-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TnrKauRvqon8dtdZD8gz04fsAV4UL2cwnKYNY8B8z2JVP2dx19nL2xBQejnswtvB uiuXyr3NCPhhH1/TwHXPhw== 0000950124-01-001379.txt : 20010320 0000950124-01-001379.hdr.sgml : 20010320 ACCESSION NUMBER: 0000950124-01-001379 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010319 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENTAIR INC CENTRAL INDEX KEY: 0000077360 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY (NO METALWORKING MACHINERY) [3550] IRS NUMBER: 410907434 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11625 FILM NUMBER: 1570957 BUSINESS ADDRESS: STREET 1: 90 SOUTH 7TH STREET 36TH FL CITY: MINNEAPOLIS STATE: MN ZIP: 55402 BUSINESS PHONE: 6123385100 FORMER COMPANY: FORMER CONFORMED NAME: PENTAIR INDUSTRIES INC DATE OF NAME CHANGE: 19790327 10-K 1 c60900e10-k.txt FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-11625 PENTAIR, INC. - -------------------------------------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MINNESOTA 41-0907434 - ------------------------------------------------- ----------------------------------------- (STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NUMBER) ORGANIZATION) 1500 COUNTY ROAD B2 WEST, SUITE 400, ST. PAUL, 55113 MINNESOTA ----------------------------------------- - ------------------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (651) 636-7920 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED - ------------------------------------------------- ----------------------------------------- Common Shares, $0.16 2/3 par value New York Stock Exchange Common Share Purchase Rights New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in PART III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by nonaffiliates of the Registrant on February 26, 2001, was $1,203,932,854, based upon a closing price of $27.2813 per share. The number of shares outstanding of Registrant's only class of common stock on February 26, 2001, was 49,004,429. 2 PENTAIR, INC. ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000 PART I
PAGE ---- ITEM 1. Our Business 3 ITEM 2. Properties 5 ITEM 3. Legal Proceedings 5 ITEM 4. Submission of Matters to a Vote of Security Holders 7 PART II ITEM 5. Market for Registrant's Common Stock and Related Security Holder Matters 8 ITEM 6. Selected Financial Data 9 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk 19 ITEM 8. Financial Statements and Supplementary Data 20 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 45 PART III ITEM 10. Directors and Executive Officers of the Registrant 45 ITEM 11. Executive Compensation 45 ITEM 12. Security Ownership of Certain Beneficial Owners and Management 45 ITEM 13. Certain Relationships and Related Transactions 45 PART IV ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 46 Signatures 49
2 3 PART I ITEM 1. OUR BUSINESS Unless otherwise indicated, all references to "Pentair," "we," "our," and "us" refer to Pentair, Inc., a Minnesota corporation (incorporated in 1966), and its subsidiaries. We are a diversified manufacturer operating in three segments on a global basis. Our diversification enables us to provide shareholders with relatively consistent and improved operating results despite difficult markets in one or another segment. Continuous demand for power tools, ever-increasing need for clean water throughout the world, and the critical importance of protecting sensitive electronics give Pentair excellent prospects for long-term performance. Our basic operating strategies include: - - ongoing cost containment; - - new product development; - - multi-channel distribution; and - - portfolio management of our businesses. Our home page on the Internet is www.pentair.com. You may learn more about us by visiting this site. The information on our web site is not incorporated into this annual report on Form 10-K. RECENT DEVELOPMENTS GROWTH OF OUR BUSINESS We continually look at each of our businesses to determine whether they fit with our evolving strategic vision. Our primary focus is on businesses with strong fundamentals and growth opportunities. We seek growth both through product and service innovation and acquisitions. Acquisitions have played an important part in the growth of our business over the past five years. DISCONTINUED OPERATIONS After evaluating our strategic plans for the future, we elected to discontinue our Equipment segment (Century/Lincoln and Lincoln Industrial businesses) in the fourth quarter of 2000. Discussions with potential purchasers are currently being held and we expect to dispose of these businesses in mid-2001. Also refer to ITEM 7, Management's Discussion and Analysis, and ITEM 8, Note 3 of the Notes to Consolidated Financial Statements, included in this Form 10-K. BUSINESS SEGMENTS We classify our continuing operations into the following business segments: - - TOOLS -- which manufactures and markets tool products positioned at the high-end of the market and targets professionals and upscale hobbyists. Tools segment products include woodworking machinery, portable power tools, compressors, generators, and pressure washers. - - WATER -- which manufactures and markets essential products for the transport and treatment of water, wastewater and fluids. Water segment products include water and wastewater pumps, control valves, pumps and pumping stations for thick fluid transfer applications, storage tanks, filtration systems, and pool and spa accessories. - - ENCLOSURES -- which designs, manufactures, and markets customized and standard metal and composite enclosures that house and protect sensitive controls and components for markets that include data communications, networking, telecommunications, automotive, and general electronics. Products include metallic and composite enclosures, cabinets, cases, subracks, thermal management backplanes and power supplies. - - OTHER -- is primarily composed of corporate expenses, our insurance subsidiary, intermediate finance companies, divested operations, discontinued operations, and intercompany eliminations. 3 4 Business segment and geographical financial information is contained in ITEM 8, Note 14 of the Notes to Consolidated Financial Statements, included in this Form 10-K and is incorporated herein by reference. TOOLS SEGMENT SEASONALITY In line with the Christmas gift-giving season, we experience strong fourth quarter and weaker first quarter sales in our Tools segment. Because of this, we also experience higher inventories in the third quarter and growth in accounts receivable in the fourth and first quarters of each year. COMPETITION The Tools segment faces numerous competitors, some of which are larger and have more resources. Competition in the Tools segment has been intense and continues to increase, especially as these industries consolidate. In most markets, only a few large players remain, each having extensive product lines. Growth is anticipated to come from product development, continued penetration of expanding market channels, and acquisitions. Competition at the end-user level focuses primarily on brand names, product performance and features, quality, service and, most importantly, price. The competition for shelf space at home centers and national retailers is particularly intense, demanding continuing product innovation, special inventory and delivery programs, after-sale service capability, and competitive pricing. Our strategy is to be the price/quality leader in our selected markets. Our success in maintaining our position in the marketplace is primarily due to developing product feature innovations, new products, outsourcing, and other cost-reduction measures. CUSTOMER CONCENTRATION Information regarding significant customers in our Tools segment is contained in ITEM 8, Note 14 of the Notes to Consolidated Financial Statements, included in this Form 10-K and is incorporated herein by reference. WATER SEGMENT SEASONALITY We experience strong seasonal demand in our Water segment for pool and spa equipment products in the March through July time period, with advance sales occurring in earlier months, which generally receive longer payment terms. COMPETITION Our Water segment faces numerous competitors, some of which are larger, have more resources, and are more vertically integrated. Competition in the commercial and residential pump markets focuses on brand names, product performance, quality and price. While home center and national retailers are important for residential lines of water and wastewater pumps, they are much less important in commercial pump markets. In municipal pump markets, competition focuses on performance to required specification, service and price. Competition in the water treatment component market focuses on product performance and design, quality, delivery and price. In the pool and spa equipment market, there are a number of competitors with one that we consider our major competitor. We compete by offering a wide variety of innovative and high quality products, which are competitively priced. Our existing distribution channels and reputation for quality also contribute to our continuing market penetration. ENCLOSURES SEGMENT COMPETITION Competition in product markets can be very intense, especially in telecom and datacom markets, where product design, prototyping, global supply, and customer service are very significant factors. As we further penetrate the telecom and datacom markets, the Enclosures segment encounters increasing competition on a global basis from contract electronics manufacturers. Finally, growth in the Enclosures segment will 4 5 likely come from continued channel penetration, growth in defined modification product offerings, product development, geographic expansion, and acquisitions. Consolidation, globalization, and outsourcing are the most important trends in the fast-growing electronic enclosures business and we participated by making several acquisitions in the past few years. The globalization of product demand increasingly requires worldwide local supply capability and no one competitor has successfully established that capability, although each of the major competitors in this market is actively pursuing geographic extension for customer support purposes. INFORMATION REGARDING ALL BUSINESS SEGMENTS BACKLOG Our backlog of orders from continuing operations was $257.1 million as of the end of 2000, compared with $221.1 million as of the end of 1999. The increase in 2000 backlog is primarily due to increased orders for our enclosure products. ENVIRONMENTAL Matters pertaining to the environment are discussed in ITEM 3, ITEM 7, and in ITEM 8, Note 15 of the Notes to Consolidated Financial Statements, included in this Form 10-K and are incorporated herein by reference. RAW MATERIALS As a result of our significant diversification, we are not exposed to large swings in any one raw material price. The materials used in the various manufacturing processes are purchased on the open market, and the majority are available through multiple sources and are in adequate supply. INTELLECTUAL PROPERTY Patents, trademarks, and proprietary technology are important to our business. However, we do not regard our business as being materially dependent upon any single patent, trademark, or technology. EMPLOYEES As of the end of 2000 we employed approximately 13,100 people and consider our employee relations to be good. ITEM 2. PROPERTIES Our corporate offices are located in St. Paul, Minnesota. Manufacturing operations are carried out at approximately 22 plants located throughout the United States and at some 16 manufacturing plants located in 9 other countries. In addition, we have approximately 30 warehouse facilities and numerous sales and service offices throughout the world. We believe that our production facilities are suitable for their purpose and are adequate to support our businesses. ITEM 3. LEGAL PROCEEDINGS We have been made parties to a number of actions filed or have been given notice of potential claims relating to the conduct of our business, including those pertaining to product liability, environmental, safety and health, patent infringement, and employment matters. Major matters that may have an impact on Pentair are discussed below. We believe that the outcome of such legal proceedings and claims will not have a material adverse effect on our financial position, liquidity, or future results of operations. ENVIRONMENTAL We have been named as defendants, targets or potentially responsible parties (PRPs) in a small number of environmental cleanups, in which we or our current or former business units have generally been given de minimis status. To date, none of these claims have resulted in cleanup costs, fines, penalties, or damages in an amount material to our financial condition or results of operations. We have disposed of a 5 6 number of businesses over the past ten years; in certain cases, such as the disposition of Cross Pointe Paper Corporation uncoated paper business in 1995 and the disposition of Federal Cartridge Company ammunition business in 1997, we have retained responsibility and potential liability for certain environmental obligations. We have established what we believe to be adequate accruals for potential liabilities arising out of these retained responsibilities. Claims since the sale have supported our position on accruals. In addition to retained obligations relating to these disposed operations, there are pending environmental issues concerning a site in Jackson, Tennessee, on which the state environmental agency has opened an investigation. We acquired the site from Rockwell International Corporation, with whom we have agreed on division of responsibility for remediation and other future costs relating to the site. We do not believe, however, that projected response costs will result in material liability or material changes in operations. PRODUCT LIABILITY CLAIMS As of February 28, 2001, we are defendants in approximately 123 product liability lawsuits and have been notified of approximately 138 additional claims. We continue to have in place insurance coverage deemed adequate for our needs. A substantial number of these lawsuits and claims are insured and accrued for by Penwald Insurance Company (Penwald), a regulated insurance company wholly owned by Pentair. See discussion in ITEM 8, Note 1 of Notes to the Consolidated Financial Statements -- Insurance subsidiary. Accounting accruals covering the deductible portion of liability claims not covered by Penwald have been established and are reviewed on a regular basis. We have not experienced unfavorable trends in either the severity or frequency of product liability claims. HORIZON LITIGATION Twenty-eight separate lawsuits involving 29 primary plaintiffs, a class action, and claims for indemnity by Celebrity Cruise Lines, Inc. (Celebrity), were brought against Essef Corporation (Essef) and certain of its subsidiaries prior to our acquisition in August 1999. These lawsuits alleged exposure to Legionnaires bacteria by passengers aboard the cruise ship M/V Horizon, a ship operated by Celebrity. The lawsuits included a class action brought on behalf of all passengers aboard the ship during the relevant time period, individual "opt-out" passenger suits, and a suit by Celebrity. Celebrity alleges in its suit that it has sustained economic damages due to loss of usage of the M/V Horizon while it was dry-docked. The claims against Essef and its involved subsidiaries, are based upon the allegation that Essef designed, manufactured, and marketed two sand swimming pool filters that were installed as a part of the spa system on the Horizon, and allegations that the spa, and filters, contained bacteria that infected certain passengers on cruises from December 1993 through July 1994. Prior to our acquisition of Essef, a settlement was reached in the class action. Essef and Celebrity have jointly attempted to resolve claims brought by "opt-out" plaintiffs. To date, all but four of the "opt-out" plaintiffs' claims have been settled. Compensatory damage trials for the four remaining "opt-out" plaintiffs are scheduled to commence in late March 2001. The claims of one plaintiff were tried under a stipulation among all remaining parties providing that the liability findings would be applicable to all plaintiffs and defendants. The claims of this plaintiff were unusual because he alleged that he developed complications that profoundly impaired his mental functioning. (No other plaintiff asserted similar claims). The trial resulted in a jury verdict on June 13, 2000 finding liability on the part of the Essef Defendants (70%) and Celebrity and its sister company Fantasia (together 30%). Compensatory damages in the total amount of $2.7 million were awarded, each defendant being accountable for its proportionate share of liability. The Essef Defendants' proportionate share is covered by insurance. Punitive damages were separately awarded against the Essef Defendants in the total amount of $7 million, with 60% awarded to all remaining plaintiffs and 40% to Celebrity. In any subsequent trial of other plaintiffs in this litigation, no 6 7 further punitive damages will be available. Essef and its subsidiaries filed post-trial motions challenging the verdict, and if necessary, will file an appeal. At the current time, we are optimistic that all of the pending suits will be resolved within available insurance coverage. With regard to Celebrity's claim against Essef, Westchester, one of Essef's insurance carriers, has issued a Notice of Rights letter. This is a pre-acquisition liability and we have reserves sufficient to cover the amount of any uninsured awards or settlements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS NONE. EXECUTIVE OFFICERS OF THE REGISTRANT Current executive officers of Pentair, their ages, current position, and their business experience during the past five years are as follows:
NAME AGE CURRENT POSITION AND BUSINESS EXPERIENCE ---- --- ---------------------------------------- Randall J. Hogan 45 President and Chief Executive Officer since January 2001; President and Chief Operating Officer, December 1999 -- December 2000; Executive Vice President and President of Pentair's Electrical and Electronic Enclosures Group, March 1998 -- December 1999; President of United Technologies' Carrier Transicold Division, February 1995 -- August 1997. David D. Harrison 53 Executive Vice President and Chief Financial Officer since February 2000; Executive Vice President and Chief Financial Officer of Scotts Company, August 1999 -- February 2000; Executive Vice President and Chief Financial Officer of Coltec Industries, August 1996 -- August 1999; Executive Vice President and Chief Financial Officer of Pentair, Inc., March 1994 -- July 1996. Richard J. Cathcart 56 President and Chief Operating Officer of Water Technologies segment since January 2001; Executive Vice President and President of Pentair's Water Technologies Group, February 1996 -- December 2000; Executive Vice President, Corporate Development, March 1995 -- January 1996. George M. Danko 50 President and Chief Operating Officer of Enclosures segment since January 2001; Senior Vice President, Corporate Development & Centralized Services, September 1999 -- December 2000; Vice President, Corporate Development, October 1997 -- August 1999; General Manager of Sales Operations of General Electric's Electrical Distribution and Control Division, September 1994 -- October 1997. Frank J. Feraco 53 President and Chief Operating Officer of Tools segment since December 2000; President, Textron Industrial Products Segment, 1998 -- December 2000; President, Kohler Company International Plumbing Business, 1996 -- 1998; President, Danaher Corp. Tools Group, 1994 -- 1996. Louis L. Ainsworth 53 Senior Vice President and General Counsel since July 1997; Shareholder and Officer of the law firm of Henson & Efron, P.A., November 1985 -- June 1997. Winslow H. Buxton 61 Chairman of the Board of Directors of Pentair since January 1993; Chief Executive Officer, August 1992 -- December 2000; President, August 1992 -- November 1999. Joseph R. Collins 59 Vice-Chairman since November 1998; Executive Vice President, March 1995 -- October 1998. Karen A. Durant 41 Vice President, Controller since September 1997; Controller, January 1996 -- August 1997; Assistant Controller, September 1994 -- December 1995; Director of Financial Planning and Control of Hoffman Enclosures Inc. (subsidiary of Registrant), October 1989 -- August 1994. Debby S. Knutson 46 Vice President, Human Resources since September 1994. Roy T. Rueb 60 Vice President, Treasurer since October 1986 and Secretary since June 1994.
7 8 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS Our common stock is listed for trading on the New York Stock Exchange and trades under the symbol "PNR." As of December 31, 2000, there were 4,271 shareholders of record. The high, low, and closing sales price for our common stock and the dividends declared for each of the quarterly periods for 2000 and 1999 were as follows:
2000 1999 ----------------------------------------- ----------------------------------------- FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH - ------------------------------------------------------------------------------------------------------------ HIGH $39.4375 $44.0000 $36.3750 $30.5000 $41.8125 $48.8750 $47.8125 $41.1250 LOW $31.8125 $35.3125 $23.9375 $21.0000 $31.3125 $30.9375 $40.1250 $32.4375 CLOSE $37.0625 $35.5000 $26.7500 $24.1875 $31.3125 $45.3125 $41.4375 $38.5000 DIVIDENDS DECLARED $ 0.16 $ 0.16 $ 0.17 $ 0.17 $ 0.16 $ 0.16 $ 0.16 $ 0.16
Pentair has paid 100 consecutive quarterly dividends. See ITEM 8, Note 8 of Notes to Consolidated Financial Statements for certain dividend restrictions. The Annual Meeting of Shareholders of Pentair will be held at the Lutheran Brotherhood Auditorium, 625 Fourth Avenue South, Minneapolis, Minnesota, on Wednesday, April 25, 2001, at 10:00 A.M. 8 9 ITEM 6. SELECTED FINANCIAL DATA The table below sets forth summary consolidated historical data relating to Pentair and was derived from the audited historical Consolidated Financial Statements of Pentair.
YEARS ENDED DECEMBER 31 -------------------------------------------------------------- DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA 2000 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS Net sales: Tools $1,066,616 $ 875,643 $ 661,782 $ 573,787 $ 478,107 Water 903,672 582,927 441,030 306,047 218,344 Enclosures 777,725 657,500 586,829 600,491 566,919 Other -- -- -- 128,136 133,360 - -------------------------------------------------------------------------------------------------------------------- Total 2,748,013 2,116,070 1,689,641 1,608,461 1,396,730 - -------------------------------------------------------------------------------------------------------------------- Cost of goods sold 2,051,515 1,529,419 1,227,427 1,189,777 1,032,343 Other costs and expenses 469,679 361,877 297,972 272,578 240,982 Restructuring charge 24,789 23,048 -- -- -- Operating income: Tools 23,751 100,680 80,383 62,669 45,800 Water 120,732 73,362 56,264 32,366 30,562 Enclosures 96,268 46,346 46,026 47,282 53,856 Other (38,721) (18,662) (18,431) 3,789 (6,813) - -------------------------------------------------------------------------------------------------------------------- Total 202,030 201,726 164,242 146,106 123,405 - -------------------------------------------------------------------------------------------------------------------- Gain on sale of business -- -- -- 10,313 -- Net interest expense 74,899 43,582 19,855 19,729 16,849 Provision for income taxes 45,263 60,056 53,667 58,089 42,860 Income from continuing operations 81,868 98,088 90,720 78,601 63,696 Income (loss) from discontinued operations, net of tax (24,759) 5,221 16,120 12,999 10,813 Cumulative effect of accounting change, net of tax (1,222) -- -- -- -- Net income 55,887 103,309 106,840 91,600 74,509 Preferred dividends -- -- (4,267) (4,867) (4,928) Income available to common shareholders 55,887 103,309 102,573 86,733 69,581 - -------------------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA Property and equipment, net $ 352,984 $ 367,783 $ 271,389 $ 261,486 $ 270,071 Total assets 2,644,025 2,706,516 1,484,207 1,413,494 1,236,694 Long-term debt 781,834 857,296 288,026 294,368 279,889 Total debt 913,974 1,035,084 340,721 328,538 312,817 Preferred equity -- -- 53,638 53,381 47,618 Common equity 1,010,591 990,771 653,990 574,272 513,133 Debt/invested capital 47.5% 51.1% 32.5% 34.4% 35.8% - -------------------------------------------------------------------------------------------------------------------- COMMON SHARE DATA Basic EPS -- continuing operations $ 1.68 $ 2.24 $ 2.25 $ 1.94 $ 1.57 Basic EPS -- discontinued operations (0.51) 0.12 0.42 0.34 0.29 Basic EPS -- cumulative effect of accounting change (0.02) -- -- -- -- - -------------------------------------------------------------------------------------------------------------------- Basic EPS -- net income 1.15 2.36 2.67 2.28 1.86 - -------------------------------------------------------------------------------------------------------------------- Diluted EPS -- continuing operations 1.68 2.21 2.09 1.81 1.47 Diluted EPS -- discontinued operations (0.51) 0.12 0.37 0.30 0.26 Diluted EPS -- cumulative effect of accounting change (0.02) -- -- -- -- - -------------------------------------------------------------------------------------------------------------------- Diluted EPS -- net income 1.15 2.33 2.46 2.11 1.73 - -------------------------------------------------------------------------------------------------------------------- Cash dividends declared per common share 0.66 0.64 0.60 0.54 0.50 Stock dividends declared per common share -- -- -- -- 100.0% Book value per common share 20.75 20.51 16.99 15.04 13.60 - -------------------------------------------------------------------------------------------------------------------- OTHER DATA Depreciation and amortization $ 99,028 $ 82,068 $ 62,054 $ 62,817 $ 55,415 Capital expenditures 68,041 53,671 43,335 69,364 67,216 Employees of continuing operations 13,100 12,400 8,800 8,800 8,000 - --------------------------------------------------------------------------------------------------------------------
All financial information reflects our Equipment segment (Century/Lincoln and Lincoln Industrial businesses) as discontinued operations. We have restated all financial information for the adoption of a new accounting standard related to shipping and handling fees and costs. The 2000 results include a non-cash pre-tax cumulative effect of accounting change of $1.9 million expense ($1.2 million after tax, or $0.02 per share). The 1997 results include a pre-tax gain on the sale of Federal Cartridge of $10.3 million ($1.2 million after tax, or $0.03 per share). 9 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Our disclosure and analysis in this report may contain some forward-looking statements. Forward-looking statements give our current expectations or forecasts of future events. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "will," "expected," "intend," "estimate," "anticipate," "believe," "project," or "continue," or the negative thereof or similar words. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. Any or all of our forward-looking statements in this report and in any public statements we make could be materially different. They can be affected by assumptions we might make or by known or unknown risks or uncertainties. Consequently, no forward-looking statements can be guaranteed. Actual results may vary materially. Investors are cautioned not to place undue reliance on any forward-looking statements. Investors should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all-potential risks and uncertainties. Any change in the following factors may impact the achievement of results: - changes in industry conditions, such as: - the strength of product demand; - the intensity of competition; - pricing pressures; - market acceptance of new product introductions; - the introduction of new products by competitors; - our ability to source components from third parties without interruption and at reasonable prices; and - the financial condition of our customers. - changes in our business strategies; - general economic conditions, such as the rate of economic growth in our principal geographic or product markets or fluctuations in exchange rates; - changes in operating factors, such as continued improvement in manufacturing activities and the achievement of related efficiencies and inventory risks due to shifts in market demand; and - our ability to accurately evaluate the effects of contingent liabilities such as taxes, product liability, environmental, and other liabilities. The foregoing factors are not exhaustive, and new factors may emerge or changes to the foregoing factors may occur that would impact our business. 10 11 RESULTS OF OPERATIONS The following table sets forth information from our consolidated statements of income.
00/99 99/98 IN THOUSANDS 2000 1999 1998 % CHANGE % CHANGE - ------------------------------------------------------------------------------------------------------------- Net sales $2,748,013 $2,116,070 $1,689,641 29.9% 25.2% Cost of goods sold 2,051,515 1,529,419 1,227,427 34.1% 24.6% - ------------------------------------------------------------------------------------------------------------- Gross profit 696,498 586,651 462,214 18.7% 26.9% % of net sales 25.3% 27.7% 27.4% SG&A and R&D 469,679 361,877 297,972 29.8% 21.4% % of net sales 17.1% 17.1% 17.6% Restructuring charge 24,789 23,048 -- 7.6% -- % of net sales 0.9% 1.1% -- - ------------------------------------------------------------------------------------------------------------- Operating income 202,030 201,726 164,242 0.2% 22.8% % of net sales 7.4% 9.5% 9.7% Net interest expense 74,899 43,582 19,855 71.9% 119.5% % of net sales 2.7% 2.1% 1.2% - ------------------------------------------------------------------------------------------------------------- Income from continuing operations before income taxes 127,131 158,144 144,387 (19.6%) 9.5% % of net sales 4.6% 7.5% 8.5% Provision for income taxes 45,263 60,056 53,667 (24.6%) 11.9% Effective tax rate 35.6% 38.0% 37.2% - ------------------------------------------------------------------------------------------------------------- Income from continuing operations 81,868 98,088 90,720 (16.5%) 8.1% % of net sales 3.0% 4.6% 5.4% Income (loss) from discontinued operations, net of tax (24,759) 5,221 16,120 (574.2%) (67.6%) Cumulative effect of accounting change, net of tax (1,222) -- -- -- -- - ------------------------------------------------------------------------------------------------------------- Net income 55,887 103,309 106,840 (45.9%) (3.3%) Preferred dividends -- -- (4,267) -- (100.0%) - ------------------------------------------------------------------------------------------------------------- Income available to common shareholders $ 55,887 $ 103,309 $ 102,573 (45.9%) 0.7% =============================================================================================================
Percentages may reflect rounding adjustments. SG&A and R&D -- Selling, general and administrative; and Research and development. NET SALES The components of the net sales increase were:
2000 VS. 1999 1999 VS. 1998 - ------------------------------------------------------------------------------------------- Volume 32.5% 26.0% Price (1.0%) (0.3%) Currency (1.6%) (0.5%) - ------------------------------------------------------------------------------------------- Total net sales increase 29.9% 25.2% ===========================================================================================
Net sales in 2000 totaled $2,748 million, compared with $2,116 million in 1999 and $1,690 million in 1998. In 2000, volume grew about 32.5 percent (up about 8 percent adjusted for acquisitions), with the stronger U.S. dollar reducing sales by about 1.6 percent. In 1999, volume grew about 26 percent (up about 5 percent adjusted for acquisitions). 11 12 Sales by segment and the change from the prior year were as follows:
00/99 99/98 IN THOUSANDS 2000 1999 1998 % CHANGE % CHANGE - -------------------------------------------------------------------------------------------------- Tools $1,066,616 $ 875,643 $ 661,782 21.8% 32.3% Water 903,672 582,927 441,030 55.0% 32.2% Enclosures 777,725 657,500 586,829 18.3% 12.0% - -------------------------------------------------------------------------------------------------- Total $2,748,013 $2,116,070 $1,689,641 29.9% 25.2% ==================================================================================================
TOOLS The increase in Tools segment sales in 2000 and 1999 was primarily due to: - - the September 1999 acquisition of DeVilbiss Air Power Company (DAPC); and - - higher volume in our Porter-Cable/Delta business. These increases were partially offset by: - - volume decreases in 2000 for generators due to high inventories at distributors and retailers at the end of 1999 and lower storm sales in 2000; and - - price decreases, primarily in our Porter-Cable/Delta business, due to price discounting in some markets on some products in 2000 to recover market share. WATER The increase in Water segment sales in 2000 and 1999 was primarily due to: - - the August 1999 acquisition of the pressure vessel and pool and spa equipment businesses of Essef Corporation (Essef); and - - increased volume in our pump and valve businesses due to higher demand. These increases were somewhat offset by: - - unfavorable impacts of foreign currency translation primarily in our valve and pressure vessel businesses. ENCLOSURES The increase in Enclosures segment sales in 2000 and 1999 was primarily due to: - - higher volume due to strong demand for our products in the telecom and datacom markets and with industrial original equipment manufacturers; and - - the April 1999 acquisition of WEB Tool & Manufacturing, Inc. These increases were somewhat offset by: - - unfavorable impacts of foreign currency translation. Excluding the impacts of foreign currency translation, 2000 Enclosures segment sales increased by 22 percent over 1999. GROSS MARGIN Gross margin was 25.3 percent in 2000, compared with 27.7 percent in 1999 and 27.4 percent in 1998. The 2.4 point decline in 2000 from 1999 was primarily the result of: - - lower sales volume for generators in our DAPC business; - - lower selling prices due to price discounting to recover market share in our Porter-Cable/Delta business; - - unfavorable product mix in our Tools and Enclosures segments; - - unfavorable inventory variances, primarily in our Porter-Cable/Delta business, due in part to the increases in inventory valuation reserves in the fourth quarter of 2000; and - - higher costs due to challenges encountered in the setup of our new inventory distribution center for our Porter-Cable/Delta business in January 2000. 12 13 The slight improvement in 1999 of 0.3 points from 1998 is primarily due to: - - higher volume in our Porter-Cable/Delta business and Enclosures segment; and - - material cost savings as a result of supply management initiatives in 1999. These improvements were partially offset by: - - unfavorable product mix, primarily the result of the 1999 DAPC and Essef acquisitions. SELLING, GENERAL AND ADMINISTRATIVE AND RESEARCH AND DEVELOPMENT (SG&A AND R&D) SG&A and R&D was 17.1 percent of sales in both 2000 and 1999 and 17.6 percent in 1998. While the overall percentages in 2000 and 1999 were comparable, these expenses as a percent of sales were higher in our Tools segment as spending outpaced sales growth. We experienced higher spending in 2000 in our Tools segment for: - - advertising and selling expenses; and - - one-time costs of $22 million for the establishment of additional accounts receivable reserves, of which, $16 million was to cover the deteriorating credit quality of one customer. These increases in 2000 were offset by lower SG&A and R&D costs as a percent of sales in our Water and Enclosures segments as sales growth outpaced spending. RESTRUCTURING CHARGE 1999 RESTRUCTURING CHARGE To reduce costs and improve productivity, we initiated a restructuring program in the first quarter of 1999 to consolidate manufacturing facilities, reduce overhead, and outsource certain product lines. Related to this, we recorded a restructuring charge of $23.0 million in our Tools and Enclosures segments. In the first quarter of 2000 we reevaluated the status and progress of projects implemented in 1999 and recorded a change in estimate that reduced the restructuring charge by $8.5 million. In addition, new projects related to the original restructuring charge were identified and we recorded an additional $6.0 million charge. In the fourth quarter of 2000, we recorded a final change in estimate of $0.5 million that increased the restructuring charge. As of the end of 2000, this restructuring program was complete. The additional charge in the first quarter of 2000 of $6.0 million related to our Enclosures segment and consisted of: - - the closure of a North American facility; and - - the non-cash write-off of impaired goodwill of $3.0 million. 2000 RESTRUCTURING CHARGE To reduce costs and improve productivity and accountability, we initiated a fourth quarter 2000 restructuring program to decentralize corporate service functions and reorganize our Tools segment infrastructure. As a result, we recorded a restructuring charge of $26.8 million. 13 14 The major components of the 1999 and 2000 restructuring charges and remaining restructuring liability follows:
EMPLOYEE NON-CASH TERMINATION ASSET EXIT IN THOUSANDS BENEFITS DISPOSALS COSTS TOTAL - -------------------------------------------------------------------------------------------------- 1999 RESTRUCTURING CHARGE (FIRST QUARTER) $21,288 $ 1,100 $ 660 $ 23,048 Utilization (8,678) -- (167) (8,845) - -------------------------------------------------------------------------------------------------- DECEMBER 31, 1999 LIABILITY 12,610 1,100 493 14,203 First quarter 2000 change in estimate (9,110) -- 602 (8,508) First quarter 2000 restructuring charge 800 3,900 1,340 6,040 Fourth quarter 2000 change in estimate 747 42 (332) 457 Utilization (5,047) (5,042) (2,103) (12,192) - -------------------------------------------------------------------------------------------------- LIABILITY BEFORE 2000 RESTRUCTURING CHARGE -- -- -- -- 2000 RESTRUCTURING CHARGE (FOURTH QUARTER) 7,888 10,518 8,394 26,800 Utilization -- (10,518) (87) (10,605) - -------------------------------------------------------------------------------------------------- DECEMBER 31, 2000 LIABILITY $ 7,888 $ -- $ 8,307 $ 16,195 ==================================================================================================
Included in other current liabilities on the consolidated balance sheets is the unused portion of the restructuring charge of $16.2 million, which will be used or paid in 2001. As a result of our 1999 restructuring charge, our workforce was reduced by approximately 800 employees. Workforce reductions related to the 2000 restructuring charge are for about 260 employees. Employee termination benefits consist primarily of severance and outplacement counseling fees. Non-cash asset disposals related to the 1999 restructuring charge consisted of equipment write-downs due to abandonment and the write-off of impaired goodwill. Non-cash asset disposals related to the 2000 restructuring charge consisted of the abandonment of leasehold improvements and the abandonment of internal use software under development. Exit costs are primarily related to contract and lease termination costs. OPERATING INCOME Operating income by segment and the change from the prior year were as follows:
00/99 99/98 IN THOUSANDS 2000 1999 1998 % CHANGE % CHANGE - ------------------------------------------------------------------------------------------------ Tools(1) $ 23,751 $100,680 $ 80,383 (76.4%) 25.3% Water 120,732 73,362 56,264 64.6% 30.4% Enclosures(2) 96,268 46,346 46,026 107.7% 0.7% Other(3) (38,721) (18,662) (18,431) 107.5% 1.3% - ------------------------------------------------------------------------------------------------ Total $202,030 $201,726 $164,242 0.2% 22.8% ================================================================================================
(1) Includes restructuring charge expense of $5.4 million in 2000 and $6.3 million in 1999. (2) Includes restructuring charge (income) of $(1.6) million in 2000 and $16.7 million expense in 1999. (3) Includes restructuring charge expense of $21.0 million in 2000. TOOLS The decrease in Tools segment operating income in 2000 was primarily due to: - - one-time working capital charges of $30 million for inventory and accounts receivable impairment; - - lower sales volume for generators and a change in product mix in our Porter-Cable/Delta business; and - - lower selling prices due to price discounting to recover market share. 14 15 The increase in Tools segment operating income in 1999 was primarily due to: - - the acquisition of DeVilbiss Air Power Company; and - - higher volume in our Porter-Cable/Delta business. These 1999 increases were somewhat offset by: - - restructuring charge expense of $6.3 million in 1999. WATER The increase in Water segment operating income in 2000 and 1999 was primarily due to: - - the acquisition of the pressure vessel and pool and spa equipment businesses of Essef Corporation; - - increased volume for pumps and valves; and - - material cost savings as a result of supply management initiatives in 1999. These increases were somewhat offset by: - - unfavorable impacts of foreign currency translation in 2000. ENCLOSURES The increase in Enclosures segment operating income in 2000 was primarily due to: - - higher volume due to strong demand for our products; and - - restructuring charge expense of $16.7 million in 1999 favorably impacting European operating margins. These increases were somewhat offset by: - - unfavorable impacts of foreign currency translation in 2000. The increase in Enclosures segment operating income in 1999 was primarily due to: - - higher volume due to strong demand for our products; and - - material cost savings as a result of supply management initiatives in 1999. These increases were offset by: - - restructuring charge expense of $16.7 million in 1999. NET INTEREST EXPENSE Net interest expense was $74.9 million in 2000, compared with $43.6 in 1999 and $19.9 million in 1998. The year-over-year increases reflect higher borrowings as a result of the 1999 and 1998 acquisitions and higher average interest rates in 2000 and 1999. PROVISION FOR INCOME TAXES Our effective tax rate on continuing operations was 35.6 percent in 2000, compared with 38 percent in 1999 and 37.2 percent in 1998. The decrease in 2000 from 1999 of 2.4 points was primarily the result of the implementation of additional tax-planning strategies, somewhat offset by an increase in non-deductible amortization of goodwill resulting from the 1999 acquisitions. The increase in 1999 from 1998 of 0.8 points was primarily the result of the increase in non-deductible amortization of goodwill resulting from the 1999 acquisitions, somewhat offset by the implementation of tax planning strategies. We expect our effective tax rate on continuing operations to be 37 percent in 2001. 15 16 DISCONTINUED OPERATIONS After evaluating our strategic plans for the future, we elected to discontinue our Equipment segment (Century/Lincoln and Lincoln Industrial businesses) in the fourth quarter of 2000. Discussions with potential purchasers are currently being held and we expect to dispose of these businesses in mid-2001. LIQUIDITY AND CAPITAL RESOURCES Cash generated from operating activities, borrowings under credit agreements, and access to public equity and public and private debt markets have been our principal sources of liquidity over the past three years. These funds covered our share repurchases, dividend payments, and investments in property, plant and equipment and acquisitions of businesses. OPERATING ACTIVITIES Operating activities generated $184.9 million in 2000, compared with $144.3 million in 1999 and $120.9 million in 1998. The $40.6 million increase in 2000 over 1999 was primarily due to lower receivables and extending payment terms with vendors. The $23.4 million increase in 1999 over 1998 primarily reflected a change in the timing of payments for accounts payable and higher earnings from continuing operations and depreciation and amortization driven by our 1999 acquisitions. These increases were partially offset by unfavorable changes in other working capital accounts. INVESTING ACTIVITIES Capital expenditures in 2000, 1999, and 1998 were $68.0 million, $53.7 million, and $43.3 million, respectively. The $14.3 million increase in 2000 over 1999 and the $10.4 million increase in 1999 over 1998, reflect increased investments as a result of acquisitions. Capital expenditures as a percent of sales were 2.5 percent in both 2000 and 1999 and 2.6 percent in 1998. We anticipate capital expenditures in 2001 to be between $85 and $90 million. The anticipated increase in 2001 investments over 2000 is expected to be in the areas of tooling for new product development, factory expansion, and additional machinery and equipment for cost reductions and capacity expansion. In 1999, we acquired DeVilbiss Air Power Company, the pressure vessel and pool and spa equipment businesses of Essef Corporation, and WEB Tool & Manufacturing, Inc. for $953.1 million. In 1998, we paid $50.3 million for the acquisition of Walker Dickson Group Limited and an additional $7.4 million for final payments related to 1997 acquisitions. The 1999 acquisitions were financed through an equity offering and the issuance of additional debt. FINANCING ACTIVITIES As of the end of 2000, our capital structure comprised of $108.1 million in short-term borrowings, $805.8 million in long-term debt, and $1,010.6 million in shareholders equity. The ratio of debt-to-total capital was 47.5 percent, compared with 51.1 percent as of the end of 1999. Our targeted debt-to-total capital ratio range is 30 to 40 percent. We will exceed this target from time-to-time as needed for operational purposes and/or acquisitions. We have committed revolving credit facilities totaling $725 million (the Facilities), consisting of a $335 million 364-day facility that expires on August 30, 2001, and $390 million of multi-currency facilities that expire on September 2, 2004. We are authorized to sell $725 million of short-term commercial paper notes with the Facilities used as back-up liquidity to support 100 percent of commercial paper outstanding. As of the end of 2000, we had $423.3 million of aggregate commercial paper outstanding that matures within 60 days, of which, $315.2 million was classified as long-term and $108.1 million was classified as short-term borrowings in the consolidated balance sheets. The $315.2 million has been classified as long-term as we intend and have the ability to refinance such obligations on a long-term basis. Short-term borrowings as of the end of 1999 consisted of $150.6 million in bank borrowings under the 364-day facility. Interest rates and fees on the Facilities vary based on our debt ratings by credit rating agencies. Aggregate borrowings on the Facilities had a weighted-average interest rate of 6.71 percent in 2000 and 6.10 percent in 1999. In addition to the 16 17 Facilities, we have $56.4 million of uncommitted credit facilities. As of the end of 2000, we had no borrowings under this agreement. Due to poor operating results in our Tools and discontinued Equipment segments, as well as restructuring charges taken in the fourth quarter, we determined that we could potentially be in violation of certain covenants under our Facilities. In December 2000, we received a waiver modifying our interest coverage and leverage ratio covenants from our bank lenders. Subsequent to year-end, we amended our Facility agreements to modify these ratios through September 30, 2001. We will be required to meet our original interest coverage and leverage ratios as of the end of 2001. Our debt agreements contain certain financial covenants that restrict the amount paid for dividends and certain other payments, and require us to maintain certain financial ratios and a minimum net worth. Under the most restrictive covenants, $149.7 million of retained earnings were restricted as of the end of 2000. We were in compliance with all covenants, as modified. In December 2000, the credit rating agencies announced they were reviewing our ratings for possible downgrade. Since that announcement, we have been unable to access the commercial paper markets and have been refinancing maturing commercial paper with borrowings under the revolving credit facilities. If we continue to be unable to access the commercial paper markets or our credit ratings are lowered, our borrowing costs will increase. We have sufficient liquidity under the Facilities to refinance all outstanding commercial paper. Dividends paid in 2000 were $32.0 million, compared with $28.2 million in 1999 and $27.3 million in 1998. The year-over-year increases reflect higher outstanding shares as a result of our 1999 secondary stock offering and an increase in our quarterly dividend rate to $0.17 per share in the third quarter of 2000 from $0.16 per share. In addition to measuring our cash flow generation or usage based upon operating, investing, and financing classifications included in the consolidated statements of cash flows, we also measure our free cash flow. We define free cash flow as cash flow from operating activities less capital expenditures, including both continuing and discontinued operations. We generated free cash flow of $116.9 million in 2000, compared with $90.6 million in 1999 and $77.5 million in 1998. We intend to increase our free cash flow by reducing inventories, improving collection of receivables, and working with suppliers to increase payment terms. We also have changed our management incentive targets to include more emphasis on improving free cash flow. We believe cash generated from operating activities, together with credit available under committed and uncommitted facilities and our current cash position will provide adequate short-term and long-term liquidity. COMMITMENTS AND CONTINGENCIES ENVIRONMENTAL Under current laws and regulations, our obligations relating to environmental matters are not expected to have a material impact on our operations, financial condition, or operating results. Some subsidiaries face remediation of soil and groundwater as a result of predecessors' or their own previous disposal practices. In addition, our subsidiaries have been named as potentially responsible parties at a small number of Superfund or other sites being studied or remediated. Generally, the affected business has been deemed to be a de minimis defendant or its share of remediation costs has not been material. We contractually retained certain obligations pertaining to environmental issues of discontinued paper businesses and the divested sporting ammunition business. Costs and capital expenditures related to environmental obligations were not material to our operations in the recent past and are not anticipated to be material in 2001. We engage environmental professionals to perform periodic audits of our facilities and to assist us in complying with the various environmental laws and regulations faced by our businesses. For purposes of maintaining appropriate reserves against liabilities associated with environmental issues, whether involving on- or off-site locations, we review each individual site, taking into consideration the number of parties 17 18 involved with the site, the joint and several liability imposed by certain environmental laws, the expected level of contributions of the other parties, the nature and quantities of wastes involved, the expected method and extent of remediation, the estimated professional expenses involved, and the time period over which any costs would be incurred. Based on this evaluation, reserves are established when loss amounts are probable and reasonably estimable. Insurance recoveries are recorded only when claims for recovery are settled. NEW ACCOUNTING STANDARDS In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), which among other guidance, clarified the Staff's views on various revenue recognition and reporting matters. As a result, we changed our method of accounting for certain sales transactions. Historically, we recognized revenue upon shipment of products to the customer because, even though some products were shipped FOB destination, we used a common carrier and thus we gave up substantially all the risks of ownership. Under the new accounting method adopted retroactive to January 1, 2000, we now recognize revenue upon delivery of products to the customer, which is when title passes. The cumulative effect of the change on prior years resulted in a minor non-cash charge to income of $1.2 million (net of income taxes of $0.7 million) for the year ended December 31, 2000. The net effect of the change on the year ended December 31, 2000, was to increase income before the cumulative effect of the accounting change by $0.8 million ($0.02 per share). The pro forma amounts presented in the consolidated statements of income were calculated assuming the accounting change was made retroactively to prior periods. For the three months ended March 31, 2000, we recognized $7.4 million in revenue that was included in the cumulative effect adjustment as of January 1, 2000. The effect of the revenue in the first quarter was to increase income by $1.2 million (after reduction for income taxes of $0.7 million). Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), is effective for all fiscal years beginning after June 15, 2000. SFAS 133, as amended and interpreted, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. All derivatives, whether designated in hedging relationships or not, will be required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair-value hedge, the changes in the fair value of the derivative and the hedged item will be recognized in earnings. If the derivative is designated in a cash-flow hedge, changes in the fair value of the derivative will be recorded in other comprehensive incomes (OCI) and will be recognized in the consolidated statements of income when the hedged item affects earnings. SFAS 133 defines new requirements for designation and documentation of hedging relationships as well as ongoing effectiveness assessments in order to use hedge accounting. For a derivative that is not designated as or does not qualify as a hedge, changes in fair value will be recognized in earnings. On January 1, 2001, we adopted SFAS 133 and recorded a transition adjustment that increased OCI by $6.7 million and will be reported as a cumulative effect of accounting change in comprehensive income. The transition adjustment relates to our hedging activities through December 31, 2000. Prior to the application of SFAS 133, financial instruments designated as cash-flow hedges were not recorded in the financial statements, but cash flows from such contracts were recorded as adjustments to earnings as the hedged items effected earnings. EURO CONVERSION A new currency, the Euro, was introduced in Europe on January 1, 1999. Of the fifteen member countries of the European Union, eleven adopted the Euro as their legal currency on that date. Fixed conversion rates between the national currencies of these eleven countries and the Euro were established on that date. The national currencies are scheduled to remain legal tender as denominations of the Euro during the transition period ending December 31, 2001. During this transition period, parties may settle transactions using either the Euro or a participating country's national currency. At the current time, we do not believe that the conversion to the Euro will have a material impact on our business or financial condition. 18 19 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK MARKET RISK We are exposed to various market risks, including changes in interest rates, foreign currency rates and prices of raw materials and sourced components. Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates and foreign currency exchange rates. We use derivative financial instruments to manage and reduce the impact of some of these risks. We do not hold or issue derivative financial instruments for trading purposes. INTEREST RATE RISK We are exposed to changes in interest rates primarily as a result of our borrowing activities used to fund operations. We utilize committed floating rate credit facilities to fund a portion of our operations. Interest rates on $74.5 million of floating rate debt is swapped to fixed rates through agreements with financial institutions. The table below summarizes our floating and fixed rate debt obligations and interest rate swap agreements as of December 31, 2000 along with interest rates for the swapped portion and fair value of the swap agreement. Weighted-average variable rates are based on implied forward rates in the yield curve at December 31, 2000, plus our borrowing spread.
