-----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, TLD09yLZGIl6FsQFmqL+R713BuhHq7tG3YZtOcrdkJSjft1LVTSVHGOOPztrjjeb Bk7WJ7W5IQybE7uJLZJ13A== 0000950137-97-001268.txt : 19970401 0000950137-97-001268.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950137-97-001268 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: BADGER METER INC CENTRAL INDEX KEY: 0000009092 STANDARD INDUSTRIAL CLASSIFICATION: TOTALIZING FLUID METERS & COUNTING DEVICES [3824] IRS NUMBER: 390143280 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-06706 FILM NUMBER: 97568572 BUSINESS ADDRESS: STREET 1: 4545 WEST BROWN DEER ROAD STREET 2: C/O CORPORATE SECRETARY CITY: MILWAUKEE STATE: WI ZIP: 53223-0099 BUSINESS PHONE: 4143550400 FORMER COMPANY: FORMER CONFORMED NAME: BADGER METER MANUFACTURING CO DATE OF NAME CHANGE: 19710729 10-K 1 FORM 10-K 1 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 [No Fee Required] For the fiscal year ended DECEMBER 31, 1996 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] For the transition period from____________to____________ Commission file number 1-6706 BADGER METER, INC. (Exact name of registrant as specified in charter) WISCONSIN 39-0143280 (State of Incorporation) (I.R.S. Employer Identification No.) 4545 W. BROWN DEER ROAD MILWAUKEE, WISCONSIN 53223 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 414 - 355-0400 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of class: on which registered: Common Stock American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months 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. [ ] The aggregate market value of voting stock held by nonaffiliates of the registrant was $53,619,000 as of February 28, 1997. At February 28, 1997, the registrant had 1,213,904 shares of Common Stock outstanding and 562,785 shares of Class B Common Stock outstanding. After the effect of the two-for-one stock split payable April 18, 1997, the February 28, 1997 shares outstanding would be 2,427,808 of Common Stock and 1,125,570 of Class B Common Stock. All share and per share data in this Form 10-K and in the company's Annual Report to Shareholders have been restated for effect of this stock split. Documents Incorporated by Reference: Parts I and II incorporate information by reference from the company's 1996 Annual Report to Shareholders. Part III incorporates information by reference from the definitive Proxy Statement for the Annual Meeting of Shareholders to be held on April 25, 1997 [to be filed with the Securities and Exchange Commission under Regulation 14A within 120 days after the end of the registrant's fiscal year]. 2 Part I Item 1. Business Badger Meter, Inc. (the company) is a marketer and manufacturer of products using flow measurement and control technology serving markets worldwide. The company's markets are within a single business segment. The company was incorporated in 1905. Markets and Products The company serves the flow measurement and control market with products including water meters and related meter reading technologies, wastewater meters, industrial meters, small valves and natural gas meters and related instrumentation. The company's products are assigned to three operating units: Utility, Industrial and International. The Utility and Industrial divisions market their products in the U.S. and Canada, while the International Division markets both utility and industrial products in other countries throughout the world. The company's products are sold to water and natural gas utilities, original equipment manufacturers and various industrial customers primarily operating in the following markets: energy and petroleum; food and beverage; pharmaceutical; chemical; water, wastewater and process waters; and concrete. Principal products include disc meters; turbo and compound meters; automated and automatic remote meter reading systems; ultrasonic flowmeters; precision control valves; natural gas meters and related instrumentation; oscillating piston meters; flow tubes; lube meters; and process controllers. The company's products are primarily manufactured in the company's Milwaukee, Wisconsin and Tulsa, Oklahoma facilities. Custom molded plastic products are also produced in a facility in Rio Rico, Arizona for use as components in the company's products and for sale to original equipment manufacturers. Products are also assembled in facilities in Nogales, Mexico and Stuttgart, Germany. Badger Meter's products are sold throughout the world through various selling arrangements including direct sales managers, distributors and independent sales representatives. There is only a moderate seasonal impact on sales, primarily relating to slightly higher sales of certain utility products during the spring and summer months. No single customer accounts for more than 10% of the company's sales. Competition There are several competitors in each of the markets in which the company sells its products, and the competition varies from moderate to intense. Major competitors include Sensus Technologies, Inc., Schlumberger Industries, Inc. and ABB-Kent Meters, Inc. A number of the company's competitors in certain markets have greater financial resources. The company believes it currently provides the leading technology in certain types of automated and automatic meter reading systems, high precision valves, energy instruments and ultrasonic flowmeters. As a result of significant research and development activities, the company enjoys favorable patent positions for many of its products. Backlog The dollar amount of the company's total backlog of unshipped orders at December 31, 1996 and 1995 was $21,262,000 and $13,012,000, respectively. The 1996 backlog includes orders related to a large water meter project which is expected to be completed over several years. As such, it is estimated that $16,002,000 of the December 31, 1996 backlog will be shipped in 1997, with the balance shipped in subsequent years. 3 3 Raw Materials Raw materials used in the manufacture of the company's products include metal or alloys (such as bronze, aluminum, stainless steel, cast iron, brass and stellite), plastic resins, glass, microprocessors and other electronic subassemblies. There are multiple sources for these raw materials, but the company purchases bronze castings and certain electronic subassemblies from single suppliers. The company believes these items would be available from other sources, but that the loss of its current suppliers would result in higher cost of materials, delivery delays, short-term increases in inventory and higher quality control costs. Prices may also be affected by world commodity markets. Research and Development Expenditures for research and development activities relating to the development of new products, the improvement of existing products and manufacturing process improvements were $3,851,000 during 1996, as compared to $3,858,000 during 1995 and $3,278,000 during 1994. Research and development activities are primarily sponsored by the company. The company also engages in some joint research and development with other companies. Intangible Assets The company owns or controls many patents, trademarks, tradenames and license agreements, in the United States and other countries, related to its products and technologies. No single patent, trademark, tradename or license is material to the company's business as a whole. Environmental Protection The company is subject to contingencies relative to compliance with Federal, State and local provisions and regulations relating to the protection of the environment. Currently the company is in the process of resolving several cases relative to Superfund sites, as well an action brought under California's Proposition 65 (see Item 3). Provision has been made for any known settlement costs. Expenditures during 1996 and 1995 for compliance with environmental control provisions and regulations were not material and the company does not anticipate any material future expenditures. To insure compliance with all environmental regulations at all company sites, the Board of Directors has a Compliance Committee which monitors the company's compliance with various regulatory authorities in regard to, among other things, environmental matters. Employees The company and its subsidiaries employed 940 persons at December 31, 1996, of which 238 employees are covered by a collective bargaining agreement with District 10 of the International Association of Machinists. Effective November 1, 1996, the company negotiated a new contract with the union covering a four year period. The company has good relations with the union and all of its employees. Foreign Operations and Export Sales The company has distributors throughout the world. Additionally, the company has a sales, assembly, and distribution facility in Stuttgart, Germany, a sales and customer service office in Mexico City and an assembly facility in Nogales, Sonora, Mexico. The company exports products manufactured in Milwaukee, WI., Tulsa, OK., and Rio Rico, AZ. In January 1996, a Vice President - International was hired. His responsibility will be to manage the company's activities in all countries outside of the United States and Canada. Information about the company's foreign operations and export sales is included on page 26 of the company's 1996 Annual Report to Shareholders and such information is incorporated herein by reference. Financial Information About Industry Segments The company operates in one industry segment as a marketer and manufacturer of various flow measurement products. 4 4 Item 2. Properties The principal facilities utilized by the company at December 31, 1996, are listed below. Except as indicated, all of such facilities are owned in fee simple by the company.
Approximate Area Location Principal Use (Square Feet) ----------- ----------------------------------- ------------------ Brown Deer, Wisconsin Manufacturing and offices 287,000 Tulsa, Oklahoma Manufacturing and offices 89,500(1) Rio Rico, Arizona Manufacturing and offices 36,000 Nogales, Mexico Assembly, manufacturing and offices 41,700(2) Stuttgart, Germany Assembly, manufacturing and offices 8,253(3)
(1) Includes 30,000 sq. ft. leased facility. Lease term expires December 31, 1997. (2) Leased facility. Lease term expires January 31, 1998. (3) Leased facility. Lease term expires December, 1998. In addition to the foregoing facilities, the company leases several sales offices. The company believes that its facilities are generally well maintained and have sufficient capacity for its current needs. Item 3. Legal Proceedings There are currently no material legal proceedings pending with relation to the company, except as discussed below. In February, 1997, the company, along with other major manufacturers of water meters, was named as a defendant in a California lawsuit filed by the Natural Resources Defense Council. The lawsuit claims that the meter manufacturers are violating the standards established by California's Proposition 65 by selling bronze water meters in California that allegedly leach lead in excess of the Proposition 65 limits. The company believes that its meters are in compliance with national standards established by the American Water Works Association and that the meters fully comply with the Federal Safe Drinking Water Act. The California standards are unique to California and are set at a level of one one-thousandth of the point of observable effect. Substantially all of the company's sales of residential water meters in California are to, and in response to specifications issued by, water utilities which are exempt from compliance with the Proposition 65 regulation. Also, since 1972 Badger Meter has been the only meter manufacturer to continuously offer a plastic meter as an option to utility customers. The plastic meter fully complies with the Federal Safe Drinking Water Act, as certified by the National Sanitation Foundation. The utilities had the opportunity to specify the plastic meter, as many of them did. As such, the company disputes the claims of the lawsuit and does not believe the ultimate resolution of the lawsuit will have a material adverse effect on the results of operations. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of the company's shareholders during the quarter ended December 31, 1996. 5 5 Executive Officers of the Company The following table sets forth certain information regarding the executive officers of the company.
