<PAGE> 1
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for use of the Commission
[x] Definitive Proxy Statement only (as permitted by Rule 14a-6(e)(2)
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
PEERLESS MFG. CO.
- - --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- - --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[x] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction applies:
- - --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transactions applies:
- - --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was calculated):
- - --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- - --------------------------------------------------------------------------------
(5) Total fee paid:
- - --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
- - --------------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- - --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No:
- - --------------------------------------------------------------------------------
(3) Filing Party:
- - --------------------------------------------------------------------------------
(4) Date Filed:
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<PAGE> 2
PEERLESS MFG. CO.
2819 WALNUT HILL LANE
DALLAS, TEXAS 75229
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD NOVEMBER 21, 1996
To the Shareholders of
PEERLESS MFG. CO.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Peerless
Mfg. Co. (the "Company") will be held at the Peerless Mfg. Co. Corporate
Offices, 2819 Walnut Hill Lane, Dallas, Texas, on Thursday, the 21st day of
November, 1996 at 10:00 o'clock a.m., local time, for the following purposes:
1. To elect a Board of Directors to serve during the
ensuing year and until their successors are elected
and qualified;
2. To approve the adoption of the Peerless Mfg. Co. 1995
Stock Option and Restricted Stock Plan; and
3. To transact such other business as may properly come
before the meeting and any adjournment(s) thereof.
The Board of Directors has fixed the close of business on September 27,
1996, as the record date ("Record Date") for the determination of shareholders
entitled to notice of and to vote at such meeting and any adjournment(s)
thereof. Only shareholders of record at the close of business on the Record
Date are entitled to notice of and to vote at such meeting. The transfer books
will not be closed.
It is important that your stock be represented at the meeting regardless of
the number of shares you hold. You are invited to attend the meeting in
person, but whether or not you plan to attend, please complete, date, sign and
return the accompanying Proxy in the enclosed postage-paid self-addressed
envelope. If you do attend the meeting, you may, if you wish, revoke your
Proxy and vote your shares in person.
By Order of the Board of Directors,
KENT J. VAN HOUTEN
Secretary
Dated: October 11, 1996
<PAGE> 3
PEERLESS MFG. CO.
2819 WALNUT HILL LANE
DALLAS, TEXAS 75229
PROXY STATEMENT
FOR
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD NOVEMBER 21, 1996
------------------------
PROXY SOLICITATION
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Peerless Mfg. Co. (the "Company"), a Texas
corporation, to be used at the Annual Meeting of the Shareholders of the
Company (the "Annual Meeting"), to be held at the Company's corporate offices,
2819 Walnut Hill Lane, Dallas, Texas to be held on Thursday, November 21, 1996,
and at any adjournment(s) thereof. The approximate date on which this Proxy
Statement and accompanying form of Proxy were first sent or given to
shareholders is October 11, 1996.
The Company will bear the expense of preparing, printing and mailing this
Proxy Statement and accompanying material to its shareholders. Solicitation
may be made by mail, personal contact, telephone and telegraph by officers and
other employees of the Company, who will not receive additional compensation
for such services. The Company may also request brokerage houses, nominees,
custodians, fiduciaries and other similar parties to forward soliciting
material to the Company's record shareholders and will reimburse such persons
for their reasonable charges and expenses in connection therewith.
VOTING AT THE ANNUAL MEETING
The record date for the determination of shareholders entitled to vote at
the Annual Meeting and to notice thereof is the close of business on September
27, 1996 (the "Record Date"). On the Record Date there were issued and
outstanding 1,454,742 shares of Common Stock of the Company, par value $1.00
per share (the "Common Stock"). Each holder of Common Stock is entitled to one
vote for each share owned as of the Record Date on all matters presented at the
meeting. The presence at the Meeting in person or by proxy of the holders of a
majority of the outstanding shares of Common Stock shall constitute a quorum
for the Annual Meeting. The affirmative vote of a majority of the shares
eligible to vote and actually voted at the Annual Meeting, if a quorum is
present, is required for the election of directors, for the adoption of the
Peerless Mfg. Co. 1995 Stock Option and Restricted Stock Plan (the "1995
Plan"), and for action on such other matters as may properly come before the
Annual Meeting or any adjournment(s) thereof. The shareholders of the Company
have no appraisal rights under the corporation law statute of the Company's
place of incorporation, the Texas Business Corporation Act, or any other
statute or regulation with respect to the proposals specified in the notice.
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Shares represented by valid proxies will be voted in accordance with
instructions contained therein, or, in the absence of such instructions, in
accordance with the Board of Directors' recommendations. Any shareholder who
is present at the meeting but who abstains from voting shall be counted for
purposes of determining whether a quorum exists, but an abstention shall not be
counted as an affirmative vote with respect to any matter. With respect to all
matters other than the election of directors, an abstention would have the same
effect as a vote against the proposal. Any shareholder of the Company has the
unconditional right to revoke such shareholder's proxy at any time prior to the
voting thereof by written notice of revocation to Kent J. Van Houten,
Secretary, Peerless Mfg. Co., 2819 Walnut Hill Lane, Dallas, Texas 75229, by
executing a new proxy, or by attending the Annual Meeting and casting a
contrary vote; however, no revocation shall be effective until such notice of
revocation has been received by the Company at or prior to the Annual Meeting.
ELECTION OF DIRECTORS
PROPOSAL ONE - THE ELECTION OF DIRECTORS
One of the purposes of the Annual Meeting is the election of directors.
The number of directors expected to constitute the whole Board following the
Annual Meeting is five. Unless a shareholder indicates to the contrary, the
proxies named in the enclosed Proxy card will vote such shareholder's shares
for the election as directors of the nominees named below, all of whom are
currently directors of the Company. Each of the director nominees has held the
position listed below his name or a similar position with the same organization
for at least the past five years. The election of directors requires the
affirmative vote of the holders of a majority of the outstanding shares of
Common Stock represented in person or by proxy at the Annual Meeting. Although
it is not contemplated that any nominee will decline or be unable to serve, the
proxies will be voted by the proxy holders, in their discretion, for another
person, or for a lesser number of persons, if such a contingency should arise.
The term of each person elected as a director shall continue until the next
annual meeting and until his successor is elected and qualified.
Sherrill Stone, 59 - Chairman of the Board, Chief Executive Officer, and
President of the Company.
Donald A. Sillers, Jr., 70 - Investments. Mr. Sillers retired from his
positions as Chairman of the Board and Chief Executive Officer of the Company,
capacities in which he had served for more than the last five years, effective
March 31, 1993.
David D. Battershell, 70 - Consulting Engineer.
Bernard S. Lee, 61 - President, Institute of Gas Technology. Mr. Lee is
also a director of NUI Corporation, National Fuel Gas Company and Energy
BioSystems Corporation.