Expected year of maturity ----------------------------------------------------------------------------- DOLLARS IN THOUSANDS 2001 2002 2003 2004 2005 THEREAFTER TOTAL - ---------------------------------------------------------------------------------------------------------------------------- LONG-TERM DEBT, INCLUDING CURRENT PORTION Variable rate $ -- $ -- $ -- $390,000 $ -- $ -- $ 390,000 Average interest rate -- -- -- 7.08% -- -- 7.08% Fixed rate $23,999 $ 7,512 $53,230 $ 43,179 $ 357 $287,556 $ 415,833 Average interest rate 7.25% 6.95% 6.69% 6.72% 7.00% 7.74% 7.45% PORTION SUBJECT TO INTEREST RATE SWAPS Variable to fixed $ -- $19,500 $15,000 $ 20,000 $ 20,000 $ -- $ 74,500 Average rate to be received -- 5.50% 5.80% 6.00% 6.00% -- 5.83% Average rate to be paid -- 6.31% 6.31% 6.31% 6.31% -- 6.31%
FOREIGN CURRENCY RISK We hedge our net investment in certain of our foreign subsidiaries by borrowing in those subsidiaries' functional currencies. We have entered into foreign currency swap agreements with major financial institutions to hedge firm foreign currency commitments. As of December 31, 2000, the following table presents principal cash flows of our open currency swap agreements:
Expected year of maturity ------------------------------------------------------------------------ FAIR IN THOUSANDS 2001 2002 2003 2004 2005 THEREAFTER TOTAL VALUE - -------------------------------------------------------------------------------------------------------------------------- FORWARD EXCHANGE AGREEMENTS(1) Receive U.S. dollars $ -- $ -- $50,000 $ -- $ -- $ -- $ 50,000 $ 4,120 Pay Canadian dollars -- -- 69,385 -- -- -- 69,385 Receive Canadian dollars $ -- $ -- $69,385 $ -- $ -- $ -- $ 69,385 $ 3,386 Pay Deutschemark -- -- 88,625 -- -- -- 88,625 --------- Total exchange gain $ 7,506 =========
(1) Foreign exchange information is presented in local currency by maturity, however, the fair value is presented in U.S. dollars 19 20 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF MANAGEMENT We are responsible for the integrity and objectivity of the financial information presented in this report. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States and include certain amounts based on our best estimates and judgment. We are also responsible for establishing and maintaining our accounting systems and related internal controls, which are designed to provide reasonable assurance that assets are safeguarded and transactions are properly recorded. These systems and controls are reviewed by the internal auditors. In addition, our code of conduct states that our affairs are to be conducted under the highest ethical standards. The independent auditors provide an independent review of the financial statements and the fairness of the information presented therein. The Audit and Finance Committee of the Board of Directors, composed solely of outside directors, meets regularly with us, our internal auditors and our independent auditors to review audit activities, internal controls, and other accounting, reporting, and financial matters. Both the independent auditors and internal auditors have unrestricted access to the Audit and Finance Committee. /s/ Randall J. Hogan /s/ David D. Harrison Randall J. Hogan David D. Harrison President and Chief Executive Officer Executive Vice President and Chief Financial Officer
St. Paul, Minnesota February 16, 2001 20 21 INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF PENTAIR, INC.: We have audited the accompanying consolidated balance sheets of Pentair, Inc. and subsidiaries (the Company) as of December 31, 2000 and 1999, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2000. Our audits also included the financial statement schedule listed in the Index at Item 14. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Deloitte & Touche LLP /s/DELOITTE & TOUCHE LLP Minneapolis, Minnesota February 16, 2001 21 22 PENTAIR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31 ------------------------------------ IN THOUSANDS, EXCEPT PER-SHARE DATA 2000 1999 1998 - ----------------------------------------------------------------------------------------------- Net sales $2,748,013 $2,116,070 $1,689,641 Cost of goods sold 2,051,515 1,529,419 1,227,427 - ----------------------------------------------------------------------------------------------- Gross profit 696,498 586,651 462,214 Selling, general and administrative 438,488 339,707 281,078 Research and development 31,191 22,170 16,894 Restructuring charge 24,789 23,048 -- - ----------------------------------------------------------------------------------------------- Operating income 202,030 201,726 164,242 Interest income 1,488 1,472 1,414 Interest expense 76,387 45,054 21,269 - ----------------------------------------------------------------------------------------------- Income from continuing operations before income taxes 127,131 158,144 144,387 Provision for income taxes 45,263 60,056 53,667 - ----------------------------------------------------------------------------------------------- Income from continuing operations 81,868 98,088 90,720 Income (loss) from discontinued operations, net of tax (24,759) 5,221 16,120 Cumulative effect of accounting change, net of tax (1,222) -- -- - ----------------------------------------------------------------------------------------------- Net income 55,887 103,309 106,840 Preferred dividends -- -- (4,267) - ----------------------------------------------------------------------------------------------- Income available to common shareholders $ 55,887 $ 103,309 $ 102,573 =============================================================================================== EARNINGS PER COMMON SHARE BASIC Continuing operations $ 1.68 $ 2.24 $ 2.25 Income (loss) from discontinued operations (0.51) 0.12 0.42 Cumulative effect of accounting change (0.02) -- -- - ----------------------------------------------------------------------------------------------- Basic earnings per common share $ 1.15 $ 2.36 $ 2.67 =============================================================================================== DILUTED Continuing operations $ 1.68 $ 2.21 $ 2.09 Income (loss) from discontinued operations (0.51) 0.12 0.37 Cumulative effect of accounting change (0.02) -- -- - ----------------------------------------------------------------------------------------------- Diluted earnings per common share $ 1.15 $ 2.33 $ 2.46 =============================================================================================== PRO FORMA AMOUNTS ASSUMING THE ACCOUNTING CHANGE IS APPLIED RETROACTIVELY Net income from continuing operations $ 81,868 $ 97,514 $ 90,631 Net income (loss) from discontinued operations (24,759) 5,221 16,120 Preferred dividend requirements -- -- (4,267) - ----------------------------------------------------------------------------------------------- Income available to common shareholders $ 57,109 $ 102,735 $ 102,484 =============================================================================================== NET INCOME PER COMMON SHARE BASIC Continuing operations $ 1.68 $ 2.23 $ 2.25 Income (loss) from discontinued operations (0.51) 0.12 0.42 - ----------------------------------------------------------------------------------------------- Basic earnings per common share $ 1.17 $ 2.35 $ 2.67 =============================================================================================== DILUTED Continuing operations $ 1.68 $ 2.20 $ 2.09 Income (loss) from discontinued operations (0.51) 0.12 0.37 - ----------------------------------------------------------------------------------------------- Diluted earnings per common share $ 1.17 $ 2.32 $ 2.46 =============================================================================================== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic 48,544 43,803 38,444 Diluted 48,645 44,287 43,149
See accompanying notes to consolidated financial statements. 22 23 PENTAIR, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31 ----------------------- IN THOUSANDS, EXCEPT PER-SHARE DATA 2000 1999 - ------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 34,944 $ 63,015 Accounts and notes receivable, net of allowance of $18,636 and $14,242, respectively 468,081 502,235 Inventories 392,495 352,830 Deferred income taxes 72,577 51,356 Prepaid expenses and other current assets 22,442 13,229 Net assets of discontinued operations 101,263 143,839 - ------------------------------------------------------------------------------------- Total current assets 1,091,802 1,126,504 PROPERTY, PLANT AND EQUIPMENT, NET 352,984 367,783 OTHER ASSETS Goodwill, net 1,141,102 1,164,056 Other 58,137 48,173 - ------------------------------------------------------------------------------------- Total other assets 1,199,239 1,212,229 - ------------------------------------------------------------------------------------- $2,644,025 $2,706,516 ===================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Short-term borrowings $ 108,141 $ 150,612 Current maturities of long-term debt 23,999 27,176 Accounts and notes payable 250,088 220,944 Employee compensation and benefits 84,197 96,082 Accrued product claims and warranties 42,189 46,467 Income taxes 5,487 16,182 Other current liabilities 134,691 130,393 - ------------------------------------------------------------------------------------- Total current liabilities 648,792 687,856 Long-term debt 781,834 857,296 Pension and other retirement compensation 59,313 59,042 Postretirement medical and other benefits 34,213 31,471 Deferred income taxes 37,133 6,632 Other noncurrent liabilities 72,149 73,448 - ------------------------------------------------------------------------------------- Total liabilities 1,633,434 1,715,745 Commitments and contingencies SHAREHOLDERS' EQUITY Preferred shares -- -- Common shares par value $0.16 2/3; 48,711,955 and 48,317,068 shares issued and outstanding, respectively 8,119 8,053 Additional paid-in capital 468,425 456,516 Retained earnings 568,084 544,235 Unearned restricted stock compensation (7,285) (2,434) Accumulated other comprehensive loss (26,752) (15,599) - ------------------------------------------------------------------------------------- Total shareholders' equity 1,010,591 990,771 - ------------------------------------------------------------------------------------- $2,644,025 $2,706,516 =====================================================================================
See accompanying notes to consolidated financial statements. 23 24 PENTAIR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31 ---------------------------------- IN THOUSANDS 2000 1999 1998 - ---------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 55,887 $ 103,309 $106,840 Depreciation 59,897 56,081 46,571 Amortization 39,131 25,987 15,483 Deferred income taxes 13,118 (5,299) 4,069 Restructuring charge 24,789 23,048 -- Cumulative effect of accounting change 1,222 -- -- CHANGES IN ASSETS AND LIABILITIES, NET OF EFFECTS OF BUSINESS ACQUISITIONS AND DISPOSITIONS Accounts and notes receivable 17,719 (31,053) (16,366) Inventories (45,186) (26,740) 6,253 Prepaid expenses and other current assets (8,635) 7,447 2,077 Accounts payable 32,536 26,478 (9,017) Employee compensation and benefits (10,309) 20,122 (3,677) Accrued product claims and warranties (6,318) 21,400 (5,461) Income taxes (11,850) (4,458) (5,543) Other current liabilities (19,401) (43,289) (11,326) Pension and post-retirement benefits 3,148 4,213 2,020 Other assets and liabilities (4,940) (20,676) 9,997 - ---------------------------------------------------------------------------------------------- Net cash provided by continuing operations 140,808 156,570 141,920 Net cash provided by (used for) discontinued operations 44,139 (12,274) (21,048) - ---------------------------------------------------------------------------------------------- Net cash provided by operating activities 184,947 144,296 120,872 INVESTING ACTIVITIES Capital expenditures (68,041) (53,671) (43,335) Proceeds from sale of businesses -- -- 13,001 Acquisitions, net of cash acquired -- (953,124) (57,699) Other (32) 1,664 611 - ---------------------------------------------------------------------------------------------- Net cash used for investing activities (68,073) (1,005,131) (87,422) FINANCING ACTIVITIES Net short-term borrowings (repayments) (42,471) 150,612 -- Proceeds from long-term debt 6,967 351,297 72,967 Repayment of long-term debt (76,987) (59,814) (64,805) Proceeds from long-term bonds -- 250,000 -- Debt issuance costs -- (2,430) -- Proceeds from bridge loans -- 450,000 -- Repayment of bridge loans -- (450,000) -- Unearned ESOP compensation decrease -- -- 6,315 Stock options and restricted stock 3,100 4,454 1,715 Proceeds from issuance of common stock, net 774 214,480 -- Repurchases of common stock (410) (4,030) (12,373) Dividends paid (32,038) (28,201) (27,330) - ---------------------------------------------------------------------------------------------- Net cash provided by (used for) financing activities (141,065) 876,368 (23,511) EFFECT OF EXCHANGE RATE CHANGES ON CASH (3,880) 18,344 (7,676) - ---------------------------------------------------------------------------------------------- CHANGE IN CASH AND CASH EQUIVALENTS (28,071) 33,877 2,263 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 63,015 29,138 26,875 - ---------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 34,944 $ 63,015 $ 29,138 ============================================================================================== SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR: Interest $ 81,401 $ 46,359 $ 24,990 Income taxes $ 42,449 $ 68,108 $ 64,956
See accompanying notes to consolidated financial statements. 24 25 PENTAIR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
UNEARNED PREFERRED SHARES COMMON SHARES ADDITIONAL RESTRICTED --------------------- ------------------- PAID-IN RETAINED STOCK IN THOUSANDS, EXCEPT PER-SHARE DATA NUMBER AMOUNT NUMBER AMOUNT CAPITAL EARNINGS COMPENSATION - ----------------------------------------------------------------------------------------------------------------------- BALANCE -- DECEMBER 31, 1997 1,704,578 $ 59,696 38,184,804 $6,365 $186,486 $389,415 $(2,909) Net income 106,840 Change in cumulative translation adjustment Adjustment in minimum pension liability, net of $62 tax expense Comprehensive income Tax benefit of stock options 1,912 Cash dividends -- $0.60 per common share (23,063) Cash dividends -- preferred (4,267) Share repurchases (350,000) (58) (12,315) Exercise of stock options 185,299 30 1,685 Issuance of restricted shares, net of cancellations 22,567 3 396 (399) Amortization of restricted shares 1,571 Conversion into common stock (169,659) (6,058) 460,917 77 5,981 Tax benefit of preferred dividends 202 Earned ESOP compensation - ----------------------------------------------------------------------------------------------------------------------- BALANCE -- DECEMBER 31, 1998 1,534,919 53,638 38,503,587 6,417 184,145 469,127 (1,737) Net income 103,309 Change in cumulative translation adjustment Adjustment in minimum pension liability, net of $889 tax expense Comprehensive income Tax benefit of stock options 3,190 Cash dividends -- $0.64 per common share (28,201) Issuance of common shares from secondary offering 5,500,000 917 213,563 Share repurchases (117,000) (19) (4,011) Exercise of stock options 321,278 53 4,401 Issuance of restricted shares, net of cancellations 30,616 5 2,270 (2,275) Amortization of restricted shares 1,578 Conversion into common stock (1,534,919) (53,638) 4,078,587 680 52,958 - ----------------------------------------------------------------------------------------------------------------------- BALANCE -- DECEMBER 31, 1999 -- -- 48,317,068 8,053 456,516 544,235 (2,434) Net income 55,887 Change in cumulative translation adjustment Adjustment in minimum pension liability, net of $926 tax benefit Comprehensive income Tax benefit of stock options 985 Cash dividends -- $0.66 per common share (32,038) Adjustment for 1999 secondary offering 774 Share repurchases (13,700) (2) (408) Exercise of stock options 151,529 25 3,075 Issuance of restricted shares, net of cancellations 257,058 43 7,483 (7,526) Amortization of restricted shares 2,675 - ----------------------------------------------------------------------------------------------------------------------- BALANCE -- DECEMBER 31, 2000 -- $ -- 48,711,955 $8,119 $468,425 $568,084 $(7,285) ======================================================================================================================= UNEARNED ACCUMULATED COMPENSATION OTHER RELATING TO COMPREHENSIVE COMPREHENSIVE IN THOUSANDS, EXCEPT PER-SHARE DATA THE ESOP LOSS TOTAL INCOME - ----------------------------------- --------------------------------------------------------- BALANCE -- DECEMBER 31, 1997 $(6,315) $ (5,085) $ 627,653 Net income 106,840 $106,840 Change in cumulative translation adjustment 1,025 1,025 1,025 Adjustment in minimum pension liability, net of $62 tax expense 98 98 98 -------- Comprehensive income $107,963 ======== Tax benefit of stock options 1,912 Cash dividends -- $0.60 per common share (23,063) Cash dividends -- preferred (4,267) Share repurchases (12,373) Exercise of stock options 1,715 Issuance of restricted shares, net of cancellations -- Amortization of restricted shares 1,571 Conversion into common stock -- Tax benefit of preferred dividends 202 Earned ESOP compensation 6,315 6,315 - ----------------------------------- BALANCE -- DECEMBER 31, 1998 -- (3,962) 707,628 Net income 103,309 $103,309 Change in cumulative translation adjustment (13,027) (13,027) (13,027) Adjustment in minimum pension liability, net of $889 tax expense 1,390 1,390 1,390 -------- Comprehensive income $ 91,672 ======== Tax benefit of stock options 3,190 Cash dividends -- $0.64 per common share (28,201) Issuance of common shares from secondary offering 214,480 Share repurchases (4,030) Exercise of stock options 4,454 Issuance of restricted shares, net of cancellations -- Amortization of restricted shares 1,578 Conversion into common stock -- - ----------------------------------- BALANCE -- DECEMBER 31, 1999 -- (15,599) 990,771 Net income 55,887 $ 55,887 Change in cumulative translation adjustment (9,705) (9,705) (9,705) Adjustment in minimum pension liability, net of $926 tax benefit (1,448) (1,448) (1,448) -------- Comprehensive income $ 44,734 ======== Tax benefit of stock options 985 Cash dividends -- $0.66 per common share (32,038) Adjustment for 1999 secondary offering 774 Share repurchases (410) Exercise of stock options 3,100 Issuance of restricted shares, net of cancellations -- Amortization of restricted shares 2,675 - ----------------------------------- BALANCE -- DECEMBER 31, 2000 $ -- $(26,752) $1,010,591 ===================================
See accompanying notes to consolidated financial statements. 25 26 PENTAIR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FISCAL YEAR Our fiscal year ends on December 31. Additionally, we report our interim quarterly periods on a 13-week basis ending on a Saturday. PRINCIPLES OF CONSOLIDATION Our consolidated financial statements include the accounts of the parent company and all significant subsidiaries. Significant intercompany accounts and transactions have been eliminated. Certain balances have been reclassified to conform to the 2000 presentation. USE OF ESTIMATES The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Actual results could differ from those estimates. CASH EQUIVALENTS We consider highly liquid investments with original maturities of three months or less to be cash equivalents. INVENTORIES Inventories are stated at the lower of cost or market. Inventories of domestic subsidiaries are generally determined by the last-in, first-out (LIFO) method. Inventories of foreign subsidiaries are determined by the first-in, first-out (FIFO) and moving average methods. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Depreciation and amortization is computed for financial reporting purposes principally using the straight-line method over the following estimated useful lives:
YEARS ------- Land improvements 5 to 20 Buildings 5 to 50 Machinery and equipment 3 to 15
GOODWILL Goodwill represents the difference between the purchase price of acquired businesses and the fair value of their net assets when accounted for by the purchase method. We amortize goodwill evenly over periods ranging from 25 to 40 years. Accumulated amortization as of the end of 2000 and 1999 was $114.4 million and $80.2 million, respectively. IMPAIRMENT OF LONG-LIVED ASSETS We review long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If impairment indicators are present and the estimated future undiscounted cash flows are less than the carrying value of the assets and any related goodwill, the carrying value is reduced to the estimated fair value as measured by the discounted cash flows. Losses on long-lived assets to be disposed of are based upon estimated selling prices and reduced for the cost to sell. INCOME TAXES Deferred taxes are recognized for the estimated taxes ultimately payable or recoverable based on enacted tax law. Changes in enacted tax rates are reflected in the tax provision as they occur. 26 27 PENTAIR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) REVENUE RECOGNITION, SALES RETURNS AND WARRANTY COSTS We recognize revenue when the earnings process is complete, evidenced by an agreement between Pentair and the customer, there has been delivery and acceptance, collectibility is probable, and pricing is fixed and determinable. If significant obligations remain after delivery, revenue is deferred until such obligations are fulfilled. Provisions for sales returns and warranty costs are recorded at the time of sale based on historical information and current trends. FREIGHT EXPENSE Distribution and freight expenses for products shipped to customers are included in cost of goods sold, in accordance with Emerging Issues Task Force No. 00-10, Accounting for Shipping and Handling Fees and Costs (EITF 00-10). Distribution expense was previously reported in selling, general and administrative, while outbound freight expense was previously reported as a reduction of gross sales. Prior period expenses have also been reclassified to cost of goods sold, which had no effect on previously reported net income. FOREIGN CURRENCY TRANSLATION Assets and liabilities denominated in foreign currency are translated at the current exchange rate as of the balance sheet date, and income statement amounts are translated at the average monthly exchange rate. Translation adjustments resulting from fluctuations in exchange rates are recorded in comprehensive income. FINANCIAL INSTRUMENTS We use derivative financial instruments for the purpose of hedging interest rate and currency exposures, which exist as part of ongoing business operations. All hedging instruments are designated and effective as hedges, in accordance with generally accepted accounting principles. Instruments that do not qualify for hedge accounting are marked-to-market with changes recognized in current earnings. We do not hold or issue derivative financial instruments for trading purposes. INTEREST RATE SWAP AND CAP AGREEMENTS We use interest rate swap and cap agreements to reduce interest rate exposure. Interest rate contracts designated and effective as a hedge of underlying debt obligations were not marked-to-market. Amounts paid or received on agreements are recognized as adjustments to interest expense over the life of the underlying debt agreement. Gains and losses realized upon the settlement of such contracts are deferred and amortized to interest expense over the remaining life of the debt instrument or are recognized immediately if the underlying instrument is settled. Open interest rate contracts are reviewed regularly to ensure they remain effective as hedges of interest rate exposure. FOREIGN CURRENCY SWAP AGREEMENTS We enter into foreign currency swap agreements to hedge transactions denominated in foreign currencies in order to reduce the currency risk associated with fluctuating exchange rates. Realized and unrealized gains and losses from instruments qualifying as hedges were recognized as part of the cost basis of the underlying transaction. We hedge our net investment in certain of our foreign subsidiaries by borrowing in those subsidiaries' functional currencies. Gains and losses on contracts designated as hedges of net investments in foreign subsidiaries are recognized in accumulated other comprehensive loss. STOCK-BASED COMPENSATION In accordance with Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), we elected to account for our stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). The exercise price of stock options equals the market price on the date of grant. In general, there is no recorded compensation expense related to stock options. 27 28 PENTAIR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INSURANCE SUBSIDIARY We insure general and product liability, product recall, workers' compensation, and automobile liability risks through our wholly owned insurance subsidiary. Reserves for policy claims are established based on actuarial projections of ultimate losses. As of the end of 2000 and 1999, reserves for policy claims were $26.2 million ($10.0 million included in accrued product claims and warranties and $16.2 million included in other noncurrent liabilities) and $28.9 million ($6.0 million included in accrued product claims and warranties and $22.9 million included in other noncurrent liabilities). EARNINGS PER COMMON SHARE Basic earnings per share are computed by dividing net income, after deducting preferred stock dividends, by the weighted-average number of common shares outstanding. Diluted earnings per share are computed by dividing net income, after adjusting for the tax benefits on deductible ESOP dividends, by the weighted average number of common shares outstanding, including the dilutive effects of options, restricted stock and assumed conversion of preferred stock. Unless otherwise noted, references are to diluted earnings per share. Basic and diluted earnings per share were calculated using the following:
IN THOUSANDS, EXCEPT PER-SHARE DATA 2000 1999 1998 - -------------------------------------------------------------------------------------------- EARNINGS PER COMMON SHARE -- BASIC Income from continuing operations $ 81,868 $ 98,088 $ 90,720 Subtract preferred dividends -- -- (4,267) - -------------------------------------------------------------------------------------------- Income from continuing operations -- basic 81,868 98,088 86,453 - -------------------------------------------------------------------------------------------- Income (loss) from discontinued operations -- basic (24,759) 5,221 16,120 Cumulative effect of accounting change -- basic (1,222) -- -- - -------------------------------------------------------------------------------------------- Income available to common shareholders -- basic $ 55,887 $103,309 $102,573 ============================================================================================ Continuing operations $ 1.68 $ 2.24 $ 2.25 Income (loss) from discontinued operations (0.51) 0.12 0.42 Cumulative effect of accounting change (0.02) -- -- - -------------------------------------------------------------------------------------------- Earnings per common share -- basic $ 1.15 $ 2.36 $ 2.67 ============================================================================================ EARNINGS PER COMMON SHARE -- DILUTED Income from continuing operations $ 81,868 $ 98,088 $ 90,720 Adjustment for tax benefits due to assumed ESOP conversion -- -- (606) - -------------------------------------------------------------------------------------------- Income from continuing operations -- diluted 81,868 98,088 90,114 - -------------------------------------------------------------------------------------------- Income (loss) from discontinued operations -- diluted (24,759) 5,221 16,120 Cumulative effect of accounting change -- diluted (1,222) -- -- - -------------------------------------------------------------------------------------------- Income available to common shareholders -- diluted $ 55,887 $103,309 $106,234 ============================================================================================ Continuing operations $ 1.68 $ 2.21 $ 2.09 Income (loss) from discontinued operations (0.51) 0.12 0.37 Cumulative effect of accounting change (0.02) -- -- - -------------------------------------------------------------------------------------------- Earnings per common share -- diluted $ 1.15 $ 2.33 $ 2.46 ============================================================================================ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -- BASIC 48,544 43,803 38,444 Dilutive impact of stock options and restricted stock 101 346 435 Assumed conversion of preferred stock -- 138 4,270 - -------------------------------------------------------------------------------------------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -- DILUTED 48,645 44,287 43,149 ============================================================================================
28 29 PENTAIR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NEW ACCOUNTING STANDARDS In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), which among other guidance, clarified the Staff's views on various revenue recognition and reporting matters. As a result, we changed our method of accounting for certain sales transactions. Historically, we recognized revenue upon shipment of products to the customer because, even though some products were shipped FOB destination, we used a common carrier and thus we gave up substantially all the risks of ownership. Under the new accounting method adopted retroactive to January 1, 2000, we now recognize revenue upon delivery of products to the customer, which is when title passes. The cumulative effect of the change on prior years resulted in a minor non-cash charge to income of $1.2 million (net of income taxes of $0.7 million) for the year ended December 31, 2000. The net effect of the change on the year ended December 31, 2000, was to increase income before the cumulative effect of the accounting change by $0.8 million ($0.02 per share). The pro forma amounts presented in the consolidated statements of income were calculated assuming the accounting change was made retroactively to prior periods. For the three months ended March 31, 2000, we recognized $7.4 million in revenue that was included in the cumulative effect adjustment as of January 1, 2000. The effect of the revenue in the first quarter was to increase income by $1.2 million (after reduction for income taxes of $0.7 million). Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, (SFAS 133) is effective for all fiscal years beginning after June 15, 2000. SFAS 133, as amended and interpreted, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. All derivatives, whether designated in hedging relationships or not, will be required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair-value hedge, the changes in the fair value of the derivative and the hedged item will be recognized in earnings. If the derivative is designated in a cash-flow hedge, changes in the fair value of the derivative will be recorded in other comprehensive incomes (OCI) and will be recognized in the consolidated statements of income when the hedged item affects earnings. SFAS 133 defines new requirements for designation and documentation of hedging relationships as well as ongoing effectiveness assessments in order to use hedge accounting. For a derivative that is not designated as or does not qualify as a hedge, changes in fair value will be recognized in earnings. On January 1, 2001, we adopted SFAS 133 and recorded a transition adjustment that increased OCI by $6.7 million and will be reported as a cumulative effect of accounting change in comprehensive income. The transition adjustment relates to our hedging activities through December 31, 2000. Prior to the application of SFAS 133, financial instruments designated as cash-flow hedges were not recorded in the financial statements, but cash flows from such contracts were recorded as adjustments to earnings as the hedged items effected earnings. 2. RESTRUCTURING CHARGE 1999 RESTRUCTURING CHARGE To reduce costs and improve productivity, we initiated a restructuring program in the first quarter of 1999 to consolidate manufacturing facilities, reduce overhead and outsource certain product lines. Related to this, we recorded a restructuring charge of $23.0 million in our Tools and Enclosures segments. In the first quarter of 2000 we reevaluated the status and progress of projects implemented in 1999 and recorded a change in estimate that reduced the restructuring charge by $8.5 million. In addition, new projects related to the original restructuring charge were identified and we recorded an additional $6.0 million charge. In the fourth quarter of 2000, we recorded a final change in estimate of $0.5 million that increased the restructuring charge. As of the end of 2000, this restructuring program was complete. 29 30 PENTAIR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The additional charge in the first quarter of 2000 of $6.0 million related to our Enclosures segment and consisted of: - - the closure of a North American facility; and - - the non-cash write-off of impaired goodwill of $3.0 million. 2000 RESTRUCTURING CHARGE To reduce costs, improve productivity and accountability, we initiated a fourth quarter 2000 restructuring program to decentralize corporate service functions and reorganize our Tools segment infrastructure. As a result, we recorded a restructuring charge of $26.8 million. The major components of the 1999 and 2000 restructuring charges and remaining restructuring liability follows:
EMPLOYEE NON-CASH TERMINATION ASSET EXIT IN THOUSANDS BENEFITS DISPOSALS COSTS TOTAL - ------------------------------------------------------------------------------------------------- 1999 RESTRUCTURING CHARGE (FIRST QUARTER) $21,288 $ 1,100 $ 660 $ 23,048 Utilization (8,678) -- (167) (8,845) - ------------------------------------------------------------------------------------------------- DECEMBER 31, 1999 LIABILITY 12,610 1,100 493 14,203 First quarter 2000 change in estimate (9,110) -- 602 (8,508) First quarter 2000 restructuring charge 800 3,900 1,340 6,040 Fourth quarter 2000 change in estimate 747 42 (332) 457 Utilization (5,047) (5,042) (2,103) (12,192) - ------------------------------------------------------------------------------------------------- LIABILITY BEFORE 2000 RESTRUCTURING CHARGE -- -- -- -- 2000 RESTRUCTURING CHARGE (FOURTH QUARTER) 7,888 10,518 8,394 26,800 Utilization -- (10,518) (87) (10,605) - ------------------------------------------------------------------------------------------------- DECEMBER 31, 2000 LIABILITY $ 7,888 $ -- $ 8,307 $ 16,195 =================================================================================================
Included in other current liabilities on the consolidated balance sheets is the unused portion of the restructuring charge of $16.2 million, which will be used or paid in 2001. As a result of our 1999 restructuring charge, our workforce was reduced by approximately 800 employees. Workforce reductions related to the 2000 restructuring charge are for about 260 employees. Employee termination benefits consist primarily of severance and outplacement counseling fees. Non-cash asset disposals related to the 1999 restructuring charge consisted of equipment write-downs due to abandonment and the write-off of impaired goodwill. Non-cash asset disposals related to the 2000 restructuring charge consisted of the abandonment of leasehold improvements and the abandonment of internal use software under development. Exit costs are primarily related to contract and lease termination costs. 3. DISCONTINUED OPERATIONS After evaluating our strategic plans for the future, we elected to discontinue our Equipment segment (Century/Lincoln and Lincoln Industrial businesses) in the fourth quarter of 2000. Discussions with potential purchasers are currently being held and we expect to dispose of these businesses in mid-2001. Our financial statements have been restated to reflect the Equipment segment as a discontinued operation for all periods presented. Operating results of the discontinued Equipment segment are summarized below. The amounts exclude general corporate overhead previously allocated to the Equipment segment. The amounts include an allocation of interest based on a ratio of the net assets of the discontinued operations 30 31 PENTAIR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) to the total net assets of Pentair. The results for 2000 reflect activity through December 2000 (the measurement date); results for 1999 and 1998 reflect activity for each entire year.
