-----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, Hqc4jQa9mTWrzZe+teWwRnDtXNWA8auSqfXjb8MjGTZ4UpVecv711VMTuUAk4WfN IFBw7ERIIEggSLnF7uklzw== 0000068726-97-000010.txt : 19970324 0000068726-97-000010.hdr.sgml : 19970324 ACCESSION NUMBER: 0000068726-97-000010 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970321 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MUELLER PAUL CO CENTRAL INDEX KEY: 0000068726 STANDARD INDUSTRIAL CLASSIFICATION: FABRICATED PLATE WORK (BOILER SHOPS) [3443] IRS NUMBER: 440520907 STATE OF INCORPORATION: MO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-04791 FILM NUMBER: 97560333 BUSINESS ADDRESS: STREET 1: 1600 W PHELPS ST STREET 2: PO BOX 828 CITY: SPRINGFIELD STATE: MO ZIP: 65802 BUSINESS PHONE: 4178313000 MAIL ADDRESS: STREET 1: 1600 WEST PHELPS STREET STREET 2: P O BOX 828 CITY: SPRINGFIELD STATE: MO ZIP: 65801-0928 10-K405 1 1996 FORM 10-K 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 For the fiscal year ended: December 31, 1996 [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from: _______________ to _______________. Commission File Number: 0-4791 PAUL MUELLER COMPANY - ------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) Missouri - ------------------------------------------------------------------------ (State or other jurisdiction of incorporation or organization) 44-0520907 - ------------------------------------------------------------------------ (I.R.S. Employer Identification No.) 1600 West Phelps, Springfield, Missouri 65802 - ------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) (417) 831-3000 - ------------------------------------------------------------------------ (Registrant's telephone number, including Area Code) Securities registered pursuant to Section 12(b) of the Act: - ------------------------- ------------------------------------------- (Title of each class) (Name of each exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: Common Stock par value $1 per share - ------------------------------------------------------------------------ (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [X] No [ ] State the aggregate market value of the voting stock held by nonaffili- ates of the Registrant: The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock as of a specified date within 60 days prior to the date of filing. Aggregate market value on February 28, 1997, based on the last reported closing price: $ 29,436,880 Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of March 14, 1997: Common stock, $1 par value, outstanding: 1,168,021 shares Portions of the Proxy Statement for the annual meeting of shareholders to be held May 5, 1997, are incorporated by reference into Part III. 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 con- tained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K: [X] 1 2 PART I ITEM 1. - DESCRIPTION OF BUSINESS A. GENERAL DEVELOPMENT OF BUSINESS The Registrant was incorporated under the laws of Missouri in 1946 as the successor to a business begun in 1940 to perform general sheet metal work, primarily for the building industry. In the mid-1940's, the Registrant expanded its operations to include the manufacture of poultry processing equipment and stainless steel cheese-making vats for dairy plants. The Registrant in 1955 began manufacturing stainless steel milk coolers for dairy farms and in 1960 began manufacturing stain- less steel storage tanks and discontinued its sheet metal operations. The Registrant purchased a water purification product line in January 1987. Today, the Registrant is one of the world's largest manufacturers of milk coolers for dairy farms. The Registrant is also one of the nation's leading manufacturers of standard and custom-made stainless steel processing equipment for the food and dairy, beverage, chemical and pharmaceutical, and other industries. The Registrant entered into a license agreement in January 1992 under which it acquired the right to manufacture and market water distillation equipment. The agreement provides that sales can be made on an exclusive basis to the water bottling industry and for industrial process water applica- tions; pharmaceutical, laboratory and medical applications; and for milk concentration. The Registrant began selling equipment during 1992. The Registrant entered into license agreements in February 1994 under which it acquired the rights to manufacture and market evaporator assemblies used in liquid-ice systems. The agreements provide the Registrant an exclusive license to manufacture and to sell or to sublicense its rights for the following applications: milk cooling on dairy farms; HVAC; gas turbine; process cooling of food and chemicals; and con- centration of milk, fruit juices and acid solutions. The exclusive licenses are restricted to specific territories defined by application. The licenses are exclusive until expiration of the patents, but may become nonexclusive if royalties fail to equal specified minimum levels for any calendar year. The Registrant began manufacturing and marketing equipment in 1995. The Registrant has a license agreement with a Dutch company, which was extended during 1994 for five years, for the pro- duction and sale of Mueller Dairy Farm Equipment in Europe, which provides royalties for the Registrant. 2 3 B. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS EARNINGS DATA BY INDUSTRY SEGMENT
Dairy Farm Processing Equipment Equipment Consolidated ----------- ----------- ----------- 1996 ------------------------------------- Sales to unaffiliated customers.................. $19,169,174 $64,781,816 $83,950,990 =========== =========== =========== Operating profit............. $ 2,762,583 $ 5,024,339 $ 7,786,922 =========== =========== General corporate expenses... (1,943,816) Other income................. 646,913 ----------- Income from operations before income taxes........ $ 6,490,019 =========== Identifiable assets at December 31................ $10,401,372 $21,171,140 $31,572,512 =========== =========== Corporate assets............. 21,612,459 ----------- Total assets at December 31.. $53,184,971 =========== Additions to property, plant and equipment........ $ 829,961 $ 886,576 =========== =========== Depreciation expense......... $ 842,512 $ 1,157,830 =========== =========== 1995 ------------------------------------- Sales to unaffiliated customers.................. $17,954,458 $60,421,178 $78,375,636 =========== =========== =========== Operating profit............. $ 2,545,379 $ 819,115 $ 3,364,494 =========== =========== General corporate expenses... (1,815,617) Other income................. 1,065,776 ----------- Income from operations before income taxes........ $ 2,614,653 =========== Identifiable assets at December 31................ $10,576,803 $24,430,407 $35,007,210 =========== =========== Corporate assets............. 19,671,694 ----------- Total assets at December 31.. $54,678,904 =========== Additions to property, plant and equipment........ $ 719,071 $ 1,017,864 =========== =========== Depreciation expense......... $ 751,451 $ 1,143,519 =========== =========== 1994 ------------------------------------- Sales to unaffiliated customers.................. $22,897,565 $56,577,789 $79,475,354 =========== =========== =========== Operating profit............. $ 4,276,870 $ 1,601,392 $ 5,878,262 =========== =========== General corporate expenses... (1,616,725) Other income................. 829,429 ----------- Income from operations before income taxes........ $ 5,090,966 =========== Identifiable assets at December 31................ $10,777,972 $24,431,405 $35,209,377 =========== =========== Corporate assets............. 19,040,859 ----------- Total assets at December 31.. $54,250,236 =========== Additions to property, plant and equipment........ $ 810,454 $ 934,853 =========== =========== Depreciation expense......... $ 828,333 $ 1,276,872 =========== ===========
C. NARRATIVE DESCRIPTION OF BUSINESS The Registrant's industry segments include Dairy Farm Equip- ment and Processing Equipment. The Dairy Farm Equipment segment includes sales of milk coolers, pre-coolers, automatic washing systems and heat recovery equipment to the dairy farm industry. The Dairy Farm Equipment segment includes sales to domestic and export markets. 3 4 The Processing Equipment segment includes: (1) food, dairy, meat and poultry processing equipment; (2) beer, wine and beverage equipment; (3) chemical and pharmaceutical equipment; (4) industrial heat transfer equipment; (5) thermal energy storage equipment; and (6) water distilling/pure steam gener- ating equipment. The food, dairy, meat and poultry processing equipment mar- kets include stainless steel storage and mixing tanks, food processors, cookers and coolers, and a variety of other custom-fabricated tanks. The beer, wine and beverage equipment markets include stain- less steel storage and fermentation tanks, brewhouse equipment and other special equipment for breweries, wineries, distil- leries and soft drink bottlers. The chemical, pharmaceutical and industrial equipment markets include stainless steel and other alloy pressure vessels and tanks, tank components, water purification products, systems and applications for a variety of heat transfer products, and thermal energy storage equipment. The Processing Equipment segment includes sales to the domes- tic and export markets. Information as to classes of products: SALES DATA BY PRODUCT CATEGORY (In Thousands of Dollars)
1996 1995 1994 ------------- ------------- ------------- % of % of % of Total Total Total Sales Sales Sales Sales Sales Sales ------- ----- ------- ----- ------- ----- DAIRY FARM EQUIPMENT.... $19,169 23% $17,955 23% $22,897 29% PROCESSING EQUIPMENT Food and Beverage Equipment.......... $24,626 29% $24,972 32% $22,035 28% Chemical, Pharmaceuti- cal and Industrial Equipment.......... 40,156 48% 35,449 45% 34,543 43% ------- ---- ------- ---- ------- ---- $64,782 77% $60,421 77% $56,578 71% ------- ---- ------- ---- ------- ---- TOTAL.............. $83,951 100% $78,376 100% $79,475 100% ======= ==== ======= ==== ======= ====
Raw materials used in the fabrication of Registrant's products are readily available from sources in the United States. The Registrant purchases a component exclusively from a German vendor under a sales and supply agreement for its plate heat exchanger product line. Patents held by the Registrant generally are not considered significant to the successful conduct of each segment's busi- ness. Trademarks are registered for the Registrant's name, for certain products sold in the Processing Equipment segment, and for the products sold in the Dairy Farm Equipment segment in the key markets served by the Registrant. Trademarks are considered significant to the successful conduct of the Dairy Farm Equipment segment business. Key license agreements that are maintained by the Registrant have been discussed in Sec- tion A above. In general, the seasonality of the Registrant's business seg- ments is not material. The Registrant carries a significant inventory of standard sizes of stainless steel coil and plate used in the manufac- ture of its products. For some Processing Equipment orders, 4 5 stainless steel is specifically ordered for the project. The Registrant provides extended payment terms primarily on export shipments with payment secured generally by a letter of credit and to qualifying domestic Dairy Farm Equipment distributors. The Registrant requires down payments or progress payments on significant Processing Equipment orders. Sales of the Registrant's products are distributed among several customers, and sales to any one customer are not significant to total consolidated sales. Sales to any one customer did not exceed 10% of the Registrant's consolidated sales during 1996. The backlog of sales was approximately $28,400,000 at February 28, 1997, compared to approximately $29,300,000 at February 29, 1996. It is anticipated that substantially all of the February 28, 1997, backlog will be shipped during the current fiscal year. In the Processing Equipment segment, there are several compe- titors, most of which are smaller than the Registrant. Many Processing Equipment projects are bid among several possible suppliers, which tends to make pricing very competitive. The principal methods of competition are price, quality, delivery and service. In the Dairy Farm Equipment segment, there are relatively few competitors, and the Registrant is one of the largest manufacturers of farm milk coolers in the world. During 1996, stainless steel prices declined significantly compared to the prior year. However, 5% price increases have recently been announced by the major steel suppliers effec- tive for both March and May 1997. There appears to be an upward trend in the market prices of molybdenum, nickel and chromium, which could result in the assessment of surcharges by the mills. The Registrant's products are priced to cover anticipated material prices. The Registrant spent $653,200 in 1996, $597,600 in 1995 and $764,400 in 1994 on research activities relating to the development of new products or services and the improvement of existing products or services. Eleven full-time adminis- trative employees are engaged in this activity. It is not anticipated that compliance with Federal, State and local provisions, which have been enacted or adopted regu- lating the discharge of materials into the environment or otherwise relating to the protection of the environment, will have a material effect upon the capital expenditures, earnings or competitive position of the Registrant and its subsidiary. The number of employees at December 31, 1996, was 877. As previously reported, the labor contract with the Sheet Metal Workers Union (which covers a portion of the employees at the Springfield, Missouri, plant) expired on June 11, 1994. Negotiations with union representatives continued until an impasse was reached, and the Registrant implemented specific provisions of its final offer effective September 19, 1994. In November 1994, the Regional Director of the National Labor Relations Board (NLRB) also concluded that a lawful impasse had been reached in negotiations prior to the Registrant's implementation of its offer. However, on December 22, 1994, the Regional Director of the NLRB issued an unfair labor practice complaint against the Registrant for refusing to supply information to union repre- sentatives about the personal health insurance claims of individual employees and their dependents and reversed his previous decision regarding the implementation of changes in wages and benefits. A hearing on these and other unfair labor practice issues was held during August 1996 by an administra- tive law judge of the NLRB, and a decision is expected in early 1997. However, a final determination of all the charges may take up to two years, and management believes, based on an evaluation by counsel, that there is no significant financial exposure to the Registrant. 5 6 The Registrant currently employs about 900 people, of which approximately 400 at the Springfield, Missouri, facility are represented by the Sheet Metal Workers Union. The Interna- tional Union called a strike which began on July 25, 1995, and the largest number of employees participating was approxi- mately 185 during the fourth quarter of 1995. A substantial number of employees returned to work during 1996, and cur- rently there are only 25 employees participating. No action has been taken by the Union to prevent nonstriking employees from working. The Registrant has implemented the provisions of its revised and final offer effective April 1, 1996, which remains open for the Union's acceptance, and no further negotiations are scheduled. The Registrant has facilities located in Springfield, Missouri, and Osceola, Iowa. There are approximately 800 employees assigned to the Springfield facility, and there are an additional 100 employees at the Osceola facility, none of which are represented by a labor union. D. FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES Information about the amounts of export sales is covered in Note 5 of the Notes to Consolidated Financial Statements found in Part II, Item 8, and is incorporated herein by reference. Export sales were about 38% Dairy Farm Equipment and 62% Processing Equipment during 1996. ITEM 2. - PROPERTIES The Registrant's primary domestic manufacturing facilities are located in Springfield, Missouri, and occupy approximately 720,000 square feet on 50 acres of land. These facilities are owned by the Registrant, as is all of the equipment it uses. The original section of the present Springfield plant was built in 1950 and consisted of 23,720 square feet. Since then, the Registrant has added to this facility many times in the course of a continuing program for enlarging and modernizing its facilities and increasing its capabilities. The last addition of approximately 14,100 square feet was made in 1981. In February 1987, the Registrant acquired an additional manufacturing facility in Osceola, Iowa, which con- tains approximately 216,000 square feet. ITEM 3. - LEGAL PROCEEDINGS There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business or matters for which insurance coverage is adequate, which involves the Regis- trant, nor is any director, officer or any management security holder involved in any litigation that could adversely affect the Registrant. ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Registrant did not submit any matter to a vote of security holders, through a solicitation of proxies or otherwise, during the fourth quarter of 1996. 6 7 ITEM 10. (from PART III) - EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position(s) with Registrant ------------------- --- ----------------------------------------- Paul Mueller 81 Chairman of the Board and Director Daniel C. Manna 50 President and Director Donald E. Golik 53 Senior Vice President and Chief Financial Officer, Secretary and Director Individual has been employed by the Registrant through the past five years.
