-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HlP+fXImtgpe/9ZBf698Q33FDzI0mJck5udtCn/2tY0LnV3CA/HZPNHRj9DESeL+ eK9N8Ddo5DfNpui/Lc1cVA== 0000950134-96-005131.txt : 19961120 0000950134-96-005131.hdr.sgml : 19961120 ACCESSION NUMBER: 0000950134-96-005131 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960930 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEERLESS MANUFACTURING CO CENTRAL INDEX KEY: 0000076954 STANDARD INDUSTRIAL CLASSIFICATION: 3569 IRS NUMBER: 750724417 STATE OF INCORPORATION: TX FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-05214 FILM NUMBER: 96637054 BUSINESS ADDRESS: STREET 1: 2819 WALNUT HILL LN CITY: DALLAS STATE: TX ZIP: 75229 BUSINESS PHONE: 2143576181 MAIL ADDRESS: STREET 1: P.O. BOX 540667 CITY: DALLAS STATE: TX ZIP: 75354 10-K405 1 FORM 10-K 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ================================================================================ FORM 10-K [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended June 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] ================================================================================ Commission File Number 0-5214 PEERLESS MFG. CO. ================================================================================ (Exact name of registrant as specified in its charter) Texas 75-0724417 - - -------------------------------------------------------------------- -------------------------------------- (State or other jurisdiction of incorporation or organization) (IRS Employer Identification Number) 2819 Walnut Hill Lane, Dallas, Texas 75229 - - -------------------------------------------------------------------- -------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (214) 357-6181 -------------------------------------- Securities registered pursuant to Section 12(g) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- Common Stock, par value $1.00 The Nasdaq Stock Market's National Market
================================================================================ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] At September 19, 1996, Peerless Mfg. Co. had 1,454,742 shares of common stock, $1.00 par value outstanding. The Company estimates that the aggregate market value of the common stock on September 19, 1996 (based upon the closing price of these shares on Nasdaq) held by non-affiliates was approximately $15,539,946. ================================================================================ DOCUMENTS INCORPORATED BY REFERENCE Proxy Statement for Annual Meeting of Shareholders to be held on or about November 21, 1996 (Part III). 2 TABLE OF CONTENTS
ITEM PAGE - - ---- ---- PART I 1 Business . . . . . . . . . . . . . . . . . . . . . . . . 1 2 Properties . . . . . . . . . . . . . . . . . . . . . . . 6 3 Legal Proceedings . . . . . . . . . . . . . . . . . . . 6 4 Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . 7 PART II 5 Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . . . . 7 6 Selected Financial Data . . . . . . . . . . . . . . . . 8 7 Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . 9 8 Financial Statements and Supplementary Data . . . . . . 14 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . 34 PART III 10 Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . 34 11 Executive Compensation . . . . . . . . . . . . . . . . . 34 12 Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . 34 13 Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . 34 PART IV 14 Exhibits, Financial Statement Schedule, and Reports on Form 8-K . . . . . . . . . . . . . . . 35
i 3 PART I ITEM 1. BUSINESS. Peerless Mfg. Co. (the "Company" or "Registrant") was organized in 1933 as a proprietorship and was incorporated as a Texas corporation in 1946. The Company has wholly owned subsidiaries in the Netherlands, the United Kingdom, the Netherlands Antilles and Barbados. Products and Operations The Company is engaged in the business of designing, engineering, manufacturing and selling highly specialized products, referred to as "separators" or "filters," which are used for a variety of purposes in cleaning gases and liquids as they move through a piping system. The Company also packages these products on skids complete with instruments, controls and related valves and piping. These products are used, among other applications, to remove solid and liquid contaminants from natural gas, and salt water aerosols from the combustion intake air of ship board gas turbine and diesel engines. The Company also designs, engineers, manufactures and sells specialized products referred to as "pulsation dampeners." These products are used primarily to reduce or eliminate vibrations caused by acoustical pulsations commonly found in piping connected to the reciprocating compressors generally used to move gases and air. Pulsation dampeners reduce noise levels, improve efficiency and prolong the life of piping systems. The Company's products are also used as components in selective catalytic reduction systems. Selective catalytic reduction equipment is used to separate nitrogen oxide (NOx) emissions from exhaust gases caused by burning hydrocarbon fuels such as gasoline, natural gas and oil. Additionally, the Company sells gas odorization equipment, quick-opening closures, parts for its products and other miscellaneous items. It also renders certain engineering services. While the Company manufactures and stocks a limited number of items of equipment for immediate delivery, the vast majority of its products are designed and constructed for specific customer requirements or specifications. In certain cases, the Company's products and components are designed by the Company but produced by subcontractors under Company supervision. The Company markets its products worldwide through manufacturers' representatives, who sell on a commission basis under the general direction of an officer of the Company. Additionally, a number of the Company's employees sell Company products directly to customers. The Company has a sales office in Singapore with a staff of seven engineering and administrative employees. The Company's United Kingdom subsidiary, Peerless Europe Ltd., began operations in January of 1992 and currently has a staff of ten full-time employees. The Company's Netherlands subsidiary has three full-time employees. 1 4 Customers and Export Sales Gas separators and filters are sold to gas producers and gas gathering, transmission and distribution companies, and to chemical manufacturers and oil refineries, either directly or through contractors engaged to build plants and pipelines. Separators and filters are also sold to manufacturers of compressors, turbines, and nuclear and conventional steam generating equipment. Marine separation/filtration systems are sold primarily to ship builders. Pulsation dampeners are purchased by customers in the same industries as purchasers of separators and filters (except ship builders and steam generating equipment manufacturers). Selective catalytic reduction equipment is sold to gas turbine operators, refineries and others who desire or may be required to reduce nitrogen oxide (NOx) emissions. The Company is not dependent upon any single customer or group of customers. Due to the custom-designed nature of its business and the nature of the products it sells, the Company's major customers typically vary from year to year. During Fiscal 1996 and 1995 no single customer accounted for 10% or more of Company revenues. During Fiscal 1994, the Company's largest customer, Mobil Oil Indonesia, accounted for approximately 10.5% of Company revenues. No other customer accounted for 10% or more of Company revenues during Fiscal 1994. Sales to foreign customers have been a part of the Company's business for more than forty years. During Fiscal 1996, foreign sales amounted to $19,434,000, or 57.8% of total consolidated revenue. Sales in Asia were approximately $4.5 million, or 13.4%, $7.0 million, or 21.8%, and $6.3 million, or 24.6%, of net sales in Fiscal 1996, 1995 and 1994, respectively. Due to the custom-designed and project-specific nature of its products, the Company's sales to any geographic region may vary from year to year. For a breakdown of the Company's foreign sales by geographic area during Fiscal 1996, 1995 and 1994, see Note I of the Notes to Consolidated Financial Statements. There are certain risks attendant to the Company's foreign sales. These include the possibility that foreign purchasers may default in the payment of amounts due, and that collection of such amounts may be more difficult than for U.S. customers, that foreign exchange rates may fluctuate adversely, that the U.S. and foreign governments may impose regulatory burdens upon exports and imports of the Company's products, and that the Company may be required to perform its obligations under product warranties, which might result in added expense due to the requirement that it perform such services in a foreign country. The Company has not, however, incurred substantial expenses to date involving these risks. The Company believes that its credit and collection risks are reduced to a significant extent because a substantial part of foreign sales are made either to large, well-established foreign companies or to foreign operations of domestic companies. When sales are made to smaller foreign enterprises, the Company generally requires an appropriate guarantee of payment or a letter of credit from a banking institution. In addition, products sold to foreign customers are generally priced to provide a higher profit margin, designed in part to cover the risk of 2 5 potentially greater warranty costs. In order to minimize the risks of fluctuating currency exchange rates, the Company generally requires payment in U.S. dollars (or in the functional currency of its foreign subsidiaries) for its foreign product sales. The Company hedges its exposure, if substantial, to foreign currency fluctuations on firm commitment sales under contracts that are not denominated in U.S. dollars. Backlog The Company's backlog of incomplete orders at June 30, 1996 was approximately $15,300,000 compared to approximately $15,875,000 in 1995. Virtually all of the June 30, 1996 backlog is presently expected to be completed and shipped in Fiscal 1997. Backlog has been calculated under the Company's normal practice of including incomplete orders for products that are deliverable over various periods and that may be changed or cancelled in the future. Competition and Other Market Factors There are a number of competitors in the manufacture and sale of separators, filters and pulsation dampeners, some of which are larger than the Company and have greater financial resources. In addition, several smaller manufacturers also produce custom-designed equipment that is competitive with the Company's specialized products and services. The Company believes that performance, reliability and warranty service are the prime competitive factors in the markets in which it competes. The Company believes that because of its reputation in those areas, it is a world leader in sales of custom-built separators, filters and pulsation dampeners. The markets for the Company's products are highly competitive worldwide. In addition, competition may increase as larger and better financed foreign companies become attracted to the market potential for products manufactured by the Company. Patents, Licenses and Product Development The Company considers itself a world leader in the technology required to design and apply its high efficiency vapor/liquid separation and filtration equipment. The Company believes it is also a leader in the design, manufacture and application of high efficiency pulsation dampeners for reciprocating compressors, and in the production of selective catalytic reduction component equipment. The Company's expenditures for new product development and improvements were approximately $515,000 in Fiscal 1996 and $526,000 in Fiscal 1995. The Company has several patents on its products and processes that are important to its business. However, other companies are marketing competitive products which may not infringe upon the Company's patents. Royalty revenues, included in net sales, are $451,620, $272,673 and $143,394 in Fiscal 1996, 1995 and 1994, respectively. Employees At June 30, 1996, the Company and its subsidiaries had approximately 160 employees. 3 6 Raw Materials The Company purchases the raw materials and component parts essential to its business from established sources with which it has had commercial relationships for many years. During the fiscal year ended June 30, 1996, the Company experienced no unusual problems in purchasing required materials and parts, and the Company believes that raw materials and component parts will be available in sufficient quantities for it to meet anticipated demand for its products. However, conditions may occur from time to time which could make it difficult to obtain desired materials within timely delivery schedules. Environmental Regulation The Company does not believe that its compliance with federal, state or local statutes or regulations relating to the protection of the environment has had any material effect upon capital expenditures, earnings or the competitive position of the Company. The manufacturing processes of the Company do not emit substantial foreign substances into the environment. Regulations related to nitrous oxide (NOx) emissions have in the past resulted in increased sales of the Company's component parts for selective catalytic reduction equipment, and further regulations in that area could increase demand for that equipment. 