SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
X Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the Fiscal Year ended: April 30, 1999
or
Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from to .
Commission File No.: 0-9880
ENGINEERING MEASUREMENTS COMPANY
(Exact name of Registrant as specified in its charter)
Colorado 84-0572936
(State or other jurisdiction of (I.R.S. Identification No.)
incorporation or organization)
600 Diagonal Highway, Longmont, Colorado 80501
(Address of principal executive offices (Zip Code)
Issuer's telephone number: (303) 651-0550
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common Stock par value $.01
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act 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
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
Issuer's revenues for its most recent fiscal year: $9,694,913.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant as of July 15, 1999 was $22,062,744.
The number of shares outstanding of Registrant's $.01 par value common stock, as
July 15, 1999 was 4,057,143.
No documents are incorporated by reference into the text of this report.
Transitional Small Business Disclosure Format : Yes ; No X
Exhibit Index on Pages 34-35
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PART I
ITEM 1. BUSINESS
General
Engineering Measurements Company ("EMCO" or the "Company") is a Colorado
corporation that was incorporated on January 4, 1967. The Company's executive
offices and factory are located at 600 Diagonal Highway, Longmont, Colorado
80501. Its telephone number is (303) 651-0550. The Company has a website at
www.emcoflow.com.
The Company designs, manufactures, and markets electronic and electro-mechanical
instruments (flowmeters) for measuring the flow of liquids, steam and gases.
The Company operates within the flow measurement devices and systems industry
segment (S.I.C. Code No. 3823). The Company generates its revenues from the
sales of flowmeter hardware in both foreign and domestic. Revenue is also
generated through the sale of excess capacity in the form of contract electronic
printed circuit board assembly. With its 32 years experience in the field of
flow measurement, EMCO is able to provide its customers with a family of
products capable of measuring almost any kind of fluid or gas flow. While the
Company has historically been strongest in energy utility flow measurement
(particularly steam metering) it has products capable of measuring most types of
process fluids, as well as fuel oils and natural gas. Primarily utilizing a
network of distributors and commissioned sales representatives as well as a
direct sales force, the Company markets flowmeters worldwide.
The Company has a marketing agreement with Danfoss A/S, a flow meter company in
Denmark which distributes products in different markets, which was renewed
October 6, 1998, and runs for a period of 30 months with a six month
renegotiation period. Terms of the agreement with Danfoss A/S allow the Company
to be the exclusive distributor for Danfoss' MAG and MASS flowmeters in the U.S.
industrial market under the "EMCO" label. In turn, Danfoss is allowed to market
and distribute EMCO's Vortex PhD flowmeter on a non-exclusive basis under the
"Danfoss" label in Europe and around the world. The marketing agreement signed
with Danfoss A/S completes the Company's "family of flowmeters". This family
features five types of flowmeters capable of handling a broad spectrum of
applications (steam, gas and liquid) as well as a large range of line sizes. It
also positions the Company to compete on a product level with any flowmeter
manufacturer in the world.
Products
The Company has developed and markets a series of products to measure the flow
of steam, chilled and hot water, natural gas, compressed gases and other fluids
in a pipeline. Also included are products, which support the primary flow
measurements, such as pressure and temperature measurements and supporting
electronics.
The Company has two major technologies used in its product lines. The sales
contribution by each technology as a percent of sales for fiscal years 1999 and
1998 are as follows:
Technology FY 1999 FY 1998
- ---------- ------- -------
Volumetric 74% 75%
Mass 26% 25%
Volumetric technologies include the following products: turbine, vortex
shedding, and positive displacement meters. Mass technologies include the
following products: electromagnetic, coriolis, flow processors and digital
valves.
The Company manufactures several series of insertion meters for various
applications of steam, liquids and compressed gas measurement. The insertion
meters offer customers solutions for metering flows in large size pipes. Each is
available with an assortment of options allowing for extremes in flow range,
pressure and temperature, with adaptation to various output requirements which
provide mass and energy measurement for totalizing or computer input.
The Company introduced a line of vortex shedding flowmeters in fiscal year 1992.
The Vortex PhD has no moving parts, provides high reliability, has low
maintenance requirements and is capable of operating with dirty fluids.
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The Company also develops, manufactures and markets a series of positive
displacement meters which provide accurate measurements of fluid flow rates.
The products' primary applications relate to the measurement of viscous fluids,
such as crude oil, as well as applications requiring a high degree of accuracy.
As a result of the marketing agreement with Danfoss A/S of Denmark, EMCO serves
as the exclusive distributor for Danfoss' electromagnetic (MAG) flowmeters and
coriolis (MASS) flowmeters in the U.S. industrial marketplace. These two
Danfoss meters are marketed and distributed under the "EMCO" label in the U.S.,
establishing EMCO as one of the few companies in the world to offer a complete
line of flowmetering technologies.
Digital valves are digitally actuated control valves providing industry with a
unique means of controlling and measuring the flow of fluids. Because of their
accuracy and speed of response, these products are capable of providing a high
degree of control that cannot easily be matched by other valves. In addition,
this product can be configured as a metering valve, thus providing both
measurement and control.
All Company products utilize a family of digital flow processors to provide a
wide range of measurement processing. The flow processors provide the desired
outputs in engineering units, such as gallons, liters, etc., with provisions for
computing density, mass flow and enthalpy.
The Company introduced a commercial vortex shedding water flowmeter in March
1997. This product is marketed into the commercial HVAC, ultra-pure and de-
ionized water and landscape/irrigation markets.
The Company utilizes excess capacity to provide contract surface mount
technology board assembly. This service began in April 1997.
Product Distribution
The Company primarily uses a network of distributors and commissioned sales
representatives, as well as a direct sales force, to market the Company's
flowmeters worldwide. The Company also markets the Vortex PhD through Danfoss'
network of wholly owned subsidiaries, primarily in Western Europe.
Competition
The Company encounters various levels of competition in its different product
lines. The flow products face somewhat less competition when the application is
large size steam lines. Here, the product is sold primarily on the basis of
quality, performance and return on investment, with little price competition.
In smaller sized steam lines, as well as applications where other energy
utilities or process fluids are being measured, the Company faces a greater
level of competition and price is often a factor. However, no one company is a
major force in this market segment.
The positive displacement meter products encounter direct competition in most of
their markets. Two companies, one utilizing the same technology and the other
employing a different technological approach, comprise most of the competition.
Quality, performance and selling price are all important competitive factors.
Digital Valve products offer unique performance characteristics as regards
speed, accuracy and direct digital control. Where the application requires
these characteristics, the Company experiences no direct competition and price
is generally not a factor. In less demanding installations, the Company faces
direct competition from the manufacturers of more traditional control valves. In
such cases, price does become a competitive factor.
Contract surface mount technology board assembly faces extensive direct
competition for larger production runs. The Company is focusing on the
engineering prototype and small production run market niches where the emphasis
is on production quality and rapid turn around. In these markets there is
generally less competition and price is generally not a factor. No one company
is a major force in this market segment.
Raw Materials
The Company purchases electronic components, printed circuit boards, fabricated
sheet metal parts, machined components, raw steel and aluminum, metallic
castings, various other materials and electrical energy from various suppliers.
These purchased components are generally available and the loss of any one
supplier would not have a material adverse impact on the Company's operations.
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Customers
In Fiscal Year 1999 no single customer accounted for more than 10% of the
Company's revenues. For Fiscal Year 1998, one customer, Danfoss, did account
for more than 10% of the Company's reported revenues. In Fiscal Year 1999, the
Company renegotiated its marketing contract with Danfoss. This contract now
extends to April 2001 plus a six month renegotiation period. The loss of this
customer could have an adverse effect on the Company.
Patents
EMCO has acquired, or is currently pursuing, patent protection on a number of
its products, although management believes that the protection afforded by
patenting is generally not important to the success of the Company. Patents are
prevalent in the flow metering industry and, since the Company has not conducted
exhaustive infringement searches on all of its products, it is possible that one
or more of its products may infringe upon the patents of others.
Depending on the product involved, a lawsuit against the Company for patent
infringement could result in damages in a material amount being assessed against
the Company, which would have an adverse effect on the financial condition of
the Company. At this time the Company is not aware of any existing or
threatened litigation regarding matters involving the Company and its products.
Seasonal and Other Conditions
The Company's sales and production are affected by slight seasonality caused by
the Company's emphasis on steam energy measurement. However, the Company's
marketing initiatives designed to increase the importance of the Process Control
market (a non-seasonal market) if successful, should mitigate against the effect
of seasonality in the future. Sales are also affected by the capital budgeting
plans of large industrial firms, as well as by other economic and political
conditions in the U.S. and internationally.
Working Capital Requirements
The Company is not required to carry significant amounts of inventory to meet
rapid delivery requirements of customers or to assure itself of a continuous
allotment of goods from suppliers. In addition, the Company believes its
working capital of approximately $3,340,000 as of April 30, 1999 is adequate to
meet its current obligations. Although no assurances can be made, the Company
believes it has adequate cash flows from operations to fund future operations
and capital expenditure requirements for the next twelve months.
Backlog
At April 30, 1999, the total order backlog was approximately $1,290,000 as
compared to $1,260,000 at April 30, 1998. It is anticipated that the entire
backlog outstanding at April 30, 1999, will be shipped in the fiscal year ending
April 30, 2000.
Government Approvals and Regulation
The Company's principal products and services are not subject to government
approvals. The Company does not expect any significant effect on its business
from existing or probable government regulations. No material portion of the
Company's sales is subject to renegotiation of profits or termination of
contracts or subcontracts at the election of the government. If the Company's
products become subject to government regulation or approval however, it could
have a material adverse affect on the Company.
Research and Development
The Company maintains research and development programs on a continuing basis.
Research activities are primarily directed toward flow measurement and control.
The Company spent approximately $790,000 for research and development in the
fiscal year ending April 30, 1999, and about $604,000 in the fiscal year ending
April 30, 1998.
In 1999, the emphasis of research and development (R&D) was new product
development. There is no assurance that the R&D efforts will result in
additional sales for the Company. Management believes that R&D expenses will
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continue at the current levels in the future due to further new product
development and enhancements. The intent of the Company's R&D is twofold: 1)
Develop new flowmeter products for industries and applications for which it has
not historically provided products, and 2) Continue to lower product cost and
improve quality.
Effects of Environmental Regulations
Compliance with present federal, state and local regulations regarding the
discharge of materials into the environment or otherwise relating to the
protection of the environment should not have any material adverse effect on the
capital expenditures, earnings and competitive position of the Company. The
Company does not plan any capital expenditures for environmental control
facilities during the current and succeeding fiscal year. If the Company's
products, business or operations become subject to such environmental
regulations, however, it could have a material adverse affect on the Company's
results of operations and competitive position.
Employees
At April 30, 1999, EMCO had 86 full-time employees, of which 8 are employed in
administrative duties, 16 in sales, marketing and customer service duties, 8 in
R&D and 54 in production. This compares with 82 full-time employees at April 30,
1998. The Company had 7 part time employees at April 30, 1999.
Foreign Sales
In fiscal year 1999, the Company had foreign sales of approximately $2,691,000,
or 27.8% of sales, compared to approximately $2,969,000, or 30.1% of sales in
fiscal year 1998. The decrease of sales for fiscal year 1999 in Europe is due
primarily to lower sales to Danfoss in 1999. The Company experienced an
increase in sales to Asia due to its emphasis on entering new markets. Other
foreign sales are lower due to lower activity overall, rather than sales of a
single large project. The breakdown of foreign sales for fiscal years 1999 and
1998, in dollars and percent of total sales are:
FY 1999 FY 1998
------- -------
Europe $1,580,000 16.3% $1,918,000 19.4%
Asia 755,000 7.8% 434,000 4.4%
Other 356,000 3.7% 617,000 6.3%
All foreign sales are exports from domestic operations.
ITEM 2. PROPERTIES
The Company maintains its executive offices and factory at 600 Diagonal Highway,
Longmont, Colorado in a 44,800 square foot brick, concrete and cinder block
facility. In Management's opinion, the current executive offices and factory
space are more than adequate for the Company's current operations and should
provide enough space through Fiscal Year 1999 or later. Management also
believes the building is in adequate condition for office and factory use, and
will require no substantial improvements through Fiscal Year 1999 or later.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
Market Information
The Company's common stock is traded over-the-counter and is listed on the
NASDAQ Over the Counter Bulletin Board (Symbol EMCO). The table below
represents the high and low bid prices of the Company's common stock for its
two most recent fiscal years. Such prices reflect inter-dealer prices, without
retail mark-up, mark-down or commissions and may not necessarily represent
actual transactions.
Quarters Ended in Fiscal Year 1999
----------------------------------
07/31/98 10/31/98 01/31/99 04/30/99
-------- -------- -------- --------
High $6.25 $4.63 $5.03 $5.00
Low $4.00 $3.20 $4.00 $4.00
Quarters Ended in Fiscal Year 1998
----------------------------------
07/31/97 10/31/97 01/31/98 04/30/98
-------- -------- -------- --------
High $6.63 $6.38 $6.75 $6.25
Low $3.75 $3.25 $4.50 $4.25
Approximate Number of Holders of Common Stock
The number of holders of record of the Company's common stock as of July 20,
1999, were 486.