Each of the above officers was elected to serve until the next annual meeting of the Board of Directors, which will be held on May 5, 1997, and until his successor shall have been duly elected and qualified or until his earlier resignation or removal. 7 8 PART II ITEM 5. - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The Registrant's common stock is traded on the NASDAQ National Market tier of The NASDAQ Stock Market(SM) under the symbol MUEL. As of December 31, 1996, there were approximately 320 shareholders of record and approximately 720 beneficial shareholders. Market high and low prices and quarterly cash dividends in 1996 and 1995 were as follows:
1996 Quarter Ended 1995 Quarter Ended ------------------------------ ------------------------------ Mar 31 Jne 30 Spt 30 Dec 31 Mar 31 Jne 30 Spt 30 Dec 31 ------ ------ ------ ------ ------ ------ ------ ------ MARKET PRICE OF STOCK High....... 34-1/2 34 35 43 31-3/4 33-1/2 37-3/4 34-1/4 Low........ 30 29-3/4 31-3/4 33 27 29 29-1/2 30 7/8 CASH DIVIDENDS Declared per share.. $0.50 $0.50 $0.50 $0.60 $0.50 $0.50 $0.50 $0.50
ITEM 6. - SELECTED FINANCIAL DATA SELECTED FINANCIAL DATA - FIVE-YEAR SUMMARY
1996 1995 1994 1993 1992 ----------- ----------- ----------- ----------- ----------- Net sales...... $83,950,990 $78,375,636 $79,475,354 $73,756,659 $74,620,088 Net income..... $ 4,424,019 $ 1,954,653 $ 3,510,966 $ 2,217,656 $ 2,916,604 Earnings per common share.. $ 3.79 $ 1.67 $ 3.01 $ 1.90 $ 2.50 Weighted average common shares outstanding... 1,168,021 1,168,021 1,168,021 1,168,021 1,168,021 Dividends de- clared per common share.. $2.10 $2.00 $2.00 $2.00 $2.00 Total assets... $53,184,971 $54,678,904 $54,250,236 $52,947,295 $53,005,481 Long-term debt. $ 161,434 $ 161,434 $ 3,153,747 $ 3,153,747 $ 3,153,747
8 9 ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OPERATING RESULTS The primary factors affecting 1996 results were a higher level of sales in both business segments and a significant reduction in the required LIFO reserve. SALES -- Comparative consolidated sales for the past three years were as follows:
Sales ------------------------------ (in thousands of dollars) 1996 1995 1994 -------- -------- -------- Dairy Farm Equipment.... $ 19,169 $ 17,955 $ 22,897 Processing Equipment.... 64,782 60,421 56,578 -------- -------- -------- $ 83,951 $ 78,376 $ 79,475 ======== ======== ========
Sales of Dairy Farm Equipment increased by $1,214,000 during 1996 compared to 1995. All of the increase was attributable to domestic operations, as unit sales of milk coolers increased by 17%. Domes- tically, the market remained relatively soft early in 1996 due to extremely high prices for feed. However, in the spring, the milk price began to escalate and reached an all-time record high level during the third quarter of 1996. The average price for milk during 1996 was about 13% higher than the average price during 1995, as total milk production also declined from the prior year. In spite of high feed prices, milk prices were at levels that allowed dairy farmers to invest in additional milk cooling and storage capacity. Overall, the level of export sales of Dairy Farm Equipment was comparable between 1996 and 1995. However, the eco- nomic conditions in Argentina and Mexico adversely affected our ability to export to those markets. Additionally, the effects of "mad cow disease," both in the United Kingdom and Ireland, slowed sales to those countries. We were able to achieve some growth in other export markets, and this allowed us to maintain export sales at approximately the same level as the prior year. During 1995, sales of Dairy Farm Equipment decreased by $4,942,000, with 80% of the decline attributable to domestic operations. Lower milk prices, poor weather conditions, high feed prices, and low beef prices all combined to adversely affect the profitability of dairy farmers and our ability to sell milk cooling and storage equipment. The unsettled economic conditions in Argentina and Mexico hampered our ability to export to these key markets. Al- though we were able to increase sales to other export markets, they were not sufficient to offset the significant declines we exper- ienced in Argentina and Mexico. During the fourth quarter of 1996, the milk price declined by about 25%. For 1997, milk prices will be soft initially, as they are expected to be below the 1996 prices for at least the first few months. The expectation for 1997 is that the average milk price will be below the 1996 average. However, with continued strong demand and only a small increase in milk production projected, the 1997 average annual price should be at a reasonably favorable level. We believe the market for Dairy Farm Equipment will remain relatively soft until milk prices improve, and there is a definite indication that feed prices will be maintained at more reasonable levels. During 1997, we expect continuing recovery in the Argen- tine and Mexican economies and continued growth in the United Kingdom market. We expect relatively stable conditions in the other markets that we serve, which will provide the opportunity for moderate growth in order entry and sales. In the domestic Dairy Farm Equipment market, the number of dairy farms continues to decline. The consolidation process leaves fewer dairy farm operations, but with larger milk cooling and storage 9 10 capacity requirements. The Registrant is well positioned to meet the cooling and storage requirements of the changing marketplace, and any impact on revenues and profitability will depend upon the rate at which farm consolidation continues. During 1996, sales of Processing Equipment increased by about 7%, or $4,361,000. Although order entry for Processing Equipment was comparable between 1996 and 1995, the backlog at the beginning of 1996 for Processing Equipment was approximately $6,000,000 higher than at the beginning of 1995. During 1996, increases in sales were recorded in our traditional custom-fabricated products, such as Pharmaceutical Processing Equipment and Component Products, as well as increases in PyroPure (Registered) Water Purification Systems and Accu-Therm (Registered) Plate Heat Exchangers. During mid-1996, we had approximately 100 employees, who had been on strike, return to work. The strike primarily affected Proces- sing Equipment, and with the return of experienced employees, this allowed us to increase our capacity and efficiency in the fabrica- tion of traditional Processing Equipment. Additionally, export sales of Processing Equipment were approximately 40% higher during 1996 as compared to 1995. Sales of Processing Equipment improved by about 7% during 1995 compared to 1994 levels. Favorable economic conditions, parti- cularly strong capital expenditures, led to an increase in order entry and sales during 1995 for our more traditional custom- fabricated products, such as Food Processing Equipment, Component Products, and Temp-Plate Heat Transfer Surface. The balance of the increase occurred in Commercial Refrigeration and was primarily for thermal energy storage equipment. Although order entry in- creased by 21% during 1995, sales of custom-fabricated products were hampered by the strike called by the Sheet Metal Workers Union, which began during the third quarter. Additionally, export sales of Processing Equipment were approximately 10% lower during 1995 compared to 1994. With respect to 1997 operations, the backlog of Processing Equip- ment at December 31, 1996, is approximately at the same level it was at the beginning of last year. Our level of order entry and sales in 1997 will depend on a favorable capital expenditure environment. Although the outlook is for capital expenditures overall to continue to increase, growth in industrial equipment spending is expected to be sluggish during the early months of 1997. We have noted that our quote activity for Processing Equip- ment has been slow initially, which is consistent with the economic outlook. We expect very competitive conditions for the projects that are available, particularly with respect to price and de- livery. During 1996, stainless steel prices declined to more reasonable levels and surcharges were eliminated. Looking to 1997, price increases of approximately 5% have been announced by the major mills for both March and May. Also, the mills are assessing a modest surcharge due to the increase in prices of nickel, chro- mium and molybdenum. However, it appears that stainless steel prices during 1997 will remain at fairly reasonable levels due to the continuing pricing pressure afforded by foreign suppliers. As previously reported, the labor contract with the Sheet Metal Workers Union (which covers a portion of the employees at the Springfield, Missouri, plant) expired on June 11, 1994. Negotia- tions with union representatives continued until an impasse was reached, and the Registrant implemented specific provisions of its final offer effective September 19, 1994. In November 1994, the Regional Director of the National Labor Relations Board (NLRB) also concluded that a lawful impasse had been reached in negotiations prior to the Registrant's implementation of its offer. However, on December 22, 1994, the Regional Director of the NLRB issued an unfair labor practice complaint against the Registrant for refusing to supply information to union representatives about the personal health insurance claims of individual employees and their dependents and reversed his previous decision regarding the implementation of changes in wages and benefits. A hearing on these and other unfair labor practice issues was held during August 1996 by an administrative law judge of the NLRB, and a decision is expected in early 1997. However, a final determination of all the 10 11 charges may take up to two years, and management believes, based on an evaluation by counsel, that there is no significant financial exposure to the Registrant. The Registrant currently employs about 900 people, of which approx- imately 400 at the Springfield, Missouri, facility are represented by the Sheet Metal Workers Union. The International Union called a strike which began on July 25, 1995, and the largest number of employees participating was approximately 185 during the fourth quarter of 1995. A substantial number of employees returned to work during 1996, and currently there are only 25 employees par- ticipating. No action has been taken by the Union to prevent nonstriking employees from working. The Registrant has implemented the provisions of its revised and final offer effective April 1, 1996, which remains open for the Union's acceptance, and no further negotiations are scheduled. The Registrant has facilities located in Springfield, Missouri, and Osceola, Iowa. There are approximately 800 employees assigned to the Springfield facility, and at the Osceola facility, there are an additional 100 employees, none of which are represented by a labor union. Total Registrant sales backlog was $27,400,000 at December 31, 1996, versus $25,700,000 and $19,500,000 at the end of 1995 and 1994, respectively. The Processing Equipment backlog was $23,000,000, $22,200,000 and $16,200,000 at the end of 1996, 1995 and 1994, respectively, with the remaining balance in each year attributable to Dairy Farm Equipment. Substantially all of the December 31, 1996, backlog will be shipped during the current year. OPERATING INCOME -- Operating income for 1996 was $5,843,000 versus $1,549,000 for 1995. The major factors contributing to the in- crease in operating income, in comparing 1996 to 1995, were the increase in sales of $5,575,000 and the significant reduction in the LIFO reserve. In addition to the increase in sales, gross margins improved in 1996 compared to 1995, particularly for custom- fabricated Processing Equipment, which was the product area most affected by the strike. During 1996, the significant decrease in inventory levels, coupled with the decline in stainless steel prices, resulted in a reduction in the required LIFO reserve, and this had the effect of increasing operating income by approximately $1,859,000. Expenditures for selling, general and administrative expenses were comparable between 1996 and 1995. This was due to the curtailment primarily of selling expenses during the first half of 1996 when there was still a significant number of employees par- ticipating in the strike. Operating income for 1995 was $1,549,000 compared to $4,262,000 for 1994. The major factors contributing to the decrease in operating income were the lower level of sales, the effects of the strike and a large LIFO provision. In addition to the sales decrease, gross margins declined due to the lower proportion of Dairy Farm Equip- ment sales, which have high margins. Also, the strike adversely impacted efficiency, particularly for custom-fabricated Processing Equipment, and contributed to higher indirect manufacturing costs. During 1995, a considerable increase in stainless steel prices re- quired a significant provision to the LIFO reserve, which had the effect of reducing operating income by approximately $1,789,000. The decline in selling, general and administrative expenses was due to lower costs for warranty and service, manufacturers' representa- tive's commissions, insurance and product development. The profitability of Processing Equipment is much lower than for Dairy Farm Equipment, as a substantial number of Processing Equip- ment projects are engineered-to-order. These projects require much greater support from the sales, engineering and manufacturing areas and a higher degree of skill to fabricate. Also, the risks of manufacturing are greater because the products are custom-designed and built and, in general, the chances of misinterpretation, errors and mistakes are much greater than with a standard product. Many of the projects are bid among several possible suppliers, which tends to make pricing very competitive. In addition, there is a risk of adverse material price variances on some projects in 11 12 periods of rising prices due to relatively long lead times between quotation and completion of the project. Dairy Farm Equipment, on the other hand, is a standard product, and engineering designs have been well defined and manufacturing methods have been refined for efficiency. The proprietary nature of the product also permits more attractive pricing. There are relatively few competitors, and the Registrant is the largest domestic manufacturer of dairy farm milk coolers. Inflation is a factor that affects the cost of operations, and the Registrant seeks ways to minimize the effect on operating results. To the extent permitted by competitive conditions, higher material prices, labor costs and operating costs are passed on to the cus- tomer by increasing prices. The Registrant uses the LIFO method of accounting for inventories, and under this method, the cost of pro- ducts sold, as reported in the financial statements, approximates the current replacement cost. Additionally, the Registrant uses accelerated depreciation methods in charging depreciation expense to current operations, which to a certain extent offsets the effect of the increased cost of replacement productive capacity. OTHER INCOME (EXPENSE) -- Although the average interest rate was lower, 1996 interest income increased compared to 1995, as the average level of investable funds was higher. Interest income increased during 1995 compared to 1994, as the average interest rate was higher, with a lower average level of investable funds. Interest expense amounts in 1996, 1995 and 1994 are consistent with the interest rate levels during those years. Other income for 1996 was lower than 1995 due to an additional 401(k) match, reduced mis- cellaneous income, lower trucking operation results, and reduced royalty income. Other income was higher in 1995 compared to 1994 due to increased royalty income, improved trucking operation re- sults, and higher miscellaneous income. PROVISION FOR INCOME TAXES -- The effective tax rates in 1996, 1995, and 1994 were 31.8%, 25.2%, and 31.0%, respectively. The effective tax rates for 1996, 1995, and 1994 were below the statu- tory rate (34%) primarily as a result of tax-exempt interest, the lower effective tax rate for the foreign sales corporation, and tax credits. FINANCIAL CONDITION LIQUIDITY - CAPITAL RESOURCES -- Working capital was $26,082,000 at December 31, 1996, compared to $23,508,000 at December 31, 1995. The increase in working capital was primarily due to the increase in sales and net income during 1996. The current ratio, a mea- sure of liquidity, was 3.09 at December 31, 1996, versus 2.48 at December 31, 1995. The Registrant has no significant amount of long-term debt. Net cash provided by operations was $9,723,000 in 1996 compared to $5,160,000 in 1995 and $3,615,000 in 1994. The 1996 cash flow was primarily attributable to net income, a decrease in inventories, and depreciation and amortization expense. The 1995 cash flow was primarily attributable to net income, depreciation and amortization expense, a decrease in accounts and notes receivable, and an in- crease in advanced billings. The 1994 cash flow was primarily attributable to net income and to depreciation and amortization expense. Capital expenditures for the most recent three years were $2,131,000 in 1996, $2,284,000 in 1995, and $1,635,000 in 1994. The level of planned expenditures for 1997 is $3,000,000, none of which has been committed as of December 31, 1996. Anticipated expenditures are primarily for plant equipment to maintain quality and improve efficiency. Management has the discretion of lowering the level of expenditures if the operating results deviate from budgeted performance. 