FISCAL YEAR Section 5. The fiscal year of the corporation shall end on June 30 of each year until such date is changed by resolution of the Board of Directors. SEAL Section 6. The corporate seal, if any, shall have inscribed thereon the name of the corporation, and be in a form approved by the board of directors. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. ARTICLE VIII AMENDMENT OF BYLAWS Section 1. The board of directors may amend or repeal these bylaws, or adopt new bylaws at any regular meeting of the board of directors or at any special meeting of the board of directors if notice of such amendment, repeal or adoption of new bylaws is contained in the notice of such meeting, unless (a) the articles of incorporation or the TBCA reserves the power exclusively to the shareholders in whole or in part, or (b) the shareholders, in amending, repealing or adopting a particular bylaw, expressly provide that the board of directors may not amend or repeal that bylaw. Section 2. The shareholders may amend or repeal these bylaws, or adopt new bylaws upon the affirmitive vote of the holders of at least sixty six and two thirds percent (66 2/3%) of the issued and outstanding shares then entitled to vote on such amendment, unless the articles of incorporation or a bylaw adopted by the shareholders provide otherwise as to all or some portion of these bylaws, even though the bylaws may also be amended, repealed or adopted by the board of directors. ARTICLE IX INDEMNIFICATION OF OFFICERS AND DIRECTORS Section 1. As utilized in this Article, the following terms shall have the meanings indicated: (a) The term "corporation" includes any domestic or foreign predecessor entity of the corporation in a merger, consolidation or other transaction in which the liabilities of the predecessor are transferred to the corporation by operation of law and in any other transaction in which the corporation assumes the liabilities of the predecessor, but does not specifically exclude liabilities that are the subject matter of this Article. 16 (b) The term "director" means any person who is or was a director of the corporation and any person who, while a director of the corporation, is or was serving at the request of the corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise. (c) The term "expenses" include court costs and attorneys' fees. (d) The term "official capacity" means: (i) when used with respect to a director, the office of director in the corporation, and (ii) when used with respect to a person other than a director, the elective or appointive office in the corporation held by the officer or the employment or agency relationship undertaken by the employee or agent on behalf of the corporation, but (iii) in both (i) and (ii) above does not include service for any other foreign or domestic corporation or any partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise. (e) The term "proceeding" means any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative, any appeal in such an action, suit or proceeding and any inquiry or investigation that could lead to such an action, suit or proceeding. Section 2. The corporation shall indemnify a person who was, is or is threatened to be made a named defendant or respondent in a proceeding because the person is or was a director only if it is determined, in accordance with Section 6 of this Article that the person (a) conducted himself or herself in good faith; (b) reasonably believed: (i) in the case of conduct in the official capacity as a director of the corporation, that the conduct was in the corporation's best interests, and (ii) in all other cases, that the conduct was at least not opposed to the corporation's best interests; and (iii) in the case of any criminal proceeding, had no reasonable cause to believe the conduct was unlawful. Section 3. A director shall not be indemnified by the corporation as provided in Section 2 of this Article for obligations resulting from a proceeding (a) in which the director is found liable on the basis that a personal benefit was improperly received by the director, whether or not the benefit resulted from an action taken in the person's official capacity, or (b) in which the person is found liable to the corporation, except to the extent permitted in Section 5 of this Article. Section 4. The termination of a proceeding by judgment, order, settlement or conviction or on a plea of nolo contendere or its equivalent is not of itself determinative that the person did not meet the requirements set forth in Section 2 of this Article. A person shall be deemed to have been found liable in respect of any claim, issue or matter only after the person shall have been so adjudged by a court of competent jurisdiction after exhaustion of all appeals therefrom. 17 Section 5. A person may be indemnified by the corporation as provided in Section 2 of this Article against judgments, penalties (including excise and similar taxes), fines, settlements and reasonable expenses actually incurred by the person in connection with the proceeding; but if the person is found liable to the corporation or is found liable on the basis that a personal benefit was improperly received by the person, the indemnification (a) shall be limited to reasonable expenses actually incurred by the person in connection with the proceeding, and (b) shall not be made in respect of any proceeding in which the person shall have been found liable for willful or intentional misconduct in the performance of the person's duty to the corporation. Section 6. A determination of indemnification under Section 2 of this Article shall be made (a) by a majority vote of a quorum consisting of directors who at the time of the vote are not named defendants or respondents in the proceeding; (b) if such a quorum cannot be obtained, by a majority vote of a committee of the board of directors, designated to act in the matter by a majority vote of all directors, consisting solely of two (2) or more directors who at the time of the vote are not named defendants or respondents in the proceeding; (c) by special legal counsel selected by the board of directors or a committee thereof by a vote as set forth in subsection (a) or (b) of this Section 6, or, if such a quorum cannot be obtained and such a committee cannot be established, by a majority vote of all directors; or (d) by the shareholders in a vote that excludes the shares held by directors who are named defendants or respondents in the proceeding. Section 7. Authorization of indemnification and determination as to reasonableness of expenses shall be made in the same manner as the determination that indemnification is permissible, except that if the determination that indemnification is permissible is made by special legal counsel, authorization of indemnification and determination as to reasonableness of expenses shall be made in the manner specified by subsection (c) of Section 6 of this Article for the selection of special legal counsel. A provision contained in the articles of incorporation, the bylaws, a resolution of shareholders or directors, or an agreement that makes mandatory the indemnification described in Section 2 of this Article shall be deemed to constitute authorization of indemnification in the manner required herein, even though such provision may not have been adopted or authorized in the same manner as the determination that indemnification is permissible. Section 8. The corporation shall indemnify a director against reasonable expenses incurred by the director in connection with a proceeding in which the director is a named defendant or respondent because the person is or was a director if the director has been wholly successful, on the merits or otherwise, in the defense of the proceeding. Section 9. If, upon application of a director, a court of competent jurisdiction determines, after giving any notice the court considers necessary, that the director is fairly and reasonably entitled to indemnification in view of all the relevant circumstances, whether or not the director has met the requirements set forth in Section 2 of this Article or has been found liable in the circumstances described in Section 3 of this Article, the corporation shall indemnify the director to such further extent as the court shall determine; but if the person is found liable to the corporation or is found liable on the basis that personal benefit was improperly received by 18 the person, the indemnification shall be limited to reasonable expenses actually incurred by the person in connection with the proceeding. Section 10. Reasonable expenses incurred by a director who was, is or is threatened to be made a named defendant or respondent in a proceeding may be paid or reimbursed by the corporation in advance of the final disposition of the proceeding and without the determination specified in Section 6 of this Article or the authorization or determination specified in Section 7 of this Article, after the corporation receives a written affirmation by the director of a good faith belief that the standard of conduct necessary for indemnification under this Article has been met and a written undertaking by or on behalf of the director to repay the amount paid or reimbursed if it is ultimately determined that he has not met that standard or if it is ultimately determined that indemnification of the director against expenses incurred by him in connection with that proceeding is prohibited by Section 5 of this Article. A provision contained in the articles of incorporation, these bylaws, a resolution of the shareholders or directors, or an agreement that makes mandatory the payment or reimbursement permitted under this Section shall be deemed to constitute authorization of that payment or reimbursement. Section 11. The written undertaking required by Section 10 of this Article shall be an unlimited general obligation of the director, but need not be secured. It may be accepted without reference to financial ability to make repayment. Section 12. Notwithstanding any other provision of this Article, the corporation may pay or reimburse expenses incurred by a director in connection with an appearance as a witness or other participation in a proceeding at a time when he is not a named defendant or respondent in the proceeding. Section 13. An officer of the corporation shall be indemnified by the corporation as and to the same extent provided by Sections 7, 8 and 9 of this Article for a director and is entitled to seek indemnification under those sections to the same extent as a director. The corporation may indemnify and advance expenses to an officer, employee or agent of the corporation to the same extent that it may indemnify and advance expenses to directors under this Article. Section 14. The corporation may indemnify and advance expenses to persons who are not or were not officers, employees or agents of the corporation but who are or were serving at the request of the corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise, to the same extent that it may indemnify and advance expenses to directors under this Article. Section 15. The corporation may indemnify and advance expenses to an officer, employee, agent or person identified in Section 14 of this Article and who is not a director to such further extent, consistent with law, as may be provided by the articles of incorporation, these bylaws, general or specific action of the board of directors or contract or as permitted or required by common law. 19 Section 16. The corporation may purchase and maintain insurance or another arrangement on behalf of any person who is or was a director, officer, employee or agent of the corporation or who is or was serving at the request of the corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise, against any liability asserted against such person and incurred by such person in such a capacity or arising out of the status as such a person, whether or not the corporation would have the power to indemnify such person against that liability under this Article. If the insurance or other arrangement is with a person or entity that is not regularly engaged in the business of providing insurance coverage, the insurance or arrangement may provide for payment of a liability with respect to which the corporation would not have the power to indemnify the person only if including coverage for the additional liability has been approved by the shareholders of the corporation. Without limiting the power of the corporation to procure or maintain any kind of insurance or other arrangement, the corporation may, for the benefit of persons indemnified by the corporation (a) create a trust fund, (b) establish any form of self-insurance, (c) secure its indemnity obligations by grant of a security interest or other lien on the assets of the corporation, or (d) establish a letter of credit, guaranty or surety arrangement. The insurance or other arrangement may be procured, maintained or established within the corporation or with any insurer or other person deemed appropriate by the board of directors, regardless of whether all or part of the stock or other securities of the insurer or other person are owned in whole or part by the corporation. In the absence of fraud, the judgment of the board of directors as to the terms and conditions of the insurance or other arrangement and the identity of the insurer or other person participating in an arrangement shall be conclusive and the insurance or arrangement shall not be voidable and shall not subject the directors approving the insurance or arrangement to liability, on any ground, regardless of whether directors participating in the approval are beneficiaries of the insurance or arrangement. Section 17. Any indemnification of or advance of expenses to a director in accordance with this Article shall be reported in writing to the shareholders with or before the notice or waiver of notice of the next meeting of shareholders or with or before the next submission to shareholders of a consent to action without a meeting and, in any case, within the twelve (12) month period immediately following the date of the indemnification or advance. Section 18. For purposes of this Article, the corporation is deemed to have requested a director to serve an employee benefit plan whenever the performance by the director of the director's duties to the corporation also imposes duties on, or otherwise involves services by, the director to the plan or participants or beneficiaries of the plan. Excise taxes assessed on a director with respect to an employee benefit plan pursuant to applicable law shall be deemed to be fines. Action taken or omitted by the director with respect to an employee benefit plan in the performance of the director's duties or for a purpose reasonably believed by the director to be in the interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose which is not opposed to the best interests of the corporation. 20 FIRST AMENDMENT TO THE AMENDED AND RESTATED BYLAWS OF PEERLESS MFG. CO. On January 14, 2004, at a meeting of directors duly called and at which a quorum was present, the Board of Directors of Peerless Mfg. Co., a Texas corporation, amended Section 13 of Article III of its Amended and Restated Bylaws to read in its entirety as follows: "CHAIRMAN OF THE BOARD Section 13. The board of directors may, in its discretion, choose a chairman of the board who shall preside at meetings of shareholders and of the directors. The chairman of the board shall have such other powers and shall perform such other duties as shall be designated by the board of directors. The chairman of the board shall be a member of the board of directors, but no other officers of the corporation need be a director. The chairman of the board shall serve until his successor is chosen and qualified, but he may be removed at any time by the affirmative vote of a majority of the board of directors." Except as set forth above, the Amended and Restated Bylaws are unchanged. This Amendment became effective on the date adopted by the Board of Directors. IN WITNESS WHEREOF, the undersigned has executed this Amendment by order of the Board of Directors. /s/ KATHERINE FRAZIER ---------------------------------- Katherine Frazier, Secretary EX-10.(A) 4 d12159exv10wxay.txt CREDIT AGREEMENT EXHIBIT 10(a) [Execution] CREDIT AGREEMENT BY AND BETWEEN COMERICA BANK ("BANK") AND PEERLESS MFG. CO. ("BORROWER") DATED: OCTOBER 30, 2003 INDEX

5.2 Mergers or Dispositions................................................................ 10 5.3 Guaranties............................................................................. 10 5.4 Debt................................................................................... 10 5.5 Encumbrances........................................................................... 11 5.6 Acquisitions........................................................................... 11 5.7 Investments............................................................................ 11 5.8 Transactions with Affiliates. ........................................................ 11 5.9 Defaults on Other Obligations.......................................................... 12 5.10 Pension Plans.......................................................................... 12 5.11 No Further Negative Pledges............................................................ 12 5.12 Accounts Receivable.................................................................... 12 5.13 No License Restrictions................................................................ 12 5.14 Sale of Assets......................................................................... 12 5.15 Distributions to Foreign Subsidiaries.................................................. 12 SECTION 6. EVENTS OF DEFAULT............................................................................... 12 6.1 Events of Default...................................................................... 12 6.2 Remedies Upon Event of Default......................................................... 14 6.3 Setoff................................................................................. 14 6.4 Waiver of Certain Laws................................................................. 15 6.5 Waiver of Defaults..................................................................... 15 6.6 Receiver............................................................................... 15 6.7 Application of Proceeds of Collateral.................................................. 15 SECTION 7. MISCELLANEOUS................................................................................... 15 7.1 Accounting Principles.................................................................. 15 7.2 Taxes and Fees......................................................................... 16 7.3 Governing Law.......................................................................... 16 7.4 Audits of Collateral; Fees............................................................. 16 7.5 Costs and Expenses..................................................................... 16 7.6 Notices................................................................................ 16 7.7 Further Action......................................................................... 17 7.8 Successors and Assigns; Participation.................................................. 17 7.9 Indulgence............................................................................. 17 7.10 Amendment and Waiver................................................................... 17 7.11 Severability........................................................................... 17 7.12 Headings and Construction of Terms..................................................... 17 7.13 Independence of Covenants.............................................................. 17 7.14 Reliance on and Survival of Various Provisions......................................... 17 7.15 Effective Upon Execution............................................................... 18 7.16 Complete Agreement; Conflicts.......................................................... 18 7.17 Exhibits and Addenda................................................................... 18 7.18 WAIVER OF JURY TRIAL................................................................... 18 7.19 ORAL AGREEMENTS INEFFECTIVE............................................................ 19

