10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 30, 2002

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 organization)	(I.R.S. Employer Identification number)

1500 County Road B2 West, Suite 400, St. Paul, Minnesota	55113
(Address of principal executive offices)	(Zip code)
Registrant’s telephone number, including area code: (651) 636-7920

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  ¨

On April 26, 2002, 49,231,674 shares of the Registrant’s common stock were outstanding.

Pentair, Inc. and Subsidiaries

		Page
Part I  Financial Information
Item 1.	Financial Statements
	Condensed Consolidated Statements of Income for the three months ended March 30, 2002 and March 31, 2001	3
	Condensed Consolidated Balance Sheets as of March 30, 2002, December 31, 2001, and March 31, 2001	4
	Condensed Consolidated Statements of Cash Flows for the three months ended March 30, 2002 and March 31, 2001	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	14
Part II  Other Information
Item 1.	Legal Proceedings	15
Item 4.	Submission of Matters to a Vote of Security Holders	15
Item 6.	Exhibits and Reports on Form 8-K	15
Signatures		16

2

PART I     FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS

Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Income (Unaudited)

	Three months ended
	March 30		March 31
In thousands, except per-share data	2002		2001
Net sales	$	613,435	$	671,383
Cost of goods sold		466,052		507,396
Gross profit		147,383		163,987
Selling, general and administrative		93,292		103,392
Research and development		8,364		7,739
Operating income		45,727		52,856
Net interest expense		13,730		17,716
Other expense, write-off of investment		—		2,500
Income before income taxes		31,997		32,640
Provision for income taxes		10,559		12,077
Net income	$	21,438	$	20,563
Earnings per common share
Basic	$	0.44	$	0.42
Diluted	$	0.43	$	0.42
Weighted average common shares outstanding
Basic		49,173		49,006
Diluted		49,584		49,127
Cash dividends declared per common share	$	0.18	$	0.17

See accompanying notes to condensed consolidated financial statements.

3

Pentair, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

In thousands, except share and per-share data	March 30 2002 (Unaudited)			December 31 2001			March 31 2001 (Unaudited)
Assets
Current assets
Cash and cash equivalents	$	20,946		$	39,844		$	33,003
Accounts and notes receivable, net		447,483			398,579			508,344
Inventories		295,391			300,923			383,194
Deferred income taxes		67,871			69,953			73,252
Prepaid expenses and other current assets		19,340			20,979			21,295
Net assets of discontinued operations		3,613			5,325			106,633
Total current assets		854,644			835,603			1,125,721
Property, plant and equipment, net		318,758			329,500			346,820
Other assets
Goodwill, net		1,085,463			1,088,206			1,132,070
Other assets		116,833			118,889			66,373
Total assets	$	2,375,698		$	2,372,198		$	2,670,984
Liabilities and Shareholders’ Equity
Current liabilities
Short-term borrowings	$	—		$	—		$	170,111
Current maturities of long-term debt		5,972			8,729			24,569
Accounts and notes payable		197,407			179,149			224,293
Employee compensation and benefits		59,930			74,888			66,330
Accrued product claims and warranties		37,825			37,590			41,483
Income taxes		15,501			6,252			11,888
Other current liabilities		127,511			121,825			124,281
Total current liabilities		444,146			428,433			662,955
Long-term debt		689,136			714,977			782,173
Pension and other retirement compensation		75,858			74,263			61,141
Post-retirement medical and other benefits		43,367			43,583			34,103
Deferred income taxes		34,040			34,128			36,702
Other noncurrent liabilities		61,664			61,812			70,475
Total liabilities		1,348,211			1,357,196			1,647,549
Shareholders’ equity
Common shares par value $0.16 2/3; 49,211,099, 49,110,859,
and 49,020,742 shares issued and outstanding, respectively		8,201			8,193			8,170
Additional paid-in capital		481,690			478,541			475,520
Retained earnings		579,213			566,626			580,318
Unearned restricted stock compensation		(10,244	)		(9,440	)		(13,310	)
Accumulated other comprehensive loss		(31,373	)		(28,918	)		(27,263	)
Total shareholders’ equity		1,027,487			1,015,002			1,023,435
Total liabilities and shareholders’ equity	$	2,375,698		$	2,372,198		$	2,670,984

See accompanying notes to condensed consolidated financial statements.

4

Pentair, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

	Three months ended
In thousands	March 30 2002			March 31 2001
Operating activities
Net income	$	21,438		$	20,563
Depreciation		15,035			16,854
Amortization of intangibles and unearned compensation		864			9,884
Deferred income taxes		2,089			(880	)
Other expense, write-off of investment		—			2,500
Changes in assets and liabilities, net of effects of business acquisitions
Accounts and notes receivable		(48,583	)		(45,438	)
Inventories		3,255			6,615
Prepaid expenses and other current assets		1,146			(3,969	)
Accounts payable		21,318			(22,866	)
Employee compensation and benefits		(13,768	)		(16,832	)
Accrued product claims and warranties		287			(552	)
Income taxes		9,295			6,791
Other current liabilities		8,051			(3,425	)
Pension and post-retirement benefits		2,506			2,930
Other assets and liabilities		(2,879	)		(2,378	)
Net cash provided by (used for) continuing operations		20,054			(30,203	)
Net cash provided by (used for) discontinued operations		1,712			(9,894	)
Net cash provided by (used for) operating activities		21,766			(40,097	)
Investing activities
Capital expenditures		(6,980	)		(12,859	)
Proceeds from sale of businesses		1,138			—
Acquisitions, net of cash acquired		—			(6,937	)
Equity investments		(2,081	)		—
Other		(165	)		—
Net cash used for investing activities		(8,088	)		(19,796	)
Financing activities
Net short-term borrowings		—			62,016
Proceeds from long-term debt		45			2,413
Repayment of long-term debt		(27,736	)		(1,189	)
Proceeds from exercise of stock options		1,490			251
Dividends paid		(8,851	)		(8,331	)
Net cash provided by (used for) financing activities		(35,052	)		55,160
Effect of exchange rate changes on cash		2,476			2,792
Change in cash and cash equivalents		(18,898	)		(1,941	)
Cash and cash equivalents, beginning of period		39,844			34,944
Cash and cash equivalents, end of period	$	20,946		$	33,003

See accompanying notes to condensed consolidated financial statements.

5

Pentair, Inc. and subsidiaries

Notes to condensed consolidated financial statements (unaudited)

1. Basis of Presentation and Responsibility for Interim Financial Statements

We prepared the unaudited condensed consolidated financial statements following the requirements of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by accounting principles generally accepted in the United States can be condensed or omitted. We made certain reclassifications to the 2001 condensed consolidated financial statements to conform to the 2002 presentation.

We are responsible for the unaudited financial statements included in this document. The financial statements include all normal recurring adjustments that are considered necessary for the fair presentation of our financial position and operating results. As these are condensed financial statements, one should also read our consolidated financial statements and notes thereto which are included in our 2001 Annual Report on Form 10-K.

Revenues, expenses, cash flows, assets and liabilities can and do vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year.

2. New Accounting Standards

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Other Intangible Assets. This statement requires that goodwill and intangible assets deemed to have an indefinite life not be amortized. Instead of amortizing goodwill and intangible assets deemed to have an indefinite life, the statement requires a test for impairment to be performed annually, or immediately if conditions indicate that such an impairment could exist. We adopted the provisions of SFAS 142 effective January 1, 2002, and as a result, will no longer record goodwill amortization (2001 goodwill amortization was $36.1 million, or $32.0 million after tax or $0.65 per diluted share). We are currently in the process of completing the first step of the initial goodwill impairment test required by SFAS 142 and will complete this assessment in the second quarter of 2002.

The following table provides the comparable effects of the adoption of SFAS No. 142 for the quarters ended March 30, 2002 and March 31, 2001.

	Three months ended
In thousands, except per-share data	March 30 2002		March 31 2001
Reported net income	$	21,438	$	20,563
Add back goodwill amortization, net of tax		—		8,000
Adjusted net income	$	21,438	$	28,563
Reported earnings per share—basic	$	0.44	$	0.42
Goodwill amortization		—		0.16
Adjusted net earnings per share—basic	$	0.44	$	0.58
Reported earnings per share—diluted	$	0.43	$	0.42
Goodwill amortization		—		0.16
Adjusted net earnings per share—diluted	$	0.43	$	0.58

The changes in the carrying amount of goodwill for the quarter ended March 30, 2002 by operating segment is as follows:

In thousands	Tools			Water			Enclosures			Consolidated
Balance December 31, 2001	$	344,707		$	576,757		$	166,742		$	1,088,206
Foreign currency translation		(79	)		(1,262	)		(1,402	)		(2,743	)
Balance March 30, 2002	$	344,628		$	575,495		$	165,340		$	1,085,463

In August 2001, the FASB issued SFAS No. 143 (SFAS 143), Accounting for Asset Retirement Obligations, which is effective January 1, 2003. SFAS 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. We are currently in the process of evaluating the effect the adoption of this standard will have on our consolidated results of operations, financial position and cash flows.

In September 2001, the FASB issued SFAS No. 144 (SFAS 144), Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, it retains many of the fundamental provisions of that statement. The adoption of this standard on January 1, 2002 did not have an effect on our historical consolidated results of operations, financial position and cash flows.

6

Pentair, Inc. and subsidiaries

Notes to condensed consolidated financial statements (unaudited)

3. Earnings Per Common Share

Basic and diluted earnings per share were calculated using the following:

	Three months ended
In thousands, except per-share data	March 30 2002		March 31 2001
Net income	$	21,438	$	20,563
Weighted average common shares outstanding—basic		49,173		49,006
Dilutive impact of stock options and restricted stock		411		121
Weighted average common shares outstanding—diluted		49,584		49,127
Earnings per common share—basic	$	0.44	$	0.42
Earnings per common share—diluted	$	0.43	$	0.42

There were 1.1 million and 1.7 million stock options excluded from the computation of diluted earnings per share in the first quarter of 2002 and 2001, respectively, due to their anti-dilutive effect.

4. Inventories

Inventories were comprised of:

In thousands	March 30 2002 (Unaudited)		December 31 2001		March 31 2001 (Unaudited)
Raw materials and supplies	$	91,847	$	94,404	$	114,545
Work-in-process		36,973		38,760		47,485
Finished goods		166,571		167,759		221,164
Total inventories	$	295,391	$	300,923	$	383,194

5. Comprehensive Income

Comprehensive income and its components, net of tax, are as follows:

	Three months ended
In thousands	March 30 2002			March 31 2001
Net income	$	21,438		$	20,563
Changes in cumulative translation adjustment		(4,318	)		(7,519	)
Changes in market value of derivative financial instruments classified as cash flow hedges		1,863			717
Unrealized loss from marketable securities classified as available for sale		—			(449	)
Cumulative effect of accounting change—SFAS 133		—			6,739
Comprehensive income (loss)	$	18,983		$	20,051

6. Restructuring Charge

In the fourth quarter of 2001, we initiated a restructuring program designed to consolidate manufacturing operations and eliminate non-critical support facilities in our Enclosures segment. We also wrote off internal-use software development costs at corporate for the abandonment of a company-wide human resource system. Consequently, we recorded a restructuring charge of $42.8 million. Cash outlays associated with the charge were $2.0 million in the first quarter of 2002.

The components of the restructuring charge and utilization are as follows:

			Utilization
In thousands	2001 restructuring charge (fourth quarter)		Year 2001			Three months 2002			Balance March 30 2002
Employee termination benefits	$	16,696	$	(2,464	)	$	(1,522	)	$	12,710
Non-cash asset disposals		11,050		(11,050	)		—			—
Impaired goodwill		7,362		(7,362	)					—
Exit costs		7,649		(769	)		(501	)		6,379
Total		42,757		(21,645	)		(2,023	)		19,089

7

Pentair, Inc. and subsidiaries

Notes to condensed consolidated financial statements (unaudited)

Included in other current liabilities on the March 30, 2002 condensed consolidated balance sheet is the unused portion of the restructuring charge liability of $19.1 million. We expect to complete the remaining restructuring activities in second half of 2002.

