Exhibit 10.1
 
 
PEERLESS MFG. CO.

 
2007 STOCK INCENTIVE PLAN
 

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TABLE OF CONTENTS
 

                          Page  
1.
  Purpose   1
2.
  Definitions   1
3.
  Shares Subject To This Plan   3
4.
  Option Rights   4
5.
  Restricted Stock   5
6.
  Restricted Stock Units   6
7.
  Performance Shares And Performance Units   6
8.
  Administration Of This Plan   7
9.
  Adjustments   7
10.
  Change Of Control   8
11.
  Non U.S. Participants   8
12.
  Transferability   8
13.
  Withholding Taxes   9
14.
  Compliance With Section 409a Of The Code   9
15.
  Effective Date   10
16.
  Amendments   10
17.
  Termination   11
18.
  Governing Law   11
19.
  Miscellaneous Provisions   11

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PEERLESS MFG. CO.

 
2007 Stock Incentive Plan
 
1. Purpose.  The purpose of this 2007 Stock Incentive Plan is to attract and
retain directors, officers and other key employees of Peerless Mfg. Co. and its
Subsidiaries and to provide to such persons incentives and rewards for
performance.
 
2. Definitions.  As used in this Plan,
 
(a) “Board” means the Board of Directors of the Company and, to the extent of
any delegation by the Board to a committee (or subcommittee thereof) pursuant to
Section 8 of this Plan, such committee (or subcommittee).
 
(b) “Change of Control” has the meaning provided in Section 10 of this Plan.
 
(c) “Code” means the Internal Revenue Code of 1986, as amended from time to
time.
 
(d) “Common Stock” means Common Stock, par value $1.00 per share, of the Company
or any security into which such shares of Common Stock may be changed by reason
of any transaction or event of the type referred to in Section 9 of this Plan.
 
(e) “Company” means Peerless Mfg. Co., a Texas corporation, and its successors.
 
(f) “Covered Employee” means a Participant who is, or is determined by the Board
to be likely to become, a “covered employee” within the meaning of
Section 162(m) of the Code (or any successor provision).
 
(g) “Date of Grant” means the date specified by the Board on which a grant of
Option Rights, Performance Shares, Performance Units, or a grant or sale of
Restricted Stock or Restricted Stock Units, will become effective (which date
will not be earlier than the date on which the Board takes action with respect
thereto).
 
(h) “Director” means a member of the Board.
 
(i) “Effective Date” means the date immediately following the date that this
Plan is approved by the shareholders of the Company.
 
(j) “Evidence of Award” means an agreement, certificate, resolution or other
type or form of writing or other evidence that sets forth the terms and
conditions of Option Rights, Performance Shares or Performance Units granted, or
a grant or sale of Restricted Stock or Restricted Stock Units. An Evidence of
Award may be in an electronic medium, may be limited to notation on the books
and records of the Company and need not be signed by a representative of the
Company or a Participant.
 
(k) “Exchange Act” means the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder, as such law, rules and regulations may be
amended from time to time.
 
(l) “Incentive Stock Options” means Option Rights that are intended to qualify
as “incentive stock options” under Section 422 of the Code or any successor
provision.
 
(m) “Incumbent Directors” means the individuals who, as of the Effective Date,
are Directors of the Company and any individual becoming a Director subsequent
to the date thereof whose election, nomination for election by the Company’s
shareholders, or appointment, was approved by a vote of at least two-thirds of
the then Incumbent Directors (either by a specific vote or by approval of the
proxy statement of the Company in which such person is named as a nominee for
Director, without objection to such nomination); provided, however, that an
individual shall not be an Incumbent Director if such individual’s election or
appointment to the Board occurs as a result of an actual or threatened election
contest (as described in Rule 14a-12(c) of the Exchange Act) with respect to the
election or removal of Directors or other actual or threatened solicitation of
proxies or consents by or on behalf of a Person other than the Board.
 
(n) “Management Objectives” means the measurable performance objective or
objectives established pursuant to this Plan for Participants who have received
grants of Performance Shares or Performance Units or, when so determined by the
Board, Option Rights, Restricted Stock, Restricted Stock Units or dividend
credits pursuant to this Plan. Management Objectives may be described in terms
of Company-wide objectives or objectives that are

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related to the performance of the individual Participant or of the Subsidiary,
division, department, region or function within the Company or Subsidiary in
which the Participant is employed. The Management Objectives may be made
relative to the performance of other companies. The Management Objectives
applicable to any award to a Covered Employee will be based on specified levels
of or growth in one or more of the following criteria:
 
(i) Appreciation in value of shares;
 
(ii) Total shareholder return;
 
(iii) Earnings per share;
 
(iv) Operating income;
 
(v) Net income;
 
(vi) Pretax earnings;
 
(vii) Earnings before interest, taxes, depreciation and amortization;
 
(viii) Pro forma net income;
 
(ix) Return on equity;
 
(x) Return on designated assets;
 
(xi) Return on capital;
 
(xii) Economic value added;
 
(xiii) Revenues;
 
(xiv) Expenses;
 
(xv) Operating profit margin;
 
(xvi) Operating cash flow;
 
(xvii) Free cash flow;
 
(xviii) Cash flow return on investment;
 
(xix) Operating margin or net profit margin; or
 
(xx) Any of the above criteria as compared to the performance of a published or
a special index deemed applicable by the Board, including, but not limited to,
the Standard & Poor’s 500 Stock Index.
 