4 7 Executive Officers of the Company The executive officers of the Company on September 19, 1996 are listed below. Each of these officers has been employed by the Company for at least five years in the same position or a similar capacity, except as noted: Name and Age Position ------------ -------- Sherrill Stone, 59 Chairman of the Board, President and Chief Executive Officer (1) Dayle B. Ellis, 43 Executive Vice President and Chief Operating Officer (2) Edward Perry, 58 Vice President (3) G. D. Cornwell, 52 Vice President (4) Kent J. Van Houten, 43 Chief Financial Officer and Secretary - Treasurer (5) - - -------------------- (1) Responsible for formulation of corporate policy, investment and new business opportunities. Mr. Stone assumed the duties of Chairman of the Board and Chief Executive Officer of the Company on March 31, 1993. (2) Responsible for marketing, manufacturing and engineering operations of the Company. Mr. Ellis assumed the duties of Executive Vice President and Chief Operating Officer of the Company on July 17, 1996. (3) Responsible for marketing, manufacturing and engineering of filters and separators associated with pressure applications. (4) Responsible for marketing, manufacturing and engineering of liquid vapor separators. (5) Mr. Van Houten is responsible for financial and administrative operations, and has been employed by the Company since May 22, 1995. He previously was Manager of Financial Accounting at The Austin Company. 5 8 ITEM 2. PROPERTIES. The principal executive offices of the Registrant are located in Dallas, Texas, on approximately twelve acres of land owned by the Company. These facilities include two one story buildings, one containing approximately 4,000 square feet of space used for the Company's executive and sales offices, and the second containing 3,600 square feet used for research and development. The Company also utilizes 20,000 square feet of a 40,000 square foot building located on the same site, with the remaining portion leased to other companies. Rental income from such properties is not material to the Company's results of operations. The Company owns approximately 21,600 additional square feet of manufacturing facilities in Denton, Texas, and approximately 29,000 square feet of manufacturing facilities in Carrollton, Texas. The Company also owns a 79,800 square foot Dallas manufacturing plant which was closed in 1983, and is now leased to other companies for periods of three years or less. During Fiscal 1996, the estimated average utilization of the Company's manufacturing facilities was approximately 90% in Denton, Texas, and 90% in Carrollton, Texas. Because of the availability and use by the Company of subcontractors, high utilization rates do not necessarily indicate a capacity problem. The Company believes that its office and manufacturing facilities are adequate and suitable for its present requirements. While future needs may require additional manufacturing facilities, space at the Denton, Texas location is available for expansion. The Company has also determined that a number of locations in the immediate area could be leased in the event future needs require such action. ITEM 3. LEGAL PROCEEDINGS. From time to time the Company is involved in litigation relating to claims arising in the ordinary course of business operations. In addition, the Company has been named as a defendant in three lawsuits alleging damages suffered by former employees or independent contractors of the Company. In Roy L. Greeson v. Peerless Mfg. Co., filed June 17, 1994 in the 68th Judicial District Court, Dallas County, Texas, the plaintiff alleged that while working for a temporary employment agency, he was assigned to perform work at the Company. He further asserted that while at the Company he was injured and that the negligence of the Company caused his personal injuries. The plaintiff seeks lost earnings, front pay, past and future medical expenses and damages for past and future pain and suffering. An out of court settlement was agreed to and signed February 14, 1996. The amount of the settlement had no material impact to the financial statements of the Company. In David Kyle Miller v. Peerless Mfg. Co., filed August 25, 1995 in the 167th Judicial District Court, Dallas County, Texas, the plaintiff, a former employee, alleged that while employed by the Company he was injured and that these injuries were caused by the negligence and gross negligence of the Company. The plaintiff seeks damages including exemplary and/or punitive damages, damages for mental and emotional pain and anguish, physical impairment, loss of income, medical expenses and conscious physical pain and suffering. An out of court settlement was agreed to and signed August 29, 1996. The amount of such settlement had no material impact to the financial statements of the Company. 6 9 In Florentino San Miguel v. Carl W. Yarbrough, and Peerless Mfg. Co., filed June 28, 1996 in the 211th Judicial District Court, Denton, Texas, Plaintiff alleged that while employed by the Company he was injured and that these injuries were caused by the negligence and gross negligence of the Company. The plaintiff seeks damages including exemplary damages, prejudgment and postjudgment interest and court costs. At this early stage of the lawsuit, the Company is unable to determine the likelihood of the Company's success. The Company intends to vigorously defend the case. In Peerless Mfg. Co. v. Senior Engineering Company, the Company filed the action on November 13, 1995, alleging that Senior Engineering Company ("Senior") had misappropriated certain of the Company's trade secrets, breached certain contractual obligations owed to the Company, and breached its duty of good faith and fair dealing in connection with Senior's efforts to market moisture separation technology and systems in competition with the Company. By its action, the Company sought both damages and injunctive relief against Senior. On or about February 19, 1996, the Company and Senior entered into a preliminary agreement to resolve the Company's claims and settle the case. As a part of such preliminary agreement, all proceedings in the action were abated as of December 29, 1995, and remain abated. The Company and Senior are in the process of negotiating and preparing final documents which, when executed, will bring the case to an end. The Company believes that the current negotiations will be successful and will result in the settlement of the case. In the event such negotiations are not consummated, the Company intends to vigorously pursue the claims it has asserted in the case. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is quoted on the Nasdaq Stock Market's National Market under the symbol PMFG. The Company's Board of Directors reviews the financial position of the Company periodically to determine the advisability of paying dividends. The following table sets forth, for the periods indicated, the range of the daily high and low closing bid prices for the Company's Common Stock as reported by Nasdaq Stock Market's National Market and cash dividends paid per share. 7 10
Quarter Ended: Closing Bid Prices Cash Dividends High Low Per Share ---- --- --------- Fiscal 1995 - - -------------------- September 30, 1994 $14 $ 9-3/4 $.125 December 31, 1994 16-1/2 11 .125 March 31, 1995 11-3/4 9-1/2 .125 June 30, 1995 12-3/4 9-1/2 .125 Fiscal 1996 - - ----------- September 30, 1995 $12-3/4 $ 9-7/8 $.125 December 31, 1995 11-5/8 9-1/4 .125 March 31, 1996 9-3/4 8-3/4 .125 June 30, 1996 11-5/8 9-5/8 .125
The number of record holders of the Company's Common Stock on August 16, 1996 was 233. The Company estimates that approximately 700 additional shareholders own shares in broker names. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial and other data regarding the Company's results of operations and financial position. This information should be read in conjunction with the Company's Consolidated Financial Statements and related Notes included elsewhere herein.
Year ended June 30 ------------------------------------------------------------------------------ 1996 1995 1994 1993 1992 ----------- ----------- ------------ ------------ ------------ Net sales $33,643,998 $32,089,132 $25,567,560 $25,797,270 $23,058,643 Gross profit 10,213,237 10,583,128 9,038,606 8,828,398 8,518,020 Earnings before income taxes 1,133,955 1,860,468 1,227,959 267,092 1,393,594 Net earnings $ 789,721 $ 1,226,246 $ 780,275 $ 155,059 $ 979,549 =========== =========== =========== =========== =========== Earnings per common share: $.55 $.85 $.54 $.11 $.68 ==== ==== ==== ==== ==== Total assets $18,631,025 $17,156,055 $18,022,466 $14,261,243 $14,669,889 =========== =========== =========== ========== =========== Long-term obligations --- --- --- --- --- Cash dividend per common share $ .50 $ .50 $ .50 $ .50 $ .50 =========== =========== =========== =========== ===========
8 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Liquidity And Capital Resources As a general policy, the Company maintains corporate liquidity at a level it believes adequate to support existing operations and planned growth, as well as continue operations during reasonable periods of unanticipated adversity. Management also intends to direct additional resources to strategic new product development, market expansion and continuing improvement of existing products to enhance the Company's position as a market leader and to promote planned internal growth and profitability. The Company has historically financed and continues to finance working capital requirements and any expansion, equipment purchases or acquisitions primarily through the retention of earnings, which is reflected by the absence of long-term debt on the Company's consolidated balance sheet. In addition to retained earnings, the Company has infrequently used a short term bank credit line of $5,000,000 to supplement working capital. During early Fiscal 1995 and Fiscal 1996, it was necessary for the Company to use its short-term bank credit line in order to finance a temporary shortfall in working capital. At June 30, 1996, the Company had no amounts outstanding against its credit line. The Company pays an annual commitment fee of 0.25% of the unused balance under the credit line. The Company has no material commitments for capital expenditures other than replacing equipment and maintaining its existing plants and equipment. During Fiscal 1996 the Company purchased fixed assets totaling $273,593, consisting primarily of replacement manufacturing equipment, computer hardware and software, office equipment and building improvements. This is compared to purchases of $339,199 during Fiscal 1995. The Company believes that these sources will be sufficient to satisfy its needs in the foreseeable future. Working capital was $9,350,600 at June 30, 1996, substantially unchanged from $9,031,200 at June 30, 1995. 9 12 The following table sets forth certain information related to working capital for the Company's last three fiscal years:
1996 1995 1994 -------- -------- -------- Average working capital as a percentage of net sales 25.6% 27.5% 31.0% Annual accounts receivable turnover(1) 3.8 6.0 3.3 Annual inventory turnover(2) 5.7 6.7 4.8
(1) Annual accounts receivable turnover is computed by dividing annual net sales by the average monthly accounts receivable. (2) Annual inventory turnover is computed by dividing the cost of goods sold by the average monthly inventory. Although year-end working capital increased from Fiscal 1995 to Fiscal 1996, the average working capital decrease as a percentage of net sales is related to increased sales volume of approximately $1,555,000 reported in Fiscal 1996 over Fiscal 1995. The decrease in annual accounts receivable turnover reflects the Company's growth in foreign sales. The process of collecting foreign receivables usually takes longer than that of domestic receivables due to the length of time required for ocean-going shipments of equipment as well as the time involved in processing the required documentation. The decrease in average inventory turnover is due primarily to larger projects and more costs included in work in process during Fiscal 1996 compared to Fiscal 1995. Results of Operations The following table sets forth various measures of performance expressed as percentages of net sales for the Company's last three fiscal years, as well as the Company's effective income tax rate for the same periods:
1996 1995 1994 -------- -------- -------- Gross profit margin 30.4% 33.0% 35.3% Operating expenses 26.9% 27.5% 31.1% Earnings before income taxes 3.4% 5.8% 4.8% Effective income tax rate 30.4% 34.1% 36.5%
Inflation did not have a material impact on the Company's operating results during the last three fiscal years. 10 13 Comparison of Fiscal 1996 to Fiscal 1995 Net Sales The Company's net sales increased approximately $1,555,000, or 4.8%, to $33,644,000 in Fiscal 1996 as compared to $32,089,000 in Fiscal 1995. Compared to Fiscal 1995, Fiscal 1996 domestic sales decreased by 1.0% from $14,389,000 to $14,244,000. Foreign sales increased from $17,700,000 in Fiscal 1995 to $19,400,000 in Fiscal 1996, an increase of 9.6%. The increase was primarily the result of additional sales realized in Europe. The Company's backlog of unfilled orders decreased slightly from $15,875,000 at June 30, 1995 to $15,300,000 at June 30, 1996. Sales decreased from $3,346,000 in Fiscal 1995 to $2,562,000 in Fiscal 1996 at the Company's Singapore sales office. The backlog of unfilled orders at June 30, 1996 includes approximately $510,000 of orders generated through the Singapore office. The Company continues to believe that its sales in Asia are enhanced by its maintenance of a Singapore office. During Fiscal 1996, Peerless Europe Ltd., the Company's UK subsidiary, contributed Fiscal 1996 sales revenue of $5,394,000, representing an increase of $1,760,000, or 48.4% over Fiscal 1995 revenue of $3,634,000. This subsidiary continued to operate solidly during Fiscal 1996, with a year-end backlog of approximately $1,000,000. Peerless Europe B.V., the Company's Dutch subsidiary which became operational as a trading company late in Fiscal 1993, continued its efforts during Fiscal 1996 to implement the Company's direct marketing strategy in Europe. Sales revenue increased from $1,155,000 in Fiscal 1995 to $2,105,000 in Fiscal 1996. Sales by the Company's SCR (Selective Catalytic Reduction) division improved from $3,696,000 in Fiscal 1995 to $6,013,000 in Fiscal 1996. During Fiscal 1996, the SCR division, which designs and manufactures equipment used to remove nitrogen oxide (NOx) emissions caused by boilers, gas burners, turbines and internal combustion engines, experienced an improvement in its order intake activity and ended the year with a backlog of unfilled orders of approximately $4,838,000. Gross Profit Margin The Company's gross profit margin decreased from 33.0% of net sales in Fiscal 1995 to 30.4% of net sales in Fiscal 1996. The decrease resulted from a change in product mix of orders completed in Fiscal 1996. 