1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended July 1, 2001. [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 0-25150 STRATTEC SECURITY CORPORATION ----------------------------- (Exact name of registrant as specified in its charter) WISCONSIN 39-1804239 --------- ---------- (State of Incorporation) (I.R.S. Employer Identification No.) 3333 WEST GOOD HOPE ROAD, MILWAUKEE, WI 53209 --------------------------------------------- (Address of principal executive offices) (414) 247-3333 -------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of exchange on which registered ------------------- ------------------------------------ N/A N/A Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value ---------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X]Yes [ ]No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. [X] The aggregate market value of the voting Common Stock held by non-affiliates of the registrant as of August 21, 2001 was approximately $140,920,000 (based upon the last reported sale price of the Common Stock at August 21, 2001 on the NASDAQ National Market). On August 21, 2001, there were outstanding 4,100,463 shares of $.01 par value Common Stock. Documents Incorporated by Reference Part of the Form 10-K Document into which incorporated -------- ----------------------- Portions of the Annual Report to Shareholders for the fiscal year ended July 1, 2001. I, II, IV Portions of the Proxy Statement dated September 7, 2001, for the Annual Meeting of Shareholders to be held on October 23, 2001. III
2 PART I ITEM 1. BUSINESS The information set forth under "Company Description" which appears on pages 4 through 8 of the Company's 2001 Annual Report to Shareholders is incorporated herein by reference. For information as to export sales, see the information set forth under "Export Sales" included on page 21 of the Company's 2001 Annual Report to Shareholders, which is incorporated herein by reference. EMERGING TECHNOLOGIES Automotive vehicle access systems, which are both theft deterrent and end user friendly, are being developed as mechanical-electrical devices. Electronic companies are developing user identification systems such as bio-systems, card holder (transmitter) systems, etc., while locks and door latches are metamorphosing to accommodate the electronics. This will result in more secure vehicles and eventually passive entry and passive start. Vehicle access modules that pre-assemble and pre-test individual components allow assembly cost reductions at the Original Equipment Manufacturer and the potential for the introduction of different components. Innovations in coatings, which could potentially eliminate the need for grease and innovative product redesign with different materials, offer potential cost reductions for manufacturing and original equipment manufacturers. These technologies benefit the Company by increasing the potential customer base as a tier 2 supplier while attaining tier 1 status on some product lines and adding additional product line availability. SOURCES AND AVAILABILITY OF RAW MATERIALS The primary raw materials used by the Company are high-grade zinc and brass. These materials are generally available from a number of suppliers, but the Company has chosen to concentrate its sourcing with one primary vendor for each commodity. The Company believes its sources for raw materials are very reliable and adequate for its needs. The Company has not experienced any significant long term supply problems in its operations and does not anticipate any significant supply problems in the foreseeable future. PATENTS, TRADEMARKS AND OTHER INTELLECTUAL PROPERTY The Company believes that the success of its business will not only result from the technical competence, creativity and marketing abilities of its employees but also from the protection of its intellectual property through patents, trademarks and copyrights. As part of its ongoing research, development and manufacturing activities, the Company has a policy of seeking patents on new products, processes and improvements when appropriate. The Company owns 25 issued United States patents, with expirations occurring between 2010 and 2019. Although, in the aggregate, the patents discussed above are of considerable importance to the manufacturing and marketing of many of its products, the Company does not consider any single patent or trademark or group of patents or trademarks to be material to its business as a whole, except for the STRATTEC and STRATTEC with logo trademarks. The Company also relies upon trade secret protection for its confidential and proprietary information. The Company maintains confidentiality agreements with its key executives. In addition, the Company enters into confidentiality agreements with selected suppliers, consultants and associates as appropriate to evaluate new products or business relationships pertinent to the success of the Company. However, there can be no assurance that others will not independently obtain similar information and techniques or otherwise gain access to the Company's trade secrets or that the Company can effectively protect its trade secrets. 2