Age at Name Position 2/28/97 ------------------------ --------------------------------------- ------- James L. Forbes President and Chief 64 Executive Officer Robert D. Belan Vice President - Utility Division 56 William H. Vander Heyden Vice President - Industrial Division 60 Theodore N. Townsend Vice President - International 52 Ronald H. Dix Vice President - Administration 52 and Human Resources Deirdre C. Elliott Vice President - Corporate Counsel 40 and Secretary Richard A. Meeusen Vice President - Finance, Treasurer and 42 Chief Financial Officer William J. Shinners Vice President - Controller 62
There are no family relationships between any of the executive officers. All of the officers are elected annually at the first meeting of the Board of Directors held after each annual meeting of the shareholders. Each officer holds office until his successor has been elected or until his death, resignation or removal. There is no arrangement or understanding between any executive officer and any other person pursuant to which he was elected as an officer. Mr. Forbes has served as President and Chief Executive Officer for more than five years. Mr. Belan was elected Vice President - Utility Division in March 1992. In October 1991, he was appointed President of the Utility Division and currently also serves in that capacity. Mr. Vander Heyden was elected Vice President - Industrial Division in April 1983. From April 1989 to April 1993, Mr. Vander Heyden was also Executive Vice President and Chief Technical Officer. Mr. Vander Heyden was appointed President of the Industrial Division in 1990 and currently also serves in that capacity. Mr. Townsend joined the company and was elected Vice President - International in February 1996. From 1993 to 1995, Mr. Townsend was Managing Director of International Gas Measurement, based in London, England for twelve companies related to Elster/Kromshroder and American Meter Companies. From 1990 to 1992, Mr. Townsend was a Vice President of American Meter Company. Mr. Dix has served as Vice President of Administration and Human Resources for more than five years. Ms. Elliott was elected Vice President - Corporate Counsel and Secretary in December 1993. From October 1991 to December 1993, she served as Vice President - Corporate Counsel. Ms. Elliott joined the company in February 1991 as Corporate Counsel. Mr. Meeusen joined the company and was elected Vice President - Finance and elected Chief Financial Officer in November 1995 and was elected Treasurer in January 1996. Prior to joining the company, Mr. Meeusen was Vice President - - Finance and Treasurer for Zenith Sintered Products for more than five years. Mr. Shinners was elected Vice President-Controller of the company in April 1989. 6 6 Part II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters The information set forth on page 26 in the company's 1996 Annual Report to Shareholders is incorporated herein by reference in response to this Item. Item 6. Selected Financial Data The information set forth on pages 1 and 28 in the company's 1996 Annual Report to Shareholders is incorporated herein by reference in response to this Item. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information set forth on pages 14, 15 and 16 in the company's 1996 Annual Report to Shareholders is incorporated herein by reference in response to this Item. Item 8. Financial Statements and Supplementary Data Consolidated financial statements of the company at December 31, 1996 and 1995 and for each of the three years in the period ended December 31, 1996 and the auditor's report thereon and the company's unaudited quarterly financial data for the two-year period ended December 31, 1996 are incorporated herein by reference from the 1996 Annual Report to Shareholders, pages 17 through 26. 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 Information required by this Item with respect to directors is included under the headings "Nomination and Election of Directors" and "Other Matters" in the company's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on April 25, 1997, and is incorporated herein by reference. Information concerning the executive officers of the company is included in Part I of this Form 10-K. Item 11. Executive Compensation Information required by this Item is included under the headings "Nomination and Election of Directors - Director Compensation" and "Executive Compensation" in the company's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on April 25, 1997, and is incorporated herein by reference; provided, however, that the subsection entitled "Executive Compensation-Board Management Review Committee Report on Executive Compensation" shall not be deemed to be incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management Information required by this Item is included under the heading "Stock Ownership of Management and Others" in the company's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on April 25, 1997, and is incorporated herein by reference. 7 7 Item 13. Certain Relationships and Related Transactions Information required by this Item is included under the headings "Management Review Committee Interlocks and Insider Participation" and "Certain Transactions" in the company's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on April 25, 1997, and is incorporated herein by reference. Part IV Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K. (a) Documents filed 1.and 2. Financial Statements and Financial Statement Schedule. See index to Financial Statements and Financial Statement Schedule on page F-0 which is incorporated herein by reference. 3. Exhibits. See the Exhibit Index included as the last pages of this report which is incorporated herein by reference. (b) Reports on Form 8-K No report on Form 8-K was required to be filed by the Registrant during the quarter ended December 31, 1996. 8 8 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. BADGER METER, INC. Registrant By: /s/ Richard A. Meeusen -------------------------------------- Richard A. Meeusen Vice President - Finance and Treasurer Chief Financial Officer February 14, 1997 By: /s/ William J. Shinners -------------------------------------- William J. Shinners Vice President - Controller Chief Accounting Officer February 14, 1997 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: /s/ James O. Wright /s/ James L. Forbes - ------------------------- ------------------------ James O. Wright James L. Forbes Director and Chairman Director, President and February 14, 1997 Chief Executive Officer February 14, 1997 /s/ Robert M. Hoffer /s/ Pamela B. Strobel - ------------------------- ------------------------ Robert M. Hoffer Pamela B. Strobel Director Director February 14, 1997 February 14, 1997 /s/ Charles F. James, Jr. /s/ Andrew J. Policano - ------------------------- ------------------------ Charles F. James, Jr. Andrew J. Policano Director Director February 14, 1997 February 14, 1997 /s/ Donald J. Schuenke /s/ Kenneth P. Manning - ------------------------- ------------------------ Donald J. Schuenke Kenneth P. Manning Director Director February 14, 1997 February 14, 1997 /s/ John J. Stollenwerk /s/ James O. Wright, Jr. - ------------------------- ------------------------ John J. Stollenwerk James O. Wright, Jr. Director Director February 14, 1997 February 14, 1997 9 9 BADGER METER, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULES Page References Annual Report to Shareholders Form 10-K Page Number Page Number ------------- ----------- Item 14(a) 1 ------------ Financial statements: Consolidated balance sheets at December 31, 1996 and 1995 18 Consolidated statements of operations for each of the three years in the period ended December 31, 1996 17 Consolidated statements of cash flows for each of the three years in the period ended December 31, 1996 19 Consolidated statements of shareholders' equity for each of the three years in the period ended December 31, 1996 20 Notes to consolidated financial statements 21 - 26 Item 14(a) 2 ------------ Financial statement schedules: Consolidated schedules for each of the three years in the period ended December 31, 1996: II - Valuation and qualifying accounts F-1 All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedules, or because the information required is included in the financial statements and the notes thereto. F-0 10 10 BADGER METER, INC. SCHEDULE II - CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS Years ended December 31, 1996, 1995, and 1994
Balance at Additions Deductions Balance beginning charged to from at end of year earnings allowances of year Allowance for doubtful receivables: 1996 $ 216,000 $ 115,000 $ 89,000(a) $ 242,000 ========== =========== ========== ========== 1995 $ 135,000 $ 137,000 $ 56,000(a) $ 216,000 ========== =========== ========== ========== 1994 $ 99,000 $ 62,000 $ 26,000(a) $ 135,000 ========== =========== ========== ========== Warranty/after-sale cost reserve: 1996 $ 691,000 $ 2,735,000 $1,497,000 $1,929,000 ========== =========== ========== ========== 1995 $ 260,000 $2,154,,000 $1,723,000 $ 691,000 ========== =========== ========== ========== 1994 $ 0 $ 1,229,000 $ 969,0000 $ 260,000 ========== =========== ========== ==========
Note: (a) Accounts receivable written off, less recoveries, against the allowance. F-1 11 11 EXHIBIT INDEX
Exhibit No. Exhibit Description Page No. - ----------- ------------------- --------- (3.0) Restated Articles of Incorporation effective April 23, 1993. [Incorporated -- by reference from Exhibit (4.3) to the Registrant's Form S-8 Registration Statement (Registration No. 33-65618)]. (3.1) Restated By-Laws as amended February 14, 1997. Included (4.0) Loan Agreement, as amended April 30, 1988, between the Registrant and -- the M&I Marshall & Ilsley Bank relating to the Registrant's revolving credit loan. [Incorporated by reference from Exhibit (4.0) to the Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1988]. (4.1) Loan Agreement between the Firstar Bank Milwaukee, N.A. and the Badger -- Meter Employee Savings and Stock Ownership Plan and Trust, dated December 1, 1995. [Incorporated by reference from Exhibit (4.3) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995]. (9.0) Badger Meter, Inc. Voting Trust Agreement dated June 1, 1953 as amended. -- [Incorporated by reference from Exhibit (13) to the Registrant's Form 10 dated April 28, 1967]. (9.1) Badger Meter Officers' Voting Trust Agreement dated December 18, 1991. -- [Incorporated by reference from Exhibit (9.1) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991]. (10.0) * Badger Meter, Inc. Restricted Stock Plan, as amended. [Incorporated by -- reference from Exhibit (4.1) to the Registrant's Form S-8 Registration Statement (Registration No. 33-27649)]. (10.1) * Badger Meter, Inc. 1989 Stock Option Plan. [Incorporated by reference from -- Exhibit (4.1) to the Registrant's Form S-8 Registration Statement (Registration No. 33-27650)]. (10.2) * Badger Meter, Inc. 1993 Stock Option Plan. [Incorporated by reference -- from Exhibit (4.3) to the Registrant's Form S-8 Registration Statement (Registration No. 33-65618)]. (10.3) * Badger Meter, Inc. Deferred Compensation Plan. [Incorporated by -- reference from Exhibit (10.5) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993]. (10.4) * Badger Meter, Inc. 1995 Stock Option Plan [Incorporated by reference -- from Exhibit (4.1) to the Registrant's Form S-8 Registration Statement (Registration No. 033-62239)].
*A management contract or compensatory plan or arrangement. 12 12 EXHIBIT INDEX (CONTINUED)
Exhibit No. Exhibit Description Page No. - ----------- ------------------- --------- (10.5) Badger Meter, Inc. Employee Savings and Stock Ownership Plan -- [Incorporated by reference from Exhibit (4.1) to the Registrant's Form S-8 Registration Statement (Registration No. 033-62241)]. (10.6) * Long-Term Incentive Plan. [Incorporated by reference from Exhibit (10.6) -- to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995]. (10.7) * Badger Meter, Inc. Supplemental Non-Qualified Unfunded Pension Plan. -- [Incorporated by reference from Exhibit (10.7) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995]. (11.0) Computation of fully diluted earnings per share. Included (13.0) Portions of the Annual Report to Shareholders that are incorporated by reference. Included (21.0) Subsidiaries of the Registrant. Included (23.0) Consent of Ernst & Young LLP, Independent Auditors. Included (27.0) Financial Data Schedule. Included (99.0) Definitive Proxy Statement for the Annual Meeting of Shareholders to be held -- April 25, 1997. [To be filed with the Securities and Exchange Commission under Regulation 14A within 120 days after the end of the Registrant's fiscal year. With the exception of the information incorporated by reference into Items 10, 11, 12 and 13 of this Form 10-K, the definitive Proxy Statement is not deemed filed as part of this report].
13 EX-3.1 2 AMENDED BYLAWS 1 Exhibit (3.1) RESTATED BY-LAWS OF BADGER METER, INC. (AS AMENDED FEBRUARY 14, 1997) ARTICLE I SHAREHOLDERS Section 1. Annual Meeting. The annual meeting of shareholders of the Corporation shall be held on the second Saturday in April of each year, at the registered office of the Corporation in Brown Deer, Wisconsin, or at such other time or place as may be designated by the directors, for the purpose of electing directors and for the transaction of such other business as may be brought before the meeting. Section 2. Special Meetings. Special meetings of the shareholders of the Corporation may be called by the Chairman, the President or the Board of Directors, and shall be called by the Secretary on a written request to him signed by the holders of record of one-tenth of all the outstanding shares entitled to vote at the meeting. In the event a meeting is called on request of shareholders as aforesaid, the Secretary shall designate a date not more than fifteen (15) days following the receipt by him of such written request as the date of the meeting. Special meetings shall be held at such place in Brown Deer, Wisconsin or elsewhere, and at such time as the Chairman, the President or Board of Directors may designate; and in case the Chairman, the President or Board of Directors shall fail or neglect to make such designation, the Secretary shall designate the time and place of such meeting. Section 3. Notice of Meeting. Written notice stating the place, day and hour of the meeting and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) days nor more than fifty (50) days before the date of the meeting, either personally or by mail, by or at the direction of the Chairman, the President, or the Secretary, or other officer or persons calling the meeting, to each shareholder of record entitled to vote at such meeting unless a different period is required by law or the Articles of Incorporation. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail, addressed to the shareholder at his address as it appears on the stock record books of the Corporation with postage thereon prepaid. Section 4. Closing of Transfer Books or Fixing of Record Date. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the Board of Directors shall fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than seventy (70) days and not less then ten (10) days prior to the date on which the particular action, requiring such determination of shareholders, is to be taken. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall be applied to any adjournment thereof except that no such adjourned meeting shall be held more than seventy (70) days after the date fixed for such determination of shareholders. Section 5. Voting Lists. The officer or agent having charge of the stock transfer books for shares of the Corporation shall make a complete list of the shareholders entitled to vote at such meeting, or any adjournment thereof, with the address of and the number of shares held by each, which list shall be produced and kept open at the offices of the Corporation and shall be subject to the inspection of any shareholder during the period beginning two (2) business days after notice of the meeting for which the list was prepared was given and continuing to the date of the meeting. 14 2 The original stock transfer books shall be prima facie evidence as to who are the shareholders entitled to examine such list or transfer books or to vote at any meeting of shareholders. Failure to comply with the requirements of this section shall not affect the validity of any action taken at such meeting. Section 6. Quorum. Except as otherwise provided in the Articles of Incorporation, a majority of votes represented by shares entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders. Once a share is represented for any purpose at the meeting, other than for the purpose of objecting to holding the meeting or transacting business at the meeting, it is considered present for purposes of determining whether a quorum exists for the remainder of the meeting and for any adjournment of that meeting unless a new record date is set or must be set for the adjourned meeting. If a quorum is present, the affirmative vote of the majority of the votes represented by shares at the meeting and entitled to vote on the subject matter shall be the act of the shareholders unless the vote of a greater number or voting by classes is required by law or the Articles of Incorporation. Though less than a quorum of the outstanding shares are represented at a meeting, a majority of the votes represented by the shares so represented may adjourn the meeting from time to time without further notice. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. Section 7. Voting of Shares. Each outstanding share shall be entitled to one vote upon each matter submitted to a vote at a meeting of shareholders, except to the extent that the voting rights of the shares of any class or classes are enlarged, limited or denied by the Articles of Incorporation. Section 8. Proxies. At all meetings of shareholders, a shareholder entitled to vote may vote in person or by proxy appointed in writing by the shareholder or by his duly authorized attorney in fact. Such proxy shall be filed with the Secretary of the Corporation before or at the time of the meeting. Unless otherwise provided in the proxy, a proxy may be revoked at any time before it is voted, either by written notice filed with the Secretary or the acting secretary of the meeting or by oral notice given by the shareholder to the presiding officer during the meeting. The presence of a shareholder who has filed his proxy shall not of itself constitute a revocation. No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided in the proxy. The Board of Directors shall have the power and authority to make rules establishing presumptions as to the validity and sufficiency of proxies. Section 9. Acceptance of Instruments Showing Shareholder Action. If the name signed on a vote, consent, waiver or proxy appointment corresponds to the name of a shareholder, the Corporation, if acting in good faith, may accept the vote, consent, waiver, or proxy appointment and give it effect as the act of a shareholder. If the name signed on a vote, consent, waiver, or proxy appointment does not correspond to the name of a shareholder, the Corporation, if acting in good faith, may accept the vote, consent, waiver, or proxy appointment and give it effect as the act of the shareholder if any of the following apply: (a) The shareholder is an entity and the name signed purports to be that of an officer or agent of the entity. (b) The name purports to be that of a personal representative, administrator, executor, guardian or conservator representing the shareholder and, if the corporation requests, evidence of fiduciary status acceptable to the corporation is presented with respect to the vote, consent, waiver or proxy appointment. (c) The name signed purports to be that of a receivor or trustee in bankruptcy of the shareholder and, if the corporation requests, evidence of the status acceptable to the corporation is presented with respect to the vote, consent, waiver or proxy appointment. (d) The name signed purports to be that of a pledgee, beneficial owner, or attorney-in-fact of the shareholder and, if the corporation requests, evidence acceptable to the corporation of the signatory's authority to sign for the shareholder is presented with respect to the vote, consent, waiver or proxy appointment. 15 3 (e) Two or more persons are the shareholders as co-tenants or fiduciaries and the name signed purports to be the name of at least one of the co-owners and the person signing appears to be acting on behalf of all co-owners. The corporation may reject a vote, consent, waiver or proxy appointment if the Secretary or other officer or agent of the Corporation authorized to tabulate votes, acting in good faith, has reasonable basis for doubt about the validity of the signature on it or about the signatory's authority to sign for the shareholder. Section 10. Waiver of Notice by Shareholders. Whenever any notice whatever is required to be given to any shareholder of the Corporation under the Articles of Incorporation or By-laws or any provision of law, a waiver thereof in writing, signed at any time, whether before or after the time of meeting, by the shareholder entitled to such notice, shall be deemed equivalent to the giving of such notice; provided that such waiver in respect to any matter of which notice is required under any provisions of the Wisconsin Business Corporation Law, shall contain the same information as would have been required to be included in such notice, except the time and place of meeting. ARTICLE II BOARD OF DIRECTORS Section 1. General Powers and Number. All corporate powers of the Corporation shall be exercised by or under the authority of, and the business and affairs of the Corporation managed under, the direction of its Board of Directors, which shall consist of ten (10) directors. The Board of Directors shall elect one of its members as Chairman, who, when present, shall preside at all meetings of the shareholders and Board of Directors. Section 2. Tenure and Qualifications. Each director shall hold office until the next annual meeting of shareholders and until his successor shall have been elected, or until his prior death, resignation or removal. A director may be removed from office by affirmative vote of a majority of the outstanding shares entitled to vote for the election of such director, taken at a meeting of shareholders called for that purpose. A director shall not be eligible to stand for re-election at the next annual meeting of shareholders following his 70th birthday, except that any directors who are over 70 years old and hold office before February 19, 1993, may be entitled to be re-elected without limitation and to hold office until death, resignation or removal. A director may resign at any time by delivering written notice which complies with the Wisconsin Business Corporation Law to the Board of Directors, to the Chairman of the Board, if any, or to the corporation. A director's resignation is effective when such notice is delivered unless the notice specifies a later date. Directors need not be residents of the State of Wisconsin or shareholders of the Corporation. Section 3. Regular Meetings. A regular meeting of the Board of Directors shall be held without other notice than this By-law immediately after, and at the same place as, the annual meeting of shareholders, and each adjourned session thereof. The Board of Directors may provide, by resolution, the time and place, either within or without the State of Wisconsin, for the holding of additional regular meetings without other notice than such resolution. Section 4. Special Meetings. Special meetings of the Board of Directors may be called by or at the request of the Chairman, the President, Secretary or any two directors. The person or persons calling any special meeting of the Board of Directors may fix any place, either within or without the State of Wisconsin, as the place for holding any special meeting of the Board of Directors called by them, and if no other place is fixed, the place of meeting shall be the principal business office of the Corporation in the State of Wisconsin. 16 4 Section 5. Notice; waiver. Notice of each meeting of the Board of Directors (unless otherwise provided in or pursuant to Section 4, Article II) shall be given by written notice delivered personally or given by telegram, teletype, facsimile or other form of wire or wireless communication not less than twenty-four (24) hours prior to the meeting or mailed or delivered by private carrier not less than forty-eight (48) hours prior to the meeting to each director at his business address or at such other address as such director shall have designated in writing filed with the Secretary. If mailed or delivered by a private carrier, such notice shall be deemed to be delivered when deposited in the United States mail or delivered to the private carrier so addressed, with postage or delivery cost thereon prepaid. If notice be given by telegram, such notice shall be deemed to be delivered when the telegram is delivered to the telegraph company. If notice be given by teletype, facsimile or other form of wire or wireless communication, such notice shall be deemed to be delivered when evidence of its transmittal is received. Whenever any notice whatever is required to be given to any director of the Corporation under the Articles of Incorporation or By-laws or any provision of law, a waiver thereof in writing, signed at any time, whether before or after the time of meeting, by the director entitled to such notice, shall be deemed equivalent to the giving of such notice. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting and objects thereat to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. Section 6. Quorum. A majority of the directors shall constitute a quorum for the transaction of business; and, except as otherwise provided by law or by the Articles of Incorporation or these By-laws, a majority of the votes cast at any meeting of the Board of Directors at which a quorum is present shall be decisive of any action. A majority of the directors present at a meeting, though less than quorum, may adjourn the meeting from time to time without further notice. Section 7. Vacancies. Any vacancy occurring in the Board of Directors, including a vacancy created by an increase in the number of directors, may be filled until the next succeeding annual election by the affirmative vote of a majority of the directors then in office, though less than a quorum of the Board of Directors; provided, that in case of a vacancy created by the removal of a director by vote of the shareholders, the shareholders shall have the right to fill such vacancy at the same meeting or any adjournment thereof. Section 8. Compensation. The Board of Directors, by affirmative vote of a majority of the directors then in office, and irrespective of any personal interest of any of its members, may establish reasonable compensation of all directors for services to the Corporation as directors, officers or otherwise, or may delegate such authority to an appropriate committee. The Board of Directors also shall have authority to provide for or to delegate authority to an appropriate committee to provide for reasonable pensions, disability or death benefits, and other benefits or payments, to directors, officers and employees and to their estates, families, dependents or beneficiaries on account of prior services rendered by such directors, officers and employees to the Corporation. Section 9. Presumption of Assent. A director of the Corporation who is present at a meeting of the Board of Directors or a committee thereof of which he is a member at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the Secretary of the Corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action. 17 5 Section 10. Committees. The Board of Directors by resolution adopted by the affirmative vote of a majority of the number of directors set forth in Section 1 of this Article II may designate one or more committees, each committee to consist of three or more directors elected by the Board of Directors, which shall have and may exercise, when the Board of Directors is not in session, the powers of the Board of Directors in the management of the business and affairs of the Corporation, in the committee's designated area of responsibility, except action in respect to dividends to shareholders, election of the principal officers or the filling of vacancies on the Board of Directors or committees created pursuant to this section, with respect to the approval or proposal of actions that the law requires to be approved by the shareholders, amendment of the Articles of Incorporation, the adoption, amendment or repeal of the by-laws, the approval of a plan of merger not requiring shareholder approval, the authorization or approval of the re-acquisition of shares other than according to a method prescribed by the Board of Directors, and the authorization for approval of the issuance or sale or contract for sale of shares, or the determination of the designation and relative rights, preferences and limitations of a class or series of shares, unless authorized to do so by the Board of Directors within prescribed limits. The Board of Directors may elect one or more of its members as alternate members of any such committee who may take the place of any absent member or members at any meeting of such committee, upon request by the Chairman or upon request by the chairman of such meeting. Each such committee shall fix its own rules governing the conduct of its activities and shall make such reports to the Board of Directors of its activities as the Board of Directors may request. Section 11. Unanimous Consent Without Meeting. Any action required or permitted by the Articles of Incorporation or By-laws or any provision of law to be taken by the Board of Directors at a meeting or by resolution may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the directors then in office. Section 12. Telephonic Meetings. Notwithstanding any place set forth in the notice of the meeting or these By-laws, members of the Board of Directors may participate in regular or special meetings of the Board of Directors and all Committees of the Board of Directors by or through the use of any means of communication by which all directors participating may simultaneously hear each other, such as by conference telephone; provided, however, that the Chairman of the Board or the chairman of the respective Committee and the Board or other person or persons calling a meeting may determine that the directors cannot participate by such means, in which case the notice of the meeting, or other notice to directors given prior to the meeting, shall state that each director's physical presence shall be required. If a meeting is conducted through the use of such means of communication, then at the commencement of such meeting all participating directors shall be informed that a meeting is taking place at which official business may be transacted. A director participating in a meeting by such means shall be deemed present in person at such meeting. ARTICLE III OFFICERS Section 1. General Officers. The general officers of the Corporation shall be the President, one or more Vice Presidents, a Secretary, a Treasurer, a Controller, and one or more Assistant Secretaries and one or more Assistant Treasurers, each of whom shall be elected annually by the Board of Directors and shall hold office until his or her successor shall have been duly elected and qualified. The President shall be chief executive officer of the Corporation and shall exercise general supervision of the business and affairs of the Corporation subject to the directives of the Board of Directors. Further, each general officer shall have such powers and duties as generally pertain to his or her respective office; provided, that such powers and duties may from time to time be modified, enlarged, restricted or augmented by the Board of Directors. Section 2. Additional Officers. The Board of Directors may appoint such additional corporate officers as it may deem necessary, each of whom shall have such powers and duties as from time to time may be conferred by the Board of Directors, and shall serve for such terms as the Board may fix. 18 6 Section 3. Removal of Officers. Any officer or agent elected or appointed by the Board of Directors may be removed by the Board of Directors whenever in its judgment, the best interests of the Corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Section 4. Vacancies. A vacancy in any principal office because of death, resignation, removal, disqualification or otherwise, shall be filled by the Board of Directors for the unexpired portion of the term. The resignation of an officer by the delivery of written notice to the President or Secretary of the Corporation is effective upon delivery of the notice, unless the notice specifies a later date and the Corporation accepts the later date. ARTICLE IV SPECIAL CORPORATE ACTS Section 1. Voting of Securities Owned by This Corporation. Subject always to the specific directions of the Board of Directors, (a) any shares or other securities issued by any other corporation and owned or controlled by this Corporation may be voted at any meeting of security holders of such other corporation by the Chairman of this Corporation if he be present, or in his absence by the President or any Vice President of this Corporation who may be present, and (b) whenever, in the judgment of the Chairman, or in his absence, of the President or any Vice President, it is desirable for this Corporation to execute a proxy or give a shareholder's consent in respect to any shares or other securities issued by any other corporation and owned by this Corporation, such proxy or consent shall be executed in the name of this Corporation by the Chairman, or the President or one of the Vice Presidents of this Corporation without necessity of any authorization by the Board of Directors, affixation of corporate seal or countersignature or attestation by another officer. Any person or persons designated in the manner above stated as the proxy or proxies of this Corporation shall have full right, power and authority to vote the share or shares of stock issued by such other corporation and owned by this Corporation the same as such share or shares might be voted by this Corporation. Section 2. Contracts. The Board of Directors may authorize any officer or officers, agent or agents, to enter into any contract or execute or deliver any instrument in the name of and on behalf of the Corporation, and such authorization may be general or confined to specific instances. In the absence of other designation, all deeds, mortgages, and instruments of assignment or pledge made by the Corporation shall be executed in the name of the Corporation by the Chairman or the President or one of the Vice Presidents and by the Secretary, an Assistant Secretary, the Treasurer or an Assistant Treasurer; the Secretary or an Assistant Secretary, when necessary or required, shall affix the corporate seal thereto; and when so executed no other party to such instrument or any third party shall be required to make any inquiry into the authority of the signing officer or officers. ARTICLE V CERTIFICATES FOR SHARES AND THEIR TRANSFER Section 1. Certificates for Shares. Certificates representing shares of the Corporation shall be in such form as shall be determined by the Board of Directors. Such certificates shall be signed by the Chairman or the President or a Vice President and by the Secretary or an Assistant Secretary. All certificates for shares shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares represented thereby are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the Corporation. All certificates surrendered to the Corporation for transfer shall be canceled and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and canceled, except as provided in Section 6 of this Article V. 19 7 Section 2. Facsimile Signatures and Seal. The seal of the corporation on any certificates for shares may be a facsimile. The signatures of the Chairman or President or Vice President and the Secretary or Assistant Secretary upon a certificate may be facsimiles if the certificate is countersigned by a transfer agent, or registered by a registrar, other than the Corporation itself or an employee of the Corporation. Section 3. Signature by Former Officers. In case any