11 14 Operating Expenses Operating expenses increased from $8,818,000 in Fiscal 1995 to $9,058,000 in Fiscal 1996. However, operating expenses as a percent of sales decreased slightly from 27.5% in Fiscal 1995 to 26.9% in Fiscal 1996, due primarily to the increase in net sales. Income Tax The Company's effective income tax rate decreased from 34.1% in Fiscal 1995 to 30.4% in Fiscal 1996. For a further discussion of the Company's federal income taxes, see Note H to the Company's Consolidated Financial Statements. Comparison of Fiscal 1995 to Fiscal 1994 Net Sales The Company's net sales increased approximately $6,500,000, or 25.5%, to $32,089,000 in Fiscal 1995 as compared to $25,568,000 in Fiscal 1994. Compared to Fiscal 1994, Fiscal 1995 domestic sales increased by 27.6% from $11,268,000 to $14,389,000. Foreign sales increased from $14,300,000 in Fiscal 1994 to $17,700,000 in Fiscal 1995, an increase of 23.8%. The increase was primarily the result of additional sales realized in Europe. The Company's backlog of unfilled orders declined slightly from $17,100,000 at June 30, 1994 to $15,875,000 at June 30, 1995. Sales decreased from $4,612,000 in Fiscal 1994 to $3,346,000 in Fiscal 1995 at the Company's Singapore sales office. The backlog of unfilled orders at June 30, 1995 includes approximately $425,000 of orders generated through the Singapore office. The Company continues to believe that its sales in the Far East are enhanced by its maintenance of an office in that region of the world. During Fiscal 1995, Peerless Europe Ltd., the Company's UK subsidiary, contributed Fiscal 1995 sales revenue of $3,634,000, representing an increase of $1,491,000, or 69.6% over Fiscal 1994 revenue of $2,143,000. Although this subsidiary continued to operate at a small loss during Fiscal 1995, with a year-end backlog of approximately $1,800,000, it is currently expected that the subsidiary will be profitable in Fiscal 1996. Peerless Europe B.V., the Company's Dutch subsidiary which became operational as a trading company late in Fiscal 1993, continued its efforts during Fiscal 1995 to implement the Company's direct marketing strategy in Europe. Sales revenue increased from $178,000 in Fiscal 1994 to $1,155,000 in Fiscal 1995, as the subsidiary turned profitable in Fiscal 1995 as compared to a loss in Fiscal 1994. Sales by the Company's SCR (Selective Catalytic Reduction) division improved from $1,458,000 in Fiscal 1994 to $3,696,000 in Fiscal 1995. During Fiscal 1995, the SCR division, 12 15 which designs and manufactures equipment used to remove nitrogen oxide (NOx) emissions caused by boilers, gas burners, turbines and internal combustion engines, experienced an improvement in its order intake activity and ended the year with a backlog of unfilled orders of approximately $3,832,000. Gross Profit Margin The Company's gross profit margin decreased from 35.3% of net sales in Fiscal 1994 to 33.0% of net sales in Fiscal 1995. The decrease resulted from a change in product mix of orders completed in Fiscal 1995. Operating Expenses Operating expenses increased from $7,953,000 in Fiscal 1994 to $8,818,000 in Fiscal 1995. However, operating expenses as a percent of sales decreased from 31.1% in Fiscal 1994 to 27.5% in Fiscal 1995, due primarily to the increase in net sales. Income Tax The Company's effective income tax rate decreased from 36.5% in Fiscal 1994 to 34.1% in Fiscal 1995. For a further discussion of the Company's federal income taxes, see Note H to the Company's Consolidated Financial Statements. 13 16 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Index to Financial Statements
Page ---- REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . . . 15 CONSOLIDATED BALANCE SHEETS AT JUNE 30, 1996 AND 1995 . . . . . . . . . 16 CONSOLIDATED STATEMENTS OF EARNINGS FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994 . . . . . . . . . . . . . 18 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994 . . . . . . . . . . . . . . . . . . . . . . . . 19 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994 . . . . . . . . . . . . . 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994 . . . . . . . . . . 22 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE . . . . . . . . . . . . . . . . . . . . . . . . . 32 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNT . . . . . . . . . . . . 33
14 17 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Peerless Mfg. Co. We have audited the accompanying consolidated balance sheets of Peerless Mfg. Co. and Subsidiaries as of June 30, 1996 and 1995, and the related consolidated statements of earnings, changes in stockholders' equity, and cash flows for each of the three years in the period ended June 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above, present fairly, in all material respects, the consolidated financial position of Peerless Mfg. Co. and Subsidiaries as of June 30, 1996 and 1995, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended June 30, 1996, in conformity with generally accepted accounting principles. GRANT THORNTON LLP Dallas, Texas September 13, 1996 15 18 PEERLESS MFG. CO. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30,
ASSETS 1996 1995 ----------- ----------- CURRENT ASSETS Cash and cash equivalents $ 2,082,329 $ 1,561,747 Short-term investments 246,659 221,968 Accounts receivable - principally trade - net of allowance for doubtful accounts of $100,000 and $99,082 in 1996 and 1995, respectively 8,700,762 9,135,623 Inventories 4,138,965 2,816,774 Deferred income taxes 226,214 232,554 Other 620,072 334,876 ----------- ----------- TOTAL CURRENT ASSETS 16,015,001 14,303,542 PROPERTY, PLANT AND EQUIPMENT - AT COST, less accumulated depreciation 1,213,859 1,282,275 PROPERTY HELD FOR INVESTMENT - AT COST, less accumulated depreciation 948,775 952,823 OTHER ASSETS 453,390 617,415 ----------- ----------- $18,631,025 $17,156,055 =========== ===========
16 19 PEERLESS MFG. CO. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - CONTINUED June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995 ----------- ----------- CURRENT LIABILITIES Accounts payable - trade $ 4,329,645 $ 3,096,025 Advance payments from customers 435,549 600,957 Commissions payable 566,766 509,512 Accrued expenses Compensation 549,210 593,550 Warranty reserve 286,384 317,092 Other 496,847 155,236 ----------- ----------- TOTAL CURRENT LIABILITIES 6,664,401 5,272,372 DEFERRED INCOME TAXES 86,768 97,704 COMMITMENTS - - STOCKHOLDERS' EQUITY Common stock - authorized, 4,000,000 shares of $1 par value; issued and outstanding, 1,446,742 shares 1,446,742 1,446,742 Additional paid-in capital 2,489,879 2,493,428 Unamortized value of restricted stock grants (33,750) (97,107) Cumulative foreign currency translation adjustment 23,842 56,110 Retained earnings 7,953,143 7,886,806 ----------- ----------- 11,879,856 11,785,979 ----------- ----------- $18,631,025 $17,156,055 =========== ===========
The accompanying notes are an integral part of these statements. 17 20 PEERLESS MFG. CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS Year ended June 30,
1996 1995 1994 ----------- ----------- ----------- NET SALES $33,643,998 $32,089,132 $25,567,560 COST OF GOODS SOLD 23,430,761 21,506,004 16,528,954 ----------- ----------- ---------- GROSS PROFIT 10,213,237 10,583,128 9,038,606 OPERATING EXPENSES Marketing and engineering 5,945,206 5,885,595 5,349,216 General and administrative 3,112,463 2,932,410 2,604,008 ----------- ----------- ---------- 9,057,669 8,818,005 7,953,224 ----------- ----------- ---------- OPERATING PROFIT 1,155,568 1,765,123 1,085,382 OTHER INCOME (EXPENSE) Interest income 45,559 93,974 37,073 Interest expense (16,858) (8,040) (35,596) Other, net (50,314) 9,411 141,100 ----------- ----------- ---------- (21,613) 95,345 142,577 ----------- ----------- ---------- EARNINGS BEFORE INCOME TAXES 1,133,955 1,860,468 1,227,959 INCOME TAX EXPENSE (BENEFIT) Current 348,830 612,853 468,063 Deferred (4,596) 21,369 (20,379) ----------- ----------- ---------- 344,234 634,222 447,684 ----------- ----------- ---------- NET EARNINGS $ 789,721 $ 1,226,246 $ 780,275 =========== =========== ========== Earnings per common share $ .55 $ .85 $ .54 =========== =========== ========== Weighted average number of common shares outstanding 1,446,742 1,442,039 1,437,192 =========== =========== ==========
The accompanying notes are an integral part of these statements. 18 21 PEERLESS MFG. CO. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Cumulative Unamortized foreign Additional value of currency Common paid-in restricted translation Retained stock capital stock grant adjustment earnings Total ---------- ---------- ----------- ----------- ---------- ----------- Balances as of July 1, 1993 $1,437,492 $2,384,702 $ (85,554) $(108,918) $7,319,498 $10,947,220 Net earnings - - - - 780,275 780,275 Issuance of 3,000 shares of common stock 3,000 27,750 (30,750) - - - Forfeiture of 3,750 shares of common stock (3,750) (27,031) 30,781 - - - Translation adjustment - - - 32,855 - 32,855 Cash dividends paid ($.50 per share) - - - - (718,091) (718,091) Amortization of restricted stock grants - - 35,682 - - 35,682 Income tax expense related to restricted stock plans - (1,551) - - - (1,551) ---------- ---------- ---------- --------- ---------- ----------- Balances as of June 30, 1994 1,436,742 2,383,870 (49,841) (76,063) 7,381,682 11,076,390 Net earnings - - - - 1,226,246 1,226,246 Issuance of 12,000 shares of common stock 12,000 123,000 (135,000) - - - Forfeiture of 2,000 shares of common stock (2,000) (18,500) 20,500 - - - Translation adjustment - - - 132,173 - 132,173 Cash dividends paid ($.50 per share) - - - - (721,122) (721,122) Amortization of restricted stock grants - - 67,234 - - 67,234 Income tax benefit related to restricted stock plans - 5,058 - - - 5,058 ---------- ---------- ---------- --------- ---------- ----------- Balances as of June 30, 1995 1,446,742 2,493,428 (97,107) 56,110 7,886,806 11,785,979 Net earnings - - - - 789,721 789,721 Translation adjustment - - - (32,268) - (32,268) Cash dividends paid ($.50 per share) - - - - (723,384) (723,384) Amortization of restricted stock grants - - 63,357 - - 63,357 Income tax expense related to restricted stock plans - (3,549) - - - (3,549) ---------- ---------- --------- --------- ---------- ----------- Balances as of June 30, 1996 $1,446,742 $2,489,879 $ (33,750) $ 23,842 $7,953,143 $11,879,856 ========== ========== ========= ========= ========== ===========
The accompanying notes are an integral part of this statement. 19 22 PEERLESS MFG. CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended June 30,
1996 1995 1994 ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 789,721 $1,226,246 $ 780,275 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities Depreciation and amortization 416,207 386,364 392,524 Deferred income taxes (4,596) 21,369 (20,379) Exchange loss 28,628 56,368 - Other (2,342) 5,058 (1,551) Changes in operating assets and liabilities Accounts receivable 616,280 (323,226) (2,253,588) Inventories (1,580,993) 1,810,607 (2,429,406) Other current assets (285,196) 108,174 15,010 Other assets 156,025 (195,985) (78,551) Accounts payable 1,240,661 464,022 1,320,851 Advance payments from customers (165,408) (1,624,268) 1,834,049 Commissions payable 57,254 6,981 (54,684) Accrued expenses 266,563 (133,144) 342,836 ---------- ---------- ---------- 743,083 582,320 (932,889) ---------- ---------- ---------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,532,804 1,808,566 (152,614) CASH FLOWS FROM INVESTING ACTIVITIES Net sales (purchases) of short-term investments (24,691) 415,017 685,984 Purchase of property and equipment (273,593) (339,199) (116,285) ---------- ---------- ---------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (298,284) 75,818 569,699
20 23 PEERLESS MFG. CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED Year ended June 30,
1996 1995 1994 ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Net changes in short-term borrowings $ - $ (260,400) $ 190,813 Dividends paid (723,384) (721,122) (718,091) ---------- ---------- ---------- NET CASH USED IN FINANCING ACTIVITIES (723,384) (981,522) (527,278) EFFECT OF EXCHANGE RATE ON CASH AND CASH EQUIVALENTS 9,446 25,691 32,855 ---------- ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 520,582 928,553 (77,338) Cash and cash equivalents at beginning of year 1,561,747 633,194 710,532 ---------- ---------- ---------- Cash and cash equivalents at end of year $2,082,329 $1,561,747 $ 633,194 ========== ========== ========== Supplemental information on cash flows: - - -------------------------------------- Interest paid $ 16,858 $ 9,597 $ 33,961 Income taxes paid $ 138,018 $1,059,500 $ 60,069
