-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JulnjYwCUrwDWIgbDVRLCXAzMEt9FyLH4tYOZs1fHxv7EygSHTZaLykeg2ptv1Jy zdbkN8Oloc+gJavX3kl48w== 0000950134-97-007061.txt : 19970929 0000950134-97-007061.hdr.sgml : 19970929 ACCESSION NUMBER: 0000950134-97-007061 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970926 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEERLESS MANUFACTURING CO CENTRAL INDEX KEY: 0000076954 STANDARD INDUSTRIAL CLASSIFICATION: GENERAL INDUSTRIAL MACHINERY & EQUIPMENT, NEC [3569] IRS NUMBER: 750724417 STATE OF INCORPORATION: TX FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-05214 FILM NUMBER: 97686669 BUSINESS ADDRESS: STREET 1: 2819 WALNUT HILL LN CITY: DALLAS STATE: TX ZIP: 75229 BUSINESS PHONE: 2143576181 MAIL ADDRESS: STREET 1: P.O. BOX 540667 CITY: DALLAS STATE: TX ZIP: 75354 10-K405 1 FORM 10-K YEAR ENDED JUNE 30, 1997 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ================================================================================ FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ ================================================================================ Commission File Number 0-5214 PEERLESS MFG. CO. ================================================================================ (Exact name of registrant as specified in its charter) Texas 75-0724417 - ----------------------------------------- --------------------------- (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) 2819 Walnut Hill Lane, Dallas, Texas 75229 - ----------------------------------------- --------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (214) 357-6181 --------------------------- Securities registered pursuant to Section 12(g) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED - ----------------------------- ------------------------------------------- Common Stock, par value $1.00 The Nasdaq Stock Market's National Market ================================================================================ Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] At September 19, 1997, Peerless Mfg. Co. had 1,451,992 shares of common stock, $1.00 par value outstanding. The Company estimates that the aggregate market value of the common stock on September 19, 1997 (based upon the closing price of these shares on Nasdaq) held by non-affiliates was approximately $20,690,886. ================================================================================ 2 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for Annual Meeting of Shareholders to be held on or about November 20, 1997 (to be filed) are incorporated by reference into Part III of this Form 10-K. 3 TABLE OF CONTENTS
ITEM PAGE - ---- ---- PART I 1 Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3 Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4 Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 PART II 5 Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 6 Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 7 Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 8 Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 PART III 10 Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 11 Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 12 Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 13 Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 PART IV 14 Exhibits, Financial Statement Schedule, and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
i 4 PART I ITEM 1. BUSINESS. Peerless Mfg. Co. (the "Company" or "Registrant") was organized in 1933 as a proprietorship and was incorporated as a Texas corporation in 1946. The Company has wholly owned subsidiaries in the Netherlands, the United Kingdom and Barbados. Products and Operations The Company is engaged in the business of designing, engineering, manufacturing and selling highly specialized products, referred to as "separators" or "filters," which are used for a variety of purposes in cleaning gases and liquids as they move through a piping system. The Company also packages these products on skids complete with instruments, controls and related valves and piping. These products are used, among other applications, to remove solid and liquid contaminants from natural gas, and salt water aerosols from the combustion intake air of ship board gas turbine and diesel engines. The Company also designs, engineers, manufactures and sells specialized products referred to as "pulsation dampeners." These products are used primarily to reduce or eliminate vibrations caused by acoustical pulsations commonly found in piping connected to the reciprocating compressors generally used to move gases and air. Pulsation dampeners reduce noise levels, improve efficiency and prolong the life of piping systems. The Company's products are also used as components in selective catalytic reduction systems. Selective catalytic reduction equipment is used to separate nitrogen oxide (NOx) emissions from exhaust gases caused by burning hydrocarbon fuels such as gasoline, natural gas and oil. Additionally, the Company sells gas odorization equipment, quick-opening closures, parts for its products and other miscellaneous items. It also renders certain engineering services. While the Company manufactures and stocks a limited number of items of equipment for immediate delivery, the vast majority of its products are designed and constructed for specific customer requirements or specifications. In certain cases, the Company's products and components are designed by the Company but produced by subcontractors under Company supervision. The Company markets its products worldwide through manufacturers' representatives, who sell on a commission basis under the general direction of an officer of the Company. Additionally, a number of the Company's employees sell Company products directly to customers. The Company has a sales office in Singapore with a staff of seven engineering and administrative employees. The Company's United Kingdom subsidiary, Peerless Europe Ltd., began operations in January of 1992 and currently has a staff of 13 full-time employees. The Company's Netherlands subsidiary has two full-time employees. 2 5 Customers and Export Sales Gas separators and filters are sold to gas producers and gas gathering, transmission and distribution companies, and to chemical manufacturers and oil refineries, either directly or through contractors engaged to build plants and pipelines. Separators and filters are also sold to manufacturers of compressors, turbines and nuclear and conventional steam generating equipment. Marine separation/filtration systems are sold primarily to ship builders. Pulsation dampeners are purchased by customers in the same industries as purchasers of separators and filters (except ship builders and steam generating equipment manufacturers). Selective catalytic reduction equipment is sold to gas turbine operators, refineries and others who desire or may be required to reduce nitrogen oxide (NOx) emissions. The Company is not dependent upon any single customer or group of customers. Due to the custom-designed nature of its business and the nature of the products it sells, the Company's major customers typically vary from year to year. During Fiscal 1997, one of the Company's customers accounted for approximately 12.3% of Company revenues. No other customer accounted for 10% or more of Company revenues during Fiscal 1997. During Fiscal 1996 and 1995 no single customer accounted for 10% or more of Company revenues. Sales to foreign customers have been a part of the Company's business for more than forty years. During Fiscal 1997, foreign sales amounted to $25,605,000, or 61.7% of total consolidated revenue. Sales in Asia were approximately $11.0 million, or 26.6%, $5.2 million, or 15.4%, and $8.0 million, or 25.0%, of net sales in Fiscal 1997, 1996 and 1995, respectively. Due to the custom-designed and project-specific nature of its products, the Company's sales to any geographic region may vary from year to year. For a breakdown of the Company's foreign sales by geographic area during Fiscal 1997, 1996 and 1995, see Note I of the Notes to Consolidated Financial Statements. There are certain risks attendant to the Company's foreign sales. These include the possibility that foreign purchasers may default in the payment of amounts due, and that collection of such amounts may be more difficult than for U.S. customers, that foreign exchange rates may fluctuate adversely, that the U.S. and foreign governments may impose regulatory burdens upon exports and imports of the Company's products, and that the Company may be required to perform its obligations under product warranties, which might result in added expense due to the requirement that it perform such services in a foreign country. The Company has not, however, incurred substantial expenses to date involving these risks. The Company believes that its credit and collection risks are reduced to a significant extent because a substantial part of foreign sales are made either to large, well-established foreign companies or to foreign operations of domestic companies. When sales are made to smaller foreign enterprises, the Company generally requires an appropriate guarantee of payment or a letter of credit from a banking institution. In addition, products sold to foreign customers are generally priced to provide a higher profit margin, designed in part to cover the risk of potentially greater warranty costs. In order to minimize the risks of fluctuating currency exchange rates, the Company generally requires payment in U.S. dollars (or in the functional 3 6 currency of its foreign subsidiaries) for its foreign product sales. The Company hedges its exposure, if substantial, to foreign currency fluctuations on firm commitment sales under contracts that are not denominated in U.S. dollars. Backlog The Company's backlog of incomplete orders at June 30, 1997 was approximately $20,200,000 compared to approximately $15,300,000 in 1996. Virtually all of the June 30, 1997 backlog is presently expected to be completed and shipped in Fiscal 1998. Backlog has been calculated under the Company's normal practice of including incomplete orders for products that are deliverable over various periods and that may be changed or cancelled in the future. Competition and Other Market Factors There are a number of competitors in the manufacture and sale of separators, filters and pulsation dampeners, some of which are larger than the Company and have greater financial resources. In addition, several smaller manufacturers also produce custom-designed equipment that is competitive with the Company's specialized products and services. The Company believes that performance, reliability and warranty service are the prime competitive factors in the markets in which it competes. The Company believes that because of its reputation in those areas, it is a world leader in sales of custom-built separators, filters and pulsation dampeners. The markets for the Company's products are highly competitive worldwide. In addition, competition may increase as larger and better financed foreign companies become attracted to the market potential for products manufactured by the Company. Patents, Licenses and Product Development The Company considers itself a world leader in the technology required to design and apply its high efficiency vapor/liquid separation and filtration equipment. The Company believes it is also a leader in the design, manufacture and application of high efficiency pulsation dampeners for reciprocating compressors, and in the production of selective catalytic reduction component equipment. The Company's expenditures for new product development and improvements were approximately $554,000 in Fiscal 1997 and $515,000 in Fiscal 1996. The Company has several patents on its products and processes that are important to its business. However, other companies are marketing competitive products which may not infringe upon the Company's patents. Historically the Company's approach to its international markets was through licensing arrangements with fabricators throughout the world. However, in 1992 the Company shifted its emphasis from licensing its foreign sales to a strategy of focusing on direct international marketing through its Singapore sales branch and its European subsidiaries, Peerless Europe B.V. and Peerless Europe Ltd. The Company derives royalty income from older license arrangements in France and England and engineering fees on certain projects. Royalty and 4 7 engineering fee revenues, included in net sales, are $359,038, $451,620 and $272,673 in Fiscal 1997, 1996 and 1995, respectively. Employees At June 30, 1997, the Company and its subsidiaries had approximately 164 employees. Raw Materials The Company purchases the raw materials and component parts essential to its business from established sources with which it has had commercial relationships for many years. During the fiscal year ended June 30, 1997, the Company experienced no unusual problems in purchasing required materials and parts, and the Company believes that raw materials and component parts will be available in sufficient quantities for it to meet anticipated demand for its products. However, conditions may occur from time to time that could make it difficult to obtain desired materials within timely delivery schedules. Environmental Regulation The Company does not believe that its compliance with federal, state or local statutes or regulations relating to the protection of the environment has had any material effect upon capital expenditures, earnings or the competitive position of the Company. The Company's manufacturing processes do not emit substantial foreign substances into the environment. Regulations related to nitrous oxide (NOx) emissions have in the past resulted in increased sales of the Company's component parts for selective catalytic reduction equipment, and further regulations in that area could increase demand for such equipment. 5 8 Executive Officers of the Company The executive officers of the Company on September 19, 1997 are listed below. Each of these officers has been employed by the Company for at least five years in the same position or a similar capacity, except as noted: Name and Age Position ------------ -------- Sherrill Stone, 60 Chairman of the Board, President and Chief Executive Officer (1) Edward Perry, 59 Vice President (2) G. D. Cornwell, 53 Vice President (3) Kent J. Van Houten, 44 Chief Financial Officer and Secretary - Treasurer (4) ____________________ (1) Mr. Stone is responsible for formulation of corporate policy, investment and new business opportunities. Mr. Stone assumed the duties of Chairman of the Board and Chief Executive Officer of the Company on March 31, 1993. (2) Mr. Perry is responsible for marketing, manufacturing and engineering of filters and separators associated with pressure applications. (3) Mr. Cornwall is responsible for marketing, manufacturing and engineering of liquid vapor separators. (4) Mr. Van Houten is responsible for financial and administrative operations, and has been employed by the Company since May 22, 1995. He previously was Manager of Financial Accounting at The Austin Company. 6 9 ITEM 2. PROPERTIES. The principal executive offices of the Registrant are located in Dallas, Texas, on approximately twelve acres of land owned by the Company. These facilities include two one story buildings, one containing approximately 4,000 square feet of space used for the Company's executive and sales offices, and the second containing 3,600 square feet used for research and development. The Company also utilizes 20,000 square feet of a 40,000 square foot building located on the same site, with the remaining portion leased to other companies. Rental income from such properties is not material to the Company's results of operations. The Company owns approximately 21,600 additional square feet of manufacturing facilities in Denton, Texas, and approximately 29,000 square feet of manufacturing facilities in Carrollton, Texas. The Company also owns a 79,800 square foot Dallas manufacturing plant which was closed in 1983, and is now leased to other companies for periods of three years or less. During Fiscal 1997, the estimated average utilization of the Company's manufacturing facilities was approximately 85% in Denton, Texas, and 90% in Carrollton, Texas. Because of the availability and use by the Company of subcontractors, high utilization rates do not necessarily indicate a capacity problem. The Company believes that its office and manufacturing facilities are adequate and suitable for its present requirements. While future needs may require additional manufacturing facilities, space at the Denton, Texas location is available for expansion. The Company has also determined that a number of locations in the immediate area could be leased in the event future needs require such action. ITEM 3. LEGAL PROCEEDINGS. From time to time the Company is involved in litigation relating to claims arising in the ordinary course of business operations. In addition, the Company has been named as a defendant in one lawsuit alleging damages suffered by former employees or independent contractors of the Company. In Florentino San Miguel v. Carl W. Yarbrough, and Peerless Mfg. Co., filed June 28, 1996 in the 211th Judicial District Court, Denton, Texas, Plaintiff alleged that while employed by the Company he was injured and that these injuries were caused by the negligence and gross negligence of the Company. The plaintiff seeks damages including exemplary damages, prejudgment and postjudgment interest and court costs. At this stage of the lawsuit, the Company is unable to determine the likelihood of the Company's success. The Company intends to vigorously defend the case. In March 1997 the Company entered into a final agreement with Senior Engineering Company ("Senior"), settling effective April 1, 1997 the action the Company filed against Senior in Peerless Mfg. Co. v. Senior Engineering Company on November 13, 1995, in the United States District Court for the Northern District of Texas. Pursuant to the settlement agreement, the Company and Senior have established a strategic alliance to cooperate in the marketing and sales of technology and equipment to the nuclear power generation industry. 7 10 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is quoted on the Nasdaq Stock Market's National Market under the symbol PMFG. The Company's Board of Directors reviews the financial position of the Company periodically to determine the advisability of paying dividends. The following table sets forth, for the periods indicated, the range of the daily high and low closing bid prices for the Company's Common Stock as reported by Nasdaq Stock Market's National Market and cash dividends paid per share.