officer, who has signed or whose facsimile signature has been placed upon any certificate for shares, shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer at the date of its issue. Section 4. Transfer of Shares. Prior to due presentment of a certificate for shares for registration of transfer the Corporation may treat the registered owner of such shares as the person exclusively entitled to vote, to receive notifications and otherwise to exercise all the rights and powers of an owner. Where a certificate for shares is presented to the Corporation with a request to register for transfer, the Corporation shall not be liable to the owner or any other person suffering loss as a result of such registration of transfer if (a) there were on or with the certificate the necessary endorsements, and (b) the Corporation had no duty to inquire into adverse claims or has discharged any such duty. The Corporation may require reasonable assurance that said endorsements are genuine and effective and in compliance with such other regulations as may be prescribed under the authority of the Board of Directors. Section 5. Restrictions on Transfer. The face or reverse side of each certificate representing shares shall bear a conspicuous notation of any restriction imposed by the Corporation upon the transfer of such shares. Section 6. Lost, Destroyed or Stolen Certificates. Where the owner claims that his certificate for shares has been lost, destroyed or wrongfully taken, then a new certificate shall be issued in place thereof if the owner (a) so requests before the Corporation has notice that such shares have been acquired by a bona fide purchaser, and (b) files with the Corporation a sufficient indemnity bond, and (c) satisfied such other reasonable requirements as the Board of Directors may prescribe. Section 7. Consideration for Shares. The shares of the Corporation may be issued for such consideration as shall be fixed from time to time by the Board of Directors, provided that any shares having a par value shall not be issued for a consideration less than the par value thereof. The consideration to be paid for shares may be paid in whole or in part, in money, in other property, tangible or intangible, or in labor or services actually performed for the Corporation. When payment of the consideration for which shares are to be issued shall have been received by the Corporation, such shares shall be deemed to be fully paid and nonassessable by the Corporation. No certificate shall be issued for any share until such share is fully paid. Section 8. Stock Regulations. The Board of Directors shall have the power and authority to make all such further rules and regulations not inconsistent with the statutes of the State of Wisconsin as it may deem expedient concerning the issue, transfer and registration of certificates representing shares of the Corporation. ARTICLE VI CORPORATE SEAL The Board of Directors shall provide a corporate seal which shall be circular in form and shall have inscribed thereon the name of the Corporation and the state of incorporation and the words, "Corporate Seal". 20 8 ARTICLE VII AMENDMENTS Section 1. By Shareholders. These By-laws may be altered, amended, repealed, augmented and new By-laws may be adopted by the shareholders by affirmative vote of not less than a majority of the votes represented by the shares present or represented at any annual or special meeting of the shareholders at which a quorum is in attendance. Section 2. By Directors. These By-laws may also be altered, amended, repealed, augmented and new By-laws may be adopted by the Board of Directors by affirmative vote of a majority of the number of directors present at any meeting at which a quorum is in attendance; but no By-law adopted by the shareholders shall be amended or repealed by the Board of Directors if the By-law so adopted so provides. Section 3. Implied Amendments. Any action taken or authorized by the shareholders or by the Board of Directors, which would be inconsistent with the By-laws then in effect but is taken or authorized by affirmative vote of not less than the number of shares or the number of directors required to amend the By-laws so that the By-laws would be consistent with such action, shall be given the same effect as though the By-laws had been temporarily amended or suspended so far, but only so far, as is necessary to permit the specific action so taken or authorized. ARTICLE VIII INDEMNIFICATION Section 1.01. Certain Definitions. All capitalized terms used in this Article VIII and not otherwise hereinafter defined in this Section 1.01 shall have the meaning set forth in Section 180.0850 of the Statute (as hereinafter defined). The following capitalized terms (including any plural forms thereof) used in this Article VIII shall be defined as follows: (a) "Affiliate" shall include, without limitation, any corporation, partnership, joint venture, employee benefit plan, trust or other enterprise that directly or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the Corporation. (b) "Authority" shall mean the entity selected by the Director or Officer to determine his or her right to indemnification pursuant to Section 1.04 of this Article. (c) "Board" shall mean the entire then elected and serving board of directors of the Corporation, including all members thereof who are Parties to the subject Proceeding or any related Proceeding. (d) "Breach of Duty" shall mean the Director or Officer breached or failed to perform his or her duties to the Corporation and his or her breach of or failure to perform those duties is determined, in accordance with Section 1.04 of this Article, to constitute misconduct under Section 180.0851 (2) (a) 1, 2, 3 or 4 of the Statute. (e) "Corporation, " as used herein and as defined in the Statute and incorporated by reference into the definitions of certain capitalized terms used herein, shall mean this Corporation, including, without limitation, any successor corporation or entity to the Corporation by way of merger, consolidation or acquisition of all or substantially all of the capital stock or assets of this Corporation. (f) "Director or Officer" shall have the meaning set forth in the Statute; provided, that, for purposes of this Article, it shall be conclusively presumed that any Director or Officer serving as a director, officer, partner, trustee, member of any governing or decision-making committee, employee or agent of an Affiliate shall be so serving at the request of the Corporation. 21 9 (g) "Disinterested Quorum" shall mean a quorum of the Board who are not Parties to the subject Proceeding or any related Proceeding. (h) "Party" shall have the meaning set forth in the Statute; provided, that, for purposes of this Article, the term "Party" shall also include any Director, Officer or employee who is or was a witness in a Proceeding at a time when he or she has not otherwise been formally named a Party thereto. (i) "Proceeding" shall have the meaning set forth in the Statute; provided, that, for purposes of this Article, "Proceeding" shall include all Proceedings (i) brought under (in whole or in part) the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, their respective state counterparts, and/or any rule or regulation promulgated under any of the foregoing; (ii) brought before an Authority or otherwise to enforce rights hereunder; (iii) any appeal from a Proceeding; and (iv) any Proceeding in which the Director or Officer is a plaintiff or petitioner because he or she is a Director or Officer, provided, however, that such Proceeding is authorized by a majority vote of a Disinterested Quorum. (j) "Statute" shall mean Sections 180.0850 through 180.0859, inclusive, of the Wisconsin Business Corporation Law, Chapter 180 of the Wisconsin Statutes, including any amendments thereto, but, in the case of any such amendment, only to the extent such amendment permits or requires the Corporation to provide broader indemnification rights than the Statute permitted or required the Corporation to provide prior to such amendment. Section 1.02. Mandatory Indemnification. To the fullest extent permitted or required by the Statute, the Corporation shall indemnify a Director or Officer against all Liabilities incurred by or on behalf of such Director or Officer in connection with a Proceeding in which the Director or Officer is a Party because he or she is a Director or Officer. Section 1.03. Procedural Requirements. (a) A Director or Officer who seeks indemnification under Section 1.02 of this Article shall make a written request therefor to the Corporation. Subject to Section 1.03 (b) of this Article, within sixty days of the Corporation's receipt of such request, the Corporation shall pay or reimburse the Director or Officer for the entire amount of Liabilities incurred by the Director or Officer in connection with the subject Proceeding (net of any Expenses previously advanced pursuant to Section 1.05 of this Article). (b) No indemnification shall be required to be paid by the Corporation pursuant to Section 1.03 (a) of this Article if, within such sixty-day period: (i) a Disinterested Quorum, by a majority vote thereof, determines that the Director or Officer requesting indemnification engaged in misconduct constituting a Breach of Duty; or (ii) a Disinterested Quorum cannot be obtained. (c) In either case of nonpayment pursuant to Section 1.03 (b) of this Article, the Board shall immediately authorize by resolution that an Authority, as provided in Section 1.04 of this Article, determine whether the Director's or Officer's conduct constituted a Breach of Duty and, therefore, whether indemnification should be denied hereunder. (d) (i) If the Board does not authorize an Authority to determine the Director's or Officer's right to indemnification hereunder within such sixty-day period and/or (ii) if indemnification of the requested amount of Liabilities is paid by the Corporation, then it shall be conclusively presumed for all purposes that a Disinterested Quorum has determined that the Director or Officer did not engage in misconduct constituting a Breach of Duty and, in the case of subsection (i) above (but not subsection (ii)), indemnification by the Corporation of the requested amount of Liabilities shall be paid to the Officer or Director immediately. 22 10 Section 1.04. Determination of Indemnification. (a) When the Board authorized an Authority to determine a Director's or Officer's right to indemnification pursuant to Section 1.03 of this Article, then the Director or Officer requesting indemnification shall have the absolute discretionary authority to select one of the following as such Authority: (i) An independent legal counsel; provided, that such counsel shall be mutually selected by such Director or Officer and by a majority vote of a Disinterested Quorum or, if a Disinterested Quorum cannot be obtained, then by a majority vote of the Board; (ii) A panel of three arbitrators selected from the panels of arbitrators of the American Arbitration Association in Milwaukee, Wisconsin; provided, that (A) one arbitrator shall be selected by such Director or Officer, the second arbitrator shall be selected by a majority vote of a Disinterested Quorum or, if a Disinterested Quorum cannot be obtained, then by a majority vote of the Board, and the third arbitrator shall be selected by the two previously selected arbitrators; and (B) in all other respects, such panel shall be governed by the American Arbitration Association's then existing Commercial Arbitration Rules; or (iii) A court pursuant to and in accordance with Section 180.0854 of the Statute. (b) In any such determination by the selected Authority there shall exist a rebuttable presumption that the Director's or Officer's conduct did not constitute a Breach of Duty and that indemnification against the requested amount of Liabilities is required. The burden of rebutting such a presumption by clear and convincing evidence shall be on the Corporation or such other party asserting that such indemnification should not be allowed. (c) The Authority shall make its determination within sixty days of being selected and shall submit a written opinion of its conclusion simultaneously to both the Corporation and the Director or Officer. (d) If the Authority determines that indemnification is required hereunder, the Corporation shall pay the entire requested amount of Liabilities (net of any Expenses previously advanced pursuant to Section 1.05 of this Article), including interest thereon at a reasonable rate, as determined by the Authority, within ten days of receipt of the Authority's opinion; provided, that, if it is determined by the Authority that a Director or Officer is entitled to indemnification as to some claims, issues or matters, but not as to other claims, issues or matters, involved in the subject Proceeding, the Corporation shall be required to pay (as set forth above) only the amount of such requested Liabilities as the Authority shall deem appropriate in light of all of the circumstances of such Proceeding. (e) The determination by the Authority that indemnification is required hereunder shall be binding upon the Corporation regardless of any prior determination that the Director or Officer engaged in a Breach of Duty. (f) All Expenses incurred in the determination process under this Section 1.04 by either the Corporation or the Director or Officer, including, without limitation, all Expenses of the selected Authority, shall be paid by the Corporation. Section 1.05. Mandatory Allowance of Expenses. (a) The Corporation shall pay or reimburse, within ten days after the receipt of the Director's or Officer's written request therefor, the reasonable Expenses of the Director or Officer as such Expenses are incurred, provided the following conditions are satisfied: (i) The Director or Officer furnishes to the Corporation an executed written certificate affirming his or her good faith belief that he or she has not engaged in misconduct which constitutes a Breach of Duty; and 23 11 (ii) The Director or Officer furnishes to the Corporation an unsecured executed written agreement to repay any advances made under this Section 1.05 if it is ultimately determined by an Authority that he or she is not entitled to be indemnified by the Corporation for such Expenses pursuant to Section 1.04 of this Article. (b) If the Director or Officer must repay any previously advanced Expenses pursuant to this Section 1.05, such Director or Officer shall not be required to pay interest on such amounts. Section 1.06. Indemnification and Allowance of Expenses of Certain Others. (a) The Corporation shall indemnify a director or officer of an Affiliate (who is not otherwise serving as a Director or Officer) against all Liabilities, and shall advance the reasonable Expenses, incurred by such director or officer in a Proceeding to the same extent hereunder as if such director or officer incurred such Liabilities because he or she was a Director or Officer, if such director or officer is a Party thereto because he or she is or was a director or officer of the Affiliate. (b) Except as hereinafter provided, the Corporation shall indemnify each employee of the Corporation or an Affiliate of the Corporation acting within the scope of his or her duties as such, against all Liabilities, and shall advance Reasonable Expenses, incurred by or on behalf of such employee in connection with a Proceeding in which he or she is a Party by virtue of being an employee of the Corporation or an Affiliate of the Corporation, to the same extent and in the same manner as a Director or Officer hereunder. The foregoing provision shall not apply, and the Corporation shall not indemnify any employee, with respect to any Liability to the extent covered by insurance maintained by or on behalf of such employee (other than insurance maintained by the Corporation or an Affiliate of the Corporation). (c) The Board may, in its sole and absolute discretion as it deems appropriate, pursuant to a majority vote thereof, indemnify against Liabilities incurred by, and/or provide for the allowance of reasonable Expenses of, an authorized agent of the Corporation acting within the scope of his or her duties as such and who is not otherwise a Director or Officer. Section 1.07. Insurance. The Corporation may purchase and maintain insurance on behalf of a Director, Officer and/or any individual who is or was an authorized employee or agent of the Corporation against any Liability asserted against or incurred by such individual in his or her capacity as such or arising from his or her status as such, regardless of whether the Corporation is required or permitted to indemnify against any such Liability under this Article. Section 1.08. Notice to the Corporation. A Director, Officer or employee shall promptly notify the Corporation in writing when he or she has actual knowledge of a Proceeding which may result in a claim or indemnification against Liabilities or allowance of Expenses hereunder, but the failure to do so shall not relieve the Corporation of any liability to the Director, Officer or employee hereunder unless the Corporation shall have been irreparably prejudiced by such failure (as determined by an Authority). Section 1.09. Report to Shareholders. In the event that the Corporation indemnifies or advances expenses to a Director or Officer in connection with a proceeding brought in the right of the Corporation, the Corporation shall report the indemnification or advance in writing to shareholders with or before the notice of the next meeting of shareholders. The report shall be delivered to shareholders who are entitled to receive notice of the next meeting of shareholders. Section 1.10. Severability. If any provision of this Article shall be deemed invalid or inoperative, or if a court of competent jurisdiction determines that any of the provisions of this Article contravene public policy, this Article shall be construed so that the remaining provisions shall not be affected, but shall remain in full force and effect, and any such provisions which are invalid or inoperative or which contravene public policy shall be deemed, without further action or deed by or on behalf of the Corporation, to be modified, amended and/or limited, but only to the extent necessary to render the same valid and enforceable. 24 12 Section 1.11. Nonexclusivity of this Article. The rights of a Director, Officer or employee (or any other person) granted under this Article shall not be deemed exclusive of any other rights to indemnification against Liabilities or advancement of Expenses which the Director, Officer or employee (or such other person) may be entitled to under any written agreement, Board resolution, vote of shareholders of the Corporation or otherwise, including without limitation under the Statute. Nothing contained in this Article shall be deemed to limit the Corporation's obligations to indemnify a Director, Officer or employee under the Statute. Section 1.12. Contractual Nature of this Article; Repeal or Limitation of Rights. This Article shall be deemed to be a contract between the Corporation and each Director, Officer and employee and any repeal or other limitation of this Article or any repeal or limitation of the Statute or any other applicable law shall not limit any rights of indemnification against Liabilities or allowance of Expenses then existing or arising out of events, acts or omissions occurring prior to such repeal or limitation, including, without limitation, the right of indemnification against Liabilities or allowance of Expenses for Proceedings commenced after such repeal or limitation to enforce this Article with regard to acts, omissions or events arising prior to such repeal or limitation. Section 1.13. Subrogation Rights. Notwithstanding any provision to the contrary set forth herein, the Corporation's obligations hereunder are not intended to constitute, and shall not constitute, a waiver of any right to subrogation which the Corporation may have against any person or entity. 25 EX-11 3 COMPUTATION OF EARNINGS PER SHARE 1 Exhibit (11.0) BADGER METER, INC. COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE (Restated for impact of two-for-one split effective April 18, 1997)
