UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No. )
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[_] Confidential, For Use of the SS.240.14a-11(c) or SS.240.14a-12
Commission Only (as permitted
by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
PENTAIR, INC.
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(Name of Registrant as Specified In Its Charter)
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PENTAIR, INC.
1500 County Road B2 West
Saint Paul, Minnesota 55113
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 30, 2003
To our Shareholders:
The Annual Meeting of Shareholders of Pentair, Inc. (the "Company") will be
held at the Thrivent Financial (formerly Lutheran Brotherhood) Auditorium, 625
4th Avenue South, Minneapolis, Minnesota, on Wednesday, April 30, 2003, at 10:00
a.m., for the following purposes:
1. To elect two directors.
2. To approve an amendment to the Executive Officer Performance Plan
for Section 162(m) purposes.
3. To approve an amendment to the Omnibus Stock Incentive Plan for
Section 162(m) purposes.
4. To transact such other business as may properly come before the
meeting or any adjournment thereof.
The Board of Directors has fixed the close of business on March 3, 2003
as the record date for determining the shareholders entitled to vote at the
Annual Meeting. Accordingly, only shareholders of record at the close of
business on that date will be entitled to vote. The Company's transfer books
will not be closed.
By Order of the Board of Directors
Louis L. Ainsworth, Secretary
Saint Paul, Minnesota
March 19, 2003
IMPORTANT: For the Annual Meeting to be legally held, there must be a quorum
(majority of the outstanding shares). Accordingly, you are urged to vote your
proxy promptly by Internet or telephone as described in the voting instructions
on the proxy; or date, sign and return the proxy in the enclosed envelope. This
will not prevent you from voting in person if you so desire.
TABLE OF CONTENTS FOR PROXY STATEMENT
PAGE
Appointment, Revocation and Voting of Proxy...................................1
Outstanding Shares and Voting Rights..........................................1
Corporate Governance Matters..................................................1
Security Ownership of Management and Beneficial Ownership.....................2
Proposals to be Acted Upon at the Annual Meeting..............................3
Election of Directors................................................3
Approval of an Amendment to the Executive Officer Performance Plan...5
Approval of an Amendment to the Omnibus Stock Incentive Plan.........7
Securities Authorized for Issuance Under Equity Compensation Plans............9
Comparative Stock Performance Graph..........................................10
Executive Compensation.......................................................10
Report of the Compensation Committee of the Board of Directors...............15
Report of the Audit and Finance Committee of the Board of Directors..........20
Independent Auditors.........................................................21
Section 16(a) Beneficial Ownership Reporting Compliance......................21
Future Proposals.............................................................21
Solicitation.................................................................21
2002 Annual Report on Form 10-K..............................................21
Reduce Duplicate Mailings....................................................21
Executive Officer Performance Plan...................................APPENDIX 1
Omnibus Stock Incentive Plan.........................................APPENDIX 2
Compensation Committee Charter ......................................APPENDIX 3
Audit and Finance Committee Charter..................................APPENDIX 4
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PROXY STATEMENT
FOR ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 30, 2003
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PENTAIR, INC.
1500 County Road B2 West
Saint Paul, Minnesota 55113
March 19, 2003
This proxy statement is furnished in connection with the solicitation
of proxies by the Board of Directors of Pentair, Inc. (the "Company") to be
voted at the Annual Meeting of Shareholders of the Company to be held on
Wednesday, April 30, 2003, or at any adjournment or adjournments of such
meeting. Distribution of this proxy statement and accompanying proxy to
shareholders began on or about March 19, 2003.
APPOINTMENT, REVOCATION AND VOTING OF PROXY
Shareholders whose shares are registered directly with the Company's
transfer agent can appoint a proxy by telephone, by Internet or by mailing their
signed proxy card in the enclosed envelope. Please refer to the instructions
included on the accompanying proxy to vote by proxy. Shareholders who hold
shares in street name through a bank, broker or other record holder may vote by
the methods that their bank or broker makes available, in which case the bank or
broker will include instructions with this proxy statement. Shareholders voting
via the Internet should understand that there may be costs associated with
electronic access, such as usage charges from Internet access providers and
telephone companies, that the shareholders must bear.
Any shareholder giving a proxy may revoke it prior to its use at the
meeting by (1) delivering a written notice expressly revoking the proxy to the
Secretary at the Company's offices, (2) signing and forwarding to the Company at
its offices a later dated proxy or (3) attending the Annual Meeting and casting
his or her votes personally.
A majority of the outstanding shares will constitute a quorum at the
Annual Meeting. Abstentions and broker non-votes are counted for purposes of
determining the presence or absence of a quorum for the transaction of business.
The affirmative vote of a majority of the outstanding shares of the Company's
common stock (the "Common Stock") entitled to vote on the election of directors
and other proposals presented to shareholders and present in person or by proxy
at the Annual Meeting is required for the election to the Board of Directors
(the "Board") of each director nominee and for approval of such proposals.
Pursuant to Minnesota law and the Company's Articles of Incorporation,
abstentions are counted in determining the total number of the votes cast on
proposals presented to shareholders, but will not be treated as votes in favor
of the proposals. Broker non-votes are not counted for purposes of determining
the total number of votes cast on proposals presented to shareholders.
Unless otherwise directed in the accompanying proxy, the persons named
therein will vote FOR the directors and the other proposals set forth in this
Notice of Annual Meeting of Shareholders. As to any other business that may
properly come before the meeting, they will vote in accordance with their best
judgment. The Company does not presently know of any other business.
OUTSTANDING SHARES AND VOTING RIGHTS
At the close of business on March 3, 2003, the record date, there were
49,359,572 shares of the Company's Common Stock outstanding. Each share of
Common Stock entitles the holder to one vote. There is no cumulative voting for
directors.
CORPORATE GOVERNANCE MATTERS
BOARD GOVERNANCE
In light of the enactment of the Sarbanes-Oxley Act of 2002, Securities and
Exchange Commission ("SEC") rules promulgated thereunder and proposed New York
Stock Exchange listing standards, the Company's Board of Directors has reviewed,
revised and adopted new charters for the Board's Audit and Finance Committee,
Compensation Committee,
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Governance Committee and International Committee as well as Corporate Governance
Principles for the Board. The Board also has adopted Pentair's Code of Business
Conduct and Ethics and designated it as the code of ethics for the Company's
Chief Executive Officer and senior financial officers in accordance with SEC
rules. Copies of these documents are available on Pentair's website at
www.pentair.com.
INDEPENDENT DIRECTORS
The Board considers all directors other than Randall J. Hogan to be
independent in accordance with the recently proposed New York Stock Exchange
listing standards for independence of directors generally. Charles A. Haggerty
acts as the presiding director for all executive sessions of the independent
Board members.
SECURITY OWNERSHIP OF MANAGEMENT AND BENEFICIAL OWNERSHIP
The following table contains information concerning the beneficial
ownership of the Company's Common Stock as of March 3, 2003 by each director, by
each executive officer listed in the Summary Compensation Table, by all
directors and executive officers as a group and, as of December 31, 2002, by
each person known to the Company to "beneficially own" more than 5% of its
Common Stock.
RIGHT TO
COMMON SHARE ACQUIRE WITHIN RESTRICTED ESOP PERCENT
NAME OF BENEFICIAL OWNER STOCK(a) UNITS(b) 60 DAYS(c) STOCK(d) STOCK(e) TOTAL OF CLASS(f)
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Louis L. Ainsworth 28,142 74,827 8,865 611 112,445
William J. Cadogan 4,700 13,096 8,482 26,278
Richard J. Cathcart 32,889 125,333 17,300 1,735 177,257
Barbara B. Grogan 2,400 16,898 8,482 27,780
Charles A. Haggerty 9,200 22,042 8,482 39,724
David D. Harrison 37,453 83,494 17,978 249 139,174
William H. Hernandez 500 716 3,332 4,548
Randall J. Hogan 106,450 265,994 67,300 320 440,064
Stuart Maitland 800 7,871 5,932 14,603
Augusto Meozzi 200 9,738 5,932 15,870
William T. Monahan 500 5,507 3,332 9,339
Michael V. Schrock 18,253 51,666 26,084 320 96,323
Karen E. Welke 4,071 16,249 8,482 28,802
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Directors and executive officers as 257,417 92,117 691,103 143,916 6,317 1,190,870 2.4%
a group (14 persons)
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FMR Corp.(g) 2,599,643 5.3%
82 Devonshire Street
Boston, MA 02109
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(a) Unless otherwise noted, all shares are held either directly or indirectly
by individuals possessing sole voting and investment power with respect to
such shares. Beneficial ownership of an immaterial number of shares held by
spouses and children has been disclaimed in some instances. Amounts listed
do not include 471,570 shares held by the Pentair, Inc. Master Trust for
various pension plans of the Company and its subsidiaries. The Trust
Investment Committee of such Master Trust includes Randall J. Hogan, David
D. Harrison and one other member of senior management. Although these
individuals could be deemed under applicable Securities and Exchange
Commission rules to "beneficially own" all of the shares held by these
Plans because of their shared voting and investment power with respect to
those shares, they disclaim beneficial ownership of such shares.
(b) Represents share units paid under the Compensation Plan for Non-Employee
Directors as to which the beneficial owner has no voting or investment
power.
(c) Represents stock options exercisable within 60 days from March 3, 2003.
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(d) Restricted shares issued pursuant to incentive plans as to which the
beneficial owner has sole voting power but no investment power.
(e) Represents common shares owned as a participant in the Pentair Employee
Stock Ownership Plan ("Pentair ESOP"). As of March 3, 2003, Fidelity
Management Trust Company ("Fidelity"), the Trustee of the Pentair ESOP,
held 2,381,642 common shares (4.8%). Fidelity disclaims beneficial
ownership of all shares. The Pentair ESOP participants have the right to
direct the Trustee to vote their shares although participants have no
investment power over such shares. The Trustee, except as otherwise
required by law, votes the shares for which it has received no direction
from participants, in the same proportion on each issue as it votes those
shares for which it has received voting directions from participants.
(f) Less than 1% unless otherwise indicated.
(g) Information derived from a Schedule 13G filed with the Securities and
Exchange Commission on February 14, 2003. As of December 31, 2002, FMR
Corp. and related persons, including Edward C. Johnson III, Abigail P.
Johnson and its wholly-owned subsidiaries, Fidelity Management & Research
Company and Fidelity Management Trust Company, collectively had sole voting
power over 1,374,673 shares and sole dispositive power over 2,599,643
shares.
PROPOSALS TO BE ACTED UPON AT THE ANNUAL MEETING
ITEM 1
ELECTION OF DIRECTORS
The Company's By-Laws provide for a Board of ten members. The Board is
divided into three classes with directors serving three-year terms but with the
beginning date for each term staggered so that the term of only one class
expires in any particular year. Vacancies may be filled by the Board or by
election at a special meeting of shareholders. Any director elected to fill a
vacancy by the remaining directors is required to stand for election at the next
meeting of shareholders.
At the forthcoming Annual Meeting, two persons have been nominated as
candidates to be elected to the Company's Board. Charles A. Haggerty and Randall
J. Hogan, each incumbent directors, have been nominated for three-year terms,
expiring at the 2006 Annual Meeting. Six other directors have terms of office
that do not expire at this time and will continue to serve their full terms.
Although there will be two vacancies remaining on the Board following this
election, proxies cannot be voted for a greater number of directors than the
number nominated in this proxy statement. The Company is engaged in a search to
identify Board candidates for these two vacancies. Unless you direct otherwise,
proxies will be voted FOR the election of all nominees listed below. Should any
nominee decline or be unable to accept such nomination or to serve as director
(an event the Company does not now expect to occur), proxies will be voted FOR a
substitute nominee or nominees in accordance with the best judgment of the
person or persons acting under them.
Information concerning the persons nominated for election as directors,
as well as those continuing in office, is set forth on the following pages.
DIRECTORS STANDING FOR ELECTION
FOR A THREE-YEAR TERM EXPIRING AT THE 2006 ANNUAL MEETING OF SHAREHOLDERS
CHARLES A. HAGGERTY, director since 1994, age 61
Mr. Haggerty serves as the chair of the Company's Compensation
Committee. Mr. Haggerty is currently Chief Executive Officer of LeConte
Associates, LLC, a consulting and investment firm. Mr. Haggerty was Chief
Executive Officer and Chairman of the Board of Western Digital Corporation, a
maker of hard disc drives, from July 1993 until he retired as Chief Executive
Officer in January 2000 and as Chairman in June 2000. Mr. Haggerty is also a
director of Beckman Coulter, Inc., Vixel Corporation and Deluxe Corporation.
RANDALL J. HOGAN, director since 1999, age 47
Since January 1, 2001, Mr. Hogan has been the Chief Executive Officer
of the Company. Mr. Hogan became Chairman of the Board on May 1, 2002. From
December 1999 through December 2000, Mr. Hogan was President and Chief Operating
Officer of the Company. From March 1998 to December 1999, he was Executive Vice
President and President of the Company's Electrical and Electronic Enclosures
Group. From February 1995 to August 1997, he was President of the Carrier
Transicold Division of United Technologies Corporation.
DIRECTORS CONTINUING IN OFFICE
TERM EXPIRING AT THE 2004 ANNUAL MEETING OF SHAREHOLDERS
WILLIAM H. HERNANDEZ, director since 2001, age 54
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Mr. Hernandez has been the Senior Vice President, Finance of PPG
Industries, Inc., a coatings, glass, fiber glass and chemicals manufacturer,
since 1995. He was the Vice President and Controller from 1994 to 1995 and the
Controller from 1990 to 1994.
WILLIAM T. MONAHAN, director since 2001, age 55
Since November 1995, Mr. Monahan has been Chairman of the Board of
Directors and Chief Executive Officer of Imation Corp., a manufacturer of
magnetic and optical data storage media. Mr. Monahan is also a director of
Hutchinson Technology, Inc. and a member of its Compensation Committee.
KAREN E. WELKE, director since 1995, age 58
Ms. Welke retired from Minnesota Mining and Manufacturing Company
("3M"), a diversified technology company, effective January 2002, after
completing a two-year Loaned Executive commitment to Project Hope, a
non-government, non-profit organization dedicated to achieving sustainable
advances in health care around the world. From February 1995 to December 1999,
Ms. Welke was Group Vice President, Medical Markets Group for 3M. Ms. Welke is
also a director of Millipore Corporation and a member of its Compensation
Committee.
DIRECTORS CONTINUING IN OFFICE
TERM EXPIRING AT THE 2005 ANNUAL MEETING OF SHAREHOLDERS
BARBARA B. GROGAN, director since 1996, age 55
Ms. Grogan is Chairman and President of Western Industrial Contractors,
Inc., a company specializing in machinery erection and installation, which she
founded in September 1982. She was Chairman of the Board of Directors of the
Federal Reserve Bank of Kansas City, Denver Branch, from 1989 to 1994, and
currently is a member of the Board of Directors of Deluxe Corporation, Apogee,
Inc., Committee for Economic Development, New York City and Volunteers of
America, Colorado.
STUART MAITLAND, director since 1999, age 57
Mr. Maitland was Director of Manufacturing Operations for the Vehicle
Operations organization at Ford Motor Company, the world's second largest
automaker, Dearborn, Michigan from 1996 through October 2001, when he retired.
He joined Ford Motor Company in 1988 and held positions as Plant Manager at
Ford's Kansas City Assembly Plant, Twin Cities Assembly Plant in St. Paul,
Minnesota and Dearborn Assembly Plant in Dearborn, Michigan.
AUGUSTO MEOZZI, director since 1999, age 63
Since October 2002, Mr. Meozzi has been the President and Chief
Executive Officer of North American operations of the ISOLA Group, a world-wide
producer of base materials. From January 1998 through September 2002, Mr. Meozzi
was the Chief Operating Officer of the ISOLA Group. From November 1992 to
December 1997, Mr. Meozzi was Corporate Executive Vice President of the ISOLA
Group.
DIRECTORS' ATTENDANCE
The Board of Directors held seven meetings in 2002. All directors
attended at least 75% of the aggregate of all the meetings of the Board and all
of the committees on which they served, with the exception of William Cadogan,
who attended 73%. Six of the nine directors attended continuing director
education courses in 2002.
COMMITTEES OF THE BOARD
The Board of Directors has four standing committees: an Audit and
Finance Committee (the "Audit Committee"), a Compensation Committee, a
Governance Committee and an International Committee.
The Audit Committee is responsible, among other things, for assisting
the Board of Directors with oversight of the Company's accounting and financial
reporting processes and audits of the Company's financial statements, including
the integrity of the Company's financial statements, the Company's compliance
with legal and regulatory requirements, the independence and qualifications of
the Company's external auditor and the performance of the Company's internal
audit function and of the external auditor. The Audit Committee is directly
responsible for the appointment, compensation, terms of engagement (including
retention and termination) and oversight of the work of the external auditor.
The Audit Committee held six meetings in 2002. The members of the Audit
Committee are Karen E. Welke (Chair), William H. Hernandez, Stuart Maitland and
Augusto Meozzi.
The Compensation Committee is responsible for discharging the
responsibilities of the Board of Directors relating to the Company's
compensation philosophy and practices for management and overseeing
administration of the Company's
4
employee benefit plans. The Compensation Committee held seven meetings during
2002. The members of the Compensation Committee are Charles A. Haggerty (Chair),
Barbara B. Grogan, Stuart Maitland and William T. Monahan.
The Governance Committee is responsible, among other things, for
identifying individuals qualified to become directors of the Company and
recommending to the Board of Directors nominees for election at the next annual
meeting of shareholders, developing and recommending to the Board of Directors a
set of corporate governance principles applicable to the Company and monitoring
developments in director compensation and recommending to the Board of Directors
changes in compensation as appropriate. The Governance Committee also oversees
the Company's public policy and certain other legal and business risks. The
Governance Committee considers nominees recommended by shareholders. The
Company's by-laws require that shareholders give advance notice and furnish
certain information to nominate a person for election as a director. The
Governance Committee held four meetings in 2002. The members of the Governance
Committee are William J. Cadogan (Chair) (retiring from the Board, effective as
of April 29, 2003), Barbara B. Grogan and Charles A. Haggerty. Randall J. Hogan
resigned from the Governance Committee on August 21, 2002.
The International Committee was established in 2002 to assume oversight
previously conducted by directors acting as the European Subcommittee. The
Committee provides oversight of operations of the Company outside North America,
and assists management in formulating growth, development and organizational
strategies for the Company's international business units. The members of the
International Committee are Augusto Meozzi (Chair), Barbara B. Grogan, Charles
A. Haggerty, Randall J. Hogan, and Karen E. Welke.
DIRECTORS' COMPENSATION
It is the Company's philosophy that a significant portion of directors'
compensation should be tied to long-term growth in shareholder value. In 2002,
non-employee directors were paid an annual retainer of $30,000 ($35,000 for the
Chairs of the Compensation and Audit Committees), $13,938 of deferred
compensation in the form of share units under the Compensation Plan for
Non-Employee Directors (the "Non-Employee Director Plan"), $1,500 for attendance
at each Board meeting, $1,000 ($2,000 for committee chairs) for attendance at
each committee meeting, and $500 for participation in a telephone conference in
lieu of a meeting. Effective December 2002, Board members are paid $2,000
($3,000 for committee chairs) for attendance at committee meetings lasting more
than two hours and $1,000 for participation in a telephone conference in lieu of
a meeting that lasts more than two hours. Under the Non-Employee Director Plan,
non-employee directors of the Company may elect to defer payment of all or a
portion of their annual retainer and meeting fees in the form of share units.
The Plan provides for a Company match of 25% on the first $750 per month
deferred in the form of share units. The value of a share unit is equal to the
market value of a share of Common Stock. Share units carry no voting or
investment power. In 2002, compensation for directors was changed from the prior
year to increase the number of options granted and to decrease the amount of
cash compensation.
The Outside Directors Nonqualified Stock Option Plan provides for the
granting of options to purchase Common Stock to directors who are not employees
of the Company. The Plan provides for automatic annual grants to the directors
and offers alternative forms of payment of the exercise price including
surrender of Common Stock. The persons to receive options, the number of options
granted, and the terms of the options are determined by the Plan. No option
granted under the Plan may extend for a period of more than ten years from the
date of the grant and no option exercise price may be less than the current
market price of Common Stock on the date of award of such option. One-third of
the options granted to each recipient become exercisable on each of the first
three anniversaries of the date of grant. If the director exercises the stock
option during the first five years of the option term by tendering Company
common shares, the Company can grant to the director an option ("Reload Option")
to purchase common shares equal to the number of shares tendered. The Reload
Option may be exercised during the remaining term of the original stock option
period. The Reload Option exercise price is equal to the market price per share
on the date the shares are tendered.
