SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934
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PEERLESS MFG. CO.
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
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[PEERLESS MFG. CO. LOGO]
PEERLESS MFG. CO.
2819 Walnut Hill Lane
Dallas, Texas 75229
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD THURSDAY NOVEMBER 21, 2002
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We will hold this year's annual shareholders' meeting on Thursday, November
21, 2002 at 10:00 a.m. at our corporate offices, located at 2819 Walnut Hill
Lane, Dallas, Texas 75229. At this meeting we will ask you to consider and vote
on the following proposals:
o the election of two Directors to serve as Class II Directors for
a three-year term or until their successors are elected and
qualified; and
o the ratification of the selection of Grant Thornton LLP as our
independent auditors for fiscal year 2003.
We will also discuss and take action on any other business that is properly
brought before the meeting or any adjournment thereof. If you were a shareholder
at the close of business on October 18, 2002, you are entitled to notice of and
to vote on the proposals to be considered at this year's Annual Meeting. It is
important that your Common Stock be represented at the meeting regardless of the
number of shares you hold.
You are invited to attend the meeting in person. However, if you are unable
to attend in person, please know that we desire to have maximum representation
of our shareholders at the meeting and respectfully request that you complete,
date, sign and return the enclosed proxy in the enclosed postage-paid
self-addressed envelope. No additional postage is required if mailed in the
United States. You may revoke your proxy at any time prior to the use as
specified in the enclosed Proxy Statement. We look forward to hearing from you.
By Order of the Board of Directors,
/s/ Katherine S. Frazier
Corporate Controller
Secretary / Treasurer
Dallas, Texas
October 28, 2002
YOUR VOTE IS IMPORTANT.
Please vote early even if you plan to attend the Annual Meeting.
PEERLESS MFG. CO.
2819 Walnut Hill Lane
Dallas, Texas 75229
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
NOVEMBER 21, 2002
TABLE OF CONTENTS
<Table>
QUESTIONS AND ANSWERS:
Why did I receive this proxy statement?...................................................................... 1
I may have received more than one proxy statement. Why? ......................................................1
What will occur at the Annual Meeting? .......................................................................1
How many votes are necessary to elect the nominees for director? .............................................2
What if a nominee is unwilling or unable to stand for election? ..............................................2
How do I vote if I am not planning to attend the Annual Meeting? .............................................2
What if I want to change my vote?.............................................................................2
How do I raise an issue for discussion or vote at the Annual Meeting?.........................................2
What if my shares are in a brokerage account and I do not vote? ..............................................3
How are abstentions treated? .................................................................................3
Who will pay for the cost of this solicitation? ..............................................................3
Where can I find the voting results of the Annual Meeting? ...................................................3
MORE ABOUT THE PROPOSALS:
Proposal 1: Election of Class II Directors ...................................................................4
Proposal 2: Ratification of Independent Auditors..............................................................5
OTHER INFORMATION YOU NEED TO MAKE AN INFORMED DECISION:
Directors, Nominees, Executive Officers and Significant Employees of the Company..............................6
Security Ownership of Management and Certain Beneficial Owners................................................8
Section 16(a) Beneficial Ownership Reporting Compliance.......................................................9
Certain Relationships and Related Transactions................................................................9
Meeting Attendance and Committees of the Board of Directors .................................................10
Compensation of Directors and Executive Officers:
Summary Compensation Table..............................................................................11
Option Grants in 2002 to Named Executive Officers.......................................................12
Aggregated Option Exercises in 2002 and Year-end Option Values..........................................13
Equity Compensation Plan Information ...................................................................14
Employment, Severance and Change in Control Agreements with Certain Executive Officers .................14
Director Compensation ..................................................................................16
Compensation Committee Interlocks and Insider Participation..................................................16
Report of Compensation Committee of the Board of Directors...................................................16
Report of the Audit Committee of the Board of Directors......................................................19
Stock Price Performance Graph ...............................................................................21
Other Matters................................................................................................22
</Table>
QUESTIONS AND ANSWERS
WHY DID I RECEIVE THIS PROXY STATEMENT?
Peerless Mfg. Co. is furnishing you with this proxy statement on behalf of
its Board of Directors to solicit proxies for its 2002 Annual Meeting of
Shareholders and any adjournment or postponement of the Annual Meeting. On or
about October 28, 2002, we will begin mailing this proxy statement and
accompanying proxy card to everyone who was a shareholder of our company at the
close of business on October 18, 2002. We prepare a proxy statement each year to
let our shareholders know when and where we will hold our annual shareholders'
meeting. This proxy statement:
o includes information about the matters that will be discussed and
voted on at the meeting, and
o provides you with updated information about our company.
I MAY HAVE RECEIVED MORE THAN ONE PROXY STATEMENT. WHY?
If you received more than one proxy statement, your shares are probably
registered differently or are in more than one account. Please vote each proxy
card that you received.
WHAT WILL OCCUR AT THE ANNUAL MEETING?
We will determine whether enough shareholders are present at the meeting to
conduct business. A shareholder will be deemed to be "present" at the meeting if
the shareholder:
o is present in person, or
o is not present in person but has voted by proxy card prior to the
meeting.
All shareholders of record at the close of business on October 18, 2002
will be entitled to vote on matters presented at the meeting or any adjournment
thereof. On October 18, 2002 there were 2,993,134 shares of our Common Stock
issued and outstanding. The holders of a majority, or 1,499,560, of the shares
of our Common Stock entitled to vote at the meeting, must be represented at the
meeting in person or by proxy to have a quorum for the transaction of business
at the meeting and to act on the matters specified in the Notice. If holders of
fewer than 1,499,560 shares are present at the meeting, we will adjourn and
reschedule the meeting until a quorum is present. Under our Articles of
Incorporation, for each share of Common Stock that you owned at the close of
business on October 18, 2002, you are entitled to one vote on all matters
brought before the meeting or any adjournment thereof.
After each proposal has been voted on at the meeting, we will discuss and
take action on any other matter that is properly brought before the meeting. Our
transfer agent, Mellon Investor Services, will count the votes and act as
inspector of election.
We know of no other matters that will be presented for consideration at the
Annual Meeting. If, however, other matters or proposals are presented and
properly come before the meeting, the proxy holders intend to vote all proxies
in accordance with their best judgment in the interest of Peerless Mfg. Co. and
our shareholders.
1
A representative of Grant Thornton LLP (we refer to it as "Grant
Thornton"), our independent auditors, is expected to be present at the Annual
Meeting and will be afforded an opportunity to make a statement, if such
representative so desires, and to respond to appropriate questions.
HOW MANY VOTES ARE NECESSARY TO ELECT THE NOMINEES FOR DIRECTOR?
The two nominees receiving the highest number of "yes" votes will be
elected as directors. A majority of the votes cast is not required. This number
is called a "plurality."
Votes that are withheld from any director nominee will be counted in
determining whether a quorum has been reached, but will not affect the outcome
of the vote. Assuming a quorum is present, the election of directors will be
determined by a plurality of votes cast. Votes may be cast in favor of, or
withheld from, a director nominee.
In the election of directors, shareholders are not entitled to cumulate
their votes or to vote for a greater number of persons than the number of
nominees named in this proxy statement.
WHAT IF A NOMINEE IS UNWILLING OR UNABLE TO STAND FOR ELECTION?
Each of the persons nominated for re-election to our Board of Directors has
agreed to stand for election. However, should any nominee become unable or
unwilling to accept nomination or election, the directors' proxies will vote for
the election of such other person as the Board may recommend. Our Board of
Directors has no reason to believe that any of the nominees will be unable or
unwilling to serve if elected, and to the knowledge of the Board, each of the
nominees intends to serve the entire term for which election is sought.