Quarter Ended: Closing Bid Prices Cash Dividends ------------- -------------------- High Low Per Share ---- --- --------- Fiscal 1996 ----------- September 30, 1995 $12-3/4 $9-7/8 $.125 December 31, 1995 11-5/8 9-1/4 .125 March 31, 1996 9-3/4 8-3/4 .125 June 30, 1996 11-5/8 9-5/8 .125 Fiscal 1997 ----------- September 30, 1996 $13-3/4 $9-1/4 [$.125 December 31, 1996 14-7/8 11-5/8 .125 March 31, 1997 13-1/4 9-1/2 .125 June 30, 1997 11 9-1/8 .125]
The number of record holders of the Company's Common Stock on August 15, 1997 was 221. The Company estimates that approximately 700 additional shareholders own shares in broker names. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial and other data regarding the Company's results of operations and financial position. This information should be read in conjunction with the Company's Consolidated Financial Statements and related Notes included elsewhere herein. 8 11
Year ended June 30 --------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ------------- ----------- ------------ ------------- ------------- Net sales $ 41,486,492 $33,643,998 $ 32,089,132 $ 25,567,560 $ 25,797,270 Gross profit 11,525,289 10,213,237 10,583,128 9,038,606 8,828,398 Earnings before income taxes 537,996 1,182,148 1,908,661 1,227,959 267,092 Net earnings $ 537,416 $ 789,721 $ 1,226,246 $ 780,275 $ 155,059 ============= =========== ============ ============= ============= Earnings per common share: $ .37 $ .55 $ .85 $ .54 $ .11 ============= =========== ============ ============= ============= Total assets $ 19,081,593 $18,191,426 $ 17,156,055 $ 18,022,466 $ 14,261,243 ============= =========== ============ ============= ============= Long-term obligations --- --- --- --- --- Cash dividend per common share $ .50 $ .50 $ .50 $ .50 $ .50 ============= =========== ============ ============= =============
9 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Liquidity And Capital Resources As a general policy, the Company maintains corporate liquidity at a level it believes adequate to support existing operations and planned growth, as well as continue operations during reasonable periods of unanticipated adversity. Management also intends to direct additional resources to strategic new product development, market expansion and continuing improvement of existing products to enhance the Company's position as a market leader and to promote planned internal growth and profitability. The Company has historically financed and continues to finance working capital requirements and any expansion, equipment purchases or acquisitions primarily through the retention of earnings, which is reflected by the absence of long-term debt on the Company's consolidated balance sheet. In addition to retained earnings, the Company has infrequently used short term bank credit lines of $7,500,000 to supplement working capital. During Fiscal 1996 and Fiscal 1997, it was necessary for the Company to use its short-term bank credit lines in order to finance a temporary shortfall in working capital. At June 30, 1997, the Company had no amounts outstanding against its credit lines. The Company pays an annual commitment fee of 0.25% of the unused balance under the credit lines. The Company has no material commitments for capital expenditures other than replacing equipment and maintaining its existing plants and equipment. During Fiscal 1997 the Company purchased fixed assets totaling $596,395, consisting primarily of replacement manufacturing equipment, computer hardware and software, office equipment and building improvements. This is compared to purchases of $273,593 during Fiscal 1996. The Company believes that these sources will be sufficient to satisfy its needs in the foreseeable future. Working capital was $8,584,400 at June 30, 1997, down from $9,350,600 at June 30, 1996, a decline of 8.2%. This decline was due primarily to the adverse effects of a third-quarter cost overrun related to a major international project in the Company's environmental equipment division and to the early declaration of dividends in Fiscal 1997 rather than in Fiscal 1998, which resulted in a charge against working capital in Fiscal 1997. 10 13 The following table sets forth certain information related to working capital for the Company's last three fiscal years:
1997 1996 1995 ---- ---- ---- Average working capital as a percentage of net sales 20.8% 25.6% 27.5% Annual accounts receivable turnover(1) 4.3 3.8 6.0 Annual inventory turnover(2) 6.6 5.7 6.7
(1) Annual accounts receivable turnover is computed by dividing annual net sales by the average monthly accounts receivable. (2) Annual inventory turnover is computed by dividing the cost of goods sold by the average monthly inventory and contract costs. The average working capital decrease as a percentage of net sales is related to increased sales volume of approximately $7,842,000 reported in Fiscal 1997 over Fiscal 1996. The increase in annual accounts receivable turnover reflects improved collection methods by the Company in Fiscal 1997. The increase in average inventory turnover is due primarily to increased efforts to manage inventory in Fiscal 1997. Peerless continues to monitor and streamline the Company's receivable collection and inventory purchasing procedures to enhance and maximize cash flow. Results of Operations The following table sets forth various measures of performance expressed as percentages of net sales for the Company's last three fiscal years, as well as the Company's effective income tax rate for the same periods:
1997 1996 1995 ---- ---- ---- Gross profit margin 27.8% 30.4% 33.0% Operating expenses 26.8% 26.8% 27.3% Earnings before income taxes 1.3% 3.5% 6.0% Effective income tax rate 0.1% 33.2% 35.8%
Inflation did not have a material impact on the Company's operating results during the last three fiscal years. 11 14 Comparison of Fiscal 1997 to Fiscal 1996 Net Sales The Company's net sales increased approximately $7,842,000, or 23.3%, to $41,486,000 in Fiscal 1997 from $33,644,000 in Fiscal 1996. Compared to Fiscal 1996, Fiscal 1997 domestic sales increased by 11.5% from $14,244,000 to $15,886,000. Foreign sales increased from $19,400,000 in Fiscal 1996 to $25,600,000 in Fiscal 1997, an increase of 32.0%. The increase resulted primarily from additional sales realized in Asia. The Company's backlog of unfilled orders increased from $15,300,000 at June 30, 1996 to $20,200,000 at June 30, 1997. Sales increased from $2,562,000 in Fiscal 1996 to $3,326,000 in Fiscal 1997 at the Company's Singapore sales office. The backlog of unfilled orders at June 30, 1997 includes approximately $2,000,000 of orders generated through the Singapore office. The Company continues to believe that its sales in Asia are enhanced by its maintenance of a Singapore office. During Fiscal 1997, Peerless Europe Ltd., the Company's UK subsidiary, contributed Fiscal 1997 sales revenue of $4,605,000, representing a decrease of $789,000, or 14.6% below Fiscal 1996 revenue of $5,394,000. This subsidiary continued to operate solidly during Fiscal 1997, with a year-end backlog of approximately $2,515,000 as compared with $1,000,000 in Fiscal 1996. Approximately $800,000 of this increase is attributable to Peerless Europe Ltd. assuming certain sales of Peerless Europe B.V. in Fiscal 1997. Peerless Europe B.V., the Company's Dutch subsidiary, continued its efforts during Fiscal 1997 to implement the Company's direct marketing strategy in Europe. Sales revenue decreased from $2,105,000 in Fiscal 1996 to $1,332,000 in Fiscal 1997. Peerless Europe B.V. is winding down its operations, which will be continued by Peerless Europe Ltd., the Company's U.K. subsidiary. Sales by the Company's SCR (Selective Catalytic Reduction) division improved from $6,013,000 in Fiscal 1996 to $9,632,000 in Fiscal 1997. During Fiscal 1997, the SCR division, which designs and manufactures equipment used to remove nitrogen oxide (NOx) emissions caused by boilers, gas burners, turbines and internal combustion engines, ended the year with a backlog of unfilled orders of approximately $2,123,000, a decrease from the Fiscal 1996 backlog of $4,838,000. Gross Profit Margin The Company's gross profit margin decreased from 30.4% of net sales in Fiscal 1996 to 27.8% of net sales in Fiscal 1997. The decrease resulted from a change in product mix of orders completed in Fiscal 1997 and adverse effects of a cost overrun related to a major international project in the Company's environmental equipment division in the third quarter. Operating Expenses Operating expenses increased from $9,009,000 in Fiscal 1996 to $11,118,000 in Fiscal 1997. However, operating expenses as a percent of sales held steady at 26.8% in Fiscal 1996 12 15 and 26.8% in Fiscal 1997. This increase in operating expenses was primarily due to increased sales and additional personnel hired to support the increased level of sales anticipated by the Company. Income Tax The Company's effective income tax rate decreased from 33.2% in Fiscal 1996 to 0.1% in Fiscal 1997. This decrease resulted from foreign deferred tax benefits offsetting domestic tax expenses. The Company anticipates that it will not be able to continue utilizing these deferred tax benefits to the same extent and expects that the Company's effective income tax rates will return to historical levels in Fiscal 1998. For a further discussion of the Company's federal income taxes, see Note H to the Company's Consolidated Financial Statements. Comparison of Fiscal 1996 to Fiscal 1995 Net Sales The Company's net sales increased approximately $1,555,000, or 4.8%, to $33,644,000 in Fiscal 1996 as compared to $32,089,000 in Fiscal 1995. Compared to Fiscal 1995, Fiscal 1996 domestic sales decreased by 1.0% from $14,389,000 to $14,244,000. Foreign sales increased from $17,700,000 in Fiscal 1995 to $19,400,000 in Fiscal 1996, an increase of 9.6%. The increase was primarily the result of additional sales realized in Europe. The Company's backlog of unfilled orders decreased slightly from $15,875,000 at June 30, 1995 to $15,300,000 at June 30, 1996. Sales decreased from $3,346,000 in Fiscal 1995 to $2,562,000 in Fiscal 1996 at the Company's Singapore sales office. The backlog of unfilled orders at June 30, 1996 includes approximately $510,000 of orders generated through the Singapore office. The Company continues to believe that its sales in Asia are enhanced by its maintenance of a Singapore office. During Fiscal 1996, Peerless Europe Ltd., the Company's UK subsidiary, contributed Fiscal 1996 sales revenue of $5,394,000, representing an increase of $1,760,000, or 48.4% over Fiscal 1995 revenue of $3,634,000. This subsidiary continued to operate solidly during Fiscal 1996, with a year-end backlog of approximately $1,000,000. Peerless Europe B.V., the Company's Dutch subsidiary which became operational as a trading company late in Fiscal 1993, continued its efforts during Fiscal 1996 to implement the Company's direct marketing strategy in Europe. Sales revenue increased from $1,155,000 in Fiscal 1995 to $2,105,000 in Fiscal 1996. Sales by the Company's SCR (Selective Catalytic Reduction) division improved from $3,696,000 in Fiscal 1995 to $6,013,000 in Fiscal 1996. During Fiscal 1996, the SCR division, which designs and manufactures equipment used to remove nitrogen oxide (NOx) emissions caused by boilers, gas burners, turbines and internal combustion engines, experienced an 13 16 improvement in its order intake activity and ended the year with a backlog of unfilled orders of approximately $4,838,000. Gross Profit Margin The Company's gross profit margin decreased from 33.0% of net sales in Fiscal 1995 to 30.4% of net sales in Fiscal 1996. The decrease resulted from a change in product mix of orders completed in Fiscal 1996. Operating Expenses Operating expenses increased from $8,770,000 in Fiscal 1995 to $9,009,000 in Fiscal 1996. However, operating expenses as a percent of sales decreased slightly from 27.3% in Fiscal 1995 to 26.8% in Fiscal 1996, due primarily to the increase in net sales. Income Tax The Company's effective income tax rate decreased from 35.8% in Fiscal 1995 to 33.2% in Fiscal 1996. For a further discussion of the Company's federal income taxes, see Note H to the Company's Consolidated Financial Statements. Outlooks and Uncertainties This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements refer to events that could occur in the future or may be identified by the use of words such as "expect," "intend," "plan," "believe," correlative words, and other expressions indicating that future events are contemplated. Such statements are subject to inherent risks and uncertainties, and actual results could differ materially from those projected in the forward-looking statements as a result of certain of the risk factors set forth below and elsewhere in this Annual Report on Form 10-K. In addition to the other information contained in this Annual Report on Form 10-K, investors should carefully consider the following risk factors. Competition. The Company operates in highly competitive markets worldwide. The Company competes with manufacturers and sellers of separators, filters and pulsation dampeners, some of which are larger than the Company and have greater financial resources. In addition, several smaller manufacturers also produce custom-designed equipment that is competitive with the Company's specialized products and services. Competition may also increase as larger and better financed foreign companies become attracted to the market potential for products manufactured by the Company. There can be no assurance that the Company will be able to compete successfully with current or future competitors. Foreign Operations. The Company derives a significant portion of its revenues from foreign sales, particularly in Asia. The Company is subject to risks of doing business abroad, including 14 17 the possibility that foreign purchasers may default in the payment of amounts due, and that collection of such amounts may be more difficult than for U.S. customers, adverse fluctuations in currency exchange rates, that the U.S. and foreign governments may impose regulatory burdens upon exports and imports of the Company's products, and that the Company may be required to perform its obligations under product warranties, which might result in added expense due to the requirement that it perform such services in a foreign country. The occurrence of any one or more of the foregoing could adversely affect the Company's operations. Concentrations of Credit Risk. The Company continues to closely monitor the creditworthiness of its customers and has never experienced significant credit losses; however, a significant portion of the Company's sales are to customers whose activities are related to the oil and gas industry, including some who are located in foreign countries. The Company generally extends credit to these customers. Its exposure to credit risk is affected by conditions within the oil and gas industry, and with respect to foreign sales, collection may be more difficult in the event of a default. However, substantially all foreign sales are made to large, well-established companies and the Company generally requires collateral or guarantees on foreign sales to smaller companies. 15 18 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Index to Financial Statements
Page ---- REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 CONSOLIDATED BALANCE SHEETS AT JUNE 30, 1997 AND 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 CONSOLIDATED STATEMENTS OF EARNINGS FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