ADDENDA: Defined Terms Addendum Financial Covenants Addendum Loan Terms, Conditions and Procedures Addendum EXHIBITS: Exhibit A - Form of Compliance Certificate Exhibit B - Form of Request for Advance SCHEDULES: Schedule 3.5 Subsidiaries Schedule 3.14 Employee Benefit Plans Schedule 3.17 Environmental Disclosures Schedule 5.4 Debt CREDIT AGREEMENT THIS CREDIT AGREEMENT (this "Agreement") is made and delivered effective as of October 30, 2003, by and between Peerless Mfg. Co., a Texas corporation ("Borrower"), and COMERICA BANK ("Bank"). RECITALS A. Borrower desires to obtain certain facilities from the Bank, and the Bank is willing to provide such credit facilities to and in favor of Borrower. B. Such credit facilities are subject to the terms and conditions set forth herein and in every other Loan Document. AGREEMENT NOW, THEREFORE, in consideration of the premises and the mutual promises herein contained, Borrower and Bank agree as follows: SECTION 1. DEFINITIONS 1.1 Defined Terms. The terms as used in this Agreement shall have the meanings assigned to such terms in the Defined Terms Addendum. 1.2 Accounting Terms. All accounting terms not specifically defined in this Agreement shall be determined and construed in accordance with GAAP. 1.3 Singular and Plural. Where the context herein requires, the singular number shall be deemed to include the plural, the masculine gender shall include the feminine and neuter genders, and vice versa. SECTION 2. TERMS, CONDITIONS AND PROCEDURES FOR BORROWING Subject to the terms, conditions and procedures of this Agreement and each other Loan Document including, but not limited to, the terms, conditions and procedures set forth in the Defined Terms Addendum and Loan Terms, Conditions and Procedures Addendum, Bank agrees to make credit available to the Borrower on such dates and in such amounts as the Borrower shall request from time to time or as may otherwise be agreed to by Borrower and Bank. SECTION 3. REPRESENTATIONS AND WARRANTIES Borrower represents and warrants, and such representations and warranties shall be deemed to be continuing representations and warranties during the entire life of this Agreement, and so long as Bank shall have any commitment or obligation to make any Loans or issue any Letters of Credit hereunder, and so long as any Indebtedness remains unpaid and outstanding under any Loan Document, as follows: 3.1 Authority. Borrower is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and is duly qualified and authorized to do business in each other jurisdiction in which the character of its assets or the nature of its business makes such qualification necessary. 3.2 Due Authorization. Each Loan Party has all requisite power and authority to execute, deliver and perform its obligations under each Loan Document to which it is a party or is otherwise bound, all of which have been duly authorized by all necessary action, and are not in contravention of law or the terms of any Loan Party's organizational or other governing documents. 3.3 Title to Property. Each Loan Party has good title to all property and assets purported to be owned by it, including those assets identified on the Financial Statements most recently delivered by Borrower to Bank. 3.4 Encumbrances. To Borrower's knowledge, there are no security interests or other Liens or encumbrances on, and no financing statements on file with respect to, any of the property or assets of any Loan Party, except for Permitted Encumbrances. 3.5 Subsidiaries. Borrower has no Subsidiaries, except as set forth in Schedule 3.5 which Schedule sets forth the percentage of ownership of Borrower in each such Subsidiary as of the date of this Agreement. 3.6 Taxes. To Borrower's knowledge, each Loan Party has filed, on or before their respective due dates, all federal, state, local and foreign tax returns which are required to be filed, or has obtained extensions for filing such tax returns, and is not delinquent in filing such returns in accordance with such extensions, and has paid all taxes which have become due pursuant to those returns or pursuant to any assessments received by any such party, as the case may be, to the extent such taxes have become due, except to the extent such tax payments are being actively and diligently contested in good faith by appropriate proceedings, and if reasonably requested by Bank, have been bonded or reserved in an amount and manner satisfactory to Bank. 3.7 No-Defaults. To Borrower's knowledge, there exists no default (or event which, with the giving of notice or passage of time, or both, would result in a default) under the provisions of any instrument or agreement evidencing, governing, securing or otherwise relating to any material Debt of any Loan Party or pertaining to any of the Permitted Encumbrances. 3.8 Enforceability of Agreement and Loan Documents. Each Loan Document has been duly executed and delivered by duly authorized officer(s) or other representative(s) of each Loan Party, and constitutes the valid and binding obligations of each Loan Party, enforceable in accordance with their respective terms, except to the extent that enforcement thereof may be limited by applicable bankruptcy, reorganization, insolvency, moratorium or similar laws affecting the enforcement of creditors' rights generally at the time in effect. 3.9 Non-contravention. The execution, delivery and performance by each Loan Party of the Loan Documents to which such Loan Party is a party or otherwise bound, are not in 2 contravention of the terms of any indenture, agreement or undertaking to which any such Loan Party is a party or by which it is bound, except to the extent that such terms have been waived or that failure to comply with any such terms would not have a Material Adverse Effect. 3.10 Actions, Suits, Litigation or Proceedings. There are no actions, suits, litigation or proceedings, at law or in equity, and no proceedings before any arbitrator or by or before any Governmental Authority, pending, or, to the knowledge of Borrower, threatened against or affecting any Loan Party, which, if adversely determined, could materially impair the right of any Loan Party to carry on its business substantially as now conducted or could have a Material Adverse Effect. To Borrower's knowledge, no Loan Party is under investigation by, or is operating under any restrictions imposed by, any Governmental Authority. 3.11 Compliance with Laws. To Borrower's knowledge, each Loan Party has complied with all Governmental Requirements, including, without limitation, Environmental Laws, to the extent that failure to so comply could have a Material Adverse Effect. 3.12 Consents, Approvals and Filings, Etc. To Borrower's knowledge, except as have been previously obtained or as otherwise expressly provided in this Agreement, no authorization, consent, approval, license, qualification or formal exemption from, nor any filing, declaration or registration with, any Governmental Authority and no material authorization, consent or approval from any other Person, is required in connection with the execution, delivery and performance by each Loan Party of any Loan Document to which it is a party. All such authorizations, consents, approvals, licenses, qualifications, exemptions, filings, declarations and registrations which have previously been obtained or made, as the case may be, are in full force and effect and are not the subject of any attack, or to the knowledge of Borrower, any threatened attack, in any material respect, by appeal, direct proceeding or otherwise. 3.13 Contracts, Agreements and Leases. To Borrower's knowledge, no Loan Party is in default (beyond any applicable period of grace or cure) in complying with any provision of any material contract, agreement, indenture, lease or instrument to which it is a party or by which it or any of its properties or assets are bound, where such default would have a Material Adverse Effect. To Borrower's knowledge, each such contract, commitment, undertaking, agreement, indenture and instrument is in full force and effect and is valid and legally binding. 3.14 ERISA. To Borrower's knowledge, except as shown on Schedule 3.14, no Loan Party maintains or contributes to any employee benefit plan subject to Title IV of ERISA. Furthermore, no Loan Party has incurred any accumulated funding deficiency within the meaning of ERISA or incurred any liability to the PBGC in connection with any employee benefit plan established or maintained by such Loan Party, and, to Borrower's knowledge, no reportable event or prohibited transaction, as defined in ERISA, has occurred with respect to such plans that involves a liability in excess of $25,000. 3.15 No Investment Company. No Loan Party is an "investment company" within the meaning of the Investment Company Act of 1940, as amended, nor is any Loan Party "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 3 3.16 No Margin Stock. No Loan Party is engaged principally, or as one of its important activities, directly or indirectly, in the business of extending credit for the purpose of purchasing or carrying margin stock, and none of the proceeds of any of the Loans will be used, directly or indirectly, to purchase or carry any margin stock or made available by any Loan Party in any manner to any other Person to enable or assist such Person in purchasing or carrying margin stock, or otherwise used or made available for any other purpose which might violate the provisions of Regulations G, T, U, or X of the Board of Governors of the Federal Reserve System. Terms for which meanings are provided in Regulation U of said Board of Governors or any regulations substituted therefor, as are from time to time in effect, are used in this Section with such meanings, and these representations and warranties shall be immediately effective. 3.17 Environmental Representations. (a) No Loan Party has received any notice of any violation of any Environmental Law(s); and no Loan Party is a party to any litigation or administrative proceeding, nor, so far as is known by Borrower, is any litigation or administrative proceeding threatened against any Loan Party which, in any case, (i) asserts or alleges that any Loan Party violated any Environmental Law(s), (ii) asserts or alleges that any Loan Party is required to clean up, remove or take any other remedial or response action due to the disposal, depositing, discharge, leaking or other release of any Hazardous Materials, or (iii) asserts or alleges that any Loan Party is required to pay all or a portion of any past, present or future clean-up, removal or other remedial or response action which arises out of or is related to the disposal, depositing, discharge, leaking or other release of any Hazardous Materials by any Loan Party, and which, either singularly or in the aggregate, could reasonably be expected to have a Material Adverse Effect. (b) To Borrower's knowledge, there are no conditions existing currently which could subject any Loan Party to damages, penalties, injunctive relief or clean-up costs under any applicable Environmental Law(s), or which require, or are likely to require, clean-up, removal, remedial action or other response pursuant to any applicable Environmental Law(s) by any Loan Party, and which, in any case, either singularly or in aggregate, could reasonably be expected to have a Material Adverse Effect. (c) No Loan Party is subject to any judgment, decree, order or citation related to or arising out of any applicable Environmental Law(s), which, either singularly or in the aggregate, could reasonably be expected to have a Material Adverse Effect; and, to Borrower's knowledge, no Loan Party has been named or listed as a potentially responsible party by any Governmental Authority in any matter arising under any applicable Environmental Law(s), except as disclosed in Schedule 3.17, and, in the event that any such matters are disclosed in said Schedule 3.17 they will not, either singularly or in the aggregate, reasonably be expected to have a Material Adverse Effect. 4 (d) To Borrower's knowledge, each Loan Party has all permits, licenses and approvals required under applicable Environmental Laws, where the failure to so obtain or maintain any such permits, licenses or approvals could reasonably be expected to have a Material Adverse Effect. 3.18 Accuracy of Information. The Financial Statements previously furnished to Bank have been prepared in accordance with GAAP and fairly present the financial condition of Borrower and its Subsidiaries as such Financial Statements purport to present, and the results of their respective operations as of the dates and for the periods covered thereby; and since the date(s) of said Financial Statements, there has been no material adverse change in the financial condition of Borrower or any other consolidated Subsidiary covered by such Financial Statements. No Loan Party, nor any such other consolidated Subsidiary has any material contingent obligations, liabilities for taxes, long-term leases or long-term commitments not disclosed by, or reserved against in, such Financial Statements. Each Loan Party is solvent, able to pay its respective debts as they mature, has capital sufficient to carry on its business and has assets the fair market value of which exceed its liabilities, and Borrower will not be rendered insolvent, under-capitalized or unable to pay debts generally as they become due by the execution or performance of any Loan Document to which it is a party or by which it is otherwise bound. SECTION 4. AFFIRMATIVE COVENANTS Borrower covenants and agrees that, so long as Bank is committed to make any Loan or issue any Letter of Credit under this Agreement, and until all instruments and agreements evidencing any Loan which is payable on demand or which conditions advances upon the Bank's discretion are fully discharged and terminated, and thereafter, so long as any Indebtedness remains outstanding, it will, and, as applicable, it will cause each Loan Party within its control or under common control to: 4.1 Preservation of Existence, Etc. Preserve and maintain Borrower's existence and preserve and maintain such of its rights, licenses, and privileges as are material to the business and operations conducted by it; qualify and remain qualified to do business in each jurisdiction in which such qualification is material to its business and operations or ownership of its properties, continue to conduct and operate its business substantially as conducted and operated during the present and preceding calendar year; at all times maintain, preserve and protect all of Borrower's franchises and trade names and preserve all the remainder of its property and keep the same in good repair, working order and condition; and from time to time make, or cause to be made, all needed and proper repairs, renewals, replacements, betterments and improvements thereto. 4.2 Keeping of Books. Keep proper books of record and account in which full and correct entries shall be made of all of its financial transactions and its assets and businesses so as to permit the presentation of financial statements (including, without limitation, those Financial Statements to be delivered to Bank pursuant Section 4.3 hereof) prepared in accordance with GAAP. 4.3 Reporting Requirements. Furnish to Bank, or cause to be furnished to Bank, the following: 5 (a) as soon as possible, and in any event within five (5) calendar days after becoming aware of the occurrence or existence of each Default or Event of Default hereunder or any material adverse change in the consolidated financial condition of Borrower, a written statement of the chief financial officer of Borrower (or in his or her absence, a responsible senior officer of Borrower), setting forth details of such Default, Event of Default or change, and the action which Borrower has taken, or has caused to be taken, or proposes to take, or to cause to be taken, with respect thereto; (b) as soon as available, and in any event within ninety (90) days after and as of the end of each fiscal year of Borrower, audited consolidated Financial Statements of Borrower for and as of such fiscal year then ending, with comparative numbers for the preceding fiscal year, and such other comments and financial details as are usually included in similar reports. Such audited Financial Statements shall be prepared by Borrower in accordance with GAAP and certified by independent certified public accountants of recognized national standing selected by Borrower's audit committee and shall contain unqualified opinions as to the fairness of the statements therein contained, except that the opinion may be qualified as a "going concern" of the fiscal year preceding the Revolving Credit Maturity Date due to the non-extension of this Agreement. (c) as soon as available, and in any event within (i) thirty (30) days after and as of October 31, 2003, and November 30, 2003, and (ii) forty-five (45) days after and as of the end of each fiscal quarter thereafter (excluding the last such reporting period of each of Borrower's fiscal years, for which reporting period Section 4.3(b) will control) unaudited consolidated Financial Statements of Borrower for and as of such reporting period then ending and for and as of that portion of the fiscal year then ending, with comparative numbers for the same period of the preceding fiscal year, in each case, certified by the chief financial officer of Borrower as to consistency with prior financial reports and accounting periods, accuracy and fairness of presentation; (d) as soon as available, and in any event within (i) thirty (30) days after and as of October 31, 2003 and November 30, 2003, and (ii) thereafter, (A) forty-five (45) days after and as of the end of each of Borrower's first three fiscal quarters of each fiscal year, and (B) ninety (90) days after the end of Borrower's last fiscal quarter of each fiscal year, accounts receivable agings, backlog and percentage complete reports, in form and detail similar to those previously delivered to Bank, (e) as soon as available, and in any event within thirty (30) days after and as of the end of each Applicable Calendar Month, accounts receivable agings, backlogs and completion reports and such of the other Loan Parties as may 6 be required by the Bank, in form and detail similar to those previously delivered to Bank; (f) as soon as available, and in any event within thirty (30) days after and as of the end of each Applicable Calendar Month, a listing of Eligible Inventory of Borrower, in form and detail satisfactory to Bank, such listing to identify the cost and location thereof; (g) as soon as available, and in any event within forty-five (45) days after and as of the end of each fiscal quarter, a Compliance Certificate, dated as of the end of such fiscal quarter; (h) as soon as available, and in any event within thirty (30) days after and as of the end of each Applicable Calendar Month, a Borrowing Base Certificate, dated as of the end of such Applicable Calendar Month; (i) as soon as available, and in any event within sixty (60) days after and as of the end of each fiscal year, consolidated annual financial projections of Borrower for the immediately following fiscal year, prepared on a quarter-by-quarter basis in form similar to the form of such projections previously delivered to Bank; (j) promptly upon receipt thereof, copies of all management letters and other substantive reports submitted to any Loan Party by independent certified public accountants in connection with any annual audit of any such party, to the extent the disclosure thereof is not prohibited by applicable securities laws; and (k) promptly, and in form and detail satisfactory to Bank, such other information as Bank may reasonably request from time to time. 4.4 Financial Covenants. Borrower will maintain, all financial covenants set forth in the Financial Covenants Addendum. 4.5 Inspections. Permit Bank, or its representatives, at reasonable times and intervals, at Borrower's cost and expense, to visit any office of any Loan Party, discuss its financial matters with its officers, employees and independent certified public accountants, and by this provision, Borrower authorizes such officers, employees and accountants to discuss the finances and affairs of Borrower and any of its consolidated Subsidiaries. 4.6 Further Assurances; Financing Statements. Furnish Bank, at Borrower's expense, upon Bank's reasonable request and in form satisfactory to Bank (and execute and deliver or cause to be executed and delivered), such additional pledges, assignments, mortgages, lien instruments or other security instruments, consents, acknowledgments, subordinations and financing statements covering any or all of the Collateral pledged, assigned, mortgaged or encumbered pursuant to any Loan Document, of every nature and description, whether now owned or hereafter acquired by 7 Borrower or any other Person providing such Collateral, together with such other documents or instruments as Bank may require to effectuate more fully the purposes of any Loan Document. 4.7 Compliance with Leases. Comply with all terms and conditions of any leases covering any premises or property (real or personal) wherein any of the Collateral is or may be located, or covering any of the other material personal or real property now or hereafter owned, leased or otherwise used by any Loan Party in the conduct of its business, and any Governmental Requirement, except where the failure to so comply could not cause a Material Adverse Effect. 4.8 Indemnification. Indemnify, defend and save Bank harmless from any and all claims, losses, costs, damages, liabilities, obligations and expenses (as used in this Section, collectively, the "Indemnified Matters"), including, without limitation, reasonable attorneys' fees (whether inside or outside counsel is used), incurred by Bank by reason of any Default or Event of Default, in defending or protecting the Liens which secure or purport to secure all or any portion of the Indebtedness, whether existing under any Loan Document or otherwise or the priority thereof, or in enforcing the obligations of Borrower or any other Person under or pursuant to any Loan Document, or in the prosecution or defense of any action or proceeding concerning any matter growing out of or connected with the Collateral or any Loan Document, INCLUDING ANY CLAIMS, LOSSES, COSTS, DAMAGES, LIABILITIES, OBLIGATIONS, AND EXPENSES RESULTING FROM BANK'S OWN NEGLIGENCE, except and to the extent but only to the extent caused by Bank's gross negligence or willful misconduct. Upon Bank's receipt of written notice of any such Indemnified Matter, Bank will provide to Borrower notice, in writing accompanied by reasonable detail, of such Indemnified Matter, but any failure by Bank to provide such notice to Borrower shall not impair or otherwise affect the rights of Bank to be indemnified, defended and held harmless under this Section. 4.9 Governmental and Other Approvals. Apply for, obtain and/or maintain in effect, as applicable, all authorizations, consents, approvals, licenses, qualifications, exemptions, filings, declarations and registrations (whether with any court, governmental agency, regulatory authority, securities exchange or otherwise) which are necessary in connection with the execution, delivery and/or performance by any Loan Party of any Loan Document to which it is a party. 4.10 Insurance. Maintain insurance coverage on its physical assets and against other business risks in such amounts and of such types as are customarily carried by companies similar in size and nature (including, without limitation, loss of rent and/or business interruption insurance and boiler and machinery insurance), and in the event of acquisition of additional property, real or personal, or of the incurrence of additional risks of any nature, increase such insurance coverage in such manner and to such extent as prudent business judgment and present practice would dictate; and in the case of all policies covering property subject to any Loan Document or property in which the Bank shall have a Lien of any kind whatsoever, other than those policies protecting against casualty liabilities to strangers, all such insurance policies shall provide that the loss payable thereunder shall be payable to Borrower (or other Person providing Collateral) and Bank, with mortgagee's clauses in favor of and satisfactory to Bank for all such policies, and such policies shall also provide that they may not be canceled or changed without thirty (30) days' prior written notice to Bank. Upon the request of Bank, all of said policies, or copies thereof, including all endorsements thereon and those required hereunder, shall be deposited with Bank. 8 4.11 Compliance with ERISA. In the event that any Loan Party or any of its Subsidiaries maintain(s) or establish(es) a Pension Plan subject to ERISA, (a) comply in all material respects with all requirements imposed by ERISA as presently in effect or hereafter promulgated, including, but not limited to, the minimum funding requirements thereof; (b) promptly notify Bank upon the occurrence of a "reportable event" or "prohibited transaction" within the meaning of ERISA, or that the PBGC or any Loan Party has instituted or will institute proceedings to terminate any Pension Plan, together with a copy of any proposed notice of such event which may be required to be filed with the PBGC; and (c) if requested by Bank, furnish to Bank (or cause the plan administrator to furnish Bank) a copy of the annual return (including all schedules and attachments) for each Pension Plan covered by ERISA, and filed with the Internal Revenue Service by any Loan Party not later than thirty (30) days after such report has been so filed. 4.12 Environmental Covenants. (a) Comply with all applicable Environmental Laws, and maintain all permits, licenses and approvals required under applicable Environmental Laws, where the failure to do so could have a Material Adverse Effect. (b) Promptly notify Bank, in writing, as soon as Borrower becomes aware of any condition or circumstance which makes any of the environmental representations or warranties set forth in this Agreement incomplete, incorrect or inaccurate in any material respect as of any date; and promptly provide to Bank, immediately upon receipt thereof, copies of any material correspondence, notice, pleading, citation, indictment, complaint, order, decree, or other document from any source asserting or alleging a violation of any Environmental Laws by any Loan Party, or of any circumstance or condition which requires or may require, a financial contribution by any Loan Party, or a clean-up, removal, remedial action or other response by or on behalf of any Loan Party, under applicable Environmental Law(s), or which seeks damages or civil, criminal or punitive penalties from any Loan Party or any violation or alleged violation of Environmental Law(s). (c) Borrower hereby agrees to indemnify, defend and hold Bank, and any of Bank's past, present and future officers, directors, shareholders, employees, representatives and consultants, harmless from any and all claims, losses, damages, suits, penalties, costs, liabilities, obligations and expenses (as used in this Section, collectively, the "Indemnified Matters") (including, without limitation, reasonable legal expenses and attorneys' fees, whether inside or outside counsel is used) incurred or arising out of any claim, loss or damage of any property, injuries to or death of any persons, contamination of or adverse effects on the environment, or other violation of any applicable Environmental Law(s), in any case, caused by any Loan Party or in any way related to any property owned or operated by any Loan Party or due to any acts of any Loan Party or any of its officers, directors, shareholders, employees, consultants and/or representatives INCLUDING ANY CLAIMS, LOSSES, DAMAGES, SUITS, PENALTIES, COSTS, LIABILITIES, 9 OBLIGATIONS OR EXPENSES, RESULTING FROM BANK'S OWN NEGLIGENCE; provided however, that the foregoing indemnification shall not be applicable, and Borrower shall not be liable for any such claims, losses, damages, suits, penalties, costs, liabilities, obligations or expenses, to the extent (but only to the extent) the same arise or result from any gross negligence or willful misconduct of Bank or any of its agents or employees. Upon Bank's receipt of written notice of any such Indemnified Matter, Bank will provide to Borrower notice, in writing accompanied by reasonable detail, of such Indemnified Matter, but any failure by Bank to provide such notice to Borrower shall not impair or otherwise affect the rights of Bank or any of Bank's past, present or future officers, directors, shareholders, employees, representatives or consultants to be indemnified, defended and held harmless under this Section. SECTION 5. NEGATIVE COVENANTS Borrower covenants and agrees that, so long as Bank is committed to make any Loan or issue any Letter of Credit under this Agreement and until all instruments and agreements evidencing any Loan which is payable on demand or which conditions advances upon the Bank's discretion are fully discharged and terminated, and thereafter, so long as any Indebtedness remains outstanding, it will not, and it will not allow any Loan Party within its control or under common control to, without the prior written consent of the Bank, which consent, with respect to the following Sections 5.1, 5.6 and 5.7, shall not be unreasonably withheld: 5.1 Capital Structure, Business Objects or Purpose. Purchase, acquire or redeem any of its equity ownership interests; provided that Borrower may repurchase its common stock so long as the purchase price for all such stock does not exceed $250,000 during any fiscal year, or enter into any reorganization or recapitalization or reclassify its equity ownership interests, or make any material change in its capital structure or general business objects or purpose. 5.2 Mergers or Dispositions. Change its name, enter into any merger or consolidation, whether or not the surviving entity thereunder, or sell, lease, transfer, relocate or dispose of all, substantially all, or any material part of its assets (whether in a single transaction or in a series of transactions); provided that any Subsidiary of Borrower may be merged with Borrower so long as Borrower is the surviving entity. 5.3 Guaranties. Guarantee, endorse, or otherwise become secondarily liable for or upon the obligations or Debt of others (whether directly or indirectly), except: (a) guaranties in favor of and satisfactory to Bank; (b) endorsements for deposit or collection in the ordinary course of business; (c) guaranties of Debt of Borrower's Subsidiaries in an aggregate amount not to exceed $1,000,000; and 10 (d) guaranties of obligations to reimburse sureties with respect to performance or warranty bonds; provided that the Loan Parties' aggregate liability under such guaranties and for Debt described in Section 5.4(d), shall not exceed $5,000,000. 5.4 Debt. Become or remain obligated for any Debt except: (a) Indebtedness and other Debt from time to time outstanding and owing to Bank; (b) Trade payables and other payables and accrued liabilities arising in the ordinary course of business and normally classified as current liabilities under GAAP; (c) Debt (including, without limitation, Capitalized Lease Obligations) outstanding as of the date hereof more particularly described in Schedule 5.4 attached hereto and any refinancing thereof; (d) Debt to reimburse sureties with respect to performance or warranty bonds; provided that the Loan Parties' aggregate liability for such Debt and the guaranties described in Section 5.3(d), shall not exceed $5,000,000; (e) Debt arising under Hedging Contracts entered into with respect to Indebtedness; and (f) Other Debt in an aggregate amount not to exceed $1,500,000. 5.5 Encumbrances. Create, incur, assume or suffer to exist any Lien upon, or create, suffer or permit to exist any Lien upon any of its property or assets, whether now owned or hereafter acquired, except for Permitted Encumbrances. 5.6 Acquisitions. Purchase or otherwise acquire or become obligated for the purchase of all or substantially all of the assets or business interests of any Person or any shares of stock or other ownership interests of any Person or otherwise purchase assets for which the aggregate purchase price exceeds $2,000,000 in any fiscal year. 5.7 Investments. Make or allow to remain outstanding any investment (whether such investment shall be of the character of investment in shares of stock, evidences of indebtedness or other securities or otherwise) in, or any loans, advances or extensions of credit to, any Person, other than: (a) Borrower's current ownership interests in those Subsidiaries of Borrower identified on Schedule 3.5 attached hereto; and (b) any investment in direct obligations of the United States of America or any agency thereof, or in certificates of deposit issued by Bank, maintained 11 consistent with Borrower's or such Subsidiary's business practices prior to the date hereof. (c) any investment in repurchase obligations with a term of not more than seven days for underlying securities of the types described in clause (a) above entered into with any national or state bank or trust company which is organized under the Laws of the United States of America or any state therein, which has capital, surplus and undivided profits of at least $500,000,000, and whose long term certificates of deposit have an investment grade rating. (d) any investment in corporate bonds which have an investment grade rating. 5.8 Transactions with Affiliates. Enter into any transaction with any of their stockholders, officers, employees, partners or any of their Affiliates involving an aggregate amount in excess of $60,000 during any fiscal year of Borrower, except subject to the terms hereof, transactions in the ordinary course of business and on terms not less favorable than would be usual and customary in similar transactions between Persons dealing at arm's length. 5.9 Defaults on Other Obligations. Fail to perform, observe or comply duly with any covenant, agreement or other obligation to be performed, observed or complied with by any Loan Party, subject to any grace periods provided therein, which failure could have a Material Adverse Effect. 5.10 Pension Plans. Except in compliance with this Agreement, enter into, maintain, or make contribution to, directly or indirectly, any Pension Plan that is subject to ERISA. 5.11 No Further Negative Pledges. Enter into or become subject to any agreement (other than this Agreement or the Loan Documents) (a) prohibiting the guaranteeing by any Loan Party of any obligations, (b) prohibiting the creation or assumption of any Lien upon the properties or assets of any Loan Party, whether now owned or hereafter acquired or (c) requiring an obligation to become secured (or further secured) if another obligation is secured or further secured. 5.12 Accounts Receivable. Sell or assign any Eligible Account, account receivable, note or trade acceptance, except to the Bank. 5.13 No License Restrictions. Permit any restriction in any license or other agreement that restricts Borrower or any other Loan Party from granting a Lien to Bank upon any of Borrower's or such other Loan Party's rights under such license or agreement. 5.14 Sale of Assets. Sell or otherwise dispose of any of its assets in an aggregate amount that exceeds $250,000 in any fiscal year. 12 5.15 Distributions to Foreign Subsidiaries. Make any direct or indirect payment or distribution to any Subsidiary that is not organized under the Laws of the United States or any political subdivision thereof, in an aggregate amount that exceeds $500,000 in any fiscal year. SECTION 6. EVENTS OF DEFAULT 6.1 Events of Default. The occurrence or existence of any of the following conditions or events shall constitute an "Event of Default" hereunder: (a) upon non-payment of any principal, interest or other sums due under the terms of this Agreement or under any Note(s), or under any other instrument or evidence of Indebtedness, whether under this Agreement, any Note(s), or otherwise, in any case, when due in accordance with the terms hereof or as otherwise specified therein; or if any Guarantor shall fail to pay, when due, any indebtedness, obligation or liability whatsoever of any such Guarantor to Bank; (b) (i) default in the observance or performance of any of the conditions, covenants or agreements of Borrower set forth in Section 4.3(a), Section 4.4, or Sections 5.1 through 5.15 inclusive, and (ii) default in the observance or performance of any other term or condition set forth in this Agreement and not set forth above in Section 6.1(b)(i) or in Section 6.1(a), and such default is not cured within 15 days after the date on which Borrower first has knowledge of the occurrence of such default; (c) any representation or warranty made by any Loan Party in any Loan Document shall be untrue or incorrect in any material respect and is not cured within 15 days after the date on which Borrower first has knowledge that such representation or warranty has become untrue or incorrect; (d) any default or event of default, as the case may be, in the observance or performance of any of the conditions, covenants or agreements of any Loan Party set forth in any Loan Document and continuation thereof beyond any applicable period of grace or cure provided with respect thereto; (e) any default by any Loan Party, other than a "default," the existence of which is being contested by such Loan Party in good faith by appropriate proceedings or actions, in the payment of any Debt having a principal amount in excess of $100,000 (other than Debt owing to Bank), or in the observance or performance of any conditions, covenants or agreements related or given with respect thereto and, in each such case, continuation thereof beyond any applicable grace or cure period; (f) the rendering of one or more judgments or decrees for the payment of money, against any Loan Party, and such judgment(s) or decree(s) shall remain 13 unvacated, unbonded or unstayed, by appeal or otherwise, for a period of sixty (60) consecutive days after the date of entry; (g) a Change of Control occurs; (h) the failure by any Loan Party, to meet the minimum funding requirements under ERISA with respect to any Pension Plan established or maintained by it; the occurrence of any "reportable event," as defined in ERISA, which could constitute grounds for termination by the PBGC of any Pension Plan or for the appointment by the appropriate United States District Court of a trustee to administer such Pension Plan, and such reportable event is not corrected and such determination is not revoked within thirty (30) days after notice thereof has been given to the plan administrator or any Loan Party, as the case may be; or the institution of any proceedings by the PBGC to terminate any such Pension Plan or to appoint a trustee by the appropriate United States District Court to administer any such Pension Plan; (i) if any Loan Party, becomes insolvent or generally fails to pay, or admits in writing its inability to pay, its debts as they mature, or applies for, consents to, or acquiesces in the appointment of a trustee, receiver, liquidator, conservator or other custodian for any Loan Party, or a substantial part of its property, or makes a general assignment for the benefit of creditors; or in the absence of such application, consent or acquiescence, a trustee, receiver, liquidator, conservator or other custodian is appointed for any Loan Party, or for a substantial part of its property, and the same is not discharged within sixty (60) days; or any bankruptcy, reorganization, debt arrangement, or other proceedings under any bankruptcy or insolvency law, or any dissolution or liquidation proceeding, is instituted by or against any Loan Party, and, if instituted against any Loan Party, the same is consented to or acquiesced in by any such Loan Party or otherwise remains undismissed for sixty (60) days; or any warrant of attachment is issued against any substantial part of the property of any Loan Party, which is not released within sixty (60) days of service thereof; (j) if any Loan Document shall be terminated, revoked, or otherwise rendered void or unenforceable, in any case, without Bank's prior written consent, other than in accordance with the terms thereof; or (k) Bank reasonably deems itself insecure believing that the prospect of payment of any of the Indebtedness is impaired or shall fear deterioration, removal or waste of any of the Collateral. 