The accompanying notes are an integral part of these statements. 21 24 PEERLESS MFG. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1996, 1995 and 1994 NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES A summary of the significant accounting policies applied in the preparation of the accompanying financial statements follows. Nature of Operations Peerless Mfg. Co. designs, engineers, and manufactures specialized products for the removal of contaminants from gases and liquids and for air pollution abatement. The Company's products are manufactured principally at plants located in Dallas, Texas and are sold worldwide with the principal markets located in the United States and Europe. Primary customers are equipment manufacturers, engineering contractors and operators of power plants. Consolidation The Company consolidates the accounts of its wholly-owned foreign subsidiaries, Peerless Europe Limited (Europe Limited), Peerless International N.V. (International) and Peerless Europe B.V. (Europe B.V.). All significant intercompany accounts and transactions have been eliminated in consolidation. Cash Equivalents For purposes of the statement of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market. Depreciable Assets Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives, principally by the straight-line method. 22 25 Revenue Recognition The Company generally recognizes sales of custom-contracted products at the completion of the manufacturing process. The percentage-of-completion method is used for significant long-term contracts. Percentage-of-completion is determined using the actual labor incurred to date as compared to management's estimate of total labor to be incurred on each contract. 23 26 PEERLESS MFG. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1996, 1995 and 1994 NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES - CONTINUED Earnings Per Common Share Earnings per common share are computed by dividing net earnings by the weighted average number of shares of common stock outstanding during the year. There are no common stock equivalents or other dilutive securities. Foreign Currency All balance sheet accounts of foreign operations are translated into U.S. dollars at the year-end rate of exchange and statements of earnings items are translated at the weighted average exchange rates for the year. The resulting translation adjustments are made directly to a separate component of stockholders' equity. Gains and losses from foreign currency transactions, such as those resulting from the settlement of foreign receivables or payables, are included in the consolidated statements of earnings. The Company enters into forward exchange contracts in anticipation of future movements in certain foreign exchange rates and to hedge against foreign currency fluctuations. Realized and unrealized gains and losses on these contracts are included in net income, except that gains and losses on contracts to hedge specific foreign currency commitments are deferred and accounted for as part of the underlying transaction. Reclassifications Certain 1995 amounts have been reclassified to conform with the 1996 presentation. Financial Instruments The carrying amount for cash and cash equivalents approximates fair value because of the short-term nature of these items. Short-term investments are carried at fair value. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 24 27 PEERLESS MFG. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1996, 1995 and 1994 NOTE B - CONCENTRATIONS OF CREDIT RISK A significant portion of the Company's sales are to customers whose activities are related to the oil and gas industry, including some who are located in foreign countries. The Company generally extends credit to these customers. Its exposure to credit risk is affected by conditions within the oil and gas industry. Also, with respect to foreign sales, collection may be more difficult in the event of a default. However, the Company closely monitors extensions of credit and has never experienced significant credit losses. Substantially all foreign sales are made to large, well-established companies. The Company generally requires collateral or guarantees on foreign sales to smaller companies. NOTE C - INVENTORIES Principal components of inventories are as follows:
June 30, -------------------------------- 1996 1995 ---------- ---------- Raw materials $1,094,774 $ 988,275 Work in process 2,757,798 1,590,050 Finished goods 286,393 238,449 ---------- ---------- $4,138,965 $2,816,774 ========== ==========
NOTE D - PROPERTY, PLANT AND EQUIPMENT AND PROPERTY HELD FOR INVESTMENT Property, plant and equipment is summarized as follows:
June 30, --------------------------------- 1996 1995 ------------ ----------- Buildings $ 1,418,842 $ 1,364,693 Equipment 2,300,777 2,224,037 Furniture and fixtures 1,114,583 1,078,826 ------------ ----------- 4,834,202 4,667,556 Less accumulated depreciation (3,880,559) (3,645,497) ------------ ---------- 953,643 1,022,059 Land 260,216 260,216 ------------ ----------- $ 1,213,859 $ 1,282,275 ============ ===========
25 28 PEERLESS MFG. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1996, 1995 and 1994 NOTE D - PROPERTY, PLANT AND EQUIPMENT AND PROPERTY HELD FOR INVESTMENT - CONTINUED Property held for investment is summarized as follows:
June 30, ----------------------------- 1996 1995 ------------ ------------ Buildings $ 1,641,776 $ 1,639,792 Equipment 158,171 102,963 ------------ ------------ 1,799,947 1,742,755 Less accumulated depreciation (1,380,582) (1,319,342) ---------- ----------- 419,365 423,413 Land 529,410 529,410 ------------ ------------ $ 948,775 $ 952,823 ============ ============
NOTE E - CREDIT ARRANGEMENT The Company has an agreement with a bank for an unsecured continuing line of credit in the amount of $5,000,000 due upon demand, with interest at the bank's prime lending rate (8.25% at June 30, 1996) paid monthly. The bank charges usage fees at an annual rate of .25% of the average daily unused portion of the line. At June 30, 1996 and 1995, no amounts were outstanding under the line. The Company had letters of credit outstanding under separate arrangements of $3,259,533 and $2,898,534 at June 30, 1996 and 1995, respectively. Other assets with a cost of approximately $545,000 were pledged against the letters of credit outstanding at June 30, 1996. NOTE F - RESTRICTED STOCK PLANS The Company has a restricted stock plan whereby the Company can award up to 75,000 shares of common stock to employees. Sale of the stock awarded is restricted for five years from the date of grant. For the year ended June 30, 1995, the Company awarded 12,000 shares of common stock which had a fair value at the date of grant of $135,000. There were no awards for the years ended June 30, 1994 or 1996. Compensation under the plan is charged to earnings over the restriction period and amounted to $63,357, $67,234 and $18,907 in 1996, 1995 and 1994, respectively. At June 30, 1996, 8,750 shares were available for issuance. The Company also has a restricted stock plan for non-employee directors of the Company. Vesting is pro rata over a three-year period. Pursuant to the plan, the maximum number of shares that may be granted is 16,200 shares. No awards have been made since 1991. Compensation under the plan is charged to earnings over the vesting period and amounted to $16,775 in 1994. At June 30, 1996, 5,400 shares were available for issuance. 26 29 PEERLESS MFG. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1996, 1995 and 1994 The tax effect of income tax deductions that differ from compensation expense under these plans is credited or charged to additional paid-in capital. NOTE G - EMPLOYEE BENEFIT PLANS The Company has a 401(k) Plan to provide eligible employees with a retirement savings plan. All employees are eligible to participate in the plan upon completing 90 days of service. Company contributions are voluntary and at the discretion of the Board of Directors of the Company. The Company's contribution expense for the years ended June 30, 1996, 1995 and 1994 was $109,000, $103,000 and $98,000, respectively. 27 30 ] PEERLESS MFG. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1996, 1995 and 1994 NOTE H - FEDERAL INCOME TAXES Deferred taxes are provided for the temporary differences between the financial reporting bases and the tax bases of the Company's assets and liabilities. The temporary differences that give rise to the deferred tax assets or liabilities are as follows:
June 30, --------------------- 1996 1995 -------- -------- Deferred tax assets Restricted stock grants $ 19,125 $ 18,754 Accrued compensation 97,760 90,020 Warranty reserve 97,237 107,461 Inventories - 9,167 Foreign subsidiaries' net operating loss carryforwards 15,371 37,493 Interest expense 116,240 103,385 Other 70,158 15,613 -------- -------- 415,891 381,893 Less valuation allowance (160,405) (121,091) --------- -------- 255,486 260,802 Deferred tax liabilities Property, plant and equipment (88,491) (85,475) Inventories (22,962) - Other (4,587) (40,477) -------- -------- (116,040) (125,952) --------- -------- Net deferred tax asset $139,446 $134,850 ======== ========
28 31 PEERLESS MFG. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1996, 1995 and 1994 NOTE H - FEDERAL INCOME TAXES - CONTINUED Deferred tax assets and liabilities included in the balance sheet are as follows:
June 30, --------------------- 1996 1995 -------- -------- Current deferred tax asset $226,214 $232,554 Noncurrent deferred tax liability (86,768) (97,704) -------- -------- $139,446 $134,850 ======== ======== The effective income tax rate varies from the statutory rate due to the following: As a percentage of pretax earnings ---------------------- 1996 1995 1994 ------ ------ ------ Income tax expense at statutory rate 34.0% 34.0% 34.0% Increase (decrease) in income taxes resulting from Foreign sales corporation exclusions (1.5) (3.1) (3.7) Tax-exempt interest income ( .4) ( .8) ( .2) Change in valuation allowance (3.5) (1.4) 4.0 Other 1.8 5.4 2.4 ---- ---- ---- Income tax expense at effective rate 30.4% 34.1% 36.5% ==== ==== ====
The valuation allowance relates to deferred tax assets of foreign subsidiaries. These assets are recoverable only from future income of the respective foreign subsidiaries. Utilization of foreign net operating carryforwards reduced income tax expense by approximately $19,000 and $55,000 for 1996 and 1995, respectively. 29 32 PEERLESS MFG. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1996, 1995 and 1994 NOTE I - INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION The Company's operations consist of a dominant industry segment, the designing and manufacturing of specialized products for the removal of contaminants from gases and liquids and for air pollution abatement, principally in the United States and the United Kingdom. Information about the Company's operations in different geographic areas as of and for the years ended June 30, 1996, 1995 and 1994 is as follows:
United United States Kingdom Other Eliminations Consolidated ----------- ---------- ---------- ------------ ------------ 1996 - - ---- Net sales to unaffiliated customers $26,775,000 $4,764,000 $2,105,000 $ - $33,644,000 Transfers between geographic areas 984,000 630,000 - (1,614,000) - ----------- ---------- ---------- ----------- ----------- Total $27,759,000 $5,394,000 $2,105,000 $(1,614,000) $33,644,000 =========== ========== ========== =========== =========== Operating profit (loss) $ 1,071,000 $ 145,000 $ (39,000) $ (21,000) $ 1,156,000 =========== ========== ========== =========== =========== Identifiable assets $17,684,000 $2,112,000 $1,599,000 $(2,764,000) $18,631,000 =========== ========== ========== =========== =========== 1995 - - ---- Net sales to unaffiliated customers $27,673,000 $3,261,000 $1,155,000 $ - $32,089,000 Transfers between geographic areas 479,000 373,000 - (852,000) - ----------- ---------- ---------- ----------- ----------- Total $28,152,000 $3,634,000 $1,155,000 $ (852,000) $32,089,000 =========== ========== ========== =========== =========== Operating profit (loss) $ 1,764,000 $ (13,000) $ 9,000 $ 5,000 $ 1,765,000 =========== ========== ========== =========== =========== Identifiable assets $16,048,000 $2,113,000 $1,237,000 $(2,242,000) $17,156,000 =========== ========== ========== =========== ===========
30 33 PEERLESS MFG. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1996, 1995 and 1994 NOTE I - INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION - CONTINUED
United United States Kingdom Other Eliminations Consolidated ----------- ---------- --------- ------------ ------------ 1994 ---- Net sales to unaffiliated customers $23,270,000 $2,120,000 $ 178,000 $ - $25,568,000 Transfers between geographic areas 599,000 23,000 - (622,000) - ----------- ---------- --------- ----------- ----------- Total $23,869,000 $2,143,000 178,000 $ (622,000) $25,568,000 =========== ========== ========= =========== =========== Operating profit (loss) $ 1,260,000 $ (21,000) $(149,000) $ (5,000) $ 1,085,000 =========== ========== ========= =========== =========== Identifiable assets $17,494,000 $1,693,000 $ 675,000 $(1,840,000) $18,022,000 =========== ========== ========= =========== ===========
Transfers between the geographic areas primarily represent intercompany export sales and are accounted for based on established sales prices between the related companies. In computing operating profit (loss), no allocations of general corporate expenses have been made. Identifiable assets of geographic areas are those assets related to the Company's operations in each area. United States assets consist of all other operating assets of the Company. Export sales account for a significant portion of the Company's revenues and are summarized by geographic area as follows:
1996 1995 1994 ----------- ----------- ----------- C> North and South America (excluding U.S.A.) $ 4,625,000 $ 3,817,000 $ 4,050,000 Europe 8,760,000 6,051,000 3,353,000 Asia 4,502,000 7,011,000 6,293,000 Other 1,547,000 826,000 599,000 ----------- ----------- ----------- $19,434,000 $17,705,000 $14,295,000 =========== =========== ===========
31 34 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE Board of Directors Peerless Mfg. Co. In connection with our audit of the consolidated financial statements of Peerless Mfg. Co. and Subsidiaries referred to in our report dated September 13, 1996, which is included in Part II of this form, we have also audited Schedule II for each of the three years in the period ended June 30, 1996. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. GRANT THORNTON LLP Dallas, Texas September 13, 1996 32 35 PEERLESS MFG. CO. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS June 30,
Additions Balance at --------------------------------- beginning of Charged to Charged to Balance at Description period expenses other accounts(1) Deductions(2) end of period ----------- ------------ ---------- -------------- ---------- ------------- 1996 - - ---- Allowance for doubtful accounts $99,082 $44,307 $852 $44,241 $100,000 ======= ======= ==== ======= ======== 1995 - - ---- Allowance for doubtful accounts $85,827 $55,401 $ - $42,146 $ 99,082 ======= ======= ==== ======= ======== 1994 - - ---- Allowance for doubtful accounts $39,176 $60,000 $ - $13,349 $ 85,827 ======= ======= ==== ======= ========