16 19 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Peerless Mfg. Co. We have audited the accompanying consolidated balance sheets of Peerless Mfg. Co. and Subsidiaries as of June 30, 1997 and 1996, and the related consolidated statements of earnings, changes in stockholders' equity, and cash flows for each of the three years in the period ended June 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above, present fairly, in all material respects, the consolidated financial position of Peerless Mfg. Co. and Subsidiaries as of June 30, 1997 and 1996, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended June 30, 1997, in conformity with generally accepted accounting principles. GRANT THORNTON LLP Dallas, Texas September 2, 1997 17 20 PEERLESS MFG. CO. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30,
ASSETS 1997 1996 ---- ---- CURRENT ASSETS Cash and cash equivalents $ 772,553 $ 2,082,329 Short-term investments 259,007 246,659 Accounts receivable - principally trade - net of allowance for doubtful accounts of $312,450 and $100,000 in 1997 and 1996, respectively 9,671,067 8,404,331 Inventories 2,993,855 2,972,456 Costs and earnings in excess of billings on uncompleted contracts 1,871,817 1,403,199 Deferred income taxes 269,721 226,214 Other 298,605 240,214 ----------- ----------- TOTAL CURRENT ASSETS 16,136,625 15,575,402 PROPERTY, PLANT AND EQUIPMENT - AT COST, less accumulated depreciation 1,527,856 1,213,859 PROPERTY HELD FOR INVESTMENT - AT COST, less accumulated depreciation 888,383 948,775 OTHER ASSETS 528,729 453,390 ----------- ----------- $ 19,081,593 $ 18,191,426 =========== ===========
18 21 PEERLESS MFG. CO. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - CONTINUED June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996 ---- ---- CURRENT LIABILITIES Accounts payable - trade $ 5,054,532 $ 4,325,595 Billings in excess of costs and earnings on uncompleted contracts 363,257 - Commissions payable 779,474 566,766 Accrued expenses Compensation 656,082 549,210 Warranty reserve 406,903 286,384 Other 291,953 496,847 ----------- ----------- TOTAL CURRENT LIABILITIES 7,552,201 6,224,802 DEFERRED INCOME TAXES 99,962 86,768 COMMITMENTS - - STOCKHOLDERS' EQUITY Common stock - authorized, 4,000,000 shares of $1 par value; issued and outstanding, 1,451,992 and 1,446,742 shares in 1997 and 1996, respectively 1,451,992 1,446,742 Additional paid-in capital 2,535,221 2,489,879 Unamortized value of restricted stock grants (44,625) (33,750) Cumulative foreign currency translation adjustment (93,944) 23,842 Retained earnings 7,580,786 7,953,143 ----------- ----------- 11,429,430 11,879,856 ----------- ----------- $ 19,081,593 $ 18,191,426 =========== ==========
The accompanying notes are an integral part of these statements. 19 22 PEERLESS MFG. CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS Year ended June 30,
1997 1996 1995 ---- ---- ---- NET SALES $41,486,492 $33,643,998 $32,089,132 COST OF GOODS SOLD 29,961,203 23,430,761 21,506,004 ------------ ------------ ---------- GROSS PROFIT 11,525,289 10,213,237 10,583,128 OPERATING EXPENSES Marketing and engineering 9,129,347 7,524,363 7,011,380 General and administrative 1,988,618 1,485,113 1,758,432 ------------ ------------ ---------- 11,117,965 9,009,476 8,769,812 ------------ ------------ ---------- OPERATING PROFIT 407,324 1,203,761 1,813,316 OTHER INCOME (EXPENSE) Interest income 24,687 45,559 93,974 Interest expense (55,475) (16,858) (8,040) Foreign exchange gains (losses) 103,583 (28,628) (56,368) Other, net 57,877 (21,686) 65,779 ------------ ------------ ---------- 130,672 (21,613) 95,345 ------------ ------------ ---------- EARNINGS BEFORE INCOME TAXES 537,996 1,182,148 1,908,661 INCOME TAX EXPENSE (BENEFIT) Current 65,766 397,023 661,046 Deferred (65,186) (4,596) 21,369 ------------ ------------ ---------- 580 392,427 682,415 ------------ ------------ ---------- NET EARNINGS $ 537,416 $ 789,721 $ 1,226,246 ============ ============ ========== Earnings per common share $.37 $.55 $.85 === === === Weighted average number of common shares outstanding 1,454,045 1,446,742 1,442,039 ========= ========= =========
The accompanying notes are an integral part of these statements. 20 23 PEERLESS MFG. CO. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Cumulative Unamortized foreign Additional value of currency Common paid-in restricted translation stock capital stock grants adjustment ---------- ---------- ------------ ---------- Balances as of July 1995 1,436,742 $2,383,870 $ (49,841) $ (76,063) Net earnings - - - - Issuance of 12,000 shares of common stock 12,000 123,000 (135,000) - Forfeiture of 2,000 shares of common stock (2,000) (18,500) 20,500 - Translation adjustment - - - 132,173 Cash dividends paid ($.50 per share) - - - - Amortization of restricted stock grants - - 67,234 - Income tax benefit related to restricted stock plans - 5,058 - - --------- --------- ---------- ---------- Balances as of June 30, 1995 1,446,742 2,493,428 (97,107) 56,110 Net earnings - - - - Translation adjustment - - - (32,268) Cash dividends paid ($.50 per share) - - - - Amortization of restricted stock grants - - 63,357 - Income tax expense related to restricted stock plans - (3,549) - - --------- --------- ---------- ---------- Balances as of June 30, 1996 1,446,742 2,489,879 (33,750) 23,842 Net earnings - - - - Issuance of 8,000 shares of common stock 8,000 72,250 (80,250) - Forfeiture of 4,000 shares of common stock (4,000) (38,750) 42,750 - Stock options exercised 1,250 10,312 - - Translation adjustment - - - (117,786) Cash dividends paid ($.50 per share) - - - - Cash dividends declared ($.125 per share) - - - - Amortization of restricted stock grants - - 26,625 - Income tax benefit related to restricted stock plans - 1,530 - - --------- --------- ---------- ---------- Balances as of June 30, 1997 $1,451,992 $2,535,221 $ (44,625) $ (93,944) ========= ========= ========== ==========
Retained earnings Total -------- ----- Balances as of July 1995 $7,381,682 $11,076,390 Net earnings 1,226,246 1,226,246 Issuance of 12,000 shares of common stock - - Forfeiture of 2,000 shares of common stock - - Translation adjustment - 132,173 Cash dividends paid ($.50 per share) (721,122) (721,122) Amortization of restricted stock grants - 67,234 Income tax benefit related to restricted stock plans - 5,058 --------- ---------- Balances as of June 30, 1995 7,886,806 11,785,979 Net earnings 789,721 789,721 Translation adjustment - (32,268) Cash dividends paid ($.50 per share) (723,384) (723,384) Amortization of restricted stock grants - 63,357 Income tax expense related to restricted stock plans - (3,549) --------- ---------- Balances as of June 30, 1996 7,953,143 11,879,856 Net earnings 537,416 537,416 Issuance of 8,000 shares of common stock - - Forfeiture of 4,000 shares of common stock - - Stock options exercised - 11,562 Translation adjustment - (117,786) Cash dividends paid ($.50 per share) (727,149) (727,149) Cash dividends declared ($.125 per share) (182,624) (182,624) Amortization of restricted stock grants - 26,625 Income tax benefit related to restricted stock plans - 1,530 --------- ---------- Balances as of June 30, 1997 $7,580,786 $11,429,430 ========= ==========
The accompanying notes are an integral part of these statements. 21 24 PEERLESS MFG. CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended June 30,
1997 1996 1995 ------------- ------------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 537,416 $ 789,721 $ 1,226,246 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities Depreciation and amortization 370,525 416,207 386,364 Deferred income taxes (65,185) (4,596) 21,369 Foreign exchange loss (gain) (103,583) 28,628 56,368 Other 1,530 (2,342) 5,058 Changes in operating assets and liabilities Accounts receivable (1,586,991) 508,764 (323,226) Inventories (11,463) (154,231) 1,695,052 Cost and profit in excess of billings on uncompleted contracts (468,618) (1,287,644) 115,555 Other current assets (59,501) (285,196) 108,174 Other assets (40,466) 156,025 (195,985) Accounts payable 791,364 1,240,661 464,022 Billings in excess of costs and earnings on uncompleted contracts 363,257 (197,010) (1,624,268) Commissions payable 212,708 57,254 6,981 Accrued expenses 22,497 266,563 (133,144) ------------- ------------- ----------- (573,926) 743,083 582,320 ------------- ------------- ----------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (36,510) 1,532,804 1,808,566 CASH FLOWS FROM INVESTING ACTIVITIES Net sales (purchases) of short-term investments (12,348) (24,691) 415,017 Purchase of property and equipment (596,395) (273,593) (339,199) ------------- ------------- ----------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (608,743) (298,284) 75,818
22 25 PEERLESS MFG. CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED Year ended June 30,
1997 1996 1995 ------------ ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Sale of common stock $ 11,562 $ - $ - Net changes in short-term borrowings - - (260,400) Dividends paid (727,149) (723,384) (721,122) ------------ ----------- ----------- NET CASH USED IN FINANCING ACTIVITIES (715,587) (723,384) (981,522) EFFECT OF EXCHANGE RATE ON CASH AND CASH EQUIVALENTS 51,064 9,446 25,691 ------------ ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,309,776) 520,582 928,553 Cash and cash equivalents at beginning of year 2,082,329 1,561,747 633,194 ------------ ----------- ----------- Cash and cash equivalents at end of year $ 772,553 $ 2,082,329 $ 1,561,747 ============ =========== =========== Supplemental information on cash flows: - -------------------------------------- Interest paid $ 55,475 $ 16,858 $ 9,597 Income taxes paid $ 379,347 $ 138,018 $ 1,059,500
The accompanying notes are an integral part of these statements. 23 26 PEERLESS MFG. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997, 1996 and 1995 NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES Nature of Operations Peerless Mfg. Co. designs, engineers, and manufactures specialized products for the removal of contaminants from gases and liquids and for air pollution abatement. The Company's products are manufactured principally at plants located in Dallas, Texas and are sold worldwide with the principal markets located in the United States and Europe. Primary customers are equipment manufacturers, engineering contractors and operators of power plants. Consolidation The Company consolidates the accounts of its wholly-owned foreign subsidiaries, Peerless Europe Limited (Europe Limited), Peerless International N.V. (International) and Peerless Europe B.V. (Europe B.V.). All significant intercompany accounts and transactions have been eliminated in consolidation. Cash Equivalents For purposes of the statement of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market. Depreciable Assets Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives, principally by the straight-line method. Revenue Recognition The Company generally recognizes sales of custom-contracted products at the completion of the manufacturing process. The percentage-of-completion method is used for significant long-term contracts. Percentage-of-completion is generally determined using the actual labor 24 27 PEERLESS MFG. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1997, 1996 and 1995 NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES - CONTINUED incurred to date as compared to management's estimate of total labor to be incurred on each contract. Stock-Based Compensation Statement of Financial Accounting Standards No. 123 (SFAS 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 account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees, and related interpretations. Earnings Per Common Share Earnings per common share are computed by dividing net earnings by the weighted average number of shares of common stock outstanding during the year. The dilutive effect of stock options is not material. Statement of Financial Accounting Standards No. 128 (SFAS 128), Earnings Per Share, is effective for financial statements issued after December 15, 1997. The adoption of SFAS 128 is not expected to have a material impact on the disclosure of earnings per share in the financial statements. Foreign Currency All balance sheet accounts of foreign operations are translated into U.S. dollars at the year-end rate of exchange and statements of earnings items are translated at the weighted average exchange rates for the year. The resulting translation adjustments are made directly to a separate component of stockholders' equity. Gains and losses from foreign currency transactions, such as those resulting from the settlement of foreign receivables or payables, are included in the consolidated statements of earnings. From time to time, the Company enters into forward exchange contracts in anticipation of future movements in certain foreign exchange rates and to hedge against foreign currency fluctuations. Realized and unrealized gains and losses on these contracts are included in net 25 28 PEERLESS MFG. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1997, 1996 and 1995 NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES - CONTINUED income, except that gains and losses on contracts to hedge specific foreign currency commitments are deferred and accounted for as part of the underlying transaction. Reclassifications Certain prior years' amounts have been reclassified to conform with the 1997 presentation. Financial Instruments The carrying amounts of cash and cash equivalents and short-term investments approximate fair value because of the short-term nature of these items. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 26 29 PEERLESS MFG. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1997, 1996 and 1995 NOTE B - CONCENTRATIONS OF CREDIT RISK A significant portion of the Company's sales are to customers whose activities are related to the oil and gas industry, including some who are located in foreign countries. The Company generally extends credit to these customers. Its exposure to credit risk is affected by conditions within the oil and gas industry. Also, with respect to foreign sales, collection may be more difficult in the event of a default. However, the Company closely monitors extensions of credit and has never experienced significant credit losses. Substantially all foreign sales are made to large, well-established companies. The Company generally requires collateral or guarantees on foreign sales to smaller companies. Sales to one customer accounted for approximately 12.3% of revenues for the year ended June 30, 1997. No single customer accounted for more than 10% of revenues in 1996 or 1995. NOTE C - INVENTORIES AND UNCOMPLETED CONTRACTS Principal components of inventories are as follows:
June 30, ------------------------------ 1997 1996 ---------- ---------- Raw materials $1,084,890 $1,094,774 Work in process 1,586,213 1,591,289 Finished goods 322,752 286,393 ---------- ---------- $2,993,855 $2,972,456 ========= =========
At June 30, 1997 and 1996, progress payments of $318,043 and $296,431 respectively, have been offset against inventories and costs of uncompleted contracts. 27 30 PEERLESS MFG. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1997, 1996 and 1995 NOTE D - PROPERTY, PLANT AND EQUIPMENT AND PROPERTY HELD FOR INVESTMENT Property, plant and equipment is summarized as follows:
June 30, -------------------------------- 1997 1996 ------------ ------------ Buildings $ 1,380,241 $ 1,418,842 Equipment 2,432,792 2,300,777 Furniture and fixtures 1,585,930 1,114,583 ----------- ----------- 5,398,963 4,834,202 Less accumulated depreciation (4,131,323) (3,880,559) ----------- ----------- 1,267,640 953,643 Land 260,216 260,216 ----------- ----------- $ 1,527,856 $ 1,213,859 =========== ===========
Property held for investment is summarized as follows:
June 30, --------------------------------- 1997 1996 ------------- ------------- Buildings $ 1,641,769 $ 1,641,776 Equipment 158,171 158,171 ------------ ------------ 1,799,940 1,799,947 Less accumulated depreciation (1,440,967) (1,380,582) ------------ ------------ 358,973 419,365 Land 529,410 529,410 ------------ ------------ $ 888,383 $ 948,775 ============ ============