3 DEPENDENCE UPON SIGNIFICANT CUSTOMERS A very significant portion of the Company's annual sales are to General Motors Corporation, Delphi Automotive Corporation, Ford Motor Company, and DaimlerChrysler Corporation. These four customers accounted for approximately 85% of the Company's total net sales in each fiscal year 1999 through 2001. Further information regarding sales to the Company's largest customers is set forth under "Sales to Largest Customers" included on page 21 of the Company's 2001 Annual Report to Shareholders, which is incorporated herein by reference. The products sold to these customers are model specific, fitting only certain defined applications. Consequently, the Company is highly dependent on its major customers for their business, and on these customers' ability to produce and sell vehicles which utilize the Company's products. The Company has enjoyed relationships with General Motors Corporation, DaimlerChrysler Corporation, Ford Motor Company, and Delphi Automotive Corporation in the past, and expects to do so in the future. However, a significant change in the purchasing practices of, or a significant loss of volume from, one or more of these customers could have a detrimental effect on the Company's financial performance. SALES AND MARKETING The Company provides its customers with engineered locksets, which are unique to specific vehicles. Any given vehicle will typically take 1 to 3 years of development and engineering design time prior to being offered to the public. The locksets are designed concurrently with the vehicle. Therefore, commitment to the Company as the production source occurs 1 to 3 years prior to the start of production. The typical process used by automotive manufacturers in selecting a lock supplier is to offer the business opportunity to the Company and various of the Company's competitors. Each competitor will pursue the opportunity, doing its best to provide the customer with the most attractive proposal. Price pressure is strong during this process but once an agreement is reached, the price is fixed for each year of the product program. Typically, price reductions resulting from productivity improvement by the Company are included in the contract and are estimated in evaluating each of these opportunities by the Company. A blanket purchase order, a contract indicating a specified part will be supplied at a specified price during a defined time period, is issued by customers for each model year and releases, quantity commitments, are made to that purchase order for weekly deliveries to the customer. As a consequence and because the Company is a "Just-in-Time" supplier to the automotive industry, it does not maintain a backlog of orders in the classic sense for future production and shipment. COMPETITION The Company competes with domestic and foreign-based competitors on the basis of custom product design, engineering support, quality, delivery and price. While the number of direct competitors is currently relatively small, the auto manufacturers actively encourage competition between potential suppliers. Although the Company may not be the lowest cost producer, it has a dominant share of the North American market because of its ability to provide a beneficial combination of price, quality and technical support. In order to reduce lockset production costs while still offering a wide range of technical support, the Company utilizes assembly operations in Mexico, which results in lower assembly labor costs as compared to the United States. As locks become more sophisticated and involve additional electronics, competitors with specific electronic expertise may emerge to challenge the Company. RESEARCH AND DEVELOPMENT The Company engages in research and development activities pertinent to automotive access control. A major area of focus for research is the expanding role of vehicle access via electronic interlocks and modes of communicating authorization data between consumers and vehicles. Development activities include new products, applications and product performance improvement. In addition, specialized data collection equipment is developed to facilitate increased product development efficiency and continuous quality improvements. For fiscal years 2001, 2000, and 1999, the Company spent $2,030,000, $2,306,000, and $2,383,000, respectively, on research and development. The Company believes that, historically, it has committed sufficient resources to research and development and anticipates increasing such expenditures in the future as required to support additional product programs associated with both existing and new customers. Patents are pursued and will continue to be pursued as appropriate to protect the Company's interests resulting from these activities. 3
4 CUSTOMER TOOLING An important aspect of the Company's production processes is customer program specific assembly lines and production tooling. In general, capital equipment acquired by the Company for customer product programs is recognized as a long-term asset and depreciated. Ownership of tooling for these same programs is determined through negotiations with the customer. For products in which the customer maintains ownership of the tooling, costs are accumulated as a current asset on the Company's balance sheet and rebilled to the customer upon formal product approval from the customer. Recovery of tooling costs for which the Company retains ownership occurs over the life of the program through the piece price. See Notes to Consolidated Financial Statements included in the Company's 2001 Annual Report to Shareholders, which is incorporated herein by reference. ENVIRONMENTAL COMPLIANCE As is the case with