6.2 Remedies Upon Event of Default. Upon the occurrence and at any time during the existence or continuance of any Event of Default, but without impairing or otherwise limiting the Bank's right to demand payment of all or any portion of the Indebtedness which is payable on demand, at Bank's option, Bank may give notice to Borrower declaring all or any portion of the 14 Indebtedness remaining unpaid and outstanding, whether under the Note or otherwise, to be due and payable in full without presentation, demand, protest, notice of dishonor, notice of intent to accelerate or notice of acceleration and without other notice of any kind, except as provided in the Loan Documents, all of which are hereby expressly waived, whereupon all such Indebtedness shall immediately become due and payable. Furthermore, upon the occurrence of a Default or Event of Default and at any time during the existence or continuance of any Default or Event of Default, but without impairing or otherwise limiting the right of Bank, if reserved under any Loan Document, to make or withhold financial accommodations at its discretion, to the extent not yet disbursed, any commitment by Bank to make any further loans to Borrower or issue any further Letters of Credit for Borrower's account under this Agreement shall automatically terminate; provided, should such Default or Event of Default be cured to Bank's satisfaction, Bank may, but shall be under no obligation to, reinstate any such commitment by written notice to Borrower. Notwithstanding the foregoing, in the case of an Event of Default under Section 6.1(i), and notwithstanding the lack of any notice, demand or declaration by Bank, the entire Indebtedness remaining unpaid and outstanding shall become automatically due and payable in full, and any commitment by Bank to make any further loans to Borrower or issue any further Letters of Credit for Borrower's account shall be automatically and immediately terminated, without any requirement of notice or demand by Bank upon Borrower, each of which are hereby expressly waived by Borrower. The foregoing rights and remedies are in addition to any other rights, remedies and privileges Bank may otherwise have or which may be available to it, whether under this Agreement, any other Loan Document, by law, or otherwise. 6.3 Setoff. In addition to any other rights or remedies of Bank under any Loan Document, by law or otherwise, upon the occurrence and during the continuance or existence of any Event of Default, Bank may, at any time and from time to time, without notice to Borrower (any requirements for such notice being expressly waived by Borrower), setoff and apply against any or all of the Indebtedness (whether or not then due), any or all deposits (general or special, time or demand, provisional or final) at any time held by Borrower and other indebtedness at any time owing by Bank to or for the credit or for the account of Borrower, and any property of Borrower, from time to time in possession or control of Bank, irrespective of whether or not Bank shall have made any demand hereunder or for payment of the Indebtedness and although such obligations may be contingent or unmatured, and regardless of whether any Collateral then held by Bank is adequate to cover the Indebtedness. The rights of Bank under this Section are in addition to any other rights and remedies (including, without limitation, other rights of setoff) which Bank may otherwise have. Borrower hereby grants Bank a Lien on and security interest in all such deposits, indebtedness and other property as additional collateral for the payment and performance of the Indebtedness. Bank shall provide reasonable detail as to the application of any funds that have been set off. 6.4 Waiver of Certain Laws. To the extent permitted by applicable law, Borrower hereby agrees to waive, and does hereby absolutely and irrevocably waive and relinquish, the benefit and advantage of any valuation, stay, appraisement, extension or redemption laws now existing or which may hereafter exist, which, but for this provision, might be applicable to any sale made under the judgment, order or decree of any court, on any claim for interest on the Note, or to any security interest or other Lien contemplated by or granted under or in connection with this Agreement or the Indebtedness. 15 6.5 Waiver of Defaults. No Default or Event of Default shall be waived by Bank except in a written instrument specifying the scope and terms of such waiver and signed by an authorized officer of Bank, and such waiver and shall be effective only for the specific time(s) and purpose(s) given. No single or partial exercise of any right, power or privilege hereunder, nor any delay in the exercise thereof, shall preclude other or further exercise of Bank's rights. No waiver of any Default or Event of Default shall extend to any other or further Default or Event of Default. No forbearance on the part of Bank in enforcing any of Bank's rights or remedies under any Loan Document shall constitute a waiver of any of its rights or remedies. Borrower expressly agrees that this Section may not be waived or modified by Bank by course of performance, estoppel or otherwise. 6.6 Receiver. Bank, in any action or suit to foreclose upon any of the Collateral, shall be entitled, without notice or consent, and completely without regard to the adequacy of any security for the Indebtedness, to the appointment of a receiver of the business and premises in question, and of the rents and profits derived therefrom. This appointment shall be in addition to any other rights, relief or remedies afforded Bank. Such receiver, in addition to any other rights to which he shall be entitled, shall be authorized to sell, foreclose or complete foreclosure on Collateral for the benefit of Bank, pursuant to provisions of applicable law. 6.7 Application of Proceeds of Collateral. Notwithstanding anything to the contrary set forth in any Loan Document, after an Event of Default, the proceeds of any of the Collateral, together with any offsets, voluntary payments, and any other sums received or collected in respect of the Indebtedness, may be applied in such order and manner as determined by Bank in its sole and absolute discretion. SECTION 7. MISCELLANEOUS 7.1 Accounting Principles. Except to the extent expressly stated to the contrary herein, where the character or amount of any asset or liability or item of income or expense is required to be determined, or any consolidation or other accounting computation is required to be made for purposes of this Agreement, it shall be done in accordance with GAAP, and all accounting terms not specifically defined in this Agreement shall be construed in accordance with GAAP. 7.2 Taxes and Fees. Unless otherwise prohibited by applicable law, should any tax (other than a tax based upon the net income of Bank) or recording or filing fee become payable in respect of any Loan Document, any of the Collateral, any of the Indebtedness or any amendment, modification or supplement hereof or thereof, Borrower agrees to pay such taxes (or reimburse Bank therefor upon demand for reimbursement), together with any interest or penalties thereon, and agrees to hold Bank harmless with respect thereto. 7.3 Governing Law. Each Loan Document shall be deemed to have been delivered in the State of Texas, and shall be governed by and construed and enforced in accordance with the laws of the State of Texas, except to the extent that the Uniform Commercial Code, other personal property law or real property law of another jurisdiction where Collateral is located is applicable, and except to the extent expressed to the contrary in any Loan Document. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, 16 such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 7.4 Audits of Collateral; Fees. Bank shall have the right from time to time to audit Accounts and Inventory pledged by any Loan Party and other Collateral, provided that such audits will be conducted no more than two (2) times in any fiscal year unless an Event of Default has occurred. Borrower agrees to reimburse Bank, on demand, for customary and reasonable fees and costs incurred by Bank for such audits. 7.5 Costs and Expenses. Borrower shall pay Bank, on demand, all costs and expenses, including, without limitation, reasonable attorneys' fees and legal expenses (whether inside or outside counsel is used), incurred by Bank in perfecting, revising, protecting or enforcing any of its rights or remedies against any Loan Party or any Collateral, or otherwise incurred by Bank in connection with any Default or Event of Default or the enforcement of the Loan Documents or the Indebtedness. Bank shall provide reasonable detail regarding such costs and expenses. Following Bank's demand upon Borrower for the payment of any such costs and expenses, and until the same are paid in full, the unpaid amount of such costs and expenses shall constitute Indebtedness and shall bear interest at the Default Rate. 7.6 Notices. All notices and other communications provided for in any Loan Document (unless otherwise expressly stipulated therein) or contemplated thereby, given thereunder or required by law to be given, shall be in writing (unless expressly provided to the contrary). If personally delivered, such notices shall be effective when delivered, and in the case of mailing or delivery by overnight courier, such notices shall be effective when placed in an envelope and deposited at a post office or official depository under the exclusive care and custody of the United States Postal Service or delivered to an overnight courier, postage prepaid, in each case addressed to the parties as set forth on the signature page of this Agreement, or to such other address as a party shall have designated to the other in writing in accordance with this Section. In the case of mailing, the mailing shall be by certified or first class mail. The giving of at least ten (10) days' notice before Bank shall take any action described in any notice shall conclusively be deemed reasonable for all purposes; provided, that this shall not be deemed to require Bank to give such ten (10) days' notice, or any notice, if not specifically required to do so in this Agreement. 7.7 Further Action. Borrower, from time to time, upon written request of Bank, will promptly make, execute, acknowledge and deliver, or cause to be made, executed, acknowledged and delivered, all such further and additional instruments, and promptly take all such further action as may be reasonably required to carry out the intent and purpose of the Loan Documents, and to provide for the Loans thereunder and payment of the Note, according to the intent and purpose therein expressed. 7.8 Successors and Assigns; Participation. This Agreement shall be binding upon and shall inure to the benefit of Borrower and Bank and their respective successors and assigns. The foregoing shall not authorize any assignment or transfer by Borrower of any of its respective rights, duties or obligations hereunder, such assignments or transfers being expressly prohibited. Bank, may assign its rights, duties and obligations hereunder, and will give to Borrower five (5) Business Days' prior notice of such assignment; provided that Bank shall not participate any of its rights, duties or 17 obligations hereunder so long as no Default or Event of Default has occurred and is continuing. Bank is hereby authorized to disclose to any such assignee or participant (or proposed assignee or participant) any financial or other information in its knowledge or possession regarding any Loan Party or the Indebtedness. 7.9 Indulgence. No delay or failure of Bank in exercising any right, power or privilege hereunder or under any of the Loan Documents shall affect such right, power or privilege, nor shall any single or partial exercise thereof preclude any further exercise thereof, nor the exercise of any other right, power or privilege available to Bank. The rights and remedies of Bank hereunder are cumulative and are not exclusive of any rights or remedies of Bank. 7.10 Amendment and Waiver. No amendment or waiver of any provision of any Loan Document, nor consent to any departure by any Loan Party therefrom, shall in any event be effective unless the same shall be in writing and signed by Bank, and then such waiver or consent shall be effective only in the specific instance(s) and for the specific time(s) and purpose(s) for which given. 7.11 Severability. In case any one or more of the obligations of any Loan Party under any Loan Document shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining obligations of such Loan Party shall not in any way be affected or impaired thereby, and such invalidity, illegally or unenforceability in one jurisdiction shall not affect the validity, legality or enforceability of the obligations of such Loan Party under any Loan Document in any other jurisdiction. 7.12 Headings and Construction of Terms. The headings of the various sub-Sections hereof are for convenience of reference only and shall in no way modify or affect any of the terms or provisions hereof. Where the context herein requires, the singular number shall include the plural, and any gender shall include any other gender. 7.13 Independence of Covenants. Each covenant hereunder shall be given independent effect so that if a particular action or condition is not permitted by any such covenant, the fact that it would be permitted by an exception to, or would be otherwise within the limitations of, another covenant shall not avoid the occurrence of any Default or Event of Default. 7.14 Reliance on and Survival of Various Provisions. All terms, covenants, agreements, representations and warranties of any Loan Party made in any Loan Document, or in any certificate, report, financial statement or other document furnished by or on behalf of any Loan Party in connection with any Loan Document, shall be deemed to have been relied upon by Bank, notwithstanding any investigation heretofore or hereafter made by Bank or on Bank's behalf, and those covenants and agreements of Borrower set forth in Sections 4.8 and 4.12 hereof (together with any other indemnities of Borrower contained elsewhere in any Loan Document) shall survive the termination of this Agreement and the repayment in full of the Indebtedness. 7.15 Effective Upon Execution. This Agreement shall become effective upon the execution hereof by Bank and Borrower, and shall remain effective until the Indebtedness under this Agreement and the Note and the related Loan Documents shall have been repaid and discharged in 18 full and no commitment to extend any credit hereunder (whether optional or obligatory) remains outstanding. 7.16 Complete Agreement; Conflicts. The Loan Documents contain the entire agreement of the parties thereto, and none of the parties shall be bound by anything not expressed in writing. In the event that and to the extent that any of the terms, conditions or provisions of any of the other Loan Documents are inconsistent with or in conflict with any of the terms, conditions or provisions of this Agreement, the applicable terms, conditions and provisions of this Agreement shall govern and control. 7.17 Exhibits and Addenda. The following Addenda, Exhibits and Schedules are attached to this Agreement and are incorporated into this Agreement by this reference and made a part hereof for all purposes: Addenda: Defined Terms Addendum Financial Covenants Addendum Loan Terms, Conditions and Procedures Addendum Exhibits: Exhibit A - Form of Compliance Certificate Exhibit B - Form of Request for Advance Schedules: Schedule 3.5 Subsidiaries Schedule 3.14 Employee Benefit Plans Schedule 3.17 Environmental Disclosures Schedule 5.4 Debt 7.18 WAIVER OF JURY TRIAL. BANK AND BORROWER EACH ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH OF THEM, AFTER CONSULTING OR HAVING HAD THE OPPORTUNITY TO CONSULT, WITH COUNSEL OF THEIR CHOICE, KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT EITHER OF THEM MAY HAVE TO A TRIAL BY JURY IN ANY LITIGATION BASED UPON OR ARISING OUT OF ANY LOAN DOCUMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED BY THE LOAN DOCUMENTS OR ANY COURSE OF CONDUCT, DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN), OR ACTION OF EITHER OF THEM. THESE PROVISIONS SHALL NOT BE DEEMED TO HAVE BEEN MODIFIED IN ANY RESPECT OR RELINQUISHED BY BANK OR BORROWER, EXCEPT BY A WRITTEN INSTRUMENT EXECUTED BY EACH OF THEM. 7.19 ORAL AGREEMENTS INEFFECTIVE. THIS AGREEMENT AND THE OTHER "LOAN AGREEMENTS" (AS DEFINED IN SECTION 26.02(A)(2) OF THE TEXAS BUSINESS & COMMERCE CODE, AS AMENDED) REPRESENT THE FINAL AGREEMENT BETWEEN 19 THE PARTIES, AND THIS AGREEMENT AND THE OTHER WRITTEN LOAN AGREEMENTS MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS BETWEEN THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. REMAINDER OF THE PAGE LEFT BLANK INTENTIONALLY SIGNATURE PAGE TO FOLLOW 20 WITNESS the due execution hereof as of the day and year first above written. COMERICA BANK PEERLESS MFG. CO. By: /s/ Deborah T. Purvin By: /s/ Richard L. Travis, Jr. ----------------------------- -------------------------------- Deborah T. Purvin Richard L. Travis, Jr. Vice President Chief Financial Officer Address: 1601 Elm Street Address: 2819 Walnut Hill Lane Dallas, Texas 75201 Dallas, Texas 75229 P.O. Box 650282 Attn: Richard L. Travis, Dallas, Texas 75262-0282 Jr. Attn: Deborah T. Purvin Telefax No.: (214) 351-0194 Telefax No.: (214) 589-1360 21 DEFINED TERMS ADDENDUM SECTION 1. DEFINITIONS 1.1 Defined Terms. As used in this Agreement, the following terms shall have the following respective meanings: "ACCOUNT DEBTOR" shall mean the party who is obligated on or under any Account. "ACCOUNTS," "CHATTEL PAPER," "DOCUMENTS," "EQUIPMENT," "FIXTURES," "GENERAL INTANGIBLES," "GOODS," "INSTRUMENTS" AND "INVENTORY" shall have the respective meanings assigned to them in the UCC on the date of this Agreement. "ACCOUNTS RECEIVABLE" shall mean and include all Accounts, Chattel Paper, General Intangibles, contract rights, deposit accounts, documents and Instruments now owned or hereafter acquired by Borrower and, to the extent applicable, any other Loan Party pledging or purporting to pledge the same as security for all or any part of the Indebtedness. "AFFILIATE" shall mean, when used with respect to any Person, any other Person which, directly or indirectly, controls or is controlled by or is under common control with such Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with"), with respect to any Person, shall mean possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise. "AFFILIATE RECEIVABLES" shall mean, as of any time of determination, any amounts in respect of loans or advances owing to Borrower or another Loan Party from any of its Subsidiaries or Affiliates or any officer, director or shareholder of any Loan Party at such time. "AGREEMENT" shall mean this Credit Agreement, including the Defined Terms Addendum, the Financial Covenants Addendum and the Loan Terms, Conditions and Procedures Addendum, together with all exhibits and schedules, as it may be amended from time to time. "APPLICABLE CALENDAR MONTH" shall mean any calendar month during which the aggregate outstanding amount of all Loans and Letter of Credit Liabilities equals or exceeds $8,000,000 at any time. "APPLICABLE INTEREST RATE" shall mean, with respect to the Indebtedness from time to time outstanding under any Note the rate or rates provided in such Note as the Applicable Interest Rate. "BORROWING BASE CERTIFICATE" shall mean a certificate describing the Eligible Accounts and Eligible Inventory in a form acceptable to Bank. "BORROWING BASE LIMITATION" shall mean the sum of: DEFINED TERMS ADDENDUM PAGE 1 (a) Seventy percent (70%) of Eligible Accounts minus the positive difference between (i) billings in excess of cost and (ii) cost in excess of billings; and (b) Forty percent (40%) of Eligible Inventory. "BUSINESS DAY" shall mean any day, other than a Saturday, Sunday or holiday, on which the Bank is open to carry on all or substantially all of its normal commercial lending business in Dallas, Texas. "CAPITALIZED LEASE OBLIGATION" shall mean any Debt represented by obligations under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP. "CHANGE OF CONTROL" shall mean that at any time one-third or more of the directors of Borrower shall consist of Persons not nominated by Borrower's Board of Directors (not including as Board nominees any directors which the Board is obligated to nominate pursuant to shareholders agreements, voting trust arrangements or similar arrangements). "COLLATERAL" shall mean all Accounts Receivable, Inventory, and Equipment of Borrower, and all other property, assets and rights in which a Lien or other encumbrance in favor of or for the benefit of Bank is or has been granted or arises or has arisen, or may hereafter be granted or arise, under or in connection with any Loan Document, or otherwise, to secure the payment or performance of the Indebtedness. "COMPLIANCE CERTIFICATE" shall mean a certificate to be furnished by Borrower to Bank, in the form of Exhibit A, certified by the chief financial officer of Borrower in his capacity as a responsible officer of Borrower (or in such officer's absence, another responsible officer of Borrower in his capacity as a responsible officer of Borrower) pursuant to Section 4.3 of this Agreement, certifying that, as of the date thereof, no Default or Event of Default shall have occurred and be continuing, or if any Default or Event of Default shall have occurred and be continuing, specifying in detail the nature and period of existence thereof and any action taken or proposed to be taken by Borrower with respect thereto, and also certifying as to Borrower's Debt to Tangible Net Worth Ratio and as to whether Borrower is in compliance with the financial covenants contained in the Financial Covenants Addendum to this Agreement (which certificate shall set forth, in reasonable detail, the calculations and the resultant ratios and financial tests determined thereunder). "CONSOLIDATED" or "CONSOLIDATED" shall mean, when used with reference to any financial term in this Agreement, the aggregate for two or more persons of the amounts signified by such term for all such persons determined on a consolidated basis in accordance with GAAP. Unless otherwise specified herein, references to "consolidated" financial statements or data of the Borrower includes consolidation with its Subsidiaries in accordance with GAAP. "CURRENT RATIO" shall mean as of any applicable date of determination thereof, the ratio of Borrower's current assets to Borrower's current liabilities, calculated on a Consolidated basis. DEFINED TERMS ADDENDUM PAGE 2 "DEBT" shall mean, as of any applicable date of determination thereof, all items of indebtedness, obligation or liability of a Person, whether matured or unmatured, liquidated or unliquidated, direct or indirect, absolute or contingent, joint or several. In the case of Borrower, the term "Debt" shall include, without limitation, the Indebtedness. "DEBT TO TANGIBLE NET WORTH RATIO" shall mean, in respect of a Person and as of any applicable date of determination thereof, the ratio of the GAAP Debt of such Person to the Tangible Net Worth of such Person. With respect to Borrower, the Debt to Tangible Net Worth Ratio shall be calculated on a Consolidated basis. "DEFAULT" shall mean, any condition or event which, with the giving of notice or the passage of time, or both, would constitute an Event of Default. "DEFAULT RATE" shall mean, at any time of determination thereof with respect to the applicable portion of the Indebtedness, a per annum rate of interest equal to the sum of the contractual rate of interest which would apply to such Indebtedness if the Default Rate was not then in effect plus three percent (3%). "DISBURSEMENT DATE" shall mean the date upon which Bank makes a Loan under this Agreement. "DISTRIBUTION" shall mean any dividend on or other distribution (whether by reduction of capital or otherwise) with respect to any shares of capital stock (or other ownership interests), except for dividends from a Subsidiary of a Loan Party to another of its Subsidiaries. "ELIGIBLE ACCOUNT" shall mean an Account (but shall not include interest and service charges thereon) arising in the ordinary course of business which meets each of the following requirements: (a) it is not owing more than sixty (60) days after the date on which payment of the original invoice or other writing evidencing such Account is due; (b) it arises from the sale or lease of goods and such goods have been shipped or delivered to the Account Debtor under such Account, or it arises from services rendered and such services have been performed; (c) it is evidenced by an invoice, dated not later than the date of shipment or performance (either partial or complete), rendered to such Account Debtor or some other evidence of billing acceptable to Bank; (d) it is not evidenced by any note, trade acceptance, draft or other Instrument or by any Chattel Paper, unless such note or other document or Instrument or Chattel Paper has previously been endorsed and delivered by the relevant Loan Party to Bank. DEFINED TERMS ADDENDUM PAGE 3 (e) it is a valid, legally enforceable obligation of the Account Debtor thereunder, and is not subject to any offset, counterclaim or other defense on the part of such Account Debtor or to any claim on the part of such Account Debtor denying liability thereunder in whole or in part; provided, however, that any Account that is subject to offset may be an Eligible Account to the extent it exceeds the amount of such offset if it meets all of the other requirements of this definition; (f) it is not subject to any sale of accounts, any rights of offset or Lien whatsoever other than to Bank; (g) it is not owing by a Subsidiary or Affiliate of Borrower; (h) it is not (i) owing by an Account Debtor that (A) does not maintain its chief executive office in the United States of America or Canada, or (B) is not organized under the laws of the United States of America, or any state thereof or under the laws of Canada or any province thereof, or (C) is the government of any foreign country or sovereign state, or of any state, province, municipality or other instrumentality thereof, and (ii) supported by (A) one or more letters of credit in an amount and of a tenor, and issued by a financial institution, acceptable to Bank, or (B) insurance provided by an insurer acceptable to Bank; (i) is not an Account billed in advance, payable on delivery, for consigned goods, for guaranteed sales, for unbilled sales, payable at a future date in accordance with its terms or insured by a surety company; (j) it is not an Account owing by the United States of America or any state or political subdivision thereof, or by any department, agency, public body corporate or other instrumentality of any of the foregoing, unless all necessary steps are taken to comply with the Federal Assignment of Claims Act of 1940, as amended, or with any comparable state law, if applicable, and all other necessary steps are taken to perfect Bank's security interest in such Account; (k) it is not owing by an Account Debtor for which a Loan Party or any of its Subsidiaries has received a notice of (i) the dissolution, liquidation, termination of existence, insolvency or business failure of the Account Debtor, (ii) the appointment of a receiver for any material part of the property of the Account Debtor, or (iii) an assignment for the benefit of creditors, the filing of a petition in bankruptcy, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against the Account Debtor; and (l) it is not owing by any Account Debtor whose obligations Bank, acting in its reasonable discretion, shall have notified Borrower prior to its inclusion on a Borrowing Base Certificate, are not deemed to constitute Eligible Accounts. DEFINED TERMS ADDENDUM PAGE 4 An Account which is at any time an Eligible Account, but which subsequently fails to meet any of the foregoing requirements, shall forthwith cease to be an Eligible Account. "ELIGIBLE INVENTORY" shall mean all of Borrower's Inventory which is in good and merchantable condition, is not obsolete or discontinued, and which would properly be classified as "raw materials" under GAAP, excluding (a) Borrower's work in process, miscellaneous supplies such as hand tools and packaging materials, consigned goods, Inventory located outside the United States of America and goods in transit, (b) Inventory covered by or subject to a seller's right to repurchase, or any consensual or nonconsensual Lien (including, without limitation, purchase money security interests) other than in favor of Bank, whether senior or junior to Bank's security interest and Liens, and (c) Inventory that Bank, acting in its reasonable discretion, after having notified Borrower, excludes as Eligible Inventory. Inventory which is at any time Eligible Inventory, but which subsequently fails to meet any of the foregoing requirements, shall forthwith cease to be Eligible Inventory. Eligible Inventory shall be valued at the lesser of cost or market value in accordance with GAAP. "ENVIRONMENTAL LAW(S)" shall mean all laws, codes, ordinances, rules, regulations, orders, decrees and directives issued by any federal, state, local, foreign or other governmental or quasi governmental authority or body (or any agency, instrumentality or political subdivision thereof) pertaining to Hazardous Materials or otherwise intended to regulate or improve health, safety or the environment, including, without limitation, any hazardous materials or wastes, toxic substances, flammable, explosive or radioactive materials, asbestos, and/or other similar materials; any so-called "superfund" or "superlien" law, pertaining to Hazardous Materials on or about any of the Collateral, or any other property at any time owned, leased or otherwise used by any Loan Party, or any portion thereof, including, without limitation, those relating to soil, surface, subsurface ground water conditions and the condition of the ambient air; and any other federal, state, foreign or local statute, law, ordinance, code, rule, regulation, order or decree regulating, relating to, or imposing liability or standards of conduct concerning, any hazardous, toxic, radioactive, flammable or dangerous waste, substance or material, as now or at anytime hereafter in effect. "EQUIPMENT" shall have the meaning assigned to such term in the UCC on the date of this Agreement together with all of the following to the extent, if any, the same are not included within such definition: all machinery, equipment, furniture, furnishings, fixtures, and other tangible personal property (except Inventory) including, without limitation, data processing hardware and software, motor vehicles, aircraft, dies, tools, jigs, and office equipment, as well as all of such types of property that are leased and all rights and interests with respect thereto under such leases to the extent that any such lease does not prohibit or require a consent to the creation of a Lien in favor of the Bank (including, without limitation, options to purchase) together with all present and future additions and accessions thereto, replacements therefor, component and auxiliary parts and supplies used or to be used in connection therewith, and all substitutes for any of the foregoing, and all manuals, drawings, instructions, warranties and rights with respect thereto wherever any of the foregoing is located to the extent that any of the foregoing are now owned or hereafter acquired by the Borrower and to the extent that any other Loan Party now or hereafter grants or purports to grant a Lien upon all or any of the foregoing as security for all or any portion of the Indebtedness. DEFINED TERMS ADDENDUM PAGE 5 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, or any successor act or code. "EVENT OF DEFAULT" shall mean any of those conditions or events listed in Section 6.1 of this Agreement. "FINANCIAL STATEMENTS" shall mean all balance sheets, income statements, statements of operations, statements of changes in shareholders' equity, statements of cash flow and reports and notes thereto of Borrower, all presented on a consolidated basis, which are required to, have been, or may from time to time hereafter, be furnished to Bank, for the purposes of, or in connection with, this Agreement, the transactions contemplated hereby or any of the Indebtedness. "GAAP" shall mean generally accepted accounting principles consistently applied. "GAAP DEBT" shall mean all Debt that should be classified as a liability on a consolidated balance sheet of Borrower in accordance with GAAP. "GOOD FAITH" or "GOOD FAITH" shall have the meaning ascribed to the term "good faith" in Article 1.201 (19) of the UCC on the date of this Agreement. "GOVERNMENTAL AUTHORITY" shall mean the United States, each state, each county, each city, and each other political subdivision in which all or any portion of the Collateral is located, and each other political subdivision, agency, or instrumentality exercising jurisdiction over Bank, any Loan Party or any Collateral. "GOVERNMENTAL REQUIREMENTS" shall mean all laws, ordinances, rules, and regulations of any Governmental Authority applicable to any Loan Party, any of the Indebtedness or any Collateral. "GUARANTOR(S)" shall mean, as the context dictates, any Person(s) (other than the Borrower) who shall, at any time, guarantee or otherwise be or become obligated for the repayment of all or any part of the Indebtedness, including, without limitation, PMC Acquisition, Inc. "HAZARDOUS MATERIAL" shall mean and include any hazardous, toxic or dangerous waste, substance or material defined as such in, or for purposes of, any Environmental Law(s). "HEDGING CONTRACT" shall mean any agreement providing for options, swaps, floors, caps, collars, forward sales or forward purchases involving interest rates. "INDEBTEDNESS" shall mean all loans, advances, indebtedness, obligations and liabilities of any Loan Party to Bank under any Loan Document, together with all other indebtedness, obligations and liabilities whatsoever of Borrower to Bank, whether matured or unmatured, liquidated or unliquidated, direct or indirect, absolute or contingent, joint or several, due or to become due, now existing or hereafter arising, voluntary or involuntary, known or unknown, or originally payable to Bank or to a third party and subsequently acquired by Bank including, without limitation, any: late DEFINED TERMS ADDENDUM PAGE 6 charges; loan fees or charges; overdraft indebtedness; costs incurred by Bank in establishing, determining, continuing or defending the validity or priority of any Lien or in pursuing any of its rights or remedies under any Loan Document or in connection with any proceeding involving Bank as a result of any financial accommodation to Borrower; debts, obligations and liabilities for which Borrower would otherwise be liable to the Bank were it not for the invalidity or enforceability of them by reason of any bankruptcy, insolvency or other law or for any other reason; and reasonable costs and expenses of attorneys and paralegals, whether any suit or other action is instituted, and to court costs if suit or action is instituted, and whether any such fees, costs or expenses are incurred at the trial court level or on appeal, in bankruptcy, in administrative proceedings, in probate proceedings or otherwise; provided, however, that the term Indebtedness shall not include any consumer loan to the extent treatment of such loan as part of the Indebtedness would violate any Governmental Requirement. "INVENTORY" shall have the meaning assigned to such term in the UCC on the date of this Agreement together with all goods, merchandise and other personal property of Borrower and each other Loan Party which shall pledge or purport to pledge the same as security for any of the Indebtedness, now owned or hereafter produced, manufactured or acquired by any such Person, which are held for sale or lease or are furnished under a contract of service or are raw materials, work-in-process or materials used or consumed or to be used or consumed in any such Person's business, and any other Inventory of any such Person, as determined in accordance with GAAP. "LETTER OF CREDIT" shall mean a letter of credit issued by the Bank for the account of and/or upon the application of any Loan Party in accordance with this Agreement, as such Letter of Credit may be amended, supplemented, extended or confirmed from time to time. "LETTER OF CREDIT LIABILITIES" shall mean, at any time and in respect of all Letters of Credit, the sum of (a) the aggregate amount available to be drawn under all such Letters of Credit plus (b) the aggregate unpaid amount of all Reimbursement Obligations then due and payable in respect of previous drawings under such Letters of Credit. "LIEN" shall mean any valid and enforceable interest in any property, whether real, personal or mixed, securing an indebtedness, obligation or liability owed to or claimed by any Person other than the owner of such property, whether such indebtedness is based on the common law or any statute or contract and including, but not limited to, a security interest, pledge, mortgage, assignment, conditional sale, trust receipt, lease, consignment or bailment for security purposes. "LOAN DOCUMENTS" shall mean collectively, this Agreement, the Note, any reimbursement agreement or other documentation executed in connection with any Letter of Credit, and any other documents, instruments or agreements evidencing, governing, securing, guaranteeing or otherwise relating to or executed pursuant to or in connection with any of the Indebtedness or any Loan Document (whether executed and delivered prior to, concurrently with or subsequent to this Agreement), as such documents may have been or may hereafter be amended from time to time. "LOAN PARTY" shall mean Borrower and each Guarantor. DEFINED TERMS ADDENDUM PAGE 7 "LOANS" shall mean, collectively, the Revolving Loans, and "LOAN" shall mean any of them. "MASTER REVOLVING NOTE" shall mean the Master Revolving Note of even date herewith in the original principal amount of $12,500,000 made by Borrower payable to the order of the Bank, as the same may be renewed, extended, modified, increased