HOW DO I VOTE IF I AM NOT PLANNING TO ATTEND THE ANNUAL MEETING?
In addition to voting in person at the meeting, you may mark your
selections on the enclosed proxy card, date and sign the card and return the
card in the enclosed postage-paid envelope.
We encourage you to vote now even if you plan to attend the Annual Meeting
in person. If your shares are in a brokerage account, you may receive different
voting instructions from your broker.
If you sign your proxy card but do not specify how you want to vote on a
proposal, then your shares will be voted FOR that proposal.
WHAT IF I WANT TO CHANGE MY VOTE?
You may revoke your vote on a proposal at any time before the Annual
Meeting for any reason. To revoke your proxy before the meeting, write to our
Secretary, Katherine S. Frazier, at 2819 Walnut Hill Lane, Dallas, Texas 75229.
You may also come to the meeting and change your vote in writing.
HOW DO I RAISE AN ISSUE FOR DISCUSSION OR VOTE AT THE ANNUAL MEETING?
If you would like to submit a proposal to be voted on at our next Annual
Meeting, you must submit your proposal in writing so that we receive it no later
than June 30, 2003. We will include your proposal in our next annual proxy
statement if it is a proposal that we are required to include in our proxy
statement pursuant to the rules of the Securities and Exchange Commission (we
refer to it as the "SEC"). Under Rule 14a-8 of the Securities Exchange Act of
1934, as amended, proposals of shareholders must conform to certain requirements
as to form and may be omitted from the proxy materials under certain
2
circumstances. To avoid unnecessary expenditures of time and money, you are
urged to review this rule and, if questions arise, consult legal counsel prior
to submitting a proposal to us. Proposals should be directed to our Secretary,
Katherine S. Frazier, at 2819 Walnut Hill Lane, Dallas, Texas 75229.
Where a shareholder has appropriately specified how a proxy is to be voted,
it will be voted accordingly, and where no specific direction is given on a
properly executed proxy card, it will be voted FOR adoption of the proposals set
forth in this proxy statement. The proxy holders will have discretion to vote on
any matter properly brought before the meeting that was not brought to our
attention by September 13, 2002.
WHAT IF MY SHARES ARE IN A BROKERAGE ACCOUNT AND I DO NOT VOTE?
If your shares are in a brokerage account and you do not vote, your
brokerage firm could:
o vote your shares, if it is permitted by the NASDAQ rules, or
o leave your shares unvoted.
Under applicable rules, brokers who hold shares in street name have the
authority to vote in favor of all proposals specified in this proxy statement,
if they do not receive contrary voting instructions from beneficial owners.
Under applicable law, if a broker has not received voting instructions with
respect to certain shares and gives a proxy for those shares, but does not vote
the shares on a particular matter, those shares will not affect the outcome of
the vote with respect to that matter. Such broker non-votes will be counted for
purposes of determining the presence or absence of a quorum for the transaction
of business, but will not be counted for purposes of determining the number of
votes cast with respect to a proposal. A broker non-vote will not affect the
outcome of the voting on any proposals in this proxy statement.
HOW ARE ABSTENTIONS TREATED?
Any shareholder that is present at the meeting, either in person or by
proxy, but who abstains from voting, will still be counted for purposes of
determining whether a quorum exists. An abstention will not be counted as an
affirmative or negative vote in the election of the directors or the
ratification of our independent accountants. Our shareholders have no appraisal
rights under Texas law with respect to the proposals specified in this proxy
statement.
WHO WILL PAY FOR THE COST OF THIS SOLICITATION?
We will bear the cost of solicitation of proxies, including the cost of
preparing, printing and mailing proxy materials, and the cost of reimbursing
brokers for forwarding proxies and proxy statements to their principals. Proxies
may also be solicited without extra compensation by our officers and employees
by telephone or otherwise. Arrangements may also be made with brokerage houses
and other custodians, nominees and fiduciaries for forwarding the proxy
materials to the beneficial owners of our Common Stock, and we may reimburse
them for reasonable out-of-pocket expenses incurred by them.
WHERE CAN I FIND THE VOTING RESULTS OF THE ANNUAL MEETING?
We will announce the voting results at the meeting and will publish the
results in our quarterly report on Form 10-Q for the second quarter of fiscal
2003 ending on December 31, 2002. We will file that report with the SEC by
mid-February 2003, and you can get a copy by contacting either our Investor
Relations office at (214) 353-5589 or the SEC at (800) SEC-0330 or visiting the
SEC's website at http://www.sec.gov.
3
MORE ABOUT THE PROPOSALS
PROPOSAL NO. 1
ELECTION OF CLASS II DIRECTORS
The Company's Bylaws provide that the number of directors will be five. The
Company's Board of Directors consists of three classes, with one director
serving in Class I, and two directors serving in each of Classes II and III.
Each class of director serves three-year terms or until successors have been
elected and qualified. The term of the Class II directors, Bernard S. Lee and
Joseph V. Mariner, Jr., expire at the Annual Meeting.
Our Board of Directors proposes the re-election of each of Bernard S. Lee
and Joseph V. Mariner, Jr. as Class II directors, to hold office for a term of
three years, expiring at the close of our Annual Meeting of Shareholders to be
held in 2005 or until his successor is elected and qualified. It is the Board's
opinion that because of Messrs. Lee and Mariner's tenure as directors they are
sufficiently familiar with the Company and its business to be able to
competently direct and manage the Company's business affairs. Biographical
information on Bernard S. Lee and Joseph V. Mariner, Jr. is set forth below in
"Other Information You Need To Make An Informed Decision - Directors, Nominees,
Executive Officers and Significant Employees of the Company."
If Messrs. Lee or Mariner becomes unavailable for election, which is not
anticipated, the directors' proxies will vote for the election of such other
person as the Board may recommend.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR
THE NOMINEES FOR DIRECTORS SET FORTH ABOVE.
4
PROPOSAL NO. 2
RATIFICATION OF INDEPENDENT AUDITORS
Grant Thornton LLP, independent certified public accountants, served as
independent auditors for the Company for the fiscal year ended June 30, 2002 and
has reported on the Company's financial statements. The Audit Committee of the
Board of Directors has selected Grant Thornton LLP as the Company's independent
auditors for fiscal year 2003 and recommends that the shareholders ratify this
selection.
A representative of Grant Thornton is expected to be present at the Annual
Meeting and will have an opportunity to make a statement if he/she desires to do
so, and is expected to be available to respond to appropriate questions. See
"Report of Audit Committee of the Board of Directors" for a discussion of
auditor independence.
Shareholder ratification is not required for the selection of Grant
Thornton LLP as the Company's independent auditors for fiscal year 2003, because
the Audit Committee has the responsibility of selecting the Company's
independent auditors. The selection is being submitted for ratification with a
view toward soliciting the opinion of the shareholders, which opinion will be
taken into consideration in future deliberations.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR
THE RATIFICATION OF THE APPOINTMENT OF GRANT THORNTON LLP
AS THE COMPANY'S INDEPENDENT AUDITORS FOR THE 2003 FISCAL YEAR.
5
OTHER INFORMATION YOU NEED TO MAKE AN INFORMED DECISION
DIRECTORS, NOMINEES, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES OF THE
COMPANY
The Company's Bylaws divide the Board into three classes, with the terms of
each class expiring in consecutive years so that only one class is elected in
any given year. The shareholders of the Company elect successors to directors
whose terms have expired. The Board fills vacancies in unexpired terms.