2
<PAGE> 5
Joseph V. Mariner, Jr., 76 - Investments. Mr. Mariner is also a director
of El Chico Restaurants, Inc., Renters Choice, Inc. and Temtex Industries, Inc.
The Board of Directors has an Audit Committee and a Compensation Committee.
The Audit Committee is responsible for reviewing the scope of the audit by the
independent auditors, reviewing the management letter received from the
auditors and recommending changes in the Company's internal accounting
controls. The Compensation Committee is responsible for recommending to the
full Board of Directors salaries and bonuses for the Company's key employees.
Members of the Audit and Compensation Committees in fiscal 1996 were Messrs.
Battershell, Lee, Sillers and Mariner. The Board of Directors does not have a
nominating committee.
During fiscal 1996, the Board of Directors held six meetings, the Audit
Committee held four meetings and the Compensation Committee held four meetings.
Each of the directors attended at least 75% of the aggregate number of meetings
of the Board of Directors and any meetings held by any committee on which that
director served. Directors who are not also employees of the Company are paid
$1,250 per quarter, plus $500 for each board or board committee meeting
attended.
THE BOARD OF DIRECTORS URGES SHAREHOLDERS TO VOTE "FOR" EACH OF THE
NOMINEES FOR THE BOARD OF DIRECTORS SET FORTH ABOVE.
THE 1995 PLAN
PROPOSAL TWO - APPROVAL OF THE PEERLESS MFG. CO. 1995 STOCK OPTION AND
RESTRICTED STOCK PLAN
Effective as of December 31, 1995, the Board of Directors adopted the 1995
Plan, subject to shareholder approval. A summary of the material features of
the 1995 Plan follows. This summary does not purport to be complete and is
qualified in its entirety by reference to the text of the 1995 Plan, a copy of
which is attached as Appendix A and is incorporated herein by reference.
General. The 1995 Plan provides for grants of stock options ("Options")
and restricted stock ("Restricted Stock") to officers and key employees of the
Company, a group comprised of approximately 10 persons. The 1995 Plan will be
administered by a committee of non-employee directors (the "Stock Option
Committee") designated by the Board of Directors.
Amendments to the 1995 Plan. The Stock Option Committee may amend or
discontinue the 1995 Plan at any time subject to certain restrictions set forth
in the 1995 Plan. Except in limited circumstances, no amendment or
discontinuance may adversely affect any previously granted Option or Restricted
Stock award without the consent of the recipient thereof.
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<PAGE> 6
Shares Issuable through the 1995 Plan. A total of 100,000 shares of Common
Stock are authorized and reserved for issuance under the 1995 Plan upon the
exercise of Options or the grant of Restricted Stock. Proportionate
adjustments will be made to the number of shares of the Common Stock subject to
the 1995 Plan in the event of any recapitalization, stock dividend, stock
split, combination of shares or other change in the Common Stock. The Stock
Option Committee may also provide additional anti-dilution protection to a
participant under the terms of such participant's Option or Restricted Stock
agreement. Shares of Common Stock subject to Options or Restricted Stock
grants that are canceled, terminated or forfeited will again be available for
issuance under the 1995 Plan.
Administration of the 1995 Plan. The Stock Option Committee will
administer the 1995 Plan and has authority to select the participants that will
be granted Options and Restricted Stock, to terminate the plan or accelerate
vesting of Options and Restricted Stock, to determine the nature, extent,
timing, exercise price, vesting and duration of Options and Restricted Stock,
to prescribe all other terms and conditions consistent with the 1995 Plan, to
interpret the 1995 Plan, to establish any rules or regulations relating to the
1995 Plan that it determines to be appropriate, and to make any other
determination that it believes necessary or advisable for the proper
administration of the 1995 Plan.
Stock Options and Restricted Stock. From time to time, the Chief Executive
Officer of the Company will recommend to the Stock Option Committee individuals
he or she believes should receive Options or Restricted Stock grants, the
amount of shares of Common Stock he or she believes should be subject to such
Option or grant, and, with respect to any recommended Option, whether the
Option should be a qualified or nonqualified option. The Stock Option
Committee will consider, but need not accept, the Chief Executive Officer's
grant recommendations. Each non-employee director of the Company or its
subsidiaries will receive nonqualified options to purchase 500 shares of Common
Stock on the date that the shareholders approve the 1995 Plan and on the date
of the Company's annual shareholder's meeting for each following year that such
director serves on the Board.
The Stock Option Committee may grant nonqualified stock options or
incentive stock options to purchase shares of Common Stock. The Stock Option
Committee will determine the number and exercise price of the Options, and the
time or times that the Options become exercisable, provided that an Option
exercise price may not be less than the fair market value of the Common Stock
on the date of grant. As of October 10, 1996, the latest practicable date
prior to the printing of this proxy statement, the closing price of the Common
Stock on the Nasdaq Stock Market's National Market was $12.00. The Stock
Option Committee may award shares of Restricted Stock without requiring the
payment of cash consideration for such shares. The term of an Option will also
be determined by the Stock Option Committee, provided that the term of a
qualified Option may not exceed 10 years. The 1995 Plan provides that each
grant of Options or Restricted Stock will vest in accordance with the
applicable Option or Restricted Stock agreement.
The Option exercise price may be paid in cash, or, at the Company's option,
in shares of Common Stock.
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<PAGE> 7
Termination of Employment. If a participant dies or becomes disabled, all
vested Options may be exercised at any time within one year (or their remaining
term of the Option, if less). If a participant ceases to be a Company employee
for any other reason, he or she must exercise any vested Options within ninety
days.
FEDERAL INCOME TAX CONSEQUENCES
The following general description of federal income tax consequences is
based upon current statutes, regulations and interpretations and does not
purport to be complete. Reference should be made to the applicable provisions
of the Internal Revenue Code of 1986 (the "Code"). There also may be state,
local and foreign income tax consequences applicable to transactions involving
Options or Restricted Stock. In addition, the following description does not
address specific tax consequences applicable to an individual participant who
receives an incentive Option and does not address special rules that may be
applicable to directors and officers.
Stock Options. Under existing federal income tax provisions, a participant
who receives stock options will not normally realize any income, nor will the
Company normally receive any deduction for federal income tax purposes, in the
year such Option is granted.
When a non-qualified stock option granted pursuant to the 1995 Plan is
exercised, the employee generally will realize ordinary income measured by the
difference between the aggregate purchase price of the Common Stock as to which
the option is exercised and the aggregate fair market value of the Common Stock
on the exercise date, and the Company generally will be entitled to a deduction
in the year the option is exercised equal to the amount the employee is
required to treat as ordinary income. Any taxable income recognized in
connection with a non-qualified stock option exercised by an optionee who is
also an employee of the Company will be subject to tax withholding by the
Company. Upon resale of such shares by the optionee, any difference between
the sales price and the exercise price, to the extent not recognized as taxable
income as described above, will be treated as long-term or short-term capital
gain or loss, depending on the holding period.