28 31 PEERLESS MFG. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1997, 1996 and 1995 NOTE E - CREDIT ARRANGEMENT The Company has banking agreements for unsecured revolving lines of credit in the combined amount of $7,500,000 due upon demand, with interest at the banks' prime lending rate (8.50% at June 30, 1997), payable monthly. The banks charge usage fees at an annual rate of .25% of the average daily unused portion of the line. At June 30, 1997 and 1996, no amounts were outstanding under the lines. The Company had letters of credit outstanding under separate arrangements of $3,597,646 and $3,259,533 at June 30, 1997 and 1996, respectively. Other assets with a cost of approximately $566,000 were pledged against the letters of credit outstanding at June 30, 1997. NOTE F - STOCKHOLDERS' EQUITY The Company has a 1985 restricted stock plan (the 1985 Plan) under which 75,000 shares of common stock were reserved for awards to employees. Restricted stock grants made under the 1985 Plan vest over a five-year period. The Company awarded 12,000 shares (fair value at date of grant of $135,000) in fiscal 1995 and 8,000 shares (fair value at date of grant of $80,250), of which 3,000 shares were subsequently forfeited, in fiscal 1997. Compensation expense for stock grants is charged to earnings over the five-year restriction period and amounted to $26,625, $63,357 and $67,234 in fiscal 1997, 1996, and 1995, respectively. The tax effect of differences between compensation expense for financial statement and income tax purposes is charged or credited to additional paid-in capital. In December 1995, the Company adopted a stock option and restricted stock plan (the 1995 Plan), which provides for a maximum of 100,000 shares of common stock to be issued. Stock options are granted at market value, vest generally over four years, and expire ten years from date of grant. At June 30, 1997, 67,250 shares of common stock were available for issuance under the 1995 Plan, and 4,750 shares were available under the 1985 Plan. The Company has adopted the disclosure provisions of SFAS 123. It applies APB 25 and related interpretations in accounting for stock options issued and, therefore, does not recognize compensation expense for stock options granted at or greater than market value. If the Company had elected to recognize compensation expense based upon the fair value at the grant date for awards under this plan consistent with the methodology prescribed by SFAS 123, the effect on net earnings and earnings per share would have been as follows: 29 32 PEERLESS MFG. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1997, 1996 and 1995 NOTE F - STOCKHOLDERS' EQUITY - CONTINUED
Year ended Year ended June 30, 1997 June 30, 1996 ------------- ------------- Net earnings - as reported $537,416 $789,721 Net earnings - pro forma 527,012 784,896 Earnings per share - as reported .37 .55 Earnings per share - pro forma .36 .54
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: expected volatility of 45%; risk-free interest rates ranging from 4.6% to 5.3%; dividend yield of 3.7% in fiscal 1997 and 5.4% in fiscal 1996; and expected lives of five years. Additional information with respect to options outstanding under the plan is as follows:
Number of Weighted shares average underlying exercise Stock options options price ------------- --------- -------- Outstanding at June 30, 1995 - $ - Granted 34,000 9.25 ------ Outstanding at June 30, 1996 34,000 9.25 Granted 2,500 13.33 Exercised (1,250) 9.25 Canceled/forfeited (3,750) 9.25 ------ Outstanding at June 30, 1997 31,500 9.57 ====== Exercisable at June 30, 1997 9,250 9.25 ===== Exercisable at June 30, 1996 - ======
The weighted-average remaining life of options outstanding at June 30, 1997 was 9.08 years. The weighted average fair-value at grant date for options granted in 1997 was $1.82 30 33 PEERLESS MFG. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1997, 1996 and 1995 NOTE F - STOCKHOLDERS' EQUITY - CONTINUED On May 21, 1997, the Board of Directors declared a dividend of one common share purchase right for each outstanding share of common stock to shareholders of record at the close of business on June 2, 1997. Each Right entitles the registered holder to purchase from the Company one common share at a price of $30.00, subject to adjustment, as more fully set forth in a Rights Agreement dated May 22, 1997. The Rights will become exercisable only in the event that any person or group of affiliated persons acquires, or obtains the right to acquire, beneficial ownership of 20% or more of the outstanding common shares or commences a tender or exchange offer, the consummation of which would result in the beneficial ownership by a person or group of 20% or more of such outstanding common shares. The rights are redeemable under certain circumstances at $.01 each and expire in May 2007. 31 34 PEERLESS MFG. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1997, 1996 and 1995 NOTE G - EMPLOYEE BENEFIT PLANS The Company has a 401(k) Plan to provide eligible employees with a retirement savings plan. All employees are eligible to participate in the plan upon completing 90 days of service. Company contributions are voluntary and at the discretion of the Board of Directors of the Company. The Company's contribution expense for the years ended June 30, 1997, 1996 and 1995 was $119,500, $109,000 and $103,000, respectively. NOTE H - FEDERAL INCOME TAXES Deferred taxes are provided for the temporary differences between the financial reporting bases and the tax bases of the Company's assets and liabilities. The temporary differences that give rise to the deferred tax assets or liabilities are as follows:
June 30, --------------------------- 1997 1996 ----------- ---------- Deferred tax assets Restricted stock grants $ 13,938 $ 19,125 Inventories 28,362 16,052 Foreign subsidiaries' net operating loss carryforwards 145,157 15,371 Accrued expenses 243,090 311,237 Other 52,701 70,158 ---------- ---------- 483,248 431,943 Less valuation allowance (29,710) (160,405) ---------- -------- 453,538 271,538 Deferred tax liabilities Property, plant and equipment (110,396) (88,491) Uncompleted contracts (135,006) (39,014) Other (3,504) (4,587) ---------- ---------- (248,906) (132,092) ---------- --------- Net deferred tax asset $ 204,632 $ 139,446 ========== =========
Deferred tax assets and liabilities included in the balance sheet are as follows: 32 35 PEERLESS MFG. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1997, 1996 and 1995 NOTE H - FEDERAL INCOME TAXES - CONTINUED
June 30, -------------------------- 1997 1996 --------- -------- Current deferred tax asset $269,721 $226,214 Noncurrent deferred tax asset 34,873 - Noncurrent deferred tax liability (99,962) (86,768) -------- -------- $204,632 $139,446 ======= =======
The provision for income taxes consisted of the following:
1997 1996 1995 ------------ ------------ ------------ Federal Current $ 41,765 $ 348,830 $ 581,976 Deferred (65,185) (4,596) 21,369 State 24,000 48,193 79,070 --------- -------- -------- $ 580 $ 392,427 $ 682,415 ========= ======== ========
The valuation allowance relates to deferred tax assets of foreign subsidiaries. These assets are recoverable only from future income of the respective foreign subsidiaries. Because of a recapitalization of Europe Limited and a reorganization of European operations, the Company concluded at June 30, 1997 that it was more likely than not that certain of the deferred tax assets are recoverable, and the valuation allowance was reduced. Utilization of foreign net operating carryforwards reduced income tax expense by approximately $130,000, $19,000 and $55,000 for 1997, 1996 and 1995, respectively. The effective income tax rate varies from the statutory rate due to the following:
As a percentage of pretax earnings --------------------------- 1997 1996 1995 ------- ------ ------ Income tax expense at statutory rate 34.0% 34.0% 34.0% Increase (decrease) in income taxes resulting from State tax, net of federal benefits 2.9 2.8 2.9 Foreign sales corporation exclusions (10.2) (1.5) (3.1) Change in valuation allowance (24.3) 3.5 (1.4) Other (2.3) (5.6) 3.4 ----- ---- ---- Income tax expense at effective rate .1% 33.2% 35.8% ==== ==== ====
33 36 PEERLESS MFG. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1997, 1996 and 1995 NOTE I - INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION The Company's operations consist of a dominant industry segment, the designing and manufacturing of specialized products for the removal of contaminants from gases and liquids and for air pollution abatement, principally in the United States and the United Kingdom. Information about the Company's operations in different geographic areas as of and for the years ended June 30, 1996, 1995 and 1994 is as follows:
United United States Kingdom Other Eliminations Consolidated --------------- ----------- --------------- ------------ ------------ 1997 ---- Net sales to unaffiliated customers $35,553,000 $4,601,000 $1,332,000 - $41,486,000 Transfers between geographic areas 889,000 4,000 - (893,000) - ---------- --------- --------- ---------- ---------- Total $36,442,000 $4,605,000 $1,332,000 $ (893,000) $41,486,000 ========== ========= ========= ========== ========== Operating profit (loss) $ 549,000 $ (129,000) $ (12,000) (1,000) $ 407,000 ========== ========= ========= ========== ========== Identifiable assets $18,129,000 $2,790,000 $1,027,000 $(2,144,000) $19,082,000 ========== ========= ========= ========== ========== 1996 ---- Net sales to unaffiliated customers $26,775,000 $4,764,000 $2,105,000 $ - $33,644,000 Transfers between geographic areas 984,000 630,000 - (1,614,000) - ---------- --------- --------- ---------- ---------- Total $27,759,000 $5,394,000 $2,105,000 $(1,614,000) $33,644,000 ========== ========= ========= =========== ========== Operating profit (loss) $ 1,119,000 $ 145,000 $ (39,000) $ (21,000) $ 1,204,000 ========== ========= ========= ========== ========== Identifiable assets $17,244,000 $2,112,000 $1,599,000 $(2,764,000) $18,191,000 ========== ========= ========= ========== ==========
34 37 PEERLESS MFG. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1997, 1996 and 1995 NOTE I - INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION - CONTINUED
United United States Kingdom Other Eliminations Consolidated --------------- ----------- --------------- ------------ ------------ 1995 ---- Net sales to unaffiliated customers $27,673,000 $3,261,000 $1,155,000 - $32,089,000 Transfers between geographic areas 479,000 373,000 - (852,000) - ---------- --------- --------- ---------- ---------- Total $28,152,000 $3,634,000 $1,155,000 $ (852,000) $32,089,000 ========== ========= ========= ========== ========== Operating profit (loss) $ 1,764,000 $ (13,000) $ 9,000 $ 5,000 $ 1,765,000 ========== ========= ========= ========== ========== Identifiable assets $16,048,000 $2,113,000 $1,237,000 $(2,242,000) $17,156,000 ========== ========= ========= ========== ==========
Transfers between the geographic areas primarily represent intercompany export sales and are accounted for based on established sales prices between the related companies. In computing operating profit (loss), no allocations of general corporate expenses have been made. Identifiable assets of geographic areas are those assets related to the Company's operations in each area. United States assets consist of all other operating assets of the Company. Export sales account for a significant portion of the Company's revenues and are summarized by geographic area as follows:
1997 1996 1995 --------------- --------------- --------------- North and South America (excluding U.S.A.) $ 5,899,000 $ 5,864,000 $ 3,817,000 Europe 5,213,000 6,627,000 5,055,000 Asia 11,023,000 5,188,000 8,008,000 Other 3,470,000 1,756,000 826,000 ----------- ----------- ------------ $25,605,000 $19,435,000 $17,706,000 ========== ========== ==========
35 38 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE Board of Directors Peerless Mfg. Co. In connection with our audit of the consolidated financial statements of Peerless Mfg. Co. and Subsidiaries referred to in our report dated September 2, 1997, which is included in Part II of this form, we have also audited Schedule II for each of the three years in the period ended June 30, 1997. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. GRANT THORNTON LLP Dallas, Texas September 2, 1997 36 39 PEERLESS MFG. CO. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS June 30,
Additions Balance at ---------------------------------- beginning of Charged to Charged to Balance at Description period expenses other accounts(1) Deductions(2) end of period ----------- ------------- ----------- -------------- ---------- ------------- 1997 - ---- Allowance for doubtful accounts $100,000 $ 249,612 $ - $ 37,162 (2) $ 312,450 ======= ======= ====== ======== ======== Deferred tax valuation allowance $160,405 $ - $ - $ 130,695 (3) $ 29,710 ======= ======== ====== ======== ======== 1996 - ---- Allowance for doubtful accounts $ 99,082 $ 44,307 $ 852 $ 44,241 (2) $ 100,000 ======= ======== ====== ======== ======== Deferred tax valuation allowance $121,091 $ 39,314 $ - $ - $ 160,405 ======= ======== ====== ======== ======== 1995 - ---- Allowance for doubtful accounts $ 85,827 $ 55,401 $ - $ 42,146 (2) $ 99,082 ======= ======== ====== ======== ======== Deferred tax valuation allowance $147,071 $ - $ - $ 25,980 (3) $ 121,091 ======= ======== ====== ======== ========
(1) Collections on accounts previously written off. (2) Write offs. (3) Utilization and/or revaluation of net operating loss carryovers. 37 40 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. For information concerning the Company's Directors, reference is made to the information set forth under the caption "Election of Directors" and "Common Stock Ownership of Management and Certain Beneficial Owners" in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held November 20, 1997 (the "Proxy Statement"), which information is incorporated herein by reference. For information concerning the Company's Executive Officers, see Item 1, "Business - Executive Officers of the Company." ITEM 11. EXECUTIVE COMPENSATION. For information concerning the Company's executive compensation, reference is made to the information set forth under the caption "Executive Compensation" in the Proxy Statement, which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. For information concerning the security ownership of certain beneficial owners and management, reference is made to the information set forth under the caption "Election of Directors" and "Common Stock Ownership of Management and Certain Beneficial Owners" in the Proxy Statement, which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. For information concerning certain relationships and related transactions, reference is made to the information set forth under the caption "Compensation Committee Interlocks and Insider Participation" in the Proxy Statement, which information is incorporated herein by reference. 38 41 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K. (a) 1. All Financial Statements: see Item 8 "Financial Statements and Supplementary Data" in Part II of this Report. 2. Financial Statement Schedule and Exhibits filed in Part IV of this report are as follows: SCHEDULES*: II - Valuation and Qualifying Account - Years Ended June 30, 1997, 1996 and 1995 *All other schedules are omitted because the required information is inapplicable or the information is presented in the financial statements and the related notes. (b) Reports on Form 8-K: None (c) Exhibits: see Index to Exhibits, pages 41-42. 39 42 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PEERLESS MFG. CO. (Registrant) By: /s/ SHERRILL STONE --------------------------- Sherrill Stone, Chairman, President, and Chief Executive Officer Date: September 26, 1997. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: September 26, 1997 /s/ SHERRILL STONE ------------------------------------------- Sherrill Stone, Chairman of the Board, President, Director and Chief Executive Officer September 26, 1997 /s/ KENT J. VAN HOUTEN ------------------------------------------- Kent J. Van Houten, Treasurer, Principal Financial Officer and Principal Accounting Officer September 26, 1997 /s/ DONALD A. SILLERS ------------------------------------------- Donald A. Sillers, Jr., Director September 26, 1997 /s/ J. V. MARINER ------------------------------------------- J. V. Mariner, Director September 26, 1997 /s/ BERNARD S. LEE ------------------------------------------- Bernard S. Lee, Director September 26, 1997 /s/ D. D. BATTERSHELL ------------------------------------------- D. D. Battershell, Director 40 43 INDEX TO EXHIBITS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS FINANCIAL STATEMENT SCHEDULES: II Valuation and Qualifying Accounts - Years Ended June 30, 1997, 1996 and 1995 (included in Item 8) EXHIBITS: 3(a) The Company's Articles of Incorporation, as amended to date (filed as Exhibit 1 to the Company's Registration Statement on Form S-1, Registration No. 2-35767) and amended by the Company's December 12, 1990 Form 8 amending Exhibit 3(a) to the Company's Annual Report on Form 10-K dated June 30, 1990, and incorporated herein by reference). 3(b) The Company's Bylaws, as amended to date.* 10(a) Incentive Compensation Plan effective January 1, 1981, as amended January 23, 1991 (filed as Exhibit 10(b) to the Company's Annual Report on Form 10-K, dated June 30, 1991, and incorporated herein by reference). 10(b) 1985 Restricted Stock Plan for Peerless Mfg. Co., effective December 13, 1985 (filed as Exhibit 10(b) to the Company's Annual Report on Form 10-K, dated June 30, 1993, and incorporated herein by reference). 10(c) 1991 Restricted Stock Plan for Non-Employee Directors of Peerless Mfg. Co., adopted subject to shareholder approval May 24, 1991, and approved by shareholders November 20, 1991 (filed as Exhibit 10(e) to the Company's Annual Report on Form 10-K dated June 30, 1991 and incorporated herein by reference).