Workforce reductions related to the 2001 restructuring charge is for approximately 720 employees, of whom 586 were terminated as of the end of the first quarter of 2002. Employee termination benefits consist primarily of severance and outplacement counseling fees. Exit costs relate to the shutdown of six Enclosures segment facilities, of which two are owned and currently held for resale and four are leased.

7. Equity Method Investments

We have invested approximately $24.9 million to take a 40 percent interest in certain joint venture operations of an Asian supplier for bench and portable tools, of which $22.5 million has been paid ($2.1 million was paid in the first quarter of 2002) and $2.4 million is included in other current liabilities. We hold an option to increase our ownership interest in these joint ventures to as much as 100 percent. Our portion of the earnings of these joint ventures is included in costof goods sold, however, it was not material.

8. Business Segments

Financial information by reportable business segment is included in the following summary:

	Three months ended
In thousands	March 30 2002			March 31 2001
Net sales to external customers
Tools	$	261,069		$	240,392
Water		212,806			220,852
Enclosures		139,560			210,139
Consolidated	$	613,435		$	671,383
Operating income (loss) as reported
Tools	$	16,686		$	7,863
Water		29,747			28,193
Enclosures		4,608			21,237
Other		(5,314	)		(4,437	)
Consolidated	$	45,727		$	52,856
Goodwill amortization
Tools	$	—		$	2,319
Water		—			4,549
Enclosures		—			2,146
Total goodwill amortization		—			9,014
Amortization of unearned compensation		864			870
Total amortization	$	864		$	9,884
Operating income (loss) excluding goodwill amortization
Tools	$	16,686		$	10,182
Water		29,747			32,742
Enclosures		4,608			23,383
Other		(5,314	)		(4,437	)
Consolidated	$	45,727		$	61,870

Other operating income (loss) is primarily composed of corporate expenses, our insurance subsidiary, intermediate finance companies, divested operations, discontinued operations, and intercompany eliminations.

8

ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

                    AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

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 from actual results. 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. We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. 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, including acquisition, divestiture, and restructuring activities;

· governmental and regulatory policies;

· 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;

· 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 claims.

The foregoing factors are not exhaustive, and new factors may emerge or changes to the foregoing factors may occur that would impact our business.

CRITICAL ACCOUNTING POLICIES

Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements included in our 2001 Annual Report on Form 10-K. The accounting policies used in preparing our interim 2002 condensed consolidated financial statements are the same as those described in our annual report, except as described in Note 2 of this report “New Accounting Standards.”

In preparing the financial statements, we follow accounting principles generally accepted in the United States of America, which in many cases require us to make assumptions, estimates and judgments that affect the amounts reported. Many of these policies are relatively straightforward. There are, however, a few policies that are critical because they are important in determining the financial condition and results of operations and they can be difficult to apply. Our critical accounting policies include those related to:

· the collectibility of accounts receivable;

· the valuation of inventories and reserves to adjust inventory to the lower of cost or market;

· estimating sales returns and warranty costs;

· self-insurance reserves for product liability, workers’ compensation, and employee medical liabilities;

· assumptions used in the valuation of environmental remediation costs and pending litigation;

· the resolution of matters related to open tax years;

· the evaluation of long-lived assets, including goodwill, for impairment; and

· accounting for pensions and other post-retirement benefits, because of the importance of management judgment in making the estimates necessary to apply these policies.

9

RESULTS OF OPERATIONS

Net sales

The components of the net sales decrease was as follows:

	% change from 2001
Percentages	First quarter
Volume	(8.3	)
Price	0.2
Currency	(0.5	)
Total	(8.6	)

Net sales in the first quarter of 2002 totaled $613.4 million, compared with $671.4 million in the first quarter of 2001. The $58.0 million or 8.6 percent decline was primarily due to volume declines in our Enclosures and Water segments, partially offset by a volume increase in our Tools segment. The stronger U.S. dollar also reduced the dollar value of foreign sales by about 0.5 percent.

Sales by segment and the change from the prior year period was as follows:

In thousands	Three months ended
	March 30 2002		March 31 2001		$ change			% change
Tools	$	261,069	$	240,392	$	20,677		8.6%
Water		212,806		220,852		(8,046	)	(3.6%)
Enclosures		139,560		210,139		(70,579	)	(33.6%)
Total	$	613,435	$	671,383	$	(57,948	)	(8.6%)

Tools

The 8.6 percent increase in Tools segment sales in the first quarter of 2002 from 2001 was primarily driven by:

· higher sales volume in our DeVilbiss Air Power Company (DAPC) business, particularly for pressure washers and incremental sales of generators due to a January 2002 ice storm in the Midwest.

Water

The 3.6 percent decline in Water segment sales in the first quarter of 2002 from 2001 was primarily due to:

· lower sales of pool and spa equipment products due to timing of orders;

· lower sales of pressure vessels for large water treatment systems; and

· unfavorable impacts of foreign currency translation.

These declines were partially offset by:

· higher sales volume for our municipal and residential pumps; and

· slight increases in average selling prices.

While we experienced lower Water segment sales volume in the first quarter of 2002 compared with 2001, backlog was up about 6 percent from prior year levels going into the second quarter, primarily driven by strong orders in our pool and spa equipment business.

Enclosures

The 33.6 percent decline in Enclosures segment sales in the first quarter of 2002 from 2001 was primarily due to:

· lower sales volume due to significant industry-wide sales declines, reflecting severely reduced capital spending in the industrial market and over-capacity and lack of demand in the datacom and telecom markets; and

·     unfavorable impacts of foreign currency translation.

Although we experienced significantly lower Enclosures sales volume from first quarter 2001 levels, sales in the North American industrial market increased about 5 percent from the fourth quarter of 2001. In addition, we have also experienced an increase in automotive quote activity over the fourth quarter of 2001 and there may be early signs of recovery in the North American base electronics market as well. The worldwide datacom and telecom markets, however, continue to suffer from over-capacity and a lack of demand.

We are pursuing several strategies aimed at improving our Enclosures segment performance by continuing to expand our distribution network, principally in the commercial market. In the first quarter of 2002, we added 99 new distributors and we expect to add another 300 distribution locations in the near future.

10

Supplemental Financial Information

Effective January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Other Intangible Assets. This statement requires that goodwill and intangible assets deemed to have an indefinite life not be amortized. The following supplemental condensed consolidated statements of income are presented as if we had accounted for goodwill under SFAS 142 for all prior periods (i.e., no longer amortizing goodwill). The following table shows selected as reported and as adjusted numbers had we been accounting for goodwill under SFAS 142 for the quarter ended March 31, 2001.

	Three months ended March 31, 2001
In thousands, except per-share data	As reported		Goodwill amortization			As adjusted
SG&A	$	103,392	$	(9,014	)	$	94,378
Operating income		52,856		9,014			61,870
Provision for income taxes		12,077		1,014			13,091
Net income		20,563		8,000			28,563
Earnings per share—diluted	$	0.42	$	0.16		$	0.58

Supplemental Condensed Consolidated Statements of Income	Three months ended
In thousands	March 30 2002			March 31 2001 As adjusted (1)			Percentage point change
Net sales	$	613,435		$	671,383
Cost of goods sold		466,052			507,396
Gross profit		147,383			163,987
% of net sales		24.0%			24.4%		(0.4) pts
Selling, general and administrative (SG&A) (1)		93,292			94,378
% of net sales		15.2%			14.1%		1.1 pts
Research and development (R&D)		8,364			7,739
% of net sales		1.4%			1.2%		0.2 pts
Operating income		45,727			61,870
% of net sales		7.5%			9.2%		(1.7) pts
Net interest expense		13,730			17,716
% of net sales		2.2%			2.6%		(0.4) pts
Other expense, write-off of investment		—			2,500
% of net sales		n/a			0.4%
Income before income taxes		31,997			41,654
% of net sales		5.2%			6.2%		(1.0) pts
Provision for income taxes (1)		10,559			13,091
Effective tax rate		33.0%			31.4%		1.6 pts
Net income	$	21,438		$	28,563
% of net sales		3.5	%		4.3	%	(0.8	) pts

Percentages may reflect rounding adjustments.

n/a—not applicable.

⁽¹⁾ First quarter 2001 numbers have been adjusted to exclude goodwill amortization as noted above.

Gross profit

Gross profit margin was 24.0 percent of net sales in the first quarter of 2002, compared with 24.4 percent of net sales for the same period last year.

The 0.4 percentage point decline in the first quarter of 2002 from 2001 was primarily the result of:

·     lower sales volume, primarily in our Enclosures segment resulting in unabsorbed overhead, partially offset by savings resulting from our supply chain management and lean enterprise initiatives.

SG&A and R&D

SG&A expense in the first quarter of 2002 was $93.3 million, compared with $94.4 million (excluding goodwill amortization of $9.0 million) in the first quarter of 2001, or 15.2 and 14.1 percent of sales, respectively. The 1.1 percentage point increase is largely the result of Enclosures segment sales declining at a much faster rate than the decline in SG&A spending, and higher spending on selling expense in our Tools segment, primarily for advertising.

11

R&D expense was $8.4 million in the first quarter of 2002, compared with $7.7 million in the first quarter of 2001, or 1.4 and 1.2 percent of sales, respectively. The year-over-year increase is primarily the result of additional investments related to new product development initiatives in our Tools segment.

Operating income

Tools

The following table provides a comparison of Tools segment operating income as reported, and those results as if we had accounted for goodwill under SFAS 142 for all prior periods presented:

	Three months ended
In thousands	March 30 2002			March 31 2001
Tools
Operating income as reported	$	16,686		$	7,863
Add back goodwill amortization		—			2,319
Adjusted operating income	$	16,686		$	10,182
% of net sales		6.4%			4.2%
Percentage point change		2.2	pts

The 2.2 percentage point increase in first quarter 2002 operating income margin excluding 2001 goodwill amortization for our Tools segment was primarily the result of:

· cost savings as a result of our supply management and lean enterprise initiatives; and

· higher sales volume, particularly for pressure washers.

These increases were partially offset by:

· higher selling expense, primarily for advertising; and

· higher R&D expense related to new product development initiatives.

Water

The following table provides a comparison of Water segment operating income as reported, and those results as if we had accounted for goodwill under SFAS 142 for all prior periods presented:

	Three months ended
In thousands	March 31 2001			March 31 2001
Water
Operating income as reported	$	29,747		$	28,193
Add back goodwill amortization		—			4,549
Adjusted operating income	$	29,747		$	32,742
% of net sales		14.0%			14.8%
Percentage point change		(0.8	) pts

The 0.8 percentage point decline in first quarter 2002 operating income margin excluding 2001 goodwill amortization for our Water segment was primarily the result of:

· lower sales of pool and spa equipment products due to timing of orders;

· temporary declines in productivity at our pool business associated with production line rationalization between our factories in California and North Carolina; and

· lower sales of pressure vessels for large water treatment systems.

These decreases were partially offset by:

· cost improvements as a result of our lean enterprise initiatives; and

· slight increases in average selling prices.

12

Enclosures

The following table provides a comparison of Enclosures segment operating income as reported, and those results as if we had accounted for goodwill under SFAS 142 for all prior periods presented:

	Three months ended
In thousands	March 30 2002			March 31 2001
Enclosures
Operating income as reported	$	4,608		$	21,237
Add back goodwill amortization		—			2,146
Adjusted operating income	$	4,608		$	23,383
% of net sales		3.3%			11.1%
Percentage point change		(7.8	) pts

The 7.8 percentage point decline in first quarter 2002 operating income margin excluding 2001 goodwill amortization for our Enclosures segment was primarily the result of:

· lower sales volume due to significant industry-wide sales declines, resulting in unabsorbed overhead despite reductions in overall cost structure; and

· higher SG&A expense as a percent of sales, as the decline in sales was at a much faster rate than the reduction in costs.

These decreases were partially offset by:

· savings realized as a part of our restructuring program, net of one-time nonrecurring costs; and

· material cost savings and other cost reductions as a result of our lean enterprise initiatives.