(1) Amounts represent current year collections on accounts previously written off. (2) Amounts represent current year write offs. 33 36 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. For information concerning the Company's Directors, reference is made to the information set forth under the caption "Election of Directors and Stock Ownership of Certain Beneficial Owners" in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held November 21, 1996 (the "Proxy Statement"), which information is incorporated herein by reference. For information concerning the Company's Executive Officers, see Item 1, "Business - Executive Officers of the Company" and the Proxy Statement, which information regarding the executive officers is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. For information concerning the Company's executive compensation, reference is made to the information set forth under the caption "Executive Compensation" in the Proxy Statement, which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. For information concerning the security ownership of certain beneficial owners and management, reference is made to the information set forth under the caption "Election of Directors and Stock Ownership of Certain Beneficial Owners" in the Proxy Statement, which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. For information concerning certain relationships and related transactions, reference is made to the information set forth under the caption "Compensation Committee Interlocks and Insider Participation" in the Proxy Statement, which information is incorporated herein by reference. 34 37 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K. (A) 1. All Financial Statements: see Item 8 "Financial Statements and Supplementary Data" in Part II of this Report. 2. Financial Statement Schedule and Exhibits filed in Part IV of this report are as follows: SCHEDULES*: II - Valuation and Qualifying Account - Years Ended June 30, 1996, 1995 and 1994 *All other schedules are omitted because the required information is inapplicable or the information is presented in the financial statements and the related notes. (B) Reports on Form 8-K: None (C) Exhibits: see Index to Exhibits, pages 37-38 35 38 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PEERLESS MFG. CO. (Registrant) By: /s/ SHERRILL STONE -------------------------------------- Sherrill Stone, Chairman, President, and Chief Executive Officer Date: September 27, 1995. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date: September 27, 1995 /s/ SHERRILL STONE -------------------------------------- Sherrill Stone, Chairman of the Board, President, Director and Chief Executive Officer September 27, 1995 /s/ KENT J. VAN HOUTEN -------------------------------------- Kent J. Van Houten, Treasurer, Principal Financial Officer and Principal Accounting Officer September 27, 1995 /s/ DONALD A. SILLERS, JR. -------------------------------------- Donald A. Sillers, Jr., Director September 27, 1995 /s/ J. V. MARINER -------------------------------------- J. V. Mariner, Director September 27, 1995 /s/ BERNARD S. LEE -------------------------------------- Bernard S. Lee, Director September 27, 1995 /s/ D. D. BATTERSHELL -------------------------------------- D. D. Battershell, Director 36 39 INDEX TO EXHIBITS Page REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 15 FINANCIAL STATEMENT SCHEDULES: II Valuation and Qualifying Accounts - Years Ended June 30, 1996, 1995 and 1994 (included in Item 8) 33 EXHIBITS: 3(a) The Company's Articles of Incorporation, as amended to date (filed as Exhibit 1 to the Company's Registration Statement on Form S-1, Registration No. 2-35767) and amended by the Company's December 12, 1990 Form 8 amending Exhibit 3(a) to the Company's Annual Report on Form 10-K dated June 30, 1990, and incorporated herein by reference). 3(b) The Company's Bylaws, as amended to date (filed as Exhibit 3(b) to the Company's Annual Report on Form 10-K, dated June 30, 1993, and incorporated herein by reference). 10(a) Incentive Compensation Plan effective January 1, 1981, as amended January 23, 1991 (filed as Exhibit 10(b) to the Company's Annual Report on Form 10-K, dated June 30, 1991, and incorporated herein by reference). 10(b) 1985 Restricted Stock Plan for Peerless Mfg. Co., effective December 13, 1985 (filed as Exhibit 10(b) to the Company's Annual Report on Form 10-K, dated June 30, 1993, and incorporated herein by reference). 10(c) 1991 Restricted Stock Plan for Non-Employee Directors of Peerless Mfg. Co., adopted subject to shareholder approval May 24, 1991, and approved by shareholders November 20, 1991 (filed as Exhibit 10(e) to the Company's Annual Report on Form 10-K dated June 30, 1991 and incorporated herein by reference). 37 40 10(d) Employment Agreement, dated as of April 29, 1994, by and between the Company and Sherrill Stone (filed as Exhibit 10(d) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1994 and incorporated herein by reference). 10(e) Agreement, dated as of April 29, 1994, by and between the Company and Sherrill Stone (filed as Exhibit 10(e) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1994 and incorporated herein by reference). 10(f) Loan Agreement, dated as of December 14, 1993, between NationsBank of Texas, N.A. and the Company (filed as Exhibit 10(f) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1994 and incorporated herein by reference). 10(g) Second Amended and Restated Loan Agreement, dated as of February 13, 1995, by and between NationsBank of Texas, N.A. and the Company* 10(h) Third Amended and Restated Loan Agreement, dated as of December 12, 1995, by and between NationsBank of Texas, N.A. and the Company* 21 Subsidiaries of the Company (filed as Exhibit 21 to the Company's Annual Report on Form 10-K dated June 30, 1993 and incorporated herein by reference). 27 Financial Data Schedule.* - - ------------------------ * Filed herewith 38 EX-10.(G) 2 2ND AMENDED & RESTATED LOAN AGREEMENT 1 EXHIBIT 10(g) NATIONSBANK OF TEXAS, N.A. SECOND AMENDED AND RESTATED LOAN AGREEMENT This Second Amended and Restated Loan Agreement (the "Agreement") dated as of February 13, 1995, by and between NationsBank of Texas, N.A., a national banking association ("Bank") and the Borrower described below: In consideration of the Loan or Loans described below and the mutual covenants and agreements contained herein, and intending to be legally bound hereby, Bank and Borrower agree as follows: 1. DEFINITIONS AND REFERENCE TERMS. In addition to any other terms defined herein, the following terms shall have the meaning set forth with respect thereto: A. BORROWER. Peerless Mfg. Co., a Texas Corporation B. BORROWER'S ADDRESS: 2819 Walnut Hill Lane Dallas, Texas 75354 C. HAZARDOUS MATERIALS. Hazardous Materials include all materials defined as hazardous wastes or substances under any local, state or federal environmental laws, rules or regulations, and petroleum, petroleum products, oil and asbestos. D. LOAN(S). Loan(s) means collectively any and all loans heretofore or hereafter made by Bank to the Borrower. E. LOAN DOCUMENTS. Loan Documents means this Loan Agreement and any and all promissory notes executed by Borrower in favor of Bank and all other documents, instruments, guarantees, certificates and agreements executed and/or delivered by Borrower, any guarantor or third party in connection with any Loan. F. ACCOUNTING TERMS. All accounting terms not specifically defined or specified herein shall have the meanings generally attributed to such terms under generally accepted accounting principles ("GAAP"), as in effect from time to time, consistently applied, with respect to the financial statements referenced in Section 3.H. hereof. 2. LOANS. A. LOAN. Bank hereby agrees to make (or has made) a loan or loans to Borrower in the aggregate principal amount of $5,000,000. The obligation to repay the loan is evidenced by a promissory note or notes dated February 13, 1995 (the promissory note or notes together with any other promissory notes heretofore or hereafter executed by Borrower in favor of Bank and any and all renewals, extensions or rearrangements thereof being hereafter collectively referred to as the "Note") having a maturity date, repayment terms and interest rate as set forth in the Note. B. REVOLVING CREDIT FEATURE. The Loan provides for a revolving line of credit (the "Line") under which Borrower may from time to time, borrow, repay and re-borrow funds. C. USAGE FEE. Borrower will pay hereafter on February 13, 1995 and on the last day of each quarter for the period from and including the date the Line was established to and including the maturity date of the Line, a usage fee at a rate per annum of .25% of the average daily unused portion of the Line during such period. The Borrower may at any time upon written notice to the Bank permanently reduce the amount of the Line at which time the obligation of the Borrower to pay a usage fee shall thereupon correspondingly be reduced. - 1 - 2 D. LETTER OF CREDIT SUBFEATURE. As a subfeature under the Line, Bank may from time to time up to and including December 12, 1995, issue letters of credit for the account of Borrower (each, a "Letter of Credit" and collectively, "Letters of Credit"); provided, however, that the form and substance of each Letter of Credit shall be subject to approval by Bank in its sole discretion; and provided further that the aggregate undrawn amount of all outstanding Letters of Credit shall not at any time exceed $5,000,000. No Letter of Credit shall have an expiration date subsequent to December 12, 1995 unless 100% secured by a NationsBank CD or 105% secured by the cash value of life insurance on Don Sillers. The undrawn amount of all Letters of Credit plus any and all amounts paid by Bank in connection with drawings under any Letter of Credit for which the Bank has not been reimbursed shall be reserved under the Line and shall not be available for advances thereunder. Each draft paid by Bank under a Letter of Credit shall be deemed an advance under the Line and shall be repaid in accordance with the terms of the Line; provided however, that if the Line is not available for any reason whatsoever, at the time any draft is paid by Bank, or if advances are not available under the Line in such amount due to any limitation of borrowing set forth herein, then the full amount of such drafts shall be immediately due and payable, together with interest thereon, from the date such amount is paid by Bank to the date such amount is fully repaid by Borrower, at that rate of interest applicable to advances under the Line. In such event, Borrower agrees that Bank, at Bank's sole discretion may debit Borrower's deposit account with Bank for the amount of such draft. 3. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and warrants to Bank as follows: A. GOOD STANDING. Borrower is a corporation, duly organized, validly existing and in good standing under the laws of Texas and has the power and authority to own its property and to carry on its business in each jurisdiction in which Borrower does business. B. AUTHORITY AND COMPLIANCE. Borrower has full power and authority to execute and deliver the Loan Documents and to incur and perform the obligations provided for therein, all of which have been duly authorized by all proper and necessary action of the appropriate governing body of Borrower. No consent or approval of any public authority or other third party is required as a condition to the validity of any Loan Document, and Borrower is in compliance with all laws and regulatory requirements to which it is subject. C. BINDING AGREEMENT. This Agreement and the other Loan Document executed by Borrower constitute valid and legally binding obligations of Borrower, enforceable in accordance with their terms. D. LITIGATION. There is no proceeding involving Borrower pending or, to the knowledge of Borrower, threatened before any court or governmental authority, agency or arbitration authority, except as disclosed to Bank in writing and acknowledged by Bank prior to the date of this Agreement. E. NO CONFLICTING AGREEMENTS. There is no charter, bylaw, stock provision, partnership agreement or other document pertaining to the organization, power or authority of Borrower and no provision of any existing agreement, mortgage, indenture or contract binding on Borrower or affecting its property, which would conflict with or in any way prevent the execution, delivery or carrying out of the terms of this Agreement and the other Loan Documents. F. OWNERSHIP OF ASSETS. Borrower has good title to its assets, and its assets are fee and clear of hens, except those granted to Bank and as disclosed to Bank in writing prior to the date of this Agreement. G. TAXES. All taxes and assessments due and payable by Borrower have been paid or are being contested in good faith by appropriate proceedings and the Borrower has filed all tax returns which it is required to file. - 2 - 3 H. FINANCIAL STATEMENTS. The financial statements of Borrower heretofore delivered to Bank have been prepared in accordance with GAAP applied on a consistent basis throughout the period involved and fairly present Borrower's financial condition as of the date or dates thereof, and there has been no material adverse change in Borrower's financial condition or operations since June 30, 1994. To the best of Borrower's knowledge, all factual information furnished by Borrower to Bank in connection with this Agreement and the other Loan Documents is and will be accurate and complete on the date as of which such information is delivered to Bank and is not and will not be incomplete by the omission of any material fact necessary to make such information not misleading. I. PLACE OF BUSINESS. Borrower's chief executive office is located at 2819 Walnut Hill Lane Dallas, Texas 75354 J. ENVIRONMENTAL MATTERS. Environmental Law Compliance. The conduct of Borrower's business operations do not and will not violate any federal laws, rules or ordinances for environmental protection, regulations of the Environmental Protection Agency and any applicable local or state law, rule, regulation or rule of common law and any judicial interpretation thereof relating primarily to the environment or Hazardous Materials and Borrower will not use or permit any other party to use any Hazardous Materials at any of Borrower's places of business or at any other property owned by Borrower except such materials as are incidental to Borrower's normal course of business, maintenance and repairs and which are handled in compliance with all applicable environmental laws. Borrower agrees to permit Bank, its agents, contractors and employees to enter and