If the Board determines that a change in the business, operations, corporate
structure or capital structure of the Company, or the manner in which it
conducts its business, or other events or circumstances render the Management
Objectives unsuitable, the Board may in its discretion modify such Management
Objectives or the related level or levels of achievement, in whole or in part,
as the Board deems appropriate and equitable, except in the case of a Covered
Employee where such action would result in the loss of the otherwise available
exemption of the award under Section 162(m) of the Code. In such case, the Board
will not make any modification of the Management Objectives or the level or
levels of achievement with respect to such Covered Employee.
 
(o) “Market Value Per Share” means, as of any particular date, the average of
the highest and lowest reported sales prices of the Common Stock during normal
trading hours on the Nasdaq Global Market System or, if not listed on such
exchange, on any other national securities exchange on which the Common Stock is
listed. If there is no regular public trading market for such Common Stock, the
Market Value Per Share of the Common Stock shall be determined by the Board.
 
(p) “Optionee” means the optionee named in an Evidence of Award evidencing an
outstanding Option Right.
 
(q) “Option Price” means the purchase price payable on exercise of an Option
Right.

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(r) “Option Right” means the right to purchase shares of Common Stock upon
exercise of an option granted pursuant to Section 4 of this Plan.
 
(s) “Participant” means a person who is selected by the Board to receive
benefits under this Plan and who is at the time a Director, officer or other
employee of the Company or any one or more of its Subsidiaries, or who has
agreed to commence serving in any of such capacities within 90 days of the Date
of Grant.
 
(t) “Performance Period” means, in respect of a Performance Share or Performance
Unit, a period of time established pursuant to Section 7 of this Plan within
which the Management Objectives relating to such Performance Share or
Performance Unit are to be achieved.
 
(u) “Performance Share” means a bookkeeping entry that records the equivalent of
one share of Common Stock awarded pursuant to Section 7 of this Plan.
 
(v) “Performance Unit” means a bookkeeping entry awarded pursuant to Section 7
of this Plan that records a unit equivalent to $1.00 or such other value as is
determined by the Board.
 
(w) “Person” means any individual, entity or group (within the meaning of
Section 13(d)(3) or 14(d)(2) of the Exchange Act).
 
(x) “Plan” means The Peerless Mfg. Co. 2007 Stock Incentive Plan, as may be
amended from time to time.
 
(y) “Restricted Stock” means shares of Common Stock granted or sold pursuant to
Section 5 of this Plan as to which neither the substantial risk of forfeiture
nor the prohibition on transfer has expired.
 
(z) “Restriction Period” means the period of time during which Restricted Stock
Units are subject to restrictions, as provided in Section 6 of this Plan.
 
(aa) “Restricted Stock Unit” means an award made pursuant to Section 6 of this
Plan of the right to receive shares of Common Stock or cash at the end of a
specified period.
 
(bb) “Subsidiary” means a corporation, company or other entity (i) at least
50 percent of whose outstanding shares or securities (representing the right to
vote for the election of directors or other managing authority) are, or
(ii) which does not have outstanding shares or securities (as may be the case in
a partnership, joint venture or unincorporated association), but at least
50 percent of whose ownership interest representing the right generally to make
decisions for such other entity is, now or hereafter, owned or controlled,
directly or indirectly, by the Company except that (A) for purposes of
determining whether a Participant may receive a grant of Incentive Stock
Options, “Subsidiary” means any corporation in which at the time the Company
owns or controls, directly or indirectly, at least 50 percent of the total
combined voting power represented by all classes of stock issued by such
corporation, and (B) for purposes of determining whether a Participant may
receive a grant of any other Option Rights, “Subsidiary” means any member of the
Company’s controlled group described in Section 14(b).
 
(cc) “Voting Securities” means, at any time, (i) the securities entitled to vote
generally in the election of Directors in the case of the Company, or (ii) the
securities entitled to vote generally in the election of members of the board of
directors or similar body in the case of another legal entity.
 
3. Shares Subject to this Plan.
 
(a) Maximum Shares Available Under Plan.
 
(i) Subject to adjustment as provided in Section 9 of this Plan, the number of
shares of Common Stock that may be issued or transferred (A) upon the exercise
of Option Rights; (B) as Restricted Stock and released from substantial risks of
forfeiture thereof; (C) in payment of Restricted Stock Units; (D) in payment of
Performance Shares or Performance Units that have been earned; or (E) in payment
of dividend equivalents paid with respect to awards made under this Plan will
not exceed in the aggregate 900,000 shares of Common Stock, plus any shares of
Common Stock relating to awards that expire or are forfeited or are cancelled
under this Plan. Such shares may be shares of original issuance or treasury
shares or a combination of the foregoing.
 