Net interest expense

Net interest expense was $13.7 million and $17.7 million in the first quarter of 2002 and 2001, respectively. Included in the $13.7 million, is a write-off of $1.8 million of financing costs related to excess capacity on certain credit facilities that we do not expect to utilize. Excluding the $1.8 million write-off, net interest expense declined $5.8 million reflecting lower average borrowings driven by our strong cash flow performance and lower interest rates on our variable debt. Net interest expense in the fourth quarter of 2001 was $13.1 million.

Provision for income taxes

Our effective tax rate was 33.0 percent in the first quarter of 2002, compared with 31.4 percent, as if we had accounted for goodwill under SFAS 142 (37.0 percent as reported), for the comparable period in 2001. The 1.6 percentage point increase reflects a change in U.S. versus foreign earnings mix in 2002 compared to 2001. We expect our effective tax rate to be around 33.0 percent for 2002.

Other expense

In the first quarter of 2001, we incurred a non-cash charge of $2.5 million for the write-off of our business-to-business e-commerce equity investment that we made in early 2000.

LIQUIDITY AND CAPITAL RESOURCES

To fund capital expenditures, acquisitions, repurchase shares, and pay dividends, committed revolving credit facilities are used to complement operating cash flows. Because of the seasonality of some of our businesses, particularly the pool and spa equipment business and the tools business, we generally experience negative cash flows from operations in the first half of any given year. However, due to our emphasis on working capital management, we generated $21.8 million of cash from operating activities in the first quarter of 2002, which (net of $7.0 million of capital expenditures) resulted in a positive free cash flow of $14.8 million.

The following table presents selected measures of our liquidity calculated from our monthly operating results based on a 13-month moving average:

Days	March 30 2002	March 31 2001
Days of sales in accounts receivable	64	69
Days inventory on hand	72	80
Days in accounts payable	58	60
Cash conversion cycle	78	89

Operating activities

Operating activities provided $21.8 million in the first quarter of 2002, compared with a use of $40.1 million for the same period in 2001 for a year-over-year improvement of $61.9 million. The increase was primarily the result of higher accounts payable balances at the end of the first quarter of 2002 compared with the end of 2001, driven by increased material purchases, higher inventory turnover, and improved sell through of products in our Tools segment. In addition, the disposition of our Equipment segment businesses at the end of 2001 provided a year-over-year improvement of $11.6 million.

13

Investing activities

Capital expenditures in the first quarter of 2002 and 2001 were $7.0 million and $12.9 million, respectively. We anticipate capital expenditures in 2002 to be approximately $50 million. Anticipated expenditures in 2002 are expected to be in the areas of tooling for new product development and general maintenance capital.

Financing activities

As of the end of the first quarter of 2002, our capital structure was comprised of $695.1 million in long-term debt (including current maturities), and $1,027.5 million in shareholders’ equity. The ratio of debt-to-total capital as of the end of the first quarter of 2002 was 40.4 percent, compared with 41.6 percent as of the end of 2001 and 48.8 percent as of the end of the first quarter of 2001. The 1.2 percentage point decline from the end of 2001 reflects a decrease in our total debt and an increase in our equity resulting from our strong cash flow performance. Our targeted debt-to-total capital ratio is around 40 percent. As of March 30, 2002, we had $705.0 million in committed revolving credit facilities with various banks, of which $403.4 million was unused.

In March 2002, we entered into an interest rate swap agreement for senior notes having a notional principal amount of $100 million and maturing in 2009. Under the terms of the interest rate swap agreement, we will pay interest semi-annually at the six month LIBOR rate plus 2.49 percent and we will receive interest semi-annually at the annual rate of 7.85 percent. This swap agreement has been accounted for as a fair value hedge in accordance with SFAS No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities, as amended. Since this swap qualifies as an “effective” hedge under SFAS 133, there is no impact on net income or shareholders’ equity.

Dividends paid in the first quarter of 2002 were $8.9 million or $0.18 per common share, compared with $8.3 million or $0.17 per common share for the same period in 2001.

In addition to measuring our cash flow generation or usage based upon operating, investing, and financing classifications included in the condensed 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 had positive free cash flow of $14.8 million in the first quarter of 2002, compared with a negative $53.0 million for the same period in 2001. Our free cash flow goal for 2002 is $200 million, compared with $178.7 million realized in 2001. We intend to achieve this goal through higher earnings and further reductions in working capital. Our management incentive plans include a component that emphasizes 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.

NEW ACCOUNTING STANDARDS — SEE NOTE 2 OF ITEM 1

ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in our market risk during the quarter ended March 30, 2002. For additional information, refer to Item 7A on page 24 of our 2001 Annual Report on Form 10-K.

14

PART II    OTHER INFORMATION

ITEM 1.     Legal Proceedings

Environmental, Product Liability Claims, and Horizon Litigation

There have been no further material developments regarding the above from that contained in our 2001 Annual Report on Form 10-K.

Other

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 based on the expected eventual disposition of these matters. We believe the effect on our consolidated results

ITEM 4.      Submission of Matters to a Vote of Security Holders

At Pentair’s Annual Meeting of Shareholders held on May 1, 2002, the shareholders voted on the following items:

Proposal 1. — Election of Directors

Nominees	Votes For	Votes Withheld
Barbara B. Grogan	42,320,765	1,313,964
Stuart Maitland	42,019,456	1,615,273
Augusto Meozzi	41,976,660	1,658,069
William H. Hernandez	41,748,445	1,886,284
Proposal 2. — Approval of amendments to the Articles of Incorporation and By-Laws to fix the number of the directors at ten.
Votes For	Votes Against	Votes Abstain
43,087,817	392,347	154,565
Proposal 3. — Approval of the Omnibus Stock Incentive Plan for Section 162(m) purposes.
Votes For	Votes Against	Votes Abstain
40,463,447	2,898,214	273,068
Proposal 4. — Approval of an amendment to the Executive Officer Performance Plan.
Votes For	Votes Against	Votes Abstain
39,850,853	3,472,260	311,616
Proposal 5. — Proposal to ratify the selection of Deloitte & Touche LLP as independent auditors of Pentair for 2002.
Votes For	Votes Against	Votes Abstain
41,470,882	2,010,788	153,059

ITEM 6.      Exhibits and Reports on Form 8-K

(a)   Exhibits

3.1	Second Restated Articles of Incorporation of Pentair, Inc. as amended through May 1, 2002 (Filed herewith).
3.2	Third Amended and Superseding By-Laws of Pentair, Inc. adopted on August 23, 2000 as amended May 1, 2002 (Filed herewith).
10.15	Pentair, Inc. Executive Officer Performance Plan as amended and restated, dated February 27, 2002 and approved by shareholders on May 1, 2002 (Incorporated by reference to Exhibit 10.15 contained in Pentair’s Annual Report on Form 10-K for the year ended December 31, 2001).

(b)   Reports on Form 8-K

None.

15

SIGNATURES

Pursuant to the requirements 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 May 9, 2002.

PENTAIR, INC.
Registrant
By:	/s/    DAVID D. HARRISON
	David D. Harrison
	Executive Vice President and Chief Financial Officer
	(Chief Accounting Officer)

16

EX-3.1

Exhibit 3.1

                    SECOND RESTATED ARTICLES OF INCORPORATION
                                OF PENTAIR, INC.

                Compiled Version As Amended Through May 1, 2002.


                                   ARTICLE I.

     The name of this Corporation shall be PENTAIR, INC.

                                   ARTICLE II.

     The duration of this Corporation shall be perpetual.

                                  ARTICLE III.

     Section 1. This Corporation has general business purposes.

     Section 2. In amplification but not in limitation of the provisions and
legal effect of Section 1 hereof or of any other provision in these Articles,
and in amplification but not in limitation of the purposes, powers and authority
this Corporation would have in the absence from these Articles of this Section 2
hereof, the nature of the business, or objects or purposes to be transacted,
promoted or carried on are: to manufacture, purchase or otherwise dispose of,
and to deal generally in and with paper and paper products and related products,
of every type and description; to manufacture, purchase or otherwise acquire,
invest in, own, mortgage, sell, assign and transfer, or otherwise dispose of,
trade, deal in and deal with goods, wares and merchandise and personal property
of every class and description; to carry on any other business in connection
with any one or more of the foregoing purposes; and to do any and all acts and
things necessary or convenient to accomplish or implement any one or more of the
foregoing purposes.

                                   ARTICLE IV.

     This Corporation shall have all the powers granted to private corporations
organized for profit by said Minnesota Business Corporation Act and, in
furtherance, and not in limitation, of the powers conferred by the laws of the
State of Minnesota upon corporations organized for the foregoing purposes, the
Corporation shall have the power:

     (a)  To issue bonds, debentures or other obligations of the Corporation,
          and to contract indebtedness without limit as to amount for any of the
          objects and purposes of the Corporation, and to secure the same by
          mortgage or mortgages, deed or deeds of trust, or pledge, or lien, or
          any or all of the real or personal property, or both, of the
          Corporation.

     (b)  To acquire, hold, mortgage, pledge or dispose of the shares, bonds,
          securities or other evidences of indebtedness of the United States of
          America or of any domestic or foreign corporation, and while the
          holder of such shares, to exercise all the privileges of ownership,
          including the right to vote thereon, to the same extend as a natural
          person might or could do, by the president of this Corporation or by
          proxy appointed by him, unless some other person, by resolution of the
          Board of Directors, shall be appointed to



          vote such shares.

     (c)  To purchase or otherwise acquire on such terms and in such manner as
          the By-Laws of this Corporation from time to time provide, and to own
          and hold, shares of the capital stock of this Corporation, and to
          reissue the same from time to time.

     (d)  When and as authorized by the vote of the holders of not less than a
          majority of the shares entitled to vote, at a shareholders' meeting
          called for that purpose or when authorized upon the written consent of
          the holders of a majority of such shares, to sell, lease, exchange, or
          otherwise dispose of all, or substantially all, of its property and
          assets, including its good will, upon such terms and for such
          considerations, which may be money, shares, bonds, or other
          instruments for the payment of money or other property, as the Board
          of Directors deems expedient or advisable.

     (e)  To acquire, hold, lease, encumber, convey or otherwise dispose of,
          either alone or in conjunction with others, real and personal property
          within or without the state; and to take real and personal property by
          will or gift.

     (f)  To acquire, hold, take over as a going concern and thereafter to carry
          on, mortgage, sell or otherwise dispose of, either alone or in
          conjunction with others, the rights, property and business of any
          person, entity, partnership, association, or corporation heretofore or
          hereafter engaged in any business, the purpose of which is similar to
          the purposes set forth in Article III of these Articles of
          Incorporation.

     (g)  To enter into any lawful arrangement for sharing of profits, union of
          interest, reciprocal association, or cooperative association with any
          corporation, association, partnership, individual, or other legal
          entity, for the carrying on of any business, the purpose of which is
          similar to the purposes set forth in Article III of these Articles of
          Incorporation, and, insofar as it is lawful, to enter into any general
          or limited partnership, the purpose of which is similar to such
          purposes.

                                   ARTICLE V.

     An agreement for consolidation or merger with one or more foreign or
domestic corporations may be authorized by vote of the shareholders entitled to
exercise at least two-thirds of the shares entitled to vote unless the necessary
affirmative vote to authorize any particular merger or consolidation is reduced
by the Board of Directors, which reduction shall be to not less than a majority
of the shares entitled to vote.

                                   ARTICLE VI.

     The location and post office address of the registered office of this
Corporation shall be 1500 County Road B2 West, St. Paul, Minnesota.

                                  ARTICLE VII.