other manufacturers, the Company is subject to federal, state, local and foreign laws and other legal requirements relating to the generation, storage, transport, treatment and disposal of materials as a result of its lock and key manufacturing and assembly operations. These laws include the Resource Conservation and Recovery Act (as amended), the Clean Air Act (as amended), the Clean Water Act of 1990 (as amended) and the Comprehensive Environmental Response, Compensation and Liability Act (as amended). The Company believes that its existing environmental management policies and procedures are adequate and it has no current plans for substantial capital expenditures in the environmental area. Contamination existing at the Company's Milwaukee site from an underground waste coolant storage tank and a former above-ground solvent storage tank, located on the east side of the facility, will be remediated in accordance with federal, state and local requirements. The Company does not currently anticipate any materially adverse impact on its results of operations, financial condition or competitive position as a result of compliance with federal, state, local and foreign environmental laws or other legal requirements. However, risk of environmental liability and charges associated with maintaining compliance with environmental laws is inherent in the nature of the Company's business and there is no assurance that material liabilities or charges could not arise. EMPLOYEES At July 1, 2001, the Company had approximately 2,760 full-time employees, of which approximately 475 or 17% percent were represented by a labor union. During June 2001, there was a 16-day strike by the represented employees at the Company's Milwaukee facility. Further information regarding the strike is discussed under "Management's Discussion and Analysis" which appears on pages 10 through 12 of the Company's Annual Report to Shareholders, which is incorporated herein by reference. ITEM 2. PROPERTIES The Company has two manufacturing plants, one warehouse, and a sales office. These facilities are described as follows: LOCATION TYPE SQ. FT. OWNED OR LEASED -------- ---- ------- --------------- Milwaukee, Wisconsin Headquarters and General Offices; Component Manufacturing , Assembly and Service Parts Distribution.. 352,000 Owned Juarez, Chihuahua Mexico Subsidiary Offices and Assembly.......................... 97,000 Owned El Paso, Texas Finished Goods Warehouse................................. 22,800 Leased** Troy, Michigan Sales and Engineering Office for Detroit Area........... 3,000 Leased** - ----------- ** Leased unit within a complex. The Company believes that both of its production facilities are adequate for the foreseeable future as they relate to the Company's current products. As the Company evaluates and expands into other products, consideration of further production facilities will be necessary. 4
5 ITEM 3. LEGAL PROCEEDINGS In the normal course of business the Company may be involved in various legal proceedings from time to time. The Company does not believe it is currently involved in any claim or action the ultimate disposition of which would have a material adverse effect on the Company or its financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of shareholders during the fourth quarter of fiscal 2001. EXECUTIVE OFFICERS OF REGISTRANT The names, ages and positions of all executive officers of the Company as of the date of this filing are listed below, together with their business experience during the past five years. Executive officers are appointed annually by the Board of Directors at the meeting of directors immediately following the annual meeting of shareholders. There are no family relationships among any of the executive officers of the Company, nor any arrangements or understanding between any such officer and another person pursuant to which he was appointed as an executive officer. NAME AND AGE POSITION AND BUSINESS EXPERIENCE - ------------ -------------------------------- Harold M. Stratton II, 53 Chairman and Chief Executive Officer of the Company since 1999. President and Chief Executive Officer of the Company 1995 to 1999. Vice President of Briggs & Stratton Corporation and General Manager of the Technologies Division of Briggs & Stratton Corporation from 1989 to 1995. John G. Cahill, 44 President and Chief Operating Officer of the Company since 1999. Executive Vice President, Chief Financial Officer, Treasurer and Secretary of the Company 1994 to 1999. Vice President, Chief Financial Officer, Secretary and Treasurer, Johnson Worldwide Associates, Inc. (manufacturer and marketer of recreational and marking systems products) 1992 to 1994 and Corporate Controller from 1989 to 1992. Michael R. Elliott, 45 Vice President - Global Market Development since 1999. Vice President - Sales and Marketing of the Company 1995 to 1999. Vice President - Marketing and Sales of the Technologies Division from 1993 to 1995. Vice President - Corporate Development of Iverness Casting Group (a producer of castings and injection molded products) from 1991 to 1992. Vice President - Sales and Marketing of Iverness Casting Group from 1990 to 1991. Sales, Marketing and Planning Manager of the AC Rochester Division of General Motors Corporation (an automotive manufacturer) from 1988 to 1990. Patrick J. Hansen, 42 Vice President, Chief Financial Officer, Secretary and Treasurer of the