There is no family relationship among any of our directors and senior
officers. The following table sets forth, as of September 30, 2002, the names of
our directors and senior officers and their respective ages and positions:
<Table>
<Caption>
NAME AGE POSITION
---- --- --------
Peter J. Burlage 38 Vice President
J. Jeff East 43 Vice President
Kenneth J. Fewel 49 Vice President
Katherine S. Frazier 48 Controller, Secretary and Treasurer
Frank J. Fuller 73 Vice President
Bernard S. Lee(1)(2) 67 Class II Director
Joseph V. Mariner, Jr.(1)(2) 82 Class II Director
R. Clayton Mulford(2) 46 Class I Director
W. S. Respess 59 Vice President
Donald A. Sillers, Jr.(1)(2) 76 Class III Director
Sherrill Stone 66 Class III Director, Chairman, President, and
Chief Executive Officer
David Taylor 37 Vice President
Richard L. Travis, Jr. 47 Chief Financial Officer and Vice President
of Administration
</Table>
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(1) member of the Audit Committee
(2) member of the Compensation Committee
Set forth below is a description of the backgrounds of the executive
officers and directors, including the nominees for director.
o PETER J. BURLAGE joined the Company in 1992. He has served as Vice
President SCR Systems since January 2001. Prior to this, Mr. Burlage was
the Company's SCR division manager from 1997 to 2000 and its Vice President
of Engineering from 2000 to 2001.
o J. JEFF EAST joined the Company in August 2000 as the Company's Director of
Project Management. He was promoted to Vice President of Project Management
in November 2000. Prior to joining the Company, he was employed as the
manager of the project management group for Koch-Glitsch, Inc. from 1990
through 2000.
o KENNETH J. FEWEL joined the Company in 1987. He has served as Vice
President of Research and Technology since 1997.
o KATHERINE S. FRAZIER joined the Company in October 2000. Prior to coming to
Peerless Mfg. Co., she served as Controller for PC Service Source from 1998
through 2000, and Vice President of Operations for AMR Global Logistics
from 1997 through 1998.
6
o FRANK J. FULLER joined the Company in 1995. He served as Vice President of
the Company's international operations since 1999. Prior to his current
appointment, Mr. Fuller was the Managing Director of our Asia-Pacific
operations.
o BERNARD S. LEE, retired, was the former President of Institute of Gas
Technology. Mr. Lee is also a director of NUI Corporation and National Fuel
Gas Company. Mr. Lee has been a director of our Company since 1982 and is a
nominee for Class II director.
o JOSEPH V. MARINER, JR., retired, has been a director of the Company since
1980 and is a nominee for Class II director.
o R. CLAYTON MULFORD has been a director of the Company since January 2002
when he joined the Board of Directors to fill the unexpired term of David
D. Battershell. Mr. Mulford is a partner and member of the Executive
Committee of the Texas based law firm of Hughes & Luce, LLP. Mr. Mulford
has served as lead corporate legal counsel to the Company for a number of
years.
o W. S. RESPESS joined the Company in 2001 and directs all manufacturing
operations. Prior to joining the Company, he served as Assistant Dean for
Operations at the University of Dallas Graduate School of Management from
1999 through 2001, and Chief Operation Officer of Koch-Glitsch, Inc. from
1997 through 1999.
o DONALD A. SILLERS, JR. is the Company's former Chairman of the Board and
Chief Executive Officer, and has served as a director of the Company since
1970.
o SHERRILL STONE has served as Chairman of the Board and Chief Executive
Officer since 1993, and President of the Company since 1986. Mr. Stone has
also served as a director of the Company since 1986.
o DAVID TAYLOR joined the Company in 1988. He has served as Vice President
since 1999 and was appointed the head of our gas/liquid filtration business
unit in July 2002. Prior to his current position, Mr. Taylor served as the
Vice president of our nuclear/marine product line and Director of Sales and
Engineering for our Asia-Pacific operations.
o RICHARD L. TRAVIS, JR. joined the Company in February 2002 as the Company's
Chief Financial Officer and Vice President of Administration. Mr. Travis
has over 20 years experience as an executive financial officer in the
manufacturing, construction, technology, and telecommunications industries.
Prior to joining the Company, Mr. Travis served as the Senior Vice
President and Chief Financial Officer of Trintel Communications, Inc. from
2000 to 2002, as President, Chief Operating Officer and Chief Financial
Officer of CT Holdings, Inc. from 1996 through 1999, and as Executive Vice
President and Chief Financial Officer of Texwood Industries, Inc. from 1986
to 1996.
7
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table sets forth information regarding the beneficially
ownership of our Common Stock as of October 18, 2002 (unless otherwise noted)
for:
o each person who is known by us to own beneficially more than 5%
of the outstanding shares of our Common Stock;
o each of our directors and director nominees;
o each of our executive officers named in the Summary Compensation
Table; and
o all of our directors and executive officers as a group.
The percentages of shares outstanding provided in the table is based on
2,993,134 voting shares outstanding as of October 18, 2002. Beneficial ownership
is determined in accordance with the rules of the Securities and Exchange
Commission and generally includes voting or investment power with respect to
securities. Unless otherwise indicated, each person or entity named in the table
has sole voting and investment power, or shares voting and investment power with
his or her spouse, with respect to all shares of stock listed as owned by that
person. The number of shares shown does not include the interest of certain
persons in shares held by family members in their own right. Shares issuable
upon the exercise of options that are exercisable within 60 days of October 18,
2002 are considered outstanding for the purpose of calculating the percentage of
outstanding shares of our Common Stock held by the individual, but not for the
purpose of calculating the percentage of outstanding shares held by any other
individual. The address of our directors, director nominees and executive
officers listed below is c/o Peerless Mfg. Co., 2819 Walnut Hill Lane, Dallas,
Texas 75229.
<Table>
<Caption>
NAME NUMBER OF SHARES PERCENT
---- ---------------- -------
Peter J. Burlage(1) 4,500 *
Roy C. Cuny(2) 10,000 *
Bernard S. Lee(3) 12,000 *
Joseph V. Mariner, Jr.(4) 11,100 *
R. Clayton Mulford -- *
W. S. Respess(5) 4,400 *
Donald A. Sillers, Jr.(6) 124,801 4.2%
Sherrill Stone(7) 114,716 3.8%
David Taylor(8) 3,000 *
Royce & Associates, Inc.(9)
1414 Avenue of the Americas
New York, NY 10019 431,200 14.4%
William F. Nicklin(10)
3 Rivers Edge
Newburgh, NY 12550 249,200 8.3%
All directors and senior officers as a group (13 persons)(11) 311,067 10.0%
</Table>
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* Denotes ownership of less than 1%.
(1) Includes 4,500 shares issuable pursuant to options to purchase Common
Stock.
(2) Mr. Cuny, the Company's former President and Chief Operating Officer,
resigned his position with the Company on July 10, 2002. These shares have
been excluded in determining the amount of shares held by our directors and
senior officers.
8
(3) Includes 1,000 shares issuable pursuant to options to purchase Common
Stock.
(4) Includes 8,400 shares issuable pursuant to options to purchase Common
Stock.
(5) Includes 2,000 shares issuable pursuant to options to purchase Common
Stock.
(6) Includes 8,400 shares presently issuable pursuant to options to purchase
Common Stock. Does not include 1,778 shares owned of record by Virginia
Sillers, Mr. Sillers' wife, as to which shares Mr. Sillers disclaims any
beneficial interest.