     The aggregate number of shares which this Corporation shall have authority
to issue is 250,000,000 shares, of which not more than 15,000,000 shares shall
be "Preferred Shares."

     a.   All classes of Preferred and Common shares may be issued as and when
          and for such consideration as the Board of Directors shall determine,
          and, to the full extent permitted by the Minnesota Business
          Corporation Act, the Board of Directors shall have the power to
          establish any classes or series of Preferred Shares or Common Shares,
          with such par value, rights and priorities it deems appropriate, and
          to fix or alter, from time to time, in respect of any Preferred Shares
          then unissued, the rights and


                                       -2-



          preferences of such shares, including without limitation, any or all
          of the following: dividend rate and dividend cumulation rights; voting
          rights; redemption rights and price; liquidation rights and price;
          conversion rights and sinking or purchase fund rights; or the number
          of shares constituting any class or series. The Board of Directors
          shall also have the power to fix the terms and provisions of options,
          rights and warrants to purchase or subscribe for shares of any class
          or classes and to authorize the issuance thereof. Dividends payable in
          shares of any class may be paid to shareholders of any other class as
          and when determined by the Board of Directors.

     b.   The voting rights of the shares of this Corporation shall be vested in
          the holders of all shares presently outstanding, with one vote per
          share. The voting rights of unissued shares shall be fixed by the
          Board of Directors, but no such share shall be entitled to more than
          one vote. No holder of any shares shall be entitled to any cumulative
          voting rights.

     c.   No shareholder of this Corporation shall have any pre-emptive right to
          subscribe for or purchase any shares of any class or series of the
          Corporation, whether now or hereafter established or authorized, or
          any securities or obligations convertible into any such shares, or any
          options or warrants or rights to purchase any such shares.

                                  ARTICLE VIII.

     Section 1. If any person has become an Acquiring Person as defined in
Section 2, each holder of Voting Shares, other than the Acquiring Person or a
transferee of the Acquiring Person, until and including the ninetieth day
following the date the notice to holders of Voting Shares referred to in Section
3 herein is mailed, shall have the right to have the Voting Shares held by such
holder redeemed by the Corporation at the Redemption Price determined as
provided in Section 4 herein, and each holder of securities convertible into
Common Shares or of options, warrants, or rights exercisable to acquire Common
Shares prior to such ninetieth day, other than the Acquiring Person or a
transferee of the Acquiring Person, shall have the right simultaneously with the
conversion of such securities or exercise of such options, warrants, or rights
to have the Common Shares to be received thereupon by such holder redeemed by
the Corporation at the Redemption Price; provided that no holder of Voting
Shares shall have any right to have Voting Shares redeemed by the Corporation
pursuant to this Article if the Corporation acting through a majority of its
Board of Directors shall either (a) recommend to the holders of Voting Shares
that a pending tender offer be accepted by the holders of Voting Shares or (b)
if no tender offer is pending it announces that it does not oppose any
accumulation of shares by an Acquiring Person; provided, however, that such
recommendation or announcement is made within ten days following either (i) the
announcement or publication of such tender offer made by an Acquiring Person,
(ii) any amendment to such tender offer, (iii) a vote by shareholders of the
Corporation for approval of the acquisition of shares by the Acquiring Person
(iv) receipt by the Board of Directors of credible notice that an Acquiring
Person exists, or (v) receipt by the Board of Directors of credible notice that
an Acquiring Person has increased ownership of Voting Shares by more than three
percent (3%) of the Voting Shares outstanding.

     Section 2. For purposes of this Article:


                                       -3-



          (a) The term "person" shall include an individual, a corporation,
     partnership, trust or other entity.

          (b) An "Acquiring Person" shall be any person who becomes the
     beneficial owner, directly or indirectly, of more than twenty percent (20%)
     of the voting shares outstanding and becomes the beneficial owner, directly
     or indirectly, of any additional Voting Shares pursuant to a tender offer
     or otherwise or (ii) becomes the beneficial owner, directly or indirectly,
     of more than fifty percent (50%) of the Voting Shares outstanding whether
     such shares were acquired by market purchases, a tender offer or otherwise.

          (c) For the purpose of determining whether a person is an Acquiring
     Person, such person shall be deemed to beneficially own (i) all Voting
     Shares with respect to which such person has the capability to control or
     influence the voting power in respect thereof and (ii) all Voting Shares
     which such person has the immediate or future right to acquire, directly or
     indirectly, pursuant to agreements, through the exercise of options,
     warrants or rights or through the conversion of convertible securities or
     otherwise; and all Voting Shares which such person has the right to acquire
     in such manner shall be deemed to be outstanding shares, but Voting Shares
     which any other person has the right to acquire in such manner shall not be
     deemed to be outstanding shares.

          (d) The term "Voting Shares" shall mean such of the Common Shares and
     the Preferred Shares of the Corporation as shall have been granted voting
     rights.

          (e) The acquisition of Voting Shares by the Corporation or by any
     person controlling, controlled by or under common control with the
     Corporation shall not affect the right to have Voting Shares redeemed
     pursuant to this Article.

          (f) The right to have Voting Shares redeemed pursuant to this Article
     shall attach to such shares and shall not be personal to the holder
     thereof.

          (g) The term "tender offer" shall mean an offer to acquire or an
     acquisition of Voting Shares pursuant to a request or invitation for
     tenders or an offer to purchase such shares for cash, securities or any
     other consideration.

          (h) The term "market purchases" shall mean the acquisition of Voting
     Shares from holders of such shares in privately negotiated transactions or
     in transactions effected through a broker or dealer.

          (i) Subject to the provisions of Section 2(c) herein, "outstanding
     shares" shall mean Voting Shares which at the time in question have been
     issued by the Corporation and not reacquired and held or retired by it or
     held by any subsidiary of the Corporation.

     Section 3. If Voting Shares are subject to redemption in accordance with
Section 1:

     (a) Not later than sixty (60) days following the date on which the
Corporation receives credible notice that any person has become an Acquiring
Person, the Corporation shall give written notice, by first class mail, postage
prepaid, at the addresses shown on the records of the Corporation, to each
holder of record of Voting Shares (and to any other person known by the
Corporation to have rights to demand redemption pursuant to Section 2 of this
Article) as of a date not more than seven (7) days prior to the date of the
mailing pursuant to this Section 3 and shall advise each such holder of the
right to have shares redeemed and the procedure for such redemption.

     (b) If the Corporation fails to give notice as required by this Section 3,
any holder entitled to receive such notice may within twenty (20) days
thereafter serve written demand upon the Corporation to give such notice. If
within


                                       -4-



twenty (20) days after the receipt of the written demand the Corporation fails
to give the required notice, such holder may at the expense and on behalf of the
Corporation take such reasonable action as may be appropriate to give notice or
to cause notice to be given pursuant to this Section 3.

     (c) The Directors of the Corporation shall designate a Redemption Agent,
which shall be a corporation or association (i) organized and doing business
under the laws of the United States or any State, (ii) subject to supervision or
examination by Federal or State authority, (iii) having combined capital and
surplus of at least $20 million, and (iv) having the power to exercise corporate
trust powers.

     (d) For a period of ninety (90) days from the date of the mailing of the
notice to the holders of Voting Shares referred to in this Section 3, holders of
Voting Shares and other persons entitled to have Voting Shares redeemed pursuant
to this Article may, at their option, deposit certificates representing all or
less than all Voting Shares held of record by them with the Redemption Agent
together with written notice that the holder elects to have such shares redeemed
pursuant to this Article. Redemption shall be deemed to have been effected at
the close of business on the day such certificates are deposited in proper form
with the Redemption Agent.

     (e) The Corporation shall promptly deposit in trust with the Redemption
Agent cash in an amount equal to the aggregate Redemption Price of all of the
Voting Shares deposited with the Redemption Agent for purposes of redemption.

     (f) As soon as practicable after receipt by the Redemption Agent of the
cash deposit by the Corporation referred to in this Section 3, the Redemption
Agent shall issue its checks payable to the order of the persons entitled to
receive the Redemption Price of the Voting Shares in respect of which such cash
deposit was made.

     Section 4. (a) The Redemption Price shall be the amount payable by the
Corporation in respect of each Voting Share with respect to which redemption has
been demanded pursuant to this Article and shall be the greater amount
determined on either of the following bases, but in no event shall the
Redemption Price be less than the amount of shareholders' equity in respect of
each outstanding Voting Share as determined in accordance with generally
accepted accounting principles and as reflected in any published report by the
Corporation as at the fiscal year quarter ending immediately preceding the
notice to shareholders referred to in Section 3 herein:

          (i) The highest price per Voting Share, including any commission paid
     to brokers or dealers for solicitation or whatever, at which Voting Shares
     held by the Acquiring Person were acquired pursuant to a tender offer
     regardless of when such tender offer was made or were acquired pursuant to
     any market purchase or otherwise within eighteen months prior to the notice
     to holders of Voting Shares referred to in Section 3 herein. For purposes
     of this subsection (i) if the consideration paid in any such acquisition of
     Voting Shares consisted, in whole or in part, of consideration other than
     cash, the Board of Directors of the Corporation shall take such action, as
     in its judgment it deems appropriate, to establish the cash value of such
     consideration, but such valuation shall not be less


                                       -5-



     than the cash value, if any, ascribed to such consideration by the
     Acquiring Person.

          (ii) The highest sale price per Voting Share for any trading day
     during the eighteen months prior to the notice to holders of Voting Shares
     referred to in Section 3 herein. For purposes of this subsection (ii), the
     sale price for any trading day shall be the last sale price per Voting
     Share traded on the New York Stock Exchange, any or other national
     securities exchange or the National Market System or, if Voting Shares are
     not then traded on the foregoing, the mean of the closing bid and asked
     price per Voting Share.

     (b) The determination to be made pursuant to this Section 4 shall be made
by the Board of Directors not later than the date of the notice to holders of
Voting Shares referred to in Section 3 herein. In making such determination the
Board of Directors may engage such persons, including investment banking firms
and the independent accountants who have reported on the most recent financial
statements of the Corporation, and utilize employees and agents of the
Corporation, who will, in the judgment of the Board of Directors, be of
assistance to the Board of Directors.

     (c) The determinations to be made pursuant to this Section 4, when made by
the Board of Directors acting in good faith on the basis of such information and
assistance as was then reasonably available for such purpose, shall be
conclusive and binding upon the Corporation and its shareholders, including any
person referred to in Section 2 herein.

     (d) Notwithstanding the foregoing provisions of this Section 4, each such
holder of Voting Shares shall have the right to have the Redemption Price to be
paid determined under and pursuant to the appraisal provisions of the Minnesota
Statutes then in effect.

     Section 5. This Article may be amended or repealed only by the affirmative
vote of the holders of 85% of each class of shares of the Corporation entitled
to exercise the voting power of the Corporation; provided, however, that if no
person holds more than twenty percent (20%) of the Voting Shares and there is no
tender offer pending or threatened of which the Board of Directors has credible
notice, the necessary vote for amendment or repeal may be reduced by the Board
of Directors to not less than the requirements of Article XII of these Articles
of Incorporation; provided, further that no amendment or repeal adopted after
the notice to holders of Voting Shares referred to in Section 3 herein shall
affect any Voting Shares theretofore or thereafter deposited with the Redemption
Agent for redemption under this Article pursuant to such notice.

                                   ARTICLE IX.

     The amount of stated capital with which this Corporation shall commence
business will be at least $1,000.

                                   ARTICLE X.

     Meetings of the shareholders, whether annual or special, shall be held at
the principal place of business of the Corporation at such time and date as may
be fixed in the By-Laws, or at any other place designated by the Board of
Directors


                                       -6-



pursuant to the By-Laws or consented to in writing by all of the shareholders
entitled to vote thereat.

                                   ARTICLE XI.

     Section 1. The business of this Corporation shall be managed by a Board of
Directors who shall be elected at the annual meeting of the shareholders. The
number of directors is hereby fixed at ten (10). The directors are hereby
divided into three classes, each class to consist as nearly as may be of
one-third of the number of directors then constituting the whole Board. The term
of office of those of the first class shall expire at the annual meeting in
1977. The term of office of the second class shall expire in 1978. The term of
office of the third class shall expire in 1979. At each annual election
commencing in 1977, the directors elected shall be chosen for a full term of
three years to succeed those whose terms then expire. Vacancies on the Board of
Directors may be filled by the remaining directors and each person so elected
shall be a director until his successor is elected at an annual meeting of
shareholders or at a special meeting duly called therefor.

     Section 2. The Board of Directors shall have all of the powers of the
Corporation, subject to such action restricting said powers as may legally be
taken from time to time by the shareholders either at an annual meeting or at a
special meeting duly called therefor.