Company Dividend Policy Disclosure
The Company has never paid cash dividends on its common stock and currently
has no plans to do so in the foreseeable future. However, the Company had a
25% stock dividend in October 1998. As a result, the Company issued an
additional 804,189 shares of $.01 par value common stock. The Company has no
restrictions on the ability to pay dividends.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain written statements of management of the Company included in this Form
10-KSB and elsewhere may contain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, which are intended to be covered by the safe harbors
created thereby. These statements include the plans and objectives of
management for future operations and contain certain words such as
"anticipate", "believe", "plan", "expect" or similar words. The forward-
looking statements included herein and elsewhere are based on current
expectations and assumptions about an industry or business and involve
judgments which are difficult or impossible to predict accurately and many of
which are beyond the control of the Company. Although the Company believes
that the assumptions underlying the forward-looking statements are reasonable,
any of the assumptions could be inaccurate and, therefore, there can be no
assurance that the forward-looking statements will prove to be accurate. The
forward looking statements are dependent on certain risks and uncertainties
including among others, a discontinuance of the Danfoss arrangement, lack of
market acceptance of new products, research and development efforts which
results in no additional sales and the cost and impact of Year 2000 compliance
by the Company and its suppliers. In light of the significant uncertainties
inherent in the forward-looking statements, the inclusion of such information
should not be regarded as representation by the Company or any other person
that the objectives and plans of the Company will be achieved. The actual
results of the Company could differ materially from those anticipated in the
forward-looking statements contained herein and elsewhere.
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DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION:
Liquidity, Capital Resources and Cash Flows
Net working capital decreased approximately $75,000 during the fiscal year
ended April 30, 1999, primarily due lower cash and accounts receivable offset
by higher inventories and lower accounts payable. The working capital ratio
for fiscal year 1999 increased to 4.4 from 4.3 the previous fiscal year.
The Company has a $500,000 revolving line of credit with Norwest Bank Colorado
through September 30, 1999, collateralized by accounts receivable. The
interest rate is at Norwest Bank Colorado's prime rate. The Company has not
drawn against this line of credit as of the date of this Form 10-KSB. The
loans from a stockholder matured in April 1998. The stockholder converted the
$353,790 loans into 345,766 shares of EMCO common stock as provided in the
loan agreement in fiscal year 1998.
The Company uses excess cash to invest in high grade securities until the cash
is needed for operations. As of April 30, 1999, the Company holds
approximately $556,000 in high grade investment securities.
Cash and cash equivalents decreased approximately $243,000, due to capital
expenditures and increases in inventories offset by decreases in accounts
receivable due to better collections. Management believes it has adequate
cash to support operations. This belief is supported by the fact that positive
cash flow from operating activities for fiscal year 1999 were approximately
$546,000. The Company will continue to manage cash in order to support
operations.
Net accounts receivable decreased by approximately $316,000, due to improved
collections and lower sales volume of approximately $92,000 in the fourth
quarter of fiscal year 1999 compared to the previous year. Collections of
accounts receivable improved as reflected by the 3.3 day decrease of the
Company's Days Sales Outstanding (DSO) to 54.3 days from 57.6 days in fiscal
years 1999 and 1998, respectively.
Short-term investments decreased approximately $1,000 during the year ended
April 30, 1999. The impact of recording investments at market value decreased
the cost by approximately $63,000.
Inventories increased approximately $430,000 during the year ended April 30,
1999, which decreased the inventory turn ratio from 2.42 in 1998 to 1.84 in
1999. The higher inventories are mainly due to higher finished goods
inventories in fiscal year 1999 as part of a program to improve product
delivery times.
Income taxes receivable of approximately $46,000 in fiscal year 1998 has been
replaced by income taxes payable of approximately $4,000 in fiscal year 1999.
The receivable, a result of overpayment of taxes, was reduced by prior year
refunds and current year taxes.
Accounts payable decreased approximately $141,000 due to lower capital
purchases, and taking more early payment discounts in fiscal year 1999.
The Company does not have any material commitments for capital expenditures.
The Company believes that the proposed capital expenditures can be financed
from the Company's cash flow.
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Net working capital and the working capital ratio for the last two fiscal
years were:
As of April 30
--------------
1999 1998
---- ----
Working capital $3,339,423 $3,413,972
Working capital ratio 4.4 4.3
Material changes in cash flows are summarized as follows:
As of April 30
--------------
1999 1998
---- ----
Net cash provided by operating activities $546,074 $790,051
Net cash (used in) investing activities ($949,630) ($422,109)
Net cash provided by financing activities $160,566 $24,908
Net increase (decrease) in cash and cash
equivalents ($242,990) $392,850
Management believes EMCO will enjoy improved results in the future. Although
there is no assurance this will occur, management believes is that the Company
has a strong foundation upon which to grow. The Company has accomplished the
following:
A. The Company introduced a new commercial water flowmeter in March
1997. Fiscal year 1999 sales of the water flowmeter increased
more than 150%. Management believes sales will grow, although at
a slower rate, in fiscal year 2000 since the product is still in
the early phases of the product life cycle.
B. The Company continues using excess production capacity to perform
contract manufacturing of surface mount technology board
assembly. Sales from contract manufacturing in fiscal year 1999
were up more than 80% over the previous fiscal year. Additional
sales efforts are being made to increase utilization of
additional capital and human resources added in the past year.
C. The Company expects to continue R&D activity for new products to
be introduced in coming years. There is no assurance that the
R&D activity will result in additional sales for the Company.
The Company also intends to emphasize value engineering to
sustain margin despite increasing price competition.
D. The Company continues to make improvements in overall production
efficiency through increased investments in equipment. The
Company is now capable of greater production capacity at little
or no increased fixed cost. All equipment purchases were paid
from the Company's cash flow.
E. The Company's balance sheet remains strong. The Company
recognized approximately $93,000 in interest and dividend income
from investments during the fiscal year ended April 30, 1999.
There can be no assurance, however, that these accomplishments will result in
improved or continued sales of its products or services. Actual results of
operations could differ materially from management's expectations.
Management is not aware of any known trends, events or uncertainties that have
had, or are likely to have, an impact on short-term or long-term liquidity of
the Company.
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RESULTS OF OPERATIONS:
Sales Revenues
Sales revenues for the Company decreased approximately $167,000 or 1.7% in
fiscal year 1999 as compared to fiscal year 1998. Existing product sales were
lower in fiscal year 1999, primarily due to reduced sales to a major European
customer (DANFOSS) of approximately $259,000 in fiscal year 1999. This
decrease in sales was partially offset by increased sales of the new water
meter introduced in March 1997 and contract surface mount technology (SMT)
board assembly. Sales from the new water meter and the contract SMT
manufacturing were up in fiscal year 1999. The Company continues to place a
high priority on product quality and customer satisfaction. Management
believes this emphasis will have long-term positive impacts on sales. The
Company expects to continue to maintain a healthy product development program.
Net Income
In fiscal year 1999, the Company recognized net income of $196,938, as
compared to net income of $87,045 for fiscal year 1998. The increase in
income in 1999 can be attributed to the following:
1999 1998
---- ----
Gross margin on sales $3,983,907 $3,940,847
Income from operations $113,696 $4,096
Gain/(loss) on sale of stock (6,574) 10,620
Other income 125,054 96,185
Interest expense (266) (32,844)
Income tax provision/(benefit) 34,972 (8,988)
The Company's increase in net income in 1999 is due to the following reasons:
The gross margin on sales in 1999 was 41.1% compared to 40.0% in 1998, which
is attributable to lower material and overhead costs, offset by higher labor
cost. Income from operations in 1999 was 1.17% compared to 0.04% in 1998.
The higher income from operations is due to higher gross margin and lower
sales and marketing expenses offset by increased research and development
costs. Gain/(Loss) on sale of stock is approximately $17,000 lower in fiscal
year 1999. Other income is approximately $29,000 higher in fiscal year 1999,
due in part to gains on the disposal of assets. Interest expense decreased by
approximately $32,000 due to the reduction of corporate debt. Income taxes
are approximately $44,000 more in fiscal year 1999 due to higher income.
Gross Margins
Overall gross margins for the past two years are reflected as follows:
As of April 30
--------------
1999 1998
---- ----
Gross margin 41% 40%
The increase in gross margin from 1998 to 1999 was due to lower material
(2.5%) and overhead (1.1%) costs, partially offset by higher labor (2.2%) and
warranty costs (0.2%). Management believes investments made in 1999 will make
manufacturing more efficient in the future.
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Selling Expense
The Company incurred the following selling expenses as a percent of sales:
As of April 30
--------------
1999 1998
---- ----
Selling expense 22% 24%
Selling expense decreased by approximately $224,000 and as a percent to sales.
The savings were achieved in part due to a decrease in sales subject to
commissions and a move from regional sales managers to a direct sales force.
In the future, management expects to continue to promote the Company's
products through increased direct sales activities, industry trade shows,
advertising in trade journals and telemarketing.
General and Administrative
General and administrative expense for the Company as a percent of sales for
the past two years is as follows:
As of April 30
--------------
1999 1998
---- ----
General and administrative expense 10% 10%
General and administrative expenses in fiscal year 1999 were similar to the
prior year as a percent of sales. Actual expenses were approximately $28,000
lower in fiscal year 1999, due to lower bad debt, labor and various other
expenses, partially offset by higher depreciation expense. Although no
assurances can be made, management intends in the future for general and
administration expenses not to increase as quickly as sales.
Research and Development
Research and development expense as a percent of the Company's sales over the
past two years is:
As of April 30
--------------
1999 1998
---- ----
Research and development expense 8% 6%
Research and development expenses increased approximately $186,000 in fiscal
year 1999, due to higher new product development costs. Management intends in
the future to continue product development activities; while continuing to
perform value engineering to lower product cost and improve product quality.
There is no assurance that the new product development activities will result
in additional sales for the Company.
Gains/(Losses) on Sale/Exchange of Stock
The Company recognized losses from the sale of stock, from investments, of
approximately $7,000 in fiscal year 1999 compared to gains of approximately
$10,000 in fiscal year 1998.
Interest Rates
The outstanding borrowed amounts, the interest expense, and the effective
interest rates, are shown below for the past two years:
As of April 30
--------------
1999 1998
---- ----
Amount Borrowed $0 $0
Interest Expense $0 $32,844
Interest Rates 0.0% 7.8%
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As a result of the conversion of $353,790 in debt into 345,766 shares of EMCO
common stock in April 1998, the Company had no outstanding debt at April 30,
1998. The Company did not borrow any money in fiscal year 1999.
Income Taxes
Income taxes as a percentage of pre-tax income are depicted below:
As of April 30
--------------
1999 1998
---- ----
Income tax (benefit)expense 15% (12%)
Please see Note 8 of the Notes to Financial Statements for a discussion of the
reasons income taxes have varied.
Trends
Most of the Company's sales (approximately 72%) are generated in the United
States. Therefore, the health of the U.S. economy has a significant impact on
the Company. However, the Company has such a small share of the total market
currently that management believes the Company can continue to grow despite
the fluctuations in the domestic economy. While the Company generates
approximately 28% of sales internationally, management believes that the
Danfoss marketing arrangement, (in which Danfoss markets and distributes the
Company's Vortex PhD flowmeter in Europe and around the world), and an
improved Asian economy, along with continued sales emphasis in developing
nations, could result in increased international sales beyond the current 28%
in the near future. Management can make no assurances, however, that the
Danfoss marketing agreement, and the economic and political conditions of the
U. S., Asian, European and developing countries will result in increased sales
in the future.
The Company has a diverse product mix. Therefore, it is unlikely that any
single current competitor could have a decidedly negative impact on EMCO. The
Company is able to address a number of different markets with a variety of
products and technologies. Therefore, the Company's product market risk is
also lower than many companies with less diverse product lines in the flow
measurement industry.
In recent years the Company has developed a new product line for the
commercial water market. The Company is also using excess capacity for
contract manufacturing of surface mount electronics board assembly. Revenues
for these products and services, although increasing rapidly, remain a small
part of the Company's total revenues.
The Company intends to continue to devote resources to new product
development. However, there are no assurances that the new product
development costs will result in additional sales for the Company.
Finally, the Company has eliminated debt as of the end fiscal year 1998.
During fiscal year 1999 the Company established a line of credit with Norwest
Bank Colorado, N.A. In light of these events, management feels it has reduced
its exposure to developments that might impact capital markets and the
availability of capital.
Although it can make no assurances, the Company knows of no and does not
anticipate any events to cause material changes in the revenue/cost
relationship in the foreseeable future.
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Year 2000 Compliance
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the `Year 2000 Problem'). The Company replaced its
inventory and financial software in fiscal year 1998 with a system, which is
Year 2000 compliant. The Company has evaluated its other internal-use software
and hardware for Year 2000 compliance, and has implemented a plan to replace all
non-compliant items either through upgrade or replacement. The planned
completion date for this task is September 30, 1999, and the cost of these
upgrades/replacements is anticipated to be approximately $60,000.