IN THOUSANDS 2000 1999 1998 - -------------------------------------------------------------------------------------------- Net sales $255,256 $318,334 $306,689 - -------------------------------------------------------------------------------------------- Pre-tax income (loss) $(37,809) $ 8,385 $ 26,558 Provision for income taxes (13,050) 3,164 10,438 - -------------------------------------------------------------------------------------------- Income (loss) from discontinued operations, net of tax $(24,759) $ 5,221 $ 16,120 ============================================================================================
Net assets of the discontinued Equipment segment consisted of the following:
IN THOUSANDS 2000 1999 - --------------------------------------------------------------------------------- Net current assets $ 59,708 $ 92,288 Property, plant and equipment, net 28,339 36,023 Net other noncurrent assets and liabilities 13,216 15,528 - --------------------------------------------------------------------------------- Net asset of discontinued operations $101,263 $143,839 =================================================================================
Included within the net assets of the discontinued Equipment segment at December 31, 1999, was a restructuring liability of $11.0 million. During 2000, an additional $0.8 million was incurred due to a change in estimate and $11.8 million was utilized in 2000, with no liability remaining at December 31, 2000. The $11.8 million utilization consisted of $6.6 million in cash and $5.2 million non-cash. 4. ACQUISITIONS All of the following acquisitions were accounted for as purchases and, accordingly, the respective purchase prices were allocated to the respective assets and liabilities based upon their estimated fair values as of the acquisition date. Operating results of businesses acquired have been included in the consolidated statements of income from the respective acquisition dates forward. A summary of our purchase transactions for the past three years is included in the following table (In thousands):
ENTITY NAME AND BUSINESS DATE DESCRIPTION OF BUSINESS ACQUIRED SEGMENT ACQUIRED CONSIDERATION INTANGIBLES FORM OF CONSIDERATION - ------------------------------------------------------------------------------------------------------------------------------- 1999 ACQUISITIONS DeVilbiss Air Power Company Tools 9/99 $466,579 $360,445 $466,579 Cash Manufacturer of air compressors, generators, and pressure washers Essef Corporation (Structural Fibers and Pac-Fab) Water 8/99 424,633 349,608 304,633 Cash Manufacturer of pressure vessels and 120,000 Debt assumed pool and spa equipment WEB Tool & Manufacturing, Inc. Enclosures 4/99 61,912 45,342 61,912 Cash Designer, manufacturer and marketer of custom server subracks for the datacom and telecom markets 1998 ACQUISITIONS Walker Dickson Group Limited Enclosures 10/98 50,333 27,200 50,333 Cash Designer, manufacturer and marketer of custom and standard enclosures, subracks and systems ORSCO, Inc. Equipment 1/98 1,248 894 1,248 Note Manufacturer of oil lubrication systems (discontinued in 12/00) T-Tech Industries Equipment 4/98 7,729 6,419 6,419 Cash Manufacturer of automatic transmission fluid exchangers (discontinued in 12/00)
31 32 PENTAIR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. ACCUMULATED OTHER COMPREHENSIVE LOSS Components of accumulated other comprehensive loss consist of the following:
IN THOUSANDS 2000 1999 1998 - ------------------------------------------------------------------------------------------- Minimum pension liability adjustments, net of tax $ (2,433) $ (985) $(2,375) Foreign currency translation adjustments (24,319) (14,614) (1,587) - ------------------------------------------------------------------------------------------- Accumulated other comprehensive loss $(26,752) $(15,599) $(3,962) ===========================================================================================
6. INVENTORIES Inventories were comprised of:
IN THOUSANDS 2000 1999 - --------------------------------------------------------------------------------- Raw materials and supplies $110,935 $104,840 Work-in-process 48,392 46,947 Finished goods 233,168 201,043 - --------------------------------------------------------------------------------- Total inventories $392,495 $352,830 =================================================================================
If all inventories were valued at FIFO as of the end of 2000 and 1999, inventories would have been $396.9 million and $357.5 million, respectively. 7. PROPERTY, PLANT AND EQUIPMENT The major categories of property, plant and equipment follow:
IN THOUSANDS 2000 1999 - --------------------------------------------------------------------------------- Land and land improvements $ 17,238 $ 20,319 Buildings 149,620 146,042 Machinery and equipment 496,175 455,084 Construction in progress 25,682 35,771 - --------------------------------------------------------------------------------- Total property and equipment 688,715 657,216 Less accumulated depreciation and amortization 335,731 289,433 - --------------------------------------------------------------------------------- Property, plant and equipment, net $352,984 $367,783 =================================================================================
8. DEBT CREDIT FACILITIES We have committed revolving credit facilities totaling $725 million (the Facilities), consisting of a $335 million 364-day facility that expires on August 30, 2001, and $390 million of multi-currency facilities that expire on September 2, 2004. We are authorized to sell $725 million of short-term commercial paper notes with the Facilities used as back-up liquidity to support 100 percent of commercial paper outstanding. As of the end of 2000, we had $423.3 million of aggregate commercial paper outstanding that matures within 60 days, of which, $315.2 million was classified as long-term and $108.1 million was classified as short-term borrowings in the consolidated balance sheets. The $315.2 million has been classified as long-term as we intend and have the ability to refinance such obligations on a long-term basis. Short-term borrowings as of the end of 1999 consisted of $150.6 million in bank borrowings under the 364-day facility. Interest rates and fees on the Facilities vary based on our debt ratings by credit rating agencies. Aggregate borrowings on the Facilities had a weighted-average interest rate of 6.71 percent in 2000 and 6.10 percent in 1999. In addition to the Facilities, we have $56.4 million of uncommitted credit facilities. As of the end of 2000, we had no borrowings under this agreement. 32 33 PENTAIR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Due to poor operating results in our Tools and discontinued Equipment segments as well as restructuring charges taken in the fourth quarter, we determined that we could potentially be in violation of certain covenants under our Facilities. In December 2000, we received a waiver modifying our interest coverage and leverage ratio covenants from our bank lenders. Subsequent to year-end, we amended our Facility agreements to modify these ratios through September 30, 2001. We will be required to meet our original interest coverage and leverage ratios as of the end of 2001. Our debt agreements contain certain financial covenants that restrict the amount paid for dividends and certain other payments, and require us to maintain certain financial ratios and a minimum net worth. Under the most restrictive covenants, $149.7 million of retained earnings were restricted as of the end of 2000. We were in compliance with all covenants, as modified. In December 2000, the credit rating agencies announced they were reviewing our ratings for possible downgrade. Since that announcement, we have been unable to access the commercial paper markets and have been refinancing maturing commercial paper with borrowings under the revolving credit facilities. If we continue to be unable to access the commercial paper markets or our credit ratings are lowered, our borrowing costs will increase. We have sufficient liquidity under the Facilities to refinance all outstanding commercial paper. In October 1999, we issued $250 million of 7.85 percent Senior notes due October 2009. The proceeds were used to repay other outstanding debt. Long-term debt and the average interest rate on debt outstanding as of December 31, is summarized as follows:
Average Maturity In thousands interest rate (Year) 2000 1999 - -------------------------------------------------------------------------------------------------- Commercial paper, maturing within 60 days 7.04% 2004 $315,172 $ -- Revolving credit facilities 7.22% 2004 74,828 440,000 Private placement 6.80% 2001-2007 149,814 174,694 Senior notes 7.85% 2009 250,000 250,000 Other Various 2001-2006 16,019 19,778 - -------------------------------------------------------------------------------------------------- Long-term debt, including current portion 805,833 884,472 Less current maturities of long-term debt (23,999) (27,176) - -------------------------------------------------------------------------------------------------- Long-term debt $781,834 $857,296 ==================================================================================================
Long-term debt outstanding at December 31, 2000 matures as follows:
IN THOUSANDS 2001 2002 2003 2004 2005 THEREAFTER TOTAL - ------------------------------------------------------------------------------------- Maturities $23,999 $7,512 $53,230 $433,179 $357 $287,556 $805,833 =====================================================================================
9. FINANCIAL INSTRUMENTS INTEREST RATE SWAP AND CAP AGREEMENTS We have entered into interest rate swap agreements with major financial institutions to exchange variable rate interest payment obligations for fixed rate obligations without the exchange of the underlying principal amounts in order to manage interest rate exposures. Net payments or receipts under the agreements are recorded as adjustments to interest expense and credit risk is considered remote. As of the end of 2000, we had swap agreements outstanding with an aggregate notional amount of $74.5 million that expire in various amounts through June 2005. The swap agreements have a fixed interest rate of 6.31 percent and an average remaining maturity of 3 years. The net fair value of our swap agreements as of the end of 2000 was a net liability of $0.8 million. 33 34 PENTAIR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As of the end of 2000, we had a 35 million Deutschemark interest rate cap agreement outstanding that expires in November 2001, with a capped interest rate of 7.29 percent DEM-LIBOR. FOREIGN CURRENCY SWAP AGREEMENTS We have entered into foreign currency swap agreements with major financial institutions to hedge firm foreign currency commitments. The original term of the currency swap agreements ranged from 3 to 6 years and mature on October 1, 2003. The notional amounts in the table below serve solely as a basis for the calculation of interest payments which are exchanged over the life of the swap transaction and are equal to the amount of foreign currency or dollar principal exchanged at maturity. Gains or losses are deferred and recognized in income as part of the underlying transaction. Deferred unrealized gains, based on dealer-quoted prices, are as follows:
IN THOUSANDS 2000 1999 - --------------------------------------------------------------------------------- Notional amounts $100,000 $128,431 Gains 7,506 5,322
FAIR VALUE OF FINANCIAL INSTRUMENTS The recorded amounts and estimated fair values of financial instruments, including derivative financial instruments were as follows:
2000 1999 ----------------------------------------- RECORDED FAIR RECORDED FAIR IN THOUSANDS AMOUNT VALUE AMOUNT VALUE - ---------------------------------------------------------------------------------------------- Long-term debt, including current portion $805,833 $789,087 $884,472 $899,726 Derivative financial instruments: Interest rate swap asset (liability) -- (826) -- 1,518 Interest rate cap asset (liability) -- 59 -- (120) Currency swap asset (liability) -- 7,506 -- 5,322
The following methods were used to estimate the fair values of each class of financial instrument: - - short-term financial instruments (cash and cash equivalents, accounts and notes receivable, accounts and notes payable, and short-term borrowings) -- recorded amount approximates fair value because of the short maturity period; - - long-term debt, including current maturities -- fair value is based on market quotes available for issuance of debt with similar terms; - - interest rate swap and cap agreements -- fair value is based on market or dealer quotes; and - - currency swap -- fair value is based on market or dealer quotes. 10. INCOME TAXES Income from continuing operations before income taxes consisted of the following:
IN THOUSANDS 2000 1999 1998 - -------------------------------------------------------------------------------------------- United States $ 89,111 $146,420 $133,187 International 38,020 11,724 11,200 - -------------------------------------------------------------------------------------------- Income from continuing operations before taxes $127,131 $158,144 $144,387 ============================================================================================
34 35 PENTAIR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The provision for income taxes from continuing operations consisted of the following:
IN THOUSANDS 2000 1999 1998 - ----------------------------------------------------------------------------------------- Currently payable: Federal $18,869 $48,122 $38,895 State 2,132 8,220 8,620 International 16,708 8,869 2,581 - ----------------------------------------------------------------------------------------- Total current taxes 37,709 65,211 50,096 Deferred: Federal 11,317 11 2,280 International (3,763) (5,166) 1,291 - ----------------------------------------------------------------------------------------- Total deferred taxes 7,554 (5,155) 3,571 - ----------------------------------------------------------------------------------------- Total provision for income taxes $45,263 $60,056 $53,667 =========================================================================================
Reconciliation of the U.S. statutory income tax rate to our effective tax rate for continuing operations follows:
2000 1999 1998 - -------------------------------------------------------------------------------- U.S. statutory income tax rate 35.0% 35.0% 35.0% State income taxes, net of federal tax benefit 2.1% 3.6% 4.2% Tax effect of foreign operations (5.6%) (2.8%) (3.0%) Non-deductible amortization of goodwill 7.0% 3.3% 1.6% ESOP dividend benefit (0.6%) (0.6%) (0.9%) Tax credits (2.4%) (0.7%) 0.0% All other, net 0.1% 0.2% 0.3% - -------------------------------------------------------------------------------- Effective tax rate on continuing operations 35.6% 38.0% 37.2% ================================================================================
Deferred taxes arise because of different treatment between financial statement accounting and tax accounting, known as "temporary differences." We record the tax effect of these temporary differences as "deferred tax assets" (generally items that can be used as a tax deduction or credit in future periods) and "deferred tax liabilities" (generally items that we received a tax deduction for, but not yet been recorded in the consolidated statements of income). The tax effects of the major items recorded as deferred tax assets and liabilities are:
2000 1999 DEFERRED TAX DEFERRED TAX ------------------------------------------------------- IN THOUSANDS ASSETS LIABILITIES ASSETS LIABILITIES - ----------------------------------------------------------------------------------------------------------- Accounts receivable allowances $ 8,185 $ -- $ 6,402 $ -- Inventory allowances 10,194 -- 3,702 -- Accelerated depreciation/amortization -- 23,166 -- 24,386 Accrued product claims and warranties 31,791 -- 25,739 -- Employee benefit accruals 39,113 -- 40,994 -- Other, net -- 30,673 -- 7,727 - ----------------------------------------------------------------------------------------------------------- Subtotal 89,283 53,839 76,837 32,113 Valuation allowance -- -- -- -- - ----------------------------------------------------------------------------------------------------------- Total deferred taxes $89,283 $53,839 $76,837 $32,113 =========================================================================================================== Net deferred tax asset $35,444 $44,724 ===========================================================================================================
35 36 PENTAIR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. BENEFIT PLANS PENSION AND POSTRETIREMENT BENEFITS We have various non-contributory defined-benefit pension plans that cover nearly all U.S. employees and many employees outside the United States. Pension benefits are based principally on an employee's years of service and/or compensation levels near retirement. Our pension funding policy is to deposit with independent trustees amounts as required by applicable law. In addition, we also provide certain postretirement health care and life insurance benefits for nearly all retirees. Generally, the postretirement health care and life insurance plans require contributions from retirees. The weighted-average assumptions used for these plans consisted of:
PENSION BENEFITS POSTRETIREMENT --------------------------------------- 2000 1999 1998 2000 1999 1998 - ----------------------------------------------------------------------------------------------- Discount rate 7.75% 7.75% 6.75% 7.75% 7.75% 6.75% Expected return on plan assets 8.50% 8.50% 8.50% -- -- -- Rate of compensation increase 5.00% 5.00% 5.00% -- -- --
Components of the net periodic benefit cost are as follows:
PENSION BENEFITS POSTRETIREMENT --------------------------------------------------------- IN THOUSANDS 2000 1999 1998 2000 1999 1998 - ---------------------------------------------------------------------------------------------------- Service cost $ 11,922 $ 12,796 $ 12,146 $ 376 $ 466 $ 407 Interest cost 20,744 18,651 17,702 2,145 1,744 1,622 Expected return on plan assets (27,439) (25,476) (23,858) -- -- Amortization of transition (asset) (134) (176) (181) -- -- -- Amortization of prior year service cost (benefit) 535 689 1,608 (591) (591) (451) Recognized net actuarial (gain) (4,777) (3,114) (703) (59) (51) (91) Special termination benefits 2,191 -- -- -- -- -- - ---------------------------------------------------------------------------------------------------- Net periodic benefit cost $ 3,042 $ 3,370 $ 6,714 $1,871 $1,568 $1,487 ====================================================================================================
36 37 PENTAIR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following tables present reconciliations of the benefit obligation of the plans, the plan assets of the pension plans, and the funded status of the plans:
PENSION BENEFITS POSTRETIREMENT ----------------------------------------- IN THOUSANDS 2000 1999 2000 1999 - ---------------------------------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION Benefit obligation beginning of year $278,629 $282,065 $ 28,783 $ 25,539 Service cost 11,922 12,796 376 466 Interest cost 20,744 18,651 2,145 1,744 Plan amendments 347 834 (91) -- Actuarial (gain) loss 7,673 (30,642) (2,835) 129 Special termination benefits 2,191 -- -- -- Acquisition -- 10,317 -- 3,009 Translation (gain) loss (1,341) (3,392) -- -- Benefits paid (18,304) (12,000) (1,130) (2,104) - ---------------------------------------------------------------------------------------------- Benefit obligation end of year $301,861 $278,629 $ 27,248 $ 28,783 ============================================================================================== CHANGE IN PLAN ASSETS Fair value of plan assets beginning of year $332,530 $297,335 $ -- $ -- Actual return on plan assets (13,937) 36,331 -- -- Acquisition -- 9,888 -- -- Company contributions 1,400 1,155 1,130 2,104 Translation (gain) loss (356) (179) -- -- Benefits paid (18,304) (12,000) (1,130) (2,104) - ---------------------------------------------------------------------------------------------- Fair value of plan assets end of year $301,333 $332,530 $ -- $ -- ============================================================================================== FUNDED STATUS Plan assets in excess of/(less than) benefit obligation $ (528) $ 53,901 $(27,248) $(28,783) Unrecognized cost: Net transition (asset) obligation -- (134) -- -- Net actuarial (gains) (40,877) (96,590) (12,672) (6,849) Prior service cost (benefit) 3,260 3,448 (1,864) (2,365) - ---------------------------------------------------------------------------------------------- Net amount recognized $(38,145) $(39,375) $(41,784) $(37,997) ==============================================================================================
The components in the consolidated balance sheets consist of:
PENSION BENEFITS POSTRETIREMENT ----------------------------------------- IN THOUSANDS 2000 1999 2000 1999 - ---------------------------------------------------------------------------------------------- Prepaid benefit cost $ 7,222 $ 6,199 $ -- $ -- Accrued benefit liability (50,888) (48,617) (41,784) (37,997) Intangible asset 1,532 1,429 -- -- Accumulated other comprehensive income -- pre-tax 3,989 1,614 -- -- - ---------------------------------------------------------------------------------------------- Net amount recognized $(38,145) $(39,375) $(41,784) $(37,997) ==============================================================================================
Plan assets consist primarily of listed stocks and bonds as well as cash and short-term investments. Our common stock accounted for approximately 7 percent and 10 percent of plan assets as of the end of 2000 and 1999, respectively. 37 38 PENTAIR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Pension plans with obligations in excess of plan assets were as follows:
IN THOUSANDS 2000 1999 - ------------------------------------------------------------------------------- Pension plans with an accumulated benefit obligation in excess of plan assets: Fair value of plan assets $ 827 $ -- Accumulated benefit obligation 51,330 39,757 Pension plans with a benefit obligation in excess of plan assets: Fair value of plan assets $ 827 $ 227 Benefit obligation 55,362 45,187
A one-percentage point change in the assumed health care cost trend rate would have the following effects:
IN THOUSANDS INCREASE DECREASE - --------------------------------------------------------------------------------- Effect on total of service and interest cost $ 81 $ (69) Effect on postretirement benefit obligation 766 (663)
Health care cost trend rate was 9.62 percent in 2000 and assumed to gradually decline to 6 percent in 2019. SAVINGS PLAN We have a 401(k) plan (the plan) with an employee stock ownership (ESOP) bonus component, which covers certain union and nearly all-nonunion U.S. employees who meet certain age requirements. Under the plan, eligible U.S. employees may voluntarily contribute a percentage of their eligible compensation. Matching contributions are made to employees who meet certain eligibility and service requirements. Our matching contribution is based on our financial performance and ranges from 30 percent to 90 percent of eligible employee contributions, limited to 4 percent of compensation contributed by employees. Beginning in 1999, our annual matching contribution was in the form of cash. Prior to 1999, matching contributions were made in the form of Pentair 8% Callable Cumulative Voting Convertible Preferred Stock, Series 1990, and were allocated to eligible employees based on a fixed acquisition price of $30.25 per share. In addition to the matching contribution, all employees who meet certain service requirements receive a discretionary ESOP contribution. In 2000 and 1999, the discretionary contribution was equal to 1.5 percent of annual eligible compensation and was 1 percent in 1998. Our combined contributions to the 401(k) and ESOP were $11.9 million, $9.2 million, and $7.1 million in 2000, 1999, and 1998, respectively. 12. SHAREHOLDERS' EQUITY AUTHORIZED SHARES We may issue up to 250 million shares of common stock. Our Board of Directors may designate up to 15 million of those shares as preferred stock. COMMON SHARE PURCHASE RIGHTS We have a ten-year Share Rights Agreement dated July 31, 1995. Under this agreement, each outstanding share of our common stock has one common share purchase right attached to it and entitle the holder to purchase one share of our common stock, at the current price of $80 per share, subject to adjustment. However, these rights are not exercisable unless certain change-in-control events transpire, such as a person acquiring or obtaining the right to acquire beneficial ownership of 15 percent or more of our outstanding common stock. The rights are redeemable by us for $0.01 per right until ten business days after certain defined change-in-control events transpire, or at any time prior to the expiration of the rights. 38 39 PENTAIR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SHARE REPURCHASES In December 1999, the Board of Directors authorized the repurchase of up to 400,000 shares of our common stock in open market or negotiated transactions. 13. STOCK PLANS OMNIBUS STOCK INCENTIVE PLAN In April 1996, the Omnibus Stock Incentive Plan (the Plan) was approved. The Plan authorizes the issuance of additional shares of our common stock and extends through February 2006. The Plan allows for the granting of: - - nonqualified stock options; - - incentive stock options; - - restricted stock; - - rights to restricted stock; - - incentive compensation units (ICUs); - - stock appreciation rights; - - performance shares; and - - performance units. The Plan is administered by our Compensation and Human Resources Committee (the Committee), which is made up of members of our Board of Directors. Employees eligible to receive awards under the Plan are managerial, administrative, or other key employees who are in a position to make a material contribution to the continued profitable growth and long-term success of Pentair. The Committee has the authority to select the recipients of awards, determine the type and size of awards, establish certain terms and conditions of award grants, and take certain other actions as permitted under the Plan. The Plan provides that no more than 20 percent of the total shares available for issuance under the Plan may be used to make awards other than stock options and limits the Committee's authority to reprice awards or to cancel and reissue awards at lower prices. INCENTIVE STOCK OPTIONS We may grant stock options to any eligible employee with an exercise price equal to 100 percent of the market value of the shares on the dates the options were granted. Options are generally exercisable after five years or less, subject to continuous employment and certain other conditions and have expiration dates of five to ten years after the grant date. RESTRICTED STOCK, RIGHTS TO RESTRICTED STOCK AND ICUS Under the Plan, eligible employees are awarded restricted shares or rights to restricted shares (awards) of our common stock and ICUs. Restrictions on awards and ICUs generally expire from three to five years after issuance, subject to continuous employment and certain other conditions. Restricted stock awards are recorded at market value on the date of the grant as unearned compensation. Unearned compensation is shown as a reduction of shareholders' equity in our consolidated financial statements and is being amortized to expense over the restriction period. The value of ICUs is based on a matrix, which takes into account growth in operating income and return on invested capital. Annual compensation expense for the value of restricted stock and ICUs was $0.1 million in 2000, $7.3 million in 1999 and $6.1 million in 1998. OUTSIDE DIRECTORS NONQUALIFIED STOCK OPTION PLAN Nonqualified stock options are granted to outside directors under the Outside Directors Nonqualified Stock Option Plan (the Directors Plan) with an exercise price equal to 100 percent of the market value of the shares on the dates the options were granted. Options generally expire after five years, but may expire up to ten years from the date of grant. The Directors Plan extends to January 2008. 39 40 PENTAIR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) STOCK OPTIONS The following table summarizes stock option activity under all plans:
OPTIONS OUTSTANDING 2000 1999 1988 ------------------------------------------------------------------ Exercise Exercise Exercise Shares price(1) Shares price(1) Shares price(1) - ----------------------------------------------------------------------------------------------------- BALANCE JANUARY 1 1,522,518 $33.21 1,483,472 $28.41 1,359,822 $23.93 Granted 693,321 34.88 431,972 39.55 424,100 35.75 Exercised (301,664) 24.82 (384,486) 21.44 (280,344) 18.44 Canceled (87,819) 36.44 (8,440) 34.33 (20,106) 29.70 - ----------------------------------------------------------------------------------------------------- BALANCE DECEMBER 31 1,826,356 $35.07 1,522,518 $33.21 1,483,472 $28.41 ===================================================================================================== OPTIONS EXERCISABLE -- DECEMBER 31 788,999 $33.65 710,468 $28.67 739,385 $23.77 SHARES AVAILABLE FOR GRANT -- DECEMBER 31 Omnibus Plan 1,108,787 1,970,055 2,419,774 Directors Plan 372,798 384,498 395,973 - ----------------------------------------------------------------------------------------------------- TOTAL 1,481,585 2,354,553 2,815,747 =====================================================================================================
(1) Weighted average The following table summarizes information concerning stock options outstanding as of the end of 2000 under all plans:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------------------------ Remaining Range of life(1) Exercise Exercise exercise prices Shares (in years) price(1) Shares price(1) - ----------------------------------------------------------------------------------- $21.00-$25.00 136,512 4.6 $23.15 73,512 $25.00 25.01- 30.00 960 7.1 26.85 300 29.13 30.01- 35.00 668,876 3.7 33.16 547,556 32.77 35.01- 40.00 973,100 8.0 37.67 138,508 39.58 40.01- 45.00 21,599 6.9 41.48 12,248 41.74 45.01- 50.00 25,309 7.3 45.14 16,875 45.15 - ----------------------------------------------------------------------------------- 1,826,356 6.2 $35.07 788,999 $33.65 ===================================================================================
(1) Weighted average We apply APB 25 and related interpretations in accounting for employee stock options. Accordingly, no compensation expense has been recognized related to stock options. The following table summarizes results as if we had recorded compensation expense for our stock option plans under SFAS 123.
IN THOUSANDS, EXCEPT PER-SHARE DATA 2000 1999 1998 - ------------------------------------------------------------------------------------------- INCOME AVAILABLE TO COMMON SHAREHOLDERS As reported $55,887 $103,309 $102,573 Pro forma $52,307 $100,519 $100,608 EARNINGS PER COMMON SHARE -- BASIC As reported $ 1.15 $ 2.36 $ 2.67 Pro forma $ 1.08 $ 2.29 $ 2.62 EARNINGS PER COMMON SHARE -- DILUTED As reported $ 1.15 $ 2.33 $ 2.46 Pro forma $ 1.08 $ 2.27 $ 2.42
40 41 PENTAIR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The weighted-average fair value of options granted in 2000, 1999 and 1998 was $10.93, $12.20 and $9.44 per option, respectively. We estimated the fair values using the Black-Scholes option-pricing model, modified for dividends and using the following assumptions:
2000 1999 1998 - -------------------------------------------------------------------------------- Risk-free rate 4.5% 6.5% 4.6% Dividend yield 2.0% 1.7% 1.7% Expected stock price volatility 40% 34% 31% Expected term until exercise (years): Omnibus Plan 2.07 1.91 1.91 Directors Plan 2.24 2.13 2.17
The expected life was determined separately for each plan due to varying exercise patterns. The fair value of options is amortized to expense over a three-year option-vesting period in determining the pro forma impact. 14. BUSINESS SEGMENTS We classify our continuing operations into the following business segments: - - TOOLS -- which manufactures and markets tool products positioned at the high-end of the market and targets professionals and upscale hobbyists. Tools segment products include woodworking machinery, portable power tools, compressors, generators, and pressure washers. - - WATER -- which manufactures and markets essential products for the transport and treatment of water, wastewater and fluids. Water segment products include water and wastewater pumps, control valves, pumps and pumping stations for thick fluid transfer applications, storage tanks, filtration systems, and pool and spa accessories. - - ENCLOSURES -- which designs, manufactures, and markets customized and standard metal and composite enclosures that house and protect sensitive controls and components for markets that include data communications, networking, telecommunications, automotive, and general electronics. Products include metallic and composite enclosures, cabinets, cases, subracks, thermal management backplanes and power supplies. - - OTHER -- is primarily composed of corporate expenses, our insurance subsidiary, intermediate finance companies, divested operations, discontinued operations, and intercompany eliminations. The accounting policies of our operating segments are the same as those described in the summary of significant accounting policies. We evaluate performance based on the operating income of the segment and use a variety of ratios to measure performance. 41 42 PENTAIR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Financial information by reportable business segment is included in the following summary:
IN THOUSANDS 2000 1999 1998 2000 1999 1998 - ----------------------------------------------------------------------------------------------------- NET SALES TO EXTERNAL CUSTOMERS OPERATING INCOME (LOSS) ------------------------------------ ------------------------------ Tools $1,066,616 $ 875,643 $ 661,782 $ 23,751 $100,680 $ 80,383 Water 903,672 582,927 441,030 120,732 73,362 56,264 Enclosures 777,725 657,500 586,829 96,268 46,346 46,026 Other -- -- -- (38,721) (18,662) (18,431) - ----------------------------------------------------------------------------------------------------- CONSOLIDATED $2,748,013 $2,116,070 $1,689,641 $202,030 $201,726 $164,242 =====================================================================================================
IDENTIFIABLE ASSETS(1) DEPRECIATION AND AMORTIZATION - ----------------------------------------------------------------------------------------------------- Tools $ 864,051 $ 936,096 $ 338,466 $26,692 $16,898 $11,082 Water 990,730 953,736 442,048 37,232 28,167 16,956 Enclosures 558,160 547,705 535,811 29,797 35,259 32,285 Other(1) 231,084 268,979 167,882 5,307 1,744 1,731 - ----------------------------------------------------------------------------------------------------- CONSOLIDATED $2,644,025 $2,706,516 $1,484,207 $99,028 $82,068 $62,054 =====================================================================================================
CAPITAL EXPENDITURES - -------------------------------------------------------------------- Tools $23,154 $23,019 $14,237 (1) Segment assets include all Water 11,966 12,413 10,112 assets except cash and cash Enclosures 20,254 14,395 17,320 equivalents. These assets Other 12,667 3,844 1,666 are included in Other, which - -------------------------------------------------------------------- also includes the net assets CONSOLIDATED $68,041 $53,671 $43,335 of discontinued operations. ====================================================================
OPERATING INCOME Tools segment operating income includes: - - restructuring charge expense of $5.4 million in 2000 and $6.3 million expense in 1999; and - - one-time working capital charges of $30 million in 2000 to establish additional accounts receivable ($22 million) and inventory valuation ($8 million) reserves. Enclosures segment operating income includes: - - restructuring charge income of $(1.6) million in 2000 and $16.7 million expense in 1999. Other segment operating income includes: - - restructuring charge expense of $21.0 million in 2000. The following table presents certain geographic information:
IN THOUSANDS 2000 1999 1998 2000 1999 1998 - --------------------------------------------------------------------------------------------------------- NET SALES TO EXTERNAL CUSTOMERS LONG-LIVED ASSETS ------------------------------------ ---------------------------------- United States $2,339,478 $1,754,961 $1,368,954 $1,308,169 $1,324,577 $488,058 Canada 59,976 58,077 54,785 752 557 387 Germany 129,884 136,131 141,244 84,594 92,389 115,100 All other 218,675 166,901 124,658 100,571 114,316 116,737 - --------------------------------------------------------------------------------------------------------- CONSOLIDATED $2,748,013 $2,116,070 $1,689,641 $1,494,086 $1,531,839 $720,282 =========================================================================================================
Net sales are based on the location in which the sale originated. Long-lived assets include property, plant and equipment, and goodwill, net of related depreciation and amortization. 42 43 PENTAIR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) We sell our products through various distribution channels including home centers and retail chains. In 2000, sales to The Home Depot, a major customer of our Tools segment, accounted for approximately 10.5 percent of total net sales. In addition, three customers accounted for about 58 percent of our Tools segment net sales, which if lost, would have a material adverse effect on the segment. 15. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS Rental expense under operating leases was $35.4 million, $25.0 million and $20.7 million in 2000, 1999 and 1998, respectively. The minimum lease commitments under non-cancelable operating leases is as follows:
IN THOUSANDS 2001 2002 2003 2004 2005 THEREAFTER TOTAL - -------------------------------------------------------------------------------------------------- Lease commitments $29,976 $25,294 $16,716 $11,800 $9,484 $11,664 $104,934 ==================================================================================================
Environmental Under current laws and regulations, our obligations relating to environmental matters are not expected to have a material impact on our operations, financial condition or operating results. Some subsidiaries face remediation of soil and groundwater as a result of predecessors' or their own previous disposal practices. In addition, our subsidiaries have been named as potentially responsible parties at a small number of Superfund or other sites being studied or remediated. Generally, the affected business has been deemed to be a de minimis defendant or its share of remediation costs has not been material. We contractually retained certain obligations pertaining to environmental issues of discontinued paper businesses and the divested sporting ammunition business Costs and capital expenditures related to environmental obligations were not material to our operations in the recent past and are not anticipated to be material in 2001. We engage environmental professionals to perform periodic audits of our facilities and to assist us in complying with the various environmental laws and regulations faced by our businesses. For purposes of maintaining appropriate reserves against liabilities associated with environmental issues, whether involving on- or off-site locations, we review each individual site, taking into consideration the number of parties involved with the site, the joint and several liability imposed by certain environmental laws, the expected level of contributions of the other parties, the nature and quantities of wastes involved, the expected method and extent of remediation, the estimated professional expenses involved and the time period over which any costs would be incurred. Based on this evaluation, reserves are established when loss amounts are probable and reasonably estimable. Insurance recoveries are recorded only when claims for recovery are settled. LITIGATION We are occasionally a party to litigation arising in the normal course of business. We regularly analyze current information and, as necessary, provide accruals for probable liabilities on the eventual disposition of these matters. We believe the effect on our consolidated results of operations and financial position, if any, for the disposition of all currently pending matters will not be material. 43 44 PENTAIR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST(1) SECOND(2) THIRD --------------------- --------------------- --------------------- AS AS AS PREVIOUSLY AS PREVIOUSLY AS PREVIOUSLY AS 2000 (IN THOUSANDS, EXCEPT PER-SHARE DATA) REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED FOURTH(1)(2) - -------------------------------------------------------------------------------------------------------------------------------- Net sales $659,010 $647,691 $730,410 $733,761 $683,518 $691,784 $674,777 Gross profit 182,511 179,902 191,730 192,147 170,350 172,859 151,590 Operating income 74,678 72,752 78,495 79,437 59,840 61,350 (11,509) Income (loss) from continuing operations 34,874 33,641 38,070 38,673 27,055 28,021 (18,467) Income (loss) from discontinued operations, net of tax (975) (975) (1,440) (1,440) (14,382) (14,382) (7,962) Cumulative effect of accounting change, net of tax -- (1,222) -- -- -- -- -- Net income 33,899 31,444 36,630 37,233 12,673 13,639 (26,429) EARNINGS PER COMMON SHARE(4) BASIC Continuing operations $ 0.72 $ 0.69 $ 0.78 $ 0.80 $ 0.56 $ 0.58 $ (0.38) Income (loss) from discontinued operations (0.02) (0.02) (0.03) (0.03) (0.30) (0.30) (0.16) Cumulative effect of accounting change -- (0.02) -- -- -- -- -- - -------------------------------------------------------------------------------------------------------------------------------- Basic earnings per common share $ 0.70 $ 0.65 $ 0.75 $ 0.77 $ 0.26 $ 0.28 $ (0.54) ================================================================================================================================ DILUTED Continuing operations $ 0.72 $ 0.69 $ 0.78 $ 0.79 $ 0.56 $ 0.58 $ (0.38) Income (loss) from discontinued operations (0.02) (0.02) (0.03) (0.03) (0.30) (0.30) (0.16) Cumulative effect of accounting change -- (0.02) -- -- -- -- -- - -------------------------------------------------------------------------------------------------------------------------------- Diluted earnings per common share $ 0.70 $ 0.65 $ 0.75 $ 0.76 $ 0.26 $ 0.28 $ (0.54) ================================================================================================================================ 2000 (IN THOUSANDS, EXCEPT PER-SHARE DATA) YEAR(1)(2) - ------------------------------------------ ---------- Net sales $2,748,013 Gross profit 696,498 Operating income 202,030 Income (loss) from continuing operations 81,868 Income (loss) from discontinued operations, net of tax (24,759) Cumulative effect of accounting change, net of tax (1,222) Net income 55,887 EARNINGS PER COMMON SHARE(4) BASIC Continuing operations $ 1.68 Income (loss) from discontinued operations (0.51) Cumulative effect of accounting change (0.02) - ------------------------------------------ Basic earnings per common share $ 1.15 ========================================== DILUTED Continuing operations $ 1.68 Income (loss) from discontinued operations (0.51) Cumulative effect of accounting change (0.02) - ------------------------------------------ Diluted earnings per common share $ 1.15 ==========================================
FIRST(3) SECOND THIRD FOURTH ---------------------- ---------------------- ---------------------- ---------- AS AS AS AS PREVIOUSLY PREVIOUSLY PREVIOUSLY PREVIOUSLY 1999 (IN THOUSANDS, EXCEPT PER-SHARE DATA) REPORTED PRO FORMA REPORTED PRO FORMA REPORTED PRO FORMA REPORTED - --------------------------------------------------------------------------------------------------------------------------------- Net sales $408,240 $409,262 $439,188 $438,799 $546,586 $542,396 $722,056 Gross profit 115,163 115,465 122,869 122,887 150,422 149,093 198,197 Operating income 17,551 17,706 43,287 43,306 56,170 55,223 84,718 Income (loss) from continuing operations 8,299 8,395 23,613 23,625 26,549 25,962 39,627 Income (loss) from discontinued operations, net of tax (6,059) (6,059) 4,672 4,672 3,260 3,260 3,348 Net income 2,240 2,336 28,285 28,297 29,809 29,222 42,975 EARNINGS PER COMMON SHARE(4) BASIC Continuing operations $ 0.19 $ 0.19 $ 0.55 $ 0.55 $ 0.62 $ 0.61 $ 0.83 Income (loss) from discontinued operations (0.14) (0.14) 0.11 0.11 0.08 0.08 0.07 - --------------------------------------------------------------------------------------------------------------------------------- Basic earnings per common share $ 0.05 $ 0.05 $ 0.66 $ 0.66 $ 0.70 $ 0.69 $ 0.90 ================================================================================================================================= DILUTED Continuing operations $ 0.19 $ 0.19 $ 0.55 $ 0.55 $ 0.61 $ 0.59 $ 0.83 Income (loss) from discontinued operations (0.14) (0.14) 0.11 0.11 0.08 0.08 0.07 - --------------------------------------------------------------------------------------------------------------------------------- Diluted earnings per common share $ 0.05 $ 0.05 $ 0.66 $ 0.66 $ 0.69 $ 0.67 $ 0.90 ================================================================================================================================= FOURTH YEAR(3) --------- ----------------------- AS PREVIOUSLY 1999 (IN THOUSANDS, EXCEPT PER-SHARE DATA) PRO FORMA REPORTED PRO FORMA - ------------------------------------------ ----------------------------------- Net sales $722,777 $2,116,070 $2,113,234 Gross profit 198,430 586,651 585,875 Operating income 84,626 201,726 200,861 Income (loss) from continuing operations 39,532 98,088 97,514 Income (loss) from discontinued operations, net of tax 3,348 5,221 5,221 Net income 42,880 103,309 102,735 EARNINGS PER COMMON SHARE(4) BASIC Continuing operations $ 0.83 $ 2.24 $ 2.23 Income (loss) from discontinued operations 0.07 0.12 0.12 - ------------------------------------------ Basic earnings per common share $ 0.90 $ 2.36 $ 2.35 ========================================== DILUTED Continuing operations $ 0.83 $ 2.21 $ 2.20 Income (loss) from discontinued operations 0.07 0.12 0.12 - ------------------------------------------ Diluted earnings per common share $ 0.90 $ 2.33 $ 2.32 ==========================================
The above quarterly financial information does not agree to previously filed quarterly reports on Form 10-Q as: - - all financial information reflects our Equipment segment (Century/Lincoln and Lincoln Industrial businesses) as discontinued operations; and - - we have restated all financial information for the adoption of EITF 00-10. In addition, as restated and pro forma quarterly financial information reflects the impact of the adoption of SAB 101 on January 1. (1) First quarter 2000 net income reflects pre-tax restructuring charge (income) of $(2.5) million, or $(0.03) per share, and fourth quarter net income reflects pre-tax restructuring charge expense of $27.3, or $0.36 per share. (2) Second quarter 2000 net income reflects a one-time pre-tax cost to establish an additional $5.0 million in accounts receivable reserves. Fourth quarter 2000 net income reflects one-time pre-tax costs to establish an additional $25.0 million for accounts receivable ($17.0 million) and inventory valuation ($8.0 million) reserves. (3) First quarter 1999 net income reflects pre-tax restructuring charge expense of $23.0 million, or $0.34 per share. (4) Amounts may not total to the annual earnings per share because each quarter and the year are calculated separately based on basic and diluted weighted average common shares outstanding during that period. 44 45 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NONE. PART III ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT Information required under this item with respect to Directors is contained in our Notice of Annual Meeting of Shareholders and Proxy Statement under the captions "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information required under this item is contained in our Notice of Annual Meeting of Shareholders and Proxy Statement under the captions "Election of Directors" and "Executive Compensation" and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required under this item is contained in our Notice of Annual Meeting of Shareholders and Proxy Statement under the caption "Security Ownership of Management and Beneficial Ownership" and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS NONE. 45 46 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT: (1) FINANCIAL STATEMENTS Consolidated Statements of Income for the Years Ended December 31, 2000, 1999 and 1998 Consolidated Balance Sheets as of December 31, 2000 and December 31, 1999 Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 2000, 1999 and 1998 Notes to Consolidated Financial Statements (2) FINANCIAL STATEMENT SCHEDULES Schedule II -- Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. (3) EXHIBITS 3.1 Second Restated Articles of Incorporation as amended through June 14, 1999 (Incorporated by reference to Exhibit 3.1 contained in Pentair's Amendment 1 to Registration Statement on Form S-3 dated July 16, 1999). 3.2 Third Amended and Restated By-Laws as amended effective August 23, 2000 (Incorporated by reference to Exhibit 3.2 contained in Pentair's Current Report on Form 8-K filed September 21, 2000). 4.1 Rights Agreement as of July 21, 1995 between Norwest Bank N.A. and Pentair, Inc. (Incorporated by reference to Exhibit 4.1 contained in Pentair's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995). 4.2 Form of Indenture, dated June 1, 1999, between Pentair, Inc. and U.S. Bank National Association, as Trustee. 10.1 Pentair's Supplemental Employee Retirement Plan as Amended and Restated effective August 23, 2000 (Incorporated by reference to Exhibit 10.1 contained in Pentair's Current Report on Form 8-K filed September 21, 2000). 10.2 Pentair's 1999 Supplemental Executive Retirement Plan as Amended and Restated effective August 23, 2000 (Incorporated by reference to Exhibit 10.2 contained in Pentair's Current Report on Form 8-K filed September 21, 2000). 10.3 Pentair's Restoration Plan as Amended and Restated effective August 23, 2000 (Incorporated by reference to Exhibit 10.3 contained in Pentair's Current Report on Form 8-K filed September 21, 2000). 10.4 Pentair's Omnibus Stock Incentive Plan as Amended and Restated (Incorporated by reference to Exhibit 10.1 contained in Pentair's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1996). 10.5 Pentair's First Amendment effective August 23, 2000 to Omnibus Stock Incentive Plan as Amended and Restated effective February 14, 1996 (Incorporated by reference to Exhibit 10.4 contained in Pentair's Current Report on Form 8-K filed September 21, 2000).
46 47 10.6 Fourth Amended and Restated Compensation Plan for Non-Employee Directors (Incorporated by reference to Exhibit 10.12 contained in Pentair's Annual Report on Form 10-K for the year ended December 31, 1996). 10.7 Amendment effective August 23, 2000 to Pentair's Fourth Amended and Restated Compensation Plan for Non-Employee Directors (Incorporated by reference to Exhibit 10.5 contained in Pentair's Current Report on Form 8-K filed September 21, 2000). 10.8 Pentair, Inc. Outside Directors Nonqualified Stock Option Plan dated January 15, 1998 (Incorporated by reference to Exhibit 10.8 contained in Pentair's Annual Report on Form 10-K for the year ended December 31, 1997). 10.9 Amendment effective August 23, 2000 to Pentair's Outside Directors Non-Qualified Stock Option Plan (Incorporated by reference to Exhibit 10.6 contained in Pentair's Current Report on Form 8-K filed September 21, 2000). 10.10 Pentair, Inc. Deferred Compensation Plan effective January 1, 1993 (Incorporated by reference to Exhibit 10.21 contained in Pentair's Annual Report on Form 10-K for the year ended December 31, 1992). 10.11 Amendment effective August 23, 2000 to Pentair's Deferred Compensation Plan effective January 1, 1993 (Incorporated by reference to Exhibit 10.7 contained in Pentair's Current Report on Form 8-K filed September 21, 2000). 10.12 Pentair, Inc. Non-Qualified Deferred Compensation Plan effective January 1, 1996 (Incorporated by reference to Exhibit 10.17 contained in Pentair's Annual Report on Form 10-K for the year ended December 31, 1995). 10.13 Trust Agreement for Pentair, Inc. Non-Qualified Deferred Compensation Plan between Pentair, Inc. and State Street Bank and Trust Company (Incorporated by reference to Exhibit 10.18 contained in Pentair's Annual Report on Form 10-K for the year ended December 31, 1995). 10.14 Amendment effective August 23, 2000 to Pentair's Non-Qualified Deferred Compensation Plan effective January 1, 1996 (Incorporated by reference to Exhibit 10.8 contained in Pentair's Current Report on Form 8-K filed September 21, 2000). 10.15 Executive Officer Performance Plan (Incorporated by reference to Exhibit 10.14 contained in Pentair's Annual Report on Form 10-K for the year ended December 31, 1997). 10.16 Amendment effective August 23, 2000 to Pentair's Executive Officer Performance Plan (Incorporated by reference to Exhibit 10.9 contained in Pentair's Current Report on Form 8-K filed September 21, 2000). 10.17 Pentair's Management Incentive Plan as amended to January 12, 1990 (Incorporated by reference to Exhibit 10.17 contained in Pentair's Annual Report on Form 10-K for the year ended December 31, 1989). 10.18 Employee Stock Purchase and Bonus Plan as amended and restated effective January 1, 1992. (Incorporated by reference to Exhibit 10.16 contained in Pentair's Annual Report on Form 10-K for the year ended December 31, 1991). 10.19 Pentair's Flexible Perquisite Program as amended to January 1, 1989. (Incorporated by reference to Exhibit 10.20 contained in Pentair's Annual Report on Form 10-K for the year ended December 31, 1989). 10.20 Form of Key Executive Employment and Severance Agreement effective August 23, 2000 for Winslow H. Buxton (Incorporated by reference to Exhibit 10.10 contained in Pentair's Current Report on Form 8-K filed September 21, 2000).
47 48 10.21 Form of Key Executive Employment and Severance Agreement effective August 23, 2000 for Randall J. Hogan (Incorporated by reference to Exhibit 10.11 contained in Pentair's Current Report on Form 8-K filed September 21, 2000). 10.22 Form of Key Executive Employment and Severance Agreement effective August 23, 2000 for Roy T. Rueb (Incorporated by reference to Exhibit 10.12 contained in Pentair's Current Report on Form 8-K filed September 21, 2000). 10.23 Form of Key Executive Employment and Severance Agreement effective August 23, 2000 for Louis Ainsworth, Richard J. Cathcart, George M. Danko, Karen A. Durant, David D. Harrison, Deb S. Knutson, Frank J. Feraco and others (Incorporated by reference to Exhibit 10.13 contained in Pentair's Current Report on Form 8-K filed September 21, 2000). 10.24 Long-Term Credit Agreement, dated as of September 2, 1999, between Pentair and subsidiaries and various financial institutions and Bank of America, N.A., as Administrative Agent (Incorporated by reference to Exhibit 4.1 contained in Pentair's Current Report on Form 8-K filed September 3, 1999). 10.25 First Amendment, dated as of February 16, 2001, to the Long-Term Credit Agreement, dated as of September 2, 1999, between Pentair and subsidiaries and various financial institutions and Bank of America, N.A., as Administrative Agent. 10.26 364-Day Credit Agreement, dated as of September 2, 1999, between Pentair and subsidiaries and various financial institutions and Bank of America, N.A., as Administrative Agent (Incorporated by reference to Exhibit 10.1 contained in Pentair's Current Report on Form 8-K filed September 3, 1999). 10.27 Second Amendment, dated as of February 16, 2001, to the 364-Day Credit Agreement dated as of September 2, 1999, between Pentair and various financial institutions and Bank of America, N.A., as Administrative Agent. 10.28 Separation Agreement dated May 31, 2000 between Pentair, Inc. and Richard Ingman. 10.29 Separation Agreement dated November 27, 2000 between Pentair, Inc. and James White. 10.30 Proposed form of Pentair, Inc. Omnibus Stock Incentive Plan as Amended and Restated, dated February 14, 2001 (Submitted for shareholder approval on April 25, 2001). 21 List of Pentair subsidiaries. 23 Consent of Independent Auditors -- Deloitte & Touche LLP 24 Power of Attorney (See signature page) (B) REPORTS ON FORM 8-K None.
48 49 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 19, 2001. PENTAIR, INC. By /s/ David D. Harrison ------------------------------------- David D. Harrison Executive Vice President and Chief Financial Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that the undersigned directors of Pentair, Inc., a Minnesota corporation, hereby constitute and appoint Louis L. Ainsworth his/her attorney-in-fact and agent, with full power of substitution, for the purpose of signing on his/her behalf as a director of Pentair, Inc. the Annual Report on Form 10-K, to be filed with the Securities and Exchange Commission within the next sixty days, and to file the same, with all exhibits thereto and other supporting documents, with the Commission, granting unto such attorney-in-fact, full power and authority to do and perform any and all acts necessary or incidental to the performance and execution of the powers herein expressly granted. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on March 19, 2001 in the capacities indicated.