(7) Includes 68,000 shares issuable pursuant to options to purchase Common
Stock. Does not include 300 shares owned of record by Jo Ann Stone, Mr.
Stone's wife, as to which shares Mr. Stone disclaims any beneficial
ownership.
(8) Includes 3,000 shares issuable pursuant to options to purchase Common
Stock.
(9) The information is based on a Schedule 13F filed with the Securities and
Exchange Commission on June 30, 2002.
(10) The information is based on a Schedule 13G filed with the Securities and
Exchange Commission on February 15, 2002.
(11) Includes 114,050 shares issuable pursuant to options to purchase Common
Stock. The shares indicated do not include the shares held by Mr. Cuny, the
Company's former President and COO, who separated his employment with the
Company in July 2002.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under the securities laws of the United States, our directors, officers and
any beneficial owner of more than 10% of our outstanding Common Stock
(collectively, "insiders") are required to report their initial ownership of our
Common Stock and any subsequent changes in their ownership to the SEC. The SEC's
rules require insiders to provide us with copies of all Section 16(a) reports
that the insiders file with the SEC. Specific due dates have been established by
the SEC, and we are required to disclose any failure to file by those dates.
Based solely upon our review of copies of Section 16(a) reports that we received
from insiders for their 2002 transactions, we believe, with the exception of the
Form 5 required of Mr. Mariner, that our insiders have complied with all Section
16(a) filing requirements applicable to them during fiscal year 2002. The Form 5
for Mr. Mariner was filed late and covered options to purchase 1,000 shares of
Common Stock granted to him on November 20, 2001.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
R. Clayton Mulford, a director of the Company, is a partner at the law firm
of Hughes & Luce, LLP, Dallas, Texas. Hughes & Luce, LLP provided legal services
to the Company during the 2002 fiscal year. The dollar amount of fees that the
Company paid to Hughes & Luce, LLP during the 2002 fiscal year did not exceed
five percent of Hughes & Luce, LLP's gross revenue for its latest full fiscal
year.
9
MEETING ATTENDANCE AND COMMITTEES OF THE BOARD OF DIRECTORS
Our business is managed under the direction of our Board of Directors. Our
Board meets during the year to review significant developments and to act on
matters requiring Board approval. Our Board met on nine occasions during the
year ended June 30, 2002. Each of the current directors attended at least 75% of
all meetings of our Board called during the time he served as a director. Each
of the current directors attended at least 75% of all meetings of each committee
of our Board on which he served.
Our Board has established an Audit Committee and a Compensation Committee
to devote attention to specific subjects and to assist our Board in discharging
its responsibilities. The functions of these committees are described below.
AUDIT COMMITTEE
Our Audit Committee is currently comprised of Bernard S. Lee, Joseph V.
Mariner, and Donald A. Sillers, Jr. The Audit Committee operates under a written
charter adopted by our Board of Directors and oversees our financial reporting
process on behalf of our Board, pursuant to the charter. This includes reviewing
the scope and results of audits made by the independent auditors. The Audit
Committee met in person on three occasions during the year ended June 30, 2002
and held an additional two telephonic meetings that included members of both the
Company's management team and Grant Thornton.
Our Board has, in accordance with the recommendation of the Audit
Committee, chosen the firm of Grant Thornton as our independent auditors for
2003. Following is a summary of Grant Thornton's fees for the year ended June
30, 2002:
Audit Fees. Grant Thornton's fees for our 2002 annual audit and review of
our quarterly financial statements were $76,900.
Financial Information Systems Design and Implementation Fees. Grant
Thornton did not render any professional services to us in 2002 with respect to
financial information systems design and implementation.
All Other Fees. In addition to the fees described above, Grant Thornton
billed us an aggregate of $34,037 for all other services rendered during fiscal
year 2002. This included audit-related services of $5,007, and non-audit
services of $29,030. Audit-related services included fees for the SEC
registration statement, assistance in responding to a letter of comment from the
SEC on the Company's Form 10-K and Form 10-Q. Non-audit services included fees
for tax consultations and return preparation.
The Audit Committee has determined that the services provided under "All
Other Fees" are compatible with maintaining Grant Thornton's independence. For
additional information concerning the Audit Committee, see "Report of the Audit
Committee of the Board of Directors."
COMPENSATION COMMITTEE
Our Compensation Committee is currently comprised of Bernard S. Lee, Joseph
V. Mariner, Jr., R. Clayton Mulford, and Donald A. Sillers, Jr.
The Compensation Committee is responsible for recommending to the full
Board salaries and bonuses for our senior management and also administers the
stock incentive and benefit plans of the Company. The Compensation Committee met
four times in the 2002 fiscal year. For additional
10
information concerning the Compensation Committee, see "Report of Compensation
Committee of the Board of Directors."
NOMINATING COMMITTEE
The Company's Board does not have a nominating committee. The Board, as a
whole, performed the functions customarily attributable to a nominating
committee. Audit and Compensation committee members are appointed annually by
the Board, and serve until their successors are appointed or their earlier
resignation or removal.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table sets forth information regarding compensation we paid
during our last three fiscal years to our Chief Executive Officer and our most
highly compensated executive officers during fiscal year ending June 30, 2002.
<Table>
<Caption>
LONG TERM COMPENSATION
---------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------------------------------- -------------------------- -------
SECURITIES
RESTRICTED UNDERLYING
OTHER ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
FISCAL SALARY BONUS COMPENSATION AWARDS(S) SAR'S PAYOUTS COMPENSATION
NAME YEAR ($) ($)(1) ($)(2) ($)(3) (#) ($) ($)(4)
---- ------ --------- -------- ------------ ---------- ---------- ------- ------------
PETER J. BURLAGE 2002 $ 109,750 $ 83,257 -- -- 4,000 -- $ 2,264
Vice President 2001 101,750 96,300 -- -- 6,000 -- 2,104
2000 96,500 -- -- -- 6,000 -- 2,030
ROY C. CUNY(5) 2002 186,000 166,514 -- -- 8,000 -- 41,960
President, COO 2001 168,500 140,783 -- -- 8,000 -- 46,100
2000 19,038 -- -- 38,190 -- 750
W. S. RESPESS 2002 123,000 93,664 -- -- 4,000 -- 7,330
Vice President 2001 56,397 43,017 -- -- 4,000 -- 1,071
2000 -- -- -- -- -- -- --
SHERRILL STONE 2002 226,500 197,735 -- -- 10,000 -- 14,231
Chairman, CEO 2001 199,000 164,247 -- -- 8,000 -- 12,428
2000 195,231 -- -- -- 20,000 -- 4,120
DAVID TAYLOR 2002 109,750 83,257 -- 4,000 -- 2,296
Vice President 2001 102,500 96,300 -- -- 6,000 -- 2,150
2000 93,967 -- -- -- 6,000 -- 1,979
</Table>
- ----------
(1) Bonuses are paid in the fiscal year following the year in which they
are earned.
(2) The aggregate value of perquisites and other personal benefits did not
exceed the lesser of either $50,000 or 10% of the total of annual
salary and bonus for the named executive officer.
11
(3) Calculated by multiplying the closing price of the Company's Common
Stock, on the date of grant (May 8, 2000), by the number of restricted
shares awarded (6,000 shares x $6.365 - after giving effect to 2-for-1
stock split in October 2001). These shares vest over four years at
1,500 shares per year commencing May 8, 2001 and ending on May 8,
2004. The value of the unvested shares at June 30, 2002 was $50,970
(3,000 shares x $16.99 -- closing price of the Company's Common
Stock). Mr. Cuny forfeited these shares upon his separation of
employment with the Company in July 2002.