An employee generally will not recognize any income upon the exercise of an
incentive stock option, but the exercise may, depending on particular factors
relating to the employee, subject the employee to the alternative minimum tax.
An employee will recognize capital gain or loss in the amount of the difference
between the exercise price and the sale price on the sale or exchange of stock
acquired pursuant to the exercise of an incentive stock option, provided that
the employee does not dispose of such stock within two years from the date of
grant and one year from the date of exercise of the incentive stock option (the
"required holding periods"). An employee disposing of such shares before the
expiration of the required holding periods will recognize ordinary income equal
to the lesser of (i) the difference between the option price and the fair
market value of the stock on the date of exercise, or (ii) the total amount of
gain realized. The remaining gain or loss is treated as short term or long
term gain or loss depending on how long the shares are held. The Company will
not be entitled to a federal income tax deduction in connection with the
exercise of an incentive stock option, except where the employee disposes of
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<PAGE> 8
the shares of Common Stock received upon exercise before the expiration of the
required holding periods.
THE 1995 PLAN BENEFITS
The following table presents information with respect to certain persons
who have received Options or are currently slated to receive Options under the
1995 Plan:
<TABLE>
<CAPTION>
Name Number of Options Granted or to be
---- Granted Under the 1995 Plan (1)
---------------------------
<S> <C>
Sherrill Stone 10,000
Donald A. Sillers, Jr. 500(2)
David D. Battershell 500(2)
Bernard S. Lee 500(2)
Joseph V. Mariner, Jr. 500(2)
G. D. Cornwell 5,000
Dayle B. Ellis 5,000
Edward Perry 5,000
Current Executive Officers 28,000
as a Group
Current Directors who are not 2,000
Executive Officers as a Group
All Employees, including Current 6,000
Officers who are not Executive
Officers
</TABLE>
- - ----------------------
(1) All Options listed in this table are nonqualified Options.
(2) These Options will be granted upon shareholder approval of the 1995 Plan.
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<PAGE> 9
REASON FOR PROPOSAL
The purpose of the 1995 Plan is to increase shareholder value and to
advance the interests of the Company by furnishing equity incentives designed
to attract, retain and motivate key employees and to strengthen the mutuality
of interest between such employees and the Company's shareholders. The Board
of Directors believes that the 1995 Plan is in the best interest of the Company
and its shareholders.
VOTE REQUIRED AND RECOMMENDATION FOR APPROVAL
The affirmative vote of the holders of a majority of the total votes cast
with respect to the 1995 Plan proposal is required to approve the 1995 Plan.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" APPROVAL OF THE
PEERLESS MFG. CO. 1995 STOCK OPTION AND RESTRICTED STOCK PLAN.
INTERESTS OF CERTAIN PERSONS IN
MATTERS TO BE ACTED UPON
In considering whether to vote for approval of the 1995 Plan, shareholders
should be aware that each of the directors, nominees for director, and
executive officers will be eligible for Option grants and Restricted Stock
awards under the 1995 Plan.
7
<PAGE> 10
COMMON STOCK OWNERSHIP OF MANAGEMENT
AND CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information, as of the Record Date,
concerning each nominee for director, the named executive officers, and certain
beneficial owners regarding beneficial ownership of the Company's Common Stock.
Mr. Sillers and Quest Advisory Corp. are the only persons or entities known by
the Company to beneficially own more than 5% of the Common Stock as of such
date.
<TABLE>
<CAPTION>
Shares of Common Percent of
Stock Beneficially Common
Name Owned Stock
---- ------------------- -----------
<S> <C> <C>
Sherrill Stone 23,358 (1) 1.61%
Donald A. Sillers, Jr. 156,677 (2) 10.77%
David D. Battershell 6,600 *
Bernard S. Lee 3,600 (3) *
Joseph V. Mariner, Jr. 3,750 *
G. D. Cornwell 8,500 *
Dayle Ellis 5,000 *
Edward Perry 2,000 *
Quest Advisory Corp. (4) 118,300 (4) 8.13%
All Directors and Officers as a 209,485 14.40%
Group (nine persons including
those named above)
</TABLE>
- - ----------------------------
*Less than 1%.
(1) Does not include 150 shares owned of record by Mrs. Jo Ann Stone, Mr.
Stone's wife, as to which shares Mr. Stone disclaims any beneficial
interest.
(2) Includes 63,000 shares owned of record by Mr. Sillers as sole trustee
of a trust, the income from which is payable for life to Mr. Sillers
and his wife, remainder to their children. Does not include 939
shares owned of record by Mrs. Virginia Sillers, Mr. Sillers' wife, as
to which shares Mr. Sillers disclaims any beneficial interest.
(3) Does not include 3,000 shares owned of record by Mrs. Pauline Lee, Mr.
Lee's wife, as to which shares Mr. Lee disclaims any beneficial
interest.
(4) Quest Advisory Corp., Quest Management Company and Charles M. Royce,
controlling person of Quest Advisory Corp. and Quest Management
Company, are deemed the beneficial owners of 118,300 shares of Common
Stock as of September 30, 1996. Quest Advisory Corp. and Quest
Management Company are registered investment advisers.
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<PAGE> 11
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
paid during its fiscal year ended June 30, 1996 to the Company's Chief
Executive Officer and its most highly compensated executive officers whose
total annual salaries and bonuses during fiscal 1996 exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
----------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------------ ----------------------- ---------------------
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING ALL OTHER
COMPEN- STOCK OPTIONS/ LTIP COMPEN-
BONUS SATION AWARD(S) SAR'S PAYOUTS SATION
PRINCIPAL FISCAL SALARY ($) ($) ($) (#) ($) ($)
POSITION YEAR ($) (1) (2) (3) (4) (5)
- - ------------------- ------ ------- ------ --------- --------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sherrill Stone 1996 168,000 8,716 None None 10,000 N/A 3,360
Chairman, CEO 1995 164,480 10,878 None 33,750 N/A N/A 3,290
& President 1994 155,000 None None None N/A N/A 3,094
Dayle B. Ellis 1996 92,500 5,684 None None 5,000 N/A 1,850
Executive Vice 1995 92,541 7,095 None 33,750 N/A N/A 1,743
President & COO 1994 81,459 None None None N/A N/A 1,629
Edward Perry 1996 115,750 6,063 None None 5,000 N/A 2,315
Vice President 1995 113,946 7,568 None 33,750 N/A N/A 2,268
1994 109,700 None None None N/A N/A 2,192
G.D. Cornwell 1996 101,600 6,063 None None 5,000 N/A 2,032
Vice President 1995 104,692 7,568 None 33,750 N/A N/A 1,982
1994 95,817 None None None N/A N/A 958
</TABLE>
(1) Bonuses are paid in the fiscal year following the fiscal year in which
earned.
(2) The aggregate value of Other Annual Compensation paid does not exceed
the lesser of $50,000 or 10% of the salary and bonuses paid to the
executive officers named above.