(ii) Shares of Common Stock covered by an award granted under this Plan shall
not be counted as used unless and until they are actually issued and delivered
to a Participant. Without limiting the generality of the foregoing,

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upon payment in cash of the benefit provided by any award granted under this
Plan, any shares of Common Stock that were covered by that award will be
available for issue or transfer hereunder. Notwithstanding anything to the
contrary contained herein: (A) shares of Common Stock tendered in payment of the
Option Price of a Option Right shall not be added to the aggregate plan limit
described above; (B) shares of Common Stock withheld by the Company to satisfy
the tax withholding obligation shall not be added to the aggregate plan limit
described above; and (C) shares of Common Stock that are repurchased by the
Company with Option Right proceeds shall not be added to the aggregate plan
limit described above.
 
(b) Life-of-Plan Limits.  Notwithstanding anything in this Section 3, or
elsewhere in this Plan, to the contrary and subject to adjustment pursuant to
Section 9 of this Plan:
 
(i) The aggregate number of shares of Common Stock actually issued or
transferred by the Company upon the exercise of Incentive Stock Options shall
not exceed 900,000.
 
(ii) The aggregate number of shares of Common Stock issued as Restricted Stock
(and released from substantial risks of forfeiture), Restricted Stock Units,
Performance Shares or Performance Units shall not exceed 900,000.
 
(c) Individual Participant Limits.  Notwithstanding anything in this Section 3,
or elsewhere in this Plan, to the contrary and subject to adjustment pursuant to
Section 9 of this Plan:
 
(i) No Participant shall be granted Option Rights, in the aggregate, for more
than 100,000 shares of Common Stock during any calendar year.
 
(ii) No Participant will be granted Restricted Stock or Restricted Stock Units
that specify Management Objectives or Performance Shares, in the aggregate, for
more than 100,000 shares of Common Stock during any calendar year.
 
(iii) Notwithstanding any other provision of this Plan to the contrary, in no
event will any Participant in any calendar year receive an award of Performance
Units having an aggregate maximum value as of their respective Dates of Grant in
excess of $2,000,000.
 
4. Option Rights.  The Board may, from time to time and upon such terms and
conditions as it may determine, authorize the granting to Participants of
options to purchase shares of Common Stock. Each such grant will be subject to
all of the requirements contained in the following provisions:
 
(a) Each grant will specify the number of shares of Common Stock to which it
pertains subject to the limitations set forth in Section 3 of this Plan.
 
(b) Each grant will specify an Option Price per share, which may not be less
than the Market Value Per Share on the Date of Grant.
 
(c) Each grant will specify whether the Option Price will be payable (i) in cash
or by check acceptable to the Company or by wire transfer of immediately
available funds, (ii) by the actual or constructive transfer to the Company of
shares of Common Stock owned by the Optionee having a value at the time of
exercise equal to the total Option Price, (iii) by a combination of such methods
of payment, or (iv) by such other methods as may be approved by the Board.
 
(d) To the extent permitted by law, any grant may provide for deferred payment
of the Option Price from the proceeds of sale through a bank or broker on a date
satisfactory to the Company of some or all of the shares to which such exercise
relates.
 
(e) Successive grants may be made to the same Participant whether or not any
Option Rights previously granted to such Participant remain unexercised.
 
(f) Each grant will specify the period or periods of continuous service by the
Optionee with the Company or any Subsidiary that is necessary before the Option
Rights or installments thereof will become exercisable. A grant of Option Rights
may provide for the earlier exercise of such Option Rights in the event of
retirement, death or disability of the Participant or a Change of Control.

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(g) Any grant of Option Rights may specify Management Objectives that must be
achieved as a condition to the exercise of such rights. The grant of such Option
Rights will specify that, before the exercise of such rights, the Board must
determine that the Management Objectives have been satisfied.
 
(h) Option Rights granted under this Plan may be (i) options, including, without
limitation, Incentive Stock Options, that are intended to qualify under
particular provisions of the Code, (ii) options that are not intended so to
qualify, or (iii) combinations of the foregoing.
 
(i) No Option Right will be exercisable more than 10 years from the Date of
Grant.
 
(j) Each grant of Option Rights will be evidenced by an Evidence of Award. Each
Evidence of Award shall be subject to this Plan and shall contain such terms and
provisions, consistent with this Plan, as the Board may approve.
 
5. Restricted Stock.  The Board may also authorize the grant or sale of
Restricted Stock to Participants. Each such grant or sale will be subject to all
of the requirements contained in the following provisions:
 
(a) Each such grant or sale will constitute an immediate transfer of the
ownership of shares of Common Stock to the Participant in consideration of the
performance of services, entitling such Participant to voting, dividend and
other ownership rights, but subject to the substantial risk of forfeiture and
restrictions on transfer hereinafter referred to.
 