12 13 The Registrant does not have a bank borrowing facility, and manage- ment believes that cash flows provided by operations and the strong cash and investment position will continue to be sufficient to satisfy the Registrant's working capital requirements, normal capi- tal expenditure levels, and anticipated dividends. A policy of requiring down payments and progress payments on large Processing Equipment orders has had a favorable effect on cash flows. Manage- ment expects internally generated funds to be sufficient to finance operations, and this is consistent with historical performance. Statement of Financial Account Standards (SFAS) No. 121, "Account- ing for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," was issued in March 1995, effective for the Registrant's 1996 fiscal year, and the adoption of SFAS No. 121 did not have a material effect on the Registrant's financial posi- tion or results of operations. In October 1995, SFAS No. 123, "Accounting for Stock-Based Com- pensation," was issued. The statement was effective for the Registrant's 1996 fiscal year, and the adoption of SFAS No. 123 had no effect on the Registrant's financial position or results of operations. 13 14 ITEM 8. - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED BALANCE SHEETS December 31, 1996 and 1995
1996 1995 ----------- ----------- ASSETS - ------ Current Assets: Cash and cash equivalents (Note 1)................ $ 2,220,648 $ 2,491,167 Available-for-sale investments, at market (Note 1) 14,605,457 12,063,140 Accounts and notes receivable, less reserve of $698,036 in 1996 and $531,601 in 1995 for doubtful accounts (Note 1).................... 15,328,569 13,033,660 Inventories (Note 1) - Raw materials and components.................... $ 3,768,312 $ 6,891,452 Work-in-process................................. 719,176 2,065,719 Finished goods.................................. 1,497,536 2,240,684 ----------- ----------- $ 5,985,024 $11,197,855 Prepayments....................................... 403,260 617,445 ----------- ----------- Total Current Assets...................... $38,542,958 $39,403,267 Other Assets (Notes 2 and 3)........................ 3,486,087 3,845,380 Property, Plant and Equipment - at cost (Note 1) - Land and land improvements........................ $ 2,611,250 $ 2,600,374 Buildings......................................... 10,477,887 10,260,250 Shop equipment.................................... 23,872,341 22,979,146 Transportation, office & other equipment.......... 9,524,357 9,067,799 Construction-in-progress.......................... 621,210 405,061 ----------- ----------- $47,107,045 $45,312,630 Less - Accumulated depreciation................... 35,951,119 33,882,373 ----------- ----------- $11,155,926 $11,430,257 ----------- ----------- $53,184,971 $54,678,904 =========== =========== LIABILITIES AND SHAREHOLDERS' INVESTMENT - ---------------------------------------- Current Liabilities: Current maturities of long-term debt (Note 4)..... $ - $ 3,000,000 Accounts payable.................................. 2,282,897 1,960,823 Accrued expenses - Income taxes (Note 3)........................... 799,467 333,599 Payrolls........................................ 2,334,298 1,814,523 Vacations....................................... 1,633,914 1,574,353 Other........................................... 1,324,925 1,073,379 Advance billings.................................. 4,085,152 6,138,892 ----------- ----------- Total Current Liabilities................. $12,460,653 $15,895,569 Other Long-Term Liabilities (Notes 2)............... 1,188,399 1,218,591 Contingencies (Note 6).............................. Shareholders' Investment: Common stock, par value $1 per share--Authorized 20,000,000 shares--Issued 1,342,325 shares.... $ 1,342,325 $ 1,342,325 Preferred stock, par value $1 per share-- Authorized 1,000,000 shares--No shares issued. - - Paid-in surplus................................... 4,306,728 4,306,728 Retained earnings................................. 36,440,899 34,469,724 ----------- ----------- $40,089,952 $40,118,777 Less - Treasury stock, 174,304 shares, at cost.... 2,554,033 2,554,033 ----------- ----------- $39,535,919 $37,564,744 ----------- ----------- $53,184,971 $54,678,904 =========== ===========
The accompanying notes are an integral part of these balance sheets. 14 15 CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994 ----------- ----------- ----------- Net Sales.............................. $83,950,990 $78,375,636 $79,475,354 Cost of Sales (Note 1)................. 62,252,750 61,012,139 58,959,913 ----------- ----------- ----------- Gross profit......................... $21,698,240 $17,363,497 $20,515,441 Selling, General & Administrative Expenses (Note 1).................. 15,855,134 15,814,620 16,253,904 ----------- ----------- ----------- Operating income..................... $ 5,843,106 $ 1,548,877 $ 4,261,537 Other Income (Expense): Interest income...................... $ 710,324 $ 581,456 $ 468,816 Interest expense..................... (107,619) (129,608) (98,861) Other, net........................... 44,208 613,928 459,474 ----------- ----------- ----------- $ 646,913 $ 1,065,776 $ 829,429 ----------- ----------- ----------- Income before provision for income taxes............... $ 6,490,019 $ 2,614,653 $ 5,090,966 Provision for Income Taxes (Note 3).... 2,066,000 660,000 1,580,000 ----------- ----------- ----------- Net Income............................. $ 4,424,019 $ 1,954,653 $ 3,510,966 =========== =========== =========== Earnings per Common Share (Note 1)..... $ 3.79 $ 1.67 $ 3.01 ====== ====== ======
The accompanying notes are an integral part of these statements. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT For the Years Ended December 31, 1996, 1995 and 1994
Common Stock Treasury Stock -------------------- Paid-in Retained --------------------- Shares Amount Surplus Earnings Shares Amount --------- --------- --------- ---------- -------- ---------- $'s $'s $'s $'s Balance, 12-31-93 1,342,325 1,342,325 4,306,728 33,676,189 (174,304) (2,554,033) Add (Deduct): Net income - - - 3,510,966 - - Dividends, $2 per com- mon share - - - (2,336,042) - - --------- --------- --------- ---------- -------- ---------- Balance, 12-31-94 1,342,325 1,342,325 4,306,728 34,851,113 (174,304) (2,554,033) Add (Deduct): Net income - - - 1,954,653 - - Dividends, $2 per com- mon share - - - (2,336,042) - - --------- --------- --------- ---------- -------- ---------- Balance, 12-31-95 1,342,325 1,342,325 4,306,728 34,469,724 (174,304) (2,554,033) Add (Deduct): Net income - - - 4,424,019 - - Dividends, $2.10 per common share - - - (2,452,844) - - --------- --------- --------- ---------- -------- ---------- Balance, 12-31-96 1,342,325 1,342,325 4,306,728 36,440,899 (174,304) (2,554,033) ========= ========= ========= ========== ======== ==========
The accompanying notes are an integral part of these statements. 15 16 CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994 ----------- ----------- ----------- Cash Flows from Operating Activities: Net income............................ $ 4,424,019 $ 1,954,653 $ 3,510,966 Adjustments to reconcile net income to net cash provided by operating activities: Bad debt expense.................... 279,061 114,432 150,688 Depreciation and amortization....... 2,560,862 2,507,260 2,739,943 (Gain) on sales of equipment........ (7,603) (7,711) (62,354) Changes in assets and liabilities- (Increase) decrease in interest receivable........... (124,140) 83,180 58,629 (Increase) decrease in accounts and notes receivable.......... (2,573,970) 1,691,385 (1,525,390) Decrease (increase) in inventories 5,212,831 (1,818,373) (511,433) Decrease (increase) in prepayments 214,185 (24,667) (151,324) Decrease (increase) in other assets.................. 203,293 (150,295) (635,065) Increase (decrease) in accounts payable.............. 322,074 (325,454) (300,056) Increase (decrease) in accrued expenses.............. 1,296,750 (1,543,014) 981,893 (Decrease) increase in advance billings.............. (2,053,740) 2,890,583 (696,828) (Decrease) increase in other long-term liabilities......... (30,192) (212,059) 55,142 ----------- ----------- ----------- Net Cash Provided by Operating Activities........ $ 9,723,430 $ 5,159,920 $ 3,614,811 Cash Flows (Requirements) from Investing Activities: Proceeds from maturities of investments.................... $22,431,823 $20,235,000 $18,665,226 Purchases of investments.............. (24,850,000) (20,170,000) (19,686,944) Proceeds from sales of equipment...... 7,603 12,376 97,564 Additions to property, plant and equipment..................... (2,130,531) (2,284,352) (1,634,742) ----------- ----------- ----------- Net Cash (Required) by Investing Activities.......... $(4,541,105) $(2,206,976) $(2,558,896) Cash Flows (Requirements) from Financing Activities: Repayment of debt..................... $(3,000,000) $ - $ - Dividends paid........................ (2,452,844) (2,336,042) (2,336,042) ----------- ----------- ----------- Net Cash (Required) by Financing Activities........ $(5,452,844) $(2,336,042) $(2,336,042) ----------- ----------- ----------- Net (Decrease) Increase in Cash......... $ (270,519) $ 616,902 $(1,280,127) Cash and Cash Equivalents at Beginning of Year..................... 2,491,167 1,874,265 3,154,392 ----------- ----------- ----------- Cash and Cash Equivalents at End of Year........................... $ 2,220,648 $ 2,491,167 $ 1,874,265 =========== =========== ===========
The accompanying notes are an integral part of these statements. 16 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 (1) SUMMARY OF ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION -- Paul Mueller Company (Registrant) specializes in the manufacture of high-quality stainless steel tanks and industrial processing equipment. The Registrant serves the food, beverage, chemical, pharmaceutical and other process indus- tries and the dairy farm market. The financial statements include the accounts of the Registrant and its wholly owned subsidiary, Mueller International Sales Corporation, a foreign sales corpora- tion (FSC) (Companies). All significant intercompany accounts and transactions have been eliminated in consolidation. Effective January 1, 1997, all trucking operations, previously performed by the Registrant, and the related assets were transferred to Mueller Transportation, Inc., a wholly owned subsidiary. USE OF ESTIMATES -- The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those esti- mates. REVENUE RECOGNITION AND RETAINAGES -- Revenue from sales of manufac- tured products is recognized upon passage of title to the customer, which generally coincides with shipment. Contracts with some customers provide for a portion of the sales amount to be retained by the customer for a period of time after completion of the con- tract. Retainages included in accounts receivable were $175,900 at December 31, 1996, and $69,900 at December 31, 1995. INVENTORIES -- The Registrant's inventories are recorded at the lower of cost, last-in, first-out (LIFO), or market. Cost includes material, labor and manufacturing burden required in the production of the Registrant's products. Under the first-in, first-out (FIFO) method of accounting, which approximates current cost, Registrant inventories would have been $7,119,773, $8,978,736, and $6,957,191 higher than those reported at December 31, 1996, 1995 and 1994, respectively. A reduction in inventory quantities during 1996 resulted in liqui- dation of LIFO quantities recorded at lower costs prevailing in prior years as compared with the cost of 1996 purchases. The effect was to lower the cost of sales, which increased net income by $531,300, or $0.45 per share. Research and Development -- Research and development costs are charged to expense as incurred and were $653,200 in 1996, $597,600 in 1995, and $764,400 in 1994. DEPRECIATION POLICIES -- The Registrant provides for depreciation expense using principally the double-declining balance method for new items and straight-line method for used items. The economic useful lives for the more significant items within each property classification are as follows:
Years ------- Buildings................................... 40 Land improvements........................... 10 - 20 Shop equipment.............................. 5 - 10 Transportation, office and other equipment.. 3 - 10
Maintenance and repairs are charged to expense as incurred. The cost and accumulated depreciation of assets retired are removed from the accounts, and any resulting gains or losses are reflected in net income currently. 17 18 EARNINGS PER COMMON SHARE -- The net income per share of common stock has been computed on the basis of weighted average shares outstanding (1,168,021 shares in 1996, 1995 and 1994). INVESTMENTS -- The Registrant classifies its investments in tax- exempt bonds and tax-exempt variable rate preferred stock funds as available-for-sale and records them at market value. These securities are a part of the Registrant's asset/liability management program and may be sold in response to capital or liquidity needs. Investments in tax-exempt bonds generally have maturities from three to twelve months. Available-for-sale investments on the accompany- ing consolidated balance sheets at December 31, 1996 and 1995, include:
1996 1995 ----------- ----------- Tax-exempt bonds......................... $11,900,000 $ 5,981,823 Tax-exempt preferred stock funds......... 2,500,000 6,000,000 Accrued interest......................... 205,457 81,317 ----------- ----------- $14,605,457 $12,063,140 =========== ===========
Unrealized holding gains and losses were not material as of December 31, 1996 or 1995. There were no realized gains or losses during 1996, 1995 or 1994. STATEMENTS OF CASH FLOWS -- For purposes of the statements of cash flows, the Registrant considers all short-term highly liquid invest- ments in money market funds to be cash equivalents. Interest and income tax payments for each of the three years during the period ended December 31, 1996, were as follows:
1996 1995 1994 ----------- ----------- ----------- Interest payments........... $ 107,600 $ 129,300 $ 98,900 =========== =========== =========== Income tax payments......... $ 1,336,600 $ 1,275,200 $ 1,493,000 =========== =========== ===========
(2) RETIREMENT PLANS: The Registrant has a Profit Sharing and Retirement Savings Plan [401(k) plan] in which substantially all employees are eligible to participate. The plan provides for a match of employees' contribu- tions up to a specified limit. The plan also has a profit-sharing feature whereby an additional match is made if the Registrant's net income reaches predetermined levels established annually by the Board of Directors. The funds of the plan are deposited with an insurance company and are invested at the employee's option in one or more investment funds. The Registrant's contributions to the plan were $587,500 for 1996, $289,800 for 1995, and $404,500 for 1994. The Registrant has pension plans covering substantially all em- ployees. Benefits under the plans are based either on final average pay or a flat benefit formula. Total pension expense under the plans was $364,200 in 1996, $98,700 in 1995, and $7,900 in 1994. Management's policy is to fund pension expense that is currently deductible for tax purposes. 18 19 The following table sets forth the funded status of the plans at December 31, 1996 and 1995:
Funded Status --------------------------------------------------------------------------- December 31 ------------------------ 1996 1995 ----------- ----------- Actuarial present value of accumulated benefit obligation, including vested benefits of $20,155,800 and $18,176,800 at December 31, 1996 and 1995, respectively..................... $22,373,300 $20,215,400 =========== =========== Plans' assets at fair value, primarily listed stocks and insurance company investment funds... $28,502,600 $26,115,400 Actuarial present value of projected benefit obligation for services rendered to date........ 25,145,400 22,819,500 ----------- ----------- Assets in excess of projected benefit obligation.. $ 3,357,200 $ 3,295,900 Unrecognized net (gain)........................... (3,250,200) (2,123,600) Unrecognized net (asset).......................... (1,511,400) (1,862,000) Unrecognized prior service cost................... 2,309,100 1,517,300 ----------- ----------- Prepaid pension asset............................. $ 904,700 $ 827,600 =========== ===========
Prepaid pension assets of $2,452,900 and $2,326,000 at December 31, 1996 and 1995, respectively, are included in other assets on the accompanying consolidated balance sheets. Pension liabilities of $1,548,200 and $1,498,400 at December 31, 1996 and 1995, respec- tively, are included in current and other long-term liabilities on the accompanying consolidated balance sheets. Net pension expense for the Registrant's plans includes the follow- ing components:
1996 1995 1994 ----------- ----------- ----------- Service cost - benefit earned during year......... $ 897,200 $ 662,700 $ 794,900 Interest cost on projected benefit obligation......... 1,692,400 1,493,700 1,316,700 Actual return on assets...... (3,249,700) (4,654,500) (340,100) Amortization of unrecognized net assets................. (206,600) (231,200) (299,000) Deferred asset gain (loss)... 1,230,900 2,828,000 (1,464,600) ----------- ----------- ----------- Net pension expense.......... $ 364,200 $ 98,700 $ 7,900 =========== =========== ===========
The weighted average expected long-term rates of return on plan assets used in the determination of annual pension expense were 8.5% for 1996, 1995 and 1994. The weighted average assumed discount rates used to measure the projected benefit obligation were 7.5% at December 31, 1996, and 7.25% at December 31, 1995. The assumed rate of compensation increase used to measure the projected benefit obli- gation was 4.5% at December 31, 1996 and 1995, for the applicable plan. (3) INCOME TAXES: The provision for taxes on income from operations includes:
1996 1995 1994 ---------- ---------- ---------- Current tax expense............. $1,823,800 $ 780,200 $1,667,900 Deferred, net................... 242,200 (120,200) (87,900) ---------- ---------- ---------- $2,066,000 $ 660,000 $1,580,000 ========== ========== ==========
The deferred tax consequences of temporary differences in reporting items for financial statement and income tax purposes are recog- nized, if appropriate. Net deferred tax assets of $693,400 and 19 20 $935,600 at December 31, 1996 and 1995, respectively, are included in other assets on the accompanying consolidated balance sheets. The income tax effect of temporary differences comprising the de- ferred tax assets and deferred tax liabilities in the accompanying consolidated balance sheets is a result of the following:
1996 1995 ---------- ---------- Deferred Tax Assets: Insurance............................... $ 107,700 $ 155,000 Vacation................................ 547,900 532,600 Warranty................................ 142,400 83,500 Doubtful accounts....................... 258,300 196,700 Healthcare benefits..................... 185,000 156,000 AMT carry-forward credit................ - 384,500 Other................................... 226,000 214,700 ---------- ---------- $1,467,300 $1,723,000 ========== ========== Deferred Tax Liabilities: Depreciation............................ $ 219,500 $ 291,000 Pensions................................ 527,600 469,500 Other................................... 26,800 26,900 ---------- ---------- $ 773,900 $ 787,400 ========== ==========
A reconciliation between the statutory federal income tax rate (34%) and the effective rate of income tax expense for each of the three years during the period ended December 31, 1996, follows:
1996 1995 1994 ---------------- ---------------- ---------------- Amount % Amount % Amount % ---------- ---- ---------- ---- ---------- ---- Statutory federal income tax............ $2,206,600 34.0 $ 889,000 34.0 $1,730,900 34.0 Increase (decrease) in taxes resulting from: State tax, net of federal benefit..... 67,600 1.0 17,700 0.7 51,600 1.0 Tax-exempt interest.. (165,700) (2.6) (147,800) (5.7) (117,900) (2.3) Tax credits.......... (14,400) (0.2) (23,400) (0.9) (40,100) (0.8) FSC exempt income.... (138,500) (2.1) (105,400) (4.0) (128,200) (2.5) Other, net......... 110,400 1.7 29,900 1.1 83,700 1.6 ---------- ---- ---------- ---- ---------- ---- $2,066,000 31.8 $ 660,000 25.2 $1,580,000 31.0 ========== ==== ========== ==== ========== ====
(4) DEBT: The $3,000,000 Floating Rate Weekly Demand Industrial Development Revenue Bond issue due December 1, 1996, was repaid as required. (5) OPERATIONS BY INDUSTRY AND EXPORT SALES: A description of the various industries in which the Companies operate and a summary of operations by industry are included on pages 4 and 5 of this annual report. The information included therein is incorporated as an integral part of these consolidated financial statements. The Registrant's export sales were $16,263,700 in 1996, $13,385,800 in 1995, and $15,105,900 in 1994. Export sales during 1996, 1995 and 1994, respectively, were made to the following geographic areas: North America - $5,581,400, $4,275,800, and $5,940,800; Asia and the Far East - $6,648,300, 20 21 $5,395,200, and $5,176,300; and other areas - $4,034,000, $3,714,800, and $3,988,800. During 1996, 1995 and 1994, sales to any one customer were not in excess of 10% of consolidated sales. (6) CONTINGENCIES: The Registrant employs nearly 900 people, of which approximately 400 are represented by the Sheet Metal Workers Union. The Inter- national Union called a strike beginning July 25, 1995, and currently 25 employees are participating. The Registrant is a defendant in two lawsuits pending at December 31, 1996. In the opinion of management, after consultation with legal counsel, the outcome of these lawsuits will not have a material adverse effect on the Registrant's consolidated financial statements. FINANCIAL HIGHLIGHTS BY QUARTER (UNAUDITED) (In Thousands, Except Per Share Data)
Quarter Ended --------------------------------------------------------------- March 31 June 30 September 30 December 31 --------------- --------------- --------------- --------------- 1996 1995 1996 1995 1996 1995 1996 1995 ------- ------- ------- ------- ------- ------- ------- ------- Net sales...... $18,690 $15,764 $21,526 $22,216 $21,187 $21,186 $22,548 $19,210 Gross profit... $ 4,065 $ 4,578 $ 5,026 $ 5,243 $ 5,426 $ 4,304 $ 7,181 $ 3,238 Net income..... $ 500 $ 466 $ 971 $ 1,027 $ 1,171 $ 419 $ 1,782 $ 43 Earnings per common share.. $0.43 $0.40 $0.83 $0.88 $1.00 $0.36 $1.53 $0.03 Because the inventory determination under the LIFO method can only be made at the end of each fiscal year based on the inventory levels and costs at that point, interim LIFO determinations must be based on management's estimate of expected year-end inventory levels and costs. Net income for the first quarter of 1996 was favorably affected by an insurance refund of $197,000 after tax, or $0.17 per share. Net income for the fourth quarter of 1996 was favorably affected by a LIFO adjustment. The adjustment increased net income by $1,321,300, or $1.13 per share. Net income for the fourth quarter of 1995 was adversely affected by a LIFO adjustment. The adjustment decreased net income by $234,400, or $0.20 per share.
21 22 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Paul Mueller Company: We have audited the accompanying consolidated balance sheets of PAUL MUELLER COMPANY (a Missouri corporation) AND SUBSIDIARY as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' investment and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Registrant's management. Our responsi- bility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and dis- closures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by manage- ment, as well as evaluating the overall financial statement presenta- tion. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Paul Mueller Company and Subsidiary as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II is the respon- sibility of the Registrant's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been sub- jected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP Kansas City, Missouri, February 13, 1997 ITEM 9. - DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no disagreements on accounting principles or finan- cial statement disclosure with the independent public accountants. 22 23 PART III ITEM 10. - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information as to Directors of the Registrant required by Item 10 is included on pages 4 and 5 of the Registrant's Proxy Statement for the annual meeting of shareholders to be held May 5, 1997, and is incorporated herein by reference. The information concerning executive officers is set forth on page 7 of Part I hereof. ITEM 11. - MANAGEMENT REMUNERATION AND TRANSACTIONS Information as to management remuneration and transactions required by Item 11 is included on pages 5 and 6 of the Registrant's Proxy Statement for the annual meeting of shareholders to be held May 5, 1997, and is incorporated herein by reference. ITEM 12. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information as to security ownership of certain beneficial owners and management required by Item 12 is included on pages 3 and 4 of the Registrant's Proxy Statement for the annual meeting of share- holders to be held May 5, 1997, and is incorporated herein by reference. ITEM 13. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information as to certain relationships and related transactions required by Item 13 is included on page 5 of the Registrant's Proxy Statement for the annual meeting of shareholders to be held May 5, 1997, and is incorporated herein by reference. 23 24 PART IV ITEM 14. - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K A. The financial statements and schedules, required under Part II- Item 8, are as follows: 1. The consolidated financial statements of the Registrant and its subsidiary, for the year ended December 31, 1996: - Consolidated Balance Sheets..............December 31, 1996 and 1995 - Consolidated Statements of Income........For years ended December 31, 1996, 1995 and 1994 - Consolidated Statements of Shareholders' Investment.................For years ended December 31, 1996, 1995 and 1994 - Consolidated Statements of Cash Flows....For years ended December 31, 1996, 1995 and 1994 - Notes to Consolidated Financial Statements...............................December 31, 1996, 1995 and 1994 - Financial Highlights by Quarter..........For years ended December 31, 1996 and 1995 - Report of Independent Public Accountants 2. Additional financial statement schedules included herein: - Schedule II - Valuation and Qualifying Accounts....Page 26 - All other schedules are not submitted because they are not applicable or not required, or because the required information is included in the financial statements or notes thereto. 3. The exhibits set forth in the Exhibit Index found on pages 27 through 29. B. No reports on Form 8-K were filed by the Registrant during the last quarter of 1996. 24 25 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. PAUL MUELLER COMPANY DATE March 14, 1997 BY /S/ DANIEL C. MANNA -------------- ------------------------------------- Daniel C. Manna President (Chief Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. DATE March 14, 1997 BY /S/ DANIEL C. MANNA -------------- ------------------------------------- Daniel C. Manna President (Chief Executive Officer) DATE March 14, 1997 BY /S/ PAUL MUELLER -------------- ------------------------------------- Paul Mueller Chairman of the Board and Director DATE March 14, 1997 BY /S/ DONALD E. GOLIK -------------- ------------------------------------- Donald E. Golik Senior Vice President, Chief Financial Officer, Secretary and Director DATE March 14, 1997 BY /S/ ROBERT A. BECKER -------------- ------------------------------------- Robert A. Becker Director DATE March 14, 1997 BY /S/ JACK S. CURTIS -------------- ------------------------------------- Jack S. Curtis Director DATE March 14, 1997 BY /S/ WILLIAM B. JOHNSON -------------- ------------------------------------- William B. Johnson Director DATE March 14, 1997 BY /S/ CHARLES M. RUPRECHT -------------- ------------------------------------- Charles M. Ruprecht Director 25 26 SCHEDULE II PAUL MUELLER COMPANY AND SUBSIDIARY VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS ENDED DECEMBER 31, 1996
Balance at Charged to Charged Balance Beginning Costs and to Other at End of of Period Expenses Accounts Deductions Period -------- -------- -------- -------- -------- RESERVE FOR DOUBTFUL ACCOUNTS 12-31-96..... $531,601 $316,990 $ - $150,555 $698,036 12-31-95..... $679,018 $ 20,465 $ - $167,882 $531,601 12-31-94..... $595,925 $142,991 $ - $ 59,898 $679,018 Accounts written off during the year.