(3) Restricted stock awards are valued at the closing market price of the
Common Stock as of the date of grant. Dividends are paid on
restricted shares at the same rate paid to all shareholders. The
Company's Restricted Stock Plan is discussed in the "Board
Compensation Committee Report on Executive Compensation - Restricted
Stock Plan" section.
(4) Amounts shown give effect to grants under the 1995 Plan.
(5) Amounts shown represent contributions made by the Company on behalf of
the named executive officers to the Peerless Mfg. Co. Retirement
Savings Plan Trust, a defined contribution plan defined under Section
401(k) of the Internal Revenue Code of 1986, as amended.
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<PAGE> 12
OPTION GRANTS DURING 1996 FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF STOCK
INDIVIDUAL GRANTS APPRECIATION FOR OPTION TERM
----------------------------------------- ---------------------------
% OF TOTAL
OPTIONS
OPTIONS GRANTED TO EXERCISE OR
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION 5% 10%
NAME (#)(1) FISCAL YEAR(2) ($/SHARE) DATE ($) ($)
- - ---------------- -------- --------------- ------------ ----------- --------- -----------
(a) (b) (c) (d) (e) (f) (g)
<S> <C> <C> <C> <C> <C> <C>
Sherrill Stone 10,000 29.4 9.25 1/17/76 58,200 147,400
Dayle B. Ellis 5,000 14.7 9.25 1/17/76 29,100 73,700
Edward Perry 5,000 14.7 9.25 1/17/76 29,100 73,700
G.D. Cornwell 5,000 14.7 9.25 1/17/76 29,100 73,700
</TABLE>
- - -------------------------
(1) Amounts shown give effect to grants under the 1995 Plan.
(2) Total options granted during 1996 were 34,000 shares to the Named
Executive Officers and all other employees.
OPTION EXERCISES IN 1996 FISCAL YEAR AND
FISCAL YEAR ENDED JUNE 30, 1996, VALUE TABLE
<TABLE>
<CAPTION>
SHARES VALUE OF UNEXERCISED
ACQUIRED ON NUMBER OF OPTIONS IN-THE-MONEY OPTIONS AT
EXERCISE VALUE FY-END 06/30/96 FY-END 06/30/96
REALIZED (#) ($)
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - --------------- ---------- -------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sherrill Stone 0 0 0 10,000 0 15,000
Dayle B. Ellis 0 0 0 5,000 0 7,500
Edward Perry 0 0 0 5,000 0 7,500
G. D. Cornwell 0 0 0 5,000 0 7,500
</TABLE>
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<PAGE> 13
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors is composed of Messrs.
Battershell, Lee, Sillers and Mariner, the four independent outside directors
of the Company. No compensation committee interlocks existed and no insiders
participated in compensation committee decisions in fiscal 1996.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee is responsible for setting the annual base
compensation and bonus levels and administering the restricted stock program
for the Company's employees, including its executive officers. Its
recommendations are subject to final approval by the Board of Directors. The
Company believes that the key to a successful executive compensation program is
in setting aggressive business goals by integrating the program with the
Company's annual and strategic planning and evaluation processes and by
comparing the Company's results against industry performance levels. The
Company's achievements during the past fiscal year, as well as the individual
achievements of its various business units and divisions, are taken into
account in making executive compensation determinations. In addition, the
Company recognizes that it competes in an increasingly competitive environment,
and executive compensation therefore must also take into account the Company's
performance as compared to that of other companies in the industry or in
similar industries. The Compensation Committee also evaluates on an annual
basis the Company's corporate performance, revenues and share performance with
respect to a broader group of companies, such as the Standard & Poor's 500.
Annual Base Compensation
Annual base compensation awarded in any particular fiscal year to each of
the Company's executive officers is based upon the following factors:
corporate performance of the Company during the prior year, performance of the
divisions within the Company for which the executive officer is responsible,
and a more subjective evaluation of the executive officer's personal
performance. The evaluation of the Company's corporate performance is directly
linked to the Company's profitability during the period, and therefore is based
upon the value of the stock of the Company. In making this determination, the
Compensation Committee reviews the Company's percentage growth in earnings per
share over the prior year, and the Company's overall return on equity for that
period. The Compensation Committee believes that these two factors are the
primary determinants of stock price over time. The Compensation Committee next
reviews the profit performance of the individual divisions for which the
executive officer is responsible. Finally, the Compensation Committee
determines the personal rating for each executive officer, which is based upon
such qualitative factors as the achievement of certain financial objectives and
specific organizational and management goals for that officer. Annual base
compensation for the Company's Chief Executive Officer is determined in the
same manner as for the Company's other executive officers, except that the
Compensation Committee does not review or evaluate any particular division's
performance, but looks to the Company as a whole in determining corporate
performance relevant to the Chief Executive Officer's compensation.
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<PAGE> 14
Additionally, the Company and the Chief Executive Officer entered into an
Employment Agreement in 1994 which provides that, under certain circumstances,
the Company will pay the Chief Executive Officer ninety percent of his annual
base compensation for three years as severance pay.
The Committee also recognizes that in order to attract and retain the
highest quality executive officers, its base compensation must be competitive
when compared to that paid by companies in similar industries and in comparable
geographic areas. Accordingly, the Compensation Committee periodically reviews
the executive compensation paid by such companies.
Annual Bonus Plans
The Company has an incentive bonus plan pursuant to which certain key
employees, including the named executive officers, are selected annually by the
Compensation Committee to earn a cash bonus based upon the after-tax
profitability of the Company. This plan requires that the Company achieve a
specific after-tax return on beginning-of-year equity, after which bonuses may
be paid out. The available bonus pool for the Company is calculated on
earnings in excess of the base level.
Once the total bonus pool is calculated, it is distributed to participants
in the plan in accordance with pre-determined percentages as set by the
Compensation Committee annually. The determination of the bonus level awarded
to the Company's Chief Executive Officer is made in the same manner as that of
the Company's other executive officers. The bonuses paid in fiscal 1996 to the
executive officers are set forth in the Summary Compensation Table.
The Compensation Committee also recommended that an additional
discretionary bonus pool of $20,000 be established, to be used by the President
for the purpose of recognizing certain outstanding contributions made by any
employee, including the named executive officers, but excluding the President.
Awards under this plan may be made in order to recognize new product inventions
or improvements, ideas for major manufacturing cost reductions, originations of
large and profitable orders or for other purposes. No awards were made from
this bonus pool to the executive officers named in the Summary Compensation
Table in fiscal 1996.
