UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
--------------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 3, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
------ -----
COMMISSION FILE NUMBER 0-362
FRANKLIN ELECTRIC CO., INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
INDIANA 35-0827455
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
400 EAST SPRING STREET 46714-3798
BLUFFTON, INDIANA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(260) 824-2900
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE NONE
(TITLE OF EACH CLASS) (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.10 PAR VALUE
(TITLE OF EACH CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2)
YES X NO
----- -----
The aggregate market value of the registrant's common stock held by non-
affiliates of the registrant at June 28, 2003 (the last business day of the
registrant's most recently completed second quarter) was $608,480,304. The
stock price used in this computation was the last sales price on that date.
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT FEBRUARY 13, 2004:
10,988,572 SHARES
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Page 1 of 102
<Page> 2
DOCUMENTS INCORPORATED BY REFERENCE
A portion of the Proxy Statement for the Annual Meeting of Shareholders to be
held on May 5, 2004 (Part III).
The exhibits filed with this Form 10-K are listed in the exhibit index located
on pages 47-48.
<Page> 3
TABLE OF CONTENTS
Page
----
Part I
Item 1. Business........................................ 4-6
Item 2. Properties...................................... 6-7
Item 3. Legal Proceedings............................... 7
Item 4. Submission of Matters to a Vote of
Security Holders................................ 7
Supplemental Item - Executive
Officers of the Registrant...................... 7-8
Part II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters................. 8
Item 6. Selected Financial Data......................... 9
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of
Operations...................................... 10-16
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk .................................... 16
Item 8. Financial Statements and Supplementary Data..... 17-41
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.......... 42
Item 9A. Controls and Procedures......................... 42
Part III
Item 10. Directors and Executive Officers
of the Registrant............................... 42
Item 11. Executive Compensation.......................... 43
Item 12. Security Ownership of Certain
Beneficial Owners and Management,
and Related Stockholder Matters................. 43
Item 13. Certain Relationships and Related
Transactions.................................... 43
Item 14. Principal Accountant Fees and Services.......... 43
Part IV
Item 15. Exhibits, Financial Statement Schedules
and Reports on Form 8-K......................... 44-45
Signatures ............................................... 46
Exhibit Index ............................................... 47-48
<Page> 4
PART I
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ITEM 1. BUSINESS
- ----------------
Franklin Electric Co., Inc. is an Indiana corporation founded in 1944 and
incorporated in 1946 that, together with its subsidiaries, conducts business
in a single reportable segment: the design, manufacture and distribution of
electric motors, electronic controls and related parts and equipment. Except
where the content otherwise requires, "Franklin Electric" or the "Company"
shall refer to Franklin Electric Co., Inc. and its consolidated subsidiaries.
Description of Business
- -----------------------
Franklin Electric, a technical leader in electric motors, drives and controls,
is the world's largest manufacturer of submersible water and fueling systems
motors, a manufacturer of underground fueling systems hardware and flexible
piping systems and a leader in engineered industrial motor products.
Franklin Electric's motors are used principally in submersible motor
applications for pumping fresh water, fuel, wastewater and other liquids in a
variety of applications including residential, industrial, agriculture,
fueling, off-shore drilling, and mining. The Company also manufactures other
industrial electric motors which are used in a wide variety of applications
including gasoline dispensers, paint handling equipment, electric hoists,
explosion-proof vapor exhaust fans, vacuum pumping systems, food preparation
equipment, as well as commercial and industrial water, fuel and other liquid
pumping systems. Franklin Electric also manufactures electronic controls for
the motors which control functionality and provide protection from various
hazards, such as electric surges, over-heating or dry wells and tanks. Along
with the fueling motor applications, the Company supplies a variety of
products to the petroleum equipment industry included with the submersible
pumping systems, such as flexible piping, electronic tank monitoring
equipment, fittings, and vapor recovery systems.
The Company's products are sold principally in the United States, Europe,
South Africa, Australia, Mexico, Japan, China and other world markets. The
Company's products are also sold through independent distributors and repair
shops.
The market for the Company's products is highly competitive and includes both
large and small suppliers. The Company's submersible water, fueling and
industrial motor products and related equipment are sold to original equipment
manufacturers of pumps, compressors, fans, swimming pool equipment, medical
furniture and business machines as well as industrial equipment distributors,
major oil and utility companies.
ITT Industries, Inc., and its various subsidiaries and affiliates, accounted
for 18.0 percent, 18.2 percent and 18.7 percent of the Company's consolidated
sales in 2003, 2002, and 2001, respectively. Sta-Rite Industries, Inc., a
subsidiary of Wisconsin Energy Corporation, accounted for 13.6 percent and
11.5 percent of the Company's consolidated sales in 2003 and 2002,
respectively.
The Company offers normal and customary trade terms to its customers, no
significant part of which is of an extended nature. Special inventory
<Page> 5
requirements are not necessary, and customer merchandise return rights do not
extend beyond normal warranty provisions.
The principal raw materials used in the manufacture of the Company's products
are steel in coils and bars, stainless steel, copper wire, and aluminum ingot.
Major components are capacitors, motor protectors, forgings, gray iron
castings and bearings. Most of these raw materials are available from many
sources in the United States and in many world markets. In the opinion of
management, no single source of supply is critical to the Company's business.
Availability of fuel and energy is adequate to satisfy current and projected
overall operations unless interrupted by government direction or allocation.
During 2002, the Company paid $30.3 million for acquisitions, net of cash
acquired, of which $24.3 million was recorded as goodwill based on the
estimated fair values of the net assets acquired. Included in the acquisitions
were Coverco, a manufacturer of submersible and industrial electric motors and
controls in Italy, and Intelligent Controls, Inc. (INCON), a producer of
fueling systems electronic leak detection and inventory management systems
controls in Maine. See also Footnote 2.
The Company employed approximately 2,500 persons at the end of 2003.
Segment and Geographic Information
- ----------------------------------
Segment and geographic information is included within this Form 10-K on pages
39.
Research and Development
- ------------------------
The Company spent approximately $6.0 million in 2003, $6.0 million in 2002,
and $5.2 million in 2001 on activities related to the development of new
products, on improvements of existing products and manufacturing methods, and
on other applied research and development.
In 2003, the Company continued development of a more corrosion resistant 4"
submersible motor, expanded the line of variable speed constant pressure motor
systems for residential applications, and developed an integrated fuel
management system for the petroleum equipment industry. The Company developed
a HydroDuty(tm) motor based on its submersible electric motor technology for
use in industrial applications where electric motors must withstand repeated
wash-downs for sanitation and other reasons. Research continued on new
materials and processes designed to achieve higher quality and more cost-
effective construction of the Company's high volume products.
The Company owns a number of patents, trademarks and licenses. In aggregate,
these patents are of material importance in the operation of the business;
however, the Company believes that its operations are not dependent on any
single patent or group of patents.
Backlog
- -------
The dollar amount of backlog at the end of 2003 and 2002 was as follows:
<Page> 6
(In thousands)
2003 2002
---- ----
Backlog....................... $14,104 $18,890
The backlog is composed of written orders at prices adjustable on a price-at-
the-time-of-shipment basis for products, primarily standard catalog items. All
backlog orders are expected to be filled in fiscal 2004. The Company's sales
in the first quarter are generally less than the sales of other quarters due
to generally lower construction activity during that period in the northern
hemisphere. Beyond that there is no seasonal pattern to the backlog and the
backlog has not proven to be a significant indicator of future sales.
Environmental Matters
- ---------------------
The Company believes that it is in compliance with all applicable federal,
state and local laws concerning the discharge of material into the
environment, or otherwise relating to the protection of the environment. The
Company has not experienced any material costs in connection with
environmental compliance, and does not believe that such compliance will have
any material adverse effect upon the financial position, capital expenditures,
earnings or competitive position of the Company.
Available Information
- ---------------------
The Company's website address is http://www.franklin-electric.com. The Company
makes available free of charge on or through its website its annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
all amendments to those reports as soon as reasonably practicable after such
material is electronically filed with or furnished to the Securities and
Exchange Commission.
ITEM 2. PROPERTIES
- ------------------
The Company maintains its principal executive offices in Bluffton, Indiana;
manufacturing plants are located in the United States and abroad. Location and
approximate square footage for the Company's principal facilities are
described below. All principal properties are owned or held under operating
leases.
The Company's principal properties are as follows:
Acres Approximate
Location of Land Square Feet
-------- ------- -----------
Bluffton, Indiana 35.8 406,000
Siloam Springs, Arkansas 32.6 240,000
Wilburton, Oklahoma 30.0 327,000
Jonesboro, Indiana (1) - 35,000
Grant County, Indiana 9.0 24,000
Muskegon, Michigan 10.8 114,000
Saco, Maine (1) - 17,000
McFarland, Wisconsin (1) - 23,000
Suzhou, China 4.9 51,000
Wittlich, Rhineland, Germany 6.9 77,000
<Page> 7
Brno, Czech Republic 2.3 51,000
Berzo Demo, Italy (1) - 23,000
Motta di Livenza, Italy 5.0 39,000
Linares, Mexico 10.0 150,000
Nine facilities, each with less
than 25,000 square feet(2) 1.7 87,000
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Total 149.0 1,664,000
===== =========
In the Company's opinion, its facilities are suitable for their intended use,
adequate for the Company's business needs and in good condition.
(1) Leased facility.
(2) Eight of the facilities are leased and in the aggregate have
approximately 67,000 square feet.
ITEM 3. LEGAL PROCEEDINGS
- -------------------------
The Company is defending various claims and legal actions, including
environmental matters, which have arisen in the ordinary course of
business. In the opinion of management, after discussion with counsel, these
claims and legal actions can be successfully defended or resolved without a
material adverse effect on the Company's financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------
The names, ages and all positions and offices held by the executive officers
of the Company are:
In this
Name Age Positions and Offices office since
---- --- --------------------- ------------
R. Scott Trumbull 55 Chairman of the Board and 2003
Chief Executive Officer
Jess B. Ford 52 Senior Vice President 1999
Peter C. Maske 53 Senior Vice President and 1999
President of Europa
Gregg C. Sengstack 45 Senior Vice President, 1999
Chief Financial Officer,
and Secretary
Donald R. Hobbs 62 Vice President, Submersible 1996
Motor Marketing
Thomas A. Miller 54 Vice President, Electronic 1998
Technology
Kirk M. Nevins 60 Vice President, Sales 1995
Robert J. Stone 39 Vice President, Submersible 2003
Engineering, Technology
and Procurement
<Page> 8
Dan Crose 55 Vice President, North American 2003
Operations
All executive officers are elected annually by the Board of Directors at the
Board meeting held in conjunction with the annual statutory meeting of
shareowners. Thereafter they are elected for one-year terms or until their
successors have been elected. All executive officers have been executives or
in a management position of Franklin Electric Co., Inc. for the last five
years with the exception of R. Scott Trumbull and Dan Crose. R Scott Trumbull
has been a Director of Franklin for the last five years and was Executive Vice
President and Chief Financial Officer of Owens-Illinois, Inc. prior to joining
Franklin Electric Co., Inc. in 2003. Dan Crose was Senior Vice President of
Operations at Hamilton Beach/Proctor Silex, Inc. prior to joining Franklin
Electric Co., Inc. in 2001.
PART II
- -------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -----------------------------------------------------------------------------
The number of shareowners of record as of February 13,2004 was 1,088. The
Company's stock is traded on Nasdaq National Market: Symbol FELE.
All share and per share data included in this Form 10-K reflect the Company's
two-for-one stock split effected in the form of a 100 percent stock
distribution made on March 22, 2002. Dividends paid and the price range per
common share as quoted by the Nasdaq National Market for 2003 and 2002 were as
follows:
DIVIDENDS PER SHARE PRICE PER SHARE
2003 2002 2003 2002
Low High Low High
1st Quarter... $.13 $.12 $47.000 $58.140 $40.600 $53.900
2nd Quarter... $.14 $.13 $45.990 $59.950 $43.520 $60.528
3rd Quarter... $.14 $.13 $51.430 $64.000 $39.900 $52.640
4th Quarter... $.14 $.13 $55.340 $65.600 $41.151 $51.000
<Page> 9
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------
The following selected financial data should be read in conjunction with our consolidated financial
statements. The information set forth below is not necessarily indicative of future operations.
FIVE YEAR FINANCIAL SUMMARY
- ------------------------------------------------------------------------------------------------------------
FRANKLIN ELECTRIC CO., INC.
(In thousands, except per share amounts)
2003 2002 2001 2000 1999
<F1> <F2>
- ------------------------------------------------------------------------------------------------------------
Operations:
Net sales............................. $359,502 $354,872 $322,908 $325,731 $293,236
Gross profit.......................... 110,996 104,935 92,871 85,186 84,171
Interest expense...................... 1,107 1,317 1,193 1,111 1,317
Income taxes ......................... 16,847 18,273 16,235 13,683 15,591
Net income............................ 34,480 32,204 27,150 22,226 26,805
Depreciation and amortization......... 13,748 12,878 12,660 10,839 7,460
Capital expenditures.................. 15,261 15,568 6,709 14,108 13,691
Balance sheet:
Working capital <F3>.................. 82,640 62,762 69,158 54,897 56,886
Property, plant and equipment, net.... 83,916 76,033 58,839 64,604 57,047
Total assets.......................... 281,971 258,583 195,643 197,179 176,101
Long-term debt........................ 14,960 25,946 14,465 15,874 17,057
Shareowners' equity................... $192,938 $153,138 $123,269 $115,998 $ 96,293
Other data:
% Net income to sales................. 9.6% 9.1% 8.4% 6.8% 9.1%
% Net income to total average assets.. 12.8% 14.2% 13.8% 11.9% 15.6%
Current ratio <F4>.................... 2.8 2.2 2.7 2.2 2.2
Number of common shares outstanding... 10,914 10,824 10,668 11,008 10,826
Per share:
Market price range
High.................................. $ 65.60 $ 60.53 $ 42.64 $ 36.50 $ 37.438
Low................................... 45.99 39.90 32.00 26.125 29.50
Net income per weighted-average
common share...................... 3.19 2.98 2.49 2.04 2.44
Net income per weighted-average
common share, assuming dilution..... 3.05 2.83 2.39 1.96 2.30
Book value <F5>....................... 17.05 13.47 10.84 10.21 8.27
Cash dividends on common stock........ $ 0.55 $ 0.51 $ 0.47 $ 0.43 $ 0.39
- ------------------------------------------------------------------------------------------------------------
<F1> Includes the results of operations of its wholly-owned subsidiaries Coverco S.r.l. and Intelligent
Controls, Inc., since their acquisition on January 7, 2002 and July 16, 2002, respectively.
<F2> Includes the results of operations of its wholly-owned subsidiaries EBW, Inc. and Advanced Polymer
Technology, Inc., since their acquisition on August 31, 2000.
<F3> Working capital = Current assets minus Current liabilities
<F4> Current ratio = Current assets divided by Current liabilities
<F5> Book value = Shareowners equity divided by Weighted average common shares assuming full dilution
</FN>
<Page> 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -----------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
OVERVIEW
- --------
Sales and earnings for 2003 were up from 2002. The increase in sales is
attributable to the impact of foreign exchange rate changes and the full year
impact of a 2002 acquisition. Sales improvements also occurred in fueling
systems motors and related products, large submersible motors and
international product sales. These improvements were partially offset by
decline in North American and European small submersible motor sales. Prior
year sales of small submersible motors were exceptionally strong due to
weather conditions and an announced price increase effective in 2003. Earnings
improved in 2003 as the Company's focus on productivity yielded improvements.
Warranty costs were lower year over year and tax planning activities reduced
the effective tax rate.
RESULTS OF OPERATIONS
- ---------------------
Net sales for 2003 were $359.5 million, a 1 percent increase from 2002 net
sales of $354.9 million. Foreign currencies, particularly the euro and the
Rand, strengthened relative to the U.S. dollar during 2003. The impact of the
changes in exchange rates was a $15.9 million increase in the Company's
reported 2003 sales. Net sales also increased due to full year sales related
to the INCON acquisition in mid 2002, an increase of $4.7 million. Excluding
the impact of changes in foreign currencies and the full year impact of the
2002 acquisition, net sales decreased $16.0 million or 5%. The sales decrease
of $16.0 million relates primarily to decreased demand for submersible water
products to North American customers of about $8.5 million and lower demand by
European customers of about $8.8 million (when comparing both years at the
current year exchange rate). Last year sales were unusually strong in the
North American residential water well market as drought conditions prevailed
over much of the East Coast and due to a 2003 price increase announced prior
to the 2002 year end. This year residential water sales have fallen back to
historical levels. Lower demand in Europe is attributed to generally wetter
conditions and also to the impact of the conflict in the Middle East. Net
sales for 2002 were $354.9 million, a 9.9 percent increase from 2001 net sales
of $322.9 million. The increased sales were primarily the result of strong
North American residential submersible electric motor sales, as well as the
inclusion of Coverco, a January 2002 acquisition, and INCON, a July 2002
acquisition. Sales from these acquisitions represented 5.2 percent of sales
for the year. These increases were partially offset by lower demand from the
petroleum equipment industry.
Cost of sales as a percent of net sales for 2003, 2002 and 2001 was 69.1
percent, 70.4 percent and 71.2 percent, respectively. Cost of sales as a
percent of net sales decreased in 2003 from 2002 primarily as a result of
improved productivity which lowered labor and overhead costs by about 0.7
percent of net sales, changes in product mix from small residential motors to
larger motors and fueling systems products which decreased labor and overhead
costs by about 0.5 percent and quality improvements which reduced warranty
costs by about 0.4 percent of net sales. Cost of sales as a percent of net
sales decreased in 2002 from 2001 primarily as a result of productivity
improvements and lower costs in key commodities. The Company has achieved
these results by continually focusing on improving its productivity and
quality as well as identifying alternative sources for certain materials.
<Page> 11
Selling and administrative ("SG&A") expense as a percent of net sales for
2003, 2002 and 2001 was 16.4 percent, 15.4 percent and 14.7 percent,
respectively. The increase of SG&A expenses in 2003 over 2002 was primarily
due to the effect of changes in the foreign exchange rate, $1.4 million, and
costs incurred for tax planning activities, $1.2 million. The Company also
recognized full year SG&A costs related to the INCON acquisition, a $1.1
million year over year increase, and has incurred additional SG&A costs for
its new plant in Mexico and the launch of new electronic products related to
submersible motors.
Interest expense for 2003, 2002 and 2001 was $1.1 million, $1.3 million and
$1.2 million, respectively.
Included in other income for 2003, 2002 and 2001 was interest income of $0.4
million, $0.5 million and $0.6 million, respectively, primarily derived from
the investment of cash balances in short-term U.S. treasury and agency
securities.
Foreign currency-based transactions produced a gain for 2003 of $0.3 million.
The foreign currency-based transaction gain was due primarily to the
strengthening euro relative to the U.S. dollar during most of 2003.
The provision for income taxes in 2003, 2002 and 2001 was $16.8 million, $18.3
million and $16.2 million, respectively. The effective tax rate in 2003 of
32.8 percent is lower than the 2002 rate of 36.2 percent as a result of tax
credits realized in 2003. The tax credits, some of them from prior years,
resulted from tax planning activities performed in 2002 and 2003 in the areas
of foreign income exclusion which reduced the rate by 4.0 percent and R&D
which reduced the rate by 1.2 percent. The effective tax rate differs from the
United States statutory rate of 35 percent, due to the foreign income
exclusion and R&D credits and to the effects of state and foreign income
taxes, net of federal tax benefits.
Net income for 2003 was $34.5 million, or $3.05 per diluted share, compared to
2002 net income of $32.2 million, or $2.83 per diluted share. Net income for
2001 was $27.2 million, or $2.39 per diluted share. All share and per share
data reflects the Company's two-for-one stock split effected in the form of a
100 percent stock distribution made on March 22, 2002.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
Cash flows from operations provide the principal source of current liquidity.
Net cash flows provided by operating activities were $47.0 million, $54.6
million and $39.9 million in 2003, 2002 and 2001, respectively. The primary
source of cash from operations for 2003 was earnings. The operating cash flow
decrease in 2003 is related to an increase in inventory, $2.1 million and
payments to employee benefit plans, $4.0 million. Inventories increased $2.1
million, primarily in finished goods, as sales were lower than anticipated for
the year. The impact of the strengthening euro and Rand increased inventory
values by $4.1 million in Europe and South Africa. The 2002 operating cash
flow increase was related to increased earnings and decreases in inventories
and accounts receivable. Inventories decreased due to increased sales during
2002 because of the near drought conditions in the East as discussed in
Results of Operations above.
Net cash flows used in investing activities were $15.5 million, $57.2 million
and $10.2 million in 2003, 2002 and 2001, respectively. The primary uses of
cash in 2003 were additions to property plant and equipment. The primary uses
of cash in 2002 were for the acquisitions of Coverco and INCON. The Company
<Page> 12
paid an aggregate of $30.3 million for these two acquisitions, net of cash
acquired. During the third quarter of 2002, the Company paid $10.5 million in
cash as contingent consideration in accordance with the terms of an agreement
entered into in 1998 in which the Company purchased certain operating and
intangible assets from a motor manufacturer.
Net cash flows used in financing activities were $24.0 million and $19.0
million in 2003 and 2001, respectively. Financing activities in 2002 generated
$0.5 million cash flow. The primary use of cash in 2003 was the repayment of
long term debt, $19.9 million. Another principal use of cash during 2003, 2002
and 2001 was purchases of Company common stock under the Company's repurchase
program and the payment of dividends. During 2003, 2002 and 2001, the Company
repurchased, or received as consideration for stock options exercised,
283,563, 223,499 and 408,200 shares of its common stock for $14.8 million,
$10.5 million and $14.2 million, respectively. The Company paid $5.9 million,
$5.5 million and $5.1 million in dividends on the Company's common stock in
2003, 2002 and 2001, respectively. The Company has authority under its Board-
approved stock repurchase program to purchase an additional 465,106 shares of
its common stock after January 3, 2004.
Cash and cash equivalents at the end of 2003 were $30.0 million compared to
$20.1 million at the end of 2002. Working capital increased $19.8 million in
2003 and the current ratio of the Company was 2.8 and 2.2 at the end of 2003
and 2002, respectively.
Principal payments of $1.0 million per year on the Company's $20.0 million of
unsecured long-term debt began in 1998 and will continue until 2008 when a
balloon payment of $10.0 million will fully retire the debt. In November 2001,
the Company entered into an unsecured, 38-month $60.0 million revolving credit
agreement (the "Agreement"). The Agreement includes a facility fee of one-
eighth of one percent on the committed amount. The Company's borrowings under
the Agreement totaled $0.0 million and $10.1 at January 3, 2004 and December
28, 2002, respectively. The Company is subject to certain financial covenants
with respect to borrowings, interest coverage, working capital, net worth,
loans or advances, and investments. The Company was in compliance with all
debt covenants at all times in 2003 and 2002. See Note 6.
At January 3, 2004, the Company had $4.5 million of commitments for the
construction of a building in Linares, Mexico, and the purchase of machinery
and equipment.
Management believes that internally generated funds and existing credit
arrangements provide sufficient liquidity to meet current commitments.
AGGREGATE CONTRACTUAL OBLIGATIONS
- ---------------------------------
Most of the Company's contractual obligations to make payments to third
parties are debt obligations. In addition, the Company has certain contractual
obligations for future lease payments, as well as, purchase obligations. The
payment schedule for these contractual obligations is as follows:
<Page> 13
(In thousands)
- ------------------------------------------------------------------------------
Less More
than than
Total 1 Year 2-3 Years 4-5 Years 5 Years
----- ------ --------- --------- -------
Debt ............... $14,141 $1,000 $2,050 $11,091 $-
Capital leases...... 2,211 392 913 697 209
Operating leases ... 4,288 2,236 1,665 382 5
Purchase Obligations 4,503 4,503 - - -
------- ------ ------ ------- ----
$25,143 $8,131 $4,628 $12,170 $214
======= ====== ====== ======= ====
Note: The Company also has pension and other post-retirement benefit
obligations not included in the above table which will result in future
payments.