26 27 EXHIBIT INDEX
Number Description Page No. - ------ ----------------------------------------------------------- -------- (3) ARTICLES OF INCORPORATION AND BY-LAWS - The Restated Arti- cles of Incorporation of the Registrant filed with the Secretary of State on May 20, 1991, and the Restated By-Laws of the Registrant dated May 6, 1991, attached as Exhibit (3), page 19, of the Registrant's Form 10-K for the year ended December 31, 1991, are incorporated herein by reference. (4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS - (a) A specimen stock certificate (unlimited denomination) representing shares of the common stock, par value $1 per share, attached as Exhibit (4), page 69, of the Registrant's Form 10-K for the year ended December 31, 1981, is incorporated herein by reference. (b) Shareholder Rights Plan, dated January 29, 1991, between Paul Mueller Company and United Missouri Bank of Kansas City, N.A., is incorporated by reference to Form 8-A under the Securities Exchange Act of 1934, dated January 31, 1991, and filed with the Securities and Exchange Commission on February 1, 1991. (10) MATERIAL CONTRACTS - (a) Exclusive License Agreement between Registrant and Superstill Technology, Inc. dated January 9, 1992, Addendum No. 1 dated January 28, 1992, and Addendum No. 2 dated June 15, 1992 (portions of this Agreement and Addendums were previously omitted as confiden- tial information and were filed separately with the Securities and Exchange Commission).................... 30 (b) The following Material Contracts, attached as Exhibit (10) of the Registrant's Form 10-Q for the quarter ended September 30, 1995, are incorporated herein by reference: CAPTION Description Page No. --------------------------------------------- -------- 1. Paul Mueller Company Tax Savings Plan and Trust, effective January 1, 1996, and adopted by the Board of Directors on August 2, 1995............................ 11 2. Paul Mueller Company Dependent Care Assis- tant Plan, effective January 1, 1996, and adopted by the Board of Directors on August 2, 1995............................ 22 (c) Paul Mueller Company Noncontract Employees Retirement Plan, as amended and restated effective January 1, 1989, and adopted by the Board of Directors of the Registrant on May 7, 1990, was attached as Exhibit (10), page 179, of the Registrant's Form 10-K for the year ended December 31, 1990, and is incorporated herein by reference. Amendment Number One, effective October 29, 27 28 Number Description Page No. - ------ ----------------------------------------------------------- -------- 1991, was adopted by the Board of Directors on October 29, 1991, and Amendment Number Two, effective June 1, 1992, was adopted by the Board of Directors on May 4, 1992, and both were attached as Exhibit (10), page 18, of the Registrant's Form 10-K for the year ended December 31, 1992, and both are incorporated herein by reference. Amendment Number Three was adopted by the Board of Directors on July 26, 1994, and Amendment Number Four, effective January 1, 1994, was adopted by unanimous consent of the Executive Committee of the Board of Directors on December 5, 1994, and both were attached as Exhibit (10), page 59, of the Registrant's Form 10-K for the year ended December 31, 1994, and both are incorporated herein by reference. Amendment Number Five, adopted by the Board of Directors on October 31, 1995, was attached as Exhibit (10), page 26, of the Registrant's Form 10-Q for the quarter ended September 30, 1995, and is incorporated herein by reference. Amendment Number Six, effective January 1, 1996, and executed on May 6, 1996, was attached as Exhibit (10), page 14, of the Registrant's Form 10-Q for the quarter ended March 31, 1996, and is incorporated herein by reference. (d) Paul Mueller Company Employee Benefit Plan, amended and restated effective March 22, 1995, and adopted by the Trustees on April 14, 1995, was attached as Exhibit (10), page 10, of the Registrant's Form 10-Q for the quarter ended March 31, 1995, and is incorporated herein by reference. The First Amendment, adopted by the Trustees on October 12, 1995, was attached as Exhibit (10), page 25, of the Registrant's Form 10-Q for the quarter ended September 30, 1995, and is incorporated herein by reference. The Second Amendment, effective April 1, 1996, and executed on May 15, 1996, was attached as Exhibit (10), page 11, of the Registrant's Form 10-Q for the quarter ended June 30, 1996, and is incorporated herein by reference. (e) Paul Mueller Company Profit Sharing and Retirement Savings Plan, restated effective January 1, 1993, and adopted by the Trustees on June 22, 1994, was attached as Exhibit (10), page 15, of the Registrant's Form 10-K for the year ended December 31, 1994. (f) Paul Mueller Company Contract Employees Retirement Plan, restated effective January 1, 1992, and adopted November 17, 1992, was attached as Exhibit (10), page 22, of the Registrant's Form 10-K for the year ended December 31, 1992, and is incorporated herein by reference. Amendment Number One, effective September 19, 1994, was executed October 20, 1994, and Amendment Number Two, effective January 1, 1993, was executed December 2, 1994, and both were attached as Exhibit (10), page 67, of the Registrant's Form 10-K for the year ended December 31, 1994, and are incorporated herein by reference. Amendment Number Three, executed April 10, 1996, was attached as Exhibit (10), page 10, of the Registrant's Form 10-Q for the quarter ended March 31, 1996, and is incorporated herein by reference. Amendment Number Four, executed July 26, 1996, was attached as Exhibit (10), page 11, of the Registrant's Form 10-Q for the quarter ended September 30, 1996, and is incorporated herein by reference. (g) Sales and Supply Agreement between Registrant and GEA Ahlborn GmbH dated October 1, 1993, attached as Exhibit (10), page 103, of the Registrant's Form 10-K 28 29 Number Description Page No. - ------ ----------------------------------------------------------- -------- for the year ended December 31, 1993, is incorporated herein by reference (portions of this Agreement have been omitted as confidential information and have been filed separately with the Securities and Exchange Commission). (h) Agreement between Registrant and Sheet Metal Workers' International Association Local No. 208 dated June 12, 1991, attached as Exhibit (10), page 59, of the Regis- trant's Form 10-K for the year ended December 31, 1991, is incorporated herein by reference. (i) Agreement and Declaration of Trust for the Paul Mueller Company Employee Benefit Plan dated May 2, 1988, at- tached as Exhibit (10), page 107, of the Registrant's Form 10-K for the year ended December 31, 1988, is incorporated herein by reference. (j) Paul Mueller Company Salaried and Clerical Employees Retirement Trust, as amended August 11, 1981, was attached as Exhibit (10), page 318, of the Registrant's Form 10-K for the year ended December 31, 1981, and is incorporated herein by reference. The First Amendment to the trust, adopted by the Board of Directors on May 1, 1983, was attached as Exhibit (10), page 160, of the Registrant's Form 10-K for the year ended December 31, 1983, and is incorporated herein by reference. (k) Executive Compensation Plans and Arrangements: i. Paul Mueller Company Supplemental Executive Retire- ment Plan, effective January 1, 1996, adopted by the Board of Directors on February 8, 1996, was attached as Exhibit (10), page 30, of the Regis- trant's Form 10-K for the year ended December 31, 1995, and is incorporated herein by reference. ii. Termination Agreement with Philip K. Daniels, Vice President - Sales and Marketing, dated November 11, 1995, was attached as Exhibit (10), page 34, of the Registrant's Form 10-K for the year ended December 31, 1995, and is incorporated herein by reference. iii. Severance Agreement with Philip K. Daniels, Vice President - Sales and Marketing, attached as Exhibit (10), page 13, of the Registrant's Form 10-Q for the quarter ended June 30, 1994, is incorporated herein by reference. iv. Agreement Not to Compete for Philip K. Daniels, Vice President - Sales and Marketing, attached as Exhibit (10), page 14, of the Registrant's Form 10-Q for the quarter ended June 30, 1994, is incorporated herein by reference. v. Executive Short-Term Incentive Plan, adopted January 31, 1995, attached as Exhibit (10), page 71, of the Registrant's Form 10-K for the year ended December 31, 1994, is incorporated herein by reference. (21) SUBSIDIARIES OF THE REGISTRANT............................. 58 (27) FINANCIAL DATA SCHEDULE AS OF DECEMBER 31, 1995............ 59
29 EX-10 2 EXHIBIT 10(A) FOR 1996 FORM 10-K 1 EXCLUSIVE LICENSE AGREEMENT --------------------------- This license Agreement is made as of January 9, 1996, by and be- tween SUPERSTILL TECHNOLOGY INC., a California corporation (hereinafter referred to as "Superstill"), and PAUL MUELLER COMPANY, INC., a Missouri Corporation (hereinafter referred to as "PMC"). RECITALS: --------- WHEREAS, Superstill designs, develops, manufactures and markets pro- prietary energy-efficient commercial distillation equipment including certain vapor compression water processing units and accessories; WHEREAS, Superstill anticipates that in the future it may develop new products and/or Improvements to current products for the Field; WHEREAS, PMC desires to be licensed to make, have made, use, and sell Licensed Products in the Field, all as defined below, to the extent and on the conditions hereinafter set forth; and WHEREAS, PMC has significant design, manufacturing, and marketing experience and expertise in related markets which make it uniquely qualified to successfully commercialize Superstill's vapor compression distillation and product concentration equipment; NOW, THEREFORE, in consideration of the premises and the mutual covenants, promises, and undertakings hereinafter set forth, the parties hereto agree as follows: 1. DEFINITIONS. As used herein, the following terms are defined as follows: 1.1 "Agreement" shall mean this agreement as amended from time to time, as well as any exhibits, attachments, schedules, supple- ments or addenda to this agreement or made part hereof. 1.2 "Base Patent" shall mean Sears U.S. Patent 4,671,856 which discloses and claims the basic method utilized in Superstill's vapor compression distillation and product concentration equipment. 1.3 "Field" shall mean, collectively, all of the following Subfields: Subfield No. 1 to include water bottling, beverage, retail water stores, and supermarkets; Subfield No. 2 to include purification and re-use of water for industrial process, solvent purification, food and dairy purification, water purification for commercial buildings, and water purification for printed circuit board and semiconductor; Subfield No. 3 to include pharmaceutical, laboratory, medical, kidney dialysis and water for injection applications; Subfield No. 4 to include milk concentration. 1.3.1 The Field shall not include desalinization, muni- cipal potable water, waste water treatment, power plants, agricultural run-off water clean up, alcohol distillation, or residential appli- cations. Clean up of water for discharge or sale to municipal water systems is included in the definition of waste water treatment. 1.4 "Improvements" shall mean any development or enhancement, whether patentable or not, relating to the Technology in the Field which is owned, controlled, developed or otherwise acquired, either now or 30 2 subsequent hereto, by Superstill, and PMC, either individually or col- lectively. 1.5 "License Year" shall mean the calendar year commencing January 1 and ending December 31. 1.6 "Licensed Area" shall mean the world, except for Subfield No. 4 which shall include only the United States and Canada. 1.7 "Licensed Products" shall mean all vapor compression, distillation or product concentration equipment utilizing plate-type heat exchangers, operating at 1-2 psi differential pressure at less than 50 watts per gallon energy usage. 1.8 "Net Profit" shall mean PMC's Gross Sales revenues from the sale of Licensed Products less only the following: Sales Deduc- tions, Cost of Goods Sold, Selling Expenses, General and Administrative Expenses, Interest Expense, Depreciation Expense, and Amortization Expense. 1.8.1 Gross Sales shall mean the gross sales invoice prices of Licensed Products which are billed in the usual course of business to an end-user customer of PMC, a PMC subsidiary, or to a distributor of PMC and shall not include (a) ordinary and customary trade discounts; (b) sales, excise, value-added, consumption or similar taxes applicable to the sale of Licensed Products, paid or accrued by PMC; (c) duties, customs and other compulsory government levies or charges paid, deducted, or accrued; (d) interest on deferred payments; and (e) any other amounts not directly constituting the purchase price of the Licensed Products. 1.8.2 Sales Deductions shall include (a) freight ab- sorbed, which is transportation costs paid or accrued by PMC; (b) sales returns, allowances and credits; and (c) sales concessions. 1.8.3 Cost of Goods Sold shall include (a) all direct labor costs and direct labor variances from standard incurred in the manufacture of the Licensed Products; (b) all direct material costs and direct material variances from standard incurred in the manufacture of the Licensed Products; and (c) manufacturing burden at a rate of 120% for all direct labor costs. 1.8.4 Selling Expenses shall include (a) all direct selling expenses to include salaries, wages and fringe benefits; commis- sions for employees and nonemployees; all direct costs for advertising (e.g., sales literature, trade shows and marketing literature); sales meetings; training meetings; travel expense; and all other direct costs incurred in marketing the Licensed Products; (b) all warranty expenses related to the Licensed Products; (c) any payments made in satisfaction of any product liability claims not covered by insurance; and (d) an allocation of PMC's indirect selling expenses at 1.5% of Net Sales. 1.8.5 General and Administrative Expenses will be charged at 5% of Net Sales. 1.8.6 Interest Expense for the purchase of dedicated tooling and capital equipment for Licensed Products. 31 3 1.8.7 Depreciation Expense shall mean depreciation on the equipment acquired and used to manufacture the Licensed Products. If such tooling or equipment is used for other purposes, depreciation shall be pro rated accordingly. 1.8.8 Amortization Expense shall mean amortization of the $500,000 prepaid license fee over a period of ten years on a straight-line basis. 1.9 "Net Sales" shall mean Gross Sales less Sales Deductions. 1.10 "OEM Selling Price" shall be calculated at manufacturing cost divided by .9. 1.10.1 Manufacturing costs shall include: (a) All direct labor costs and direct labor variances from standard incurred in the manufacture of the Licensed Product or component thereof; (b) All direct material costs and direct material variances from standard incurred in the manufacture of the Licensed Product or component thereof; (c) Manufacturing burden at a rate of 120% of all direct labor costs; and (d) S, G, and A at 12% of the sum of the pre- ceding paragraphs (a),(b), and (c). 1.11 "Patents" shall mean all patents identified in Attach- ment A hereto, all patents issuing from Patent Applications, and all re-issues, re-examinations, substitutes, replacements, and extensions thereof. 1.12 "Patent Applications" shall mean all patent applica- tions identified in Attachment A hereto, any divisionals, continuations, continuations-in-part, substitutes, corresponding foreign national applications, PCT applications, and any other applications based at least in part thereon, and any applications for patent, inventor's certificates, or other intellectual property right filed to date or at any time in the future in the U.S., or with any regional, inter- national, or foreign governmental agency, on any Improvement. 1.13 "Patent Rights" shall mean all Patents and Patent Applications 1.14 "Technology" shall mean both Patent Rights and Trade Secrets. 1.15 "Trade Secrets" shall mean all information, inventions, product designs, conceptions, processes and any other data owned, con- trolled, developed or otherwise acquired by Superstill which relates in any way to vapor compression distillation and product concentration equipment in the Field and the design, manufacture or use of devices incorporating such information, including all Improvements and enhance- ments thereto. 2. WARRANTIES OF SUPERSTILL. Superstill warrants, represents and covenants that: 2.1 Superstill is the sole and exclusive owner of all right, title and interest in the Patents and Patent Applications set forth in Attachment A hereto and, to the best of its knowledge, the Technology, 32 4 and that they have full right and authority to grant unrestricted rights and licenses free and clear of all encumbrances with respect to the Technology, in the Field, except for the following: 2.1.1 A Conditional Assignment entered into on July 29, 1991, between Superstill and PMC. 2.1.2 A Distributor Agreement between Superstill and COBE Laboratories, Inc. dated March of 1988. 