Each director received an automatic grant of 1,150 shares under the
Outside Directors Nonqualified Stock Option Plan on January 2, 2002. The
exercise price for these options is $36.30 per share, and they expire on January
2, 2012. Following an amendment to the Plan, the directors were granted 8,850
options on February 27, 2002, 5,000 of which were to ensure equity with new
directors who will receive 5,000 options upon becoming a director. The exercise
price for these options is $39.08 and they expire on February 27, 2012. As
amended, the Plan provides that directors will receive 5,000 options each year
on an ongoing basis.
ITEM 2
APPROVAL OF THE AMENDMENT TO THE EXECUTIVE OFFICER PERFORMANCE PLAN
The Company is asking shareholders to approve an amendment to the
Pentair, Inc., Executive Officer Performance Plan (the "EOPP"). The Compensation
Committee adopted the amendment on February 25, 2003 to be effective January 1,
2003, subject to shareholder approval. As described in the Report of the
Compensation Committee on page 15, the EOPP is
5
a component of the Company's overall strategy to more closely align incentive
pay with the achievement of financial objectives. The EOPP provides key
executives with annual incentive compensation tied to the achievement of
pre-established performance goals. The purposes of the amendment are to promote
this compensation philosophy by giving the Compensation Committee discretion to
choose the appropriate standard or standards by which to measure executives'
performances in any given fiscal year, to choose the appropriate performance
targets and to choose the appropriate weightings for each performance measure
selected. The amendment also changes the maximum annual award available under
the EOPP to $3,500,000, and permits the entire award to be paid in cash.
Previously, the maximum award was 200% of base salary, but in no event more than
$3,500,000 and any portion of an award that exceeded a participant's base salary
was payable in restricted stock. The amendment will not become effective unless
approved by the shareholders.
BACKGROUND. Before the amendment, the EOPP's objective performance
criteria measured the Company's performance against annually predetermined goals
for Pentair Value Added ("PVA") and Free Cash Flow. PVA was calculated as net
operating profit after taxes ("NOPAT") less a surcharge against average Invested
Capital. Free Cash Flow was equal to net cash provided by operating activities,
excluding net tax-affected interest expense, less capital expenditures. Under
the EOPP as amended, the Compensation Committee will have the discretion to
choose one or more appropriate standards for measuring performance from among
the following: net income; stockholder return; stock price appreciation;
earnings per share; revenue growth; return on investment; return on invested
capital; earnings before interest, taxes, depreciation, and amortization;
operating income; market share; return on sales; asset reduction; cost
reduction; return on equity; cash flow; and new product releases.
Below is a summary of the principal provisions of the EOPP. Capitalized
terms have the meanings set forth in the Amended and Restated EOPP, a copy of
which is attached as Appendix 1. The following description of the Amended and
Restated EOPP is qualified in its entirety by reference to that Appendix.
GENERAL. The EOPP is administered by the Compensation Committee.
Committee members must qualify as "outside directors" under Section 162(m) of
the Internal Revenue Code (the "Code") in order for cash awards under the EOPP
to qualify as deductible performance-based compensation under the Code. The
Compensation Committee members meet this requirement. Subject to the terms of
the EOPP, the Compensation Committee has the sole discretion to determine the
key employees who will participate in the EOPP and the amounts, terms and
conditions of each award.
ELIGIBILITY. In selecting participants for the EOPP, the Compensation
Committee will choose those senior executives (Vice President and above) the
Committee believes are most likely to make significant contributions to
Pentair's success. The actual number of employees who will receive awards under
the EOPP cannot be determined in advance because eligibility for participation
is at the discretion of the Compensation Committee. An individual's
participation in future years is at the discretion of the Compensation
Committee. An employee who participates in the Plan is not eligible for an
incentive award under the Pentair Management Incentive Plan, a more
broadly-based cash bonus plan, with respect to the same performance period.
EOPP AWARDS AND PERFORMANCE GOALS. The Compensation Committee will
establish for each performance period (a) the performance goals based on
business criteria and the target levels of performance, and (b) a formula for
calculating a participant's award based on actual performance compared to the
pre-established performance goals. The performance goals may be based on a
variety of business criteria as outlined above in the "Background" section. The
Compensation Committee may set performance periods and performance goals that
differ from participant to participant. For example, the Compensation Committee
may designate performance goals based on either Company-wide or business unit
results, as appropriate for the participant's specific responsibilities. After
the end of each performance period, the Compensation Committee will determine
the extent to which the performance goals for each participant were achieved.
The Compensation Committee will determine the actual award, if any, for each
participant by the level of actual performance achieved. The Compensation
Committee, however, retains discretion to eliminate or reduce the actual award
payable to any participant below that which otherwise would be payable under the
applicable formula, but may not increase the award. Awards under the EOPP
generally will be payable in cash after the end of the performance period during
which the award was earned.
MAXIMUM AWARD. During any fiscal year no participant may receive an
award of more than $3,500,000.
AMENDMENTS AND TERMINATION. The Compensation Committee may amend or
terminate the EOPP at any time and for any reason. To maintain the plan's
qualification under Section 162(m), material amendments of the EOPP will require
stockholder approval.
CHANGE IN CONTROL. If a "Change in Control" (as defined in the
Company's Key Executive Employment and Severance Agreement, effective August 23,
2000) occurs, a participant in the EOPP as of the date of such change in control
is entitled to receive (a) payment of any outstanding but unpaid award for the
prior year and (b) an award for the fiscal year in effect as of the Change in
Control using the annual base salary rate as in effect immediately before the
Change in Control
6
and assuming the EOPP goals for such year have been attained. Such amounts are
payable within 10 days of the Change in Control. In addition, certain other
provisions or requirements applying to awards under the EOPP are modified or
eliminated in the event of a Change in Control, including the authority of the
Compensation Committee to reduce an award, the minimum operating income
requirement, the requirement of an annual audit and the requirement that a
participant remain employed through the end of the incentive period.
FEDERAL INCOME TAX INFORMATION. As discussed in the Compensation
Committee Report on Executive Compensation below, under Section 162(m) of the
Code, the Company is not entitled to a deduction for certain executive
compensation in excess of $1,000,000. This limitation, however, does not apply
to compensation that qualifies as "performance-based compensation" under Section
162(m). If the shareholders approve the proposed amendment, bonus awards paid
under the objective performance criteria established under the EOPP will
continue to so qualify.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ITEM 2 TO APPROVE THE AMENDMENT
TO THE EXECUTIVE OFFICER PERFORMANCE PLAN.
ITEM 3
APPROVAL OF THE AMENDMENT TO THE OMNIBUS STOCK INCENTIVE PLAN
The Company is asking shareholders to approve an amendment to the
Omnibus Stock Incentive Plan (the "Omnibus Plan") to permit restricted stock
grants to qualify for an income tax deduction under Section 162(m) of the Code.
The Compensation Committee adopted the amendment on February 25, 2003 to be
effective January 1, 2003, subject to shareholder approval. The amendment
imposes a limit on the maximum aggregate number of restricted stock the
Committee may grant to any one Omnibus Plan participant during a fiscal year.
The amendment also sets forth specific business criteria the Committee may use
to grant performance-based restricted stock awards to align the Omnibus Plan
with the compensation philosophy described in the Report of the Compensation
Committee on page 15. The amendment will not become effective unless approved by
shareholders.
Following is a summary of the material features of the Omnibus Plan.
Capitalized terms have the meanings set forth in the Omnibus Plan, a copy of
which is attached as Appendix 2. The following description is qualified in its
entirety by reference to that Appendix. The amendment is reflected in Section
5.1(f) and (g) of the amended Omnibus Plan document.
PURPOSE. The purpose of the Omnibus Plan is to attract and retain top
quality executives and key employees, encourage innovation and growth, reward
executives for attainment of short-term performance objectives and long-term
shareholder value, recognize outstanding performance, encourage executive stock
ownership and, in general, to align management and shareholder interests.
ELIGIBILITY AND PARTICIPATION. Any key managerial, administrative or
professional employee of the Company (or an affiliate) generally in salary grade
25 or higher who is in a position to make a material contribution to the
continued profitable growth and long term success of the Company (or an
affiliate) is eligible to participate in the Omnibus Plan.
SHARES AUTHORIZED. The Omnibus Plan has 5,600,000 shares authorized by
shareholders for issuance over the life of the plan. No more than 20% of the
shares available for issuance following the 2001 increase approved by
shareholders may be issued as grants in a form other than stock options. As of
December 31, 2002, 2,100,497 shares remained available for issuance under this
plan. Unused shares, such as canceled or expired options or forfeited shares of
restricted stock, are eligible for future grants.
OPTIONS. The exercise price of an option, whether incentive stock
options ("ISOs") or non-qualified stock options ("NQSOs"), cannot be less than
the Fair Market Value as of the date of grant. Without shareholder approval, the
Company may not cancel any outstanding option and replace it with a new option
which has a lower option price, if such action would have the same economic
effect as reducing the option price of such a canceled option. The term of the
option is set by the Compensation Committee at the time of grant, but may not be
longer than ten years. No one participant may receive options or SARs under the
Omnibus Plan for more than 150,000 shares in the aggregate in any calendar year.
SARs. Participants who have been awarded ISOs may also be award Stock
Appreciation Rights up to the total number of shares the participant could
acquire by exercise of the underlying ISOs, which must expire at the same time
as the underlying ISO and for which the payment amount cannot be more than 100%
of the difference between the exercise price and the Fair Market Value of the
shares subject to the option on the date the SAR is exercised.
RESTRICTED STOCK AWARDS. Under the existing terms of the Omnibus Plan,
the Committee may make awards of restricted stock (including rights to
restricted stock), which are subject to a vesting period before the participant
is entitled to
7
the shares. The Committee determines the vesting period at the time of grant,
but no more than 5% of the maximum number of shares available for issuance under
the Omnibus Plan may vest during a period shorter than three years. The
Committee also has the discretion to impose additional conditions or
restrictions on the grant.
Subject to shareholder approval, the proposed amendment provides that
for specific grants of restricted stock to eligible participants, the Committee
may establish for each participant for each performance period (a) the
performance goals based on business criteria and the target levels of
performance and (b) a formula for calculating a participant's award based on
actual performance compared to the pre-established performance goals. The
performance goals may be based on one or more of the following business
criteria: net income; stockholder return; stock price appreciation; earnings per
share; revenue growth; return on investment; return on invested capital;
earnings before interest, taxes, depreciation and amortization; operating
income; market share; return on sales; asset reduction; cost reduction; return
on equity; cash flow; and new product releases. The Compensation Committee may
set performance periods and performance goals that differ from participant to
participant. For example, the Compensation Committee may designate performance
goals based on either Company-wide or business unit results, as appropriate for
the participant's specific responsibilities. After the end of each performance
period, the Compensation Committee will determine the extent to which the
performance goals for each participant were achieved. The Compensation Committee
will determine the actual award, if any, for each participant by the level of
actual performance achieved. The Compensation Committee, however, retains
discretion to eliminate or reduce the actual award payable to any participant
below that which otherwise would be payable under the applicable formula, but
may not increase the award. Performance awards qualifying under Section 162(m)
for favorable tax treatment will be made in the form of restricted shares that
are payable after the end of the performance period during which the award was
earned. The amendment also limits restricted stock grants to an annual aggregate
maximum of 150,000 shares to any one Participant.
PERFORMANCE SHARES. The Compensation Committee may make awards of
Performance Shares and Performance Units. At the time of the award the Committee
establishes the terms and conditions applicable to the payment of the award,
including the achievement of target performance objectives. The performance
objectives include such financial measures as return on shareholders equity,
growth in earnings per share, return on sales, growth in income and growth in
sales. The achievement of the designated targets is measured over the
Performance Period specified at the date of the award. Awards are paid based on
the degree of attainment of the performance targets. The maximum amount of
compensation a Participant may be granted by reason of a performance award in
any one calendar year is $100,000 (based on the Fair Market Value of the award
on the date of grant).
Payment of an award is made within four months following the end of the
Performance Period. The payment may be made in cash, Stock, Restricted Stock or
Rights to Restricted Stock (or any combination), as determined by the Committee
at the time of grant. Shares of stock used in payment of an award are valued as
of the date the Performance Period ends.
STOCK OWNERSHIP GUIDELINES. Stock ownership guidelines for top
management have been established to motivate individual achievement and increase
ownership of the Company's Common Stock. The Committee determined that over a
period of five years, its top management should accumulate and hold Company
stock equal to the following values: Chief Executive Officer - at least three
times base salary; Senior Corporate Officers -- two to three times base salary;
and other corporate officers and subsidiary presidents -- one to two times base
salary.
The Committee considers incentive grants of restricted stock or rights
to restricted stock based on the increase in ownership during the preceding
year. These restricted stock grants (made under the Omnibus Plan) vest in equal
increments on the third, fourth and fifth anniversaries of the grant. The size
of the grant is equal to 10% of the increase in Common Stock during the year if
the annual ownership target is met, but limited to 10% of the targeted ownership
level if the targeted ownership level has already been achieved.
AMENDMENT, SUSPENSION, MODIFICATION AND TERMINATION. The Compensation
Committee has the right to amend, suspend, modify or terminate the Omnibus Plan
at any time, subject to approval by the Board of Directors. To maintain the
plan's qualification under Section 162(m), material amendments of the Omnibus
Plan will require shareholder approval.
TERMINATION OF EMPLOYMENT. If a participant dies, becomes disabled,
retires or is otherwise terminated, for cause or otherwise (except for a "Change
of Control," which is described below), the outstanding options or other awards
may be subject to accelerated vesting, a shortening of the exercise period or
termination, as the Compensation Committee may determine on a case by case
basis.
CHANGE IN CONTROL. If a "Change in Control" (as defined in the
Company's Key Executive Employment and Severance Agreement, effective August 23,
2000) occurs, all options granted to a participant then employed by Pentair (or
an affiliate) become fully vested and immediately exercisable, restrictions on
Restricted Stock and Performance Share
8
awards automatically lapse, Rights to Restricted Stock become fully vested and
outstanding ICUs and Performance Units are valued assuming all goals are met and
all or a portion of such award is paid based on when such award was granted. All
payments must be made within 10 days of the Change in Control.
MODIFICATION OF AWARDS. While the Committee has authority generally to
make modifications to individual awards, including accelerating vesting or
removing restrictions, the Committee does not have discretion to increase the
amount of compensation a Participant could earn by application of
pre-established performance goals and financial measurements relevant to the
award, although the Committee does have discretion to decrease such an award.
FEDERAL INCOME TAX INFORMATION. As discussed in the Compensation
Committee Report on Executive Compensation below, under Section 162(m) of the
Code, the Company is not entitled to a deduction for certain executive
compensation in excess of $1,000,000. This limitation, however, does not apply
to compensation that qualifies as "performance-based compensation" under Section
162(m). If the shareholders approve the proposed amendment, restricted stock
awarded under the objective performance criteria established under the Omnibus
Stock Incentive Plan will so qualify.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ITEM 3 TO APPROVE THE AMENDMENT
TO THE OMNIBUS PLAN.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table summarizes, as of December 31, 2002, information
about compensation plans under which equity securities of Pentair are authorized
for issuance:
EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER
ISSUED UPON EXERCISE OF EXERCISE PRICE OF EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES REFLECTED
WARRANTS AND RIGHTS WARRANTS AND RIGHTS IN COLUMN (a))
PLAN CATEGORY (a) (b) (c)
----------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders 2,513,238(1) $33.18 2,400,645(2)
Equity compensation plans not
approved by security holders 230,000(3) $35.67 --
----------------------------------------------------------------------------------------------------------------------
Total 2,743,238 $33.39 2,400,645
======================================================================================================================
(1) Represents options to purchase shares of Pentair Common Stock granted under
the Pentair Omnibus Stock Incentive Plan and the Pentair Outside Directors
Nonqualified Stock Option Plan.
(2) Represents securities remaining available for issuance under the Omnibus
Stock Incentive Plan and Outside Directors Nonqualified Stock Option Plan. No
more than 20% of the shares available for issuance under the Omnibus Stock
Incentive Plan (approximately 390,000) may be used to make awards other than
stock options.
(3) Represents options to purchase Pentair Common Stock granted pursuant to
certain individual stock option agreements described below.
INDIVIDUAL STOCK OPTION AGREEMENTS. On January 2, 2001, the Company
awarded each of Randall J. Hogan (currently the Company's Chairman and Chief
Executive Officer) and Winslow H. Buxton (former Chairman of the Board of
Directors effective April 30, 2002) an option to purchase 24,000 shares of
Pentair Common Stock pursuant to individual stock option agreements. These
options have an exercise price of $22.75 per share. The options awarded Randall
J. Hogan vest in three equal annual installments, commencing one year after the
date of grant, and the options awarded to Winslow H. Buxton became fully vested
and exercisable on April 30, 2001. In addition, on February 27, 2002, the
Company awarded Mr. Buxton an option to purchase 182,000 shares of the Pentair
Common Stock pursuant to an individual stock option agreement in lieu of any
compensation, fees or other benefits to which Mr. Buxton would have otherwise
been entitled as a non-employee member of the Board. This option has an exercise
price of $39.0781 per share and vests in three equal annual installments,
commencing one year after the date of grant. In each case, the options expire
ten years after the date of grant and the exercise price of the options was the
closing price of Pentair Common Stock on the date of grant. If a "Change in
Control" (as defined in the Company's Key Executive Employment and Severance
Agreements) of the Company occurs, then all the options become immediately
exercisable.
9
COMPARATIVE STOCK PERFORMANCE GRAPH
The following graph sets forth the cumulative total shareholder return
on the Company's Common Stock for the last five fiscal years, assuming the
investment of $100 on December 31, 1997 and the reinvestment of all dividends
since that date to December 31, 2002. The graph also contains for comparison
purposes the S&P 500 Index and the S&P MidCap 400 Index, assuming the same
investment level and reinvestment of dividends.
By virtue of its market capitalization, Pentair is a component of the
S&P MidCap 400 Index. On the basis of the Company's size and diversification of
businesses, a readily identifiable peer group has not been found. The Company
believes the S&P MidCap 400 Index is an appropriate comparison. The Company has
evaluated other published indices, but has determined that the results are
skewed by one or two large companies included in the indices. The Company
believes such a comparison would not be meaningful.
COMPARISON OF FIVE-YEAR CUMULATIVE RETURN
FISCAL YEAR ENDED DECEMBER 31
[PERFORMANCE GRAPH]
COMPANY / INDEX DEC97 DEC98 DEC99 DEC00 DEC01 DEC02
------------------------------- ----------- ----------- ----------- ----------- ---------- -----------
PENTAIR, INC. 100 112.52 110.51 70.84 109.35 105.48
S&P 500 INDEX 100 128.58 155.63 141.46 124.65 97.10
S&P MIDCAP 400 INDEX 100 119.12 136.65 160.57 159.60 136.44
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the cash and noncash compensation
awarded to or earned by the Chief Executive Officer of the Company and the four
other highest paid executive officers of the Company whose salary and bonus
earned in 2002 exceeded $100,000.
10
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------- ----------------------
AWARDS PAYOUTS
----------------------- -----------------------
OTHER RESTRICTED ALL OTHER
ANNUAL STOCK SECURITIES LTIP COMPEN-
NAME AND SALARY BONUS(a) COMPEN- AWARDS(c) UNDERLYING PAYOUTS SATION
PRINCIPAL POSITION YEAR ($) ($) SATION(b) ($) OPTIONS(d) ($) ($)(e)
----------------------- ---- ------- ------- --------- --------- ---------- ------- -------------
Randall J. Hogan 2002 692,500 692,500 -- 133,135 148,994 125,126 9,126
CHIEF EXECUTIVE OFFICER 2001 625,000 403,125 -- 1,766,772 174,000 164,962 8,856
2000 450,000 400,000 -- 1,012,356 53,000 22,155 11,561
David D. Harrison 2002 376,250 227,514 -- 28,939 39,494 8,667 12,709
EXECUTIVE VICE PRESIDENT, 2001 365,000 172,501 100,376(f) 476,637 45,000 12,621 11,129
CHIEF FINANCIAL OFFICER 2000 308,902 120,472 432,429(g) -- 60,000 -- 1,594
Richard J. Cathcart 2002 374,750 167,752 -- 14,803 34,000 89,203 12,478
PRESIDENT AND CHIEF 2001 365,000 75,920 46,397(h) 574,936 48,000 115,900 12,107
OPERATING OFFICER, WATER 2000 350,000 350,000 -- 94,117 32,000 201,282 13,803
TECHNOLOGIES SEGMENT
Louis L. Ainsworth 2002 302,850 162,782 -- -- 28,494 52,009 9,879
SENIOR VICE PRESIDENT AND 2001 296,400 48,165 -- 251,453 28,500 65,983 8,595
GENERAL COUNSEL; SECRETARY 2000 285,000 71,250 -- 6,836 19,000 68,749 12,226
Michael V. Schrock 2002 318,125 135,566 140,359(i) 9,659 34,000 54,705 10,814
PRESIDENT AND CHIEF 2001 273,854 71,275 -- 188,486 38,500 59,108 14,332
OPERATING OFFICER, 2000 242,500 242,494 -- 466,523 9,000 2,986 15,331
ENCLOSURES SEGMENT
(a) Represents cash bonuses accrued by the Company for the year even if
paid after December 31. Any portion of a bonus paid in restricted stock
is included in the Restricted Stock Awards column.