or restated from time to time. "MATERIAL ADVERSE EFFECT" shall mean (i) any act, event, condition or circumstance which could materially and adversely affect the business, operations, condition (financial or otherwise), performance or assets of Borrower on a consolidated basis, the ability of Borrower to perform its obligations under any Loan Document to which it is a party or by which it is bound or the enforceability of any Loan Document, and (ii) with respect to Sections 3.10, 3.11, 3.17 and 4.12, any act, event, condition or circumstance which could materially and adversely affect the business, operations, condition (financial or otherwise), performance or assets of any Loan Party, the ability of any Loan Party to perform its obligations under any Loan Document to which it is a party or by which it is bound or the enforceability of any Loan Document. "MAXIMUM LEGAL RATE" shall mean the maximum rate of nonusurious interest per annum permitted to be paid by Borrower or, if applicable, another Loan Party or received by Bank with respect to the applicable portion of the Indebtedness from time to time under applicable state or federal law as now or as may be hereafter in effect, including, as to Chapter 303 of the Texas Finance Code, but otherwise without limitation, that rate based upon the "weekly ceiling" (as defined in the Texas Finance Code). "NET INCOME" shall mean the net income of the Borrower on a consolidated basis for any applicable period of determination, determined in accordance with GAAP, but excluding, in any event: (a) any material gains or losses on the sale or other disposition, not in the ordinary course of business, of investments or fixed or capital assets, and any taxes on the excluded gains and any tax deductions or credits on account of any excluded losses; and (b) net earnings of any Person not consolidated with Borrower in which Borrower has an ownership interest, unless such net earnings shall have actually been received by Borrower in the form of cash distributions. "NOTE" shall mean the Master Revolving Note, and all notes given in replacement and substitution thereof. "PBGC" shall mean the Pension Benefit Guaranty Corporation, or any Person succeeding to the present powers and functions of the Pension Benefit Guaranty Corporation. "PENSION PLAN(S)" shall mean any and all employee benefit pension plans of Borrower and/or any of its Subsidiaries in effect from time to time, as such term is defined in ERISA. DEFINED TERMS ADDENDUM PAGE 8 "PERMITTED ENCUMBRANCES" shall mean: (a) Liens in favor of the Bank; (b) Liens for taxes, assessments or other governmental charges which are not yet due and payable, incurred in the ordinary course of business and for which no interest, late charge or penalty is attaching or which are being contested in good faith by appropriate proceedings and, if requested by Bank, bonded in an amount and manner satisfactory to Bank; (c) Liens, not delinquent, arising in the ordinary course of business and created by statute in connection with worker's compensation, unemployment insurance, social security and similar statutory obligations; (d) Liens of mechanics, materialmen, carriers, warehousemen or other like statutory or common law Liens securing obligations incurred in good faith in the ordinary course of business without violation of any Loan Document that are not yet due and payable; (e) encumbrances consisting of existing or future zoning restrictions, existing recorded rights-of-way, existing recorded easements, existing recorded private restrictions or existing or future public restrictions on the use of real property, none of which materially impairs the use of such property in the operation of the business for which it is used, and none of which is violated in any material respect by any existing or proposed structure or land use and none of which is prohibited by any other Loan Document; (f) Liens arising in connection with Capitalized Lease Obligations permitted under Section 5.4(d); and (g) Liens on Accounts that are not Eligible Accounts. "PERSON" or "PERSON" shall mean any individual, corporation, partnership, joint venture, limited liability company, association, trust, unincorporated association, joint stock company, government, municipality, political subdivision or agency, or other entity. "REIMBURSEMENT OBLIGATIONS" shall mean, at any time and in respect of all Letters of Credit, the aggregate obligations any Loan Party, then outstanding or which may thereafter arise, to reimburse the Bank for any amount paid or incurred by the Bank in respect of any and all drawings under such Letter of Credit, together with any and all other Indebtedness, obligations and liabilities of any Loan Party to Bank related to such Letter of Credit arising under this Agreement, any Letter of Credit application or any other Loan Document, to the extent not repaid with the Revolving Loans advanced under this Agreement. DEFINED TERMS ADDENDUM PAGE 9 "REQUEST FOR ADVANCE" shall mean an oral or written request or authorization for an advance of Loan proceeds which if made in writing shall be in the form annexed hereto as Exhibit B, or in such other form as is acceptable to Bank. "REVOLVING CREDIT MATURITY DATE" shall mean November 1, 2006 or such earlier date on which the entire unpaid principal amount of al Revolving Loans becomes due and payable whether by the lapse of time, demand for payment, acceleration or otherwise; provided, however, if any such date is not a Business Day, then the Revolving Credit Maturity Date shall be the next succeeding Business Day. "REVOLVING CREDIT MAXIMUM AMOUNT" shall mean (a) $8,000,000 if the sum of the outstanding principal balance of all Revolving Loans plus the Letter of Credit Liabilities is less than or equal to $8,000,000, or (b) the lesser of (i) TWELVE MILLION FIVE HUNDRED THOUSAND DOLLARS ($12,500,000), or (ii) the Borrowing Base Limitation if the sum of outstanding principal balance of all Revolving Loans plus the Letter of Credit Liabilities exceeds $8,000,000. "REVOLVING LOAN" shall mean an advance made, or to be made, under the revolving credit loan facility to or for the credit of Borrower by the Bank pursuant to the Loan Terms, Conditions and Procedures Addendum. "SUBSIDIARY" shall mean as to any particular parent entity, any corporation, partnership, limited liability company or other entity (whether now existing or hereafter organized or acquired) in which more than fifty percent (50%) of the outstanding equity ownership interests having voting rights as of any applicable date of determination, shall be owned directly, or indirectly through one or more Subsidiaries, by such parent entity. "TANGIBLE NET WORTH" shall mean as of any applicable date of determination, the consolidated shareholder's equity of Borrower, calculated in accordance with GAAP, less any Affiliate Receivables, goodwill, and all other assets normally classified as intangible assets under GAAP. "TELEPHONE NOTICE AUTHORIZATION" shall mean an agreement in form satisfactory to Bank authorizing telephonic and facsimile notices of borrowing and establishing a codeword system of identification in connection therewith. "UCC" shall mean the Uniform Commercial Code as adopted and in force in the State of Texas, as amended. DEFINED TERMS ADDENDUM PAGE 10 FINANCIAL COVENANTS ADDENDUM SECTION 1. FINANCIAL COVENANTS. 1.1 Tangible Net Worth. Maintain a Tangible Net Worth at all times of not less than (a) from the dated of this Agreement through June 29, 2004, $20,500,000 and (b) during each fiscal year thereafter, the sum of (i) the minimum Tangible Net Worth required pursuant to this Section 1.1 for the immediately preceding fiscal year, plus (ii) fifty percent (50%) multiplied by the positive Net Income of Borrower for the immediately preceding fiscal year. 1.2 Current Ratio. Maintain in a Current Ratio at all times of not less than 1.15 to 1. FINANCIAL COVENANTS ADDENDUM PAGE 1 LOAN TERMS, CONDITIONS AND PROCEDURES ADDENDUM SECTION 1. REVOLVING CREDIT FACILITY 1.1 Revolving Credit Commitment. Subject to the terms and conditions of the Loan Documents, the Bank agrees to make Revolving Loans to Borrower at any time and from time to time from the effective date hereof until (but not including) the Revolving Credit Maturity Date. The aggregate principal amount of Revolving Loans at any time outstanding plus the Letter of Credit LIABILITIES shall not exceed the Revolving Credit Maximum Amount. All of such Revolving Loans shall be evidenced by the Master Revolving Note, under which advances, repayments and re-advances may be made, subject to the terms and conditions of the Loan Documents. 1.2 Repayment of and Interest on the Master Revolving Note. Each Revolving Loan evidenced by the Master Revolving Note from time to time outstanding hereunder shall, from and after the date of such Revolving Loan, bear interest at a per annum rate equal to the Applicable Interest Rate until the occurrence of an Event of Default and thereafter at the Default Rate and shall be due and payable in accordance with the terms of the Master Revolving Note. All unpaid principal, accrued and unpaid interest and other amounts owing under the Master Revolving Note shall be due and payable on the Revolving Credit Maturity Date. 1.3 Requests for Advances. Except as hereinafter provided, Borrower may request a Revolving Loan by submitting to Bank a Request for Advance by an authorized officer or other representative of Borrower, subject to the following: i. each such Request for Advance shall include, without limitation, the proposed amount of such Revolving Loan and the proposed Disbursement Date, which date must be a Business Day; ii. each such Request for Advance shall be communicated to Bank by 2:00 p.m. (Dallas, Texas time) on the proposed Disbursement Date; iii. a Request for Advance, once communicated to Bank, shall not be revocable by Borrower; iv. each Request for Advance, once communicated to Bank, shall constitute a representation, warranty and certification by Borrower as of the date thereof that: (1) both before and after the making of such Revolving Loan, the obligations set forth in the Loan Documents are and shall be valid, binding and enforceable obligations of each Loan Party, as applicable; (2) all terms and conditions precedent to the making of such Revolving Loan have been satisfied, and shall remain satisfied through the date of such Revolving Loan; LOAN TERMS, CONDITIONS AND PROCEDURES ADDENDUM PAGE 1 (3) the making of such Revolving Loan will not cause the aggregate outstanding principal amount of all Revolving Loans plus the Letter of Credit Liabilities to exceed the Revolving Credit Maximum Amount; (4) no Default or Event of Default shall have occurred or be in existence, and none will exist or arise upon the making of such Revolving Loan; (5) the representations and warranties contained in the Loan Documents are true and correct in all material respects and shall be true and correct in all material respects as of the making of such Revolving Loan; and (6) the Request for Advance will not violate the terms or conditions of any contract, indenture, agreement or other borrowing of any Loan Party. Bank may elect (but without any obligation to do so) to make a Revolving Loan upon the telephonic or facsimile request of Borrower, provided that Borrower has first executed and delivered to Bank a Telephone Notice Authorization. If any such Revolving Loan based upon a telephonic or facsimile request is made by Borrower, Bank may require Borrower to confirm said telephonic or facsimile request in writing by delivering to Bank, on or before 2:00 p.m. (Dallas, Texas time) on the next Business Day following the Disbursement Date of such Revolving Loan, a duly executed written Request for Advance, and all other provisions of this Section 1 shall be applicable with respect to such Revolving Loan. In addition, Borrower may authorize the Bank to automatically make Revolving Loans pursuant to such other written agreements as may be entered into by Bank and Borrower 1.4 Prepayment. Borrower may prepay all or part of the outstanding balance under the Master Revolving Note at any time, without premium, penalty or prejudice to the right of Borrower to reborrow under the terms of this Agreement, subject to the terms and conditions of the Loan Documents. 1.5 Revolving Credit Maximum Amount and Reduction of Indebtedness. Notwithstanding anything contained in this Agreement to the contrary, the aggregate principal amount of all Revolving Loans at any time outstanding plus the Letter of Credit Liabilities shall not exceed the Revolving Credit Maximum Amount. If said limitations are exceeded at anytime, Borrower shall immediately, without demand by Bank, pay to Bank an amount not less than such excess, or, if Bank, in its sole discretion, shall so agree, Borrower shall provide Bank cash collateral in an amount not less than such excess, and Borrower hereby pledges and grants to Bank a security interest in such cash collateral so provided to Bank. 1.6 Use of Proceeds of Revolving Loans. The proceeds of Revolving Loans shall be used to refinance existing revolving credit line indebtedness and outstanding letters of credit and for other working capital needs of Borrower. LOAN TERMS, CONDITIONS AND PROCEDURES ADDENDUM PAGE 2 1.7 Non-Application of Chapter 346 of Texas Finance Code. The provisions of Chapter 346 of the Texas Finance Code are specifically declared by the parties not to be applicable to any of the Loan Documents or the transactions contemplated thereby. 1.8 Unused Commitment Fee. Borrower shall pay to Bank an unused commitment fee, calculated at a per annum rate, in an amount equal to the product of (a) 0.125% per annum multiplied by (b) the amount by which $12,500,000 exceeds the sum of (i) the outstanding principal balance of all Revolving Loans plus (ii) the Letter of Credit Liabilities, plus (iii) $2,500,000. Such fee shall be computed on a daily basis and shall be payable quarterly in arrears as of the end of each of Borrower's fiscal quarters. Bank shall invoice Borrower for such fees, which invoice shall be due and payable within fifteen (15) days after receipt. 1.9 Letters of Credit. i. Letters of Credit. Subject to the terms and conditions of this Agreement and the other Loan Documents, the Bank shall, upon request from Borrower from time to time prior to the Revolving Credit Maturity Date, issue one or more Letters of Credit. The Letter of Credit Liabilities shall not exceed $10,000,000; and the sum of (i) the outstanding principal balance of all Revolving Loans plus (ii) the Letter of Credit Liabilities shall not exceed the Revolving Credit Maximum Amount. No Letter of Credit shall have a stated expiration date later than eighteen (18) months after the date of issuance thereof, and in no event shall such stated expiration date be later than twelve (12) months after the Revolving Credit Maturity Date. ii. Additional Provisions. The following additional provisions shall apply to each Letter of Credit: (1) Borrower shall give the Bank written notice requesting each issuance of a Letter of Credit hereunder not less than three (3) Business Days prior to the requested issuance date and shall furnish such additional information regarding such transaction as Bank may request. The issuance by Bank of each Letter of Credit shall, in addition to the conditions precedent set forth elsewhere in this Agreement, be subject to the conditions precedent that (A) such Letter of Credit shall be in form and substance satisfactory to Bank, (B) Borrower shall have executed and delivered such applications and other instruments and agreements relating to such Letter of Credit as Bank shall have requested and are not inconsistent with the terms of this Agreement, (C) each of the statements in Section 1.3(d)(i), (ii), (iv), (v) and (vi) of this Loan Terms, Conditions and Procedures Addendum are true as of the date of issuance of such Letter of Credit with respect to issuance of such Letter of Credit (as opposed to making a Revolving Loan), and the submission of an application for issuance of a Letter of Credit shall constitute a representation, warranty and certification of Borrower to that effect, and (D) no Letter of Credit may be issued if after giving effect thereto, the sum of the aggregate outstanding principal balance of all Revolving Loans plus the Letter of Credit LOAN TERMS, CONDITIONS AND PROCEDURES ADDENDUM PAGE 3 Liabilities would exceed the Revolving Credit Maximum Amount. With respect to the issuance or renewal of each Letter of Credit, Borrower shall pay to Bank such letter of credit fees and other expenses customarily charged by Bank in connection with the issuance or renewals of letters of credit. (2) Borrower shall be irrevocably and unconditionally obligated forthwith to reimburse Bank for any amount paid by Bank upon any drawing under any Letter of Credit, without presentment, demand, protest or other formalities of any kind, all of which are hereby waived. Unless Borrower shall elect to otherwise satisfy such Reimbursement Obligation, such reimbursement shall, subject to satisfaction of any conditions provided herein for the making of Revolving Loans and to the Revolving Credit Maximum Amount, automatically be made by advancing to Borrower a Revolving Loan in the amount of such Reimbursement Obligation. (3) Borrower shall pay to Bank a fee, calculated at a per annum rate, for the issuance of each Letter of Credit (the "Letter of Credit Fee"), which fee shall be determined in accordance with the following schedule based on Borrower's Debt to Tangible Net Worth Ratio:
LETTER OF CREDIT FEE DEBT TO TANGIBLE NET WORTH RATIO PER ANNUM - -------------------------------- ---------- ~~Equal to or greater than 1.5:1 1.25% Less than 1.5:1 and equal to or greater than 1:1 1.125% Less than 1:1 1.00%~~
The Debt to Tangible Net Worth Ratio applicable to any Letter of Credit for the purposes of calculating the Letter of Credit Fee shall be the Debt to Tangible Net Worth Ratio demonstrated on the most recent Compliance Certificate or Financial Statements received by Bank, or in the event the Bank does not timely receive a Compliance Certificate and all Financial Statements as required by Section 4.3 of this Agreement or any other Loan Document, the Letter of Credit Fee shall be 1.25%. The Letter of Credit fee shall be due and payable quarterly in arrears as of the end of each of Borrower's fiscal quarters. Notwithstanding any of the foregoing, for any Letter of Credit having a face amount of less than $25,000, the Letter of Credit Fee shall be $150 per annum and shall be due and payable in advance on the date of the issuance of such Letter of Credit and on each annual anniversary thereof. iii. Indemnification; Release. Borrower hereby indemnifies and agrees to defend and hold harmless Bank and its officers, directors, employees, agents and representatives LOAN TERMS, CONDITIONS AND PROCEDURES ADDENDUM PAGE 4 from and against any and all claims and damages, losses, liabilities, costs or expenses (as used in this Section, collectively, the "Indemnified Matters") which any such indemnified party may incur (or which may be claimed against Bank or any such indemnified party by any person whatsoever), REGARDLESS OF WHETHER CAUSED IN WHOLE OR IN PART BY THE NEGLIGENCE OF ANY OF THE INDEMNIFIED PARTIES, in connection with the execution and delivery of any Letter of Credit or transfer of or payment or failure to pay under any Letter of Credit; provided that Borrower shall not be required to indemnify any party seeking indemnification for any claims, damages, losses, liabilities, costs or expenses to the extent, but only to the extent, caused by (i) the willful misconduct or gross negligence of the party seeking indemnification, or (ii) by the failure by the party seeking indemnification to pay under any Letter of Credit after the presentation to it of a request required to be paid under application law. Upon Bank's receipt of written notice of any such Indemnified Matter, Bank will provide to Borrower notice, in writing accompanied by reasonable detail, of such Indemnified Matter, but any failure by Bank to provide such notice to Borrower shall not impair or otherwise affect the rights of Bank or its officers, directors, employees, agents or representatives to be indemnified, defended and held harmless under this Section. SECTION 2. FUNDING LOANS, PAYMENTS, RECOVERIES AND COLLECTIONS 2.1 Funding Loans. Subject to the satisfaction of all conditions precedent to the making and funding of any Loan set forth in any Loan Document, including, without limitation, those conditions precedent set forth in Section 3 of this Addendum, Bank shall make the proceeds of any such Loan available to Borrower by 5:00 p.m. (Dallas, Texas time) on the respective Disbursement Date of such Loan, by depositing such proceeds into such account maintained by Borrower with Bank as Borrower shall designate in writing or as otherwise agreed to in writing by Borrower and Bank. 2.2 Bank's Books and Records. The amount and date of each Loan hereunder, the amount from time to time outstanding under each Note, the Applicable Interest Rate in respect of each Loan, and the amount and date of any repayment hereunder or the Note, shall be noted on Bank's books and records, which shall be conclusive evidence thereof, absent manifest error; provided, however, any failure by Bank to make any such notation, or any error in any such notation, shall not relieve Borrower of its obligations to pay to Bank all amounts owing to Bank under or pursuant to the Loan Documents, in each case, when due in accordance with the terms hereof or thereof. 2.3 Payments on Non-Business Day. In the event that any payment of any principal, interest, fees or any other amounts payable by Borrower under or pursuant to any Loan Document shall become due on any day which is not a Business Day, such due date shall be extended to the next succeeding Business Day, and, to the extent applicable, interest shall continue to accrue and be payable at the Applicable Interest Rate(s) for and during any such extension. 2.4 Payment Procedures. Unless otherwise expressly provided in a Loan Document, all sums payable by Borrower to Bank under or pursuant to any Loan Document, whether principal, LOAN TERMS, CONDITIONS AND PROCEDURES ADDENDUM PAGE 5 interest, or otherwise, shall be paid, when due, directly to Bank at the office of Bank identified on the signature page of this Agreement, or at such other office of Bank as Bank may designate in writing to Borrower from time to time, in immediately available United States funds, and without setoff, deduction or counterclaim. Bank may, in its discretion, charge any and all deposit or other accounts (including, without limitation, any account evidenced by a certificate of deposit or time deposit) of Borrower maintained with Bank for all or any part of any Indebtedness then due and payable; provided, however, that such authorization shall not affect Borrower's obligations to pay all Indebtedness, when due, whether or not any such account balances maintained by Borrower with Bank are insufficient to pay any amounts then due. 2.5 Maximum Interest Rate. At no time shall any Applicable Interest Rate or Default Rate under this Agreement or any Note, or otherwise in respect of any Loan or any Indebtedness hereunder, exceed the Maximum Legal Rate, giving due consideration to the execution of this Agreement and each Note. In the event that any interest is charged or otherwise received by Bank in excess of the Maximum Legal Rate, Borrower hereby acknowledges and agrees that any such excess interest shall be the result of an accidental and bona fide error, and any such excess shall be deemed to have been payments of principal, and not of interest, and shall be applied, first, to reduce the principal Indebtedness then outstanding, second, any remaining excess, if any, shall be applied to reduce any other Indebtedness, and third, any remaining excess, if any, shall be returned to Borrower. Notwithstanding the foregoing or anything to the contrary contained in this Agreement or any other Loan Document, but subject to all limitations contained in this paragraph, if at anytime any Applicable Interest Rate or Default Rate or other rate of interest applicable to any portion of the Indebtedness is computed on the basis of the Maximum Legal Rate, any subsequent reduction in the Applicable Interest Rate, Default Rate or such other rate of interest shall not reduce such interest rate thereafter payable below the Maximum Legal Rate until the aggregate amount of interest accrued equals the total amount of interest that would have accrued if interest had, at all times, been computed solely on the basis of the Applicable Interest Rate, Default Rate or such other interest rate. This paragraph shall control all agreements between the Borrower and the Bank. 2.6 Receipt of Payments by Bank. Any payment by Borrower of any of the Indebtedness made by mail will be deemed tendered and received by Bank only upon actual receipt thereof by Bank at the address designated for such payment, whether or not Bank has authorized payment by mail or in any other manner, and such payment shall not be deemed to have been made in a timely manner unless actually received by Bank on or before the date due for such payment, time being of the essence. Borrower expressly assumes all risks of loss or liability resulting from non-delivery or delay of delivery of any item of payment transmitted by mail or in any other manner. Acceptance by Bank of any payment in an amount less than the amount then due shall be deemed an acceptance on account only, and any failure to pay the entire amount then due shall constitute and continue to be an Event of Default hereunder. Bank shall be entitled to exercise any and all rights and remedies conferred upon and otherwise available to Bank under any Loan Document upon the occurrence and during the continuance of any such Event of Default. Prior to the occurrence of any Default, Borrower shall have the right to direct the application of any and all payments made to Bank hereunder to the Indebtedness evidenced by the Note. Borrower waives the right to direct the application of any and all payments received by Bank hereunder at any time or times after the occurrence and during the continuance of any Default. Borrower further agrees that after the LOAN TERMS, CONDITIONS AND PROCEDURES ADDENDUM PAGE 6 occurrence and during the continuance of any Default, or prior to the occurrence of any Default if Borrower has failed to direct such application, Bank shall have the continuing exclusive right to apply and to reapply any and all payments received by Bank at any time or times, whether as voluntary payments, proceeds from any Collateral, offsets, or otherwise, against the Indebtedness in such order and in such manner as Bank may, in its sole discretion, deem advisable, notwithstanding any entry by Bank upon any of its books and records. Borrower hereby expressly agrees that, to the extent that Bank receives any payment or benefit of or otherwise upon any of the Indebtedness, and such payment or benefit, or any part thereof, is subsequently invalidated, declared to be fraudulent or preferential, set aside, or required to be repaid to a trustee, receiver, or any other Person under any bankruptcy act, state or federal law, common law, equitable cause or otherwise, then to the extent of such payment or benefit, the Indebtedness, or part thereof, intended to be satisfied shall be revived and continued in full force and effect as if such payment or benefit had not been made or received by Bank, and, further, any such repayment by Bank shall be added to and be deemed to be additional Indebtedness. 2.7 Security. Payment and performance of the Indebtedness shall be secured by Liens on all of the assets and properties of Borrower and of such other Loan Parties as Bank may require from time to time and shall be guaranteed by the Guarantors. If on or after the Revolving Credit Maturity Date, all Indebtedness (excluding Indebtedness with respect to future drawings under Letters of Credit) shall have been paid in full, and all Indebtedness with respect to future drawings under Letters of Credit shall have been secured by cash collateral or letters of credit in a manner acceptable to Bank, then Bank shall release its Liens on the Collateral, other than such cash collateral. SECTION 3. CONDITIONS PRECEDENT 3.1 Conditions Precedent to First Loan or First Letter of Credit. The obligation of the Bank to issue the first Letter of Credit or to make the first Revolving Loan under or pursuant to this Agreement shall be subject to the following conditions precedent: (i) Execution of this Agreement, Note and other Loan Documents. Borrower shall have executed and delivered to Bank, or caused to have been executed and delivered to Bank, this Agreement, the Note and all other Loan Documents, and this Agreement (including all addenda, schedules, exhibits, certificates, opinions, financial statements and other documents to be delivered pursuant hereto), such Note, and all other Loan Documents, shall be in full force and effect and binding and enforceable obligations of Borrower and, to the extent that it is a party thereto or otherwise bound thereby, of each other Person who may be a party thereto or bound thereby. (ii) Authority Documents. Bank shall have received: (i) copies of resolutions of the board of directors of each Loan Party evidencing approval of the borrowing hereunder and the transactions contemplated by the Loan Documents, and authorizing the execution, delivery and performance by each Loan Party of each Loan Document to which it is a party or by which it is otherwise bound, which resolutions shall have been certified by a duly authorized officer or other representative, as LOAN TERMS, CONDITIONS AND PROCEDURES ADDENDUM PAGE 7 applicable, of each Loan Party as of the date of this Agreement as being complete, accurate and in full force and effect; (ii) incumbency certifications of a duly authorized officer, partner or other representative, as applicable, of each Loan Party, in each case, identifying those individuals who are authorized to execute the Loan Documents for and on behalf of such Loan Party, respectively, and to otherwise act for and on behalf of such Loan Party; (iii) certified copies of each of such Loan Party's articles of incorporation and bylaws, and all amendments thereto; and (iv) certificates of existence, good standing and authority to do business, as applicable, certified within 30 days of the date of this Agreement, from the state or other jurisdiction of each of such Loan Party's organization. (iii) Collateral Documents. As security and support for the payment and performance of all Indebtedness of Borrower to Bank, Borrower shall have furnished, executed and delivered to Bank, or shall have caused to have been furnished, executed and delivered to Bank, prior to or concurrently with the Disbursement Date for the initial Loan hereunder, in form satisfactory to Bank, the following documents, and Bank shall have received proof that appropriate security agreements, financing statements, collateral and other documents covering the Collateral shall have been executed and delivered by the appropriate Persons and recorded or filed in such jurisdictions and such other steps shall have been taken as necessary to perfect, subject only to Permitted Encumbrances, the Liens granted thereby: (1) a security agreement executed by Borrower covering all of its assets, including all equity interests of Borrower in all of its domestic Subsidiaries; (2) Guaranty executed by the Guarantor; (3) financing statements required or requested by Bank to perfect all security interests to be conferred upon Bank under the Loan Documents and to accord Bank a perfected security position in the Collateral, subject only to Permitted Encumbrances; (4) such additional documents or certificates as may reasonably be required by Bank and/or required under the terms of any and every Loan Document; and (5) such other documents or agreements of security and appropriate assurances of validity, perfection and priority of Lien as Bank may reasonably request. (iv) Legal Opinion Letter. Borrower shall have furnished to Bank an opinion of Borrower's legal counsel, dated as of the date of this Agreement, and covering such matters as are required by Bank and which is otherwise satisfactory in form and substance to Bank. (v) Licenses, Permits, Approvals, Etc. To the extent necessary and applicable, Borrower shall have received any and all necessary authorizations, approvals and consents from LOAN TERMS, CONDITIONS AND PROCEDURES ADDENDUM PAGE 8 all applicable Governmental Authorities in respect of the borrowing by Borrower of the Loans hereunder, the Loan Documents and the transactions contemplated by any Loan Document; and Bank shall have also received copies of each authorization, license, permit, consent, order or approval of, or registration, declaration or filing with, any Governmental Authority or any securities exchange or other Person obtained or made by Borrower or any other Person in connection with the transactions contemplated by the Loan Documents and which is material to the financial condition of Borrower or such other Person or the conduct of its business or the transactions contemplated hereby or the Collateral. (vi) UCC Lien Search. Bank shall have received UCC, tax lien and judgment lien record and copy searches, disclosing no notice of any Liens or encumbrances filed against any of the Collateral, other than the Permitted Encumbrances. (vii) Casualty Insurance. Borrower shall have furnished to Bank, or cause to have been furnished to Bank, in form and content and in amounts and with companies rated "A" or better by a nationally recognized rating agency for insurance carriers, casualty insurance policies, with loss payable clauses in favor of Bank, relating to the assets and properties (including, but not limited to, the Collateral) of Borrower any applicable Loan Party. (viii) Financial Statements and Audit. Borrower shall have furnished to Bank, Borrower's audited annual Consolidated financial statements for the fiscal year ended June 30, 2003, prepared by Grant Thornton, and the field audit of Borrower shall have been completed and the results thereof shall be satisfactory to Bank. (ix) Approval of Bank Counsel. All actions, proceedings, instruments and documents required to carry out the borrowings and transactions contemplated by this Agreement or any other Loan Document or incidental thereto, and all other related legal matters, shall have been satisfactory to and approved by legal counsel for Bank, and said counsel shall have been furnished with such certified copies of actions and proceedings and such other instruments and documents as they shall have requested. (x) Compliance with Certain Documents and Agreements. Each Loan Party shall have each performed and complied with all agreements and conditions contained in the Loan Documents applicable to it and which are then in effect. (xi) Other Documents and Instruments. Bank shall have received such other instruments and documents (not inconsistent with the terms hereof) as Bank may request in connection with the making of the Loans hereunder, and all such instruments and documents shall be satisfactory in form and substance to Bank. 3.2 Conditions Precedent to Disbursement of All Loans and All Letters of Credit. In addition to any other terms and conditions set forth in this Agreement, including, without limitation, those set forth in Section 3.1 above, the obligation of Bank to make any Loan or to issue any Letter of Credit under this Agreement, including, without limitation, the initial Loan hereunder, shall be LOAN TERMS, CONDITIONS AND PROCEDURES ADDENDUM PAGE 9 further subject to the satisfaction of each of the following conditions precedent on or before the Disbursement Date for such Loan: (i) Execution and Delivery of Note. Borrower shall have executed and delivered to Bank the applicable Note, with appropriate insertions, to evidence such Loan and the Indebtedness of Borrower in respect thereof. (ii) Loan Documents Binding and Enforceable. All Loan Documents shall be in full force and effect and binding and enforceable obligations of each Loan Party. (ii) Representations and Warranties. Each of the representations and warranties of each Loan Party under any Loan Document shall be true and correct in all material respects. (iv) No Default or Material Adverse Effect. No Default or Event of Default shall have occurred and be continuing; and no event shall have occurred which could reasonably be expected to cause a Material Adverse Effect. LOAN TERMS, CONDITIONS AND PROCEDURES ADDENDUM PAGE 10 EXHIBIT A FORM COMPLIANCE CERTIFICATE This Compliance Certificate is executed and delivered to Comerica Bank ("Bank") by Peerless Mfg. Co. ("Borrower"), this _________ day of ________________, 20__. All capitalized terms used but not defined herein, shall have the meanings given to such terms in that certain Credit Agreement, dated as of October 30, 2003 between Bank and Borrower (as renewed, extended, modified and restated from time to time, the "Credit Agreement"). The undersigned hereby certifies to Bank as follows: (1) The undersigned is the duly elected, qualified and acting ______________________________ of Borrower and, as such, is authorized to make and deliver this Certificate. (2) The undersigned has reviewed the provisions of the Credit Agreement and confirms that, as of the date hereof: (a) the representations and warranties contained in Section 3 of the Credit Agreement are true and correct in all material respects on and as of the date hereof with the same force and effect as though made on and as of the date hereof, (b) no Default or Event of Default has occurred and is continuing, and Borrower has complied with all of the terms, covenants and conditions set forth in the Credit Agreement; and (c) attached hereto as Schedule A is a report prepared by the undersigned setting forth information and calculations that demonstrate (i) compliance (or noncompliance) with each of the covenants set forth in the Financial Covenants Addendum to the Credit Agreement, and (ii) Borrower's Debt to Tangible Net Worth Ratio. The foregoing certificate is given in my capacity as __________________________ of Borrower, and not in my individual capacity. PEERLESS MFG. CO., a Texas corporation By: _____________________________________ Name: _____________________________________ Title: _____________________________________ FORM OF COMPLIANCE CERTIFICATE EXHIBIT A PAGE 1 SCHEDULE A TO COMPLIANCE CERTIFICATE (i) Tangible Net Worth. (i) Tangible Net $____________ Worth: (ii) Financial Covenants $____________ Addendum presently requires Tangible Net Worth be not less than: Covenant Satisfied___________________ Covenant Not Satisfied_______________ Covenant Not Tested__________________ (ii) Current Ratio. (i) Current assets: $____________ (ii) Current liabilities: $____________ (iii) Ratio of (i) current assets to (ii) current liabilities [(a) + (b)]: ____ to 1.0 (iv) Financial Covenants Addendum presently requires maintenance of a Current Ratio of not less than: 1.15 to 1.0 Covenant Satisfied __________________ Covenant Not Satisfied ______________ Covenant Not Tested _________________ (iii) Debt to Tangible Net Worth Ratio. (i) Consolidated Debt: $____________ (ii) Consolidated Tangible Net $____________ Worth:

FORM OF COMPLIANCE CERTIFICATE EXHIBIT A PAGE 2 ~~(iii) Ratio of (i) Consolidated Debt to (ii) Consolidated Tangible Net Worth ____ to 1.0~~

FORM OF COMPLIANCE CERTIFICATE EXHIBIT A PAGE 3 EXHIBIT B FORM OF REQUEST FOR ADVANCE (REVOLVING LOAN) The undersigned hereby requests COMERICA BANK ("Bank") to make a Revolving Loan to the undersigned on , 20__, in the amount of ____________________ Dollars ($ ) under the Credit Agreement dated as of October 30, 2003 by and between the undersigned and Bank (herein called the "Credit Agreement"). The undersigned represents, warrants and certifies that no Default or Event of Default has occurred and is continuing under the Credit Agreement, and none will exist upon the making of the Revolving Loan requested hereunder. The undersigned further certifies that upon advancing the sum requested hereunder, the aggregate principal amount outstanding under the Master Revolving Note plus the Letter of Credit Liabilities will not exceed the Revolving Credit Maximum Amount. The undersigned hereby authorizes Bank to disburse the proceeds of the Revolving Loan being requested by this Request for Advance by crediting the account of the undersigned with Bank separately designated by the undersigned or as the undersigned and Bank may otherwise agree. Capitalized terms used but not otherwise defined herein shall have the respective meanings given to them in the Credit Agreement. Dated this _______ day of __________________, 20__. PEERLESS MFG. CO., a Texas corporation By: _____________________________________ Name: _____________________________________ Title: _____________________________________ FORM OF REQUEST FOR ADVANCE (REVOLVING LOAN) EXHIBIT B PAGE B-1 SCHEDULE 3.5 SUBSIDIARIES SUBSIDIARIES SCHEDULE 3.5 PAGE 1 SCHEDULE 3.14 EMPLOYEE BENEFIT PLANS EMPLOYEE BENEFIT PLANS SCHEDULE 3.14 PAGE 1 SCHEDULE 3.17 ENVIRONMENTAL DISCLOSURES None. ENVIRONMENTAL DISCLOSURES SCHEDULE 3.17 PAGE 1 SCHEDULE 5.4 DEBT DEBT SCHEDULE 5.4 PAGE 1 EX-10.(B) 5 d12159exv10wxby.txt GUARANTY AGREEMENT EXHIBIT 10(b) [COMERICA BANK LOGO] GUARANTY As of October 30, 2003, the undersigned, for value received, unconditionally and absolutely guarantee(s) to Comerica Bank ("Bank"), payment when due, whether by stated maturity, demand, acceleration or otherwise, of all existing and future indebtedness ("Indebtedness") to the Bank of PEERLESS MFG. CO. ("Borrower"). Indebtedness includes without limit any and all obligations or liabilities of the Borrower to the Bank, whether absolute or contingent, direct or indirect, voluntary or involuntary, liquidated or unliquidated, joint or several, known or unknown; originally payable to the Bank or to a third party and subsequently acquired by the Bank including, without limitation, late charges, loan fees or charges and overdraft indebtedness; any and all indebtedness, obligations or liabilities for which Borrower would otherwise be liable to the Bank were it not for the invalidity, irregularity or unenforceability of them by reason of any bankruptcy, insolvency or other law or order of any kind, or for any other reason; any and all amendments, modifications, renewals and/or extensions of any of the above; and all costs of collecting Indebtedness, including, without limit, attorneys' fees. Any reference in this Guaranty to attorneys' fees shall be deemed a reference to reasonable fees, charges, costs and expenses of counsel and paralegals, whether inside or outside counsel is used, and whether or not a suit or action is instituted, and to court costs if a suit or action is instituted, and whether attorneys' fees or court costs are incurred at the trial court level, on appeal, in a bankruptcy, administrative or probate proceeding or otherwise. All costs shall be payable immediately by the undersigned when incurred by the Bank, upon demand in writing, accompanied by reasonable detail and explanation, and until paid shall bear interest at the highest per annum rate applicable to any of the Indebtedness, but not in excess of the maximum rate permitted by law. 1. LIMITATION: The total obligation of the undersigned under this Guaranty is UNLIMITED unless specifically limited in the Additional Provisions of this Guaranty, and this obligation (whether unlimited or limited to the extent specified in the Additional Provisions) shall include, IN ADDITION TO any limited amount of principal guaranteed, all interest on that limited amount, and all costs incurred by the Bank in collection efforts against the Borrower and/or the undersigned or otherwise incurred by the Bank in any way relating to the Indebtedness, or this Guaranty, including without limit attorneys' fees. The undersigned agree(s) that (a) this limitation shall not be a limitation on the amount of Borrower's Indebtedness to the Bank; (b) any payments by the undersigned shall not reduce the maximum liability of the undersigned under this Guaranty unless written notice to that effect is actually received by the Bank at, or prior to, the time of the payment; and (c) the liability of the undersigned to the Bank shall at all times be deemed to be the aggregate liability of the undersigned under this Guaranty. 2. NATURE OF GUARANTY: This is a continuing Guaranty of payment and not of collection and remains effective whether the Indebtedness is from time to time reduced and later increased or entirely extinguished and later reincurred. The undersigned deliver(s) this Guaranty based solely on the undersigned's independent investigation of (or decision not to investigate) the financial condition of Borrower and is (are) not relying on any information furnished by the Bank. The undersigned assume(s) full responsibility for obtaining any further information concerning the Borrower's financial condition, the status of the Indebtedness or any other matter which the undersigned may deem necessary or appropriate now or later. The undersigned knowingly accept(s) the full range of risk encompassed in this Guaranty, which risk includes, without limit, the possibility that Borrower may incur Indebtedness to the Bank after the financial condition of the Borrower, or the Borrower's ability to pay debts as they mature, has deteriorated. 3. APPLICATION OF PAYMENTS: The undersigned authorize(s) the Bank, either before or after termination of this Guaranty, without notice to or demand on the undersigned and without affecting the undersigned's liability under this Guaranty, from time to time to: (a) apply any security and direct the order or manner of sale; and (b) apply payments received by the Bank from the Borrower to any indebtedness of the Borrower to the Bank, in such order as the Bank shall determine in its sole discretion, whether or not this indebtedness is covered by this Guaranty, and the undersigned waive(s) any provision of law regarding application of payments which specifies otherwise. The undersigned agree(s) to provide to the Bank copies of the undersigned's financial statements upon request. 4. SECURITY: The undersigned pledge(s), assign(s) and grant(s) to the Bank a security interest in and lien upon and the right of setoff as to any and all property of the undersigned now or later in the possession of the Bank. The undersigned further assign(s) to the Bank as collateral for the obligations of the undersigned under this Guaranty all claims of any nature that the undersigned now or later has (have) against the Borrower (other than any claim under a deed of trust or mortgage covering California real property) with full right on the part of the Bank, in its own name or in the name of the undersigned, to collect and enforce these claims. The undersigned agree(s) that no security now or later held by the Bank for the payment of any Indebtedness, whether from the Borrower, any guarantor, or otherwise, and whether in the nature of a security interest, pledge, lien, assignment, setoff, suretyship, guaranty, indemnity, insurance or otherwise, shall affect in any manner the unconditional obligation of the undersigned under this Guaranty, and the Bank, in its sole discretion, without notice to the undersigned, may release, exchange, enforce and otherwise deal with any security without affecting in any manner the unconditional obligation of the undersigned under this Guaranty. The undersigned acknowledge(s) and agree(s) that the Bank has no obligation to acquire or perfect any lien on or security interest in any asset(s), whether realty or personalty, to secure payment of the Indebtedness, and the undersigned is (are) not relying upon any asset(s) in which the Bank has or may have a lien or security interest for payment of the Indebtedness. 5. [INTENTIONALLY OMITTED]. 6. TERMINATION: Any of the undersigned may terminate their obligation under this Guaranty as to future Indebtedness (except as provided below) by (and only by) delivering written notice of termination to an officer of the Bank and receiving from an officer of the Bank written acknowledgement of delivery; provided, however, the termination shall not be effective until the opening of business on the fifth (5th) day ("effective date") following written acknowledgement of delivery. Any termination shall not affect in any way the unconditional obligations of the remaining guarantor(s), whether or not the termination is known to the remaining guarantor(s). Any termination shall not affect in any way the unconditional obligations of the terminating guarantor(s) as to any Indebtedness existing at the effective date of termination or any Indebtedness created after that pursuant to any commitment or agreement of the Bank or pursuant to any Borrower loan with the Bank existing at the effective date of termination (whether advances or readvances by the Bank after the effective date of termination are optional or obligatory), or any modifications, extensions or renewals of any of this Indebtedness, whether in whole or in part, and as to all of this Indebtedness and modifications, extensions or renewals of it, this Guaranty shall continue effective until the same shall have been fully paid. The Bank has no duty to give notice of termination by any guarantor(s) to any remaining guarantor(s). The undersigned shall indemnify the Bank against all claims, damages, costs and expenses (collectively, the "Indemnified Matters"), INCLUDING ANY CLAIMS, DAMAGES, COSTS AND EXPENSES RESULTING FROM BANK'S OWN NEGLIGENCE, except and to the extent (but only to the extent) caused by Bank's gross negligence or wilful misconduct, including, without limit, attorneys' fees, incurred by the Bank in connection with any suit, claim or action against the Bank arising out of any modification or termination of a Borrower loan or any refusal by the Bank to extend additional credit in connection with the termination of this Guaranty. Upon Bank's receipt of written notice of any such Indemnified Matter, Bank will provide to Debtor notice, in writing accompanied by reasonable detail, of such Indemnified Matter, but any failure by Bank to provide such notice to Debtor shall not impair or otherwise affect the rights of Bank to be indemnified and held harmless under this Section. 7. REINSTATEMENT: Notwithstanding any prior revocation, termination, surrender or discharge of this Guaranty (or of any lien, pledge or security interest securing this Guaranty) in whole or in part, the effectiveness of this Guaranty, and of all liens, pledges and security interests securing this Guaranty, shall automatically continue or be reinstated in the event that any payment received or credit given by the Bank in respect of the Indebtedness is returned, disgorged or rescinded under any applicable state or federal law, including, without limitation, laws pertaining to bankruptcy or insolvency, in which case this Guaranty, and all liens, pledges and security interests securing this Guaranty, shall be enforceable against the undersigned as if the returned, disgorged or rescinded payment or credit had not been received or given by the Bank, and whether or not the Bank relied upon this payment or credit or changed its position as a consequence of it. In the event of continuation or reinstatement of this Guaranty and the liens, pledges and security interests securing it, the undersigned agree(s) upon demand by the Bank to execute and deliver to the Bank those documents which the Bank determines are appropriate to further evidence (in the public records or otherwise) this continuation or reinstatement, although the failure of the undersigned to do so shall not affect in any way the reinstatement or continuation. If the undersigned do(es) not execute and deliver to the Bank upon demand such documents, the Bank and each Bank officer is irrevocably appointed (which appointment is coupled with an interest) the true and lawful attorney of the undersigned (with full power of substitution) to execute and deliver such documents in the name and on behalf of the undersigned. 8. WAIVERS: The undersigned, to the extent not expressly prohibited by applicable law, waive(s) any right to require the Bank to: (a) proceed against any person or property; (b) give notice of the terms, time and place of any public or private sale of personal property security held from the Borrower or any other person, or otherwise comply with the provisions of Sections 9-611 or 9-621 of the Texas or other applicable Uniform Commercial Code, as the same may be amended, revised or replaced from time to time; or (c) pursue any other remedy in the Bank's power. The undersigned waive(s) notice of acceptance of this Guaranty and presentment, demand, protest, notice of protest, dishonor, notice of dishonor, notice of default, notice of intent to accelerate or demand payment or notice of acceleration of any Indebtedness, any and all other notices to which the undersigned might otherwise be entitled, and diligence in collecting any Indebtedness, and all rights of a guarantor under Rule 31, Texas Rules of Civil Procedure, Chapter 34 of the Texas Business and Commerce Code, or Section 17.001 of the Texas Civil Practice and Remedies Code, and agree(s) that the Bank may, once or any number of times, modify the terms of any Indebtedness, compromise, extend, increase, accelerate, renew or forbear to enforce payment of any or all Indebtedness, or permit the Borrower to incur additional Indebtedness, all without notice to the undersigned and without affecting in any manner the unconditional obligation of the undersigned under this Guaranty. The undersigned unconditionally and irrevocably waive(s) each and every defense and setoff of any nature which, under principles of guaranty or otherwise, would operate to impair or diminish in any way the obligation of the undersigned under this Guaranty, and acknowledge(s) that each such waiver is by this reference incorporated into each security agreement, collateral assignment, pledge and/or other document from the undersigned now or later securing this Guaranty and/or the Indebtedness, and acknowledge(s) that as of the date of this Guaranty no such defense or setoff exists. 9. WAIVER OF SUBROGATION: The undersigned waive(s) any and all rights (whether by subrogation, indemnity, reimbursement, or otherwise) to recover from the Borrower any amounts paid by the undersigned pursuant to this Guaranty until the Indebtedness has been paid in full. 10. SALE/ASSIGNMENT: The undersigned acknowledge(s) that the Bank has the right to sell, assign, transfer, negotiate, or grant participations in all or any part of the Indebtedness and any related obligations, including, without limit, this Guaranty, as provided in that certain Credit Agreement of even date herewith between Borrower and the Bank, without notice to the undersigned and that the Bank may disclose any documents and information which the Bank now has or later acquires relating to the undersigned or to the Borrower or the Indebtedness in connection with such sale, assignment, transfer, negotiation, or grant. The undersigned agree(s) that the Bank may provide information relating to this Guaranty or relating to the undersigned to the Bank's parent, affiliates, subsidiaries and service providers. 11. GENERAL: This Guaranty constitutes the entire agreement of the undersigned and the Bank with respect to the subject matter of this Guaranty. No waiver, consent, modification or change of the terms of the Guaranty shall bind any of the undersigned or the Bank unless in writing and signed by the waiving party or an authorized officer of the waiving party, and then this waiver, consent, modification or change shall be effective only in the specific instance and for the specific purpose given. This Guaranty shall inure to the benefit of the Bank and its successors and assigns and shall be binding on the undersigned and the undersigned's legal representatives, successors and assigns including, without limit, any debtor in possession or trustee in bankruptcy for any of the undersigned. The undersigned has (have) knowingly and voluntarily entered into this Guaranty in good faith for the purpose of inducing the Bank to extend credit or make other financial accommodations to the Borrower. If any provision of this Guaranty is unenforceable in whole or in part for any reason, the remaining provisions shall continue to be effective. THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES. 12. HEADINGS: Headings in this Agreement are included for the convenience of reference only and shall not constitute a part of this Agreement for any purpose. 13. ADDITIONAL PROVISIONS: None. 14. JURY TRIAL WAIVER: THE UNDERSIGNED AND BANK, BY ACCEPTANCE OF THIS GUARANTY, ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY, AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT WAIVES ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE OR ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS GUARANTY OR THE INDEBTEDNESS. 15. THIS WRITTEN LOAN AGREEMENT (AS DEFINED BY SECTION 26.02 OF THE TEXAS BUSINESS AND COMMERCE CODE) 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 OR ORAL AGREEMENTS BETWEEN THE PARTIES. IN WITNESS WHEREOF, Guarantor(s) has (have) signed and delivered this Guaranty the day and year first written above. GUARANTOR: PMC ACQUISITION, INC. By: /s/ Richard L. Travis, Jr. ---------------------------------------- SIGNATURE OF Its: Chief Financial Officer ----------------------------------- TITLE (IF APPLICABLE) GUARANTOR"S ADDRESS: 2819 Wallnut Hill Lane ---------------------------------------- STREET ADDRESS Dallas TX 75354 -------- ------- ---------- CITY STATE ZIP CODE EX-10.(C) 6 d12159exv10wxcy.txt MASTER REVOLVING NOTE . . . EXHIBIT 10(c) MASTER REVOLVING NOTE [COMERICA BANK LOGO] Eurodollar Rate-Maturity Date-Committed (Business and Commercial Loans Only)
AMOUNT NOTE DATE MATURITY DATE TAX IDENTIFICATION NUMBER ~~$12,500,000 October 30, 2003 November 1, 2006 17507244170~~
ON THE MATURITY DATE, as stated above, for value received, the undersigned promise(s) to pay to the order of Comerica Bank ("Bank"), at any office of the Bank in the State of Texas, Twelve Million Five Hundred Thousand Dollars (U.S.) (or that portion of it advanced by the Bank and not repaid as later provided) with interest until maturity, whether by acceleration or otherwise, or until the occurrence of an Event of Default (as defined in that certain Credit Agreement of even date herewith between the undersigned and Bank (the "Credit Agreement") and used with the same meaning herein), at a per annum rate equal to the lesser of (a) the Maximum Rate, as later defined, or (b) the Stated Rate, as later defined, and after that at a rate equal to the rate of interest otherwise prevailing under this Note plus three percent (3%) per annum (but in no event in excess of the Maximum Rate). If on any day the Stated Rate shall exceed the Maximum Rate for that day, the rate of interest applicable to this Note shall be fixed at the Maximum Rate on that day and on each day thereafter until the total amount of interest accrued on the unpaid principal balance of this Note equals the total amount of interest which would have accrued if there had been no Maximum Rate. Interest rate changes will be effective for interest computation purposes as and when the Maximum Rate or the Stated Rate, as applicable, changes. Subject to the limitations hereinbelow set forth, interest shall be calculated on the basis of a 360-day year for actual number of days the principal is outstanding. Accrued interest on this Note shall be payable on the first Eurodollar Business Day, as later defined, of each calendar month, commencing with the first Eurodollar Business Day of the calendar month following the date of this Note and with respect to interest accrued on any Eurodollar Balance, as later defined, on the last day of the applicable Eurodollar Interest Period, as later defined, until the Maturity Date (set forth above) when all amounts outstanding under this Note shall be due and payable in full. If the frequency of interest payments is not otherwise specified, accrued interest on this Note shall be payable monthly on the first day of each month. If any payment of principal or interest under this Note shall be payable on a day other than a day on which the Bank is open for business, this payment shall be extended to the next succeeding business day and interest shall be payable at the rate specified in this Note during this extension. A late payment charge equal to a reasonable amount not to exceed five percent (5%) of each late payment may be charged on any payment not received by the Bank within ten (10) calendar days after the payment due date, but acceptance of payment of this charge shall not waive any Event of Default under this Note. Subject to the provisions hereof, the undersigned shall have the option (an "Interest Option") exercisable from time to time to designate a portion of the unpaid principal balance of this Note to bear interest at the Prime Rate (such portion being herein referred to as the "Prime Rate Balance") and to designate one or more portions of the unpaid principal balance of this Note to bear interest at a Eurodollar Rate (each such portion being herein referred to as a "Eurodollar Balance"). The term "Maximum Rate" as used herein, shall mean at the particular time in question the maximum nonusurious rate of interest which, under applicable law, may then be charged on this Note. If such maximum rate of interest changes after the date hereof, the Maximum Rate shall be automatically increased or decreased, as the case may be, without notice to the undersigned from time to time as of the effective date of each change in such maximum rate. For purposes of determining the Maximum Rate under the law of the State of Texas, the applicable interest rate ceiling shall be the "weekly ceiling" from time to time in effect under Chapter 303 of the Texas Finance Code, as amended. The term "Stated Rate," as used in this Note, shall mean (a) with respect to the Prime Rate Balance outstanding from time to time, a fluctuating per annum rate of interest equal to the Prime Rate minus the Applicable Margin and (b) with respect to each Eurodollar Balance, a per annum rate of interest equal to the Eurodollar Rate for the Eurodollar Interest Period then in effect with respect to such Eurodollar Balance plus the Applicable Margin. The term "Prime Rate," as used herein, shall mean that annual rate of interest which is equal to the greater of the annual rate of interest designated by the Bank as its Prime Rate which is changed by the Bank from time to time or a variable per annum rate of interest determined from day to day which equals the sum of 1% plus the average per annum rate of interest on overnight Federal funds transactions with members of Federal Reserve System arranged by Federal funds brokers ("Overnight Transactions") transacted on the immediately preceding Business Day, as published by the Federal Reserve Bank of New York, or, if such interest rate is not so published for any Business Day, the average of the per annum interest rate quotations for Overnight Transactions received by the Bank (or, at its option, the Reference Bank) for such Business Day from 3 Federal funds brokers of recognized standing selected by the Bank. The Bank's Prime Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged by the Bank (or, at its option, the Reference Bank) to any of its customers. The Bank may make commercial loans at rates of interest at, above or below its Prime Rate. The term "Eurodollar Rate", as used herein, shall mean, with respect to the applicable Eurodollar Interest Period and applicable Eurodollar Balance (as later defined), the quotient of the following (rounded upwards, if necessary, to the nearest 1/16 of 1%): (a) the interest rate determined by the Bank (which determination shall be conclusive) to be the per annum interest rate at which deposits in immediately available funds in U.S. dollars are offered to the Bank (or, if elected by the Bank, by Bank's designated eurodollar lending office) at such time as the Bank elects on the first day of such Eurodollar Interest Period, to prime banks in the interbank eurodollar market selected by Bank (or, if applicable, by Bank's designated eurodollar lending office) for delivery on the first day of such Eurodollar Interest Period in an amount equal to the principal amount of the corresponding Eurodollar Balance for a period equal to the length of such Eurodollar Interest Period; divided by (b) a percentage (expressed as a decimal) equal to 1.00 minus the maximum rate during such interest period at which Bank (or, if applicable, Bank's designated eurodollar lending office) is required to maintain reserves on "Eurocurrency Liabilities" as defined in and pursuant to Regulation D of the Board of Governors of the Federal Reserve System or, if such regulation or designation is modified, and as long as Bank (or, if applicable, Bank's designated eurodollar lending office) is required to maintain reserves against a category of liabilities which includes eurodollar deposits or includes a category of assets which includes eurodollar loans, the rate at which such reserves are required to be maintained on such category. The term "Eurodollar Interest Period", as used herein, shall mean, with respect to the applicable Eurodollar Balance, a period commencing on the date (which must be a Eurodollar Business Day) upon which, pursuant to an Interest Notice, as later defined, the principal amount of such Eurodollar Balance begins to accrue interest at the applicable Eurodollar Rate (or, in the case of a rollover to a successive Eurodollar Interest Period, the last day of the immediately preceding Eurodollar Interest Period) and ending 30, 60, 90 or 180 days after 1 the commencement date (as designated in the Interest Notice); provided, that: (i) any Eurodollar Interest Period which would otherwise end on a day which is not a Eurodollar Business Day shall be extended to the next succeeding Eurodollar Business Day (unless such Eurodollar Business Day falls in another calendar month, in which case, such Eurodollar Interest Period shall end on the next preceding Eurodollar Business Day); and (ii) any Eurodollar Interest Period which begins on a day for which there is no numerically corresponding day in the calendar month at the end of such Eurodollar Interest Period shall end on the last Eurodollar Business Day of such last calendar month; and (iii) no Eurodollar Interest Period shall extend beyond the Maturity Date. The term "Eurodollar Business Day," as used herein, shall mean a Business Day on which dealings in U.S. dollars are carried out in the interbank eurodollar market selected by Bank (or, if applicable, Bank's designated eurodollar lending office). The term "Applicable Margin," as used herein, shall be determined in accordance with the following schedule based on the Debt to Tangible Net Worth Ratio of the undersigned, determined in accordance with the Credit Agreement:
DEBT TO TANGIBLE NET WORTH RATIO PRIME RATE BALANCE EURODOLLAR BALANCE - -------------------------------- ------------------ ------------------ Equal to or greater than 1.5:1 0.25% 2.25% Less than 1.5:1 and greater than 1:1 0.50% 2.00% Less than or equal to 1:1 0.75% 1.75%
Any decrease in Stated Rate due to a change in the Applicable Margin shall take effect five (5) Business Days after the undersigned has submitted a Compliance Certificate and Financial Statements in accordance with Section 4.3 of the Credit Agreement to Bank demonstrating a Debt to Worth Ratio which would cause such decrease; provided, no reduction in the Applicable Margin shall take effect until Borrower shall have maintained a certain Debt to Worth Ratio giving rise to such reduction for a consecutive three-month period. Any increase in the Stated Rate resulting from an increase in the Applicable Margin due to a change in the Debt to Worth Ratio shall take effect immediately upon the Bank's receipt of a Compliance Certificate or Financial Statements (as defined in the Credit Agreement) demonstrating a Debt to Worth Ratio which would cause such increase, or in the event the Bank does not timely receive a Compliance Certificate and all Financial Statements as required by the Credit Agreement or any other Loan Document, as defined in the Credit Agreement, then the Applicable Margin shall become 0.25% for the Prime Rate Balance and 2.25% for all Eurodollar Balances on the earliest date on which delivery the Compliance Certificate and/or any Financial Statement was due. The term "Business Day" as used herein, shall mean any day other than a Saturday, Sunday or holiday, on which the Bank and the Reference Bank (and, if applicable, the Reference Bank's designated eurodollar lending office) are open to carry on all or substantially all of their normal commercial lending business in Dallas, Texas. The Interest Option shall be exercisable by the undersigned subject to the other limitations in this Note on the undersigned's option to designate a portion of the unpaid principal balance hereof as a Eurodollar Balance and only in the manner provided below: (i) Before 12:00 noon at least 3 Business Days prior to the date the undersigned has requested the Bank to make an advance upon this Note, the undersigned shall have given the Bank written notice (any such notice, an "Interest Notice") in form and content satisfactory to Bank specifying the initial Interest Option(s) and the respective initial amounts of the Prime Rate Balance and Eurodollar Balance designated by the undersigned for each advance. If the required Interest Notice shall not have been timely received by the Bank or fails to designate all or any portion of the unpaid principal amount of the advance as either a Prime Rate Balance or a Eurodollar Balance in accordance with the terms and provisions of this Note, the undersigned shall be deemed conclusively to have designated such amounts to be a Prime Rate Balance and to have given the Bank notice of such designation. (ii) At least three (3) Business Days prior to the termination of any Eurodollar Interest Period for a Eurodollar Balance, the undersigned shall give the Bank an Interest Notice specifying the Interest Option which is to be applicable to such Eurodollar Balance upon the expiration of such Eurodollar Interest Period. If the required Interest Notice shall not have been timely received by the Bank the undersigned shall be deemed conclusively to have designated such amount as a Prime Rate Balance immediately upon the expiration of such Eurodollar Interest Period and to have given the Bank notice of such designation. (iii) The undersigned shall have the right, exercisable on any Business Day subject to the terms of this Note, to convert an eligible portion of the Prime Rate Balance to a Eurodollar Balance by giving the Bank an Interest Notice of such designation at least three (3) Eurodollar Business Days prior to the effective date of such exercise. Additionally, upon termination of any Eurodollar Interest Period, the undersigned shall have the right, on any Business Day, to convert all or a portion of such principal amount from the Eurodollar Balance to a Prime Rate Balance by giving Bank an Interest Notice of such selection at least three (3) Eurodollar Business Days prior to effective date of such exercise. (iv) There may be no more than five (5) Eurodollar Balances in effect at any time. (v) Each Eurodollar Balance must be, as of the first day of the applicable Eurodollar Interest Period, at least $100,000. (vi) No Event of Default, or condition or event which, with the giving of notice or the lapse of time, or both, would constitute an Event of Default, shall have occurred and be continuing or exist. (vii) Each exercise of an Interest Option to designate a Eurodollar Balance to bear interest at a Stated Rate which is based on the Eurodollar Rate shall not be revocable. 2 Changes in the Stated Rate applicable to a Prime Rate Balance or a Eurodollar Balance shall become effective without prior notice to the undersigned automatically as of the opening of business on the date of each change in the Prime Rate or the Eurodollar Rate, as the case may be. If the Bank (or, if applicable, Bank's designated eurodollar lending office) determines that deposits in U.S. dollars (in the applicable amounts) are not being offered to prime banks in the interbank eurodollar market selected by the Bank (or if applicable, Bank's designated eurodollar lending office for the applicable Eurodollar Interest Period, or that the rate at which such dollar deposits are being offered will not adequately and fairly reflect the cost to the Bank (or, if applicable, Bank's designated eurodollar lending office) of making or maintaining a Eurodollar Balance for the applicable Eurodollar Interest Period, the Bank shall forthwith give notice thereof to the undersigned, whereupon, until the Bank notifies the undersigned that such circumstances no longer exist, the right of the undersigned to select an Interest Option based upon the Eurodollar Rate shall be suspended, and the undersigned may only select Interest Options based on the Prime Rate. If the adoption of any applicable law, rule or regulation, or any change therein, 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 the Bank (or, if applicable, Bank's designated eurodollar lending office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall make it unlawful or impractical for the Bank (or, if applicable, Bank's designated eurodollar lending office) to make or maintain a Eurodollar Balance, the Bank shall so notify the undersigned and any then-existing Eurodollar Balance shall automatically convert to a Prime Rate Balance either (i) on the last day of the then-current Eurodollar Interest Period applicable to such Eurodollar Balance, if the Bank (and, if applicable, its designated eurodollar lending office) may lawfully continue to maintain and fund such Eurodollar Balance to such day, or (ii) immediately, if the Bank (or, if applicable, its designated eurodollar lending office) may not lawfully continue to maintain such Eurodollar Balance to such day. Further, until Bank notices the undersigned that such conditions or circumstances no longer exist, the right of the undersigned to select an Interest Option based on the Eurodollar Rate shall be suspended, and the undersigned may only select Interest Options based on the Prime Rate. If either (i) the adoption of any applicable law, rule or regulation, or any change therein, 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 the Bank (or, if applicable, its designated eurodollar lending office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall subject the Bank (or, if applicable, its designated eurodollar lending office) to any tax (including without limitation any United States interest equalization or similar tax, however named), duty or other charge with respect to any Eurodollar Balance, this Note or the Bank's (or, if applicable, its designated eurodollar lending office) obligation to compute interest on the principal balance of this Note at a rate based upon the Eurodollar Rate, or shall change the basis of taxation of payments to the Bank (or, if applicable, its designated eurodollar lending office) of the principal of or interest on any Eurodollar Balance or any other amounts due under this Note in respect of any Eurodollar Balance or the Bank's (or, if applicable, its designated eurodollar lending office) obligation to compute the interest on the balance of this Note at a rate based upon the Eurodollar Rate, or (ii) any governmental authority, central bank or other comparable authority shall at any time impose, modify or deem applicable any reserve (including, without limitation, any imposed by the Board of Governors of the Federal Reserve System), special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, the Bank (or, if applicable, its designated eurodollar lending office), or shall impose on the Bank (or, if applicable, its designated eurodollar lending office) or any relevant interbank eurodollar market or exchange any other condition affecting any Eurodollar Balance, this Note or the Bank's (or, if applicable, its designated eurodollar lending office) obligation to compute the interest on the balance of this Note at a rate based upon the Eurodollar Rate; and the result of any of the foregoing is to increase the cost to the Bank (or, if applicable, its designated eurodollar lending office) of maintaining any Eurodollar Balance, or to reduce the amount of any sum received or receivable by the Bank (or, if applicable, Bank's designated eurodollar lending office) under this Note by an amount deemed by the Bank to be material, then upon demand by the Bank in writing, accompanied by reasonable detail and explanation, the undersigned shall pay to the Bank such additional amount or amounts as will compensate the Bank (or, if applicable, Bank's designated eurodollar lending office) for such increased cost or reduction. The Bank will promptly notify the undersigned of any event of which it has knowledge, occurring after the date hereof, which will entitle the Bank (or, if applicable, Bank's designated eurodollar lending office) to compensation pursuant to this paragraph. A certificate of the Bank claiming compensation under this paragraph and setting forth the additional amount or amounts to be paid to the Bank hereunder shall be conclusive in the absence of manifest error. If any applicable law, treaty, rule, or regulation (whether domestic or foreign) now or hereafter in effect and whether presently applicable to the Bank (or, if applicable, its designated eurodollar lending office) or any change therein or any interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof or compliance by the Bank (or, if applicable, its designated eurodollar lending office) therewith or with any guidance, request or directive of any such governmental authority, central bank or comparable agency (whether or not having the force of law), including any risk-based capital guidelines, affects or would affect the amount of capital required or expected to be maintained by the Bank (or any corporation controlling the Bank), and the Bank determines that the amount of such capital is increased by or based upon the existence of any obligations of Bank hereunder or the maintaining of any Eurodollar Balance hereunder, and such increase has the effect of reducing the rate of return on Bank's (or its controlling corporation's) capital as a consequence of such obligations or the maintaining of Eurodollar Balances hereunder to a level below that which the Bank (or such controlling corporation) could have achieved but for such circumstances (taking into consideration its policies with respect to capital adequacy), then the undersigned shall pay to Bank, within fifteen (15) days of receipt by the undersigned of written notice from the Bank demanding such compensation and detailing the calculation thereof, such additional amounts as are sufficient to compensate the Bank (and its controlling corporation) for any increase in the amount of capital and reduced rate of return which the Bank determines to be allocable to the existence of any obligations of the Bank (or its controlling corporation) hereunder or maintenance of any Eurodollar Balances hereunder. A certificate of Bank as to the amount of such compensation and the calculation thereof, prepared in good faith and in reasonable detail by the Bank, which is submitted by the Bank to the undersigned shall be conclusive and binding for all purposes absent manifest error. The undersigned may not repay any Eurodollar Balance or convert all or any portion of a Eurodollar Balance to a Prime Rate Balance prior to the expiration of the applicable Eurodollar Interest Period, unless (i) such repayment or conversion is specifically required by the terms of this Note, (ii) the Bank demands that such repayment or conversion be made, or (iii) the Bank, in its sole discretion, consents to such repayment or conversion. If for any reason, whether or not consent shall have been given or demand shall have been made by the Bank, any Eurodollar 3 Balance is repaid or converted prior to the expiration of the corresponding Eurodollar Interest Period, or any Interest Option which designates a Eurodollar Balance is revoked for any reason whatsoever prior to the commencement of the applicable Eurodollar Interest Period or the undersigned fails for any reason to borrow the full amount of any Eurodollar Balance for which the undersigned has exercised an Interest Option, or if for any other reason whatsoever, the basis for determining the Stated Rate shall be changed from a Eurodollar Rate to the Prime Rate prior to the expiration of the applicable Eurodollar Interest Period, or the undersigned shall fail to make any payment of principal or interest upon this Note at any time that the Stated Rate if based on a Eurodollar Rate, then the undersigned shall pay to the Bank on demand any amounts required to compensate the Bank (and, if applicable, its designated eurodollar lending office) for any losses, costs or expenses which it may incur as a result thereof, including, without limitation, any loss, cost or expense incurred in obtaining, liquidating, employing or redeploying deposits from third parties. Amounts payable by the undersigned to the Bank pursuant to this paragraph may include, without limitation, amounts equal to the excess, if any of (a) the amounts of interest which would have accrued on any amounts so prepaid, refunded, converted or not so borrowed, from the respective dates of prepayment, refund, conversion or failure to borrow through the last day of the relevant Eurodollar Interest Periods at the applicable rates of interest for the applicable Eurodollar Balances, as provided under this Note, over (b) the amounts of interest determined by the Bank (or, if applicable, its designated eurodollar lending office) which would have accrued to the Bank or Reference Bank (or, if applicable, its designated eurodollar lending office) on such respective amounts by placing such amounts on deposit for comparable periods with leading banks in the interbank eurodollar market selected by the Bank (or, if applicable, its designated eurodollar lending office). The calculation of any such amounts under this paragraph shall be made as if the Bank (or, if applicable, its designated eurodollar lending office) actually funded or committed to fund the relevant Eurodollar Balances hereunder through the purchase of underlying deposits in amounts equal to the respective amounts of the applicable Eurodollar Balances and having terms comparable to the applicable Eurodollar Interest Periods; provided, however, that the Bank (or, if applicable, its designated eurodollar lending office) may fund Eurodollar Balances hereunder in any manner they may elect in their sole discretion, and the foregoing assumptions shall be utilized only for the purposes of calculating amounts payable under this paragraph. Upon written request by the undersigned, the Bank shall deliver to the undersigned a certificate setting for the basis for determining such losses, costs and expenses which certificate shall be conclusive in the absence of manifest error. For any Eurodollar Balance, if the Bank shall designate a eurodollar lending office which maintains books separate from those of the Bank, the Bank shall have the option of maintaining and carrying such Eurodollar Balance on the Books of such eurodollar lending office. The principal amount payable under this Note shall be the sum of all advances made by the Bank to or at the request of the undersigned, as provided in the Credit Agreement less principal payments actually received by the Bank. The books and records of the Bank shall be the best evidence of the principal amount and the unpaid interest amount owing at any time under this Note and shall be conclusive absent manifest error. No interest shall accrue under this Note until the date of the first advance made by the Bank; after that interest on all advances shall accrue and be computed on the principal balance outstanding from time to time under this Note until the same is paid in full. This Note and any other indebtedness and liabilities of any kind of the undersigned (or any of them) to the Bank, and any and all modifications, renewals or extensions of it, whether joint or several, contingent or absolute, now existing or later arising, and however evidenced and whether incurred voluntarily or involuntarily, known or unknown, or originally payable to the Bank or to a third party and subsequently acquired by Bank including, without limitation, any late charges; loan fees or charges; overdraft indebtedness; costs incurred by Bank in establishing, determining, continuing or defending the validity or priority of any security interest, pledge or other lien or in pursuing any of its rights or remedies under any loan document (or otherwise) or in connection with any proceeding involving the Bank as a result of any financial accommodation to the undersigned (or any of them); and reasonable costs and expenses of attorneys and paralegals, whether inside or outside counsel is used, and whether any suit or other action is instituted, and to court costs if suit or action is instituted, and whether any such fees, costs or expenses are incurred at the trial court level or on appeal, in bankruptcy, in administrative proceedings, in probate proceedings or otherwise (collectively "Indebtedness"), are secured by and the Bank is granted a security interest in and lien upon all items deposited in any account of any of the undersigned with the Bank and by all proceeds of these items (cash or otherwise), all account balances of any of the undersigned from time to time with the Bank, by all property of any of the undersigned from time to time in the possession of the Bank and by any other collateral, rights and properties described in each and every deed of trust, mortgage, security agreement, pledge, assignment and other security or collateral agreement which has been, or will at any time(s) later be, executed by any (or all) of the undersigned to or for the benefit of the Bank (collectively "Collateral"). Upon the occurrence of an Event of Default, the Bank may, at its option and without prior notice to the undersigned (or any of them), declare any or all of the Indebtedness to be immediately due and payable (notwithstanding any provisions contained in the evidence of it to the contrary), cease advancing money or extending credit to or for the benefit of the undersigned under this Note or any other agreement between the undersigned and Bank, terminate this Note as to any future liability or obligation of Bank, but without affecting Bank's rights and security interests in any Collateral or the Indebtedness, sell or liquidate all or any portion of the Collateral, set off against the Indebtedness any amounts owing by the Bank to the undersigned (or any of them), charge interest at the default rate provided in the Credit Agreement and exercise any one or more of the rights and remedies granted to the Bank by any agreement with the undersigned (or any of them) or given to it under applicable law. All payments under this Note shall be in immediately available United States funds, without setoff or counterclaim. This Note shall bind the undersigned and its personal representatives, successors and assigns. The undersigned waive(s) presentment, demand, protest, notice of dishonor, notice of demand or intent to demand, notice of acceleration or intent to accelerate, and all other notices, except as set forth in the Credit Agreement, and agree(s) that no extension or indulgence to the undersigned (or any of them) or release, substitution