Year ended December 31 1996 1995 1994 PRIMARY (1) (1) Shares Average shares outstanding 3,539,728 3,508,450 3,461,530 Shares issuable upon exercise of stock options 158,735 74,384 59,120 ------------------------------------ Total 3,698,463 3.582.834 3,520,650 ==================================== Net Earnings $5,126,655 $3,718,679 $3,215,527 ==================================== Net Earnings per share $ 1.39 $ 1.04 $ .91 ==================================== FULLY DILUTED Shares Average shares outstanding 3,539,728 3,508,450 3,461,530 Shares issuable upon exercise of stock options 242,052 95,498 65,452 ------------------------------------ Total 3,781,780 3,603,948 3,526,982 ==================================== Net Earnings $5,126,655 $3,718,679 $3,215,527 ==================================== Net Earnings per share $ 1.36 $ 1.03 $ .91 ==================================== Percentage dilution 6.4% 2.6% 1.9%
(1) Earnings per share for 1995 and 1994 financial statement purposes does not include common stock equivalants since dilution was less than 3%. 26 EX-13 4 ANNUAL REPORT 1 Exhibit (13.0) Portions of Annual Report to Shareholders that are incorporated by reference. 27 2 (Page 1 of Annual Report to Shareholders) BADGER METER, INC. F I N A N C I A L H I G H L I G H T S December 31, 1996 and 1995
1996 1995 %CHANGE - --------------------------------------------------------------------------------------------- OPERATIONS Net sales $116,018,000 $108,644,000 6.8 Net earnings $ 5,127,000 $ 3,719,000 37.9 - --------------------------------------------------------------------------------------------- PER SHARE Net earnings: Primary $ 1.39 $ 1.06 31.1 Fully diluted $ 1.36 $ 1.06 28.3 Cash dividends declared: Common Stock $ .4300 $ .3908 10.0 Class B Common Stock $ .3910 $ .3555 10.0 Net book value $ 10.32 $ 9.16 12.7 - --------------------------------------------------------------------------------------------- YEAR-END FINANCIAL POSITION Working capital $ 17,645,000 $ 16,178,000 9.1 Current ratio 2.0 to 1 2.1 to 1 (4.8) Long-term debt $ 1,091,000 $ 1,000,000 9.1 Shareholders' equity $ 36,638,000 $ 32,163,000 13.9 Net earnings as a percent of equity 14.0% 11.6% 20.7 ============================================================================================= OTHER Number of employees 940 904 4.0 Number of shareholders: Common Stock: In employee plans 695 678 2.5 Of record 579 608 (4.8) Class B Common Stock 9 9 0 Shares outstanding: Common Stock 2,426,376 2,387,214 1.6 Class B Common Stock 1,125,570 1,125,570 0 =============================================================================================
28 3 (Page 14 to 16 of Annual Report to Shareholders) MANAGEMENT'S DISCUSSION AND ANALYSIS BUSINESS DESCRIPTION Badger Meter, Inc. serves the flow measurement and control market worldwide with products including water meters and related meter reading technologies, wastewater meters, industrial meters, small valves and natural gas meters and related instrumentation. The company operates in one business segment with three internal operating units: Utility, Industrial and International. The Utility and Industrial divisions market their products in the U.S. and Canada, while the International Division markets both utility and industrial products in other countries throughout the world. The company has continued to see growth in both its domestic and international markets. RESULTS OF OPERATIONS SALES Badger Meter's sales increased $7,374,000 and $9,489,000, or 6.8% and 9.6% in 1996 and 1995, respectively. Sales trends are primarily affected by new product sales and general market conditions. Residential water meter sales for the past several years have been impacted by a general industry movement away from manually-read meters to automated meter reading technologies. Both years were favorably affected by increased unit sales of the TRACE radio-frequency automated meter reading system and increased European sales of lubrication meters. In addition, the 1996 sales increase was impacted by favorable pricing of meter products, improved channels of distribution and increased sales of primary flow elements. The 1995 sales increase was also favorably affected by increased sales volumes of large Recordall meters and Research Control valves. Badger Meter continues to improve existing products and develop new products, primarily in the areas of meter reading technologies, ultrasonic meters, residential and commercial meters, lubrication meters, valves and natural gas instrumentation. Increases in sales of new products depends upon the rate of acceptance of the new technologies, both domestically and internationally, and overall market conditions. Sales of mature product lines are directly related to the strength of the various markets utilizing those products and the development of products to replace them. International sales are comprised primarily of sales of industrial metering products in Europe and sales of automated meter reading technologies in Mexico. Major sales of TRACE radio-frequency meter reading systems under a single contract to Mexico contributed significantly to 1994 and 1995 sales. In 1996, these sales decreased as this contract neared completion. However, this impact was partially offset by additional sales to Mexico through expansion of the original contract . The company continues to pursue new business opportunities in Mexico, as well as worldwide. Because the company does business in Mexico in U.S. dollars, Badger Meter experienced no currency losses on Mexican business in 1994, 1995 or 1996. The company's sales growth is derived from both new products and alliances that have been, and continue to be developed with other companies. Badger Meter's strategy is to meet customers' metering needs with its proprietary technologies or other technologies available through alliances in the marketplace. Both alternatives enable the company to sell its products either as part of a proprietary technology or as components that interface with systems developed by other companies. For example, Badger Meter has a long-term distribution agreement with American Meter Company and in 1996 added to that by obtaining worldwide distribution rights to the TRACE technology for the water market. Related to ultrasonic flowmeters, the company entered into a joint marketing agreement in 1996 with ADS Environmental Services. The company also formed a joint venture in 1996 with Instromet International for marketing and selling gas measurement products. GROSS PROFIT MARGINS Gross profit margins were 36.7%, 36.0% and 36.7% for 1996, 1995 and 1994, respectively. These margin variations result primarily from changes in product mix between years. The decrease in margins from 1994 to 1995 was due primarily to increased sales of lower-margin meter reading technology products. Although sales of meter reading technology products again increased in 1996, manufacturing cost improvements have increased the margins on these products and enabled the company to maintain stable margins in total. 29 4 In 1995, the company experienced price increases in castings, plastic resin, glass, electronic components and cartons. Increases in raw material prices were more moderate in 1996. Competitive marketing conditions make it somewhat difficult to pass along all of the raw material cost increases through higher selling prices. Offsetting the increased raw material prices are cost reductions resulting from capital investment to improve manufacturing equipment and systems and from continued savings achieved from the company's cost improvement programs. Higher unit volumes in the meter reading technology product line also offset some of the raw material price increases. OTHER FACTORS Marketing and administrative costs increased 6.6% in 1996 and 4.7% in 1995, which were both less than the percentage increases in sales for each year. The higher 1996 increase was due primarily to increased incentive compensation costs and costs associated with the formation of the International Division in 1996. Research and engineering costs increased 9.4% from 1994 to 1995, but were essentially flat between 1995 and 1996. The increased expenditures in 1995 related primarily to expansion of the meter reading technology products, development of a new line of large utility meters and the continued upgrade and expansion of the ultrasonic and natural gas instrumentation product lines. In 1996, work continued in all of these areas but the engineering expenditures leveled off as certain product development cycles reached successful conclusion. Interest expense decreased in both 1995 and 1996 due to a combination of lower interest rates and lower debt balances. Other expenses increased in 1995 due primarily to foreign currency translation losses, but decreased in 1996 as hedging activities eliminated any such losses. The company uses a combination of foreign currency forward contracts and lines of credit with foreign banks to reduce the impact of changes in the value of its existing foreign currency commitments and net asset positions. INCOME TAXES Income tax as a percentage of earnings before income taxes was 37.2%, 37.1% and 35.3% for 1996, 1995 and 1994, respectively. The increase in the percentage from 1994 to 1995 was due to a reduction in the amount of the tax benefit of the company's foreign sales corporation ("FSC"). In 1996, the FSC benefit increased again, but was offset by higher taxes on foreign operations. The company currently has a net deferred tax asset of approximately $1,257,000, reflecting the net temporary differences between financial reporting and tax reporting. The majority of this net asset relates to deferred payments for employee benefit plans and is expected to reverse as future payments exceed expenses. NET EARNINGS AND EARNINGS PER SHARE The 1996 record earnings resulted from the increased sales, improved margins, level research and engineering expenditures and lower interest and other expenses. The 1995 earnings improvement reflected the increased sales and reduced interest expense. This was partially offset by a decrease in gross profit margins and increased research and engineering expenditures. Net earnings increased 15.6% from 1994 to 1995, while primary earnings per share increased at a lower rate, 14%, due to an increase in the shares outstanding between the periods. For both 1995 and 1994, the per share information was computed using the average number of share outstanding without consideration of the impact of stock options because the dilution from such options was less than 3%. For 1996, dilution exceeded 3% and therefore the impact of stock options outstanding was factored into the calculation. As a result, while net earnings increased 37.9% from 1995 to 1996, primary earnings per share increased 31.1%, due to increased shares outstanding and the impact of stock options outstanding. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operations increased from $6.3 million in 1994 to $12 million in 1995, due to increased earnings and reduced inventory and receivable balances. In 1996, cash provided by operations decreased to $9.9 million as inventory and receivable balances increased to support higher sales levels, partially offset by increased earnings and higher payables related to increased purchasing activity. 30 5 Capital expenditures were $5.4 million in 1996, $4.5 million in 1995 and $3.6 million in 1994. These increased levels of expenditures enabled the company to continue to expand production capacity to meet higher sales requirements, improve manufacturing processes to achieve higher quality and lower costs, and to improve facilities for marketing and administrative personnel. The company used cash provided by operations to reduce its debt levels by $2.9 million in 1996, $4.9 million in 1995 and $2.1 million in 1994. Total debt at December 31, 1996 was $3.7 million, compared to $6.5 million at December 31, 1995 and $11.6 million at December 31, 1994. Total indebtedness at December 31, 1996 consisted of commercial paper, bank debt and a capital lease. During 1994 and 1995, the company had an interest rate swap agreement to minimize exposure to short-term interest rate fluctuations. Due to the reduced risk as a result of decreased debt levels, this agreement was terminated during 1996. Other significant changes in balance sheet accounts during 1996 include an increase in other accrued liabilities, primarily due to provisions for other after-sale costs. Intangible assets (primarily patents) decreased due to normal annual amortization, and the prepaid pension asset increased due to payments in excess of the pension provision. As a result of the merger of its overfunded and underfunded pension plans as of December 31, 1996, the company eliminated its minimum pension liability adjustment to equity. The company's financial condition remains strong. The company believes that its cash, other liquid assets, operating cash flows and available borrowing capacity of over $24 million at December 31, 1996, provide adequate resources to fund ongoing operating requirements and future capital expenditures related to expansion of capacity and development of new products. ENVIRONMENTAL MATTERS The company's domestic and international operations are subject to various environmental statutes and regulations. The company believes it is in compliance with such existing domestic and foreign environmental statutes and regulations. Currently, the company is in the process of resolving a case relative to a landfill site, as well as litigation alleging violation of California's Proposition 65. The company believes the ultimate resolution of these claims will not have a material adverse effect on the results of operations. Provision has been made for known settlement costs. 31 6 (Page 17 of Annual Report to Shareholders) BADGER METER, INC. C O N S O L I D A T E D S T A T E M E N T S O F O P E R A T I O N S Years ended December 31, 1996, 1995 and 1994
1996 1995 1994 - ---------------------------------------------------------------------------------------- Net sales $116,018,255 $108,644,001 $99,154,839 Operating costs and expenses: Cost of sales 73,489,917 69,499,606 62,806,600 Marketing and administrative 27,347,697 25,643,624 24,501,650 Research and engineering 6,426,063 6,479,329 5,923,735 - ---------------------------------------------------------------------------------------- 107,263,677 101,622,559 93,231,985 - ---------------------------------------------------------------------------------------- Operating earnings 8,754,578 7,021,442 5,922,854 Other deductions: Interest expense 367,728 721,250 829,643 Other - net 220,185 389,513 119,684 - ---------------------------------------------------------------------------------------- 587,913 1,110,763 949,327 - ---------------------------------------------------------------------------------------- Earnings before income taxes 8,166,665 5,910,679 4,973,527 Provision for income taxes (Note 8) 3,040,000 2,192,000 1,758,000 - ---------------------------------------------------------------------------------------- Net earnings $ 5,126,665 $ 3,718,679 $ 3,215,527 ======================================================================================== Earnings per share: Primary $ 1.39 $ 1.06 $ .93 Fully diluted * $ 1.36 $ 1.06 $ .93 - ---------------------------------------------------------------------------------------- Weighted average shares used in computation of: Primary 3,698,462 3,508,450 3,461,530 Fully diluted * 3,781,780 3,508,450 3,461,530 ========================================================================================
* Dilution was not significant in 1995 and 1994. See accompanying notes. 32 7 (Page 18 of Annual Report to Shareholders) BADGER METER, INC. C O N S O L I D A T E D B A L A N C E S H E E T S December 31, 1996 and 1995