ACCOUNTING PRONOUNCEMENTS
- -------------------------
In May 2003, FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liability and Equity". Statement 150
affects an entity's accounting for freestanding financial instruments:
mandatorily redeemable shares, put options, forward purchase contracts, and
debt obligations. Most of the provisions are consistent with the existing FASB
Concepts Statement No. 6, "Elements of Financial Statements". The remaining
portion of Statement 150 encompasses certain obligations that an entity can or
must settle by issuing equity shares, pending the relationship between the
holder and issuer. The adoption of this pronouncement does not have a material
impact on the Company's results of operations or financial position.
In December 2003, the FASB issued FASB Staff Position (FSP) FAS 106-1,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003" (the "Act"). The Act expands
Medicare, primarily by adding a prescription drug benefit for Medicare-
eligibles starting in 2006. The Act provides employers currently sponsoring
prescription drug programs for Medicare-eligibles with a range of options for
coordinating with the new government-sponsored program to potentially reduce
program cost. The FSP concludes that companies will be permitted to recognize
that amount for year-end 2003 financial statements pursuant to FAS 106 or to
delay having to report the effects of the Act until remaining questions are
resolved. Pursuant to guidance from the FASB under FSP FAS 106-1, the Company
has chosen to defer recognition of the potential effects of the Act for 2003
disclosures. The impact of the Act on the Company's accumulated pension
benefit obligation and net periodic postretirement benefit cost has not been
determined. When issued, the authoritative guidance on the accounting for the
subsidy will address transition.
In December 2003, FASB issued a revision of SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits". The revision
requires that companies provide more detail concerning plan assets, benefit
obligations, cash flows, benefit costs, and other relevant information. Plan
assets should be broken down by category, whereby describing investment
policies, strategies, and target ranges. The Statement is effective for
financial statements with fiscal years ending after December 15, 2003.
However, disclosure of estimated future benefit payments is effective for
fiscal years ending after June 15, 2004. In compliance with Statement 132, the
<Page> 14
Company has expanded detail regarding plan assets, benefit obligations,
benefit costs, and other pertinent information.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
- ------------------------------------------
Management's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and the
related disclosure of contingent assets and liabilities. On an on-going basis,
management evaluates its estimates, including those related to allowance for
doubtful accounts, inventories, recoverability of long-lived assets,
intangible assets, income taxes, warranty obligations, pensions and other
employee benefit plan obligations, and contingencies. Management bases its
estimates on historical experience and on other assumptions that are believed
to be reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying value of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
Revenue Recognition:
Products are shipped utilizing common carriers direct to customers or, for
consignment products, to customer specified warehouse locations. Sales are
recognized when the Company's products are shipped direct or transferred from
a warehouse location to the customer, at which time transfer of ownership and
risk of loss pass to the customer. The Company reduces sales revenues for
discounts based on past experience. Differences may result in the amount of
discounts if actual experience differs significantly from management
estimates; such differences have not historically been material.
Accounts Receivable:
Accounts receivable is comprised of balances due from customers net of
estimated allowances for uncollectible accounts. In determining allowances,
historical trends are evaluated and economic conditions and specific customer
issues are reviewed to arrive at appropriate allowances. Allowance levels
change as customer-specific circumstances and the other analysis areas noted
above change. Differences may result in the amount for allowances if actual
experience differs significantly from management estimates; such differences
have not historically been material.
Inventory Valuation:
The Company uses certain estimates and judgments to value inventory. Inventory
is recorded at the lower of cost or market. The Company reviews its
inventories for excess or obsolete products or components. Based on an
analysis of historical usage and management's evaluation of estimated future
demand, market conditions and alternative uses for possible excess or obsolete
parts, reserves are recorded or changed. Significant fluctuations in demand or
changes in market conditions could impact management's estimates of necessary
reserves. Excess and obsolete inventory is periodically disposed through sale
to third parties, scrapping or other means, and the reserves are appropriately
reduced. Differences may result in the amount for reserves if actual
experience differs significantly from management estimates; such differences
have not historically been material.
Goodwill and other intangible assets:
Under the requirements of SFAS no. 142, "Goodwill and other Intangible
Assets", goodwill is no longer amortized; however it is tested for impairment
<Page> 15
annually or more frequently whenever events or change in circumstances
indicate that the asset may be impaired. The Company performs impairment
reviews for its reporting unit using future cash flows based on management's
judgments and assumptions. An asset's value is impaired if our estimate of the
aggregate future cash flows, undiscounted and without interest charges, to be
generated are less than the carrying amount of the reporting unit including
goodwill. Such cash flows consider factors such as expected future operating
income and historical trends, as well as the effects of demand and
competition. To the extent impairment has occurred, the loss will be measured
as the excess of the carrying amount of the reporting unit including goodwill
over the fair value. Such estimates require the use of judgment and numerous
subjective assumptions, which, if actual experience varies, could result in
material differences in the requirements for impairment charges.
Income taxes:
Under the requirements of SFAS No. 109, "Accounting for Income Taxes", we
record deferred tax assets and liabilities for the future tax consequences
attributable to differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Management judgment is required in
determining the Company's provision for income taxes, deferred tax assets and
liabilities, which, if actual experience varies, could result in material
adjustments to deferred tax assets and liabilities.
Warranty obligations:
Warranty terms are generally two years from date of manufacture or one year
from date of installation. Warranty liability is recorded when revenue is
recognized and is based on actual historical return rates from the most recent
warranty periods. While the Company's warranty costs have historically been
within its calculated estimates, it is possible that future warranty costs
could exceed those estimates.
Pension and employee benefit obligations:
With the assistance of actuaries and investment advisors the Company selects
the discount rate to be used to determine pension and post-retirement plan
liabilities based on a review of Moody's Aa bond ratings and U.S Treasury
rates. A change in the discount rate selected by the Company of 25 basis
points would result in a change of about $0.1 million of employee benefit
expense. The Company consults with actuaries, asset allocation consultants
and investment advisors to determine the expected long term rate of return on
plan assets based on historical and projected rates of return on the types of
assets in which the plans have invested. A change in the long term rate of
return selected by the Company of 25 basis points would result in a change of
about $0.3 million of employee benefit expense. See Note 3.
FACTORS THAT MAY AFFECT FUTURE RESULTS
- --------------------------------------
Any forward-looking statements contained herein involve risks and
uncertainties, including, but not limited to, general economic and currency
conditions, various conditions specific to the Company's business and
industry, market demand, competitive factors, supply constraints, technology
factors, government and regulatory actions, the Company's accounting policies,
future trends, and other risks, all as described in Exhibit 99.1 of this Form
10-K. These risks and uncertainties may cause actual results to differ
materially from those indicated by the forward-looking statements. Any
forward-looking statements included in this Form 10-K are based upon
<Page> 16
information presently available. The Company does not assume any obligation to
update any forward-looking information.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
The Company is subject to market risk associated with changes in foreign
currency exchange rates and interest rates. Foreign currency exchange rate
risk is mitigated through several means: maintenance of local production
facilities in the markets served, invoicing of customers in the same currency
as the source of the products, prompt settlement of intercompany balances
utilizing a global netting system and limited use of foreign currency
denominated debt. Interest rate exposure is limited to variable rate interest
borrowings under the Company's revolving credit agreement and an interest rate
swap. Additional information regarding the use of an interest rate swap is
included in Note Seven to the consolidated financial statements.
<Page> 17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF INCOME
FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
- ------------------------------------------------------------------------------
2003 2002 2001
(In thousands, except per share amounts)
- ------------------------------------------------------------------------------
Net sales............................. $359,502 $354,872 $322,908
Cost of sales (including research
and development expenses of $5,995,
$6,035 and $5,232, respectively).... 248,506 249,937 230,037
-------- -------- --------
Gross profit.......................... 110,996 104,935 92,871
Selling and administrative expenses... 59,106 54,637 47,522
-------- -------- --------
Operating income...................... 51,890 50,298 45,349
Interest expense...................... (1,107) (1,317) (1,193)
Other income (expense),net............ 278 130 (239)
Foreign exchange income (loss)........ 266 1,366 (532)
-------- -------- --------
Income before income taxes............ 51,327 50,477 43,385
Income taxes (Note 5)................. 16,847 18,273 16,235
-------- -------- --------
Net income............................ $ 34,480 $ 32,204 $ 27,150
======== ======== ========
Per share data (Note 9):
Net income per common share......... $ 3.19 $ 2.98 $ 2.49
======== ======== ========
Net income per common share,
assuming dilution................. $ 3.05 $ 2.83 $ 2.39
======== ======== ========
Dividends per common share.......... $ .55 $ .51 $ .47
======== ======== ========
See Notes to Consolidated Financial Statements.
<Page> 18
CONSOLIDATED BALANCE SHEETS
FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
- ------------------------------------------------------------------------------
ASSETS
2003 2002
(In thousands)
- ------------------------------------------------------------------------------
Current assets:
Cash and equivalents........................ $ 29,962 $ 20,133
Receivables (less allowances of $1,949
and $1,907, respectively)................. 29,194 31,711
Inventories:
Raw materials............................. 17,733 16,115
Work-in-process........................... 6,636 7,481
Finished goods............................ 40,686 33,905
LIFO reserve.............................. (10,402) (9,233)
-------- --------
54,653 48,268
Other current assets (including deferred
income taxes of $9,672 and $8,615,
respectively, Note 5)..................... 14,232 12,897
-------- --------
Total current assets.................... 128,041 113,009
Property, plant and equipment, at cost:
Land and buildings.......................... 44,577 34,126
Machinery and equipment..................... 147,368 141,347
-------- --------
191,945 175,473
Less allowance for depreciation........... 108,029 99,440
-------- --------
83,916 76,033
Deferred and other assets (including deferred
income taxes of $0 and $1,391,
respectively, Note 5)...................... 13,828 16,504
Goodwill...................................... 56,186 53,037
-------- --------
Total Assets.................................. $281,971 $258,583
======== ========
See Notes to Consolidated Financial Statements.
<Page> 19
- ------------------------------------------------------------------------------
LIABILITIES AND SHAREOWNERS' EQUITY
2003 2002
(In thousands)
- ------------------------------------------------------------------------------
Current liabilities:
Current maturities of long-term debt and
short-term borrowings (Note 6)............ $ 1,392 $ 1,467
Accounts payable............................ 15,958 18,584
Accrued expenses (Note 4)................... 28,051 28,484
Income taxes (Note 5)....................... - 1,712
-------- --------
Total current liabilities................. 45,401 50,247
Long-term debt (Note 6)....................... 14,960 25,946
Deferred Income Taxes......................... 4,354 -
Employee benefit plan obligations (Note 3).... 18,697 23,988
Other long-term liabilities................... 5,621 5,264
Shareowners' equity (Note 7):
Common shares outstanding
(10,914 and 10,824, respectively)......... 1,091 1,082
Additional capital.......................... 46,917 34,079
Retained earnings........................... 139,057 125,308
Loan to ESOP Trust (Note 3)................. (897) (1,130)
Accumulated other comprehensive
income (loss)............................. 6,770 (6,201)
-------- --------
Total shareowners' equity................. 192,938 153,138
-------- --------
Total Liabilities and Shareowners' Equity..... $281,971 $258,583
======== ========
See Notes to Consolidated Financial Statements.
<Page> 20
CONSOLIDATED STATEMENTS OF CASH FLOWS
FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
- ------------------------------------------------------------------------------
2003 2002 2001
(In thousands)
- ------------------------------------------------------------------------------
Cash flows from operating activities:
Net income................................. $34,480 $32,204 $27,150
Adjustments to reconcile net income to
net cash flows from operating activities:
Depreciation and amortization............ 13,748 12,878 12,660
Deferred income taxes.................... 3,117 664 2,916
Loss on disposals of plant
and equipment.......................... 489 428 1,980
Changes in assets and liabilities,
excluding the effects of acquisitions:
Receivables............................ 4,875 3,125 2,963
Inventories............................ (2,140) 7,434 (697)
Accounts payable and other
accrued expenses..................... (4,439) (315) (8,028)
Employee benefit plan obligations...... (2,584) 1,128 (718)
Other, net............................. (582) (2,923) 1,697
------- ------- -------
Net cash flows from operating activities..... 46,964 54,623 39,923
------- ------- -------
Cash flows from investing activities:
Additions to plant and equipment........... (15,261) (15,568) (6,709)
Proceeds from sale of plant and equipment.. 241 20 354
Additions to deferred assets............... (434) (14,312) (802)
Purchases of marketable securities......... - - (2,999)
Cash paid for acquisitions, net of cash
acquired (Note 2)........................ - (30,344) -
Proceeds from maturities of marketable
securities............................... - 2,999 -
------- ------- -------
Net cash flows from investing activities..... (15,454) (57,205) (10,156)
------- ------- -------
Cash flows from financing activities:
Borrowing of long-term debt................ 6,648 8,575 -
Repayment of long-term debt (Note 6)....... (19,853) (1,408) (1,016)
Borrowing on line of credit and short-term
borrowings............................... 11,000 3,000 11,055
Repayment of line of credit and short-term
borrowings................................... (11,024) (3,017) (11,073)
Proceeds from issuance of common stock..... 4,750 2,320 1,059
Purchases of common stock (Note 7)......... (9,782) (3,662) (14,157)
Reduction of loan to ESOP Trust............ 233 232 232
Dividends paid............................. (5,946) (5,505) (5,122)
------- ------- -------
Net cash flows from financing activities..... (23,974) 535 (19,022)
------- ------- -------
Effect of exchange rate changes on cash...... 2,293 1,430 374
------- ------- -------
Net change in cash and equivalents........... 9,829 (617) 11,119
Cash and equivalents at beginning of year.... 20,133 20,750 9,631
------- ------- ------
Cash and equivalents at end of year.......... $29,962 $20,133 $20,750
======= ======= =======
<Page> 21
Cash paid during 2003, 2002, and 2001 for interest was $1.2 million, $1.3
million and $1.1 million, respectively. Also, cash paid during 2003, 2002 and
2001 for income taxes was $13.8 million, $16.6 million and $13.1 million,
respectively.
See Notes to Consolidated Financial Statements.
<Page> 22
<OPTION>
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
- ---------------------------------------------------------------------------------------------------------------------
(In thousands, except share amounts)
Accumulated
Common Loan to Other
Shares Common Additional Retained ESOP Comprehensive Comprehensive
Outstanding Stock Capital Earnings Trust Income (Loss) Income
----------- ----- ------- -------- ----- ------------- ------
- ---------------------------------------------------------------------------------------------------------------------
Balance year end 2000.............. 11,008,734 $1,101 $29,484 $ 93,445 $(1,594) $(6,438)
Net income......................... 27,150 $27,150
Currency translation adjustment... (2,353) (2,353)
Pension liability adjustment...... (96) (96)
-------
Comprehensive income, net of tax. $24,701
=======
Dividends on common stock.......... (5,122)
Common stock issued................ 68,000 6 1,053
Common stock repurchased or received
for stock options exercised...... (408,200) (40) (7,747) (6,370)
Tax benefit of stock options
exercised........................ 558
Loan payment from ESOP............. 232
---------- ------ ------- -------- ------- -------
Balance year end 2001.............. 10,668,534 1,067 23,348 109,103 (1,362) (8,887)
---------- ------ ------- -------- ------- -------
Net income......................... 32,204 $32,204
Currency translation adjustment... 5,858 5,858
Pension liability adjustment...... (3,172) (3,172)
-------
Comprehensive income, net of tax. $34,890
=======
Dividends on common stock.......... (5,505)
Common stock issued................ 378,500 38 5,907
Common stock repurchased or received
for stock options exercised...... (223,499) (23) (10,494)
Tax benefit of stock options
exercised........................ 4,824
Loan payment from ESOP............. 232
---------- ------ ------- -------- ------- -------
Balance year end 2002.............. 10,823,535 1,082 34,079 125,308 (1,130) (6,201)
---------- ------ ------- -------- ------- -------
Net income......................... 34,480 $34,480
Currency translation adjustment... 10,983 10,983
Pension liability adjustment...... 1,988 1,988
-------
Comprehensive income, net of tax. $47,451
=======
Dividends on common stock.......... (5,946)
Common stock issued................ 374,000 37 7,759
Common stock repurchased or received
for stock options exercised...... (283,563) (28) (14,785)
Tax benefit of stock options
exercised........................ 5,079
Loan payment from ESOP............. 233
---------- ------ ------- -------- ------- -------
Balance year end 2003.............. 10,913,972 $1,091 $46,917 $139,057 $ (897) $ 6,770
========== ====== ======= ======== ======= =======
See Notes to Consolidated Financial Statements.
<Page> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
- ------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR--The Company's fiscal year ends on the Saturday nearest December
31. The financial statements and accompanying notes are as of and for the
years ended January 3, 2004 (53 weeks), December 28, 2002 (52 weeks) and
December 29, 2001 (52 weeks) and are referred to as 2003, 2002 and 2001,
respectively.
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include the
accounts of the Company and its subsidiaries.
REVENUE RECOGNITION--Products are shipped utilizing common carriers direct to
customers or, for consignment products, to customer specified warehouse
locations. Sales are recognized when the Company's products are shipped direct
or transferred from a warehouse location to the customer, at which time
transfer of ownership and risk of loss pass to the customer.
CASH EQUIVALENTS--Cash equivalents consist of highly liquid investments which
are readily convertible to cash, present insignificant risk of changes in
value due to interest rate fluctuations and have original or purchased
maturities of three months or less.
MARKETABLE SECURITIES--Marketable securities consist of short-term U.S.
treasury and agency securities with maturities of greater than three months at
the date of purchase. All securities are categorized as held-to-maturity and
are stated at amortized cost. Due to the short-term nature of these
securities, the difference between the amortized cost and fair value is not
significant.
RESEARCH AND DEVELOPMENT EXPENSES--The Company's research and development
activities are charged to expense in the period incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The carrying amounts for cash and
equivalents, long-term debt, and short-term debt approximate fair value. The
fair value of long-term debt is estimated based on current borrowing rates for
similar issues and current exchange rates for foreign currency denominated
amounts. The Company's off-balance sheet instruments consist of operating
leases which are not significant (see Footnote 12).
ACCOUNTS RECEIVABLE--Accounts receivable are stated at estimated net
realizable value. Accounts receivable comprise balances due from customers net
of estimated allowances for uncollectible accounts. In determining
collectibility, historical trends are evaluated and specific customer issues
are reviewed to arrive at appropriate allowances.
INVENTORIES--Inventories are stated at the lower of cost or market. The
majority of the cost of domestic inventories is determined using the last-in,
first-out (LIFO) method; all remaining inventory costs are determined using
the first-in, first-out (FIFO) method. Inventories stated on the LIFO method
approximated 42.8 percent and 43.8 percent of total inventories in 2003 and
2002, respectively. The Company reviews its inventories for excess or obsolete
products or components. Based on an analysis of historical usage and
management's evaluation of estimated future demand, market conditions and
<Page> 24
alternative uses for possible excess or obsolete parts, reserves are recorded
or changed.
PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment are stated at
cost. Depreciation of plant and equipment is provided principally on a
straight line basis over the estimated useful lives of 5 to 50 years for land
improvements and buildings, 2 to 10 years for machinery, equipment, furniture,
and fixtures. Accelerated methods are used for income tax purposes. The
Company reviews its property and equipment for impairment whenever events or
changes in circumstances indicate that the carrying amount of such assets may
not be recoverable.
GOODWILL AND OTHER INTANGIBLE ASSETS--The Company adopted SFAS No. 142,
"Goodwill and Other Intangible Assets," in 2002. Under SFAS No. 142, goodwill
is not amortized; however, it must be tested for impairment at least annually.
Amortization continues to be recorded for other intangible assets with
definite lives. The Company is subject to risk in the event that goodwill
becomes impaired.
STOCK-BASED COMPENSATION--The Company accounts for its stock-based
compensation plans under the intrinsic value method in accordance with the
recognition and measurement principles of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees", and related
Interpretations. No stock-based compensation cost is reflected in net income,
as all options granted under those plans had an exercise price equal to the
market value of the underlying common stock on the date of grant. See pro-
forma example in Note 10.
EARNINGS PER COMMON SHARE--Basic and diluted earnings per share are computed
and disclosed under Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings Per Share". Diluted earnings per share is computed based upon
earnings applicable to common shares divided by the weighted-average number of
common shares outstanding during the period adjusted for the effect of other
dilutive securities.
TRANSLATION OF FOREIGN CURRENCIES--All assets and liabilities of foreign
subsidiaries whose functional currency is other than the U.S. dollar are
translated at year end exchange rates. All revenue and expense accounts are
translated at average rates in effect during the respective period.
USE OF ESTIMATES--Management's best estimates of certain amounts are required
in preparation of the consolidated financial statements in accordance with
generally accepted accounting principles, and actual results could differ from
those estimates.
RECLASSIFICATIONS--Certain prior year amounts are reclassified when necessary
to conform to the current year presentation. All share and per share data
included in these financial statements reflect the Company's two-for-one stock
split effected in the form of a 100 percent stock distribution made on March
22, 2002.
ACCOUNTING PRONOUNCEMENTS--In May 2003, FASB issued SFAS No. 150, "Accounting
for Certain Financial Instruments with Characteristics of both Liability and
Equity". Statement 150 affects an entity's accounting for freestanding
financial instruments: mandatorily redeemable shares, put options, forward
purchase contracts, and debt obligations. Most of the provisions are
consistent with the existing FASB Concepts Statement No. 6, "Elements of
Financial Statements". The remaining portion of Statement 150 encompasses
certain obligations that an entity can or must settle by issuing equity
<Page> 25
shares, pending the relationship between the holder and issuer. The adoption
of this pronouncement does not have a material impact on the Company's results
of operations or financial position.
In December 2003, the FASB issued FASB Staff Position (FSP) FAS 106-1,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003" (the "Act"). The Act expands
Medicare, primarily by adding a prescription drug benefit for Medicare-
eligibles starting in 2006. The Act provides employers currently sponsoring
prescription drug programs for Medicare-eligibles with a range of options for
coordinating with the new government-sponsored program to potentially reduce
program cost. The FSP concludes that companies will be permitted to recognize
that amount for year-end 2003 financial statements pursuant to FAS 106 or to
delay having to report the effects of the Act until remaining questions are
resolved. Pursuant to guidance from the FASB under FSP FAS 106-1, the Company
has chosen to defer recognition of the potential effects of the Act for 2003
disclosures. The impact of the Act on the Company's accumulated pension
benefit obligation and net periodic postretirement benefit cost has not been
determined. When issued, the authoritative guidance on the accounting for the
subsidy will address transition.
In December 2003, FASB issued a revision of SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits". The revision
requires that companies provide more detail concerning plan assets, benefit
obligations, cash flows, benefit costs, and other relevant information. Plan
assets should be broken down by category, whereby describing investment
policies, strategies, and target ranges. The Statement is effective for
financial statements with fiscal years ending after December 15, 2003.
However, disclosure of estimated future benefit payments is effective for
fiscal years ending after June 15, 2004. In compliance with Statement 132, the
Company has expanded detail regarding plan assets, benefit obligations,
benefit costs, and other pertinent information.
2. GOODWILL AND OTHER INTANGIBLE ASSETS
Statement of Financial Accounting Standards Nos. 141 and 142,
"Business Combinations" and "Goodwill and Other Intangible Assets",
respectively, were published in June 2001. SFAS No. 141 requires the purchase
method of accounting for business combinations, and SFAS No. 142 changes the
accounting for goodwill from an amortization method to an impairment-only
approach. The Company adopted the provisions of SFAS Nos. 141 and 142
effective December 30, 2001; accordingly, the Company's recorded goodwill is
no longer being amortized. During the first quarter of 2002, the Company
performed its initial impairment testing required by SFAS No. 142. No
impairment loss or transition adjustments were required. In addition, during
the fourth quarter of 2002 and 2003, the Company performed its annual
impairment testing required by SFAS No. 142. No impairment loss was required
to be recognized.