(b) Other annual compensation includes perquisites and other personal
benefits, securities or property. Disclosure is required only if the
amount exceeds the lesser of $50,000 or 10% of the total annual salary
and bonus reported for the named executive officer. Information has
been included only for those named executive officers who have met the
reporting threshold.
(c) The restricted stock awards reflected in the table were made pursuant
to the Company's executive compensation programs, including any
restricted stock portion of a bonus earned in 2002. Restricted stock
awards are subject to vesting as determined by the Committee. The value
of restricted stock awards reflected in the table is based on the
closing market price of the Common Stock on the date of grant. As of
December 31, 2002, the following restricted stock awards (not yet
earned) were held by each of the named executives (based on the
December 31, 2002 closing price of $34.55): Hogan 58,862 shares or
$2,033,682; Harrison 9,864 shares or $340,801; Cathcart 14,887 shares
or $514,346; Ainsworth, 5,546 shares or $191,614; Schrock, 20,274
shares or $700,467.
(d) Option grants in 2002 included 3,494 options granted to each of Hogan,
Harrison and Ainsworth as "Reload Options." See footnote (a) to Option
Grants in 2002 Table.
(e) Includes Company contributions to the Retirement Savings and Stock
Incentive Plan, RSIP Sidekick Plan and the Employee Stock Purchase and
Bonus Plan and life insurance premiums paid by the Company on behalf of
the named executive officer.
(f) Includes relocation expenses of approximately $32,991 and the balance
of this amount reflects the value of benefits ("Flexible Perquisite
Program Benefits") provided under a flexible perquisite program
available to certain executives for the reimbursement of certain
business-related expenses, including automobile expenses, membership
fees, professional fees (including tax preparation costs) and
out-of-pocket medical expenses. The program includes an annual benefit
of up to $20,000, plus a one-time benefit of up to $50,000 for certain
membership fees.
11
(g) Includes relocation expenses of approximately $416,000 and the balance
of this amount reflects the value of Flexible Perquisite Program
Benefits.
(h) This amount reflects the value of benefits provided under the Flexible
Perquisite Program.
(i) Includes relocation expenses of approximately $120,452 and the balance
of this amount reflects the value of Flexible Perquisite Program
Benefits.
STOCK OPTIONS
The following tables summarize option grants to and exercises by the
Chief Executive Officer and the executive officers named in the Summary
Compensation Table above during 2002, and the values of the options held by such
persons at the end of 2002. Option grants shown in the table below include both
incentive stock options and non-qualified stock options.
OPTION GRANTS IN 2002
---------------------
POTENTIAL REALIZABLE VALUE
NUMBER OF % OF TOTAL AT ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION -----------
NAME GRANTED(A) FISCAL 2002 PRICE DATE 5% 10%
---- ---------- ---- ----- ---- ----------------------------
Randall J. Hogan 3,494 .7% $32.55 1/02/11 $ 62,414 $ 153,585
145,500 28.9% $36.30 1/02/12 $3,321,318 $8,416,871
------- ----- ---------- ----------
148,994 29.6% $3,383,732 $8,570,456
David D. Harrison 3,494 .7% $32.55 1/02/11 $ 62,414 $ 153,585
36,000 7.1% $36.30 1/02/12 $ 821,769 $2,082,525
------ ---- ----------- ----------
39,494 7.8% $ 884,183 $2,236,110
Richard J. Cathcart 34,000 6.7% $36.30 1/02/12 $ 776,115 $1,966,829
Louis L. Ainsworth 3,494 .7% $32.55 1/02/11 $ 62,414 $ 153,585
25,000 5.0% $36.30 1/02/12 $ 570,673 $1,446,198
------ ---- ----------- ----------
28,494 5.7% $ 633,087 $1,599,783
Michael V. Schrock 34,000 6.7% $36.30 1/02/12 $ 776,115 $1,966,829
(a) Generally one-third of each grant becomes exercisable on each of the
first three anniversaries of the date of grant. The exercise price for
the options granted was the closing market price of the Common Stock as
of the date of grant. Stock options can be granted for terms up to ten
years. If the employee exercises the stock option during the first five
years of the option term by tendering Company common shares owned by
that employee, the Committee can grant to the employee an option
("Reload Option") to purchase common shares equal to the number of
shares tendered. The Reload Option may be exercised during the
remaining term of the original stock option period. The Reload Option
exercise price is equal to the market price per share on the date the
shares are tendered.
12
AGGREGATE OPTION EXERCISES IN 2002 AND VALUE AT END OF 2002
-----------------------------------------------------------
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
END OF 2002 END OF 2002
SHARES ACQUIRED VALUE EXERCISABLE (E) EXERCISABLE (E)
NAME ON EXERCISE REALIZED UNEXERCISABLE (U) UNEXERCISABLE (U)
---- ----------- -------- ----------------- -----------------
Randall J. Hogan 5,000 $ 48,985 E 141,827 E $ 632,399
U 279,167 U $1,368,800
David D. Harrison 10,000 $114,095 E 37,494 E $ 65,999
U 97,000 U $ 354,000
Richard J. Cathcart -- -- E 87,333 E $ 188,800
U 76,667 U $ 377,600
Louis L. Ainsworth 5,000 $ 48,985 E 50,660 E $ 60,099
U 50,334 U $ 224,200
Michael V. Schrock -- -- E 32,833 E $ 64,975
U 62,667 U $ 129,950
LONG-TERM INCENTIVE PLAN AWARDS
The following table reflects incentive compensation unit (ICU) awards
made under the Omnibus Plan during 2002 to the Chief Executive Officer and the
executive officers named in the Summary Compensation Table above.
LONG-TERM INCENTIVE PLAN AWARDS IN 2002
---------------------------------------
PERFORMANCE OR
OTHER PERIOD ESTIMATED FUTURE PAYOUTS UNDER
NUMBER OF UNTIL NON-STOCK PRICE BASED PLANS(a)
SHARES, UNITS OR MATURATION OR -------------------------------------
NAME OTHER RIGHTS PAYOUT THRESHOLD TARGET MAXIMUM
---- --------------------- ------------------- ---------------- -------------------------------------
Randall J. Hogan 273,000 units 3 years $ 0 $273,000 $546,000
David D. Harrison 151,000 units 3 years $ 0 $151,000 $302,000
Richard J. Cathcart 144,000 units 3 years $ 0 $144,000 $288,000
Louis L. Ainsworth 105,000 units 3 years $ 0 $105,000 $210,000
Michael V. Schrock 144,000 units 3 years $ 0 $144,000 $288,000
(a) These calculations do not include the Total Shareholder Return multiplier
(discussed in the paragraph below), as it is not able to be estimated.
The ultimate payout value of each ICU is determined based on the
Company's operating income (OI) growth and return on invested capital (ROIC)
averaged over the three-year period. The target payout shown in the table is
based on annual OI growth of 10% and annual ROIC of 14% which results in a value
per ICU of $1.00. If over the three-year period there is no OI growth and ROIC
is less than 11%, the value per ICU will be $0. The maximum value per ICU is
$2.00. The following table shows the Company ICU values based on the OI growth
and ROIC.
13
OPERATING INCOME (OI) GROWTH
RETURN ON INVESTED --------------------------------------------------------------------------------------
CAPITAL (ROIC) 0% 2% 5% 10% 15% 20% 25%
----------------------- --------------------------------------------------------------------------------------
11% 0.00 0.00 0.06 0.16 0.25 0.30 0.33
12% 0.35 0.41 0.47 0.52 0.57 0.59 0.60
13% 0.80 0.81 0.82 0.82 0.83 0.83 0.83
14% 0.96 0.97 0.98 1.00 1.02 1.04 1.05
14.5% 1.11 1.13 1.16 1.20 1.25 1.30 1.35
15.5% 1.27 1.30 1.34 1.41 1.49 1.57 1.66
17.0% 1.45 1.49 1.54 1.65 1.76 1.88 2.00
For 2002, tables were also developed for the Company's Tools, Water and
Enclosure segments in order to more closely align business operating results to
employees within each segment. Similar to the Company table, if over the
three-year period there is no OI growth in the business unit and ROIC is less
than 11% (or 15% in the Water segment), the value per ICU will be $0. The
maximum value per ICU is $2.00.
For 2002, a Total Shareholder Return (TSR) multiplier was added to
align management and shareholder interests. For example, if over the three-year
period total shareholder return (change in stock price plus dividends) is 33%,
the TSR multiplier would be 1.33.
RETIREMENT BENEFIT PLANS
The Company maintains a tax-qualified defined benefit pension plan
covering substantially all non-bargaining U.S. employees and an excess benefit
plan covering highly-paid employees. Benefits under each plan are based on a
participant's high five-year average eligible earnings, which generally include
salary and bonus.
The Company maintains an unfunded, nonqualified Supplemental Executive
Retirement Plan (SERP) for corporate officers and subsidiary presidents. The
annual retirement benefit payable under the SERP at age 65 is equal to 50% of
the participant's high three year average eligible earnings reduced by 100% of
the annual primary Social Security benefit and further reduced by age 65
benefits payable under qualified pension plans sponsored by the Company and
previous employers of the participant.
Effective January 1, 1999 the Company amended the SERP to provide an
annual retirement benefit which, expressed as a lump sum, is equal to the
product of 15 percentage points for each year of service times the high five
year average eligible earnings with no reductions for Social Security or
qualified pension benefits. SERP benefits are payable as early as the attainment
of age 55 and completion of five years of service in the new plan and are
converted into and received in the form of a term certain or joint and survivor
annuity.
The following estimated aggregate amounts are payable from the
qualified pension (as a life annuity), excess plan and SERP (as a fifteen year
term annuity) upon retirement to the named executive officers, assuming
retirement at age 65 and each final salary is the same as that at January 1,
2003: Hogan $483,346; Harrison $265,475; Cathcart $368,951; Ainsworth $187,630;
Schrock $225,300.
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
The Company has an Employment Agreement with Richard J. Cathcart, the
President and Chief Operating Officer of the Water Technologies segment. The
Employment Agreement provides that in the event Mr. Cathcart's employment is
terminated at any time prior to his normal retirement date (as determined under
the primary defined benefit pension plan applicable to Mr. Cathcart), unless
terminated "For Cause" as defined in the agreement, then Mr. Cathcart is
entitled to receive certain severance benefits. Prior to reaching age 62, he is
entitled to a payment of three times his annual cash compensation, at age 62 he
is entitled to an amount equal to his annual cash compensation and from age 63
on there is no cash payment amount. The amount of this payment is subject to
reduction if the average performance of the Water Technologies segment (or any
other segment for which Mr. Cathcart has responsibility during the applicable
period) for the three fiscal years preceding termination does not meet the
specified criteria. Mr. Cathcart is also entitled to receive outplacement
services, medical benefits, full vesting in the accrued benefit under the
Supplemental Executive Retirement Plan plus any additional benefits he would
have received if employment had continued until age 62. In addition, the
agreement provides for the vesting of restricted stock awards and stock options,
as well as a formula for calculating payment of outstanding performance-based
awards. The Employment Agreement also contains a covenant against competition by
Mr. Cathcart.
14
The Company's key corporate executives and business unit leaders
(including the executive officers) have entered into agreements with the Company
that provide for contingent benefits in the event of a change in control of the
Company (except in certain very limited circumstances). Such benefits include:
a. bonus awards for the year in question to be made under the
Management Incentive Plan or EOPP;
b. immediate vesting of all unvested stock options, termination
of all restrictions on shares issued under the Omnibus Plan,
and payment for ICUs and performance units without regard to
the plan's forfeiture provisions;
c. reimbursement of any excise taxes triggered by payments to the
executive;
d. the cost of an executive search agency;
e. short-term replacement coverage for Company-provided group
medical, dental and life insurance policies;
f. amount of non-vested benefits under any of the Company's
tax-qualified deferred compensation plans;
g. the accelerated accrual and vesting of benefits under the
Supplemental Executive Retirement Plan (for those executives
who have been made participants of such plan); and
h. severance pay equal to 300% (for the CEO), 250% (for the
Company's other executive officers and business unit
presidents) or 200% (for all other applicable executives) of
annual compensation for terminated employees; guaranteed
salary, benefit and bonus levels for continuing employees for
up to a three-year period.
In addition, the Omnibus Plan permits the Compensation Committee, upon
a change in control of the Company, to cancel all outstanding options granted
under the plan, whether or not exercisable, and authorize payment of the
"spread" between the exercise price of the options and the then current market
value of the underlying stock. The agreement requires the executive to devote
his or her best efforts to the Company or its successor during the three-year
period, to maintain the confidentiality of Company information during and
following employment and to refrain from competitive activities for a period of
one year following termination of employment with the Company or its successor.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 2002, the Compensation Committee was comprised of Charles A.
Haggerty (Chair), Barbara B. Grogan, Stuart Maitland and William T. Monahan.
During 2002, none of the members of the Committee were officers or employees of
the Company and there were no interlock relationships.
REPORT OF THE COMPENSATION COMMITTEE
EXECUTIVE COMPENSATION
OVERVIEW
The Compensation Committee (the "Committee") is responsible for
supervising the development of, and making recommendations to the Board with
respect to, the Company's executive compensation policies. In addition, the
Committee makes annual recommendations to the Board concerning compensation to
be paid to the Chief Executive Officer ("CEO") and each of the other executive
officers of the Company.
The Committee also oversees all aspects of the Company's executive
compensation program, including many of the Company's employee benefit plans.
The Company currently maintains a variety of compensation and benefit plans in
which its executive officers, other senior management or all employees may
participate, including the Omnibus Stock Incentive Plan (the "Omnibus
Plan")(including stock awards granted under the Management Incentive Plan
("MIP")), the Employee Stock Purchase and Bonus Plan, the Retirement Savings and
Stock Incentive Plan, the RSIP Sidekick Plan, the Supplemental Executive
Retirement Plan and the Executive Officer Performance Plan ("EOPP"). The Company
also maintains a defined benefit pension plan in which substantially all
U.S.-based, non-bargaining employees, including the Company's executive
officers, participate. On February 25, 2003, the Compensation Committee revised
its Charter, which is attached as Appendix 3 to this Proxy Statement, to comply
with proposed New York Stock Exchange listing standards. The Board considers all
of the members of the Compensation Committee to be independent in accordance
with the recently proposed standards for independence of directors generally.
The Board considers a Compensation Committee member to be
15
independent if the member meets the independence standards set forth in the
recently revised Compensation Committee Charter.
PENTAIR'S COMPENSATION PHILOSOPHY
The principles guiding the executive compensation program are designed
to ensure an appropriate linkage between executive compensation and creation of
shareholder value. Goals of the program are to
(a) encourage innovation and growth;
(b) reward executives for top short-term performance and long-term
shareholder value;
(c) recognize outstanding performance;
(d) attract and retain top-quality executives and key employees;
(e) encourage executive stock ownership; and thereby
(f) align management and shareholder interests.
The Company believes compensation of the executive officers should be
directly and materially linked to operating results and stock price performance.
To achieve this, compensation is heavily weighted towards annual bonuses and
long-term equity incentives. The mix of base salary, bonuses and other benefits
reflects the Company's goal of providing competitive compensation for average
performance and enhanced compensation for superior performance.
The Committee annually reviews and evaluates the Company's corporate
performance and the compensation and equity ownership of its executive officers.
This is done by reviewing information prepared by an independent compensation
consultant covering a representative group of other major industrial
organizations, as well as a review of other nationally recognized pay surveys.
These major organizations include companies that the Company competes with for
business or executive talent. Many of the companies included in the independent
consultant's compensation database and national pay surveys are also listed in
the S&P 500 Index and the S&P 400 MidCap Index, the indices included in the
Comparative Stock Performance Graph.
CHANGES IN COMPENSATION METHODOLOGY FOR 2003
The Compensation Committee periodically reviews the methods and
formulas for determining and paying executive compensation to ensure they are
aligned with the Company's compensation philosophy. For 2003, subject to
shareholder approval of Items 2 and 3 relating to the amendments to the EOPP and
the Omnibus Plan, the Company has revised the bonus (including the MIP and EOPP)
and long-term equity incentive components of executive compensation.
2003 BONUS
For 2003, the Company has revised the MIP and EOPP to improve the
alignment between its incentive pay and its overall financial objectives, to
reinforce key Company initiatives such as the Pentair Integrated Management
System ("PIMS") and to enhance the Company's market competitiveness in executive
pay. For 2003, the MIP will measure performance in four categories: Return On
Invested Capital ("ROIC"), Sales Growth, Free Cash Flow ("FCF") and Strategy
Deployment. ROIC, a measure of value creation that replaces Pentair Value Added
("PVA"), is calculated by dividing Operating Income by average Invested Capital.
Organic Sales Growth, also a new measure for 2003, is measured by year-over-year
growth in revenues from organic (non-acquisition-related) sales. FCF is equal to
net cash provided by operating activities less capital expenditures. Strategy
Deployment is a qualitative measure that relates to strategic initiatives of the
Company, including implementation of PIMS. Strategy Deployment is a process that
provides a structured framework by which Pentair's overall strategies can be
implemented. The MIP and EOPP are designed to be self-funded through performance
improvements and generally no awards will be paid with respect to a business
unit that does not have Operating Income. For 2003, the individual performance
factor of the MIP bonus calculation is being replaced by the Strategy Deployment
category and will be based on a supervisor's judgment relating to the
individual's performance of specifically identified tasks and goals developed in
accordance with the Company's strategic plans. The Compensation Committee
assigns to each of these performance measures a weighting to reinforce corporate
goals, strategies and opportunities. The weighting of each factor may vary by
business unit, depending on each unit's goals and objectives for the year.
EOPP PARTICIPANTS. For participants in the EOPP, an EBITDA factor will
replace the Strategy Deployment factor used in the MIP. This will permit
continuing qualification of EOPP bonus awards for favorable tax treatment under
Section
16
162(m) of the Code. The Company is requesting shareholders to approve the
revised EOPP for Section 162(m) purposes, as reflected above under the heading
"PROPOSALS TO BE ACTED UPON AT THE ANNUAL MEETING - ITEM 2: APPROVAL OF THE
AMENDMENT TO EXECUTIVE OFFICER PERFORMANCE PLAN" on pages 5 to 7. 2003 LONG-TERM
EQUITY INCENTIVES
To encourage ownership in the Company and to further align executives'
interests with those of shareholders, the Company will shift the focus more
heavily in favor of restricted stock and stock options. One-third of the total
award value will be delivered in the form of restricted stock, with the number
of shares awarded based on a participant's salary grade and performance level.
The restricted shares vest in one-half increments, on the third and fourth
anniversaries of the date of grant. The remaining two-thirds of the total award
value will be delivered in the form of stock options, with the value determined
using the Black-Scholes model of valuation of the stock price on the grant date.
Options become exercisable in three equal annual installments beginning on the
first anniversary of the date of grant.
The Company has revised the Omnibus Plan to set forth performance-based
criteria upon which restricted stock awards may be based. The Company is
requesting shareholders to approve the amendment to the Omnibus Stock Incentive
Plan for 162(m) purposes, as reflected above under the heading "PROPOSALS TO BE
ACTED UPON AT THE ANNUAL MEETING - ITEM 3: APPROVAL OF THE AMENDMENT TO OMNIBUS
STOCK INCENTIVE PLAN" on pages 7 to 9.
EXECUTIVE COMPENSATION PROGRAM FOR 2002
The components of the Company's executive compensation program, which
are subject to the discretion of the Committee on an individual basis, include
base salaries, annual cash performance-based bonuses, long-term
performance-based equity incentives and miscellaneous fringe benefits. All of
these components are comparable to those of companies similar to the Company.