(4) Amounts reported for 2002 consist of: (1) Personal use of Company
vehicles of $4,768, $4,199 and $5,890 for Messrs. Cuny, Respess and
Stone, respectively; (2) Employer matching contributions under the
Company's 401(k) plan of $2,195 for Mr. Burlage, $3,720 for Mr. Cuny,
$2,460 for Mr. Respess, $4,530 for Mr. Stone and $2,195 for Mr.
Taylor; (3) Cost of premiums for group life insurance in excess of
$50,000 of $69, $407, $671, $3,811 and $101 for Messrs. Burlage, Cuny,
Respess, Stone and Taylor; and (4) Moving and relocation expense
payments to Mr. Cuny of $33,065 in 2002 and $39,458 in 2001.
(5) Separated from employment with the Company in July 2002. See also
"Other Information You Need to Make an Informed Decision - Employment,
Severance and Change in Control Agreements with Certain Executive
Officers."
OPTION GRANTS IN 2002 TO EXECUTIVE OFFICERS
In fiscal 2002, stock options for an aggregate of 64,500 shares of our
Common Stock were issued to 25 employees, 13,000 of which were immediately
exercisable and 51,500 of which will vest 25% ratably over the first four years
of the 10-year exercise period. The Company also granted stock options to our
non-employee directors for an aggregate of 4,000 shares of our Common Stock
(1,000 Common Stock per non-employee director), all of which were immediately
exercisable.
The following table sets forth certain information concerning Common Stock
options granted to the named executive officers during the fiscal year ending
June 30, 2002.
<Table>
<Caption>
INDIVIDUAL GRANTS
-----------------------------------------------------------
NUMBER OF POTENTIAL REALIZABLE VALUE AT
SECURITIES % OF TOTAL ASSUMED ANNUAL RATES OF STOCK
UNDERLYING OPTIONS GRANTED EXERCISE PRICE APPRECIATION
OPTIONS TO EMPLOYEES IN OR BASE FOR OPTION TERM (1)
GRANTED FISCAL YEAR PRICE EXPIRATION -----------------------------
NAME (2)(#) 2002 ($/SHARE) DATE 5% ($) 10% ($)
---- ---------- --------------- --------- ---------- -------- --------
Peter J. Burlage 4,000 5.84% $19.50 11/20/2011 $127,054 $202,312
Roy C. Cuny (3) 8,000 11.68% $19.50 11/20/2011 $254,108 $404,624
W. S. Respess 4,000 5.84% $19.50 11/20/2011 $127,054 $202,312
Sherrill Stone 10,000 14.60% $19.50 11/20/2011 $317,634 $505,780
David Taylor 4,000 5.84% $19.50 11/20/2011 $127,054 $202,312
</Table>
- ----------
(1) Caution is recommended in interpreting the financial significance of
these figures. Potential values are based on the assumption that the
Company's Common Stock will appreciate 5% or 10% each year, compounded
annually, from the grant date of the option to the end of the option
term, and therefore, the figures are not intended to forecast possible
future appreciation, if any, of the price of the Common Stock or
establish a present value of the options.
12
(2) All options granted are exercisable for Common Stock pursuant to the
Peerless Mfg. Co. 2001 Stock Option and Restricted Stock Plan.
(3) Mr. Cuny's options were cancelled upon his separation of employment
with the Company in July 2002.
AGGREGATED OPTION EXERCISES IN 2002 AND FISCAL YEAR-END OPTION VALUES TABLE
The following table sets forth information concerning Common Stock acquired
on exercise of stock options during fiscal 2002, any value realized therein, the
number of options at the end of fiscal 2002 (exercisable and unexercisable) and
the value of stock options held at the end of 2002 by the executive officers.
The "Value Realized" column reflects the difference between the market price on
the date of exercise and the market price on the date of grant (which
establishes the exercise price for the option) for all options exercised, even
though the executive may have actually received fewer shares as a result of the
surrender of shares to pay the exercise price, or the withholding of shares to
cover the tax liability associated with the option exercise. Accordingly, the
"Value Realized" numbers do not necessarily reflect what the executive might
receive, should the optionee choose to sell the shares required by the option
exercise, since the market price of the shares so acquired may at any time be
higher or lower than the price on the exercise date of the option.
<Table>
<Caption>
VALUE OF UNEXERCISED
NUMBER OF OPTIONS IN-THE-MONEY-OPTIONS
AT FY-END AT FY-END
SHARES JUNE 30, 2002 JUNE 30, 2002
ACQUIRED VALUE (#) ($) (1)
ON EXERCISE REALIZED ----------------------------- ------------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
Peter J. Burlage 9,000 $123,213 3,500 8,500 $ 38,121 $ 48,049
Roy C. Cuny (2) 2,000 14,000 21,355 64,065
W. S. Respess 1,000 7,000 10,678 32,033
Sherrill Stone 68,000 -- 669,295 --
David Taylor 7,500 111,631 2,000 8,500 21,855 48,049
</Table>
- ----------
(1) The closing price for the Company's Common Stock as reported on the
NASDAQ Stock Market National Market on June 30, 2002 was $16.99. Value
is calculated on the basis of the difference between $16.99 and the
option exercise price of "in the money" options, multiplied by the
number of shares of our Common Stock underlying the option.
(2) In connection with his separation of employment with the Company in
July 2002, all unexercisable options were canceled.
13
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth aggregate information regarding the
Company's compensation plans in effect as of June 30, 2002.
<Table>
<Caption>
NUMBER OF
SECURITIES
AVAILABLE FOR
FUTURE ISSUANCES
NUMBER OF WEIGHTED- UNDER EQUITY
SECURITIES TO BE AVERAGE COMPENSATION
ISSUED UPON EXERCISE PRICE PLANS (EXCLUDING
EXERCISE OF OF SECURITIES
OUTSTANDING OUTSTANDING REFLECTED IN
OPTIONS OPTIONS COLUMN (a))
PLAN CATEGORY (a) (b) (c)
- ------------- ---------------- -------------- ----------------
Equity compensation plans approved by
security holders(1) 211,950 $9.89 195,400
Equity compensation plans not approved by
security holders -- -- --
------- ----- -------
Total 211,950 $9.89 195,400
======= ===== =======
</Table>
- ----------
(1) Includes the 1995 Stock Option and Restricted Stock Plan and the 2001 Stock
Option and Restricted Stock Plan.
EMPLOYMENT, SEVERANCE AND CHANGE IN CONTROL AGREEMENTS WITH CERTAIN EXECUTIVE
OFFICERS
The Company has entered into an employment agreement and a change of
control agreement with each of Sherrill Stone, the Company's Chief Executive
Officer, and Richard Travis, the Company's Chief Financial Officer. The Company
also entered into an employment and a change of control agreement with Roy Cuny,
the Company's former President and Chief Operating Officer, whose employment
with the Company ended in July 2002.
Stone Agreements. Mr. Stone's employment agreement with the Company as
Chairman of the Board, Chief Executive and Officer and President is for a one
year term, commencing July 20, 2001 and renewing for successive 12 month periods
thereafter unless the agreement is terminated by either party prior to the
anniversary date of the agreement. Pursuant to the terms of the employment
agreement, Mr. Stone has agreed not to compete with the Company during his
employment and for one year following the termination of his employment. Mr.