or nonenforcement of any security, or release or substitution of any of the undersigned, any guarantor or any other party, whether with or without notice, shall affect the obligations of any of the undersigned. The undersigned waive(s) all defenses or right to discharge available under Section 3.605 of the Texas Uniform Commercial Code and waive(s) all other suretyship defenses or right to discharge. The undersigned agree(s) that the Bank has the right to sell, assign, or grant participations or any interest in, any or all of the Indebtedness, as provided in the Credit Agreement, and that, in connection with this right, but without limiting its ability to make other disclosures to the full extent allowable, the Bank may disclose all documents and information which the Bank now or later has relating to the undersigned or the Indebtedness. The undersigned agree(s) that the Bank may provide 4 information relating to this Note or the Indebtedness or relating to the undersigned to the Bank's parent, affiliates, subsidiaries and service providers. The undersigned agree(s) to reimburse the holder or owner of this Note upon demand for any and all costs and expenses (including without limit, court costs, legal expenses and reasonable attorneys' fees, whether inside or outside counsel is used, and whether or not suit is instituted and, if suit is instituted, whether at the trial court level, appellate level, in a bankruptcy or administrative proceeding or otherwise) incurred in collecting or attempting to collect this Note or incurred in any other matter or proceeding relating to this Note. The undersigned acknowledge(s) and agree(s) that there are no contrary agreements, oral or written, establishing a term of this Note and agree(s) that the terms and conditions of this Note may not be amended, waived or modified except in a writing signed by an officer of the Bank expressly stating that the writing constitutes an amendment, waiver or modification of the terms of this Note. As used in this Note, the word "undersigned" means, individually and collectively, each maker, accommodation party, indorser and other party signing this Note in a similar capacity. If any provision of this Note is unenforceable in whole or part for any reason, the remaining provisions shall continue to be effective. Chapter 346 of the Texas Finance Code (and as the same may be incorporated by reference in other Texas statutes) shall not apply to the Indebtedness evidenced by this Note. THIS NOTE IS MADE IN THE STATE OF TEXAS AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLE. This Note and all other documents, instruments and agreements evidencing, governing, securing, guaranteeing or otherwise relating to or executed pursuant to or in connection with this Note or the Indebtedness evidenced hereby (whether executed and delivered prior to, concurrently with or subsequent to this Note), as such documents may have been or may hereafter be amended from time to time (the "Loan Documents") are intended to be performed in accordance with, and only to the extent permitted by, all applicable usury laws. If any provision hereof or of any of the other Loan Documents or the application thereof to any person or circumstance shall, for any reason and to any extent, be invalid or unenforceable, neither the application of such provision to any other person or circumstance nor the remainder of the instrument in which such provision is contained shall be affected thereby and shall be enforced to the greatest extent permitted by law. It is expressly stipulated and agreed to be the intent of the holder hereof to at all times comply with the usury and other applicable laws now or hereafter governing the interest payable on the indebtedness evidenced by this Note. If the applicable law is ever revised, repealed or judicially interpreted so as to render usurious any amount called for under this Note or under any of the other Loan Documents, or contracted for, charged, taken, reserved or received with respect to the indebtedness evidenced by this Note, or if Bank's exercise of the option to accelerate the maturity of this Note, or if any prepayment by the undersigned or prepayment agreement results (or would, if complied with, result) in the undersigned having paid, contracted for or being charged for any interest in excess of that permitted by law, then it is the express intent of the undersigned and Bank that this Note and the other Loan Documents shall be limited to the extent necessary to prevent such result and all excess amounts theretofore collected by Bank shall be credited on the principal balance of this Note or, if fully paid, upon such other Indebtedness as shall then remaining outstanding (or, if this Note and all other Indebtedness have been paid in full, refunded to the undersigned), and the provisions of this Note and the other Loan Documents shall immediately be deemed reformed and the amounts thereafter collectable hereunder and thereunder reduced, without the necessity of the execution of any new document, so as to comply with the then applicable law, but so as to permit the recovery of the fullest amount otherwise called for hereunder or thereunder. All sums paid, or agreed to be paid, by the undersigned for the use, forbearance, detention, taking, charging, receiving or reserving of the indebtedness of the undersigned to Bank under this Note or arising under or pursuant to the other Loan Documents shall, to the maximum extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full term of such indebtedness until payment in full so that the rate or amount of interest on account of such indebtedness does not exceed the usury ceiling from time to time in effect and applicable to such indebtedness for so long as such indebtedness is outstanding. To the extent federal law permits Bank to contract for, charge or receive a greater amount of interest, Bank will rely on federal law instead of the Texas Finance Code for the purpose of determining the Maximum Rate. Additionally, to the maximum extent permitted by applicable law now or hereafter in effect, Bank may, at its option and from time to time, implement any other method of computing the Maximum Rate under the Texas Finance Code or under other applicable law, by giving notice, if required, to the undersigned as provided by applicable law now or hereafter in effect. Notwithstanding anything to the contrary contained herein or in any of the other Loan Documents, it is not the intention of Bank to accelerate the maturity of any interest that has not accrued at the time of such acceleration or to collect unearned interest at the time of such acceleration. THE UNDERSIGNED AND THE BANK, BY ACCEPTANCE OF THIS NOTE, ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY, AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT, WAIVES ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE OR ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS NOTE OR THE INDEBTEDNESS. THIS WRITTEN LOAN AGREEMENT (AS DEFINED BY SECTION 26.02 OF THE TEXAS BUSINESS AND COMMERCE CODE) 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. PEERLESS MFG. CO. By: /s/ Richard L. Travis, Jr. ------------------------------- RICHARD L. TRAVIS, JR. CHIEF FINANCIAL OFFICER 2819 Walnut Hill Lane, Dallas Texas 75229 - -------------------------------------------------------------------------------- STREET ADDRESS CITY STATE ZIP CODE 5 FOR BANK USE ONLY CCAR # - -------------------------------------------------------------------------------- LOAN OFFICER INITIALS LOAN GROUP NAME OBLIGOR NAME - -------------------------------------------------------------------------------- LOAN OFFICER ID. NO. LOAN GROUP NO. OBLIGOR NO. NOTE NO. AMOUNT - -------------------------------------------------------------------------------- 6 EX-10.(D) 7 d12159exv10wxdy.txt SECURITY AGREEMENT EXHIBIT 10(d) SECURITY AGREEMENT [COMERICA BANK LOGO] (All Assets) As of October 30, 2003, for value received, the undersigned ("Debtor") pledges, assigns and grants to Comerica Bank ("Bank"), whose address is P. O. Box 650282, Dallas, Texas 75265-0282, Attention: Deborah T. Purvin, Mail Code 6525, a continuing security interest and lien (any pledge, assignment, security interest or other lien arising hereunder is sometimes referred to herein as a "security interest") in the Collateral (as defined below) to secure payment when due, whether by stated maturity, demand, acceleration or otherwise, of all existing and future indebtedness ("Indebtedness") to the Bank of Debtor. Indebtedness includes without limit any and all obligations or liabilities of the Debtor to the Bank, whether absolute or contingent, direct or indirect, voluntary or involuntary, liquidated or unliquidated, joint or several, known or unknown, originally payable to the Bank or to a third party and subsequently acquired by the Bank including, without limitation, any late charges, loan fees or charges, and overdraft indebtedness, any and all obligations or liabilities for which the Debtor would otherwise be liable to the Bank were it not for the invalidity or unenforceability of them by reason of any bankruptcy, insolvency or other law, or for any other reason; any and all amendments, modifications, renewals and/or extensions of any of the above; all reasonable costs incurred by Bank in establishing, determining, continuing, or defending the validity or priority of any security interest, or in pursuing its rights and remedies under this Agreement or under any other agreement between Bank and Debtor or in connection with any proceeding involving Bank as a result of any financial accommodation to Debtor; and all other costs of collecting Indebtedness, including without limit attorneys' fees. Debtor agrees to pay Bank all such costs incurred by the Bank, immediately upon demand in writing, accompanied by reasonable detail and explanation, and, following such written demand and reasonable explanation, until paid all costs shall bear interest at the highest per annum rate applicable to any of the Indebtedness, but not in excess of the maximum rate permitted by law. Any reference in this Agreement to attorneys' fees shall be deemed a reference to reasonable fees, costs, and expenses of both in-house and outside counsel and paralegals, whether inside or outside counsel is used, whether or not a suit or action is instituted, and to court costs if a suit or action is instituted, and whether attorneys' fees or court costs are incurred at the trial court level, on appeal, in a bankruptcy, administrative or probate proceeding or otherwise. Debtor further covenanats, agrees, represents and warrants as follows: 1. COLLATERAL shall mean all personal property of Debtor including, without limitation, all of the following property Debtor now or later owns or has an interest in, wherever located : (a) all Accounts Receivable (for purposes of this Agreement, "Accounts Receivable" consists of all accounts, general intangibles, chattel paper (including without limit electronic chattel paper and tangible chattel paper), contract rights, deposit accounts, documents, instruments and rights to payment evidenced by chattel paper, documents or instruments, health care insurance receivables, commercial tort claims, letters of credit, letter of credit rights, supporting obligations, and rights to payment for money or funds advanced or sold), (b) all Inventory, (c) all Equipment and Fixtures, (d) all Software (for purposes of this Agreement "Software" consists of all (i) computer programs and supporting information provided in connection with a transaction relating to the program, and (ii) computer programs embedded in goods and any supporting information provided in connection with a transaction relating to the program whether or not the program is associated with the goods in such a manner that it customarily is considered part of the goods, and whether or not, by becoming the owner of the goods, a person acquires a right to use the program in connection with the goods, and whether or not the program is embedded in goods that consist solely of the medium in which the program is embedded), (e) all investment property (including, without limitation, securities, securities entitlements and financial assets); (f) specific items listed below and/or on attached Schedule A, if any, is/are also included in Collateral: ______________________________________________________________ ______________________________________________________________ ______________________________________________________________ (g) all goods, instruments (including, without limit, promissory notes), documents (including, without limit, negotiable documents), policies and certificates of insurance, deposit accounts, and money or other property (except real property which is not a fixture) which are now or later in possession or control of Bank, or as to which Bank now or later controls possession by documents or otherwise, and (h) all additions, attachments, accessions, parts, replacements, substitutions, renewals, interest, dividends, distributions, rights of any kind (including but not limited to stock splits, stock rights, voting and preferential rights), products, and proceeds of or pertaining to the above including, without limit, cash or other property which were proceeds and are recovered by a bankruptcy trustee or otherwise as a preferential transfer by Debtor. In the definition of Collateral, a reference to a type of collateral shall not be limited by a separate reference to a more specific or narrower type of that collateral. 2. WARRANTIES, COVENANTS AND AGREEMENTS. Debtor warrants, covenants and agrees as follows: 2.1 Debtor shall furnish to Bank such information and reports as are required to be delivered under that certain Credit Agreement of even date herewith (the "Credit Agreement") by and between Debtor and Bank, and shall allow Bank to examine, inspect, and copy any of Debtor's books and records as provided in the Credit Agreement. Debtor shall, at the request of Bank, mark its records and the Collateral clearly to indicate the security interest of Bank under this Agreement. 2.2 At the time any Collateral becomes, or is represented to be, subject to a security interest in favor of Bank, Debtor shall be deemed to have warranted that (a) Debtor is the lawful owner of the Collateral and has the right and authority to subject it to a security interest granted to Bank; (b) none of the Collateral is subject to any security interest, except for a Permitted Encumbrance (as defined in the Credit Agreement), other than that in favor of Bank; (c) there are no financing statements on file, except with respect 1 to Permitted Encumbrances, other than in favor of Bank; (d) no person, other than Bank, has possession or control (as defined in the Uniform Commercial Code) of any Collateral, except with respect to Permitted Encumbrances, of such nature that perfection of a security interest may be accomplished by control; and (e) Debtor acquired its rights in the Collateral in the ordinary course of its business. 2.3 Debtor will keep the Collateral free at all times from all claims, liens, security interests and encumbrances other than those in favor of Bank and Permitted Encumbrances. Debtor will not, without the prior written consent of Bank, sell, transfer, lease or grant control to any person other than Bank over, or permit to be sold, transferred, leased or controlled (by a person other than Bank), any or all of the Collateral, except for Inventory in the ordinary course of its business and will not return any Inventory to its supplier. Bank or its representatives may inspect the Collateral as provided in the Credit Agreement, and, in connection with such inspections, may enter upon all premises where the Collateral is kept or might be located. 2.4 Debtor will do all acts and will execute or cause to be executed all writings requested by Bank to establish, maintain and continue an exclusive, perfected and first security interest of Bank in the Collateral. Debtor agrees that Bank has no obligation to acquire or perfect any lien on or security interest in any asset(s), whether realty or personalty, to secure payment of the Indebtedness, and Debtor is not relying upon assets in which the Bank may have a lien or security interest for payment of the Indebtedness. 2.5 Debtor will pay within the time that they can be paid without interest or penalty all taxes, assessments and similar charges which at any time are or may become a lien, charge, or encumbrance upon any Collateral, except to the extent contested in good faith and bonded in a manner satisfactory to Bank. If Debtor fails to pay any of these taxes, assessments, or other charges in the time provided above, Bank has the option (but not the obligation) to do so, and Debtor agrees to repay all amounts so expended by Bank immediately upon demand in writing, accompanied by reasonable detail and explanation, together with interest at the highest lawful default rate which could be charged by Bank on any Indebtedness. 2.6 Debtor will keep the Collateral in operating condition, and will protect it from loss, damage, or deterioration from any cause. Debtor has and will maintain at all times (a) with respect to the Collateral, insurance under an "all risk" policy against fire and other risks customarily insured against, and (b) public liability insurance and other insurance as may be required by law or reasonably required by Bank, all of which insurance shall be in amount, form and content, and written by companies as may be satisfactory to Bank, containing a lender's loss payable endorsement acceptable to Bank. Debtor will deliver to Bank immediately upon demand evidence satisfactory to Bank that the required insurance has been procured. If Debtor fails to maintain satisfactory insurance, Bank has the option (but not the obligation) to do so and Debtor agrees to repay all amounts so expended by Bank immediately upon demand in writing, accompanied by reasonable detail and explanation, together with interest at the Maximum Legal Rate (as defined in the Credit Agreement). 2.7 On each occasion on which Debtor evidences to Bank the account balances on and the nature and extent of the Accounts Receivable, Debtor shall be deemed to have warranted that except as otherwise indicated (a) each of those Accounts Receivable is valid and enforceable without performance by Debtor of any act; (b) each of those account balances are in fact owing, (c) there are no setoffs, recoupments, credits, contra accounts, counterclaims or defenses against any of those Accounts Receivable, (d) as to any Accounts Receivable represented by a note, trade acceptance, draft or other instrument or by any chattel paper or document, the same have been endorsed and/or delivered by Debtor to Bank, (e) Debtor has not received with respect to any Account Receivable, any notice of the death of the related account debtor, or of the dissolution, liquidation, termination of existence, insolvency, business failure, appointment of a receiver for, assignment for the benefit of creditors by, or filing of a petition in bankruptcy by or against, the account debtor, and (f) as to each Account Receivable, except as may be expressly permitted by Bank to the contrary in another document, the account debtor is not an affiliate of Debtor, the United States of America or any department, agency or instrumentality of it, or a citizen or resident of any jurisdiction outside of the United States. Debtor will do all acts and will execute all writings requested by Bank to perform, enforce performance of, and collect all Accounts Receivable. Debtor shall neither make nor permit any modification, compromise or substitution for any Account Receivable without the prior written consent of Bank. Debtor shall, at Bank's request, arrange for verification of Accounts Receivable directly with account debtors or by other methods acceptable to Bank. 2.8 Debtor at all times shall be in material compliance with all applicable laws, including without limit any laws, ordinances, directives, orders, statutes, or regulations an object of which is to regulate or improve health, safety, or the environment ("Environmental Laws"). 2.9 If Bank, acting in its sole discretion, redelivers Collateral to Debtor or Debtor's designee for the purpose of (a) the ultimate sale or exchange thereof; or (b) presentation, collection, renewal, or registration of transfer thereof; or (c) loading, unloading, storing, shipping, transshipping, manufacturing, processing or otherwise dealing with it preliminary to sale or exchange; such redelivery shall be in trust for the benefit of Bank and shall not constitute a release of Bank's security interest in it or in the proceeds or products of it unless Bank specifically so agrees in writing. If Debtor requests any such redelivery, Debtor will deliver with such request a duly executed financing statement in form and substance satisfactory to Bank. Any proceeds of Collateral coming into Debtor's possession as a result of any such redelivery shall be held in trust for Bank and immediately delivered to Bank for application on the Indebtedness. Bank may (in its sole discretion) deliver any or all of the Collateral to Debtor, and such delivery by Bank shall discharge Bank from all liability or responsibility for such Collateral. Bank, at its option, may require delivery of any Collateral to Bank at any time with such endorsements or assignments of the Collateral as Bank may request. 2.10 At any time after the occurrence and during the continuance of an Event of Default and without notice, except as required by the Credit Agreement or under applicable law, Bank may (a) cause any or all of the Collateral to be transferred to its name or to the name of its nominees; (b) receive or collect by legal proceedings or otherwise all dividends, interest, principal payments and other sums and all other distributions at any time payable or receivable on account of the Collateral, and hold the same as Collateral, or apply the same to the Indebtedness, the manner and distribution of the application to be in the sole discretion of Bank; (c) enter into any extension, subordination, reorganization, deposit, merger or consolidation agreement or any other agreement relating to or affecting the Collateral, and deposit or surrender control of the Collateral, and accept other property in exchange for the Collateral and hold or apply the property or money so received pursuant to this Agreement; and (d) take such actions in its own name or in Debtor's name as Bank, in its sole discretion, deems necessary or appropriate to establish exclusive control (as defined in the Uniform Commercial Code) over any Collateral of such nature that perfection of the Bank's security interest may be accomplished by control. 2.11 Bank may assign any of the Indebtedness and deliver any or all of the Collateral to its assignee, as permitted under the Credit Agreement, who then shall have with respect to Collateral so delivered all the rights and powers of Bank under this Agreement, and after that Bank shall be fully discharged from all liability and responsibility with respect to Collateral so delivered. 2.12 [Intentionally Omitted.] 2.13 Debtor shall defend, indemnify and hold harmless Bank, its employees, agents, shareholders, affiliates, officers, and directors from and against any and all claims, damages, fines, expenses, liabilities or causes of action of whatever kind (as used in this Section, 2 collectively, the "Indemnified Matters"), including without limit consultant fees, legal expenses, and attorneys' fees, suffered by any of them as a direct or indirect result of any actual or asserted violation of any law, including, without limit, Environmental Laws, or of any remediation relating to any property required by any law, including without limit Environmental Laws, INCLUDING ANY CLAIMS, DAMAGES, FINES, EXPENSES, LIABILITIES OR CAUSES OF ACTION OF WHATEVER KIND RESULTING FROM BANK'S OWN NEGLIGENCE, except and to the extent (but only to the extent) caused by Bank's gross negligence or wilful misconduct. Upon Bank's receipt of written notice of any such Indemnified Matters, Bank will provide to Debtor notice, in writing accompanied by reasonable detail, of such Indemnified Matters, but any failure by Bank to provide such notice to Debtor shall not impair or otherwise affect the rights of Bank, its employees, agents, shareholders, affiliates, officers, or directors to be indemnified and held harmless under this Section. 3. COLLECTION OF PROCEEDS. 3.1 Debtor agrees to collect and enforce payment of all Collateral until Bank, after the occurrence and during the continuance of an Event of Default, shall direct Debtor to the contrary. Immediately upon notice to Debtor by Bank and at all times after that, Debtor agrees to fully and promptly cooperate and assist Bank in the collection and enforcement of all Collateral and to hold in trust for Bank all payments received in connection with Collateral and from the sale, lease or other disposition of any Collateral, all rights by way of suretyship or guaranty and all rights in the nature of a lien or security interest which Debtor now or later has regarding Collateral. Immediately upon and after such notice, Debtor agrees to (a) endorse to Bank and immediately deliver to Bank all payments received on Collateral or from the sale, lease or other disposition of any Collateral or arising from any other rights or interests of Debtor in the Collateral, in the form received by Debtor without commingling with any other funds, and (b) immediately deliver to Bank all property in Debtor's possession or later coming into Debtor's possession through enforcement of Debtor's rights or interests in the Collateral. Debtor irrevocably authorizes Bank or any Bank employee or agent to endorse the name of Debtor upon any checks or other items which are received in payment for any Collateral, and to do any and all things necessary in order to reduce these items to money. Bank shall have no duty as to the collection or protection of Collateral or the proceeds of it, or as to the preservation of any related rights, beyond the use of reasonable care in the custody and preservation of Collateral in the possession of Bank. Debtor agrees to take all steps necessary to preserve rights against prior parties with respect to the Collateral. Nothing in this Section 3.1 shall be deemed a consent by Bank to any sale, lease or other disposition of any Collateral. 3.2 Debtor agrees that immediately upon Bank's request (if and for so long as an Event of Default exists) the Indebtedness shall be on a "remittance basis" as follows: Debtor shall at its sole expense establish and maintain (and Bank, at Bank's option may establish and maintain at Debtor's expense): (a) an United States Post Office lock box (the "Lock Box"), to which Bank shall have exclusive access and control. Debtor expressly authorizes Bank, from time to time, to remove contents from the Lock Box, for disposition in accordance with this Agreement. Debtor agrees to notify all account debtors and other parties obligated to Debtor that all payments made to Debtor (other than payments by electronic funds transfer) shall be remitted, for the credit of Debtor, to the Lock Box, and Debtor shall include a like statement on all invoices; and (b) a non-interest bearing deposit account with Bank which shall be titled as designated by Bank (the "Cash Collateral Account") to which Bank shall have exclusive access and control. Debtor agrees to notify all account debtors and other parties obligated to Debtor that all payments made to Debtor by electronic funds transfer shall be remitted to the Cash Collateral Account, and Debtor, at Bank's request, shall include a like statement on all invoices. Debtor shall execute all documents and authorizations as required by Bank to establish and maintain the Lock Box and the Cash Collateral Account. 3.3 All items or amounts which are remitted to the Lock Box, to the Cash Collateral Account, or otherwise delivered by or for the benefit of Debtor to Bank on account of partial or full payment of, or with respect to, any Collateral shall, at Bank's option, (a) be applied to the payment of the Indebtedness, whether then due or not, in such order or at such time of application as Bank may determine in its sole discretion, or, (b) be deposited to the Cash Collateral Account. Debtor agrees that Bank shall not be liable for any loss or damage which Debtor may suffer as a result of Bank's processing of items or its exercise of any other rights or remedies under this Agreement, including without limitation indirect, special or consequential damages, loss of revenues or profits, or any claim, demand or action by any third party arising out of or in connection with the processing of items or the exercise of any other rights or remedies under this Agreement. Debtor agrees to indemnify and hold Bank harmless from and against all such third party claims, demands or actions, and all related expenses or liabilities (as used in this Section, collectively, the "Indemnified Matters"), including, without limitation, attorneys' fees and INCLUDING CLAIMS, DAMAGES, FINES, EXPENSES, LIABILITIES OR CAUSES OF ACTION OF WHATEVER KIND RESULTING FROM BANK'S OWN NEGLIGENCE except to the extent (but only to the extent) caused by Bank's gross negligence or willful misconduct. Upon Bank's receipt of written notice of any such Indemnified Matters, Bank will provide to Debtor notice, in writing accompanied by reasonable detail, of such Indemnified Matter, but any failure by Bank to provide such notice to Debtor shall not impair or otherwise affect the rights of Bank to be indemnified and held harmless under this Section. 4. DEFAULTS, ENFORCEMENT AND APPLICATION OF PROCEEDS. 4.1 Upon the occurrence of any "Event of Default" (as defined in the Credit Agreement and used with the same meaning herein), Debtor shall be in default under this Agreement. 4.2 Upon the occurrence of any Event of Default, Bank may at its discretion and without prior notice to Debtor declare any or all of the Indebtedness to be immediately due and payable, and shall have and may exercise any right or remedy available to it including, without limitation, any one or more of the following rights and remedies: (a) Exercise all the rights and remedies upon default, in foreclosure and otherwise, available to secured parties under the provisions of the Uniform Commercial Code and other applicable law; (b) Institute legal proceedings to foreclose upon the lien and security interest granted by this Agreement, to recover judgment for all amounts then due and owing as Indebtedness, and to collect the same out of any Collateral or the proceeds of any sale of it; (c) Institute legal proceedings for the sale, under the judgment or decree of any court of competent jurisdiction, of any or all Collateral; and/or (d) Personally or by agents, attorneys, or appointment of a receiver, enter upon any premises where Collateral may then be located, and take possession of all or any of it and/or render it unusable; and without being responsible for loss or damage to such Collateral, hold, operate, sell, lease, or dispose of all or any Collateral at one or more public or private sales, leasings or other dispositions, at places and times and on terms and conditions as Bank may deem fit, without any previous demand or advertisement; and except as provided in this Agreement, all notice of sale, lease or other disposition, and advertisement, and other notice or demand, any right or equity of redemption, and any obligation of a prospective purchaser or lessee to inquire as to the power and authority of Bank to sell, lease, or otherwise dispose of the Collateral or as to the application by Bank of the proceeds of sale or otherwise, which would otherwise be required by, or available to Debtor under, applicable law are expressly waived by Debtor to the fullest extent permitted. 3 At any sale pursuant to this Section 4.2, whether under the power of sale, by virtue of judicial proceedings or otherwise, it shall not be necessary for Bank or a public officer under order of a court to have present physical or constructive possession of Collateral to be sold. The recitals contained in any conveyances and receipts made and given by Bank or the public officer to any purchaser at any sale made pursuant to this Agreement shall, to the extent permitted by applicable law, conclusively establish the truth and accuracy of the matters stated (including, without limit, as to the amounts of the principal of and interest on the Indebtedness, the accrual and nonpayment of it and advertisement and conduct of the sale); and all prerequisites to the sale shall be presumed to have been satisfied and performed. Upon any sale of any Collateral, the receipt of the officer making the sale under judicial proceedings or of Bank shall be sufficient discharge to the purchaser for the purchase money, and the purchaser shall not be obligated to see to the application of the money. Any sale of any Collateral under this Agreement shall be a perpetual bar against Debtor with respect to that Collateral. At any sale or other disposition of the Collateral pursuant to this Section 4.2, Bank disclaims all warranties which would otherwise be given under the Uniform Commercial Code, including without limit a disclaimer of any warranty relating to title, possession, quiet enjoyment or the like, and Bank may communicate these disclaimers to a purchaser at such disposition. This disclaimer of warranties will not render the sale commercially unreasonable. 4.3 Debtor shall at the request of Bank, after the occurrence and during the continuance of an Event of Default, notify the account debtors or obligors of Bank's security interest in the Collateral and direct payment of it to Bank. Bank may, itself, upon the occurrence of any Event of Default so notify and direct any account debtor or obligor. At the request of Bank, after an Event of Default shall have occurred, Debtor shall immediately take such actions as the Bank shall request to establish exclusive control (as defined in the Uniform Commercial Code) by Bank over any Collateral which is of such a nature that perfection of a security interest may be accomplished by control. 4.4 The proceeds of any sale or other disposition of Collateral authorized by this Agreement shall be applied by Bank in such order as the Bank, in its discretion, deems appropriate including, without limitation, the following order: first upon all expenses authorized by the Uniform Commercial Code and all reasonable attorneys' fees and legal expenses incurred by Bank; the balance of the proceeds of the sale or other disposition shall be applied in the payment of the Indebtedness, first to interest, then to principal, then to remaining Indebtedness and the surplus, if any, shall be paid over to Debtor or to such other person(s) as may be entitled to it under applicable law. Debtor shall remain liable for any deficiency, which it shall pay to Bank immediately upon demand. Debtor agrees that Secured Party shall be under no obligation to accept any noncash proceeds in connection with any sale or disposition of Collateral unless failure to do so would be commercially unreasonable. If Secured Party agrees in its sole discretion to accept noncash proceeds (unless the failure to do so would be commercially unreasonable), Secured Party may ascribe any commercially reasonable value to such proceeds. Without limiting the foregoing, Secured Party may apply any discount factor in determining the present value of proceeds to be received in the future or may elect to apply proceeds to be received in the future only as and when such proceeds are actually received in cash by Secured Party. 4.5 Nothing in this Agreement is intended, nor shall it be construed, to preclude Bank from pursuing any other remedy provided by law or in equity for the collection of the Indebtedness or for the recovery of any other sum to which Bank may be entitled for the breach of this Agreement by Debtor. Nothing in this Agreement shall reduce or release in any way any rights or security interests of Bank contained in any existing agreement between Debtor or any Guarantor and Bank. 4.6 No waiver of default or consent to any act by Debtor shall be effective unless in writing and signed by an authorized officer of Bank. No waiver of any default or forbearance on the part of Bank in enforcing any of its rights under this Agreement shall operate as a waiver of any other default or of the same default on a future occasion or of any rights. 4.7 Debtor (a) irrevocably appoints Bank or any agent of Bank (which appointment is coupled with an interest) the true and lawful attorney of Debtor (with full power of substitution) in the name, place and stead of, and at the expense of, Debtor and (b) authorizes Bank or any agent of Bank, in its own name, at Debtor's expense, to do any of the following, after the occurrence and during the continuance of an Event of Default, as Bank, in its sole discretion, deems appropriate: (i) to demand, receive, sue for, and give receipts or acquittances for any moneys due or to become due on any Collateral (including, without limit, to draft against Collateral) and to endorse any item representing any payment on or proceeds of the Collateral; (ii) to execute and file in the name of and on behalf of Debtor all financing statements or other filings or Collateral control agreements deemed necessary or desirable by Bank to evidence, perfect, or continue the security interests granted in this Agreement; and (iii) to do and perform any act on behalf of Debtor permitted or required under this Agreement. 4.8 Upon the occurrence of an Event of Default, Debtor also agrees, upon request of Bank, to assemble the Collateral and make it available to Bank at any place designated by Bank which is reasonably convenient to Bank and Debtor. 4.9 The following shall be the basis for any finder of fact's determination of the value of any Collateral which is the subject matter of a disposition giving rise to a calculation of any surplus or deficiency under Section 9.615 (f) of the Uniform Commercial Code (as in effect on or after July 1, 2001): (a) the Collateral which is the subject matter of the disposition shall be valued in an "as is" condition as of the date of the disposition, without any assumption or expectation that such Collateral will be repaired or improved in any manner; (b) the valuation shall be based upon an assumption that the transferee of such Collateral desires a resale of the Collateral for cash promptly (but no later than 30 days) following the disposition; (c) all reasonable closing costs customarily borne by the seller in commercial sales transactions relating to property similar to such Collateral shall be deducted including, without limitation, brokerage commissions, tax prorations, attorneys' fees, whether inside or outside counsel is used, and marketing costs; (d) the value of the Collateral which is the subject matter of the disposition shall be further discounted to account for any estimated holding costs associated with maintaining such Collateral pending sale (to the extent not accounted for in (c) above), and other maintenance, operational and ownership expenses; and (e) any expert opinion testimony given or considered in connection with a determination of the value of such Collateral must be given by persons having at least 5 years experience in appraising property similar to the Collateral and who have conducted and prepared a complete written appraisal of such Collateral taking into consideration the factors set forth above. The "value" of any such Collateral shall be a factor in determining the amount of proceeds which would have been realized in a disposition to a transferee other than a secured party, a person related to a secured party or a secondary obligor under Section 9-615(f) of the Uniform Commercial Code. 5. MISCELLANEOUS. 5.1 Until Bank is advised in writing by Debtor to the contrary, all notices, requests and demands required under this Agreement or by law shall be given to, or made upon, Debtor at the following address: 2819 Walnut Hill Lane, Dallas, Texas 75229. 5.2 Debtor will give Bank not less than 90 days prior written notice of all contemplated changes in Debtor's name, location, chief executive office, principal place of business , and/or location of any Collateral, but the giving of this notice shall not cure any Event of Default caused by this change. 4 5.3 Bank assumes no duty of performance or other responsibility under any contracts contained within the Collateral. 5.4 Bank has the right to sell, assign, transfer, negotiate or grant participations or any interest in, any or all of the Indebtedness and any related obligations, including without limit this Agreement, as provided in the Credit Agreement. In connection with the above, but without limiting its ability to make other disclosures to the full extent allowable, Bank may disclose all documents and information which Bank now or later has relating to Debtor, the Indebtedness or this Agreement, however obtained. Debtor further agrees that Bank may provide information relating to this Agreement or relating to Debtor or the Indebtedness to the Bank's parent, affiliates, subsidiaries, and service providers. 5.5 In addition to Bank's other rights, any indebtedness owing from Bank to Debtor can be set off and applied by Bank on any Indebtedness at any time(s) either before or after maturity or demand without notice to anyone. Any such action shall not constitute acceptance of collateral in discharge of any portion of the Indebtedness. 5.6 Debtor, to the extent not expressly prohibited by applicable law, waives any right to require the Bank to: (a) proceed against any person or property; (b) give notice or notification of the terms, time and place of, or of any other information relating to, any public or private sale or disposition of personal property security held from Debtor or any other person, or otherwise comply with the provisions of Sections 9.611 or 9.621 of the Uniform Commercial Code; or (c) pursue any other remedy in the Bank's power. Debtor waives notice of acceptance of this Agreement and presentment, demand, protest, notice of protest, dishonor, notice of dishonor, notice of default, notice of intent to accelerate or demand payment or notice of acceleration of any Indebtedness, any and all other notices to which the undersigned might otherwise be entitled, and diligence in collecting any Indebtedness, and agree(s) that the Bank may, once or any number of times, modify the terms of any Indebtedness, compromise, extend, increase, accelerate, renew or forbear to enforce payment of any or all Indebtedness, all without notice to Debtor and without affecting in any manner the unconditional obligation of Debtor under this Agreement. Debtor unconditionally and irrevocably waives each and every defense and setoff of any nature which, under principles of guaranty or otherwise, would operate to impair or diminish in any way the obligation of Debtor under this Agreement, and acknowledges that such waiver is by this reference incorporated into each security agreement, collateral assignment, pledge and/or other document from Debtor now or later securing the Indebtedness, and acknowledges that as of the date of this Agreement no such defense or setoff exists. 5.7 [Intentionally Omitted.] 5.8 In the event that applicable law shall obligate Bank to give prior notice to Debtor of any action to be taken under this Agreement, Debtor agrees that a written notice given to Debtor at least ten days before the date of the act shall be reasonable notice of the act and, specifically, reasonable notification of the time and place of any public sale or of the time after which any private sale, lease, or other disposition is to be made, unless a shorter notice period is reasonable under the circumstances. A notice shall be deemed to be given under this Agreement when delivered to Debtor or when placed in an envelope addressed to Debtor and deposited, with postage prepaid, in a post office or official depository under the exclusive care and custody of the United States Postal Service or delivered to an overnight courier. The mailing shall be by overnight courier, certified, or first class mail. 5.9 Notwithstanding any prior revocation, termination, surrender, or discharge of this Agreement in whole or in part, the effectiveness of this Agreement shall automatically continue or be reinstated in the event that any payment received or credit given by Bank in respect of the Indebtedness is returned, disgorged, or rescinded under any applicable law, including, without limitation, bankruptcy or insolvency laws, in which case this Agreement, shall be enforceable against Debtor as if the returned, disgorged, or rescinded payment or credit had not been received or given by Bank, and whether or not Bank relied upon this payment or credit or changed its position as a consequence of it. In the event of continuation or reinstatement of this Agreement, Debtor agrees upon demand by Bank in writing, accompanied by reasonable detail and explanation, to execute and deliver to Bank those documents which Bank determines are appropriate to further evidence (in the public records or otherwise) this continuation or reinstatement, although the failure of Debtor to do so shall not affect in any way the reinstatement or continuation. 5.10 This Agreement and all the rights and remedies of Bank under this Agreement shall inure to the benefit of Bank's permitted successors and assigns and to any other holder who derives from Bank title to or an interest in the Indebtedness or any portion of it, and shall bind Debtor and the heirs, legal representatives, successors, and assigns of Debtor. Nothing in this Section 5.10 is deemed a consent by Bank to any assignment by Debtor. 5.11 If there is more than one Debtor, all undertakings, warranties and covenants made by Debtor and all rights, powers and authorities given to or conferred upon Bank are made or given jointly and severally. 5.12 Except as otherwise expressly provided in this Agreement, all terms in this Agreement which are defined in the Uniform Commercial Code shall have the meanings assigned to them in Article 9 (or, absent definition in Article 9, in any other Article) of the Uniform Commercial Code, as those meanings may be amended, revised or replaced from time to time. "Uniform Commercial Code" means the Texas Business and Commerce Code as amended, revised or replaced from time to time. Notwithstanding the foregoing, the parties intend that the terms used herein which are defined in the Uniform Commercial Code have, at all times, the broadest and most inclusive meanings possible. Accordingly, if the Uniform Commercial Code shall in the future be amended or held by a court to define any term used herein more broadly or inclusively than the Uniform Commercial Code in effect on the date of this Agreement, then such term, as used herein, shall be given such broadened meaning. If the Uniform Commercial Code shall in the future be amended or held by a court to define any term used herein more narrowly, or less inclusively, than the Uniform Commercial Code in effect on the date of this Agreement, such amendment or holding shall be disregarded in defining terms used in this Agreement. 5.13 No single or partial exercise, or delay in the exercise, of any right or power under this Agreement, shall preclude other or further exercise of the rights and powers under this Agreement. The unenforceability of any provision of this Agreement shall not affect the enforceability of the remainder of this Agreement. This Agreement constitutes the entire agreement of Debtor and Bank with respect to the subject matter of this Agreement. No amendment or modification of this Agreement shall be effective unless the same shall be in writing and signed by Debtor and an authorized officer of Bank. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES. 5.14 [Intentionally Omitted.] 5.15 Debtor represents and warrants that Debtor's exact name is the name set forth in this Agreement. Debtor further represents and warrants the following and agrees that Debtor is, and at all times shall be, located in the following place : Debtor is a registered organization which is organized under the laws of one of the states comprising the United States (e.g. corporation, limited partnership, registered limited liability partnership or limited liability company), and Debtor is located (as determined pursuant to the Uniform Commercial Code) in the state under the laws of which it was organized, which is: 2819 Walnut Hill Lane, Dallas, Texas 75229. 