BASE SALARY
The CEO submits a performance appraisal and recommendation to the
Committee with respect to annual salaries of the executive officers. The
Committee discusses and evaluates the salaries and makes its recommendation to
the Board. Base salary targets for executive positions are set at the 50th
percentile of competitive compensation. An individual performance and experience
factor is applied to the target midpoint to determine each executive's actual
base salary, within a range of +/- 20% of midpoint. For 2002, the salaries of
the named executive officers identified in the Summary Compensation Table are
within the salary targets for each position.
BONUS
Generally, bonuses are considered for payment to executives following
the end of each year under the EOPP (see pages 5 to 7 for discussion of the
EOPP) and the MIP. For 2002, MIP awards were determined by applying the
following factors to base salary: a bonus opportunity category of 35-45% for
executive officers covered under the MIP, a corporate performance factor and an
individual performance factor.
The corporate performance factor was determined by multiplying factors
for PVA and FCF. The PVA for 2002 was calculated as Net Operating Profit After
Taxes ("NOPAT") less a 10% surcharge against average Invested Capital. FCF for
the 2002 bonus calculation was equal to net cash provided by operating
activities, excluding net tax-affected interest expense, less capital
expenditures. Under the MIP, the achievement of (a) FCF of 65% of NOPAT and (b)
PVA generated that equates to a 15% total business return, results in a
corporate performance factor of 1.00. The use of these two factors reinforced
the importance of balancing economically profitable growth and cash generation.
The maximum corporate performance factor was 4.50 and the minimum corporate
performance factor was 0.10. No bonus is paid if the Company has an operating
loss. If the Company's performance results in a negative PVA, the maximum bonus
remains capped at 2.00. Performance between the stated factors is interpolated.
The maximum individual cash bonus was 100% of the participant's annual base
salary, with the remainder being paid in restricted stock. In addition to the
corporate performance factor, for executives in charge of operating segments, a
segment performance factor was used and weighted at 75% versus 25% for the
corporate performance factor, to recognize contributions made at the segment
level.
In the fourth quarter of 2000, the Company recorded a special
restructuring charge against continuing operations of $24.8 million ($15.9
million after tax, or $0.33 per share). In the fourth quarter of 2001, the
Company recorded a restructuring charge of $41.1 million ($29.8 million
after-tax, or $0.60 per share). For purposes of the MIP calculation, costs
related to these restructuring activities are being amortized against the first
24 months of benefits, on a project-by-project basis. This is a timing
difference only for MIP purposes in order to match the costs with the associated
benefits. The bonus calculations for 2002 include a portion of these
restructuring charges.
17
The individual performance factor component of the MIP bonus
calculation is determined by the assignment of a numerical factor based on a
supervisor's judgment on attainment of expectations relative to the employee's
function. The CEO submits a performance appraisal and recommendation to the
Committee for executive officers with respect to the individual performance
factor. The Committee approves all MIP awards and has the right to increase or
decrease awards to better accomplish the objectives of the MIP.
The Committee has the discretion to make special awards to retain key
executives or to recognize extraordinary contributions to the welfare,
reputation and earnings of the Company. For 2002, the Company made one such
award to one of the named executive officers, which award was made in addition
to the MIP award earned by such individual.
LONG-TERM EQUITY INCENTIVES
Long-term incentive compensation is awarded in the form of restricted
shares, incentive compensation units ("ICUs"), performance shares and stock
options under the Omnibus Plan. The Compensation Committee determines the amount
of awards for the CEO. All other awards are proposed by the CEO and approved by
the Committee. Long-term incentives are determined by using the average of the
50th and 60th percentile of grant practices of comparable companies based on
third-party compensation surveys. Annual awards are granted in the form of ICUs
(10% for the CEO and 20% for executive officers) and stock options (90% for the
CEO and 80% for executive officers).
Stock options can be granted for terms up to ten years. If the employee
exercises the stock option during the first five years of the option term by
tendering Company common shares, the Committee can grant to the employee an
option ("Reload Option") to purchase common shares equal to the number of shares
tendered. The Reload Option may be exercised during the remaining term of the
original stock option period. The Reload Option exercise price is equal to the
market price per share on the date the shares are tendered.
The total Omnibus Plan awards for 2002 for all executive officers as a
group, including the CEO and named executive officers, amounted to 938,000 ICUs,
313,482 stock options and 5,103 shares of restricted stock. Grants for the named
executive officers are shown in the Summary Compensation Table (page 11) and the
Option Grants in 2002 table (page 12).
Payouts on ICUs in 2002 which related to ICU grants in 1999 were based
upon the Company's three year average Return On Invested Capital (ROIC) and
three year average Operating Income, which resulted in a dollar value for each
ICU of $0.75. Payouts in 2002 for the named executive officers are shown in the
LTIP Payout column on the Summary Compensation Table (page 11).
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
The base salary, annual bonus and long-term equity incentives paid to
Mr. Hogan in 2002 were generally determined in accordance with the guidelines
described above, and his compensation is comprised of the same elements as for
all executive officers. Mr. Hogan became CEO effective January 1, 2001. He was
given the additional title of Chairman of the Board on May 1, 2002. The
Committee has a formal rating process for evaluating the performance of the CEO.
The rating process includes a self-evaluation rating by the CEO, after which
each Board member completes an evaluation and rating with commentary. The
Chairman of the Committee provides a consolidated rating report and chairs a
discussion with the Board members without the CEO present. From that discussion,
the performance rating is finalized and the Committee Chairman is instructed to
review the final rating results and commentary with the CEO. This then
translates into a personal development plan for the following year.
BASE SALARY
Mr. Hogan's base salary was $715,000, effective April 1, 2002, in
accordance with the Committee's guideline of establishing the base salary at the
market compensation rate for the CEO at about the 50th percentile for companies
at a comparable size as projected based on 2001 performance. This resulted in a
14.4% increase in Mr. Hogan's base salary over 2001, reflecting his additional
duties as Chairman of the Board, beginning May 1, 2002, in addition to Chief
Executive Officer.
BONUS
Mr. Hogan's bonus was determined under the EOPP. During 2002, Mr. Hogan
was the only eligible officer participating in the EOPP. EOPP awards are
determined based on the participant's bonus opportunity and a corporate
performance factor. For 2002, the maximum individual bonus for Mr. Hogan was
200% of his annual base salary, but in no event more than $3,500,000. In
administering the EOPP and in establishing bonus awards thereunder, the
Committee does
18
not have the discretion to pay participants more than the bonus amount indicated
by the pre-established goals. The Committee has the discretion and flexibility,
however, based on its business judgment, to reduce this amount.
For 2002, the corporate performance factor was determined by
multiplying factors for PVA and FCF. The use of these two factors reinforces the
importance of balancing economically profitable growth and cash generation. PVA
was calculated as NOPAT less a 10% surcharge against average Invested Capital.
FCF for bonus calculation was equal to net cash provided by operating
activities, excluding net tax-affected interest expense, less capital
expenditures. Under the EOPP, the achievement of (a) FCF equal to 65% of NOPAT
and (b) PVA generated that equates to a 15% total business return, results in a
corporate performance factor of 1.00. The maximum corporate performance factor
was 4.50 and the minimum corporate performance factor was 0.10; however, there
is no EOPP bonus if the Company has an operating loss. If the Company's
performance results in a negative PVA the maximum performance factor is capped
at 2.00. Performance between the stated factors is interpolated. Mr. Hogan's
bonus for 2002 was calculated using the formula described above, which resulted
in a corporate performance factor of 1.055. In accordance with the terms of the
EOPP, Mr. Hogan earned a bonus equal to $730,588, of which $692,500 was paid in
cash. Under the terms of the EOPP, the balance of the 2002 bonus ($38,088) was
payable in the form of restricted stock (1,074 shares). The bonus was paid in
2003 following final calculation and approval.
LONG-TERM EQUITY INCENTIVES
Mr. Hogan's Omnibus Plan grants in 2002 were computed based on the
average of the 50th and 75th percentile of comparable grant practices at
comparative companies. The award was delivered in a combination of 273,000 ICUs
and 145,500 stock options.
STOCK OWNERSHIP GUIDELINES
The Committee has established stock ownership guidelines for executive
officers and other key employees to motivate them to become significant
shareholders and to further encourage long-term performance and Company growth.
The Committee determined that, over a period of five years from appointment, its
key employees should accumulate and hold Company stock equal to a multiple of
base salary as follows:
Stock Ownership Guidelines
Executive Level (as a multiple of salary)
-------------------------------------------------------------------------
Chief Executive Officer at least 3x base salary
Senior Corporate Officers 2-3x base salary
Corporate Officers and Subsidiary Presidents 1-2x base salary
The Committee will consider making incentive grants of restricted stock
based on the increase in ownership during the preceding year. These restricted
stock grants (made under the Omnibus Plan) vest in equal increments on the
third, fourth, and fifth anniversaries of the grant. The size of the grant is
equal to 10% of the increase in common stock during the year if the annual
ownership target is met, but limited to 10% of the targeted ownership level if
the targeted ownership level has been achieved. For 2002, restricted stock
awards of 4,178 shares were granted under these guidelines to all key employees.
COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(m)
Section 162(m) of the Internal Revenue Code generally disallows a tax
deduction to public companies for compensation over $1,000,000 paid to each of
the corporation's Chief Executive Officer and the four other most highly
compensated officers. Performance-based compensation that has been approved by
shareholders, however, is excluded from the $1 million limit if, among other
requirements, the compensation is payable only upon attainment of
pre-established, objective performance goals and the Board committee that
establishes such goals consists only of "outside directors" (as defined for
purposes of Section 162(m)). All members of the Compensation Committee qualify
as "outside directors." The Company's policy is to maximize the deductibility of
executive compensation so long as the deductibility is compatible with the more
important objectives of retaining executives and maintaining competitive and
motivational performance-based compensation. The shareholders are being asked to
approve amendments to the EOPP and to the Omnibus Plan this year to comply with
Section 162(m) requirements.
COMPENSATION COMMITTEE
----------------------
Charles A. Haggerty, Chair
Barbara B. Grogan
Stuart Maitland
William T. Monahan
19
REPORT OF THE AUDIT AND FINANCE COMMITTEE
The Audit and Finance Committee (the "Audit Committee") is responsible
for assisting the Board of Directors with oversight of the Company's accounting
and financial reporting processes and audits of the Company's financial
statements, including the integrity of the Company's financial statements, the
Company's compliance with legal and regulatory requirements, the independence
and qualifications of the Company's external auditor and the performance of the
Company's internal audit function and of the external auditor. The Audit
Committee is directly responsible for the appointment, compensation, terms of
engagement (including retention and termination) and oversight of the work of
the external auditor. On February 25, 2003, the Audit Committee revised its
Charter, which is attached as Appendix 4 to this Proxy Statement, to comply with
proposed New York Stock Exchange ("NYSE") listing standards and proposed and
final SEC rules. Although some of the new rules are not yet in effect, the Audit
Committee determined to proactively focus on the matters addressed.
The Board of Directors considers all of the members of the Audit
Committee to be independent in accordance with the existing NYSE standards and
the recently proposed SEC and NYSE standards for independence of Audit Committee
members. The Board considers a member of the Audit Committee to be independent
if the member meets the independence standards set forth in the recently revised
Audit and Finance Committee Charter.
The Audit Committee has (a) reviewed and discussed the Company's
audited financial statements with management; (b) discussed with the Company's
independent auditors, Deloitte & Touche LLP, the matters required to be
discussed by Statement on Auditing Standards No. 61; (c) received from the
auditors disclosures regarding the auditors' independence in accordance with
Independence Standards Board Standard No. 1 and discussed with the auditors the
auditors' independence; and (d) considered whether the level of non-audit
services provided by Deloitte & Touche LLP is compatible with maintaining the
independence of its auditors.
During fiscal year 2002, Deloitte & Touche LLP, the member firms of
Deloitte Touche Tohmatsu, and their affiliates, provided various audit,
audit-related and non-audit services to the Company as follows (in thousands):
2002 2001
a) Audit fees, including aggregate fees for the audit of the
Company's annual financial statements, reviews of the Company's
quarterly financial statements, statutory audits and review of
SEC filings $1,265 $1,019
b) Audit-related fees, including acquisitions and divestitures,
systems internal control assessments, employee benefit plan
audits, accounting research and certain other attest services 946 784
-----------------------
Total audit and audit-related fees 2,211 1,803
c) Tax fees, including tax consulting and tax return preparation 558 475
d) All other fees, including internal audit (performed 1/2001 -
7/2002), actuarial services, human resources consulting (2001
only) and systems consulting 2,438 2,325
------------------------
Total Deloitte & Touche fees $5,207 $4,603
========================
Based on the review and discussions described above, the Audit
Committee recommended to the Board of Directors that the Company's audited
financial statements for the year ended December 31, 2002 be included in the
Company's 2002 Annual Report on Form 10-K for filing with the SEC. In addition,
the Audit Committee, through its Chair, reviewed the Company's 2002 quarterly
results prior to public release. The Audit Committee reviews the fees of the
independent auditor on a biannual basis. For 2002, the Committee received
pre-notification of all non-audit services of the independent auditor that
exceeded $100,000. Pursuant to the Committee's amended Charter, the Committee
will pre-approve audit fees and all permitted non-audit services of the
independent auditor in 2003.
AUDIT AND FINANCE COMMITTEE
---------------------------
Karen E. Welke, Chair
William H. Hernandez
Stuart Maitland
Augusto Meozzi
20
INDEPENDENT AUDITORS
The Audit and Finance Committee has appointed Deloitte & Touche LLP as
independent auditors to audit the consolidated financial statements of the
Company for 2003. Representatives of Deloitte & Touche LLP are expected to
attend the Annual Meeting with the opportunity to make a statement if they so
desire, and they will be available to respond to appropriate questions.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers to file with the SEC initial reports
of ownership and reports of changes in ownership of Common Stock and other
equity securities of the Company. Officers, directors and greater than ten
percent shareholders are required by SEC regulations to furnish the Company with
copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms furnished to the
Company and written representations from the Company's officers and directors,
the Company believes that all of its directors and officers complied on a timely
basis with Section 16(a) filing requirements for the fiscal year ended December
31, 2002, except that (a) Stuart Maitland inadvertently filed one Form 4 late
for one transaction and (b) Frank Feraco, a former executive officer of the
Company, failed to report one transaction on Form 4.
FUTURE PROPOSALS
The deadline for submitting a shareholder proposal for inclusion in the
Company's proxy statement and form of proxy for the Company's 2004 Annual
Meeting of Shareholders pursuant to Rule 14a-8 of the Securities and Exchange
Commission is November 20, 2003. A shareholder who otherwise intends to present
business at the 2004 Annual Meeting must comply with the requirements set forth
in the Company's By-Laws. The By-Laws state, among other things, that to bring
business before an annual meeting, a shareholder must give written notice that
complies with the By-Laws to the Secretary of the Company not less than 45 days
nor more than 70 days prior to the first annual anniversary of the date the
Company first mailed its proxy statement to shareholders in connection with the
immediately preceding annual meeting. Accordingly, the Company must receive
notice of a shareholder proposal submitted other than pursuant to Rule 14a-8 by
February 3, 2004. If the notice is received after February 3, 2004, then the
notice will be considered untimely and the Company is not required to present
such proposal at the 2004 Annual Meeting. If the Board of Directors chooses to
present a proposal submitted other than pursuant to Rule 14a-8 at the 2004
Annual Meeting, then the persons named in the proxies solicited by the Board for
the 2004 Annual Meeting may exercise discretionary voting power with respect to
such proposal. Any shareholder proposal submitted before June 1, 2003 should be
sent to the Company at its principal executive offices: 1500 County Road B2
West, Saint Paul, Minnesota 55113, Attention: Secretary. Proposals submitted
after June 1, 2003 should be sent to the Company at its principal executive
offices: 5500 Wayzata Boulevard, Suite 800, Golden Valley, MN 55416, Attention:
Secretary.
SOLICITATION
The cost of soliciting proxies and the notices of the meeting,
including the preparation, assembly and mailing of proxies and this statement,
will be borne by the Company. In addition to this mailing, proxies may be
solicited personally or by telephone or electronic communication by regular
employees of the Company. Assistance in the solicitation of proxies is also
being rendered by Morrow & Co., 445 Park Avenue, New York, New York, at a cost
to the Company of $7,000 plus expenses of up to $2,500. Furthermore,
arrangements may be made with brokers, banks and similar organizations to send
proxies and proxy materials to beneficial owners for voting instructions, for
which the Company will reimburse such organizations for their expense in so
doing and will pay all costs of soliciting the proxies.
2002 ANNUAL REPORT ON FORM 10-K
Any security holder wishing to receive, without charge, a copy of the
Company's 2002 Annual Report on Form 10-K (without exhibits) filed with the
Securities and Exchange Commission should write to Pentair, Inc., 1500 County
Road B2 West, Saint Paul, Minnesota 55113, Attention: Secretary.
REDUCE DUPLICATE MAILINGS
To reduce duplicate mailings, we are now sending only one copy of
any proxy statement or annual report to multiple shareholders sharing an address
unless we receive contrary instructions from one or more of the shareholders.
Upon written or oral request, the Company will promptly deliver a separate copy
of the annual report or proxy statement to a shareholder at a shared address.
If you wish to receive separate copies of each proxy statement and
annual report please notify us by writing or calling Pentair, Inc., 1500 County
Road B2 West, Saint Paul, Minnesota 55113, Attention: Secretary, Telephone:
(651) 636-7920 or (800) 328-9626.
If you are receiving duplicate mailings, you may authorize us to
discontinue mailings of multiple proxy statements and annual reports. To
discontinue duplicate mailings, notify us by writing or calling Pentair, Inc.,
1500 County Road B2 West, Saint Paul, Minnesota 55113, Attention: Secretary,
Telephone: (651) 636-7920 or (800) 328-9626.
21
APPENDIX 1
PENTAIR, INC. EXECUTIVE OFFICER PERFORMANCE PLAN,
AS AMENDED AND RESTATED
EFFECTIVE JANUARY 1, 2003
I. PURPOSE
The purpose of the Pentair, Inc. Executive Officer Performance Plan is to
advance the interests of Pentair, Inc. ("Pentair") and its shareholders by
providing certain of its key executives with annual incentive compensation which
is tied to the achievement of pre-established and objective performance goals.
II. DEFINITIONS
Unless the context clearly indicates otherwise, when used herein the following
terms shall have the following meanings:
2.1 "Award" or "Performance Award" means the compensation paid under
the Plan with respect to the achievement of Performance Goals for a Performance
Period.
2.2 "Business Criteria" mean one or more of the following business
measurements of Pentair or one of its business units as selected by the
Committee: net income; stockholder return; stock price appreciation; earnings
per share; revenue growth; return on investment; return on invested capital;
earnings before interest, taxes, depreciation, and amortization; operating
income; market share; return on sales; asset reduction; cost reduction; return
on equity; cash flow; and new product releases.
2.3 "Board" means the Board of Directors of Pentair, Inc.
2.4 "Code" means the Internal Revenue Code of 1986, as amended.
2.5 "Committee" means the Compensation Committee of the Board, a
subcommittee thereof, or such other committee as may be appointed by the Board
to administer the Plan. The Committee shall be comprised of two (2) or more
members of the Board each of whom is a "non-employee director" under Rule 16b-3
of the Securities Exchange Act of 1934, as amended, and an "outside director"
under Section 162(m) of the Code.
2.6 "Participant" means an employee of Pentair or one of its business
units who has been selected by the Committee as eligible for an Award with
respect to the Performance Period concerned.
2.7 "Plan" means the Pentair, Inc. Executive Officer Performance Plan,
as amended.
2.8 "Performance Goals" mean the performance-based incentives and
related payouts as measured by achievement of one or more performance targets
based upon Business Criteria.
2.9 "Performance Period" means Pentair's fiscal year, or such other
period as determined by the Committee.