Company since 1999. Corporate Controller of the Company 1995 to 1999. Controller, Schwarz Pharma (manufacturer and distributor of pharmaceutical drugs) 1993 to 1995. Corporate Controller, ASAA Inc. (manufacturer of automotive parts) 1989 to 1993. Donald J. Harrod, 57 Vice President - Engineering of the Company since 1998. Product Engineering Manager, Mertior/Rockwell (manufacturer of automotive parts) 1997 to 1998. Vice President - Engineering, Coltec Farnem Holley (manufacturer of automotive parts) 1986 to 1997. Donald P. Klick, 49 Vice President - Business Operations of the Company since 1999. Vice President - Engineering, Erie Controls (manufacturer of HVAC control components) 1998 to 1999. Engineering Program Director, Tower Automotive/A.O. Smith (manufacturer of automotive parts) 1994 to 1998. Gerald L. Peebles, 58 Vice President and General Manager of STRATTEC de Mexico - since 1997. Vice President - Operations of the Company 1995 - 1997. Vice President - Operations of the Technologies Division from 1994 to 1995. Operations Manager - Juarez Plant of the Technologies Division from 1990 to 1994. Plant Manager - Juarez Plant of the Technologies Division from 1988 to 1990. 5
6 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information set forth in the "Quarterly Financial Data" section appearing on page 23 of the Company's 2001 Annual Report to Shareholders is incorporated herein by reference. The Company does not intend to pay cash dividends on the Company Common Stock in the foreseeable future; rather, it is currently anticipated that Company earnings will be retained for use in its business. The future payment of dividends will depend on business decisions that will be made by the Board of Directors from time to time based on the results of operations and financial condition of the Company and such other business considerations as the Board of Directors considers relevant. The Company's revolving credit agreement contains restrictions on the payment of dividends. See Notes to Consolidated Financial Statements included in the Company's 2001 Annual Report to Shareholders, which is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information set forth under "Five Year Financial Summary" which appears on page 23 of the Company's 2001 Annual Report to Shareholders is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The information set forth under "Management's Discussion and Analysis" which appears on pages 10 through 12 of the Company's 2001 Annual Report to Shareholders is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company did not hold any market risk sensitive instruments during the period covered by this report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements, together with the report thereon of Arthur Andersen LLP dated July 30, 2001, which appear on pages 13 through 23 of the Company's 2001 Annual Report to Shareholders, are incorporated herein by reference. The Quarterly Financial Data (unaudited) which appears on page 23 of the Company's 2001 Annual Report to Shareholders is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information on pages 2 through 8 of the Company's Proxy Statement, dated September 7, 2001, under "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information on pages 8 through 16 of the Company's Proxy Statement, dated September 7, 2001, under "Executive Compensation" and "Compensation of Directors" is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information on pages 6 through 8 of the Company's Proxy Statement, dated September 7, 2001, under "Security Ownership" is incorporated herein by reference. 6
7 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information on pages 8 through 16 of the Company's Proxy Statement, date d September 7, 2001, under "Executive Compensation" is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents Filed as part of this Report (1) Financial Statements - The following financial statements of the Company, included on pages 13 through 22 of the Company's 2001 Annual Report to Shareholders, are incorporated by reference in Item 8. Report of Independent Public Accountants Balance Sheets - as of July 1, 2001 and July 2, 2000 Statements of Income - years ended July 1, 2001, July 2, 2000 and June 27, 1999 Statements of Changes in Equity - years ended July 1, 2001, July 2, 2000 and June 27, 1999 Statements of Cash Flows - years ended July 1, 2001, July 2, 2000 and June 27, 1999 Notes to Financial Statements (2) Financial Statement Schedules Page in this Form 10-K Report ---------------- Report of Independent Public Accountants 8 Schedule II - Valuation and Qualifying Accounts 9 All other schedules have been omitted because they are not applicable or are not required, or because the required information has been included in the Financial Statements or Notes thereto. (3) Exhibits. See "Exhibit Index" beginning on page 11. (b) Reports on Form 8-K No reports on Form 8-K were filed by the Company during the fourth quarter of fiscal 2001. 7
8 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS We have audited in accordance with generally accepted auditing standards the consolidated financial statements included in the STRATTEC SECURITY CORPORATION Annual Report to Shareholders incorporated by reference in this Form 10-K and have issued our report thereon dated July 30, 2001. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in the accompanying index is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Milwaukee, Wisconsin, July 30, 2001. 8