inspect any of Borrower's places of business or any other property of Borrower at any reasonable times upon three (3) days prior notice for the purposes of conducting an environmental investigation and audit (including taking physical samples) to insure that Borrower is complying with this covenant and Borrower shall reimburse Bank on demand for the costs of any such environmental investigation and audit. Borrower shall provide Bank, its agents, contractors, employees and representatives with access to and copies of any and all data and documents relating to or dealing with any Hazardous Materials used, generated, manufactured, stored or disposed of by Borrower's business operations within five (5) days of the request therefore. K. CONTINUATION OF REPRESENTATION AND WARRANTIES. All representations and warranties made under this Agreement shall be deemed to be made at and as of the date hereof and at and as of the date of any future advance under any Loan. 4. AFFIRMATIVE COVENANTS. Until full payment and performance of all obligations of Borrower under the Loan Documents, Borrower will, unless Bank consents otherwise in writing (and without limiting any requirement of any other Loan Document): A. FINANCIAL STATEMENTS AND OTHER INFORMATION. Maintain a system of accounting satisfactory to Bank and in accordance with GAAP applied on a consistent basis throughout the period involved, permit Bank's officers or authorized representatives to visit and inspect Borrower's books of account and other records at such reasonable times and as often as Bank may desire, and pay the reasonable fees and disbursements of any accountants or other agents of Bank selected by Bank for the foregoing purposes. Unless written notice of another location is given to Bank, Borrower's books and records will be located at Borrower's chief executive office set forth above. All financial statements called for below shall be prepared in form and content acceptable to Bank and by independent certified public accountants acceptable to Bank. In addition, Borrower will: i. Furnish to Bank consolidated financial statements of Borrower for each fiscal year of Borrower, within 90 days after the close of each such fiscal year. ii. Furnish to Bank consolidated financial statements (including a balance sheet and profit and loss statement) of Borrower for each quarter of each fiscal year of Borrower, within 30 days after the close of each such period. - 3 - 4 iii. Furnish to Bank promptly such additional information, reports and statements respecting the business operations and financial condition of Borrower from time to time, as Bank may reasonably request. B. INSURANCE. Maintain insurance with responsible insurance companies on such of its properties, in such amounts and against such risks as is customarily maintained by similar businesses operating in the same vicinity, specifically to include fire and extended coverage insurance covering all assets, business interruption insurance, workers compensation insurance and liability insurance, all to be with such companies and in such amounts as are satisfactory to Bank and with respect to insurance on the Collateral, to contain a mortgagee clause naming Bank as a loss payee or an additional insured (as applicable) as its interest may appear and providing for at least 30 days prior notice to Bank of any cancellation thereof Satisfactory evidence of such insurance will be supplied to Bank prior to funding under the Loan(s) and 30 days prior to each policy renewal. C. EXISTENCE AND COMPLIANCE. Maintain its existence, good standing and qualification to do business, where required and comply with all laws, regulations and governmental requirements including, without limitation, environmental laws applicable to it or to any of its property, business operations and transactions. D. ADVERSE CONDITIONS OR EVENTS. Promptly advise Bank in writing of (i) any condition, event or act which comes to its attention that would or might materially adversely affect Borrower's financial condition or operations, the Collateral, or Bank's rights under the Loan Documents, (ii) any litigation filed by or against Borrower, (iii) any, event that has occurred that would constitute an event of default under any Loan Documents and (iv) any uninsured or partially uninsured loss through fire, theft, liability or property damage. E. TAXES AND OTHER OBLIGATIONS. Pay all of its taxes, assessments and other obligations, including, but not limited to taxes, costs or other expenses arising out of this transaction, as the same become due and payable, except to the extent the same are being contested in good faith by appropriate proceedings in a diligent manner. F. MAINTENANCE. Maintain all of its tangible property in good condition and repair and make all necessary replacements thereof, and preserve and maintain all licenses, trademarks, privileges, permits, franchises, certificates and the like necessary for the operation of its business. G. NOTIFICATION OF ENVIRONMENTAL CLAIMS. Borrower shall immediately advise Bank in writing of (i) any and all enforcement, cleanup, remedial, removal, or other governmental or regulatory actions instituted, completed or threatened pursuant to any applicable federal, state, or local laws, ordinances or regulations relating to any Hazardous Materials affecting Borrower's business operations; and (ii) all claims made or threatened by any third party against Borrower relating to damages, contribution, cost recovery, compensation, loss or injury resulting from any Hazardous Materials. Borrower shall immediately notify Bank of any remedial action taken by Borrower with respect to Borrower's business operations. 5. NEGATIVE COVENANTS. Until full payment and performance of all obligations of Borrower under the Loan Documents, Borrower will not, without the prior written consent of Bank (and without limiting any requirement of any other Loan Documents): A. TRANSFER OF ASSETS OR CONTROL. Sell, lease, assign or otherwise dispose of or transfer any assets, except in the normal course of its business, or enter into any merger or consolidation, or transfer control or ownership of the Borrower or from or acquire any subsidiary. B. LIENS. Grant, suffer or permit any contractual or noncontractual lien on or security interest in its assets, except in favor of Bank, or fail to promptly pay when due all lawful claims, whether for labor, materials or otherwise. - 4 - 5 C. INVESTMENTS. Make an investment in any subsidiary, including but not limited to Peerless International N.V., Peerless Europe B.V., and Peerless Europe Ltd, that would cause the aggregate amount of investments in subsidiaries to exceed $1,700,000 at any time. D. EXTENSIONS OF CREDIT. Make any loan or advance to any individual, partnership, corporation or other entity. Borrower may make loans and/or advances to subsidiaries, provided however that such loans and advances to subsidiaries shall not exceed an aggregate of $1,700,000 at any time. E. BORROWINGS. Create, incur, assume or become liable in any manner for any indebtedness (for borrowed money, deferred payment for the purchase of assets, lease payments, as surety or guarantor for the debt for another, or otherwise) other than to Bank, except for normal trade debts incurred in the ordinary course of Borrower's business, and except for existing indebtedness disclosed to Bank in writing and acknowledged by Bank prior to the date of this Agreement. F. CHARACTER OF BUSINESS. Change the general character of business as conducted at the date hereof, or engage in any type of business not reasonably related to its business as presently conducted. 6. DEFAULT. Borrower shall be in default under this Agreement and under each of the other Loan Documents if it shall default in the payment of any amount due and owing under the Loans or should it fail to timely and properly observe, keep or perform any term, covenant, agreement or condition in any Loan Document or in any other loan agreement, promissory note, security agreement, deed of trust, mortgage, assignment or other contract securing or evidencing payment of any indebtedness of Borrower to Bank or any affiliate or subsidiary of NationsBank Corporation. 7. REMEDIES UPON DEFAULT. If an event of default shall occur Bank shall have all rights, powers and remedies available under each of the Loan Documents as well as all rights and remedies available at law or in equity. 8. NOTICES. All notices, requests or demands which any party is required or may desire to give to any other party under any provision of this Agreement must be in writing delivered to the other party at the following address: Borrower Peerless Mfg. Co. 1819 Walnut Hill Lane Dallas, Texas 75354 Bank: NationsBank of Texas, N.A. Brian Gordon 901 Main Street, 7th Floor P.O. Box 831000 Dallas, Texas 75283-1000 or to such other address as any party may designate by written notice to the other party. Each such notice, request and demand shall be deemed given or made as follows: A. If sent by hand delivery, upon delivery; B. If sent by mail, upon the earlier of the date of receipt or five (5) days after deposit in the U.S. Mail, first class postage prepaid. 9. COSTS, EXPENSES AND ATTORNEY'S FEES. Borrower shall pay to Bank immediately upon demand the full amount of all costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of Bank's in-house counsel), incurred by Bank in connection with (a) negotiation and preparation of this Agreement and each of the Loan Documents, and (b) Bank's continued administration thereof. - 5 - 6 10. MISCELLANEOUS. Borrower and Bank further covenant and agree as follows, without limiting any requirement of any other Loan Document: A. CUMULATIVE RIGHTS AND NO WAIVER. Each and every right granted to Bank under any Loan Document, or allowed it by law or equity shall be cumulative of each other and may be exercised in addition to any and all other rights of Bank, and no delay in exercising any right shall operate as a waiver thereof, nor shall any single or partial exercise by Bank of any right preclude any other or future exercise thereof or the exercise of any other right. Borrower expressly waives any presentment, demand, protest or other notice of any kind, including but not limited to notice of intent to accelerate and notice of acceleration. No notice to or demand on Borrower in any case shall, of itself, entitle Borrower to any other or future notice or demand in similar or other circumstances. B. APPLICABLE LAW. This Loan Agreement and the rights and obligations of the parties hereunder shall be governed by and interpreted in accordance with the laws of Texas and applicable United States federal law. C. AMENDMENT. No modification, consent, amendment or waiver of any provision of this Loan Agreement, nor consent to any departure by Borrower therefrom, shall be effective unless the same shall be in writing and signed by an officer of Bank, and then shall be effective only in the specified instance and for the purpose for which given. This Loan Agreement is binding upon Borrower, its successors and assigns, and inures to the benefit of Bank, its successors and assigns; however, no assignment or other transfer of Borrower's rights or obligations hereunder shall be made or be effective without Bank's prior written consent, nor shall it relieve Borrower of any obligations hereunder. There is no third party beneficiary of this Loan Agreement. D. DOCUMENTS. All documents, certificates and other items required under this Loan Agreement to be executed and/or delivered to Bank shall be in form and content satisfactory to Bank and its counsel. E. PARTIAL INVALIDITY. The unenforceability or invalidity of any provision of this Loan Agreement shall not affect the enforceability or validity of any other provision herein and the invalidity or unenforceability of any provision of any Loan Document to any person or circumstance shall not affect the enforceability or validity of such provision as it may apply to other persons or circumstances. F. INDEMNIFICATION. Borrower shall indemnify, defend and hold Bank and its successors and assigns harmless from and against any and all claims, demands, suits, losses, damages, assessments, fines, penalties, costs or other expenses (including reasonable attorneys' fees and court costs) arising from or in any way related to any of the transactions contemplated hereby, including but not limited to actual or threatened damage to the environment, agency costs of investigation, personal injury or death, or property damage, due to a release or alleged release of Hazardous Materials, arising from Borrower's business operations, any other property owned by Borrower or in the surface or ground water arising from Borrower's business operations, or gaseous emissions arising from Borrower's business operations or any other condition existing or arising from Borrower's business operations resulting from the use or existence of Hazardous Materials, whether such claim proves to be true or false. Borrower further agrees that its indemnity obligations shall include, but are not limited to, liability for damages resulting from the personal injury or death of an employee of the Borrower, regardless of whether the Borrower has paid the employee under the workmen's compensation laws of any state or other similar federal or state legislation for the protection of employees. The term "property damage" as used in this paragraph includes, but is not limited to, damage to any real or personal property of the Borrower, the Bank, and of any third parties. The Borrower's obligations under this paragraph shall survive the repayment of the Loan and any deed in lieu of foreclosure or foreclosure of any Deed to Secure Debt, Deed of Trust, Security Agreement or Mortgage securing the Loan. G. SURVIVABILITY. All covenants, agreements, representations and warranties made herein or in the other Loan Documents shall survive the making of the Loan and shall continue in full force and effect so long as the Loan is outstanding or the obligation of the Bank to make any advances under the Line shall not have expired. - 6 - 7 11. ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY RELATED AGREEMENTS OR INSTRUMENTS, INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW). THE RULES OF PRACTICE AND PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OF JUDICIAL ARBITRATION AND MEDIATION SERVICES, INC. (J.A.M.S.), AND THE "SPECIAL RULES" SET FORTH BELOW. IN THE EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY TO THIS AGREEMENT MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THIS AGREEMENT APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH ACTION. A. SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN THE CITY OF THE BORROWER'S DOMICILE AT TIME OF THIS AGREEMENT'S EXECUTION AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AN ARBITRATOR; IF J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE ARBITRATION, THEN THE AMERICAN ARBITRATION ASSOCIATION WILL SERVE. ALL ARBITRATION HEARINGS WILL BE COMMENCED WITHIN 90 DAYS OF THE DEMAND FOR ARBITRATION; FURTHER, THE ARBITRATOR SHALL ONLY UPON A SHOWING OF CAUSE, BE PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR UP TO AN ADDITIONAL 60 DAYS. B. RESERVATION OF RIGHTS. NOTHING IN THIS AGREEMENT SHALL BE DEEMED TO (I) LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE STATUTES OF LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED IN THIS AGREEMENT; OR (II) BE A WAIVER BY THE BANK OF THE PROTECTION AFFORDED TO IT BY 12 U.S.C. SEC. 91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW; OR (III) LIMIT THE RIGHT OF THE BANK HERETO (A) TO EXERCISE SELF HELP REMEDIES SUCH AS (BUT NOT LIMITED TO) SETOFF, OR (B) TO FORECLOSE AGAINST ANY REAL OR PERSONAL PROPERTY COLLATERAL, OR (C) TO OBTAIN FROM A COURT PROVISIONAL OR ANCILLARY REMEDIES SUCH AS (BUT NOT LIMITED TO) INJUNCTIVE RELIEF, WRIT OF POSSESSION OR THE APPOINTMENT OF A RECEIVER. THE BANK MAY EXERCISE SUCH SELF HELP RIGHTS, FORECLOSE UPON SUCH PROPERTY, OR OBTAIN SUCH PROVISIONAL OR ANCILLARY REMEDIES BEFORE, DURING OR AFTER THE PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS AGREEMENT. NEITHER THIS EXERCISE OF SELF HELP REMEDIES NOR THE INSTITUTION OR MAINTENANCE OF AN ACTION FOR FORECLOSURE OR PROVISIONAL OR ANCILLARY REMEDIES SHALL CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE CLAIMANT IN ANY SUCH ACTION, TO ARBITRATE THE MERITS OF THE CONTROVERSY OF CLAIM OCCASIONING RESORT TO SUCH REMEDIES. - 7 - 8 12. NOTICE OF FINAL AGREEMENT: THIS WRITTEN LOAN AGREEMENT 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. Dated: 2/13/95 NationsBank of Texas, N.A. Borrower: By: /s/ BRIAN GORDON Peerless Mfg. Co. ----------------------------------- By: /s/ GENE B. ELROD, CFO Brian Gordon, Assistant Vice President --------------------------------- Gene B. Elrod, CFO ------------------------------------ Print Name and Title - 8 - EX-10.(H) 3 3RD AMENDED & RESTATED LOAN AGREEMENT 1 EXHIBIT 10(h) NATIONSBANK OF TEXAS, N.A. THIRD AMENDED AND RESTATED LOAN AGREEMENT This Third Amended and Restated Loan Agreement (the "Agreement") dated as of December 12, 1995, by and between NationsBank of Texas, N.A., a national banking association ("Bank") and the Borrower described below: In consideration of the Loan or Loans described below and the mutual covenants and agreements contained herein, and intending to be legally bound hereby, Bank and Borrower agree as follows: 1. DEFINITIONS AND REFERENCE TERMS. In addition to any other terms defined herein, the following terms shall have the meaning set forth with respect thereto: A. BORROWER. Peerless Mfg. Co., a Texas Corporation B. BORROWER'S ADDRESS: 2819 Walnut Hill Lane Dallas, Texas 75229 C. HAZARDOUS MATERIALS. Hazardous Materials include all materials defined as hazardous wastes or substances under any local, state or federal environmental laws, rules or regulations, and petroleum, petroleum products, oil and asbestos. D. LOAN(S). Loan(s) means collectively any and all loans heretofore or hereafter made by Bank to the Borrower. E. LOAN DOCUMENTS. Loan Documents means this Loan Agreement and any and all promissory notes executed by Borrower in favor of Bank and all other documents, instruments, guarantees, certificates and agreements executed and/or delivered by Borrower, any guarantor or third party in connection with any Loan. F. ACCOUNTING TERMS. All accounting terms not specifically defined or specified herein shall have the meanings generally attributed to such terms under generally accepted accounting principles ("GAAP"), as in effect from time to time, consistently applied, with respect to the financial statements referenced in Section 3.H. hereof. 2. LOANS A. LOAN. Bank hereby agrees to make (or has made) a loan or loans to Borrower in the aggregate principal amount of $5,000,000. The obligation to repay the loan is evidenced by a promissory note or notes dated December 12, 1995 (the promissory note or notes together with any other promissory notes heretofore or hereafter executed by Borrower in favor of Bank and any and all renewals, extensions or rearrangements thereof being hereafter collectively referred to as the "Note") having a maturity date, repayment terms and interest rate as set forth in the Note. B. REVOLVING CREDIT FEATURE. The Loan provides for a revolving line of credit (the "Line") under which Borrower may from time to time, borrow, repay and re-borrow funds. C. USAGE FEE. Borrower will pay hereafter on December 12, 1995 and on the last day of each quarter for the period from and including the date the Line was established to and including the maturity date of the Line, a usage fee at a rate per annum of.25% of the average daily unused portion of the Line during such period. The Borrower may at any time upon written notice to the Bank permanently reduce the amount of the Line at which time the obligation of the Borrower to pay a usage fee shall thereupon correspondingly be reduced. - 1 - 2 D. LETTER OF CREDIT SUBFEATURE. As a subfeature under the Line, Bank may from time to time up to and including December 12, 1996, issue letters of credit for the account of Borrower (each, a "Letter of Credit' and collectively, "Letters of Credit"); provided, however, that the form and substance of each Letter of Credit shall be subject to approval by Bank in its sole discretion; and provided further that the aggregate undrawn amount of all outstanding Letters of Credit shall not at any time exceed $5,000,000. No Letter of Credit shall have an expiration date subsequent to December 12, 1996 unless 100% secured by a NationsBank CD or 105% secured by the cash value of life insurance on Don Sillers. The undrawn amount of all Letters of Credit plus any and all amounts paid by Bank in connection with drawings under any Letter of Credit for which the Bank has not been reimbursed shall be reserved under the Line and shall not be available for advances thereunder. Each draft paid by Bank under a Letter of Credit shall be deemed an advance under the Line and shall be repaid in accordance with the terms of the Line; provided however, that if the Line is not available for any reason whatsoever, at the time any draft is paid by Bank, or if advances are not available under the Line in such amount due to any limitation of borrowing set forth herein, then the full amount of such drafts shall be immediately due and payable, together with interest thereon, from the date such amount is paid by Bank to the date such amount is fully repaid by Borrower, at that rate of interest applicable to advances under the Line. In such event, Borrower agrees that Bank, at Bank's sole discretion may debit Borrower's deposit account with Bank for the amount of such draft. 3. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and warrants to Bank as follows: A. GOOD STANDING. Borrower is a corporation, duly organized, validly existing and in good standing under the laws of Texas and km be power and authority to own is property and to carry on its business in each jurisdiction in which Borrower does business. B. AUTHORITY AND COMPLIANCE. Borrower has full power and authority to execute and deliver the Loan Documents and to incur and perform the obligations provided for therein, all of which have been duly authorized by all proper and necessary action of the appropriate governing bay of Borrower. No consent or approval of any public authority or other third party is required as a condition to the validity of any Loan Document, and Borrower is in compliance with all laws and regulatory requirements to which it is subject. C. BINDING AGREEMENT. This Agreement and the other Loan Documents executed by Borrower constitute valid and legally binding obligations of Borrower, enforceable in accordance with their terms. D. LITIGATION. There is no proceeding involving Borrower pending or, to the knowledge of Borrower, threatened before any court or governmental authority, agency or arbitration authority, except as disclosed to Bank in writing and acknowledged by Bank prior to the date of this Agreement. E. NO CONFLICTING AGREEMENTS. There is no charter, bylaw, stock provision, partnership agreement or other document pertaining to the organization, power or authority of Borrower and no provision of any existing agreement, mortgage, indenture or contract binding on Borrower or affecting its property, which would conflict with or in any way prevent the execution, delivery or carrying out of the terms of this Agreement and the other Loan Documents. F. OWNERSHIP OF ASSETS. Borrower has good title to its assets, and its assets are free and clear of liens, except those granted to Bank and as disclosed to Bank in writing prior to the date of this Agreement. G. TAXES. All taxes and assessments due and payable by Borrower have been paid or are being contested in good faith by appropriate proceedings and the Borrower has filed all tax returns which it is required to file. - 2 - 3 H. FINANCIAL STATEMENTS. The financial statements of Borrower heretofore delivered to Bank have been prepared in accordance with GAAP applied on a consistent basis throughout the period involved and fairly present Borrower's financial condition as of the date or dates thereof, and there has been no material adverse change in Borrower's financial condition or operations since June 30, 1995. To the best of Borrower's knowledge, all factual information furnished by Borrower to Bank in connection with this Agreement and the other loan Documents is and will be accurate and complete on the date as of which such information is delivered to Bank and is not and will not be incomplete by the omission of any material fact necessary to make such information not misleading. I. PLACE OF BUSINESS. Borrower's chief executive office is located at 2819 Walnut Hill Lane Dallas, Texas 75229 J. ENVIRONMENTAL MATTERS. Environmental Law Compliance. The conduct of Borrower's business operations do not and will not violate any federal laws, rules or ordinances for environmental protection, regulations of the Environmental Protection Agency and any applicable local or state law, rule, regulation or rule of common law and any judicial interpretation thereof relating primarily to the environment or Hazardous Materials and Borrower will not use or permit any other party to use any Hazardous Materials at any of Borrower's places of business or at any other property owned by Borrower except such materials as are incidental to Borrower's normal course of business, maintenance and repairs and which are handled in compliance with all applicable environmental laws. Borrower agrees to permit Bank, its agents, contractors and employees to enter and inspect any of Borrower's places of business or any other property of Borrower at any reasonable times upon three (3) days prior notice for the purposes of conducting an environmental investigation and audit (including taking physical samples) to insure that Borrower is complying with this covenant and Borrower shall reimburse Bank on demand for the costs of any such environmental investigation and audit. Borrower shall provide Bank, its agents, contractors, employees and representatives with access to and copies of any and all data and documents relating to or dealing with any Hazardous Materials used, generated, manufactured, stored or disposed of by Borrower's business operations within five (5) days of the request therefore. K. CONTINUATION OF REPRESENTATION AND WARRANTIES. All representations and warranties made under this Agreement shall be deemed to be made at and as of the date hereof and at and as of the date of any future advance under any Loan. 4. AFFIRMATIVE COVENANTS. Until full payment and performance of all obligations of Borrower under the Loan Documents, Borrower will, unless Bank consents otherwise in writing (and without limiting any requirement of any other Loan Document): A. FINANCIAL STATEMENTS AND OTHER INFORMATION. Maintain a system of accounting satisfactory to Bank and in accordance with GAAP applied on a consistent basis throughout the period involved, permit Bank's officers or authorized representatives to visit and inspect Borrower's books of account and other records at such reasonable times and as often as Bank may desire, and pay the reasonable fees and disbursements of any accountants or other agents of Bank selected by Bank for the foregoing purposes. Unless written notice of another location is given to Bank, Borrower's books and records will be located at Borrower's chief executive office set forth above. All financial statements called for below shall be prepared in form and content acceptable to Bank and by independent certified public accountants acceptable to Bank. In addition, Borrower will: i. Furnish to the Bank consolidated financial statements of Borrower for each fiscal year of Borrower, within 90 days after the close of each such fiscal year. ii. Furnish to Bank consolidated financial statements (including a balance sheet and profit and loss statement) of Borrower for each quarter of each fiscal year of Borrower, within 45 days after the close of each such period. - 3 - 4 iii. Furnish to Bank promptly such additional information, reports and statements respecting the business operations and financial condition of Borrower from time to time, as Bank may reasonably request. B. INSURANCE. Maintain insurance with responsible insurance companies on such of its properties, in such amounts and against such risks as is customarily maintained by similar businesses operating in the same vicinity, specifically to include fire and extended coverage insurance covering all assets, liability