Appendix 1 - 1
III. ADMINISTRATION
3.1 The Plan shall be administered by the Committee. The Committee
shall have the authority to:
(a) interpret and determine all questions of policy and
expediency pertaining to the Plan;
(b) adopt such rules, regulations, agreements and instruments
as it deems necessary for its proper administration;
(c) select key employees to receive Awards;
(d) determine the terms of Awards;
(e) determine amounts subject to Awards (within the limits
prescribed in the Plan);
(f) determine whether Awards will be granted in replacement of
or as alternatives to any other incentive or compensation plan of
Pentair or one of its business units;
(g) grant waivers of Plan or Award conditions (but with
respect to Awards intended to qualify under Code Section 162(m), only
as permitted under that Section);
(h) accelerate the payment of Awards (but with respect to
Awards intended to qualify under Code Section 162(m), only as permitted
under that Section);
(i) correct any defect, supply any omission, or reconcile any
inconsistency in the Plan, any Award or any Award notice;
(j) take any and all other actions it deems necessary or
advisable for the proper administration of the Plan;
(k) adopt such Plan procedures, regulations, and sub-plans as
it deems are necessary to enable Plan participants to receive Awards;
and
(l) amend the Plan at any time and from time to time, provided
however that no amendment to the Plan shall be effective unless
approved by Pentair stockholders, to the extent such stockholder
approval is required under Code Section 162(m) with respect to Awards
which are intended to qualify under that Section.
3.2 The Committee may delegate its authority to grant and administer
Awards to a separate committee; however, only the Committee may grant and
administer Awards which are intended to qualify as performance-based
compensation under Code Section 162(m).
IV. ELIGIBILITY AND PARTICIPATION
Appendix 1 - 2
The Committee shall determine the key employees eligible to participate under
the Plan. Eligibility shall be determined by the magnitude and scope of the
employee's position. An employee who participates in the Plan with respect to a
Performance Period is not eligible for an incentive award under the Pentair
Management Incentive Plan with respect to the same period.
V. PERFORMANCE GOALS AND AWARDS
5.1 Prior to the start of a Performance Period, the Committee shall
establish the Performance Goals for a Participant with respect to such period;
provided, however, such goals may be established after the start of the
Performance Period, and while achievement of such goals is substantially
uncertain, and within such time periods as are permitted by Treasury Regulations
issued under Code Section 162(m).
5.2 Regardless of the Performance Goals so established and achieved, no
Award shall be payable for a Performance Period if Pentair's operating income
(after corporate charges) is zero or less or if Pentair or one of its business
units fails to satisfy any other minimum performance requirement imposed by the
Committee.
5.3 Awards for a Performance Period shall be paid after completion of
the annual audit of Pentair and after the Committee has determined that the
Participant has met the requirements for an Award for such period.
5.4 The maximum amount of a Participant's Award with respect to a
Performance Period, expressed as a percentage of base salary, shall be set by
the Committee at the time it sets the Performance Goals for such period;
provided, however, in no event shall a Participant's Award exceed three and
one-half million dollars ($3,500,000).
5.5 An Award as measured by achievement of the Performance Goals may be
reduced or eliminated by the Committee in its sole discretion. In determining
whether an Award will be reduced or eliminated, the Committee may consider any
extraordinary changes which occur during the Performance Period, such as changes
in accounting practices or applicable law, extraordinary items of gain or loss,
restructuring costs, and such individual or business performance criteria that
it deems appropriate, including operating and strategic business results
applicable to the Participant.
5.6 A Participant shall not be entitled to receive an Award unless
actively employed by Pentair or one of its business units on the last day of the
Performance Period to which the Award relates. The Committee may make exceptions
to this requirement in the case of retirement, death or disability as determined
in its sole discretion.
VI. PAYMENT OF PERFORMANCE AWARDS
An Award shall be paid in cash as soon as administratively feasible after
written certification by the Committee that the Performance Goals and other
material terms of the Performance Award for the Performance Period have been
satisfied, and the amount of the Award has been finally determined.
Appendix 1 - 3
VII. PLAN AMENDMENT AND TERMINATION
Notwithstanding any provision herein to the contrary, the Committee may, at any
time, terminate or, from time to time amend, modify or suspend the Plan. No
Award may be made during any suspension of the Plan or after its termination. No
such termination or amendment shall alter a Participant's right to receive an
amount finally awarded but unpaid to such participant at the time of the
termination or amendment
VIII. CONSIDERATION FOR ACQUISITIONS/DIVESTITURES
8.1 No special adjustment shall be made to the Performance Goals with
respect to a Performance Period in event of an acquisition in such period. The
relevant financial results related to an acquisition shall flow into the
calculations and impact the results and payouts under the Plan for that
Performance Period.
8.2 In the event of a divestiture, however, achievement of the
Performance Goals shall be determined based on relevant results from continuing
operations. Any financial gain or loss from the divestiture will be excluded
from consideration except as it may be taken into account by the Committee in
reducing or eliminating an Award as described herein.
IX. GENERAL PROVISIONS
9.1. The Plan shall become effective for Performance Periods beginning
on or after January 1, 2003, subject to shareholder approval of this amended and
restated Plan document.
9.2 Nothing contained herein shall be construed to limit or affect in
any manner or degree the normal and usual powers of management, including the
right at any time to terminate the employment of a Participant or remove him or
her from Plan participation.
9.3 The judgment of the Compensation Committee in administering the
Plan shall be final, conclusive and binding upon all officers and employees of
Pentair and its subsidiaries, and their heirs, executors, personal
representatives and assigns.
9.4 In the event of death, a Participant's designated beneficiary shall
be entitled to the Award. If a Participant does not designate a beneficiary in
writing, the Participant's beneficiary(ies) will be determined according to the
Participant's will. If there is no will, the beneficiary(ies) shall be
determined by the laws of descent and distribution of the state of which the
Participant was a resident at death.
9.5 A Participant does not have the right to assign, transfer, encumber
or dispose of any Award under the Plan until it is distributed to the
Participant. No Award is liable to the claims of any creditor of the Participant
until it is distributed to him or her.
9.6 Calculations will exclude the impact of periodic change in
accounting methods required by the Financial Accounting Standards Board after
the Performance Goals for a Performance Period are established.
Appendix 1 - 4
9.7 Except to the extent superseded by the laws of the United States,
the laws of the State of Minnesota, without regard to its conflict of laws
principles, shall govern in all matters relating to the Plan.
9.8 In the event any provision of the Plan shall be held to be illegal
or invalid for any reason, such illegality or invalidity shall not affect the
remaining parts of the Plan, and the Plan shall be construed and enforced as if
such illegal or invalid provisions had never been contained in the Plan.
9.9 Amounts payable under the Plan shall be subject to such tax and
other withholding as required by law.
9.10 Except as otherwise expressly determined by the Committee with
respect to a particular Award, the Plan shall be construed to the extent
possible as providing for remuneration which is "performance-based compensation"
within the meaning of Section 162(m) of the Code.
X. CHANGE IN CONTROL
10.1 "Change in Control" is a change in control of Pentair as defined
in the KEESA, and the "KEESA" is the Key Executive Employment and Severance
Agreement, as approved by the Board effective August 23, 2000.
10.2 If a Participant is employed by Pentair or one of its business
units on the date of a Change in Control, or if a Participant or former
Participant who has entered into a KEESA terminates employment before a Change
in Control but is entitled to benefits under Section 2(b) of the KEESA, then the
following provisions shall apply:
(a) If the Change in Control occurs prior to the end of the
Performance Period to which an Award relates, the Award for such period
shall be (i) determined by using the Participant's annual base salary
rate as in effect immediately before the Change in Control and by
assuming the Performance Goals for such period have been fully
achieved, and (ii) paid to the Participant in cash within ten (10) days
of the Change in Control.
(b) If the Change in Control occurs at such time as the
Participant or former Participant has not received payment of an Award
for a prior Performance Period, such Award (based upon achievement of
the Performance Goals for such period) shall be paid to the Participant
or former Participant in cash within ten (10) days of the Change in
Control.
(c) The requirement that the Participant remain employed
through the end of the Performance Period to which the Award relates
shall not apply.
(d) The requirement that an Award be paid after completion of
an annual audit and completion of a review and approval by the
Compensation Committee shall not apply.
Appendix 1 - 5
(e) The Pentair operating income requirement, or any other
minimum performance requirement imposed by the Committee, shall not
apply to the Award described in paragraph (i) immediately preceding.
(f) The Compensation Committee shall not have the discretion
to directly or indirectly reduce or eliminate an Award.
(g) The dollar limit on an Award shall remain in effect.
(h) These Change in Control provisions shall apply to the
extent any other provision of the Plan may be in conflict with them. In
the case of any conflict between the terms and provisions of this Plan
and the terms and provisions of the KEESA entered into by a Participant
or former Participant, the terms of such KEESA shall control to the
extent more beneficial to the Participant or former Participant, and
the obligations of Pentair under such KEESA shall be in addition to any
of its obligations under the Plan.
Appendix 1 - 6
APPENDIX 2
PENTAIR, INC.
OMNIBUS STOCK INCENTIVE PLAN
AS AMENDED AND RESTATED
EFFECTIVE JANUARY 1, 2003
SECTION 1. BACKGROUND AND PURPOSE
1.1. Background. Pentair, Inc. maintains a comprehensive equity
compensation incentive plan to award long-term equity incentives which tie the
compensation of executives and key managerial employees to its operating
results. In particular, this Plan is designed to attract and retain top quality
executives and key employees, encourage innovation and growth, reward executives
for attainment of short-term performance objectives and long-term shareholder
value, recognize outstanding performance, encourage executive stock ownership
and, in general, to align management and shareholder interests. The Plan was
established in 1990 by combining its then separate equity compensation plans
into one plan to achieve administrative consistency and greater flexibility in
structuring equity compensation awards. The Plan, as last approved in its
entirety by shareholders, extends until February 14, 2006.
1.2. The Plan has been amended, subject to shareholder approval,
effective January 1, 2003 to add certain performance measures for and a limit on
Restricted Share awards so that such an award will qualify as performance-based
compensation for federal income tax purposes. Effective as of the same date,
other ministerial and non-substantive changes have been made. The Plan as so
amended is described in this document.
SECTION 2. DEFINITIONS
Unless the context requires otherwise, when capitalized the terms
listed below shall have the following meanings when used in this or any other
section of the Plan:
2.1. "Affiliate" is any corporation, business trust, division,
partnership or joint venture in which Pentair owns (either directly or
indirectly) fifty percent (50%) or more of the voting stock, or rights analogous
to voting stock, but only for the duration of such ownership.
2.2. "Board" is the Board of Directors of Pentair, Inc., as elected
from time to time.
2.3. "Book Value per Share" or "Book Value" is the total consolidated
shareholders' equity of Pentair at the close of a Fiscal Year, less the equity
attributable to preferred shares, divided by the number of shares of Stock
outstanding at the end of that Fiscal Year.
2.4. "Code" is the Internal Revenue Code of 1986, as amended.
Appendix 2 - 1
2.5. "Committee" is the Compensation and Human Resources Committee of
the Board, as appointed from time to time.
2.6. "Disabled" or "Disability" is a physical or mental incapacity
which qualifies an individual to collect a benefit under the long-term
disability plan of Pentair or an Affiliate, or such other condition which the
Committee may determine to be a Disability.
2.7. "Eligible Employee" is any key managerial, administrative or
professional employee of Pentair or an Affiliate, generally in salary grade 25
or higher, who is in a position to make a material contribution to the continued
profitable growth and long term success of Pentair or an Affiliate.
2.8. "Fair Market Value" is the closing price of a share of Stock on
the relevant date as reported on either the NASDAQ National Market System or the
New York Stock Exchange, depending on which exchange then lists Pentair stock,
or as otherwise determined using procedures established by the Committee.
2.9. "Fiscal Year" is the twelve (12) consecutive month period
beginning January 1 and ending December 31.
2.10. "Incentive Compensation Unit" or "ICU" is a unit representing the
right to receive an amount determined by attainment of corporate performance
objectives over an applicable Incentive Period.
2.11. "Incentive Period" is a period of continuous employment fixed by
the Committee at the time of grant of an ICU after which such ICU may become
payable, provided all relevant performance objectives have been met.
2.12. "Incentive Stock Option" or "ISO" is an Option which is
designated as such by the Committee and intended to so qualify under Code
section 422.
2.13. "Nonqualified Stock Option" or "NQSO" is any Option which is not
an ISO.
2.14. "Option" is a right granted pursuant to the Plan to purchase
Stock subject to such terms and conditions as may be specified by the Committee
at the time of grant.
2.15. "Participant" is an Eligible Employee approved by the Committee
to receive a grant or award under the Plan.
2.16. "Pentair" is Pentair, Inc., a Minnesota corporation.
2.17. "Performance Period" is the period of time over which a
Participant must meet the relevant performance criteria established by the
Committee at the time of an award of Performance Shares or Performance Units.
Appendix 2 - 2
2.18. "Performance Share" is a share of Stock, Restricted Stock, or a
Right to Restricted Stock, awarded by the Committee, subject to such performance
targets or other restrictions as are established by the Committee at the time of
award.
2.19. "Performance Unit" is an amount equal to the value of an ICU
determined on the date of award.
2.20. "Plan" is the Pentair, Inc. Omnibus Stock Incentive Plan, as
amended from time to time.
2.21. "Restricted Stock" is Stock issued or transferred to a
Participant by means of an award subject to such restrictions as may be imposed
at the time of grant by the Committee, and which will remain subject to said
restrictions until such time as the restrictions lapse.
2.22. "Retirement" is the time a Participant who is eligible to receive
retirement income benefits from the Pentair tax qualified pension plan separates
from employment.
2.23. "Right to Restricted Stock" is a right awarded to a Participant
to receive Stock or Restricted Stock which will vest at some future time and
which is subject to such restrictions as may be imposed at the time of grant by
the Committee, and which will remain subject to such restrictions until the
restrictions lapse.
2.24. "Significant Shareholder" is an employee who owns more than ten
percent (10%) of the total combined voting power of all classes of stock issued
by Pentair as of the date such employee is granted an Option. For this purpose,
the provisions of Code sections 422 and 424, as amended, shall apply.
2.25. "Stock" is Pentair common stock.
SECTION 3. SHARES SUBJECT TO THE PLAN
3.1. Shares. (a) Number of Shares. The maximum number of shares of
Stock which may be issued for any type of award or grant under the Plan shall be
5,600,000, subject to adjustment as provided in Sections 3.1(b) and 3.3. Not
more than twenty percent (20%) of such shares shall be available for various
types of grants, other than Options, which may be made under the Plan.
(b) Unused Shares. Any shares of Stock subject to an Option which is
canceled, expires or otherwise terminates without having been exercised in full
(unless such cancellation is due to the exercise of a related SAR), or any
shares of Restricted Stock, Rights to Restricted Stock or Performance Shares
which are forfeited, shall again be available for grants or awards under the
Plan.
Appendix 2 - 3
3.2. Incentive Compensation Units. The maximum number of Incentive
Compensation Units which may be awarded under the Plan is 4,000,000, subject to
adjustment as provided in this Section 3.2 and in Section 3.3. If an ICU is
awarded, but is forfeited or otherwise terminates without payment having been
made to the Participant, then such ICU shall again be available for awards under
the Plan.
3.3. Antidilution. In the event of a change in the number or class of
outstanding shares of Stock by reason of a stock dividend or split,
recapitalization, reclassification, merger, consolidation, or other similar
corporate change, the number of shares of Stock as to which grants of Options or
other awards under the Plan may be made, and the number of ICUs available for
award under the Plan, shall be adjusted proportionately to the nearest whole
share or unit. Any such action shall be within the discretion of the Committee,
whose determination shall be conclusive.
If such an adjustment is made with respect to shares then subject to an
Option, the number of shares and the Option price per share shall be adjusted
proportionately so the aggregate exercise price of such Option shall not change.
SECTION 4. STOCK OPTIONS
4.1. Granting Options. Participants may be granted ISOs, SARs or NQSOs.
No one Participant shall be granted, in the aggregate, Options or SARs on more
than 150,000 shares in any calendar year. Solely for purposes of determining the
number of Options or SARs available for grant to an individual in any calendar
year, Options which are canceled or repriced shall be counted against this
annual maximum to the extent required by applicable regulations.
4.2. Option Terms and Conditions. (a) Grant of Option. Except as
otherwise limited by the Plan, the Committee shall have the discretion to grant
to a Participant any number or type of Options at any time, and subject to such
terms and conditions as the Committee may determine.
(b) Exercise Limit. With respect to Options designated as ISOs at the
time of grant, to the extent the aggregate Fair Market Value of Stock,
determined as of the date of grant, with respect to which ISOs are first
exercisable during any single calendar year exceeds $100,000, or such other
limit as shall be allowed under the Code, such Options shall be treated as
NQSOs. In applying this limit Options shall be taken into account in the order
granted.
(c) Option Price. The Option price of an ISO or NQSO shall be not less
than Fair Market Value as of the date of grant. If an ISO is granted to a
Significant Shareholder, the Option price shall be not less than 110% of Fair
Market Value on the date of grant.
(d) Term of Option. Each Option shall expire at the time specified by
the Committee when granting the Option. The Committee may not fix a term which
is shorter
Appendix 2 - 4
than required under any applicable state or federal law, nor longer than ten
(10) years from the date of grant. With respect to a Significant Shareholder,
the Committee may not fix a term which is longer than five (5) years from the
date of grant. An Option term may extend beyond the Plan's termination date.
(e) Manner of Exercise. To exercise an Option, whether partially or
completely, the Participant shall give written notice to Pentair in such form
and manner as the Committee may prescribe. Payment for Stock to be acquired by
the exercise of an Option must accompany the written notice of exercise.
(f) Payment. (1) General. Full payment for all Stock to be acquired
upon the exercise of an Option, together with an amount sufficient to satisfy
applicable federal, state or local withholding taxes, shall be made at the time
such Option, or any part thereof, is exercised, and no Stock certificate shall
be issued until such payment has been made. Payment may be made in cash or in
such other form as is acceptable to the Committee, provided that in the case of
an ISO, no form of payment shall be allowed which would prevent the Option from
qualifying as such within the meaning of Code section 422.
(2) Payment with Options. The Participant, in lieu of or in combination
with a payment in cash, may transfer to Pentair a sufficient number of
outstanding Options as will pay all applicable withholding tax liability
incurred on exercise of the Option. For this purpose, the Participant may use
only Options having an exercise price less than Fair Market Value on the date
such Options are transferred or exercised, and the value of any such Option so
transferred shall be the difference between its then exercise price and Fair
Market Value. Transfer of an Option for payment of taxes shall be considered
exercise of the Option.
(3) Payment with Stock. Subject to such Code requirements as are
relevant to ISOs, a Participant, in lieu of or in combination with a payment in
cash, may transfer to Pentair a sufficient number of shares of Stock to satisfy
all or any part of the Option price and applicable withholding taxes. Such Stock
may be Stock already owned by the Participant or, in the case of an NQSO, Stock
to be acquired by exercise of the Option. For this purpose, the value of the
Stock shall be Fair Market Value as of the date of exercise. Where payment is
made in whole or in part by Stock, the Participant may not transfer fractional
shares of Stock or shares of Stock with an aggregate Fair Market Value in excess
of the Option price plus applicable withholding taxes.
(4) Interim Broker Loan. The Committee may arrange through a stock
brokerage or other similar agent, a loan to a Participant of some or all of the
funds needed to exercise an Option. Upon application for such loan and receipt
of written notice of exercise of an Option from a Participant, the broker will
pay to Pentair the amount requested by the Participant to pay the Option
exercise price and applicable withholding taxes. Pentair will promptly deliver
to such broker a certificate representing the total number of shares of Stock to
be acquired by exercise of said Option. The broker will then sell part or all of
these shares and pay to the Participant the proceeds from the sale, less
Appendix 2 - 5
the loan principal and any interest charged thereon from the date the broker
received the notice of exercise until the date the broker is repaid.
(5) Other Payment Methods. The Committee may, in its discretion,
authorize payment by other methods or forms within the limitations imposed by
the Plan and applicable state or federal law.
(g) No Tandem Options. No ISO granted under this Plan shall contain
terms which would limit or otherwise affect a Participant's right to exercise
any other Option, nor shall any NQSO contain terms which will limit or otherwise
affect the Participant's right to exercise any other Option in such a manner
that an Option intended to be an ISO would be deemed a tandem option.
4.3. Stock Appreciation Rights. (a) Grant of Stock Appreciation Rights.
The Committee may grant Stock Appreciation Rights ("SARs") to Participants who
have been granted ISOs. These SARs may relate to any number of shares, up to the
total number of shares the Participant could acquire by exercise of the
underlying ISOs. An SAR shall expire no later than the expiration date of the
underlying ISO, and the amount paid shall not be more than 100% of the
difference between the Option price and Fair Market Value of the Stock subject
to the Option, determined on the date the SAR is exercised.