41 44 10(d) Employment Agreement, dated as of April 29, 1994, by and between the Company and Sherrill Stone (filed as Exhibit 10(d) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1994 and incorporated herein by reference). 10(e) Agreement, dated as of April 29, 1994, by and between the Company and Sherrill Stone (filed as Exhibit 10(e) to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1994 and incorporated herein by reference). 10(f) Fifth Amended and Restated Loan Agreement, dated as of February 3, 1997, between NationsBank of Texas, N.A. and the Company (filed as Exhibit 10(f) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 and incorporated herein by reference). 10(g) Loan Agreement, dated as of March 7, 1997, by and between Texas Commerce Bank National Association and the Company (filed as Exhibit 10(g) to the Company's Quarterly Report on Form 10-Q for quarter ended March 31, 1997 and incorporated herein by reference). 10(h) Peerless Mfg. Co. 1995 Stock Option and Restricted Stock Plan, adopted by the Board of Directors December 31, 1995 and approved by the Shareholders of the Company November 21, 1996.* 21 Subsidiaries of the Company.* 27 Financial Data Schedule.*
- -------------- * Filed herewith 42 EX-3.(B) 2 BYLAWS OF THE COMPANY AS AMENDED TO DATE 1 EXHIBIT 3(b) AMENDED AND RESTATED BYLAWS OF PEERLESS MFG. CO. As Adopted and in Effect on May 21, 1997 ARTICLE I OFFICES Section 1. The registered office shall be located in the City of Dallas, County of Dallas, State of Texas. Section 2. The corporation may also have offices at such other places, either within or without the State of Texas, as the board of directors may from time to time determine or as the business of the corporation may require. ARTICLE II MEETINGS OF SHAREHOLDERS Section 1. All annual meetings of shareholders shall be held at such place, within or without the State of Texas, as may be designated by the board of directors and stated in the notice of the meeting or in a duly executed waiver of notice thereof. Special meetings of shareholders may be held at such place, within or without the State of Texas, and at such time as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2. The annual meetings of shareholders shall be held on a date to be determined from time to time by the board of directors. At the annual meeting the shareholders shall elect a board of directors and transact such other business as may properly be brought before the meeting. In order to properly submit any business to an annual meeting of shareholders, including, without limitation, a nomination for the election to the board of directors by a shareholder, a shareholder must give timely notice in writing to the secretary of the corporation. To be considered timely, a shareholder's notice must be delivered either in person or by United States certified mail, postage prepaid, and received at the principal executive offices of the corporation (a) not less than one hundred twenty (120) days nor more than one hundred fifty (150) days before the first anniversary date of the corporation's proxy statement in connection with the last annual meeting of shareholders or (b) if no annual meeting has been called after the expiration of more than thirty (30) days from the date for such meeting contemplated at the time of the previous year's proxy statement, not less than a reasonable time, as determined by the board of directors, prior to the date of the applicable annual meeting. 1 2 The secretary of the corporation will deliver any shareholder proposals and nominations received in a timely manner for review by the board of directors or a committee designated by the board of directors. A shareholder's notice to submit business to an annual meeting of shareholders will set forth (i) the name and address of the shareholder, (ii) the class and number of shares of stock beneficially owned by such shareholder, (iii) the name in which such shares are registered on the stock transfer books of the corporation, (iv) a representation that the shareholder intends to appear at the meeting in person or by proxy to submit the business specified in such notice, (v) any material interest of the shareholder in the business to be submitted, and (vi) a brief description of the business desired to be submitted to the annual meeting, including the complete text of any resolutions to be presented at the annual meeting, and the reasons for conducting such business at the annual meeting. In addition, the shareholder making such proposal will promptly provide any other information reasonably requested by the corporation. Notwithstanding the foregoing provisions of this bylaw, a shareholder who seeks to have any proposal included in the corporation's proxy statement will comply with the requirements of Regulation 14A under the Securities Exchange Act of 1934, as amended. Section 3. Special meetings of shareholders may be called by (a) the president or the board of directors or (b) the holders of at least ten percent (10%) of all shares entitled to vote at a special meeting, unless the articles of incorporation provide for a number of shares greater than or less than ten percent (10%), in which event a special meeting may be called by the holders of at least the percentage of shares specified in the articles of incorporation. Section 4. Written or printed notice stating the place, day and hour of a meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) nor more than sixty (60) days before the day of the meeting, except in the case of a special meeting called by the requsite number shareholders as provided in Section 3 of this Article, in which case the notice must be given not less than fifty (50) nor more than sixty (60) days before the day of such meeting, either personally or by mail, by or at the direction of the president, the secretary or the officer or person calling the meeting, to each shareholder entitled to vote at such. When a meeting of shareholders is adjourned for thirty (30) days or more, notice of the adjourned meeting shall be given as in the case of an original meeting. When a meeting is adjourned for less than thirty (30) days, it shall not be necessary to give any notice of the time and place of the adjourned meeting or of the business to be transacted thereat, other than by announcement at the meeting at which the adjournment is taken. Section 5. Any notice required to be given to any shareholder, under any provision of the Texas Business Corporation Act, as amended (the "TBCA"), or the articles of incorporation or bylaws, need not be given to the shareholder if (a) notice of two (2) consecutive annual meetings and all notices of meetings held during the period between those annual meetings, if any, or (b) all (but in no event less than two) payments (if sent by first class mail) of distributions or interest on securities during a 12-month period have been mailed to that person, addressed at 2 3 his address as shown on the share transfer records of the corporation, and have been returned undeliverable. Any action or meeting taken or held without notice to such a person shall have the same force and effect as if the notice had been duly given, and if the action taken by the corporation is reflected in any articles or document filed with the Secretary of State, such articles or document may state that notice was duly given to all persons to whom notice was required to be given. If such a person delivers to the corporation a written notice setting forth his then current address, the requirement that notice be given to that person shall be reinstated. Section 6. Business transacted at any special meeting shall be confined to the purposes stated in the notice thereof. Section 7. The holders of a majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum at meetings of shareholders except as otherwise provided in the articles of incorporation. If, however, a quorum shall not be present or represented at any meeting of shareholders, the shareholders present in person or represented by proxy shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified and called. The shareholders present at a duly organized meeting may continue to transact business notwithstanding the withdrawal of some shareholders prior to adjournment, but in no event shall a quorum consist of the holders of less than one-third of the shares entitled to vote and thus represented at such meeting. Section 8. The vote of the holders of a majority of the shares entitled to vote and thus represented at a meeting at which a quorum is present shall be the act of the meeting of shareholders, unless the vote of a greater number is required by law, the articles of incorporation or bylaws. Section 9. Each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders, except to the extent that the voting rights of the shares of any class are limited or denied by the articles of incorporation or the TBCA. At any election for directors, every shareholder entitled to vote at any such election shall have the right to vote, in person or proxy, the number of shares owned by him for as many persons as there are directors to be elected and for whose election he has a right to vote, and shareholders of the corporation are expressly prohibited from cumulating their votes in any election for directors of the corporation. Section 10. A shareholder may vote in person or by proxy executed in writing by the shareholder. A telegram, telex, cablegram or similar transmission by the shareholder, or a photographic, photostatic, facsimile or similar reproduction of a writing executed by the shareholder, shall be treated as an execution in writing for the purposes of this section. No proxy shall be valid after eleven (11) months from the date of its execution unless otherwise provided in the proxy. Each proxy shall be revocable unless the proxy form conspicuously states that the proxy is irrevocable and the proxy is coupled with an interest. 3 4 Section 11. The officer or agent having charge of the stock transfer books shall make, at least ten (10) days before each meeting of shareholders, a complete list of the shareholders entitled to vote at such meeting or any adjournment thereof, arranged in alphabetical order, with the address of and number of shares held by each, which list, for a period of ten (10) days prior to such meeting, shall be kept on file at the registered office or principal place of business of the corporation and shall be subject to inspection by any shareholder at any time during the usual business hours. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting. The original stock transfer book shall be prima facie evidence as to who are the shareholders entitled to examine such list or transfer book or to vote at any such meeting of shareholders. However, failure to prepare and to make available such list in the manner provided above shall not affect the validity of any action taken at the meeting. Section 12. Any action required by law to be taken at a meeting of shareholders, or any action which may be taken at a meeting of shareholders, may be taken without a meeting, without prior notice, and without a vote, if a consent in writing, setting forth the action so taken shall be signed and bear the date of the signature by shareholders having not less than the minimum number of votes that would be necessary to take such action at a meeting at which the holders of all shares entitled to vote on the action were present and voted with respect to the subject matter thereof. Section 13. In advance of any meeting of shareholders, the board of directors may appoint any persons, other than nominees for office, as inspectors of election to act at such meeting or any adjournment thereof. If inspectors of election are not so appointed, the chairman of any such meeting may, and on the request of any shareholder or his proxy shall, appoint inspectors of election at the meeting. The number of inspectors shall be either one (1) or three (3). If appointed at a meeting on the request of one or more shareholders or proxies, the majority of shares present shall determine whether one or three inspectors are to be appointed. In case any person appointed as inspector fails to appear or fails or refuses to act, the vacancy may be filled by appointment by the board of directors in advance of the meeting, or at the meeting by the person acting as chairman. The inspectors of election shall (a) determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity and effect of proxies; (b) receive votes, ballots or consents; (c) hear and determine all challenges and questions in any way arising in connection with the right to vote; (d) count and tabulate all votes or consents and determine the result; and (e) do such acts as may be proper to conduct the election or vote with fairness to all shareholders. The inspectors of election shall perform their duties impartially, in good faith, to the best of their ability and as expeditiously as is practical. If there are three inspectors of election, the decision, act or certificate of a majority is effective in all respects as the decision, act or certificate of all. On request of the chairman of the meeting or of any shareholder or his proxy, the inspectors shall make a report in writing of any challenge or question or matter determined by them and execute a certificate of any fact found by them. Any report or certificate made by them is prima facie evidence of the facts stated therein. At every meeting of the shareholders, the chairman 4 5 of the board, or in his absence, or in the event that the board of directors has not designated a chairman of the board, the president, or in his absence, the vice president designated by the president, or, in the absence of such designation, a chairman (who shall be one of the vice presidents, if any is present) chosen by a majority in interest of