Stone is also bound by confidentiality, nondisparagement and conflict of
interest provisions. The Company may terminate Mr. Stone for "cause" or without
"cause" at any time. If Mr. Stone is terminated without "cause" or the Company
does not renew his employment agreement after the first anniversary date of the
agreement, the Company must pay Mr. Stone a severance payment equal to 150% of
his current base salary plus provide insurance benefits to Mr. Stone and his
spouse for 12 months after the date of termination. Mr. Stone may terminate his
employment at any time and the Company will have no severance obligations in the
event of his voluntary resignation, unless Mr. Stone resigns to retire from
active working life. In the event Mr. Stone retires from active working life,
the Company will pay Mr. Stone a payment equal to 150% of his current base
salary. In each officer's employment agreement and change of control agreement,
"cause" is defined as (1) the conviction of a crime involving moral turpitude,
(2) the employee's intentional material act of fraud to his pecuniary
14
benefit, or (3) the employee's intentional and continued failure to
substantially perform his duties to the Company or intentional wrong doing
resulting in material injury to the Company.
Mr. Stone's change of control agreement provides that if after a "change of
control" occurs, Mr. Stone is terminated by the Company (or its successor)
without "cause" or Mr. Stone resigns and (1) an adverse change in his position,
duties or authority has occurred, (2) he has been hindered in his ability to
perform his job, (3) his principal location of work is relocated outside of the
Dallas metropolitan area, or (4) the Company (or its successor) breaches the
change of control agreement (each, a "Good Reason"), Mr. Stone will receive
severance compensation equal to 299% of his average annual compensation for the
prior five years plus customary employee benefits for three years thereafter.
The change of control agreement also provides that if a "sale of the Company"
occurs prior to July 1, 2003 and the Company employs Mr. Stone at such time, Mr.
Stone will receive a bonus based on the amount of consideration received by the
Company's shareholders in excess of specified amount. The change of control
agreement has a term of three years following a change of control, which renews
for successive one-year periods unless either party gives notice prior to the
annual renewal date. As used in each executive's change of control agreement,
"change of control" means (1) the Company is merged, consolidated or reorganized
with another company and as a result, the Company's shareholders own less than
50.1% of the voting power of the combined company, (2) the Company sells all or
substantially all its assets, (3) more than 50% of the Company's issued and
outstanding Common Stock is sold, (4) the current Board of Directors, or
successor directors approved by the Board, cease to constitute a majority of the
Company's Board of Directors, or (5) such other events that cause a change of
control of the Company as determined by the Board. In each agreement, a "sale of
the Company" means a sale of 51% or more of the Company's issued and outstanding
Common Stock or a sale of all or substantially all of its assets.
Travis Agreements. Mr. Travis's employment agreement with the Company as
Chief Financial Officer and Vice President - Administration is for a three year
term, commencing February 4, 2002. Pursuant to the terms of the employment
agreement, Mr. Travis has agreed not to compete with the Company during his
employment and for one year following the termination of his employment. Mr.
Travis is also bound by confidentiality, nondisparagement and conflict of
interest provisions. The Company may terminate Mr. Travis for "cause" or without
"cause" at any time. If Mr. Travis is terminated without "cause", the Company
must pay Mr. Travis a severance payment equal to 150% of his then current base
salary. Mr. Travis may terminate his employment at any time and the Company will
have no severance obligations in the event of his voluntary termination.
Mr. Travis's change of control agreement provides that if after a "change
of control" occurs, Mr. Travis is terminated by the Company (or its successor)
without "cause" or Mr. Travis resigns and a "Good Reason" has occurred, Mr.
Travis will receive severance compensation equal to 299% of his average annual
compensation for the prior five years plus customary employee benefits for three
years thereafter. The change of control agreement also provides that if a "sale
of the Company" occurs prior to July 1, 2003 and the Company employs Mr. Travis
at such time, Mr. Travis will receive a bonus based on the amount of
consideration received by the Company's shareholders in excess of a specified
amount. The change of control agreement has a term of three years following a
change of control, which renews for successive one-year periods unless either
party gives notice prior to the annual renewal date.
Cuny Agreements. Mr. Cuny separated from employment with the Company in
July 2002. In connection therewith, Mr. Cuny's employment and change in control
agreements were canceled.
15
DIRECTOR COMPENSATION
Non-employee directors are paid $1,575 per quarter, plus $950 for each
Board meeting they attend. The Company also grants stock options for 1,000
shares of our Common Stock to each of the non-employee directors on the date of
the annual shareholder's meeting for such director's prior year's service. Mr.
Stone, the only officer serving on the Board, does not receive compensation for
serving on our Board.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the 2002 fiscal year, none of the Company's executive officers
served on the board of directors of any entities whose directors or officers
serve on the Company's Compensation Committee. Except for Mr. Sillers prior
service as Chairman of the Board and Chief Executive Officer of the Company from
which he retired in 1993, no other member of the Compensation Committee is
currently or has been an officer or employee of the Company.
REPORT OF COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
The Compensation Committee (the "Compensation Committee") is responsible
for setting the annual base compensation and bonus levels and administering the
restricted stock program for our employees, including our executive officers.
Its recommendations are subject to final approval by the Board of Directors. We
believe that the key to a successful executive compensation program is in
setting aggressive business goals by integrating the program with our annual and
strategic planning and evaluation processes and by comparing our results against
industry performance levels. The Compensation Committee takes into account
achievements during the past fiscal year, as well as the individual achievements
of our various business units and divisions, in making executive compensation
determinations. In addition, we recognize that we compete in an increasingly
competitive environment, and executive compensation therefore must also take
into account our performance as compared to that of other companies in our
industry or in similar industries. The Compensation Committee also evaluates on
an annual basis our corporate performance, revenues and share performance
compared to a broader group of companies, such as the Standard & Poor's 500.
Annual Base Compensation. Annual base compensation awarded in any
particular fiscal year to each of our executive officers is based upon the
following factors: our corporate performance during the prior year, performance
of our divisions for which the executive officer is responsible, and a more
subjective evaluation of each of the executive officer's individual performance.
The evaluation of our corporate performance is directly linked to our
profitability during the period, and therefore is based upon the value of our
Common Stock. In making this evaluation, the Compensation Committee reviews our
percentage growth in earnings per share over the prior year, and our overall
return on equity for that period. The Compensation Committee believes that these
two factors are the primary determinants of stock price over time. The
Compensation Committee next reviews the profit performance of the individual
divisions for which the executive officer is responsible. Finally, the
Compensation Committee determines the individual rating for each executive
officer, which is based upon such qualitative factors as the achievement of
certain financial objectives and specific organizational and management goals
for that officer. Annual base compensation for our Chief Executive Officer and
Chief Financial Officer is determined in the same manner as for our other
executive officers, except that the Compensation Committee does not review or
evaluate any particular division's performance, but rather, looks to our Company
as a whole in determining corporate performance relevant to these Officer's
compensation.
16
The Compensation Committee also recognizes that, in order to attract and
retain the highest quality executive officers, their base compensation must be
competitive in relation to that paid by companies in similar industries and in
comparable geographic areas. Accordingly, the Compensation Committee
periodically reviews the executive compensation paid by such companies.
Annual Bonus Plans. We have an incentive bonus plan pursuant to which
certain key employees, including the named executive officers, are selected
annually by the Compensation Committee to earn a cash bonus based upon our
after-tax profitability. This plan requires that we achieve a specific after-tax
return on beginning-of-year equity, after which bonuses may be paid out. The
available bonus pool is calculated on earnings in excess of the base level.