9 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (THOUSANDS OF DOLLARS) Balance, Provision Payments Balance, Beginning Charged to and Accounts End of of Year Profit & Loss Written Off Year ------- ------------- ----------- ---- Year ended July 1, 2001 Allowance for doubtful accounts $250 $61 $61 $250 ==== === === ==== Year ended July 2, 2000 Allowance for doubtful accounts $250 $43 $43 $250 ==== === === ==== Year ended June 27, 1999 Allowance for doubtful accounts $250 $33 $33 $250 ==== === === ==== 9
10 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. STRATTEC SECURITY CORPORATION By: /s/ Harold M. Stratton II ---------------------------- Harold M. Stratton II, Chairman and Chief Executive Officer Date: August 21, 2001 Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ Harold M. Stratton II Chairman, Chief Executive August 21, 2001 - ------------------------------- Officer, and Director Harold M. Stratton II /s/ John G. Cahill President, Chief Operating August 21, 2001 - ------------------------------- Officer and Director John G. Cahill /s/ Frank J. Krejci Director August 21, 2001 - ------------------------------- Frank J. Krejci /s/ Michael J. Koss Director August 21, 2001 - ------------------------------- Michael J. Koss /s/ Robert Feitler Director August 21, 2001 - ------------------------------- Robert Feitler /s/ Patrick J. Hansen Vice President, Chief August 21, 2001 - ------------------------------- Financial Officer, Patrick J. Hansen Secretary and Treasurer (Principal Financial and Accounting Officer) 10
11 EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K Page Number in Sequential Numbering of all Form 10-K and Exhibit Exhibit Pages - ------- ------------- 3.1 (2) Amended and Restated Articles of Incorporation of the Company * 3.2 (2) By-laws of the Company * 4.1 (2) Rights Agreement between the Company and Firstar Trust Company, as Rights Agent * 4.2 (3) Revolving Credit Agreement dated as of February 27, 1995 by and between the Company * and M&I Bank, together with Revolving Credit Note 4.3 Amendments to Revolving Credit Agreement dated as of February 27, 1995 by and 21 between the Company and M&I Bank, together with Revolving Credit Notes 10.1 (4) STRATTEC SECURITY CORPORATION Stock Incentive Plan * 10.2 (5) Employment Agreements between the Company and the identified executive officers 41 10.3 (1)(5) Change In Agreement between the Company and the identified executive officers 61 10.15 Amended STRATTEC SECURITY CORPORATION Economic Value Added Plan for 91 Executive Officers and Senior Managers 13.1 Annual Report to Shareholders for the year ended July 1, 2001 141 21 (1) Subsidiaries of the Company * 23 Consent of Independent Public Accountants dated September 4, 2001 181 - ----------------------- (1) Incorporated by reference from Amendment No. 1 to the Form 10 filed on January 20, 1995. (2) Incorporated by reference from Amendment No. 2 to the Form 10 filed on February 6, 1995. (3) Incorporated by reference form the April 2, 1995 Form 10-Q filed on May 17, 1995. (4) Incorporated by reference from the Proxy Statement for the 1997 Annual Meeting of Shareholders filed on September 10, 1997. (5) Incorporated by reference from the June 27, 1999 Form 10-K filed on September 17, 1999. 11
1 EXHIBIT 4.3 AMENDMENT NO. 1 This is Amendment No. 1 to a Revolving Credit Agreement between Strattec Security Corporation ("Company") and M&I Marshall & Ilsley Bank ("Bank") dated as of February 27, 1995, and subsequently amended, (the "Agreement"). The Agreement is amended as follows: 1. Section 1. Definitions and Terms. The "Termination Date" definition is amended in its entirety to read as follows: "Termination Date" shall mean October 31, 1999, or such earlier date on which the Obligations shall terminate as provided in Section 7.2. 2. Section 6.9. Tangible Net Worth. Subsection (iv) is added to this Section as follows: (iv) Minus any treasury stock. 3. Exhibit B - Revolving Credit Note. Exhibit B to the Agreement is amended in its entirety to provide as set forth in Exhibit B attached to this Amendment. Any reference to Exhibit B throughout the Agreement shall mean Exhibit B attached hereto. These are the only changes in the Agreement and all other terms and conditions are hereby ratified and confirmed. Dated: as of March 28, 1997. M&I Marshall & Ilsley Bank (SEAL) Strattec Security Corporation (SEAL) By:_____________________________ By:___________________________ Title:__________________________ Title:________________________ By:_____________________________ By:___________________________ Title:__________________________ Title:________________________
2 AMENDMENT NO. 2 This is Amendment No. 2 to a Revolving Credit Agreement between STRATTEC SECURITY CORPORATION ("Company") and M&I Marshall & Ilsley Bank ("Bank") dated as of February 27, 1995, and subsequently amended, (the "Agreement"). The Agreement is amended as follows: 1. Section 1. Definitions and Terms. The "Termination Date" definition is amended in its entirety to read as follows: "Termination Date" shall mean October 31, 2000, or such earlier date on which the Obligations shall terminate as provided in Section 7.2. 2. Exhibit B - Revolving Credit Note. Exhibit B to the Agreement is amended in its entirety to provide as set forth in Exhibit B attached to this Amendment. Any reference to Exhibit B throughout the Agreement shall mean Exhibit B attached hereto. These are the only changes in the Agreement and all other terms and conditions are hereby ratified and confirmed. Dated: as of November 25, 1997. M&I Marshall & Ilsley Bank (SEAL) Strattec Security Corporation (SEAL) By:_____________________________ By:_____________________________ Title:__________________________ Title:__________________________ By:_____________________________ By:_____________________________ Title:__________________________ Title:__________________________