(b) Exercise. Stock Appreciation Rights may be exercised at the same
time, to the same extent and subject to the same conditions as the related ISO,
and only when the Fair Market Value of the Stock subject to the ISO exceeds the
Option price. The exercise of an SAR shall cancel the related ISO; the exercise
of an ISO shall cancel a related SAR.
(c) Payment of Stock Appreciation Rights. Upon exercise of an SAR, the
Participant shall be paid in cash, Stock, Rights to Restricted Stock, Restricted
Stock, or a combination thereof, as the Committee shall determine at the time of
grant. If payment is made in Stock, Rights to Restricted Stock or Restricted
Stock, the shares shall be valued at Fair Market Value on the date the SAR is
exercised.
4.4. Issuance of Certificates. (a) Delivery. As soon as practicable
after either the exercise of an Option and the delivery of payment therefor, or
the exercise of an SAR which is to be paid in Stock, Rights to Restricted Stock
or Restricted Stock, Pentair shall:
(i) if Stock is to be issued due to the exercise of an Option,
record in the name of the Participant a number of certificated
or uncertificated shares equal to the number of shares
acquired by the Participant through exercise of the Option;
(ii) if payment is to be made in Restricted Stock, record in the
name of the Participant a number of nonnegotiable certificated
or uncertificated shares equal to the number of shares of
Restricted Stock acquired; and
Appendix 2 - 6
(iii) if payment is to be made in Rights to Restricted Stock,
establish and maintain a separate written account for each
Participant and record in such account the number of Rights to
Restricted Stock so acquired.
Consistent with applicable state or federal law, the Committee may fix
a minimum or maximum period of time during which a Participant may not sell any
such Stock or Restricted Stock, or obtain Restricted Stock in lieu of a Right to
Restricted Stock.
(b) Designation. Shares acquired pursuant to the exercise of an ISO
shall be designated as such on the stock transfer records of Pentair, to the
extent the value of such shares does not exceed the exercise limit contained in
Section 4.2(b). Shares acquired by exercise of an Option which exceed this
exercise limit shall be designated on Pentair's stock transfer records as shares
acquired pursuant to the exercise of an NQSO. For purposes of this exercise
limit, the designation of shares as acquired pursuant to the exercise of an ISO
or NQSO shall be subject to change as permitted by applicable Code provisions.
SECTION 5. RESTRICTED STOCK AND INCENTIVE COMPENSATION UNITS
5.1. Restricted Stock Awards (a) Written Agreement. Each award of
Restricted Stock or Rights to Restricted Stock shall be evidenced by a written
agreement, executed by the Participant and Pentair. Such agreement shall specify
the number of shares of Restricted Stock or the number of Rights to Restricted
Stock awarded and any terms and conditions the Committee may require on such
award.
(b) Restriction Period. At the time of an award of Restricted Stock or
Rights to Restricted Stock, the Committee shall fix a period of time
("Restriction Period") during which such restrictions as are imposed by the
Committee shall remain in effect; provided that the number of shares of Stock
with respect to which the Committee may make an award which fixes a Restriction
Period of less than three (3) years shall not exceed five percent (5%) of the
maximum number of shares available under the Plan. Such restrictions shall lapse
upon expiration of the Restriction Period, or sooner if otherwise provided in
the Plan.
(c) Restrictions. In addition to such other restrictions as the
Committee may impose at grant, each share of Restricted Stock or Right to
Restricted Stock shall be subject to the following restrictions:
(i) Neither Restricted Stock nor Rights to Restricted Stock may be
sold, assigned, transferred, pledged, hypothecated, or
otherwise disposed of during a Restriction Period.
(ii) Except as otherwise herein provided, unless the Participant
remains continuously employed by Pentair or an Affiliate until
the conditions for the removal of such restrictions as the
Committee may impose have been
Appendix 2 - 7
satisfied, Restricted Stock and Rights to Restricted Stock
shall be forfeited and returned to Pentair, and all rights of
a Participant to receive Restricted Stock or vest in Rights to
Restricted Stock shall terminate without any payment or
consideration by Pentair.
(d) Record keeping. As soon as practicable after the execution of the
written agreement required by Section 5.2(a), Pentair shall:
(i) for awards of Restricted Stock, record in the name of the
Participant a number of nonnegotiable, certificated or
uncertificated shares equal to the number of shares of
Restricted Stock awarded; and
(ii) for awards of Rights to Restricted Stock, establish and
maintain a separate written account for each Participant and
record in such account the number of Rights to Restricted
Stock awarded.
(e) Dividends. Dividends declared with respect to shares of Restricted
Stock shall be paid in cash to the Participant as and when declared, or as
otherwise determined by the Committee. Where Rights to Restricted Stock are
awarded, the Committee shall determine whether amounts equivalent to dividends
declared on Stock subject to an award of Rights to Restricted Stock shall be
paid when the dividends are declared, or as otherwise determined by the
Committee. Dividends, regardless of when paid, shall be subject to all
applicable withholding taxes.
(f) Annual Award Limit. The maximum number of shares of Restricted
Stock granted in any one calendar year to any one Participant shall be 150,000
subject to adjustment as provided in section 3.3, but only to the extent that
such adjustment does not adversely affect the status of the award as performance
based compensation within the meaning of Code Section 162(m).
(g) Performance measures. A Participant's right to and the amount of an
award of Restricted Stock intended to qualify for the performance-based
exception under Code section 162(m) shall be measured by achievement of
established performance goals related to one or more of the following business
criteria as determined by the Committee: net income; stockholder return; stock
price appreciation; earnings per share; revenue growth; return on investment;
return on invested capital; earnings before interest, taxes, depreciation, and
amortization; operating income; market share; return on sales; asset reduction;
cost reduction; return on equity; cash flow; and new product releases.
The performance goals and business criteria to be used for such an
award for a calendar year or other relevant period shall be established by the
Committee before such year or period or after such year or period has commenced
but while achievement of the performance goal is substantially uncertain. The
Committee in its sole discretion shall have the ability to establish performance
goals and business criteria on a Pentair group-wide basis or individual business
unit or group level. In awarding Restricted Stock, the Committee also shall have
the discretion to use such other performance measures as it
Appendix 2 - 8
deems appropriate with respect to Participants who are not reasonably likely to
be covered employees, within the meaning Code section 162(m), at the time all or
part of a Restricted Stock award is otherwise deductible by the employer for
purposes of federal income taxes.
5.2. Incentive Compensation Units. (a) Award Agreements. Each ICU award
shall be evidenced by a written agreement, executed by the Participant and
Pentair, which shall specify the number of ICUs awarded and contain such other
terms and conditions as the Committee may require.
(b) ICU Account. Pentair shall establish and maintain a separate
account ("ICU Account") for each Participant and record in such accounts the
number of ICUs awarded to each Participant. The number of ICUs which may be
realized by each Participant may be adjusted by any conditions specified by the
Committee in the award agreement. The maintenance of an ICU Account is
principally a bookkeeping function and does not entitle a Participant to realize
on an ICU award.
(c) Earning an ICU Award. (1) General. The ability of a Participant to
realize on an ICU award shall be determined by achievement of specific corporate
performance factors over the designated Incentive Period. The maximum amount of
compensation per ICU payable to a Participant in any calendar year by reason of
an ICU award shall not exceed twice the growth in Book Value, determined
pursuant to Section 5.2(d), over the applicable Incentive Period.
(2) Incentive Period. At the time of award, the Committee shall fix the
Incentive Period during which the Participant must remain continuously employed
by Pentair or an Affiliate. The Incentive Period shall generally be three (3)
years, unless another expiration date is specified by the Committee or the Plan
provides otherwise.
(3) Corporate Performance Factors. The amount of compensation payable
to a Participant on account of an ICU award shall be determined by application
of the following factors:
(i) the change in Book Value per share of Stock over the
designated Incentive Period;
(ii) the growth in earning per share of Stock over the designated
Incentive Period;
(iii) the average return on equity of Stock over the designated
Incentive Period; or
(iv) such other factors as the Committee shall specify at the time
of grant.
(d) Valuation of Incentive Compensation Unit. (1) Valuation at
Expiration of Incentive Period. As soon as practicable after the Incentive
Period expires, Pentair's
Appendix 2 - 9
audited financial statements for the preceding Fiscal Year shall be provided in
final form to the Committee, which shall determine the value of each ICU. Such
value shall be based on the net increase in Book Value over the Incentive
Period, calculated by subtracting the beginning Book Value (determined as of the
December 31 immediately preceding the date the ICUs were awarded) from the
ending Book Value (determined on the December 31 immediately following the end
of the Incentive Period). The resulting number shall then be subject to
adjustment by a multiplier which takes into account average return on equity,
compounded growth in earnings per share, or any other corporate performance
factors established with respect to the award being valued.
(2) Valuation if Incentive Period Shortened. If for any reason an
Incentive Period is shortened, the Committee shall determine the value of an
affected Participant's ICUs as soon as practicable after the date such Period
prematurely ends, and for this purpose, the ending Book Value shall be
determined as of the December 31 immediately preceding the date the Incentive
Period ends, or as otherwise determined by the Committee.
(3) Adjustments to Valuation Formula. The Committee shall retain the
discretion to modify the factors or formula used to value an ICU award;
provided, however, that any such change shall be defined in the written
agreement executed pursuant to Section 5.2(a) at the time of grant. No such
modification shall in any event cause the value of an ICU award made to any one
Participant to exceed the maximum possible award as defined in Section
5.2(c)(1).
(e) Payment of ICU Account. Payment of the value of each ICU shall be
made to the Participant, or, if applicable, a designated beneficiary, as soon as
practicable after valuation. Such payment may be made in cash, Stock, Rights to
Restricted Stock, Restricted Stock or any combination thereof, as the Committee
shall determine at the time of grant. If payment is made in Stock, Rights to
Restricted Stock or Restricted Stock, the shares shall be valued at Fair Market
Value (as adjusted for any restrictions) on the date the Incentive Period
expires.
SECTION 6. PERFORMANCE SHARES AND PERFORMANCE UNITS
6.1. Performance Awards. (a) Performance Agreement. Each award of
Performance Shares and Performance Units shall be evidenced by a written
agreement, executed by the Participant and Pentair. Such agreement shall
establish all terms and conditions applicable to the payment of a Performance
Share or Performance Unit as the Committee may determine, including the
achievement of relevant performance objectives. These performance objectives
shall include such financial measures as return on shareholders equity, growth
in earnings per share, return on sales, growth in income, growth in sales and
various techniques which compare actual returns with required returns based on
cost of capital criteria.
(b) Performance Accounts. At such time as a performance award is made,
Pentair shall establish an account ("Performance Account") for each Participant
and
Appendix 2 - 10
credit the Performance Units and Performance Shares awarded to such account.
Performance Shares shall be credited in the form of Restricted Stock or Rights
to Restricted Stock. The maintenance of Performance Accounts is principally a
bookkeeping function, and does not entitle a Participant to payment of any
awards hereunder.
(c) Dividends. Dividends or the equivalent paid with respect to
Restricted Stock shall be paid in cash to the Participant as and when declared,
or as otherwise determined by the Committee. The Committee shall determine
whether dividends or the equivalent declared on Stock subject to Rights to
Restricted Stock shall be paid when declared, or as otherwise determined by the
Committee. Dividends, regardless of when paid, shall be subject to all
applicable withholding taxes.
6.2. Performance Period and Targets. (a) Performance Period. The
Performance Period shall be established by the Committee at the time of the
award. This period may differ for each award granted to any one Participant.
(b) Performance Targets. At the time a performance award is
established, the Committee shall establish such performance targets as it
determines to be relevant. Successful completion of performance targets within
the designated Performance Period shall be certified by the Committee, using
such measures of performance during the Performance Period as are specified in
the performance agreement.
6.3. Earning a Performance Award. The Committee shall pay a performance
award to a Participant based on the degree of attainment of the relevant
performance targets during the Performance Period, and in accordance with the
provisions of the performance agreement. The maximum amount of compensation a
Participant may be granted by reason of a performance award in any one calendar
year shall be $100,000, calculated by reference to Fair Market Value of the
award on date of grant.
6.4. Payment of Performance Awards. (a) Time for Payment. No
performance award shall be payable until after earned in accordance with the
terms and conditions of the performance agreement, unless otherwise provided in
the Plan or in the sole discretion of the Committee. Any Performance Shares,
Performance Units or other amounts credited to a Performance Account shall be
paid to the Participant only when, and to the extent, the Committee so
determines. All such determinations shall be made during the four (4) month
period immediately following the end of the Performance Period as established in
the performance agreement.
(b) Form of Payment. Payment of Performance Shares or Performance Units
shall be in the form of cash, Stock, Rights to Restricted Stock or Restricted
Stock, or a combination thereof as determined by the Committee at the time of
grant. If payment is made in Stock, Rights to Restricted Stock or Restricted
Stock, the shares shall be valued at Fair Market Value (as adjusted for any
restrictions) on the date the Performance Period expires.
Appendix 2 - 11
6.5. Bonus Plans. (a) Executive Bonus Award. Pentair maintains the
Executive Officer Performance Plan ("EOPP"), an annual bonus plan designed to
compensate participating executive officers for performance as measured against
the key financial measurements defined in the EOPP plan. To the extent an annual
bonus award exceeds any amount which can be paid in cash pursuant to any
limitation which may be imposed under the EOPP, the balance shall be considered
an award of Performance Shares payable in the form of Restricted Stock under the
Plan. The performance targets applicable to such Performance Shares shall be the
same as the criteria established under the EOPP for purposes of earning the
award. The Performance Shares so granted shall be subject to any vesting
conditions the Committee may impose as of the date the Performance Shares are
issued. The maximum amount of compensation a Participant may be granted by
reason of a Performance Share award under the EOPP in any one calendar year is
equal to the maximum award available to such Participant under the EOPP, reduced
by the amount of such award payable to the Participant in cash.
(b) Management Incentive Plan. Pentair also maintains an annual bonus
plan (the "MIP") which provides incentive compensation for management employees
other than executive officers. To the extent an annual bonus award exceeds any
amount which can be paid in cash pursuant to any limitation which may be imposed
under the MIP, the balance shall be considered an award of Performance Shares
payable in the form of Restricted Stock under the Plan. The Performance Shares
so granted shall be subject to any vesting conditions the Committee may impose
as of the date the Performance Shares are issued. The maximum amount of
compensation a Participant may be granted by reason of a Performance Share award
under the MIP in any one calendar year is equal to the maximum award available
to such Participant under the MIP reduced by the amount of such award payable to
the Participant in cash.
SECTION 7. TERMINATION OF EMPLOYMENT
7.1. General Rule. Except as otherwise provided herein, Options and
SARs may be exercised and Restricted Stock, Rights to Restricted Stock, ICUs,
Performance Share or Performance Unit awards paid to a Participant only in
accordance with the terms and conditions specified by the Committee at the time
of grant.
7.2. Exceptions for Death, Disability or Retirement. (a) Death of a
Participant. If a Participant's employment terminates due to death, any benefits
under the Plan may be transferred to the beneficiary designated by the
Participant. If no beneficiary has been duly designated, said benefits shall
transfer pursuant to the provisions of such Participant's will, or if there is
no will, by the laws of intestate succession in the state in which the
Participant is domiciled on the date of death. The individual who succeeds to
the Participant's benefits under the Plan may:
(i) exercise any outstanding Options to the same extent the
Participant was entitled to exercise such Options, together
with any Options the Committee may accelerate, at any time
prior to the earlier of six (6)
Appendix 2 - 12
months from the date of the Participant's death, or the date
the Options would otherwise expire by their terms;
(ii) receive payment of any shares of Restricted Stock or Rights to
Restricted Stock based on a deemed lapse of the restrictions,
or of any ICUs based on a deemed expiration of the Incentive
Period and attainment of the relevant performance goals,
provided that any such payment may be either prorated or
otherwise paid as determined by the Committee;
(iii) receive payment of a Performance Share or Performance Unit
award, as determined by the Committee, based on the degree to
which established performance targets had been attained as of
the Participant's death.
(b) Disability of Participant. A Participant who becomes Disabled may:
(i) exercise outstanding Options that are otherwise exercisable,
together with any Options the Committee may accelerate, at any
time prior to the earlier of twelve (12) months after the date
of Disability or the date the Options would otherwise expire
by their terms;
(ii) be paid a prorated amount of an award of Restricted Stock or
Rights to Restricted Stock or ICUs, determined by application
of the payment provisions in Section 7.2(a)(ii), based on a
deemed lapse of restrictions or a deemed expiration of an
Incentive Period and attainment of the relevant performance
goals;
(iii) be paid a Performance Share or Performance Unit award prior to
expiration of a Performance Period, as the Committee shall
determine by considering the degree of attainment of
established performance targets.
(c) Retirement. At the time of Retirement, a Participant may:
(i) exercise outstanding Options which are otherwise exercisable,
together with any Options the Committee may accelerate, at any
time prior to the earlier of thirty (30) days following
Retirement, or the date the Options would otherwise expire by
their terms;
(ii) receive a prorated payment of an award of Restricted Stock,
Rights to Restricted Stock or ICUs, determined by application
of the payment provisions in Section 7.2(a)(ii), based on a
deemed lapse of restrictions or a deemed expiration of an
Incentive Period and, if applicable, attainment of relevant
performance goals;
(iii) receive a payment of Performance Shares or Performance Units
as the Committee shall determine by considering the degree to
which performance targets have been attained.
Appendix 2 - 13
(d) Other Termination of Employment. (1) Termination Not for Cause. If
a Participant's employment ends for reasons other than those listed in Sections
7.2 or 7.3, outstanding Options may be exercised no later than the earlier of
thirty (30) days following such termination, or the date the Options would, by
their terms, expire. Any other outstanding awards under the Plan, to the extent
not then earned and paid to the Participant, shall terminate unless accelerated
by the Committee, subject to the provisions of Section 8.1.
(2) Termination for Cause. If a Participant's services are terminated
for cause, as determined by the Committee, all Options or other benefits granted
under the Plan, to the extent not already exercised or otherwise earned or paid,
shall terminate.
7.3. Change in Control. (a) Definitions. Unless the context requires
otherwise, when capitalized the terms listed below shall have the following
meanings when used in this or any other section of the Plan:
(1) "Change in Control" is a change in control of Pentair, as that
term is defined in the KEESA.
(2) "KEESA" is the Key Executive Employment and Severance
Agreement between Pentair and key executives, as approved by
the Board effective August 23, 2000.
(b) Treatment of Options. Upon the occurrence of a Change in Control,
all Options granted to a Participant who is then employed by Pentair or an
Affiliate shall, to the extent not then vested or exercised, become fully vested
and immediately exercisable without regard to the terms and conditions attached
to such Options at the time of grant. To the extent such Options are then
exercised under circumstances which would otherwise result in a grant of Reload
Options to the Participant, no such Reload Options will be granted.
(c) Treatment of Restricted Stock. Upon the occurrence of a Change in
Control the restrictions then applicable to all outstanding shares of Restricted
Stock awarded under the Plan shall automatically lapse. If on the Change in
Control date any dividends declared with respect to such Restricted Stock have
not been paid to the Participant, then all such amounts shall be paid within ten
(10) days of the Change in Control date.
(d) Treatment of Rights to Restricted Stock. Upon the occurrence of a
Change in Control, all Rights to Restricted Stock shall be fully and immediately
vested and the participant shall be paid within ten (10) days the cash value of
the shares of Stock which otherwise would have been issued based on the Fair
Market Value of the Stock on the Change in Control date, together with any then
unpaid dividends which have been declared on the Stock subject to the award of
Rights to Restricted Stock.
Appendix 2 - 14
(e) ICUs. Outstanding ICUs shall be valued by assuming the corporate
performance goals for the applicable Incentive Period have been met and shall be
paid in cash within ten (10) days of the Change in Control date, as follows:
(i) one-third of the ICUs awarded less than one (1) year prior
to the Change in Control date shall be paid;
(ii) two-thirds of the ICUs awarded one (1), but less than two (2)
years prior to the Change in Control date shall be paid;
(iii) all of the ICUs awarded two (2) or more years prior to the
Change in Control date shall be paid.
(f) Performance Shares. Upon the occurrence of a Change in Control the
restrictions then applicable to all outstanding Performance Shares shall lapse
and any dividends declared with respect to such shares which have not been paid
shall be paid within ten (10) days of the Change in Control date.
(g) Performance Units. Outstanding Performance Units shall be valued by
assuming all performance targets for the applicable Performance Period have been
fully met and shall be paid as cash within ten (10) days of the Change in
Control date, as follows:
(i) one-third of the Performance Units granted less than one (1)
year prior to the Change in Control date shall be paid;
(ii) two-thirds of the Performance Units granted one (1) but less
than two (2) years prior to the Change in Control date shall
be paid;
(iii) all of the Performance Units granted two (2) or more years
prior to the Change in Control date shall be paid.