Once the total bonus pool is calculated, we distribute it to participants
in the plan in accordance with pre-determined percentages as set by the
Compensation Committee annually. The determination of the bonus level awarded to
our Chief Executive Officer is made in the same manner as that of our other
executive officers.
The Compensation Committee also recommended that an additional
discretionary bonus pool of $50,000 be established, to be used by the Chief
Executive Officer for the purpose of recognizing certain outstanding
contributions made by any employee, including the named executive officers, but
excluding the Chief Executive Officer. Awards under this plan may be made in
order to recognize new product inventions or improvements, ideas for major
manufacturing cost reductions, originations of large and profitable orders or
for other purposes.
Compensation of Chief Executive Officer. During fiscal 2002, Sherrill
Stone, the Company's Chief Executive Officer, received a base salary of
$226,500, an increase of 14% from the previous year. Mr. Stone was also granted
an option to purchase 10,000 shares of the Company's Common Stock as part of the
normal compensation awards for the Company's officers and employees. This option
has an exercise price of $19.50 per share, which was the fair market value of
the Common Stock on the date of grant, a term of ten years and vests in four
annual equal increments.
Mr. Stone's base salary is not directly related to specific measures of
corporate performance. His tenure of service and his current job
responsibilities as well as the relative salaries of his peers in the industries
in which the Company participates determine his base salary. Any stock options
awarded to Mr. Stone are not necessarily directly tied to specific measures of
corporate performance. Such awards are generally based on his current
compensation and the Company's overall relative performance. As previously
mentioned, Mr. Stone's annual bonus is tied to a specific after-tax return on
beginning of year equity balance and is calculated on earnings in excess of the
base level pursuant to the Company's incentive bonus plan.
1985 Restricted Stock Plan. Our Board of Directors adopted the 1985
Restricted Stock Plan (the "1985 Plan") to attract, motivate and retain
qualified employees. The 1985 Plan was approved by our shareholders on November
13, 1985 and became effective as of December 13, 1985. Under the terms of the
1985 Plan, we could have granted up to an aggregate of 150,000 shares of
restricted Common Stock to any employee. Employees that received restricted
stock did not pay for such stock; however, certain ownership restrictions were
placed upon the stock on the date of its issuance which lapse, generally, within
five years after such issuance. Dividends are paid to the employees on
restricted shares during the restriction period. This plan expired in December
2000, and no further grants have been made. As of June 30, 2002, 2,500 shares of
restricted Common Stock were outstanding under the 1985 Plan.
17
1995 Stock Option and Restricted Stock Plan. Our Board of Directors adopted
the 1995 Stock Option and Restricted Stock Plan (the "1995 Plan") to attract,
motivate and retain qualified employees. The 1995 Plan was approved by our
shareholders on November 21, 1996 and became effective immediately thereafter.
Our Board of Directors, which administers the 1995 Plan, delegated to the
Compensation Committee its power to determine which employees should be awarded
stock options or restricted stock pursuant to the plan. From time to time, our
Chief Executive Officer will recommend to the Compensation Committee individuals
he believes should receive an option or grant, and, with respect to any
recommended option, whether the option should be a qualified or nonqualified.
The Compensation Committee will consider, but need not accept, the Chief
Executive Officer's recommendations.
Under the terms of the 1995 Plan, we may provide options or grants up to an
aggregate of 240,000 shares of Common Stock to any employee or non-employee
director. The designated non-employee directors will determine the number and
the exercise price of the options, and the time or times that the options become
exercisable, provided that an option exercise price may not be less than the
fair market value of our Common Stock on the date of grant. The designated
non-employee directors will also determine the term of an option, provided that
the term of a qualified option may not exceed 10 years. Designated non-employee
directors may grant shares of restricted stock without requiring the payment of
cash consideration for the shares. As of June 30, 2002, there were 10,900 shares
of Common Stock still available for grant under the 1995 Plan.
2001 Stock Option and Restricted Stock Plan. Our Board of Directors adopted
the 2001 Stock Option and Restricted Stock Plan (the "2001 Plan") to attract,
motivate and retain qualified employees. The 2001 Plan was approved by our
shareholders on November 20, 2001 and became effective immediately thereafter.
Our Board of Directors, which administers our 2001 Plan, delegated to the
Compensation Committee its power to determine employees should be awarded stock
options or restricted stock pursuant to the 2001 Plan. From time to time, our
Chief Executive Officer will recommend to the Compensation Committee individuals
he believes should be subject to an option or grant, and, with respect to any
recommended option, whether the option should be a qualified or nonqualified.
The Compensation Committee will consider, but need not accept, the Chief
Executive Officer's recommendations.
Under the terms of the 2001 Plan, we may provide options or grants up to an
aggregate of 250,000 shares of Common Stock to any employee or non-employee
director. Under the 2001 Plan, each of our non-employee directors receive
additional options on the date of our annual shareholders meeting for the prior
year's service on the Board of Directors. The designated non-employee directors
will determine the number and the exercise price of the options, and the time or
times that the options become exercisable, provided that an option exercise
price may not be less than the fair market value of our Common Stock on the date
of grant. The designated non-employee directors will also determine the term of
an option, provided that the term of a qualified option may not exceed 10 years.
Designated non-employee directors may grant shares of restricted stock without
requiring the payment of cash consideration for the shares.
This report is submitted by the members of the Compensation Committee:
Joseph V. Mariner, Jr., Chairman,
Bernard S. Lee,
R. Clayton Mulford
Donald A. Sillers, Jr.
The foregoing report of the compensation committee does not constitute
soliciting material and shall not be deemed to be incorporated by reference in
any filing by the Company under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended.
18
REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
On May 8, 2000, the Board adopted the Audit Committee Charter setting out
the audit related functions the committee is to perform. A copy of the Audit
Committee Charter was included in the Company's Proxy Statement for its 2001
Annual Meeting of Shareholders. The Board of Directors and the Audit Committee
review the Audit Committee Charter at least annually. The functions of the Audit
Committee of the Board of Directors (the "Audit Committee") are focused on three
areas:
o The adequacy of the Company's internal controls and financial
reporting process and the reliability of the Company's financial
statements.
o The independence and performance of the Company's independent
auditors.
o The Company's compliance with legal and regulatory requirements.
The directors who serve on the Audit Committee are all "independent" for
purposes of the NASDAQ listing standards. That is, the Board has determined that
no members on the Audit Committee have a relationship to the Company that may
interfere with the Committee's independence from the Company and its management.
Management is responsible for the Company's financial statements, internal
controls and financial reporting process. The Company's independent auditors are
responsible for performing an independent audit of the Company's financial
statements, expressing an opinion as to whether those financial statements
fairly present the financial position, results of operations and cash flows of
the Company in accordance with auditing standards generally accepted in the
United States of America and for issuing a report thereon. The Audit Committee
is responsible for monitoring and overseeing these processes.
In connection with those responsibilities, the Audit Committee meets with
management periodically to consider the adequacy of the Company's internal
controls and the objectivity of its financial reporting and discusses these
matters with the Company's independent auditors and appropriate Company
financial personnel. The Audit Committee regularly meets privately with both the
independent auditors and Company financial personnel, each of which has
unrestricted access to the Audit Committee. The Audit Committee also recommends
to the Board the appointment of the independent auditors and reviews
periodically their performance and independence from management. In addition,
the Audit Committee reviews the Company's financial plans and reports
recommendations to the full Board for approval and to authorize action.