3 AMENDMENT NO. 3 This is Amendment No. 3 to a Revolving Credit Agreement between Strattec Security Corporation ("Company") and M&I Marshall & Ilsley Bank ("Bank") dated as of February 27, 1995, and subsequently amended, (the "Agreement"). The Agreement is amended as follows: 1. Section 1. Definitions and Terms. The "Termination Date" definition is amended in its entirety to read as follows: "Termination Date" shall mean the date the Revolving Credit Note is due by maturity, or such earlier date on which the Obligations shall terminate as provided in Section 7.2. 2. Exhibit B - Revolving Credit Note. Exhibit B to the Agreement is amended in its entirety to provide as set forth in Exhibit B attached to this Amendment and any renewals, modifications or extensions thereof. Any reference to Exhibit B throughout the Agreement shall mean Exhibit B attached hereto. These are the only additional changes in the Agreement and all other terms and conditions are hereby ratified and confirmed. Dated: as of November 23, 1998. M&I Marshall & Ilsley Bank (SEAL) Strattec Security Corporation (SEAL) By:_____________________________ By:_____________________________ Title:__________________________ Title:__________________________ By:_____________________________ By:_____________________________ Title:__________________________ Title:__________________________
4 AMENDMENT NO. 4 This is Amendment No. 4 to a Revolving Credit Agreement between Strattec Security Corporation ("Company") and M&I Marshall & Ilsley Bank ("Bank") dated as of February 27, 1995, and subsequently amended, (the "Agreement"). The Agreement is amended as follows: 1. This section is amended and restated in its entirety to read as follows: RECITALS The Company has requested that the Bank extend to it a credit not to exceed $20,000,000.00 evidenced by a Revolving Credit Note dated June 15, 2001; and $30,000,000.00 evidenced by a Revolving Credit Note dated June 15, 2001, and any renewals, extensions or modifications thereof. The Bank has agreed to extend credit to the Company upon all of the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the premises and the mutual agreements contained herein, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 2. SECTION 1 DEFINITIONS AND TERMS. The "Revolving Loan Commitment" definition is amended and restated in its entirety to read as follows: "Revolving Loan Commitment" shall mean an aggregate principal amount not to exceed $50,000,000.00, or such lesser amount to which the Revolving Loan Commitment is reduced under Section 2.1(j). 3. SECTION 5 AFFIRMATIVE COVENANTS. Subsection 5.9(f) is hereby added to the Agreement as follows: (f) Pay the Bank a 1/8 percent fee for any unused portion of a Revolving Credit Note dated June 15, 2001 in the amount of $20,000,000.00 commencing on June 15, 2001, until such maturity of said Note.
5 4. SECTION 6 NEGATIVE COVENANTS. Subsection 6.10 is amended and restated in its entirety to read as follows: 6.10 INDEBTEDNESS TO TANGIBLE NET WORTH. Permit the ratio of Indebtedness to Tangible Net Worth to exceed 2.00 to 1 at any time. These are the only additional changes in the Agreement and all other terms and conditions are hereby ratified and confirmed. Dated: as of June 15, 2001. M&I Marshall & Ilsley Bank (SEAL) Strattec Security Corporation (SEAL) By:_____________________________ By:_____________________________ Title:__________________________ Title:__________________________ By:_____________________________ By:_____________________________ Title:__________________________ Title:__________________________
6 REVOLVING CREDIT NOTE $30,000,000.00 MILWAUKEE, WISCONSIN REVOLVING LOANS DUE: OCTOBER 31, 2001 JUNE 15, 2001 FOR VALUE RECEIVED, STRATTEC SECURITY CORPORATION, a Wisconsin corporation (the "Borrower"), promises to pay to the order of M&I MARSHALL & ILSLEY BANK, a Wisconsin banking association (the "Bank") at M&I Marshall & Ilsley Bank, Loan Services Department, 401 N. Executive Drive, Brookfield, WI 53005, or at such other place as the holder hereof may from time to time in writing designate, in lawful money of the United States of America, the principal sum of Thirty Million and 00/100ths Dollars ($30,000,000.00), or so much thereof as has been advanced and remains outstanding pursuant to Section 2.1 of the Revolving Credit Agreement by and between the Borrower and the Bank dated as of the date hereof (the "Loan Agreement"), together with accrued interest and all other costs, charges and fees due thereunder. The undersigned further promises to pay interest on the unpaid principal amount of each Revolving Loan (as such term is defined in the Loan Agreement) as is outstanding under the Loan Agreement, payable at such rates and at such times, as provided in the Loan Agreement. Subject to the provisions of the Loan Agreement with respect to acceleration, prepayment or loan limitations, all