(b) Each such grant or sale may be made without additional consideration or in
consideration of a payment by such Participant that is less than the Market
Value Per Share at the Date of Grant.
 
(c) Each such grant or sale will provide that the Restricted Stock covered by
such grant or sale that vests upon the passage of time will be subject to a
“substantial risk of forfeiture” within the meaning of Section 83 of the Code
for a period of not less than one year to be determined by the Board at the Date
of Grant and may provide for the earlier lapse of such substantial risk of
forfeiture as provided in Section 5(e) below or (i) with respect to shares of
Restricted Stock granted to non-employee Directors, (ii) in the event of
retirement, death or disability of the Participant or (iii) in the event of a
Change of Control.
 
(d) Each such grant or sale will provide that during the period for which such
substantial risk of forfeiture is to continue, the transferability of the
Restricted Stock will be prohibited or restricted in the manner and to the
extent prescribed by the Board at the Date of Grant (which restrictions may
include, without limitation, rights of repurchase or first refusal in the
Company or provisions subjecting the Restricted Stock to a continuing
substantial risk of forfeiture in the hands of any transferee).
 
(e) Any grant of Restricted Stock may specify Management Objectives that, if
achieved, will result in termination or early termination of the restrictions
applicable to such Restricted Stock and in addition, may provide for the earlier
termination of these restrictions in the event of (i) the retirement, death or
disability of the Participant or (ii) a Change of Control; provided, however,
that restrictions relating to Restricted Stock that vests upon the achievement
of Management Objectives may not terminate sooner than one year from the Date of
Grant. Each grant may specify in respect of such Management Objectives a minimum
acceptable level of achievement and may set forth a formula for determining the
number of shares of Restricted Stock on which restrictions will terminate if
performance is at or above the minimum level, but falls short of full
achievement of the specified Management Objectives. The grant of Restricted
Stock will specify that, before the termination or early termination of the
restrictions applicable to such Restricted Stock, the Board must determine that
the Management Objectives have been satisfied.
 
(f) Any such grant or sale of Restricted Stock may require that any or all
dividends or other distributions paid thereon during the period of such
restrictions be automatically deferred and reinvested in additional shares of
Restricted Stock, which may be subject to the same restrictions as the
underlying award.
 
(g) Each grant or sale of Restricted Stock will be evidenced by an Evidence of
Award and will contain such terms and provisions, consistent with this Plan, as
the Board may approve. Unless otherwise directed by the Board, all certificates
representing shares of Restricted Stock will be held in custody by the Company
until

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all restrictions thereon will have lapsed, together with a stock power or powers
executed by the Participant in whose name such certificates are registered,
endorsed in blank and covering such Shares.
 
6. Restricted Stock Units.  The Board may also authorize the granting or sale of
Restricted Stock Units to Participants. Each such grant or sale will be subject
to all of the requirements contained in the following provisions:
 
(a) Each such grant or sale will constitute the agreement by the Company to
deliver shares of Common Stock or cash to the Participant in the future in
consideration of the performance of services, but subject to the fulfillment of
such conditions (which may include the achievement of Management Objectives)
during the Restriction Period as the Board may specify. If a grant of Restricted
Stock Units specifies that the Restriction Period will terminate upon the
achievement of Management Objectives, such Restriction Period may not terminate
sooner than one year from the Date of Grant; provided, however the Board may
provide for the earlier termination of these restrictions in the event of
(i) the retirement, death or disability of the Participant or (ii) a Change of
Control. Each grant may specify in respect of such Management Objectives a
minimum acceptable level of achievement and may set forth a formula for
determining the number of shares of Restricted Stock Units on which restrictions
will terminate if performance is at or above the minimum level, but falls short
of full achievement of the specified Management Objectives. The grant of such
Restricted Stock Units will specify that, before the termination or early
termination of the restrictions applicable to such Restricted Stock Units, the
Board must determine that the Management Objectives have been satisfied.
 
(b) Each such grant or sale may be made without additional consideration or in
consideration of a payment by such Participant that is less than the Market
Value Per Share at the Date of Grant.
 
(c) If the Restriction Period lapses only by the passage of time, each such
grant or sale will be subject to a Restriction Period of not less than one year,
as determined by the Board at the Date of Grant, and may provide for the earlier
lapse or other modification of such Restriction Period in the event of
retirement, death or disability of the Participant or a Change of Control.
 
(d) During the Restriction Period, the Participant will have no right to
transfer any rights under his or her award and will have no rights of ownership
in the Restricted Stock Units and will have no right to vote them, but the Board
may at the Date of Grant, authorize the payment of dividend equivalents on such
Restricted Stock Units on either a current, deferred or contingent basis, either
in cash or in additional shares of Common Stock.
 
(e) Each grant or sale will specify the time and manner of payment of Restricted
Stock Units that have been earned. Any grant or sale may specify that the amount
payable with respect thereto may be paid by the Company in cash, in shares of
Common Stock or in any combination thereof and may either grant to the
Participant or retain in the Board the right to elect among those alternatives.
 