Information regarding the Company's other intangible assets which are included
in deferred and other assets, and goodwill follows:
(in millions) 2003 2002
---- ----
Amortized intangibles
Patents............................. $ 3.5 $ 3.5
Supply agreements................... 10.2 10.1
Other............................... 1.6 1.3
<Page> 26
Accumulated amortization............ (6.8) (4.8)
----- -----
Total............................. $ 8.5 $10.1
Goodwill.............................. $56.2 $53.0
Amortization expense related to intangible assets for the year ended January
3, 2004 was $2.0 million. Amortization expense for each of the five
succeeding years is $2.0 million, $1.2 million, $0.8 million, $0.7 million and
$0.7 million for 2004, 2005, 2006, 2007, 2008, respectively.
Acquisitions
- ------------
During 2002, the Company paid $30.3 million for acquisitions, net of cash
acquired, of which $24.3 million was recorded as goodwill based on the
estimated fair values of the net assets acquired. In January 2002, the Company
acquired certain assets and liabilities of Coverco S.p.A., and Emco
S.r.L.(jointly "Coverco") manufacturers of submersible and industrial electric
motors and controls in Italy. In July 2002, the Company acquired all of the
outstanding shares of Intelligent Controls, Inc., a producer of fueling
systems electronic leak detection and inventory management systems controls in
Maine.
These acquisitions were accounted for using the purchase method of accounting.
Accordingly, a portion of the aggregate purchase price was allocated to the
net assets acquired based on the estimated fair values. The excess of purchase
price over the fair value of the net assets acquired has been recorded as
goodwill.
The following sets forth a reconciliation of reported net income and earnings
per share to the same amounts adjusted to exclude amortization expense
recognized on goodwill of acquisitions completed prior to 2002 in each
respective period:
(In thousands, except
per share amounts) 2003 2002 2001
---- ---- ----
Reported net income................. $34,480 $32,204 $27,150
Add back: Goodwill amortization.... - - 757
------- ------- -------
Adjusted net income................. $34,480 $32,204 $27,907
======= ======= =======
Basic earnings per share:
Reported net income................. $ 3.19 $ 2.98 $ 2.49
Add back: Goodwill amortization.... - - 0.07
------- ------- -------
Adjusted net income................. $ 3.19 $ 2.98 $ 2.56
======= ======= =======
Diluted earnings per share:
Reported net income................. $ 3.05 $ 2.83 $ 2.39
Add back: Goodwill amortization.... - - 0.07
------- ------- -------
Adjusted net income................. $ 3.05 $ 2.83 $ 2.46
======= ======= =======
<Page> 27
Other
- -----
During 1998, the Company purchased certain operating and intangible assets
from a motor manufacturer for $17.5 million and, in connection therewith,
entered into related supply agreements. During 2001, the parties initiated
arbitration proceedings to resolve certain purchase price contingencies as
provided under the original purchase agreement. In September 2002, the Company
paid $10.5 million in additional consideration which resolved these purchase
price contingencies. The Company recorded this amount as an increase to the
cost of the acquired intangible assets because the Company determined that it
is probable that these transactions will provide the Company with a future
economic benefit. In accordance with SFAS No. 142, the Company will evaluate
the intangible assets on a periodic basis and the intangible assets will be
subject to impairment testing as prescribed by the statement.
In 1998, the Marley Pump Company ("Marley") offered its submersible
electric motor and water pump businesses for sale, valuing the combined
businesses at $40 million. The Company subsequently paid Marley $17.5
million in cash, primarily for assets used in the submersible electric
motor business and as an upfront discount on motors to be supplied to
Marley over a multi-year term. The Company also agreed to pay
additional consideration to Marley in the event that Marley elected to
sell the water pump business to another party during the next three
years and its ultimate sale price was less than $22.5 million (the
"floor value"). As the parties viewed the value of the water pump
business at that time to be equal to the floor value, the Company did
not record any additional liability in connection with this transaction.
In 1999, after further negotiations with Marley, the Company agreed to
pay an additional $3.0 million to Marley for the previously acquired
assets, recording the payment as an increase to the cost of that
business. The floor value for the water pump business was
correspondingly reduced to $19.5 million, which was below what both
parties believed at that time to be the fair value of the water pump
business. Accordingly, no additional liability was recorded by the
Company.
In 2001, Marley sold its water pump business for approximately $7.8
million to a third party and made demand on the Company for $11.7
million, the difference between the sale price and the then floor value.
The Company refused to pay the demand, alleging, among other things,
that Marley had violated the terms of the 1998 agreement for handling
the sale of the water pump business and had violated patent licenses
that were entered into with the 1998 agreement. The parties entered
into arbitration to settle their claims. At the time the arbitration
proceedings were initiated and until their conclusion, the Company could
not determine the amount, if any, of additional consideration that would
be payable to either party and, accordingly, the Company did not
recognize an additional liability or asset. On August 26, 2002, the
arbitrator entered an interim award in favor of Marley, and thereafter,
in September 2002 the parties entered into a settlement agreement
pursuant to which the Company paid Marley $10.5 million in additional
consideration to resolve all purchase price contingencies and all other
matters between the parties. The Company originally recorded this
amount as an increase to the costs of the acquired submersible electric
motor assets included in "Deferred and Other Assets" on the balance
sheet. On further review, the Company reclassified certain of the
acquired intangible assets to "Goodwill" as of the third quarter of
2003. The Company's final cost for the Marley motor business, including
acquisition costs, along with the related payment for the sale of the
<Page> 28
Marley water pump business, was $31.6 million, of which $15.1 million
was recorded as goodwill.
3. EMPLOYEE BENEFIT PLANS
DEFINED BENEFIT PLANS - As of January 3, 2004, the Company's domestic
operations maintain three separate pension plans. The Company uses a December
31 measurement date for its plans.
The Company's other postretirement benefit plans provide health and life
insurance benefits to domestic employees hired prior to 1992. The Company
effectively capped its cost for those benefits through plan amendments made in
1992, freezing Company contributions for insurance benefits at 1991 levels for
current and future beneficiaries with actuarially reduced benefits for
employees who retire before age 65.
The following table sets forth aggregated information related to the Company's
domestic pension benefits and other postretirement benefits, including changes
in the benefit obligations, changes in plan assets, funded status, amounts
recognized in the Consolidated Balance Sheets, and actuarial assumptions:
(In thousands)
- ------------------------------------------------------------------------------
Pension Benefits Other Benefits
2003 2002 2003 2002
---- ---- ---- ----
Change in benefit obligation:
Benefit obligation, b/o/y...... $115,744 $109,209 $ 12,914 $ 12,450
Service cost................... 3,422 3,276 312 312
Interest cost.................. 7,593 7,588 821 859
Plan amendments................ 1,122 1,409 - -
Actuarial loss................. 6,379 2,923 400 495
Settlements paid............... (995) (445) - -
Benefits paid.................. (8,523) (8,216) (1,200) (1,202)
-------- -------- -------- --------
Benefit obligation, e/o/y...... $124,742 $115,744 $ 13,247 $ 12,914
======== ======== ======== ========
Change in plan assets:
Fair value of assets, b/o/y.... $ 97,955 $109,190 $ - $ -
Actual return on plan assets... 22,162 (3,125) - -
Company contributions.......... 5,257 551 1,200 1,202
Settlements paid............... (995) (445) - -
Benefits paid.................. (8,523) (8,216) (1,200) (1,202)
-------- -------- -------- --------
Fair value of assets, e/o/y.... $115,856 $ 97,955 $ - $ -
======== ======== ======== ========
Table continued - Pension Benefits Other Benefits
2003 2002 2003 2002
---- ---- ---- ----
Reconciliation of funded status:
Funded status.................. $ (8,886) $(17,789) $(13,247) $(12,914)
Unrecognized net (gain)/loss... 607 5,860 3,134 2,898
Unrecognized transition
obligation................... - - 4,400 4,889
Unrecognized prior service
cost......................... 5,359 5,699 - -
-------- -------- -------- --------
<Page> 29
Net amount recognized.......... $ (2,920) $ (6,230) $ (5,713) $ (5,127)
======== ======== ======== ========
Amounts recognized in the
Consolidated Balance Sheets:
Accrued benefit liability...... $(11,320) $(17,611) $ (5,713) $ (5,127)
Other Assets................... 587 - - -
Intangible asset............... 4,544 4,802 - -
Deferred tax asset............. 1,308 2,630 - -
Accumulated other comprehensive
loss.......................... 1,961 3,949 - -
-------- -------- -------- --------
Net amount recognized.......... $ (2,920) $ (6,230) $ (5,713) $ (5,127)
======== ======== ======== ========
- ------------------------------------------------------------------------------
Pension Benefits Other Benefits
2003 2002 2003 2002
---- ---- ---- ----
Increase/(decrease) in
Minimum liability included
in other comprehensive
income....................... $ (1,988) $ 3,172 $ - $ -
======== ======== ======== ========
- ------------------------------------------------------------------------------
Actuarial assumptions used to determine benefit obligations:
Pension Benefits Other Benefits
2003 2002 2003 2002
---- ---- ---- ----
Discount rate.................. 6.25% 6.75% 6.25% 6.75%
Rate of increase in future
compensation................. 2.5-7.00% 2.5-7.00% 2.5%-7.00% 2.5-7.00%
(Graded) (Graded) (Graded) (Graded)
- ------------------------------------------------------------------------------
Actuarial assumptions used to determine periodic benefit cost:
Pension Benefits Other Benefits
2003 2002 2003 2002
---- ---- ---- ----
Discount rate.................. 6.75% 7.25% 6.75% 7.25%
Rate of increase in future
compensation................. 2.5-7.00% 2.5-7.00% 2.5%-7.00% 2.5-7.00%
(Graded) (Graded) (Graded) (Graded)
Expected long-term rate of
return on plan assets........ 9.25% 9.25% - -
- ------------------------------------------------------------------------------
The accumulated benefit obligation for the Company's qualified defined benefit
pension plans was $117,079 and $108,152 at January 3, 2004 and December 28,
2002.
The following table sets forth aggregated net domestic periodic benefit cost
for 2003, 2002 and 2001:
(In thousands)
- ------------------------------------------------------------------------------
Pension Benefits Other Benefits
2003 2002 2001 2003 2002 2001
---- ---- ---- ---- ---- ----
Service cost........ $ 3,422 $ 3,276 $ 3,163 $ 312 $ 312 $ 307
Interest cost....... 7,593 7,588 7,487 821 859 872
<Page> 30
Expected return
on assets.......... (10,559) (10,433) (9,835) - - -
Amortization of
unrecognized:
obligation/
(asset).......... - - - 489 489 489
Prior service
cost............. 1,462 1,214 913 - - -
Loss/(Gain)...... (208) (719) (770) 164 144 135
-------- -------- ------- ------ ------ ------
Net periodic
benefit cost....... $ 1,710 $ 926 $ 958 $1,786 $1,804 $1,803
Settlement cost..... 238 117 - - - -
-------- -------- ------- ------ ------ ------
Total benefit cost.. $ 1,948 $ 1,043 $ 958 $1,786 $1,804 $1,803
======== ======== ======= ====== ====== ======
- ------------------------------------------------------------------------------
The Company consults with actuaries, asset allocation consultants and
investment advisors to determine the expected long term rate of return on plan
assets. While past performance is not a guarantee of future returns, the plan
assets of the pension plans for the past fifteen years have averaged in excess
of 12% annually and the composition of the plan assets leads the Company to
expect a long term rate of return in excess of 9.25%.
- ------------------------------------------------------------------------------
The plans asset allocations at December 31, 2003, and 2002, by asset category
are as follows:
Plan Assets
at December 31
2003 2002
---- ----
Equity Securities 76% 74%
Fixed Income Securities 24% 26%
---- ----
Total 100% 100%
Equity securities include Company stock of $22,020 (19% of total plan assets)
and $25,399 (26% of total plan assets) at December 31, 2003 and 2002,
respectively.
The Company employs a total return investment approach whereby a mix of equity
and fixed-income investments are used to maximize the long-term return on plan
assets for a prudent level of risk. Risk tolerance is established through
careful consideration of plan liabilities, plan funded status, and corporate
financial condition. The investment portfolio contains a diversified blend of
equity and fixed-income investments. Furthermore, equity investments are
diversified across growth, value, and small and large capitalizations.
Investment risk is measured and monitored on an ongoing basis through
investment portfolio reviews, annual liability measurements, and periodic
asset/liability studies.
One of the Company's three pension plans covers certain management employees.
The Company does not fund this plan, and its assets were zero in 2003 and
2002. The plan's projected benefit obligation and accumulated benefit
obligation were $6,195 and $4,771, respectively, at January 3, 2004, and
$5,898 and $5,231, respectively, at December 28, 2002.
The Company's German subsidiary, which does not report pension information
under the Employee Retirement Income Security Act of 1974, calculates the
pension liability based on local requirements. The long-term pension liability
<Page> 31
for the German subsidiary was $1,679 at January 3, 2004 and $1,250 at December
28, 2002. The difference between calculating the pension liability under local
requirements versus SFAS No. 87 requirements is not material. Pension
liabilities for other foreign subsidiaries are not significant.
The Company estimates total contributions to the plans of $2,459 in 2004.
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 was signed into law. The Act expands Medicare,
primarily by adding a prescription drug benefit for Medicare-eligibles
starting in 2006. The Act provides employers currently sponsoring prescription
drug programs for Medicare-eligibles with a range of options for coordinating
with the new government-sponsored program to potentially reduce program cost.
The impact of the Act on the Company's accumulated pension benefit obligation
and net periodic postretirement benefit cost has not been included. Pursuant
to guidance from the FASB under FSP FAS 106-1, the Company has chosen to defer
recognition of the potential effects of the Act in these 2003 disclosures.
DEFINED CONTRIBUTION PLANS - The Company maintains an integrated 401(k) and
Employee Stock Ownership Plan (ESOP). In 1996 and 1992, the ESOP Trustee
acquired shares of Company common stock on the open market using the proceeds
of a ten-year, $0.3 million loan and a fifteen-year, $3.0 million loan,
respectively, from the Company. Under the terms of the variable rate loan
(6.31 percent at January 3, 2004), principal plus interest is payable in equal
annual installments. The shares of stock purchased with the loan proceeds are
collateral for the loan and are considered outstanding for purposes of
calculating earnings per share.
The Company contributes a portion of its 401(k) matching contribution as well
as an additional annual contribution, both subject to the Company's annual
financial results, to the ESOP Trust. The ESOP Trustee uses a portion of the
Company's contributions to make principal and interest payments on the loan.
As loan payments are made, shares of common stock are released as collateral
and are allocated to participants' accounts. The balance of the Company's
contributions in cash or common stock is made to the Company stock fund of the
401(k) and ESOP Trusts, and allocated to participants' accounts to satisfy the
balance of the Company's 401(k) matching contribution.
At January 3, 2004 266,440 shares were allocated to the accounts of
participants, 16,365 shares were committed to be released and allocated to the
accounts of participants for service rendered during 2003, and 58,896 shares
were held by the ESOP Trust in suspense.
The following table sets forth the interest expense and Company contributions
to the integrated ESOP and 401(k) Plan.
(In thousands)
- ------------------------------------------------------------------------------
2003 2002 2001
---- ---- ----
Interest expense incurred by the plan
on ESOP debt............................. $ 59 $ 74 $ 88
Company contributions to integrated plan... $ 991 $1,118 $1,199
- ------------------------------------------------------------------------------
<Page> 32
4. ACCRUED EXPENSES
Accrued expenses consisted of:
(In thousands)
- ------------------------------------------------------------------------------
2003 2002
---- ----
Salaries, wages and commissions....... $11,499 $11,595
Product warranty costs................ 5,447 5,308
Insurance............................. 5,769 5,762
Employee benefits..................... 2,105 2,116
Other................................. 3,231 3,703
------- ------
$28,051 $28,484
======= =======
- ------------------------------------------------------------------------------
5. INCOME TAXES
Income before income taxes consisted of:
(In thousands)
- ------------------------------------------------------------------------------
2003 2002 2001
---- ---- ----
Domestic.................... $42,494 $45,344 $35,643
Foreign..................... 8,833 5,133 7,742
------- ------- -------
$51,327 $50,477 $43,385
======= ======= =======
- ------------------------------------------------------------------------------
The income tax provision consisted of:
(In thousands)
- ------------------------------------------------------------------------------
2003 2002 2001
---- ---- ----
Currently payable:
Federal................... $ 9,326 $11,890 $ 9,145
Foreign................... 2,968 2,934 2,622
State..................... 1,436 2,785 1,552
Deferred:
Federal................... 2,056 1,435 2,320
Foreign................... 725 (826) 152
State..................... 336 55 444
------- ------- -------
$16,847 $18,273 $16,235
======= ======= =======
- ------------------------------------------------------------------------------
Significant components of the Company's deferred tax assets and liabilities
were as follows:
<Page> 33
(In thousands)
- ------------------------------------------------------------------------------
2003 2002
---- ----
Deferred tax assets:
Accrued expenses and reserves.............. $ 5,134 $ 5,094
Compensation and employee benefits......... 8,797 10,636
Other items................................ 2,065 2,488
------- -------
Total deferred tax assets................ 15,996 18,218
------- -------
Deferred tax liabilities:
Accelerated depreciation on fixed assets... 8,823 7,043
Other items................................ 1,854 1,169
------- -------
Total deferred tax liabilities........... 10,677 8,212
------- -------
Net deferred tax assets...................... $ 5,319 $10,006
======= =======
- ------------------------------------------------------------------------------
The portions of current and non-current deferred tax assets and liabilities
were as follows:
(In thousands)
- ------------------------------------------------------------------------------
2003 2002
---- ----
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
Current........ $ 9,735 $ 63 $ 8,797 $ 182
Non-current.... 6,260 10,614 9,421 8,030
------- ------- ------- -------
$15,995 $10,677 $18,218 $ 8,212
======= ======= ======= =======
There was no valuation allowance for deferred tax assets required in 2003 or
2002.
The differences between the statutory and effective tax rates were as follows:
- ------------------------------------------------------------------------------
2003 2002 2001
---- ---- ----
U.S. Federal statutory rate...... 35.0% 35.0% 35.0%
State income taxes, net of
federal benefit................ 2.2 3.7 3.0
Extraterritorial Income Exclusion (4.0) (1.9) (1.4)
R&D Tax Credits.................. (1.2) (1.3) -
Other Items...................... 0.8 0.7 0.8
----- ----- -----
32.8% 36.2% 37.4%
===== ===== =====
<Page> 34
6. DEBT
Long-term debt consisted of:
(In thousands)
- ------------------------------------------------------------------------------
2003 2002
---- ----
Insurance Company--6.31%, principal
payments of $1.0 million due in
annual installments, with a balloon
payment of $10,000 in 2008 ($3,275
denominated in JPY at 1/03/04)........ $14,141 $14,697
Revolving Credit Agreement--
denominated in euro at 12/28/2002..... - 10,128
Other................................... 2,211 2,564
------- -------
16,352 27,389
Less current maturities................. (1,392) (1,443)
------- -------
$14,960 $25,946
======= =======
- ------------------------------------------------------------------------------
The Company's short-term borrowings were $0 and $24 at January 3, 2004 and
December 28, 2002, respectively.
On November 26, 2001, the Company entered into an unsecured, 38-month, $60.0
million revolving credit agreement (the "Agreement"). The Agreement includes a
facility fee of one-eighth of one percent on the committed amount. The
Agreement provides for various borrowing rate options including interest rates
based on the London Interbank Offered Rates (LIBOR) plus interest spreads
keyed to the Company's ratio of debt to earnings before interest, taxes,
depreciation, and amortization (EBITDA). The Agreement contains certain
financial covenants with respect to borrowings, interest coverage, working
capital, net worth, loans or advances and investments.
The Company was in compliance with all debt covenants at all times in 2003 and
2002.
7. Interest Rate Risk
On September 24, 2003 the Company entered into a fixed-to-variable interest
rate swap to achieve a desired proportion of variable vs. fixed rate debt. The
fixed-to-variable interest rate swap is accounted for as a fair value hedge,
per SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", with effectiveness assessed based on changes in the fair value of
the underlying debt using incremental borrowing rates currently available on
loans with similar terms and maturities. The effective gain or loss on the
interest rate swap and that of the underlying debt are equal and offsetting
resulting in no net effect to earnings. The fair value of this hedge
instrument was ($89) at January 3, 2004 and is recorded in other assets and
other long-term liabilities.
The swap contract has a notional amount of $10 million and matures on November
10, 2008. Per the terms of the swap contract the Company receives interest at
a fixed rate of 6.31% and pays interest at a variable rate based on the three
month LIBOR rate plus a spread. The average variable rate paid by the Company
<Page> 35
from the swap inception date to the fiscal year end, January 3, 2004, was
3.8%. The differential in interest rates on the swap is recognized as an
adjustment of interest expense over the term of the agreement.
8. SHAREOWNERS' EQUITY
The Company had 10,914,000 shares of common stock (25,000,000 shares
authorized, $.10 par value) outstanding at the end of 2003.
During 2003 and 2002, pursuant to a stock repurchase program authorized by the
Company's Board of Directors, the Company repurchased a total of 190,147
shares for $9.8 million and 85,131 shares for $3.6 million, respectively. Of
these shares, 150,000 were repurchased from an officer of the Company in 2003.
All repurchased shares were retired.
During 2003, under terms of a Company stock option plan, participants
delivered 93,416 shares of Company common stock as consideration for stock
issued upon the exercise of stock options. Of these shares, 81,888 were from
officers of the Company. The total exercise price of the respective stock
options was $5.0 million. The Company recorded a $5.1 million reduction in its
deferred tax liability and an increase to shareowners' equity as a result of
these exercises. The shares delivered to the Company were subsequently
retired.
Accumulated other comprehensive gain (loss), consisting of the currency
translation adjustment and the pension liability adjustment, was $8,732 and
$(1,962), respectively, at January 3, 2004, and ($2,251) and ($3,950),
respectively, as of December 28, 2002.
9. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
(In thousands, except per share amounts)
- ------------------------------------------------------------------------------
2003 2002 2001
---- ---- ----
Numerator:
Net Income.......................... $34,480 $32,204 $27,150
======= ======= =======
Denominator:
Basic
Weighted-average common shares..... 10,813 10,792 10,886
Diluted
Effect of dilutive securities:
Employee and director incentive
stock options and awards........ 500 574 484
------- ------- -------
Adjusted weighted-average common
shares.......................... 11,313 11,366 11,370
======= ======= =======
Basic earnings per share.............. $ 3.19 $ 2.98 $ 2.49
======= ======= =======
Diluted earnings per share............ $ 3.05 $ 2.83 $ 2.39
======= ======= =======
- ------------------------------------------------------------------------------
<Page> 36
10. STOCK-BASED COMPENSATION
The Company has authorized the grant of options to purchase common stock of
the Company to employees and non-employee directors of the Company and its
subsidiaries under two fixed stock option plans. The plans and the original
number of authorized shares available for grants are as follows:
- ------------------------------------------------------------------------------
Shares
------
1990 Non-Employee Director Stock Option Plan 120,000
Franklin Electric Co., Inc. Stock Option Plan 1,800,000
- ------------------------------------------------------------------------------
In 2003, the 1996 Non-Employee Director Stock Option Plan and the 1996
Employee Stock Option Plan were merged into the Franklin Electric Co., Inc.
Stock Option Plan.
Under each of the above plans, the exercise price of each option equals the
market price of the Company's common stock on the date of grant and the
options expire ten years after the date of the grant. Generally, options
granted to non-employee directors vest 33 percent a year and become fully
vested and exercisable after three years and options granted to employees vest
20 percent a year and become fully vested and exercisable after five years.
Subject to the terms of the plans, in general, the aggregate option price and
any applicable tax withholdings may be satisfied in cash or its equivalent, or
by the plan participant's delivery of shares of the Company's common stock
owned more than six months, having a fair market value at the time of exercise
equal to the aggregate option price and/or the applicable tax withholdings.