the shareholders present in person or by proxy and entitled to vote, shall act as chairman. The secretary of the corporation, or in his absence, an assistant secretary, shall act as secretary of all meetings of the shareholders. In the absence at such meeting of the secretary or assistant secretary, the chairman may appoint another person to act as secretary of the meeting. Section 14. Subject to the provisions required herein for notice of meetings, shareholders may participate in and hold a meeting of shareholders, by means of conference by telephone or similar communications equipment, provided all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 14 shall constitute presence in person at such meeting, except where a person participates in a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. ARTICLE III DIRECTORS Section 1. The number of directors of the corporation shall be five (5). Directors need not be residents of the State of Texas or shareholders of the corporation. No decrease in the number of directors shall have the effect of reducing the term of any incumbent director. A director may only be removed from office for "cause" (as defined below), at a meeting of shareholders called expressly for that purpose by the affirmitive vote of shareholders holding sixty six and two-thirds percent (66 2/3%) or more of the issued and outstanding shares then entitled to vote at any election of the directors. For purposes of this Section, "cause" shall mean the willful engaging by the director in illegal conduct or gross misconduct which is materially and demonstrably injurious to the corporation. For purpose of this provision, no act or failure to act, on the part of the director, shall be considered willful unless it is done, or omitted to be done, by the director in bad faith or without reasonable belief that the director's action or omission was in the best interests of the corporation. The directors will be divided into three classes designated as Class I, Class II, and Class III. Class I will consist of one director, and each of Class II and Class III will consist of two directors. Each Class of directors will stand for election at the 1997 annual shareholders' meeting for the following terms: Class I director will be elected for a one-year term; Class II directors will be elected for a two-year term; and Class III directors will be elected for a three-year term. At each following annual shareholders' meeting, commencing with the 1998 annual stockholders' meeting, each of the successors to the directors of the Class whose term will expire at such annual meeting will be elected for a term running until the third annual meeting succeeding his or her election and until his or her successor has been duly elected and qualified. 5 6 Section 2. Vacancies in the board of directors shall exist in the case of the happening of any of the following events: (a) the death, resignation or removal of any director; (b) the authorized number of directors is increased or (c) at any annual or special meeting of shareholders at which any director is elected, the shareholders fail to elect the full authorized number of directors to be voted for at that meeting. The board of directors may declare vacant the office of a director in either of the following cases: (a) if he is adjudged incompetent by an order of court, or finally convicted of a felony or (b) if within sixty (60) days after notice of his election, he does not accept the office either in writing or by attending a meeting of the board of directors. Any vacancy occurring in the board of directors may be filled by election at an annual meeting or at a special meeting of shareholders called for that purpose or by the affirmative vote of a majority of the remaining directors though less than a quorum of the board of directors, or by a sole remaining director. Any directorship to be filled by reason of an increase in the number of directors may be filled by election at an annual meeting or at a special meeting of shareholders called for that purpose, or may be filled by the board of directors for a term of office continuing only until the next election of one or more directors by the shareholders; provided that the board of directors may not fill more than two such directorships during the period between any two successive annual meetings of shareholders. A director elected to fill a vacancy shall be elected to the unexpired term of his predecessor in office. Section 3. The business and affairs of the corporation shall be managed by its board of directors, which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the articles of incorporation or by these bylaws directed or required to be exercised and done or authorized or approved by the shareholders. MEETINGS OF THE BOARD OF DIRECTORS Section 4. Meetings of the board of directors, regular or special, may be held either within or without the State of Texas. Any regular or special meeting is valid, wherever held, if held on written consent of all members of the board given either before or after the meeting and filed with the secretary of the corporation. Section 5. The first meeting of each newly elected board of directors shall be held at such time and place as shall be fixed by the vote of the shareholders at the annual meeting, and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present. In the event of the failure of the shareholders to fix the time and place of such first meeting of the newly elected board of directors, or in the event such meeting is not held at the time and place so fixed by the shareholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the board of directors, or as shall be specified in a written waiver signed by all of the directors. Section 6. Regular meetings of the board of directors may be held without notice at such time and at such place as shall from time to time be determined by the board of directors. 6 7 Section 7. Special meetings of the board of directors may be called by the president and shall be called by the secretary on the written request of two (2) directors. Written notice of special meetings of the board of directors shall be given personally, or sent by mail or by other form of written communication, to each director at least three (3) days before the date of the meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the board of directors need be specified in the notice or waiver of notice of such meeting. Section 8. A majority of the authorized number of directors shall constitute a quorum for the transaction of business and the act of the majority of the directors present at a meeting duly held at which a quorum is present shall be the act of the board of directors, unless a greater number is required by law or the articles of incorporation or as otherwise set forth in these bylaws. Each director present at a meeting will be deemed to have assented to any action taken at the meeting unless his dissent to the action is entered in the minutes of the meeting, or unless he shall file his written dissent thereto with the secretary of the meeting or shall forward such dissent by registered mail to the secretary of the corporation immediately after such meeting. If a quorum shall not be present at any meeting of the board of directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. At such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified and called. Section 9. Any action required or permitted to be taken at a meeting of the board of directors or any committee thereof may be taken without a meeting if a consent in writing, setting forth the action taken, is signed by all of the members of the board of directors or the committee, as the case may be, and such consent shall have the same force and effect as a unanimous vote at a meeting. Subject to the provisions required herein for notice of meetings, members of the board of directors or members of any committee designated by the board of directors may participate in and hold a meeting of such board or committee by means of conference by telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 9 shall constitute presence in person at such meeting, except where a person participates in a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. Section 10. No director shall be disqualified from holding his office or be liable to the corporation or to any shareholder or creditor thereof for any loss incurred by this corporation under or by reason of any contract, transaction or act, or be accountable for any gains or profits he may have realized therein as a result of any contract or transaction between this corporation and such director or between this corporation and any other corporation, partnership, association or other organization in which such director or officer is a director or officer or has a financial interest. 7 8 COMMITTEES OF DIRECTORS Section 11. The board of directors, by resolution adopted by a majority of the full board, may designate from among its members one or more committees, each of which, to the extent provided in such resolution, shall have and may exercise all of the authority of the board of directors, except that no such committee shall have the authority of the board of directors in reference to amending the articles of incorporation (except that a committee may exercise the authority of the board of directors vested in accordance with Article 2.13 of the TBCA); proposing a reduction of the stated capital of the corporation in the manner permitted by Article 4.12 of TBCA; approving a plan of merger or share exchange of the corporation; recommending to the shareholders the sale, lease or exchange of all or substantially all of the property and assets of the corporation otherwise than in the usual and regular course of its business; recommending to the shareholders a voluntary dissolution of the corporation or a revocation thereof; amending, altering or repealing the bylaws of the corporation or adopting new bylaws of the corporation; filling vacancies in the board of directors or any such committee; filling any directorship to be filled by reason of an increase in the number of directors; electing or removing officers of the corporation or members of any such committee, fixing the compensation of any member of such committee; or altering or repealing any resolution of the board of directors that, by its terms, provides that it shall not be amended or repealed. Unless the resolution designating a particular committee so provides, no committee of the board of directors shall have the authority to authorize a distribution or to authorize the issuance of shares of the corporation. Vacancies in the membership of any such committee shall be filled by the board of directors at a regular or special meeting of the board of directors. Any such committee shall keep regular minutes of its proceedings and report the same to the board of directors when required. The designation of a committee of the board of directors and the delegation thereto of authority shall not operate to relieve the board of directors, or any member thereof, of any responsibility imposed by law. Each director shall be deemed to have assented to any action of the executive committee or any other committee, unless he shall, within seven (7) days after receiving actual or constructive notice of such action, deliver his written dissent thereto to the secretary of the corporation. Members of such committee shall serve at the pleasure of the board of directors. COMPENSATION OF DIRECTORS Section 12. The directors may be paid their expenses, if any, of attendance at each meeting of the board of directors and may be paid a fixed sum for attendance at each meeting of the board of directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. CHAIRMAN OF THE BOARD Section 13. The board of directors may, in its discretion, choose a chairman of the board who shall preside at meetings of shareholders and of the directors and shall be an ex officio member of all standing committees. The chairman of the board shall have such other powers and 8 9 shall perform such other duties as shall be designated by the board of directors. The chairman of the board shall be a member of the board of directors, but no other officers of the corporation need be a director. The chairman of the board shall serve until his successor is chosen and qualified, but he may be removed at any time by the affirmative vote of a majority of the board of directors. ARTICLE IV NOTICES AND REQUESTS Section 1. Notices and requests to directors, officers or shareholders shall be in writing and delivered personally or mailed to the directors, officers or shareholders at their addresses appearing on the books of the corporation. Notice or request by mail shall be deemed to be given and received at the time when deposited in the United States mail, addressed to the addressee at his address as it appears on the records of the corporation, with adequate postage thereon prepaid; notice or request by personal delivery shall be deemed to be given and received at the time when same shall be actually received by the person to whom addressed. Notices and requests to directors and officers may also be given by telegram, and shall be deemed delivered when same shall be deposited at a telegraph office for transmission and all appropriate fees therefor have been paid. Section 2. Whenever any notice is required to be given to any shareholder or director under the provisions of the statutes or of the articles of incorporation or of these bylaws, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be equivalent to the giving of such notice. Section 3. Attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. ARTICLE V OFFICERS Section 1. The officers of the corporation shall consist of a president and a secretary and such other officers as may be elected or appointed by the board of directors. Any two or more offices may be held by the same person. Section 2. The board of directors, at its first meeting after each annual meeting of shareholders, shall choose a president, a secretary and such other officers as they deem appropriate, none of whom need be a member of the board. 