2.1.3 A License Agreement between Superstill and Liberty Land and Cattle, Inc. dated March 19, 1991, as subsequently amended. 2.1.4 Exploitation of Technology Agreement between Superstill and Superstill Developments (NZ) Ltd. dated May 29, 1989. 2.2 Superstill shall diligently prosecute the Patent Applica- tions at their own cost and expense provided, however, that Superstill does not warrant, assure or guarantee that the Patent Applications will be successful or that any patent will issue thereunder. 2.3 Superstill has no knowledge of any pending or threatened activities, grants of rights, claims, or litigation which would encum- ber, limit, or in any way detract from or interfere with their ownership or enjoyment of the use of the Technology, or with PMC's assumption and exercise of the rights granted herein. Superstill has no knowledge of any prior art, prior public use, prior offer for sale, or any other set of facts which would form the basis for a claim of invalidity of any Patent or Patent Application. Superstill has no knowledge of any unau- thorized making, using, or selling of any products, devices, assemblies, or other equipment of any kind which is or would be subject to a claim of infringement or breach of rights under any of the Technology. 2.4 The Technology, including all of the Patent Rights, is duly issued, subsisting, or pending, as the case may be, and that Super- still has made its best effort to have taken all action desired or required to be taken to maintain said Patent Rights, including specifi- cally without limiting the generality of the foregoing, the payment of all maintenance fees, examination fees, annuities, and other govern- mental fees. 2.5 Superstill has the corporate power and authority to enter into this license granting exclusive rights to PMC herein. 2.6 Superstill has obtained all rights from Stephan B. Sears, its President (hereinafter "Sears"), to the Technology which was developed, conceived, invented, or otherwise created by Sears. Sears presently has no rights to any intellectual property which could be considered part of or related to the Technology. 2.7 Sears is the President of Superstill and is subject to an agreement, valid and subsisting, under which Superstill obtains all of the right, title and interest in and to any intellectual property rights relating to any Improvements. 2.8 Superstill has performed all reasonable acts necessary to fully comply with all requirements of the U.S. patent laws and regula- tions in connection with the filing of all Patent Applications and Patents, prosecuting said Patent Applications and Patents, and obtaining 33 5 the issuance of said Patents including specifically, without limiting the generality of the foregoing, complying with the duty of candor and good faith in disclosing all material prior art to the Patent Office in a timely manner. 2.9 Superstill has the full right and authority to grant rights and licenses outside the Field. 3. WARRANTIES OF PMC. PMC warrants and covenants that: 3.1 It has the right and authority to enter into this Agreement. 3.2 It shall identify all Licensed Products as being manu- factured and sold under license from Superstill. It shall not use the name of Superstill, its trademarks, or its trade names in connection with the manufacture or sale of the Licensed Products without obtaining prior written consent from Superstill, which consent shall not be with- held unreasonably. 3.3 It shall use its best efforts, consistent with its sound business judgment, to introduce and promote the sale of the Licensed Products in the Field, and shall maintain and utilize such personnel, organization and facilities as will be competent and adequate to enable PMC, in its sound business judgment, to satisfy its obligations under this Agreement. 3.4 PMC shall use the Technology only for the purposes set forth in this Agreement to the extent such Technology is not otherwise in the public domain. PMC shall act in good faith to promote a long- term relationship and comply with the spirit of this Agreement in performing its duties and obligations hereunder. 4. LICENSE GRANT. 4.1 Superstill hereby grants to PMC an exclusive license, including the right to grant sublicenses in accordance with Section 18 hereof, under the Technology (comprising Patent Rights and Trade Secrets) to make, have made for it, use, and sell (i) Licensed Products; and (ii) sub-assemblies thereof, parts thereof, and any and all inci- dental and ancillary equipment related thereto for use in Licenses Products or Superstill-manufactured products; said exclusive license to extend throughout the Licensed Area and in the Field. 5. LICENSE FEE AND ROYALTIES. 5.1 In consideration for the rights granted hereunder, inclu- ding full and complete consideration for a fully paid-up, royalty-free, license under the Trade Secrets, PMC shall pay Superstill a license fee in the amount of $500,000. In full and complete satisfaction of said license fee, PMC shall execute such documents as Superstill shall rea- sonably require in order to evidence complete satisfaction and discharge of the $500,000 loan made by PMC to Superstill in accordance with a Loan and Security Agreement and Note dated July 29, 1991. 5.2 In further consideration for the license granted herein solely under PATENT RIGHTS, PMC hereby agrees to pay to Superstill a royalty in the amounts set forth below based upon Net Profits, said Net Profits to be determined on an annual basis at the end of the first portion of a calendar year and each succeeding calendar year hereunder: 34 6 5.2.1
Superstill Share of Net Profits Net Profits ------------------------------- Percentage With Monopoly Without Monopoly ---------- ------------- ---------------- 0% 25% 12 1/2% 10% 25% 12 1/2% 20% 25% 20% 30% 37 1/2% 35% 40% 50% 50% 50% 55% 55% 60% 60% 60% 70% 60% 60%
PMC Net Profit Percentage to be calculated and rounded to one decimal place. Superstill share of profit shall be determined by a linear interpolation of the two adjacent schedule entries above rounded to one decimal place. 5.2.2 Notwithstanding the foregoing Sections 5.2, 5.2.1, should Net Profits exceed $3,000,000, for any full calendar year of the initial 5-year term during which PMC enjoys an exclusive license hereunder, then the royalty due hereunder shall be as determined in accordance with subsection 5.2.1 for the first $3,000,000, plus 65% of all Net Profits in excess of $3,000,000. 5.3 In the event that this Agreement becomes effective on or before January 31, 1992, then 1992 shall be considered as the first full calendar year for all purposes in this Agreement. 6. REPORTS, RECORDS, AND PAYMENT. 6.1 Within one month after the last day of each calendar quarter during the term of this Agreement, or within two months of the end of each last quarter, commencing with the first calendar quarter in which sales of a Licensed Product are made by PMC, PMC shall furnish Superstill with payment and a written report: 6.1.1 Each written report shall include, as to all Licensed Products manufactured and sold by PMC during the preceding calendar quarter, the number of units produced, the number of units sold, the Net Profit thereof, the amounts of each category of deduction therefrom pursuant to Section 1.8 hereof, and the amount of royalty due thereon. 6.1.2 PMC shall include with each royalty report a check in the amount of the royalty due on a year-to-date basis, less any payments made for that calendar year, except that a report for each last calendar quarter shall include a check in the amount of the balance of royalties remaining due for the entire preceding year. 6.1.3 Any loss in Net Profits for any quarter may be carried forward or backward and used to offset Net Profits, and royal- ties therefor, for any other quarter or quarters in the same or any subsequent calendar year. Similarly, any overpayment in royalties for any quarter shall be carried forward and used to offset royalties other- wise due and owing for any other quarter or quarters in the same or any subsequent calendar year. Any offsets for losses and royalty overpay- ments shall be cumulative and shall both be satisfied prior to the payment of any royalties. 35 7 6.2 PMC shall keep full, true and accurate books of account and records showing the production and sales of all Licensed Products. Such books and records shall be made available to an independent Certi- fied Public Accountant of national standing designated by Superstill at reasonable intervals, during regular business hours, for the purpose of determining PMC's compliance with its reporting and payment obligations hereunder; provided that any such audit shall be performed no later than twelve (12) months after the end of the calendar year to be audited. The cost of services supplied by such Certified Public Accountant shall be borne by Superstill unless it shall be established by Superstill that as a result of a material error in such a report PMC has failed to pay Superstill at least 95% of the amount of earned royalties due and owing under this Agreement and the unpaid royalties aggregate at least $10,000 for each quarter audited, in which event the cost of such services shall be borne by PMC. 6.3 Such books of account and records shall be kept at one of PMC's regular and established places of business and shall be retained by it for at least three years. 7. IMPROVEMENTS. 7.1 Rights to any and all Improvements, including any patent- able inventions and patents arising therefrom, relating to or utilizing the Technology and engineering and manufacturing practices in asso- ciation with Licensed Products, which are invented, developed, or discovered by PMC or any of its employees or consultants, shall be the property of PMC, provided however, that PMC shall offer to Superstill a non-exclusive, worldwide license to make, have made, use, and sell products outside the Field incorporating such PMC Improvements. In such event, and prior to any filing with a Patent Office, PMC shall make prompt disclosure of the invention, development, or discovery of such improvement to Superstill in accordance with Section 7.6. The parties shall negotiate in good faith to determine the terms of any such license. 7.2 Any and all Improvements relating to or utilizing the Technology, including any patentable inventions and patents arising therefrom, which are jointly invented, developed or discovered by PMC and Superstill or their respective employees or consultants, during the term of this Agreement shall be jointly owned by PMC and Superstill, without any obligation to account to the other for any proceeds there- from, provided however, that: (a) PMC shall not make, have made, use and sell pro- ducts incorporating such Improvements outside the Field, and (b) Superstill shall not make, have made, use and sell products incorporating such Improvements within the Field. 7.3 In the event that Superstill shall file a Patent Application in any country, it shall also promptly file and diligently prosecute such Patent Application in the United States, Canada, Japan and the European Economic Community, all at Superstill's sole expense. 7.4 PMC may, at its own expense, apply for patents in any country on any Licensed Product or Improvement which PMC or its employ- ees shall have invented, so long as it shall promptly notify Superstill of its intention, keeping Superstill currently informed of its activi- ties in respect thereto, and shall provide Superstill with copies of Patent Applications and amendments thereto, patent office communica- tions, and other relevant information. Ownership of any patents obtained by PMC pursuant to this Section shall be in accordance with the provision of this Section 7. In the event that PMC shall fail to apply for such patents, or shall fail to prosecute such applications to 36 8 their final conclusion, Superstill shall have the right to effect patent coverage on behalf, and with the full cooperation, of PMC. 7.5 Superstill shall, at its own expense, apply for patents in any country on any Licensed Product or Improvement which Superstill or its employees shall have invented, and for any Licensed Product or Improvement which has been jointly invented by Superstill and PMC. In connection therewith, Superstill shall promptly notify PMC of its in- tention to prepare and file any Patent Application and shall keep PMC currently informed of its activities in respect thereto including pro- viding PMC with copies of all Patent Applications, all communications from the Patent Office including office actions, all communications to the Patent Office from Superstill or its attorneys, including amend- ments in response to office actions, and any other relevant information including copies of all issued Patents. Ownership of any patents obtained by Superstill pursuant to this Section shall be in accordance with the provisions of this Section 7. In the event that Superstill shall fail to apply for patent protection for any such Licensed Product or Improvement, or shall fail to diligently prosecute any such Patent Application to its final conclusion, Superstill shall promptly notify PMC of such failure in sufficient time to avoid any loss of right or procedural advantage in connection with any such Patent Application and PMC shall have the right to continue such patent prosecution on Superstill's behalf, at PMC's expense, with the full cooperation of Superstill. In such event, Superstill shall assign all of its right, title, and interest to such Patent Application to PMC for use in the Field. 7.5.1 Superstill has developed certain Improvements which are incorporated in its second generation design, said Improve- ments including several inventions which appear to be patentable. Superstill shall immediately commence the preparation of Patent Appli- cations covering these inventions by patent counsel and shall diligently proceed as necessary to effect the prompt filing thereof, all at Super- still's expense. Said Patent Applications shall be considered as part of Patent Applications and shall be prosecuted in accordance with the provisions of this Agreement. 7.6 Superstill and PMC shall promptly disclose to the other all Improvements developed, discovered or invented by it or any of its consultants, agents or employees. Such disclosure shall be made in writing and shall include all drawings, descriptions and data reasonable for a full understanding thereof. 8. TECHNOLOGY TRANSFER. 8.1 Superstill shall, commencing on the date of this Agree- ment, with respect to the Technology which is licensed hereunder, and concluding as soon as practicable thereafter, but in no event later than January 30, 1992 for present designs, and no later than the dates listed below for second generation designs, deliver to PMC complete documenta- tion for the Technology, not only as it relates to the current Licensed Product, but also as it relates to the second generation design, to the extent reasonably required for PMC's manufacture, sale, maintenance and use of the Licensed Products. It is understood that for second genera- tion designs, Superstill shall furnish sufficient drawings, design and other data, including performance data, as shall be reasonably necessary to enable PMC to complete the manufacturing documentation necessary to manufacture said second generation designs. The schedule for delivery of prototype engineering drawings (including details related to the manufacturing process for the new design plate packs) for second generation designs is: 37 9 S-1000 by January 31, 1992 S-3500 by May 31, 1992 S-25 by September 30, 1992