1996 1995 - ------------------------------------------------------------------------------------------------------------------ ASSETS Current assets: Cash $ 1,123,145 $ 1,176,947 Receivables (Note 3) 15,498,461 13,661,094 Inventories: Finished goods 3,577,268 3,403,329 Work in process 8,466,296 6,750,432 Raw materials and purchased parts 5,462,619 5,680,616 - ------------------------------------------------------------------------------------------------------------------ Total inventories 17,506,183 15,834,377 Prepaid expenses 917,761 744,989 - ------------------------------------------------------------------------------------------------------------------ Total current assets 35,045,550 31,417,407 Property, plant and equipment, at cost: Land and improvements 2,770,286 2,759,230 Buildings and improvements 12,270,624 11,354,085 Machinery and equipment 42,070,255 40,987,455 - ------------------------------------------------------------------------------------------------------------------ 57,111,165 55,100,770 Less accumulated depreciation (37,751,230) (37,714,079) - ------------------------------------------------------------------------------------------------------------------ Net property, plant and equipment 19,359,935 17,386,691 Intangible assets, at cost less accumulated amortization 877,621 1,216,645 Prepaid pension (Note 7) 7,102,215 5,821,221 Deferred income taxes (Note 8) 1,256,917 1,536,120 Deferred charges and other assets (Note 7) 2,491,032 3,148,437 - ------------------------------------------------------------------------------------------------------------------ $ 66,133,270 $ 60,526,521 ================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt (Notes 4 and 6) $ 2,634,326 $ 5,515,320 Payables 7,102,025 4,230,517 Accrued compensation and employee benefits 4,762,988 4,249,643 Other accrued liabilities 1,928,701 690,857 Income and other taxes 972,400 553,355 - ------------------------------------------------------------------------------------------------------------------ Total current liabilities 17,400,440 15,239,692 Accrued non-pension postretirement benefits (Note 7) 8,106,000 8,396,000 Other accrued employee benefits (Notes 5 and 7) 2,898,538 3,727,880 Long-term debt (Notes 6 and 7) 1,090,608 1,000,000 Commitments and contingencies (Note 6) Shareholders' equity: (Notes 2, 5 and 7) Common Stock, $1 par; authorized 5,000,000 shares; issued 3,154,566 shares in 1996 and 1,551,912 shares in 1995 3,154,566 1,551,912 Class B Common Stock, $.10 par; authorized 5,000,000 shares; issued 1,125,570 shares in 1996 and 562,785 shares in 1995 112,557 56,278 Capital in excess of par value 6,802,690 7,831,877 Reinvested earnings 28,199,737 24,552,011 Less:Employee benefit stock (1,052,596) (1,101,846) Pension liability adjustment (Note 7) 0 (368,978) Treasury stock, at cost, 728,190 shares in 1996 and 358,305 in 1995 (579,270) (358,305) - ------------------------------------------------------------------------------------------------------------------ Total shareholders' equity 36,637,684 32,162,949 - ------------------------------------------------------------------------------------------------------------------ $ 66,133,270 $ 60,526,521 ==================================================================================================================
See accompanying notes. 33 8 (Page 19 of Annual Report to Shareholders) BADGER METER, INC. C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S Years ended December 31, 1996, 1995 and 1994
1996 1995 1994 - ----------------------------------------------------------------------------------------------- Operating activities: Net earnings $ 5,126,665 $ 3,718,679 $ 3,215,527 Adjustments to reconcile net earnings to net cash provided by operations: Depreciation 3,521,521 3,522,944 3,467,618 Amortization 597,888 874,683 968,585 Noncurrent employee benefits (882,718) (205,529) (154,947) Deferred income taxes 279,203 (209,380) (325,740) Other 37,634 200,329 94,346 Changes in: Receivables (1,837,367) 771,123 (2,868,621) Inventories (1,671,805) 2,632,889 (482,246) Current liabilities other than short-term debt 4,879,818 730,336 2,431,359 Prepaid expenses (172,774) (9,637) (3,655) - ----------------------------------------------------------------------------------------------- Total adjustments 4,751,400 8,307,758 3,126,699 - ----------------------------------------------------------------------------------------------- Net cash provided by operations 9,878,065 12,026,437 6,342,226 - ----------------------------------------------------------------------------------------------- Investing activities: Property, plant and equipment (5,381,505) (4,492,690) (3,553,186) Other - net (548,303) (597,490) (276,364) - ----------------------------------------------------------------------------------------------- Net cash used for investing activities (5,929,808) (5,090,180) (3,829,550) - ----------------------------------------------------------------------------------------------- Financing activities: Bank borrowings (repayments) (2,941,280) (4,921,220) (2,145,303) Dividends (1,478,939) (1,331,276) (1,194,722) Stock options and ESSOP 639,125 128,600 317,926 Purchase of treasury stock (220,965) 0 0 - ----------------------------------------------------------------------------------------------- Net cash provided by (used for) financing activities (4,002,059) (6,123,896) (3,022,099) - ----------------------------------------------------------------------------------------------- Increase (decrease) in cash (53,802) 812,361 (509,423) Cash - beginning of year 1,176,947 364,586 874,009 - ----------------------------------------------------------------------------------------------- Cash - end of year $ 1,123,145 $ 1,176,947 $ 364,586 =============================================================================================== Supplemental disclosures of cash flow information: Cash paid during the year for: Income taxes $ 2,348,337 $ 2,141,821 $ 2,382,320 Interest $ 377,931 $ 767,189 $ 851,533 Non-cash transaction (Note 7) ===============================================================================================
See accompanying notes. 34 9 (Page 20 of Annual Report to Shareholders) BADGER METER, INC. C O N S O L I D A T E D S T A T E M E N T S O F S H A R E H O L D E R S' E Q U I T Y Years ended December 31, 1996, 1995 and 1994
Class B Capital in Employee Pension Common Common excess of Reinvested benefit liability Treasury Stock Stock par value earnings stock adjustment stock - ---------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1993 $1,498,609 $ 56,278 $ 6,693,011 $20,143,803 $(1,663,968) $(295,304) $(358,305) Net earnings 3,215,527 Cash dividends, $.3548 per Common share (831,726) Cash dividends, $.3225 per Class B Common share (362,996) Restricted stock plan (Note 5): Amortization of unearned compensation 66,471 Shares canceled (1,000) (17,750) 18,750 Tax benefit on vested restricted stock 37,000 Employee stock ownership plan (Note 7): Amortization of unearned compensation 200,000 Stock options exercised (Note 5) 18,570 299,356 Tax benefit on stock options (Note 5) 55,000 Treasury stock issued 30,733 614,660 Tax benefit on dividends (Notes 5 and 7) 27,000 Pension liability adjustment (Note 7) (92,969) - ---------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1994 1,546,912 56,278 7,708,277 22,164,608 (1,378,747) (388,273) (358,305) - ---------------------------------------------------------------------------------------------------------------------------------- Net earnings 3,718,679 Cash dividends, $.3908 per Common share (931,136) Cash dividends, $.3555 per Class B Common share (400,140) Restricted stock plan (Note 5): Amortization of unearned compensation 76,901 Tax benefit on vested restricted stock 4,000 Employee stock ownership plan (Note 7): Amortization of unearned compensation 200,000 Stock options exercised (Note 5) 5,000 81,600 Tax benefit on stock options (Note 5) 11,000 Tax benefit on dividends (Notes 5 and 7) 27,000 Pension liability adjustment (Note 7) 19,295 - ---------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1995 1,551,912 56,278 7,831,877 24,552,011 (1,101,846) (368,978) (358,305) - ---------------------------------------------------------------------------------------------------------------------------------- Net earnings 5,126,665 Cash dividends, $.430 per Common share (1,038,841) Cash dividends, $.391 per Class B Common share (440,098) Restricted stock plan (Note 5): Amortization of unearned compensation 39,875 Shares Canceled (500) (8,875) 9,375 Tax benefit on vested restricted stock 13,000 Stock options exercised (Note 5) 24,600 428,935 Tax benefit on stock options (Note 5) 103,000 Tax benefit on dividends (Notes 5 and 7) 27,000 Pension liability adjustment (Note 7) 368,978 Shares purchased by ESSOP Participants 1,271 36,394 Treasury stock issued 4,921 210 Treasury stock purchased (221,175) Two-for-one stock split 1,577,283 56,279 (1,633,562) - ---------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 $3,154,566 $112,557 $ 6,802,690 $28,199,737 $(1,052,596) $ (0) $(579,270) ==================================================================================================================================
See accompanying notes. 35 10 (Pages 21 to 26 of Annual Report to Shareholders) BADGER METER, INC. N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S December 31, 1996, 1995 and 1994 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PROFILE Badger Meter is a leading marketer and manufacturer of products using flow measurement and control technology. It operates in one business segment. Its products are used to measure and control the flow of liquids and gases in a variety of applications. The company serves the flow measurement and control market worldwide with products including water meters and associated systems, wastewater meters, industrial meters, small valves and natural gas meters and related instrumentation. CONSOLIDATION The consolidated financial statements include the accounts of the company and its wholly owned subsidiaries. REVENUE RECOGNITION Revenues are recognized from product sales upon shipment. The company estimates and records provisions for warranties and other after-sale costs in the period the sale is reported. Such provisions are included in other accrued liabilities. INVENTORIES Inventories are valued at the lower of cost (first-in, first-out method), or market. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Depreciation has been provided principally by the straight-line method. INTANGIBLE ASSETS Costs of purchased patents are amortized over the lives of the patents. Accumulated amortization at December 31, 1996 and 1995, was $2,512,000 and $2,173,000, respectively. TREASURY STOCK Treasury stock is stated at cost. In 1996, the Board of Directors authorized the repurchase of up to 350,000 shares of stock. During 1996, the company purchased 12,000 shares, which were added to treasury stock. RESEARCH AND DEVELOPMENT Research and development costs are charged to expense as incurred and amounted to $3,851,000, $3,858,000 and $3,278,000 in 1996, 1995 and 1994, respectively. EARNINGS PER SHARE For 1995 and 1994, earnings per share is based on the weighted-average shares outstanding during each period. Dilution from common stock equivalents was less than 3% in both years. For 1996, earnings per share is based on the weighted-average common and common equivalent shares (stock options) outstanding during the year. 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 amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. FOREIGN CURRENCY TRANSLATION The company's functional currency for all of its foreign subsidiaries is the U.S. dollar. Translation adjustments and transaction gains and losses are recognized in consolidated income as incurred. These amounts are reflected in Other-net in the Statements of Operations and have not been material. PROSPECTIVE ACCOUNTING CHANGES In October 1996, the Accounting Standards Executive Committee issued Statement of Position 96-1 (SOP), to be effective in 1997. The SOP provides guidance for determining when an environmental liability should be recorded. The company believes that future adoption of the SOP will have no material effect on results of operations or financial position. 36 11 RECLASSIFICATIONS Certain reclassifications have been made to the 1995 consolidated balance sheet to conform to the 1996 presentation. 2 COMMON STOCK On February 14, 1997, the Board of Directors declared a two-for-one stock split on the company's Common Stock and Class B Common Stock effected in the form of a 100% stock dividend, payable on April 18, 1997, to shareholders of record at the close of business on March 27, 1997. In this report, all per share amounts and numbers of shares have been restated to reflect this stock split. In addition, Common Stock, Class B Common Stock and capital in excess of par value as of December 31, 1996, have been restated to reflect this split. Holders of Class B Common Stock are restricted in their ability to transfer such shares although they may convert their shares of Class B Common Stock into shares of Common Stock at any time. Holders of Common Stock are entitled to cash dividends per share equal to 110% of all dividends declared and paid on each share of the Class B Common Stock. Holders of Class B Common Stock are entitled to ten votes per share on any matters brought before the shareholders of the company while holders of Common Stock are entitled to one vote per share. Liquidation rights are the same for both classes of stock. 3 TRANSACTIONS WITH AFFILIATED COMPANY The company carries its 15% interest in a Mexican company, Medidores Azteca, S.A. (Azteca) at cost ($75,000). During 1996, 1995 and 1994, the company sold approximately $1,175,000, $441,000 and $974,000 of goods to Azteca. Trade receivables from Azteca at December 31, 1996 and 1995, were $541,000 and $615,000, respectively. 4 SHORT-TERM DEBT AND CREDIT LINES Short-term debt at December 31, 1996 and 1995, consisted of:
1996 1995 ----------------------------------------------------------------- Notes payable to banks $1,439,040 $1,057,320 Commercial paper 1,135,000 4,458,000 Current portion of capital lease (Note 6) 60,286 0 ----------------------------------------------------------------- TOTAL $2,634,326 $5,515,320 =================================================================
The company has $26,948,000 of short-term credit lines with domestic banks and a foreign bank which includes a $5,000,000 commercial paper line of credit. At December 31, 1996, $2,574,040 of these lines was used, which included $1,135,000 of commercial paper. The weighted-average interest rate on the outstanding balance was 5.22% and 5.81% at December 31, 1996 and 1995. 5 RESTRICTED STOCK AND STOCK OPTION PLANS A. RESTRICTED STOCK PLAN The company's Restricted Stock Plan (The Plan) provided for the award of up to 200,000 shares of the company's Common Stock to certain officers and key employees and for the reimbursement to certain participants for the personal income tax liability resulting from such awards. The company provides for any income tax liability ratably throughout the restricted period. Plan participants are entitled to cash dividends and to vote their respective shares. The sale or transfer of the shares is limited during the restricted period, not exceeding eight years. All eligible shares have been issued. The value of such stock was established by the market price on the date of grant. Restrictions on 6,000 shares expired during 1996 and 1,000 shares were canceled. Unearned compensation was charged for the market value of the restricted shares as these shares were issued in accordance with The Plan. The unearned compensation is shown as a reduction of shareholders' equity in the accompanying consolidated balance sheets and is being amortized ratably over the restricted period. During 1996, 1995 and 1994, $43,000, $82,000 and $101,000 was charged to expense relating to The Plan. 37 12 BADGER METER, INC. N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S B. STOCK OPTION PLANS The company has three stock option plans which provide for the issuance of options to key employees and directors of the company. Each plan authorizes the issuance of options to purchase up to an aggregate of 200,000 shares of Common Stock, with vesting periods of up to three years and maximum option terms of ten years. As of December 31, 1996, options to purchase approximately 68,000 shares are available for issue. The following table summarizes the transactions of the company's stock option plans for the three year period ended December 31, 1996:
Weighted-Average Number of Shares Exercise Price - --------------------------------------------------------------------------------- Unexercised options outstanding - December 31, 1993 320,600 $ 9.06 Options granted 4,200 $ 9.57 Options exercised (37,140) $ 8.57 Options forfeited (9,000) $ 8.72 - --------------------------------------------------------------------------------- Unexercised options outstanding - December 31, 1994 278,660 $ 9.14 Options granted 84,200 $11.25 Options exercised (10,000) $ 8.66 Options forfeited (3,600) $ 8.57 - --------------------------------------------------------------------------------- Unexercised options outstanding - December 31, 1995 349,260 $ 9.64 Options granted 144,168 $12.96 Options exercised (49,200) $ 9.22 Options forfeited (8,468) $10.67 - --------------------------------------------------------------------------------- Unexercised options outstanding - December 31, 1996 435,760 $10.77 Price range $8.38-$12.88 (weighted-average contractual life of 7.1 years) 403,760 $10.43 Price range $14.82-$15.82 (weighted-average contractual life of 9.4 years) 32,000 $15.00 - --------------------------------------------------------------------------------- Exercisable options - December 31, 1994 200,400 $ 9.03 December 31, 1995 230,060 $ 9.11 December 31, 1996 241,610 $ 9.39 ================================================================================