9 10 Section 3. Such other officers and assistant officers and agents as may be deemed necessary may be elected or appointed by the board of directors to hold office for such period, have such authority and perform such duties as are provided by the bylaws or as the board of directors may determine. Section 4. The salaries of all officers and agents of the corporation shall be fixed from time to time by the board of directors. Section 5. Each officer of the corporation shall hold office until he shall resign or shall be removed or otherwise disqualified to serve, or his successor shall be chosen and qualified. Any officer or agent may be removed by the board of directors, with or without cause, whenever in its judgment the best interest of the corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Any vacancy occurring in any office of the corporation by death, resignation, removal or otherwise shall be filled by the board of directors. THE PRESIDENT Section 6. The president shall be the chief executive officer of the corporation, shall have general and active management of the business of the corporation and shall see that all orders and resolutions of the board of directors are carried into effect. In the absence of the chairman of the board or in the event the board of directors shall not have designated a chairman of the board, the president shall preside at meetings of shareholders and the board of directors. Section 7. He shall execute bonds, mortgages and other contracts except where the signing and execution thereof shall be expressly delegated by the board of directors to some other officer or agent of the corporation. THE VICE PRESIDENTS Section 8. The vice presidents in the order of their seniority, or otherwise, as determined by the board of directors, shall, in the absence or disability of the president, perform the duties and exercise the powers of the president. They shall perform such other duties and have such other powers as the board of directors shall prescribe. THE SECRETARY AND ASSISTANT SECRETARIES Section 9. The secretary shall attend all meetings of the board of directors and all meetings of shareholders and record all the proceedings of the meetings of the corporation and of the board of directors in a book to be kept for that purpose and shall perform like duties for the standing committees, when required. Except as may be otherwise provided in these bylaws, he shall give, or cause to be given, notice of all meetings of shareholders and special meetings of the board of directors, and shall perform such other duties as may be prescribed by the board of directors or president, under whose supervision he shall be. 10 11 Section 10. The assistant secretaries in the order of their seniority, or if there be none, the treasurer, acting as assistant secretary, or otherwise, as determined by the board of directors, shall, in the absence or disability of the secretary, perform the duties and exercise the powers of the secretary. They shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. Assistant secretaries may be appointed by the president without prior approval of the board of directors. THE TREASURER AND ASSISTANT TREASURERS Section 11. The treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all monies and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the board of directors. Section 12. He shall disburse the funds of the corporation as may be ordered by the board of directors, taking proper vouchers for such disbursements, and shall render to the president and the board of directors at its regular meetings or when the board of directors so requires an account of all his transactions as treasurer and of the financial condition of the corporation. Section 13. If required by the board of directors, he shall give the corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the board of directors for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation. Section 14. The assistant treasurers in the order of their seniority, or otherwise, as determined by the board of directors, or the secretary acting as assistant treasurer shall, in the absence or disability of the treasurer, perform the duties and exercise the powers of the treasurer. They shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. ARTICLE VI CERTIFICATES FOR SHARES Section 1. The corporation shall deliver certificates representing all shares to which shareholders are entitled. Certificates representing shares shall be signed by the president or any vice president and the secretary or any assistant secretary of the corporation, or any other officers of the corporation so authorized by the board of directors and may be sealed with the seal of the corporation, if any, or a facsimile thereof. No certificate shall be issued for any share until the consideration therefor has been fully paid. Each certificate representing shares shall state upon the face thereof that the corporation is organized under the laws of the State of Texas, the name 11 12 of the person to whom issued, the number and class and the designation of the series, if any, which said certificate represents, and the par value of each share represented by such certificate or a statement that the shares are without par value. If the corporation is authorized to issue shares of more than one class, each certificate representing shares issued by the corporation (a) shall conspicuously set forth on the face or back of the certificate a full statement of all of the designations, preferences, limitations and relative rights of the shares of each class authorized to be issued and if the corporation is authorized to issue shares of any preferred or special class in series, the variations in the relative rights and preferences of the shares of each such series to the extent that they have been fixed and determined and the authority of the board of directors to fix and determine the relative rights and preferences of subsequent series; or (b) shall conspicuously state on the face or back of the certificate that such a statement is set forth in the articles of incorporation on file in the office of the Secretary of State, and the corporation will furnish a copy of such statement to the record holder of the certificate without charge on written request to the corporation at its principal place of business or registered office. Each certificate representing shares issued by the corporation (a) shall conspicuously set forth on the face or back of the certificate a full statement of the limitation or denial of preemptive rights contained in the articles of incorporation, or (b) shall conspicuously state on the face or back of the certificate that (i) such a statement is set forth in the articles of incorporation on file in the office of the Secretary of State and (ii) the corporation will furnish a copy of such statement to the record holder of the certificate without charge on request to the corporation at its principal place of business or registered office. Each certificate representing shares restricted as to transfer or registration of the transfer, as permitted by the TBCA (a) shall conspicuously contain a full or summary statement of the restriction on the face of the certificate, or (b) shall contain such statement on the back of the certificate and conspicuously refer to the same on the face of the certificate, or (c) shall conspicuously state on the face of or back of the certificate that such a restriction exists pursuant to a specified document and (i) that the corporation will furnish to the record holder of the certificate, without charge, upon written request to the corporation at its principal place of business or registered office a copy of the specified document, or (ii) if such document is one required or permitted to be and has been filed under the TBCA, that such specified document is on file in the office of the Secretary of State and contains a full statement of such restriction. The definitions of the terms "conspicuous" and "conspicuously" are set forth in the TBCA. Section 2. The signatures of the authorized officers of the corporation upon a certificate may be facsimiles. In case any officer who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer at the date of the issuance. Section 3. Where a certificate has been lost, apparently destroyed or wrongfully taken and the owner fails to notify the corporation of that fact within a reasonable time after he has notice of it, and the corporation registers a transfer of the shares represented by the certificate before receiving such a notification, the owner is precluded from asserting against the 12 13 corporation any claim for registering the transfer or any claim to a new certificate. The board of directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, destroyed or wrongfully taken, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost or destroyed. When authorizing such issuance of a new certificate or certificates, the board of directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost or destroyed and/or to satisfy any other reasonable requirements imposed by the board of directors. If, after the issuance of a new certificate as a replacement for a lost, destroyed or wrongfully taken certificate, a bona fide purchaser of the original certificate presents it for registration of transfer, the corporation must register the transfer unless registration would result in over-issue. In addition to any rights on the indemnity bond, the corporation may recover the new certificate from the person to whom it was issued or any person taking under him except a bona fide purchaser. Section 4. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. When a transfer of shares is requested and there is reasonable doubt as to the right of the person seeking the transfer, the corporation or its transfer agent, before recording the transfer of the shares on its books or issuing any certificate therefor, may require from the person seeking the transfer reasonable proof of his right to the transfer. If there remains a reasonable doubt of the right to the transfer, the corporation may refuse a transfer unless the person gives adequate security or a bond of indemnity executed by a corporate surety or by two individual sureties satisfactory to the corporation as to form, amount and responsibility of sureties. The bond shall be conditioned to protect the corporation, its officers, transfer agents and registrars, or any of them, against any loss, damage, expense or other liability to the owner of the shares by reason of the recordation of the transfer or the issuance of a new certificate for shares. CLOSING OF TRANSFER BOOKS AND RECORD DATE Section 5. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or entitled to receive a distribution by the corporation (other than a distribution involving a purchase or redemption by the corporation of any of its own shares) or a share dividend, or in order to make a determination of shareholders for any other proper purposes (other than determining shareholders entitled to consent to action by shareholders proposed to be taken without a meeting of shareholders), the board of directors may provide that the share transfer records shall be closed for a stated period not to exceed, in any case, sixty (60) days. If the share transfer records shall be closed for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders, such records shall be closed for at least ten (10) days immediately preceding such meeting. In lieu of 13 14 closing the share transfer records, the board of directors may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than sixty (60) days, and, in case of a meeting of shareholders, not less than ten (10) days prior to the date on which the particular action requiring such determination of shareholders is to be taken. If the share transfer records are not closed and no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive a distribution (other than a distribution involving a purchase or redemption by the corporation of any of its own shares) or a share dividend, the date on which the notice of the meeting is mailed or the date on which the resolutions of the board of directors declaring such distribution or share dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment thereof, except where the determination has been made through the closing of share transfer records and the stated period of closing has expired, in which case the board of directors shall make a new determination, as hereinbefore provided. Section 6. Distributions made by the corporation, whether in liquidation or from earnings, profits, assets or capital, including all distributions payable but not paid to the holder of the shares, his heirs, successors or assigns but that have been held in suspense by the corporation or that were paid or delivered by it into an escrow account or to a trustee or custodian, shall be payable by the corporation, escrow agent, trustee or custodian to the holder of the shares as of the record date determined for that distribution as provided in Section 5 of this Article, or to his heirs, successors or assigns. CORPORATE RECORDS AND REPORTS Section 7. The corporation shall keep books and records of account and shall keep minutes of the proceedings of its shareholders, its board of directors and each committee of its board of directors. The corporation shall keep at its registered office or principal place of business, or at the office of its transfer agent or registrar, a record of the original issuance of shares issued by the corporation and a record of each transfer of those shares that have been presented to the corporation for registration of transfer. Such records shall contain the names and addresses of all past and current shareholders of the corporation and the number and class of shares issued by the corporation and held by each of them. Any books, records, minutes, and share transfer records may be in written form or in any other form capable of being converted into written form within a reasonable time. Any person who shall have been a shareholder for at least six (6) months immediately preceding his demand, or shall be the holder of at least five percent (5%) of all the outstanding shares of the corporation, upon written demand stating the purpose thereof, shall have the right to examine, in person or by agent, accountant or attorney, at any reasonable time or times, for any proper purpose, its relevant books and records of account, minutes and share transfer records, and to make extracts therefrom. 14 15 REGISTERED SHAREHOLDERS Section 8. The corporation shall be entitled to recognize the exclusive rights of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the State of Texas. ARTICLE VII GENERAL PROVISIONS Section 1. The board of directors may authorize and the corporation may make distributions, and pay share dividends, subject to any restrictions in the articles of incorporation and limitations set forth in the TBCA. Section 2. The board of directors may by resolution create a reserve or reserves out of surplus or designate or allocate any and all of its surplus in any manner for any proper purpose or purposes, and may increase, decrease or abolish any such reserve in the same manner. Section 3. When shares are registered on the books of the corporation in the names of two (2) or more persons as joint owners with the right of survivorship, after the death of a joint owner and before the time that the corporation receives actual written notice that parties other than the surviving joint owner or owners claim an interest in the shares or any distributions thereon, the corporation may record on its books and otherwise effect the transfer of those shares to any person, firm or corporation (including the surviving joint owner, individually) and pay any distributions made in respect of those shares, in each case as if the surviving joint owner or owners were the absolute owners of the shares. In permitting such a transfer by and making any distributions to such a surviving joint owner or owners before the receipt of written notice from other parties claiming an interest in those shares or distributions, the corporation shall be discharged from all liability for the transfer or payment so made; provided, however, that the discharge of the corporation from liability and the transfer of full legal and equitable title of the shares in no way shall affect, reduce or limit any cause of action existing in favor of any owner of an interest in those shares or distributions against the surviving owner or owners. CHECKS Section 4. All checks, drafts or other orders for payment of money, notes or other evidences of indebtedness issued in the name of or payable to the corporation shall be signed or endorsed by such officer or officers or such other person or persons as the board of directors may from time to time designate. 15 16 FISCAL YEAR Section 5. The fiscal year of the corporation shall end on June 30 of each year until such date is changed by resolution of the Board of Directors. SEAL Section 6. The corporate seal, if any, shall have inscribed thereon the name of the corporation, and be in a form approved by the board of directors. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. ARTICLE VIII AMENDMENT OF BYLAWS Section 1. The board of directors may amend or repeal these bylaws, or adopt new bylaws at any regular meeting of the board of directors or at any special meeting of the board of directors if notice of such amendment, repeal or adoption of new bylaws is contained in the notice of such meeting, unless (a) the articles of incorporation or the TBCA reserves the power exclusively to the shareholders in whole or in part, or (b) the shareholders, in amending, repealing or adopting a particular bylaw, expressly provide that the board of directors may not amend or repeal that bylaw. Section 2. The shareholders may amend or repeal these bylaws, or adopt new bylaws upon the affirmitive vote of the holders of at least sixty six and two thirds percent (66 2/3%) of the issued and outstanding shares then entitled to vote on such amendment, unless the articles of incorporation or a bylaw adopted by the shareholders provide otherwise as to all or some portion of these bylaws, even though the bylaws may also be amended, repealed or adopted by the board of directors. ARTICLE IX INDEMNIFICATION OF OFFICERS AND DIRECTORS Section 1. As utilized in this Article, the following terms shall have the meanings indicated: (a) The term "corporation" includes any domestic or foreign predecessor entity of the corporation in a merger, consolidation or other transaction in which the liabilities of the predecessor are transferred to the corporation by operation of law and in any other transaction in which the corporation assumes the liabilities of the predecessor, but does not specifically exclude liabilities that are the subject matter of this Article. 16 17 (b) The term "director" means any person who is or was a director of the corporation and any person who, while a director of the corporation, is or was serving at the request of the corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise. (c) The term "expenses" include court costs and attorneys' fees. (d) The term "official capacity" means: (i) when used with respect to a director, the office of director in the corporation, and (ii) when used with respect to a person other than a director, the elective or appointive office in the corporation held by the officer or the employment or agency relationship undertaken by the employee or agent on behalf of the corporation, but (iii) in both (i) and (ii) above does not include service for any other foreign or domestic corporation or any partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise. (e) The term "proceeding" means any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative, any appeal in such an action, suit or proceeding and any inquiry or investigation that could lead to such an action, suit or proceeding. Section 2. The corporation shall indemnify a person who was, is or is threatened to be made a named defendant or respondent in a proceeding because the person is or was a director only if it is determined, in accordance with Section 6 of this Article that the person (a) conducted himself or herself in good faith; (b) reasonably believed: (i) in the case of conduct in the official capacity as a director of the corporation, that the conduct was in the corporation's best interests, and (ii) in all other cases, that the conduct was at least not opposed to the corporation's best interests; and (iii) in the case of any criminal proceeding, had no reasonable cause to believe the conduct was unlawful. Section 3. A director shall not be indemnified by the corporation as provided in Section 2 of this Article for obligations resulting from a proceeding (a) in which the director is found liable on the basis that a personal benefit was improperly received by the director, whether or not the benefit resulted from an action taken in the person's official capacity, or (b) in which the person is found liable to the corporation, except to the extent permitted in Section 5 of this Article. Section 4. The termination of a proceeding by judgment, order, settlement or conviction or on a plea of nolo contendere or its equivalent is not of itself determinative that the person did not meet the requirements set forth in Section 2 of this Article. A person shall be deemed to have been found liable in respect of any claim, issue or matter only after the person shall have been so adjudged by a court of competent jurisdiction after exhaustion of all appeals therefrom. 17 18 Section 5. A person may be indemnified by the corporation as provided in Section 2 of this Article against judgments, penalties (including excise and similar taxes), fines, settlements and reasonable expenses actually incurred by the person in connection with the proceeding; but if the person is found liable to the corporation or is found liable on the basis that a personal benefit was improperly received by the person, the indemnification (a) shall be limited to reasonable expenses actually incurred by the person in connection with the proceeding, and (b) shall not be made in respect of any proceeding in which the person shall have been found liable for willful or intentional misconduct in the performance of the person's duty to the corporation. Section 6. A determination of indemnification under Section 2 of this Article shall be made (a) by a majority vote of a quorum consisting of directors who at the time of the vote are not named defendants or respondents in the proceeding; (b) if such a quorum cannot be obtained, by a majority vote of a committee of the board of directors, designated to act in the matter by a majority vote of all directors, consisting solely of two (2) or more directors who at the time of the vote are not named defendants or respondents in the proceeding; (c) by special legal counsel selected by the board of directors or a committee thereof by a vote as set forth in subsection (a) or (b) of this Section 6, or, if such a quorum cannot be obtained and such a committee cannot be established, by a majority vote of all directors; or (d) by the shareholders in a vote that excludes the shares held by directors who are named defendants or respondents in the proceeding. Section 7. Authorization of indemnification and determination as to reasonableness of expenses shall be made in the same manner as the determination that indemnification is permissible, except that if the determination that indemnification is permissible is made by special legal counsel, authorization of indemnification and determination as to reasonableness of expenses shall be made in the manner specified by subsection (c) of Section 6 of this Article for the selection of special legal counsel. A provision contained in the articles of incorporation, the bylaws, a resolution of shareholders or directors, or an agreement that makes mandatory the indemnification described in Section 2 of this Article shall be deemed to constitute authorization of indemnification in the manner required herein, even though such provision may not have been adopted or authorized in the same manner as the determination that indemnification is permissible. Section 8. The corporation shall indemnify a director against reasonable expenses incurred by the director in connection with a proceeding in which the director is a named defendant or respondent because the person is or was a director if the director has been wholly successful, on the merits or otherwise, in the defense of the proceeding. Section 9. If, upon application of a director, a court of competent jurisdiction determines, after giving any notice the court considers necessary, that the director is fairly and reasonably entitled to indemnification in view of all the relevant circumstances, whether or not the director has met the requirements set forth in Section 2 of this Article or has been found liable in the circumstances described in Section 3 of this Article, the corporation shall indemnify the director to such further extent as the court shall determine; but if the person is found liable to the corporation or is found liable on the basis that personal benefit was improperly received by 18 19 the person, the indemnification shall be limited to reasonable expenses actually incurred by the person in connection with the proceeding. Section 10. Reasonable expenses incurred by a director who was, is or is threatened to be made a named defendant or respondent in a proceeding may be paid or reimbursed by the corporation in advance of the final disposition of the proceeding and without the determination specified in Section 6 of this Article or the authorization or determination specified in Section 7 of this Article, after the corporation receives a written affirmation by the director of a good faith belief that the standard of conduct necessary for indemnification under this Article has been met and a written undertaking by or on behalf of the director to repay the amount paid or reimbursed if it is ultimately determined that he has not met that standard or if it is ultimately determined that indemnification of the director against expenses incurred by him in connection with that proceeding is prohibited by Section 5 of this Article. A provision contained in the articles of incorporation, these bylaws, a resolution of the shareholders or directors, or an agreement that makes mandatory the payment or reimbursement permitted under this Section shall be deemed to constitute authorization of that payment or reimbursement. Section 11. The written undertaking required by Section 10 of this Article shall be an unlimited general obligation of the director, but need not be secured. It may be accepted without reference to financial ability to make repayment. Section 12. Notwithstanding any other provision of this Article, the corporation may pay or reimburse expenses incurred by a director in connection with an appearance as a witness or other participation in a proceeding at a time when he is not a named defendant or respondent in the proceeding. Section 13. An officer of the corporation shall be indemnified by the corporation as and to the same extent provided by Sections 7, 8 and 9 of this Article for a director and is entitled to seek indemnification under those sections to the same extent as a director. The corporation may indemnify and advance expenses to an officer, employee or agent of the corporation to the same extent that it may indemnify and advance expenses to directors under this Article. Section 14. The corporation may indemnify and advance expenses to persons who are not or were not officers, employees or agents of the corporation but who are or were serving at the request of the corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise, to the same extent that it may indemnify and advance expenses to directors under this Article. Section 15. The corporation may indemnify and advance expenses to an officer, employee, agent or person identified in Section 14 of this Article and who is not a director to such further extent, consistent with law, as may be provided by the articles of incorporation, these bylaws, general or specific action of the board of directors or contract or as permitted or required by common law. 19 20 Section 16. The corporation may purchase and maintain insurance or another arrangement on behalf of any person who is or was a director, officer, employee or agent of the corporation or who is or was serving at the request of the corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise, against any liability asserted against such person and incurred by such person in such a capacity or arising out of the status as such a person, whether or not the corporation would have the power to indemnify such person against that liability under this Article. If the insurance or other arrangement is with a person or entity that is not regularly engaged in the business of providing insurance coverage, the insurance or arrangement may provide for payment of a liability with respect to which the corporation would not have the power to indemnify the person only if including coverage for the additional liability has been approved by the shareholders of the corporation. Without limiting the power of the corporation to procure or maintain any kind of insurance or other arrangement, the corporation may, for the benefit of persons indemnified by the corporation (a) create a trust fund, (b) establish any form of self-insurance, (c) secure its indemnity obligations by grant of a security interest or other lien on the assets of the corporation, or (d) establish a letter of credit, guaranty or surety arrangement. The insurance or other arrangement may be procured, maintained or established within the corporation or with any insurer or other person deemed appropriate by the board of directors, regardless of whether all or part of the stock or other securities of the insurer or other person are owned in whole or part by the corporation. In the absence of fraud, the judgment of the board of directors as to the terms and conditions of the insurance or other arrangement and the identity of the insurer or other person participating in an arrangement shall be conclusive and the insurance or arrangement shall not be voidable and shall not subject the directors approving the insurance or arrangement to liability, on any ground, regardless of whether directors participating in the approval are beneficiaries of the insurance or arrangement. Section 17. Any indemnification of or advance of expenses to a director in accordance with this Article shall be reported in writing to the shareholders with or before the notice or waiver of notice of the next meeting of shareholders or with or before the next submission to shareholders of a consent to action without a meeting and, in any case, within the twelve (12) month period immediately following the date of the indemnification or advance. Section 18. For purposes of this Article, the corporation is deemed to have requested a director to serve an employee benefit plan whenever the performance by the director of the director's duties to the corporation also imposes duties on, or otherwise involves services by, the director to the plan or participants or beneficiaries of the plan. Excise taxes assessed on a director with respect to an employee benefit plan pursuant to applicable law shall be deemed to be fines. Action taken or omitted by the director with respect to an employee benefit plan in the performance of the director's duties or for a purpose reasonably believed by the director to be in the interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose which is not opposed to the best interests of the corporation. 20 EX-10.(H) 3 1995 STOCK OPTION PLAN 1 EXHIBIT 10(h) 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 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). 2 (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. (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 2 3 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. 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 3 4 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. 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 4 5 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. 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. 5 6 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. 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. 6 7 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 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 7 8 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. 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. 8 9 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. 9 EX-21 4 SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21 LIST OF SUBSIDIARIES Company Domicile Ownership - ------- -------- --------- Peerless International N.V.* Netherlands Antilles 100% Peerless Europe B.V. Netherlands 100% Peerless Europe Ltd. The United Kingdom 100% Peerless (Barbados) Inc. Barbados 100%
- --------------------- *Liquidated by unanimous motion of shareholders of the Company on August 11, 1997 EX-27 5 FINANCIAL DATA SCHEDULE
5 YEAR JUN-30-1997 JUN-30-1997 772,553 259,007 9,983,517 312,450 2,993,855 16,136,625 7,988,530 5,572,291 19,081,593 7,552,201 0 0 0 1,451,992 9,977,438 19,081,593 41,486,492 41,486,492 29,961,203 29,961,203 9,129,347 249,612 55,475 537,996 580 537,416 0 0 0 537,416 0.37 0
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