SIGNATURE TITLE --------- ----- /s/ Randall J. Hogan President and Chief - --------------------------- Executive Officer Randall J. Hogan /s/ William J. Cadogan Director - --------------------------- William J. Cadogan /s/ Joseph R. Collins Director - --------------------------- Joseph R. Collins /s/ Barbara B. Grogan Director - --------------------------- Barbara B. Grogan /s/ Charles A. Haggerty Director - --------------------------- Charles A. Haggerty /s/ Harold V. Haverty Director - --------------------------- Harold V. Haverty
SIGNATURE TITLE --------- ----- /s/ Winslow H. Buxton Chairman of the Board - --------------------------- Winslow H. Buxton /s/ Quentin J. Hietpas Director - --------------------------- Quentin J. Hietpas /s/ Stuart Maitland Director - --------------------------- Stuart Maitland /s/ Augusto Meozzi Director - --------------------------- Augusto Meozzi /s/ Richard M. Schulze Director - --------------------------- Richard M. Schulze /s/ Karen E. Welke Director - --------------------------- Karen E. Welke
49 50 SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS Pentair, Inc. and subsidiaries
ADDITIONS OTHER BALANCE CHARGED TO CHANGES BALANCE BEGINNING COSTS AND DEDUCTIONS -- ADD (DEDUCT) END OF IN THOUSANDS OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD - -------------------------------------------------------------------------------------------------------- ALLOWANCES FOR DOUBTFUL ACCOUNTS Year ended December 31, 2000 $14,242 $28,055 $23,661(1) $ --(2) $18,636 Year ended December 31, 1999 $ 9,373 $ 3,008 $ 2,397(1) $4,258(2) $14,242 Year ended December 31, 1998 $ 9,910 $ 1,115 $ 1,784(1) $ 132(2) $ 9,373
(1) Uncollectible accounts written off, net of recoveries. (2) Result of acquisitions. 50 EX-4.2 2 c60900ex4-2.txt FORM OF INDENTURE, DATED JUNE 1, 1999 1 EXHIBIT 4.2 ================================================================================ PENTAIR, INC. TO U.S. BANK NATIONAL ASSOCIATION, AS TRUSTEE ---------- INDENTURE DATED AS OF JUNE 1, 1999 ---------- ================================================================================ PENTAIR, INC. Reconciliation and tie between Trust Indenture Act of 1939 and Indenture, dated as of June 1, 1999 2
Trust Indenture Act Section Indenture Section - --------------- ----------------- Section 310 (a)(1) .......................................... 609 (a)(2) .......................................... 609 (a)(3) .......................................... Not Applicable (a)(4) .......................................... Not Applicable (a)(5) .......................................... 609 (b) ............................................. 608, 610 Section 311 ................................................. 613 Section 312 (a) ............................................. 701, 702(a) (b) ............................................. 702(b) (c) ............................................. 702(c) Section 313 ................................................. 703 Section 314 (a) ............................................. 704 (b) ............................................. Not Applicable (c)(1) .......................................... 102 (c)(2) .......................................... 102 (c)(3) .......................................... Not Applicable (d) ............................................. Not Applicable (e) ............................................. 102 Section 315 (a) ............................................. 601 (b) ............................................. 602 (c) ............................................. 601 (d) ............................................. 601 (e) ............................................. 514 Section 316 (a) ............................................. 101 (a)(1)(A) ....................................... 502, 512 (a)(1)(B) ....................................... 513 (a)(2) .......................................... Not Applicable (b) ............................................. 508 Section 317 (a)(1) .......................................... 503 (a)(2) .......................................... 504 (b) ............................................. 1003 Section 318 (a) ............................................. 107
- ---------- Note: This reconciliation and tie shall not, for any purpose, be deemed to be part of the Indenture. 3 TABLE OF CONTENTS RECITALS OF THE COMPANY....................................................................................1 ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION ...................................1 SECTION 101. Definitions..........................................................................1 SECTION 102. Compliance Certificates and Opinions.................................................8 SECTION 103. Form of Documents Delivered to Trustee...............................................9 SECTION 104. Acts of Holders......................................................................9 SECTION 105. Notices, Etc., to Trustee and Company...............................................10 SECTION 106. Notice to Holders; Waiver...........................................................10 SECTION 107. Compliance with Trust Indenture Act.................................................11 SECTION 108. Effect of Headings and Table of Contents............................................11 SECTION 109. Successors and Assigns..............................................................11 SECTION 110. Separability Clause.................................................................11 SECTION 111. Benefits of Indenture...............................................................11 SECTION 112. Governing Law.......................................................................12 SECTION 113. Legal Holidays......................................................................12 ARTICLE TWO SECURITY FORMS............................................................................12 SECTION 201. Forms Generally.....................................................................12 SECTION 202. Form of Face of Security............................................................13 SECTION 203. Form of Reverse of Security.........................................................15 SECTION 204. Form of Trustee's Certificate of Authentication.....................................19 SECTION 205. Form of Legend for Global Securities................................................19 ARTICLE THREE THE SECURITIES............................................................................19 SECTION 301. Amount Unlimited; Issuable in Series................................................19 SECTION 302. Denominations.......................................................................22 SECTION 303. Execution, Authentication, Delivery and Dating......................................22 SECTION 304. Temporary Securities................................................................24 SECTION 305. Registration, Registration of Transfer and Exchange.................................25 SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities....................................26 SECTION 307. Payment of Interest; Interest Rights Preserved......................................27 SECTION 308. Persons Deemed Owners...............................................................28 SECTION 309. Cancellation........................................................................28 SECTION 310. Computation of Interest.............................................................29 SECTION 311. Payment to be in Proper Currency....................................................29 ARTICLE FOUR SATISFACTION AND DISCHARGE................................................................29 SECTION 401. Satisfaction and Discharge of Indenture..............................................29 SECTION 402. Application of Trust Money..........................................................30 SECTION 403. Defeasance and Discharge of Indenture...............................................31 ARTICLE FIVE REMEDIES..................................................................................32 SECTION 501. Events of Default...................................................................32 SECTION 502. Acceleration of Maturity; Rescission and Annulment..................................34 SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee.....................35 SECTION 504. Trustee May File Proofs of Claim.....................................................35 SECTION 505. Trustee May Enforce Claims Without Possession of Securities.........................36
4 SECTION 506. Application of Money Collected......................................................36 SECTION 507. Limitation on Suits.................................................................37 SECTION 508. Unconditional Right of Holders to Receive Principal, Premium and Interest...........37 SECTION 509. Restoration of Rights and Remedies..................................................38 SECTION 510. Rights and Remedies Cumulative......................................................38 SECTION 511. Delay or Omission Not Waiver........................................................38 SECTION 512. Control by Holders..................................................................38 SECTION 513. Waiver of Past Defaults.............................................................39 SECTION 514. Undertaking for Costs...............................................................39 SECTION 515. Waiver of Stay or Extension Laws....................................................40 ARTICLE SIX THE TRUSTEE...............................................................................40 SECTION 601. Certain Duties and Responsibilities.................................................40 SECTION 602. Notice of Defaults..................................................................40 SECTION 603. Certain Rights of Trustee...........................................................40 SECTION 604. Not Responsible for Recitals or Issuance of Securities..............................42 SECTION 605. May Hold Securities.................................................................42 SECTION 606. Money Held in Trust.................................................................42 SECTION 607. Compensation and Reimbursement......................................................42 SECTION 608. Disqualification; Conflicting Interests.............................................43 SECTION 609. Corporate Trustee Required; Eligibility.............................................43 SECTION 610. Resignation and Removal; Appointment of Successor...................................43 SECTION 611. Acceptance of Appointment by Successor..............................................45 SECTION 612. Merger, Conversion, Consolidation or Succession to Business.........................46 SECTION 613. Preferential Collection of Claims Against Company...................................46 SECTION 614. Appointment of Authenticating Agent.................................................46 ARTICLE SEVEN HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY.........................................48 SECTION 701. Company to Furnish Trustee Names and Addresses of Holders...........................48 SECTION 702. Preservation of Information; Communications to Holders..............................48 SECTION 703. Reports by Trustee..................................................................49 SECTION 704. Reports by Company..................................................................49 ARTICLE EIGHT CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE......................................50 SECTION 801. Company May Consolidate, Etc., Only on Certain Terms................................50 SECTION 802. Successor Substituted...............................................................50 ARTICLE NINE SUPPLEMENTAL INDENTURES...................................................................51 SECTION 901. Supplemental Indentures Without Consent of Holders..................................51 SECTION 902. Supplemental Indentures with Consent of Holders.....................................52 SECTION 903. Execution of Supplemental Indentures................................................53 SECTION 904. Effect of Supplemental Indentures...................................................53 SECTION 905. Conformity with Trust Indenture Act.................................................53 SECTION 906. Reference in Securities to Supplemental Indentures..................................53 SECTION 907. Notice of Supplemental Indentures....................................................54 ARTICLE TEN COVENANTS.................................................................................54 SECTION 1001. Payment of Principal, Premium and Interest.........................................54 SECTION 1002. Maintenance of Office or Agency....................................................54
5 SECTION 1003. Money for Securities Payments to Be Held in Trust..................................55 SECTION 1004. Existence..........................................................................56 SECTION 1005. Maintenance of Properties..........................................................56 SECTION 1006. Payment of Taxes and Other Claims..................................................56 SECTION 1007. Restriction on Secured Debt........................................................57 SECTION 1008. Restriction on Sale and Leaseback Transactions.....................................59 SECTION 1009. Defeasance of Certain Obligations..................................................60 SECTION 1010. Waiver of Certain Covenants........................................................61 ARTICLE ELEVEN REDEMPTION OF SECURITIES..................................................................61 SECTION 1101. Applicability of Article...........................................................61 SECTION 1102. Election to Redeem; Notice to Trustee..............................................62 SECTION 1103. Selection by Trustee of Securities to Be Redeemed..................................62 SECTION 1104. Notice of Redemption...............................................................62 SECTION 1105. Deposit of Redemption Price........................................................63 SECTION 1106. Securities Payable on Redemption Date..............................................63 SECTION 1107. Securities Redeemed in Part........................................................64 ARTICLE TWELVE SINKING FUNDS.............................................................................64 SECTION 1201. Applicability of Article...........................................................64 SECTION 1202. Satisfaction of Sinking Fund Payments with Securities..............................64 SECTION 1203. Redemption of Securities for Sinking Fund..........................................65
6 INDENTURE, dated as of June 1, 1999 between Pentair, Inc., a corporation duly organized and existing under the laws of the State of Minnesota (herein called the "Company"), having its principal office at 1500, County Road B2 West, Suite 400, St. Paul, Minnesota 55113-3105, and U.S. Bank Trust National Association, a national banking association, as Trustee (herein called the "Trustee"). RECITALS OF THE COMPANY The Company has duly authorized the execution and delivery of this Indenture to provide for the issuance from time to time of its unsecured debentures, notes or other evidences of indebtedness (herein called the "Securities"), to be issued in one or more series as in this Indenture provided. All things necessary to make this Indenture a valid agreement of the Company, in accordance with its terms, have been done. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Securities or of series thereof, as follows: ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 101. Definitions. For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: (1) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular; (2) all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein; (3) any gender used in this Indenture shall be deemed and construed to include correlative words of the masculine, feminine or neuter gender; (4) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles, and, except as otherwise herein expressly provided, the term "generally accepted accounting principles" with respect to any computation required or permitted hereunder shall mean such accounting principles as are generally accepted at the date of such computation; and 1 7 (5) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. Certain terms, used principally in Article Six, are defined in that Article. "Act", when used with respect to any Holder, has the meaning specified in Section 104. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control", when used with respect to any specified Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Attributable Debt" in respect of any Sale and Leaseback Transaction means, at the date of determination, the present value (discounted at the rate of interest implicit in the terms of the lease) of the obligation of the lessee for net rental payments during the remaining term of the lease (including any period for which such lease has been extended or may, at the option of the lessor, be extended). "Net rental payments" under any lease for any period means the sum of the rental and other payments required to be paid in such period by the lessee thereunder, excluding any amounts required to be paid by such lessee (whether or not designated as rental or additional rental) on account of maintenance and repairs, insurance, taxes, assessments, water rates or similar charges required to be paid by such lessee thereunder or any amounts required to be paid by such lessee thereunder contingent upon the amount of sales, maintenance and repairs, insurance, taxes, assessments, water rates or similar charges. "Authenticating Agent" means any Person authorized by the Trustee pursuant to Section 614 to act on behalf of the Trustee to authenticate Securities of one or more series. "Board of Directors" means either the board of directors of the Company or any duly authorized committee appointed by that board. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification. Where any provision of this Indenture refers to action to be taken pursuant to a Board Resolution (including establishment of any series of the Securities and the forms and terms thereof), such action may be taken by any committee, officer or employee of the Company authorized to take such action by a Board Resolution. "Business Day", when used with respect to any Place of Payment, means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions generally in that Place of Payment are obligated by law or executive order to close, unless otherwise specified in a form of Security. 2 8 "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Securities Exchange Act of 1934, as amended, or, if at any time after the execution of this instrument such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "Company" means the Person named as the "Company" in the first paragraph of this instrument until a successor corporation shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" shall mean such successor corporation. "Company Request" or "Company Order" means a written request or order signed in the name of the Company by its Chairman of the Board, its President or a Vice President, and by its Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary and delivered to the Trustee. "Consolidated Net Tangible Assets" means the aggregate amount of assets (less applicable reserves and other properly deductible items) after deducting therefrom (a) all current liabilities (excluding any indebtedness for money borrowed having a maturity of less than 12 months from the date of the most recent consolidated balance sheet of the Company but which by its terms is renewable or extendable beyond 12 months from such date at the option of the borrower) and (b) all goodwill, trade names, patents, unamortized debt discount and expense and any other like intangibles, all as set forth on the most recent consolidated balance sheet of the Company and computed in accordance with generally accepted accounting principles. "Corporate Trust Office" means the office of the Trustee at which at any particular time its corporate trust business shall be principally administered. "Corporation" includes corporations, associations, companies, joint stock companies and business trusts. "Debt" has the meaning specified in Section 1007. "Defaulted Interest" has the meaning specified in Section 307. "Depositary" means, with respect to the Securities of any series issuable or issued in whole or in part in the form of one or more Global Securities, the clearing agency registered under the Exchange Act, specified for that purpose as contemplated by Section 301 or any successor clearing agency registered under the Exchange Act as contemplated by Section 305, and if at any time there is more than one such Person, "Depositary" as used with respect to the Securities of any series shall mean the Depositary with respect to the Securities of such series. "Event of Default" has the meaning specified in Section 501. "Exchange Act" means the Securities Exchange Act of 1934, as amended. 3 9 "Funded Debt" means Debt which by its terms matures at or is extendible or renewable at the option of the obligor to a date more than 12 months after the date of the creation of such Debt. "Global Security" means a Security bearing the legend specified in Section 205 evidencing all or part of a series of Securities, issued to the Depositary for such series or its nominee, and registered in the name of such Depositary or nominee. "Holder" means a Person in whose name a Security is registered in the Security Register. "Indenture" means this instrument as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof and shall include the terms of particular series of Securities established as contemplated by Section 301; provided, however, that, if at any time more than one Person is acting as Trustee under this instrument due to the appointment of one or more separate Trustees for any one or more separate series of Securities pursuant to Section 610(e), "Indenture" shall mean, with respect to such series of Securities for which any such Person is Trustee, this instrument as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof and shall include the terms of particular series of Securities for which such Person is Trustee established as contemplated by Section 301, exclusive, however, of any provisions or terms which relate solely to other series of Securities for which such Person is not Trustee, regardless of when such terms or provisions were adopted, and exclusive of any provisions or terms adopted by means of one or more indentures supplemental hereto executed and delivered after such Person had become such Trustee but to which such Person, as such Trustee, was not a party. "Interest", when used with respect to an Original Issue Discount Security which by its terms bears interest only after Maturity, means interest payable after Maturity. "Interest Payment Date", when used with respect to any Security, means the Stated Maturity of an installment of interest on such Security. "Lien" or "Liens" has the meaning specified in Section 1007. "Maturity", when used with respect to any Security, means the date on which the principal of such Security or an installment of principal becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration, call for redemption or otherwise. "Officers' Certificate" means a certificate signed by the Chairman of the Board, the President, a Vice President or an Assistant Vice President of the Company, and by the Treasurer or an Assistant Treasurer of the Company, and delivered to the Trustee. 4 10 "Opinion of Counsel" means a written opinion of counsel, who may be counsel for the Company and, in the case of counsel for the Company, may be either inside or outside counsel, which opinion may be subject to standard qualifications and exceptions. "Original Issue Discount Security" means any Security which provides for an amount less than the principal amount thereof to be due and payable at maturity or upon a declaration of acceleration of the Maturity thereof pursuant to Section 502. "Outstanding", when used with respect to Securities, means, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture, except: (i) Securities theretofore canceled by the Trustee or delivered to the Trustee for cancellation; (ii) Securities for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Securities; provided that, if such Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; and (iii) Securities which have been paid pursuant to Section 306 or in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture, other than any such Securities in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Securities are held by a bona fide purchaser in whose hands such Securities are valid obligations of the Company; provided, however, that in determining whether the Holders of the requisite principal amount of the Outstanding Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder or whether a quorum is present at a meeting of Holders of Securities, (i) the principal amount of an Original Issue Discount Security that shall be deemed to be Outstanding shall be the amount of the principal thereof that would be due and payable as of the date of such determination upon acceleration of the Maturity thereof pursuant to Section 502, (ii) the principal amount of a Security denominated in one or more foreign currencies or currency units that shall be deemed to be Outstanding shall be the U.S. dollar equivalent, determined in the manner provided as contemplated by Section 301 as of the date of original issuance of such Security, of the principal amount (or, in the case of an Original Issue Discount Security, the U.S. dollar equivalent, determined as of the date of original issuance of such Security, of the amount determined as provided in (i) above) of such Security as determined by the Company pursuant to Section 301, and (iii) Securities owned by the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Securities which the Trustee knows to be so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes 5 11 to the satisfaction of the Trustee the pledgee's right so to act with respect to such Securities and that the pledgee is not the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor. "Paying Agent" means any Person authorized by the Company to pay the principal of (and premium, if any) and/or interest on any Securities on behalf of the Company. "Periodic Offering" means an offering of Securities of a series from time to time the specific terms of which Securities, including without limitation the rate or rates of interest (or formula for determining the rate or rates of interest), if any, thereon, the Stated Maturity or Maturities thereof and the redemption provisions, if any, with respect thereto, are to be determined by the Company or its agents upon the issuance of such Securities. "Person" means any individual, Corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Place of Payment", when used with respect to the Securities of any series, means the place or places where the principal of (and premium, if any) and/or interest on the Securities of that series are payable, where Securities of that series may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Securities of that series and this Indenture may be served. "Predecessor Security" of any particular Security means every previous Security evidencing all or a portion of the same debt as that evidenced by such particular Security, and, for the purposes of this definition, any Security authenticated and delivered under Section 306 in exchange for or in lieu of a mutilated, destroyed, lost or stolen Security shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen Security. "Principal Property" means any manufacturing plant, office facility, warehouse or distribution center (consisting of real estate, buildings and fixtures) located within the United States of America (other than its territories or possessions) and owned by the Company or any Subsidiary, the gross book value (without deduction of any depreciation reserves) of which on the date as of which the determination is being made exceeds _________________ of the Company (as shown on the Company's most recent consolidated balance sheet and computed in accordance with generally accepted accounting principles), except any such plant (i) to the extent financed by obligations issued by a State or local governmental unit pursuant to Section 142(a)(5), 142(a)(6), 142(a)(8) or 144(a) of the Internal Revenue Code of 1986, or any successor provision thereof, or (ii) which is not of material importance to the business conducted by the Company and its Subsidiaries, taken as a whole (as determined by any two of the following: the Chairman or a Vice Chairman of the Board of the Company, its President, its Chief Financial Officer, its Vice President of Finance, its Treasurer or its Controller). 6 12 "Redemption Date", when used with respect to any Security to be redeemed, means the date fixed for such redemption pursuant to this Indenture. "Redemption Price", when used with respect to any Security to be redeemed, means the price at which it is to be redeemed pursuant to this Indenture. "Regular Record Date" for the interest payable on any Interest Payment Date on the Securities of any series means the date specified for that purpose as contemplated by Section 301. "Required Currency" has the meaning specified in Section 311. "Responsible Officer", when used with respect to the Trustee, means any officer of the Trustee assigned by it to administer its corporate trust matters. "Restricted Subsidiary" means any Subsidiary which owns or leases a Principal Property. "Sale and Leaseback Transaction" has the meaning specified in Section 1008. "Securities" has the meaning stated in the first recital of this Indenture and more particularly means any Securities authenticated and delivered under this Indenture; provided, however, that if at any time there is more than one Person acting as Trustee under this Indenture, "Securities" with respect to the Indenture as to which such Person is Trustee shall have the meaning stated in the first recital of this Indenture and shall more particularly mean Securities authenticated and delivered under this Indenture, exclusive, however, of Securities of any series as to which such Person is not Trustee. "Security Register" and "Security Registrar" have the respective meanings specified in Section 305. "Special Record Date" for the payment of any Defaulted Interest means a date fixed by the Trustee pursuant to Section 307. "Stated Maturity", when used with respect to any Security or any installment of principal thereof or interest thereon, means the date specified in such Security as the fixed date on which the principal of such Security or such installment of principal or interest is due and payable. "Subsidiary" means any Corporation of which securities (excluding securities entitled to vote for directors only by reason of the happening of a contingency) entitled to elect at least a majority of the corporation's directors shall at the time be owned, directly or indirectly, by the Company, or one or more Subsidiaries, or by the Company and one or more Subsidiaries. "Trustee" means the Person named as the "Trustee" in the first paragraph of this instrument until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean or include each Person who is then a Trustee hereunder, and if at any time there is more than one such Person, "Trustee" as used with respect to the Securities of any series shall mean the Trustee with respect to Securities of that series. 7 13 "Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939 as in force at the date as of which this instrument was executed, except as provided in Section 905. "U.S. Government Obligations" means direct obligations of the United States of America, backed by its full faith and credit. "Vice President", when used with respect to the Company, means any vice president, whether or not designated by a number or a word or words added before or after the title "vice president". "Voting Stock", when used with respect to a Corporation, means stock of the class or classes having general voting power under ordinary circumstances to elect at least a majority of the board of directors, managers or trustees of such Corporation (irrespective of whether at the time stock or securities of any other class or classes shall have or might have voting power by reason of the happening of any contingency). SECTION 102. Compliance Certificates and Opinions. Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate stating that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with, except that in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include: (1) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of each such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion whether such covenant or condition has been complied with; and (4) a statement whether, in the opinion of each such individual, such condition or covenant has been complied with. Every such certificate or opinion provided under this Indenture shall be without personal recourse to the individual executing the same and may include an express statement to such effect. 8 14 SECTION 103. Form of Documents Delivered to Trustee. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of any officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which such officer's certificate or opinion is based are erroneous. Any such certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. All applications, requests, consents, certificates, statements, opinions or other instruments given under this Indenture shall be without personal recourse to any individual giving the same and may include an express statement to such effect. SECTION 104. Acts of Holders. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by an agent duly appointed in writing, and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Section 601) conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section. (b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution 9 15 thereof. Where such execution is by a signer acting in a capacity other than such signer's individual capacity, such certificate or affidavit shall also constitute sufficient proof of such signer's authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which the Trustee deems sufficient. (c) The ownership of Securities shall be proved by the Security Register. The Company may fix any day as the record date for the purpose of determining the Holders of Securities of any series entitled to give or take any request, demand, authorization, direction, notice, consent, waiver or other action, or to vote on any action, authorized or permitted to be given or taken by Holders of Securities of such series. If not set by the Company prior to the first solicitation of a Holder of Securities of such series made by any Person in respect of any such action, or, in the case of any such vote, prior to such vote, the record date for any such action or vote shall be the 30th day (or, if later, the date of the most recent list of Holders required to be provided pursuant to Section 701) prior to such first solicitation or vote, as the case may be. With regard to any record date for action to be taken by the Holders of one or more series of Securities, only the Holders of Securities of such series on such date (or their duly designated proxies) shall be entitled to give or take, or vote on, the relevant action. (d) Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Security shall bind every future Holder of the same Security and the Holder of every Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the Company in reliance thereon, whether or not notation of such action is made upon such Security. SECTION 105. Notices, Etc., to Trustee and Company. Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with, (1) the Trustee by any Holder or by the Company shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with a Responsible Officer of the Trustee at its Corporate Trust Office, Attention: Corporate Trust Department, or (2) the Company by the Trustee or by any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Company addressed to it at the address of its principal office specified in the first paragraph of this instrument (Attention: Treasurer) or at any other address previously furnished in writing to the Trustee by the Company. SECTION 106. Notice to Holders; Waiver. Where this Indenture provides for notice to Holders of any event, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first- 10 16 class postage prepaid, to each Holder affected by such event, at such Holder's address as it appears in the Security Register, not later than the latest date, and not earlier than the earliest date, prescribed for the giving of such notice. In any case where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case by reason of the suspension of regular mail service or by reason of any other cause it shall be impracticable to give such notice by mail, then such notice shall be given by such other method as the Company shall reasonably determine and the same shall constitute a sufficient notification for every purpose hereunder. SECTION 107. Compliance with Trust Indenture Act. This Indenture is subject to, and shall be governed by, the provisions of the Trust Indenture Act that are required to be part of this Indenture. If any provision hereof limits, qualifies or conflicts with a provision of the Trust Indenture Act that is required under such Act to be a part of and govern this Indenture, the latter provision shall control. If any provision of this Indenture modifies or excludes any provision of the Trust Indenture Act that may be so modified or excluded, the latter provision shall be deemed to apply to this Indenture as so modified or to be excluded, as the case may be. SECTION 108. Effect of Headings and Table of Contents. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 109. Successors and Assigns. All covenants and agreements in this Indenture by the Company or the Trustee shall bind its successors and assigns, whether so expressed or not. SECTION 110. Separability Clause. In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 111. Benefits of Indenture. Nothing in this Indenture or in the Securities, express or implied, shall give to any Person, other than the parties hereto, any Authenticating Agent, any Paying Agent, any Securities 11 17 Registrar, and their successors hereunder and the Holders, any benefit or any legal or equitable right, remedy or claim under this Indenture. SECTION 112. Governing Law. This Indenture and the Securities shall be governed by and construed in accordance with the laws of the State of New York, without regard for principles of conflicts of law thereof. SECTION 113. Legal Holidays. Except as may be otherwise specified with respect to any particular Securities, in any case where any Interest Payment Date, Redemption Date or Stated Maturity of any Security shall not be a Business Day at any Place of Payment, then (notwithstanding any other provision of this Indenture or of the Securities) payment of interest or principal (and premium, if any) need not be made at such Place of Payment on such date, but may be made on the next succeeding Business Day at such Place of Payment with the same force and effect as if made on the Interest Payment Date or Redemption Date, or at the Stated Maturity, provided that no interest shall accrue on such unpaid interest or principal (and premium, if any) for the period from and after such Interest Payment Date, Redemption Date or Stated Maturity, as the case may be. ARTICLE TWO SECURITY FORMS SECTION 201. Forms Generally. The Securities of each series shall be in substantially the form set forth in this Article, or in such other form as shall be established by or pursuant to a Board Resolution and set forth in an Officers' Certificate or established by one or more indentures supplemental hereto, in each case with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with the rules of any securities exchange or as may, consistently herewith, be determined by the officers executing such Securities, as evidenced by their execution of the Securities. When the form of Securities of any series is established by action taken pursuant to a Board Resolution, a copy of an appropriate record of such action shall be certified by the Secretary or an Assistant Secretary of the Company and delivered to the Trustee at or prior to the delivery of the Company Order contemplated by Section 303 for the authentication and delivery of such Securities. The Trustee's certificates of authentication shall be in substantially the form set forth in this Article with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture. The definitive Securities may be printed, lithographed or engraved on steel engraved borders or may be produced in any other manner, all as determined by the officers executing such Securities, as evidenced by their execution of such Securities. 12 18 SECTION 202. Form of Face of Security. [INSERT ANY LEGEND REQUIRED BY THE INTERNAL REVENUE CODE AND THE REGULATIONS THEREUNDER.] PENTAIR, INC. ---------- No. [$] -------- ------- Pentair, Inc., a corporation duly organized and existing under the laws of Minnesota (herein called the "Company", which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to ____________, or registered assigns, the principal sum of _____________ [Dollars] on ____________ [If the Security is to bear interest prior to Maturity, insert --, and to pay interest thereon from ____________ or from the most recent Interest Payment Date to which interest has been paid or duly provided for, [semiannually in arrears on ____________ and ____________ in each year] [annually in arrears on ____________], commencing ____________, at the rate of _____% per annum, until the principal hereof is paid or made available for payment [If applicable insert --, and (to the extent that the payment of such interest shall be legally enforceable) at the rate of _____% per annum on any overdue principal and premium and on any overdue installment of interest]. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the ____________ [or ____________] (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to holders of Securities of this series not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities of this series may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said Indenture]. [If the Security is not to bear interest prior to Maturity, insert --. The principal of this Security shall not bear interest except in the case of a default in payment of principal upon acceleration, upon redemption or at Stated Maturity and in such case the overdue principal of this Security shall bear interest at the rate of ____% per annum (to the extent that the payment of such interest shall be legally enforceable), which shall accrue from the date of such default in payment to the date payment of such principal has been made or duly provided for. Interest on any overdue principal shall be payable on demand. Any such interest on any overdue principal that is not so paid on demand shall bear interest at the rate of ____% per annum (to the extent that the payment of such interest shall be legally enforceable), which shall accrue from the date of such demand for payment to the date payment of such interest has been made or duly provided for, and such interest shall also be payable on demand.] 13 19 Payment of the principal of (and premium, if any) and [If applicable, insert -- any such] interest on this Security will be made at the office or agency of the Company maintained for that purpose in ____________, in such coin or currency [of the United States of America] as at the time of payment is legal tender for payment of public and private debts [If applicable, insert --; provided, however, that at the option of the Company payment of interest may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register]. [If applicable, insert -- [The Securities of this series are/This Security is] subject to redemption prior to the Stated Maturity as described on the reverse hereof.] Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Unless the certificate of authentication hereon has been executed by or on behalf of the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. 14 20 IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed. Dated: PENTAIR, INC. By --------------------------- Attest: - --------------------------- SECTION 203. Form of Reverse of Security. This Security is one of a duly authorized issue of securities of the Company (herein called the "Securities"), issued and to be issued in one or more series under an Indenture, dated as of June 1, 1999 (herein called the "Indenture"), between the Company and U.S. Bank Trust National Association, as Trustee (herein called the "Trustee", which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee and the Holders of the Securities and of the terms upon which the Securities are, and are to be authenticated and delivered. This Security is one of the series designated on the face hereof [, limited in aggregate principal amount to [$]_______________]. By the terms of the Indenture, additional Securities [If applicable, insert -- of this series and] of other separate series, which may vary as to date, amount, Stated Maturity, interest rate or method of calculating the interest rate and in other respects as therein provided, may be issued in an unlimited principal amount. [If applicable, insert -- [The Securities of this series are/This Security is] subject to redemption prior to the Stated Maturity hereof upon not less than 30 days' notice by mail to the Person[s] in whose name[s] [the Securities to be redeemed are/this Security is] registered at the address specified in the Security Register, [If applicable, insert -- (1) on __________ in any year commencing with the year __________ and ending with the year __________ through operation of the sinking fund for this series at a Redemption Price equal to 100% of the principal amount, and (2)] at any time [on or after ], as a whole or in part, at the election of the Company, at the following Redemption Prices (expressed as percentages of the principal amount): if redeemed [on or before __________, ____%, and if redeemed] during the 12-month period beginning __________ of the years indicated, 15 21 Redemption Redemption Year Price Year Price ---- ---------- ---- ---------- and thereafter at a Redemption Price equal to % of the principal amount, [If applicable, insert -- together in the case of any such redemption [If applicable, insert -- (whether through operation of the sinking fund or otherwise)] with accrued interest to the Redemption Date, provided, however, that installments of interest whose Stated Maturity is on or prior to (but not after) such Redemption Date will be payable to the [Holders of such Securities/Holder of this Security] (or one or more Predecessor Securities) of record at the close of business on the relevant Record Dates referred to on the face hereof, all as provided in the Indenture]. [If there is no sinking fund, insert -- [The Securities of this series are/This Security is] not subject to any sinking fund.] [If applicable, insert -- [The Securities of this series are/This Security is] subject to redemption prior to the Stated Maturity hereof upon not less than 30 days' notice by mail to the Person[s] in whose name[s] [the Securities to be redeemed are/this Security is] registered at the address specified in the Security Register, (1) on __________ in any year commencing with the year _________ and ending with the year _________ through operation of the sinking fund for this series at the Redemption Prices (expressed as percentages of the principal amount) set forth in the table below, and (2) at any time [on or after _________], as a whole or in part, at the election of the Company, at the Redemption Prices for redemption otherwise than through operation of the sinking fund (expressed as percentages of the principal amount) set forth in the table below: Redemption Price for Redemption Redemption Price for Through Operation Redemption Otherwise of the Than Through Operation Year Sinking Fund of the Sinking Fund ---- ----------------- ---------------------- If redeemed during the 12-month period beginning _________ of the years indicated, and thereafter at a Redemption Price equal to ____% of the principal amount [If applicable, insert --, together in the case of any such redemption (whether through operation of the sinking fund or otherwise) with accrued interest to the Redemption Date, provided, however, that installments of interest whose Stated Maturity is on or prior to (but not after) such Redemption Date will be payable to the [Holders of such Securities/Holder of this Security] (or one or more Predecessor Securities) of record at the close of business on the relevant Record Dates referred to on the face hereof, all as provided in the Indenture].] [Notwithstanding the foregoing, the Company may not, prior to _________, redeem any Securities of this series as contemplated by [Clause (2) of] the preceding paragraph as a part of, or in anticipation of, any refunding operation by the application, directly or indirectly, of moneys borrowed having an interest cost to the Company (calculated in accordance with generally accepted financial practice) of less than ____% per annum.] 16 22 [The sinking fund for this series provides for the redemption on _________ in each year beginning with the year and ending with the year of [not less than] [$] _________ [("mandatory sinking fund") and not more than [$] _________] aggregate principal amount of Securities of this series. [Securities of this series acquired or redeemed by the Company otherwise than through [mandatory] sinking fund payments may be credited against subsequent [mandatory] sinking fund payments otherwise required to be made -- in the inverse order in which they become due.]] [In the event of redemption of this Security in part only, a new Security or Securities of this series and of like tenor or an authorized denomination for the unredeemed portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof, and, in the event of transfer or exchange, a new Security or Securities of this series and of like tenor and for a like aggregate principal amount will be issued to the Holder, in the case of exchange, or the designated transferee or transferees, in the case of transfer.] [If the Security is not an Original Issue Discount Security, -- If an Event of Default with respect to Securities of this series shall occur and be continuing, the principal of the Securities of this series may (subject to the conditions set forth in the Indenture) be declared due and payable in the manner and with the effect provided in the Indenture.] [If the Security is an Original Issue Discount Security, -- If an Event of Default with respect to Securities of this series shall occur and be continuing, a lesser amount than the principal amount due at the Stated Maturity of the Securities of this series may (subject to the conditions set forth in the Indenture) be declared due and payable in the manner and with the effect provided in the Indenture. The amount due and payable on this Security in the event that this Security is declared due and payable prior to the Stated Maturity hereof shall be -- insert formula for determining the amount. Upon payment (i) of the amount of principal so declared due and payable and (ii) of interest on any overdue principal and overdue interest (in each case to the extent that the payment of such interest shall be legally enforceable), all of the Company's obligations in respect of the payment of the principal of and interest, if any, on the Securities of this series shall terminate.] The Indenture contains provisions for defeasance at any time of the Company's obligations in respect of (i) the entire indebtedness of this Note or (ii) certain restrictive covenants with respect to this Note, in each case upon compliance with certain conditions set forth therein. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities of each series to be affected under the Indenture at any time by the Company and the Trustee with the consent of the Holders of not less than a majority in aggregate principal amount of the Securities at the time Outstanding of each series to be affected and, for certain purposes, without the consent of the Holders of any Securities at the time Outstanding. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Securities of each series at the time Outstanding, on behalf of 17 23 the Holders of all Securities of such series, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange hereof or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security. [If the Security is an Original Issue Discount Security, -- In determining whether the Holders of the requisite principal amount of the Outstanding Securities have given any request, demand, authorization, direction, notice, consent or waiver under the Indenture or whether a quorum is present at a meeting of Holders of Securities, the principal amount of any Original Issue Discount Security that shall be deemed to be Outstanding shall be the amount of the principal thereof that would be due and payable as of the date of such determination upon the acceleration of the Maturity thereof.] No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of (and premium, if any) and interest on this Security at the times, place and rate, and in the coin or currency, herein prescribed. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Security Register, upon surrender of this Security for registration of transfer at the office or agency of the Company in any place where the principal of (and premium, if any) and interest on this Security are payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or such Holder's attorney duly authorized in writing, and thereupon one or more new Securities of this series, of like tenor and of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Securities of this series are issuable only in registered form without coupons in denominations of [$1,000] and any amount in excess thereof which is an integral multiple of [$1,000]. As provided in the Indenture and subject to certain limitations therein set forth, Securities of this series are exchangeable for a like aggregate principal amount of Securities of this series and of like tenor of a different authorized denomination, as requested by the Holder surrendering the same. No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Prior to due presentment of this Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered in the Security Register as the owner hereof for all purposes, whether or not this Security be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary. 18 24 The Securities shall be governed by and construed in accordance with the laws of the State of New York. All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture. SECTION 204. Form of Trustee's Certificate of Authentication. This is one of the Securities of the series designated therein and issued pursuant to the within-mentioned Indenture. ------------------------------------- U.S. Bank Trust National Association, as Trustee By ---------------------------------- Authorized Officer SECTION 205. Form of Legend for Global Securities. Any Global Security authenticated and delivered hereunder shall, in addition to the provisions contained in Sections 202 and 203, bear a legend in substantially the following form or such other form as may be required by the Depositary: "Unless this certificate is presented by an authorized representative of The Depository Trust Company (55 Water Street, New York, New York) to the issuer or to its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of Cede & Co. or such other name as requested by an authorized representative of The Depository Trust Company and any payment is made to Cede & Co., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL since the registered owner hereof, Cede & Co., has an interest herein." ARTICLE THREE THE SECURITIES SECTION 301. Amount Unlimited; Issuable in Series. The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is unlimited. The Securities may be issued in one or more series. There shall be established by or pursuant to a Board Resolution and, subject to Section 303, set forth or determined in the manner 19 25 provided in an Officers' Certificate or established in one or more indentures supplemental hereto, prior to the initial issuance of Securities of any series, (1) the title of the Securities of the series (which shall distinguish the Securities of the series from Securities of any other series); (2) any limit upon the aggregate principal amount of the Securities of the series which may be authenticated and delivered under this Indenture (except for Securities authenticated and delivered upon registration of transfer of, or in lieu of, other Securities of the series pursuant to Section 304, 305, 306, 906, 1107 and except for any Securities which, pursuant to Section 303, are deemed never to have been authenticated and delivered hereunder); (3) the Person to whom any interest on a Security of the series shall be payable, if other than the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest; (4) the date or dates on which the principal or installments of principal of the Securities of the series is or are payable and any rights to extend such date or dates; (5) the rate or rates at which the Securities of the series shall bear interest, if any, or the formula pursuant to which such rate or rates shall be determined, the date or dates from which such interest shall accrue, the Interest Payment Dates on which such interest shall be payable and the Regular Record Date for the interest payable on any Interest Payment Date; (6) the place or places where the principal of (and premium, if any) and interest on Securities of the series shall be payable, any Securities of the series may be surrendered for registration of transfer or exchange and notices and demands to or upon the Company with respect to the Securities of the series and this Indenture may be served; (7) the period or periods within which, the price or prices at which and the terms and conditions upon which Securities of the series may be redeemed, in whole or in part, at the option of the Company; (8) the obligation, if any, of the Company to redeem or purchase Securities of the series pursuant to any sinking fund or analogous provisions or at the option of a Holder thereof and the period or periods within which, the price or prices at which and the terms and conditions upon which Securities of the series shall be redeemed or purchased, in whole or in part, pursuant to such obligation; (9) if other than denominations of $1,000 or any amount in excess thereof which is an integral multiple of $1,000, the denominations in which Securities of the series shall be issuable; 20 26 (10) the currency, currencies or currency units in which payment of the principal of and any premium and interest on any Securities of the series shall be payable if other than the currency of the United States of America, the manner of determining the U.S. dollar equivalent of the principal amount thereof for purposes of the definition of "Outstanding" in Section 101, and, if the principal of or any premium or interest on any Securities of the series is to be payable, at the election of the Company or a Holder thereof, in one or more currencies or currency units other than that or those in which the Securities are stated to be payable, the currency, currencies or currency units in which payment of the principal of and any premium and interest on Securities of such series as to which such election is made shall be payable, and the periods within which and the terms and conditions upon which such election is to be made; (11) any other event or events of default applicable with respect to Securities of the series in addition to or in lieu of those provided in Section 501(1) through (7); (12) any other restrictive covenants applicable with respect to the Debt Securities of the series in addition to or in lieu of those provided in Sections 1007 and 1008; (13) if less than the principal amount thereof, the portion of the principal amount of Securities of the series which shall be payable upon declaration of acceleration of the Maturity thereof pursuant to Section 502; (14) any index used to determine the amount of payment of principal of and any premium and interest on the Securities of the series; (15) whether the Securities of the series shall be issued in whole or in part in the form of one or more Global Securities and, if so, (a) the Depositary with respect to such Global Security or Securities and (b) the circumstances under which any such Global Security may be exchanged for Securities registered in the name of, and any transfer of such Global Security may be registered to, a Person other than such Depositary or its nominee, if other than as set forth in Section 305; (16) if principal of or any premium or interest on the Securities of a series is denominated or payable in a currency or currencies other than the currency of the United States of America, whether and under what terms and conditions the Company may be discharged from obligations pursuant to Sections 403 and 1107 with respect to Securities of such series; and (17) any other terms of the series (which terms shall not be inconsistent with the provisions of this Indenture, except as permitted by Section 901(5)). All Securities of any one series (other than Securities offered in a Periodic Offering) shall be substantially identical except as to denomination and except as may otherwise be provided by or pursuant to the Board Resolution referred to above and, subject to Section 303, set forth, or 21 27 determined in the manner provided, in the Officers' Certificate referred to above or in any such indenture supplemental hereto. If any of the terms of the series are established by action taken pursuant to a Board Resolution, a copy of an appropriate record of such action shall be certified by the Secretary or an Assistant Secretary of the Company and delivered to the Trustee at or prior to the delivery of the Officers' Certificate setting forth the terms of the series. With respect to Securities of a series offered in a Periodic Offering, such Board Resolution and Officers' Certificate or supplemental indenture may provide general terms or parameters for Securities of such series and provide either that the specific terms of particular Securities of such series shall be specified in a Company Order or that such terms shall be determined by the Company or its agents in accordance with other procedures specified in a Company Order as contemplated by the third paragraph of Section 303. SECTION 302. Denominations. Unless otherwise provided in the applicable Officers' Certificate or supplemental indenture, the Securities of each series shall be issued in registered form without coupons in such denominations as shall be specified as contemplated by Section 301. In the absence of any such provisions with respect to the Securities of any series, the Securities of such series shall be issuable in denominations of $1,000 or any amount in excess thereof which is an integral multiple of $1,000. SECTION 303. Execution, Authentication, Delivery and Dating. The Securities shall be executed on behalf of the Company by its Chairman of the Board, its President or one of its Vice Presidents. The signature