5 The Collateral is located and shall be maintained at the following location(s): 2819 Walnut Hill Lane, Dallas, Dallas County, Texas 75229 1115 Duncan, Denton, Denton County, Texas 75205 2675 East Highway 80, Abilene, Taylor County, Texas 79601 Collateral shall be maintained only at the locations identified in this Section 5.15. 5.16 A carbon, photographic or other reproduction of this Agreement shall be sufficient as a financing statement under the Uniform Commercial Code and may be filed by Bank in any filing office. 5.17 This Agreement shall be terminated only by the filing of a termination statement in accordance with the applicable provisions of the Uniform Commercial Code, but the obligations contained in Section 2.13 of this Agreement shall survive termination. 5.18 Debtor agrees to reimburse the Bank upon demand in writing, accompanied by reasonable detail and explanation, for any and all costs and expenses (including, without limit, court costs, legal expenses and reasonable attorneys' fees, whether inside or outside counsel is used, whether or not suit is instituted and, if suit is instituted, whether at the trial court level, appellate level, in a bankruptcy, probate or administrative proceeding or otherwise) incurred in enforcing or attempting to enforce this Agreement or in exercising or attempting to exercise any right or remedy under this Agreement or incurred in any other matter or proceeding relating to this Security Agreement. 6. DEBTOR AND BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY, AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT WAIVES ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE OR ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS AGREEMENT OR THE INDEBTEDNESS. 7. THIS IS A TEXAS SPECIFIC PROVISION: THIS WRITTEN LOAN AGREEMENT (AS DEFINED BY SECTION 26.02 OF THE TEXAS BUSINESS AND COMMERCE CODE) 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. 8. SPECIAL PROVISIONS APPLICABLE TO THIS AGREEMENT. (*NONE, IF LEFT BLANK) DEBTOR: BANK: PEERLESS MFG. CO. COMERICA BANK By: /s/ Richard L. Travis, Jr. By: /s/ Deborah T. Purvin -------------------------------- ------------------------------ Richard L. Travis, Jr. Deborah T. Purvin Chief Financial Officer Vice President 6 EX-10.(E) 8 d12159exv10wxey.txt EMPLOYMENT AGREEMENT - PETER J. BURLAGE EXHIBIT 10(e) EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into to be effective as of October 10, 2003 (the "Effective Date"), between PEERLESS MFG. CO. ("Employer"), and PETER J. BURLAGE ("Employee"). SECTION 1. EMPLOYMENT. 1.1 Employment and Term. Subject to the terms and conditions of this Agreement, Employer agrees to employ Employee pursuant to this Agreement for a term beginning on the Effective Date and ending on the third anniversary date of the Effective Date, unless Employee's employment is terminated earlier as provided in Section 4 below. Notwithstanding the foregoing, in no event will the term of Employee's employment hereunder be less than 90 days from the Effective Date. Sections 2, 3, and 5 of this Agreement shall survive any termination of Employee's employment with Employer. 1.2 Duties. At all times during the course of Employee's employment with Employer, Employee agrees to perform the duties associated with his position diligently and to devote all of his business time, attention and efforts to the business of Employer. Employee agrees to comply with the policies, procedures and guidelines established by Employer from time to time. Employee agrees to perform his duties faithfully and loyally and to the best of his abilities, and shall use his best efforts to promote the business of Employer. Employee understands and agrees that both the business and personal standards and ethics of Employer's employees must at all times be above reproach. Employee agrees to act at all times so as to reflect this high standard. Employee further agrees to abide by all rules, policies, or procedures established by Employer from time to time. SECTION 2. NON-COMPETITION. 2.1 Non Competition. (a) Employee agrees that during the term of his employment and for a period of one (1) year following termination of his employment (regardless of whether Employee is terminated without Cause (as defined in Section 4.1(c) below), for Cause, voluntarily resigns or otherwise), neither Employee nor any person or entity directly or indirectly controlling, controlled by or under common control with Employee, shall directly or indirectly, on his own behalf or as an employee or other agent of or an investor in another person: (i) engage in any business conducted by Employer during Employee's term of employment with Employer (collectively, the "Business"); (ii) influence or attempt to influence any customer or supplier of Employer or any affiliate of Employer to purchase goods or services related to the Business from any person other than Employer or such affiliate; or (iii) employ or attempt to employ any individuals who are then or have been employees of Employer or any affiliate of Employer during the preceding 12 months, or influence or seek to influence any such employees to leave Employer's or such affiliate's employment. (b) 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 restrictive covenant regarding competition contained in this Section 2.1 shall apply without geographic limitation. (c) Employee acknowledges that his obligations under this Section 2.1 are a material inducement and condition to Employer's entering into this Agreement and a material inducement and condition to Employee receiving or having access to Confidential Information (as defined in Section 3.1). Employee acknowledges and agrees that the terms and provisions of this Agreement (including the severance provisions of Section 4.1) and Employee's receipt and access to Confidential Information are sufficient consideration for the restrictions set forth in this Section 2.1. Employee acknowledges and agrees further that such restrictions are reasonable as to time, geographic area and scope of activity and do not impose a greater restraint than is necessary to protect the goodwill and other business interests of Employer, and Employee agrees that Employer is justified in believing the foregoing. (d) If any provision of this Section 2.1 should be found by any court of competent jurisdiction to be unenforceable by reason of its being too broad as to the period of time, territory, and/or scope, then, and in that event, such provision shall nevertheless remain valid and fully effective, but shall be considered to be amended so that the period of time, territory, and/or scope set forth shall be changed to be the maximum period of time, the largest territory, and/or the broadest scope, as the case may be, which would be found enforceable by such court (e) Employee acknowledges that Employee's violation or attempted violation of this Section 2.1 will cause irreparable damage to Employer or its affiliates, and Employee therefore agrees that Employer shall be entitled as a matter of right to an injunction, out of any court of competent jurisdiction, restraining any violation or further violation of such agreements by Employee or others acting on his behalf. Employer's right to injunctive relief will be cumulative and in addition to any other remedies provided by law or equity. SECTION 3. CONFIDENTIALITY; NONDISPARAGEMENT; CONFLICT OF INTEREST. 3.1 Confidentiality. (a) In the course of his employment with Employer, Employee will receive and have access to commercially valuable, confidential or proprietary information ("Confidential Information"). Confidential Information means all information, whether oral or written, previously or hereafter developed, acquired or used by Employer and relating to the business of Employer that is not generally known to others in Employer's area of business, including without limitation (i) any trade secrets, work product, - 2 - processes, analyses or know-how of Employer; (ii) Employer's advertising, product development, strategic and business plans and information, including customer and prospect lists; (iii) the prices at which Employer has sold or offered to sell its products or services; and (iv) Employer's financial statements and other financial information. (b) Employee acknowledges and agrees that the Confidential Information is and shall be the sole and exclusive property of Employer. Employee shall not use any Confidential Information for his own benefit or disclose any Confidential Information to any third party (except in the course of performing his authorized duties for Employer under this Agreement), either during or subsequent to his employment with Employer. (c) Specifically, Employee agrees that, except as expressly authorized in writing by Employer, or as may be required by law or court order, Employee shall (i) not disclose Confidential Information to any third party, (ii) not copy Confidential Information for any reason, and (iii) not remove Confidential Information from Employer's premises. Upon termination of his employment with Employer, Employee shall promptly deliver to the Employer all Confidential Information, including documents, computer disks and other computer storage devices and other papers and materials (including all copies thereof in whatever form) containing or incorporating any Confidential Information or otherwise relating in any way to the Employer's business that are in his possession or under his control. (d) Employee acknowledges that Employee's violation or attempted violation of this Section 3.1 will cause irreparable damage to Employer or its affiliates, and Employee therefore agrees that Employer shall be entitled as a matter of right to an injunction, out of any court of competent jurisdiction, restraining any violation or further violation of such agreements by Employee or others acting on his behalf. Employer's right to injunctive relief will be cumulative and in addition to any other remedies provided by law or equity. 3.2. Covenant of Nondisparagement. In consideration of this Agreement, Employee agrees and promises that, during the term of and at all times after the termination of this Agreement (regardless of whether Employee is terminated without Cause, for Cause, voluntarily resigns or otherwise), not to make any libelous, disparaging or otherwise injurious statements about or concerning Employer or any of its affiliates, their officers, employees or representatives. Such prohibited statements include any statement that is injurious to the business or business reputation of any of Employer, its affiliates or their employees or representatives, but does not include reasonable statements of disagreement that Employee makes for the purpose of protecting or enforcing any of his rights or interests hereunder or defending against any claim or claims of Employer, so long as such statements are not slanderous or libelous and are delivered in terms as would ordinarily be considered customary and appropriate. 3.3. Conflict of Interest. Employee agrees that during the term of this Agreement without the prior approval of the Board of Directors of Employer, Employee shall not engage, either directly or indirectly, in any activity which may involve a conflict of interest with Employer or its affiliates (a "Conflict of Interest"), including ownership in any supplier, contractor, subcontractor, customer or other entity with which Employer does business (other - 3 - than as a shareholder of less than one percent of a publicly traded class of securities) or accept any material payment, service, loan, gift, trip, entertainment or other favor from a supplier, contractor, subcontractor, customer or other entity with which Employer does business and that Employee shall promptly inform the Chief Executive Officer or the Board of Directors of Employer as to each offer received by Employee to engage in any such activity. Employee further agrees to disclose to Employer any other facts of which Employee becomes aware which might involve or give rise to a Conflict of Interest or potential Conflict of Interest. SECTION 4. TERMINATION. 4.1 Termination by Employer. (a) Employer may terminate Employee's employment without Cause upon no less than 30 days prior notice of termination to Employee. In the event of any such termination without Cause, on the effective date of such termination Employer shall pay Employee as severance compensation, a lump sum payment in an amount equal to the difference of (i) 75% of Employee's then current base salary annualized less (ii) the amount of base salary paid to Employee from the date of Employer's notice of termination to the effective date of such termination. In the event of any such termination without Cause, except as aforesaid, Employer shall have no other obligations to pay any base salary, incentive compensation or bonus or provide for any benefits to Employee after the effective date of such termination. As used herein, "base salary" excludes any bonus or incentive compensation. (b) Employer may discharge Employee for Cause at any time without prior notice. In the event of any such termination for Cause, Employer's obligations to pay any base salary, incentive compensation or bonus or provide for any benefits to Employee shall terminate immediately upon the effective date of such termination. (c) As used herein, "Cause" shall mean any of the following: (i) the conviction of Employee by a court of competent jurisdiction of any felony or crime involving moral turpitude; (ii) commission by Employee of an act of fraud or other act reflecting unfavorably upon the public image of Employer as reasonably determined by Employer's Board of Directors; (iii) the continued failure by Employee to substantially perform his duties hereunder, or the intentional wrongdoing by Employee resulting in material injury to Employer, in each case as reasonably determined by Employer's Board of Directors; (iv) the failure by Employee to follow a reasonable directive of the Board of Directors or the Chief Executive Officer of Employer; or (v) violation of any policies or procedures of Employer, including without limitation, any human relations policy, resulting in material injury to - 4 - Employer, in each case as reasonably determined by Employer's Board of Directors. 4.2 Termination by Employee. (a) Employee may resign from Employee's employment hereunder (whether for voluntary retirement or otherwise) upon no less than 30 days prior notice of resignation to Employer, unless such prior notice is otherwise waived by Employer in its absolute and sole discretion. The effective date of Employee's resignation shall be as stated in Employee's notice of resignation or at the sole option of Employer, such earlier date as determined by Employer in its sole discretion. If Employee voluntarily resigns from his employment with Employer during the term hereof (whether for voluntary retirement or otherwise), except as expressly set forth in Section 4.2(b) below, Employer's obligations to pay any base salary, incentive compensation or bonus or provide for any benefits shall terminate immediately upon the effective date of such resignation. Upon retirement, Employee shall be entitled to all benefits (if any) provided by Employer in the ordinary course to other Employee officers of Employer at comparable retirement age. (b) If Employee resigns from Employee's employment hereunder in accordance with Section 4.2(a) above and at the time of such resignation at least one of the following events has continued for at least 30 consecutive days after Employee has notified Employer in writing of the occurrence of such event, Employer shall pay Employee an amount equal to a lump sum payment in the amount of 25% of Employee's then current base salary annualized, less the amount of base salary paid to Employee from the date of notice of resignation to the effective date of such resignation. Such payment to be made on the effective date of resignation. In addition, the Employer will pay the pro rata portion of the annual bonus Employee would have earned pursuant to Employer's written bonus incentive plan (if any) if Employee had remained employed by Employer for the remainder of the applicable calendar year, with such pro rata amount being determined in equal amounts over the course of the calendar year (for example, 1/12 of the bonus for each month Employee was employed during the applicable bonus year) and such amount being paid in the ordinary course consistent with Employer's practice]. Such events include: (i) a material adverse change in the nature or scope of the authorities, functions or duties that Employee had as of the Effective Date; (ii) a material adverse change in the calculation (but not the amount) of any annual bonus or a significant reduction in scope or value in the aggregate of other monetary or nonmonetary benefits to which Employee was entitled as of the Effective Date; (iii) a determination by Employee made in good faith that as a result of a change in circumstances significantly affecting his position, changes in the composition or policies of Employer's Board of Directors, 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 as of the Effective Date, or - 5 - (iv) the requirement by Employer that Employee have as his principal location of work any location not within the greater Dallas - Fort Worth, Texas metropolitan area. 4.3 Termination on Death of Employee. This Agreement shall terminate automatically upon the death of Employee and all rights of Employee, his heirs, executors and administrators to base salary shall terminate immediately; provided, however, Employer shall pay to Employee's duly authorized representative all incentive compensation, bonus and benefits earned or accrued but unpaid as of the date of death, with payment of Employee's benefits to be made as provided in Employer's benefit plan(s) in effect on the date of death. 4.4 Termination by Disability. Employer may terminate Employee's employment hereunder upon Employee becoming Disabled (as defined below). Upon such termination, Employer shall pay Employee an amount equal to his then current monthly base salary for a period of six months, which payment amounts will be reduced by any disability payments Employee receives during such period from the disability insurance provided through Employer, if any. Employee shall be entitled to all other disability benefits then in effect (if any) provided by Employer to all other executive officers of Employer. In the event of termination due to Employee being Disabled, except as aforesaid, Employer shall have no other obligation to pay any base salary, incentive compensation or bonus or provide for any benefits to Employee after the effective date of termination. For purposes of this Agreement, "Disabled" means any mental or physical impairment lasting (or that will last) more than 180 consecutive or non-consecutive calendar days that prevents Employee from performing the essential functions of his position with or without reasonable accommodation as determined by a competent physician chosen by Employer and consented to by Employee or his legal representatives, which consent will not be unreasonably withheld or delayed. Employee agrees to submit to appropriate medical examinations and authorize his physicians to release medical information necessary to determine whether Employee is Disabled for purposes of this Agreement. SECTION 5. MISCELLANEOUS. 5.1 Notice. Except as set forth below in this Section 5.1, any notice under this Agreement must be in writing and shall be deemed to have been given when delivered personally or by overnight courier service or three days after being sent by mail, postage prepaid, at the address indicated below or to such changed address as such person may subsequently give such notice of: if to Employer: Peerless Mfg. Co. 2819 Walnut Hill Lane Dallas, Texas 75229 Attn: Chairman, Board of Directors - 6 - if to Employee: Peter J. Burlage 5704 Danmire Court Plano, Texas 75093 Notwithstanding the foregoing, the party receiving notice may waive any provisions of this Section 5.1 in its sole and absolute discretion. 5.2 Assignment. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, personal representatives, successors, and assigns. Except as otherwise provided herein, this Agreement may not be assigned by any party hereto without the prior written consent of the other party hereto. Employer shall require any successor, and any corporation or other person which is in control of such successor, to all or substantially all of the business and/or assets of Employer (by purchase, merger, consolidation or otherwise), by agreement in form and substance reasonably satisfactory to Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Employer would be required to perform it if no such succession had taken place. Failure of Employer to obtain such agreement prior to the effectiveness of any such succession shall be a material breach of this Agreement by Employer. As used in this Agreement, "Employer" shall mean Employer as herein before defined and any successor to its business and/or all or part of its assets as aforesaid which executes and delivers the assumption agreement provided for in this Section 5.2 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. 5.3 Headings. The section headings used herein are for reference and convenience only and shall not enter into the interpretation hereof. 5.4 Counterparts. This Agreement may be executed in one or more counterparts for the convenience of the parties hereto, all of which together shall constitute one and the same instrument. 5.5 Amendment and Waiver. The provisions of this Agreement may be amended or waived only by written agreement of Employer and Employee, and no course of conduct, failure or delay in enforcing the provisions of this Agreement shall effect the validity, binding effect or enforceability of this Agreement. 5.6 Severability. Any provision or portion of a provision of this Agreement that is held to be invalid or unenforceable will be severable, and this Agreement will be construed and enforced as if such provision, or portion thereof, did not comprise a part hereof, and the remaining provisions or portions of provisions will remain in full force and effect. In lieu of each invalid or unenforceable provision there will be added automatically as part of this Agreement a provision as similar in terms to such invalid or unenforceable provision as may be possible and be legal, valid, and enforceable. 5.7 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas, without giving effect to any conflicts of law rule or principle that might require the application of the laws of another jurisdiction. - 7 - 5.8 Disputes. The parties to this Agreement agree that in the event there is a dispute or controversy between them that cannot be settled through direct discussions, it is in the best interests of all for such dispute or controversy to be resolved in the shortest time and with the lowest cost of resolution as practicable. Consequently, any such dispute, controversy or claim between the parties to this Agreement will not be litigated, but instead will be resolved by arbitration in accordance with Title 9 of the U.S. Code (United States Arbitration Act) and the Commercial Arbitration Rules of the American Arbitration Association (the "Rules"), and judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The arbitration will be before one neutral arbitrator and will proceed under the Expedited Procedures of said Rules. The arbitration will be held in Dallas, Texas, or such other place as may be selected by mutual agreement. The arbitrator will have the discretion to order a prehearing exchange of information by the parties, and to set limits for both the scope and time period of such exchange. All issues regarding exchange requests will be decided by the arbitrator. Neither party nor the arbitrator may disclose the existence, content or results of any arbitration hereunder, unless required to do so by court or regulatory order, without the prior written consent of both parties. Administrative fees and expenses of the arbitration itself will be borne by the parties equally unless otherwise required by law, a court of competent jurisdiction or the Rules; provided, that, in no event will Employee be required to pay in excess of $1,000 of such fees and expenses. The arbitrator will also be authorized to award to the prevailing party all or that fraction of its reasonable costs and fees as is deemed equitable. Costs of a party's representation by counsel or preparation costs for hearing are not considered administrative fees and expenses for purposes hereof. This provision will not apply to any injunctive relief sought by the Company or any of its affiliate under Section 2 or 3 of this Agreement. 5.9 Entire Agreement. This Agreement embodies the complete agreement between Employer and Employee regarding the subject matter hereof and the same supersede all prior agreements or understandings, whether oral, written or otherwise, between the parties hereto that may have related in any way to the subject matter hereof. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] - 8 - EMPLOYER: PEERLESS MFG. CO. /s/ Sherrill Stone ------------------ Sherrill Stone, Chairman of the Board and Chief Executive Officer EMPLOYEE: /s/ Peter J. Burlage -------------------- Peter J. Burlage - 9 - EX-10.(F) 9 d12159exv10wxfy.txt EMPLOYMENT AGREEMENT - DAVID TAYLOR EXHIBIT 10(f) EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into to be effective as of October 10, 2003 (the "Effective Date"), between PEERLESS MFG. CO. ("Employer"), and DAVID TAYLOR ("Employee"). SECTION 1. EMPLOYMENT. 1.1 Employment and Term. Subject to the terms and conditions of this Agreement, Employer agrees to employ Employee pursuant to this Agreement for a term beginning on the Effective Date and ending on the third anniversary date of the Effective Date, unless Employee's employment is terminated earlier as provided in Section 4 below. Notwithstanding the foregoing, in no event will the term of Employee's employment hereunder be less than 90 days from the Effective Date. Sections 2, 3, and 5 of this Agreement shall survive any termination of Employee's employment with Employer. 1.2 Duties. At all times during the course of Employee's employment with Employer, Employee agrees to perform the duties associated with his position diligently and to devote all of his business time, attention and efforts to the business of Employer. Employee agrees to comply with the policies, procedures and guidelines established by Employer from time to time. Employee agrees to perform his duties faithfully and loyally and to the best of his abilities, and shall use his best efforts to promote the business of Employer. Employee understands and agrees that both the business and personal standards and ethics of Employer's employees must at all times be above reproach. Employee agrees to act at all times so as to reflect this high standard. Employee further agrees to abide by all rules, policies, or procedures established by Employer from time to time. SECTION 2. NON-COMPETITION. 2.1 Non Competition. (a) Employee agrees that during the term of his employment and for a period of one (1) year following termination of his employment (regardless of whether Employee is terminated without Cause (as defined in Section 4.1(c) below), for Cause, voluntarily resigns or otherwise), neither Employee nor any person or entity directly or indirectly controlling, controlled by or under common control with Employee, shall directly or indirectly, on his own behalf or as an employee or other agent of or an investor in another person: (i) engage in any business conducted by Employer during Employee's term of employment with Employer (collectively, the "Business"); (ii) influence or attempt to influence any customer or supplier of Employer or any affiliate of Employer to purchase goods or services related to the Business from any person other than Employer or such affiliate; or (iii) employ or attempt to employ any individuals who are then or have been employees of Employer or any affiliate of Employer during the preceding 12 months, or influence or seek to influence any such employees to leave Employer's or such affiliate's employment. (b) 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 restrictive covenant regarding competition contained in this Section 2.1 shall apply without geographic limitation. (c) Employee acknowledges that his obligations under this Section 2.1 are a material inducement and condition to Employer's entering into this Agreement and a material inducement and condition to Employee receiving or having access to Confidential Information (as defined in Section 3.1). Employee acknowledges and agrees that the terms and provisions of this Agreement (including the severance provisions of Section 4.1) and Employee's receipt and access to Confidential Information are sufficient consideration for the restrictions set forth in this Section 2.1. Employee acknowledges and agrees further that such restrictions are reasonable as to time, geographic area and scope of activity and do not impose a greater restraint than is necessary to protect the goodwill and other business interests of Employer, and Employee agrees that Employer is justified in believing the foregoing. (d) If any provision of this Section 2.1 should be found by any court of competent jurisdiction to be unenforceable by reason of its being too broad as to the period of time, territory, and/or scope, then, and in that event, such provision shall nevertheless remain valid and fully effective, but shall be considered to be amended so that the period of time, territory, and/or scope set forth shall be changed to be the maximum period of time, the largest territory, and/or the broadest scope, as the case may be, which would be found enforceable by such court (e) Employee acknowledges that Employee's violation or attempted violation of this Section 2.1 will cause irreparable damage to Employer or its affiliates, and Employee therefore agrees that Employer shall be entitled as a matter of right to an injunction, out of any court of competent jurisdiction, restraining any violation or further violation of such agreements by Employee or others acting on his behalf. Employer's right to injunctive relief will be cumulative and in addition to any other remedies provided by law or equity. SECTION 3. CONFIDENTIALITY; NONDISPARAGEMENT; CONFLICT OF INTEREST. 3.1 Confidentiality. (a) In the course of his employment with Employer, Employee will receive and have access to commercially valuable, confidential or proprietary information ("Confidential Information"). Confidential Information means all information, whether oral or written, previously or hereafter developed, acquired or used by Employer and relating to the business of Employer that is not generally known to others in Employer's area of business, including without limitation (i) any trade secrets, work product, - 2 - processes, analyses or know-how of Employer; (ii) Employer's advertising, product development, strategic and business plans and information, including customer and prospect lists; (iii) the prices at which Employer has sold or offered to sell its products or services; and (iv) Employer's financial statements and other financial information. (b) Employee acknowledges and agrees that the Confidential Information is and shall be the sole and exclusive property of Employer. Employee shall not use any Confidential Information for his own benefit or disclose any Confidential Information to any third party (except in the course of performing his authorized duties for Employer under this Agreement), either during or subsequent to his employment with Employer. (c) Specifically, Employee agrees that, except as expressly authorized in writing by Employer, or as may be required by law or court order, Employee shall (i) not disclose Confidential Information to any third party, (ii) not copy Confidential Information for any reason, and (iii) not remove Confidential Information from Employer's premises. Upon termination of his employment with Employer, Employee shall promptly deliver to the Employer all Confidential Information, including documents, computer disks and other computer storage devices and other papers and materials (including all copies thereof in whatever form) containing or incorporating any Confidential Information or otherwise relating in any way to the Employer's business that are in his possession or under his control. (d) Employee acknowledges that Employee's violation or attempted violation of this Section 3.1 will cause irreparable damage to Employer or its affiliates, and Employee therefore agrees that Employer shall be entitled as a matter of right to an injunction, out of any court of competent jurisdiction, restraining any violation or further violation of such agreements by Employee or others acting on his behalf. Employer's right to injunctive relief will be cumulative and in addition to any other remedies provided by law or equity. 3.2. Covenant of Nondisparagement. In consideration of this Agreement, Employee agrees and promises that, during the term of and at all times after the termination of this Agreement (regardless of whether Employee is terminated without Cause, for Cause, voluntarily resigns or otherwise), not to make any libelous, disparaging or otherwise injurious statements about or concerning Employer or any of its affiliates, their officers, employees or representatives. Such prohibited statements include any statement that is injurious to the business or business reputation of any of Employer, its affiliates or their employees or representatives, but does not include reasonable statements of disagreement that Employee makes for the purpose of protecting or enforcing any of his rights or interests hereunder or defending against any claim or claims of Employer, so long as such statements are not slanderous or libelous and are delivered in terms as would ordinarily be considered customary and appropriate. 3.3. Conflict of Interest. Employee agrees that during the term of this Agreement without the prior approval of the Board of Directors of Employer, Employee shall not engage, either directly or indirectly, in any activity which may involve a conflict of interest with Employer or its affiliates (a "Conflict of Interest"), including ownership in any supplier, contractor, subcontractor, customer or other entity with which Employer does business (other - 3 - than as a shareholder of less than one percent of a publicly traded class of securities) or accept any material payment, service, loan, gift, trip, entertainment or other favor from a supplier, contractor, subcontractor, customer or other entity with which Employer does business and that Employee shall promptly inform the Chief Executive Officer or the Board of Directors of Employer as to each offer received by Employee to engage in any such activity. Employee further agrees to disclose to Employer any other facts of which Employee becomes aware which might involve or give rise to a Conflict of Interest or potential Conflict of Interest. SECTION 4. TERMINATION. 4.1 Termination by Employer. (a) Employer may terminate Employee's employment without Cause upon no less than 30 days prior notice of termination to Employee. In the event of any such termination without Cause, on the effective date of such termination Employer shall pay Employee as severance compensation, a lump sum payment in an amount equal to the difference of (i) 75% of Employee's then current base salary annualized less (ii) the amount of base salary paid to Employee from the date of Employer's notice of termination to the effective date of such termination. In the event of any such termination without Cause, except as aforesaid, Employer shall have no other obligations to pay any base salary, incentive compensation or bonus or provide for any benefits to Employee after the effective date of such termination. As used herein, "base salary" excludes any bonus or incentive compensation. (b) Employer may discharge Employee for Cause at any time without prior notice. In the event of any such termination for Cause, Employer's obligations to pay any base salary, incentive compensation or bonus or provide for any benefits to Employee shall terminate immediately upon the effective date of such termination. (c) As used herein, "Cause" shall mean any of the following: (i) the conviction of Employee by a court of competent jurisdiction of any felony or crime involving moral turpitude; (ii) commission by Employee of an act of fraud or other act reflecting unfavorably upon the public image of Employer as reasonably determined by Employer's Board of Directors; (iii) the continued failure by Employee to substantially perform his duties hereunder, or the intentional wrongdoing by Employee resulting in material injury to Employer, in each case as reasonably determined by Employer's Board of Directors; (iv) the failure by Employee to follow a reasonable directive of the Board of Directors or the Chief Executive Officer of Employer; or (v) violation of any policies or procedures of Employer, including without limitation, any human relations policy, resulting in material injury to - 4 - Employer, in each case as reasonably determined by Employer's Board of Directors. 4.2 Termination by Employee. (a) Employee may resign from Employee's employment hereunder (whether for voluntary retirement or otherwise) upon no less than 30 days prior notice of resignation to Employer, unless such prior notice is otherwise waived by Employer in its absolute and sole discretion. The effective date of Employee's resignation shall be as stated in Employee's notice of resignation or at the sole option of Employer, such earlier date as determined by Employer in its sole discretion. If Employee voluntarily resigns from his employment with Employer during the term hereof (whether for voluntary retirement or otherwise), except as expressly set forth in Section 4.2(b) below, Employer's obligations to pay any base salary, incentive compensation or bonus or provide for any benefits shall terminate immediately upon the effective date of such resignation. Upon retirement, Employee shall be entitled to all benefits (if any) provided by Employer in the ordinary course to other Employee officers of Employer at comparable retirement age. (b) If Employee resigns from Employee's employment hereunder in accordance with Section 4.2(a) above and at the time of such resignation at least one of the following events has continued for at least 30 consecutive days after Employee has notified Employer in writing of the occurrence of such event, Employer shall pay Employee an amount equal to a lump sum payment in the amount of 25% of Employee's then current base salary annualized, less the amount of base salary paid to Employee from the date of notice of resignation to the effective date of such resignation. Such payment to be made on the effective date of resignation. In addition, the Employer will pay the pro rata portion of the annual bonus Employee would have earned pursuant to Employer's written bonus incentive plan (if any) if Employee had remained employed by Employer for the remainder of the applicable calendar year, with such pro rata amount being determined in equal amounts over the course of the calendar year (for example, 1/12 of the bonus for each month Employee was employed during the applicable bonus year) and such amount being paid in the ordinary course consistent with Employer's practice]. Such events include: (i) a material adverse change in the nature or scope of the authorities, functions or duties that Employee had as of the Effective Date; (ii) a material adverse change in the calculation (but not the amount) of any annual bonus or a significant reduction in scope or value in the aggregate of other monetary or nonmonetary benefits to which Employee was entitled as of the Effective Date; (iii) a determination by Employee made in good faith that as a result of a change in circumstances significantly affecting his position, changes in the composition or policies of Employer's Board of Directors, 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 as of the Effective Date, or - 5 - (iv) the requirement by Employer that Employee have as his principal location of work any location not within the greater Dallas - Fort Worth, Texas metropolitan area. 4.3 Termination on Death of Employee. This Agreement shall terminate automatically upon the death of Employee and all rights of Employee, his heirs, executors and administrators to base salary shall terminate immediately; provided, however, Employer shall pay to Employee's duly authorized representative all incentive compensation, bonus and benefits earned or accrued but unpaid as of the date of death, with payment of Employee's benefits to be made as provided in Employer's benefit plan(s) in effect on the date of death. 4.4 Termination by Disability. Employer may terminate Employee's employment hereunder upon Employee becoming Disabled (as defined below). Upon such termination, Employer shall pay Employee an amount equal to his then current monthly base salary for a period of six months, which payment amounts will be reduced by any disability payments Employee receives during such period from the disability insurance provided through Employer, if any. Employee shall be entitled to all other disability benefits then in effect (if any) provided by Employer to all other executive officers of Employer. In the event of termination due to Employee being Disabled, except as aforesaid, Employer shall have no other obligation to pay any base salary, incentive compensation or bonus or provide for any benefits to Employee after the effective date of termination. For purposes of this Agreement, "Disabled" means any mental or physical impairment lasting (or that will last) more than 180 consecutive or non-consecutive calendar days that prevents Employee from performing the essential functions of his position with or without reasonable accommodation as determined by a competent physician chosen by Employer and consented to by Employee or his legal representatives, which consent will not be unreasonably withheld or delayed. Employee agrees to submit to appropriate medical examinations and authorize his physicians to release medical information necessary to determine whether Employee is Disabled for purposes of this Agreement. SECTION 5. MISCELLANEOUS. 5.1 Notice. Except as set forth below in this Section 5.1, any notice under this Agreement must be in writing and shall be deemed to have been given when delivered personally or by overnight courier service or three days after being sent by mail, postage prepaid, at the address indicated below or to such changed address as such person may subsequently give such notice of: if to Employer: Peerless Mfg. Co. 2819 Walnut Hill Lane Dallas, Texas 75229 Attn: Chairman, Board of Directors - 6 - if to Employee: David Taylor 4532 Staten Island Court Plano, Texas 75024 Notwithstanding the foregoing, the party receiving notice may waive any provisions of this Section 5.1 in its sole and absolute discretion. 5.2 Assignment. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, personal representatives, successors, and assigns. Except as otherwise provided herein, this Agreement may not be assigned by any party hereto without the prior written consent of the other party hereto. Employer shall require any successor, and any corporation or other person which is in control of such successor, to all or substantially all of the business and/or assets of Employer (by purchase, merger, consolidation or otherwise), by agreement in form and substance reasonably satisfactory to Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Employer would be required to perform it if no such succession had taken place. Failure of Employer to obtain such agreement prior to the effectiveness of any such succession shall be a material breach of this Agreement by Employer. As used in this Agreement, "Employer" shall mean Employer as herein before defined and any successor to its business and/or all or part of its assets as aforesaid which executes and delivers the assumption agreement provided for in this Section 5.2 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. 5.3 Headings. The section headings used herein are for reference and convenience only and shall not enter into the interpretation hereof. 5.4 Counterparts. This Agreement may be executed in one or more counterparts for the convenience of the parties hereto, all of which together shall constitute one and the same instrument. 5.5 Amendment and Waiver. The provisions of this Agreement may be amended or waived only by written agreement of Employer and Employee, and no course of conduct, failure or delay in enforcing the provisions of this Agreement shall effect the validity, binding effect or enforceability of this Agreement. 5.6 Severability. Any provision or portion of a provision of this Agreement that is held to be invalid or unenforceable will be severable, and this Agreement will be construed and enforced as if such provision, or portion thereof, did not comprise a part hereof, and the remaining provisions or portions of provisions will remain in full force and effect. In lieu of each invalid or unenforceable provision there will be added automatically as part of this Agreement a provision as similar in terms to such invalid or unenforceable provision as may be possible and be legal, valid, and enforceable. 5.7 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas, without giving effect to any conflicts of law rule or principle that might require the application of the laws of another jurisdiction. - 7 - 5.8 Disputes. The parties to this Agreement agree that in the event there is a dispute or controversy between them that cannot be settled through direct discussions, it is in the best interests of all for such dispute or controversy to be resolved in the shortest time and with the lowest cost of resolution as practicable. Consequently, any such dispute, controversy or claim between the parties to this Agreement will not be litigated, but instead will be resolved by arbitration in accordance with Title 9 of the U.S. Code (United States Arbitration Act) and the Commercial Arbitration Rules of the American Arbitration Association (the "Rules"), and judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The arbitration will be before one neutral arbitrator and will proceed under the Expedited Procedures of said Rules. The arbitration will be held in Dallas, Texas, or such other place as may be selected by mutual agreement. The arbitrator will have the discretion to order a prehearing exchange of information by the parties, and to set limits for both the scope and time period of such exchange. All issues regarding exchange requests will be decided by the arbitrator. Neither party nor the arbitrator may disclose the existence, content or results of any arbitration hereunder, unless required to do so by court or regulatory order, without the prior written consent of both parties. Administrative fees and expenses of the arbitration itself will be borne by the parties equally unless otherwise required by law, a court of competent jurisdiction or the Rules; provided, that, in no event will Employee be required to pay in excess of $1,000 of such fees and expenses. The arbitrator will also be authorized to award to the prevailing party all or that fraction of its reasonable costs and fees as is deemed equitable. Costs of a party's representation by counsel or preparation costs for hearing are not considered administrative fees and expenses for purposes hereof. This provision will not apply to any injunctive relief sought by the Company or any of its affiliate under Section 2 or 3 of this Agreement. 5.9 Entire Agreement. This Agreement embodies the complete agreement between Employer and Employee regarding the subject matter hereof and the same supersede all prior agreements or understandings, whether oral, written or otherwise, between the parties hereto that may have related in any way to the subject matter hereof. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] - 8 - EMPLOYER: PEERLESS MFG. CO. /s/ Sherrill Stone ------------------ Sherrill Stone, Chairman of the Board and Chief Executive Officer EMPLOYEE: /s/ David Taylor ------------------ David Taylor - 9 - EX-31.(A) 10 d12159exv31wxay.htm CERTIFICATION OF CEO PURSUANT TO RULE 13A-14 exv31wxay