unpaid principal with respect to each Revolving Loan, together with accrued interest and all other costs, charges and fees, shall be due and payable in full on the Termination Date for this Note. This Note evidences indebtedness incurred under, and is entitled to the benefits of, the Loan Agreement, together with all future amendments, modifications, waivers, supplements and replacements thereof, to which Loan Agreement reference is made for a statement of the terms and provisions under which this Note may be paid prior to its due date or its due date accelerated. This Note is pursuant to a Revolving Credit Agreement and reference is made thereto for a statement of terms and provisions thereof. The Borrower hereby agrees to pay all costs of collection including reasonable attorneys' fees and legal expenses in the event this Note is not paid when due. This Note is issued in and shall be governed by the laws of the State of Wisconsin. No delay or omission on the part of the holder in exercising any right hereunder shall operate as a waiver of such right or of any other remedy under this Note. A waiver on any one occasion shall not be construed as a waiver of any such right or remedy on a future occasion. All makers, endorsers, sureties, guarantors and other accommodation parties hereby waive presentment for payment, protest and notice of nonpayment and consent, without affecting their liability hereunder, to any and all extensions, renewals, substitutions and alterations of any of the terms of this Note and to the release of or failure by the Bank to exercise any rights against any party liable for or any property securing payment thereof. STRATTEC SECURITY CORPORATION By:___________________________________ Title:________________________________ JPM/cm Acct#1440055 Note#10001
7 REVOLVING CREDIT NOTE $20,000,000.00 MILWAUKEE, WISCONSIN REVOLVING LOANS DUE: OCTOBER 31, 2003 JUNE 15, 2001 FOR VALUE RECEIVED, STRATTEC SECURITY CORPORATION, a Wisconsin corporation (the "Borrower"), promises to pay to the order of M&I MARSHALL & ILSLEY BANK, a Wisconsin banking association (the "Bank") at M&I Marshall & Ilsley Bank, Loan Services Department, 401 N. Executive Drive, Brookfield, WI 53005, or at such other place as the holder hereof may from time to time in writing designate, in lawful money of the United States of America, the principal sum of Twenty Million and 00/100ths Dollars ($20,000,000.00), or so much thereof as has been advanced and remains outstanding pursuant to Section 2.1 of the Revolving Credit Agreement by and between the Borrower and the Bank dated as of the date hereof (the "Loan Agreement"), together with accrued interest and all other costs, charges and fees due thereunder. The undersigned further promises to pay interest on the unpaid principal amount of each Revolving Loan (as such term is defined in the Loan Agreement) as is outstanding under the Loan Agreement, payable at such rates and at such times, as provided in the Loan Agreement. A 1/8 percent fee for any unused portion of said Note will be charged commencing June 15, 2001 until maturity. Subject to the provisions of the Loan Agreement with respect to acceleration, prepayment or loan limitations, all unpaid principal with respect to each Revolving Loan, together with accrued interest and all other costs, charges and fees, shall be due and payable in full on the Termination Date for this Note. This Note evidences indebtedness incurred under, and is entitled to the benefits of, the Loan Agreement, together with all future amendments, modifications, waivers, supplements and replacements thereof, to which Loan Agreement reference is made for a statement of the terms and provisions under which this Note may be paid prior to its due date or its due date accelerated. This Note is pursuant to a Revolving Credit Agreement and reference is made thereto for a statement of terms and provisions thereof. The Borrower hereby agrees to pay all costs of collection including reasonable attorneys' fees and legal expenses in the event this Note is not paid when due. This Note is issued in and shall be governed by the laws of the State of Wisconsin. No delay or omission on the part of the holder in exercising any right hereunder shall operate as a waiver of such right or of any other remedy under this Note. A waiver on any one occasion shall not be construed as a waiver of any such right or remedy on a future occasion. All makers, endorsers, sureties, guarantors and other accommodation parties hereby waive presentment for payment, protest and notice of nonpayment and consent, without affecting their liability hereunder, to any and all extensions, renewals, substitutions and alterations of any of the terms of this Note and to the release of or failure by the Bank to exercise any rights against any party liable for or any property securing payment thereof. STRATTEC SECURITY CORPORATION By:___________________________________ Title:________________________________ JPM/cm Acct#1440055 Note#10000