(h) Participants Covered under a KEESA. The provisions of this Section
7.3 shall also apply to a Participant who terminates employment before a Change
in Control if the Participant has entered into a KEESA and is entitled to
benefits thereunder pursuant to Section 2(b) of the KEESA.
(i) Governing Documents. In the case of any conflict between the
provisions of this Section 7.3 and any other provision of the Plan, this Section
7.3 will control. In the case of any conflict between the terms of this Plan and
the terms and provisions of a Participant's KEESA, the terms of such KEESA shall
control to the extent more beneficial to such Participant, and the obligations
of Pentair under such KEESA shall be in addition to any of its obligations under
the Plan.
SECTION 8. CHANGES TO AWARDS
Appendix 2 - 15
8.1. Acceleration of Benefits. The Committee shall have the discretion
to accelerate the exercise date of an Option or SAR or the time at which
restrictions on Stock or Rights thereto lapse, to remove any Stock restrictions
or to accelerate the expiration of an Incentive Period or Performance Period due
to changes in applicable tax or other laws, or such other changes of
circumstances as may arise after the date of an award under the Plan, or to take
any such similar action it may decide, in its absolute discretion, is in the
best interests of Pentair and equitable to a Participant (or such Participant's
heirs or beneficiaries). Notwithstanding the above, however, the Committee shall
have no discretion to increase the amount of compensation a Participant could
earn by application of the preestablished performance goals and financial
measurements relevant to the award, although the Committee shall retain the
discretion to decrease any such award. Any action by the Committee to accelerate
a grant or award for reasons other than death, disability or change in control
of Pentair shall include application of a commercially reasonable discount to
the compensation payable to reflect the value of accelerated payment.
8.2. Accounting Standards. Calculation of changes to any performance
goal established for purposes of making awards under the Plan shall be without
regard to changes in accounting methods used by Pentair or in accounting
standards that may be required by the Financial Accounting Standards Board after
the goal is established and prior to the time compensation earned on account of
achievement of the relevant performance goal is paid to the Participant.
8.3. Amendment of Awards. The Committee shall have the discretion to
amend the terms of any grant or award made under the Plan. Any such amendment
may be made either prospectively or retroactively, as necessary, provided that
no such amendment shall either impair the rights of an affected Participant
without the consent of such Participant or amend the terms of an Option so as to
reduce the Option price. Absent shareholder approval, the Committee may not
cancel any outstanding Option and replace it with a new Option which has a lower
Option price, if such action would have the same economic effect as reducing the
Option price of such a canceled Option.
SECTION 9. MISCELLANEOUS PROVISIONS
9.1. Stockholder Privileges. (a) Options. Until such time as a Stock
certificate is issued, a Participant, or other person entitled to exercise an
Option under the Plan, shall have none of the privileges of a stockholder with
respect to Stock covered by an Option granted under this Plan.
(b) Other Awards. Upon delivery of Restricted Stock to a Participant
(or to an escrow holder, if applicable) such Participant shall have all of the
rights of a shareholder with respect to the Restricted Stock, subject to the
restrictions imposed, including the right to receive dividends and vote the
shares of Restricted Stock. Participants for whom an account is established to
record an award of Rights to Restricted Stock shall not have the rights of a
shareholder until such time as the Rights to Restricted Stock vest, but may, in
the discretion of the Committee, receive payment of or credit for the equivalent
of
Appendix 2 - 16
dividends otherwise payable with respect to the number of shares of Stock to
which such Rights to Restricted Stock relate.
In the event of forfeiture, the certificate or certificates, if any,
representing such Restricted Stock shall be delivered to Pentair, accompanied by
executed instruments of transfer. If the Restricted Stock is held in escrow,
Pentair shall be entitled to have the certificates representing the Restricted
Stock redelivered to it out of escrow.
(c) Interest. The Committee may provide for the crediting of earnings
interest with respect to Performance Units or ICUs credited to a Participant's
account. Any rate of earnings credited hereunder shall be determined by the
Committee.
(d) Sale of Stock or Restricted Stock. The Committee may fix a period
during which any Stock, Right to Restricted Stock or Restricted Stock acquired
under the Plan may not be sold, provided that the Committee may not fix any
period which is less than or which exceeds such requirements as may be imposed
by applicable state or federal law.
9.2. Amendment, Suspension, Modification and Termination of Plan. The
Committee, subject to approval by the Board, may amend or modify the Plan at any
time to conform to changes in applicable laws or in any other respect deemed to
be in the best interests of Pentair. Pursuant to Code section 422, however, no
such amendment shall, without shareholder approval (i) materially increase the
number of shares of Stock as to which ISOs may be granted under the Plan,
(ii) materially modify the requirements as to eligibility to receive Options
under the Plan, (iii) materially increase the benefits accruing to Participants
receiving ISOs under the Plan, (iv) reduce an ISO Option price below Fair Market
Value on the day the Option is granted, (v) permit the award of SARs other than
in tandem with an ISO, (vi) extend the period during which an Option may be
granted or exercised, or (vii) extend the termination date of the provisions of
the Plan which permit the granting of ISOs. No amendment or modification of the
Plan shall adversely affect any Participant under the Plan, or any section
thereof, without such Participant's consent.
9.3. Administration. The Plan shall be administered by the Committee.
Pursuant to this delegation, the Committee is authorized to (i) interpret and
construe the Plan, (ii) adopt, amend, or rescind rules and regulations relating
to the Plan, and (iii) make all other determinations necessary or advisable for
the administration of the Plan, to the extent not contrary to the express
provisions of the Plan. Any actions, determinations or other interpretations
made by the Committee within the scope of its authority shall be final, binding
and conclusive for all purposes.
9.4. Indemnification. To the extent permitted by law, members of the
Committee and the Board shall be indemnified and held harmless by Pentair with
respect to any loss, cost, liability or expense that may reasonably be incurred
in connection with any claim, action, suit or proceeding which arises by reason
of any act or omission under the Plan, taken within the scope of the authority
delegated herein.
Appendix 2 - 17
9.5. Expenses. The expenses of maintaining and administering this Plan
shall be borne by Pentair.
9.6. Rights of Participants. Nothing in this Plan shall interfere with
or limit in any way the right of Pentair or an Affiliate to terminate any
individual's employment at any time, with or without notice or cause. This Plan
does not, nor is it intended to, confer upon any employee the right to continue
in the employment of Pentair or an Affiliate.
9.7. Transferability. (a) Nontransferability. Except as otherwise
specified in the Plan, Options, SARs, Restricted Stock, Rights to Restricted
Stock, ICUs, Performance Shares and Performance Units granted or awarded under
the Plan shall not be transferable.
(b) Designation of Beneficiary(ies). A Participant may designate a
person or persons to receive his or her Plan benefits in the event of death.
Such designation shall be on forms as prescribed by the Committee and may be
modified or revoked only in writing.
9.8. Governing Law. To the extent not preempted by applicable federal
law, this Plan shall be construed and interpreted in accordance with the
substantive laws of the State of Minnesota.
Appendix 2 - 18
APPENDIX 3
PENTAIR, INC.
COMPENSATION COMMITTEE CHARTER
The purposes of the Compensation Committee are to establish the compensation
philosophy and employee compensation programs for the Company, including (a)
discharging the responsibilities of the Board of Directors relating to
compensation of the Company's executive officers and (b) producing an annual
report on executive compensation for inclusion in the Company's proxy statement
in accordance with applicable rules and regulations.
The Compensation Committee has overall responsibility for compensation actions
affecting the Company's chief executive officer (the "CEO") and other officers
elected by the Board of Directors from time to time (collectively, "Officers").
Each member of the Committee shall be (a) an Independent director, (b) a
"Non-Employee Director" under the qualifications set forth in Rule 16b-3
promulgated under the Securities Exchange Act of 1934 and (c) an "outside
director" for purposes of Section 162(m)(4)(C) of the Internal Revenue Code. The
members of the Compensation Committee, which shall be at least three in number,
and its Chairperson will be appointed by the Board of Directors on the
recommendation of the Governance Committee. Any member of the Compensation
Committee may be removed by a majority vote of the Board of Directors.
The Committee shall meet separately or with management, other personnel and its
advisors as frequently as it shall determine necessary or appropriate in its
reasonable judgment to perform its duties hereunder.
For a director to qualify as "Independent":
(a) The Board of Directors must affirmatively determine that the
director has no material relationship with the Company (either
directly or as a partner, shareholder or officer of an
organization that has a material relationship with the
Company) that would prevent the director from acting
independently from management of the Company.
(b) The director (including such director's immediate family
members and anyone who shares the same home as such director)
within the immediately preceding five (5) years shall not be
or have been:
(i) an employee of the Company or any affiliate of the
Company;
(ii) affiliated with or employed by a present or former
auditor of the Company or a material affiliate of the
Company, at a time when such auditor was the external
auditor of the Company;
(iii) part of an interlocking directorate in which an
executive officer of the Company serves on the
compensation committee of another company that
employs the director; or
Appendix 3 - 1
(iv) a significant supplier or customer, or an affiliate
of any significant supplier or customer of the
Company or any of its material affiliates or
subsidiaries.
The Committee shall provide assistance to the Board of Directors in fulfilling
its responsibility to shareholders relating to the Company's compensation
philosophy and practices for Officers and administration of the Company's
various employee benefit plans. In so doing, it is the responsibility of the
Committee to maintain free and open means of communication between the
directors, the Company's financial management and, if appropriate, independent
outside professional compensation advisors.
In carrying out these responsibilities, the Committee will:
1. Adopt an executive compensation strategy consistent with the Company's
plans and objectives and linked to the Company's pay for performance
philosophy. The Committee shall review and approve corporate goals and
objectives relevant to the CEO's compensation.
2 Review and establish all compensation arrangements and agreements
between the Company and Officers, and other senior executives, and take
all necessary salary actions in the form of written resolutions. Such
arrangements may include, but not be limited to cash compensation,
bonuses, stock options, restricted stock awards, insurance, retirement,
other benefits and other perquisites.
3. With respect to the CEO, be responsible for evaluating, at least
annually, the CEO's performance in light of the Company's goals and
objectives, and shall set the CEO's compensation level based on this
evaluation.
(a) In determining the long-term incentive component of the CEO's
compensation, the Committee will consider the Company's
performance and relative shareholder return, the value of
similar incentive awards to CEOs at comparable companies, and
the awards given to the CEO in prior years.
(b) All Independent directors on the Board of Directors shall be
given the opportunity to give input on the performance of the
CEO in connection with the annual performance review conducted
by the Committee.
4. Supervise participation in all stock plans (Omnibus Stock Incentive
Plan, Stock Bonus Purchase Plan, RSIP Plus, etc.) and grant awards
under these stock plans consistent with each plan's intended purpose.
5. Periodically review the competitiveness of major compensation, bonus,
stock incentive, retirement and savings plans, the Company's retirement
program philosophy, and the adequacy of retirement benefits, savings
programs, and retirement planning programs for all categories of
employees.
Appendix 3 - 2
6. Meet with the CEO, Human Resources management, legal counsel, and if
deemed appropriate, independent outside professional compensation
advisors to review current trends and practices in executive
compensation and disclosure requirements under various securities and
exchange rules and regulations. The Committee has the sole authority to
retain and terminate any outside compensation advisors, including sole
authority to approve the firm's fees and other retention terms, hired
for the purpose of assisting the Committee in the evaluation of
director, CEO or Officer compensation.
7. Review incentive-compensation plans and stock-based compensation
programs and make recommendations to the Board of Directors with
respect to such programs and the relative weighting and composition of
stock-based compensation in overall Officer compensation.
8. Review annually with the CEO and the Governance Committee, the
recruitment, development, and promotion programs of candidates expected
to assume senior management positions as well as high potential
candidates.
9. Within the scope of its duties, to investigate or have investigated any
matter of concern brought to its attention as the Committee determines
to be necessary or appropriate. The Committee specifically has the
power to retain outside advisors for this purpose if, in its judgment,
that is appropriate.
10. Conduct an annual evaluation of the performance of the Committee.
11. Report its activities to the Board of Directors at each Board meeting.
12. Prepare annually a report on executive compensation for inclusion in
the Company's proxy statement, in accordance with applicable rules and
regulations of the Securities and Exchange Commission.
12. The Committee has the power and authority to delegate such of its
powers and duties to one or more subcommittees of the Committee, as it
from time to time determines to be necessary and/or appropriate. The
Committee also performs other functions that are delegated by the Board
from time to time.
In carrying out its responsibilities, the Committee believes its policies and
procedures should remain flexible in order that it can best react to changing
conditions and environment, and to assure the Board of Directors and
shareholders that the executive compensation and stock plan practices of the
Company are in accordance with all requirements and are of the highest quality.
Appendix 3 - 3
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APPENDIX 4
PENTAIR, INC.
AUDIT AND FINANCE COMMITTEE CHARTER
-----------------------------------
The Audit and Finance Committee is responsible for (a) assisting the Board of
Directors with oversight of the accounting and financial reporting processes of
the Company and audits of the financial statements of the Company, including
(i) the integrity of the Company's financial statements,
(ii) the Company's compliance with legal and regulatory
requirements,
(iii) the independence and qualifications of the Company's external
auditor and
(iv) the performance of the Company's internal audit function and
of the external auditor, and
(b) preparing the report that Securities and Exchange Commission ("SEC") rules
require be included in the Company's annual proxy statement.
The Committee shall meet as a committee at least quarterly with the Company's
senior financial management, with the Company's senior internal audit staff, and
with the external auditor, either together, separately or alone, as the
Committee may deem appropriate from time to time. In addition, the Committee
shall meet separately or with management, other personnel, and its advisors as
frequently as it shall determine necessary or appropriate in its reasonable
judgment to perform its duties hereunder. It shall meet periodically with the
Company's General Counsel to review legal matters that may have a material
impact on the financial statements, the Company's compliance policies and any
material reports or inquiries received from regulators or government agencies.
The Committee shall generally be referred to as the Audit Committee.
1. Committee Composition. The Audit Committee shall consist of at least
three directors, all of whom shall be Independent and financially
literate. All members of the Committee shall be directors of the
Company. In addition, at least one member of the Committee shall be an
Audit Committee Financial Expert, as determined by the Board of
Directors. The members of the Audit Committee, and its Chairperson,
will be appointed by the Board of Directors on the recommendation of
the Governance Committee. Any member of the Audit Committee may be
removed by a majority vote of the Board of Directors. If an Audit
Committee member simultaneously serves on the audit committee of more
than two other public companies, the Board must determine that such
simultaneous service would not impair the ability of such member to
effectively serve on the Audit Committee and disclose such
determination in the Company's annual proxy statement.
Each Committee member will submit an annual statement to the Board of
Directors confirming compliance with these independence requirements.
QUALIFICATIONS
"Audit Committee Financial Expert" shall mean a person who has, through
Appendix 4 - 1
(i) education and experience as a public accountant,
auditor, principal financial officer, controller, or
principal accounting officer or experience in one or
more positions that involve the performance of
similar functions,
(ii) experience actively supervising a public accountant,
auditor, principal financial officer, controller, or
principal accounting officer or other person
performing similar functions,
(iii) experience overseeing or assessing the performance of
companies or public accountants with respect to the
preparation, auditing or evaluation of financial
statements, or
(iv) other relevant experience,
the following attributes:
(a) an understanding of generally accepted accounting principles
("GAAP") and financial statements;
(b) an ability to assess the general application of such
principles in connection with the accounting for estimates,
accruals, and reserves;
(c) experience preparing, auditing, analyzing or evaluating
financial statements that present a breadth and level of
complexity of accounting issues that are generally comparable
to the breadth and complexity of issues that can resonably be
expected to be raised by the Company's financial statements,
or experience actively supervising one or more persons engaged
in such activities;
(d) an understanding of internal controls and procedures for
financial reporting; and
(e) an understanding of audit committee functions.
For a director to qualify as "Independent":
(a) The Board of Directors must affirmatively determine that the
director has no material relationship with the Company (either
directly or as a partner, shareholder or officer of an
organization that has a material relationship with the
Company) that would prevent the director from acting
independently of management of the Company.
b) The director (including such director's immediate family
members and anyone who shares the same home as such director)
within the immediately preceding five (5) years shall not be
or have been:
(i) an employee of the Company or any affiliate of the
Company;
(ii) affiliated with or employed by a present or former
auditor of the Company or a material affiliate of the
Company, at a time when such auditor was the external
auditor of the Company;
Appendix 4 - 2
(iii) part of an interlocking directorate in which an
executive officer of the Company serves on the
compensation committee of another company that
employs the director; or
(iv) a significant supplier or customer, or an affiliate
of any significant supplier or customer, of the
Company or any of its material affiliates or
subsidiaries.
(c) The director may not, other than in his or her capacity as
member of the Board of Directors or any committee thereof,
accept directly or indirectly any consulting, advisory or
other compensatory fee from the Company or any affiliate (as
defined and interpreted pursuant to SEC rules).
(d) Other than in his or her capacity as a member of the Board of
Directors or any committee thereof, the director may not be an
affiliated person of the Company or any of its subsidiaries
(as defined and interpreted pursuant to SEC rules).
2. Hiring and Independence of External Auditors. The Audit Committee is directly
responsible for the appointment, compensation, terms of engagement (including
retention and termination) and oversight of the work of the independent
registered public accounting firm chosen to serve as external auditor of the
Company for the purpose of preparing or issuing an audit report or related work,
and for rendering opinions reflecting proper compliance with GAAP and various
financial accounting standards. The external auditor shall report directly to
the Audit Committee.
(a) The external auditor appointed by the Committee shall, in the
opinion of the Committee, be independent of the Company. An
external auditor does not meet the independence requirement of
this Charter if a chief executive officer, controller, chief
financial officer, chief accounting officer, any person
serving in an equivalent position for the Company or any
person in a position to, or that does, exercise influence over
the contents of the Company's financial statements or anyone
who prepares them, was employed by the external auditor and
participated in any capacity in the audit of the Company
during the one year period preceding the date of the
initiation of the audit.
(b) The Committee shall require the external auditor to submit on
a periodic basis to the Committee a formal written statement
delineating all relationships between the external auditor and
the Company; shall actively engage in a dialogue with the
external auditor with respect to any disclosed relationships
or services that may impact the objectivity and independence
of the external auditor.
(c) On an annual basis, the Committee shall be responsible for
obtaining and reviewing a report by the external auditor
describing: (i) the external auditor's internal
quality-control procedures; (ii) any material issues raised by
the most recent internal quality-control review, or peer
review, of the external auditor, or by any inquiry or
investigation by governmental or professional authorities,
Appendix 4 - 3
within the preceding five years, respecting one or more
independent audits carried out by the external auditor, and
(iii) any steps taken to deal with any such issues.
(d) In appointing an external auditor, the Committee shall require
audit partner rotation at least every 5 years, after the
effective date of any transition time periods under applicable
SEC and other rules and regulations.
(e) The Committee shall report periodically to the Board regarding
its determinations and findings with respect to the
independence and qualifications of the external auditor.
(f) The Committee shall set clear policies for the hiring by the
Company of employees or former employees of the external
auditors who participated in any capacity in the audit of the
Company.
3. Audit Services and Permitted Non-Audit Services; Conduct of Audit. The
Audit Committee is responsible for approving all auditing services
(including providing comfort letters in connection with securities
underwritings) and all Permitted Non-Audit Services, proposed to be
provided by the external auditor, PRIOR to the rendering of such
services.
(a) The Committee shall review and approve the external auditor's
audit plan including scope, staffing and timing of work.
(b) "Permitted Non-Audit Services" shall mean such non-audit
services, including tax services, that are permitted by law
and applicable rules and regulations, but SHALL NOT INCLUDE
the following services, after the effective date of any
transition time periods under applicable SEC and other rules
and regulations:
(i) bookkeeping or other services related to the
accounting records or financial statements of the
company;
(ii) financial information systems design and
implementation;
(iii) appraisal or valuation services, fairness opinions,
or contribution-in-kind reports;
(iv) actuarial services related to financial statement
amounts or disclosures;
(v) internal audit outsourcing services;
(vi) management functions or human resources;
(vii) broker or dealer, investment adviser, or investment
banking services;
(viii) legal services; or
(ix) expert services unrelated to the audit.