of any of these officers on the Securities may be manual or facsimile. Securities bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities. At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities of any series executed by the Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Securities, or, in the case of Securities offered in a Periodic Offering, from time to time in accordance with such other procedures (including, without limitation, the receipt by the Trustee of electronic instructions from the Company or its duly authorized agents, promptly confirmed in writing by the Company) acceptable to the Trustee as may be specified from time to time by a Company Order for establishing the specific terms of particular Securities being so offered, and the Trustee in accordance with the Company Order shall authenticate and deliver such Securities. If the form or forms or terms of the Securities of the series have been established by or pursuant to one or more Board Resolutions as permitted by Sections 201 and 301, in authenticating such Securities and accepting the additional responsibilities under this Indenture in relation to such 22 28 Securities, the Trustee shall be entitled to receive, and (subject to Section 601) shall be fully protected in relying upon, an Opinion of Counsel stating, (a) that the form or forms of such Securities have been established in conformity with the provisions of this Indenture; (b) that the terms of such Securities have been established in conformity with the provisions of this Indenture; (c) that such Securities, when authenticated and delivered by the Trustee, issued by the Company and paid for by the purchasers thereof in the manner and subject to any conditions specified in such Opinion of Counsel, will constitute valid and legally binding obligations of the Company, enforceable in accordance with their terms, subject to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting the enforcement of creditors' rights and to general equity principles; (d) that authentication and delivery of such Securities and the execution and delivery of the supplemental indenture, if any, by the Trustee will not violate the terms of the Indenture; (e) that the Company has the corporate power to issue such Securities, and has duly taken all necessary corporate action with respect to such issuance; and (f) that the issuance of such Securities will not contravene the articles of incorporation or bylaws of the Company or result in any violation of any of the terms or provisions of any law or regulation or of any indenture, mortgage or other agreement known to such Counsel by which the Company is bound, which contravention or violation would reasonably be expected to materially adversely affect the Company's performance of its obligations with respect to the Securities; provided, however, that, with respect to Securities of a series offered in a Periodic Offering, the Trustee shall be entitled to receive such Opinion of Counsel in connection only with the first authentication of each form of Securities of such series and that the opinions described in Clauses (b) and (c) above may state, respectively, that (b) if the terms of such Securities are to be established pursuant to a Company Order or pursuant to such procedures as may be specified from time to time by a Company Order, all as contemplated by a Board Resolution or action taken pursuant thereto, such terms will have been duly authorized by the Company and established in conformity with the provisions of this Indenture; and (c) that such Securities, when executed by the Company, completed, authenticated and delivered by the Trustee in accordance with this Indenture, and issued and delivered by the Company and paid for, all in accordance with any agreement of the Company relating to the offering, issuance and sale of such Securities, will be duly issued under this Indenture and will constitute valid and legally binding obligations of the 23 29 Company, enforceable in accordance with their terms, subject to bankruptcy, insolvency, reorganization, moratorium and other laws relating to or affecting generally the enforcement of creditors' rights and to general principles of equity. With respect to Securities of a series offered in a Periodic Offering, the Trustee may rely, as to the authorization by the Company of any of such Securities, the form or forms and terms thereof and the legality, validity, binding effect and enforceability thereof, upon the Opinion of Counsel, Company Order and other documents delivered pursuant to Sections 201 and 301 and this Section, as applicable, in connection with the first authentication of a form of Securities of such series and it shall not be necessary for the Company to deliver such Opinion of Counsel and other documents (except as may be required by the specified other procedures, if any, referred to above) at or prior to the time of authentication of each Security of such series unless and until the Trustee receives notice that such Opinion of Counsel or other documents have been superseded or revoked, and may assume compliance with any conditions specified in such Opinion of Counsel (other than any conditions to be performed by the Trustee). If such form or forms or terms have been so established, the Trustee shall not be required to authenticate such Securities if the issue of such Securities pursuant to this Indenture will affect the Trustee's own rights, duties or immunities under the Securities and this Indenture or otherwise in a manner which is not reasonably acceptable to the Trustee. Each Security shall be dated the date of its authentication. No Security shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Security a certificate of authentication substantially in the form provided for herein executed by the Trustee by manual signature, and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder and is entitled to the benefits of this Indenture. Notwithstanding the foregoing, if any Security shall have been authenticated and delivered hereunder but never issued and sold by the Company, and the Company shall deliver such Security to the Trustee for cancellation as provided in Section 309 together with a written statement (which need not comply with Section 102 and need not be accompanied by an Opinion of Counsel) stating that such Security has never been issued and sold by the Company, for all purposes of this Indenture such Security shall be deemed never to have been authenticated and delivered hereunder and shall never be entitled to the benefits of this Indenture. SECTION 304. Temporary Securities. Pending the preparation of definitive Securities of any Series, the Company may execute, and upon Company Order the Trustee shall authenticate and deliver, temporary Securities which are printed, lithographed, typewritten or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Securities may determine, as evidenced by their execution of such Securities. If temporary Securities of any series are issued, the Company will cause definitive Securities of that series to be prepared without unreasonable delay. After the preparation of 24 30 definitive Securities of such series, the temporary Securities of such series shall be exchangeable for definitive Securities of like tenor of such series upon surrender of the temporary Securities of such series at the office or agency of the Company in a Place of Payment for that series, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities of any series the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a like principal amount of definitive Securities of the same series and of like tenor and of any authorized denominations. Until so exchanged the temporary Securities of any series shall in all respects be entitled to the same benefits under this Indenture as definitive Securities of such series and tenor. SECTION 305. Registration, Registration of Transfer and Exchange. The Company shall cause to be kept at the Corporate Trust Office of the Trustee a register (the "Security Register") in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Securities and of transfers of Securities. The Trustee is hereby appointed "Security Registrar" for the purpose of registering Securities and transfers of Securities as herein provided. Upon surrender for registration of transfer of any Security of any series at the office or agency of the Company in any Place of Payment for such series, the Company shall execute and the Trustee shall authenticate and deliver (in the name of the designated transferee or transferees) one or more new Securities of the same series, of any authorized denominations and of a like aggregate principal amount and tenor. At the option of the Holder, Securities of any series may be exchanged for other Securities of the same series, of any authorized denominations and of a like aggregate principal amount and tenor, upon surrender of the Securities to be exchanged at the office or agency of the Company in any Place of Payment for such series. Whenever any Securities are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive. All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Company, evidencing the same debt and entitled to the same benefits under this Indenture as the Securities surrendered upon such registration of transfer or exchange. Every Security presented or surrendered for registration of transfer or for exchange shall (if so required by the Company or the Trustee) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed, by the Holder thereof or such Holder's attorney duly authorized in writing. No service charge shall be made for any registration of transfer or exchange of Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Securities, other than exchanges pursuant to Section 304, 906 or 1107 not involving any transfer. 25 31 The Company may but shall not be required (i) to issue, register the transfer of or exchange Securities of any series during a period beginning at the opening of business 15 days before the day of the mailing of a notice of redemption of Securities of that series selected for redemption under Section 1103 and ending at the close of business on the day of such mailing, or (ii) to register the transfer of or exchange any Security so selected for redemption in whole or in part, except the unredeemed portion of any Security being redeemed in part. Notwithstanding the foregoing, except as otherwise specified as contemplated by Section 301, any Global Security shall be exchangeable pursuant to this Section 305 for Securities registered in the name of Persons other than the Depositary for such Security or its nominee only if (i) such Depositary notifies the Company that it is unwilling or unable to continue as Depositary for such Global Security or if at any time such Depositary ceases to be a clearing agency registered under the Exchange Act, (ii) the Company executes and delivers to the Trustee a Company Order that such Global Security shall be so exchangeable or (iii) there shall have occurred and be continuing an Event of Default with respect to the Securities of such series. Upon the occurrence in respect of any Global Security of any series of any one or more of the conditions specified in Clauses (i), (ii) or (iii) of the preceding sentence or such other conditions as may be specified as contemplated by Section 301 for such series, such Global Security may be exchanged for Securities not bearing the legend specified in Section 205 and registered in the names of such Persons as may be specified by the Depositary (including Persons other than the Depositary). Notwithstanding any other provision of this Indenture (except the provisions of the preceding paragraph), a Global Security may not be transferred except as a whole by the Depositary for such Global Security to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary. SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities. If any mutilated Security is surrendered to the Trustee, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a new Security of the same series and of like tenor and principal amount and bearing a number not contemporaneously outstanding. If there shall be delivered to the Company and the Trustee (i) evidence to their satisfaction of the destruction, loss or theft of any Security and (ii) such security or indemnity as may be required by them to save each of them and any agent of either of them harmless, then, in the absence of notice to the Company or the Trustee that such Security has been acquired by a bona fide purchaser, the Company shall execute and upon its written request the Trustee shall authenticate and deliver, in lieu of any such destroyed, lost or stolen Security, a new Security of the same series and of like tenor and principal amount and bearing a number not contemporaneously outstanding. In case any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Security, pay such Security. 26 32 Upon the issuance of any new Security under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. Every new Security of any series issued pursuant to this Section in lieu of any destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities of that series duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities. SECTION 307. Payment of Interest; Interest Rights Preserved. Unless otherwise provided as contemplated by Section 301 with respect to any series of Securities, interest on any Security which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name that Security (or one or more Predecessor Securities) is registered in the Security Register at the close of business on the Regular Record Date for such Interest Payment Date. Any interest on any Security of any series which is payable but is not punctually paid or duly provided for on any Interest Payment Date (herein called "Defaulted Interest") shall forthwith cease to be payable to the Holder on the relevant Regular Record Date by virtue of having been such Holder, and such Defaulted Interest may be paid by the Company, at its election in each case, as provided in Clause (1) or (2) below: (1) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Securities of such series (or their respective Predecessor Securities) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Security of such series and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this Clause provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to 27 33 be mailed, first-class postage prepaid, to each Holder of Securities of such series at such Holder's address as it appears in the Security Register, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so mailed, such Defaulted Interest shall be paid to the Persons in whose names the Securities of such series (or their respective Predecessor Securities) are registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following Clause (2). (2) The Company may make payment of any Defaulted Interest on the Securities of any series in any other lawful manner not inconsistent with the requirements of any securities exchange on which such Securities may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this Clause, such manner of payment shall be deemed practicable by the Trustee. Subject to the foregoing provisions of this Section, each Security delivered under this Indenture upon registration of transfer of, or in exchange for, or in lieu of, any other Security shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security. SECTION 308. Persons Deemed Owners. Prior to due presentment of a Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name such Security is registered in the Security Register as the owner of such Security for the purpose of receiving payment of principal of (and premium, if any) and (subject to Section 307) interest on such Security and for all other purposes whatsoever, whether or not such Security be overdue, and neither the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary. No holder of any beneficial interest in any Global Security held on its behalf by a Depositary (or its nominee) shall have any rights under this Indenture with respect to such Global Security or any Security represented thereby, and such Depositary may be treated by the Company, the Trustee, and any agent of the Company or the Trustee as the owner of such Global Security or any Security represented thereby for all purposes whatsoever. Notwithstanding the foregoing, with respect to any Global Security, nothing herein shall prevent the Company, the Trustee, or any agent of the Company or the Trustee, from giving effect to any written certification, proxy or other authorization furnished by a Depositary or impair, as between a Depositary and such holders of beneficial interest, the operation of customary practices governing the exercise of the rights of the Depositary (or its nominees) as Holder of any Security. SECTION 309. Cancellation. All Securities surrendered for payment, redemption, registration of transfer or exchange or for credit against any sinking fund payment shall, if surrendered to any Person other than the 28 34 Trustee, be delivered to the Trustee and shall be promptly canceled by it. The Company may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and may deliver to the Trustee (or to any other Person for delivery to the Trustee) for cancellation any Securities previously authenticated hereunder which the Company has not issued and sold, and all Securities so delivered shall be promptly canceled by the Trustee. No Securities shall be authenticated in lieu of or in exchange for any Securities canceled as provided in this Section, except as expressly permitted by this Indenture. All canceled Securities held by the Trustee shall be destroyed unless otherwise directed by a Company Order. SECTION 310. Computation of Interest. Except as otherwise specified as contemplated by Section 301 for Securities of any series, interest on the Securities of each series shall be computed on the basis of a 360-day year of twelve 30-day months. SECTION 311. Payment to be in Proper Currency. In the case of any Securities denominated in any currency (the "Required Currency") other than United States of America dollars, except as otherwise provided therein, the obligation of the Company to make any payment of principal, premium or interest thereon shall not be discharged or satisfied by any tender by the Company, or recovery by the Trustee, in any currency other than the Required Currency, except to the extent that such tender or recovery shall result in the Trustee timely holding the full amount of the Required Currency then due and payable. If any such tender or recovery is in a currency other than the Required Currency, the Trustee may take such actions as it considers appropriate to exchange such currency for the Required Currency. The costs and risks of any such exchange, including without limitation the risks of delay and exchange rate fluctuation, shall be borne by the Company, the Company shall remain fully liable for any shortfall or delinquency in the full amount of Required Currency then due and payable, and in no circumstances shall the Trustee be liable therefor except in the case of its negligence or willful misconduct. ARTICLE FOUR SATISFACTION AND DISCHARGE SECTION 401. Satisfaction and Discharge of Indenture. This Indenture shall upon Company Request cease to be of further effect (except as to any surviving rights of registration of transfer or exchange of Securities herein expressly provided for), and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when (1) either (A) all Securities theretofore authenticated and delivered (other than (i) Securities which have been destroyed, lost or stolen and which have been replaced 29 35 or paid as provided in Section 306 and (ii) Securities for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 1003) have been delivered to the Trustee for cancellation; or (B) all such Securities not theretofore delivered to the Trustee for cancellation (i) have become due and payable, or (ii) will become due and payable at their Stated Maturity within one year, or (iii) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company, and the Company, in the case of (i), (ii) or (iii) above, has deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose an amount, in the currency in which such Securities are payable, sufficient to pay and discharge the entire indebtedness on such Securities not theretofore delivered to the Trustee for cancellation, for principal (and premium, if any) and interest to the date of such deposit (in the case of Securities which have become due and payable) or to the respective Stated Maturity or Redemption Date, as the case may be; (2) the Company has paid or caused to be paid all other sums payable hereunder by the Company, and (3) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with. Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee under Section 607, the obligations of the Trustee to any Authenticating Agent under Section 614, and, if money shall have been deposited with the Trustee pursuant to Subclause (B) of Clause (1) of this Section, the obligations of the Trustee under Section 402 and the last paragraph of Section 1003, shall survive. SECTION 402. Application of Trust Money. Subject to provisions of the last paragraph of Section 1003, all money deposited with the Trustee pursuant to Section 401 shall be held in trust and applied by it, in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal (and premium, if any) and interest for 30 36 whose payment such money has been deposited with the Trustee but such money need not be segregated from other funds except to the extent required by law. SECTION 403. Defeasance and Discharge of Indenture. If principal of and any premium and interest on Securities of any series are denominated and payable in United States of America dollars, the Company shall be deemed to have paid and discharged the entire indebtedness on all the Outstanding Securities of such series on the 123rd day after the date of the deposit referred to in subparagraph (d) hereof, and the provisions of this Indenture, as it relates to such Outstanding Securities, shall no longer be in effect (and the Trustee, at the expense of the Company, shall at Company Request, execute proper instruments acknowledging the same), except as to: (a) the rights of Holders of Securities to receive, from the trust funds described in subparagraph (d) hereof, (i) payment of the principal of (and premium, if any) or interest on the Outstanding Securities on the Stated Maturity of such principal or installment of principal or interest and (ii) the benefit of any mandatory sinking fund payments applicable to the Securities on the day on which such payments are due and payable in accordance with the terms of this Indenture and the Securities; (b) the Company's obligations with respect to such Securities under Sections 305, 306, 1002 and 1003; and (c) the rights, powers, trusts, duties and immunities of the Trustee hereunder; provided that, the following conditions shall have been satisfied: (d) The Company has deposited or caused to be irrevocably deposited with the Trustee (or another trustee satisfying the requirements of Section 609) as trust funds in the trust, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of the Securities, (i) money in an amount, or (ii) U.S. Government Obligations which through the payment of interest and principal in respect thereof in accordance with their terms will provide not later than one day before the due date of any payment referred to in clause (A) or (B) of this subparagraph (d) money in an amount or (iii) a combination thereof, sufficient, in the opinion of a nationally recognized firm of independent certified public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge (A) the principal of (and premium, if any) and each installment of principal of (and premium, if any) and interest on the Outstanding Securities on the Stated Maturity of such principal or installment of principal and interest and (B) any mandatory sinking fund payments applicable to the Securities on the day on which such payments are due and payable in accordance with the terms of this Indenture and of the Securities; (e) such deposit shall not cause the Trustee with respect to the Securities to have a conflicting interest as defined in Section 608 and for purposes of the Trust Indenture Act with respect to the Securities; 31 37 (f) such deposit will not result in a breach or violation of, or constitute a default under, this Indenture or any other agreement or instrument to which the Company is a party or by which it is bound; (g) such provision would not cause any Outstanding Securities then listed on the New York Stock Exchange or other securities exchange to be de-listed as a result thereof; (h) no Event of Default or event which with notice or lapse of time would become an Event of Default with respect to the Securities shall have occurred and be continuing on the date of such deposit or during the period ending on the 123rd day after such date; (i) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel to the effect that there has been a change in applicable Federal law such that, or the Company has received from, or there has been published by, the Internal Revenue Service a ruling to the effect that, Holders of the Securities will not recognize income, gain or loss for Federal income tax purposes as a result of such deposits, defeasance and discharge and will be subject to Federal income tax on the same amount and in the same manner and at the same times, as would have been the case if such deposit, defeasance and discharge had not occurred; and (j) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent relating to the defeasance contemplated by this Section have been complied with. ARTICLE FIVE REMEDIES SECTION 501. Events of Default. "Event of Default", wherever used herein with respect to Securities of any series, and unless otherwise provided with respect to Securities of any series pursuant to Section 301(11), means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (1) default in the payment of any interest upon any Security of that series when it becomes due and payable, and continuance of such default for a period of 30 days; or (2) default in the payment of the principal of (or premium, if any, on) any Security of that series at its Maturity; or 32 38 (3) default in the deposit of any sinking fund payment, when and as due by the terms of a Security of that series; or (4) default in the performance, or breach, of any covenant or warranty of the Company in this Indenture (other than a covenant or warranty a default in whose performance or whose breach is elsewhere in this Section specifically dealt with or which has expressly been included in this Indenture solely for the benefit of a series of one or more Securities other than that series), and continuance of such default or breach for a period of 60 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in aggregate principal amount of the Outstanding Securities of that series a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (5) an event of default, as defined in any indenture or instrument under which the Company or any Restricted Subsidiary shall have outstanding at least $10,000,000 aggregate principal amount of indebtedness for money borrowed, shall happen and be continuing and such indebtedness shall, as a result thereof, have been accelerated so that the same shall be or become due and payable prior to the date on which the same would otherwise have become due and payable, and such acceleration shall not be rescinded or annulled within 10 days after notice thereof shall have been given, by registered or certified mail, to the Company by the Trustee, or to the Company and the Trustee by the Holders of at least 25% in aggregate principal amount of the Securities at the time Outstanding; provided, however, that if such event of default under such indenture or instrument shall be remedied or cured by the Company or waived by the Holders of such indebtedness, then, unless the Securities of any series shall have been accelerated as provided herein, the Event of Default hereunder by reason thereof shall be deemed likewise to have been thereupon remedied, cured or waived without further action upon the part of either the Trustee or any Holders of the Securities of any series; or (6) the entry by a court having jurisdiction in the premises of (A) a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or (B) a decree or order adjudging the Company a bankrupt or insolvent, or approving as properly filed by any party other than the Company a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company under any applicable Federal or State law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of all or substantially all of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order for relief specified in clause (A) or (B) or any such other decree or order unstayed and in effect for a period of 60 consecutive days; or (7) the commencement by the Company of a voluntary case or proceeding under any applicable Federal or state bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to the entry of a decree or order for relief in respect of the Company 33 39 in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under any applicable Federal or State bankruptcy or insolvency law, or the consent by it to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of all or substantially all of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Company in furtherance of any such action; or (8) any other Event of Default provided with respect to Securities of that series as provided in Section 301(11). SECTION 502. Acceleration of Maturity; Rescission and Annulment. If an Event of Default with respect to Outstanding Securities of any series occurs and is continuing, then and in every such case the Trustee or the Holders of not less than 25% in aggregate principal amount of the Outstanding Securities of that series may declare the principal amount (or, if any of the Securities of that series are Original Issue Discount Securities, such lesser portion of the principal amount of such Securities as may be specified in the terms thereof) of all of the Securities of that series to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by Holders), and upon any such declaration such principal amount (or specified portion thereof) shall become immediately due and payable. At any time after such a declaration of acceleration with respect to Outstanding Securities of any series has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article provided, the Holders of a majority in aggregate principal amount of the Outstanding Securities of that series, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if (1) the Company has paid or deposited with the Trustee a sum sufficient to pay (A) all overdue interest on all Securities of that series, (B) the principal of (and premium, if any, on) any Securities of that series which have become due otherwise than by such declaration of acceleration and interest thereon at the rate or rates prescribed therefor in such Securities, (C) to the extent that payment of such interest is lawful, interest upon overdue interest at the rate or rates prescribed therefor in such Securities, and (D) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, 34 40 its agents and counsel, and any other amounts due the Trustee under Section 607; and (2) all Events of Default with respect to Securities of that series, other than the non-payment of the principal of Securities of that series which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 513. No such rescission shall affect any subsequent default or impair any right consequent thereon. SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee. The Company covenants that if: (1) default is made in the payment of any interest on any Security when such interest becomes due and payable and such default continues for a period of 30 days, or (2) default is made in the payment of the principal of (or premium, if any, on) any Security at the Maturity thereof, the Company will, upon demand of the Trustee, pay to it, for the benefit of the Holders of such Security, the whole amount then due and payable on such Security for principal (and premium, if any) and interest and, to the extent that payment of such interest shall be legally enforceable, interest on any overdue principal (and premium, if any) and on any overdue interest at the rate or rates prescribed therefor in such Security, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. If the Company fails to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same against the Company or any other obligor upon such Security and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company or any other obligor upon such Security, wherever situated. If an Event of Default with respect to Securities of any series occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders of Securities of such series by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. SECTION 504. Trustee May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor upon the Securities or all or substantially all of the property of the 35 41 Company or of such other obligor, the Trustee (irrespective of whether the principal of the Securities shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company for the payment of overdue principal or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise, (i) to file and prove a claim for the whole amount of principal (and premium, if any) or such portion of the principal amount of any series of Original Issue Discount Securities as may be specified in the terms of such series and interest owing and unpaid in respect of the Securities and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 607) and of the Holders allowed in such judicial proceeding, and (ii) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 607. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 505. Trustee May Enforce Claims Without Possession of Securities. All rights of action and claims under this Indenture or the Securities may be prosecuted and enforced by the Trustee without the possession of any of the Securities or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and for any other amounts due the Trustee under Section 607, be for the ratable benefit of the Holders of the Securities in respect of which such judgment has been recovered. SECTION 506. Application of Money Collected. Any money collected by the Trustee pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal (or premium, if any) or interest, upon presentation of the 36 42 Securities and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: FIRST: To the payment of all amounts due the Trustee under Section 607; and SECOND: To the payment of the amounts then due and unpaid for principal of (and premium, if any) and interest on the Securities in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Securities for principal (and premium, if any) and interest, respectively; and THIRD: The balance, if any, to the Person or Persons entitled thereto. SECTION 507. Limitation on Suits. No Holder of any Security of any series shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless (1) such Holder has previously given written notice to the Trustee of a continuing Event of Default with respect to the Securities of that series; (2) the Holders of not less than 25% in principal amount of the Outstanding Securities of that series shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; (3) such Holder or Holders have offered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (4) the Trustee, for 60 days after its receipt of such notice, request and offer of indemnity, has failed to institute any such proceeding; and (5) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in principal amount of the Outstanding Securities of that series; it being understood and intended that no one or more of such Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other of such Holders, or to obtain or to seek to obtain priority or preference over any other of such Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all of such Holders. SECTION 508. Unconditional Right of Holders to Receive Principal, Premium and Interest. Notwithstanding any other provision in this Indenture, the Holder of any Security shall have the right, which is absolute and unconditional, to receive payment of the principal of (and premium, if any) and (subject to Section 307) interest on such Security on the Stated Maturity or 37 43 Maturities expressed in such Security (or, in the case of redemption, on the Redemption Date) and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder. SECTION 509. Restoration of Rights and Remedies. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case, subject to any determination in such proceeding, the Company, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. SECTION 510. Rights and Remedies Cumulative. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities in the last paragraph of Section 306, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 511. Delay or Omission Not Waiver. No delay or omission of the Trustee or of any Holder of any Securities to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. SECTION 512. Control by Holders. The Holders of a majority in aggregate principal amount of the Outstanding Securities of any series shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee, with respect to the Securities of such series, provided that (1) such direction shall not be in conflict with any rule of law or with this Indenture, and (2) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. 38 44 SECTION 513. Waiver of Past Defaults. The Holders of not less than a majority in aggregate principal amount of the Outstanding Securities of any series may, on behalf of the Holders of all the Securities of such series, waive any past default hereunder with respect to such series and its consequences, except a default (1) in the payment of the principal of (or premium, if any) or interest on any Security of such series, or (2) in respect of a covenant or provision hereof which under Article Nine cannot be modified or amended without the consent of the Holder of each Outstanding Security of such series affected; provided that, a majority in aggregate principal amount of Outstanding Securities may rescind and annul a declaration of payment due as provided in Section 502. The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Persons entitled to waive any past default hereunder. If a record date is fixed, the Holders on such record date, or their duly designated proxies, and only such Persons, shall be entitled to waive any default hereunder, whether or not such Holders remain Holders after such record date; provided, that unless such majority in principal amount shall have waived such default prior to the date which is 90 days after such record date, any such waiver of such default previously given shall automatically and without further action by any Holder be canceled and of no further effect. Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. SECTION 514. Undertaking for Costs. All parties to this Indenture agree, and each Holder of any Security by such Holder's acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; provided, however, that the provisions of this Section shall not apply to any suit instituted by the Company, to any suit instituted by the Trustee, to any suit instituted by any Holder, or group of Holders, holding in the aggregate more than 10% in principal amount of the Outstanding Securities of any series, or to any suit instituted by any Holder for the enforcement of the payment of the principal of (or premium, if any) or interest on any Security on or after the Stated Maturity or Maturities expressed in such Security (or, in the case of redemption, on or after the Redemption Date). 39 45 SECTION 515. Waiver of Stay or Extension Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE SIX THE TRUSTEE SECTION 601. Certain Duties and Responsibilities. The provisions of TIA Section 315 shall apply to the Trustee. SECTION 602. Notice of Defaults. Within 90 days after the occurrence of any default hereunder with respect to the Securities of any series, the Trustee shall transmit by mail to all Holders of Securities of such series, as their names and addresses appear in the Security Register, notice of such default hereunder known to the Trustee, unless such default shall have been cured or waived; provided however, that, except in the case of a default in the payment of the principal of (or premium, if any) or interest on any Security of such series or in the payment of any sinking fund installment with respect to Securities of such series, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee or a trust committee of directors and/or Responsible Officers of the Trustee in good faith determine that the withholding of such notice is in the interest of the Holders of Securities of such series; and provided, further, that in the case of any default of the character specified in Section 501(4) with respect to Securities of such series, no such notice to Holders shall be given until at least 30 days after the occurrence thereof. For the purpose of this Section, the term "default" means any event which is, or after notice or lapse of time or both would become, an Event of Default with respect to Securities of such series. SECTION 603. Certain Rights of Trustee. Subject to the provisions of TIA Section 315(a) through 315(d): (a) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; 40 46 (b) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order or as otherwise expressly provided herein and any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution; (c) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers' Certificate; (d) the Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; (e) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; (f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such fact or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney; (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; (h) the Trustee shall not be liable for any action taken, suffered or omitted by it in good faith and believed by it to be authorized or within the discretion, rights or powers conferred upon it by this Indenture; and (i) the Trustee shall not be required to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. 41 47 (j) except with respect to Section 1001, the Trustee shall have no duty to inquire as to the performance of the Company with respect to the covenants contained in Article 10. In addition, the Trustee shall not be deemed to have knowledge of an Event of Default except (i) any Default or Event of Default occurring pursuant to Sections 501(1), 501(2), 501(3) or 1001 or (ii) any Default or Event of Default of which the Trustee shall have received written notification or obtained actual knowledge. (k) delivery of reports, information and documents to the Trustee under Section 704(1) is for informational purposes only and the Trustee's receipt of the foregoing shall not constitute constructive notice of any information contained therein or determinable from the information contained therein, including the Company's compliance with any of their covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers' Certificates). SECTION 604. Not Responsible for Recitals or Issuance of Securities. The recitals contained herein and in the Securities, except the Trustee's certificates of authentication, shall be taken as the statements of the Company, and neither the Trustee nor any Authenticating Agent assumes any responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Securities. The Trustee or any Authenticating Agent shall not be accountable for the use or application by the Company of Securities or the proceeds thereof. SECTION 605. May Hold Securities. The Trustee, any Authenticating Agent, any Paying Agent, any Security Registrar or any other agent of the Company, in its individual or any other capacity, may become the owner or pledgee of Securities and, subject to TIA Sections 310(b) and 311, may otherwise deal with the Company with the same rights it would have if it were not Trustee, Authenticating Agent, Paying Agent, Security Registrar or such other agent. SECTION 606. Money Held in Trust. Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed with the Company. SECTION 607. Compensation and Reimbursement. The Company agrees (1) to pay to the Trustee from time to time reasonable compensation for all services rendered by it hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); 42 48 (2) except as otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; and (3) to indemnify the Trustee and its agents for, and to hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. The obligations of the Company under this Section 607 to compensate and indemnify the Trustee and to pay or reimburse the Trustee for expenses, disbursements and advances shall constitute additional indebtedness hereunder and shall survive the satisfaction and discharge of this Indenture. Such additional indebtedness shall be a senior claim to that of the Securities upon all property and funds held or collected by the Trustee as such, except funds held in trust for the payment of principal of (and premium, if any) or interest on particular Securities, and the Securities are hereby subordinated to such senior claim. SECTION 608. Disqualification; Conflicting Interests. The provisions of TIA Section 310(b) shall apply to the Trustee. SECTION 609. Corporate Trustee Required; Eligibility. There shall at all times be a Trustee hereunder which shall be eligible to act under TIA Section 310(a)(1) and shall have a combined capital and surplus of at least $25,000,000 and subject to supervision or examination by Federal, State or District of Columbia authority. If such Corporation publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article. Neither the Company, nor any Person directly or indirectly controlling, controlled by or under common control with the Company, shall act as Trustee hereunder. SECTION 610. Resignation and Removal; Appointment of Successor. (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of Section 611. 43 49 (b) The Trustee may resign at any time with respect to the Securities of one or more series by giving written notice thereof to the Company. If the instrument of acceptance by a successor Trustee required by Section 611 shall not have been delivered to the Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee with respect to the Securities of such series. (c) The Trustee may be removed at any time with respect to the Securities of any series by Act of the Holders of a majority in principal amount of the Outstanding Securities of such series, delivered to the Trustee and to the Company. (d) If at any time: (1) the Trustee shall fail to comply with TIA Section 310(b) after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Security for at least six months, or (2) the Trustee shall cease to be eligible under Section 609 and shall fail to resign after written request therefor by the Company or by any such Holder, or (3) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, (i) the Company by a Board Resolution may remove the Trustee with respect to all Securities, or (ii) subject to Section 514, any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee with respect to all Securities and the appointment of a successor Trustee or Trustees. (e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, with respect to the Securities of one or more series, the Company, by a Board Resolution, shall promptly appoint a successor Trustee or Trustees with respect to the Securities of that or those series (it being understood that any such successor Trustee may be appointed with respect to the Securities of one or more or all of such series and that at any time there shall be only one Trustee with respect to the Securities of any particular series) and shall comply with the applicable requirements of Section 611. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee with respect to the Securities of any series shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Securities of such series delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment in accordance with the applicable requirements of Section 611, become the successor Trustee with respect to the Securities of such series and to that extent supersede the successor Trustee appointed by the Company. If no successor Trustee with respect to the Securities of any series shall have been so appointed by the Company or the Holders and 44 50 accepted appointment in the manner required by Section 611, any Holder who has been a bona fide Holder of a Security of such series for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee with respect to the Securities of such series. (f) The Company shall give notice of each resignation and each removal of the Trustee with respect to the Securities of any series and each appointment of a successor Trustee with respect to the Securities of any series by mailing written notice of such event by first-class mail, postage prepaid, to all Holders of Securities of such series as their names and addresses appear in the Security Register. Each notice shall include the name of the successor Trustee with respect to the Securities of such series and the address of its Corporate Trust Office. SECTION 611. Acceptance of Appointment by Successor. (a) In case of the appointment hereunder of a successor Trustee with respect to all Securities, every such successor Trustee so appointed shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on the request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder. (b) In case of the appointment hereunder of a successor Trustee with respect to the Securities of one or more (but not all) series, the Company, the retiring Trustee and each successor Trustee with respect to the Securities of one or more series shall execute and deliver an indenture supplemental hereto wherein each successor Trustee shall accept such appointment and which (1) shall contain such provisions as shall be necessary or desirable to transfer and confirm to, and to vest in, each successor Trustee all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates, (2) if the retiring Trustee is not retiring with respect to all Securities, shall contain such provisions as shall be deemed necessary or desirable to confirm that all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series as to which the retiring Trustee is not retiring shall continue to be vested in the retiring Trustee, and (3) shall add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, it being understood that nothing herein or in such supplemental indenture shall constitute such Trustees co-trustees of the same trust and that each such Trustee shall be trustee of a trust or trusts hereunder separate and apart from any trust or trusts hereunder administered by any other such Trustee; and upon the execution and delivery of such supplemental indenture the resignation or removal of the retiring Trustee shall become effective to the extent provided therein and each such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates; 45 51 but, on request of the Company or any successor Trustee, such retiring Trustee shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder with respect to the Securities of that or those series to which the appointment of such successor Trustee relates. Whenever there is a successor Trustee with respect to one or more (but less than all) series of securities issued pursuant to this Indenture, the terms "Indenture" and "Securities" shall have the meanings specified in the provisos to the respective definitions of those terms in Section 101 which contemplate such situation. (c) Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts referred to in paragraph (a) and (b) of this Section, as the case may be. (d) No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article. SECTION 612. Merger, Conversion, Consolidation or Succession to Business. Any Corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any Corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any Corporation succeeding to all or substantially all the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such Corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Securities shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Securities so authenticated with the same effect as if such successor Trustee had itself authenticated such Securities; in case any of the Securities shall not have been authenticated by the Trustee then in office, any successor by merger, conversion or consolidation to such Trustee may authenticate such Securities either in the name of such predecessor hereunder or in the name of the successor Trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Securities or in this Indenture provided that the certificate of the Trustee shall have; provided, however, that the right to adopt the certificate of authentication of any predecessor Trustee or to authenticate Securities in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation. SECTION 613. Preferential Collection of Claims Against Company. The Trustee shall comply with TIA Section 311(a). A Trustee which has resigned or been removed is subject to TIA Section 311(a) to the extent indicated therein. SECTION 614. Appointment of Authenticating Agent. At any time when any of the Securities remain Outstanding the Trustee, with the concurrence of the Company, may appoint an Authenticating Agent or Agents with respect to 46 52 one or more series of Securities which shall be authorized to act on behalf of the Trustee to authenticate Securities of such series, and Securities so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder. Wherever reference is made in this Indenture to the authentication and delivery of Securities by the Trustee or the Trustee's certificate of authentication, such reference shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent and a certificate of authentication executed on behalf of the Trustee by an Authenticating Agent. Each Authenticating Agent shall be acceptable to the Company and shall at all times be a Corporation organized and doing business under the laws of the United States of America, any State thereof or the District of Columbia authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of not less than $50,000,000 and subject to supervision or examination by Federal, State or District of Columbia authority. If such Authenticating Agent publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Authenticating Agent shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, such Authenticating Agent shall resign immediately in the manner and with the effect specified in this Section. Any Corporation into which an Authenticating Agent may be merged or converted or with which it may be consolidated, or any Corporation resulting from any merger, conversion or consolidation to which such Authenticating Agent shall be a party, or any Corporation succeeding to the corporate agency or corporate trust business of an Authenticating Agent, shall continue to be an Authenticating Agent, provided such Corporation shall be otherwise eligible under this Section, without the execution or filing of any paper or any further act on the part of the Trustee or the Authenticating Agent. An Authenticating Agent may resign at any time by giving written notice thereof to the Trustee and to the Company. The Trustee may at any time terminate the agency of an Authenticating Agent by giving written notice thereof to such Authenticating Agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, the Trustee may appoint a successor Authenticating Agent which shall be acceptable to the Company and shall mail written notice of such appointment by first class mail, postage prepaid, to all Holders of Securities of the series with respect to which such Authenticating Agent will serve, as their names and addresses appear in the Security Register. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all the rights, powers and duties of its predecessor hereunder, with like effect as if originally named as an Authenticating Agent. No successor Authenticating Agent shall be appointed unless eligible under the provisions of this Section. The Company agrees to pay to each Authenticating Agent from time to time reasonable compensation for its services under this Section. 47 53 If an appointment with respect to one or more series is made pursuant to this Section, the Securities of such series may have endorsed thereon, in addition to the Trustee's certificate of authentication, an alternate certificate of authentication in the following form: This is one of the Securities of the series designated herein and issued pursuant to the within-mentioned Indenture. U.S. Bank Trust National Association, as Trustee By ------------------------------- As Authenticating Agent By ------------------------------- Authorized Officer ARTICLE SEVEN HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY SECTION 701. Company to Furnish Trustee Names and Addresses of Holders. If the Trustee is not acting as Security Registrar for the Securities of any series, the Company will furnish or cause to be furnished to the Trustee. (a) at intervals of no more than six months commencing after the first issue of such series, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders as of a date not more than 15 days prior to the time such information is furnished, and (b) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished. SECTION 702. Preservation of Information; Communications to Holders. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders contained in the most recent list furnished to the Trustee as provided in Section 701 and the names and addresses of Holders received by the Trustee in its capacity as Security Registrar. The Trustee may destroy any list furnished to it as provided in Section 701 upon receipt of a new list so furnished. 48 54 (b) The rights of Holders to communicate with other Holders with respect to their rights under this Indenture or under the Securities, and the corresponding rights and privileges of the Trustee, shall be as provided by TIA Section 312(b). (c) Every Holder of Securities, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any agent of either of them shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the Holders in accordance with Section 702(b), regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under Section 702(b). SECTION 703. Reports by Trustee. Within 60 days after May 15 of each year commencing with the later of May 1, 2000 or the first May 1 after the first issuance of Securities pursuant to this Indenture, the Trustee shall transmit by mail to all Holders of Securities as provided in TIA Section 313(c) a brief report dated as of such May 1 if required by TIA Section 313(a). A copy of each such report shall, at the time of such transmission to Holders, be filed by the Trustee with each stock exchange upon which any Securities are listed, with the Commission and with the Company. The Company will notify the Trustee when any Securities are listed on any stock exchange. SECTION 704. Reports by Company. The Company shall: (1) file with the Trustee, within 15 days after the Company is required to file the same with the Commission, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may from time to time by rules and regulations prescribe) which the Company may be required to file with the Commission pursuant to Section 13 or Section 15 (d) of the Securities Exchange Act of 1934; or, if the Company is not required to file information, documents or reports pursuant to either of said Sections, then it shall file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such of the supplementary and periodic information, documents and reports which may be required pursuant to Section 13 of the Securities Exchange Act of 1934 in respect of a security listed and registered on a national securities exchange as may be prescribed from time to time in such rules and regulations; (2) file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such additional information, documents and reports with respect to compliance by the Company with the conditions and covenants of this Indenture as may be required from time to time by such rules and regulations; 49 55 (3) transmit by mail to all Holders, as their names and addresses appear in the Security Register, within 30 days after the filing thereof with the Trustee, such summaries of any information, documents and reports required to be filed by the Company pursuant to paragraphs (1) and (2) of this Section as may be required by rules and regulations prescribed from time to time by the Commission; and (4) furnish to the Trustee, within 120 days after the end of each fiscal year of the Company ending after the date hereof, a brief certificate of the Company's principal executive officer, principal financial officer or principal accounting officer as to his or her knowledge of the Company's compliance with all conditions and covenants under this Indenture. For purposes of this paragraph, such compliance shall be determined without regard to any period of grace or requirement of notice provided under this Indenture. ARTICLE EIGHT CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE SECTION 801. Company May Consolidate, Etc., Only on Certain Terms. The Company shall not consolidate with or merge into any other Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person unless: (1) the Person formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance or transfer, or which leases, the properties and assets of the Company substantially as an entirety shall be a Corporation, partnership or trust, shall be organized and validly existing under the laws of the United States of America, any State thereof or the District of Columbia and shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, the due and punctual payment of the principal of (and premium, if any) and interest on all the Securities and the performance or observance of every covenant of this Indenture on the part of the Company to be performed or observed; (2) immediately after giving effect to such transaction and treating any indebtedness which becomes an obligation of the Company or any Subsidiary as a result of such transaction as having been incurred by the Company or such Subsidiary at the time of such transaction, no Event of Default, and no event which, after notice or lapse of time or both, would become an Event of Default, shall have happened and be continuing; and (3) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, conveyance, transfer or lease and supplemental indenture comply with this Article and that all conditions precedent herein provided for relating to such transaction have been complied with. SECTION 802. Successor Substituted. Upon any consolidation of the Company with, or merger by the Company into, any other Person or any conveyance, transfer or lease of the properties and assets of the Company substantially as an entirety in accordance with Section 801, the successor Person formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, 50 56 the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein, and thereafter, except in the case of a lease, the predecessor Person shall be relieved of all obligations and covenants under this Indenture and the Securities. ARTICLE NINE SUPPLEMENTAL INDENTURES SECTION 901. Supplemental Indentures Without Consent of Holders. Without the consent of any Holders, the Company, when authorized by or pursuant to a Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes: (1) to evidence the succession of another Person to the Company and the assumption by any such successor of the covenants of the Company herein and in the Securities; or (2) to add to the covenants of the Company for the benefit of the Holders of all or any series of Securities (and if such covenants are to be for the benefit of less than all series of Securities, stating that such covenants are expressly being included solely for the benefit of one or more specified series) or to surrender any right or power herein conferred upon the Company; or (3) to add any additional Events of Default (and if such Events of Default are to be for the benefit of less than all series of Securities, stating that such Events of Default are being included solely for the benefit of one or more specified series); or (4) to add to or change any of the provisions of this Indenture to such extent as shall be necessary to permit or facilitate the issuance of Securities in bearer form, registrable or not registrable as to principal, and with or without interest coupons; or (5) to add to, change or eliminate any of the provisions of this Indenture in respect of one or more series of Securities, provided that any such addition, change or elimination (i) shall neither (A) apply to any Security of any series created prior to the execution of such supplemental indenture and entitled to the benefit of such provision nor (B) modify the rights of the Holder of any such Security with respect to such provision or (ii) shall become effective only when there is no such Security Outstanding; or (6) to secure the Securities; or (7) to establish the form or terms of Securities of any series as permitted by Sections 201 and 301; or (8) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Securities of one or more series and to add to or 51 57 change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, pursuant to the requirements of Section 611(b); or (9) to cure any ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Indenture, provided such action shall not adversely affect the interests of the Holders of Securities of any series in any material respect. SECTION 902. Supplemental Indentures with Consent of Holders. With the consent of the Holders of not less than a majority in aggregate principal amount of the Outstanding Securities of each series affected by such supplemental indenture, by Act of said Holders delivered to the Company and the Trustee, the Company, when authorized by a Board Resolution, and the Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the Holders of Securities of such series under this Indenture; provided, however, that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Security affected thereby, (1) change the Stated Maturity of the principal of, or any installment of principal of or interest on, any such Security, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof, or reduce the amount of the principal of an Original Issue Discount Security that would be due and payable upon a declaration of acceleration of the Maturity thereof pursuant to Section 502, or change any Place of Payment where, or the coin or currency in which, any such Security or any premium or the interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (or, in the case of redemption or repayment, on or after the Redemption Date or any repayment date), or (2) reduce the percentage in principal amount of the Outstanding Securities of any series, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences provided for in this Indenture, or (3) modify any of the provisions of this Section 902, Section 513 or Section 1010, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Security affected thereby; provided however, that this Clause shall not be deemed to require the consent of any Holder with respect to changes in the references to "the Trustee" and concomitant changes in this Section 902 and Section 1010, or the deletion of this proviso, in accordance with the requirements of Sections 611(b) and 901(8). 