1985 Restricted Stock Plan
The Board of Directors adopted the 1985 Restricted Stock Plan (the "1985
Plan") to attract, motivate and retain qualified employees. The 1985 Plan was
approved by the Company's shareholders on November 13, 1985 and became
effective as of December 13, 1985. The 1985 Plan is administered by the Board
of Directors, which delegates to the Compensation Committee its power to
determine which employees should be awarded restricted stock pursuant to the
plan. Under the terms of the 1985 Plan, the Company may grant up to an
aggregate of 75,000 shares of restricted Common Stock to any employee or
employees. Employees receiving restricted stock do not pay for such stock;
however, certain ownership restrictions are placed upon the stock on
12
<PAGE> 15
the date of its issuance which lapse within five years after such issuance.
Dividends are paid to the employee on restricted shares during the restriction
period.
During fiscal 1996, the Company made no distributions of restricted stock
pursuant to the 1985 Plan. As of June 30, 1996, the following grants were
outstanding to the executive officers named in the Summary Compensation Table,
with the restrictions thereon lapsing on the dates indicated:
<TABLE>
<CAPTION>
Number
Lapse of Value of Shares at
Named Officer Date Shares Grant Issue Date
------------- ------- ------ ----------------
<S> <C> <C> <C>
Sherrill Stone 1/17/97 1,000 $11,250
1/17/98 1,000 11,250
Dayle B. Ellis 1/17/97 1,000 $11,250
1/17/98 1,000 11,250
Edward Perry 1/17/97 1,000 $11,250
1/17/98 1,000 11,250
G. D. Cornwell 1/17/97 1,000 $11,250
1/17/98 1,000 11,250
</TABLE>
This Report is submitted by the members of the Compensation Committee.
DAVID D. BATTERSHELL
BERNARD S. LEE
JOSEPH V. MARINER, JR.
DONALD A. SILLERS, JR.
This Report will not be deemed to be incorporated by reference in any
filing by the Company under the Securities Act of 1933, as amended (the
"Securities Act"), or the Exchange Act, except to the extent that the Company
specifically incorporates this Report by reference.
13
<PAGE> 16
CORPORATE PERFORMANCE GRAPH
The following graph compares the cumulative total shareholder return over a
five-year period, assuming $100 invested at June 28, 1991 in each of (i)
Peerless Mfg. Co. common stock, (ii) the Dow Jones Industrial Average and (iii)
a peer group consisting of manufacturers in the industrial sector providing
industrial and commercial services to other commercial enterprises. Total
shareholder return is based on the increase in the price of the common stock
with dividends reinvested. The graph also depicts the value of the same 1991
investment of $100 for 1988, 1989 and 1990. The Company feels that the
additional years present a more accurate representation of stock performance.
The stock price performance depicted in the Corporate Performance Graph is
not necessarily indicative of future price performance. The Corporate
Performance Graph will not be deemed to be incorporated by reference in any
filing by the Company under the Securities Act or the Exchange Act, except to
the extent that the Company specifically incorporates the graph by reference.
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN ANALYSIS
6/30/88 6/30/89 6/29/90 6/28/91 6/30/92 6/30/93 6/30/94 6/30/95 6/28/96
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PEERLESS MANUFACTURING COMPANY $ 49.53 $ 48.01 $ 117.14 $ 100.00 $ 69.70 $ 50.00 $ 60.61 $ 65.91 $ 65.15
- - ------------------------------------------------------------------------------------------------------------------------------------
DOW JONES INDUSTRIAL $ 65.92 $ 78.03 $ 95.53 $ 100.00 $ 117.62 $ 128.42 $136.05 $175.82 $223.37
- - ------------------------------------------------------------------------------------------------------------------------------------
DOW JONES INDUSTRIAL DIVERSIFIED $ 76.81 $ 81.60 $ 99.59 $ 100.00 $ 110.74 $ 133.01 $137.89 $163.93 $205.58
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Source: Carl Thompson Associates www.ctaonline.com (303) 494-5472. Data from
Bloomberg Financial Markets
14
<PAGE> 17
SECTION 16(a) BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's executive officers and directors, and
persons who own more than 10% 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 ("SEC") (and, if such security is registered
on a national securities exchange, also with the exchange). Executive
officers, directors and greater than 10% shareholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they
file.
Based solely on the Company's review of the copies of Forms 3, 4 and 5
furnished to the Company or written representations from certain reporting
persons that no Forms 5 were required for those persons, the Company believes
that, during the fiscal year ended June 30, 1996, its officers, directors and
greater than 10% shareholders complied with all Section 16(a) filing
requirements applicable to them.
AUDITORS
Grant Thornton has audited the Company's financial statements since fiscal
1970 and has been selected to act in that capacity for the ensuing fiscal year.
Representatives of Grant Thornton are expected to be present at the Annual
Meeting, will have the opportunity to make a statement if they desire to do so,
and will respond to shareholder questions raised during the meeting.
SHAREHOLDER PROPOSALS
A proper proposal submitted by a shareholder of the Company for
presentation at the Company's 1997 Annual Meeting of Shareholders and received
at the Company's executive office not later than June 16, 1997 will be included
in the Company's Proxy Statement and form of Proxy relating to such Annual
Meeting.
OTHER MATTERS
Neither management nor the Board of Directors knows of any matter to be
acted upon at the Annual Meeting other than the matters described above. If
any other matter properly comes before the Annual Meeting or any adjournments
thereof, however, the proxies in the enclosed form confer upon the persons
entitled to vote the shares represented by such proxies discretionary authority
to vote thereon in accordance with their best judgment in the interest of the
Company.
15
<PAGE> 18
UPON WRITTEN REQUEST TO THE UNDERSIGNED, C/O PEERLESS MFG. CO., 2819 WALNUT
HILL LANE, DALLAS, TEXAS 75229, THE COMPANY WILL PROVIDE, WITHOUT CHARGE, A
COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
By Order of the Board of Directors,
KENT J. VAN HOUTEN
Secretary
Dallas, Texas
October 11, 1996
16
<PAGE> 19
Appendix A
PEERLESS MFG. CO.
1995 STOCK OPTION
AND RESTRICTED STOCK PLAN
1. Purpose of the Plan. This Plan shall be known as the Peerless
Mfg. Co. 1995 Stock Option and Restricted Stock Plan. The purpose of the Plan
is to attract and retain the best available personnel for positions of
substantial responsibility and to provide incentives to such personnel to
promote the success of the business of Peerless Mfg. Co. and its subsidiaries.
Certain options granted under this Plan are intended to qualify as
"incentive stock options" pursuant to Section 422 of the Internal Revenue Code
of 1986, as amended from time to time, while certain other options granted
under the Plan will constitute nonqualified options.
2. Definitions. As used herein, the following definitions shall
apply:
(a) "Board" shall mean the Board of Directors of the
Corporation.
(b) "Common Stock" shall mean the Common Stock, $1.00 par
value per share, of the Corporation. Except as otherwise provided herein, all
Common Stock issued pursuant to the Plan shall have the same rights as all
other issued and outstanding shares of Common Stock, including but not limited
to voting rights, the right to dividends, if declared and paid, and the right
to pro rata distributions of the Corporation's assets in the event of
liquidation.
(c) "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time.