The Company may be vulnerable to the failure of other companies to be Year 2000
compliant. The Company has begun the assessment of whether third parties with
whom the Company has material relationships are Year 2000 compliant. The
Company is also evaluating its vendors and suppliers to determine if there would
be a material effect on the Company's business if they do not become Year 2000
compliant. The same analysis is also being made for significant customers.
The Company's products do not use time/date logic for internal sequencing or
calculation, and therefore the Company believes its products are Year 2000
compliant.
Although management does not expect Year 2000 issues to have a material impact
on its business or future results of operation, there can be no assurance that
there will not be interruptions of operations or other system functionality
limitations or that the Company will not incur significant costs to avoid such
interruptions or limitations.
Page 12 of 36
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
The following financial statements of Engineering Measurements Company are
found on Pages 15 through 29.
Page
Report of Independent Certified Public Accountants 14
Balance Sheets-April 30, 1999 and 1998 15,16
Statements of Income -Years Ended
April 30, 1999, and 1998 17
Statements of Changes in Stockholders'
Equity-Years Ended April 30, 1999, and 1998 18
Statements of Cash Flows-Years Ended
April 30, 1999, and 1998 19
Notes to Financial Statements 20-28
Page 13 of 36
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
of Engineering Measurements Company
We have audited the accompanying balance sheets of Engineering Measurements
Company (a Colorado corporation) as of April 30, 1999 and 1998, and the related
statements of income, stockholders' equity and cash flows for each of the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe 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 Engineering Measurements
Company as of April 30, 1999 and 1998, and the results of its operations and its
cash flows for each of the years then ended, in conformity with generally
accepted accounting principles.
GRANT THORNTON LLP
Denver, Colorado
June 14, 1999
Page 14 of 36
<PAGE>
ENGINEERING MEASUREMENTS COMPANY
BALANCE SHEETS
ASSETS
April 30, 1999 April 30, 1998
-------------- --------------
Current assets
Cash and cash equivalents $697,697 $940,687
Accounts receivable, net of allowance
for doubtful accounts and allowance for
sales returns of $75,990 at April 30, 1999
and $88,213 at April 30, 1998 1,094,954 1,410,785
Short-term investments 556,288 557,080
Inventories 1,667,011 1,237,051
Prepaid expenses 31,757 29,194
Income taxes receivable 0 45,695
Other receivables 2,376 3,671
Deferred income taxes 260,649 232,596
--------- ---------
Total current assets 4,310,732 4,456,759
--------- ---------
Property and equipment, at cost
Land 568,940 568,940
Building & improvements 1,624,950 1,619,595
Vehicles 22,196 22,196
Machinery and equipment 4,099,524 3,514,185
Office furniture and fixtures 1,301,489 1,197,821
--------- ---------
7,617,099 6,922,737
Less accumulated depreciation (4,725,996) (4,409,773)
--------- ---------
Net property and equipment 2,891,103 2,512,964
--------- ---------
Other assets
Note receivable 138,920 46,765
Other assets, net of amortization 132,351 149,233
--------- ---------
Total other assets 271,271 195,998
TOTAL ASSETS $7,473,106 $7,165,721
========== ==========
The accompanying notes are an integral part of these financial statements.
Page 15 of 36
<PAGE>
ENGINEERING MEASUREMENTS COMPANY
BALANCE SHEETS (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
April 30, 1999 April 30, 1998
-------------- --------------
Current liabilities
Accounts payable $320,853 $462,220
Accrued compensation 278,238 272,235
Other accrued liabilities 372,218 308,332
--------- ---------
Total current liabilities 971,309 1,042,787
--------- ---------
Long-term liabilities
Deferred income taxes 220,500 189,700
--------- ---------
Total long-term liabilities 220,500 189,700
--------- ---------
Stockholders' equity
Common stock, $.01 par value;
5,000,000 shares authorized;
4,232,774 shares issued at April 30, 1999,
4,172,599 shares issued at April 30, 1998,
4,042,374 shares outstanding at April 30, 1999,
3,982,199 shares outstanding at April 30, 1998, 42,328 41,726
Capital in excess of par value 2,650,332 2,487,368
Accumulated other comprehensive income (38,711) (26,270)
Retained earnings 4,257,047 4,060,109
Treasury stock at cost; 190,400 shares at
April 30, 1999, and April 30, 1998 (629,699) (629,699)
--------- ---------
Total stockholders' equity 6,281,297 5,933,234
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $7,473,106 $7,165,721
========== ==========
The accompanying notes are an integral part of these financial statements.
Page 16 of 36
<PAGE>
ENGINEERING MEASUREMENTS COMPANY
STATEMENTS OF INCOME
Year Ended April 30,
1999 1998
---- ----
Sales $9,694,913 $9,862,297
Cost of sales 5,711,006 5,921,450
--------- ---------
Gross margin on sales 3,983,907 3,940,847
--------- ---------
Operating expenses:
Selling 2,142,086 2,366,339
General and administrative 937,873 966,245
Research and development 790,252 604,167
--------- ---------
Total operating expenses 3,870,211 3,936,751
--------- ---------
Income from operations 113,696 4,096
--------- ---------
Other income/(expense):
Gain/(loss) on sale of stock (6,574) 10,620
Interest expense (266) (32,844)
Interest and dividend income 93,237 95,491
Other income 31,817 694
------- -------
Total other income 118,214 73,961
Income before
income taxes 231,910 78,057
Income tax provision/(benefit) 34,972 (8,988)
-------- -------
Net income $196,938 $87,045
======== =======
Other comprehensive income
Unrealized holding gain/(loss) (12,441) 4,139
-------- -------
Comprehensive income $184,497 $91,184
======== =======
Net earnings per share $0.05 $0.02
Net earnings per share on
a fully diluted basis $0.05 $0.02
========= =========
Weighted average number of
shares outstanding 4,021,729 3,651,138
========= =========
The accompanying notes are an integral part of these financial statements.
Page 17 of 36
<PAGE>
ENGINEERING MEASUREMENTS COMPANY
STATEMENTS OF CASH FLOWS:
Year Ended April 30,
--------------------
Increase/(Decrease) in cash 1999 1998
Cash flows from operating ---- ----
activities:
Net income $196,938 $87,045
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 479,642 474,158
Deferred tax provision/(benefit) 10,700 (9,300)
Provision for doubtful accounts (12,223) 27,109
(Gain)/Loss on sales of investments 6,574 (10,620)
(Gain)/Loss on disposal of assets (9,600) (695)
Stock compensation 3,000 -
Changes in assets and liabilities-
Receivables 329,349 178,603
Inventories (429,960) 19,546
Income taxes receivable and
prepaid expenses 43,132 109,804
Accounts payable and accrued liabilities (71,478) (85,599)
-------- ---------
Net cash provided/(used) by
operating activities 546,074 790,051
-------- ---------
Cash flows from investing activities:
Capital expenditures, net (834,604) (680,499)
Expenditures for intangible assets (6,295) (63,394)
Expenditures for note receivable (92,155) (46,765)
Investment purchases (1,277,561) (1,793,573
Proceeds from sale of investments 1,251,385 2,158,622
Proceeds from sale of fixed assets 9,600 3,500
--------- ---------
Net cash provided by/(used) in
investing activities (949,630) (422,109)
--------- ---------
Cash flows from financing activities:
Payments of long and short term debt - (64,592)
Proceeds from exercise of stock options 160,566 89,500
--------- ---------
Net cash used in financing activities 160,566 24,908
--------- ---------
Net increase/(decrease) in cash
and cash equivalents (242,990) 392,850
Cash and cash equivalents at
beginning of period 940,687 547,837
-------- --------
Cash and cash equivalents at end of period $697,697 $940,687
======== ========
Supplemental disclosure of cash
flow information:
Cash paid during period for--
Interest $ 266 $ 34,673
Income taxes 3,428 6,684
Supplemental disclosure for non cash items:
Conversion of stockholder debt to equity $ - $353,790
Stock compensation $ 3,000 $ -
The accompanying notes are an integral part of these statements.
Page 18 of 36
<PAGE>
<TABLE>
ENGINEERING MEASUREMENTS COMPANY
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Capital in Other
Common Stock Excess of Comprehensive Retained Treasury
Shares Par Value Par value Income Earnings Stock
------ --------- --------- ------ -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1997 3,687,891 $36,879 $2,048,925 ($30,409) $3,973,064 ($629,699)
Net income 87,045
Loans converted to stock 432,208 4,322 349,468
Stock Options
Exercised 52,500 525 88,975
Unrealized holding gains 4,139
--------- ------- ---------- -------- ---------- ---------
Balance at April 30, 1998 4,172,599 $41,726 $2,487,368 ($26,270) $4,060,109 ($629,699)
Net income 196,938
Stock Options
Exercised 59,538 596 159,970
Stock Compensation 637 6 2,994
Unrealized holding (losses) (12,441)
--------- ------- ---------- --------- ---------- ---------
Balance at April 30, 1999 4,232,774 $42,328 $2,650,332 ($38,711) $4,257,047 ($629,699)
========= ======= ========== ========= ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 19 of 36
<PAGE>
ENGINEERING MEASUREMENTS COMPANY
Notes to Financial Statements
1. Organization and Business
Engineering Measurements Company (EMCO or the Company) designs, manufactures,
and markets electronic and electro-mechanical instruments (flowmeters) for
measuring the flow of liquids, steam and gases. The Company sells products for
energy utility flow measurement (particularly steam metering), but it also has
products capable of measuring most types of process fluids, as well as fuel oils
and natural gas. Utilizing a network of distributors and commissioned sales
representatives, the Company markets flowmeters worldwide. (See Note 9 to the
Financial Statements).
2. Summary of Significant Accounting Policies
Inventories
Inventories are stated at the lower of cost or market determined by the first-
in, first-out method.
Investments
Investments in debt and qualifying equity securities are classified as either
held-to-maturity, trading or available-for-sale. Held-to-maturity investments
are debt securities that the Company has the positive intent and ability to hold
to maturity. These investments are recorded at amortized cost. Debt and equity
securities purchased for the purpose of resale in the near term are classified
as trading investments and are recorded at fair value. Unrealized gains or
losses on these investments are included in earnings of the current period.
Other debt and equity securities that are not categorized as held-to-maturity or
trading are classified as available-for-sale and reported at fair value.
Unrealized gains or losses on these securities are reported as a separate
component of stockholders' equity, net of applicable income tax expense or
benefit. All of the debt and qualifying equity securities of the company are
considered available-for-sale.
Depreciation and Amortization
Depreciation of property and equipment is provided on the straight-line method
over the following estimated useful lives:
Building and improvements 10-25 years
Vehicles 3-8 years
Machinery and equipment 5-10 years
Office furniture and 4-8 years
fixtures
Warranty
An estimated liability for warranty costs, based on Management's estimate of
future warranty costs, is recorded in the year in which sales are made.
Earnings Per Share
Primary earnings per share are based on the weighted average number of shares
outstanding during the year. Diluted earnings per share are based on the
assumption that all diluted potential common shares are dilutive stock options
that were converted at the beginning of the year.
Page 20 of 36
<PAGE>
The Company's common stock was split five-for-four in the form of a stock
dividend. All shares, stock option data, and earnings per share amounts have
been restated to give effect to this stock dividend.
For the Year Ended April 30, 1999
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net Income $196,938
========
Basic EPS
Net Income available to common
stockholders $196,938 4,021,729 $0.05
Effect of Dilutive Securities
Options - 80,832
Diluted EPS
Income available to stockholders plus -------- --------- -----
assumed conversions $196,938 4,102,561 $0.05
======== ========= =====
For the Year Ended April 30, 1998
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net Income $87,045
=======
Basic EPS
Net Income available to common
stockholders $87,045 3,651,138 $0.02
Effect of Dilutive Securities - -
------- --------- -----
Diluted EPS $87,045 3,651,138 $0.02
======= ========= =====
Cash Equivalents
For purpose of the statements of cash flows, the Company considers all highly
liquid cash investments with original maturity dates of three months or less to
be cash equivalents.
Reclassifications
Certain reclassifications have been made to conform prior year's information
with the current year presentation.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required 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 estimates.
Page 21 of 36
<PAGE>
Comprehensive Income
The company adopted Statement of Financial Accounting Standards No. 130 (SFAS
130), Reporting Comprehensive Income. SFAS 130 establishes standards for the
reporting and display of comprehensive income and its components.
3. Investments
The Company classifies debt and equity securities as available-for-sale
securities. Available-for-sale securities are measured at fair value, with net
unrealized gains and losses reported in equity.