52 58 A supplemental indenture which changes or eliminates any covenant or other provision of this Indenture which has expressly been included solely for the benefit of one or more particular series of Securities, or which modifies the rights of the Holders of Securities of such series with respect to such covenant or other provision, shall be deemed not to affect the rights under this Indenture of the Holders of Securities of any other series. The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Persons entitled to consent to any indenture supplemental hereto. If a record date is fixed for such purpose, the Holders on such record date or their duly designated proxies, and only such Persons, shall be entitled to consent to such supplemental indenture, whether or not such Holders remain Holders after such record date; provided, that unless such consent shall have become effective by virtue of the requisite percentage having been obtained prior to the date which is 90 days after such record date, any such consent previously given shall automatically and without further action by any Holder be canceled and of no further effect. It shall not be necessary for any Act of Holders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. SECTION 903. Execution of Supplemental Indentures. In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to Section 601) shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. SECTION 904. Effect of Supplemental Indentures. Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby to the extent provided therein. SECTION 905. Conformity with Trust Indenture Act. Every supplemental indenture executed pursuant to this Article shall conform to the requirements of the Trust Indenture Act as then in effect. SECTION 906. Reference in Securities to Supplemental Indentures. Securities authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in a form approved by the Trustee as to any matter provided for in such supplemental indenture. If the 53 59 Company shall so determine, new Securities of any series so modified as to conform, in the opinion of the Trustee and the Company, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for Outstanding Securities of such series. SECTION 907. Notice of Supplemental Indentures. Promptly after the execution by the Company and the Trustee of any supplemental indenture pursuant to the provisions of Section 902, the Company shall give notice thereof to the Holders of each Outstanding Security so affected, pursuant to Section 106, setting forth in general terms the substance of such supplemental indenture. ARTICLE TEN COVENANTS SECTION 1001. Payment of Principal, Premium and Interest. The Company covenants and agrees for the benefit of each series of Securities that it will duly and punctually pay the principal of (and premium, if any) and interest on the Securities of that series in accordance with the terms of the Securities and this Indenture. In the absence of contrary provisions with respect to the Securities of any series, interest on the Securities of any series may, at the option of the Company, be paid by check mailed to the address of the Person entitled thereto as it appears on the Security Register. SECTION 1002. Maintenance of Office or Agency. The Company will maintain in each Place of Payment for any series of Securities an office or agency where Securities of that series may be presented or surrendered for payment, where Securities of that series may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Securities of that series and this Indenture may be served. The Company will give prompt written notice to the Trustee of the location and any change in the location of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands. The Company may also from time to time designate one or more other offices or agencies where the Securities of one or more series may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain 54 60 an office or agency in each Place of Payment for Securities of any series for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. SECTION 1003. Money for Securities Payments to Be Held in Trust. If the Company shall at any time act as its own Paying Agent with respect to any series of Securities, it will, on or before each due date of the principal of (and premium, if any) or interest on any of the Securities of that series, segregate and hold in trust for the benefit of the Persons entitled thereto a sum in the currency in which such series of Securities is payable sufficient to pay the principal (and premium, if any) or interest so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided or will promptly notify the Trustee of its failure so to act. Whenever the Company shall have one or more Paying Agents for any series of Securities, it will, prior to each due date of the principal of (and premium, if any) or interest on any Securities of that series, deposit with a Paying Agent a sum sufficient to pay the principal (and premium, if any) or interest so becoming due, such sum to be held in trust for the benefit of the Persons entitled to such principal, premium or interest, or (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of its failure so to act. The Company will cause each Paying Agent for any series of Securities other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will: (1) hold all sums held by it for the payment of the principal of (and premium, if any) or interest on Securities of that series in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided; (2) give the Trustee notice of any default by the Company (or any other obligor upon the Securities of that series) in the making of any payment of principal (and premium, if any) or interest on the Securities of that series; and (3) at any time during the continuance of any such default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent. The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent, and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money. 55 61 Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of (and premium, if any) or interest on any Security of any series and remaining unclaimed for two years after such principal (and premium, if any) or interest has become due and payable shall be paid to the Company on Company Request, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Security shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in a newspaper published in the English language, customarily published on each Business Day and of general circulation in the Borough of Manhattan, The City of New York, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Company on Company Request. SECTION 1004. Existence. Subject to Article Eight, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its existence, corporate rights (charter and statutory) and corporate franchises; provided, however, that the Company shall not be required to preserve any such right or franchise if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and that the loss thereof is not disadvantageous in any material respect to the Holders. SECTION 1005. Maintenance of Properties. The Company will cause all Principal Properties used or useful in the conduct of its business to be maintained and kept in good condition, repair and working order and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted; provided, however, that nothing in this Section shall prevent the Company from discontinuing the operation or maintenance or selling or disposing of any of such Principal Properties if such discontinuance, sale or disposition is, in the judgment of the Company, desirable in the conduct of its business and not disadvantageous in any material respect to the Holders. SECTION 1006. Payment of Taxes and Other Claims. The Company will pay or discharge or cause to be paid or discharged, before the same shall become delinquent and a lien upon its property: (1) all taxes, assessments and governmental charges levied or imposed upon it or upon its income, profits or property, and (2) all lawful claims for labor, materials and supplies upon its property; provided, however, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith. 56 62 SECTION 1007. Restriction on Secured Debt. (a) The Company will not itself, and will not permit any Restricted Subsidiary to, incur, issue, assume or guarantee any notes, bonds, debentures or other similar evidences of indebtedness for money borrowed (notes, bonds, debentures or other similar evidences of indebtedness for money borrowed being hereinafter in this Article called "Debt"), secured by pledge of, or mortgage or other lien on, any Principal Property, now owned or hereafter owned by the Company or any Restricted Subsidiary, or any shares of stock or Debt of any Restricted Subsidiary held by or owed to the Company (any such pledges, mortgages and other liens being hereinafter in this Article called "Lien" or "Liens"), without effectively providing that the Securities of each series then Outstanding (together with, if the Company shall so determine, any other Debt of the Company or such Restricted Subsidiary then existing or thereafter created which is not subordinate to the Securities of each series then Outstanding) shall be secured equally and ratably with (or prior to) such secured Debt, so long as such secured Debt shall be so secured; provided, however, that this Section shall not apply to, and there shall be excluded from secured Debt in any computation under this Section, Debt secured by: (1) Liens existing on the date of this Indenture; (2) Liens on any Principal Property acquired, constructed or improved by the Company or any Restricted Subsidiary after the date of this Indenture which are created or assumed contemporaneously with such acquisition, construction or improvement, or within 120 days before or after the completion thereof, to secure or provide for the payment of all or any part of the cost of such acquisition, construction or improvement (including related expenditures capitalized for Federal income tax purposes in connection therewith) incurred after the date of this Indenture; (3) Liens of or upon any property, shares of capital stock or Debt existing at the time of acquisition thereof, whether by merger, consolidation, purchase, lease or otherwise (including Liens of or upon property, shares of capital stock or indebtedness of a corporation existing at the time such corporation becomes a Restricted Subsidiary); (4) Liens in favor of the Company or any Restricted Subsidiary; (5) Liens in favor of the United States of America or any State thereof, or any department, agency or instrumentality or political subdivision of the United States of America or any State thereof or political entity affiliated therewith, or in favor of any other country, or any political subdivision thereof, to secure partial, progress, advance or other payments, or other obligations, pursuant to any contract or statute or to secure any Debt incurred for the purpose of financing all or any part of the cost of acquiring, constructing or improving the property subject to such Liens (including Liens incurred in connection with pollution control, industrial revenue or similar financings); (6) Liens imposed by law, such as mechanics', workmen's, repairmen's, materialmen's, carriers', warehousemen's, vendors' or other similar liens arising in the 57 63 ordinary course of business, or governmental (federal, state or municipal) liens arising out of contracts for the sale of products or services by the Company or any Restricted Subsidiary, or deposits or pledges to obtain the release of any of the foregoing; (7) pledges or deposits under workmen's compensation laws or similar legislation and Liens of judgments thereunder which are not currently dischargeable, or good faith deposits in connection with bids, tenders, contracts (other than for the payment of money) or leases to which the Company or any Restricted Subsidiary is a party, or deposits to secure public or statutory obligations of the Company or any Restricted Subsidiary, or deposits in connection with obtaining or maintaining self-insurance or to obtain the benefits of any law, regulation or arrangement pertaining to unemployment insurance, old age pensions, social security or similar matters, or deposits of cash or obligations of the United States of America to secure surety, appeal or customs bonds to which the Company or any Restricted Subsidiary is a party, or deposits in litigation or other proceedings such as, but not limited to, interpleader proceedings; (8) Liens created by or resulting from any litigation or other proceeding which is being contested in good faith by appropriate proceedings, including Liens arising out of judgments or awards against the Company or any Restricted Subsidiary with respect to which the Company or such Restricted Subsidiary is in good faith prosecuting an appeal or proceedings for review; or Liens incurred by the Company or any Restricted Subsidiary for the purpose of obtaining a stay or discharge in the course of any litigation or other proceeding to which the Company or such Restricted Subsidiary is a party; (9) Liens for taxes or assessments or governmental charges or levies not yet due or delinquent, or which can thereafter be paid without penalty, or which are being contested in good faith by appropriate proceedings; (10) Liens consisting of easements, rights-of-way, zoning restrictions, restrictions on the use of real property, and defects and irregularities in the title thereto, landlords' liens and other similar liens and encumbrances which, other than liens resulting from action of any governmental authority, do not interfere materially with the use of the property covered thereby in the ordinary course of the business of the Company or such Restricted Subsidiary and do not, in the opinion of the Company, materially detract from the value of such properties; or (11) any extension, renewal or replacement (or successive extensions, renewals or replacements), as a whole or in part, of any Lien referred to in the foregoing clauses (1) to (10), inclusive; provided, that (i) such extension, renewal or replacement Lien shall be limited to all or a part of the same property, shares of stock or Debt that secured the Lien extended, renewed or replaced (plus improvements on such property) and (ii) the Debt secured by such Lien at such time is not increased. (b) Notwithstanding the restrictions contained in subdivision (a) of this Section, the Company and its Restricted Subsidiaries, or any of them, may incur, issue, assume or guarantee Debt secured by Liens without equally and ratably securing the Securities of each series then 58 64 Outstanding, provided, that at the time of such incurrence, issuance, assumption or guarantee, after giving effect thereto and to the retirement of any Debt which is concurrently being retired, the aggregate amount of all outstanding Debt secured by Liens which could not have been incurred, issued, assumed or guaranteed by the Company or a Restricted Subsidiary without equally and ratably securing the Securities of each series then Outstanding except for the provisions of this subdivision (b), together with the aggregate amount of all Attributable Debt incurred pursuant to Section 1008(b), does not at such time exceed 5%. SECTION 1008. Restriction on Sale and Leaseback Transactions. (a) The Company will not itself, and it will not permit any Restricted Subsidiary to, enter into any arrangement with any bank, insurance company or other lender or investor (not including the Company or any Subsidiary) or to which any such lender or investor is a party, providing for the leasing by the Company or a Restricted Subsidiary for a period, including renewals, in excess of three years of any Principal Property which has been or is to be sold or transferred by the Company or any Restricted Subsidiary to such lender or investor or to any person to whom funds have been or are to be advanced by such lender or investor on the security of such Principal Property (herein referred to as a "Sale and Leaseback Transaction") unless either: (1) The Company or such Restricted Subsidiary would, at the time of entering into such arrangement, be entitled, without equally and ratably securing the Securities of each series then Outstanding, to incur Debt secured by a Lien on such property, pursuant to paragraphs (1) to (11), inclusive, of Section 1007; or (2) the Company within 120 days after the sale or transfer shall have been made by the Company or by a Restricted Subsidiary, applies an amount equal to the greater of (i) the net proceeds of the sale of the Principal Property sold and leased back pursuant to such arrangement or (ii) the fair market value of the Principal Property so sold and leased back at the time of entering into such arrangement (as determined by any two of the following: the Chairman or a Vice Chairman of the Board of the Company, its President, its Chief Financial Officer, its Vice President of Finance, its Treasurer or its Controller) to the retirement of Funded Debt of the Company; provided, that the amount to be applied to the retirement of Funded Debt of the Company shall be reduced by (A) the principal amount of any Securities delivered within 120 days after such sale to the Trustee for retirement and cancellation, and (B) the principal amount of Funded Debt, other than Securities, voluntarily retired by the Company within 120 days after such sale. Notwithstanding the foregoing, no retirement referred to in this clause (a)(2) may be effected by payment at maturity or pursuant to any mandatory sinking fund payment or mandatory prepayment provision. (b) Notwithstanding the restrictions contained in subdivision (a) of this Section, the Company and its Restricted Subsidiaries, or any of them, may enter into a Sale and Leaseback Transaction, provided, that at the time of such transaction, after giving effect thereto, the aggregate amount of all Attributable Debt in respect of Sale and Leaseback Transactions existing at such time which could not have been entered into except for the provisions of this subdivision (b), 59 65 together with the aggregate amount of all outstanding Debt incurred pursuant to Section 1007(b), does not at such time exceed 5%. (c) A Sale and Leaseback Transaction shall not be deemed to result in the creation of a Lien. SECTION 1009. Defeasance of Certain Obligations. The following provisions shall apply to the Securities of each series unless specifically otherwise provided in a Board Resolution, Officers' Certificate or indenture supplemental hereto provided pursuant to Section 301. The Company may omit to comply with any term, provision or condition set forth in Sections 1005, 1006, 1007 and 1008, and any such omission with respect to Sections 1005, 1006, 1007 and 1008 shall not be an Event of Default, in each case with respect to the Securities of that series, provided that the following conditions have been satisfied: (1) with reference to this Section 1009, the Company has deposited or caused to be irrevocably deposited with the Trustee (or another trustee satisfying the requirements of Section 609) as trust funds in trust, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of the Securities of that series, (i) money in an amount, or (ii) U.S. Government Obligations which through the payment of interest and principal in respect thereof in accordance with their terms will provide not later than one day before the due date of any payment referred to in clause (A) or (B) of this subparagraph (1) money in an amount, or (iii) a combination thereof, sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge (A) the principal of (and premium, if any) and each installment of principal of (and premium, if any) and interest on the Outstanding Securities on the Stated Maturity of such principal or installments of principal and interest and (B) any mandatory sinking fund payments or analogous payments applicable to the Securities of such series on the day on which such payments are due and payable in accordance with the terms of this Indenture and of such Securities; (2) such deposit shall not cause the Trustee with respect to the Securities of that series to have a conflicting interest as defined in Section 608 and for purposes of the Trust Indenture Act with respect to the Securities of any series; (3) such deposit will not result in a breach or violation of, or constitute a default under, this Indenture or any material agreement or instrument to which the Company is a party or by which it is bound; (4) such deposit will not cause any Outstanding Securities then listed on the New York Stock Exchange or other securities exchange to be de-listed as a result thereof; (5) no Event of Default under Sections 501(6) or (7) or event which with notice or lapse of time would become an Event of Default under Sections 501(6) or (7) 60 66 with respect to the Securities of that series shall have occurred and be continuing on the date of such deposit; (6) the Company has delivered to the Trustee an Opinion of Counsel to the effect that Holders of the Securities of such series will not recognize income, gain or loss for Federal income tax purposes as a result of such deposit and defeasance of certain obligations and will be subject to Federal income tax on the same amount and in the same manner and at the same times as would have been the case if such deposit and defeasance had not occurred; and (7) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the defeasance contemplated in this Section have been complied with. SECTION 1010. Waiver of Certain Covenants. The Company may omit in any particular instance to comply with any term, provision or condition set forth in Sections 1004 to 1008, inclusive, with respect to the Securities of any series if before the time for such compliance the Holders of not less than a majority in aggregate principal amount of the Outstanding Securities of such series shall, by Act of such Holders, either waive such compliance in such instance or generally waive compliance with such term, provision or condition, but no such waiver shall extend to or affect such term, provision or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such term, provision or condition shall remain in full force and effect. The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Persons entitled to waive any such term, provision or condition. If a record date is fixed for such purpose, the Holders on such record date or their duly designated proxies, and only such Persons, shall be entitled to waive any such term, provision or condition hereunder, whether or not such Holders remain Holders after such record date; provided that unless the Holders of not less than a majority in principal amount of the Outstanding Securities of such series shall have waived such term, provision or condition prior to the date which is 90 days after such record date, any such waiver previously given shall automatically and without further action by any Holder be canceled and of no further effect. ARTICLE ELEVEN REDEMPTION OF SECURITIES SECTION 1101. Applicability of Article. Securities of any series which are redeemable before their Stated Maturity shall be redeemable in accordance with their terms and (except as otherwise specified as contemplated by Section 301 for Securities of any series) in accordance with this Article. 61 67 SECTION 1102. Election to Redeem; Notice to Trustee. The election of the Company to redeem any Securities shall be evidenced by an Officers' Certificate. The Company shall, at least 45 days prior to the Redemption Date fixed by the Company (unless a shorter notice shall be satisfactory to the Trustee), notify the Trustee of (1) such Redemption Date, (2) if the Securities of such series have different terms and less than all of the Securities of such series are to be redeemed, the terms of the Securities to be redeemed, and (3) if less than all the Securities of such series with identical terms are to be redeemed, the principal amount of such Securities to be redeemed. In the case of any redemption of Securities prior to the expiration of any restriction on such redemption provided in the terms of such Securities or elsewhere in this Indenture, the Company shall furnish the Trustee with an Officers' Certificate evidencing compliance with such restriction. SECTION 1103. Selection by Trustee of Securities to Be Redeemed. If less than all the Securities of like tenor of any series are to be redeemed, the particular Securities to be redeemed shall be selected not more than 60 days prior to the Redemption Date by the Trustee, from the Outstanding Securities of like tenor of such series not previously called for redemption, by such method as the Trustee shall deem fair and appropriate and which may provide for the selection for redemption of portions (equal to the minimum authorized denomination for Securities of like tenor of that series or any integral multiple thereof) of the principal amount of Securities of such series of a denomination larger than the minimum authorized denomination for Securities of that series. The Trustee shall promptly notify the Company in writing of the Securities selected for redemption and, in the case of any Securities selected for partial redemption, the principal amount thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Securities shall relate, in the case of any Securities redeemed or to be redeemed only in part, to the portion of the principal amount of such Securities which has been or is to be redeemed. SECTION 1104. Notice of Redemption. 62 68 Notice of redemption shall be given by first-class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior to the Redemption Date, to each Holder of Securities to be redeemed, at each such Holder's address appearing in the Security Register. All notices of redemption shall state: (1) the Redemption Date, (2) the Redemption Price, (3) if less than all the Outstanding Securities of like tenor of any series are to be redeemed, the identification (and, in the case of partial redemption, the principal amounts) of the particular Securities to be redeemed, (4) that on the Redemption Date the Redemption Price will become due and payable upon each such Security to be redeemed and, if applicable, that interest thereon will cease to accrue on and after said date, (5) the place or places where such Securities are to be surrendered for payment of the Redemption Price, and (6) that the redemption is for a sinking fund, if such is the case. Notice of redemption of Securities to be redeemed at the election of the Company shall be given by the Company or, at the Company's request, by the Trustee in the name and at the expense of the Company. SECTION 1105. Deposit of Redemption Price. On or prior to any Redemption Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 1003) an amount of money in immediately available funds sufficient to pay the Redemption Price of, and (except if the Redemption Date shall be an Interest Payment Date) accrued interest on, all the Securities which are to be redeemed on that date. SECTION 1106. Securities Payable on Redemption Date. Notice of redemption having been given as aforesaid, the Securities so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified, and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued interest) such Securities shall cease to bear interest. Upon surrender of any such Security for redemption in accordance with said notice, such Security shall be paid by the Company at the Redemption Price, together with accrued interest to the Redemption Date; provided, however, that, unless otherwise specified as contemplated by Section 301, installments of interest whose Stated Maturity is on or prior to the Redemption Date shall be payable to the Holders of such Securities, or one or more Predecessor Securities, 63 69 registered as such at the close of business on the relevant Regular Record Dates according to their terms and the provisions of Section 307. If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal (and premium, if any) shall, until paid, bear interest from the Redemption Date at the rate prescribed therefor in the Security. SECTION 1107. Securities Redeemed in Part. Any Security which is to be redeemed in part shall be surrendered at a Place of Payment for such series (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or such Holder's attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Security or Securities of the same series and of like tenor, of any authorized denomination as requested by such Holder, in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Security so surrendered; provided, however, that if a Global Security is so surrendered, such new Security so issued shall be a new Global Security in a denomination equal to the unredeemed portion of the principal of the Global Security so surrendered. ARTICLE TWELVE SINKING FUNDS SECTION 1201. Applicability of Article. The provisions of this Article shall be applicable to any sinking fund for the retirement of Securities of a series except as otherwise specified as contemplated by Section 301 for Securities of such series. The minimum amount of any sinking fund payment provided for by the terms of Securities of any series is herein referred to as a "mandatory sinking fund payment", and any payment in excess of such minimum amount provided for by the terms of Securities of any series is herein referred to as an "optional sinking fund payment". If provided for by the terms of Securities of any series, the cash amount of any sinking fund payment may be subject to reduction as provided in Section 1202. Each sinking fund payment shall be applied to the redemption of Securities of any series as provided for by the terms of Securities of such series. SECTION 1202. Satisfaction of Sinking Fund Payments with Securities. The Company (1) may deliver Outstanding Securities of like tenor of a series (other than any previously called for redemption) and (2) may apply as a credit Securities of like tenor of a series which have been redeemed either at the election of the Company pursuant to the terms of such Securities or through the application of permitted optional sinking fund payments pursuant to the terms of such Securities, in each case in satisfaction of all or any part of any sinking fund payment with respect to the Securities of like tenor of such series required to be made pursuant to the terms of such 64 70 Securities as provided for by the terms of such series; provided that such Securities have not been previously so credited. Such Securities shall be received and credited for such purpose by the Trustee at the Redemption Price specified in such Securities for redemption through operation of the sinking fund and the amount of such sinking fund payment shall be reduced accordingly. SECTION 1203. Redemption of Securities for Sinking Fund. Not less than 60 days prior to each sinking fund payment date for Securities of like tenor of a series, the Company will deliver to the Trustee an Officers' Certificate specifying the amount of the next ensuing sinking fund payment for such Securities pursuant to the terms of such Securities, the portion thereof, if any, which is to be satisfied by payment of cash and the portion thereof, if any, which is to be satisfied by delivering and crediting Securities of like tenor of that series pursuant to Section 1202 and, at the time of delivery of such Officers' Certificate, will also deliver to the Trustee any Securities to be so delivered. If no such notice shall be delivered by the Company, such sinking fund payment shall be satisfied by payment of cash. Not less than 45 days before each such sinking fund payment date the Trustee shall select the Securities to be redeemed upon such sinking fund payment date in the manner specified in Section 1103 and cause notice of the redemption thereof to be given in the name of and at the expense of the Company in the manner provided in Section 1104. Such notice having been duly given, the redemption of such Securities shall be made upon the terms and in the manner stated in Sections 1106 and 1107. This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. 65 71 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed as of the day and year first above written. PENTAIR, INC. By ---------------------------- [Name] [Title] Attest: - ---------------------------- [Name] Secretary U.S. BANK TRUST NATIONAL ASSOCIATION, as Trustee By ---------------------------- [Name] [Title] Attest: - ---------------------------- [Name] [Title] 66 EX-10.25 3 c60900ex10-25.txt FIRST AMENDMENT, DATED AS OF FEBRUARY 16, 2001 1 EXHIBIT 10.25 FIRST AMENDMENT THIS FIRST AMENDMENT, dated as of February 16, 2001 (this "Amendment"), amends the Long Term Credit Agreement, dated as of September 2, 1999 (the "Credit Agreement"), among the Borrower, various subsidiaries thereof, various financial institutions and BANK OF AMERICA, N.A., as Administrative Agent. Terms defined in the Credit Agreement are, unless otherwise defined herein or the context otherwise requires, used herein as defined therein. WHEREAS, the Company, the Lenders and the Administrative Agent have entered into the Credit Agreement; and WHEREAS, the parties hereto desire to reduce the Total Commitment and amend the Credit Agreement in certain respects as more fully set forth below; NOW, THEREFORE, the parties hereto agree as follows: SECTION 1 Amendments. Subject to the satisfaction of the conditions precedent set forth in Section 3, the Credit Agreement shall be amended as set forth below: (1) Addition of Definitions. The following new definitions are added to Section 1.01 in appropriate alphabetical sequence: Foreign Subsidiary means any Subsidiary (i) organized under the laws of a jurisdiction other than the United States or a state thereof and (ii) which conducts substantially all of its business and operations in a jurisdiction other than the United States. Subsidiary Guarantor means, on any day, each Subsidiary that has executed a counterpart of the Subsidiary Guaranty on or prior to that day (and has not been released from its obligations thereunder in accordance with the terms hereof). Subsidiary Guaranty means a Subsidiary Guaranty issued by various Subsidiaries of the Company, substantially in the form of Exhibit I. (2) Amendment to Section 1.01. Section 1.01 is amended by deleting the definitions of "EBITDA," "Interest Coverage Ratio" and "Leverage Ratio" in their entirety and substituting the following therefor, respectively: EBITDA means, for any period, the sum of the consolidated net income of the Company for such period excluding the effect of any extraordinary or non-recurring gains 2 and any extraordinary or non-recurring non-cash losses in such period plus, to the extent deducted in determining such consolidated net income, Interest Expense, income tax expense, depreciation and amortization for such period, provided that the financial results of the Company's equipment segment which was classified as a "discontinued operation"effective December 31, 2000, shall be excluded in calculating EBITDA, except to the extent that the negative contribution to EBITDA for such equipment segment for the period beginning January 1, 2001 and ending on any date of determination of EBITDA would exceed $25,000,000. Interest Coverage Ratio means, for any period, the ratio of (i) EBITDA plus rent expense for such period (excluding, for any calculation after the divestiture or liquidation of Lincoln Industrial Corporation, Lincoln Automotive Company or Century Mfg. Co. or a business unit of any of the foregoing, any portion thereof attributable to the entity or assets divested or liquidated) to (ii) Interest Expense plus rent expense of the Company and its Subsidiaries for such period (excluding, for any calculation after the divestiture or liquidation of Lincoln Industrial Corporation, Lincoln Automotive Company or Century Mfg. Co. or a business unit of any of the foregoing, any portion thereof attributable to the entity or assets divested or liquidated). Leverage Ratio means, as of any date, the ratio of (a) the sum (without duplication) of (i) all Debt of the Company and its Consolidated Subsidiaries plus (ii) all Synthetic Lease Obligations of the Company and its Consolidated Subsidiaries, all determined on a consolidated basis, to (b) EBITDA for the period of four consecutive fiscal quarters most recently ended on or before such date for which financial statements have been delivered pursuant to subsection 13.01(a) or (b); provided that for purposes of calculating EBITDA pursuant to this clause (b), the consolidated net income of any Person or business unit acquired (or divested or liquidated, if the sales revenue generated by such Person or business unit in the 12 months prior to such divestiture or liquidation was $25,000,000 or more) by the Company or any Subsidiary during such period (plus, to the extent deducted in determining such consolidated net income, Interest Expense, income tax expense, depreciation and amortization of such Person or business unit) shall be included (or, in the case of a divestiture or liquidation, excluded) on a pro forma basis for such period (assuming the consummation of each such acquisition and the incurrence or assumption of any Debt in connection therewith (or the consummation of such divestiture or liquidation) occurred on the first day of such period) in accordance with Article 11 of Regulation S-X of the Securities and Exchange Commission. (3) Amendment to Section 13.02. Section 13.02 is amended in its entirety to read as follows: 13.02 Maximum Leverage Ratio. The Company shall not at any time permit the Leverage Ratio to exceed the applicable ratio set forth below during any period set forth below: 2 3
FISCAL QUARTER ENDING: LEVERAGE RATIO Prior to 6/30/01 4.25 to 1.0 6/30/01 4.00 to 1.0 9/29/01 3.50 to 1.0 12/31/01 and thereafter 3.00 to 1.0.
(4) Amendment to Section 13.03. Section 13.03 is amended in its entirety to read as follows: 13.03 Minimum Interest Coverage Ratio. The Company shall not at any time permit the Interest Coverage Ratio to be less than the applicable ratio set forth below during any period set forth below:
COMPUTATION PERIOD ENDING: INTEREST COVERAGE RATIO On or prior to 6/30/01 2.25 to 1.0 9/29/01 2.50 to 1.0 12/31/01 and thereafter 3.00 to 1.0.
For purposes of the foregoing, a "Computation Period" is any period of four consecutive fiscal quarters of the Company ending on the last day of a fiscal quarter. (5) Amendment to Section 13.06. Section 13.06 is amended by (i) deleting the word "and" at the end of subsection (b) thereof and (ii) adding the following as new subsections (d) and (e) thereof: (d) Debt under the Subsidiary Guaranty; and (e) so long as the Subsidiary Guaranty is in effect, Debt arising under unsecured guaranties of other Senior Debt of the Company; (6) Addition of new Section 13.13. The following new Section 13.13 is added in proper numerical sequence: 13.13. Subsidiary Guaranty. The Company will take, and will cause its Subsidiaries to take such actions as are reasonably necessary or as the Administrative Agent may reasonably request (including delivery of authorization 3 4 documents and customary opinions of counsel) so that as of May 1, 2001 and at all times thereafter all of the Company's obligations hereunder are guaranteed by Subsidiaries (other than Foreign Subsidiaries) that, in the aggregate together with the Company, own 90% or more of the consolidated assets of the Company and its Subsidiaries (excluding Foreign Subsidiaries) and earned 90% or more of the consolidated revenue of the Company and its Subsidiaries (excluding Foreign Subsidiaries) during the most recent period of four consecutive fiscal quarters (excluding the revenues of any Subsidiary or business unit which has been divested or liquidated on or prior to any date of determination), in each case pursuant to the Subsidiary Guaranty. (7) Amendment to Section 14.01. Section 14.01 is amended by (i) deleting the word "or" at the end of subsection (j) thereof, (ii) inserting the word "or" after subsection (k) thereof, and (iii) adding the following as a new subsection (l) thereof: (l) the Subsidiary Guaranty shall cease to be in full force and effect with respect to any Subsidiary Guarantor (other than as a result of such Subsidiary Guarantor ceasing to be a Subsidiary pursuant to a transaction permitted hereunder), any Subsidiary Guarantor shall fail (subject to any applicable grace period) to comply with or to perform any applicable provision of the Subsidiary Guaranty, or any Subsidiary Guarantor (or any Person by, through or on behalf of such Subsidiary Guarantor) shall contest in any manner the validity, binding nature or enforceability of the Subsidiary Guaranty with respect to such Subsidiary Guarantor. (8) Addition of New Section 15.13. The following new Section 15.13 is added in proper numerical sequence: 15.13 Subsidiary Guaranty. (a) Subject to the proviso contained in clause (b) below, the Administrative Agent shall, and the Lenders irrevocably authorize the Administrative Agent to, release any Person which is a Subsidiary Guarantor from its obligations under the Subsidiary Guaranty, if such Person ceases to be a Subsidiary Guarantor pursuant to a transaction that does not result in a default of any provision hereof (including Section 13.13). Upon request by the Administrative Agent at any time, the Required Lenders will confirm in writing the Administrative Agent's authority to release any Subsidiary from its obligations under the Subsidiary Guaranty pursuant to this Section 15.13. (b) The Administrative Agent agrees to promptly execute and deliver to the Company all documents reasonably required to evidence any release permitted under this Agreement; provided that such release also is permitted under the 364-Day Credit Agreement and the Company certifies that such release also is permitted under any other agreement governing indebtedness for borrowed 4 5 money of the Company which is entitled to the benefits of the Subsidiary Guaranty. (9) Amendment to Section 16.04. Section 16.04 is amended by (i) deleting the word "or" at the end of clause (e) thereof, (ii) re-designating clause "(f)" as clause "(g)" and (iii) inserting the following new clause (f): (f) release any Subsidiary Guarantor from its obligations under the Subsidiary Guaranty (other than with respect to a Person which ceases to be a Subsidiary Guarantor pursuant to a transaction that does not result in a default of any provision hereof (including Section 13.13)); or (10) Amendment of Pricing Schedule. Schedule 1.01 (Pricing Schedule) is amended in its entirety by substituting the Schedule 1.01 attached hereto therefor (and such Pricing Schedule shall become effective immediately upon the effectiveness of this Amendment). (11) Amendment of Commitment Schedule. Schedule 2.01 (Commitments and Pro Rata Shares) is hereby amended in its entirety by substituting the Schedule 2.01 attached hereto therefor (and such Schedule 2.01 shall become effective immediately upon the effectiveness of this Amendment). (12) Addition of New Exhibit I. Exhibit I attached hereto is added in the proper alphabetical sequence. SECTION 2 Representations and Warranties. The Company represents and warrants to the Lenders that (a) each of the representations and warranties of the Company set forth in the Credit Agreement is true and correct as of the date of the execution and delivery of this Amendment by the Company, with the same effect as if made on such date, (b) the execution and delivery by the Company of this Amendment and the performance by the Company of its obligations under the Credit Agreement, as amended hereby (as so amended, the "Amended Credit Agreement"), (i) are within the powers of the Company, (ii) have been duly authorized by all necessary action on the part of the Company, (iii) have received all necessary governmental approval and (iv) do not and will not contravene or conflict with (A) any provision of law or the certificate of incorporation or by-laws or other organizational documents of the Company or (B) any agreement, judgment, injunction, order, decree or other instrument binding upon the Company or any of its Subsidiaries and (c) the Amended Credit Agreement is a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency or other similar laws of general application affecting the enforcement of creditors' rights or by general principles of equity limiting the availability of equitable remedies. SECTION 3 Effectiveness. This Amendment shall become effective on the date on which the Administrative Agent has received each of the following: 5 6 (1) counterparts (or facsimiles thereof) of signature pages to this Amendment executed by the Company, the Required Lenders and the Administrative Agent; (2) payment by the Company to the Administrative Agent of the fees required by Section 4 hereof; (3) a certificate of the secretary or an assistant secretary of the Company as to: (i) resolutions of the board of directors of the Company authorizing the execution and delivery of this Amendment and the performance by the Company of its obligations under the Amended Credit Agreement; and (ii) the incumbency and signatures of those of its officers authorized to execute and deliver this Amendment; and (4) such other documents as the Administrative Agent or any Lender may reasonably request. SECTION 4 Consent Fee. The Company shall pay on or before the effective date hereof and in immediately available funds to the Administrative Agent, for the account of each Committed Lender which has delivered to the Administrative Agent (by facsimile or otherwise) (x) on or before 5:00 p.m. (Chicago time) on February 14, 2001, an executed letter consenting hereto and (y) on or before 5:00 p.m. (Chicago time) on February 16, 2001, an executed counterpart of the applicable signature page hereof, a consent fee equal to 0.125% of the amount of such Committed Lender's Commitment under the Credit Agreement. SECTION 5 Miscellaneous. (1) Continuing Effectiveness, etc. As herein amended, the Credit Agreement shall remain in full force and effect and is hereby ratified and confirmed in all respects. After the effective date hereof, all references in the Credit Agreement and the Notes to "Credit Agreement", "Agreement" or similar terms shall refer to the Amended Credit Agreement. (2) Limited Waiver. The Required Lenders hereby waive any failure by the Borrower to comply with Section 13.02 or Section 13.03 of the Credit Agreement for the applicable calculation period ending on December 31, 2000. The aforementioned waiver is limited to the matters specifically identified therein and shall not be deemed to constitute a waiver or consent with respect to any other matter whatsoever. (3) Counterparts. This Amendment may be executed in any number of counterparts and by the different parties on separate counterparts, and each such counterpart shall be deemed to be an original but all such counterparts shall together constitute one and the same Amendment. 6 7 (4) Expenses. The Company agrees to pay the reasonable costs and expenses of the Administrative Agent (including attorney's fees and expenses) in connection with the preparation, execution and delivery of this Amendment. (5) Governing Law. This Amendment shall be a contract made under and governed by the internal laws of the State of Illinois applicable to contracts made and to be performed entirely within such State. (6) Successors and Assigns. This Amendment shall be binding upon the Company, the Lenders and the Administrative Agent and their respective successors and assigns, and shall inure to the benefit of the Company, the Lenders and the Administrative Agent and the respective successors and assigns of the Lenders and the Administrative Agent. (7) Administrative Agent. The Required Lenders acknowledge that the Administrative Agent will act as administrative agent for the Lenders for purposes of the Subsidiary Guaranty. The Required Lenders authorize the Administrative Agent to act in such capacity and to enter into a Subsidiary Guaranty on behalf of the Lenders and to execute and deliver such documents as may reasonably be required or appropriate in connection therewith. [Signatures begin on the following page.] 7 8 Delivered at Chicago, Illinois as of the day and year first above written. PENTAIR, INC. By Title BANK OF AMERICA, N.A., individually and as Administrative Agent By Title BANK ONE, NA (Main Office Chicago) (formerly known as The First National Bank of Chicago) By Title U.S. BANK NATIONAL ASSOCIATION By Title MORGAN GUARANTY TRUST COMPANY OF NEW YORK By Title FIRST UNION NATIONAL BANK By Title First Amendment to Long Term Credit Agreement S-1 9 THE INDUSTRIAL BANK OF JAPAN, LIMITED By Title By Title THE BANK OF TOKYO - MITSUBISHI, LTD., CHICAGO BRANCH By Title By Title BANK HAPOALIM B.M. By Title By Title CREDIT AGRICOLE INDOSUEZ By Title By Title First Amendment to Long Term Credit Agreement S-2 10 CREDIT LYONNAIS CHICAGO BRANCH By Title By Title SUNTRUST BANK (formerly known as SunTrust Bank, Central Florida, N.A.) By Title WELLS FARGO BANK, NATIONAL ASSOCIATION By Title By Title BANCA DI ROMA - CHICAGO BRANCH By Title By Title First Amendment to Long Term Credit Agreement S-3 11 BANCA NAZIONALE DEL LAVORO S.p.A. NEW YORK BRANCH By Title By Title BANKBOSTON, N.A. By Title BANK OF MONTREAL By Title THE BANK OF NEW YORK By Title BNP PARIBAS (formerly known as Banque Nationale De Paris) By Title By Title First Amendment to Long Term Credit Agreement S-4 12 FIRSTAR BANK, N.A. (formerly known as Firstar Bank of Minnesota, N.A.) By Title FLEET NATIONAL BANK By Title MELLON BANK, N.A. By Title SANWA BANK LIMITED By Title By Title First Amendment to Long Term Credit Agreement S-5 13 COMMERZBANK AKTIENGESELLSCHAFT, NEW YORK AND GRAND CAYMAN BRANCHES By Title By Title MICHIGAN NATIONAL BANK By Title NATIONAL CITY BANK By Title BANCO ESPIRITO SANTO, S.A. NEW YORK BRANCH By Title By Title First Amendment to Long Term Credit Agreement S-6 14 SCHEDULE 1.01 PRICING SCHEDULE The Applicable Margin, the Facility Fee Rate, the LC Fee Rate, the Usage Fee Rate and the Fronting Margin shall be determined as follows: 1. The Applicable Margin, the Facility Fee Rate, the LC Fee Rate, the Usage Fee Rate and the Fronting Margin shall each be as set forth in the table below and shall be calculated based on (a) the credit ratings assigned by Moody's and S&P to the Company's debt obligations under this Agreement and the 364-Day Credit Agreement (each a "Bank Debt Rating"), if Moody's and S&P have issued such ratings, or (b) if either Moody's or S&P has not issued a Bank Debt Rating, the general corporate rating assigned by Moody's and S&P to the Company (each a "Corporate Rating"), or (c) if either Moody's or S&P has issued neither a Bank Debt Rating nor a Corporate Rating, the credit ratings assigned by Moody's and S&P to the Company's long term senior unsecured non-credit-enhanced public Debt (each a "Senior Debt Rating"). 2. Prior to March 30, 2001, the Applicable Margin, the Facility Fee Rate, the LC Fee Rate, the Usage Fee Rate and the Fronting Margin (collectively, the "Pricing") shall be Level IV (notwithstanding that calculations made in accordance with the other provisions of this Schedule 1.01 would specify a lower level). 3. If one Bank Debt Rating, Corporate Rating or Senior Debt Rating is higher than the other (i.e., the Moody's rating is higher than the S&P rating, or vice versa), the lower of such ratings shall determine the Pricing. If at any time either Moody's or S&P does not have in effect a Bank Debt Rating, a Corporate Rating or a Senior Debt Rating (including any time when neither Moody's nor S&P has in effect any such rating), the Pricing shall be Level VI. 4. The Pricing shall be adjusted two Business Days after any applicable change in the Bank Debt Rating, Corporate Rating or Senior Debt Rating by either Moody's or S&P. 15
LEVEL I LEVEL II LEVEL III LEVEL IV LEVEL V LEVEL VI - ----------------------------------------------------------------------------------- BANK DEBT A-/A3 OR BB/Ba2 RATINGS, HIGHER BBB+/Baa1 BBB/Baa2 BBB-/Baa3 BB+/Ba1 OR LOWER CORPORATE RATINGS OR SENIOR DEBT RATINGS - ----------------------------------------------------------------------------------- APPLICABLE MARGIN (bps) 60.0 70.0 80.0 102.5 125.0 145.0 - ----------------------------------------------------------------------------------- FACILITY FEE (bps) 15.0 17.5 20.0 22.5 25.0 30.0 - ----------------------------------------------------------------------------------- LC FEE RATE (bps) 60.0 70.0 80.0 102.5 125.0 145.0 - ----------------------------------------------------------------------------------- USAGE FEE RATE (bps) 60.0 70.0 80.0 102.5 125.0 145.0 - ----------------------------------------------------------------------------------- FRONTING MARGIN (bps) 10.0 10.0 11.0 13.25 20.0 24.0 - ----------------------------------------------------------------------------------
16 SCHEDULE 2.01 COMMITMENTS AND PRO RATA SHARES
Pro Rata Lender Commitment Share ------ ---------- --------- Bank of America, N.A. $ 32,800,000 8.74666667% Bank One, N.A. $ 32,800,000 8.74666667% Morgan Guaranty Trust Company of New York $ 32,800,000 8.74666667% U.S. Bank National Association $ 32,800,000 8.74666667% First Union National Bank $ 18,800,000 5.01333333% The Industrial Bank of Japan, Limited $ 18,800,000 5.01333333% The Bank of Tokyo - Mitsubishi, Ltd., Chicago Branch $ 18,800,000 5.01333333% Fleet National Bank $ 18,800,000 5.01333333% Bank Hapoalim B.M. $ 15,700,000 4.18666667% Credit Agricole Indosuez $ 15,700,000 4.18666667% Credit Lyonnais Chicago Branch $ 11,000,000 2.93333333% SunTrust Bank $ 11,000,000 2.93333333% Wells Fargo Bank, National Association $ 11,000,000 2.93333333% Banca di Roma - Chicago Branch $ 9,400,000 2.50666667% Banca Nazionale del Lavoro S.p.A. New York Branch $ 9,400,000 2.50666667% Bank of Montreal $ 9,400,000 2.50666667% The Bank of New York $ 9,400,000 2.50666667% BNP Paribas $ 9,400,000 2.50666667% Firstar Bank, N.A. $ 9,400,000 2.50666667% Mellon Bank, N.A. $ 9,400,000 2.50666667% Sanwa Bank Limited $ 9,400,000 2.50666667% Commerzbank Aktiengesellschaft, New York and Grand Cayman Branches $ 8,100,000 2.16000000% Michigan National Bank $ 8,100,000 2.16000000% National City Bank $ 8,100,000 2.16000000% Banco Espirito Santo, S.A. New York Branch $ 4,700,000 1.25333333% TOTAL $375,000,000 100%
First Amendment to Long Term Credit Agreement 17 EXHIBIT I First Amendment to Long Term Credit Agreement EX-10.27 4 c60900ex10-27.txt SECOND AMENDMENT, DATED AS OF FEBRUARY 16, 2001 1 EXHIBIT 10.27 SECOND AMENDMENT THIS SECOND AMENDMENT, dated as of February 16, 2001 (this "Amendment"), amends the 364-Day Credit Agreement dated as of September 2, 1999 (as previously amended, the "Credit Agreement"), among PENTAIR, INC., various financial institutions, and BANK OF AMERICA, N.A., as Administrative Agent. Terms defined in the Credit Agreement are, unless otherwise defined herein or the context otherwise requires, used herein as defined therein. WHEREAS, the Company, the Lenders and the Administrative Agent have entered into the Credit Agreement; and WHEREAS, the parties hereto desire to reduce the Total Commitment and amend the Credit Agreement in certain respects as more fully set forth below; NOW, THEREFORE, the parties hereto agree as follows: SECTION 1 Amendments. Subject to the satisfaction of the conditions precedent set forth in Section 3, the Credit Agreement shall be amended as set forth below: (1) Addition of Definitions. The following new definitions are added to Section 1.01 in appropriate alphabetical sequence: Foreign Subsidiary means any Subsidiary (i) organized under the laws of a jurisdiction other than the United States or a state thereof and (ii) which conducts substantially all of its business and operations in a jurisdiction other than the United States. Subsidiary Guarantor means, on any day, each Subsidiary that has executed a counterpart of the Subsidiary Guaranty on or prior to that day (and has not been released from its obligations thereunder in accordance with the terms hereof). Subsidiary Guaranty means a Subsidiary Guaranty issued by various Subsidiaries of the Company, substantially in the form of Exhibit I. (2) Amendment to Section 1.01. Section 1.01 is amended by deleting the definitions of "EBITDA," "Interest Coverage Ratio" and "Leverage Ratio" in their entirety and substituting the following therefor, respectively: EBITDA means, for any period, the sum of the consolidated net income of the Company for such period excluding the effect of any extraordinary or non-recurring gains and any extraordinary or non-recurring non-cash losses in such period plus, to the extent 2 deducted in determining such consolidated net income, Interest Expense, income tax expense, depreciation and amortization for such period, provided that the financial results of the Company's equipment segment which was classified as a "discontinued operation"effective December 31, 2000, shall be excluded in calculating EBITDA, except to the extent that the negative contribution to EBITDA for such equipment segment for the period beginning January 1, 2001 and ending on any date of determination of EBITDA would exceed $25,000,000. Interest Coverage Ratio means, for any period, the ratio of (i) EBITDA plus rent expense for such period (excluding, for any calculation after the divestiture or liquidation of Lincoln Industrial Corporation, Lincoln Automotive Company or Century Mfg. Co. or a business unit of any of the foregoing, any portion thereof attributable to the entity or assets divested or liquidated) to (ii) Interest Expense plus rent expense of the Company and its Subsidiaries for such period (excluding, for any calculation after the divestiture or liquidation of Lincoln Industrial Corporation, Lincoln Automotive Company or Century Mfg. Co. or a business unit of any of the foregoing, any portion thereof attributable to the entity or assets divested or liquidated). Leverage Ratio means, as of any date, the ratio of (a) the sum (without duplication) of (i) all Debt of the Company and its Consolidated Subsidiaries plus (ii) all Synthetic Lease Obligations of the Company and its Consolidated Subsidiaries, all determined on a consolidated basis, to (b) EBITDA for the period of four consecutive fiscal quarters most recently ended on or before such date for which financial statements have been delivered pursuant to subsection 8.01(a) or (b); provided that for purposes of calculating EBITDA pursuant to this clause (b), the consolidated net income of any Person or business unit acquired (or divested or liquidated, if the sales revenue generated by such Person or business unit in the 12 months prior to such divestiture or liquidation was $25,000,000 or more) by the Company or any Subsidiary during such period (plus, to the extent deducted in determining such consolidated net income, Interest Expense, income tax expense, depreciation and amortization of such Person or business unit) shall be included (or, in the case of a divestiture or liquidation, excluded) on a pro forma basis for such period (assuming the consummation of each such acquisition and the incurrence or assumption of any Debt in connection therewith (or the consummation of such divestiture or liquidation) occurred on the first day of such period) in accordance with Article 11 of Regulation S-X of the Securities and Exchange Commission. (3) Amendment to Section 8.02. Section 8.02 is amended in its entirety to read as follows: 8.02 Maximum Leverage Ratio. The Company shall not at any time permit the Leverage Ratio to exceed the applicable ratio set forth below during any period set forth below: 2 3
FISCAL QUARTER ENDING: LEVERAGE RATIO Prior to 6/30/01 4.25 to 1.0 6/30/01 4.00 to 1.0 9/29/01 3.50 to 1.0 12/31/01 and thereafter 3.00 to 1.0.
(4) Amendment to Section 8.03. Section 8.03 is amended in its entirety to read as follows: 8.03 Minimum Interest Coverage Ratio. The Company shall not at any time permit the Interest Coverage Ratio to be less than the applicable ratio set forth below during any period set forth below:
COMPUTATION PERIOD ENDING: INTEREST COVERAGE RATIO On or prior to 6/30/01 2.25 to 1.0 9/29/01 2.50 to 1.0 12/31/01 and thereafter 3.00 to 1.0.