(d) "Committee" shall mean the committee described in Section
20 that administers the Plan.
(e) "Corporation" shall mean Peerless Mfg. Co., a Texas
corporation.
(f) "Date of Grant" shall mean the date on which an Option is
granted pursuant to this Plan or, if the Committee so determines, the date
specified by the Committee as the date the award is to be effective.
(g) "Disinterested Director" shall mean a director who is not,
during the one year prior to service as an administrator of the Plan, or during
such service, granted or awarded
A-1
<PAGE> 20
an Option or Restricted Stock pursuant to the Plan or any other plan of the
Corporation or any of its affiliates (except as provided in Section 20(c) of
this Plan and as may be permitted by Rule 16b-3 promulgated under the Exchange
Act).
(h) "Employee" shall mean any officer or other key employee of
the Corporation or one of its Subsidiaries (including any director who is also
an officer or key employee of the Corporation or one of its Subsidiaries).
(i) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
(j) "Fair Market Value" shall mean the closing sale price (or
average of the quoted closing bid and asked prices if there is no closing sale
price reported) of the Common Stock on the date specified as reported by
NASDAQ/NMS or by the principal national stock exchange on which the Common
Stock is then listed. If there is no reported price information for the Common
Stock, the Fair Market Value will be determined by the Committee, in its sole
discretion. In making such determination, the Committee may, but shall not be
obligated to, commission and rely upon an independent appraisal of the Common
Stock.
(k) "Nonqualified Option" shall mean any Option that is not a
Qualified Option.
(l) "Option" shall mean a stock option granted pursuant to
Section 6 of this Plan.
(m) "Optionee" shall mean any Employee or director who
receives an Option.
(n) "Participant" shall mean an Employee or director who
receives an Option or Restricted Stock pursuant to this Plan.
(o) "Plan" shall mean the Peerless Mfg. Co. 1995 Stock Option
and Restricted Stock Plan, as amended from time to time.
(p) "Qualified Option" shall mean any Option that is intended
to qualify as an "incentive stock option" within the meaning of Section 422 of
the Code.
(q) "Restricted Stock" shall mean Common Stock awarded to an
Employee or director pursuant to Section 7 of this Plan.
(r) "Rule 16b-3" shall mean Rule 16b-3 of the rules and
regulations under the Exchange Act as Rule 16b-3 may be amended from time to
time and any successor provisions to Rule 16b-3 under the Exchange Act.
(s) "Selection Procedure" shall mean the procedure set forth
in Section 8 hereof that the Committee is required to follow in granting
Options and Restricted Stock awards.
A-2
<PAGE> 21
(t) "Subsidiary" shall mean any now existing or hereinafter
organized or acquired company of which more than fifty percent (50%) of the
issued and outstanding voting stock is owned or controlled directly or
indirectly by the Corporation or through one or more Subsidiaries of the
Corporation.
3. Term of Plan. The Plan has been adopted by the Board and shall
become effective on the date it is approved by the shareholders of the
Corporation by the affirmative votes of the holders of a majority of the shares
of Common Stock then issued and outstanding, and shall continue in effect until
terminated pursuant to Section 20(a).
4. Shares Subject to the Plan. Except as otherwise provided in
Section 19 hereof, the aggregate number of shares of Common Stock issuable upon
the exercise of Options or upon the grant of Restricted Stock pursuant to this
Plan shall be 100,000 shares. Such shares may either be authorized but
unissued shares or treasury shares. The Corporation shall, during the term of
this Plan, reserve and keep available a number of shares of Common Stock
sufficient to satisfy the requirements of the Plan. If an Option should expire
or become unexercisable for any reason without having been exercised in full,
or Restricted Stock should fail to vest and be forfeited in whole or in part
for any reason, then the shares that were subject thereto shall, unless the
Plan shall have terminated, be available for the grant of additional Options or
Restricted Stock under this Plan, subject to the limitations set forth above.
5. Eligibility. Qualified Options may be granted under Section 6 of
the Plan to such Employees of the Corporation or its Subsidiaries as shall be
determined by the Committee pursuant to Selection Procedure. Nonqualified
Options may be granted under Section 6 of the Plan to such Employees and
directors of the Corporation or its Subsidiaries as shall be determined by the
Committee pursuant to the Selection Procedure. Restricted Stock may be granted
under Section 7 of the Plan to such Employees and directors of the Corporation
or its Subsidiaries as shall be determined by the Committee pursuant to the
Selection Procedure. Subject to the limitations and qualifications set forth in
this Plan (including Section 8), the Committee shall also determine the number
of Options or shares of Restricted Stock to be granted, the number of shares
subject to each Option or Restricted Stock grant, the exercise price or prices
of each Option, the vesting and exercise period of each Option and the vesting
and/or forfeiture provisions relating to Restricted Stock, whether an Option
may be exercised as to less than all of the Common Stock subject thereto, and
such other terms and conditions of each Option or grant of Restricted Stock, if
any, as are consistent with the provisions of this Plan. In connection with
the granting of Qualified Options, the aggregate Fair Market Value (determined
at the Date of Grant of a Qualified Option) of the shares with respect to which
Qualified Options are exercisable for the first time by an Optionee during any
calendar year (under all such plans of the Optionee's employer corporation and
its parent and subsidiary corporations as defined in Section 424(e) and (f) of
the Code, or a corporation or a parent or subsidiary corporation of such
corporation issuing or assuming an Option in a transaction to which Section
424(a) of the Code applies (collectively, such corporations described in this
sentence are hereinafter referred to as "Related Corporations")) shall not
exceed $100,000 or such other amount as from time to time provided in Section
422(d) of the Code or any successor provision.
A-3
<PAGE> 22
6. Grant of Options. Except as provided in Section 20(c), the
Committee shall determine the number of shares of Common Stock to be offered
from time to time pursuant to Options granted hereunder and shall grant Options
under the Plan. The grant of Options shall be evidenced by Option agreements
containing such terms and provisions as are approved by the Committee and
executed on behalf of the Corporation by an appropriate officer.
7. Restricted Stock. The Committee shall determine the number of
shares of Common Stock to be granted as Restricted Stock from time to time
under the Plan. The grant of Restricted Stock shall be evidenced by Restricted
Stock agreements containing such terms and provisions as are approved by the
Committee and executed on behalf of the Corporation by an appropriate officer.
8. Selection Procedure. From time to time, the Chief Executive
Officer of the Corporation (the "CEO") shall recommend to the Committee (a)
individuals he or she believes should receive Options and/or Restricted Stock
grants, (b) the amount of shares of Common Stock he or she believes should be
subject to each recommended Option and Restricted Stock award, and (c) with
respect to any recommended Option, whether the Option should be a Qualified
Option or a Nonqualified Option (the recommendations set forth in (a), (b) and
(c) above are hereinafter referred to as the "Grant Recommendations"). In
addition, the Committee may, at any time, request the CEO to make Grant
Recommendations. The Committee shall consider any Grant Recommendation;
provided, however, the Committee shall not be required to follow a Grant
Recommendation. In addition, the Committee may, at any time, grant Options and
Restricted Stock awards to any eligible individual irrespective of whether the
CEO has made a Grant Recommendation with respect to the individual.