The amortized cost, unrealized gains and losses, and fair values of the
Company's available-for-sale securities held at April 30, 1998 and 1999 are
amortized as follows:
Gross Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
Available-for-sale securities
Equity securities $75,016 $1,610 - $76,626
Debt securities 525,130 - $44,676 480,454
-------- ------ ------- --------
April 30, 1998 $600,146 $1,610 $44,676 $557,080
======== ====== ======= ========
Available-for-sale securities
Equity securities $387,004 $1,134 $32,031 $356,107
Debt securities 232,744 - 32,563 200,181
-------- ------ ------- --------
April 30, 1999 $619,748 $1,134 $64,594 $556,288
======== ====== ======= ========
The following table lists the maturities of debt securities held at April 30,
1999 classified as available-for sale:
Estimated
Amortized
Cost Fair Value
--------- ----------
Due in one year or less $100,002 $100,000
Due after one year through five years 132,742 100,181
-------- --------
$232,744 $200,181
======== ========
Proceeds on sales of securities classified as available-for-sale were $1,251,385
in fiscal year 1999, compared to $2,158,622 in fiscal year 1998. Gains of
$48,810 and losses of $55,384 were realized on these sales for 1999, and
$284,174 in gains and $273,554 of losses for 1998. The Company uses the
specific identification method to determine cost of securities sold.
Page 22 of 36
<PAGE>
4. Inventories
Inventories are as follows:
April 30
1999 1998
---------- ----------
Raw material and work-in-process $1,263,617 $1,115,210
Finished goods 403,394 121,841
---------- ----------
$1,667,011 $1,237,051
========== ==========
5. Note Receivable
The Company has a note receivable of $138,920 with an unaffiliated third party
to provide financing in the development of a new flowmeter technology. The note
has a 6% interest rate and is payable upon demand or upon termination of the
loan agreement. The Company exercised the option to purchase the undivided one-
half interest of the developed technology for the balance of the receivable
during May, 1999.
6. Short-term Debt
The Company signed a line of credit for up to $500,000 with Norwest Bank
Colorado NA, secured by accounts receivable on October 27, 1998. The line of
credit matures on September 30, 1999, and has an interest rate of 7.75%, equal
to Norwest Bank's prime rate. The Company has not utilized the line of credit.
7. Long-term debt
Two prime plus 2% loans from Charles E. Miller, an officer, director and
stockholder of the Company were paid in full during fiscal year 1998.
One note was collateralized by inventory, accounts and notes receivable and
fixed assets. In addition, up to 40% of the loan advances could be converted
into the Company's common stock at the option of the note holder. The
conversion prices were at 75% of the bid price for the Company's common stock on
the date of each advance under the loan agreement and ranged from $.61 to $2.25
per share. During fiscal year 1998, $252,538 of the loan was converted into
280,674 shares of common stock.
The other note was collateralized by inventory, accounts and notes receivable
and fixed assets. Up to 40% of the loan advances could be converted into the
Company's common stock at the option of the note holder. The conversion prices
were at 100% of the bid price for the Company's common stock on the date of each
advance under the loan agreement and ranged from $1.38 to $2.13 per share.
During fiscal year 1998, $101,252 of the loan was converted into 65,092 shares
of common stock.
The Company had no long-term debt during the year ended April 30, 1999.
8. Income Taxes
The Company accounts for income taxes under the liability method. Deferred
taxes are provided based upon the tax rate at which items of income and expense
are expected to be settled in the Company's tax return.
Page 23 of 36
<PAGE>
The following is a summary of the provision (benefit) for income taxes:
Year Ended April 30,
--------------------
1999 1998
---- ----
Current provision (benefit)
Federal $21,292 $312
State 2,980 0
------- ----
$24,272 $312
======= ====
Deferred provision (benefit)
Federal $9,180 ($8,100)
State 1,520 (1,200)
------- -------
$10,700 ($9,300)
======= =======
Total provision (benefit)
Federal $30,472 ($7,788)
State 4,500 (1,200)
------- -------
$34,972 ($8,988)
======= =======
The provision for income taxes differs from the amount determined by applying
the statutory rate to income before taxes, due to the following reasons:
Year Ended April 30
-------------------
1999 1998
---- ----
Income taxes at statutory rate $88,100 $29,700
Permanent tax differences (21,500) (40,900)
Change in estimate of prior year accrual (29,321) -
Other (2,307) 2,212
------- -------
Income tax expense(benefit) $34,972 ($8,988)
======= =======
Page 24 of 36
<PAGE>
Components of deferred tax assets and liabilities.
April 30,
---------
1999 1998
Assets ---- ----
Reserve for bad debt $30,000 $34,000
Inventory cost capitalization 9,000 11,000
Reserve for obsolete inventory 75,000 66,000
Book basis of stock less than tax basis 35,000 24,000
Accrued compensation 0 8,000
Investments stated at market 25,000 17,000
Reserve for warranty costs 21,000 16,000
Vacation accrual 47,000 43,000
Other 18,649 13,596
------- -------
$260,649 $232,596
Liabilities
Accelerated depreciation (220,500) (189,700)
-------- --------
Net Asset $40,149 $42,896
======= =======
Included in the Company's balance sheets as follows:
April 30,
---------
1999 1998
---- ----
Current assets $260,649 $232,596
Long-term liabilities (220,500) (189,700)
-------- --------
Net Asset $40,149 $42,896
======= =======
9. Foreign Sales
The Company had foreign sales of 27.8% and 30.1% of total sales in the fiscal
years ended April 30, 1999 and 1998 respectively. The breakdown of foreign sales
for fiscal years 1999 and 1998, in dollars and percent of total sales are:
Year ended April 30,
--------------------
1999 1998
---- ----
Europe $1,580,000 16.3% $1,918,000 19.4%
Asia 755,000 7.8% 434,000 4.4%
Other 356,000 3.7% 617,000 6.3%
10. Stock Option Plans
The 1991 Nonemployee Director Stock Plan authorized 200,000 shares, while the
1991 Incentive Plan authorized 600,000 shares. During fiscal year 1998, EMCO
Page 25 of 36
<PAGE>
terminated the 1991 Nonemployee and Incentive Plans and adopted a new plan, the
1997 Incentive Plan with 625,000 shares authorized. The Company issued options
for 30,000 shares under the plan in fiscal year 1998 and 164,375 shares in
fiscal year 1999.
A summary of stock option transactions follows:
1999 1998
------------------ ------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------- ------- ------- --------
Options outstanding May 1, ... 246,595 $2.86 269,095 $2.37
Granted ... 164,375 $4.00 30,000 $5.20
Canceled (56,250) $2.72 0
Exercised ... (59,538) $2.70 (52,500) $1.68
------- ----- ------- -----
Options outstanding April 30, 295,182 $3.55 246,595 $2.86
======= =======
Weighted average fair value of options granted during the year ended April 30,
1999 and April 30, 1998 is $ 2.34 and $ 3.83 per share respectively.
The following information applies to options outstanding at April 30, 1999:
Options Outstanding Options Exercisable
---------------------------------- -------------------------
Weighted
average Weighted Weighted
remaining average average
Number contractual exercise Number exercise
outstanding life(years) price exercisable price
----------- ----------- -------- ----------- ---------
Range of
exercise
prices
$2.00 - $3.00 31,250 0.91 $2.14 31,250 $2.14
$3.01 - $4.50 208,932 3.90 $3.35 152,682 $3.13
$4.50 - $6.75 55,000 8.63 $4.54 55,000 $4.54
------- -------
295,182 238,932
======= =======
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", encourages, but does not require companies to record compensation
cost for stock-based employee compensation plans at fair value. The company has
chosen to continue to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of grant over
the amount an employee must pay to acquire the stock.
Page 26 of 36
<PAGE>
Had compensation cost for the plan been determined based on the fair value of
the options at the grant dates consistent with the method of SFAS No. 123, the
Company's net earnings and earnings per share would have been:
1999 1998
Net income ------- ------
As reported 196,938 87,045
Pro forma - net of deferred tax benefit 81,520 81,440
Primary earnings per share
As reported $0.05 $0.02
Pro forma $0.02 $0.02
These pro forma amounts may not be representative of future disclosures because
they do not take into effect pro forma compensation expense related to grants
made before the fiscal year ended April 30, 1996. The fair value of these
options was estimated at the date of grant using the Black-Scholes option-
pricing model with the following weighted average assumptions for 1999 and 1998:
Expected life (years).... 6.485
Risk-free interest rate.. 5.800%
Volatility............... 42.426%
The Black Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
11. Employee Benefit Plan
The Company implemented a 401(k) Retirement Plan in July 1993. Employees may
join the plan after one year of service, providing they are 21 years or older.
The Company has a 5 year vesting schedule on the plan. The Company match for
the fiscal years ending 1999 and 1998 was $22,360 and $19,468, respectively.
12. Major Customer
The Company sells a significant portion of its product to one customer. During
fiscal years 1999 and 1998, sales to that customer aggregated $902,502 and
$1,161,502, respectively.
Page 27 of 36
<PAGE>
13. Fair Market Value of Financial Instruments
Estimated fair value of financial instruments held for purposes other than
trading are as follows as of April 30:
1999 1998
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
-------- -------- -------- --------
Cash and cash equivalents $697,697 $697,697 $940,687 $940,687
Short-term investments 556,288 556,288 557,080 557,080
Note receivable 138,920 138,920 78,483 78,483
The following methods and assumptions were used to estimate the fair market
value of each class of financial instruments for which it is practicable to
estimate that value.
Cash, Cash Equivalents, and Note Receivable
The carrying amount approximates fair value because of the short maturity of
those instruments.
Page 28 of 36
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY; COMPLIANCE WITH SECTION
16(a) OF THE EXCHANGE ACT.
The following table sets forth the name and age of each Director and Executive
Officer of the Company, indicating all positions and offices with the Company
presently held by him, and the period during which he has served as such:
Year
Elected as Position, Date first held
Name of Director Director or and Principal Occupation
or Officer Age Officer (For Past Five Years)
- ----------------- --- ----------- -------------------------
Charles E. Miller 61 1967 Chief Executive Officer, President,
Director and Chairman of the Board,
previously President from 1967 to 1987;
Member of the Board of Director Option
Committee .
Saeid Hosseini 36 1995 Vice President of Sales and Marketing.
Previously National Sales Manager, Product
Line Manager, and Manager of Applications
Engineering. Employed by the Company for
more than five years prior to this report.
Ken Teegardin 37 1997 Vice President of Operations. Previously
Director of Manufacturing since February
1995. Employed in a manufacturing
management capacity at Johnson Yokogawa
Corporation, Newnan, Georgia, which is not
an affiliate of the Company, for more than
five years prior to the date of this report.
William A. Ringer 65 1978 Director, Member of the Audit and
Compensation Committees; Former President
of Granville Phillips Company, Boulder,
Colorado, which is not an affiliate of the
Company. Employed by Granville Phillips in
an executive capacity for more than five
years prior to the date of this report.
Thomas G. Miller 52 1995 Director, Member of the Incentive Plan and
Compensation Committees; CEO and physician
of College Park Family Care Center of
Overland Park, Kansas, which is not an
affiliate of the Company. Employed by
College Park Family Care Center in an
executive capacity for more than five years
prior to the date of this report.
Walter Kluck 71 1995 Director, Member of the Audit,
Compensation, and Incentive Plan
Committees; CEO of Industrial
Representatives, Inc. of Clifton, New
Jersey, which is not an affiliate of the
Company. Employed by Industrial
Representatives, Inc. in an executive
capacity for more than five years prior to
the date of this report.
Page 29 of 36
<PAGE>
The Board of Directors has standing Audit, Compensation, and Incentive Plan
Committees. Mr. Ringer and Mr. Kluck constitute the members of the Audit
Committee, and Messrs. Thomas Miller, Ringer, and Kluck serve on the
Compensation Committee. Mr. Kluck and Mr. Thomas Miller serve on the Incentive
Plan Committee. The Audit Committee reviews financial statements. The Audit
Committee met once during the fiscal year ending April 30, 1999. The
Compensation Committee meets informally as required to recommend to the Board of
Directors the compensation to be paid to the officers of the Company and to
recommend to the Board of Directors any other profit sharing and bonus issues
that may come before the Board of Directors. The Incentive Plan Committee and
the Board of Director Option Committee administer the Incentive Plan. Such
Committees did not meet formally during the last fiscal year.
The Board of Directors held four meetings during the fiscal year ending April
30, 1999. All Directors attended all meetings of the Board of Directors and all
committees on which they serve.
All Directors hold office until the next annual meeting of the shareholders of
the Company or until their successors have been elected and qualified. Officers
serve at the discretion of the Board of Directors and are elected annually.
None of the Directors have been involved in any litigation or bankruptcy during
the past five years.
Charles E. Miller, Thomas G. Miller and David S. Miller are brothers. David
Miller is one of the Company's investment brokers.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors and greater than ten-percent shareholders are required by
SEC regulation to furnish the Company with the copies of all Section 16(a) forms
they file. Based solely on review of the copies of such forms furnished to the
Company, or written representations that no Forms 5 were required, the Company
believes that during the last fiscal year, all Section 16(a) filing requirements
applicable to its officers, directors and greater than ten-percent beneficial
owners were complied with.
Page 30 of 36
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth all cash compensation awarded to, earned by, or
paid to the Company's Chief Executive Officer for services in all capacities to
the Company during the fiscal year ended April 30, 1999. There were no other
executive officers of the Company who earned $100,000 or more during fiscal year
1999.