CERTIFICATION PURSUANT TO RULE 13a-14 OF THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED (ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-
OXLEYACT OF 2002)

~~I, Sherrill Stone, Chairman of the Board and Chief Executive Officer of Peerless Mfg. Co., certify that:~~

1. I have reviewed this quarterly report on Form 10-Q of Peerless Mfg. Co.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) [Omitted in accordance with SEC Release Nos. 33-8238 and 34-47986]

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s second fiscal quarter in the case of this quarterly report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.


Texas		75-0724417

(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

2819 Walnut Hill Lane, Dallas, Texas		75229

(Address of principal executive offices)		(Zip code)


PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
		CONSOLIDATED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF OPERATIONS
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 6. Exhibits and Reports on Form 8-K
Signatures
Bylaws, as Amended to Date
Credit Agreement
Guaranty Agreement
Master Revolving Note
Security Agreement
Employment Agreement - Peter J. Burlage
Employment Agreement - David Taylor
Certification of CEO Pursuant to Rule 13a-14
Certification of CFO Pursuant to Rule 13a-14
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906


PART I: FINANCIAL INFORMATION
	Item 1. Financial Statements
	Consolidated Balance Sheets at December 31, 2003 (unaudited) and June 30, 2003	3
	Unaudited Consolidated Statements of Operations for the three and six months ended December 31, 2003 and 2002	4
	Unaudited Consolidated Statements of Cash Flows for the six months ended December 31, 2003 and 2002	5
	Notes to the Consolidated Financial Statements	6
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	26
	Item 4. Controls and Procedures	26
PART II: OTHER INFORMATION
	Item 1. Legal Proceedings	27
	Item 2. Changes in Securities and Use of Proceeds	27
	Item 3. Defaults Upon Senior Securities	27
	Item 4. Submission of Matters to a Vote of Security Holders	27
	Item 5. Other Information	27
	Item 6. Exhibits and Reports on Form 8-K	28
SIGNATURES		30


				December 31,		June 30,
				2003		2003

				(unaudited)
ASSETS
Current assets
	Cash and cash equivalents			$	7,960	$	6,680
	Short term investments				311		309
	Accounts receivable - principally trade - net of allowance for doubtful accounts of $383 at December 31, 2003 and $402 at June 30, 2003				11,292		14,916
	Inventories				2,899		3,215
	Costs and earnings in excess of billings on uncompleted contracts				10,280		7,589
	Deferred income taxes				1,445		1,445
	Other				561		1,098
	Current assets of discontinued operations				2,121		2,760

		Total current assets			36,869		38,012
Property, plant and equipment – net					3,254		3,400
Other assets					1,009		989
Other assets of discontinued operations					9		151

				$	41,141	$	42,552

			LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
	Accounts payable – trade			$	11,057	$	12,661
	Billings in excess of costs and earnings on uncompleted contracts				1,084		2,027
	Commissions payable				975		1,041
	Income taxes payable				752		53
	Product warranties				771		846
	Accrued liabilities and other				2,164		2,749
	Current liabilities of discontinued operations				559		864

		Total current liabilities			17,362		20,241
Shareholders’ equity
	Common stock				3,003		2,999
	Additional paid-in capital				1,800		1,771
	Other				181		18
	Retained earnings				18,795		17,523

		Total shareholders’ equity			23,779		22,311

		Total liabilities and shareholders’ equity		$	41,141	$	42,552


			Three Months Ended						Six Months Ended
			December 31,						December 31,
			2003			2002			2003			2002

Revenues			$	16,429		$	20,011		$	33,236		$	33,287
Cost of goods sold				11,884			15,535			23,885			25,538

Gross profit				4,545			4,476			9,351			7,749
Operating expenses
	Sales and marketing			1,409			1,413			3,012			2,999
	Engineering and project management			1,037			1,071			2,131			2,744
	General and administrative			1,278			1,317			2,236			2,501
	Restructuring expense			—			—			—			483

				3,724			3,801			7,379			8,727

Operating income (loss)				821			675			1,972			(978	)
Other income
	Foreign exchange gain (loss)			94			(28	)		47			(91	)
	Other income, net			15			91			32			132

				109			63			79			41

Earnings (loss) from continuing operations before income taxes				930			738			2,051			(937	)
Income tax expense (benefit)				321			270			702			(350	)

Net earnings (loss) from continuing operations				609			468			1,349			(587	)
Discontinued operations (Note 5 – “Discontinued Operations”) Loss from discontinued operations, (including gain on disposal of $140 for the six months ended December 31, 2003)				(217	)		(789	)		(118	)		(1,246	)
	Income tax benefit			(75	)		(295	)		(41	)		(464	)

Net loss from discontinued operations				(142	)		(494	)		(77	)		(782	)

Net earnings (loss)			$	467		$	(26	)	$	1,272		$	(1,369	)

BASIC EARNINGS (LOSS) PER SHARE
	Earnings (loss) from continuing operations		$	0.20		$	0.16		$	0.45		$	(0.20	)
	Loss from discontinued operations			(0.05	)		(0.17	)		(0.03	)		(0.26	)

		Basic earnings (loss) per share	$	0.16		$	(0.01	)	$	0.42		$	(0.46	)

DILUTED EARNINGS (LOSS) PER SHARE
	Earnings (loss) from continuing operations		$	0.20		$	0.15		$	0.44		$	(0.20	)
	Loss from discontinued operations			(0.05	)		(0.16	)		(0.03	)		(0.26	)

		Diluted earnings (loss) per share	$	0.15		$	(0.01	)	$	0.42		$	(0.46	)

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			Separation
	Environmental		Filtration		Unallocated
	Systems		Systems		overhead			Consolidated

Three months ended December 31, 2003
Revenue from customers	$	8,930	$	7,499	$	—		$	16,429
Segment profit (loss)	$	1,494	$	605	$	(1,278	)	$	821
Three months ended December 31, 2002
Revenue from customers	$	12,506	$	7,505	$	—		$	20,011
Segment profit (loss)	$	802	$	1,190	$	(1,317	)	$	675
Six months ended December 31, 2003
Revenue from customers	$	19,009	$	14,227	$	—		$	33,236
Segment profit (loss)	$	3,229	$	979	$	(2,236	)	$	1,972
Six months ended December 31, 2002
Revenue from customers	$	19,449	$	13,838	$	—		$	33,287
Segment profit (loss)	$	376	$	1,630	$	(2,984	)	$	(978	)


	FOR		AGAINST		WITHHELD

Mr. Donald A. Sillers, Jr.		2,858,360		—		26,491
Mr. Sherrill Stone		2,868,460		—		16,391


Exhibit
Number		Exhibit

3(a)		Articles of Incorporation, as amended to date (filed as Exhibit 3 (a) to our report on Form 10-Q for the fiscal quarter ended December 31, 1997, and incorporated herein by reference).

3(b)		Bylaws, as amended to date.*

4(a)		Rights Agreement dated May 22, 1997 between Peerless Mfg. Co. and Mellon Investor Services, LLC (formerly ChaseMellon Shareholder Services, LLC), as Rights Agent (filed as Exhibit 1 to our Registration Statement on Form 8-A dated May 22, 1997, and incorporated herein by reference).

4(b)		Amendment to Rights Agreement dated August 23, 2001, between Peerless Mfg. Co. and Mellon Investor Services, LLC, as Rights Agent (filed as Exhibit 2 to our Registration Statement on Form 8-A/A dated August 30, 2001, and incorporated herein by reference).

10(a)		Credit Agreement by and between Comerica Bank and Peerless Mfg. Co., dated October 30, 2003 (including all exhibits but excluding all schedules). ***

10(b)		Guaranty Agreement by and between Comerica Bank and PMC Acquisition, Inc., dated October 30, 2003. *

10(c)		Master Revolving Note by and between Comerica Bank and Peerless Mfg. Co., dated October 30, 2003. *

10(d)		Security Agreement by and between Comerica Bank and Peerless Mfg. Co., dated October 30, 2003. *

10(e)		Employment Agreement, dated October 10, 2003, by and between Peerless Mfg. Co. and Peter J. Burlage. *

10(f)		Employment Agreement, dated October 10, 2003, by and between Peerless Mfg. Co. and David Taylor. *

31(a)		Certification of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended (adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002). *


31(b)		Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended (adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002). *

32(a)		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002). **

32(b)		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002). **

*		Filed herewith

* *		Furnished herewith

* * *		Filed herewith. The schedules to this Credit Agreement were omitted. A description of each omitted schedule is included with the Credit Agreement. The Company agrees to furnish a copy of any omitted schedule to the Securities and Exchange Commission upon request.


		PEERLESS MFG. CO.

Date: February 13, 2004		/s/ Sherrill Stone

		Sherrill Stone
		Chairman and Chief Executive Officer

Date: February 13, 2004		/s/ Richard L. Travis

		Richard L. Travis, Chief Financial Officer
		(Principal Financial and Accounting Officer)

1.		I have reviewed this quarterly report on Form 10-Q of Peerless Mfg. Co.;

2.		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

	(a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	(b)		[Omitted in accordance with SEC Release Nos. 33-8238 and 34-47986]

	(c)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	(d)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s second fiscal quarter in the case of this quarterly report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

	(a)		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	(b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.


		/s/ Sherrill Stone

		Sherrill Stone
		Chairman of the Board and Chief Executive Officer
Date: February 13, 2004


		/s/ Richard L. Travis, Jr.

		Richard L. Travis, Jr.
		Chief Financial Officer
Date: February 13, 2004

(1)		The Quarterly Report on Form 10-Q of the Company for the period ended December 31, 2003, as filed with the Securities Exchange Commission on the date hereof (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)		The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.


	/s/ Sherrill Stone

	Sherrill Stone
	Chairman of the Board and
	Chief Executive Officer
	Date: February 13, 2004