9. Time of Grant. The date of grant of an Option under the Plan
shall be the date on which the Committee awards the Option or Restricted Stock
or, if the Committee so determines, the date specified by the Committee as the
date the award is to be effective. Notice of the grant shall be given to each
Participant to whom an Option or Restricted Stock is granted promptly after the
date of such grant.
10. Price. The Option price for each share of Common Stock subject to
an Option (the "Exercise Price") granted pursuant to Section 6 of the Plan
shall be determined by the Committee at the Date of Grant; provided, however,
that (a) the Exercise Price for any Option shall not be less than 100% of the
Fair Market Value of the Common Stock at the Date of Grant, and (b) if the
Optionee owns on the Date of Grant more than 10 percent of the total combined
voting power of all classes of stock of the Corporation or its parent or any of
its subsidiaries, as more fully described in Section 422(b)(6) of the Code or
any successor provision (such shareholder is referred to herein as a
"10-Percent Stockholder"), the Exercise Price for any Qualified Option granted
to such Optionee shall not be less than 110% of the Fair Market Value of the
Common Stock at the Date of Grant. The Committee in its discretion may award
shares of Restricted Stock under Section 7 of the Plan to Participants without
requiring the payment of cash consideration for such shares.
A-4
<PAGE> 23
11. Vesting. Subject to Section 13 of this Plan, each Option and
Restricted Stock award under the Plan shall vest in accordance with the vesting
provisions set forth in the applicable Option agreement or Restricted Stock
agreement. The Committee may, but shall not be required to, permit
acceleration of vesting upon any sale of the Corporation or similar
transaction. A Participant's Option agreement or Restricted Stock agreement
may contain such additional provisions with respect to vesting as the Committee
shall specify.
12. Exercise. A Participant may pay the Exercise Price of the shares
of Common Stock as to which an Option is being exercised by the delivery of
cash, check or, at the Corporation's option, by the delivery of shares of
Common Stock having a Fair Market Value on the date immediately preceding the
exercise date equal to the Exercise Price.
If the shares to be purchased are covered by an effective registration
statement under the Securities Act of 1933, as amended, any Option granted
under the Plan may be exercised by a broker-dealer acting on behalf of an
Optionee if (a) the broker-dealer has received from the Optionee or the
Corporation a fully- and duly-endorsed agreement evidencing such Option,
together with instructions signed by the Optionee requesting the Corporation to
deliver the shares of Common Stock subject to such Option to the broker-dealer
on behalf of the Optionee and specifying the account into which such shares
should be deposited, (b) adequate provision has been made with respect to the
payment of any withholding taxes due upon such exercise, and (c) the
broker-dealer and the Optionee have otherwise complied with Section 220.3(e)(4)
of Regulation T, 12 CFR Part 220, or any successor provision.
13. When Qualified Options May be Exercised. No Qualified Option
shall be exercisable at any time after the expiration of ten (10) years from
the Date of Grant; provided, however, that if the Optionee with respect to a
Qualified Option is a 10-Percent Stockholder on the Date of Grant of such
Qualified Option, then such Option shall not be exercisable after the
expiration of five (5) years from its Date of Grant. In addition, if an
Optionee of a Qualified Option ceases to be an employee of the Corporation or
any Related Corporation for any reason, such Optionee's vested Qualified
Options shall not be exercisable after (a) 90 days following the date such
Optionee ceases to be an employee of the Corporation or any Related
Corporation, if such cessation of service is not due to the death or permanent
and total disability (within the meaning of Section 22(e)(3) of the Code) of
the Optionee, or (b) twelve months following the date such Optionee ceases to
be an employee of the Corporation or any Related Corporation, if such cessation
of service is due to the death or permanent and total disability (as defined
above) of the Optionee. Upon the death of an Optionee, any vested Qualified
Option exercisable on the date of death may be exercised by the Optionee's
estate or by a person who acquires the right to exercise such Qualified Option
by bequest or inheritance or by reason of the death of the Optionee, provided
that such exercise occurs within both the remaining option term of the
Qualified Option and twelve months after the date of the Optionee's death.
This Section 13 only provides the outer limits of allowable exercise dates with
respect to Qualified Options; the Committee may determine that the exercise
period for a Qualified Option shall have a shorter duration than as specified
above.
A-5
<PAGE> 24
14. Option Financing. Upon the exercise of any Option granted under
the Plan, the Corporation may, but shall not be required to, make financing
available to the Participant for the purchase of shares of Common Stock
pursuant to such Option on such terms as the Committee shall specify.
15. Withholding of Taxes. The Committee shall make such provisions
and take such steps as it may deem necessary or appropriate for the withholding
of any taxes that the Corporation is required by any law or regulation of any
governmental authority to withhold in connection with any Option or Restricted
Stock including, but not limited to, withholding the issuance of all or any
portion of the shares of Common Stock subject to such Option or Restricted
Stock until the Participant reimburses the Corporation for the amount it is
required to withhold with respect to such taxes, canceling any portion of such
issuance in an amount sufficient to reimburse the Corporation for the amount it
is required to withhold or taking any other action reasonably required to
satisfy the Corporation's withholding obligation.
16. Conditions Upon Issuance of Shares. The Corporation shall not be
obligated to sell or issue any shares upon the exercise of any Option granted
under the Plan or to deliver Restricted Stock unless the issuance and delivery
of shares shall comply with all provisions of applicable federal and state
securities laws and the requirements of any stock exchange upon which shares of
the Common Stock may then be listed.
As a condition to the exercise of an Option or the grant of
Restricted Stock, the Corporation may require the person exercising the Option
or receiving the grant of Restricted Stock to make such representations and
warranties as may be necessary to assure the availability of an exemption from
the registration requirements of applicable federal and state securities laws.
The Corporation shall not be liable for refusing to sell or issue
any shares covered by any Option or for refusing to issue Restricted Stock if
the Corporation cannot obtain authority from the appropriate regulatory bodies
deemed by the Corporation to be necessary to lawfully sell or issue such
shares. In addition, the Corporation shall have no obligation to any
Participant, express or implied, to list, register or otherwise qualify the
shares of Common Stock covered by any Option or Restricted Stock.
No Participant will be, or will be deemed to be, a holder of any
Common Stock subject to an Option unless and until such Participant has
exercised his or her Option and paid the purchase price for the subject shares
of Common Stock. Each Option under this Plan shall be transferable only by
will or the laws of descent and distribution and shall be exercisable during
the Participant's lifetime only by such Participant.