<TABLE>
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
Awards Payouts
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Securities All
Name and Annual Restricted Underlying LTIP Other
Principal Compen- Stock Options/ Pay- Compen-
Position Year Salary($) Bonus($) sation($) Awards($) SAR's(#) outs($) sation($)
- --------- ---- -------- -------- --------- ---------- ---------- ------- ---------
Charles E. 1997 $133,688 $2,651 0 0 12,500 0 $1,408
Miller, 1998 $135,000 $0 $67,500 0 0 0 $1,350
Chairman 1999 $135,000 $0 0 0 0 0 $1,350
Board
</TABLE>
Other Annual Compensation reflects the dollar value of the market price over the
exercise price on options exercised.
The Securities Underlying Options reflects the five-for-four stock split that
occurred in October 1998.
Other Compensation reflects the matching portion of the Company's 401K plan.
Option/SAR Grants in Last Fiscal Year
None.
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR
Values
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SAR's Options/SAR's
at FY-End (#) at FY-End ($)
Shares Acquired Value Exercisable/ Exercisable/
Name On Exercise (#) Realized ($) Unexercisable Unexercisable
- ----------------- --------------- ------------ ------------- --------------
Charles E. Miller 0 $0 13,594/0 $24,469/$0
6,250/0 $12,500/$0
6,250/0 $9,375/$0
Long-term Incentive Plans - Awards in Last Fiscal Year
None.
Page 31 of 36
<PAGE>
Compensation of Directors
Directors who are not employees of the Company received an annual Director's fee
of $3,000. This fee is paid whether or not the Director attends meetings of the
Board and its Committees.
In fiscal year 1999, stock options to purchase 75,000 shares were issued to the
outside directors. Messrs. Ringer, Kluck and Thomas Miller were each issued
options to purchase 25,000 shares.
Employment Contracts and Termination of Employment and Change in Control
Arrangements.
Upon the occurrence of a Change in Control, each Option granted under the
Company's 1997 Incentive Plan and outstanding at such time shall become fully
and immediately exercisable and shall remain exercisable until its expiration,
termination or cancellation pursuant to the terms of the Plan. A Change of
Control is where any person (who is not such a person on August 1, 1997) becomes
the "beneficial owner" directly or indirectly, of securities of EMCO
representing 35% or more of EMCO's outstanding securities.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth as of June 6, 1999, the number and percentage of
the Company's shares of Common Stock owned of record and beneficially by each
person owning more than five percent (5%) of such Common Stock and by all
individual directors and officers and by all directors and officers as a group:
Name of Amount and Nature Percent
Title of Class Beneficial Owner of Ownership of Class
- -------------- ------------------ ------------------ --------
Common Stock Charles E. Miller 1,570,026 (1) 38.6
Common Stock William A. Ringer 123,625 (2) 3.0
Common Stock Saeid Hosseini 89,250 (3) 2.2
Common Stock David S. Miller 480,236 (4) 11.9
Common Stock Walter Kluck 29,075 (5) 0.7
Common Stock Thomas G. Miller 458,874 (6) 11.3
Common Stock Ken Teegardin 37,500 (7) 0.9
All Directors and Officers as a Group
(Six Persons) 2,308,350 54.7
(1) Record and Beneficial; includes 1,543,932 shares of common stock owned
directly; an option to purchase 26,094 shares of common stock under the
1991 Incentive Plan; Mr. Miller has sole voting and investing power on
1,497,057 of the owned shares; the remaining 46,875 shares have shared
voting and investment power. Charles E. Miller's business address is
600 Diagonal Highway, Longmont, CO 80501.
(2) Record and Beneficial; Mr. Ringer has sole voting and investment power
on 98,125 shares of the owned shares; the remaining 500 shares have
shared voting and investment power. Mr. Ringer also has an option to
purchase 25,000 shares of common stock pursuant to the 1991 Non-
Employee Director Stock Plan. William A. Ringer's address is P.O. Box
1018, Wilson, WY 83014.
(3) Record and Beneficial; includes 51,537 shares of common stock owned
with sole voting and investment power; an option to purchase 25,213
shares of common stock under the 1991 Incentive Plan and an option to
purchase 12,500 shares under the 1997 Incentive Plan. Saeid Hosseini's
business address is 600 Diagonal Highway, Longmont, CO 80501.
Page 32 of 36
<PAGE>
(4) Record and Beneficial; includes 480,236 shares of common stock owned.
David Miller has sole voting and investment power for 457,962 of the
shares; the remaining 22,274 shares have shared voting and investment
power. David S. Miller's business address is 420 E. Armour, N. Kansas
City, MO 64166.
(5) Record and Beneficial; includes 4,075 shares of common stock owned with
sole voting and investment power; and an option to purchase 25,000
shares of common stock under the 1991 Non-Employee Director Stock Plan.
Walter Kluck's business address is P.O. Box 421, Clifton, NJ 07015.
(6) Record and Beneficial; Mr. Miller has sole voting and investment power
on 429,937 of the owned shares; the remaining 3,937 shares have shared
voting and investment power. Mr. Miller has an option to purchase
25,000 shares of common stock under the 1991 Non-Employee Director
Stock Plan. Thomas G. Miller's business address is 11725 W. 112th St.,
Overland Park, KS 66210.
(7) Record and Beneficial; includes an option to purchase 25,000 shares of
common stock under the 1991 Incentive Plan and an option to purchase
12,500 shares under the 1997 Incentive Plan. Ken Teegardin's business
address is 600 Diagonal Highway, Longmont, CO 80501.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Charles E. Miller, the Chairman and Chief Executive Officer of the Company,
converted $353,790 in loans from a stockholder into 345,766 shares of EMCO
common stock as provided in the loan agreement during the fiscal year ended
April 30, 1998.
Page 33 of 36
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(A) Exhibits
Exhibit
No. Item
- ------- ----
3 Articles of Incorporation and By-laws filed as Exhibits 2.1 and
2.2, respectively, to Registrant's Registration No. 2-69601
filed with the Commission and hereby incorporated by reference.
3-1 Articles of Amendment to Articles of Incorporation as filed as
Exhibit 3-1 to Registrant's 10-K for the fiscal year ended April
30, 1988 filed with the commission and hereby incorporated by
reference.
10-1 Loan agreement between the Registrant and the Colorado National
Bank of Denver, dated September 1, 1989, filed as Exhibit 10-2
to Registrant's 10-K for the year ended April 30, 1990 filed
with the Commission and hereby incorporated by reference.
10-4 Loan agreement between the Registrant and Charles E. Miller,
dated April 9, 1990, filed as Exhibit 10-4 to the Company's
Report on Form 10-K for the year ended April 30, 1992 and hereby
incorporated by reference.
10-5 Voting Agreement, Agreement and Plan of Merger, Voting Trust
Agreement, Sale and Licensing Agreement, Amendment to Sale and
Licensing Agreement, Manufacturing and Lease Agreement, and
Agreement by and between the Company, Measurement Auditors
Company, Marcum Natural Gas Services, Inc., and Colorado
National Bank of Denver incorporated herein by reference to
Exhibits 2.1, 2.2, 2.3, 2.4, 2.5, 2.6, and 2.7, respectively, to
registrant's Form 8-K dated June 25, 1991.
10-7 1991 Non-Employee Director Stock Plan, filed as Exhibit 10-7 to
the Company's Report on Form 10-K for the year ended April 30,
1992 and hereby incorporated by reference.
10-9 Delivery Contract EMCO - Danfoss, Delivery Contract Danfoss -
EMCO, and License Agreement, dated May 3, 1991; filed as Exhibit
10-9 to the Company's Report on Form 10-K for the year ended
April 30, 1992 and hereby incorporated by reference.
10-10 Loan agreement between the Registrant and Charles E. Miller,
dated June 10, 1993; filed as Exhibit 10-10 to the Company's
Report on Form 10-KSB for the year ended April 30, 1993, and
hereby incorporated by reference.
10-11 1991 Incentive Plan filed as Exhibit 10-11 to the Company's
Report on Form 10-KSB for the year ended April 30, 1993, and
hereby incorporated by reference.
10-12 Agreement, dated July 9, 1993, among Patrick Petroleum
Corporation of Michigan, the Company and General Metrology
Company, filed as Exhibit 10-12 to the Company's Report on Form
10-Q for the quarter ended October 31, 1993, and hereby
incorporated by reference.
10-13 Amendment to License Agreement, and Delivery Contract between
Danfoss and EMCO, dated June 13, 1995, filed as Exhibit 10-13 on
Form 10-KSB for the year ended April 30, 1994, and hereby
incorporated by reference.
10-15 1997 Incentive Plan as Exhibit A to the Company's Proxy
Statement for the Annual Meeting of Shareholders held October
22,1997, filed on September 25, 1997, and hereby incorporated by
reference.
10-16 Amendment to License Agreement, and Delivery Contract between
Danfoss and EMCO, dated October 6, 1998, filed as Exhibit 10-16
on Form 10-KSB for the year ended April 30, 1999.
21 List of Registrant's Subsidiaries; filed as Exhibit 22 to the
Company's Report on Form 10-K for year ended April 30, 1992, and
hereby incorporated by reference.
Page 34 of 36
<PAGE>
23 Consent of Grant Thornton to incorporate auditors report into
the Registrant's S-8.
27 Financial Data Schedule for fiscal year ended April 30, 1999.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended April 30, 1999.
Page 35 of 36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, Engineering Measurements Company has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
ENGINEERING MEASUREMENTS COMPANY
By:/s/Charles E. Miller
Charles E. Miller
(President)
Date: July 21, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been duly signed below by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
/s/Charles E. Miller /s/William A. Ringer
Charles E. Miller William A. Ringer
(Director, Principal Executive Officer, (Director)
Principal Financial Officer and July 21, 1999
Principal Accounting Officer)
July 21, 1999
/s/Walter Kluck /s/Thomas G. Miller
Walter Kluck Thomas G. Miller
(Director) (Director)
July 21, 1999 July 21, 1999
Page 36 of 36
<PAGE>
July 21, 1999
ENGINEERING MEASUREMENTS COMPANY
(NASDAQ SYMBOL: EMCO)
Fiscal Year 1999 Results
Corporate Contact: Charles E. Miller
(303) 651-0550
Longmont, Colorado: Engineering Measurements Company announced today net income
of $196,938 ($.05 per share) for the fiscal year ended April 30, 1999. This
compares to net income for the fiscal year ended April 30, 1998 of $87,045 ($.02
per share). Sales for fiscal year 1999 were approximately $9.7 million, a 1.7%
decrease from last year's sales.
Income from operations for fiscal year 1999 was approximately $114,000, compared
to approximately $4,000 for the same period last year. The increase in income is
due primarily to lower cost of sales, and operating expenses.
E N G I N E E R I N G M E A S U R E M E N T S C O M P A N Y
Operating Results
Year ended April 30,
1999 1998
Net sales $9,694,913 $9,862,297
Income from operations 113,696 4,096
Other income 118,214 73,961
Income before taxes 231,910 78,057
Income tax expense/(benefit) 34,972 (8,988)
Net income $196,938 $87,045
Net earnings per share $.05 $.02
Number of shares outstanding 4,021,729 3,651,138
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extrated from the Balance
Sheet and statement of operations found on pages 15, 16 and 17 of the company's
form 10-KSB for the year-to-date, and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-END> APR-30-1999
<CASH> 698
<SECURITIES> 556
<RECEIVABLES> 1,171
<ALLOWANCES> 76
<INVENTORY> 1,667
<CURRENT-ASSETS> 4,311
<PP&E> 7,617
<DEPRECIATION> 4,726
<TOTAL-ASSETS> 7,473
<CURRENT-LIABILITIES> 971
<BONDS> 0
<COMMON> 42
0
0
<OTHER-SE> 6,239
<TOTAL-LIABILITY-AND-EQUITY> 7,473
<SALES> 9,695
<TOTAL-REVENUES> 9,695
<CGS> 5,711
<TOTAL-COSTS> 5,711
<OTHER-EXPENSES> 3,870
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 232
<INCOME-TAX> 35
<INCOME-CONTINUING> 197
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 197
<EPS-BASIC> .05
<EPS-DILUTED> .05
DANFOSS- EMCO
DELIVERY CONTRACT
This Contract has been entered into by
Engineering Measurements Company, 600 Diagonal Highway, Longmont, CO, USA 80501,
a corporation incorporated under the laws of the state of Colorado, USA
(hereinafter referred to as EMCO)
and
Danfoss A/S, DK-6430 Nordborg, Denmark (hereinafter referred to as DANFOSS).
Preface
EMCO and DANFOSS are companies which in the instrumentation field are
represented on various markets with various products.
With a view to resale of products which are manufactured at DANFOSS and its
subsidiaries, EMCO wants to buy these in order to extend its product programme.
1 Definitions
1.1 By PRODUCTS is meant the flowmeters and other instruments described in
Encl. 1 incl. accessories and spare parts.
1.2 By COMMENCEMENT is meant 1st November, 1998.
1.3 In recognition of the existence of a distinction in the US between two
separate market segments (the industrial and the municipal market), by
MARKET is meant the industrial market for the PRODUCTS in the USA.