Statement of Financial Accounting Standard No. 123 "Accounting for Stock-Based Compensation" (FAS 123) became effective for the company in 1996. As allowed by FAS 123, the company has elected to continue to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) in accounting for its stock option plans. Under APB 25, the company does not recognize compensation expense on the issuance of its stock options because the option terms are fixed and the exercise price equals the market price of the underlying stock on the grant date. As required by FAS 123, the company has determined the pro-forma information as if the company had accounted for stock options granted since January 1, 1995, under the fair value method of FAS 123. The Black-Scholes option pricing model was used with the following weighted-average assumptions for 1996 and 1995: risk-free interest rates of 5.5% and 7.4%; dividend yield of 3%; expected Common Stock market price volatility factor of .168; and a weighted-average expected life of the options of three to five years. The weighted-average fair value of options granted in 1996 and 1995 were $2.11 and $2.36 per share, respectively. The pro-forma effect of these options on net earnings, primary and fully diluted earnings per share was not material. These pro-forma calculations only include the effects of 1995 and 1996 grants. As such, the impacts are not necessarily indicative of the effects on reported net income of future years. 38 13 BADGER METER, INC. N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 6 COMMITMENTS AND CONTINGENCIES A. COMMITMENTS The company leases equipment and facilities under operating leases, some of which contain renewal options. In 1996, the company also leased certain computer equipment under a capital lease. The leased asset is included in machinery and equipment and the lease obligation is included in short and long-term debt in the accompanying consolidated balance sheets. Future minimum lease payments consisted of the following at December 31, 1996:
Operating Capital Total Leases Lease Leases --------------------------------------------------------------------------- 1997 $314,472 $ 65,100 $379,572 1998 161,321 65,100 226,421 1999 49,041 28,210 77,251 2000 44,910 0 44,910 2001 and thereafter 45,494 0 45,494 --------------------------------------------------------------------------- Total minimum lease payments 615,238 158,410 773,648 Less: amount representing interest 0 (7,516) (7,516) --------------------------------------------------------------------------- Present value of net minimum lease payments 615,238 150,894 766,132 Less: current portion 0 (60,286) (60,286) --------------------------------------------------------------------------- Lease obligationss $615,238 $ 90,608 $705,846 ===========================================================================
Total rental expense charged to operations under all operating leases was approximately $1,294,000, $1,362,000 and $1,332,000 in 1996, 1995 and 1994, respectively. B. CONTINGENCIES In the normal course of business, the company is named in legal proceedings. There are currently no material legal proceedings pending with respect to the company. The company is subject to contingencies relative to environmental laws and regulations. Currently the company is in the process of resolving several cases relative to landfill sites, as well as alleged violation of California's Proposition 65. The company does not believe the ultimate resolution of these actual or potential claims will have a material adverse effect on the results of operations. Provision has been made for known settlement costs. The company has evaluated its worldwide operations to determine if any risks and uncertainties exist that could severely impact its operations in the near-term. In general the company does not believe that it is at risk. However, the company does rely on single suppliers for certain castings and components in several of its product lines. Although alternate sources of supply exist for these items, loss of certain suppliers could disrupt operations. The company attempts to mitigate these risks by working closely with key suppliers and by purchasing business interruption insurance where appropriate. 7 EMPLOYEE BENEFIT PLANS A. PENSION PLANS The company maintains non-contributory defined benefit pension plans covering substantially all domestic employees. Benefits for salaried employees are based on compensation and years of service while benefits for hourly employees are generally based on years of service. It is the company's policy to fund at least the minimum contribution required by ERISA. As of December 31, 1996, the company merged its various pension plans into one pension plan. 39 14 BADGER METER, INC. N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S The following data is provided for the pension plans: Components of Net Periodic Pension Credit - ----------------------------------------------------------------------------------------- 1996 1995 1994 - ----------------------------------------------------------------------------------------- Service cost - benefits earned during the year $ 1,043,802 $ 850,072 $ 940,006 Interest cost on projected benefit obligations 2,248,932 2,148,189 1,904,504 Actual (return) loss on plan assets (3,081,757) (6,409,454) 736,097 Net amortization and deferral (323,409) 3,175,733 (3,885,874) - ----------------------------------------------------------------------------------------- Net periodic pension credit $ (112,432) $ (235,460) $ (305,267) =========================================================================================
Reconciliation of Funded Status DECEMBER 31, - ------------------------------------------------------------------------------------------------------ 1996 1995 - ------------------------------------------------------------------------------------------------------ ASSETS ASSETS ACCUMULATED EXCEED EXCEED BENEFITS ACCUMULATED ACCUMULATED EXCEED BENEFITS BENEFITS ASSETS - ------------------------------------------------------------------------------------------------------ Actuarial present value of benefit obligations: Vested benefit obligation $28,460,986 $15,563,014 $ 8,135,305 Non-vested benefit obligation 522,827 296,236 139,133 - ------------------------------------------------------------------------------------------------------ Accumulated benefit obligation $28,983,813 $15,859,250 $ 8,274,438 ===================================================================================================== Projected benefit obligation $32,202,537 $21,711,321 $ 8,274,438 Plan assets at fair value 37,345,758 27,862,175 6,481,265 - ------------------------------------------------------------------------------------------------------ Plan assets in excess of (less than) projected benefit obligation 5,143,221 6,150,854 (1,793,173) Unrecognized net loss 6,482,703 1,728,524 644,041 Unrecognized prior service cost (credit) (2,834,660) 14,101 946,850 Unrecognized transition asset (1,693,057) (2,072,258) (44,063) Adjustment required to recognize minimum liability 0 0 (1,546,828) - ------------------------------------------------------------------------------------------------------ Prepaid pension cost 7,098,207 5,821,221 (1,793,173) Contribution payable 4,008 0 0 - ------------------------------------------------------------------------------------------------------ Prepaid pension asset (liability) included in balance sheet $ 7,102,215 $ 5,821,221 $(1,793,173) =====================================================================================================
The provisions of FAS No. 87, "Employers' Accounting for Pensions", require the recognition of an additional minimum liability for each defined benefit plan for which the accumulated benefit obligation exceeds plan assets. As a result of the December 31, 1996 merger of the plans, no additional minimum liability was required as of that date. For December 31, 1995, a minimum liability adjustment of $1,546,828 was recognized. However, the asset recognized may not exceed the amount of unrecognized prior service cost of $946,850. Therefore, a balance of $599,978, net of tax benefits of $231,000, or $368,978 was recognized as a reduction of shareholders' equity as of December 31, 1995. 40 15 BADGER METER, INC. N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S The actuarial assumptions used in the preparation of the above information were 7.5%, 9.0% and 5.0% for both years for the discount rate, long-term rate of return and rate of compensation increases, respectively. Plan assets are primarily invested in corporate and government bonds and listed common stocks. Effective January 1, 1997, a new cash balance program was established for domestic non-represented employees. Pension benefits under the previous formulas were fixed and used as a starting basis for the new plan. Future benefits will generally be based on a percentage of current salary (which varies with years of service). Transition provisions were included in the new plan for existing employees based on years of service and benefits provided by the current plan. B. OTHER POSTRETIREMENT BENEFITS In addition to providing pension benefits for its domestic employees, the company has certain postretirement plans that provide medical benefits for retirees and eligible dependents. Substantially all of the company's domestic employees may become eligible for these benefits if they reach normal retirement age while working for the company. It is the company's current policy to fund health care benefits on a cash basis. The plans are coordinated with Medicare when a retiree reaches age 65 and the plans require retiree contributions which equaled approximately 5.7% of non-pension postretirement benefits costs for both 1996 and 1995. The following tables provide information on the plan status as of December 31,
1996 1995 - ------------------------------------------------------------------------------------ Accumulated postretirement benefit obligation: Retirees $ 4,618,000 $ 7,626,000 Fully eligible active plan participants 859,000 1,042,000 Other active participants 1,736,000 1,757,000 - ------------------------------------------------------------------------------------ Total 7,213,000 10,425,000 Unrecognized prior service credit 2,534,000 0 Unrecognized net loss (1,641,000) (2,029,000) - ------------------------------------------------------------------------------------ Accrued postretirement benefit cost recognized in the accompanying consolidated balance sheet $ 8,106,000 $ 8,396,000 ====================================================================================
The discount rate used to measure the accumulated postretirement benefit obligation (APBO) was 7.5% for both years. The assumed health care cost trend rate used in measuring the APBO as of December 31, 1995, was 8.6% decreasing to 5.7%. The impact of a 1% increase in the health care cost trend rate would have increased the APBO by 8.2% at December 31, 1995, and would have increased benefit costs by 3.6% for 1996, 8.3% for 1995 and 8.0% for 1994. During 1996, the company changed certain benefits for retiree health care, establishing fixed contribution amounts. As such, future health care cost trends will no longer impact the company's accruals or provisions. This change contributed to the decrease in the accumulated postretirement benefit obligation and the related unrecognized prior service credit, as shown above. 41 16 BADGER METER, INC. N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Net periodic postretirement benefit cost for the years ending December 31,
- ------------------------------------------------------------------------------------------ 1996 1995 1994 - ------------------------------------------------------------------------------------------ Service cost, benefits attributed for service of active employees for the period $103,000 $ 93,000 $102,000 Interest cost on the accumulated postretirement benefit obligation 656,000 771,000 695,000 Unrecognized prior service credit (59,000) 0 0 Unrecognized loss 21,000 26,000 29,000 - ------------------------------------------------------------------------------------------ Net periodic postretirement benefit cost $721,000 $890,000 $826,000 ==========================================================================================
C. BADGER METER EMPLOYEE SAVINGS AND STOCK OWNERSHIP PLAN In 1991, the company formed The Badger Meter Employee Savings and Stock Ownership Plan (The ESSOP) and guaranteed a loan made to The ESSOP which had been used to purchase Common Stock of the company from shares held in Treasury. The company is obligated to contribute sufficient cash to The ESSOP to enable it to repay the loan principal and interest. Each payment releases shares of Common Stock (5,626, 22,856 and 22,856 shares in 1996, 1995 and 1994) for allocation to participants in The ESSOP. In 1995, The ESSOP renegotiated the terms of the loan. The new terms allow variable payments of principal with the final principal and interest payment due December 1, 2001. The principal amount due on the loan was $1,000,000 at December 31, 1996 and 1995. Interest may be charged at either Prime Rate or at LIBOR plus 1.5%. As of December 31, 1996, the LIBOR-based loan had an interest rate of 7%. The ESSOP includes a voluntary 401(k) savings plan which allows domestic employees to defer up to 15% of their income on a pretax basis. The company matches 25% of each employee's contribution, with the match percentage applying to a maximum of 6%, 6% and 5% of the employee's salary for 1996, 1995 and 1994, respectively. The match is paid in company stock. For 1996, 1995 and 1994, respectively, 16,038, 22,062 and 18,204 shares of Common Stock released through principal and interest payments on The ESSOP debt were allocated to participants. In addition to the match, the company may, at the discretion of the Board of Directors, allocate additional available shares to non-represented participants who are not covered by a collective bargaining agreement. An additional 1,016 and 4,652 shares were allocated for 1996 and 1994, respectively. No additional shares were allocated for 1995. The obligation related to The ESSOP has been recorded as long-term debt and a like amount of unearned compensation has been recorded as a reduction of shareholders' equity in the accompanying consolidated balance sheets. Charges to expense were $239,000, $230,000 and $200,000 in 1996, 1995 and 1994, respectively. The company paid interest on the ESSOP loan of $33,000, $51,000 and $40,000 which was net of dividends on unallocated ESSOP shares of $37,000, $44,000 and $48,000 for 1996, 1995 and 1994, respectively. These amounts are included in interest expense in the accompanying consolidated statements of operations. 42 17 BADGER METER, INC. N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 8 INCOME TAX EXPENSE Details of earnings (loss) before income taxes and the related provision for income taxes are as follows:
1996 1995 1994 - ------------------------------------------------------------------------------------------------------ Earnings (loss) before income taxes: Domestic $7,824,746 $ 5,730,814 $ 5,053,140 Foreign 341,919 179,865 (79,613) - ------------------------------------------------------------------------------------------------------ Total $8,166,665 $ 5,910,679 $ 4,973,527 ====================================================================================================== Income taxes: Current: Federal $2,286,000 $ 1,956,000 $ 1,658,000 State 434,000 339,000 300,000 Foreign 41,000 106,000 41,000 Deferred: Federal 195,000 (145,000) (199,000) State (57,000) (12,000) 21,000 Foreign 141,000 (52,000) (63,000) - ----------------------------------------------------------------------------------------------------- Total $3,040,000 $ 2,192,000 $ 1,758,000 =====================================================================================================
The components of the net deferred tax asset as of December 31, were as follows:
DEFERRED TAX ASSETS: 1996 1995 - ------------------------------------------------------------------------------------------- Receivables $ 82,000 $ 62,000 Inventories 275,000 292,000 Accrued compensation 702,000 695,000 Other payables 708,000 266,000 Non-pension postretirement benefits 3,112,000 3,231,000 Accrued employee benefits 1,174,000 1,132,000 Operating loss carryforward 84,000 218,000 - ------------------------------------------------------------------------------------------- Total deferred tax assets 6,137,000 5,896,000 DEFERRED TAX LIABILITIES: - ------------------------------------------------------------------------------------------- Depreciation 1,995,000 1,928,000 Prepaid pension 2,744,000 2,328,000 Other 141,000 104,000 - ------------------------------------------------------------------------------------------- Total deferred tax liabilities 4,880,000 4,360,000 - ------------------------------------------------------------------------------------------- Net deferred tax asset included in balance sheet $1,257,000 $1,536,000 ===========================================================================================
43 18 BADGER METER, INC. N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S A prior year operating loss at a Mexican subsidiary may be carried forward for ten years and there is no limitation on the carryforward of a prior year operating loss at a German subsidiary. The provision for income tax differs from the amount which would be provided by applying the statutory U.S. corporate income tax rate of 34% in each year due to the following items:
1996 1995 1994 ------------------------------------------------------------------ Provision at statutory rates $2,776,000 $2,010,000 $1,691,000 State income taxes, net of federal tax benefit 312,000 216,000 212,000 Foreign income taxes 66,000 (7,000) 5,000 Tax benefit of FSC (201,000) (119,000) (243,000) Other 87,000 92,000 93,000 ------------------------------------------------------------------ Actual provision $3,040,000 $2,192,000 $1,758,000 ==================================================================
No provision for federal income taxes is made on the earnings of foreign subsidiaries that are considered permanently invested or would be offset by foreign tax credits upon distribution. Such undistributed earnings at December 31, 1996, were $475,921. 9 FAIR VALUE OF FINANCIAL INSTRUMENTS Cash, accounts receivable and accounts payable are reflected in the financial statements at fair value. Short-term debt is comprised of notes payable drawn against the company's lines of credit and commercial paper. Because of the short-term nature of these instruments, the carrying value reflects the fair value. Long-term debt primarily relates to the company's guarantee of The ESSOP debt, which is offset by a similar value in shareholders' equity. 44 19 BADGER METER, INC. N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 10 INDUSTRY SEGMENTS The company operates in one industry segment as a marketer and manufacturer of various flow measurement products.