A summary of the Company's fixed stock option plans activity and related
information for 2003, 2002 and 2001 follows:
<Page> 37
- -------------------------------------------------------------------------------------------------------
2003 2002 2001
Weighted-Average Weighted-Average Weighted-Average
Fixed Options Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ------------- ------------------------ ------------------------ ------------------------
Outstanding at
beginning of year 1,463,900 $32.12 1,662,300 $26.30 1,421,700 $23.45
Granted 228,000 47.79 230,500 48.18 322,000 36.90
Exercised (374,000) 20.85 (378,500) 15.71 (68,000) 15.58
Forfeited (51,000) 42.46 (50,400) 36.96 (13,400) 31.96
--------- --------- ---------
Outstanding at
end of year 1,266,900 $37.85 1,463,900 $32.12 1,662,300 $26.30
========= ========= =========
- -------------------------------------------------------------------------------------------------------
The following summarizes information about fixed stock options
outstanding at January 3, 2004:
- -------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------------------------- ------------------------
Number Weighted-Average Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices at 1/3/04 Contractual Life Exercise Price at 1/3/04 Exercise Price
- --------------- --------- ---------------- -------------- --------- --------------
$15.63 to 31.37 130,800 2.83 years $21.13 130,800 $21.13
31.38 to 42.44 723,600 6.58 34.89 449,400 34.69
42.45 to 50.45 412,500 8.86 48.35 87,833 48.31
--------- -------
$15.63 to 50.45 1,266,900 6.93 $37.85 668,033 $33.82
========= =======
- -------------------------------------------------------------------------------------------------------
<Page> 38
For pro forma information regarding net income and earnings per share, the
fair value for the options awarded in 2003, 2002 and 2001 for all fixed stock
option plans was estimated as of the date of the grant using a Black-Scholes
option valuation model. The following table sets forth the weighted-average
assumptions for 2003, 2002 and 2001, respectively.
- ------------------------------------------------------------------------------
2003 2002 2001
---- ---- ----
Risk-free interest rate............ 3.34% 4.23% 4.93%
Dividend yield..................... .88% 1.10% 1.30%
Volatility factor.................. .211 .207 .204
Weighted-average expected life..... 6 years 6 years 6 years
- ------------------------------------------------------------------------------
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized over the option's vesting period. Therefore, in the year of
adoption and subsequently affected years, the effects of applying SFAS No. 123
for providing pro forma net income and earnings per share are not likely to be
representative of the effects on reported income in future years. The
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of SFAS No. 123
to stock-based compensation:
(In thousands, except per share amounts)
- ------------------------------------------------------------------------------
2003 2002 2001
---- ---- ----
Reported net income................. $34,480 $32,204 $27,150
Less: Total fair value computed
stock-based compensation, net of tax (1,471) (1,270) (1,086)
------- ------- -------
Pro forma net income................ $33,009 $30,934 $26,064
======= ======= =======
Reported net income available
per common share.................. $3.19 $2.98 $2.49
Pro forma net income available
per common share.................. $3.05 $2.87 $2.39
Reported net income available per
common share, assuming dilution... $3.05 $2.83 $2.39
Pro forma net income available per
common share, assuming dilution... $2.92 $2.72 $2.29
- ------------------------------------------------------------------------------
The weighted-average grant-date fair value of options granted during 2003,
2002 and 2001 was $12.11, $12.55 and $19.14, respectively.
The Black-Scholes option valuation model used by the Company was developed for
use in estimating the fair value of fully tradable options which have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. It is management's opinion that the Company's
stock options have characteristics significantly different from those of
traded options and because changes in the subjective input assumptions can
materially affect the fair value estimate, the existing models do not
necessarily provide a reliable single measure of the fair value of its stock
options.
<Page> 39
During 2000, the Franklin Electric Co., Inc. Key Employee Performance
Incentive Stock Plan (Incentive Plan) was established. Under the Incentive
Plan, employees may be granted restricted shares of the Company's common
stock, vesting subject to the employees' performance of certain goals. No
shares were awarded under the Incentive Plan in 2003 and 2002. At January 3,
2004, 200,000 shares were available for future awards.
The Company has allocated 1,776,000 shares of its common stock for the 1988
Executive Stock Purchase Plan (1988 Purchase Plan). Under the 1988 Purchase
Plan, executives of the Company are awarded the right to purchase shares of
its common stock through a Company loan at the closing price on the day prior
to the date of purchase. In 1998, the Company extended the 1988 Purchase Plan
ten additional years. At January 3, 2004, 1,025,600 shares were available for
future awards, and there were no outstanding loans to Company executives;
further, the Sarbanes-Oxley Act of 2002 prohibits the type of loan
contemplated under the 1988 Purchase Plan.
11. SEGMENT AND GEOGRAPHIC INFORMATION
Based on the management approach established by SFAS No. 131, "Disclosure
About Segments of an Enterprise and Related Information", the Company's
business consists of two operating segments that offer different products: the
motor segment and the electronic controls segment.
The motor segment designs, manufactures and sells motors and related parts and
equipment for use in submersible water and fueling systems, and in a wide
variety of industrial motor products. The electronic controls segment designs
and manufactures electronic controls for the principal purpose of being a
supplier to the motor segment.
Under SFAS No. 131's quantitative threshold and aggregation criteria, the
Company's two operating segments have been combined into a single reportable
segment. As a result, there are no significant differences between reportable
segment financial information and the Company's consolidated results.
The Company's products are primarily sold to original equipment manufacturers
and through independent distributors in the United States, Europe, Australia,
South Africa, Mexico, Japan, China and other world markets. Net sales
attributed to customers located in the United States were $230.6 million,
$232.3 million and $218.8 million in 2003, 2002 and 2001, respectively. Net
sales attributed to foreign customers were $128.9 million, $122.6 million and
$104.1 million in 2003, 2002 and 2001, respectively, of which no single
country was significant. Long-lived assets located in the United States
totaled $43.9 million, $47.8 million and $47.4 million in 2003, 2002 and 2001,
respectively. Long-lived assets in foreign countries totaled $40.0 million,
$28.2 million and $11.4 million in 2003, 2002 and 2001, respectively, of which
no single country was significant.
ITT Industries, Inc. accounted for 18.0 percent, 18.2 percent, and 18.7
percent of the Company's consolidated sales in 2003, 2002 and 2001,
respectively. Sta-Rite Industries, Inc., a subsidiary of Wisconsin Energy
Corporation accounted for 13.6 percent and 11.5 percent of the Company's
consolidated sales in 2003 and 2002, respectively.
12. CONTINGENCIES AND COMMITMENTS
The Company is defending various claims and legal actions, including
environmental matters, which have arisen in the ordinary course of business.
<Page> 40
In the opinion of management, after discussion with counsel, these claims and
legal actions can be successfully defended or resolved without a material
adverse effect on the Company's financial position, results of operation, and
net cash flows.
Total rent expense charged to operations for operating leases including
contingent rentals was $3.0 million, $2.7 million and $2.4 million for 2003,
2002 and 2001, respectively. The future minimum rental payments for
noncancellable operating leases as of January 3, 2004, are as follows: 2004,
$2.2 million; 2005, $1.2 million; and 2006, $0.5 million. Rental commitments
subsequent to 2006 are not significant.
Below is a table that shows the activity in the warranty accrual accounts:
(In thousands)
2003 2002
---- ----
Beginning Balance.................. $5,308 $4,970
Accruals related to
product warranties............... 4,449 5,400
Reductions for payments made....... 4,310 5,062
------ ------
Ending Balance..................... $5,447 $5,308
====== ======
13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited quarterly financial information for 2003 and 2002 is as follows:
(In thousands, except per share amounts)
- ------------------------------------------------------------------------------
Basic Diluted
Net Gross Net Earnings Earnings
Sales Profit Income Per Share Per Share
----- ------ ------ --------- ---------
2003
- ----
1st Quarter..... $ 69,778 $ 19,815 $ 4,028 $ .37 $ .36
2nd Quarter..... 93,840 28,940 9,368 .87 .83
3rd Quarter..... 99,685 30,768 10,513 .97 .93
4th Quarter..... 96,199 31,473 10,571 .97 .93
-------- -------- -------
$359,502 $110,996 $34,480 $3.19 $3.05
======== ======== =======
2002
- ----
1st Quarter..... $ 68,069 $ 17,851 $ 3,682 $ .34 $ .32
2nd Quarter..... 93,682 26,600 9,006 .83 .79
3rd Quarter..... 97,125 29,553 9,628 .89 .85
4th Quarter..... 95,996 30,931 9,888 .91 .88
-------- -------- -------
$354,872 $104,935 $32,204 $2.98 $2.83
======== ======== =======
- ------------------------------------------------------------------------------
<Page> 41
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Shareowners and Directors, Franklin Electric Co., Inc.:
We have audited the accompanying consolidated balance sheets of Franklin
Electric Co., Inc. and consolidated subsidiaries as of January 3, 2004 and
December 28, 2002 and the related consolidated statements of income,
shareowners' equity and cash flows for each of the three years in the period
ended January 3, 2004. Our audits also included the financial statement
schedule listed in the index at Item 15. These financial statements and
financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Franklin Electric Co., Inc. and
consolidated subsidiaries as of January 3, 2004 and December 28, 2002, and the
results of their operations and their cash flows for each of the three years
in the period ended January 3, 2004, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Chicago, Illinois
January 30, 2004
<Page> 42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -----------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
None.
ITEM 9A. CONTROLS AND PROCEDURES
- --------------------------------
As of the end of the period covered by this report (the "Evaluation Date"),
the Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and the Company's Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures pursuant to Exchange Act Rule 13a-15. Based upon that
evaluation, the Company's Chief Executive Officer and the Company's Chief
Financial Officer concluded that as of the Evaluation Date, the Company's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company and its subsidiaries required to
be included in the Company's periodic SEC filings.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------
The information concerning directors required by this Item 10 is set forth in
the Company's Proxy Statement for the Annual Meeting of Shareholders to be
held on May 5, 2004, under the headings of "ELECTION OF DIRECTORS" and
"INFORMATION CONCERNING NOMINEES AND DIRECTORS," and is incorporated herein by
reference.
The information concerning executive officers required by this Item 10 is
contained in Part I of this Form 10-K under the heading of "EXECUTIVE OFFICERS
OF THE REGISTRANT."
The information concerning Item 405 disclosures of delinquent Form 3, 4 or 5
filers required by this Item 10 is set forth in the Company's Proxy Statement
for the Annual Meeting of Shareholders to be held on May 5, 2004, under the
heading of "SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE," and is
incorporated herein by reference.
The Company's board of directors has determined that Jerome D. Brady, Patricia
Schaefer, and Robert H. Little, the Audit Committee members, are "audit
committee financial experts" as defined by Item 401(h) of Regulation's S-K of
the Exchange Act, and is "independent" within the meaning of Item 7 (d)(3)(iv)
of schedule 14A of the Exchange Act.
In compliance with Section 406 of the Sarbanes-Oxley Act of 2002, the Company
has adopted a code of business conduct and ethics for its principal financial
officer, controller, principal executive officer, and employees. The Company
has posted its code of ethics on the Company website at http://www.franklin-
electric.com. The company will disclose any amendments to the Code and any
waivers from the Code for directors and executive officers by posting such
information on its website.
<Page> 43
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
The information required by Item 11 is set forth in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on May 5, 2004,
under the headings of "INFORMATION ABOUT THE BOARD AND ITS COMMITTEES,"
"COMPENSATION COMMITTEE REPORT," "SUMMARY COMPENSATION TABLE," "OPTION GRANTS
IN 2002 FISCAL YEAR," "AGGREGATED OPTION EXCERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES", "PENSION PLANS" and "AGREEMENTS," and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
- ---------------------------------------------------------------------------
RELATED STOCKHOLDER MATTERS
- ---------------------------
The information required by Item 12 is set forth in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on May 5, 2004,
under the headings of "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT" and "SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION
PLANS," and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
The information required by Item 13 is set forth in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on May 5, 2004,
under the headings of "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT" and "AGREEMENTS," and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
- -----------------------------------------------
The information required by Item 14 is set forth in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on May 5, 2004
under the leading "Principal Accountant Fees and Services".
<Page> 44
PART IV
-------
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
Form 10-K
Annual Report
(page)
--------------
(a) 1. Financial Statements - Franklin Electric
----------------------------------------
Independent Auditors' Report........................ 41
Consolidated Statements of Income for the
three years ended January 3, 2004................. 17
Consolidated Balance Sheets as of
January 3, 2004 and December 28, 2002............. 18-19
Consolidated Statements of Cash Flows
for the three years ended January 3, 2004......... 20-21
Consolidated Statements of Shareowners' Equity
for the three years ended January 3, 2004......... 22
Notes to Consolidated Financial Statements
(including quarterly financial data).............. 23-40
2. Financial Statement Schedules - Franklin Electric
-------------------------------------------------
II Valuation and Qualifying Accounts................ 45
Schedules other than those listed above are omitted for
the reason that they are not required or are not
applicable, or the required information is disclosed
elsewhere in the financial statements and related notes.
3. Exhibits
--------
See the Exhibit Index located on pages 47-48.
Management Contract or Compensatory Plan or
Arrangement is denoted by an asterisk (*).
(b) Reports on Form 8-K filed during the fourth quarter
ended January 3, 2004:
Franklin Electric Company reports increased income and sales for
the third quarter and first nine months of 2003
(c) See the Exhibit Index located on pages 47-48.
(d) Individual financial statements and all other schedules
of the Registrant are omitted as they are not required.
<Page> 45
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the years 2003, 2002 and 2001
(In thousands)
--------------
Additions
Balance at charged to Balance
beginning costs and at end
Description of period expenses Deductions Other of period
- ----------- --------- -------- ---------- ----- ---------
Allowance for doubtful accounts:
2003 $1,907 $450 $408 (A) $ - $1,949
====== ==== ==== ==== ======
2002 $1,658 $142 $296 (A) $403 (B) $1,907
====== ==== ==== ==== ======
2001 $1,949 $172 $463 (A) $ - $1,658
====== ==== ==== ==== ======
NOTES:
======
(A) Uncollectible accounts written off, net of recoveries.
(B) Allowance for doubtful accounts related to accounts receivable of
acquired companies at date of acquisition
<Page> 46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Franklin Electric Co., Inc.
/s/ R. SCOTT TRUMBULL
----------------------
R. Scott Trumbull
Chairman of the Board and Chief
Date: February 13, 2004 Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ R. SCOTT TRUMBULL Chairman of the Board and Chief
- -------------------------------------
R. Scott Trumbull February 13, 2004 Executive Officer (Principal
Executive Officer)
/s/ GREGG C. SENGSTACK Senior Vice President, Chief
- -------------------------------------
Gregg C. Sengstack February 13, 2004 Financial Officer and Secretary
(Principal Financial and Accounting
Officer)
/s/ JEROME D. BRADY
- -------------------------------------
Jerome D. Brady February 13, 2004 Director
/s/ ROBERT H. LITTLE
- -------------------------------------
Robert H. Little February 13, 2004 Director
/s/ DAVID A. ROBERTS
- -------------------------------------
David Roberts February 13, 2004 Director
/s/ PATRICIA SCHAEFER
- -------------------------------------
Patricia Schaefer February 13, 2004 Director
/s/ DONALD J. SCHNEIDER
- -------------------------------------
Donald J. Schneider February 13, 2004 Director
/s/ HOWARD B. WITT
- -------------------------------------
Howard B. Witt February 13, 2004 Director
<Page> 47
FRANKLIN ELECTRIC CO., INC.
EXHIBIT INDEX TO THE ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 3, 2004
Exhibit
Number Description
- ------ -----------
3.1 Amended and Restated Articles of Incorporation of
Franklin Electric Co., Inc. (incorporated herein by
reference to the Company's Form 10-Q for the quarter
ended April 3, 1999)
3.2 By-Laws of Franklin Electric Co., Inc. as amended
to date
10.1 Rights Agreement dated as of October 15, 1999
between Franklin Electric Co., Inc. and Illinois
Stock Transfer Company (incorporated herein by
reference to the Company's registration
statement on Form 8-A dated October 15, 1999)
10.2 Amended 1988 Executive Stock Purchase Plan
(incorporated herein by reference to the Company's
1998 Proxy Statement for the Annual Meeting held on
April 17, 1998, and included as Exhibit A to the Proxy
Statement)*
10.3 1990 Franklin Electric Non-Employee Director Stock
Option Plan (incorporated herein by reference to
the Company's 1991 Proxy Statement for the Annual
Meeting on April 19, 1991)*
10.4 Franklin Electric Co., Inc. Stock Option Plan.
10.5 Franklin Electric Co., Inc. Key Employee Performance
Incentive Stock Plan (incorporated herein by reference to
the Company's 2000 Proxy Statement for the Annual Meeting
held on April 14, 2000, and included as Exhibit B
to the Proxy Statement)*
10.6 Franklin Electric Co., Inc. Nonemployee Directors' Deferred
Compensation Plan (incorporated herein by reference to Exhibit
10.9 of the Company's Form 10-K for the fiscal year ended December
30, 2000)*
10.7 Amended and Restated Franklin Electric Co., Inc. Pension
Restoration Plan (incorporated herein by reference
to Exhibit 10.9 of the Company's Form 10-K for the fiscal year
ended December 29, 2001)*
10.8 Employment Agreement dated December 3, 2002 between
the Company and Scott Trumbull (incorporated herein by reference
to Exhibit 10.10 of the Company's Form 10-K for the fiscal year
ended December 28, 2002)*
10.9 Employment Agreement dated October 23, 1995 between
<Page> 48
the Company and Jess B. Ford (incorporated herein by
reference to Exhibit 10.7 of the Company's Form 10-K for
the fiscal year ended December 30, 1995)*
10.10 Amended Employment Agreement dated December 20, 2002 between the
Company and Gregg C. Sengstack (incorporated herein by reference
to Exhibit 10.12 of the Company's Form 10-K for the fiscal year
ended December 28, 2002)*
10.11 $60,000,000 Credit Agreement dated as of November 26, 2001
as amended between the Company and various commercial banks
(incorporated herein by reference to Exhibit 10.13 of the
Company's Form 10-K for the fiscal year ended December 29, 2001)
10.12 Amended and Restated Note Purchase and Private Shelf Agreement
dated March 1, 2002 between the Company and the Prudential
Insurance Company of America (incorporated herein by reference to
Exhibit 10.1 of the Company's Form 10-Q for the quarter ended
March 30, 2002)
10.13 Consulting Agreement dated January 31, 2003 between the Company
and William H. Lawson (incorporated herein by reference to Exhibit
10.15 of the Company's Form 10-K for the fiscal year ended
December 28, 2002)*
21 Subsidiaries of the Registrant
22 Independent Auditors' Consent
31.1 Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Chief Executive Officer Certification Pursuant to 18 U.S.C.
Section 1350 As Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
32.2 Chief Financial Officer Certification Pursuant to 18 U.S.C.
Section 1350 As Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
99.1 Forward-Looking Statements
* Management contract or compensatory plan or arrangement
<Page> 49
EXHIBIT 3.2
-----------
Effective as of 1/27/04.
AMENDED AND RESTATED
BY-LAWS OF
FRANKLIN ELECTRIC CO., INC.
ARTICLE I.
OFFICES.
Section 1.1. Principal Office. The principal office of the Corporation
shall be in the City of Bluffton, County of Wells, State of Indiana.
Section 1.2. Other Offices. The Corporation may also have other offices
at such places within or without the State of Indiana as the Board of
Directors may from time to time determine.
Section 1.3. Registered Office and Agent. The Corporation shall
maintain a registered office and registered agent as required by the Indiana
Business Corporation Law, as now or hereafter in effect ("IBCL"). The
registered office need not be the same as the Corporation's principal office.
ARTICLE II.
SHAREHOLDERS.
Section 2.1. Annual Meeting. The annual meeting of the shareholders of
the Corporation shall be held annually on the third Friday in April of each
year 10:00 a.m., local time, at the principal office of the Corporation in
Bluffton, Indiana, or at such other place (either within or without the State
of Indiana) at a date and time as may be fixed by the Board of Directors and
designated in the notice or waiver of notice of such meeting. At the annual
meeting, the directors shall be elected, and all such other business as may
properly be brought before the meeting shall be transacted.
Section 2.2. Special Meetings. Special meetings of the shareholders
may be held at the principal office of the Corporation in Bluffton, Indiana,
or at such other place within or without the State of Indiana, as may be
determined by the Board of Directors and as may be designated in the notice or
waiver of notice of such meeting. Special meetings may be called, in writing,
only by the Chairman, the President, or a majority of the Board of Directors.
Business transacted at any special meeting shall be confined to the purpose or
purposes stated in the notice of such special meeting.
Section 2.3. Notice of Shareholders' Meetings. Notice of each meeting
of shareholders, stating the date, time and place, and, in the case of special
meetings, the purpose or purposes for which such meeting is called, shall be
given to each shareholder entitled to vote thereat not less than ten nor more
than sixty days before the date of the meeting unless otherwise prescribed by
the IBCL.
Section 2.4. Record Dates. (a) In order that the Corporation may
determine the shareholders entitled to notice of or to vote at any meeting of
shareholders or any adjournment thereof, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of shares
or for the purpose of any other lawful action, the Board of Directors may fix,
in advance, a future date as the record date, which shall not be more than 70
days nor less than 10 days before the date of such meeting or any other action
requiring a determination by shareholders.
(b) If a record date has not been fixed as provided in preceding
subsection (a), then:
<Page> 50
(i) The record date for determining shareholders entitled to
notice of or to vote at a meeting of shareholders shall be at the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the day
on which the meeting is held; and
(ii) The record date for determining shareholders for any other
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
(c) Only those who shall be shareholders of record on the record date
so fixed as aforesaid shall be entitled to such notice of, and to vote at,
such meeting and any adjournment thereof, or to receive payment of such
dividend or other distribution, or to receive such allotment of rights, or to
exercise such rights, as the case may be, notwithstanding the transfer of any
shares on the books of the Corporation after the applicable record date;
provided, however, the Corporation shall fix a new record date if a meeting is
adjourned to a date more than one hundred twenty days after the date
originally fixed for the meeting.
Section 2.5. Quorum and Adjournment. At any meeting of the
shareholders the holders of a majority of the outstanding shares of the
Corporation entitled to vote who are present in person or represented by proxy
shall constitute a quorum for the transaction of business unless otherwise
prescribed by the IBCL or the Corporation's Articles of Incorporation, as
amended (the "Articles of Incorporation"). Once a share is represented for
any purpose at a meeting, it is deemed present for quorum purposes for the
remainder of the meeting and for any adjournment of that meeting unless a new
record date is set or is required to be set by the IBCL, the Articles of
Incorporation or these By-Laws.
Whether or not a quorum is present the Chairman of the meeting or
shareholders present in person or represented by proxy representing a majority
of the shares present or represented may adjourn the meeting from time to
time, without notice other than an announcement at the meeting. At any such
adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the original
meeting.
Section 2.6. Voting by Shareholders; Proxies. Every shareholder shall
have the right at every shareholders' meeting to one vote for each share
standing in his name on the books of the Corporation, except as otherwise
provided by the IBCL or the Articles of Incorporation, and except that no
share shall be voted at any meeting upon which any installment is due and
unpaid, or which belongs to the Corporation. Election of directors at all
meetings of the shareholders at which directors are to be elected shall be by
ballot, and a plurality of the votes cast thereat shall be necessary to elect
any Director. Action on a matter (other than the election of directors)
submitted to shareholders entitled to vote thereon at any meeting shall be
approved if the votes cast favoring the action exceed the votes cast opposing
the action, unless a greater number of affirmative votes is required by the
IBCL or by the Articles of Incorporation. A shareholder may vote either in
person or by proxy executed in writing by the shareholder or a duly authorized
attorney in fact. No proxy shall be valid after eleven months from the date of
its execution unless a longer time is expressly provided therein.
Section 2.7. Shareholder List. At lease five business days before each
shareholders' meeting, the Secretary of the Corporation shall make, or cause
to be made, an alphabetical list of the names of the shareholders entitled to
notice of and to vote at the meeting, arranged by voting group (and within
each voting group by class or series of shares) and showing the address of and
the number of shares held by each shareholder.
Beginning five business days before the date of the meeting and
continuing through the meeting, the list shall be on file at the principal
office of the Corporation (or at the place identified in the meeting notice in
<Page> 51
the city where the meeting will be held) and shall be available for inspection
by any shareholder entitled to vote at the meeting for the purpose and to the
extent permitted by law. During this period a shareholder, or the
shareholder's agent or attorney authorized in writing, is entitled on written
demand to inspect and copy the list during regular business hours and at the
shareholder's expense.