The industrial waste water market is non-exclusive.
2 Relations between the parties
2.1 According to this Contract EMCO has a exclusive right to place orders
for PRODUCTS (Magflo to Encl. 1 and non-exclusive for Massflo) to
DANFOSS for the MARKET, and DANFOSS is obligated to fulfil these
orders according to the conditions stipulated in this Contract.
2.2 This Contract is not meant as a distributor/agent relationship between
the parties.
<PAGE>
2.3 EMCO has a right to market the PRODUCTS in its own name and on its own
ccount to the MARKET, outside which active marketing is not allowed.
Active marketing is to be understood as direct promotion and dedicated
advertising for the PRODUCTS or initiating direct contacts with
representatives of companies with the aim of selling the PRODUCTS.
2.4 DANFOSS is to supply the PRODUCTS with a valid trade mark. Trade marks
are the subject of a separate agreement between DANFOSS and EMCO.
Labels are described in Encl. 2. If EMCO wants a special design which
is not described in Encl. 2, this should be agreed upon in each
individual case.
2.5 Confidential business information may be exchanged between DANFOSS and
EMCO. Both parties agree not to give such information to third parties
such as competitors, customers, or other third parties, also after
termination of this Contract.
This Contract shall not be construed as granting or conferring,
whether expressly or implied, any rights, licences or relationships by
the furnishing of confidential information pursuant to this Contract.
2.6 Both parties agree to work together in a mutually agreed upon manner
to develop and implement an appropriate marketing strategy for the
PRODUCTS. This strategy should provide marketing, sales and financial
data as needed to support DANFOSS' regular budget and planning cycles.
<PAGE>
3 Written Material
3.1 At the latest at the COMMENCEMENT DANFOSS is obligated to place the
following material at EMCO's disposal without charge:
a) 1 set of standard documentation material used by DANFOSS when
marketing the PRODUCTS.
b) 1 set of directions (users' manuals/instructions) used by DANFOSS
when marketing the PRODUCTS.
c) DANFOSS shall deliver to EMCO a diskette with standard DANFOSS
documentation for manuals
3.2 On the basis of the material mentioned under point 3.1, EMCO has a
right to print their own information material in connection with the
marketing of the PRODUCTS under EMCO's label, subject to prior written
approval from DANFOSS unless such prior approval would involve
excessive costs and delay. DANFOSS is authorized in each instance to
grant such approval, subject to review by the trade mark department of
DANFOSS.
3.3 If EMCO wants information about the PRODUCTS in addition to that
mentioned in the documentation in paragraphs 3.1 a + 3.1 b, DANFOSS
will place such information at EMCO's disposal, provided DANFOSS does
not consider the information confidential, and provided both parties
in the individual case agree upon the price and time of delivery for
the information.
3.4 All documents, copies of documents and other information in tangible
form shall be returned upon written request from DANFOSS or upon
termination of this Contract.
4. Education
4.1 DANFOSS agrees to educate EMCO's service instructors, including
knowledge of application areas, at such level that these are able to
educate EMCO's own service organisation. The extent of and the price
for this education is described in Enclosure 5.
4.2 DANFOSS agrees to offer sales training. The extent of the education
and the payment for this are described in Enclosure 5.
5. Quality demands
5.1 If EMCO on an order for the PRODUCTS should want a material and/or a
type certificate, EMCO is to specify the contents of the desired
certificate. DANFOSS is to comply with EMCO's wishes in so far as it
is considered technically and commercially reasonable. DANFOSS will
inform EMCO of the net price and time of delivery for the certificate.
<PAGE>
6 Alterations of the PRODUCTS
6.1 DANFOSS has a right to alter the design of the PRODUCTS. However, if
these have an influence on specifications or functions EMCO is to be
informed of the alterations at the same period of time as DANFOSS'
subsidiaries/agents are being informed.
For a period of 5 years from delivery, DANFOSS shall retain the
capacity to provide spare parts or compatible solution for delivered
PRODUCTS.
6.2 EMCO is not allowed to modify the PRODUCTS, unless authorized by
DANFOSS in writing.
7 Prices and Terms of Payment
7.1 DANFOSS will supply EMCO with the PRODUCTS according to the prices and
discounts described in Encl. 4. Both parties agree to discuss the
prices at any time required by one of the parties.
Once a year DANFOSS will carry through price alterations (January 1),
if necessary. Such alterations will also apply to EMCO. EMCO will be
informed in writing of these alterations not later than September 15.
In the case of documented, essential changes in the price of raw
material, currencies or other direct costs, DANFOSS reserves the right
to alter prices without previous notice and at dates other than those
mentioned above.
Already placed an confirmed orders will not be affected by such price
alteration.
In cases where EMCO negotiates supplies for very great projects, OEMs
or similar customers and where the limits of this Contract do not make
EMCO sufficiently competitive, DANFOSS will be willing to negotiate a
solution which will be for the benefit of both parties.
7.2 The PRODUCTS are to be delivered ex works (Incoterms 1990) from
DANFOSS to EMCO.
However, according to EMCO's desire, DANFOSS in special cases will
provide that the PRODUCTS are delivered directly from DANFOSS to an
address stated by EMCO, however, this is still for EMCO's own account
and risk.
7.3 The prices are to be understood as delivery in DANFOSS standard
packing ex works.
7.4 Terms and conditions of payment for the PRODUCTS to take place
according to encl. 4.
8 Title to PRODUCTS
All PRODUCTS become the property of EMCO as soon as they are shipped.
<PAGE>
9 Strategy, Forecast and Time of Delivery
9.1 EMCO agrees to provide input for strategies and Long Term Plans
concerning business development.
9.2 EMCO agrees to work with DANFOSS to prepare and submit market
forecasts at mutually agreed-upon intervals as needed to support the
necessary marketing efforts.
9.3 DANFOSS is to deliver the PRODUCTS as soon as possible after receipt
of orders from EMCO; however, times of delivery are to be specified in
connection with each particular order. If EMCO cancels a confirmed
order, a re-stocking fee based on the incurred cost is to be
negotiated.
10 Complaints and Service
10.1 If EMCO customers complain about defects in the PRODUCTS, DANFOSS
agrees that EMCO handles all contacts to the customers of EMCO with
regard to but not limited to warranty, complaints and service
requirements.
In the event of defects, DANFOSS shall inform EMCO of the cause of the
defect. DANFOSS shall furthermore take the necessary steps to avoid a
recurrence of the defect.
10.2 DANFOSS will assist EMCO with repair and service of the PRODUCTS. The
exact extent of this as well as costs of such assistance appear from
Encl. 5.
10.3 In the event of defective PRODUCTS, EMCO shall notify DANFOSS within
18 months from the manufacturing date stamped on the PRODUCTS,
however, a maximum of 17 months after delivery of the PRODUCTS.
DANFOSS may then either repair or replace the defective PRODUCTS.
Costs associated with disassembly and assembly will be uncompensated;
however, DANFOSS will pay transport costs for the PRODUCTS and spare
parts, if any, from DANFOSS to EMCO. EMCO is to cover transport costs,
if any, from EMCO (and its customers) to DANFOSS.
Should EMCO request a special warranty beyond the usual period of 18
months, DANFOSS may at DANFOSS' discretion assume such obligation, in
writing.
ALL OTHER WARRANTIES, EXPRESSED OR IMPLIED, INCLUDING IMPLIED
WARRANTIES OF MERCHANTABILITY ON FITNESS FOR A PARTICULAR PURPOSE ARE
HEREBY EXPRESSLY EXCLUDED.
10.4 DANFOSS is not liable for any kind of indirect or consequential damage
which might occur as a result of defective PRODUCTS.
10.5 Should EMCO or DANFOSS have reason to believe that a third party
claims or will claim that the PRODUCTS manufactured by
<PAGE>
DANFOSS violate patent or trade mark rights held by a third party, the
party having this information shall immediately inform the other party
in writing and keep that party informed of the status of the matter.
Should in the evaluation of the legal advisors of one of the parties
there exist a substantial or colourable validity to the third party's
claim, each party is authorized to suspend the purchase and sale of
the PRODUCTS under this Contract, pending clarification of the
dispute.
Should EMCO be sued in this connection, DANFOSS agrees to pay
reasonable costs of litigation (including but not restricted to
attorneys fees, expert witness fees, reimbursement for EMCO management
time used in defending the lawsuit, and all advance sums required to
pay the costs of any appeal bonds that might be necessary to further
contest the litigation) and any unappealable awards of compensation
and damages provided by a legal tribunal.
DANFOSS is also granted the right to participate in the suit or
arbitration, as a party.
11 Product Liability
11.1 This Contract does not affect the limitations on DANFOSS' usual
product liability in cases of damages to persons or personal property
which have occurred because of defective PRODUCTS. However, DANFOSS is
not liable for indirect or consequential damage.
12 Duration of the Contract
12.1 This Contract is valid indefinitely as of its COMMENCEMENT. If not
previously terminated, the parties agree that 30 months after the
inception of this Contract it shall be renegotiated; the negotiation
shall be completed within 36 months of its inception. The Contract can
at any time be terminated by either party with 12 months' written
notice. DANFOSS will continue to supply up to 24 months after written
termination at comparable prices.
12.2 Further, this Contract can be terminated with 30 days' written notice
in the event of:
1) Disclosure to a third party of confidential information.
2) Violation of trade marks.
3) Failure to make payment in a reasonable time in accordance
with Encl. 4.
4) Active marketing by EMCO of the PRODUCTS outside USA.
5) Marketing or sales practices in violation of US or Danish
legislation
<PAGE>
6) EMCO develops, manufactures, and/or markets and sells other
electro-magnetic, ultrasonic or Coriolis-mass-flowmeters, oxygen
transmitters or level transmitters based on the ultrasonic
principle.
Excepted from this restriction is EMCO's sale of insertion flowmeters.
When replacing EMCO's insertion programme, EMCO shall be allowed to
develop a replacing programme based on ultrasonic.
This product programme shall not compete in those markets where
DANFOSS is marketing its UL programme actively to DANFOSS' core
business areas. For UL-clamp-on technology DANFOSS shall be offered
for consideration exclusivity in marketing in accordance with this
Agreement on In-line Vortex.
If both parties agree that corrective action has been taken within 30
days of written notice, the termination notice is nullified.
12.3 PRODUCTS for which there have already been placed orders before or at
the date of notice of termination are to be delivered from DANFOSS to
EMCO according to this Contract.
12.4 For a period of 5 years after termination of this Contract, DANFOSS Is
to supply EMCO with all spare parts or compatible product solutions
under normal conditions and comparable prices. Apart from this,
DANFOSS' obligation as regards service cease when terminating this
Contract.
12.5 In the event of insolvency, suspension of payments, or bankruptcy of
one of the Contract parties, the other party at any time has right to
terminate the Contract without notice.
The same applies if a competitor to one of the Contract parties
obtains a considerable influence in the other party, including, but
not limited to, gaining a controlling interest in the company,
purchase of shares, and/or appointment as manager or board member in
the company.
12.6 Neither party shall be held liable for failure to meet its obligations
under this Contract in the case of force majeure, including, but not
limited to, strikes, blockade, armed conflicts, government
restrictions and natural calamities.
Should either party be unable to fulfil its obligations under this
Contract because of force majeure for more than 3 months, the other
party may terminate the Contract with 30 days notice.
12.7 Confidential business information is not to be given to any third
party in a period of 3 years from termination.
13 Law, Venue, Invalidity
13.1 This Contract shall be governed by Danish law. Any controversy
<PAGE>
which may occur in relation to this Contract shall finally be settled
in accordance with the rules of Conciliation and Arbitration of the
International Chamber of Commerce (ICC), Paris. Meetings are held in
Copenhagen. Process language is English.
13.2 In the event that single clauses should be rendered wholly or partly
invalid, the validity of the remaining clauses or the remaining parts
of such clauses are not rendered invalid.
13.3 The parties hereby agree that in signing this Delivery Contract, the
previous Delivery Contract of 1 November 1995 concerning delivery of
PRODUCTS from DANFOSS to EMCO is cancelled effective as of the
COMMENCEMENT of this Delivery Contract.
Enclosure 1: PRODUCTS
Enclosure 2: Labels
Enclosure 3: Approvals
Enclosure 4: Prices, Discounts and Conditions of Payment
Enclosure 5: Repair and Service
Place and date Place and date
for Danfoss for EMCO
6.OCT98
/s/Henrik Henriksen /s/Charles E. Miller
Henrik Henriksen Charles E. Miller
/s/Peter Madsen /s/Saeid Hosseini
Peter Madsen Saeid Hosseini
/s/Hans Uwe Simonsen /s/Ken Teegarden
Hans Uwe Simonsen Ken Teegarden
<PAGE>
Encl. 1 to Delivery Contract DANFOSS - EMCO
PRODUCTS:
From DANFOSS the Delivery Contract covers the following:
1a) i) Label (as defined in Encl. 2) PRODUCTS:
DANFOSS PRODUCTS MAGFLO
Type MAG 1100
Type MAG 2100
Type MAG 3100
Type MAG 2500
Type MAG 3000
DANFOSS PRODUCTS MASSFLO (non-exclusive)
Type MASS 2100
Type MASS 3000
ii) DANFOSS PRODUCTS with unobstructed, conspicuous DANFOSS
Label and EMCO sticker: (non-exclusive)
DANFOSS PRODUCTS MASSFLO
Type MASS 1100
1b) The Delivery Contract also includes accessories and spare parts for the
PRODUCTS.