(f) Each grant or sale of Restricted Stock Units will be evidenced by an
Evidence of Award and will contain such terms and provisions, consistent with
this Plan, as the Board may approve.
 
7. Performance Shares and Performance Units.  The Board may also authorize the
granting of Performance Shares and Performance Units that will become payable to
a Participant upon achievement of specified Management Objectives during the
Performance Period. Each such grant will be subject to all of the requirements
contained in the following provisions:
 
(a) Each grant will specify the number of Performance Shares or Performance
Units to which it pertains, which number may be subject to adjustment to reflect
changes in compensation or other factors; provided, however, that no such
adjustment will be made in the case of a Covered Employee where such action
would result in the loss of the otherwise available exemption of the award under
Section 162(m) of the Code.
 
(b) The Performance Period with respect to each Performance Share or Performance
Unit will be such period of time (not less than one year), commencing with the
Date of Grant as will be determined by the Board at the time of grant which may
be subject to earlier lapse or other modification in the event of retirement,
death or disability of the Participant or a Change of Control.

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(c) Any grant of Performance Shares or Performance Units will specify Management
Objectives which, if achieved, will result in payment or early payment of the
award, and each grant may specify in respect of such specified Management
Objectives level or levels of achievement and will set forth a formula for
determining the number of Performance Shares or Performance Units that will be
earned if performance is at or above the level(s), but falls short of full
achievement of the specified Management Objectives. The grant of Performance
Shares or Performance Units will specify that, before the Performance Shares or
Performance Units will be earned and paid, the Board must determine that the
Management Objectives have been satisfied; provided, however the Board may
provide for the earlier termination of these restrictions in the event of
(i) the retirement, death or disability of the Participant or (ii) a Change of
Control.
 
(d) Each grant will specify the time and manner of payment of Performance Shares
or Performance Units that have been earned. Any grant may specify that the
amount payable with respect thereto may be paid by the Company in cash, in
shares of Common Stock or in any combination thereof and may either grant to the
Participant or retain in the Board the right to elect among those alternatives.
 
(e) Any grant of Performance Shares may specify that the amount payable with
respect thereto may not exceed a maximum specified by the Board at the Date of
Grant. Any grant of Performance Units may specify that the amount payable or the
number of shares of Common Stock issued with respect thereto may not exceed
maximums specified by the Board at the Date of Grant.
 
(f) The Board may at the Date of Grant of Performance Shares, provide for the
payment of dividend equivalents to the holder thereof on either a current,
deferred or contingent basis, either in cash or in additional shares of Common
Stock.
 
(g) Each grant of Performance Shares or Performance Units will be evidenced by
an Evidence of Award and will contain such other terms and provisions,
consistent with this Plan, as the Board may approve.
 
8. Administration of this Plan.
 
(a) This Plan will be administered by the Board, which may from time to time
delegate all or any part of its authority under this Plan to the Compensation
Committee of the Board or any other committee of the Board (or a subcommittee
thereof), as constituted from time to time. To the extent of any such
delegation, references in this Plan to the Board will be deemed to be references
to such committee or subcommittee.
 
(b) The interpretation and construction by the Board of any provision of this
Plan or of any agreement, notification or document evidencing the grant of
Option Rights, Restricted Stock, Restricted Stock Units, Performance Shares or
Performance Units and any determination by the Board pursuant to any provision
of this Plan or of any such agreement, notification or document will be final
and conclusive.
 
(c) To the extent permitted by Texas law, the Board may, from time to time,
delegate to one or more officers of the Company the authority of the Board to
grant and determine the terms and conditions of awards granted under this Plan.
In no event shall any such delegation of authority be permitted with respect to
awards to any executive officer or any other person subject to Section 162(m) of
the Code.
 
9. Adjustments.  The Board shall make or provide for such adjustments in the
numbers of shares of Common Stock covered by outstanding Option Rights,
Restricted Stock Units, Performance Shares and Performance Units granted
hereunder, in the Option Price, and in the kind of shares covered thereby, as
the Board, in its sole discretion, may determine is equitably required to
prevent dilution or enlargement of the rights of Participants or Optionees that
otherwise would result from (a) any stock dividend, stock split, combination of
shares, recapitalization or other change in the capital structure of the
Company, or (b) any merger, consolidation, spin-off, split- off, spin-out,
split-up, reorganization, partial or complete liquidation or other distribution
of assets, issuance of rights or warrants to purchase securities, or (c) any
other corporate transaction or event having an effect similar to any of the
foregoing. Moreover, in the event of any such transaction or event, the Board,
in its discretion, may provide in substitution for any or all outstanding awards
under this Plan such alternative consideration (including cash), if any, as it
may determine to be equitable in the circumstances and may require in connection
therewith the surrender of all awards so replaced. The Board may also make or
provide for such adjustments in the numbers of shares specified in Section 3 of
this Plan as the Board in its sole discretion may determine is appropriate to
reflect any transaction or

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event described in this Section 9; provided, however, that any such adjustment
to the number specified in Section 3(b)(i) will be made only if and to the
extent that such adjustment would not cause any option intended to qualify as an
Incentive Stock Option to fail so to qualify.
 