In this context, the Audit Committee reviewed the audited consolidated
financial statements as of and for the year ended June 30, 2002 and met and held
discussions with management and Grant Thornton LLP, the Company's independent
auditors. Management has represented to the Audit Committee that the Company's
consolidated financial statements as of and for the year ended June 30, 2002
were prepared in accordance with accounting principles generally accepted in the
United States of America.
The Audit Committee discussed with the independent auditors matters
required to be discussed by Statement on Auditing Standards No. 61, which
includes, among other items, matters related to the conduct of the audit of the
Company's financial statements. The independent auditors also provided the Audit
Committee with written disclosures and the letter required by Independence
Standards Board Standard No. 1, which relates to the auditor's independence from
the Company and its related entities, and the Audit Committee discussed with the
independent auditors their independence. In addition, the Audit
19
Committee considered whether Grant Thornton LLP's provision of non-audit
services to the Company was compatible with maintaining its independence.
Based on the Audit Committee's discussions with management and the
independent auditors, as well as a review of the representations of management
and the report of the independent auditors to the Audit Committee, the Audit
Committee recommended to the Board that the Company's audited consolidated
financial statements be included in the Annual Report on Form 10-K for the
fiscal year ended June 30, 2002, as filed with the Securities and Exchange
Commission.
The Audit Committee has selected Grant Thornton LLP to be employed as the
Company's independent certified public accountants to make the annual audit and
to report on, as may be required, the consolidated financial statements which
may be filed by the Company with the Securities and Exchange Commission during
the ensuing year.
The members of the Audit Committee that were in existence at the fiscal
year ending June 30, 2002 submit this report.
Bernard S. Lee, Chairman
Joseph V. Mariner
Donald A. Sillers, Jr.
The foregoing report of the audit committee does not constitute soliciting
material and shall not be deemed to be incorporated by reference in any filing
by the Company under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended.
20
CORPORATE PERFORMANCE GRAPH
The following graph compares the cumulative total shareholder return over a
five-year period, assuming $100 invested at June 30, 1997 in each of (1) our
Common Stock, (2) the Dow Jones Industrial Average and (3) a peer group
consisting of manufacturers in the industrial sector providing industrial and
commercial services to other commercial enterprises. Total shareholder return is
based on the increase in the price of the Common Stock with dividends
reinvested. The stock price performance depicted in the Corporate Performance
Graph is not necessarily indicative of future price performance. The Corporate
Performance Graph will not be deemed incorporated by reference in any filing by
the Company under the Securities Act of 1933, as amended, or the Exchange Act of
1934, as amended.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
Among Peerless Mfg. Co.,
The Dow Jones Industrial Average Index, and
The Dow Jones US Industrial - Diversified Index
[PERFORMANCE GRAPH]
<Table>
<Caption>
TOTAL RETURN ANALYSIS 6/30/97 6/30/98 6/30/99 6/30/00 6/30/01 6/30/02
- --------------------- ------- ------- ------- ------- ------- -------
Peerless Mfg. Co. $100.00 $124.09 $108.56 $177.40 $380.50 $363.37
Dow Jones Industrial Average 100.00 148.23 184.80 178.61 182.25 163.45
Dow Jones US Industrial - Diversified 100.00 132.14 163.43 191.56 192.90 127.12
</Table>
Source: Research Data Group, Inc. www.researchdatagroup.com (415-241-6506)
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OTHER MATTERS
OTHER BUSINESS PRESENTED AT ANNUAL MEETING
As of the date of this Proxy Statement, the Board is not aware of any
matter to be presented for action at the annual meeting other than the matters
set forth herein. If a shareholder proposal that was excluded from this Proxy
Statement in accordance with Rule 14a-8 of the Securities Act is properly
brought before the meeting, it is intended that the proxy holders will use their
discretionary authority to vote the proxies against said proposal. If any other
matters should arise at the Annual Meeting, shares represented by proxies will
be voted at the discretion of the proxy holders.
WHERE YOU CAN FIND MORE INFORMATION
The Company files reports, proxy statements and other information with the
SEC. You can read and copy these reports, proxy statements and other information
concerning the Company at the SEC's public reference room at 450 Fifth Street,
N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference room. The SEC maintains an Internet site at
http://www.sec.gov/ that contains reports, proxy and information statements and
other information regarding issuers that file electronically with the SEC,
including the Company. The Company's Common Stock is quoted on the NASDAQ Stock
Market National Market under the symbol "PMFG."
A copy of the Company's 2002 annual report containing audited financial
statements accompanies this proxy statement. The annual report does not
constitute a part of the proxy solicitation materials.
If you send your request in writing to Katherine S. Frazier, c/o Peerless
Mfg. Co., 2819 Walnut Hill Lane, Dallas, Texas 75229, we will provide you,
without charge, a copy of our Annual Report on Form 10-K (exclusive of exhibits)
filed with the SEC.
You should rely only on the information contained or incorporated by
reference in this Proxy Statement to vote on the proposals contained herein. The
Company has not authorized anyone else to provide you with different
information. You should not assume that the information in this Proxy Statement
is accurate as of any date other than October 28, 2001.
By Order of the Board of Directors,
/s/ Katherine S. Frazier
Katherine S. Frazier
Corporate Controller
Secretary / Treasurer
Dallas, Texas
October 28, 2002
22
APPENDIX 1
PEERLESS MFG. CO.
PROXY
ANNUAL MEETING OF SHAREHOLDERS
NOVEMBER 21, 2002
The undersigned shareholder of Peerless Mfg. Co. (the "Company") does hereby
constitute and appoint Sherrill Stone, Chairman of the Board, and Katherine S.
Frazier, Secretary, Treasury and Controller, as his or her proxy, with full
power of substitution, to attend the Annual Meeting of Shareholders of the
Company to be held at 10:00 a.m. on Thursday, November 21, 2002, at 2819 Walnut
Hill Lane, Dallas, Texas 75229, or any continuation or adjournment thereof, with
full power to vote and act for the undersigned, in his or her name, and to vote
all Common Stock of the Company held by him or her, to the same extent and with
the same effect as the undersigned, in the manner specified below. The
undersigned here revokes any other proxy previously given by him or her.
IF YOU PLAN TO ATTEND THE MEETING AND YOUR SHARES ARE HELD IN THE NAME OF A
BROKER OR OTHER NOMINEE, PLEASE BRING A STATEMENT OR LETTER FROM THE BROKER OR
NOMINEE CONFIRMING YOUR OWNERSHIP OF SHARES.
PLEASE MARK YOUR VOTE LIKE THIS. [X]
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 1.
1. ELECTION OF DIRECTORS:
[ ] FOR all nominees listed below (except as specified to the contrary
below).
[ ] AGAINST all nominees listed below.
BERNARD S. LEE AND JOSEPH V. MARINER, JR.
To withhold authority to vote for any individual nominee, write the nominee's
name below:
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 2.
2. RATIFICATION OF APPOINTMENT OF GRANT THORNTON LLP
[ ] FOR [ ] AGAINST [ ] ABSTAIN
THIS PROXY IS SOLICITED ON BEHALF ON THE BOARD OF DIRECTORS AND WILL BE VOTED AS
DIRECTED THEREIN. IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED FOR
PROPOSALS 1 AND 2.
Signature: Dated: , 2002
------------------------ -----------------
Signature: Dated: , 2002
------------------------ -----------------
This proxy should be signed EXACTLY as your name(s) appear on this proxy card.
Joint owners must sign EACH sign personally. When signing as attorney, trustee,
executor, administrator, guardian or corporate officer, please give your FULL
title as such. If a corporation, please sign in full corporate name by president
or other authorized officer. If partnership, please sign in partnership name by
authorized person.
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