<PAGE>
Encl. 2 to Delivery Contract DANFOSS - EMCO
In connection with the marketing of DANFOSS manufactured flowmeters and in
recognition of EMCO's interest in producing its own independent image, the
following label arrangements shall be valid:
A Label PRODUCTS - MAG 2500
MAG 3000
MAG 1100
MAG 2100
MAG 3100
MASS 3000
MASS 2100
or new generation replacing the existing model.
These PRODUCTS will be marketed s label PRODUCTS. DANFOSS will send a
standard PRODUCT to EMCO. EMCO will place the new label fulfilling the
conditions stated in this Contract on top of the existing DANFOSS label.
The label shall contain a statement (such as "Magflo( is a trade-mark of
Danfoss A/S, DK") to be agreed upon stating DANFOSS' ownership of the
trade-mark. DANFOSS and EMCO agree to work together to develop a mutually
agreed-upon procedure to fulfil the requirements of this point. This
procedure may be modified, depending on quantities, by written agreement to
provide that the EMCO label is attached in Nordborg. Literature and packing
shall also bear the EMCO name, where the DANFOSS name is removed.
B Remaining PRODUCTS (Encl. 1 a with the exception of PRODUCTS named in point
A) are to be marketed by EMCO under DANFOSS label. These PRODUCTS will be
sent to EMCO as standard PRODUCTS. EMCO will attach a sticker to these
PRODUCTS, accompanying literature and packaging. The content, appearance
and procedure with regard to the EMCO sticker is to be approved by DANFOSS
in writing and state DANFOSS' ownership of trade marks.
C Accessories and spare parts to the PRODUCTS are not be labelled, used in
connection with the stickers mentioned in B above or altered by EMCO.
D All costs in connection with labelling, including price for special
packaging and manuals are to be paid by EMCO.
<PAGE>
Encl. 3 to Delivery Contract DANFOSS - EMCO
Approvals
1. At present
MAGFLO * 3A approval on MAG 2100 and MAG 1100 Food
* CENELEC hazardous area approval on MAG 1100 / 3100
with MAG 3000 electronic.
* MAG 3000 CT:
Custody transfer approval for: cold water by PTB - Germany;
OIML 75; OIML 117.
MASSFLO * CENELEC hazardous area approval on MASS 1100 / 2100
with MASS 1000 and MASS 3000 electronic
2. Wishes in order of priority:
1. NIST traceable approval
2. MASSFLO* 3A approval on MASS 2100
3. MAGFLO * FM Class 1 Div 2 hazardous area approval on
MAG 1100 / 3100 with MAG 3000 electronic
as remote and compact.
4. MASSFLO * FM Class 1 Div 1 hazardous area approval on
MASS 1100 / 2100 with MASS 3000 electronic as
remote and compact
5. MAGFLO * FM Class I Div 1 hazardous area approval on
MAG 1100 / 3100 with MAG 3000 electronic
as remote and compact
6. All PRODUCTS: General UL approval
<PAGE>
Encl. 4 to Delivery Contract DANFOSS - EMCO
Prices, Discounts, and Conditions:
PRODUCTS: EMCO is granted the enclosed discount on DANFOSS USD export pricelist
LP.96.H1.02. New price list will be forwarded on 1 OCT every year and
effective from 1 January.
If the parties require an extra discount, this will be agreed upon
from project to project.
Terms of payment:
Current month + 60 days
If payment to DANFOSS is not duly made, a 1.5% interest will be
charged for each full month or partial month. EMCO is in this regard
not authorized to make set-offs or withhold payments, unless this is
in each case accepted in writing by DANFOSS.
Currency:
Payment is to take place in USD.
<PAGE>
Encl. 5 to Delivery Contract DANFOSS - EMCO
Assistance in Connection with Service/ Repair
As regards service and repair, the parties have agreed as follows:
- - EMCO is not allowed to carry out repairs on PRODUCTS which have been
manufactured by DANFOSS. PRODUCTS are to be sent to DANFOSS who will
perform the repair, or PRODUCTS (not under warranty, i.e. older than 18
months) can follow the "Exchange to New" programme described in detail in
the document LN 2H 1.01 "Exchange to new, repairs, complaints and check
procedure for PL12 products". To optimize handling and shipping at EMCO,
the PRODUCTS may be sent in batches by EMCO.
All return of PRODUCTS to DANFOSS has to follow the guidelines in LN
25H1.01
- - The education shall enable service instructors to perform an on-site GO/NO-
GO test in order to determine whether a problem is due to the PRODUCT.
- - In so far as it is reasonable, DANFOSS will assist EMCO by telephone and/
or by means of written material on the assumption that the required
instructions are not stated in DANFOSS' data sheets, manuals, or service
instructions, or mentioned in material provided.
- - EMCO is responsible for establishing a reliable, efficient service
organisation, for all DANFOSS PRODUCTS sold by EMCO (EMCO-labelled and
DANFOSS-labelled PRODUCTS)
- - EMCO has agreed to carry the costs in connection with:
Service and field service on all PRODUCTS sold by EMCO (EMCO-labelled and
DANFOSS-labelled PRODUCTS).
<PAGE>
EMCO - DANFOSS
DELIVERY CONTRACT
This contract has been entered into by
Engineering Measurements Company, 600 Diagonal Highway, Longmont, CO, USA 80501,
a corporation incorporated under the laws of the state of Colorado, USA
(hereinafter referred to as EMCO)
and
Danfoss A/S, DK-6430 Nordborg, Denmark (hereinafter referred to as DANFOSS).
Preface
EMCO and DANFOSS are companies which in the instrumentation field are
represented on various markets with various products.
With a view to resale of products which are manufactured at EMCO and its
subsidiaries, DANFOSS wants to buy these in order to extend its product
programme.
1 Definitions
1.1 By PRODUCTS is meant the flowmeters described in Enclosure 1
incl. accessories and spare parts.
1.2 By COMMENCEMENT is meant the 1st November, 1998.
1.3 By TERRITORY is meant worldwide, with the exception of USA and
Canada.
<PAGE>
2 Relations between the parties
2.1 DANFOSS has a non-exclusive right to place orders for PRODUCTS
generally in the TERRITORY. Moreover, DANFOSS has an exclusive right
to place orders for the PRODUCTS in the areas listed in Enclosure 2.
EMCO is obligated to fulfil these orders according to the conditions
stipulated in this Contract.
2.2 This Contract is not meant as a distributor/agent relationship
between the parties.
DANFOSS is allowed to use the EMCO trade name when selling
accessories, spare parts and stickered parts. Otherwise DANFOSS is
prohibited from using the name EMCO. DANFOSS is, however, entitled
to continue to market its electronic monitoring oxygen concentration
(EMCO) product as previously.
2.3 Within the TERRITORY, DANFOSS has a non-exclusive right as described
in Clause 2.1 to actively market the PRODUCTS in its own name and on
its own account.
Active marketing is to be understood as direct promotion and
dedicated advertising for the PRODUCT or initiating direct contracts
with representatives of companies with the aim of selling EMCO
PRODUCTS.
If Danfoss wants a special design which is not described in Encl. 3,
this should be agreed upon in each individual case.
2.4 DANFOSS may not use the EMCO name or EMCO trade names without EMCO's
permission. EMCO is to supply the PRODUCTS with the standard DANFOSS
colours and standard type DANFOSS labels chosen by DANFOSS according
to DANFOSS' instructions. Colours and type labels are to be agreed
upon as described in Enclosure 3. If Danfoss wants a special design
which is not described in Encl. 3, this should be agreed upon in
each individual case.
2.5 Confidential business information may be exchanged between DANFOSS
and EMCO. Both parties agree not to give such information to third
parties such as competitors, customers, or other third parties, also
after termination of this Contract.
2.6 Both parties agree to work together in a mutually acceptable manner
to develop and implement an appropriate marketing strategy for the
PRODUCTS. This strategy should provide marketing, sales and
financial data as needed to support EMCO's regular budget and
planning cycles.
<PAGE>
2.7 DANFOSS will inform the Board of Directors and Officers of EMCO in
writing when (and if) DANFOSS, its subsidiaries or, to the best of
DANFOSS' knowledge, agents acquire 5% of the EMCO's outstanding
common stock. In addition, EMCO's prior written consent is required
in order for DANFOSS, its subsidiaries or agents to purchase any
amount of stock which causes DANFOSS' total beneficial holdings in
EMCO stock to exceed 10% of the amount of EMCO outstanding common
stock.
3 Written Material and Software
3.1 At the COMMENCEMENT EMCO is obligated to place the following
material at DANFOSS' disposal without charge:
a) 1 set of standard documentation material used by EMCO when
marketing the PRODUCTS.
b) 1 set of directions (users' manuals/instructions) used by EMCO
when marketing the PRODUCTS.
c) 1 complete set of service documentation.
d) 1 set of sizing software for In-line Vortex and application
programmes with DANFOSS logo and name as well as updating
these items. Payments for point 3.1 d), if any, will be
negotiated.
3.2 On the basis of the material mentioned under point 3.1, DANFOSS has
a right to print its own information material in connection with the
marketing of the PRODUCTS under DANFOSS label, subject to prior
written approval from EMCO, unless such prior approval would involve
excessive costs and delay. EMCO shall assist DANFOSS in preparation
of such material. Such material shall protect the EMCO copyright.
The intent of this Clause is to ensure the absence of mistakes in
literature.
3.3 If DANFOSS wants information about the PRODUCTS in addition to that
mentioned in the documentation in paragraphs 3.la + b, EMCO will
place such information at DANFOSS' disposal, provided EMCO does not
consider the information confidential, and provided both parties in
the individual case agree upon the price and time of delivery for
the information.
3.4 All documents, copies of documents and other information in tangible
form shall be returned on request from EMCO or upon termination of
the Contract.
<PAGE>
4 Education
4.1 EMCO agrees to educate DANFOSS' service instructors, including
knowledge of application areas, at such level that these are able to
educate DANFOSS' own service organisation. The extent of and the
price for this education is described in Enclosure 4.
4.2 EMCO agrees to offer sales training. The extent of the education and
the payment for this are described in Enclosure 4.
5 Quality demands
5.1 If DANFOSS on an order for the PRODUCTS should want a material
and/or a type certificate, DANFOSS is to specify the contents of the
desired certificate. EMCO is to comply with DANFOSS' wishes in so
far as it is considered technically and commercially reasonable.
EMCO will inform DANFOSS of the net price and time of delivery for
the certificate.
6 Approvals
6.1 All Products (Enc. 1) sent to Danfoss have to be CE approved.
6.2 EMCO has received the approvals from recognized institutions which
appears from Enclosure 5. To the extent provided for in general
plans, EMCO intends to obtain the approvals necessary for successful
operations in the TERRITORY.
EMCO will, in so far as it is reasonable, assist DANFOSS in
obtaining corresponding approvals in DANFOSS' name and on DANFOSS'
account.
6.3 If DANFOSS should request that EMCO applies for an approval, and if
this request is accepted by EMCO, EMCO will seek an approval at
EMCO's expense. If the PRODUCTS are not approved by one or more
authorities, however, EMCO is under no obligation to alter the
PRODUCTS in order to obtain the approval. EMCO pays the expenses for
Cenlec and other general international approvals. For local
approvals obtained by DANFOSS, DANFOSS will forward all documents to
EMCO. EMCO accepts to deliver PRODUCTS according to these local
approvals. If changes to PRODUCTS having influence on the approvals
are planned DANFOSS shall give notification in advance.
6.4 If DANFOSS receives approvals on their own on any of the PRODUCTS,
DANFOSS will, in so far as it is reasonable, assist EMCO in
obtaining corresponding approvals in EMCO's name and on EMCO's
account, if EMCO wishes to obtain the approval.
<PAGE>
7 Alterations of the PRODUCTS
7.1 EMCO has a right to alter the design of the PRODUCTS. However, if
these have an influence on specifications or functions DANFOSS is to
be informed of the alterations at the same period of time as EMCO's
subsidiaries/ agents are being informed, in all cases at least 3
months prior to implementation.
For a period of 5 years from delivery, EMCO shall retain the
capacity to provide spare parts or compatible product solutions for
delivered PRODUCTS.
7.2 DANFOSS is not allowed to modify the PRODUCTS, unless authorized by
EMCO in writing.
However, when EMCO supplies sensors and electronics separately,
DANFOSS is permitted to make the final configuration of these at the
time EMCO has the final Product Structure available to build the
complete meters in accordance with the EMCO PRODUCT and assembly
specification and in order to meet specific customer needs.
8 Prices and Terms of Payment
8.1 EMCO will supply DANFOSS with the PRODUCTS according to the prices
and discounts described in Enclosure 6. Both parties agree to
discuss the prices at any time required by one of the parties.