Section 2.8. Conduct of Business. (a) Presiding Officer. The Chairman
of the Board of Directors, when present, and in the absence of the Chairman
the President, shall be the presiding officer at all meetings of shareholders,
and in the absence of the Chairman and the President, the Board of Directors
shall choose a presiding officer. The presiding officer of the meeting shall
have plenary power to determine procedure and rules of order (including with
respect to the opening and the closing of the polls for each matter upon which
shareholders will vote at the meeting) and make definitive rulings at meetings
of the shareholders.
(b) Annual Meetings of Shareholders. (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
of shareholders (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 was a shareholder of record at the time of giving of notice
provided for in this Section 2.8, who is entitled to vote at the meeting and
who complies with the notice procedures set forth in this Section 2.8.
(ii) For director nominations or other business to be properly
brought before any annual meeting by a shareholder pursuant to clause (C) of
paragraph (b)(i) of this Section 2.8, 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 delivered to the Secretary at the principal
business office of the Corporation not later than ninety days prior to the
first anniversary of the preceding year's annual meeting; provided, however,
that in the event that the date of the annual meeting is advanced by more than
thirty days or delayed by more than sixty days from such anniversary date,
notice by the shareholder to be timely must be so delivered not later than the
ninetieth day prior to such annual meeting or the tenth day following the day
on which public announcement of the date of such meeting is first made. Such
shareholder's notice shall set forth (A) as to each person whom the
shareholder proposes to nominate for election or reelection as a director all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required,
in each case pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended (the "Exchange Act") (including such person's written consent
to being named in the proxy statement as a nominee and to serving as a
director if elected); (B) as to any other business that the shareholder
proposes to bring before the meeting, a brief description of the business
desired to be brought before the meeting, the reasons for conducting such
business at the meeting and any material interest in such business of such
shareholder and the beneficial owner, if any, on whose behalf the proposal is
made; and (C) as to the shareholder giving the notice and the beneficial
owner, if any, on whose behalf the nomination or proposal is made (x) the name
and address of such shareholder, as they appear on the Corporation's books,
and of such beneficial owner and (y) the class and number of shares of the
Corporation which are owned beneficially and of record by such shareholder and
such beneficial owner.
(iii) The notice procedures of this Section 2.8 shall not apply to
any annual meeting if the Corporation shall not have set forth in its proxy
statement for the preceding annual meeting of shareholders the date by which
notice of nominations by shareholders of persons for election as directors or
of other business proposed to be brought by shareholders at the next annual
<Page> 52
meeting of shareholders must be received by the Corporation to be considered
timely pursuant to this Section 2.8
(c) Special Meetings of Shareholders. Only such business shall be
conducted at a special meeting of shareholders as shall have been brought
before the meeting pursuant to the Corporation's notice of meeting.
Nominations of persons for election to the Board of Directors may be made at a
special meeting of shareholders at which directors are to be elected pursuant
to the Corporation's notice of meeting (A) by or at the direction of the Board
of Directors or (B) by any shareholder of the Corporation who was a
shareholder of record at the time of giving of notice provided for in this
Section 2.8, who is entitled to vote at the meeting and who complies with the
notice procedures set forth in this Section 2.8. Nominations by shareholders
of persons for election to the Board of Directors may be made at such a
special meeting of shareholders if a shareholder's notice containing the
information set forth in paragraph (b)(ii) of this Section 2.8 shall be
delivered to the Secretary at the principal executive offices of the
Corporation not later than the 90th day prior to such special meeting or the
tenth day following the date on which public announcement is first made of the
date of the special meeting and of the nominees proposed by the Board of
Directors to be elected at such meeting.
(d) General. (i) Only such persons who are nominated in accordance with
the procedures set forth in this Section 2.8 shall be eligible to serve as
directors and only such business shall be conducted at a meeting of
shareholders as shall have been brought before the meeting in accordance with
the procedures set forth in this Section 2.8. The presiding officer at 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 2.8 and, if any proposed nomination
or business is not in compliance with this Section 2.8, to declare that such
defective proposal shall be disregarded.
(ii) For purposes of this Section 2.8, "public announcement"
shall mean disclosure in a press release reported by the Dow Jones News
Service, Associated Press or comparable national news service or a document
publicly filed by the Corporation with the Securities and Exchange Commission
pursuant to Sections 13, 14 or 15(d) of the Exchange Act.
(iii) Notwithstanding the foregoing provisions of this Section
2.8, 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 2.8. Nothing in this Section 2.8 shall be
deemed to affect any rights of shareholders to request inclusion of proposals
in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange
Act.
Section 2.9. Organization of Meetings. The Secretary, who may call on
any officer or officers of the Corporation for assistance, shall make all
necessary and appropriate arrangements for all meetings of shareholders,
receive all proxies and ascertain and report to each meeting of shareholders
the number of shares present, in person and by proxy. The certificate and
report of the Secretary, as to the regularity of such proxies and as to the
number of shares present, in person and by proxy, shall be received as prima
facie evidence of the number of shares present in person and by proxy for the
purpose of establishing the presence of a quorum at such meeting and for
organizing the same, and for all other purposes.
Section 2.10. Inspectors. At every meeting of shareholders there shall
be appointed by the Board of Directors three inspectors of election to receive
and count the votes of shareholders. Each inspector shall take an oath to
fairly and impartially perform the duties of an inspector of the election and
to honestly and truly report the results thereof. Such inspectors shall be
responsible for tallying and certifying the vote taken on any matter at each
meeting which is required to be tallied and certified by them in the
<Page> 53
resolution of the Board of Directors appointing them or the appointment of the
presiding officer at such meeting as the case may be. Except as otherwise
provided by these By-Laws or by law, such inspectors shall also decide all
questions touching upon the qualification of voters, the validity of proxies
and ballots, and the acceptance and rejection of votes. The Board of Directors
shall have the authority to make rules establishing presumptions as to the
validity and sufficiency of proxies.
ARTICLE III.
DIRECTORS.
Section 3.1. Number and Classes. The Board of Directors shall consist
of no more than ten and no fewer than five members, the actual number to be
set by the Board by resolution. Subject to the rights of the holders of any
series of Preferred Stock outstanding, the directors shall be divided into
three classes, designated as Class I, Class II and Class III, respectively,
which at all times shall be as nearly equal in number as possible. One class
of directors shall be elected annually to serve for a term of three years or
until their successors shall have been elected and qualified.
Section 3.2. Resignation, Vacancies and Removal of Directors. Any
director may resign his office at any time by delivering his resignation in
writing to the Board of Directors, its Chairman, or the Secretary of the
Corporation, and the acceptance of such resignation, unless required by the
terms thereof, shall not be necessary to make such resignation effective. The
resignation shall be effective when the notice is delivered unless the notice
specifies a later effective date. If any vacancy occurs on the Board of
Directors caused by resignation, death, or other incapacity, or increase in
the number of directors, then (a) the Board of Directors may fill the vacancy;
or (b) if the directors remaining in office constitute fewer than a quorum of
the Board, they may fill the vacancy by the affirmative vote of a majority of
all directors remaining in office; or (c) if a majority of the directors
remaining in office are unable to agree on a person to fill the vacancy, then
the remaining directors may call a special shareholders' meeting to fill the
vacancy. The term of a director elected to fill a vacancy expires at the end
of the term for which the director's predecessor was elected. Prior to the
completion of their term of office, a director may only be removed in the
manner as provided in the Articles of Incorporation.
Section 3.3. Regular Meetings. A regular meeting of the Board of
Directors will be held at the place of (or reasonably near thereto) and
promptly following the annual meeting of the shareholders. At the annual
meeting, the Board shall elect the officers of the Corporation for the ensuing
year and transact such other business as may properly come before the meeting.
Other regular meetings may be held at the principal office of the Corporation
or at any other place and at such times as the Board may fix from time to
time. Notice shall be given in accordance with Article IV of these By-Laws.
Section 3.4. Special Meetings. Special meetings of the Board of
Directors shall be held at the principal office of the Corporation or at any
other place reasonably convenient for directors to attend whenever called by
the Chairman or the President or a majority of the Board of Directors. Notice
shall be given in accordance with the Article IV of these By-Laws.
Section 3.5. Quorum and Voting. Except as provided in Section 3.2, a
majority of the actual number of directors elected and qualified from time to
time shall be necessary to constitute a quorum for the transaction of any
business at any meeting of the Board of Directors. The affirmative vote of a
majority of the directors present at a meeting at which a quorum is present
shall be the act of the Board of Directors, unless the act of a greater number
is expressly required by the IBCL, the Articles of Incorporation, or these By-
<Page> 54
Laws. If a quorum shall not be present at any meeting of the Board of
Directors, the directors present may adjourn the meeting from time to time,
without notice other than an announcement at the meeting, until a quorum is
present.
Section 3.6. Compensation. Each member of the Board of Directors shall
be paid such compensation as shall be fixed by the Board of Directors,
provided, that nothing herein contained shall be construed to preclude any
director from serving in any other capacity and receiving compensation
therefore.
Section 3.7. Qualification. Upon attaining the age of seventy years, a
director shall submit a written notice of resignation to the Board of
Directors effective as of the end of the next regularly scheduled meeting of
the Board of Directors. Any employee director (other than the President or
Chairman) whose employment with the Corporation is terminated prior to
attaining the age of seventy years shall submit a written notice of
resignation to the Board of Directors effective immediately. The Board, at
its discretion, may determine not to accept, or may defer the effective date
of, any resignation received pursuant to this Section 3.7. In addition, any
person who first becomes a director of the Company after December 12, 2003
shall be limited to a term of twelve consecutive years as a director of the
Company.
Section 3.8. Committees. (a) The Board of Directors may from time to
time, in its discretion, by resolution passed by a majority of the Board,
designate, and appoint, from the directors, committees of one or more persons
which shall have and may exercise such lawfully delegable powers and duties
conferred or authorized by the resolutions of designation and appointment. The
Board of Directors shall have power at any time to change the members of any
such committee, to fill vacancies, and to discharge any such committee.
(b) Unless the Board of Directors shall provide otherwise, the presence
of one-half of the total membership of any committee of the Board of Directors
shall constitute a quorum for the transaction of business at any meeting of
such committee and the affirmative vote of a majority of those present shall
be necessary and sufficient for the taking of any action thereat.
Section 3.9. Directors' or Committee Action by Consent in Lieu of
Meeting. Any action required or permitted to be taking at any meeting of the
Board of Directors or any committee thereof may be taken without a meeting if
the action is taken by all members of the Board or such committee as the case
may be. The action shall be evidenced by one or more written consents
describing the action taken, signed by each director, and included in the
minutes or filed with the Corporation's records reflecting the action taken.
Any such written consent is effective when the last director signs the
consent, unless the consent specifies a different prior or subsequent
effective date.
Section 3.10. Meetings by Telephone or Other Communications. Members of
the Board of Directors, or any committee of the Board, may participate in a
meeting of the Board or such committee by means of telephone or other
communication by which all directors participating may simultaneously hear
each other during the meeting. A director participating in a meeting by this
means is deemed to be present in person at the meeting.
Section 3.11. Assent by Director to Action Taken at a Meeting. A
director who is present at a meeting of the Board of Directors or a committee
of the Board at which action on any corporate matter is taken is deemed to
have assented to the action taken unless:
(a) The director objects at the beginning of the meeting (or
promptly upon the director's arrival) to holding it or transacting
business at the meeting;
(b) The director's dissent or abstention from the action taken is
entered in the minutes of the meeting; or
(c) The director delivers written notice of the director's
<Page> 55
dissent or abstention to the presiding officer of the meeting before its
adjournment or to the Secretary of the Corporation immediately after
adjournment of the meeting.
The right of dissent or abstention is not available to a director who votes in
favor of the action taken.
ARTICLE IV.
NOTICES.
Section 4.1. Notices. Notices to directors and shareholders shall be in
writing and delivered personally or mailed to their addresses appearing on the
records of the Corporation or, with respect to directors only, by telegram,
cable, telephone, telecopy, facsimile or a nationally recognized overnight
delivery service. Notice to directors of special meetings by mail shall be
given at least two days before the meeting. Notice to directors of special
meetings by personal delivery, telegram, cable, telephone, telecopy or
facsimile shall be given a reasonable time before the meeting, but in no event
less than one hour before the meeting. Notice by mail or recognized overnight
delivery service shall be deemed to be given when sent to the director at his
or her address appearing on the records of the Corporation. Notice by telegram
or cable shall be deemed to be given when the telegram or cable addressed to
the director at his or her address appearing on the records of the Corporation
is delivered to the telegraph company. Notice by telephone, telecopy or
facsimile shall be deemed to be given when transmitted by telephone, telecopy
or facsimile to the telephone, telecopy or facsimile number appearing on the
records of the Corporation for the director (regardless of whether the
director shall have personally received such telephone call or telecopy or
facsimile message).
Section 4.2. Waiver of Notice. Whenever any notice is required, a
waiver thereof signed by the person entitled to such notice, whether before or
after the time stated therein, and filed with the minutes or corporate
records, shall be deemed equivalent to the giving of notice. Attendance of any
person at any meeting of shareholders or directors shall constitute a waiver
of notice of such meeting, except when such person attends only for the
express purpose of objecting, at the beginning of the meeting (or in the case
of a director's meeting, promptly upon such director's arrival), to the
transaction of any business at the meeting and does not thereafter vote for or
assent to action taken at the meeting.
ARTICLE V.
OFFICERS.
Section 5.1. Officers (Including Removal). The officers of the
Corporation may consist of a Chairman of the Board, a President, one or more
Vice Presidents, a Treasurer, and a Secretary, all of whom shall be elected by
the Board of Directors of the Corporation at the first meeting thereof
immediately following the annual meeting of the shareholders (or at such other
time as the Board deems appropriate), and shall hold office until their
successors are elected and qualify. One person may hold more than one office.
The Board of Directors shall have the power from time to time to appoint such
other officers as may be necessary for the proper conduct of the business of
the Corporation. Any officer elected or appointed by the Board of Directors
may be removed at any time with or without cause by the affirmative vote of a
majority of the whole Board of Directors.
Section 5.2. Compensation. The compensation of the officers of the
Corporation elected or appointed by the Board of Directors, shall be fixed by
the Board of Directors or a committee of the Board.
Section 5.3. Chairman. The Chairman shall be the chief executive
officer of the Corporation and shall have general authority and supervision
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over the management and direction of the affairs of the Corporation and
supervision of all departments and of all officers of the Corporation. The
Chairman shall, subject to the other provisions of these By-Laws, have such
other powers and perform such other duties as usually devolve upon the chief
executive officer of a corporation or as may be prescribed by the Board of
Directors, and shall, when present, preside at all meetings of the
shareholders and of the Board of Directors. In case of the absence,
disability, death, resignation or removal from office of the Chairman, the
powers and duties of the Chairman shall, for the time being, devolve upon and
be exercised by the President, unless otherwise ordered by the Board of
Directors.
Section 5.4. President. The President shall be the chief operating
officer of the Corporation and shall have such general authority and
supervision over the management and direction of the affairs of the
Corporation, subject to the authority of the Chairman. The President shall,
subject to the other provisions of these By-Laws, have such other powers and
perform such other duties as usually devolve upon the President of a
corporation, and such further duties as may be prescribed by the Chairman or
the Board of Directors. In case of the absence, disability, death, resignation
or removal from office of the President, the powers and duties of the
President shall, for the time being, devolve upon and be exercised by the
Chairman, and in case of the absence, disability, death, resignation, or
removal from office of both the Chairman and the President, the powers and
duties of the President shall, for the time, being devolve upon and be
exercised by the Vice President so appointed by the Board of Directors.
Section 5.5. Vice Presidents. Each of the Vice Presidents shall have
such powers and duties as may be prescribed by the Board of Directors, the
Chairman or the President. The Board of Directors, the Chairman or the
President may designate one or more of such Vice Presidents as Executive Vice
President, Senior Vice President or Assistant Vice President.
Section 5.6. Secretary. The Secretary shall attend and keep the minutes
of all meetings of the Board of Directors and of the shareholders. The
Secretary shall have charge and custody of the corporate records and corporate
seal of the Corporation, and shall in general perform all duties incident to
the office of secretary of a corporation, subject at all times to the
direction and control of the Board of Directors, the Chairman and the
President.
Section 5.7. Treasurer. The Treasurer shall have charge of, and shall
be responsible for, the collection, receipt, custody and disbursement of the
funds of the Corporation, and shall also have the custody of all securities
belonging to the Corporation. The Treasurer shall disburse the funds of the
Corporation as may be ordered by the Board of Directors, taking proper
receipts or making proper vouchers for such disbursements, and shall at all
times preserve the same during the term of office. When necessary or proper,
the Treasurer shall endorse, on behalf of the Corporation, all checks, notes,
or other obligations payable to the Corporation or coming into possession of
the Treasurer for and on behalf of the Corporation, and shall deposit the
funds arising therefrom, together with all other funds of the Corporation
coming into possession of the Treasurer, in the name and to the credit of the
Corporation in such bank or banks as the Board of Directors shall from time to
time by resolution direct. The Treasurer shall perform all duties incident to
the office of treasurer of a corporation, subject at all time to the direction
and control of the Board of Directors, the Chairman and the President.
ARTICLE VI.
CAPITAL STOCK.
Section 6.1. Certificates for Shares. Unless the Articles of
Incorporation provide otherwise, all shares of stock of the Corporation shall
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be represented by a certificate. The certificates for shares of the
Corporation shall be in such form not inconsistent with the Articles of
Incorporation and the IBCL and as shall be approved by the Board of Directors.
At a minimum, each certificate for shares must state on its face:
(a) The name of the Corporation and that it is organized under
the law of the State of Indiana;
(b) The name of the person to whom issued; and
(c) The number and class of shares and the designation of the
series, if any, the certificate represents.
Each certificate must be signed (either manually or in facsimile) by the
Chairman or the President and Secretary or such other two officers as may be
designated by the Board. Share certificates which have been signed (whether
manually or in facsimile) by officers may be used and shall continue to be
valid even though any individual whose signature appears on a certificate
shall no longer be an officer of the Corporation at the time of the issue of
the certificate.
Section 6.2. Registration of Transfer and Registered Shareholders.
Registration of transfer of shares and issuance of a new certificate or
certificates therefor shall be made only upon surrender to the Corporation or
its transfer agent and cancellation of a certificate or certificates for a
like number of shares of the same class, properly endorsed for transfer,
accompanied by (a) such assurance as the Corporation or transfer agent may
require as to the genuineness and effectiveness of each necessary endorsement,
(b) satisfactory evidence of compliance with all laws relating to collection
of taxes, and (c) satisfactory evidence of compliance with or removal of any
restriction on transfer of which the Corporation or transfer agent may have
notice.
As respects the Corporation, its stock record books shall be conclusive as to
the ownership of its shares for all purposes and the Corporation shall not be
bound to recognize adverse claims.
Section 6.3. Consideration for Issue of Shares. The shares of the
capital stock of the Corporation may be issued by the Corporation from time to
time for such an amount of consideration as may be fixed by the Board of
Directors and consisting of any tangible or intangible property or benefit to
the Corporation, including cash, promissory notes, services performed,
contracts for services to be performed, or other securities of the
Corporation. When payment of the consideration for which any share was
authorized to be issued shall have been received by the Corporation, the
shares issued therefor shall be fully paid and nonassessable. Shares may be
issued to the Corporation's shareholders without consideration to the extent
permitted by the IBCL and shares so issued shall be fully paid and
nonassessable. If the Corporation authorizes the issuance of shares for
promissory notes or for promises to render services in the future, the
Corporation shall report in writing to the shareholders the number of shares
authorized to be issued with or before the notice of the next shareholders'
meeting. The Board may (but is not required) to place in escrow shares issued
for a contract for future services or benefits or a promissory note or may
make such other arrangements or conditions or place such other restrictions on
the transfer of the shares until the services are performed, the note is paid,
or the benefits are received.
Section 6.4. Lost, Stolen or Destroyed Certificates. No certificate for
shares of the capital stock of the Corporation shall be issued in place of any
certificate alleged to have been lost, stolen or destroyed except upon proper
evidence to the satisfaction of the Board of Directors of such loss, theft, or
destruction, and (unless waived by the Board of Directors) except upon
delivery to the Corporation of a bond of indemnity in such amount as may be
fixed by the Board of Directors, executed by the person to whom the new
certificate or certificates should be issued and also by a surety company
approved by the Board of Directors, indemnifying the Corporation against any
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claim upon or in respect of such lost, stolen, or destroyed certificate;
provided, however, that whenever this Corporation has a duly appointed,
qualified and acting transfer agent for its said shares, the Board of
Directors may delegate to said transfer agent the authority to determine the
sufficiency of the proof of such loss, theft or destruction and to issue new
certificate or certificates in replacement thereof, and the Board of Directors
may waive the necessity of obtaining a separate bond of indemnity in
connection with the issuance of each certificate replacing such lost, stolen
or destroyed certificates and in lieu thereof may authorize such transfer
agent to obtain a blanket lost original instruments bond naming this
Corporation and such transfer agent as the obligees therein.
Section 6.5. Transfer Agent and Registrars. The Board of Directors may
from time to time appoint a transfer agent and a registrar in one or more
cities, may require all certificates evidencing shares of the Corporation to
bear signatures of a transfer agent and a registrar, may provide that such
certificates shall be transferable in more than one city, and may provide for
the functions of transfer agent and registrar to be combined in one agency.
ARTICLE VII.
CONDUCT OF BUSINESS.
Section 7.1. Contracts, Deeds and Other Instruments. All agreements
evidencing obligations of the Corporation, including but not limited to
contracts, trust deeds, promissory notes, sight drafts, time drafts and
letters of credit (including applications therefor), may be signed by any one
of the Chairman, the President, any Vice President, the Treasurer, the
Secretary, and any person authorized by a resolution of the Board of
Directors.
A certified copy of these By-Laws and/or any authorization given
hereunder may be furnished as evidence of the authorities herein granted, and
all persons shall be entitled to rely on such authorities in the case of a
specific contract, conveyance or other transaction without the need of a
resolution of the Board of Directors specifically authorizing the transaction
involved.
Section 7.2. Checks. Checks and other negotiable instruments for the
disbursement of Corporation funds may be signed by any one of the Chairman,
the President, any Vice President and the Treasurer. In addition to the
foregoing, other persons may sign instruments for the disbursement of
Corporation funds under written authorization signed by any two of the
foregoing officers acting jointly. Electronic or wire transfers of funds may
be authorized by any officer of the Corporation who is authorized pursuant to
this Section 7.2 to disburse Corporation funds by check or other negotiable
instrument.
Section 7.3. Deposits. Securities, notes and other evidences of
indebtedness shall be kept in such places, and deposits of checks, drafts and
funds shall be made in such banks, trust companies or depositories, as shall
be recommended and approved by any two of the Chairman, the President, any
Vice President and the Treasurer.
Section 7.4. Voting of Stock. Unless otherwise ordered by the Board of
Directors, the Chairman, the President or any Vice President shall have the
power to execute and deliver on behalf of the Corporation proxies on stock
owned by the Corporation appointing a person or persons to represent and vote
such stock at any meeting of stockholders, with full power of substitution,
and shall have power to alter or rescind such appointment. Unless otherwise
ordered by the Board of Directors, the Chairman, the President or any Vice
President shall have the power on behalf of the Corporation to attend and to
act and vote at any meeting of stockholders of any corporation in which the
Corporation holds stock and shall possess and may exercise any and all rights
and powers incident to the ownership of such stock, which, as the owner
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thereof, the Corporation might have possessed and exercised if present. The
Board of Directors may confer like powers upon any other person or persons.
Section 7.5. Transfer of Stock. Such form of transfer or assignment
customary or necessary to effect a transfer of stocks or other securities
standing in the name of the Corporation shall be signed by the Chairman, the
President, any Vice President or the Treasurer, and the Secretary shall sign
as witness if required on the form. A corporation or person transferring any
such stocks or other securities pursuant to a form of transfer or assignment
so executed shall be fully protected and shall be under no duty to inquire
whether the Board of Directors has taken action in respect thereof.