10. Change of Control.  For purposes of this Plan, except as may be otherwise
defined in an individual Participant’s Evidence of Award, a “Change of Control”
shall mean the occurrence of any of the following events:
 
(a) the acquisition by any Person of beneficial ownership (within the meaning of
Rule 13d-3 promulgated under the Exchange Act) of 50% or more of the then
outstanding Voting Securities of the Company; provided, however, that for
purposes of this Section 10(a), the following acquisitions shall not constitute
a Change of Control: (A) any acquisition by the Company or a Subsidiary of
Voting Securities, (B) any acquisition of Voting Securities by any employee
benefit plan (or related trust) sponsored or maintained by the Company or any
Subsidiary or (C) any acquisition of Voting Securities by any Person pursuant to
a Business Combination that complies with clauses (A), (B) and (C) of
Section 10(c) below;
 
(b) a majority of the Board ceases to be comprised of Incumbent Directors;
 
(c) consummation of a reorganization, merger or consolidation, a sale or other
disposition of all or substantially all of the assets of the Company or other
transaction (each, a “Business Combination”), unless, in each case, immediately
following the Business Combination, (A) all or substantially all of the
individuals and entities who were the beneficial owners of Voting Securities
immediately prior to the Business Combination beneficially own, directly or
indirectly, more than 50% of the combined voting power of the then outstanding
Voting Securities of the entity resulting from the Business Combination
(including, without limitation, an entity which as a result of such transaction
owns the Company or all or substantially all of the Company’s assets either
directly or through one or more subsidiaries), (B) no Person (other than the
Company, such entity resulting from the Business Combination, or any employee
benefit plan (or related trust) sponsored or maintained by the Company, any
Subsidiary or such entity resulting from the Business Combination) beneficially
owns, directly or indirectly, 50% or more of the combined voting power of the
then outstanding Voting Securities of the entity resulting from the Business
Combination; provided, however, that no Person will be treated for purposes of
this Section 10(c) as beneficially owning 50% or more of the Voting Securities
of the entity resulting from the Business Combination solely as a result of the
Voting Securities held in the Company prior to consummation of the Business
Combination and (C) at least a majority of the members of the board of directors
of the entity resulting from the Business Combination were Incumbent Directors
at the time of the execution of the initial agreement or of the action of the
Board providing for the Business Combination; or
 
(d) approval by the shareholders of the Company of a complete liquidation or
dissolution of the Company, except pursuant to a Business Combination that
complies with clauses (A), (B) and (C) of Section 10(c) hereof.
 
11. Non U.S. Participants.  In order to facilitate the making of any grant or
combination of grants under this Plan, the Board may provide for such special
terms for awards to Participants who are foreign nationals or who are employed
by the Company or any Subsidiary outside of the United States of America or who
provide services to the Company under an agreement with a foreign nation or
agency, as the Board may consider necessary or appropriate to accommodate
differences in local law, tax policy or custom. Moreover, the Board may approve
such supplements to or amendments, restatements or alternative versions of this
Plan (including, without limitation, sub-plans) as it may consider necessary or
appropriate for such purposes, without thereby affecting the terms of this Plan
as in effect for any other purpose, and the Secretary or other appropriate
officer of the Company may certify any such document as having been approved and
adopted in the same manner as this Plan. No such special terms, supplements,
amendments or restatements, however, will include any provisions that are
inconsistent with the terms of this Plan as then in effect unless this Plan
could have been amended to eliminate such inconsistency without further approval
by the shareholders of the Company.
 
12. Transferability.
 
(a) No Option Right granted under this Plan shall be transferable by the
Participant except by will or the laws of descent and distribution. Except as
otherwise determined by the Board, Option Rights will be exercisable during

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the Participant’s lifetime only by him or her or, in the event of the
Participant’s legal incapacity to do so, by his or her guardian or legal
representative acting on behalf of the Participant in a fiduciary capacity under
state law and/or court supervision.
 
(b) The Board may specify at the Date of Grant that part or all of the shares of
Common Stock that are (i) to be issued or transferred by the Company upon the
exercise of Option Rights, upon the termination of the Restriction Period
applicable to Restricted Stock Units or upon payment under any grant of
Performance Shares or Performance Units or (ii) no longer subject to the
substantial risk of forfeiture and restrictions on transfer referred to in
Section 5 of this Plan, will be subject to further restrictions on transfer.
 