Once a year EMCO will carry through price alterations (January 1),
if necessary. Such alterations will also apply to DANFOSS. DANFOSS
will be informed in writing to the Purchase Manager and the Product
Manager, of these alterations every year before September 1.
In the case of documented, essential changes in the price of raw
material or other direct costs, EMCO reserves the right to alter
prices without previous notice and at dates other than those
mentioned above.
Already placed an confirmed orders will not be affected by such
price alteration.
In cases where DANFOSS negotiates supplies for very great projects,
OEMs or similar customers and where the limits of this contract do
not make DANFOSS sufficiently competitive, EMCO will be willing to
negotiate a solution which will be for the benefit of both parties.
8.2 The PRODUCTS are to be delivered ex works (Incoterms 1990) from EMCO
to DANFOSS.
However, according to DANFOSS' desire, EMCO in special cases will
<PAGE>
provide that the PRODUCTS are delivered directly from EMCO to an
address stated by DANFOSS, however, this is still for DANFOSS' own
account and risk.
8.3 The prices are to be understood as delivery packed ex works in
neutral boxes with yellow DANFOSS label (approved by DANFOSS) on the
outside.
8.4 Manuals prepared by DANFOSS are to be delivered by DANFOSS.
8.5 Terms and conditions of payment for the PRODUCTS to take place
according to Enclosure 6.
9 Ownership Reservation
9.1 All PRODUCTS become the property of DANFOSS as soon as they are
shipped.
10 Strategy, Forecast and Time of Delivery
10.1 DANFOSS agrees to provide EMCO with input for strategies and long
term plans concerning business development.
10.2 DANFOSS agrees to work with EMCO to prepare and submit market
forecast at mutual agreed-upon intervals.
10.3 EMCO is to deliver the PRODUCTS as soon as possible after receipt of
orders from DANFOSS; however, times of delivery are to be specified
in connection with each particular order. If Danfoss cancels a
confirmed order, a re-stocking fee based on the incurred cost is to
be negotiated.
<PAGE>
11 Complaints and Service
11.1 EMCO is a ISO 9001 company. EMCO will maintain ISO 9001.
11.2 If DANFOSS customers complain about defects in the PRODUCTS, EMCO
agrees that DANFOSS handles all contacts to the customers of DANFOSS
with regard to, but not limited to, warranty, complaints and service
requirements. In the event of defects EMCO shall inform DANFOSS of
the cause of the defect. EMCO shall furthermore take the necessary
steps to avoid a recurrence of the defect.
11.3 EMCO will assist DANFOSS with repair and service of the PRODUCTS.
The exact extent of this as well as costs of such assistance appear
from Enclosure 4.
11.4 In the event of defective PRODUCTS, DANFOSS shall notify EMCO within
18 months from the manufacturing date stamped on the PRODUCTS,
however a maximum of 17 months after delivery of the PRODUCTS. EMCO
may then either repair or replace the defective PRODUCTS. Costs
associated with disassembly and assembly will be uncompensated;
however, EMCO will pay transport costs for the PRODUCTS and spare
parts, if any, from EMCO to DANFOSS. DANFOSS is to cover transport
costs, if any, from DANFOSS (and its customers) to EMCO.
Should DANFOSS request a special warranty beyond the usual period of
18 months, EMCO may at EMCO's discretion assume such obligation, in
writing.
ALL OTHER WARRANTIES, EXPRESSED OR IMPLIED, INCLUDING IMPLIED
WARRANTIES OF MERCHANTABILITY ON FITNESS FOR A PARTICULAR PURPOSE
ARE HEREBY EXPRESSLY EXCLUDED.
11.5 EMCO is not liable for any kind of indirect or consequential damage
which might occur as a result of defective PRODUCTS.
11.6 Should EMCO or DANFOSS have reason to believe that a third party
claims or will claim that the PRODUCTS manufactured by EMCO violate
patent or trade mark rights held by a third party, the party having
this information shall immediately inform the other party in writing
and keep that party informed of the status of the matter.
<PAGE>
Should in the evaluation of the legal advisors of one of the parties
there exist a substantial or colourable validity to the third
party's claim, each party is authorized to suspend the purchase and
sale of the PRODUCTS under this Contract, pending clarification of
the dispute.
Should DANFOSS be sued in this connection, EMCO agrees to pay
reasonable costs of litigation (including but not restricted to
attorneys fees, expert witness fees, reimbursement for DANFOSS
management time used in defending the lawsuit, and all advance sums
required to pay the costs of any appeal bonds that might be
necessary to further contest the litigation) and any unappealable
awards of compensation and damages provided by a legal tribunal.
EMCO is also granted the right to participate in the suit or
arbitration as a party.
12 Product Liability
12.1 This Contract does not affect the limitations on EMCO's usual
product liability in cases of damages to persons or personal
property which have occurred because of defective PRODUCTS. However,
EMCO is not liable for indirect or consequential damage.
EMCO shall be capable of documenting to DANFOSS the existence of a
currently valid product liability insurance covering the PRODUCTS
globally.
13 Duration of the Contract
13.1 This Contract is valid indefinitely as of its COMMENCEMENT. If not
previously terminated, the parties agree that 30 months after the
inception of this Contract it shall be renegotiated; the negotiation
shall be completed within 36 months of COMMENCEMENT.
The Contract can at any time be terminated by either party with 12
months written notice.
EMCO shall confirm to supply PRODUCTS up to 24 months after written
notice of termination at comparable prices.
13.2 Further, this Contract can be terminated with 30 days written notice
in the event of:
1) Disclosure to a third party of confidential information.
<PAGE>
2) Violation of trade marks, or misuse of company name or
literature.
3) Failure to make payment in reasonable time in accordance with
Encl. 6.
4) Active marketing by DANFOSS of the PRODUCTS in the USA or
Canada.
5) Marketing or sales practices in violation of US or Danish
legislation.
6) DANFOSS develops, manufactures, and/or markets and sells other
Inline Vortex type flowmeters.
If both parties agree that corrective action has been taken within
30 days of written notice, the termination notice is nullified.
13.3 PRODUCTS for which there have already been placed orders before or
at the date of notice of termination are to be delivered from EMCO
to DANFOSS according to this Contract.
13.4 For a period of 5 years after termination of this Contract, EMCO is
to supply DANFOSS with all spare parts or compatible product
solutions under normal conditions and comparable prices. Apart from
this, EMCO's obligation as regards service cease when terminating
this Contract.
13.5 In the event of insolvency, suspension of payments, or bankruptcy of
one of the contract parties, the other party at any time has right
to terminate the Contract without notice.
The same applies if a competitor to one of the contract parties
obtains a considerable influence in the other party, including, but
not limited to, gaining a controlling interest in the company,
purchase of shares, and/or appointment as manager or board member in
the company.
13.6 Neither party shall be held liable for failure to meet its
obligations under this Contract in the case of force majeure,
including, but not limited to, strikes, blockade, armed conflicts,
government restrictions and natural calamities.
Should either party by unable to fulfil its obligations under this
Contract because of force majeure for more than 3 months, the other
party may terminate the Contract with 30 days notice.
13.7 Confidential business information is not to be given to any third
party in a period of 3 years from termination.
<PAGE>
14 Law, Venue, Invalidity, Supremacy
14.1 This Contract shall be governed by the law of the State of Colorado
and the law of the United States of America applicable therein. Any
controversy which may occur in relation to this Contract shall
finally be settled in accordance with the rules of Conciliation and
Arbitration of the International Chamber of Commerce (ICC), Paris.
Meetings are held in a city of EMCO's choice in Colorado, USA.
Process language is English.
14.2 In the event that single clauses should be rendered wholly or partly
invalid, the validity of the remaining clauses or the remaining
parts of such clauses are not rendered invalid.
14.3 This Delivery Contract supersedes and renders null and void the
previous Delivery Contract concerning the PRODUCTS between EMCO and
DANFOSS effective on 1 November 1995.
Enclosure 1: PRODUCTS
Enclosure 2: Exclusive Sales Rights
Enclosure 3: Labels
Enclosure 4: Repair and Service
Enclosure 5: Approvals
Enclosure 6: Price, Discounts and Conditions
Place and date Place and date
for Danfoss for EMCO
6.OCT98
/s/Henrik Henriksen /s/Charles E. Miller
Henrik Henriksen Charles E. Miller
/s/Peter Madsen /s/Saeid Hosseini
Peter Madsen Saeid Hosseini
/s/Hans-Uwe Simonsen /s/Ken Teegarden
Hans-Uwe Simonsen Ken Teegarden
<PAGE>
Encl. 1 to Delivery Contract EMCO - DANFOSS
PRODUCTS:
From EMCO the Delivery Contract covers the following:
1a) i) Label (as defined in Encl. 3) Products:
EMCO In-line Vortex family
ii) EMCO Products with EMCO label and Danfoss sticker: (nonexclusive).
FP 93 flow computer
1b) Accessories and Spare Parts to the PRODUCTS are also PRODUCTS
<PAGE>
Encl. 2 to Delivery Contract EMCO - DANFOSS
DANFOSS exclusive sales rights to the PRODUCTS.
1. DANFOSS has exclusive sales rights to In-line VORTEX Family for
Denmark Estonia Austria Rumania
Sweden Latvia Hungary Bulgaria
Norway Lithuania Slovenia Albania
Finland Poland The Czech Republic Greece
UK Germany The Slovak Republic Serbia
Ireland Holland 1) Switzerland Croatia
Iceland Belgium Austria Hercegovina
Italy Bosnia
Spain
Luxemburg
Portugal
DANFOSS has acquired exclusive sales rights for the PRODUCTS for the whole
of Europe on 29 May 1997 excluding France, Russia, Ukraine, White Russia,
Kazakhstan, Uzbekistan, Georgia.
1) Shell, Holland:
As long as Danfoss Vorflow is not on the approved vendor list at
Shell, DANFOSS is working with EMBA to promote and sell the EMCO
labelled Vortex meter to Shell.
<PAGE>
Encl. 3 to Delivery Contract EMCO - DANFOSS
In connection with the DANFOSS marketing of EMCO manufactured flowmeters the
following labelling shall be valid:
a) Label products - In-line Vortex - family
These products shall be marked as label products. EMCO will attach
an EMCO approved DANFOSS label, and make necessary modifications in
the appearance of the label products so they appear to be DANFOSS
products. Literature and packing shall also bear the DANFOSS name
while the EMCO name is removed. The nature, extent and payment for
these changes shall be agreed between the parties. The label
products will be packed in neutral packing materials with DANFOSS
yellow labels, approved by DANFOSS.
b) Sticker products.
Sticker products shall consist of EMCO's flowcomputers and are to be
marketed by DANFOSS under EMCO label. EMCO will prior to delivery
attach a DANFOSS sticker to these products, accompanying literature
and packing. Content and appearance with regard to the DANFOSS
stickers are to be agreed upon. It is the intention of the parties
to market EMCO flowcomputers as a label product when an appropriate
sale volume (to be agreed upon by the parties) is obtained.
c) Accessories and spare parts.
Accessories and spare parts to the products are not to be labelled,
used in connection with the stickers mentioned in b) above or
altered by DANFOSS.
d) Costs.
All costs for manuals are to be paid by DANFOSS.
Changes which involve costs may be implemented only by agreement
with DANFOSS.
<PAGE>
Encl. 4 to Delivery Contract EMCO - DANFOSS
Assistance in connection with service/repair
As regards service and repair, the parties have agreed as follows:
- - All return and complaints will be handled in accordance with current EMCO
Service policy No. ......
- - DANFOSS normally will not carry out repairs on PRODUCTS which have been
manufactured by EMCO.
- - The education specified below shall enable service instructors to perform
an on-site fault finding/ application/ problem solving test with respect
to PRODUCT use.
- - In so far as it is reasonable, EMCO will assist DANFOSS by telephone
and/or by means of written material on the assumption that the required
instructions are not stated in EMCO's data sheets, manuals or (service)
instructions, or mentioned in material provided and taught at a seminar
for DANFOSS held by EMCO.
- - EMCO offers the following necessary service equipment:
To be agreed upon
- - DANFOSS has agreed to carry the costs in connection with:
Service and field service on all PRODUCTS sold by DANFOSS.
<PAGE>
Encl. 5 to Delivery Contract EMCO - DANFOSS
Approvals in Europe:
1. At present
VORFLO * CENELEC hazardous area approval on Vor 1100 / 1000 /
2000 EExd(ib)
2. Requirements:
1. VORFLO * CE approval (electrical)
2. VORFLO * CENELEC hazardous area approval in EExib Solution
3. FP 93 * CE approval (electrical)
3. Wishes in order of priority:
1. VORFLO * NAMUR (German chemical electrical app.)
2. FP 93 * NAMUR (German chemical electrical app.)
3. VORFLO * Custody Transfer approval for steam and gaze.
4. VORFLO and FP 93:
East European Type, custody transfer and hazardous areas
approval in EExib solution.
DANFOSS shall be consulted prior to adoption of PRODUCT alterations which might
affect approvals.