ARTICLE VIII
INDEMNIFICATION.
Section 8.1. Definitions. As used in this Article VIII:
(a) "Director" means an individual who is or was a director of the
Corporation or an individual who, while a director of the Corporation, is or
was serving at the Corporation's request as a director, officer, partner,
member, manager, trustee, employee, or agent of another foreign or domestic
corporation, partnership, limited liability company, joint venture, trust,
employee benefit plan, or other enterprise, whether for profit or not. A
director is considered to be serving an employee benefit plan at the
Corporation's request if the director's duties to the Corporation also impose
duties on, or otherwise involve services by, the director to the plan or to
participants in or beneficiaries of the plan. "Director" includes, unless the
context requires otherwise, the estate or personal representative of a
director.
(b) "Expenses" include counsel fees.
(c) "Liability" means the obligation to pay a judgment, settlement,
penalty, fine (including an excise tax assessed with respect to an employee
benefit plan), or reasonable expenses incurred with respect to a proceeding.
(d) "Officer" means an individual who is or was an officer of the
Corporation or an individual who, while an officer of the Corporation, is or
was serving at the Corporation's request as a director, officer, partner,
member, manager, trustee, employee, or agent of another foreign or domestic
corporation, partnership, limited liability company, joint venture, trust,
employee benefit plan, or other enterprise, whether for profit or not. An
officer is considered to be serving an employee benefit plan at the
Corporation's request if the officer's duties to the Corporation also impose
duties on, or otherwise involve services by, the officer to the plan or to
participants in or beneficiaries of the plan. "Officer" includes, unless the
context requires otherwise, the estate or personal representative of an
officer.
(e) "Official capacity" means:
(1) When used with respect to a director, the office of director
in the Corporation;
(2) When used with respect to an officer, the office of the
Corporation held by the officer; and
(3) When used with respect to an individual other than an
officer or director, the employment or agency relationship undertaken by
the employee or agent on behalf of the Corporation.
"Official capacity" does not include service for any other foreign or domestic
corporation or any partnership, limited liability company, joint venture,
trust, employee benefit plan, or other enterprise, whether for profit or not.
(f) "Party" includes an individual who was, is, or is threatened to be
made a named defendant or respondent in a proceeding.
(g) "Proceeding" means any threatened, pending, or completed action,
suit, or proceeding, whether civil, criminal, administrative, or investigative
and whether formal or informal.
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Section 8.2. Indemnification.
(a) The Corporation shall indemnify an individual made a party
to a proceeding because the individual is or was a director or officer
against any liability incurred in the proceeding if:
(1) the individual's conduct was in good faith; and
(2) the individual reasonably believed:
(A) in the case of conduct in the individual's
official capacity with the Corporation, that the
individual's conduct was in the Corporation's best
interests; and
(B) In all other cases, that the individual's
conduct was at least not opposed to the Corporation's best
interest; and
(3) In the case of any criminal proceeding, the individual
either:
(A) Had reasonable cause to believe the individual's
conduct was lawful; or
(B) Had no reasonable cause to believe the
individual's conduct was unlawful.
(b) A director's or officer's conduct with respect to an employee
benefit plan for a purpose the director or officer reasonably believed to be
in the interests of the participants in and beneficiaries of the plan is
conduct that satisfies the requirement of subsection (a)(2)(B) of this Section
8.2.
(c) The termination of a proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent is not, of
itself, determinative that the director or officer did not meet the standard
of conduct described in this Section 8.2.
Section 8.3. Additional Indemnification. In addition to the
indemnification to which a director or officer may be entitled pursuant to
Section 8.2, the Corporation shall indemnify a director or officer who was
wholly successful, on the merits or otherwise, in the defense of any
proceeding to which the director or officer was a party because the director
or officer was a director or officer of the Corporation against reasonable
expenses incurred by the director or officer in connection with the
proceeding.
Section 8.4. Advance Indemnification.
(a) The Corporation shall pay for or reimburse the reasonable expenses
incurred by a director or officer who is a party to a proceeding in advance of
final disposition of the proceeding if:
(1) The director or officer furnishes the Corporation a written
affirmation of the director's or officer's good faith belief that the
director or officer has met the standard of conduct described in Section
8.2.
(2) The director or officer furnishes the Corporation a written
undertaking, executed personally or on the director's or officer's behalf, to
repay the advance if it is ultimately determined that the director or officer
did not meet the standard of conduct;
and
(3) A determination is made that the facts then known to those
making the determination would not preclude indemnification under this Article
VIII.
(b) The undertaking required by subsection (a)(2) of this Section 8.4
must be an unlimited general obligation of the director or officer but need
not be secured and may be accepted without reference to financial ability to
make repayment.
(c) Determinations and authorizations of payments under this section
shall be made in the manner specified in Section 8.5 below.
Section 8.5. Procedure for Determining Indemnification.
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(a) The Corporation may not indemnify a director or officer under
Section 8.2 of this Article VIII unless authorized in the specific case after
a determination has been made that indemnification of the director or officer
is required in the circumstances because the director or officer has met the
standard of conduct set forth in Section 8.2 of this Article VIII.
(b) The determination shall be made by any one of the following
procedures:
(1) By the board of director by majority vote of a quorum
consisting of directors not at the time parties to the proceeding.
(2) If a quorum cannot be obtained under subdivision (1), by
majority vote of a committee duly designated by the board of directors
(in which designation directors who are parties may participate),
consisting solely of two or more directors not at the time parties to
the proceeding.
(3) By special legal counsel:
(A) Selected by the board of directors or its committee in
the manner prescribed in subdivision (1) or (2); or
(B) If a quorum of the board of directors cannot be
obtained under subdivision (1) and a committee cannot be
designated under subdivision (2), selected by majority vote of the
full board of directors (in which selection directors who are
parties may participate).
(4) By the shareholders, but shares owned by or voted under the
control of directors who are at the time parties to the proceeding may not be
voted on the determination.
(c) Authorization of indemnification and evaluation as to
reasonableness of expenses shall be made in the same manner as the
determination that indemnification under Section 8.2 is required, except that
if the determination is made by special legal counsel, authorization of
indemnification and evaluation as to reasonableness of expenses shall be made
by those entitled under subsection (b)(3) of this Section 8.5 to select
counsel.
Section 8.6. Indemnification of Agents and Employees.
(a) The Corporation may indemnify and advance expenses under this
Article VIII to an employee, or agent of the Corporation, whether or not an
officer or director, to the same extent as to a director or officer; and
(b) The Corporation may also indemnify and advance expenses to an
officer, employee or agent, whether or not a director, to the extent,
consistent with public policy, that may be provided by the Articles of
Incorporation, general or specific action of the Board of Directors, or
contract.
Section 8.7. Indemnification Not Exclusive.
(a) The indemnification and advance for expenses provided for or
authorized by this Article VIII does not exclude any other rights to
indemnification and advance for expenses that a person may have under:
(1) the IBCL;
(2) the Corporation's Article of Incorporation or By-Laws;
(3) a resolution of the board of directors or of the
shareholders;
(4) any contract or policy of insurance; or
(5) any other authorization, whenever adopted, after notice, by
a majority vote of all the voting shares then issued and outstanding.
(b) Without limiting the foregoing subsection (a), nothing contained
in this Article VIII shall be construed to limit in any manner the
indemnification or advance for expenses that may be permitted or required, in
the absence of the provisions of this Article VIII, pursuant to the IBCL.
(c) This Article VIII does not limit the Corporation's power to pay or
reimburse expenses incurred by a director, officer, employee, or agent in
connection with the person's appearance as a witness in a proceeding at a time
<Page> 62
when the person has not been made a named defendant or respondent to the
proceeding.
Section 8.8. Insurance. The Corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the Corporation or who while a director, officer, employee or
agent of the Corporation is or was serving at the request of the Corporation
as a director, officer, partner, member, manager, trustee, employee, or agent
of another foreign or domestic corporation, partnership, limited liability
company, joint venture, trust, employee benefit plan, or other enterprise,
against any liability asserted against him or her and incurred by him or her
in any such capacity, or arising out of his or her status as such, whether or
not the Corporation would have the power to indemnify him or her against such
liability under the provisions of this Article VIII or under the IBCL.
Section 8.9. Contract With The Corporation. The provisions of this
Article VIII shall be deemed to be a contract between the Corporation and each
director or officer who serves in any such capacity at any time while this
Article VIII is in effect, and any repeal or modification of any provisions of
this Article VIII shall not affect any rights or obligations theretofore
accruing under this Article VIII with respect to any state of facts then or
theretofore existing or any claim, action, suit or proceeding theretofore or
thereafter brought or threatened based in whole or in part upon any such state
of facts.
ARTICLE IX.
SEAL.
If a corporate seal is used, it shall have inscribed thereon the name
"Franklin Electric Co., Inc." around the circumference thereof and the word
"Seal" in the center thereof. The seal can be used by causing it or a
facsimile thereof to be impressed, affixed, reproduced or otherwise.
ARTICLE X.
FISCAL YEAR.
The fiscal year of the Corporation shall end with the Saturday nearest
to December 31 and begin with the Sunday following the Saturday nearest to
December 31.
ARTICLE XI.
AMENDMENT.
These By-Laws may be amended by the Board of Directors, by the
affirmative vote of a majority of all the members of the Board of Directors,
at any regular or special meeting, notice of which contains the proposed
amendment or a digest thereof; or at any meeting, regular or special, at which
all directors are present, or by the written consent of all directors pursuant
to Section 3.2 of Article III of these By-Laws.
ARTICLE XII.
CONTROL SHARES.
The terms "control shares" and "control share acquisition" used in this
Article XII shall have the meanings set forth in Indiana Business Corporation
Law Section 23-1-42-1, ET SEQ. (the "Act"). Control shares of the Corporation
acquired in a control share acquisition shall have only such voting rights as
are conferred by the Act.
<Page> 63
Control shares of the Corporation acquired in a control share
acquisition with respect to which the acquiring person has not filed with the
Corporation the acquiring person statement required by the Act may, at any
time during the period ending sixty days after the last acquisition of control
shares by the acquiring person, be redeemed by the Corporation at the fair
value thereof pursuant to procedures authorized by a resolution of the Board
of Directors. Such authority may be exercised generally or confined to
specific instances.
Control shares of the Corporation acquired in a control share
acquisition with respect to which the acquiring person was not granted full
voting rights by the shareholders as provided in the Act may, at any time
after the shareholder vote required by the Act, be redeemed by the Corporation
at the fair value thereof pursuant to procedures authorized by a resolution of
the Board of Directors. Such authority may be exercised generally or confined
to specific instances.
<Page> 64
Exhibit 10.4
------------
FRANKLIN ELECTRIC CO., INC.
STOCK OPTION PLAN
(AS AMENDED AND RESTATED EFFECTIVE APRIL 25, 2003)
TABLE OF CONTENTS PAGE
ARTICLE 1. AMENDMENT AND RESTATEMENT............................1
ARTICLE 2. DEFINITIONS..........................................2
ARTICLE 3. ADMINISTRATION.......................................5
ARTICLE 4. SHARES SUBJECT TO THE PLAN AND MAXIMUM AWARDS........6
ARTICLE 5. ELIGIBILITY AND PARTICIPATION........................6
ARTICLE 6. STOCK OPTIONS........................................7
ARTICLE 7. TANDEM STOCK APPRECIATION RIGHTS.....................8
ARTICLE 8. BENEFICIARY DESIGNATION.............................10
ARTICLE 9. RIGHTS OF EMPLOYEES AND NONEMPLOYEE DIRECTORS.......10
ARTICLE 10.CHANGE IN CONTROL...................................11
ARTICLE 11.AMENDMENT, MODIFICATION, AND TERMINATION............11
ARTICLE 12.WITHHOLDING.........................................12
ARTICLE 13.INDEMNIFICATION.....................................12
ARTICLE 14.SUCCESSORS..........................................13
ARTICLE 15.LEGAL CONSTRUCTION..................................13
ARTICLE 16.PLAN PROVISIONS APPLICABLE TO GRANTS MADE UNDER THE
NONEMPLOYEE DIRECTOR OPTION PLAN....................13
<Page> 65
FRANKLIN ELECTRIC CO., INC.
STOCK OPTION PLAN
(AS AMENDED AND RESTATED EFFECTIVE APRIL 25, 2003)
ARTICLE 1.
AMENDMENT AND RESTATEMENT
1.1 AMENDMENT AND RESTATEMENT. Franklin Electric Co., Inc., an Indiana
corporation (the "Company") established the Franklin Electric Co., Inc. 1996
Employee Stock Option Plan (the "Employee Option Plan"), effective as of July
1, 1995, and the Franklin Electric Co., Inc. Amended and Restated 1996
Nonemployee Director Stock Option Plan (the "Nonemployee Director Option
Plan"), effective as of February 11, 2000. The Company hereby amends and
restates the Employee Option Plan to (i) merge the Nonemployee Director Option
Plan into the amended and restated Employee Option Plan, (ii) change the name
of the Employee Option Plan to the "Franklin Electric Co., Inc. Stock Option
Plan" (the "Plan"), and (iii) make other desired changes as provided herein.
The amendment and restatement of the Employee Option Plan, as reflected
herein, was adopted by the Board of Directors on December 13, 2002 and,
subject to approval of the shareholders of the Company at the 2003 annual
meeting of shareholders, shall become effective on April 25, 2003 (the
"Effective Date"). The amendment and restatement of the Employee Option Plan,
as reflected herein, shall be null and void if shareholder approval is not
obtained.
1.2 OBJECTIVES OF THE PLAN. The objectives of the Plan are to: (i)
optimize the profitability and growth of the Company through incentives which
are consistent with the Company's goals and which link and align the personal
interests of Participants to those of the Company's shareholders, (ii) provide
Participants with an incentive for excellence in individual performance, (iii)
promote teamwork among Participants, and (iv) aid the Company in attracting
and retaining Participants who make significant contributions to the Company's
success.
1.3 DURATION OF THE PLAN. The Plan shall be effective on the Effective
Date, as described in Section 1.1 herein, and shall remain in effect, subject
to the right of the Board of Directors to amend or terminate the Plan at any
time pursuant to Article 11 herein, until all Shares subject to it shall have
been purchased or acquired according to the Plan's provisions. However, in no
event may an Award be granted under the Plan on or after June 30, 2005.
ARTICLE 2.
DEFINITIONS
Whenever used in the Plan, the following terms shall have the meanings
set forth below, and when the meaning is intended, the initial letter of the
word shall be capitalized:
<Page> 66
2.1 "AWARD" means a grant of Nonqualified Stock Options or Tandem SARs
under this Plan.
2.2 "AWARD AGREEMENT" means an agreement entered into by the Company
and each Participant setting forth the terms and provisions applicable to
Awards granted under this Plan.
2.3 "BENEFICIAL OWNER" or "Beneficial Ownership" shall have the
meaning ascribed to such term in Rule 13d-3 of the General Rules and
Regulations under the Exchange Act.
2.4 "BOARD" or "BOARD OF DIRECTORS" means the Board of Directors of
the Company.
2.5 "CHANGE IN CONTROL" of the Company shall be deemed to have
occurred if the conditions set forth in any one or more of the following
paragraphs shall have been satisfied:
(i) Any Person (other than the Person in control of the Company on the
Effective Date, or other than a trustee or other fiduciary holding
securities under an employee benefit plan of the Company, or a
corporation owned directly or indirectly by the stockholders of
the Company in substantially the same proportions as their
ownership of Shares of the Company), is or becomes the Beneficial
Owner, directly or indirectly, of securities of the Company
representing 30% or more of the combined voting power of the
Company's then outstanding securities; or
(ii) The election to the Board of Directors of the Company, without the
recommendation or approval of a majority of the incumbent Board of
Directors, of the lesser of (a) three directors, or (b) directors
constituting a majority of the numbers of directors then in
office; or
(iii) The shareholders of the Company approve (a) a plan of complete
liquidation of the Company; or (b) an agreement for the sale or
disposition of all or substantially all the Company's assets; or
(c) a merger or consolidation of the Company with any other
corporation, other than a merger or consolidation which would
result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities
of the surviving entity) at least 50% of the combined voting
securities of the Company (or such surviving entity) outstanding
immediately after such merger or consolidation.
However, in no event shall a Change in Control be deemed to have
occurred, with respect to a Participant, if that Participant is part of
a purchasing group which consummates the Change-in-Control transaction.
A Participant shall be deemed "part of a purchasing group" for purposes
of the preceding sentence if the Participant is an equity participant or
has agreed to become an equity participant in the purchasing company or
group (except for (i) passive ownership of less than 3% of the Shares of
the purchasing company; or (ii) ownership of equity participation in the
purchasing company or group which is otherwise not deemed to be
significant, as determined prior to the Change in Control by a majority
of the disinterested Directors).
<Page> 67
2.6 "CODE" means the Internal Revenue Code of 1986, as amended from
time to time.
2.7 "COMMITTEE" means the Stock Option Committee of the Board, as
specified in Article 3 herein, or such other Committee appointed by the Board
to administer the Plan with respect to grants of Awards.
2.8 "COMPANY" means Franklin Electric Co., Inc., an Indiana
corporation, and the Company's subsidiaries, as well as any successor to any
of such entities as provided in Article 14 herein.
2.9 "DIRECTOR" means any individual who is a member of the Board of
Directors of the Company.
2.10 "DISABILITY" means a permanent and total disability, within the
meaning of Code Section 22(e)(3), as determined by the Board in good faith.
2.11 "EFFECTIVE DATE" shall have the meaning ascribed to such term in
Section 1.1 hereof.
2.12 "EMPLOYEE" means any employee of the Company. Nonemployee
Directors shall not be considered Employees under this Plan unless
specifically designated otherwise.
2.13 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended from time to time, or any successor act thereto.
2.14 "FAIR MARKET VALUE" means the closing sale price of a Share on the
principal securities exchange on which the Shares are publicly traded, or if
there is no such sale on the relevant date, then on the last previous day on
which a sale was reported.
2.15 "INSIDER" shall mean an individual who is, on the relevant date,
an officer, director or ten percent (10%) beneficial owner of any class of the
Company's equity securities that is registered pursuant to Section 12 of the
Exchange Act, all as defined under Section 16 of the Exchange Act.
2.16 "NAMED EXECUTIVE OFFICER" means a Participant who, as of the date
of vesting and/or payout of an Award, as applicable, is one of the group of
"covered employees," as defined in Code Section 162(m) or the regulations
promulgated thereunder, or any successor statute.
2.17 "NONEMPLOYEE DIRECTOR" means an individual who is a member of the
Board of Directors of the Company but is not an Employee of the Company.
2.18 "NONEMPLOYEE DIRECTOR OPTION PLAN" means the Franklin Electric
Co., Inc. Amended and Restated 1996 Nonemployee Director Stock Option Plan
which, pursuant to Section 1.1 of the Plan, will be merged into the Plan.
2.19 NONQUALIFIED STOCK OPTION" or "NQSO" means an option to purchase
Shares granted under Article 6 herein and which is not intended to meet the
requirements of Code Section 422.
2.20 "OPTION" means a Nonqualified Stock Option granted under this
Plan.
<Page> 68
2.21 "OPTION PRICE" means the price at which a Share may be purchased
by a Participant pursuant to an Option.
2.22 "PARTICIPANT" means an Employee or a Nonemployee Director who has
outstanding an Award granted under the Plan.
2.23 "PERFORMANCE-BASED EXCEPTION" means the performance-based
exception from the tax deductibility limitations of Code Section 162(m).
2.24 "PERSON" shall have the meaning ascribed to such term in Section 3
(a) (9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof,
including a "group" as defined in Section 13(d) thereof.
2.25 "SHARES" means the $10 par value common stock of the Company.
2.26 "SUBSIDIARY" means any corporation, partnership, joint venture,
affiliate, or other entity in which the Company has a majority voting
interest, and which the Committee designates as a participating entity in the
Plan.
2.27 "TANDEM SAR" or "SAR" means an Award that is granted in connection
with a related Option pursuant to Article 7 herein, the exercise of which
shall require forfeiture of the right to purchase a Share under the related
Option (and when a Share is purchased under the Option, the Tandem SAR shall
similarly be canceled).
ARTICLE 3.
ADMINISTRATION
3.1 THE COMMITTEE. The Plan shall be administered by the Stock Option
Committee of the Board, or by any other Committee appointed by the Board
consisting of not less than two (2) Nonemployee Directors who fulfill the
requirements for an exempt grant transaction under Rule 16b-3 of the Exchange
Act, and who are "outside directors" within the meaning of Code Section 162(m)
and regulations thereunder. The members of the Committee shall be appointed
from time to time by, and shall serve at the discretion of, the Board of
Directors.
The Committee shall be comprised solely of Nonemployee Directors who are
eligible to administer the Plan pursuant to Rule 16b-3 of the Exchange Act and
Code Section 162(m) and regulations thereunder. However, if for any reason the
Committee does not qualify to administer the Plan as contemplated by Rule 16b-
3 of the Exchange Act and Code Section 162(m) and regulations thereunder, the
Board of Directors may appoint a new Committee so as to comply with Rule 16b-3
and Code Section 162(m) and regulations thereunder.
3.2 AUTHORITY OF THE COMMITTEE. Except as limited by law or by the
Certificate of Incorporation or Bylaws of the Company, and subject to the
provisions herein, the Committee shall have full power to select Employees and
Nonemployee Directors who shall participate in the Plan; determine the terms
and conditions of Awards in a manner consistent with the Plan; construe and
interpret the Plan and any agreement or instrument entered into under the
Plan; establish, amend, or waive rules and regulations for the Plan's
administration; and (subject to the provisions of Article 11 herein) amend the
terms and conditions of any outstanding Award to the extent such terms and
<Page> 69
conditions are within the discretion of the Committee as provided in the Plan.
Further, the Committee shall make all other determinations which may be
necessary or advisable for the administration of the Plan. As permitted by
law, the Committee may delegate its authority as identified herein.
The Committee shall keep minutes of its meetings. A majority of the
Committee shall constitute a quorum, and only the acts of a majority of the
members present at any meeting at which a quorum is present, or acts approved
in writing by a majority of the Committee, shall be valid acts of the
Committee.
3.3 DECISIONS BINDING. All determinations and decisions made by the
Committee pursuant to the provisions of the Plan and all related orders and
resolutions of the Board shall be final, conclusive and binding on all
persons, including the Company, its stockholders, Employees, Nonemployee
Directors, Participants, and their estates and beneficiaries.
ARTICLE 4.
SHARES SUBJECT TO THE PLAN AND MAXIMUM AWARDS
4.1 NUMBER OF SHARES AVAILABLE FOR GRANTS. Prior to the Effective
Date, there were (i) six hundred thousand (600,000) Shares reserved for
issuance upon the exercise of Options granted under the Nonemployee Director
Option Plan, of which three hundred thirty-four thousand (334,000) shares
remained available for grants as of February 28, 2003, and (ii) one million
two hundred thousand (1,200,000) Shares reserved for issuance under the
Employee Option Plan, of which twenty-seven thousand three hundred (27,300)
Shares remained available for grants as of February 28, 2003. From and after
the Effective Date and subject to adjustment as provided in Section 4.2, the
total number of Shares hereby reserved for issuance upon the exercise of
Options granted under the Plan shall be one million eight hundred thousand
(1,800,000), of which three hundred sixty-one thousand three hundred (361,300)
Shares remained available for grants as of February 28, 2003. If any Option
granted hereunder shall expire or terminate for any reason without having been
exercised in full, the unpurchased Shares subject thereto shall again be
available for issuance under this Plan.
Unless and until the Committee determines that an Award to a Named
Executive Officer shall not be designed to comply with the Performance-Based
Exception, the maximum aggregate number of Options and Tandem SARs that may be
granted or that may vest, as applicable, pursuant to any Award held by any
Named Executive Officer shall be six hundred thousand (600,000) during the
term of the Plan.