     Section 3. The Board of Directors shall have authority to make and alter
By-Laws, subject to the power of the shareholders to change or repeal such
By-Laws, provided, however, that the Board shall not make or alter any By-Law
fixing the number, qualifications, or term of office of Directors.

     Section 4. Any contract or other transaction between the Corporation and
one or more of its directors, or between the Corporation and any corporation,
association or firm of which one or more of its directors are shareholders,
members, directors, officers or employees, or in which they are interested,
shall be valid for all purposes, notwithstanding the presence and participation
of such director or directors at the meeting of the Board of Directors of the
Corporation which acts upon or in reference to such contract or transaction, if
the fact of such interest shall be disclosed or known to the Board of Directors,
and the Board of Directors shall, nevertheless, authorize, approve and ratify
such contract or transaction by a vote of a majority of the directors present,
such interested director or directors to be counted in determining whether a
quorum is present, but not to be counted in calculating the majority necessary
to carry such vote. This section shall not be construed to invalidate any
contract or transaction which would otherwise be valid under the laws applicable
thereto.

     Section 5. The annual meeting of the Board of Directors shall be held
immediately following the annual meeting of the shareholders, and at the same
place.

     Section 6. The names and post office addresses of the directors at the time
of adoption of these Restated Articles of


                                       -7-



Incorporation are as follows:

Winslow H. Buxton
Pentair, Inc.
1500 West County Road B2
St. Paul, MN  55113-3105

Joseph R. Collins
Pentair, Inc.
1500 West County Road B2
St. Paul, MN  55113-3105

Stuart "Chuck"Maitland
Ford Motor Company
Vehicle Operations General Office, Rm A-212
17000 Oakwood Boulevard
Allen Park, MI  48101

Augusto Meozzi
Via delle Lame, 34
50126 Florence, Italy

William J.  Cadogan
ADC Telecommunications, Inc.
P.O. Box 1101
Minneapolis, MN  55440-1101

Barbara Grogan
Western Industrial Contractors
5301 Joliet Street
Denver, CO  80239-2112

Charles Haggerty
Chairman, President and CEO
Western Digital Corporation
8105 Irvine Center Drive
Irvine, CA  92718

Harold V.  Haverty
1 Wood Duck Lane
North Oaks, MN  55127

Karen E.  Welke
3M Center, Building 220-14E-16
St. Paul, MN  55144

Quentin J. Hietpas
University of St. Thomas
2115 Summit Avenue, AQU104
St. Paul, Minnesota 55105

Richard M.  Schulze
Best Buy Co., Inc.
7075 Flying Cloud Drive
Eden Prairie, MN  55344

     Section 7. A Director of this Corporation shall not be personally liable to
the Corporation or its shareholders for monetary damages for breach of fiduciary
duty as a Director, except to the extent such exemption from liability or
limitation thereof is not permitted under Section 302A.251 of the Minnesota
Statutes.

     If Chapter 302A of the Minnesota Statutes hereafter is amended to authorize
the further elimination or limitation of the liability of directors, then, in
addition to the limitation on personal liability provided herein, the liability
of a Director of the Corporation shall be limited to the fullest extent
permitted by the amended Chapter 302A of the Minnesota Statutes.

     Any repeal or modification of this Section 7 by the shareholders of the
Corporation shall be prospective only and shall not adversely affect any
limitation of the personal liability of a Director of the Corporation existing
at the time of such repeal or modification.

                                  ARTICLE XII.

     These articles may be amended by resolution setting forth such amendment or
amendments adopted at any meeting of the shareholders by the affirmative vote of
the holders of 60% of the voting power of all shareholders entitled to vote,
provided such amendment or amendments shall not receive the negative vote of the
holders of more than 25% of the voting power of all shareholders entitled to
vote. Each share of stock shall entitle the holder thereof to one vote.


                                       -8-



     IN WITNESS WHEREOF, the undersigned corporation has caused these Second
Restated Articles of Incorporation to be executed by its Chief Executive Officer
and attested by its Secretary this _____ day of ____________, 1999.

                                     PENTAIR, INC.

                                     ------------------------------------------
                                     Winslow H. Buxton, Chief Executive Officer

ATTEST:

- -------------------------------
Roy T. Rueb, Secretary

                                       -9-

EX-3.2

Exhibit 3.2

                          THIRD AMENDED AND SUPERSEDING
                                     BY-LAWS
                                       OF
                                  PENTAIR, INC.
                           ADOPTED ON AUGUST 23, 2000
                     Compiled Version As Amended May 1, 2002


                                    ARTICLE I
                            Meetings of Shareholders

     Section 1. Place and Time of Meetings. Except as otherwise provided by
Minnesota Statutes Chapter 302A, meetings of the shareholders may be held at any
place, within or without the State of Minnesota, as may from time to time be
designated by the Board of Directors and, in the absence of such designation,
shall be held at the registered office of the Corporation in the State of
Minnesota. The Board of Directors shall designate the time of day for each
meeting and, in the absence of such designation and except as otherwise provided
in these By-Laws, every meeting of shareholders shall be held at 10:00 a.m.
local time.

     Section 2. Annual Meeting. The annual meeting of shareholders (the "Annual
Meeting") shall be held on such date after March 1 and prior to June 1 as the
Board of Directors shall select by appropriate resolution. In fixing a meeting
date for any Annual Meeting, the Board of Directors may consider such factors as
it deems relevant within the good faith exercise of its business judgment. The
Annual Meeting shall be the only regular meeting of the shareholders in any one
calendar year. At each Annual Meeting, the shareholders shall elect that number
of directors equal to the number of directors in the class whose term expires at
the time of such Annual Meeting. At any such Annual Meeting, only other business
properly brought before the Annual Meeting in accordance with Section 10 of this
Article I may be transacted.

     Section 3. Special Meetings.

     (a) A special meeting of the shareholders (a "Special Meeting") may be
called only by (i) the Chief Executive Officer, (ii) the Chief Financial
Officer, (iii) two or more members of the Board of Directors, (iv) the Chairman
of the Board or (v) a shareholder or shareholders holding ten percent (10%) or
more of the voting power of all shares entitled to vote on the matters to be
presented to the Special Meeting, except that a Special Meeting for the purpose
of considering any action to directly or indirectly facilitate or effect a
business combination, including any action to change or otherwise effect the
composition of the Board of Directors for that purpose, must be called by twenty
five percent (25%) or more of the voting power of all shares entitled to vote.

     (b) In order for a shareholder or shareholders to demand a Special Meeting,
a written demand or demands for a Special Meeting by a shareholder or
shareholders holding the voting power specified in Section 3(a)(v) of this
Article I (the "Requisite Voting Power") must be delivered to the Corporation.
To be valid, each written demand by a shareholder for a Special Meeting shall
set forth the specific purpose or purposes for which the Special Meeting is to
be held, shall be signed by one or more persons who as of the date of such
written demand are shareholders of record (or their duly authorized proxies or
other representatives), shall bear the date of signature of each such
shareholder (or proxy or other representative), shall set forth all information
about each such shareholder and beneficial owner or owners, if any, on whose
behalf the demand is made that would be required to be set forth in a
shareholder's notice described in paragraph (a)(ii) of Section 10 of this
Article I, and shall be sent to the Chief Executive Officer or Chief Financial
Officer of the Corporation by hand or by certified or registered mail, return
receipt requested. Within 30 days after the date that valid written demands for
such meeting by the shareholder or shareholders holding the Requisite Voting
Power are received by the Chief Executive Officer or Chief Financial Officer of
the Corporation (the "Delivery Date"), the Board of Directors shall cause a
Special Meeting to be called in accordance with this Section 3.

     (c) Except as provided in the following sentence, any Special Meeting shall
be held at such hour and day as may be designated by whichever of the Chief
Executive Officer, the Chief Financial Officer, two or more members of the Board
of Directors or the Chairman of the Board shall have called such Special
Meeting. In the case of any Special Meeting



called by the Board of Directors upon the demand of a shareholder or
shareholders in accordance with this Section 3 (a "Demand Special Meeting"),
such Special Meeting shall be held at such hour and day as may be designated by
the Board of Directors; provided, however, that the date of any Demand Special
Meeting shall be not more than 90 days after the Delivery Date; and provided
further that in the event that the directors then in office fail to designate an
hour and date for a Demand Special Meeting within 30 days after the Delivery
Date, then such meeting shall be held at 2:00 p.m. local time on the 90th day
after the Delivery Date or, if such 90th day is not a Business Day (as defined
below), on the first preceding Business Day. In fixing a meeting date for any
Special Meeting, the Chief Executive Officer, the Chief Financial Officer, two
or more members of the Board of Directors, the Chairman of the Board or the
Board of Directors may consider such factors as it or he deems relevant within
the good faith exercise of its or his business judgment, including, without
limitation, the nature of the action proposed to be taken, the facts and
circumstances surrounding any demand for such meeting, and any plan of the Board
of Directors to call an Annual Meeting or a Special Meeting for the conduct of
related business.

     (d) The Corporation may engage regionally or nationally recognized
independent inspectors of elections to act as an agent of the Corporation for
the purpose of promptly performing a ministerial review of the validity of any
purported written demand or demands for a Special Meeting received by the Chief
Executive Officer or Chief Financial Officer of the Corporation. For the purpose
of permitting the inspectors to perform such review, no purported demand shall
be deemed to have been delivered to the Corporation until the earlier of (i)
five Business Days following receipt by the Chief Executive Officer or Chief
Financial Officer of such purported demand and (ii) such date as the independent
inspectors certify to the Corporation that the valid demands received by the
Chief Executive Officer or Chief Financial Officer represent the Requisite
Voting Power. Nothing contained in this Section 3(d) shall in any way be
construed to suggest or imply that the Board of Directors or any shareholder
shall not be entitled to contest the validity of any demand, whether during or
after such five Business Day period, or to take any other action (including,
without limitation, the commencement, prosecution or defense of any litigation
with respect thereto).

     (e) For purposes of these By-Laws, "Business Day" shall mean any day other
than a Saturday, a Sunday or a day on which banking institutions in the State of
Minnesota are authorized or obligated by law or executive order to close.

     Section 4. Notice of Meetings. There shall be mailed to each shareholder,
shown by the books of the Corporation to be a holder of record of voting shares,
at his or her address as shown by the books of the Corporation, a notice setting
out the time and place of each Annual Meeting and each Special Meeting, except
where the meeting is an adjourned meeting and the date, time and place of the
meeting were announced at the time of adjournment, which notice shall be mailed
not less than 10 days nor more than 60 days prior thereto, except that notice of
a meeting at which an agreement of merger or exchange is to be considered shall
be mailed to all shareholders of record, whether entitled to vote or not, at
least fourteen days prior thereto. In the event of any Demand Special Meeting,
such notice shall be sent not more than 45 days after the Delivery Date. In the
case of any Special Meeting, (a) the notice of meeting shall describe any
business that the Board of Directors shall have theretofore determined to bring
before the Special Meeting and (b) in the case of a Demand Special Meeting, the
notice of meeting (i) shall describe any business set forth in the statement of
purpose of the demands received by the corporation in accordance with Section 3
of this Article I and (ii) shall contain all of the information required in the
notice received by the Corporation in accordance with Section 10(b) of this
Article I. The business transacted at all Special Meetings shall be confined to
the purpose or purposes stated in the notice. The written notice of any meeting
at which a plan of merger or exchange is to be considered shall so state such as
a purpose of the meeting. A copy or short description of the plan of merger or
exchange shall be included in or enclosed with such notice.

     Section 5. Waiver of Notice. Notice of any Annual Meeting or Special
Meeting may be waived by any shareholder either before, at or after such meeting
orally or in a writing signed by such shareholder or a representative entitled
to vote the shares of such shareholder. A shareholder, by his or her attendance
at any meeting of shareholders, shall be deemed to have waived notice of such
meeting, except where the shareholder objects at the beginning of the meeting to
the transaction of business because the item may not lawfully be considered at
that meeting and does not participate in the consideration of the item at that
meeting.