For purposes of the foregoing, a "Computation Period" is any period of four consecutive fiscal quarters of the Company ending on the last day of a fiscal quarter. (5) Amendment to Section 8.06. Section 8.06 is amended by (i) deleting the word "and" at the end of subsection (b) thereof, and (ii) adding the following as new subsections (d) and (e) thereof: (d) Debt under the Subsidiary Guaranty; and (e) so long as the Subsidiary Guaranty is in effect, Debt arising under unsecured guaranties of other Senior Debt of the Company; (6) Addition of new Section 8.11. The following new Section 8.11 is added in proper numerical sequence: 8.11. Subsidiary Guaranty. The Company will take, and will cause its Subsidiaries to take such actions as are reasonably necessary or as the Administrative Agent may reasonably request (including delivery of authorization documents and customary opinions of counsel) so that as of May 1, 2001 and at all times thereafter all of the Company's obligations hereunder are guaranteed by 3 4 Subsidiaries (other than Foreign Subsidiaries) that, in the aggregate together with the Company, own 90% or more of the consolidated assets of the Company and its Subsidiaries (excluding Foreign Subsidiaries) and earned 90% or more of the consolidated revenue of the Company and its Subsidiaries (excluding Foreign Subsidiaries) during the most recent period of four consecutive fiscal quarters (excluding the revenues of any Subsidiary or business unit which has been divested or liquidated on or prior to any date of determination), in each case pursuant to the Subsidiary Guaranty. (7) Amendment to Section 9.01. Section 9.01 is amended by (i) deleting the word "or" at the end of subsection (j) thereof, (ii) inserting the word "or" after subsection (k) thereof, and (iii) adding the following as a new subsection (l) thereof: (l) the Subsidiary Guaranty shall cease to be in full force and effect with respect to any Subsidiary Guarantor (other than as a result of such Subsidiary Guarantor ceasing to be a Subsidiary pursuant to a transaction permitted hereunder), any Subsidiary Guarantor shall fail (subject to any applicable grace period) to comply with or to perform any applicable provision of the Subsidiary Guaranty, or any Subsidiary Guarantor (or any Person by, through or on behalf of such Subsidiary Guarantor) shall contest in any manner the validity, binding nature or enforceability of the Subsidiary Guaranty with respect to such Subsidiary Guarantor. (8) Addition of New Section 10.13. The following new Section 10.13 is added in proper numerical sequence: 10.13 Subsidiary Guaranty. (a) Subject to the proviso contained in clause (b) below, the Administrative Agent shall, and the Lenders irrevocably authorize the Administrative Agent to, release any Person which is a Subsidiary Guarantor from its obligations under the Subsidiary Guaranty, if such Person ceases to be a Subsidiary Guarantor pursuant to a transaction that does not result in a default of any provision hereof (including Section 8.11). Upon request by the Administrative Agent at any time, the Required Lenders will confirm in writing the Administrative Agent's authority to release any Subsidiary from its obligations under the Subsidiary Guaranty pursuant to this Section 10.13. (b) The Administrative Agent agrees to promptly execute and deliver to the Company all documents reasonably required to evidence any release permitted under this Agreement; provided that such release also is permitted under the Long Term Credit Agreement and the Company certifies that such release also is permitted under any other agreement governing indebtedness for borrowed money of the Company which is entitled to the benefits of the Subsidiary Guaranty. 4 5 (9) Amendment to Section 11.04. Section 11.04 is amended by (i) deleting the word "or" at the end of clause (d) thereof, (ii) re-designating clause "(e)" as clause "(f)" and (iii) inserting the following new clause (e): (e) release any Subsidiary Guarantor from its obligations under the Subsidiary Guaranty (other than with respect to a Person which ceases to be a Subsidiary Guarantor pursuant to a transaction that does not result in a default of any provision hereof (including Section 8.11)); or (10) Amendment of Pricing Schedule. Schedule 1.01 (Pricing Schedule) is amended in its entirety by substituting the Schedule 1.01 attached hereto therefor (and such Pricing Schedule shall become effective immediately upon the effectiveness of this Amendment). (11) Amendment of Commitment Schedule. Schedule 2.01 (Commitments and Pro Rata Shares) is hereby amended in its entirety by substituting the Schedule 2.01 attached hereto therefor (and such Schedule 2.01 shall become effective immediately upon the effectiveness of this Amendment). (12) Addition of New Exhibit I. Exhibit I attached hereto is added in the proper alphabetical sequence. SECTION 2 Representations and Warranties. The Company represents and warrants to the Lenders that (a) each of the representations and warranties of the Company set forth in the Credit Agreement is true and correct as of the date of the execution and delivery of this Amendment by the Company, with the same effect as if made on such date, (b) the execution and delivery by the Company of this Amendment and the performance by the Company of its obligations under the Credit Agreement, as amended hereby (as so amended, the "Amended Credit Agreement"), (i) are within the powers of the Company, (ii) have been duly authorized by all necessary action on the part of the Company, (iii) have received all necessary governmental approval and (iv) do not and will not contravene or conflict with (A) any provision of law or the certificate of incorporation or by-laws or other organizational documents of the Company or (B) any agreement, judgment, injunction, order, decree or other instrument binding upon the Company or any of its Subsidiaries and (c) the Amended Credit Agreement is a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency or other similar laws of general application affecting the enforcement of creditors' rights or by general principles of equity limiting the availability of equitable remedies. SECTION 3 Effectiveness. This Amendment shall become effective on the date on which the Administrative Agent has received each of the following: (1) counterparts (or facsimiles thereof) of signature pages to this Amendment executed by the Company, the Required Lenders and the Administrative Agent; 5 6 (2) payment by the Company to the Administrative Agent of the fees required by Section 4 hereof; (3) a certificate of the secretary or an assistant secretary of the Company as to: (i) resolutions of the board of directors of the Company authorizing the execution and delivery of this Amendment and the performance by the Company of its obligations under the Amended Credit Agreement; and (ii) the incumbency and signatures of those of its officers authorized to execute and deliver this Amendment; and (4) such other documents as the Administrative Agent or any Lender may reasonably request. SECTION 4 Consent Fee. The Company shall pay on or before the effective date hereof and in immediately available funds to the Administrative Agent, for the account of each Lender which has delivered to the Administrative Agent (by facsimile or otherwise) (x) on or before 5:00 p.m. (Chicago time) on February 14, 2001, an executed letter consenting hereto and (y) on or before 5:00 p.m. (Chicago time) on February 16, 2001, an executed counterpart of the applicable signature page hereof, a consent fee equal to 0.125% of the amount of such Lender's Commitment under the Credit Agreement. SECTION 5 Miscellaneous. (1) Continuing Effectiveness, etc. As herein amended, the Credit Agreement shall remain in full force and effect and is hereby ratified and confirmed in all respects. After the effective date hereof, all references in the Credit Agreement and the Notes to "Credit Agreement", "Agreement" or similar terms shall refer to the Amended Credit Agreement. (2) Limited Waiver. The Required Lenders hereby waive any failure by the Company to comply with Section 8.02 or Section 8.03 of the Credit Agreement for the applicable calculation period ending on December 31, 2000. The aforementioned waiver is limited to the matters specifically identified therein and shall not be deemed to constitute a waiver or consent with respect to any other matter whatsoever. (3) Counterparts. This Amendment may be executed in any number of counterparts and by the different parties on separate counterparts, and each such counterpart shall be deemed to be an original but all such counterparts shall together constitute one and the same Amendment. (4) Expenses. The Company agrees to pay the reasonable costs and expenses of the Administrative Agent (including attorney's fees and expenses) in connection with the preparation, execution and delivery of this Amendment. 6 7 (5) Governing Law. This Amendment shall be a contract made under and governed by the internal laws of the State of Illinois applicable to contracts made and to be performed entirely within such State. (6) Successors and Assigns. This Amendment shall be binding upon the Company, the Lenders and the Administrative Agent and their respective successors and assigns, and shall inure to the benefit of the Company, the Lenders and the Administrative Agent and the respective successors and assigns of the Lenders and the Administrative Agent. (7) Administrative Agent. The Required Lenders acknowledge that the Administrative Agent will act as administrative agent for the Lenders for purposes of the Subsidiary Guaranty. The Required Lenders authorize the Administrative Agent to act in such capacity and to enter into a Subsidiary Guaranty on behalf of the Lenders and to execute and deliver such documents as may reasonably be required or appropriate in connection therewith. [Signatures begin on the following page.] 7 8 Delivered at Chicago, Illinois as of the day and year first above written. PENTAIR, INC. By: Title: BANK OF AMERICA, N.A., individually and as Administrative Agent By: Title: BANK ONE, NA (Main Office Chicago) (formerly known as The First National Bank of Chicago) By: Title: U.S. BANK NATIONAL ASSOCIATION By: Title: MORGAN GUARANTY TRUST COMPANY OF NEW YORK By: Title: Second Amendment to 364-Day Credit Agreement S-1 9 THE BANK OF TOKYO-MITSUBISHI, LTD., CHICAGO BRANCH By: Title: By: Title: BANCA NAZIONALE DEL LAVORO S.p.A. NEW YORK BRANCH By: Title: By: Title: BANCA ANTONVENETA NEW YORK BRANCH By: Title: By: Title: BANK HAPOALIM B.M. By: Title: By: Title: Second Amendment to 364-Day Credit Agreement S-2 10 FIRST UNION NATIONAL BANK By: Title: THE INDUSTRIAL BANK OF JAPAN, LIMITED By: Title: FLEET NATIONAL BANK By: Title: CREDIT LYONNAIS CHICAGO BRANCH By: Title: By: Title: SUNTRUST BANK (formerly known as SunTrust Bank, Central Florida, N.A.) By: Title: Second Amendment to 364-Day Credit Agreement S-3 11 WELLS FARGO BANK, NATIONAL ASSOCIATION By: Title: By: Title: THE DAI-ICHI KANGYO BANK, LTD. By: Title: BANCA DI ROMA - CHICAGO BRANCH By: Title: By: Title: FIRSTAR BANK, N.A. (formerly known as Firstar Bank of Minnesota, N.A.) By: Title: MELLON BANK, N.A. By: Title: Second Amendment to 364-Day Credit Agreement S-4 12 SANWA BANK LIMITED By: Title: By: Title: THE BANK OF NEW YORK By: Title: BNP PARIBAS (formerly known as Banque Nationale De Paris) By: Title: By: Title: NATIONAL CITY BANK By: Title: Second Amendment to 364-Day Credit Agreement S-5 13 SCHEDULE 1.01 PRICING SCHEDULE The Applicable Margin and Facility Fee Rate shall be determined as follows: 1. The Applicable Margin and the Facility Fee Rate shall be as set forth in the table below and shall be calculated based on (a) the credit ratings assigned by Moody's and S&P to the Company's debt obligations under this Agreement and the Long Term Credit Agreement (each a "Bank Debt Rating"), if Moody's and S&P have issued such ratings, or (b) if either Moody's or S&P has not issued a Bank Debt Rating, the general corporate rating assigned by Moody's and S&P to the Company (each a "Corporate Rating"), or (c) if either Moody's or S&P has issued neither a Bank Debt Rating nor a Corporate Rating, the credit ratings assigned by Moody's and S&P to the Company's long term senior unsecured non-credit-enhanced public Debt (each a "Senior Debt Rating"). 2. Prior to March 30, 2001, the Applicable Margin and the Facility Fee Rate (collectively, the "Pricing") shall be Level IV (notwithstanding that calculations made in accordance with the other provisions of this Schedule 1.01 would specify a lower level). 3. If one Bank Debt Rating, Corporate Rating or Senior Debt Rating is higher than the other (i.e., the Moody's rating is higher than the S&P rating, or vice versa), the lower of such ratings shall determine the Pricing. If at any time either Moody's or S&P does not have in effect a Bank Debt Rating, a Corporate Rating or a Senior Debt Rating (including any time when neither Moody's nor S&P has in effect any such rating), the Pricing shall be Level V. 4. The Pricing shall be adjusted two Business Days after any applicable change in the Bank Debt Rating, Corporate Rating or Senior Debt Rating by either Moody's or S&P.
LEVEL I LEVEL II LEVEL III LEVEL IV LEVEL V - -------------------------------------------------------------------------- BANK DEBT A-/A3 OR RATINGS, HIGHER BBB+/Baa1 BBB/Baa2 BBB-/Baa3 BB+/Ba1 CORPORATE OR LOWER RATINGS OR SENIOR DEBT RATINGS - -------------------------------------------------------------------------- APPLICABLE MARGIN (bps) 65.0 75.0 85.0 107.5 130.0 - -------------------------------------------------------------------------- FACILITY FEE (bps) 10.0 12.5 15.0 17.5 20.0 - --------------------------------------------------------------------------
14 SCHEDULE 2.01 COMMITMENTS AND PRO RATA SHARES
Pro Rata Lender Commitment Share ------ ---------- ----- Bank of America, N.A. $ 30,500,000 9.10447761% Bank One, NA $ 30,450,000 9.08955224% U.S. Bank National Association $ 30,450,000 9.08955224% Morgan Guaranty Trust Company of New York $ 27,840,000 8.31044776% The Bank of Tokyo - Mitsubishi, Ltd., Chicago Branch $ 21,750,000 6.49253731% Banca Nazionale del Lavoro S.p.A. New York Branch $ 17,400,000 5.19402985% Banca Antonveneta New York Branch $ 17,400,000 5.19402985% Bank Hapoalim B.M. $ 17,400,000 5.19402985% First Union National Bank $ 17,400,000 5.19402985% The Industrial Bank of Japan, Limited $ 15,660,000 4.67462687% Fleet National Bank $ 15,660,000 4.67462687% Credit Lyonnais Chicago Branch $ 9,570,000 2.85671642% SunTrust Bank $ 9,570,000 2.85671642% Wells Fargo Bank, National Association $ 9,570,000 2.85671642% The Dai-Ichi Kangyo Bank, Ltd. $ 8,700,000 2.59701493% Banca di Roma - Chicago Branch $ 8,700,000 2.59701493% Firstar Bank, N.A. $ 8,700,000 2.59701493% Mellon Bank, N.A. $ 7,830,000 2.33731343% Sanwa Bank Limited $ 7,830,000 2.33731343% The Bank of New York $ 7,830,000 2.33731343% BNP Paribas $ 7,830,000 2.33731343% National City Bank $ 6,960,000 2.07761194% TOTAL $335,000,000 100%
15 EXHIBIT I EX-10.28 5 c60900ex10-28.txt SEPARATION AGREEMENT DATED MAY 31, 2000 1 EXHIBIT 10.28 SEPARATION AGREEMENT AND RELEASE THIS SEPARATION AGREEMENT AND RELEASE ("Agreement") is made and entered by and between Richard W. Ingman ("Ingman") and Pentair, Inc. ("Pentair" or the "Company"). 1. Consideration. In consideration for the mutual promises exchanged herein and for the payments to Ingman set forth herein, Ingman and the Company acknowledge the full, complete, and final settlement of any and all claims, actions, causes of action or costs, including attorneys' fees, against the other and the other persons and entities released herein. 2. Discharge of Claims. Ingman, on behalf of himself, his agents, representatives, attorneys, assignees, heirs, executors, and administrators, hereby releases and forever discharges the Company, and its past and present employees, agents, insurers, officials, officers, directors, divisions, parents, subsidiaries and successors, and all affiliated companies and corporations (including, without limitation, Hoffman Enclosures Inc.) from any and all claims and causes of action of any type arising, or which may have arisen, out of or in connection with his employment or termination of employment with the Company and its affiliated companies, including but not limited to claims, demands or actions arising under the Federal Fair Labor Standards Act, the Age Discrimination in Employment Act of 1967, 29 U.S.C. Section 626, as amended by Public Law 101.433 (1990) (the "Older Workers Benefit Protection Act"), Title VII of the Civil Rights Act of 1964, 42 U.S.C. Section 2000e, et seq., the Americans with Disabilities Act, 29 U.S.C. Section 2101, et seq., the Family Medical Leave Act, the Minnesota Human Rights Act, Minn. Stat. Section 363.01, et seq., any other federal, state or local statute, ordinance, regulation or order regarding employment, compensation for employment, termination of employment, or discrimination in employment, and the common law of any state. Ingman further understands that this discharge of claims extends to, but is not limited to, all claims which he may have as of the date of this Agreement against the Company and its affiliated companies, based upon statutory or common law claims for defamation, libel, slander, assault, battery, negligent or intentional infliction of emotional distress, negligent hiring or retention, breach of contract, promissory estoppel, fraud, wrongful discharge, or any other theory, whether legal or equitable, including all claims for items of compensation and benefits except as prohibited by law. The Company hereby releases and forever discharges Ingman from any and all claims and causes of action of any type arising out of or in connection with Ingman's employment or termination of employment with the Company. 3. Confidential Information Acquired During Employment. Ingman agrees that he will continue to treat, as private and privileged, any information, data, figures, projections, estimates, marketing plans, customer lists, lists of contract workers, tax records, personnel Page 1 of 9 2 records, accounting procedures, formulas, contracts, business partners, alliances, ventures and all other confidential information which Ingman acquired while working for the Company. Further, Ingman agrees that he will not release any such information to any person, firm, corporation or other entity at any time, except as may be required by law, or as agreed to in writing by the Company. Ingman acknowledges that any violation of this non-disclosure provision shall entitle the Company to appropriate injunctive relief and to any damages which it may sustain due to the improper disclosure. 4. Confidentiality. Ingman represents and agrees that he will keep the terms and existence of this Agreement completely confidential, and that he will not disclose any information concerning this Agreement to anyone, except for his counsel, tax accountant, spouse or except as may be required by law or agreed to in writing by the Company. 5. Non-Solicitation/Non-Competition Agreement. Ingman acknowledges that during his employment at Pentair and with its subsidiaries and affiliates, he became familiar with trade secrets, know-how, executive personnel, business strategies, product development and other confidential and proprietary information concerning the business of Pentair and other members of the Pentair controlled group of companies (the "Group"). In consideration for the benefits paid to Ingman under this Agreement (including, but not limited to, those benefits in Paragraph 10.b. hereof), Ingman agrees that he shall not, either directly or indirectly, for a period of three (3) years from the Separation Date as defined in Paragraph 7 of this Agreement, and without the prior written consent of Pentair: a. own, manage, control, participate in, consult with or render services of any kind for any concern which engages in a business which is competitive with any business being conducted, or contemplated being conducted, by the Group as of the Separation Date; b. become an employee or agent of any publicly traded corporation or other entity, or any division or subsidiary of such a corporation or entity, where more than five percent (5%) of such organization's business is in competition with any business being conducted, or contemplated being conducted, by the Group as of the Separation Date, unless the annual sales of such organization do not exceed $40 million; c. participate in any plan or attempt to acquire the business or assets of the Group or control of the voting stock of any member thereof, or in any manner interfere with the control of Pentair, whether by friendly or unfriendly means; d. induce or attempt to induce any individual to leave the employ of Pentair or any other Group member or hire any such individual who approaches him or her for employment; or Page 2 of 9 3 e. engage in or sponsor the solicitation of customers of Pentair or any Group member to do business with any competitor of such organization. In the event Ingman breaches any obligation under paragraph 5 of this Agreement, the Company shall have no further obligation to make any payments contemplated under paragraph 10.b. hereof, and, in such event, Ingman shall forfeit any right to payments under paragraph 10.b. hereof. 6. No Wrongdoing. Ingman and the Company agree and acknowledge that the consideration exchanged herein does not constitute, and shall not be construed as, an admission of liability or wrongdoing on the part of the Company, Ingman or any person, and shall not be admissible in any proceeding as evidence of liability or wrongdoing by anyone. 7. Separation from Service. Ingman's employment with Pentair ends effective May 31, 2000 (the "Separation Date"). Notwithstanding the Separation Date, Ingman ceased to be an officer and a director of Pentair and of each Pentair subsidiary listed on the attached Schedule A and a committee member or fiduciary with respect to each Pentair benefit plan listed on Schedule B as of February 14, 2000. 8. Severance Payment. The parties acknowledge that Pentair has paid Ingman $13,500 each pay period between February 14, 2000 and the present, and the parties further acknowledge that these payments shall continue through the Separation Date. In addition to these payments, Pentair shall pay to Ingman as severance (the "Severance Payment") the sum of Eighty One Thousand Dollars ($81,000) (in increments of $13,500 per pay period from June 1, 2000 through August 15, 2000). This amount shall be paid in accordance with the usual payroll practices of Pentair and shall be subject to applicable federal and state withholding taxes and any other deductions which have been authorized by Ingman or which Pentair may be required by law to make. Ingman acknowledges that without this Agreement, he would not be entitled to the benefits set forth in this paragraph. 9. Stock and Equity Awards. Outstanding awards made to Ingman under the Pentair Omnibus Stock Incentive Plan (the "Omnibus Plan") and other equity awards shall be paid as follows: a. Restricted Stock. All shares of restricted stock awarded to Ingman through February 14, 2000 under the Ownership Incentive Plan, together with any shares of restricted stock awarded to Ingman through the end of 1999 under the Omnibus Plan or any other bonus program shall, to the extent not currently vested, be vested as of the Separation Date. Any other outstanding awards of restricted stock (if any) shall be forfeited. Ingman acknowledges that without this Agreement, he would not be entitled to the benefits set forth in this subparagraph. Page 3 of 9 4 b. Incentive Compensation Units ("ICUs") [see annotation 1 attached]. All ICUs awarded to Ingman through 1999 under the Omnibus Plan shall be deemed to be fully vested as of the Separation Date without regard to the vesting period stated at the time of grant. The value of said awards shall be calculated and paid to Ingman as soon as administratively feasible after the expiration of the rescission period set forth in Paragraph 19 of this Agreement. Any other outstanding awards of ICUs shall be forfeited. Ingman acknowledges that without this Agreement, he would not be entitled to the benefits set forth in this subparagraph. c. Stock Options. All outstanding stock options granted to Ingman through 1999 under the Omnibus Plan shall remain outstanding and exercisable by him through the earlier of their original maturity date and five years from the Separation Date. The date any such option is first exercisable shall not be accelerated. In the event Ingman should die before all such options have been exercised or otherwise lapse, then the beneficiary designated by Ingman shall have six (6) months from Ingman's death to exercise options then outstanding. Any options not so exercised shall lapse. [To the extent options designated as incentive stock options are exercised within thirty (30) days of the last day of Ingman's employment, they shall retain their status as qualified options; options exercised after this thirty (30) day period shall be treated as nonqualified options.] If within two years after the Separation Date Ingman shall sell any Pentair common stock acquired pursuant to the exercise of qualified options, he shall immediately notify Pentair of such sale and shall supply all information reasonably requested by Pentair with respect to such sale. Ingman acknowledges that without this Agreement, he would not be entitled to the benefits set forth in this subparagraph. d. Insider Status. Henson & Efron, P.A. will advise Ingman in writing of its understanding of his status as an insider with Pentair for purposes of any stock transactions. 10. Retirement Benefits. Ingman shall receive payment from the tax-qualified and non qualified retirement plans maintained by Pentair as follows: a. Pentair Pension Plan. Ingman shall be entitled to receive payment of his vested accrued benefit under the Pentair Pension Plan in accordance with applicable provisions of that plan. From and after the Separation Date, Ingman shall cease to be eligible to accrue additional benefits under the Pentair Pension Plan. b. Supplemental Retirement Payment [see annotation 2 attached]. As a supplemental retirement benefit, Ingman shall be paid $11,563.58 monthly Page 4 of 9 5 beginning on September 1, 2000, said amounts paid in the form of a joint and 50% survivor annuity. This benefit is in lieu of benefits under either the 1988 or 1999 Supplemental Executive Retirement Plans (to which Ingman is not entitled and for which he is not eligible) and, except as otherwise provided in the Agreement, any other non-tax qualified retirement or deferred compensation arrangement sponsored by Pentair or any of its affiliates. Ingman understands and agrees that this supplemental retirement benefit is more than Pentair is required to pay under its normal policies and procedures if he had been eligible, and Ingman acknowledges that without this Agreement, he would not be entitled to the benefits set forth in this subparagraph. c. Retirement Savings and Stock Incentive Plan ("RSIP"). Ingman shall be entitled to receive payment of his vested accrued benefit under the RSIP in accordance with applicable provisions of that plan. Ingman shall remain a participant in RSIP until such time as he requests and receives payment of his vested accrued benefit, but from and after the Separation Date, Ingman shall not be entitled to make contributions to or to share in allocations of contributions made by Pentair after such date, including matching or employer discretionary contributions payable on account of service completed or deferrals made during 2000. d. Non-Qualified Deferred Compensation Plan ("Sidekick"). Ingman shall be entitled to receive payment of all amounts payable to him under the terms and conditions of the Sidekick in accordance with the payment election made by him at the time he began participation in such plan. From and after the Separation Date, Ingman shall not be entitled to make contributions to or to share in allocations of contributions made by Pentair after such date, including matching or employer discretionary contributions payable on account of service completed or deferrals made during 2000. e. Other Deferred Compensation Plan. To the extent Ingman may have amounts payable to him by reason of his participation in the deferred compensation plan maintained by Pentair prior to implementation of Sidekick, Ingman shall be entitled to receive payment of such deferred compensation in accordance with the annual payment elections made by him during the time he elected to participate in such plan. 11. Insurance Benefits. Ingman shall be eligible to elect to continue participation in various medical, dental, life and disability insurance benefits offered by Pentair as follows: a. Medical and Dental Insurance. In the event Ingman elects to continue participating in the Company's medical and dental insurance programs as are made available to employees of Pentair, the cost of providing such benefits Page 5 of 9 6 shall be shared by Pentair and Ingman on the same basis as if Ingman had remained an employee of Pentair until the earlier of such time as he is eligible for such coverage with a subsequent employer or eighteen (18) months from the Separation Date. Ingman's share of the premiums shall be deducted from the Severance Payment installments each pay period through August 2000. After August 2000, Ingman shall reimburse the Company for his share of the premiums. Ingman acknowledges that he would not be entitled to this benefit without this Agreement. For purposes of COBRA, the continuation period shall begin on the Separation Date. At the expiration of the maximum continuation period, Ingman shall be offered such conversion rights as are then being made available by the then insurer. b. Supplemental Disability and Supplemental Life Insurance. Ingman will be covered under the Company's group life (including dependent life), short-term disability and long-term disability plans, as amended from time to time, through the Separation Date. After the Separation Date, Ingman may elect to arrange for continuation of coverage and direct premium payment at his sole cost and expense. c. Flexible Benefit Plan (125C). Ingman shall be offered the opportunity to continue participation in the Pentair Flexible Benefit Plan consistent with the terms and provisions of said plan. d. Retiree Flex Plan. Ingman may elect to begin participation in the Retiree Flex Plan consistent with the terms and provisions of said plan at the end of the COBRA continuation period. The Company established the Retiree Flex Plan to offset a portion of a retiree's cost for medical coverage through cash credits which reimburse premiums paid or are applied against the retiree's contributions and make available a good selection of retiree medical coverage at group rates, where possible. 12. Other Benefits or Payments. Ingman shall be entitled to receive other payments and benefits as follows: a. Flexible Perquisite Account. Pentair will pay to Ingman a maximum of $20,000 for the year 2000 under the Pentair Flexible Perquisite Plan, less vehicle lease payments made by Pentair during 2000. Ingman acknowledges that without this Agreement, he would not be entitled to the benefits set forth in this subparagraph. b. Company Vehicle. Ingman may elect to turn in the Company-provided vehicle currently in his possession or purchase the vehicle for $22,949.70 on the Separation Date. Flexible Perquisite Account funds ($20,000 Page 6 of 9 7 less applicable deductions) may be used toward the vehicle purchase price or paid in cash. All applicable sales or other taxes and transfer fees shall be paid by Ingman. c. Business Expenses. Pentair will reimburse Ingman for all business expenses incurred by him in the active performance of his duties on behalf of Pentair through February 14, 2000, provided Ingman submits proper documentation for such expenses. 13. Future Employment. Ingman will not apply for or seek employment or re-employment with the Company or its affiliated companies at any time after he signs this Agreement. 14. Executive Placement. The Company will provide to Ingman $20,000 which may be used toward outplacement or other services. 15. Cooperation. Ingman agrees that at the request of the Company, Ingman will cooperate with and assist the Company (including cooperation and assistance in any matters involving claims or lawsuits against the Company) as requested by the Company where Ingman has knowledge of the facts involved. In addition, Ingman agrees that he will, at the reasonable request of the Company, execute, if necessary, nunc pro tunc, any further documents or instruments necessary or appropriate to evidence his separation from service as an officer or director of the Company, its subsidiaries, or its affiliates, including but not necessarily limited to the forms attached hereto as Schedule C. Ingman further agrees that he will not voluntarily aid, assist, or cooperate with anyone who has claims against the Company, its affiliates or with their attorneys or agents in any claims or lawsuits which such person may bring against the Company or its affiliates. Nothing in this Agreement prevents Ingman from testifying at an administrative hearing, arbitration, deposition, or in court, in response to a lawful and properly served subpoena. 16. Minnesota Law Applies. The terms of this Agreement will be governed by the laws of the State of Minnesota, and shall be construed and enforced thereunder. 17. Merger. This Agreement, and the employee benefit plans in which Ingman participates as described herein supersede and replace all prior oral and written agreements and understandings. Ingman understands and agrees that all claims which he has or may have against the Company are fully released and discharged by this Agreement. The only claims which Ingman may hereafter assert against the Company are limited to an alleged breach of this Agreement. 18. Invalidity. If any one or more of the terms of this Agreement are deemed to be invalid or unenforceable by a court of law, the validity, enforceability, and legality of the remaining provisions of this Agreement will not in any way be affected or impaired thereby. Page 7 of 9 8 19. Ingman Understands the Terms of this Agreement. Ingman warrants that (a) other than stated herein, no promise or inducement has been offered for this Agreement; (b) this Agreement is executed without reliance upon any statement or representation of the Company or its representatives concerning the nature and extent of any claims or liability therefor, if any; (c) Ingman is legally competent to execute this Agreement and accepts full responsibility therefor; (d) the Company, by this Agreement, has advised Ingman to consult with an attorney, and Ingman has consulted with his attorney, Robert R. Reinhart, Jr., Esq. regarding the purpose and effect of this Agreement; (e) the Company has allowed Ingman at least twenty-one (21) days within which to consider this Agreement, specifically Ingman may sign this Agreement any time prior to May 24, 2000, at which time it will be automatically withdrawn without further notice; (f) Ingman understands that he may nullify and rescind this Agreement as far as it extends to his release of claims arising under Minn. Stat. Section 363.01 et seq., the Minnesota Human Rights Act, and under the Age Discrimination in Employment Act of 1967, 29 U.S.C. Section 626, as amended by Public Law 101.433 (1990) (the "Older Workers Benefit Protection Act") at any time within fifteen (15) days from the date of his signature below and, in the event of such election, Ingman shall only be entitled to receive $1,000 which the parties acknowledge is consideration for Ingman's release of all claims other than those arising under Minn. Stat. Section 363.01 et seq., the Minnesota Human Rights Act, and under the Age Discrimination in Employment Act of 1967, 29 U.S.C. Section 626, as amended by Public Law 101.433 (1990) (the "Older Workers Benefit Protection Act"); (g) in the event Ingman elects to nullify and rescind portions of his release under this Agreement pursuant to (f) of this paragraph, he must indicate his desire to do so in writing and deliver that writing to Deb S. Knutson, Vice President, Human Resources, Pentair, Inc., Waters Edge Plaza, 1500 County Road B2 West, St. Paul, MN 55113-3105, by hand or by certified mail; and (g) Ingman further understands that if he exercises his rescission rights hereunder, the Company will not be bound by the terms of this Agreement (except the obligation to pay Ingman $1,000), and Ingman will have to disgorge in full any monies and benefits received pursuant to this Agreement other than the $1,000 sum. Dated: May 31, 2000 --------------------------- Richard W. Ingman Subscribed and sworn to before me this ____ day of ___________, 2000. - ------------------------------ Notary Public Page 8 of 9 9 Dated: PENTAIR, INC. ------------------------------ By ------------------------------ Its ----------------------------- Subscribed and sworn to before me this ____ day of ________, 2000. - ------------------------------ Notary Public Page 9 of 9 10 ANNOTATIONS TO APRIL 1, 2000 INGMAN AGREEMENT 1. ICUS. ICU values are calculated after final results for a year are determined for purposes of applying a performance matrix which takes into account growth in operating income and return on invested capital for the prior year. Subject to verification of final numbers to develop performance factors for the 1998 and 1999 values and any adjustments for accelerated vesting, ICU values can be paid to Ingman shortly after his last day of employment. EXAMPLE: 1998 ICUs = 88,571.00 ($1.00 value at issue) 1998 Factor = 1.857 Payment: 88,571 ICUs X 1.857 = $164,476.34 1999 Factor = 1.851
2. SERP. The supplemental retirement benefit offered to Ingman is based on the provisions of the 1988 SERP document, although Ingman is not entitled to a benefit under this or any other supplemental or nonqualified, noncontributory pension plan maintained by Pentair. The formula used to determine Ingman's supplemental benefit will be: 50% of Final Average Compensation(1) MINUS 100% of monthly primary Social Security, MINUS retirement benefits under other retirement plans, regardless of employer, and subject to exceptions for benefits attributable to his contributions. Generally, this benefit is payable as a single life annuity, a joint and 50% survivor annuity or the other alternative payment forms described in the Pentair Pension Plan are available. A lump sum payment option is not available. Optional forms of benefit are the actuarial equivalent of a life annuity. The benefit described in this agreement is payable September 1, 2000. Other commencement dates are available. Reductions are made for early commencement of benefits (see Exhibit A to annotation 2 attached). - -------- (1) Compensation for the 36 consecutive months out of last 60 consecutive months ending March 31, 2000 of employment for which compensation is highest. For this purpose, compensation includes all cash remuneration paid for services actually rendered, including elective deferrals, but not Omnibus Plan awards. 11 Pentair will calculate a specific monthly supplemental benefit as soon as practicable after Ingman selects an alternate form of benefit and a benefit commencement date and provides information regarding other pension benefits to be offset in determining his supplemental benefit. 12 SCHEDULE A POSITIONS HELD BY RICHARD W. INGMAN AT PENTAIR AND SUBSIDIARIES
COMPANY TITLE ------- ----- Pentair, Inc. EVP, CFO Pentair, Inc. Employee Hoffman Engineering SA de CV Director Hoffman Schroff PTE Ltd Director EuroPentair GmbH Geschaftsfuhrer Pentair Canada, Inc. Director Pentair Asia PTE Ltd Director Penwald Insurance Company Chairman, Director Pentair Foreign Sales Company Chairman, President, Director Pentair Financial Services Ireland Alternate Director Pentair Nova Scotia President, Director Pentair Halifax President, Director Pentair UK Limited Director
13 SCHEDULE B FIDUCIARY POSITIONS HELD BY RICHARD W. INGMAN AT PENTAIR AND SUBSIDIARIES
COMMITTEE/PLAN TITLE - -------------- ----- Pentair, Inc. Investment Committee for all Member Bargaining and non-Bargaining Pension Plans Pentair, Inc. Retirement Savings and Stock Member Incentive Plan Committee Pentair, Inc. International Stock Purchase and Member Bonus Plan Committee The Pentair Foundation Director
14 EXHIBIT A TO ANNOTATION 2 The following calculation assumes a September 1, 2000 commencement date, although a later date might be applicable. For the qualified plan, Mr. Ingman will choose the commencement date and optional benefit form. If he does not wish to commence qualified benefits on September 1, 2000, he may defer those decisions to a later date of his choosing. For purposes of the Special Retirement benefit, because of tax regulations, Pentair's Board (or its delegate) will choose the commencement date and optional form. One factor in the Board's decision will be Mr. Ingman's preference. The monthly benefits are:
QUALIFIED SPECIAL FORM MONTHLY AMOUNT MONTHLY AMOUNT - ---- -------------- -------------- Life $ 1,069.62 $ 12,469.08 5 year C&L 1,059.13 12,346.76 10 year C&L 1,031.41 12.023.68 50% J&S 991.94 11,563.58 66-2/3% J&S 968.50 11,290.25 100% J&S 924.78 10,780.64
The following data was used to determine Mr. Ingman's benefit: Date of Birth August 3, 1944 Date of Hire: August 7, 1989 Spouse's Date of Birth: January 12, 1945 Date of Termination: March 31, 2000 2000 Eligible Earnings: $364,467.93 1999 Eligible Earnings: $518,080.72 1998 Eligible Earnings: $497,126.26 1997 Eligible Earnings: $491,161.66 Other Employer Benefit: $823.00
EX-10.29 6 c60900ex10-29.txt SEPARATION AGREEMENT DATED NOVEMBER 27, 2000 1 EXHIBIT 10.29 SEPARATION AGREEMENT AND RELEASE THIS SEPARATION AGREEMENT AND RELEASE ("Agreement") is made and entered by and between James A. White ("White" or "Employee") and Pentair, Inc. ("Pentair" or the "Company"). 1. Consideration. In consideration for the mutual promises exchanged herein and for the payments to White set forth herein, White acknowledges the full, complete, and final settlement of any and all claims, actions, causes of action or costs, including attorneys' fees, against the Company and the other persons and entities released herein. 2. Discharge of Claims. White, on behalf of himself, his agents, representatives, attorneys, assignees, heirs, executors, and administrators, hereby releases and forever discharges the Company, and its past and present employees, agents, insurers, officials, officers, directors, divisions, parents, subsidiaries and successors, and all affiliated companies and corporations (including, without limitation, Porter-Cable Corporation) from any and all claims and causes of action of any type arising, or which may have arisen, out of or in connection with his employment or termination of employment with the Company and its affiliated companies, including but not limited to claims, demands or actions arising under the Federal Fair Labor Standards Act, the Age Discrimination in Employment Act of 1967, 29 U.S.C. Section 626, as amended by Public Law 101.433 (1990) (the "Older Workers Benefit Protection Act"), Title VII of the Civil Rights Act of 1964, 42 U.S.C. Section 2000e, et seq., the Americans with Disabilities Act, 29 U.S.C. Section 2101, et seq., the Family Medical Leave Act, the Minnesota Human Rights Act, Minn. Stat. Section 363.01, et seq., any other federal, state or local statute, ordinance, regulation or order regarding employment, compensation for employment, termination of employment, or discrimination in employment, and the common law of any state. White further understands that this discharge of claims extends to, but is not limited to, all claims which he may have as of the date of this Agreement against the Company and its affiliated companies, based upon statutory or common law claims for defamation, libel, slander, assault, battery, negligent or intentional infliction of emotional distress, negligent hiring or retention, breach of contract, promissory estoppel, fraud, wrongful discharge, or any other theory, whether legal or equitable, including all claims for items of compensation and benefits except as prohibited by law. 3. Confidential Information Acquired During Employment. White agrees that he will continue to treat, as private and privileged, any information, data, figures, projections, estimates, marketing plans, customer lists, lists of contract workers, tax records, personnel records, accounting procedures, formulas, contracts, business partners, alliances, ventures and all other confidential information which White acquired while working for the Company. Further, White agrees that he will not release any such information to any person, firm, corporation or other entity at any time, except as may be required by law, or as agreed to in writing by the Page 1 of 9 2 Company. White acknowledges that any violation of this non-disclosure provision shall entitle the Company to appropriate injunctive relief and to any damages which it may sustain due to the improper disclosure. 4. Confidentiality. White represents and agrees that he will keep the terms and existence of this Agreement completely confidential, and that he will not disclose any information concerning this Agreement to anyone, except for his counsel, tax accountant, spouse or except as may be required by law or agreed to in writing by the Company. 5. Non-Solicitation/Non-Competition Agreement. White acknowledges that during his employment at Pentair and with its subsidiaries and affiliates, he became familiar with trade secrets, know-how, executive personnel, business strategies, product development and other confidential and proprietary information concerning the business of Pentair and other members of the Pentair controlled group of companies (the "Group"). In consideration for the benefits paid to White under this Agreement (including, but not limited to, those benefits in Paragraph 10.b. hereof), White agrees that he shall not, either directly or indirectly, for a period of three (3) years from the Separation Date as defined in Paragraph 7 of this Agreement, and without the prior written consent of Pentair: a. own, manage, control, participate in, consult with or render services of any kind for any concern which engages in a business which is competitive with any business being conducted, or contemplated being conducted as known by Employee, by the Group as of the Separation Date; b. become an employee or agent of any publicly traded corporation or other entity, or any division or subsidiary of such a corporation or entity, where more than five percent (5%) of such organization's business is in competition with any business being conducted, or contemplated being conducted as known by Employee, by the Group as of the Separation Date, unless the annual sales of such organization do not exceed $40 million; c. participate in any plan or attempt to acquire the business or assets of the Group or control of the voting stock of any member thereof, or in any manner interfere with the control of Pentair, whether by friendly or unfriendly means; d. induce or attempt to induce any individual to leave the employ of Pentair or any other Group member or hire any such individual who approaches him or her for employment; or e. engage in, directly or indirectly, the solicitation of customers of Pentair or any Group member to do business with any competitor of such organization with respect to a competing product. Page 2 of 9 3 The Company's sole and exclusive remedy for a breach by White of any obligation under paragraph 5 of this Agreement shall be that the Company shall have no further obligation to make any payments contemplated under paragraph 10.b. hereof, and, in such event, White shall forfeit all past and future payments under paragraph 10.b. hereof. 6. No Wrongdoing. White and the Company agree and acknowledge that the consideration exchanged herein does not constitute, and shall not be construed as, an admission of liability or wrongdoing on the part of the Company, White or any person, and shall not be admissible in any proceeding as evidence of liability or wrongdoing by anyone. 7. Separation from Service. White's employment with Pentair ended effective September 30, 2000 (the "Separation Date"). Notwithstanding the Separation Date, White ceased to be an officer and a director of Pentair and of each Pentair subsidiary listed on the attached Schedule A as of September 13, 2000. 8. Severance Payment. The parties acknowledge that Pentair has paid White $14,583.34 each pay period through the Separation Date. In addition to these payments, Pentair shall pay to White as severance (the "Severance Payment") the sum of $87,500 (in increments of $14,583.34 per pay period from October 1, 2000 through December 31, 2000). This amount shall be paid in accordance with the usual payroll practices of Pentair and shall be subject to applicable federal and state withholding taxes and any other deductions which have been authorized by White or which Pentair may be required by law to make. White acknowledges that without this Agreement, he would not be entitled to the benefits set forth in this paragraph. 9. Bonus, Stock and Equity Awards. Outstanding awards made to White under the Pentair Omnibus Stock Incentive Plan (the "Omnibus Plan") and other equity awards shall be paid as follows: a. Management Incentive Plan Substitute. The parties acknowledge Employee is not eligible for a bonus under the terms of the Company's Management Incentive Plan ("MIP"). Notwithstanding the foregoing, as additional consideration to Employee, the Company will pay to Employee in February 2001 the prorated portion of the annual bonus Employee would have received if he had remained an eligible employee under the MIP using Employee's Separation Date as the date for calculating the prorated sum. b. Restricted Stock. All shares of restricted stock awarded to White under the Ownership Incentive Plan or any other shall, to the extent not currently vested, be vested on January 22, 2001. White acknowledges that without this Agreement, he would not be entitled to the benefits set forth in this subparagraph. b. Incentive Compensation Units ("ICUs") [see Annotation 1 attached]. All ICUs awarded to White through 2000 under the Omnibus Plan shall be deemed to be fully vested on January 22, 2001 without regard to the Page 3 of 9 4 vesting period stated at the time of grant. The value of said awards shall be calculated and paid to White as soon as administratively feasible after the vesting date of January 22, 2001. White acknowledges that without this Agreement, he would not be entitled to the benefits set forth in this subparagraph. c. Stock Options. All outstanding stock options granted to White under the Omnibus Plan shall remain outstanding and exercisable by him through the earlier of their original maturity date and five years from the Separation Date. The date any such option is first exercisable shall not be accelerated. In the event White should die before all such options have been exercised or otherwise lapse, then the beneficiary designated by White shall have six (6) months from White's death to exercise options then outstanding. Any options not so exercised shall lapse. [To the extent options designated as incentive stock options are exercised within thirty (30) days of the last day of White's employment, they shall retain their status as qualified options; options exercised after this thirty (30) day period shall be treated as nonqualified options.] If within two years after the Separation Date White shall sell any Pentair common stock acquired pursuant to the exercise of qualified options, he shall immediately notify Pentair of such sale and shall supply all information reasonably requested by Pentair with respect to such sale. White acknowledges that without this Agreement, he would not be entitled to the benefits set forth in this subparagraph. d. Insider Status. Henson & Efron, P.A. will advise White in writing of its understanding of his status as an insider with Pentair for purposes of any stock transactions. 10. Retirement Benefits. White shall receive payment from the tax-qualified and non qualified retirement plans maintained by Pentair as follows: a. Pentair Pension Plan. White shall be entitled to receive payment of his vested accrued benefit under the Pentair Pension Plan in accordance with applicable provisions of that plan. From and after the Separation Date, White shall cease to be eligible to accrue additional benefits under the Pentair Pension Plan. b. Supplemental Retirement [see Annotation 2 attached]. As a supplemental retirement benefit, White shall receive monthly benefits of $8,616.00 beginning as early as October 1, 2000 in the form of a fifteen (15) year certain benefit. (See Exhibit A to Annotation 2.) This benefit is in lieu of benefits under either the 1988 or 1999 Supplemental Executive Retirement Plans (to which White is not entitled and for which he is not eligible) and, except as otherwise provided in the Agreement, any other non-tax qualified retirement or deferred compensation arrangement sponsored by Pentair or any of its affiliates. White understands and agrees that this supplemental retirement benefit is more Page 4 of 9 5 than Pentair is required to pay under its normal policies and procedures if he had been eligible, and White acknowledges that without this Agreement, he would not be entitled to the benefits set forth in this subparagraph. c. Retirement Savings and Stock Incentive Plan ("RSIP"). White shall be entitled to receive payment of his vested accrued benefit under the RSIP in accordance with applicable provisions of that plan. White shall remain a participant in RSIP until such time as he requests and receives payment of his vested accrued benefit, but from and after the Separation Date, White shall not be entitled to make contributions to or to share in allocations of contributions made by Pentair after such date, including matching or employer discretionary contributions payable on account of service completed or deferrals made during 2000. d. Non-Qualified Deferred Compensation Plan ("Sidekick"). White shall be entitled to receive payment of all amounts payable to him under the terms and conditions of the Sidekick in accordance with the payment election made by him at the time he began participation in such plan. From and after the Separation Date, White shall not be entitled to make contributions to or to share in allocations of contributions made by Pentair after such date, including matching or employer discretionary contributions payable on account of service completed or deferrals made during 2000. e. Other Deferred Compensation Plan. To the extent White may have amounts payable to him by reason of his participation in the deferred compensation plan maintained by Pentair prior to implementation of Sidekick, White shall be entitled to receive payment of such deferred compensation in accordance with the annual payment elections made by him during the time he elected to participate in such plan. 11. Insurance Benefits. White shall be eligible to elect to continue participation in various medical, dental, life and disability insurance benefits offered by Pentair as follows: a. Medical and Dental Insurance. In the event White elects to continue participating in the Company's medical and dental insurance programs as are made available to employees of Pentair, the cost of providing such benefits shall be shared by Pentair and White on the same basis as if White had remained an employee of Pentair until the earlier of such time as he is eligible for such coverage with a subsequent employer or eighteen (18) months from the Separation Date. White's share of the premiums shall be paid directly to our external benefits administrator, AON. For purposes of COBRA, the continuation period shall begin on the Separation Date. At the expiration of the maximum continuation period, White shall be offered such conversion rights as are then being made available by the then insurer. Page 5 of 9 6 b. Supplemental Disability and Supplemental Life Insurance. White will be covered under the Company's group life (including dependent life), short-term disability and long-term disability plans, as amended from time to time, through the Separation Date. After the Separation Date, White may elect to arrange for continuation of coverage and direct premium payment at his sole cost and expense. c. Flexible Benefit Plan (125C). White shall be offered the opportunity to continue participation in the Pentair Flexible Benefit Plan consistent with the terms and provisions of said plan. d. Retiree Flex Plan. White may elect to begin participation in the Retiree Flex Plan consistent with the terms and provisions of said plan at the end of the COBRA continuation period. The Company established the Retiree Flex Plan to offset a portion of a retiree's cost for medical coverage through cash credits which reimburse premiums paid or are applied against the retiree's contributions and make available a good selection of retiree medical coverage at group rates, where possible. 12. Other Benefits or Payments. White shall be entitled to receive other payments and benefits as follows: a. Flexible Perquisite Account. To the extent White does not allocate the funds toward the purchase of the Company vehicle pursuant to Section 12.b. hereof, Pentair will pay to White the sum of $11,531.78, the remaining available amount under the Pentair Flexible Perquisite Plan. White acknowledges that without this Agreement, he would not be entitled to the benefits set forth in this subparagraph. b. Company Vehicle. White may elect to turn in the Company-provided vehicle currently in his possession or purchase the vehicle for $18,046.62. The remaining Flexible Perquisite Account funds identified in Section 12.a. hereof may be used toward the vehicle purchase price, or Employee may elect to pay in cash. All applicable sales or other taxes and transfer fees shall be paid by White. c. Business Expenses. Pentair will reimburse White for all business expenses incurred by him in the active performance of his duties on behalf of Pentair through September 30, 2000, provided White submits proper documentation for such expenses. Page 6 of 9 7 d. Relocation Services. Pentair will make available to Employee as an additional benefit the relocation services in the form attached hereto as Schedule B. 13. Future Employment. White will not apply for or seek employment or re-employment with the Company or its affiliated companies at any time after he signs this Agreement. 14. Executive Placement. The Company will provide to White $20,000 which may be used toward outplacement or other services. 15. Cooperation. White agrees that at the request of the Company, White will cooperate with and assist the Company (including cooperation and assistance in any matters involving claims or lawsuits against the Company) as requested by the Company where White has knowledge of the facts involved. In addition, White agrees that he will, at the reasonable request of the Company, execute, if necessary, nunc pro tunc, any further documents or instruments necessary or appropriate to evidence his separation from service as an officer or director of the Company, its subsidiaries, or its affiliates, including but not necessarily limited to the forms attached hereto as Schedule C. White further agrees that he will not voluntarily aid, assist, or cooperate with anyone who has claims against the Company, its affiliates or with their attorneys or agents in any claims or lawsuits which such person may bring against the Company or its affiliates. Nothing in this Agreement prevents White from testifying at an administrative hearing, arbitration, deposition, or in court, in response to a lawful and properly served subpoena. 16. Minnesota Law Applies. The terms of this Agreement will be governed by the laws of the State of Minnesota, and shall be construed and enforced thereunder. 17. Merger. This Agreement, and the employee benefit plans in which White participates as described herein supersede and replace all prior oral and written agreements and understandings. White understands and agrees that all claims which he has or may have against the Company are fully released and discharged by this Agreement. The only claims which White may hereafter assert against the Company are limited to an alleged breach of this Agreement. 18. Invalidity. If any one or more of the terms of this Agreement are deemed to be invalid or unenforceable by a court of law, the validity, enforceability, and legality of the remaining provisions of this Agreement will not in any way be affected or impaired thereby. 19. White Understands the Terms of this Agreement. White warrants that (a) other than stated herein, no promise or inducement has been offered for this Agreement; (b) this Agreement is executed without reliance upon any statement or representation of the Company or its representatives concerning the nature and extent of any claims or liability therefor, if any; (c) White is legally competent to execute this Agreement and accepts full responsibility therefor; (d) the Company, by this Agreement, has advised White to consult with an attorney, and White has Page 7 of 9 8 consulted with his attorney, _______________________, Esq. regarding the purpose and effect of this Agreement; (e) the Company has allowed White at least twenty-one (21) days within which to consider this Agreement, specifically White may sign this Agreement any time prior to _____________, 2000, at which time it will be automatically withdrawn without further notice; (f) White understands that he may nullify and rescind this Agreement as far as it extends to his release of claims arising under Minn. Stat. Section 363.01 et seq., the Minnesota Human Rights Act, and under the Age Discrimination in Employment Act of 1967, 29 U.S.C. Section 626, as amended by Public Law 101.433 (1990) (the "Older Workers Benefit Protection Act") at any time within fifteen (15) days from the date of his signature below and, in the event of such election, White shall only be entitled to receive $1,000 which the parties acknowledge is consideration for White's release of all claims other than those arising under Minn. Stat. Section 363.01 et seq., the Minnesota Human Rights Act, and under the Age Discrimination in Employment Act of 1967, 29 U.S.C. Section 626, as amended by Public Law 101.433 (1990) (the "Older Workers Benefit Protection Act"); (g) in the event White elects to nullify and rescind portions of his release under this Agreement pursuant to (f) of this paragraph, he must indicate his desire to do so in writing and deliver that writing to Deb S. Knutson, Vice President, Human Resources, Pentair, Inc., Wells Fargo Center, 90 So. 7th Street, 36th Floor, Minneapolis, MN 55402 by hand or by certified mail; and (g) White further understands that if he exercises his rescission rights hereunder, the Company will not be bound by the terms of this Agreement (except the obligation to pay White $1,000), and White will have to disgorge in full any monies and benefits received pursuant to this Agreement other than the $1,000 sum. Dated: November 27, 2000 ------------------------------ James A. White Subscribed and sworn to before me this ____ day of ___________, 2000. - ------------------------------ Notary Public Page 8 of 9 9 Dated: PENTAIR, INC. ------------------------ By ------------------------- Its ------------------------ Subscribed and sworn to before me this ____ day of ________, 2000. - ------------------------------ Notary Public Page 9 of 9 10 SCHEDULE A POSITIONS HELD BY JAMES A. WHITE AT PENTAIR AND SUBSIDIARIES