4.2 ADJUSTMENTS IN AUTHORIZED SHARES. In the event of any change in
corporate capitalization, such as a stock split, or a corporate transaction,
such as any merger, consolidation, separation, including a spin-off, or other
distribution of stock or property of the Company, any reorganization (whether
or not such reorganization comes within the definition of such term in Code
Section 368) or any partial or complete liquidation of the Company, such
adjustment shall be made in the number and class of Shares available for
issuance and in the number and class of and/or price of Shares subject to
outstanding Awards granted under the Plan, as may be determined to be
appropriate and equitable by the Committee, in its sole discretion, to prevent
dilution or enlargement of rights; provided, however, that the number of
Shares subject to any Award shall always be a whole number.
<Page> 70
ARTICLE 5.
ELIGIBILITY AND PARTICIPATION
5.1 ELIGIBILITY. Persons eligible to participate in this Plan include
(i) all officers and key employees of the Company who, in the opinion of the
Committee, are materially responsible for the management, growth, and
protection of all or a material part of the business or major product lines or
major functions of the Company or its Subsidiaries, and (ii) all Nonemployee
Directors of the Company who, in the opinion of the Committee, have performed
services on the Board warranting the grant of Awards under the Plan.
5.2 ACTUAL PARTICIPATION. Subject to the provisions of the Plan, the
Committee may, from time to time, select from all eligible Employees and
Nonemployee Directors, those to whom Awards shall be granted and shall
determine the nature and amount of each Award.
ARTICLE 6.
STOCK OPTIONS
6.1 GRANT OF OPTIONS. Subject to the terms and provisions of the Plan,
Options may be granted to one or more Participants in such number, and upon
such terms, and at any time and from time to time as shall be determined by
the Committee.
6.2 AWARD AGREEMENT. Each Option grant shall be evidenced by an Award
Agreement that shall specify the Option Price, the duration of the Option, the
number of Shares to which the Option pertains, and such other provisions as
the Committee shall determine.
6.3 OPTION PRICE. Unless otherwise designated by the Committee at the
time of grant, the Option Price for each grant of an Option under this Plan
shall be equal to one hundred percent (100%) of the Fair Market Value of a
Share on the date the Option is granted; provided, however, that the Option
Price designated by the Committee shall be at least equal to fifty percent
(50%) of the Fair Market Value of a Share on the date the Option is granted.
6.4 DURATION OF OPTIONS. Each Option granted to a Participant shall
expire at such time as the Committee shall determine at the time of grant;
provided, however, that unless otherwise designated by the Committee at the
time of grant, no Option shall be exercisable later than the tenth (10th)
anniversary date of its grant.
6.5 EXERCISE OF OPTIONS. Options granted under this Article 6 shall be
exercisable at such times and be subject to such restrictions and conditions
as are set forth in the applicable Award Agreement, which need not be the same
for each grant or for each Participant.
6.6 PAYMENT. OPTIONS GRANTED under this Article 6 shall be exercised
by the delivery of a written notice of exercise to the Company, setting forth
the number of Shares with respect to which the Option is to be exercised,
accompanied by full payment for the Shares.
<Page> 71
The Option Price upon exercise of any Option shall be payable to the
Company in full either: (a) in cash or its equivalent, or (b) by tendering
previously acquired Shares having an aggregate Fair Market Value at the time
of exercise equal to the total Option Price (provided that the Shares which
are tendered must have been held by the Participant for at least six (6)
months prior to their tender to satisfy the Option Price).
As soon as practicable after receipt of a written notification of
exercise and full payment, the Company shall deliver to the Participant, in
the Participant's name, Share certificates in an appropriate amount based upon
the number of Shares purchased under the Option(s).
In the event that a Tandem SAR is granted with an Option, the exercise
of such related Option shall cause the surrender of the right to exercise the
equivalent portion of the related Tandem SAR.
6.7 RESTRICTIONS ON SHARE TRANSFERABILITY. The Committee may impose
such restrictions on any Shares acquired pursuant to the exercise of an Option
granted under this Article 6 as it may deem advisable, including, without
limitation, restrictions under applicable Federal securities laws, under the
requirements of any stock exchange or market upon which such Shares are then
listed and/or traded, and under any blue sky or state securities laws
applicable to such Shares.
6.8 TERMINATION OF EMPLOYMENT OR SERVICE ON THE BOARD. Unless
otherwise determined by the Committee, in the event a Participant's employment
with the Company and/or its Subsidiaries, or service on the Board, is
terminated due to death or Disability, all of his or her Options shall
immediately become fully vested on the date of termination and shall be
exercisable for the lesser of two (2) years following the date of termination
or the expiration date of the Options.
Unless otherwise determined by the Committee, in the event a
Participant's employment with the Company and/or its Subsidiaries or service
on the Board is terminated for any reason other than death or Disability, all
of his or her Options which are unvested at the date of termination shall be
forfeited to the Company; and his or her Options which are vested at the date
of termination shall be exercisable for the lesser of six (6) months following
the date of termination or the expiration date of the Options.
6.9 NONTRANSFERABILITY OF OPTIONS. Except as otherwise provided in a
Participant's Award Agreement, no Option granted under this Plan may be sold,
transferred, pledged, assigned, or otherwise alienated or hypothecated, other
than by will or by the laws of descent and distribution. Further, except as
otherwise provided in a Participant's Award Agreement, all NQSOs granted to a
Participant under this Article 6 shall be exercisable during his or her
lifetime only by such Participant.
ARTICLE 7.
TANDEM STOCK APPRECIATION RIGHTS
7.1 GRANT OF TANDEM SARs. Subject to the terms and conditions of the
Plan, Tandem SARs may be granted to Participants at any time and from time to
time as shall be determined by the Committee. Subject to the terms and
conditions of the Plan, the Committee shall have complete discretion in
<Page> 72
determining the number of Tandem SARs granted to each Participant (provided,
however, that in no event shall the number of Tandem SARs granted exceed the
number of related Options) and, in determining the terms and conditions
pertaining to such Tandem SARs. The grant price of Tandem SARs shall equal the
Option Price of the related Option.
7.2 EXERCISE OF TANDEM SARs. Tandem SARs may be exercised for all or
part of the Shares subject to the related Option upon the surrender of the
right to exercise the equivalent portion of the related Option. A Tandem SAR
may be exercised only with respect to the Shares for which its related Option
is then exercisable.
7.3 TANDEM SAR AGREEMENT. Each Tandem SAR grant shall be evidenced by
an Award Agreement that shall specify the grant price, the term of the Tandem
SAR, and such other provisions as the Committee shall determine.
7.4 TERM OF TANDEM SARs. The term of Tandem SARs granted under the
Plan shall be determined by the Committee, in its sole discretion; provided,
however, that unless otherwise designated by the Committee, such term shall
not exceed the term of the related Option.
7.5 PAYMENT OF TANDEM SAR AMOUNT. Upon exercise of a Tandem SAR, a
Participant shall be entitled to receive payment from the Company in an amount
determined by multiplying:
(a) The difference between the Fair Market Value of a Share on the
date of exercise over the grant price; by
(b) The number of Shares with respect to which the Tandem SAR is
exercised.
At the election of Participant and upon approval by the Committee, the
payment upon Tandem SAR exercise may be in cash, in Shares of equivalent
value, or in any combination thereof.
7.6 RULE 16b-3 REQUIREMENTS. Notwithstanding any other provision of
the Plan, the Committee may impose such conditions on exercise of a Tandem SAR
(including, without limitation, the right of the Committee to limit the time
of exercise to specified periods) as may be required to satisfy the
requirements of Section 16 of the Exchange Act (or any successor rule).
7.7 TERMINATION OF EMPLOYMENT OR SERVICE ON THE BOARD. Unless
otherwise determined by the Committee, in the event a Participant's employment
with the Company and/or its Subsidiaries, or service on the Board, is
terminated due to death or Disability, all of his or her Tandem SARs shall
immediately become fully vested on the date of termination and shall be
exercisable for the lesser of two (2) years following the date of termination
or the expiration date of the Tandem SARs.
Unless otherwise determined by the Committee, in the event a
Participant's employment with the Company and/or its Subsidiaries, or service
on the Board, is terminated for any reason other than death or Disability, all
of his or her Tandem SARs which are unvested at the date of termination shall
be forfeited to the Company; and his or her Tandem SARs which are vested at
the date of termination shall be exercisable for the lesser of six (6) months
following the date of termination or the expiration date of the Tandem SARs.
<Page> 73
7.8 NONTRANSFERABILITY OF TANDEM SARs. Except as otherwise provided in
a Participant's Award Agreement, no Tandem SAR granted under the Plan may be
sold, transferred, pledged, assigned, or otherwise alienated or hypothecated,
other than by will or by the laws of descent and distribution. Further, except
as otherwise provided in a Participant's Award Agreement, all Tandem SARs
granted to a Participant under the Plan shall be exercisable during his or her
lifetime only by such Participant.
ARTICLE 8.
BENEFICIARY DESIGNATION
Each Participant under the Plan may, from time to time, name any
beneficiary or beneficiaries (who may be named contingently or successively)
to whom any benefit under the Plan is to be paid in case of his or her death
before he or she receives any or all of such benefit. Each such designation
shall revoke all prior designations by the same Participant, shall be in a
form prescribed by the Company, and will be effective only when filed by the
Participant in writing with the Company during the Participant's lifetime, In
the absence of any such designation or if all beneficiaries predecease the
Participant, benefits remaining unpaid at the Participant's death shall be
paid to the Participant's estate.
ARTICLE 9.
RIGHTS OF EMPLOYEES AND NONEMPLOYEE DIRECTORS
9.1 EMPLOYMENT AND SERVICE ON THE BOARD. Nothing in the Plan shall
interfere with or limit in any way the right of the Company to terminate any
Participant's employment or service on the Board at any time, nor confer upon
any Participant any right to continue in the employ of the Company or continue
to serve on the Board.
For purposes of this Plan, a transfer of a Participant's employment
between the Company and a Subsidiary, or between Subsidiaries, shall not be
deemed to be a termination of employment. Upon such a transfer, the Committee
may make such adjustments to outstanding Awards as it deems appropriate to
reflect the changed reporting relationships.
9.2 PARTICIPATION. No Participant shall have the right to be selected
to receive an Award under this Plan, or, having been so selected, to be
selected to receive a future Award.
ARTICLE 10.
CHANGE IN CONTROL
10.1 TREATMENT OF OUTSTANDING AWARDS. Upon the occurrence of a Change
in Control, unless otherwise specifically prohibited under applicable laws, or
by the rules and regulations of any governing governmental agencies or
national securities exchanges, any and all Options and Tandem SARs granted
hereunder shall become immediately exercisable, and shall remain exercisable
throughout their entire term.
<Page> 74
10.2 TERMINATION, AMENDMENT, AND MODIFICATIONS OF CHANGE-IN-CONTROL
Provisions. Notwithstanding any other provision of this Plan or any Award
Agreement provision, the provisions of this Article 10 may not be terminated,
amended, or modified to affect adversely any Award theretofore granted under
the Plan without the prior written consent of the Participant with respect to
said Participant's outstanding Awards.
ARTICLE 11.
AMENDMENT, MODIFICATION, AND TERMINATION
11.1 AMENDMENT, MODIFICATION, AND TERMINATION. The Board may at any
time and from time to time, alter, amend, suspend or terminate the Plan in
whole or in part; provided, however, that no amendment which fails to comply
with the exemptions available under Rule 16b-3 of the Exchange Act, including
any successor to such Rule, shall be effective.
The Committee shall not have the authority to cancel outstanding Awards
and issue substitute Awards in replacement thereof.
11.2 AWARDS PREVIOUSLY GRANTED. Unless required by law, no termination,
amendment, or modification of the Plan shall adversely affect in any material
way any Award previously granted under the Plan, without the written consent
of the Participant holding such Award.
11.3 COMPLIANCE WITH CODE SECTION 162(m). At all times when Code
Section 162(m) is applicable, all Awards granted under this Plan shall comply
with the Performance-Based Exception requirements of Code Section 162(m) and
regulations thereunder; provided, however, that in the event the Committee
determines that such compliance is not desired with respect to any Award or
Awards available for grant under the Plan, then compliance with Code Section
162(m) and regulations thereunder will not be required. In addition, in the
event that changes are made to Code Section 162(m) and regulations thereunder
to permit greater flexibility with respect to any Award or Awards available
under the Plan, the Committee may, subject to this Article 11, make any
adjustments it deems appropriate.
ARTICLE 12.
WITHHOLDING
12.1 TAX WITHHOLDING. The Company shall have the power and the right to
deduct or withhold, or require a Participant to remit to the Company, an
amount sufficient to satisfy federal, state, and local taxes, domestic or
foreign, required by law or regulation to be withheld with respect to any
taxable event arising as a result of this Plan.
12.2 SHARE WITHHOLDING. With respect to withholding required upon the
exercise of Options or Tandem SARs, Participants may elect, subject to the
approval of the Committee, to satisfy the withholding requirement, in whole or
in part, by having the Company withhold Shares having a Fair Market Value on
the date the tax is to be determined equal to the minimum statutory total tax
which could be imposed on the transaction. All such elections shall be
irrevocable, made in writing, signed by the Participant, and shall be subject
<Page> 75
to any restrictions or limitations that the Committee, in its sole discretion,
deems appropriate.
ARTICLE 13.
INDEMNIFICATION
Each person who is or shall have been a member of the Committee, or of
the Board, shall be indemnified by the Company against and from any loss,
cost, liability, or expense that may be imposed upon or reasonably incurred by
him or her in connection with or resulting from any claim, action, suit, or
proceeding to which he or she may be a party or in which he or she may be
involved by reason of any action taken or failure to act under the Plan. Such
person shall be indemnified by the Company for all amounts paid by him or her
in settlement thereof, with the Company's approval, or paid by him or her in
satisfaction of any judgment in any such action, suit, or proceeding against
him or her, provided he or she shall give the Company an opportunity, at its
own expense, to handle and defend the same before he or she undertakes to
handle and defend it on his or her own behalf. The foregoing right of
indemnification shall not be exclusive of any other rights of indemnification
to which such persons may be entitled under the Company's Articles of
Incorporation or Bylaws, as a matter of law, or otherwise, or any power that
the Company may have to indemnify them or hold them harmless.
ARTICLE 14.
SUCCESSORS
All obligations of the Company under the Plan with respect to Awards
granted hereunder shall be binding on any successor to the Company, whether
the existence of such successor is the result of a direct or indirect
purchase, merger, consolidation, or otherwise, of all or substantially all of
the business and/or assets of the Company.
ARTICLE 15.
LEGAL CONSTRUCTION
15.1 GENDER AND NUMBER. Except where otherwise indicated by the
context, any masculine term used herein also shall include the feminine; the
plural shall include the singular and the singular shall include the plural.
15.2 SEVERABILITY. In the event any provision of the Plan shall be held
illegal or invalid for any reason, the illegality or invalidity shall not
affect the remaining parts of the Plan, and the Plan shall be construed and
enforced as if the illegal or invalid provision had not been included.
15.3 REQUIREMENTS OF LAW. The granting of Awards and the issuance of
Shares under the Plan shall be subject to all applicable laws, rules, and
regulations, and to such approvals by any governmental agencies or national
securities exchanges as may be required.
<Page> 76
15.4 GOVERNING LAW. To the extent not preempted by Federal law, the
Plan, and all agreements hereunder, shall be construed in accordance with and
governed by the laws of the State of Indiana.
ARTICLE 16.
PLAN PROVISIONS APPLICABLE TO GRANTS MADE UNDER THE NONEMPLOYEE DIRECTOR
OPTION PLAN
As provided in Section 1.1 of the Plan, the Nonemployee Director Option Plan
shall be merged into the Plan effective as of the Effective Date. Each Award
granted under the Nonemployee Director Option Plan prior to the Effective Date
shall be assumed by the Plan. Notwithstanding any provisions in the Plan to
the contrary, all Awards granted under the Nonemployee Director Option Plan
prior to the Effective Date shall be subject to the terms of this Article 16
and the terms of the Plan to the extent such terms are not inconsistent with
this Article 16.
16.1 FINITIONS.
(i) "Board" or "Board of Directors" means the Board of Directors of
the Company, and includes any committee of the Board of Directors
designated by the Board to administer part or all of the
Nonemployee Director Option Plan.
(ii) "Nonemployee Director" means any individual who was a member of
the Board of Directors of the Company, but was not, as of the
date of the grant of an Option, an Employee of the Company.
(iii) "Option" means a grant of Nonqualified Stock Options under the
Nonemployee Director Option Plan prior to the Effective Date.
16.2 ADMINISTRATION BY THE BOARD. The Board shall have the full power,
discretion and authority to interpret and administer the Options in a manner
which is consistent with the provisions of this Article 16.
16.3 GRANTS OF OPTIONS. Prior to the Effective Date, and subject to the
limitation on the number of Shares contained in the Nonemployee Director
Option Plan, each person who was a Nonemployee Director following each Annual
Meeting of the Shareholders was automatically granted an Option to purchase
ten thousand (10,000) Shares. Other than these automatic grants of Options,
no additional Options were granted under the Nonemployee Director Option Plan.
On and after the Effective Date there will be no automatic grants of Options
to Nonemployee Directors under the Plan or the Nonemployee Director Option
Plan that was merged into the Plan. All grants of Options to Nonemployee
Directors under the Plan will be made pursuant to Section 6.1 above.
16.4 AWARD AGREEMENT. Each Option granted under the Nonemployee
Director Option Plan is evidenced by an Award Agreement that specifies the
Option Price, the duration of the Option, and the number of Shares available
for purchase under the Option as set forth in this Article 16.
16.5 OPTION PRICE. The Option Price per Share available for purchase
under an Option was equal to the Fair Market Value of such Share on the date
the Option was granted.
<Page> 77
16.6 DURATION OF OPTIONS. Each Option shall expire on the tenth (10th)
anniversary date of its grant.
16.7 VESTING OF SHARES SUBJECT TO OPTION. Nonemployee Directors shall
be entitled to exercise Options at any time and from time to time, within the
time period beginning one (1) year after grant of the Options, and ending ten
(10) years after grant of the Options, and according to the following vesting
schedule: one-third of the Options shall vest on each of the first, second,
and third anniversaries of the date of grant of the Options.
16.8 PAYMENT. A Nonemployee Director may exercise an Option by delivery
of a written notice, specifying the number of Shares with respect to which the
Option is being exercised, accompanied by payment in full of the Option Price
of any Shares to be purchased (in the form of a cashier's or certified check).
No Shares shall be issued upon exercise of an Option until full payment has
been made therefor. Notwithstanding the preceding sentence, the Board may
permit a Nonemployee Director to pay the Option Price of the Shares to be
purchased (i) in Shares valued at their Fair Market Value at the date of
exercise, (ii) by agreeing to surrender Options then exercisable by him or her
valued at the excess of the aggregate Fair Market Value of the Shares subject
to such Options on the date of exercise over the aggregate Option Price of
such Shares, (iii) by directing the Company to withhold such number of Shares
otherwise issuable upon exercise of such Options having an aggregate Fair
Market Value on the date of exercise equal to the Option Price of the Option,
or (iv) by such other medium of payment as the Board, in its discretion, shall
authorize, or by any combination of the aforementioned methods of payment.
Shares issued upon exercise of an Option shall be issued only in the name of
the Nonemployee Director. All notices shall be delivered to the Secretary of
the Company and shall become effective when received.
16.9 TERMINATION OF SERVICE ON BOARD OF DIRECTORS DUE TO DEATH OR
DISABILITY. In the event the service of a Nonemployee Director on the Board is
terminated by reason of death, Disability, or retirement on or after attaining
the age of seventy (70), any outstanding Options granted to that Nonemployee
Director that are not exercisable as of the date of death (or as of the date
that the definition of Disability is satisfied, or the date of retirement, as
applicable) shall immediately become exercisable.
To the extent an Option is exercisable by reason of death, as of the
date that the definition of Disability is satisfied, or retirement on or after
attaining the age of seventy (70) as applicable, such Option shall remain
exercisable at any time prior to its expiration date, or for two (2) years
after the date of death, or the date that the definition of Disability is
satisfied, or the date of retirement, as applicable, whichever period is
shorter, by the Nonemployee Director or such person or persons as shall have
been named as the Nonemployee Director's legal representative or beneficiary,
or by such persons that have acquired the Nonemployee Directors' rights under
the Option by will or by the laws of descent and distribution.
16.10 TERMINATION OF SERVICE ON BOARD OF DIRECTORS FOR OTHER REASONS. If
the service of the Nonemployee Director on the Board shall terminate for any
reason other than for death, Disability, or retirement on or after attaining
the age of seventy (70), any outstanding Options held by the Nonemployee
Director that are not exercisable as of the date of termination immediately
shall be forfeited to the Company (and shall once again become available for
grant under the Plan). To the extent an Option is exercisable as of the date
of termination of the Nonemployee Director's service on the Board, it shall
remain exercisable at any time prior to its expiration date, or for six (6)
<Page> 78
months after the date the Nonemployee Director's service on the Board
terminates, whichever period is shorter.
16.11 NONTRANSFERABILITY OF OPTIONS. No Option granted under the
Nonemployee Director Option Plan may be sold, transferred, pledged, assigned,
or otherwise alienated or hypothecated, other than by will or by the laws of
descent and distribution. Further, all Options granted to a Nonemployee
Director under the Nonemployee Director Option Plan shall be exercisable
during his or her lifetime only by such Nonemployee Director.
Notwithstanding the preceding provisions of this Section, a Nonemployee
Director, at any time prior to his or her death, may assign all or any portion
of an Option granted to him or her to (i) his or her spouse or lineal
descendant, (ii) the trustee of a trust established for the primary benefit of
his or her spouse or lineal descendant, (iii) a partnership of which his or
her spouse and lineal descendants are the only partners, or (iv) a tax-exempt
organization as described in Section 501(c)(3) of the Code. In such event, the
spouse, lineal descendants, trustee, partnership or tax-exempt organization,
will be entitled to all the rights of the Nonemployee Director with respect to
the assigned portion of such Option, and such portion of the Option will
continue to be subject to all of the terms, conditions and restrictions
applicable to the Option as set forth herein immediately prior to the
effective date of the assignment. Any such assignment will be permitted only
if (i) the Nonemployee Director does not receive any consideration therefor,
and (ii) the assignment is expressly approved by the Board. Any such
assignment shall be evidenced by an appropriate written document executed by
the Nonemployee Director and a copy thereof shall be delivered to the Board on
or prior to the effective date of the assignment.
<Page> 79
EXHIBIT 10.11
-------------
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is made as
of the 7th day of November, 2003, by and among FRANKLIN ELECTRIC CO., INC., an
Indiana corporation (the "Borrower"), the BANKS listed on the signature pages
hereof (collectively, the "Banks"), BANK ONE, NA, a national banking
association having its main office in Chicago, Illinois, and being the
successor by merger to BANK ONE, INDIANA, NA, as Documentation Agent (the
"Documentation Agent"), WELLS FARGO BANK, NATIONAL ASSOCIATION, as Syndication
Agent (the "Syndication Agent") and WACHOVIA BANK, NATIONAL ASSOCIATION, as
Administrative Agent (the "Administrative Agent").
RECITALS:
- --------
The Borrower, the Documentation Agent, the Syndication Agent, the
Administrative Agent and the Banks have entered into a certain Credit
Agreement dated as of November 26, 2001 (as amended, the "Credit Agreement").
Capitalized terms used in this Amendment which are not otherwise defined in
this Amendment shall have the respective meanings assigned to them in the
Credit Agreement.
The Borrower has requested the Administrative Agent and the Banks to
amend the Credit Agreement to permit the Borrower to transfer certain assets
to two (2) Wholly Owned Subsidiaries and to make other such changes as the
parties hereunder deem appropriate.
NOW, THEREFORE, in consideration of the Recitals and the mutual promises
contained herein and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the Borrower, the
Documentation Agent, the Syndication Agent, the Administrative Agent and the
Banks, intending to be legally bound hereby, agree as follows:
SECTION 1. RECITALS. The Recitals are incorporated herein by
reference and shall be deemed to be a part of this Amendment.
SECTION 2. AMENDMENTS. The Credit Agreement is hereby amended as set
forth in this Section 2.
SECTION 2.1. AMENDMENTS TO ARTICLE I. The definitions set forth in
Section 1.01 of the Credit Agreement are hereby amended by:
(a) amending and restating the following definition to read as
follows:
"Material Subsidiary" means at any time (i) any Subsidiary
having total assets (determined in accordance with GAAP) in excess
of $5,000,000 and (ii) any Significant Subsidiary.