     Section 6. Voting. At each meeting of the shareholders every shareholder
having the right to vote shall be entitled to vote either in person or by proxy.
Each shareholder, unless the Articles of Incorporation or statute provide
otherwise, shall have one vote for each share having voting power registered in
such shareholder's name on the books of the Corporation. Jointly owned shares
may be voted by any joint owner unless the Corporation receives written notice
from any


                                       -2-



one of them denying the authority of that person to vote those shares. Upon the
demand of any shareholder, the vote upon any question before the meeting shall
be by ballot. All questions shall be decided by a majority vote of the number of
shares entitled to vote and represented at the meeting at the time of the vote
except if otherwise required by statute, the Articles of Incorporation, or these
By-Laws.

     Section 7. Record Date. The Board of Directors may fix a time, not
exceeding 60 days preceding the date of any meeting of shareholders, as a record
date for the determination of the shareholders entitled to notice of, and to
vote at, such meeting ("Meeting Record Date"), notwithstanding any transfer of
shares on the books of the Corporation after any record date so fixed. If the
Board of Directors fails to fix a Meeting Record Date, then the Meeting Record
Date shall be the 20th day preceding the date of such meeting. Notwithstanding
the foregoing, in the case of any Demand Special Meeting, (a) the Meeting Record
Date shall not be later than the 30th day after the Delivery Date and (b) if the
Board of Directors fails to fix the Meeting Record Date within 30 days after the
Delivery Date, then the close of business on such 30th day shall be the Meeting
Record Date.

     Section 8. Quorum, Adjourned Meetings. The presence, in person or by proxy,
of the holders of a majority of the shares entitled to vote at the meeting shall
constitute a quorum for the transaction of business. In case a quorum shall not
be present at a meeting, those present may adjourn to such day as they shall, by
majority vote, agree upon, and a notice of such adjournment shall be mailed to
each shareholder entitled to vote at least five days before such adjourned
meeting. If a quorum is present, a meeting may be adjourned without notice other
than announcement at the meeting (a) at any time upon a resolution of
shareholders by majority vote or (b) at any time prior the transaction of any
business at such meeting, by the Chairman of the Board of Directors or pursuant
to a resolution of the Board of Directors. At adjourned meetings at which a
quorum is present, any business may be transacted which might have been
transacted at the meeting as originally noticed. If a quorum is present, the
shareholders may continue to transact business until adjournment notwithstanding
the withdrawal of enough shareholders to leave less than a quorum.

     Section 9. Written Action. Any action which might be taken at a meeting of
the shareholders may be taken without a meeting if done in writing and signed by
all of the shareholders entitled to vote on that action.

     Section 10. Notice of Shareholder Business and Nomination of Directors.

     (a)  Annual Meetings.

          (i) Nominations of persons for election to the Board of Directors of
     the Corporation and the proposal of business to be considered by the
     shareholders may be made at an Annual Meeting (A) pursuant to the
     Corporation's notice of meeting, (B) by or at the direction of the Board of
     Directors or (C) by any shareholder of the Corporation who is a shareholder
     of record at the time of giving of notice provided for in this By-Law and
     who is entitled to vote at the meeting and complies with the notice
     procedures set forth in this Section 10.

          (ii) For nominations or other business to be properly brought before
     an Annual Meeting by a shareholder pursuant to clause (C) of paragraph
     (a)(i) of this Section 10, the shareholder must have given timely notice
     thereof in writing to the Secretary of the Corporation. To be timely, a
     shareholder's notice shall be received by the Secretary of the Corporation
     at the principal offices of the Corporation not less than 45 days nor more
     than 70 days prior to the first annual anniversary of the date set forth in
     the Corporation's proxy statement for the immediately preceding Annual
     Meeting as the date on which the Corporation first mailed definitive proxy
     materials for the immediately preceding Annual Meeting (the "Anniversary
     Date"); provided, however, that in the event that the date for which the
     Annual Meeting is called is advanced by more than 30 days or delayed by
     more than 30 days from the first annual anniversary of the immediately
     preceding Annual Meeting, notice by the shareholder to be timely must be so
     delivered not earlier than the close of business on the 100th day prior to
     the date of such Annual Meeting and not later than the later of (A) the
     75th day prior to the date of such Annual Meeting or (B) the 10th day
     following the day on which public announcement of the date of such Annual
     Meeting is first made. In no event shall the announcement of an adjournment
     of an Annual Meeting commence a new time period for the giving of a
     shareholder notice as described above. Such shareholder's notice shall be
     signed by the shareholder of record who intends to make the nomination or
     introduce the other business (or his duly authorized proxy or other
     representative), shall bear the date of signature of such shareholder (or
     proxy or other representative) and shall set


                                       -3-



     forth: (A) the name and address, as they appear on the Corporation's books,
     of such shareholder and the beneficial owner or owners, if any, on whose
     behalf the nomination or proposal is made; (B) the class and number of
     shares of the Corporation which are beneficially owned by such shareholder
     or beneficial owner or owners; (C) a representation that such shareholder
     is a holder of record of shares of the Corporation entitled to vote at such
     meeting and intends to appear in person or by proxy at the meeting to make
     the nomination or introduce the other business specified in the notice; (D)
     in the case of any proposed nomination for election or re-election as a
     director, (I) the name and residence address of the person or persons to be
     nominated, (II) a description of all arrangements or understandings between
     such shareholder or beneficial owner or owners and each nominee and any
     other person or persons (naming such person or persons) pursuant to which
     the nomination is to be made by such shareholder, (III) such other
     information regarding each nominee proposed by such shareholder as would be
     required to be disclosed in solicitations of proxies for elections of
     directors, or would be otherwise required to be disclosed, in each case
     pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
     amended (the "Exchange Act"), including any information that would be
     required to be included in a proxy statement filed pursuant to Regulation
     14A had the nominee been nominated by the Board of Directors and (IV) the
     written consent of each nominee to be named in a proxy statement and to
     serve as a director of the Corporation if so elected; and (E) in the case
     of any other business that such shareholder proposes to bring before the
     meeting, (I) a brief description of the business desired to be brought
     before the meeting and, if such business includes a proposal to amend these
     By-Laws, the language of the proposed amendment, (II) such shareholder's
     and beneficial owner's or owners' reasons for conducting such business at
     the meeting and (III) any material interest in such business of such
     shareholder and beneficial owner or owners.

          (iii) Notwithstanding anything in the second sentence of paragraph
     (a)(ii) of this Section 10 to the contrary, in the event that the number of
     directors to be elected to the Board of Directors of the Corporation is
     increased and there is no public announcement naming all of the nominees
     for director or specifying the size of the increased Board of Directors
     made by the Corporation at least 45 days prior to the Anniversary Date, a
     shareholder's notice required by this Section 10 shall also be considered
     timely, but only with respect to nominees for any new positions created by
     such increase, if it shall be received by the Secretary at the principal
     offices of the Corporation not later than the close of business on the 10th
     day following the day on which such public announcement is first made by
     the Corporation.

     (b) Special Meetings. The business transacted at a Special Meeting shall be
limited to the purposes stated in the notice of the Special Meeting sent to
shareholders pursuant to Section 4 of this Article I. Nominations of persons for
election to the Board of Directors may be made at a Special Meeting at which
directors are to be elected pursuant to such notice of meeting (i) by or at the
direction of the Board of Directors or (ii) by any shareholder of the
Corporation who (A) is a shareholder of record at the time of giving of such
notice of meeting, (B) is entitled to vote at the meeting and (C) complies with
the notice procedures set forth in this Section 10. Any shareholder desiring to
nominate persons for election to the Board of Directors at such a Special
Meeting shall cause a written notice to be received by the Secretary of the
Corporation at the principal offices of the Corporation not earlier than 90 days
prior to such Special Meeting and not later than the close of business on the
later of (x) the 60th day prior to such Special Meeting and (y) the 10th day
following the day on which public announcement is first made of the date of such
Special Meeting and of the nominees proposed by the Board of Directors to be
elected at such meeting. Such written notice shall be signed by the shareholder
of record who intends to make the nomination (or his duly authorized proxy or
other representative), shall bear the date of signature of such shareholder (or
proxy or other representative) and shall set forth: (A) the name and address, as
they appear on the Corporation's books, of such shareholder and the beneficial
owner or owners, if any, on whose behalf the nomination is made; (B) the class
and number of shares of the Corporation which are beneficially owned by such
shareholder or beneficial owner or owners; (C) a representation that such
shareholder is a holder of record of shares of the Corporation entitled to vote
at such meeting and intends to appear in person or by proxy at the meeting to
make the nomination specified in the notice; (D) the name and residence address
of the person or persons to be nominated; (E) a description of all arrangements
or understandings between such shareholder or beneficial owner or owners and
each nominee and any other person or persons (naming such person or persons)
pursuant to which the nomination is to be made by such shareholder; (F) such
other information regarding each nominee proposed by such shareholder as would
be required to be disclosed in solicitations of proxies for elections of
directors, or would be otherwise required to be disclosed, in each case pursuant
to Regulation 14A under the Exchange Act, including any information that would
be required to be included in a proxy statement filed pursuant to Regulation 14A
had the nominee been nominated by the Board of Directors; and (G) the written
consent of each nominee to be named in a proxy statement and to serve as a
director of the Corporation if so elected.


                                       -4-



     (c)  General.

          (i) Only persons who are nominated in accordance with the procedures
     set forth in this Section 10 shall be eligible to serve as directors. The
     Board of Directors, or a nominating committee duly appointed by the Board
     of Directors, shall have the sole authority to designate candidates to be
     nominated by management for election as directors of the Corporation. Only
     such business shall be conducted at an Annual Meeting or Special Meeting as
     shall have been brought before such meeting in accordance with the
     procedures set forth in this Section 10. The chairman of the meeting shall
     have the power and duty to determine whether a nomination or any business
     proposed to be brought before the meeting was made in accordance with the
     procedures set forth in this Section 10 and, if any proposed nomination or
     business is not in compliance with this Section 10, to declare that such
     defective proposal shall be disregarded.

          (ii) For purposes of this Section 10, "public announcement" shall mean
     disclosure in a press release reported by the Dow Jones News Service,
     Associated Press or comparable national news service or in a document
     publicly filed by the Corporation with the Securities and Exchange
     Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.

          (iii) Notwithstanding the foregoing provisions of this Section 10, a
     shareholder shall also comply with all applicable requirements of the
     Exchange Act and the rules and regulations thereunder with respect to the
     matters set forth in this Section 10. Nothing in this Section 10 shall be
     deemed to limit the Corporation's obligation to include shareholder
     proposals in its proxy statement if such inclusion is required by Rule
     14a-8 under the Exchange Act.

                                   ARTICLE II
                                    Directors

     Section 1. General Powers; Number of Directors; Classification. The
business and affairs of the Corporation shall be managed by or under the
direction of a Board of Directors, except as otherwise permitted by statute. The
Board of Directors shall consist of ten (10) directors, who need not be
shareholders of the Corporation. The Board of Directors has been divided into
three classes, as nearly equal in number as may be, with the terms of office for
each class staggered so that the term for only one class expires each year.

     Section 2. Tenure. At each Annual Meeting, the shareholders shall elect
directors to fill the vacancies of such directors whose terms have expired. Each
newly elected director shall hold office for a term expiring at the third
succeeding Annual Meeting or until his successor is elected and qualifies.

     Section 3. Vacancies. Any vacancy occurring in the Board of Directors may
be filled by the affirmative vote of a majority of the remaining directors or by
election at a meeting of shareholders. Any director who is elected to fill a
vacancy by the remaining directors shall be required to stand for election at
the next Annual Meeting or Special Meeting, regardless of whether the class of
directors into which such director has been placed will otherwise be elected at
such meeting.

     Section 4. Board Meetings. Meetings of the Board of Directors may be held
from time to time at such time and place within or without the State of
Minnesota as may be designated in the notice of such meeting.

     Section 5. Notice. The Board of Directors shall meet each year immediately
after the Annual Meeting, at the same place as the Annual Meeting. No notice of
any kind to either old or new members shall be necessary for such annual meeting
or for any regular meeting of the directors fixed from time to time by
resolution of a majority of the Board of Directors. Other meetings of the Board
of Directors may be held upon 48 hours' written notice of the date, time and
place of the meeting upon the call of the Chairman of the Board, Chief Executive
Officer, President or any director. Neither the business to be transacted at,
nor the purpose of, any meeting need be specified in the notice of such meeting.
Notice of an adjourned meeting of the Board of Directors need not be given other
than by announcement at the meeting at which adjournment is taken.