It is hereby understood and agreed that provision of the above data is considered a material obligation of Superstill. Any change in the above schedule shall result in a corresponding change in Attachment B and shall alter PMC's performance required to maintain an exclusive license hereunder. 8.2 In the event that Superstill shall create, develop, or otherwise come into possession of additional documentation embodying any Technology relating to vapor compression and product concentration devices, such documentation shall promptly be provided to PMC as a con- tinuing obligation hereunder. 8.3 Superstill shall, from time to time, and as PMC shall reasonably require, provide PMC, either at the PMC or Superstill facili- ties, as designated by PMC, with training, technical support, and advice, relating to any aspect of Licensed Products. PMC shall pay for such services in accordance with the rates set forth in Attachment C. Notwithstanding the foregoing, Superstill shall provide reasonable access to such Superstill employees, and their time, as is reasonably necessary to complete the transfer of Technology hereunder, all at no charge to PMC. It is anticipated that such access and time will be utilized by PMC either over the phone or in visits to Superstill's facilities. However, in the event that PMC shall require any trips by Superstill employees either to PMC or some other location prior to completion of the Technology transfer, PMC shall pay the reasonable travel and living expenses in addition to the hourly rate for any Superstill employee in accordance with Attachment D. 8.4 Superstill and PMC shall mutually agree to a purchase of inventory and tooling, and an orderly transition of manufacturing from Superstill to PMC in accordance with a separate agreement. 8.5 PMC, at Superstill's request, and at PMC's sole determi- nation of available capacity, shall accept orders from Superstill for components or Licensed Products priced at OEM Prices. All profits from sales under this Section 8.5 shall be excluded from Net Profits for purposes of determining royalties payable to Superstill. 8.6 Superstill shall provide research and development, manu- facturing or service support as and consistent with its obligations to third parties, at rates set forth in Attachment C. 9. CONVERSION FROM EXCLUSIVE TO NON-EXCLUSIVE. 9.1 This license, as originally granted herein, shall be an exclusive license as stated above. However, such license shall con- vert from an exclusive to a non-exclusive license upon either of the following: 9.1.1 The expiration of 5 full calendar years from the effective date hereof, unless otherwise mutually agreed in writing to be extended or renewed for additional terms as the parties may subsequently agree; or 9.1.2 Upon the expiration of 3 full calendar years from the effective date hereof, and PMC's failure to substantially, within 3%, meet minimum performance goals as shown in Attachment B, in the 38 10 aggregate, for said 3 years, and upon Superstill's notice of its elec- tion to convert this license from exclusive to non-exclusive for all Fields. Superstill's notice shall be effective hereunder only if re- ceived by PMC within 15 days after PMC's submission to Superstill of its report and royalty payment for the end of said third full calendar year. Said notice shall convert this license to non-exclusive effective at the end of said third year. 9.2 Upon conversion of this license to non-exclusive, Super- still shall have the right to grant licenses to others in the Field. Copies of all such licenses shall be forwarded to PMC within 1 week of their execution. In order to permit PMC to compete with any other licensee on an equal basis, PMC shall have the option to substitute the continuing, recurring, financial obligation of any other licensee in place of the continuing, recurring, royalty obligation of PMC hereunder upon notice to Superstill. Such substitution shall be effective for determining all royalties from and after the date of said notice. 10. CONFIDENTIAL INFORMATION. 10.1 Each party acknowledges that, in the course of performing its duties under this Agreement, it may obtain information which is of a confidential and proprietary nature. Such information may include, but is not limited to trade secrets, know-how, inventions, techniques, pro- cesses, programs, schematics, customer lists and financial information. Each party owns and intends to maintain its ownership of all such infor- mation. Prior to the disclosure of such information, the disclosing party shall mark such information "confidential" (the "Confidential Information"). Each party shall at all times, maintain in the strictest confidence and trust all such Confidential Information received from the other party, and shall not use such Confidential Information other than as contemplated under this Agreement. Each party shall employ such measures to protect the other's Confidential Information disclosed to it and its employees as it uses to protect and preserve the confidentiality of its own confidential information. 10.2 The obligations of the parties pursuant to Section 10.1 above shall not apply to information which (i) was in possession of, or was known by the receiving party prior to its receipt from the dis- closing party; (ii) is or becomes public knowledge without the fault of the receiving party; (iii) is received without restriction from a dis- closing party who received the information not in violation of any confidentiality restriction; (iv) is or becomes available on an unre- stricted basis to a third party from the disclosing party or someone acting under its control; or (v) is disclosed pursuant to statue, regu- lation, or order of a court of competent jurisdiction requiring such disclosure provided the party disclosing such information promptly notifies the other party to allow the other party to take appropriate protective measures. 11. ENFORCEMENT OF SUPERSTILL PATENTS. 11.1 PMC will promptly notify and provide all available in- formation to Superstill in writing concerning any infringement of the Technology by third parties which comes to the attention of PMC. Superstill shall promptly notify and provide all available information to PMC in writing concerning any infringement by third parties of the Technology which comes to the attention of Superstill. 11.2 Upon identification of any infringement, Superstill shall, at its own expense, diligently prosecute any and all claims against third parties for said infringement, and defend any actions 39 11 brought by third parties relating to said claims of infringement, in- cluding declaratory judgment actions challenging the validity of any Technology. If necessary or desirable, PMC may be joined as a party plaintiff in any such claim against third parties, provided that Super- still shall pay any expenses reasonably incurred by PMC as a result thereof. In connection with any such claim or action, Superstill shall pay PMC's direct expenses including, but not limited to, its attorney fees, court costs, and any damages. Should Superstill elect not to prosecute or continue to prosecute, defend, or settle any such claim or action, it shall give prompt notice thereof to PMC and PMC shall have the right, but not the obligation, and shall be afforded the maximum opportunity to effectively prosecute, defend, settle, or continue the prosecution or defense or settlement of such claim or action. 11.3 Superstill and PMC shall each provide the other with their full cooperation in the prosecution or defense of such claims and actions; shall provide any relevant information, documents or data at its disposal; shall execute all papers necessary or desirable therefor; and shall make all reasonable efforts to secure the testimony of its employees. In the event that an infringement by third parties continues unabated, then PMC shall have additional rights in accordance with the other provisions herein, including those in Section 13 Loss of Monopoly Position. 11.4 If any claim or action results in a recovery, including recoveries by way of money damages, license fees, royalties, or other- wise, such recovery shall be equitably apportioned between PMC and Superstill. Furthermore, in connection with any settlement of such claim or action, Superstill shall have no right to grant any licenses or consents to manufacture, use, or sale in the Field without the prior consent of PMC, which will not be unreasonably withheld. In the event of such license grants, it is anticipated that the royalties due here- under shall be diminished. 12. INDEMNIFICATION. 12.1 Superstill shall indemnify and save PMC harmless from any loss, by way of judgment, settlement, or otherwise, resulting from claims or actions brought by others alleging that the practice by PMC of the rights granted herein, or any portion thereof, constitutes an infringement of any of the intellectual property rights, including patent rights, owned by others. In furtherance hereof, Superstill may, at its sole expense, obtain the rights to permit PMC to continue to practice any Technology licensed hereunder which is or may infringe a valid patent or proprietary rights of a third party. This indemnity shall not apply to patent infringement claims challenging processes originated by PMC and which are not part of the Technology or reason- ably necessary to manufacture the Licensed Products. 12.2 In the event that any claim or action shall be brought against PMC which alleges that the practice by PMC of the rights granted herein, or any portion thereof, constitutes an infringement of any of the intellectual property rights, including patent rights, owned by others, then PMC shall immediately notify Superstill, and Superstill shall be obligated to immediately defend any and all such claims or actions at Superstill's sole expense, with counsel chosen by Superstill that is reasonably acceptable to PMC. 12.3 In the event of any such claim or action, or any claim or action claiming damages against PMC under Section 11, PMC shall be entitled to offset any and all of its expenses obligated to be paid by Superstill with royalties otherwise due and owing hereunder to Super- still. Under no circumstances shall PMC be entitled to withhold payment of any amounts or royalties which would be in excess of such amounts absolutely necessary to cover reasonably expected liability and expenses for any such claim or action, as determined by a mutually agreed upon third party. 40 12 12.4 Each party shall be independently liable for defending and satisfying any claims, actions or demands brought by any third party based on a theory of defective design. 12.5 IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY INCIDENTAL, SPECIAL, OR CONSEQUENTIAL DAMAGES, EXCEPT THAT THE PAR- TIES SHALL EVENLY SPLIT AND BE RESPONSIBLE FOR ANY JUDGMENTS WHICH FIND BOTH PARTIES JOINTLY AND SEVERALLY LIABLE THEREFOR. 13. LOSS OF MONOPOLY POSITION. 13.1 In the event that competitors market devises which are essentially equivalent to Licensed Products, i.e. vapor compression distillation or product concentration equipment utilizing plate-type heat exchangers, operating at 1-2 psi differential pressure at less than 50 watts per gallon energy usage, then PMC's obligation to pay royalties hereunder shall be modified in accordance with Section 5.2.1 of this Agreement. 14. TERM 14.1 The term of this Agreement shall be for the longer of 15 years from the effective date hereof, or last to expire of any Super- still U.S. patent licensed to PMC hereunder issuing from a Patent Appli- cation on a Superstill Improvement for so long as said Licensed Products are covered by any one or more claims thereof. For purposes hereof, a patent shall be considered to have expired in the event that any of the following shall occur: 1. The patent expires, or 2. The patent lapses for failure to pay any maintenance fee or annuity, or 3. All pertinent claims in the patent have been held invalid or otherwise unenforceable by a court of competent jurisdiction in a judgment which is unappealed or unappealable, or 4. With respect to a patent application, when it has been abandoned. 15. TERMINATION AND EXPIRATION. 15.1 Superstill may, at its election, terminate this Agreement upon the failure of PMC to make any payment by the date on which such payment was due. 15.2 In the event of a material breach by PMC of this Agree- ment by reason other than failure to timely pay royalties as noted in Section 6.1, then notwithstanding any other provision herein or any other legal right or remedy otherwise available to it, Superstill's SOLE remedy shall be to convert this license from exclusive to non-exclusive in accordance with the following Section 15.4 and submit any claim for monetary damages to arbitration. 15.2.1 Superstill may, at its election, convert this Agreement to a non-exclusive license in accordance with the following Section 15.4 upon the gross failure of PMC to fulfill its obligations under Section 3.3 (simple failure to meet forecasted projections shall not be considered as sufficient to satisfy this condition). 41 13 15.3 PMC may, at its election, terminate this Agreement on the happening of the following event: 15.3.1 The material breach by Superstill of this Agreement. 15.4 The party electing to terminate this Agreement, or con- vert this license to non-exclusive for breach, shall first provide the other party with written notice specifying the grounds for such termi- nation or conversion and if, within thirty (30) days from the date of receipt of such notice, such other party shall cure or correct, or commence substantial efforts to effect a cure within a reasonable time thereafter, the breach, defect or default which shall be the grounds therefor, then this Agreement shall not be terminated or converted, as the case may be. If the default is not cured within the thirty (30) day period, or if substantial efforts have not been undertaken to effect a cure within a reasonable time thereafter, the complaining party may terminate or convert this Agreement at any time thereafter upon a second written notice to the defaulting party, without prejudice to other rights and remedies the complaining party may have. 15.5 The termination or expiration of this Agreement, irre- spective of the ground thereof and the party effecting same, shall not relieve any party of any obligations which arose or became due hereunder prior to the effective date of such termination, nor of any of the obli- gations or rights set forth in Sections 2, 3, 5.1, 10, 11, 12, and 16, all of which provisions shall survive such termination or expiration. 15.6 Upon termination or expiration of this Agreement, and at such time as PMC holds no other license relating to the Patent Rights, and, upon request of Superstill and at PMC's expense, PMC shall return to Superstill all copies of documents originated by Superstill which contain the Patent Rights, which are in PMC's or its affiliates' posses- sion or control, and shall not thereafter utilize in any way the Patent Rights to the extent that they are valid and subsisting. Notwithstand- ing the foregoing, PMC shall have the right to manufacture and sell Licensed Products, and order parts from vendors, as reasonably necessary to complete the use of its inventories, if any, for Licensed Products and continue to service all Licensed Products previously manufactured and/or sold by PMC, its agents, its distributors, or its sublicensees. 15.7 In the event either party directly sells a Licensed Pro- duct outside his Field without the express approval of the other, then said party shall pay a fee of 20% of the Net Sales price thereof to the other party. 16. WARRANTY OBLIGATIONS. 16.1 Superstill shall be responsible for all maintenance and warranty obligations with respect to Licensed Products sold by it, except that PMC shall, at Superstill's request and expense, perform such service and maintenance work under such warranty obligations in accordance with the rates set forth in Attachment D. PMC shall be responsible for all maintenance and warranty obligations arising out of Licensed Products sold by it. 17. ARBITRATION. 17.1 All disputes arising in connection with this Agreement shall be finally settled under the rules of the American Arbitration Association by one or more arbitrators appointed in accordance with such Rules. The proceedings shall be conducted in the City of St. Louis, Missouri. Notwithstanding the foregoing, any disputes arising 42 14 with respect to the validity of any patent shall be resolved in the first instance by a court of competent jurisdiction. The parties agree that the decision in Arbitration shall be binding and enforceable in the courts having jurisdiction to render judgment thereon, and the par- ties expressly consent to such jurisdiction. 18. ASSIGNMENT AND SUBLICENSING. 18.1 This Agreement shall be fully assignable by either party only upon the express written consent of the other party, such consent to be not unreasonably withheld. 18.2 During the continuance of the license granted hereunder, PMC and Superstill may grant sublicenses to their respective subsidi- aries or to other persons, with the express written consent of the other party hereto, whose consent shall not be unreasonably withheld, upon the following terms and conditions: (a) No such sublicense shall be granted by the sub- licensor for a term beyond or longer than that during which the sublicensor continues to enjoy a license hereunder. (b) Any and all sublicense agreements shall provide the following: (i) The sublicense agreement shall provide for statements to be furnished to the licensor, and for the maintenance and inspection of records, upon terms corresponding to those herein provided for with respect to the sublicensor's records, statements and inspection as set forth in Section 6 hereof: (ii) All sublicensees shall agree to be bound by, and shall be provided with copies of, this Agreement in the same manner and to the same extent as PMC or Superstill, as the case may be, is bound; and (iii) PMC or Superstill, as the case may be, shall be responsible for the performance by its sublicensees of all terms and conditions of this Agreement. 18.3 Any assignment or sublicense in violation of Section 18.1 or Section 18.2 shall be void. 19. CANCELLATION OF CONDITIONAL ASSIGNMENT. 19.1 By way of separate agreement, the parties hereto shall execute a Cancellation of Conditional Assignment and Grant of License Agreement, said Cancellation Agreement being effective to cancel the Conditional Assignment previously executed on July 26, 1991 wherein Superstill conditionally assigned its rights under the Technology to PMC. It is intended by the parties that this Cancellation of Condi- tional Assignment shall be effective prior to the present Agreement so that full rights to the Technology shall be deemed to have revested in Superstill prior to the grant of rights and licenses contained herein. 20. MISCELLANEOUS. 20.1 AUTHORITY. This Agreement shall be effective only after approval by the respective Boards of Directors of Superstill and PMC and execution and delivery of the Agreement by an authorized officer of each. 43 15 20.2 NOTICES. Any notice or report required hereunder shall be in writing and shall be either personally delivered or posted by pre- paid certified mail, return receipt requested, properly addressed to the party to whom sent at the following address: If to Superstill: Superstill Technology Inc. 888 Second Avenue Redwood City, CA 94063 Attn: Stephan B. Sears, President If to PMC: Paul Mueller Company, Inc. P.O. Box 828 Springfield, MO 65801 Attn: Daniel C. Manna, President (With a copy to): Richard E. Haferkamp, Esq. Rogers, Howell & Haferkamp 7777 Bonhomme, Suite 1700 St. Louis, Missouri 63105