insurance, all to be with such companies and in such amounts as are satisfactory to Bank and with respect to insurance on the Collateral, to contain a mortgagee clause naming Bank as a loss payee or an additional insured (as applicable) as its interest may appear and providing for at least 30 days prior notice to Bank of any cancellation thereof. Satisfactory evidence of such insurance will be supplied to Bank prior to funding under the Loan(s) and 30 days prior to each policy renewal. C. EXISTENCE AND COMPLIANCE. Maintain its existence, good standing and qualification to do business, where required and comply with all laws, regulations and governmental requirements including, without limitation, environmental laws applicable to it or to any of its property, business operations and transactions. D. ADVERSE CONDITIONS OR EVENTS. Promptly advise Bank in writing of (i) any condition, event or act which comes to its attention that would or might materially adversely affect Borrower's financial condition or operations, the Collateral, or Bank's rights under the Loan Documents, (ii) any litigation filed by or against Borrower, (iii) any event that has occurred that would constitute an event of default under any Loan Documents and (iv) any uninsured or partially uninsured loss through fire, theft, liability or property damage. E. TAXES AND OTHER OBLIGATIONS. Pay all of its taxes, assessments and other obligations, including, but not limited to taxes, costs or other expenses arising out of this transaction, as the same become due and payable, except to the extent the same are being contested in good faith by appropriate proceedings in a diligent manner. F. MAINTENANCE. Maintain all of its tangible property in good condition and repair and make all necessary replacements thereof, and preserve and maintain all licenses, trademarks, privileges, permits, franchises, certificates and the like necessary for the operation of its business. G. NOTIFICATION OF ENVIRONMENTAL CLAIMS. Borrower shall immediately advise Bank in writing of (i) any and all enforcement, cleanup, remedial, removal, or other governmental or regulatory actions instituted, completed or threatened pursuant to any applicable federal, state, or local laws, ordinances or regulations relating to any Hazardous Materials affecting Borrower's business operations; and (ii) all claims made or threatened by any third party against Borrower relating to damages, contribution, cost recovery, compensation, loss or injury resulting from any Hazardous Materials. Borrower shall immediately notify Bank of any remedial action taken by Borrower with respect to Borrower's business operations. 5. NEGATIVE COVENANTS. Until full payment and performance of all obligations of Borrower under the Loan Documents, Borrower will not, without the prior written consent of Bank (and without limiting any requirement of any other Loan Documents): A. TRANSFER OF ASSETS OR CONTROL. Sell, lease, assign or otherwise dispose of or transfer any assets, except in the normal course of its business, or enter into any merger or consolidation, or transfer control or ownership of the Borrower or from or acquire any subsidiary. B. LIENS. Grant, suffer or permit any contractual or noncontractual lien on or security interest in its assets, except in favor of Bank, or fail to promptly pay when due all lawful claims, whether for labor, materials or otherwise. - 4 - 5 C. INVESTMENTS. Make an investment in any subsidiary, including but not limited to Peerless International N.V., Peerless Europe B.V., Peerless Mfg. Co. Singapore, and Peerless Europe Ltd, that would cause the aggregate amount of investments in subsidiaries to exceed $1,700,000 at any time. D. EXTENSIONS OF CREDIT. Make any loan or advance to any individual, partnership, corporation or other entity. Borrower may make loans and/or advances to subsidiaries, provided however that such loans and advances to subsidiaries shall not exceed an aggregate of $1,700,000 at any time. E. BORROWINGS. Create, incur, assume or become liable in any manner for any indebtedness (for borrowed money, deferred payment for the purchase of assets, lease payments, as surety or guarantor for the debt for another, or otherwise) other than to Bank, except for normal trade debts incurred in the ordinary course of Borrower's business, and except for existing indebtedness disclosed to Bank in writing and acknowledged by Bank prior to the date of this Agreement. F. CHARACTER OF BUSINESS. Change the general character of business as conducted at the date hereof, or engage in any type of business not reasonably related to its business as presently conducted. 6. DEFAULT. Borrower shall be in default under this Agreement and under each of the other Loan Documents if it shall default in the payment of any amounts due and owing under the Loans or should it fail to timely and properly observe, keep or perform any term, covenant, agreement or condition in any Loan Document or in any other loan agreement, promissory note, security agreement, deed of trust, mortgage, assignment or other contract securing or evidencing payment of any indebtedness of Borrower to Bank or any affiliate or subsidiary of NationsBank Corporation. 7. REMEDIES UPON DEFAULT. If an event of default shall occur Bank shall have all rights, powers and remedies available under each of the Loan Documents as well as rights and remedies available at law or in equity. 8. NOTICES. All notices, requests or demands which any party is required or may desire to give to any other party under any provision of this Agreement must be in writing delivered to the other party at the following address: Borrower Peerless Mfg. Co. 2819 Walnut Hill Lane Dallas, Texas 75229 Bank: NationsBank of Texas, N.A. Brian Gordon 901 Main Street 7th Floor P.O. Box 831000 Dallas, Texas 75283-1000 or to such other address as any party may designate by written notice to the other party. Each such notice, request and demand shall be deemed given or made as follows: A. If sent by hand delivery, upon delivery; B. If sent by mail, upon the earlier of the date of receipt or five (5) days after deposit in the U.S. Mail, first class postage prepaid. 9. COSTS, EXPENSES AND ATTORNEY'S FEES. Borrower shall pay to Bank immediately upon demand the full amount of all costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of Bank's in-house counsel), incurred by Bank in connection with (a) negotiation and preparation of this Agreement and each of the Loan Documents, and (b) Bank's continued administration thereof. - 5 - 6 10. MISCELLANEOUS. Borrower and Bank further covenant and agree as follows, without limiting any requirement of any other Loan Document: A. CUMULATIVE RIGHTS AND NO WAIVER. Each and every right granted to Bank under any Loan Document, or allowed it by law or equity shall be cumulative of each other and may be exercised in addition to any and all other rights of Bank, and no delay in exercising any right shall operate as a waiver thereof, nor shall any single or partial exercise by Bank of any right preclude any other or future exercise thereof or the exercise of any other right. Borrower expressly waives any presentment, demand, protest or other notice of any kind, including but not limited to notice of intent to accelerate and notice of acceleration. No notice to or demand on Borrower in any case shall, of itself, entitle Borrower to any other or future notice or demand in similar or other circumstances. B. APPLICABLE LAW. This Loan Agreement and the rights and obligations of the parties hereunder shall be governed by and interpreted in accordance with the laws of Texas and applicable United States federal law. C. AMENDMENT. No modification, consent amendment or waiver of any provision of this Loan Agreement, nor consent to any departure by Borrower therefrom, shall be effective unless the same shall be in writing and signed by an officer of Bank, and then shall be effective only in the specified instance and for the purpose for which given. This Loan Agreement is binding upon Borrower, its successors and assigns, and inures to the benefit of Bank, its successors and assigns; however, no assignment or other transfer of Borrower's rights or obligations hereunder shall be made or be effective without Bank's prior written consent, nor shall it relieve Borrower of any obligations hereunder. There is no third party beneficiary of this Loan Agreement. D. DOCUMENTS. All documents, certificates and other items required under this Loan Agreement to be executed and/or delivered to Bank shall be in form and content satisfactory to Bank and its counsel. E. PARTIAL INVALIDITY. The unenforceability or invalidity of any provision of this Loan Agreement shall not affect the enforceability or validity of any other provision herein and the invalidity or unenforceability of any provision of any loan Document to any person or circumstance shall not affect the enforceability or validity of such provision as it may apply to other persons or circumstances. F. INDEMNIFICATION. Borrower shall indemnify, defend and hold Bank and its successors and assigns harmless from and against any and all claims, demands, suits, losses, damages, assessments, fines, penalties, costs or other expenses (including reasonable attorneys' fees and court costs) arising from or in any way related to any of the transactions contemplated hereby, including but not limited to actual or threatened damage to the environment, agency costs of investigation, personal injury or death, or property damage, due to a release or alleged release of Hazardous Materials, arising from Borrower's business operations, any other property owned by Borrower or in the surface or ground water arising from Borrower's business operations, or gaseous emissions arising from Borrower's business operations or any other condition existing or arising from Borrower's business operations resulting from the use or existence of Hazardous Materials, whether such claim proves to be true or false. Borrower further agrees that its indemnity obligations shall include, but are not limited to, liability for damages resulting from the personal injury or death of an employee of the Borrower, regardless of whether the Borrower has paid the employee under the workmen's compensation laws of any state or other similar federal or state legislation for the protection of employees. The term "property damage" as used in this paragraph includes, but is not limited to, damage to any real or personal property of the Borrower, the Bank, and of any third parties. The Borrower's obligations under this paragraph shall survive the repayment of the Loan and any deed in lieu of foreclosure or foreclosure of any Deed to Secure Debt, Deed of Trust, Security Agreement or Mortgage securing the Loan. G. SURVIVABILITY. All covenants, agreements, representations and warranties made herein or in the other Loan Documents shall survive the making of the Loan and shall continue in full force and effect so long as the Loan is outstanding or the obligation of the Bank to make any advances under the Line shall not have expired. - 6 - 7 11. ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY RELATED AGREEMENTS OR INSTRUMENTS, INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW). THE RULES OF PRACTICE AND PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OF JUDICIAL ARBITRATION AND MEDIATION SERVICES, INC. (J.A.M.S.), AND THE "SPECIAL RULES" SET FORTH BELOW. IN THE EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY TO THIS AGREEMENT MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THIS AGREEMENT APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH ACTION. A. SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN THE CITY OF THE BORROWER'S DOMICILE AT TIME OF THIS AGREEMENT'S EXECUTION AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AN ARBITRATOR; IF J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE ARBITRATION, THEN THE AMERICAN ARBITRATION ASSOCIATION WILL SERVE. ALL ARBITRATION HEARINGS WILL BE COMMENCED WITHIN 90 DAYS OF THE DEMAND FOR ARBITRATION; FURTHER, THE ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE, BE PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR UP TO AN ADDITIONAL 60 DAYS. B. RESERVATION OF RIGHTS. NOTHING IN THIS AGREEMENT SHALL BE DEEMED TO (I) LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE STATUTES OF LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED IN THIS AGREEMENT; OR (II) BE A WAIVER BY THE BANK OF THE PROTECTION AFFORDED TO IT BY 12 U.S.C. SEC. 91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW; OR (III) LIMIT THE RIGHT OF THE BANK HERETO (A) TO EXERCISE SELF HELP REMEDIES SUCH AS (BUT NOT LIMITED TO) SETOFF, OR (B) TO FORECLOSE AGAINST ANY REAL OR PERSONAL PROPERTY COLLATERAL, OR (C) TO OBTAIN FROM A COURT PROVISIONAL OR ANCILLARY REMEDIES SUCH AS (BUT NOT LIMITED TO) INJUNCTIVE RELIEF, WRIT OF POSSESSION OR THE APPOINTMENT OF A RECEIVER. THE BANK MAY EXERCISE SUCH SELF HELP RIGHTS, FORECLOSE UPON SUCH PROPERTY, OR OBTAIN SUCH PROVISIONAL OR ANCILLARY REMEDIES BEFORE, DURING OR AFTER THE PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS AGREEMENT. NEITHER THIS EXERCISE OF SELF HELP REMEDIES NOR THE INSTITUTION OR MAINTENANCE OF AN ACTION FOR FORECLOSURE OR PROVISIONAL OR ANCILLARY REMEDIES SHALL CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE CLAIMANT IN ANY SUCH ACTION, TO ARBITRATE THE MERITS OF THE CONTROVERSY OF CLAIM OCCASIONING RESORT TO SUCH REMEDIES. - 7 - 8 12. NOTICE OF FINAL AGREEMENT: THIS WRITTEN LOAN AGREEMENT 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. Dated: 12/22/95 NationsBank of Texas, N.A. Borrower By: /s/ BRIAN GORDON Peerless Mfg. Co. ----------------------------------- By: /s/ SHERRILL STONE Brian Gordon, Assistant Vice President -------------------------------- SHERRILL STONE CHAIRMAN & CHIEF EXECUTIVE OFFICER ----------------------------------- Print Name and Title - 8 - EX-27 4 FINANCIAL DATA SCHEDULE
5 YEAR JUN-30-1996 JUN-30-1996 2,082,329 246,659 8,800,762 100,000 4,138,965 16,015,001 7,423,775 5,261,141 18,631,025 6,664,401 0 0 0 1,446,742 10,433,114 18,631,025 33,643,998 33,643,998 23,430,761 23,430,761 5,945,206 65,321 16,858 1,133,955 344,234 789,721 0 0 0 789,721 0.55 0
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