13. Withholding Taxes.  To the extent that the Company is required to withhold
federal, state, local or foreign taxes in connection with any payment made or
benefit realized by a Participant or other person under this Plan, and the
amounts available to the Company for such withholding are insufficient, it will
be a condition to the receipt of such payment or the realization of such benefit
that the Participant or such other person make arrangements satisfactory to the
Company for payment of the balance of such taxes required to be withheld, which
arrangements (in the discretion of the Board) may include relinquishment of a
portion of such benefit. If a Participant’s benefit is to be received in the
form of Common Stock, and such Participant fails to make arrangements for the
payment of tax, the Company shall withhold such shares of Common Stock having a
value equal to the amount required to be withheld. Notwithstanding the
foregoing, unless otherwise provided by the Board, when a Participant is
required to pay the Company an amount required to be withheld under applicable
income and employment tax laws, the Participant may elect to satisfy the
obligation, in whole or in part, by electing to have withheld, from the shares
required to be delivered to the Participant, shares of Common Stock having a
value equal to the amount required to be withheld (except in the case of
Restricted Stock where an election under Section 83(b) of the Code has been
made), or by delivering to the Company other shares of Common Stock held by such
Participant. The shares used for tax withholding will be valued at an amount
equal to the Market Value Per Share of such Common Stock on the date the benefit
is to be included in Participant’s income. In no event shall the Market Value
Per Share of the shares of Common Stock to be withheld and/or delivered pursuant
to this Section 13 to satisfy applicable withholding taxes in connection with
the benefit exceed the minimum amount of taxes required to be withheld.
Participants shall also make such arrangements as the Company may require for
the payment of any withholding tax obligation that may arise in connection with
the disposition of shares of Common Stock acquired upon the exercise of Option
Rights.
 
14. Compliance with Section 409A of the Code.
 
(a) To the extent applicable, it is intended that this Plan and any grants made
hereunder comply with the provisions of Section 409A of the Code. This Plan and
any grants made hereunder shall be administrated in a manner consistent with
this intent, and any provision that would cause this Plan or any grant made
hereunder to fail to satisfy Section 409A of the Code shall have no force and
effect until amended to comply with Section 409A of the Code (which amendment
may be retroactive to the extent permitted by Section 409A of the Code and may
be made by the Company without the consent of Participants). Any reference in
this Plan to Section 409A of the Code will also include any regulations or any
other guidance promulgated with respect to such Section by the U.S. Department
of the Treasury or the Internal Revenue Service.
 
(b) In order to determine for purposes of Section 409A of the Code whether a
Participant is employed by a member of the Company’s controlled group of
corporations under Section 414(b) of the Code (or by a member of a group of
trades or businesses under common control with the Company under Section 414(c)
of the Code) and, therefore, whether the shares of Common Stock that are or have
been purchased by or awarded under this Plan to the Participant are shares of
“service recipient” stock within the meaning of Section 409A of the Code:
 
(i) In applying Code Section 1563(a)(1), (2) and (3) for purposes of determining
the Company’s controlled group under Section 414(b) of the Code, the language
“at least 50 percent” is to be used instead of “at least 80 percent” each place
it appears in Code Section 1563(a)(1), (2) and (3); and
 
(ii) In applying Treasury Regulation Section 1.414(c)-2 for purposes of
determining trades or businesses under common control with the Company for
purposes of Section 414(c) of the Code, the language “at least

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50 percent” is to be used instead of “at least 80 percent” each place it appears
in Treasury Regulation Section 1.414(c)-2.
 
(c) Notwithstanding any provision of this Plan to the contrary, to the extent an
award shall be deemed to be vested or restrictions lapse, expire or terminate
upon the occurrence of a Change of Control and such Change of Control does not
constitute a “change in the ownership or effective control” or a “change in the
ownership or a substantial portion of the assets” of the Company within the
meaning of Section 409A(a)(2)(A)(v) of the Code, then even though such award may
be deemed to be vested or restrictions lapse, expire or terminate upon the
occurrence of the Change of Control or any other provision of this Plan, payment
will be made, to the extent necessary to comply with the provisions of
Section 409A of the Code, to the Participant the earliest of (i) the
Participant’s “separation from service” with the Company (determined in
accordance with Section 409A of the Code); provided, however, that if the
Participant is a “specified employee” (within the meaning of Section 409A of the
Code), the payment date shall be the date that is six months after the date of
the Participant’s separation from service with the Company, (ii) the date
payment otherwise would have been made in the absence of any provisions in this
Plan to the contrary (provided such date is permissible under Section 409A of
the Code), or (iii) the Participant’s death.
 
15. Effective Date.  This Plan will be effective as of the Effective Date. No
grants will be made under the Peerless Mfg. Co. 1995 Stock Option and Restricted
Stock Plan, as amended, and the 2001 Stock Option and Restricted Stock Plan, on
or after the Effective Date.
 
16. Amendments.
 
(a) The Board may at any time and from time to time amend this Plan in whole or
in part; provided, however, that if an amendment to this Plan (i) would
materially increase the benefits accruing to Participants under this Plan,
(ii) would materially increase the number of securities which may be issued
under this Plan, (iii) would materially modify the requirements for
participation in this Plan or (iv) must otherwise be approved by the
shareholders of the Company in order to comply with applicable law or the rules
of the Nasdaq Stock Market or, if the shares of Common Stock are not traded on
the Nasdaq Global Market System, the principal national securities exchange upon
which the shares of Common Stock are traded or quoted, then, such amendment will
be subject to shareholder approval and will not be effective unless and until
such approval has been obtained.
 