Unless otherwise provided for herein, all such notices and reports shall be deemed to have been given or made on the date upon which such notice is either delivered or deposited with the U.S. Post Office, as the case may be. 20.3 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties relating to the specific subject matter hereof and supersedes all oral or written representations, agreements, and understandings between the parties. 20.4 FORCE MAJEURE. Neither party shall be liable for delays in performance resulting from any cause beyond its control including, without limitation, acts of God, fire, flood, strike, lockout, act of civil or military authority, order of any national or local government or any department, agency or representative thereof. 20.5 MODIFICATION. No variation or modification of this Agreement or waiver of any of the terms or provisions hereof shall be deemed valid unless in writing and signed by both parties hereto. 20.6 WAIVERS. The failure of either party at any time to re- quire performance by the other party of any provision of this Agreement shall not affect in any way the full right to require such performance at any time thereafter; nor shall the waiver by either party of a breach of any provision hereof be held to be a waiver of the provision itself. 20.7 FURTHER ASSURANCES. Each of the parties hereto forthwith upon request from the other shall execute and deliver such documents and take such action as may be reasonably requested in order fully to carry out the intent and purposes of this Agreement. 20.8 SEPARABILITY. Should any provision of this Agreement or the application thereof, to any extent, be held invalid or unenforce- able, the remainder of this Agreement and the application thereof other than those provisions as to which it shall have been held invalid or unenforceable, shall not be affected thereby and shall continue valid and enforceable to the fullest extent permitted by law. 44 16 20.9 GOVERNING LAW. This Agreement shall be interpreted in accordance with the laws of the State of Missouri, without regard to its principles of conflicts of laws. 20.10 DUPLICATE ORIGINALS. This Agreement may be fully exe- cuted in a number of copies and each such fully executed copy shall be deemed to be an original. 20.11 BENEFIT. This Agreement and the license herein granted shall inure to the benefit of and be binding upon the parties hereto, their successors, assigns, and all corporations controlled by them. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed the day and year first above written. SUPERSTILL TECHNOLOGY INC. Date: January 9, 1992 /S/ STEPHAN B. SEARS --------------------------------- Stephan B. Sears Title: President PAUL MUELLER COMPANY, INC. Date: January 9, 1992 /S/ DANIEL C. MANNA --------------------------------- Daniel C. Manna Title: President 45 17
LIST OF ATTACHMENTS ------------------- ATTACHMENT A - List of Patents ATTACHMENT B - Minimum Performance Requirements ATTACHMENT C - Schedule of Other Rates ATTACHMENT D - Schedule of Field Service Rates
46 18 ATTACHMENT A ------------
U.S. PATENTS - ------------ NUMBER ITEM STATUS ------ ---- ------ 4,671,856 Method of Recycling Energy in Issued: 6/9/87 Counterflow Heat Exchange and Distillation 4,769,113 Same title (Divisional) Issued: 9/6/88 4,869,067 Same title (Divisional) Issued: 9/26/89 4,902,197 Seal Arrangement for Centrifugal Issued: 2/20/90 Type of Pump 4,919,592 Radially Compact Fluid Compressor Issued: 4/24/90 Apparatus Including Its Own Filed: 1/18/89 Combination Manifold/Support Assembly for Producing A Concentrate & Distillation Press Forming Arrangement Opened: 3/18/89 Patent Carbon Filter Opened: 7/10/89 Steam Stripper With Heat Recovery Opened: 7/10/89 Formed Plate Opened: 7/10/89 47 19 FOREIGN PATENTS - --------------- ITEM STATUS ---- ------ An Improved Method and Issued: EPC, OAPI, Brazil, Apparatus for Recycling Energy Canada, Australia, in Counterflow Heat Exchange Pending: Japan, Denmark and Distillation Seal Arrangement for Centrifugal Issued: Canada Type of Pump Pending: Japan Radially Compact Fluid Pending: Canada, Australia, Compressor Japan, South Korea, EPC
48 20 ATTACHMENT B ------------ Minimum Performance Requirements --------------------------------
Net Sales ($) 1992 1993 1994 ---- ---- ---- Subfield #1 Water Bottling S-25 600,000 850,000 1,500,000 S-200 200,000 1,000,000 3,000,000 S-1000 1,200,000 3,400,000 5,000,000 ----------- ----------- ----------- Subtotal $ 2,000,000 $ 5,250,000 $ 9,500,000 Subfield #2 Industrial Process S-25 200,000 700,000 700,000 S-200 200,000 600,000 1,000,000 S-1000 600,000 1,200,000 1,800,000 ----------- ----------- ----------- Subtotal $ 1,000,000 $ 2,500,000 $ 3,500,000 Subfield #3 Pharmaceutical/Lab S-25 630,000 1,700,000 2,000,000 S-200 100,000 400,000 500,000 S-1000 270,000 900,000 1,500,000 ----------- ----------- ----------- Subtotal $ 1,000,000 $ 3,000,000 $ 4,000,000 Subfield #4 Dairy Concentration S-25 0 50,000 125,000 S-200 0 50,000 125,000 S-1000 0 0 250,000 ----------- ----------- ----------- Subtotal $ 0 $ 100,000 $ 500,000 ----------- ----------- ----------- GRAND TOTAL $ 4,000,000 $10,850,000 $17,500,000 =========== =========== ===========
49 21 ATTACHMENT C ------------ Schedule of Other Rates -----------------------
The following current rates and charges apply for field service. Rates and charges are subject to adjustment from time to time. Mileage $1.50 per mile, includes driver and pickup of automobile; public transportation charges will be at actual expense. Travel Time Travel time spent on public transportation will be charged at the same rates as above. Living Expenses Living expenses are chargeable at the actual out-of-pocket expense. Parts At OEM selling price. Rates $/Hour ------ Monday-Saturday Sunday & Holidays --------------- ----------------- President 100 120 Engineering Manager 85 100 Senior Engineer 75 90 Manufacturing Engineer 75 90 Engineer 56 66 Marketing Manager 75 90
50 22 ATTACHMENT D ------------ Schedule of Field Service Rates -------------------------------
The following current rates and charges apply for field service. Rates and charges are subject to adjustment from time to time. Monday thru Friday 8:00 a.m. to 4:30 p.m. - $56.00/hr. Before 8:00 a.m. and after 4:30 p.m. - $66.00/hr. Saturdays $66.00/hr. Sundays and Holidays $78.00/hr. Mileage $1.50/mile, includes driver and pickup of auto- mobile; public transportation charges will be at actual expense. Travel Time Travel time spent on public transportation will be charged at the same rates as above. Living Expenses Living expenses are chargeable at the actual out- of-pocket expense. Parts At OEM selling price.
51 23 ADDENDUM NO. 1 TO EXCLUSIVE LICENSE AGREEMENT BETWEEN SUPERSTILL TECHNOLOGY INC. AND PAUL MUELLER COMPANY EXECUTED JANUARY 9, 1992 This Addendum will serve to interpret and amend the Exclusive License Agreement between Superstill and PMC referenced above. 1. Both parties confirm their understanding that the "Without Mono- poly" column in Section 5.2.1 refers to the circumstances existing after the occurrence of the event described in Section 13.1 "Loss of Monopoly Position". 2. Both parties confirm their understanding that under Section 6.1.3, a loss may be carried back from quarter to quarter WITHIN a year, but may not be carried back to a previous year. So, for example, if PMC paid Superstill after a profitable first quarter, but a loss occurred in the next three quarters, Superstill would write a check to PMC at year end for the excess payment. If, on the other hand, PMC paid Superstill at the end of a profitable year, and a loss occurred the following year, Superstill would not have to write such a check (although that loss could be carried forward to the next year). 3. Delete Section 12.4. 4. Add Section 12.6 as follows. 12.6 Notwithstanding any provision of this Agreement to the contrary, PMC shall defend, indemnify and hold Superstill harmless from any loss or damages (including reasonable attorneys fees) resulting from claims or actions brought by any third party in connection with the use, sale, manufacture or disposition of the Li- censed Products by PMC or its sub-licenses or vendees, other than by reason of an infringement claim described in Section 12.1, or the negligence of Superstill. In the event that any claim or action shall be brought against Superstill which is based on any of the fore- going, then Superstill shall immediately notify PMC, and PMC shall be obligated to immediately defend any and all such claims or actions at PMC's sole expense, with counsel chosen by PMC that is reasonably accept- able to Superstill. 5. Add Section 12.7 as follows. 12.7 Notwithstanding any provision of this Agreement to the contrary, Superstill shall defend, indemnify and hold PMC harmless from any loss or damages (in- cluding reasonable attorneys fees) resulting from 52 24 claims or actions brought by any third party in con- nection with the use, sale, manufacture or disposition of any Licensed Products which allege the negligence of Superstill. In the event that any claim or action shall be brought against PMC which is based on any of the foregoing then PMC shall immediately notify Super- still, and Superstill shall be obligated to immediately defend any and all such claims or actions at Supers- till's sole expense, with counsel chosen by Superstill that is reasonably acceptable to PMC. 6. Add new Section 5.4 as follows. 5.4 In order to fund the performance by Superstill of its obligations under this Exclusive License Agree- ment including the reasonable and necessary patent activity and the completion of design activity in order to meet the schedule for technology transfer in accordance with Section 8, PMC shall make avail- able to Superstill an amount of $100,000 in advance royalties at a rate of $10,000 per month on a cumu- lative basis for ten months commencing in February of 1992. Superstill shall warrant that all such advance royalties shall be used solely for the pur- poses stated above. Any and all payments made under this Section 5.4, and $56,500. due PMC for an advance and for equipment and parts previously supplied to Superstill, shall be considered as advances against royalties otherwise due and owing to Superstill in accordance with the other portions of Section 5 herein. Superstill shall be obligated to re-pay said advance royalties, including interest thereon at 10% per annum. Such re-payment shall be made from the first dollar amounts of royalties otherwise due and owing beginning with the first quarter of 1993 in like manner to the credit taken for an over- payment in royalties as provided for in Section 6.1.3, except that only 50% of any royalty payment shall be subject to credit under this Section 5.4. 7. The minimum performance requirements for calendar year 1992 as itemized on Attachment B shall be amended to read as follows. 53 25 1992 ---- Subfield #1 Water Bottling S-25 $ 533,000 S-200 133,000 S-1000 1,000,000 ---------- Subtotal $1,666,000 Subfield #2 Industrial Process S-25 $ 178,000 S-200 133,000 S-1000 500,000 ---------- Subtotal $ 811,000 Subfield #3 Pharmaceutical/Lab S-25 $ 560,000 S-200 67,000 S-1000 225,000 ---------- Subtotal $ 852,000 Subfield #4 Dairy Concentration S-25 $ 0 S-200 0 S-1000 0 ---------- Subtotal $ 0 ---------- GRAND TOTAL $3,329,000 ==========
54 26 IN WITNESS WHEREOF, the parties hereto execute this Addendum No. 1 which shall be effective after approval by the respective Boards of Directors of Superstill and PMC and execution and delivery hereof by an authorized officer of each. SUPERSTILL TECHNOLOGY INC. Date: January 23, 1992 /S/ STEPHAN B. SEARS ---------------- --------------------------------- Stephan B. Sears President PAUL MUELLER COMPANY, INC. Date: January 28, 1992 /S/ DANIEL C. MANNA ---------------- --------------------------------- Daniel C. Manna President 55 27 ADDENDUM NO. 2 TO EXCLUSIVE LICENSE AGREEMENT BETWEEN SUPERSTILL TECHNOLOGY INC. AND PAUL MUELLER COMPANY EXECUTED JANUARY 9, 1992 This Addendum will serve to interpret and amend the Exclusive License Agree- ment, as amended, between Superstill and PMC referenced above. 1. Amend Section 12.6 as follows. 12.6 Notwithstanding any provision of this Agreement to the contrary, PMC shall defend, indemnify and hold Superstill harmless from any loss or damages (including reasonable attar- neighs fees) resulting from claims or actions brought by any third party in connection with the use, sale, manufacture or disposition of the Licensed Products by PMC or its sub- licenses or vendees, other than an infringement claim described in Section 12.1 or those alleging the negligence of Superstill. In the event that any claim or action shall be brought against Superstill which is based on any use, sale, manufacture, or disposition of a Licenses Product including those based on the negligence of Superstill but not those based on infringement, then Superstill shall immediately notify PMC, and PMC shall be obligated to immediately defend any and all such claims or actions at PMC's sole expense, with counsel chosen by PMC that is reasonably acceptable to Super- still. If any payments are made by PMC to satisfy or settle claims or actions for losses or damages caused at least in part by the negligence of Superstill, the parties will ego- titan in good faith towards a reasonable and equitable apportionment of the obligation for said payments (including reasonable attorneys fees and costs expended in defense thereof) and Superstill shall reimburse PMC for that portion thereof which the parties agree shall be fair and appropriate considering all of the facts and circumstances relating there- to. Should the parties fail to agree on an apportionment of said payments, then either party may submit the matter to arbitration in accordance with Section 17 hereof. 2. Delete Section 12.7. 3. The minimum performance requirements from calendar years 1992, 1993 and 1994, as itemized on Attachment B and Amendment No. 1, par- graph 7, shall be further amended as follows: Minimum Performance Requirements --------------------------------
1992 1993 1994 ---- ---- ---- Subfield #1 Water Bottling S-25 $ 533,000 $ 850,000 $ 1,500,000 S-200 100,000 800,000 2,700,000 S-1000 300,000 2,700,000 4,500,000 ----------- ----------- ----------- Subtotal $ 933,000 $ 4,350,000 $ 8,700,000 56 28 Subfield #2 Industrial Process S-25 $ 178,000 $ 700,000 $ 700,000 S-200 100,000 450,000 900,000 S-1000 100,000 900,000 1,600,000 ----------- ----------- ----------- Subtotal $ 378,000 $ 2,050,000 $ 3,200,000 Subfield #3 Pharmaceutical/Lab S-25 $ 560,000 $ 1,700,000 $ 2,000,000 S-200 50,000 350,000 450,000 S-1000 100,000 800,000 1,400,000 ----------- ----------- ----------- Subtotal $ 710,000 $ 2,850,000 $ 3,850,000 Subfield #4 Dairy Concentration Subtotal $ 0 $ 100,000 $ 425,000 ----------- ----------- ----------- GRAND TOTAL $ 2,021,000 $ 9,350,000 $16,175,000 =========== =========== ===========
These revised minimum requirements are based upon release of second generation designs in accordance with the Superstill letter and Development Schedule of May 15, 1992. IN WITNESS WHEREOF, the parties hereto execute this Addendum No. 2 which shall be effective after approval by the respective Boards of Directors of Superstill and PMC and execution and delivery hereof by an authorized officer of each. SUPERSTILL TECHNOLOGY INC. Date: June 11, 1992 /S/ STEPHAN B. SEARS ------------- --------------------------------- Stephan B. Sears President PAUL MUELLER COMPANY, INC. Date: June 15, 1992 /S/ DANIEL C. MANNA ------------- --------------------------------- Daniel C. Manna President 57 EX-10 3 EXHIBIT 21 FOR 1996 FORM 10-K 1 EXHIBIT 21 SUBSIDIARIES OF REGISTRANT Mueller International Sales Corporation, a Foreign Sales Corporation, was organized December 18, 1984, and incorporated under the laws of the Virgin Islands of the United States, and became active in 1985. This is a wholly owned subsidiary and its accounts have been included in the consolidated financial statements filed herein. Mueller Transportation, Inc., a Missouri Corporation, was incorporated on October 15, 1996. This is a wholly owned subsidiary that was inac- tive during 1996. 58 EX-27 4 ARTICLE 5 FDS FOR 1996 FORM 10-K
5 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 $ 2,221 14,605 16,027 698 5,985 38,543 47,107 35,951 53,185 12,461 161 1,342 0 0 40,748 53,185 83,951 83,951 62,253 62,253 0 279 108 6,490 2,066 4,424 0 0 0 4,424 3.79 3.79
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