(b) inserting the following new definition to read in its entirety as
follows:
"Significant Subsidiary" means each of Franklin Electric
Manufacturing, Inc. and Franklin Electric Sales, Inc.
<Page> 80
SECTION 2.2. AMENDMENTS TO ARTICLE V. Article V of the Credit Agreement
is hereby amended by:
(a) amending and restating Section 5.10 to read in its entirety as
follows:
Section 5.10 Consolidations, Mergers and Sales of Assets.
The Borrower will not, nor will it permit any Subsidiary to,
consolidate or merge with or into, or sell, lease or
otherwise transfer all or any substantial part of its assets
to, any other Person, provided that: (a) the Borrower may merge
with another Person if (i) such Person was organized under the
laws of the United States of America or one of its states, (ii)
the Borrower is the corporation surviving such merger and (iii)
immediately after giving effect to such merger, no Default shall
have occurred and be continuing, (b) Subsidiaries of the Borrower
may merge with one another or with the Borrower if, in the event
such merger is between a Significant Subsidiary and another
Subsidiary, such Significant Subsidiary is the corporation
surviving such merger, and (c) the foregoing limitation on the
sale, lease or other transfer of assets shall not prohibit (i) any
sale, contribution or other transfer of Securitization Assets
pursuant to the Securitization Documents under a Permitted
Securitization by the Borrower or any Subsidiary, (ii) any sale
and leaseback of any Property owned by the Borrower or any of its
Subsidiaries, (iii) any sale, lease or other transfer of assets
made by the Borrower or any Subsidiary in the ordinary course of
its business, (iv) any sale, lease or other transfer of assets by
a Subsidiary to the Borrower or to a Wholly Owned Subsidiary, (v)
any sale, lease or other transfer of assets by the Borrower to a
Significant Subsidiary, (vi) any sale, lease or other transfer of
assets by a Significant Subsidiary to the Borrower or to any other
Significant Subsidiary, or (vii) any sale, lease or other transfer
of assets outside of the ordinary course of business so long as
the aggregate amount of assets sold, leased or otherwise
transferred outside of the ordinary course of business in the then
most recent twelve (12) month period which were not otherwise
permitted by this Section 5.10 to be sold, leased or otherwise
transferred together with the amount of any assets then proposed
to be sold, leased or otherwise transferred outside of the
ordinary course of business which are not otherwise permitted by
this Section 5.10 to be sold, leased or otherwise transferred (A)
does not constitute more than fifteen percent (15%) of
Consolidated Total Assets determined as of the end of the most
recently ended Fiscal Year and (B) has not contributed more than
fifteen percent (15%) of Consolidated Operating Profits for the
most recently ended Fiscal Year.
(b) amending and restating Section 5.22 to read in its entirety as
follows:
<Page> 81
Section 5.22 Limitation on Subsidiary Debt. The Borrower
shall not permit (i) any Significant Subsidiary to create, incur,
assume or suffer to exist any Debt, except Debt owing by any
Significant Subsidiary to the Borrower or (ii) the outstanding
principal amount of Debt (including, without limitation, any Debt
permitted under Section 5.06) of its Subsidiaries (other than
Significant Subsidiaries) at any time to exceed, in the aggregate,
an amount greater than $40,000,000.
SECTION 2.3. AMENDMENT TO ARTICLE VI. Article VI of the Credit Agreement
is hereby amended by:
(a) amending and restating clause (b) of Section 6.01 to read in its
entirety as follows:
(b) the Borrower shall fail to observe or perform any
covenant contained in Sections 5.02(ii), 5.03 to 5.11, inclusive,
Section 5.14, or Sections 5.17 to 5.22, inclusive; or
(b) adding a new clause (l) to Section 6.01, immediately following
clause (k) (and adding "or" to the end of clause (k)), to read in its entirety
as follows:
(l) any Significant Subsidiary shall cease, for any
reason, to be a Wholly Owned Subsidiary;
SECTION 3. CONDITIONS TO EFFECTIVENESS. The effectiveness of this
Amendment and the obligations of the Banks hereunder are subject to the
following conditions, unless the Banks waive such conditions:
(a) receipt by the Administrative Agent from each of the parties
hereto of a duly executed counterpart of this Amendment signed by such party;
(b) receipt by the Administrative Agent, for its own account, of all
fees and expenses payable with the closing of this Amendment;
(c) receipt by the Administrative Agent of such other documents or
items the Administrative Agent, the Banks or their counsel may reasonably
request; and
(d) the fact that the representations and warranties of the Borrower
contained in Article IV of the Credit Agreement and Section 5 of this
Amendment shall be true on and as of the date hereof.
SECTION 4. NO OTHER AMENDMENT. Except for the amendments set forth
above, the text of the Credit Agreement shall remain unchanged and in full
force and effect. This Amendment is not intended to effect, nor shall it be
construed as, a novation. The Credit Agreement and this Amendment shall be
construed together as a single agreement. Nothing herein contained shall
waive, annul, vary or affect any provision, condition, covenant or agreement
contained in the Credit Agreement, except as herein amended, nor affect or
impair any rights, powers or remedies under the Credit Agreement as hereby
amended. The Banks and the Administrative Agent do hereby reserve all of their
rights and remedies against all parties who may be or may hereafter become
secondarily liable for the repayment of the Notes or any obligations of the
Borrower under the Credit Agreement. The Borrower promises and agrees to
perform all of the requirements, conditions, agreements and obligations under
the terms of the Credit Agreement, as heretofore and hereby amended, the
<Page> 82
Credit Agreement, as amended, being hereby ratified and affirmed. The Borrower
hereby expressly agrees that the Credit Agreement, as amended, is in full
force and effect.
SECTION 5. REPRESENTATIONS AND WARRANTIES. The Borrower hereby
represents and warrants to each of the Banks as follows:
(a) No Default under the Credit Agreement or any other Loan Document
has occurred and is continuing on the date hereof.
(b) The Borrower has the power and authority to enter into this
Amendment and to do all acts and things as are required or contemplated
hereunder to be done, observed and performed by it.
(c) This Amendment has been duly authorized, validly executed and
delivered by one or more authorized officers of the Borrower and constitutes
legal, valid and binding obligations of the Borrower enforceable against it in
accordance with its terms, provided that such enforceability is subject to
general principles of equity.
(d) The execution and delivery of this Amendment and the Borrower's
performance hereunder do not and will not require the consent or approval of
any regulatory authority or governmental authority or agency having
jurisdiction over the Borrower, nor be in contravention of or in conflict with
the certificate of incorporation or bylaws of the Borrower, or the provision
of any statute, or any judgment, order, indenture, instrument, agreement or
undertaking, to which the Borrower is party or by which the Borrower's assets
or properties are or may become bound.
(e) Each Significant Subsidiary is a Wholly Owned Subsidiary.
SECTION 6. COUNTERPARTS. This Amendment may be executed in multiple
counterparts, each of which shall be deemed to be an original and all of
which, taken together, shall constitute one and the same agreement.
SECTION 7. GOVERNING LAW. This Amendment shall be construed in
accordance with and governed by the law of the State of Georgia.
[SIGNATURES APPEAR ON FOLLOWING PAGES]
<Page> 83
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed, under seal, by their respective authorized officers as of the
day and year first above written.
FRANKLIN ELECTRIC CO., INC.
By: (SEAL)
--------------------------
Name:
Title:
<Page> 84
WACHOVIA BANK, NATIONAL ASSOCIATION,
as Administrative Agent and as a Bank
By: (SEAL)
----------------------------
Name:
Title:
<Page> 85
BANK ONE, NA, as Documentation Agent and
as a Bank
By:
---------------------------------
Name:
Title:
<Page> 86
WELLS FARGO BANK, NATIONAL ASSOCIATION, as
Syndication Agent and as a Bank
By
----------------------------------
Name:
Title:
By
----------------------------------
Name:
Title:
<Page> 87
EXHIBIT 10.12
-------------
EXECUTION COPY
--------------
November 21, 2003
Franklin Electric Co., Inc.
400 East Spring Street
Bluffton, Indiana 46714
Attn: Secretary
Re: Waiver, Consent and Amendment regarding Amended and Restated Note
Purchase and Private Shelf Agreement dated as of March 1, 2002 (as amended
prior to the date hereof, the "Agreement"), by and among Franklin Electric
Co., Inc., an Indiana corporation (the "Company"), The Prudential Insurance
Company of America ("Prudential") and the Purchasers thereunder
Ladies and Gentlemen:
Reference is made to the above-captioned Agreement pursuant to which the
Company issued and sold and Prudential purchased the Company's 6.31% Series A
Senior Notes in the original principal amount of $20,000,000, due November 10,
2008. Capitalized terms used herein and not otherwise defined herein shall
have the meanings assigned to such terms in the Agreement.
Pursuant to the request of the Company and in accordance with the
provisions of paragraph 11C of the Agreement, the parties hereto agree as
follows:
SECTION 1. WAIVER AND CONSENT. Upon the effectiveness of this letter in
accordance with its terms, Prudential hereby consents to, and waives any
Default or Event of Default under the Agreement resulting solely from any of
the following actions: (a) the formation of Franklin Electric Sales, Inc., an
Indiana corporation ("New Distribution Subsidiary"), and Franklin Electric
Manufacturing, Inc., an Indiana corporation ("New Manufacturing Subsidiary"),
(b) the contribution of the business and selected assets of the Company set
forth on Schedule A hereto to New Distribution Subsidiary by no later than
March 31, 2004, and (c) the contribution of the business and selected assets
of the Company set forth on Schedule B hereto to New Manufacturing Subsidiary
by no later than March 31, 2004. The consent and waiver contained in this
Section 1 shall be effective only to the extent specifically set forth herein
and shall not be construed as a consent to, or waiver of, any other violation
or Event of Default.
SECTION 2. AMENDMENTS. From and after the date this letter becomes
effective in accordance with its terms, the Agreement is amended as follows:
2.1 Clause (x) of paragraph 6B(1) of the Agreement is amended by
replacing the reference to "15%" with a reference to "20%".
2.2 Clause (ii) of paragraph 6B(2) of the Agreement is amended and
restated to read in its entirety as follows:
"(ii) Funded Debt of the Company or any Subsidiary (including Debt
represented by the Notes), provided that (a) the aggregate principal
amount of all Funded Debt of the Company and its Subsidiaries at no
time exceeds forty percent (40%) of Consolidated Total Capitalization
and (b) the aggregate amount of (I) Debt of Subsidiaries (other than
<Page> 88
Debt of Subsidiaries owing to the Company or another Subsidiary) and
(II) Debt of the Company secured by Liens at no time exceeds twenty
percent (20%) of Consolidated Net Worth (notwithstanding the foregoing,
the basket in this subclause (b) shall not be used to provide credit
enhancements (in any form, including Liens and Guarantees) to the
lender(s) under the Company's primary bank facility); and".
2.3 Paragraph 6B(5) of the Agreement is amended by adding the following
sentence at the end thereof:
"Notwithstanding the foregoing, each of New Manufacturing
Subsidiary and New Distribution Subsidiary shall at all times be a
Wholly-Owned Subsidiary of the Company."
2.4 Paragraph 6 of the Agreement is amended to add the following new
paragraph 6C at the end thereof:
"6C. LIMITATIONS ON NEW DISTRIBUTION SUBSIDIARY AND NEW
MANUFACTURING SUBSIDIARY. The Company covenants that it will not, and
will not permit either New Distribution Subsidiary or New Manufacturing
Subsidiary to, enter into, or be otherwise subject to, any contract or
agreement which limits the amount of, or otherwise imposes restrictions
on the payment of, dividends by New Distribution Subsidiary or New
Manufacturing Subsidiary to the Company."
2.5 Paragraph 10B of the Agreement is amended by inserting the
following definitions in proper alphabetical order:
"NEW DISTRIBUTION SUBSIDIARY" shall mean Franklin Electric Sales,
Inc., an Indiana corporation.
"NEW MANUFACTURING SUBSIDIARY" shall mean Franklin Electric
Manufacturing, Inc., an Indiana corporation.
"WHOLLY-OWNED SUBSIDIARY" shall mean any Subsidiary of the Company
all of the outstanding capital stock of every class of which is owned by
the Company or another Wholly-Owned Subsidiary of the Company.
SECTION 3. REPRESENTATIONS AND WARRANTIES. The Company represents and
warrants that: (a) each representation and warranty set forth in paragraph 8
of the Agreement is true and correct as of the date of execution and delivery
of this letter by the Company with the same effect as if made on such date
(except to the extent such representations and warranties expressly refer to
an earlier date, in which case they were true and correct as of such earlier
date); and (b) after giving effect to the consent, waiver and amendments set
forth in Sections 1 and 2 hereof, no Event of Default or Default exists or has
occurred and is continuing on the date hereof.
SECTION 4. CONDITIONS PRECEDENT. This letter shall become effective as
of the date first written above upon (a) the return by the Company to
Prudential of a counterpart hereof duly executed by the Company and Prudential
and (b) a fully executed copy of a similar amendment to the Company's primary
bank facility. The foregoing documentation should be returned to: Prudential
Capital Group, Two Prudential Plaza, Suite 5600, Chicago, IL 60601-6716,
Attention: Armando M. Gamboa.
SECTION 5. REFERENCE TO AND EFFECT ON AGREEMENT. Upon the effectiveness
of this letter, each reference to the Agreement in any other document,
instrument or agreement shall mean and be a reference to the Agreement as
<Page> 89
modified by this letter. Except as specifically set forth in Sections 1 and 2
hereof, the Agreement shall remain in full force and effect and is hereby
ratified and confirmed in all respects.
SECTION 6. GOVERNING LAW. THIS LETTER SHALL BE CONSTRUED AND ENFORCED
IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE
LAW OF THE STATE OF ILLINOIS (EXCLUDING ANY CONFLICTS OF LAW RULES WHICH WOULD
OTHERWISE CAUSE THIS LETTER TO BE CONSTRUED OR ENFORCED IN ACCORDANCE WITH, OR
THE RIGHTS OF THE PARTIES TO BE GOVERNED BY, THE LAWS OF ANY OTHER
JURISDICTION).
<Page> 90
SECTION 7. COUNTERPARTS; SECTION TITLES. This letter may be executed in
any number of counterparts, each of which when so executed and delivered shall
be deemed to be an original and all of which taken together shall constitute
but one and the same instrument. Delivery of an executed counterpart of a
signature page to this letter by facsimile shall be effective as delivery of a
manually executed counterpart of this letter. The section titles contained in
this letter are and shall be without substance, meaning or content of any kind
whatsoever and are not a part of the agreement between the parties hereto.
Very truly yours,
THE PRUDENTIAL INSURANCE COMPANY
OF AMERICA
By:
-------------------------------------
Vice President
Accepted and Agreed to as
of November , 2003
---
FRANKLIN ELECTRIC CO., INC.
By:
-------------------------
Title:
------------------------
<Page> 91
SCHEDULE A
- ----------
ASSETS CONTRIBUTED TO NEW DISTRIBUTION SUBSIDIARY
* All accounts receivable of the Company incurred in the sale and
distribution of electric motors and components not to exceed $30 million.
* All finished goods inventory of the Company not to exceed $20 million.
* Operating leases associated with the sale and distribution of products will
be assigned to the new distribution subsidiary with an annual expense not
to exceed $700,000.
<Page> 92
SCHEDULE B
----------
ASSETS CONTRIBUTED TO NEW MANUFACTURING SUBSIDIARY
* All raw and work-in-process inventory of the Company associated with the
manufacturing of electric motors and components not to exceed $15 million.
* All fixed assets of the Company associated with the manufacturing of
electric motors and components not to exceed $45 million.
* Other miscellaneous assets associated with the manufacturing of electric
motors and components not to exceed $1 million.
* Operating leases associated with the manufacture of products will be
assigned to the new distribution subsidiary with an annual expense not to
exceed $500,000.
<Page> 93
EXHIBIT 21
----------
FRANKLIN ELECTRIC CO., INC.
SUBSIDIARIES OF THE REGISTRANT
------------
Percent of
State or country voting
of incorporation stock owned
---------------- -----------
Subsidiaries consolidated:
Advanced Polymer Technology, Inc. Michigan 100
Coverco S.r.l. Italy 100
EBW, Inc. Michigan 100
FE Petro, Inc. Indiana 100
Franklin Electric International, Inc. Delaware 100
Franklin Electric Subsidiaries, Inc.
[inactive] Indiana 100
Franklin Electric Foreign Sales
Corporation U.S. Virgin Islands 100
Franklin Electric B.V. Netherlands 100
Franklin Electric Europa, GmbH Germany 100
Franklin Electric spol s.r.o. Czech Republic 100
Franklin Electric (Australia) Pty. Ltd. Australia 100
Franklin Electric (South Africa)
Pty. Limited South Africa 100
Franklin Electric (Suzhou) Co., Ltd. China 100
Intelligent Controls, Inc. Maine 100
Motores Electricos Sumergibles De
Mexico S De Rl De Co Mexico 100
Motores Franklin S.A. de C.V. Mexico 100
Motori Sommersi Riavvolgibili S.r.l. Italy 75
Servicios De Mesmex S De Rl De Co Mexico 100
Franklin Electric Sales, Inc. Indiana 100
Franklin Electric Manufacturing, Inc. Indiana 100
Franklin Fueling Systems, GmbH Germany 100
<Page> 94
EXHIBIT 23
----------
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements of
Franklin Electric Co., Inc. on Form S-8 (file numbers 2-90330, 33-21303, 33-
35958, 33-35960, 33-35962, 33-38200, 333-01957, 333-01959, 333-59771, 333-
93121, 333-34992, 333-34994, 333-34996 and 333-111370) of our report dated
January 30, 2004 appearing in this Annual Report on Form 10-K of Franklin
Electric Co., Inc. for the year ended January 3, 2004.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Chicago, Illinois
February 19, 2004
<Page> 95
EXHIBIT 31.1
------------
CERTIFICATIONS
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
----------------------------------------
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
---------------------------------------------------------
I, R. Scott Trumbull, Chairman and Chief Executive Officer of Franklin
Electric Co., Inc., certify that:
1. I have reviewed this Annual Report on Form 10-K of Franklin Electric
Co., Inc.;
2. Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this Annual Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this Annual Report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this Annual Report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of end of the period covered by this Annual Report
based on such evaluation; and
c. disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrants fourth
quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal controls over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of registrant's
board of directors or persons performing similar functions:
a. All significant deficiencies and material weaknesses in the design
<Page> 96
or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability
to record, process, summarize and report financial information;
and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: February 13, 2004
-------------------------------
/s/ R. Scott Trumbull
-------------------------------
R. Scott Trumbull
Chairman and Chief Executive Officer
Franklin Electric Co., Inc.
<Page> 97
EXHIBIT 31.2
------------
CERTIFICATION OF CHIEF FINANCIAL OFFICER
----------------------------------------
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
---------------------------------------------------------
I, Gregg C. Sengstack, Senior Vice President, Chief Financial Officer
and Secretary of Franklin Electric Co., Inc., certify that:
1. I have reviewed this Annual Report on Form 10-K of Franklin Electric
Co., Inc.;
2. Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this Annual Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this Annual Report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this Annual Report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of end of the period covered by this Annual Report
based on such evaluation; and
c. disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrants fourth
quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal controls over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of registrant's
board of directors or persons performing similar functions:
a. All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which
<Page> 98
are reasonably likely to adversely affect the registrant's ability
to record, process, summarize and report financial information;
and
c. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: February 13, 2004
-------------------------------
/s/ Gregg C. Sengstack
-------------------------------
Gregg C. Sengstack
Senior Vice President, Chief Financial Officer and Secretary
Franklin Electric Co., Inc.
<Page> 99
EXHIBIT 32.1
------------
CHIEF EXECUTIVE OFFICER CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS
---------------------------------------------------------------------------
ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
-----------------------------------------------------------------
In connection with the Annual Report of Franklin Electric Co., Inc. (the
"Company") on Form 10-K for the period ending January 3, 2004 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
R. Scott Trumbull, Chairman, Chief Executive Officer and President of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
Date: February 13, 2004
-----------------------------
/s/ R. Scott Trumbull
------------------------------
R. Scott Trumbull
Chairman, Chief Executive Officer
Franklin Electric Co., Inc.
<Page> 100
EXHIBIT 32.2
------------
CHIEF FINANCIAL OFFICER CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS
---------------------------------------------------------------------------
ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
-----------------------------------------------------------------
In connection with the Annual Report of Franklin Electric Co., Inc. (the
"Company") on Form 10-K for the period ending January 3, 2004 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Gregg C. Sengstack, Senior Vice President and Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
Date: February 13, 2004
-----------------------------
/s/ Gregg C. Sengstack
------------------------------
Gregg C. Sengstack
Senior Vice President, Chief Financial Officer and Secretary
Franklin Electric Co., Inc.
<Page> 101
EXHIBIT 99.1
------------
ADDITIONAL EXHIBITS
Forward-Looking Statements
- --------------------------
Written and oral statements provided by the Company from time to time,
including in the Company's annual report to shareholders and its annual report
on Form 10-K and other filings under the Securities Exchange Act of 1934, may
contain certain forward-looking information, as that term is defined by the
Private Securities Litigation Reform Act of 1995 (the "Act") and in releases
made by the Securities and Exchange Commission ("SEC"). While the Company
believes that the assumptions underlying such forward-looking statements are
reasonable based on present conditions, forward-looking statements made by the
Company involve risks and uncertainties and are not guarantees of future
performance. Actual results may differ materially from those in the Company's
written or oral forward-looking statements as a result of various factors,
including, but not limited to, the following:
* A significant decline in sales with the Company's largest two customers,
each of whom represents over 10% of consolidated sales, or other significant
customers.
* Continued or increased competitive pressure to reduce selling prices of
products or increased financial incentives to customers.
* A prolonged disruption of scheduled deliveries from suppliers when
alternative sources of supply are not available to satisfy the Company's
requirements for raw material and components.
* Delays in the Company's ability to pass along significant increases in
the cost of raw material, components, other materials and/or services.
* The amount of and rate of growth in selling, general and administrative
expenses, and occurrences which could affect the Company's ability to reduce
or limit the increase in such expenses.
* The costs and other effects of legal and administrative cases and
proceedings (whether civil or criminal), settlements and investigations,
claims, developments or assertions by or against the Company relating to
intellectual property rights and licenses.
* The adoption of new, or changes in, accounting policies and practices.
* Difficulties or delays in the development, production, testing and
marketing of products, including, but not limited to, a failure to ship new
products when anticipated, failure of customers to accept these products when
planned, any defects in products or a failure of manufacturing economies to
develop when planned.
* Circumstances impacting the Company's ability to fund and accomplish
technological innovation, improve processes, and attract and retain capable
staff in order to deal with increasing volume and complexity in its products.
<Page> 102
* Occurrences affecting the slope or speed of decline of the life cycle of
the Company's products, or affecting the Company's ability to reduce product
costs and other costs or to increase productivity.
* The impact of unusual items resulting from the Company's ongoing
evaluation of its business strategies, acquisitions or divestitures, asset
valuations and organizational structures.
* The effects of and changes in, trade, monetary and fiscal policies, laws
and regulations and other activities of governments, agencies and similar
organizations, including, but not limited to, trade restrictions or
prohibitions, inflation, monetary fluctuations, import and other charges or
taxes, foreign exchange rates, nationalizations and unstable governments.
* The future health of the U.S. and international economies and other
economic factors that directly or indirectly affect the demand for the
Company's products.
* Labor strikes or work stoppages by employees of the Company, its
customers, suppliers, or freight contractors or other providers.
* Environmental factors such as fires, floods, or other natural disasters
and weather conditions which could impact the Company's ability to produce
products or the demand for its products.
* Increased competition due to industry consolidation or new entrants into
the Company's existing markets.
* The introduction of alternative products or governmental and regulatory
activities that favor alternative methods of serving the same function as the
Company's products.
All forward-looking statements included herein are based upon information
presently available, and the Company assumes no obligation to update any
forward-looking statements.
1