DECEMBER 31, ------------------------ 1996 1995 1994 - -------------------------------------------------------------------------------------- Exports to non-affiliated companies to consolidated net sales 11% 11% 11% Net sales by foreign subsidiaries to consolidated net sales 7% 7% 7% Assets of foreign subsidiaries to consolidated assets 7% 7% 7% Operating profits (loss) for foreign subsidiaries ($000) $ 346 $ 244 $ (63) ======================================================================================
11 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED), COMMON STOCK PRICE AND DIVIDENDS
QUARTER ENDED --------------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 - -------------------------------------------------------------------------------------- (THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA) 1996 Net sales $26,635 $30,542 $30,542 $28,299 Gross profit $ 9,921 $10,803 $11,323 $10,481 Net earnings $ 888 $ 1,389 $ 1,430 $ 1,420 Earnings per share: Primary $ .25 $ .38 $ .39 $ .38 Fully diluted $ .25 $ .38 $ .39 $ .38 Dividends declared: Common $ .10 $ .11 $ .11 $ .11 Class B $ .09 $ .10 $ .10 $ .10 Stock price: High $ 14.44 $ 15.75 $ 16.81 $ 20.81 Low $ 12.38 $ 13.25 $ 13.50 $ 16.00 Quarter-end close $ 13.50 $ 14.00 $ 15.94 $ 19.19 - -------------------------------------------------------------------------------------- 1995 Net sales $27,928 $28,579 $25,856 $26,281 Gross profit $ 9,737 $ 9,991 $ 9,494 $ 9,922 Net earnings $ 857 $ 1,051 $ 915 $ 896 Earnings per share: Primary $ .25 $ .30 $ .26 $ .26 Dividends declared: Common $ .09 $ .10 $ .10 $ .10 Class B $ .08 $ .09 $ .09 $ .09 Stock price: High $ 12.06 $ 13.19 $ 13.38 $ 13.50 Low $ 11.06 $ 11.50 $ 11.56 $ 11.44 Quarter-end close $ 11.69 $ 11.81 $ 13.13 $ 13.25 ======================================================================================
Badger Meter, Inc. Common Stock is listed on the American Stock Exchange under the symbol BMI. There is no market for Badger Meter Class B Common Stock due to transfer restrictions. Class B Common Stock is equivalent in value to Common Stock. Earnings per share is computed independently for each quarter. As such, the annual per share amount may not equal the sum of the quarterly amounts due to rounding. There are no fully diluted amounts shown for 1995 because dilution was less than 3%. Shareholders of record as of December 31, 1996 and 1995, totaled 579 and 608 for Common Stock and 9 and 9 for Class B Stock, respectively. Voting trusts are counted as single shareholders for this purpose. 45 20 (Page 27 of Annual Report to Shareholders) BADGER METER, INC. R E P O R T O F I N D E P E N D E N T A U D I T O R S REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Shareholders Badger Meter, Inc. We have audited the accompanying consolidated balance sheets of Badger Meter, Inc. as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Badger Meter, Inc. at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Milwaukee, Wisconsin January 29, 1997, except for the first paragraph of Note 2, as to which the date is February 14, 1997. 46 21 (Page 28 of Annual Report to Shareholders) BADGER METER, INC. T E N Y E A R S U M M A R Y O F S E L E C T E D D A T A Years ended December 31 (Thousands of dollars except per share data)
1996 1995 1994 1993 1992 1991 1990 1989 - ------------------------------------------------------------------------------------------------------------------------------- OPERATING RESULTS Net sales $ 116,018 108,644 99,155 84,497 82,106 78,417 77,100 72,266 Research and development $ 3,851 3,858 3,278 3,642 4,119 4,046 3,863 3,614 Earnings before income taxes $ 8,167 5,911 4,974 3,306 1,160 2,419 3,507 3,798 Earnings before changes in accounting $ 5,127 3,719 3,216 2,164 802 1,648 2,332 2,375 Cumulative effect of changes in accounting $ 0 0 0 0 (4,684) 0 0 0 Net earnings (loss) $ 5,127 3,719 3,216 2,164 (3,882) 1,648 2,332 2,375 Earnings to sales * 4.4% 3.4% 3.2% 2.6% 1.0% 2.1% 3.0% 3.3% - ------------------------------------------------------------------------------------------------------------------------------- PER COMMON SHARE Earnings before changes in accounting $ 1.39 1.06 .93 .64 .24 .49 .73 .77 Cumulative effect of changes in accounting $ 0 0 0 0 (1.38) 0 0 0 Primary earnings (loss) $ 1.39 1.06 .93 .64 (1.14) .49 .73 .77 Cash dividends declared: Common Stock $ .43 .39 .35 .32 .30 .30 .30 .29 Class B Common Stock $ .39 .36 .32 .29 .28 .28 .28 .26 Price range - high $ 20.81 13.50 14.00 11.00 8.88 9.00 9.94 11.44 Price range - low $ 12.38 11.06 9.50 8.88 7.38 6.81 6.50 8.00 Closing price $ 19.19 13.25 11.94 9.56 8.75 7.69 6.94 9.81 Book value $ 10.32 9.16 8.38 7.66 7.31 8.61 8.29 8.39 - ------------------------------------------------------------------------------------------------------------------------------- SHARES OUTSTANDING Common Stock 2,426,376 2,387,214 2,377,214 2,280,608 2,282,008 2,279,608 2,274,408 1,938,314 Class B Common Stock 1,125,570 1,125,570 1,125,570 1,125,570 1,125,570 1,125,570 1,125,570 1,148,770 - ------------------------------------------------------------------------------------------------------------------------------- FINANCIAL POSITION Working capital $ 17,645 16,178 14,569 12,010 9,876 9,842 18,365 13,803 Current ratio 2.0 to 1 2.1 to 1 1.7 to 1 1.6 to 1 1.6 to 1 1.6 to 1 3.3 to 1 2.1 to 1 Net cash provided by operations $ 9,878 12,026 6,342 2,969 3,833 5,410 5,132 3,342 Capital expenditures $ 5,382 4,493 3,553 3,121 3,496 3,335 4,901 4,376 Total assets $ 66,133 60,527 61,993 57,627 53,895 51,199 50,670 46,672 Long-term debt $ 1,091 1,000 1,200 1,400 1,700 1,900 10,400 5,183 Shareholders' equity $ 36,638 32,163 29,351 26,074 24,894 29,303 28,168 25,897 Debt to total capitalization 9.2% 16.8% 28.4% 34.9% 34.2% 28.7% 30.5% 29.2% Return on shareholders' equity * 14.0% 11.6% 11.0% 8.3% 3.2% 5.6% 8.3% 9.2% Price/earnings ratio * 13.8 12.5 12.8 15.1 37.2 15.9 9.6 12.7 - ------------------------------------------------------------------------------------------------------------------------------- 1988 1987 - -------------------------------------------------------- OPERATING RESULTS Net sales 71,150 66,737 Research and development 3,077 2,896 Earnings before income taxes 3,359 3,072 Earnings before changes in accounting 2,071 1,799 Cumulative effect of changes in accounting 0 0 Net earnings (loss) 2,071 1,799 Earnings to sales * 2.9% 2.7% - -------------------------------------------------------- PER COMMON SHARE Earnings before changes in accounting .69 .61 Cumulative effect of changes in accounting 0 0 Primary earnings (loss) .69 .61 Cash dividends declared: Common Stock .28 .28 Class B Common Stock .25 .25 Price range - high 10.13 12.13 Price range - low 6.00 5.31 Closing price 9.06 6.31 Book value 7.89 7.45 - -------------------------------------------------------- SHARES OUTSTANDING Common Stock 1,865,314 1,736,170 Class B Common Stock 1,174,770 1,234,770 - -------------------------------------------------------- FINANCIAL POSITION Working capital 13,599 14,186 Current ratio 2.4 to 1 2.5 to 1 Net cash provided by operations 5,846 3,631 Capital expenditures 2,904 1,545 Total assets 41,787 41,454 Long-term debt 5,267 7,050 Shareholders' equity 23,975 22,118 Debt to total capitalization 25.9% 32.9% Return on shareholders' equity * 8.6% 8.1% Price/earnings ratio * 13.1 10.4 - --------------------------------------------------------
* PRIOR TO ACCOUNTING CHANGES 47 EX-21 5 SUBSIDIARIES 1 Exhibit (21.0) BADGER METER, INC. SUBSIDIARIES OF THE REGISTRANT The company's subsidiaries are listed below. All of the subsidiaries of the company listed below are included in the consolidated financial statements. Percentage State or Country Name of ownership in which organized ---- ------------ ------------------ Badger Meter Europe, GmbH 100% Federal Republic of Germany Badger Meter International Sales, Inc. (a DISC) 100% Delaware Badger Meter de Mexico, S.A. de C.V. 100% Mexico Badger Meter Limited 100% U.K. Badger Meter de Las Americas, S.A. de C.V. 100% Mexico Badger Meter Export, Inc. 100% Virgin Islands (a large FSC) (U.S.) Badger/Instromet LLC 50% Wisconsin Badger Meter, Canada 100% Canada 48 EX-23 6 CONSENT OF ERNST & YOUNG LLP 1 Exhibit (23.0) CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report on Form 10-K of Badger Meter, Inc., of our report dated January 29, 1997 (except for the first paragraph of Note 2, as to which the date is February 14, 1997), included in the 1996 Annual Report to Shareholders of Badger Meter, Inc. Our audits also included the financial statement schedule of Badger Meter, Inc. listed in Item 14(a). This schedule is the responsibility of the company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects, the information set forth therein. We also consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 33-27649, 33-27650, 33-65618, 33-62239 and 33-62241) pertaining to the Badger Meter, Inc. 1989 Stock Option Plan, Badger Meter, Inc. Restricted Stock Plan, Badger Meter, Inc. 1993 Stock Option Plan, Badger Meter, Inc. 1995 Stock Option Plan and Badger Meter, Inc. Employee Savings and Stock Ownership Plan of our report dated January 29, 1997 (except for the first paragraph of Note 2, as to which the date is February 14, 1997), with respect to the consolidated financial statements and schedule of Badger Meter, Inc. included or incorporated by reference in the Annual Report (Form 10-K) for the year ended December 31, 1996. Ernst & Young LLP Milwaukee, Wisconsin March 24, 1997 49 EX-27 7 FDS
5 This schedule contains summary financial information from the Company's Annual Report ot Shareholders for the year ended December 31, 1996 incorporated by reference in the Annual Report on Form 10K and is qualified in its entirety by reference to such 10K. 1,000 12-MOS DEC-31-1996 DEC-31-1996 1,123 0 15,498 0 17,506 35,046 57,111 (37,751) 66,133 17,400 0 0 0 2,688 33,950 66,133 116,018 116,018 73,490 107,264 220 0 368 8,167 3,040 5,127 0 0 0 5,127 1.39 1.36
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