Any Common Stock issued pursuant to the exercise of an Option or
pursuant to the grant of Restricted Stock to a person who would be deemed an
officer or director of the Corporation under Rule 16b-3 shall not be
transferred until at least six months have elapsed from the Date of Grant to
the date of disposition of the Common Stock.
A-6
<PAGE> 25
17. Restrictions on Shares. Shares of Common Stock issued pursuant to
the Plan shall be subject to restrictions on transfer under applicable federal
and state securities laws. The Board may impose such additional restrictions
on the ownership and transfer of shares of Common Stock issued pursuant to the
Plan as it deems desirable; any such restrictions shall be set forth in any
Option agreement or Restricted Stock agreement entered into hereunder.
18. Modification of Options. Except as provided in Section 20(c) of
this Plan, at any time and from time to time, the Committee may execute an
instrument providing for modification, extension or renewal of any outstanding
Option, provided that no such modification, extension or renewal shall impair
the Option without the consent of the holder of the Option or conflict with the
provisions of Rule 16b-3. Notwithstanding the foregoing, in the event of such
a modification, substitution, extension or renewal of a Qualified Option, the
Committee may increase the exercise price of such Option if necessary to retain
the qualified status of such Option.
19. Effect of Change in Stock Subject to the Plan. In the event that
each of the outstanding shares of Common Stock (other than shares held by
dissenting stockholders) shall be changed into or exchanged for a different
number or kind of shares of stock of the Corporation or of another corporation
(whether by reason of merger, consolidation, recapitalization,
reclassification, split-up, combination of shares or otherwise), or in the
event a stock split or stock dividend shall have occurred, then there shall be
substituted for each share of Common Stock then subject to Options or
Restricted Stock awards or available for Options or Restricted Stock awards the
number and kind of shares of stock into which each outstanding share of Common
Stock (other than shares held by dissenting stockholders) shall be so changed
or exchanged, or the number of shares of Common Stock as is equitably required
in the event of a stock split or stock dividend, together with an appropriate
adjustment of the Exercise Price. The Board may, but shall not be required to,
provide additional anti-dilution protection to a Participant under the terms of
the Participant's Option agreement or Restricted Stock agreement.
20. Administration.
(a) Notwithstanding anything to the contrary herein, to comply
with the requirements of Rule 16b-3, the Plan shall be administered by the
Board, if each member is a Disinterested Director, or by a committee of two or
more Disinterested Directors appointed by the Board (the group responsible for
administering the Plan is referred to herein as the "Committee"). Options and
Restricted Stock may be granted under Sections 6 and 7, respectively, and only
by majority agreement of the members of the Committee. Option agreements and
Restricted Stock agreements, in the forms as approved by the Committee, and
containing such terms and conditions consistent with the provisions of this
Plan as shall have been determined by the Committee, may be executed on behalf
of the Corporation by the Chairman of the Board, the President or any Vice
President of the Corporation. Except with respect to Sections 20(b) and (c) of
this Plan, the Committee shall have complete authority to construe, interpret
and administer the provisions of this Plan and the provisions of the Option
agreements and Restricted Stock agreements granted hereunder; to prescribe,
amend and rescind rules and regulations pertaining to this Plan; to suspend or
discontinue this Plan (subject to
A-7
<PAGE> 26
Section 20(e)); and to make all other determinations necessary or deemed
advisable in the administration of the Plan. The determinations,
interpretations and constructions made by the Committee shall be final and
conclusive. No member of the Committee shall be liable for any action taken,
or failed to be taken, made in good faith relating to the Plan or any award
thereunder, and the members of the Committee shall be entitled to
indemnification and reimbursement by the Corporation in respect of any claim,
loss, damage or expense (including attorneys' fees) arising therefrom to the
fullest extent permitted by law.
(b) Members of the Committee shall be specified by the Board,
and shall consist solely of Disinterested Directors. Disinterested Directors
shall not be eligible to receive options to purchase Common Stock pursuant to
Section 6 of the Plan, except as specifically provided under Section 20(c), or
grants of Restricted Stock pursuant to Section 7 of the Plan.
(c) Each director (including any Disinterested Director who so
qualifies) who is not an employee or officer of the Corporation or any
Subsidiary on the date this Plan is approved by the shareholders of the
Corporation, and on the date of the annual shareholders' meeting of each year
thereafter that the director serves on the Board, shall automatically be
granted Nonqualified Options to purchase five hundred (500) shares of Common
Stock. The purchase price or prices for Common Stock subject to an option
granted under this Section 20(c), shall be 100% of the Fair Market Value of the
Common Stock as of the trading date immediately preceding the Date of Grant.
Such Options shall be exercisable on and after the Date of Grant until the
earlier of (i) ten years after the Date of Grant, or (ii) the date such
director is no longer a director of the Corporation or an officer or employee
of the Corporation or a Related Corporation. This Section 20(c) shall not be
amended more than once every six months, other than to comport with changes in
the Code or in the Employee Retirement Income Security Act of 1974, as amended,
or changes in the rules promulgated thereunder, or other applicable law.
(d) Notwithstanding Sections 20(a) and (c), to comply with
Rule 16b-3, no amendment may be made without the approval of the shareholders
of the Corporation by the affirmative votes of the holders of a majority of the
shares of Common Stock then issued and outstanding, which amendment would
materially (i) increase the benefits accruing to Participants, (ii) increase
the number of securities which may be issued under the Plan, other than in
accordance with Section 20 hereof, or (iii) modify the requirements as to
eligibility for participation in the Plan.
(e) Although the Committee may suspend or discontinue the Plan
at any time, all Qualified Options must be granted within ten (10) years from
the effective date of the Plan or the date the Plan is approved by the
shareholders of the Corporation, whichever is earlier.
21. Continued Employment Not Presumed. Nothing in this Plan or any
document describing it nor the grant of any Option or Restricted Stock shall
give any Participant the right to continue in the employment of the Corporation
or affect the right of the Corporation to terminate the employment of any such
person with or without cause.
A-8
<PAGE> 27
22. Liability of the Corporation. Neither the Corporation, its
directors, officers or employees or the Committee, nor any Subsidiary which is
in existence or hereafter comes into existence, shall be liable to any
Participant or other person if it is determined for any reason by the Internal
Revenue Service or any court having jurisdiction that any Qualified Option
granted hereunder does not qualify for tax treatment as an incentive stock
option under Section 422 of the Code.
23. GOVERNING LAW. THE PLAN SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF STATE OF TEXAS AND THE UNITED STATES, AS
APPLICABLE, WITHOUT REFERENCE TO THE CONFLICT OF LAWS PROVISIONS THEREOF.
24. Severability of Provisions. If any provision of this Plan is
determined to be invalid, illegal or unenforceable, such invalidity, illegality
or unenforceability shall not affect the remaining provisions of the Plan, but
such invalid, illegal or unenforceable provision shall be fully severable, and
the Plan shall be construed and enforced as if such provision had never been
inserted herein.
A-9