(b) The Board will not, without the further approval of the shareholders of the
Company, authorize the amendment of any outstanding Option Right to reduce the
Option Price. Furthermore, no Option Right will be cancelled and replaced with
awards having a lower Option Price without further approval of the shareholders
of the Company. This Section 16(b) is intended to prohibit the repricing of
“underwater” Option Rights and will not be construed to prohibit the adjustments
provided for in Section 9 of this Plan.
 
(c) If permitted by Section 409A of the Code, in case of termination of
employment by reason of death, disability or normal or early retirement, or in
the case of unforeseeable emergency or other special circumstances, of a
Participant who holds an Option Right not immediately exercisable in full, or
any shares of Restricted Stock as to which the substantial risk of forfeiture or
the prohibition or restriction on transfer has not lapsed, or any Restricted
Stock Units as to which the Restriction Period has not been completed, or any
Performance Shares or Performance Units which have not been fully earned, or who
holds shares of Common Stock subject to any transfer restriction imposed
pursuant to Section 12 of this Plan, the Board may, in its sole discretion,
accelerate the time at which such Option Right, or other award may be exercised
or the time at which such substantial risk of forfeiture or prohibition or
restriction on transfer will lapse or the time when such Restriction Period will
end or the time at which such Performance Shares or Performance Units will be
deemed to have been fully earned or the time when such transfer restriction will
terminate or may waive any other limitation or requirement under any such award.
 
(d) Subject to Section 16(b) hereof, the Board may amend the terms of any award
theretofore granted under this Plan prospectively or retroactively, except in
the case of a Covered Employee where such action would result in the loss of the
otherwise available exemption of the award under Section 162(m) of the Code. In
such case, the Board will not make any modification of the Management Objectives
or the level or levels of achievement with respect to such Covered Employee.
Subject to Section 9 above, no such amendment shall impair the rights of any
Participant without his or her consent. The Board may, in its discretion,
terminate this Plan at any time. Termination

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of this Plan will not affect the rights of Participants or their successors
under any awards outstanding hereunder and not exercised in full on the date of
termination.
 
17. Termination.  No grant will be made under this Plan more than 10 years after
the date on which this Plan is first approved by the shareholders of the
Company, but all grants made on or prior to such date will continue in effect
thereafter subject to the terms thereof and of this Plan.
 
18. Governing Law.  This Plan and all grants and awards and actions taken
thereunder shall be governed by and construed in accordance with the internal
substantive laws of the State of Texas.
 
19. Miscellaneous Provisions.
 
(a) The Company will not be required to issue any fractional shares of Common
Stock pursuant to this Plan. The Board may provide for the elimination of
fractions or for the settlement of fractions in cash.
 
(b) This Plan will not confer upon any Participant any right with respect to
continuance of employment or other service with the Company or any Subsidiary,
nor will it interfere in any way with any right the Company or any Subsidiary
would otherwise have to terminate such Participant’s employment or other service
at any time.
 
(c) To the extent that any provision of this Plan would prevent any Option Right
that was intended to qualify as an Incentive Stock Option from qualifying as
such, that provision will be null and void with respect to such Option Right.
Such provision, however, will remain in effect for other Option Rights and there
will be no further effect on any provision of this Plan.
 
(d) No award under this Plan may be exercised by the holder thereof if such
exercise, and the receipt of cash or stock thereunder, would be, in the opinion
of counsel selected by the Board, contrary to law or the regulations of any duly
constituted authority having jurisdiction over this Plan.
 
(e) Absence on leave approved by a duly constituted officer of the Company or
any of its Subsidiaries shall not be considered interruption or termination of
service of any employee for any purposes of this Plan or awards granted
hereunder, except that no awards may be granted to an employee while he or she
is absent on leave.
 
(f) No Participant shall have any rights as a shareholder with respect to any
shares subject to awards granted to him or her under this Plan prior to the date
as of which he or she is actually recorded as the holder of such shares upon the
stock records of the Company.
 
(g) The Board may condition the grant of any award or combination of awards
authorized under this Plan on the surrender or deferral by the Participant of
his or her right to receive a cash bonus or other compensation otherwise payable
by the Company or a Subsidiary to the Participant.
 
(h) Participants shall provide the Company with a written election form setting
forth the name and contact information of the person who will have beneficial
ownership rights upon the death of the Participant.
 
(i) If any provision of this Plan is or becomes invalid, illegal or
unenforceable in any jurisdiction, or would disqualify this Plan or any award
under any law deemed applicable by the Board, such provision shall be construed
or deemed amended or limited in scope to conform to applicable laws or, in the
discretion of the Board, it shall be stricken and the remainder of this Plan
shall remain in full force and effect.

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