                                       -5-



     Section 6. Waiver of Notice. Notice of any meeting of the Board of
Directors may be waived by any director either before, at, or after such meeting
orally or in a writing signed by such director. A director, by his or her
attendance at any meeting of the Board of Directors, shall be deemed to have
waived notice of such meeting, except where the director objects at the
beginning of the meeting to the transaction of business because the meeting is
not lawfully called or convened and does not participate thereafter in the
meeting.

     Section 7. Quorum; Act of the Board. A majority of the directors holding
office immediately prior to a meeting of the Board of Directors shall constitute
a quorum for the transaction of business at such meeting; provided, however,
that if any vacancies exist for any reason, the remaining directors shall
constitute a quorum for the filling of such vacancies. Except as otherwise
provided in these By-Laws, the acts of a majority of the directors present at a
meeting at which a quorum is present shall be the acts of the Board of
Directors.

     Section 8. Absent Directors. A director may give advance written consent or
opposition to a proposal to be acted on at a meeting of the Board of Directors.
If such director is not present at the meeting, consent or opposition to a
proposal does not constitute presence for purposes of determining the existence
of a quorum, but consent or opposition shall be counted as a vote in favor of or
against the proposal and shall be entered in the minutes or other record of
action at the meeting, if the proposal acted on at the meeting is substantially
the same or has substantially the same effect as the proposal to which the
director has consented or objected.

     Section 9. Electronic Communications. Any or all directors may participate
in any meeting of the Board of Directors, or of any duly constituted committee
thereof, by any means of communication through which the directors may
simultaneously hear each other during such meeting. For the purposes of
establishing a quorum and taking any action at the meeting, such directors
participating pursuant to this Section 9 shall be deemed present in person at
the meeting, and the place of the meeting shall be the place of origination of
the conference communication.

     Section 10. Removal of Directors.

     (a) A director may be removed by the Board of Directors at any time, but
only with good cause shown therefor, if (i) the director was appointed by the
Board of Directors to fill a vacancy and shareholders have not since such
appointment elected directors in such director's class; and (ii) a majority of
the other directors present affirmatively vote to remove the director.

     (b) Any one or all of the directors may be removed with good cause shown
therefor, at any meeting of the shareholders called for that purpose, by the
affirmative vote of 60% of the voting power of the shares entitled to vote
provided that removal is not opposed by more than 25% of the voting power of the
shares entitled to vote.

     (c) "Good cause" for the purpose of this Section 10 shall mean (i)
conviction of a crime involving moral turpitude, (ii) dishonesty in dealings
with the Corporation or with respect to its assets or (iii) engaging in
competition, directly or indirectly, with the Corporation, usurping any
corporate opportunity or advantage or knowingly violating Section 302A.255 of
Minnesota Statutes, as amended, with respect to director conflicts of interest,
without the prior consent of the Board of Directors after complete disclosure of
all material facts with respect thereto.

     (d) This Section 10 may be amended or repealed at any Annual Meeting or
Special Meeting by the affirmative vote of the holders of 60% of the voting
power of all shareholders entitled to vote, provided such amendment or repeal
shall not receive the negative vote of the holders of more than 25% of the
voting power of all shareholders entitled to vote.

     Section 11. Committees.

     (a) A resolution approved by the affirmative vote of a majority of the
Board of Directors may establish committees having the authority of the Board in
the management of the business of the Corporation to the extent provided in the
resolution. Except as otherwise provided in these By-Laws, a committee shall
consist of one or more persons, who need not be directors, appointed by
affirmative vote of a majority of the directors present. Except as otherwise
provided in these By-Laws, committees are subject to the direction and control
of, and vacancies in the membership thereof shall be filled by, the Board of
Directors.


                                       -6-



     (b) Except as otherwise provided in these By-Laws, a majority of the
members of the committee present at a meeting is a quorum for the transaction of
business, unless a larger or smaller proportion or number is provided in a
resolution approved by the affirmative vote of a majority of the directors
present.

     Section 12. Committee of Disinterested Persons.

     (a) The Board of Directors may establish a committee composed of two or
more disinterested directors or other disinterested persons to determine whether
it is in the best interests of the Corporation to pursue a particular legal
right or remedy of the Corporation and whether to cause the dismissal or
discontinuance of a particular proceeding that seeks to assert a right or remedy
on behalf of the Corporation.

     (b) For purposes of this Section 12, a director or other person is
"disinterested" if the director is not the owner of more than one percent of the
outstanding shares of, or a present or former officer, employee or agent of, the
Corporation or of a related corporation and has not been made or threatened to
be made a party to the proceeding in question.

     (c) The committee, once established, is not subject to direction, control,
or termination by the Board of Directors. A vacancy on the committee may be
filled by a majority vote of the remaining members. The good faith
determinations of the committee are binding upon the Corporation and its
directors, officers and shareholders. The committee's existence shall terminate
upon issuance of the final written report of its determinations.

     (d) A disinterested person appointed to a committee so established is
deemed to be a director for the period of existence of the committee but has no
power to act as a director except in conjunction with the activities of the
committee.

     Section 13. Executive Committee. The Board of Directors may by resolution
or resolutions, passed by a majority of the total number of directors, designate
an Executive Committee of three or more directors, one of whom shall be the
Chief Executive Officer of the Corporation and at least one of whom shall be
independent of management. In the event of an emergency, if one or more of the
members is absent, any of the remaining independent directors shall be an
alternative member for each member so absent, chosen by the length of service on
the Board of Directors. The Board of Directors shall designate one member of the
Executive Committee as Chairman. The Executive Committee shall exercise all
other powers of the Board of Directors between the meetings of the Board of
Directors; provided, however, that the Executive Committee shall not have the
power to fill vacancies in the Board of Directors and in its own membership;
provided further, that the Executive Committee shall not have authority to alter
or amend these By-Laws. The Board of Directors shall have the power at any time
to change the membership of or to dissolve the Executive Committee. The
Executive Committee shall take no action except by unanimous approval of all its
members. The Executive Committee shall meet at the request of the Chairman or
any member with proper notice. In an emergency, any member of the Board of
Directors or any officer of the Corporation may call a meeting of the Executive
Committee. Regular minutes will be kept of Executive Committee proceedings and
shall be reported at the next following meeting of the Board of Directors; such
report shall become a part of the record to which such report is presented.

     Section 14. Written Action. Any action which might be taken at a meeting of
the Board of Directors, or any duly constituted committee thereof, may be taken
without a meeting if done in writing and signed by a majority of the directors
or committee members, unless the Articles of Incorporation provide otherwise and
the action need not be approved by the shareholders.

     Section 15. Compensation. The Board of Directors, by the affirmative vote
of a majority of the directors then in office, and irrespective of any personal
interest of any of its members shall have authority to establish reasonable
compensation of all directors for service to the Corporation as directors,
officers or otherwise.

                                   ARTICLE III
                                    Officers

     Section 1. Number of Officers. The officers of the Corporation shall
consist of a Chairman of the Board, Chief Executive Officer, President, Chief
Financial Officer, Secretary, Treasurer, and such other officers and assistant


                                       -7-



officers and agents as may be elected or appointed by the Board of Directors
from time to time. Any number of offices may be held by the same person.

     Section 2. Election and Term of Office. At the first meeting of the Board
of Directors held after each Annual Meeting, the Board of Directors shall elect
or appoint, by resolution approved by the affirmative vote of a majority of the
directors present, from within or without their number, the Chairman of the
Board, Chief Executive Officer, President and Chief Financial Officer and such
other officers as may be deemed advisable, each of whom shall have the powers,
rights, duties and responsibilities provided for in these By-Laws or a
resolutions of the Board of Directors not inconsistent therewith. In the absence
of an election or appointment of a Chief Executive Officer or Chief Financial
Officer by the Board of Directors, the person or persons exercising the
principal functions of those offices are respectively deemed to have been
elected to those offices. Each officer shall hold office until his successor
shall have been duly elected or appointed or until his prior death, resignation
or removal.

     Section 3. Removal and Vacancies. Any officer may be removed from his or
her office by the Board of Directors at any time, with or without cause. Such
removal, however, shall be without prejudice to the contract rights of the
officer so removed. If there be a vacancy among the officers of the Corporation
by reason of death, resignation or otherwise, such vacancy shall be filled for
the unexpired term by the Board of Directors.

     Section 4. Chairman of the Board. The Chairman of the Board of Directors
shall preside at all meetings of shareholders and directors and shall perform
such other duties as may be prescribed from time to time by the Board of
Directors.

     Section 5. Chief Executive Officer. The Chief Executive Officer shall:

     (a) Have general active management of the business of the Corporation;

     (b) In the absence of the Chairman of the Board, preside at all meetings of
the Board of Directors and the shareholders;

     (c) See that all orders and resolutions of the Board of Directors are
carried into effect;

     (d) Perform such duties as may be prescribed, from time to time, by the
Board of Directors; and

     (e) Render to the Board of Directors, whenever requested, an account of all
transactions by the Chief Executive Officer.

     Section 6. President. The President shall:

     (a) Perform such duties as may be prescribed, from time to time, by the
Board of Directors or by the Chief Executive Officer; and

     (b) Render to the Chief Executive Officer or the Board of Directors,
whenever requested, an account of all transactions by the President.

     Section 7. Chief Financial Officer. The Chief Financial Officer shall:

     (a) Keep accurate financial records for the Corporation;

     (b) Deposit all money, drafts, and checks in the name of and to the credit
of the Corporation in the banks and depositories designated by the Board of
Directors;

     (c) Endorse for deposit all notes, checks, and drafts received by the
Corporation as ordered by the Board of Directors, making proper vouchers
therefor;


                                       -8-



     (d) Disburse corporate funds and issue checks and drafts in the name of the
Corporation, as ordered by the Board of Directors;

     (e) Perform such duties as may be prescribed, from time to time, by the
Board of Directors or by the Chief Executive Officer; and

     (f) Render to the Chief Executive Officer or the Board of Directors,
whenever requested, an account of all transactions by the Chief Financial
Officer and of the financial condition of the Corporation.

     Section 8. Treasurer. The Treasurer shall:

     (a) Perform such duties as may be prescribed, from time to time, by the
Board of Directors, the Chief Executive Officer or the Chief Financial Officer;
and

     (b) Render to the Chief Financial Officer, the Chief Executive Officer or
the Board of Directors, whenever requested, an account of all transactions by
the Treasurer.

     Section 9. Vice President. Each Vice President shall perform such duties as
may be prescribed, from time to time, by the Board of Directors or the Chief
Executive Officer.

     Section 10. Secretary. The Secretary shall give proper notice of meetings
of shareholders and Board of Directors and other notices required by law or by
these By-Laws. He shall attend all meetings of the shareholders and Board of
Directors and shall maintain records of, and, whenever necessary, certify all
proceedings of the shareholders and Board of Directors. He shall also perform
such duties as may be prescribed, from time to time, by the Board of Directors
or the Chief Executive Officer.

     Section 11. Contracts. All contracts, deeds, mortgages, bonds, notes,
checks, conveyances and other instruments shall be executed on behalf of the
Corporation by the Chairman of the Board, any Vice Chairman of the Board, the
Chief Executive Officer, the President, any Chief Operating Officer, the Chief
Financial Officer or any Vice President, or by such other persons as may be
designated or authorized, from time to time, by the Board of Directors or the
Chief Executive Officer.

     Section 12. Compensation. The officers of this Corporation shall receive
such compensation for their services as may be determined, from time to time, by
a resolution of the Board of Directors.