(c) The Committee may delegate authority to approve Permitted
Non-Audit Services to one or more members of the Committee,
provided that such approvals are disclosed to the Audit
Committee at its next regularly scheduled Committee meeting,
and shall cause such approved non-audit services to be
disclosed in the Company's periodic reports in accordance with
SEC rules.
Appendix 4 - 4
(d) The Committee shall receive reports from the external auditor
regarding:
(i) all critical accounting policies and practices to be
used in the audit;
(ii) all alternative treatments of financial information
within GAAP that have been discussed with management
of the Company, ramifications of the use of such
alternative disclosures and treatments, and the
treatment preferred by the external auditor;
(iii) other material written communications between the
external auditor and management of the Company, such
as any management letter or schedule of unadjusted
differences.
(e) The Committee shall review with the external auditor any audit
problems or difficulties and management's response, including
any restrictions on the scope of the external auditor's
activities or on access to requested information, and any
significant disagreements with management, such as
(i) any accounting adjustments that were noted or
proposed by the auditor but were "passed" as
immaterial or otherwise;
(ii) any communications between the audit team and the
external auditor's national office respecting
auditing or accounting issues presented by the
engagement; or
(iii) any management or internal control letter issued or
proposed to be issued by the audit firm to the
Company.
(f) Discuss with the external auditor such other matters as it
deems relevant in its judgment or those required to be
discussed by applicable laws, rules, regulations and
accounting standards, including Statement on Auditing
Standards No. 61, relating to the conduct of the audit.
4. Financial Statements; Accounting Practices and Policies. With regard to
the Company's financial statements and accounting practices and
policies, the Committee shall:
(a) Meet with management to review the annual audited financial
statements and discuss major issues regarding accounting and
auditing principles and practices as well as the adequacy of
internal controls that could significantly affect the
Company's financial statements.
(b) Review significant financial reporting issues and judgments
made in connection with the preparation of the Company's
financial statements.
(c) Review and discuss with management and the external auditor
the Company's annual audited financial statements and
quarterly financial statements, including the Company's
disclosures under "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
Appendix 4 - 5
(d) Review major changes to the Company's auditing and accounting
principles and practices as suggested by the external auditor,
internal auditor or management.
(e) Discuss earnings press releases, as well as financial
information and earnings guidance provided to analysts and
rating agencies.
(f) Be responsible for resolution of disagreements between
management of the Company and the external auditor regarding
financial reporting.
5. Risk Management. The Committee shall review and discuss policies with
respect to risk assessment and risk management, and advise management
of any suggested additions or changes to such policies and guidelines
that govern the process by which risk assessment and risk management is
handled. It is the Audit Committee's responsibility to meet
periodically with management to review the Company's major financial
risk exposures and the steps management has taken to monitor and
control such exposures.
6. Internal Audit Function. With regard to the Company's internal audit
practices, the Committee shall:
(a) Perform a general oversight function assuring adequate
competent staff and sufficient internal control policies to
ensure the integrity of the Company's financial reporting
process.
(b) Review the performance of the internal audit department.
(c) As appropriate, review significant reports to management
prepared by the internal audit department and management's
responses.
(d) Discuss with the external auditor, the appropriate
responsibilities, budget and staffing of the Company's
internal audit function, as well as any limitation on the
internal audit that the external auditor is aware of.
7. Procedure for Reporting Accounting and Auditing Concerns. The Audit
Committee is responsible for establishing procedures for the receipt,
retention and treatment of complaints received by the Company regarding
accounting, internal accounting controls or auditing matters; and for
the confidential, anonymous submission by employees of the Company of
concerns regarding questionable accounting or auditing matters.
8. Disclosures Regarding Controls. The Audit Committee shall review
disclosures made to the Committee by the Company's Chief Executive
Officer and Chief Financial Officer, or their equivalent, during their
certification process for the Form 10-K and Form 10-Q about any
significant deficiencies in the design or operation of internal
controls or material weaknesses therein and any fraud involving
management or other employees who have a significant role in the
Company's internal controls.
Appendix 4 - 6
9. Outside Advisors. The Audit Committee shall have the authority to
retain additional legal, accounting or other advisers, as it deems
necessary to advise the Committee. The Company shall provide
appropriate funding, as determined by the Committee, for payment of
compensation to the outside auditor for the purpose of rendering or
issuing an audit report and to any advisers employed by the Committee.
The Audit Committee may request any officer or employee of the Company
or the Company's or Committee's outside counsel or external auditor, or
other consultants and advisors to attend a meeting of the Committee or
to meet with any members of the Committee.
10. Other Duties and Responsibilities. The Audit Committee shall:
(a) Review and reassess at least annually the adequacy of this
Charter and recommend any proposed changes to the Board for
its review and approval.
(b) Prepare the report required by the rules of SEC to be included
in the Company's annual proxy statement regarding the
activities of the Audit Committee and shall submit all
required certifications to the appropriate exchanges.
(c) Perform an annual performance evaluation of the Audit
Committee.
(d) Reports its activities to the Board of Directors at each Board
meeting
(e) Perform such other duties as delegated to it from time to time
by the Board of Directors.
11. Finance Oversight. In addition to its responsibilities for oversight of
the Company's accounting and financial reporting process, the Audit
Committee also provides oversight for the financing strategy,
investment policies and financial condition of the Company. The
Committee shall conduct reviews, receive reports, provide direction to
management and counsel to the Board of Directors concerning matters
within the scope of this responsibility.
In order to accomplish its objectives, in consultation with management
and legal counsel, as the Committee deems necessary or appropriate, the
Committee shall have the following specific responsibilities and
authority:
(a) Shall conduct reviews jointly with management prior to making
recommendations regarding:
(i) Changes in company capital structure.
(ii) Sales or repurchases of equity and long-term debt.
(iii) The financing of major capital expenditure programs.
Appendix 4 - 7
(iv) The financing of acquisitions, divestitures, joint
ventures, partnerships or other combinations of
business interests.
(v) Annual financial performance objectives as developed
by management.
(vi) Dividend policy and declarations.
(vii) The use of any derivative related instruments,
including its use to manage currency and interest
exposure.
(viii) Foreign currency positions.
(b) Shall review investment policies and practices as follows:
(i) Review investment policies relating to the Company's
qualified employee plans and approve any material
changes to such policies.
(ii) Receive and review written semi-annual investment
performance reports.
(iii) Review annually management's reports regarding the
effectiveness of trustees and performance of
investment managers relative to established
benchmarks.
(iv) Report investment results to the Board of Directors
annually and, as conditions may require, report on
the result of any specific inquiries and analysis.
(v) As to the 401(k) plans, review (a) the criteria for
selecting funds to be offered to participants and (b)
the performance and related risks of each fund.
(c) If appropriate and necessary to receive information not
otherwise available, contact directly outside investment
managers and advisors and such other persons within or outside
of the company.
Appendix 4 - 8
(This page has been left blank intentionally.)
(This page has been left blank intentionally.)
[LOGO] PENTAIR
PLEASE SIGN AND RETURN PROMPTLY TO REDUCE SOLICITATION EXPENSES
PENTAIR, INC.
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS
APRIL 30, 2003
The undersigned hereby appoints Randall J. Hogan and David D. Harrison, or
either of them, as Proxies, each with the power to appoint his substitute, and
hereby authorizes them to represent and to vote, as designated below, all the
shares of Common Stock of Pentair, Inc. held of record by the undersigned on
March 3, 2003, at the Annual Meeting of Shareholders of Pentair, Inc. to be held
at 10:00 a.m., Wednesday, April 30, 2003, at the Thrivent Financial Auditorium,
625 4th Avenue South, Minneapolis, Minnesota, and any adjournment or
adjournments thereof.
THE BOARD RECOMMENDS A VOTE "FOR" EACH PROPOSAL.
1. ELECTION OF DIRECTORS:
[ ] FOR all nominees listed below except those I have struck by a line
through their names.
[ ] WITHHOLD AUTHORITY to vote for all nominees listed below.
Charles A. Haggerty Randall J. Hogan
2. APPROVAL OF AMENDMENT TO THE EXECUTIVE OFFICER
PERFORMANCE PLAN for Section 162(m) purposes. [ ] FOR [ ] AGAINST [ ] ABSTAIN
(CONTINUED ON REVERSE SIDE)
(CONTINUED FROM REVERSE SIDE)
3. APPROVAL OF AMENDMENT TO THE OMNIBUS STOCK
INCENTIVE PLAN for Section 162(m) purposes. [ ] FOR [ ] AGAINST [ ] ABSTAIN
4. To transact such other business as may properly come before the meeting or any adjournment thereof.
THE SHARES REPRESENTED HEREBY WILL BE VOTED AS DIRECTED BY THIS PROXY, BUT IF THIS PROXY IS RETURNED SIGNED WITH
NO DIRECTION MADE, THEY WILL BE VOTED "FOR" EACH OF THE DIRECTORS AND PROPOSALS.
The undersigned hereby ratifies and confirms all that the Proxies shall lawfully do or cause to be done by
virtue hereof and hereby revokes all proxies heretofore given to vote such shares.
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS OF PENTAIR, INC.
_____________________________________________________
Signature
_____________________________________________________
Signature if held jointly
Dated: ________________________________________, 2003
THIS CARD MUST BE DATED.
(Please sign exactly as your name appears to the
left. When shares are held by joint tenants, both
should sign. When signing as executor, administrator,
attorney, trustee or guardian, please give full title
as such. If a corporation, please sign in full
corporate name by president or other authorized
officer. If a partnership, please sign in partnership
name by an authorized person.)
[LOGO] PENTAIR
PLEASE SIGN AND RETURN PROMPTLY
TO REDUCE SOLICITATION EXPENSES
PENTAIR, INC.
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS
APRIL 30, 2003
--------------------------------------------------------------------------------
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF PENTAIR, INC.
As a participant in the Pentair, Inc. International Employee Stock Purchase
and Bonus Plan (Plan), I hereby direct ABN AMRO Trust Company (Jersey) Limited
as Trustee, to vote, as designated below, at the Annual Meeting of Shareholders
of Pentair, Inc. to be held at 10:00 a.m., Wednesday, April 30, 2003, at the
Thrivent Financial Auditorium, 625 4th Avenue South, Minneapolis, Minnesota, and
any adjournment or adjournments thereof, all shares of Common Stock of Pentair,
Inc. allocated to my account in the Plan as of March 3, 2003. I understand that
this card must be received by Wells Fargo Bank Minnesota, N.A., acting as
tabulation agent for the Trustee, by April 23, 2003.
SEE REVERSE FOR VOTING INSTRUCTIONS.
------------------
|COMPANY # |
|CONTROL # |
------------------
THERE ARE TWO WAYS TO VOTE YOUR PROXY
YOUR VOTE AUTHORIZES THE NAMED PROXIES TO VOTE YOUR SHARES IN THE SAME MANNER AS
IF YOU MARKED, SIGNED AND RETURNED YOUR PROXY CARD.
VOTE BY INTERNET -- http://www.eproxy.com/pnr/ -- QUICK --- EASY --- IMMEDIATE
o Use the Internet to vote your proxy 24 hours a day, 7 days a week, until
12:00 p.m. (CT) on April 29, 2003.
o You will be prompted to enter your 3-digit Company Number, your 7-digit
Control Number (these numbers are located on the proxy card) and the last
4-digits of the U.S. Social Security Number (SSN) or Tax Identification
Number (TIN) for this account to obtain your records and create an
electronic ballot. If you do not have a U.S. SSN or TIN please leave blank.
VOTE BY MAIL
Mark, sign and date your proxy card and return it in the postage-paid envelope
we've provided or return it to Pentair, Inc., c/o Shareowner Services-, P.O.
Box 64873, St. Paul, MN 55164-0873.
IF YOU VOTE BY INTERNET, PLEASE DO NOT MAIL YOUR PROXY CARD
--------------------------------------------------------------------------------
THE BOARD RECOMMENDS A VOTE "FOR" EACH PROPOSAL.
1. ELECTION OF DIRECTORS: 01 Charles A. Haggerty [ ] FOR all [ ] WITHHOLD AUTHORITY
02 Randall J. Hogan nominees listed to vote for all
(except as marked) nominees listed
--------------------------------------------
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDICATED NOMINEE, | |
WRITE THE NUMBER(S) OF THE NOMINEE(S) IN THE BOX PROVIDED TO THE RIGHT.) | |
--------------------------------------------
\ PLEASE FOLD HERE /
---------------------------------------------------------------------------------------------------------------------------------
2. APPROVAL OF AMENDMENT TO THE EXECUTIVE OFFICER PERFORMANCE PLAN
for Section 162(m) purposes. [ ] For [ ] Against [ ] Abstain
3. APPROVAL OF AMENDMENT TO THE OMNIBUS STOCK INCENTIVE
PLAN for Section 162(m) purposes. [ ] For [ ] Against [ ] Abstain
4. To transact such other business as may properly come before the meeting or any adjournment thereof.
THE SHARES REPRESENTED HEREBY WILL BE VOTED AS DIRECTED BY THIS PROXY, BUT IF THIS PROXY IS RETURNED SIGNED WITH NO DIRECTION MADE,
THEY WILL BE VOTED "FOR" EACH OF THE DIRECTORS AND PROPOSALS.
The undersigned hereby ratifies and confirms all that the Proxies shall lawfully do or cause to be done by virtue hereof and hereby
revokes all proxies heretofore given to vote such shares.
Address Change? Mark Box [ ] Indicate changes below:
Date _______________________________, 2003
THIS CARD MUST BE DATED.
-------------------------------------------
| |
| |
| |
-------------------------------------------
Signature(s) in Box
(Please sign exactly as your name appears to the
left. When shares are held by joint tenants, both
should sign. When signing as executor,
administrator, attorney, trustee or guardian,
please give full title as such. If a corporation,
please sign in full corporate name by president
or other authorized officer. If a partnership,
please sign in partnership name by an authorized
person.)
------------------------------------------------------------------------------------------------------------------------------------
[LOGO] PENTAIR
PLEASE SIGN AND RETURN PROMPTLY
TO REDUCE SOLICITATION EXPENSES
PENTAIR, INC.
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS
APRIL 30, 2003
--------------------------------------------------------------------------------
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF PENTAIR, INC.
The undersigned hereby appoints Randall J. Hogan and David D. Harrison, or
either of them, as Proxies, each with the power to appoint his substitute, and
hereby authorizes them to represent and to vote, as designated below, all the
shares of Common Stock of Pentair, Inc. held of record by the undersigned on
March 3, 2003 at the Annual Meeting of Shareholders of Pentair, Inc. to be held
at 10:00 a.m., Wednesday, April 30, 2003, at the Thrivent Financial Auditorium,
625 4th Avenue South, Minneapolis, Minnesota, and any adjournment or
adjournments thereof.
Furthermore, if I am a participant in the Pentair, Inc. Employee Stock
Ownership Plan (Pentair ESOP), I hereby direct Fidelity Management Trust Company
as Pentair ESOP Trustee, to vote at the Annual Meeting of Shareholders of
Pentair, Inc. to be held at 10:00 a.m., Wednesday, April 30, 2003, at the
Thrivent Financial Auditorium, 625 4th Avenue South, Minneapolis, Minnesota, and
any adjournment or adjournments thereof, all shares of Common Stock of Pentair,
Inc. allocated to my account in the Pentair ESOP as of March 3, 2003. I
understand that this card must be received by Wells Fargo Bank Minnesota, N.A.,
acting as tabulation agent for the Pentair ESOP Trustee, by April 23, 2003. If
it is not received by that date, or if the voting instructions are invalid
because this form is not properly signed and dated, the shares held in my
account will be voted by Fidelity Management Trust Company, in the same
proportion that the other participants direct them to vote shares allocated to
their accounts.
SEE REVERSE FOR VOTING INSTRUCTIONS.
------------------
|COMPANY # |
|CONTROL # |
------------------
THERE ARE THREE WAYS TO VOTE YOUR PROXY
YOUR TELEPHONE OR INTERNET VOTE AUTHORIZES THE NAMED PROXIES TO VOTE YOUR
SHARES IN THE SAME MANNER AS IF YOU MARKED, SIGNED AND RETURNED YOUR PROXY CARD.
VOTE BY PHONE -- TOLL FREE -- 1-800-240-6326 -- QUICK --- EASY --- IMMEDIATE
o Use any touch-tone telephone to vote your proxy 24 hours a day, 7 days a
week, until 11:00 a.m. (CT) on April 29, 2003.
o You will be prompted to enter your 3-digit Company Number, your 7-digit
Control Number (these numbers are located on the proxy card) and the last
4-digits of the U.S. Social Security Number (SSN) or Tax Identification
Number (TIN) for this account. If you do not have a U.S. SSN or TIN please
enter 4 zeros.
o Follow the simple instructions the Voice provides you.
VOTE BY INTERNET -- http://www.eproxy.com/pnr/ -- QUICK --- EASY --- IMMEDIATE
o Use the Internet to vote your proxy 24 hours a day, 7 days a week, until
12:00 p.m. (CT) on April 29, 2003.
o You will be prompted to enter your 3-digit Company Number, your 7-digit
Control Number (these numbers are located on the proxy card) and the last
4-digits of the U.S. Social Security Number (SSN) or Tax Identification
Number (TIN) for this account to obtain your records and create an
electronic ballot. If you do not have a U.S. SSN or TIN please leave blank.
VOTE BY MAIL
Mark, sign and date your proxy card and return it in the postage-paid envelope
we've provided or return it to Pentair, Inc., c/o Shareowner Services-, P.O.
Box 64873, St. Paul, MN 55164-0873.
IF YOU VOTE BY PHONE OR INTERNET, PLEASE DO NOT MAIL YOUR PROXY CARD
--------------------------------------------------------------------------------
THE BOARD RECOMMENDS A VOTE "FOR" EACH PROPOSAL.
1. ELECTION OF DIRECTORS: 01 Charles A. Haggerty [ ] FOR all [ ] WITHHOLD AUTHORITY
02 Randall J. Hogan nominees listed to vote for all
(except as marked) nominees listed
--------------------------------------------
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDICATED NOMINEE, | |
WRITE THE NUMBER(S) OF THE NOMINEE(S) IN THE BOX PROVIDED TO THE RIGHT.) | |
--------------------------------------------
\ PLEASE FOLD HERE /
--------------------------------------------------------------------------------
2. APPROVAL OF AMENDMENT TO THE EXECUTIVE OFFICER PERFORMANCE PLAN
for Section 162(m) purposes. [ ] For [ ] Against [ ] Abstain
3. APPROVAL OF AMENDMENT TO THE OMNIBUS STOCK INCENTIVE
PLAN for Section 162(m) purposes. [ ] For [ ] Against [ ] Abstain
4. To transact such other business as may properly come before the meeting or any adjournment thereof.
THE SHARES REPRESENTED HEREBY WILL BE VOTED AS DIRECTED BY THIS PROXY, BUT IF THIS PROXY IS RETURNED SIGNED WITH NO DIRECTION MADE,
THEY WILL BE VOTED "FOR" EACH OF THE DIRECTORS AND PROPOSALS.
The undersigned hereby ratifies and confirms all that the Proxies shall lawfully do or cause to be done by virtue hereof and hereby
revokes all proxies heretofore given to vote such shares.
Address Change? Mark Box [ ] Indicate changes below:
Date _______________________________, 2003
THIS CARD MUST BE DATED.
-------------------------------------------
| |
| |
| |
-------------------------------------------
Signature(s) in Box
(Please sign exactly as your name appears to the
left. When shares are held by joint tenants, both
should sign. When signing as executor,
administrator, attorney, trustee or guardian,
please give full title as such. If a corporation,
please sign in full corporate name by president
or other authorized officer. If a partnership,
please sign in partnership name by an authorized
person.)
------------------------------------------------------------------------------------------------------------------------------------
PENTAIR, INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 30, 2003
YOUR HOUSEHOLD WILL RECEIVE ONLY ONE COPY OF OUR
SUMMARY ANNUAL REPORT
ANNUAL REPORT ON FORM 10K AND PROXY STATEMENT
If you share the same address and last name as other shareholders residing
in your household and did not object, only one copy of Pentair's Summary Annual
Report, Annual Report on Form 10K and Proxy Statement has been mailed to your
address, with each Pentair shareholder residing at your address receiving a
separate proxy card in its own envelope. This procedure is referred to as
"householding." Shareholders who objected to householding will receive a
complete set of the Annual Meeting Materials.
If you wish to receive separate copies of the Annual Meeting Materials,
please notify us by writing or calling Pentair, Inc., 1500 County Road B2 West,
St. Paul, Minnesota 55113, Attention: Secretary, Telephone: (651) 636-7920 or
(800) 328-9626.