COMPANY TITLE - ------- ----- Pentair, Inc. EVP; President, Professional Tools and Equipment Group Pentair, Inc. Employee Porter-Cable Corporation Chairman, Director Pentair Tools & Equipment Sales Co. Chairman, Director Delta International Machinery Corporation Chairman, Director Biesemeyer Manufacturing Corporation Chairman, Director Flex Elektrowerkzeuge GmbH Geschaftsfuhrer Porter-Cable de Mexico SrL decv Chairman, Director Porter-Cable Argentina SrL Chairman, Manager Porter-Cable Chile Chairman, Manager Porter-Cable Argentina LLC Chairman, Governor Century Manufacturing Company Chairman, Director Lincoln Automotive Company Chairman, Director Apno S.A. de C.V. Chairman, Director DeVilbiss Air Power Company Chairman, Director Falcon Manufacturing, Inc. President, Director Pentair Canada, Inc. Chairman, President, Director
11 SCHEDULE B Relocation Sheets 12 SCHEDULE C Separation Forms 13 ANNOTATION 1 [ICUs] ANNOTATION 2 [SERP] EX-10.30 7 c60900ex10-30.txt STOCK INCENTIVE PLAN DATED 2/14/01 1 PENTAIR, INC. OMNIBUS STOCK INCENTIVE PLAN AS AMENDED AND RESTATED SECTION 1. BACKGROUND AND PURPOSE 1.1 BACKGROUND. Pentair, Inc. ("Pentair") maintains a comprehensive equity compensation incentive plan to award long-term equity incentives which tie the compensation of executives and key managerial employees to Pentair operating results. In particular, this Plan is designed to attract and retain top quality executives and key employees, encourage innovation and growth, reward executives for attainment of short-term performance objectives and long-term shareholder value, recognize outstanding performance, encourage executive stock ownership and, in general, to align management and shareholder interests. Pentair established the Plan in 1990 by combining its then separate equity compensation plans into one plan to achieve administrative consistency and greater flexibility in structuring equity compensation awards. 1.2 RESTATEMENT OF PLAN. Pentair amended and restated this Plan to authorize additional shares of Stock and ICUs with which to make grants under the Plan, clarify certain administrative practices and bring the Plan into compliance with Code requirements enacted since the Plan's adoption. The amended and restated Plan was adopted on February 14, 1996, subject to shareholder approval, and applies to all equity compensation grants made after that date. This amended and restated plan extends until February 14, 2006. 1.3 2001 AMENDMENTS. Pentair is amending the Plan, effective February 14, 2001, to authorize additional shares of Stock with which to make grants under the Plan, implement a cap on the amount of authorized shares of Stock available for various types of Stock awards, other than Options, and clarify the authority of the Committee to amend outstanding grants. 2 SECTION 2. DEFINITIONS Unless the context requires otherwise, when capitalized the terms listed below shall have the following meanings when used in this or any other section of the Plan: 2.1 "AFFILIATE" is any corporation, business trust, division, partnership or joint venture in which Pentair owns (either directly or indirectly) fifty percent (50%) or more of the voting stock, or rights analogous to voting stock, but only for the duration of such ownership. 2.2 "BOARD" is the Board of Directors of Pentair, Inc., as elected from time to time. 2.3 "BOOK VALUE PER SHARE" or "BOOK VALUE" is the total consolidated shareholders' equity of Pentair at the close of a Fiscal Year, less the equity attributable to preferred shares, divided by the number of shares of Stock outstanding at the end of that Fiscal Year. 2.4 "CODE" is the Internal Revenue Code of 1986, as amended. 2.5 "COMMITTEE" is the Compensation and Personnel Committee of the Board, as appointed from time to time. 2.6 "DISABLED" or "DISABILITY" is a physical or mental incapacity which qualifies an individual to collect a benefit under the long-term disability plan of Pentair or an Affiliate, or such other condition which the Committee may determine to be a Disability. 2.7 "ELIGIBLE EMPLOYEE" is any key managerial, administrative or professional employee of Pentair or an Affiliate, generally in salary grade 25 or higher, who is in a position to make a material contribution to the continued profitable growth and long term success of Pentair or an Affiliate. 2.8 "FAIR MARKET VALUE" is the closing price of a share of Stock on the relevant date as reported on either the NASDAQ National Market System or the New York Stock Exchange, depending on which exchange then lists Pentair stock, or as otherwise determined using procedures established by the Committee. 2.9 "FISCAL YEAR" is the twelve (12) consecutive month period beginning January 1 and ending December 31. 2.10 "INCENTIVE COMPENSATION UNIT" or "ICU" is a unit representing the right to receive an amount determined by attainment of corporate performance objectives over an applicable Incentive Period. 2 3 2.11 "INCENTIVE PERIOD" is a period of continuous employment fixed by the Committee at the time of grant of an ICU after which such ICU may become payable, provided all relevant performance objectives have been met. 2.12 "INCENTIVE STOCK OPTION" or "ISO" is an Option which is designated as such by the Committee and intended to so qualify under Code section 422. 2.13 "NONQUALIFIED STOCK OPTION" or "NQSO" is any Option which is not an ISO. 2.14 "OPTION" is a right granted pursuant to the Plan to purchase Stock subject to such terms and conditions as may be specified by the Committee at the time of grant. 2.15 "PARTICIPANT" is an Eligible Employee approved by the Committee to receive a grant or award under the Plan. 2.16 "PENTAIR" is Pentair, Inc., a Minnesota corporation. 2.17 "PERFORMANCE PERIOD" is the period of time over which a Participant must meet the relevant performance criteria established by the Committee at the time of an award of Performance Shares or Performance Units. 2.18 "PERFORMANCE SHARE" is a share of Stock, Restricted Stock, or a Right to Restricted Stock, awarded by the Committee, subject to such performance targets or other restrictions as are established by the Committee at the time of award. 2.19 "PERFORMANCE UNIT" is an amount equal to the value of an ICU determined on the date of award. 2.20 "PLAN" is the Pentair, Inc. Omnibus Stock Incentive Plan, as amended from time to time. 2.21 "RESTRICTED STOCK" is Stock issued or transferred to a Participant by means of an award subject to such restrictions as may be imposed at the time of grant by the Committee, and which will remain subject to said restrictions until such time as the restrictions lapse. 2.22 "RETIREMENT" is the time a Participant who is eligible to receive retirement income benefits from the Pentair tax qualified pension plan separates from employment. 2.23 "RIGHT TO RESTRICTED STOCK" is a right awarded to a Participant to receive Stock or Restricted Stock which will vest at some future time and which is subject to such restrictions 3 4 as may be imposed at the time of grant by the Committee, and which will remain subject to such restrictions until the restrictions lapse. 2.24 "SIGNIFICANT SHAREHOLDER" is an employee who owns more than ten percent (10%) of the total combined voting power of all classes of stock issued by Pentair as of the date such employee is granted an Option. For this purpose, the provisions of Code sections 422 and 424, as amended, shall apply. 2.25 "STOCK" is Pentair common stock. 4 5 SECTION 3. SHARES SUBJECT TO THE PLAN 3.1 SHARES. (a) Number of Shares. The maximum number of shares of Stock which may be issued for any type of award or grant under the Plan shall be 5,600,000, subject to adjustment as provided in Sections 3.1(b) and 3.3. Not more than twenty percent (20%) of such shares shall be available for various types of grants, other than Options, which may be made under the Plan. (b) Unused Shares. Any shares of Stock subject to an Option which is canceled, expires or otherwise terminates without having been exercised in full (unless such cancellation is due to the exercise of a related SAR), or any shares of Restricted Stock, Rights to Restricted Stock or Performance Shares which are forfeited, shall again be available for grants or awards under the Plan. 3.2 INCENTIVE COMPENSATION UNITS. The maximum number of Incentive Compensation Units which may be awarded under the Plan is 4,000,000, subject to adjustment as provided in this Section 3.2 and in Section 3.3. If an ICU is awarded, but is forfeited or otherwise terminates without payment having been made to the Participant, then such ICU shall again be available for awards under the Plan. 3.3 ANTIDILUTION. In the event of a change in the number or class of outstanding shares of Stock by reason of a stock dividend or split, recapitalization, reclassification, merger, consolidation, or other similar corporate change, the number of shares of Stock as to which grants of Options or other awards under the Plan may be made, and the number of ICUs available for award under the Plan, shall be adjusted proportionately to the nearest whole share or unit. Any such action shall be within the discretion of the Committee, whose determination shall be conclusive. If such an adjustment is made with respect to shares then subject to an Option, the number of shares and the Option price per share shall be adjusted proportionately so the aggregate exercise price of such Option shall not change. 5 6 SECTION 4. STOCK OPTIONS 4.1 GRANTING OPTIONS. Participants may be granted ISOs, SARs or NQSOs. No one Participant shall be granted, in the aggregate, Options or SARs on more than 150,000 shares in any calendar year. Solely for purposes of determining the number of Options or SARs available for grant to an individual in any calendar year, Options which are canceled or repriced shall be counted against this annual maximum to the extent required by applicable regulations. 4.2 OPTION TERMS AND CONDITIONS. (a) Grant of Option. Except as otherwise limited by the Plan, the Committee shall have the discretion to grant to a Participant any number or type of Options at any time, and subject to such terms and conditions as the Committee may determine. (b) Exercise Limit. With respect to Options designated as ISOs at the time of grant, to the extent the aggregate Fair Market Value of Stock, determined as of the date of grant, with respect to which ISOs are first exercisable during any single calendar year exceeds $100,000, or such other limit as shall be allowed under the Code, such Options shall be treated as NQSOs. In applying this limit Options shall be taken into account in the order granted. (c) Option Price. The Option price of an ISO or NQSO shall be not less than Fair Market Value as of the date of grant. If an ISO is granted to a Significant Shareholder, the Option price shall be not less than 110% of Fair Market Value on the date of grant. (d) Term of Option. Each Option shall expire at the time specified by the Committee when granting the Option. The Committee may not fix a term which is shorter than required under any applicable state or federal law, nor longer than ten (10) years from the date of grant. With respect to a Significant Shareholder, the Committee may not fix a term which is longer than five (5) years from the date of grant. An Option term may extend beyond the Plan's termination date. (e) Manner of Exercise. To exercise an Option, whether partially or completely, the Participant shall give written notice to Pentair in such form and manner as the Committee may prescribe. Payment for Stock to be acquired by the exercise of an Option must accompany the written notice of exercise. (f) Payment. 6 7 (1) General. Full payment for all Stock to be acquired upon the exercise of an Option, together with an amount sufficient to satisfy applicable federal, state or local withholding taxes, shall be made at the time such Option, or any part thereof, is exercised, and no Stock certificate shall be issued until such payment has been made. Payment may be made in cash or in such other form as is acceptable to the Committee, provided that in the case of an ISO, no form of payment shall be allowed which would prevent the Option from qualifying as such within the meaning of Code section 422. (2) Payment with Options. The Participant, in lieu of or in combination with a payment in cash, may transfer to Pentair a sufficient number of outstanding Options as will pay all applicable withholding tax liability incurred on exercise of the Option. For this purpose, the Participant may use only Options having an exercise price less than Fair Market Value on the date such Options are transferred or exercised, and the value of such any Option so transferred shall be the difference between its then exercise price and Fair Market Value. Transfer of an Option for payment of taxes shall be considered exercise of the Option. (3) Payment with Stock. Subject to such Code requirements as are relevant to ISOs, a Participant, in lieu of or in combination with a payment in cash, may transfer to Pentair a sufficient number of shares of Stock to satisfy all or any part of the Option price and applicable withholding taxes. Such Stock may be Stock already owned by the Participant or, in the case of an NQSO, Stock to be acquired by exercise of the Option. For this purpose, the value of the Stock shall be Fair Market Value as of the date of exercise. Where payment is made in whole or in part by Stock, the Participant may not transfer fractional shares of Stock or shares of Stock with an aggregate Fair Market Value in excess of the Option price plus applicable withholding taxes. (4) Interim Broker Loan. The Committee may arrange through a stock brokerage or other similar agent, a loan to a Participant of some or all of the funds needed to exercise an Option. Upon application for such loan and receipt of written notice of exercise of an Option from a Participant, the broker will pay to Pentair the amount requested by the Participant to pay the Option exercise price and applicable withholding taxes. Pentair will promptly deliver to such 7 8 broker a certificate representing the total number of shares of Stock to be acquired by exercise of said Option. The broker will then sell part or all of these shares and pay to the Participant the proceeds from the sale, less the loan principal and any interest charged thereon from the date the broker received the notice of exercise until the date the broker is repaid. (5) Other Payment Methods. The Committee may, in its discretion, authorize payment by other methods or forms within the limitations imposed by the Plan and applicable state or federal law. (g) No Tandem Options. No ISO granted under this Plan shall contain terms which would limit or otherwise affect a Participant's right to exercise any other Option, nor shall any NQSO contain terms which will limit or otherwise affect the Participant's right to exercise any other Option in such a manner that an Option intended to be an ISO would be deemed a tandem option. 4.3 STOCK APPRECIATION RIGHTS. (a) Grant of Stock Appreciation Rights. The Committee may grant Stock Appreciation Rights ("SARs") to Participants who have been granted ISOs. These SARs may relate to any number of shares, up to the total number of shares the Participant could acquire by exercise of the underlying ISOs. An SAR shall expire no later than the expiration date of the underlying ISO, and the amount paid shall not be more than 100% of the difference between the Option price and Fair Market Value of the Stock subject to the Option, determined on the date the SAR is exercised. (b) Exercise. Stock Appreciation Rights may be exercised at the same time, to the same extent and subject to the same conditions as the related ISO, and only when the Fair Market Value of the Stock subject to the ISO exceeds the Option price. The exercise of an SAR shall cancel the related ISO; the exercise of an ISO shall cancel a related SAR. (c) Payment of Stock Appreciation Rights. Upon exercise of an SAR, the Participant shall be paid in cash, Stock, Rights to Restricted Stock, Restricted Stock, or a combination thereof, as the Committee shall determine at the time of grant. If payment is made in Stock, Rights to Restricted Stock or Restricted Stock, the shares shall be valued at Fair Market Value on the date the SAR is exercised. 8 9 4.4 ISSUANCE OF CERTIFICATES. (a) Delivery. As soon as practicable after either the exercise of an Option and the delivery of payment therefor, or the exercise of an SAR which is to be paid in Stock, Rights to Restricted Stock or Restricted Stock, Pentair shall: (i) if Stock is to be issued due to the exercise of an Option, record in the name of the Participant a number of certificated or uncertificated shares equal to the number of shares acquired by the Participant through exercise of the Option; (ii) if payment is to be made in Restricted Stock, record in the name of the Participant a number of nonnegotiable certificated or uncertificated shares equal to the number of shares of Restricted Stock acquired; and (iii) if payment is to be made in Rights to Restricted Stock, establish and maintain a separate written account for each Participant and record in such account the number of Rights to Restricted Stock so acquired. Consistent with applicable state or federal law, the Committee may fix a minimum or maximum period of time during which a Participant may not sell any such Stock or Restricted Stock, or obtain Restricted Stock in lieu of a Right to Restricted Stock. (b) Designation. Shares acquired pursuant to the exercise of an ISO shall be designated as such on the stock transfer records of Pentair, to the extent the value of such shares does not exceed the exercise limit contained in Section 4.2(b). Shares acquired by exercise of an Option which exceed this exercise limit shall be designated on Pentair's stock transfer records as shares acquired pursuant to the exercise of an NQSO. For purposes of this exercise limit, the designation of shares as acquired pursuant to the exercise of an ISO or NQSO shall be subject to change as permitted by applicable Code provisions. SECTION 5. RESTRICTED STOCK AND INCENTIVE COMPENSATION UNITS 5.1 RESTRICTED STOCK AWARDS (a) Written Agreement. Each award of Restricted Stock or Rights to Restricted Stock shall be evidenced by a written agreement, executed by the Participant and Pentair. Such agreement shall specify the number of shares of Restricted Stock or the number of Rights to Restricted Stock awarded and any terms and conditions the Committee may require on such award. 9 10 (b) Restriction Period. At the time of an award of Restricted Stock or Rights to Restricted Stock, the Committee shall fix a period of time ("Restriction Period") during which such restrictions as are imposed by the Committee shall remain in effect; provided that the number of shares of Stock with respect to which the Committee may make an award which fixes a Restriction Period of less than three (3) years shall not exceed five percent (5%) of the maximum number of shares available under the Plan. Such restrictions shall lapse upon expiration of the Restriction Period, or sooner if otherwise provided in the Plan. (c) Restrictions. In addition to such other restrictions as the Committee may impose at grant, each share of Restricted Stock or Right to Restricted Stock shall be subject to the following restrictions: (i) Neither Restricted Stock nor Rights to Restricted Stock may be sold, assigned, transferred, pledged, hypothecated, or otherwise disposed of during a Restriction Period. (ii) Except as otherwise herein provided, unless the Participant remains continuously employed by Pentair or an Affiliate until the conditions for the removal of such restrictions as the Committee may impose have been satisfied, Restricted Stock and Rights to Restricted Stock shall be forfeited and returned to Pentair, and all rights of a Participant to receive Restricted Stock or vest in Rights to Restricted Stock shall terminate without any payment or consideration by Pentair. (d) Recordkeeping. As soon as practicable after the execution of the written agreement required by Section 5.2(a), Pentair shall: (i) for awards of Restricted Stock, record in the name of the Participant a number of nonnegotiable, certificated or uncertificated shares equal to the number of shares of Restricted Stock awarded; and (ii) for awards of Rights to Restricted Stock, establish and maintain a separate written account for each Participant and record in such account the number of Rights to Restricted Stock awarded. (e) Dividends. Dividends declared with respect to shares of Restricted Stock shall be paid in cash to the Participant as and when declared, or as otherwise determined by the Committee. Where Rights to Restricted Stock are awarded, the Committee shall determine whether amounts equivalent to dividends declared on Stock subject to an award of Rights to Restricted Stock shall be paid when the dividends are declared, or as otherwise determined by the 10 11 Committee. Dividends, regardless of when paid, shall be subject to all applicable withholding taxes. 5.2 INCENTIVE COMPENSATION UNITS. (a) Award Agreements. Each ICU award shall be evidenced by a written agreement, executed by the Participant and Pentair, which shall specify the number of ICUs awarded and contain such other terms and conditions as the Committee may require. (b) ICU Account. Pentair shall establish and maintain a separate account ("ICU Account") for each Participant and record in such accounts the number of ICUs awarded to each Participant. The number of ICUs which may be realized by each Participant may be adjusted by any conditions specified by the Committee in the award agreement. The maintenance of an ICU Account is principally a bookkeeping function and does not entitle a Participant to realize on an ICU award. (c) Earning an ICU Award. (1) General. The ability of a Participant to realize on an ICU award shall be determined by achievement of specific corporate performance factors over the designated Incentive Period. The maximum amount of compensation per ICU payable to a Participant in any calendar year by reason of an ICU award shall not exceed twice the growth in Book Value, determined pursuant to Section 5.2(d), over the applicable Incentive Period. (2) Incentive Period. At the time of award, the Committee shall fix the Incentive Period during which the Participant must remain continuously employed by Pentair or an Affiliate. The Incentive Period shall generally be three (3) years, unless another expiration date is specified by the Committee or the Plan provides otherwise. (3) Corporate Performance Factors. The amount of compensation payable to a Participant on account of an ICU award shall be determined by application of the following factors: (i) the change in Book Value per share of Stock over the designated Incentive Period; (ii) the growth in earning per share of Stock over the designated Incentive Period; 11 12 (iii) the average return on equity of Stock over the designated Incentive Period; or (iv) such other factors as the Committee shall specify at the time of grant. (d) Valuation of Incentive Compensation Unit. (1) Valuation at Expiration of Incentive Period. As soon as practicable after the Incentive Period expires, Pentair's audited financial statements for the preceding Fiscal Year shall be provided in final form to the Committee, which shall determine the value of each ICU. Such value shall be based on the net increase in Book Value over the Incentive Period, calculated by subtracting the beginning Book Value ( determined as of the December 31 immediately preceding the date the ICUs were awarded) from the ending Book Value (determined on the December 31 immediately following the end of the Incentive Period). The resulting number shall then be subject to adjustment by a multiplier which takes into account average return on equity, compounded growth in earnings per share, or any other corporate performance factors established with respect to the award being valued. (2) Valuation if Incentive Period Shortened. If for any reason an Incentive Period is shortened, the Committee shall determine the value of an affected Participant's ICUs as soon as practicable after the date such Period prematurely ends, and for this purpose, the ending Book Value shall be determined as of the December 31 immediately preceding the date the Incentive Period ends, or as otherwise determined by the Committee. (3) Adjustments to Valuation Formula. The Committee shall retain the discretion to modify the factors or formula used to value an ICU award; provided, however, that any such change shall be defined in the written agreement executed pursuant to Section 5.2(a) at the time of grant. No such modification shall in any event cause the value of an ICU award made to any one Participant to exceed the maximum possible award as defined in Section 5.2(c)(1). (e) Payment of ICU Account. Payment of the value of each ICU shall be made to the Participant, or, if applicable, a designated beneficiary, as soon as practicable after valuation. Such payment may be made in cash, Stock, Rights to Restricted Stock, Restricted Stock or any combination thereof, as the Committee shall determine at the time of grant. If payment is made 12 13 in Stock, Rights to Restricted Stock or Restricted Stock, the shares shall be valued at Fair Market Value (as adjusted for any restrictions) on the date the Incentive Period expires. SECTION 6. PERFORMANCE SHARES AND PERFORMANCE UNITS 6.1 PERFORMANCE AWARDS. (a) Performance Agreement. Each award of Performance Shares and Performance Units shall be evidenced by a written agreement, executed by the Participant and Pentair. Such agreement shall establish all terms and conditions applicable to the payment of a Performance Share or Performance Unit as the Committee may determine, including the achievement of relevant performance objectives. These performance objectives shall include such financial measures as return on shareholders equity, growth in earnings per share, return on sales, growth in income, growth in sales and various techniques which compare actual returns with required returns based on cost of capital criteria. (b) Performance Accounts. At such time as a performance award is made, Pentair shall establish an account ("Performance Account") for each Participant and credit the Performance Units and Performance Shares awarded to such account. Performance Shares shall be credited in the form of Restricted Stock or Rights to Restricted Stock. The maintenance of Performance Accounts is principally a bookkeeping function, and does not entitle a Participant to payment of any awards hereunder. (c) Dividends. Dividends or the equivalent paid with respect to Restricted Stock shall be paid in cash to the Participant as and when declared, or as other determined by the Committee. The Committee shall determine whether dividends or the equivalent declared on Stock subject to Rights to Restricted Stock shall be paid when declared, or as otherwise determined by the Committee. Dividends, regardless of when paid, shall be subject to all applicable withholding taxes. 6.2 PERFORMANCE PERIOD AND TARGETS. (a) Performance Period. The Performance Period shall be established by the Committee at the time of the award. This period may differ for each award granted to any one Participant. (b) Performance Targets. At the time a performance award is established, the Committee shall establish such performance targets as it determines to be relevant. Successful 13 14 completion of performance targets within the designated Performance Period shall be certified by the Committee, using such measures of performance during the Performance Period as are specified in the performance agreement. 6.3 EARNING A PERFORMANCE AWARD. The Committee shall pay a performance award to a Participant based on the degree of attainment of the relevant performance targets during the Performance Period, and in accordance with the provisions of the performance agreement. The maximum amount of compensation a Participant may be granted by reason of a performance award in any one calendar year shall be $100,000, calculated by reference to Fair Market Value of the award on date of grant. 6.4 PAYMENT OF PERFORMANCE AWARDS. (a) Time for Payment. No performance award shall be payable until after earned in accordance with the terms and conditions of the performance agreement, unless otherwise provided in the Plan or in the sole discretion of the Committee. Any Performance Shares, Performance Units or other amounts credited to a Performance Account shall be paid to the Participant only when, and to the extent, the Committee so determines. All such determinations shall be made during the four (4) month period immediately following the end of the Performance Period as established in the performance agreement. (b) Form of Payment. Payment of Performance Shares or Performance Units shall be in the form of cash, Stock, Rights to Restricted Stock or Restricted Stock, or a combination thereof as determined by the Committee at the time of grant. If payment is made in Stock, Rights to Restricted Stock or Restricted Stock, the shares shall be valued at Fair Market Value (as adjusted for any restrictions) on the date the Performance Period expires. 6.5 BONUS PLANS. (a) Executive Bonus Award. On February 14, 1996, Pentair adopted the Executive Officer Performance Plan ("EOPP"), an annual bonus plan designed to compensate participating executive officers for performance as measured against the key financial measurements defined in the EOPP plan. Cash awards under the EOPP are limited to an amount equal to an EOPP participant's annual base salary, even though a total bonus award under the EOPP may exceed that amount. To the extent an annual bonus award exceeds the 14 15 amount which can be paid in cash pursuant to the EOPP, the balance shall be considered an award of Performance Shares payable in the form of Restricted Stock under the Plan. The performance targets applicable to such Performance Shares shall be the same as the criteria established under the EOPP for purposes of earning the award. The Performance Shares so granted shall be subject to any vesting conditions the Committee may impose as of the date the Performance Shares are issued. The maximum amount of compensation a Participant may be granted by reason of a Performance Share award under the EOPP in any one calendar year is equal to the maximum award available to such Participant under the EOPP, reduced by the amount of such award payable to the Participant in cash. (b) Management Incentive Plan. Pentair also maintains an annual bonus plan (the "MIP") which provides incentive compensation for management employees other than executive officers. Like the EOPP, cash awards under the MIP are limited to an amount equal to a MIP participant's annual base salary, even though a total bonus award under the MIP may exceed that amount. To the extent such an annual bonus award exceeds the amount which can be paid in cash under the MIP, the balance shall be considered an award of Performance Shares payable in the form of Restricted Stock under the Plan. The Performance Shares so granted shall be subject to any vesting conditions the Committee may impose as of the date the Performance Shares are issued. The maximum amount of compensation a Participant may be granted by reason of a Performance Share award under the MIP in any one calendar year is equal to the maximum award available to such Participant under the MIP reduced by the amount of such award payable to the Participant in cash. SECTION 7. TERMINATION OF EMPLOYMENT 7.1 GENERAL RULE. Except as otherwise provided herein, Options and SARs may be exercised and Restricted Stock, Rights to Restricted Stock, ICUs, Performance Share or Performance Unit awards paid to a Participant only in accordance with the terms and conditions specified by the Committee at the time of grant. 7.2 EXCEPTIONS FOR DEATH, DISABILITY OR RETIREMENT. (a) Death of Participant. If a Participant's employment terminates due to death, any benefits under the Plan may be transferred 15 16 to the beneficiary designated by the Participant. If no beneficiary has been duly designated, said benefits shall transfer pursuant to the provisions of such Participant's will, or if there is no will, by the laws of intestate succession in the state in which the Participant is domiciled on the date of death. The individual who succeeds to the Participant's benefits under the Plan may: (i) exercise any outstanding Options to the same extent the Participant was entitled to exercise such Options, together with any Options the Committee may accelerate, at any time prior to the earlier of six (6) months from the date of the Participant's death, or the date the Options would otherwise expire by their terms; (ii) receive payment of any shares of Restricted Stock or Rights to Restricted Stock based on a deemed lapse of the restrictions, or of any ICUs based on a deemed expiration of the Incentive Period and attainment of the relevant performance goals, provided that any such payment may be either prorated or otherwise paid as determined by the Committee; (iii) receive payment of a Performance Share or Performance Unit award, as determined by the Committee, based on the degree to which established performance targets had been attained as of the Participant's death. (b) Disability of Participant. A Participant who becomes Disabled may: (i) exercise outstanding Options that are otherwise exercisable, together with any Options the Committee may accelerate, at any time prior to the earlier of twelve (12) months after the date of Disability or the date the Options would otherwise expire by their terms; (ii) be paid a prorated amount of an award of Restricted Stock or Rights to Restricted Stock or ICUs, determined by application of the payment provisions in Section 7.2(a)(ii), based on a deemed lapse of restrictions or a deemed expiration of an Incentive Period and attainment of the relevant performance goals; (iii) be paid a Performance Share or Performance Unit award prior to expiration of a Performance Period, as the Committee shall determine by considering the degree of attainment of established performance targets. (c) Retirement. At the time of Retirement, a Participant may: (i) exercise outstanding Options which are otherwise exercisable, together with any Options the Committee may accelerate, at any time prior to the earlier of thirty (30) days following Retirement, or the date the Options would otherwise expire by their terms; (ii) receive a prorated payment of an award of Restricted Stock, Rights to Restricted Stock or ICUs, determined by application of the payment provisions in Section 7.2(a)(ii), based on a deemed lapse of restrictions or a deemed expiration of an Incentive Period and, if applicable, attainment of relevant performance goals; 16 17 (iii) receive a payment of Performance Shares or Performance Units as the Committee shall determine by considering the degree to which performance targets have been attained. (d) Other Termination of Employment. (1) Termination Not for Cause. If a Participant's employment ends for reasons other than those listed in Sections 7.2 or 7.3, outstanding Options may be exercised no later than the earlier of thirty (30) days following such termination, or the date the Options would, by their terms, expire. Any other outstanding awards under the Plan, to the extent not then earned and paid to the Participant, shall terminate unless accelerated by the Committee, subject to the provisions of Section 8.1. (2) Termination for Cause. If a Participant's services are terminated for cause, as determined by the Committee, all Options or other benefits granted under the Plan, to the extent not already exercised or otherwise earned or paid, shall terminate. 7.3 CHANGE IN CONTROL. (a) Definitions. Unless the context requires otherwise, when capitalized the terms listed below shall have the following meanings when used in this or any other section of the Plan: (1) "CHANGE IN CONTROL" is a change in control of Pentair, as that term is defined in the KEESA. (2) "KEESA" is the Key Executive Employment and Severance Agreement between Pentair and key executives, as approved by the Board effective August 23, 2000. (b) Treatment of Options. Upon the occurrence of a Change in Control, all Options granted to a Participant who is then employed by Pentair or an Affiliate shall, to the extent not then vested or exercised, become fully vested and immediately exercisable without regard to the terms and conditions attached to such Options at the time of grant. To the extent such Options are then exercised under circumstances which would otherwise result in a grant of Reload Options to the Participant, no such Reload Options will be granted. (c) Treatment of Restricted Stock. Upon the occurrence of a Change in Control the restrictions then applicable to all outstanding shares of Restricted Stock awarded under the Plan shall automatically lapse. If on the Change in Control date any dividends declared with respect 17 18 to such Restricted Stock have not been paid to the Participant, then all such amounts shall be paid within ten (10) days of the Change in Control date. (d) Treatment of Rights to Restricted Stock. Upon the occurrence of a Change in Control, all Rights to Restricted Stock shall be fully and immediately vested and the participant shall be paid within ten (10) days the cash value of the shares of Stock which otherwise would have been issued based on the Fair Market Value of the Stock on the Change in Control date, together with any then unpaid dividends which have been declared on the Stock subject to the award of Rights to Restricted Stock. (e) ICUs. Outstanding ICUs shall be valued by assuming the corporate performance goals for the applicable Incentive Period have been met and shall be paid in cash within ten (10) days of the Change in Control date, as follows: (i) one-third of the ICUs awarded less than one (1) year prior to the Change in Control date shall be paid; (ii) two-thirds of the ICUs awarded one (1), but less than two (2) years prior to the Change in Control date shall be paid; (iii) all of the ICUs awarded two (2) or more years prior to the Change in Control date shall be paid. (f) Performance Shares. Upon the occurrence of a Change in Control the restrictions then applicable to all outstanding Performance Shares shall lapse and any dividends declared with respect to such shares which have not been paid shall be paid within ten (10) days of the Change in Control date. (g) Performance Units. Outstanding Performance Units shall be valued by assuming all performance targets for the applicable Performance Period have been fully met and shall be paid as cash within ten (10) days of the Change in Control date, as follows: (i) one-third of the Performance Units granted less than one (1) year prior to the Change in Control date shall be paid; (ii) two-thirds of the Performance Units granted one (1) but less than two (2) years prior to the Change in Control date shall be paid; (iii) all of the Performance Units granted two (2) or more years prior to the Change in Control date shall be paid. 18 19 (h) Participants Covered under a KEESA. The provisions of this Section 7.3 shall also apply to a Participant who terminates employment before a Change in Control if the Participant has entered into a KEESA and is entitled to benefits thereunder pursuant to Section 2(b) of the KEESA. (i) Governing Documents. In the case of any conflict between the provisions of this Section 7.3 and any other provision of the Plan, this Section 7.3 will control. In the case of any conflict between the terms of this Plan and the terms and provisions of a Participant's KEESA, the terms of such KEESA shall control to the extent more beneficial to such Participant, and the obligations of Pentair under such KEESA shall be in addition to any of its obligations under the Plan. SECTION 8. CHANGES TO AWARDS 8.1 ACCELERATION OF BENEFITS. The Committee shall have the discretion to accelerate the exercise date of an Option or SAR or the time at which restrictions on Stock or Rights thereto lapse, to remove any Stock restrictions or to accelerate the expiration of an Incentive Period or Performance Period due to changes in applicable tax or other laws, or such other changes of circumstances as may arise after the date of an award under the Plan, or to take any such similar action it may decide, in its absolute discretion, is in the best interests of Pentair and equitable to a Participant (or such Participant's heirs or beneficiaries). Notwithstanding the above, however, the Committee shall have no discretion to increase the amount of compensation a Participant could earn by application of the preestablished performance goals and financial measurements relevant to the award, although the Committee shall retain the discretion to decrease any such award. Any action by the Committee to accelerate a grant or award for reasons other than death, disability or change in control of Pentair shall include application of a commercially reasonable discount to the compensation payable to reflect the value of accelerated payment. 8.2 ACCOUNTING STANDARDS. Calculation of changes to any performance goal established for purposes of making awards under the Plan shall be without regard to changes in accounting methods used by Pentair or in accounting standards that may be required by the 19 20 Financial Accounting Standards Board after the goal is established and prior to the time compensation earned on account of achievement of the relevant performance goal is paid to the Participant. 8.3 AMENDMENT OF AWARDS. The Committee shall have the discretion to amend the terms of any grant or award made under the Plan. Any such amendment may be made either prospectively or retroactively, as necessary, provided that no such amendment shall either impair the rights of an affected Participant without the consent of such Participant or amend the terms of an Option so as to reduce the Option price. Absent shareholder approval, the Committee may not cancel any outstanding Option and replace it with a new Option which has a lower Option price, if such action would have the same economic effect as reducing the Option price of such a canceled Option. SECTION 9. MISCELLANEOUS PROVISIONS 9.1 STOCKHOLDER PRIVILEGES. (a) Options. Until such time as a Stock certificate is issued, a Participant, or other person entitled to exercise an Option under the Plan, shall have none of the privileges of a stockholder with respect to Stock covered by an Option granted under this Plan. (b) Other Awards. Upon delivery of Restricted Stock to a Participant (or to an escrow holder, if applicable) such Participant shall have all of the rights of a shareholder with respect to the Restricted Stock, subject to the restrictions imposed, including the right to receive dividends and vote the shares of Restricted Stock. Participants for whom an account is established to record an award of Rights to Restricted Stock shall not have the rights of a shareholder until such time as the Rights to Restricted Stock vest, but may, in the discretion of the Committee, receive payment of or credit for the equivalent of dividends otherwise payable with respect to the number of shares of Stock to which such Rights to Restricted Stock relate. In the event of forfeiture, the certificate or certificates, if any, representing such Restricted Stock shall be delivered to Pentair, accompanied by executed instruments of transfer. If the Restricted Stock is held in escrow, Pentair shall be entitled to have the certificates representing the Restricted Stock redelivered to it out of escrow. 20 21 (c) Interest. The Committee may provide for the crediting of earnings interest with respect to Performance Units or ICUs credited to a Participant's account. Any rate of earnings credited hereunder shall be determined by the Committee. (d) Sale of Stock or Restricted Stock. The Committee may fix a period during which any Stock, Right to Restricted Stock or Restricted Stock acquired under the Plan may not be sold, provided that the Committee may not fix any period which is less than or which exceeds such requirements as may be imposed by applicable state or federal law. 9.2 AMENDMENT, SUSPENSION, MODIFICATION AND TERMINATION OF PLAN. The Committee, subject to approval by the Board, may amend or modify the Plan at any time to conform to changes in applicable laws or in any other respect deemed to be in the best interests of Pentair. Pursuant to Code section 422, however, no such amendment shall, without shareholder approval (i) materially increase the number of shares of Stock as to which ISOs may be granted under the Plan, (ii) materially modify the requirements as to eligibility to receive Options under the Plan, (iii) materially increase the benefits accruing to Participants receiving ISOs under the Plan, (iv) reduce an ISO Option price below Fair Market Value on the day the Option is granted, (v) permit the award of SARs other than in tandem with an ISO, (vi) extend the period during which an Option may be granted or exercised, or (vii) extend the termination date of the provisions of the Plan which permit the granting of ISOs. No amendment or modification of the Plan shall adversely affect any Participant under the Plan, or any section thereof, without such Participant's consent. 9.3 ADMINISTRATION. The Plan shall be administered by the Committee. Pursuant to this delegation, the Committee is authorized to (i) interpret and construe the Plan, (ii) adopt, amend, or rescind rules and regulations relating to the Plan, and (iii) make all other determinations necessary or advisable for the administration of the Plan, to the extent not contrary to the express provisions of the Plan. Any actions, determinations or other interpretations made by the Committee within the scope of its authority shall be final, binding and conclusive for all purposes. 21 22 9.4 INDEMNIFICATION. To the extent permitted by law, members of the Committee and the Board shall be indemnified and held harmless by Pentair with respect to any loss, cost, liability or expense that may reasonably be incurred in connection with any claim, action, suit or proceeding which arises by reason of any act or omission under the Plan, taken within the scope of the authority delegated herein. 9.5 EXPENSES. The expenses of maintaining and administering this Plan shall be borne by Pentair. 9.6 RIGHTS OF PARTICIPANTS. Nothing in this Plan shall interfere with or limit in any way the right of Pentair or an Affiliate to terminate any individual's employment at any time, with or without notice or cause. This Plan does not, nor is it intended to, confer upon any employee the right to continue in the employment of Pentair or an Affiliate. 9.7 TRANSFERABILITY. (a) Nontransferability. Except as otherwise specified in the Plan, Options, SARs, Restricted Stock, Rights to Restricted Stock, ICUs, Performance Shares and Performance Units granted or awarded under the Plan shall not be transferrable. (b) Designation of Beneficiary(ies). A Participant may designate a person or persons to receive his or her Plan benefits in the event of death. Such designation shall be on forms as prescribed by the Committee and may be modified or revoked only in writing. 9.8 GOVERNING LAW. To the extent not preempted by applicable federal law, this Plan shall be construed and interpreted in accordance with the substantive laws of the State of Minnesota. IN WITNESS WHEREOF, this amended and restated Plan has been executed this ____ day of ___________, 2001. PENTAIR, INC. By --------------------------------------- Chief Executive Officer By --------------------------------------- Roy T. Rueb Secretary 22 EX-21 8 c60900ex21.txt LIST OF PENTAIR SUBSIDIARIES 1 EXHIBIT 21 PENTAIR, INC. AND SUBSIDIARIES AS OF MARCH 1, 2001.
NAME OF COMPANY JURISDICTION OF INCORPORATION - --------------- ----------------------------- Aplex Industries United States Biesemeyer Manufacturing Corporation United States Century Manufacturing Co. United States Delta International Machinery Corp. United States DeVilbiss Air Power Company United States Electronic Enclosures, Inc. United States Essef Corporation United States Eraba Limited United Kingdom Euroimpex SPA Italy EuroPentair GmbH Germany Falcon Manufacturing, Inc. United States Fleck Controls, Inc. United States Fleck Europe SARL France Fleck Europe SAS France Flex Elektrowerkzeuge GmbH Germany Hoffman Enclosures Inc. United States Hoffman Enclosures (Mex), LLC Mexico Hoffman Engineering, S.A. de C.V. de SrL Mexico Hoffman Engineering Co Limited United Kingdom Hoffman-Schroff PTE Ltd. Singapore Lincoln Automotive Company United States Lincoln Industrial Corporation United States Lincoln GmbH Germany Lincoln s.r.o. Czech Republic Lincoln U.K. Ltd. United Kingdom Optima Enclosures Limited United Kingdom ORSCO Inc. United States Pentair FSC Corporation Virgin Islands (U.S.) Pentair Asia PTE Ltd. Singapore Pentair Canada, Inc. Canada Pentair Electronic Packaging Company United States Pentair Enclosures Limited United Kingdom Pentair Financial Services Ireland Ireland Pentair Global Sarl Luxembourg Pentair Halifax, Inc. Canada Pentair Nova Scotia Co. Canada Pentair Pacific Rim, Ltd. Hong Kong Pentair Pool Products, Inc. United States Pentair Pump Group Inc. United States Pentair Qingdao Enclosure Company P.R.C. Pentair Transport, Inc. United States Pentair U.K. Ltd. United Kingdom Penwald Insurance Company United States Porter-Cable Corporation United States Schroff Scandinavia AB Sweden Schroff S.r.L. Italy
2 Schroff Inc. United States Schroff SAS France Schroff Co. Ltd. Taiwan Schroff K.K. Japan Schroff U.K. Ltd. United Kingdom Schroff GmbH Germany SIATA S.r.l. Italy Structural Europe NV Belgium Structural India Private Limited India Transrack SAS France Walker Dickson Inc. United States WEB Tool & Manufacturing, Inc. United States WTM, Inc. United States
EX-23 9 c60900ex23.txt CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 33-36256, 33-38534, 33-42268, 33-45012, 333-12561, and 333-62475 of Pentair, Inc. of our report dated February 16, 2001 appearing in this Annual Report on Form 10-K of Pentair, Inc. for the year ended December 31, 2000. Deloitte & Touche LLP /s/ DELOITTE & TOUCHE LLP Minneapolis, Minnesota March 16, 2001 -----END PRIVACY-ENHANCED MESSAGE-----