                                   ARTICLE IV
                                  Capital Stock

     Section 1. Certificates for Shares. All shares of the Corporation shall be
certificated shares. Every owner of shares of the Corporation shall be entitled
to a certificate, to be in such form as shall be prescribed by the Board of
Directors, certifying the number of shares of the Corporation owned by such
shareholder. The certificates for such shares shall be numbered in the order in
which they shall be issued and shall be signed, in the name of the Corporation,
by the Chairman, Chief Executive Officer or President and by the Chief Financial
Officer, Treasurer or Secretary of the Corporation or by such officers as the
Board of Directors may designate. If the certificate is signed by a transfer
agent or registrar, such signatures of the corporate officers may be by
facsimile if authorized by the Board of Directors. Every certificate surrendered
to the Corporation for exchange or transfer shall be canceled, and no new
certificate or certificates shall be issued in exchange for any existing
certificate until such existing certificate shall have been so canceled, except
in cases provided for in Section 4 of this Article IV.

     Section 2. Issuance of Shares. The Board of Directors is authorized to
cause to be issued shares of the Corporation up to the full amount authorized by
the Articles of Incorporation in such amounts as may be determined by the Board
of Directors and as may be permitted by law. No shares shall be allotted except
in consideration of cash or other property, tangible or intangible, received or
to be received by the Corporation under a written agreement, of services
rendered or to be rendered to the Corporation under a written agreement, or of
an amount transferred from surplus to stated


                                       -9-



capital upon a share dividend. At the time of such allotment of shares, the
Board of Directors making such allotments shall state, by resolution, their
determination of the fair value to the Corporation in monetary terms of any
consideration other than cash for which shares are allotted.

     Section 3. Transfer of Shares. Transfer of shares on the books of the
Corporation may be authorized only by the shareholder named in the certificate,
or the shareholder's legal representative, or the shareholder s duly authorized
attorney-in-fact, and upon surrender of the certificate or the certificates for
such shares. The Corporation may treat as the absolute owner of shares of the
Corporation, the person or persons in whose name shares are registered on the
books of the Corporation.

     Section 4. Loss of Certificates. Except as otherwise provided by Minnesota
Statutes Section 302A.419, any shareholder claiming a certificate for shares to
be lost, stolen or destroyed shall make an affidavit or that fact in such form
as the Board of Directors shall require and shall, if the Board of Directors so
requires, give the Corporation a bond of indemnity in form, in an amount, and
with one or more sureties satisfactory to the Board of Directors, to indemnify
the Corporation against any claim which may be made against it on account of the
reissue of such certificate, whereupon a new certificate may be issued in the
same tenor and for the same number of shares as the one alleged to have been
lost, stolen or destroyed.

     Section 5. Stock Regulations. The Board of Directors shall have the power
and authority to make all such further rules and regulations not inconsistent
with the Minnesota Statutes as it may deem expedient concerning the issue,
transfer and registration of certificates representing shares of the
Corporation.

     Section 6. [Intentionally omitted.]

     Section 7. Definitions. (Adopted on October 18, 1985.) The following
definitions shall apply herein:

     (a) "Acquiring person" means a person, corporation or other entity
proposing to make a control share acquisition, but does not include a licensed
broker/dealer or underwriter who (i) purchases shares of the Corporation solely
for purposes of resale to the public, and (ii) is not acting in concert with an
acquiring person.

     (b) "Beneficial owner" includes, but is not limited to, any person who
directly or indirectly through any contract, arrangement, understanding,
relationship, or otherwise has or shares the power to vote or direct the voting
of any shares of the Corporation and the power to dispose of, or direct the
disposition of, such shares. "Beneficial ownership" includes, but is not limited
to, the right, exercisable within 60 days, to acquire securities through the
exercise of options, warrants, or rights or the conversion of convertible
securities, or otherwise. The shares subject to these options, warrants, rights,
or conversion privileges held by a person shall be deemed to be outstanding for
the purpose of computing the percentage of outstanding securities of the class
owned by this person, but shall not be deemed to be outstanding for the purpose
of computing the percentage of the class owned by any other person. A person is
the beneficial owner of securities beneficially owned by any relative or spouse
or relative of the spouse residing in the home of this person, any trust or
estate in which this person owns ten percent or more of the total beneficial
interest or serves as trustee or executor, any corporation or entity in which
this person owns ten percent or more of the equity, and any affiliate or
associate of this person.

     (c) "Control share acquisition" means an acquisition of shares of the
Corporation resulting in beneficial ownership by an acquiring person of a new
range of voting power specified in Section 8(d), but does not include any of the
following:

          (1)  an acquisition before, or pursuant to an agreement entered into
               before, the date of adoption of this section of Article IV of the
               By-Laws;

          (2)  an acquisition by a donee pursuant to an inter vivos gift not
               made to avoid the provisions of Sections 7 through 14 of Article
               IV or by a distributee as defined in Minn. Stat. Section
               524.2-201, clause (10);


                                       -10-



          (3)  an acquisition pursuant to a security agreement not created to
               avoid the provisions of Sections 7 through 14 of Article IV;

          (4)  an acquisition of shares of the Corporation pursuant to a merger
               or exchange of shares, if the Corporation is a party to the
               transaction; or

          (5)  an acquisition of shares from the Corporation.

     Section 8. Information Statement. (Adopted on October 18, 1985.) An
acquiring person shall deliver to the Corporation at its principal executive
office an information statement containing all of the following:

     (a) The identity of the acquiring person;

     (b) a reference that the statement is made under this section of the
By-Laws;

     (c) the number of shares of the Corporation beneficially owned by the
acquiring person;

     (d) a specification of which of the following ranges of voting power in the
election of directors would result from consummation of the control share
acquisition:

          (1)  at least 20 percent but less than 33-1/3 percent;

          (2)  at least 33-1/3 percent but not more than 50 percent; and

          (3)  over 50 percent.

     (e) the terms of the proposed control share acquisition, including, but not
limited to, the source of funds or other consideration and the material terms of
the financial arrangements for the control share acquisition, plans or proposals
of the acquiring person to liquidate the Corporation, to sell all or
substantially all of its assets, or merge it or exchange its shares with any
other person, to change the location of its principal executive office or of a
material portion of its business activities, to change materially its management
or policies of employment, to alter materially its relationship with suppliers
or customers or the communities in which it operates, or make any other material
change in its business, corporate structure, management or personnel, and such
other objective facts as would be substantially likely to affect the decision of
a shareholder with respect to voting on the proposed control share acquisition.

     Section 9. Special Meeting. (Adopted on October 18, 1985.) Within 5 days
after receipt of an information statement pursuant to Section 8, the Corporation
shall call a special meeting of the shareholders to vote on the proposed control
share acquisition. The meeting shall be held no later than 55 days after receipt
by the Corporation of the information statement, unless the acquiring person
agrees to a later date, and no sooner than 30 days after receipt of the
information statement, if the acquiring person so requests in writing when
delivering the information statement. The notice of the meeting shall be, at a
minimum, accompanied by a copy of the information statement and a statement
disclosing that the Board of Directors of the Corporation (i) recommends
acceptance of, (ii) expresses no opinion and is remaining neutral toward, (iii)
recommends rejection of, or (iv) is unable to take a position with respect to,
the proposed control share acquisition. The notice of meeting shall be given
within 20 days after receipt of the information statement.

     Section 10. Consummation of Acquisition. (Adopted on October 18, 1985.) The
acquiring person may consummate the proposed control share acquisition if and
only if both of the following occur:

     (a) the proposed control share acquisition is approved by the affirmative
vote of the holders of a majority of the voting power of all shares entitled to
vote under applicable Minnesota law; and

     (b) the proposed control share acquisition is consummated within 180 days
after shareholder approval.


                                       -11-



     Section 11. Failure to Comply. (Adopted on October 18, 1985.) All shares of
the Corporation acquired by an acquiring person in violation of Section 10 shall
be: (a) denied voting rights for one year after acquisition; (b) nontransferable
on the books of the Corporation for one year after acquisition; and (c) subject
to the Corporation's option, during such one-year period, to call the shares for
redemption at the price at which the shares were acquired. Such redemption shall
occur on the date set in the call notice, which shall not be later than 60 days
after the call notice is given.

     Section 12. Proxy Solicitation. (Adopted on October 18, 1985.)
Notwithstanding any contrary provision of these By-Laws, a proxy relating to a
meeting of shareholders required under Section 9 of this Article IV must be
solicited separately from the offer to purchase or solicitation of an offer to
sell shares of the Corporation. Except for irrevocable proxies appointed in the
regular course of business and not in connection with a control share
acquisition, all proxies appointed for or in connection with the shareholder
authorization of a control share acquisition pursuant Sections 7 through 14 of
Article IV shall be at all times terminable at will prior to the obtaining of
the shareholder authorization, whether or not the proxy is coupled with an
interest. Without affecting any vote previously taken, the proxy may be
terminated in any manner permitted by Minnesota statutes or by giving oral
notice of the termination in the open meeting of shareholders held pursuant to
Section 9 hereof. The presence at a meeting of the person appointing a proxy
does not revoke the appointment.

     Section 13. Amendments or Repeal. (Adopted on October 18, 1985.)
Notwithstanding any contrary provision of these By-Laws, the provisions of
Sections 7 through 14 of this Article may be amended or repealed by the
shareholders only by the affirmative vote of the holders of 85% of each class of
shares of the Corporation entitled to exercise the voting power of the
Corporation; provided, however, that if no person holds more than twenty percent
(20%) of the Voting Shares and there is no control share acquisition of which
the Board of Directors has credible notice, the necessary vote for amendment or
repeal may be reduced by the Board of Directors to not less than a majority of
the outstanding shares in each class; and provided further that no amendment or
repeal of Sections 7 through 14 of this Article adopted after the notice to
shareholders referred to in Section 9 herein is given shall affect the rights of
any shareholder under said Sections 7 through 14.

     Section 14. Dissenting Shareholders. (Adopted on October 18, 1985.)
Shareholders dissenting from a control share acquisition for which approval of
shareholders is sought shall have the right to obtain fair value of their
shares, pursuant to the provisions of Minnesota Statutes 302A.473 (1985), as
amended.

                                    ARTICLE V
                                    Dividends

     Section 1. Dividends. Subject to the provisions of the Articles of
Incorporation, of these By-Laws, and of law, the Board of Directors may declare
dividends whenever, and in such amounts as, in its opinion, are deemed
advisable.

     Section 2. Record Date. Subject to any provisions of the Articles of
Incorporation, the Board of Directors may fix a date not exceeding 120 days
preceding the date fixed for the payment of any dividend as the record date for
the determination of the shareholders entitled to receive payment of the
dividend and, in such case, only shareholders of record on the date so fixed
shall be entitled to receive payment of such dividend notwithstanding any
transfer of shares on the books of the Corporation after the record date. The
Board of Directors may close the books of the Corporation against the transfer
of shares during the whole or any part of such period.

                                   ARTICLE VI
                                  Miscellaneous

     Section 1. Seal. The corporate seal, if any, shall be circular in form and
have inscribed thereon the name of the Corporation, the State in which it is
incorporated and the words "corporate seal."

     Section 2. Fiscal Year. The fiscal year of the Corporation shall be fixed
by the Board of Directors.


                                       -12-



                                   ARTICLE VII
                       Indemnification of Certain Persons

     Section 1. General. The Corporation shall indemnify such persons, for such
expenses and liabilities, in such manner, under such circumstances, and to such
extent as permitted by Minnesota Statutes Section 302A.521, as now enacted or
hereafter amended.

     Section 2. Insurance. The Corporation may purchase and maintain insurance
on behalf of any person in such person's official capacity against any liability
asserted against and incurred by such person in or arising from that capacity,
whether or not the Corporation would otherwise be required to indemnify the
person against the liability.

                                  ARTICLE VIII
                                   Amendments

     These By-Laws may be altered, amended or repealed by a vote of the majority
of the whole Board of Directors at any meeting. Such authority of the Board of
Directors is subject to the power of the shareholders to change or repeal such
By-Laws by a majority vote of the shareholders present or represented at any
Annual Meeting or Special Meeting called for such purpose. The Board of
Directors shall not adopt, amend or repeal any By-Law fixing a quorum for
meetings of shareholders, prescribing procedures for removing directors or
filling vacancies in the Board of Directors, or fixing the number of directors
or their classifications, qualifications, or terms of office, except that the
Board of Directors may adopt or amend by unanimous action any By-Law to increase
the number of directors.

                                       -13-