1 EXHIBIT 10.2 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT is made as of the 22nd day of November, 1999, by and between STRATTEC SECURITY CORPORATION, a Wisconsin corporation (the "Company"), and Donald P. Klick (the "Employee"). RECITAL The Company desires to employ the Employee and the Employee is willing to make his services available to the Company on the terms and conditions set forth below. AGREEMENTS In consideration of the premises and the mutual agreements which follow, the parties agree as follows: 1. Employment. The Company hereby employs the Employee and the Employee hereby accepts employment with the Company on the terms and conditions set forth in this Agreement. 2. Term. The term of the Employee's employment hereunder shall commence effective on November 22, 1999 and shall continue through June 30, 2000, and shall thereafter be automatically renewed for successive fiscal year terms unless either the Company or Employee gives notice of nonrenewal not less than 30 days prior to the end of the then current term (the "Employment Period"). 3. Duties. The Employee shall serve as the Vice President Business Operations of the Company and will, under the direction of President and Chief Operating Officer, faithfully and to the best of Employee's ability, perform the duties of the Vice President Business Operations. Vice President Business Operations shall be one of the principal executive officers of the Company and shall, subject to the control of the President and Chief Operating Officer, supervise the product business team functions of the Company. The Employee shall also perform such additional duties and responsibilities which may from time to time be reasonably assigned or delegated by the President and Chief Operating Officer of the Company. The Employee agrees to devote Employee's entire business time, effort, skill and attention to the proper discharge of such duties while employed by the Company. However, the Employee may engage in other business activities unrelated to, and not in conflict with, the business of the Company if the President and Chief Operating Officer consents in writing to such other business activity. 4. Compensation. The Employee shall receive a base salary of $125,000 per year, payable in regular and semi-monthly installments (the "Base Salary"). Employee's Base Salary shall be reviewed annually by the Board of Directors of the Company to determine appropriate increases, if any, in such Base Salary.
2 5. Fringe Benefits. (a) Medical, Health, Dental, Disability and Life Coverage. The Employee shall be eligible to participate in any medical, health, dental, disability and life insurance policy in effect for senior management of the Company (collectively, the "Senior Management"). (b) Incentive Bonus and Stock Ownership Plans. The Employee shall be entitled to participate in any incentive bonus or other incentive compensation plan developed generally for the Senior Management of the Company, on a basis consistent with Employee's position and level of compensation with the Company. The Employee shall also be entitled to participate in any incentive stock option plan or other stock ownership plan developed generally for the Senior Management of the Company, on a basis consistent with Employee's position and level of compensation with the Company. (c) Reimbursement for Reasonable Business Expenses. Subject to the terms and conditions of the Company's expense reimbursement policy, the Company shall pay or reimburse the Employee for reasonable expenses incurred by Employee in connection with the performance of Employee's duties pursuant to this Agreement, including, but not limited to, travel expenses, expenses in connection with seminars, professional conventions or similar professional functions and other reasonable business expenses. 6. Termination of Employment. (a) Termination for Cause, Disability or Death. During the term of this Agreement, the Company shall be entitled to terminate the Employee's employment at any time upon the "Disability" of the Employee or for "Cause" upon notice to the Employee. The Employee's employment hereunder shall automatically terminate upon the death of the Employee. For purposes of this Agreement, "Disability" shall mean a physical or mental sickness or any injury which renders the Employee incapable of performing the essential functions of Employee's job (with or without reasonable accommodations) and which does or may be expected to continue for more than 4 months during any 12-month period. In the event Employee shall be able to perform the essential functions of Employee's job (with or without reasonable accommodations) following a period of disability, and does so perform such duties, or such other duties as are prescribed by the President of the Company, for a period of three continuous months, any subsequent period of disability shall be regarded as a new period of disability for purposes of this Agreement. The Company and the Employee shall determine the existence of a Disability and the date upon which it occurred. In the event of a dispute regarding whether or when a Disability occurred, the matter shall be referred to a medical doctor selected by the Company and the Employee. In the event of their failure to agree upon such a medical doctor, the Company and the Employee shall each select a medical doctor who together shall select a third 2
3 medical doctor who shall make the determination. Such determination shall be conclusive and binding upon the parties hereto. The Company may terminate the Employee's employment under this agreement for "Cause," effective immediately upon delivery of notice to the Employee. Cause shall be deemed to exist if the Employee shall have (1) materially breached the terms of this Agreement; (2) willfully failed to substantially perform his duties, other than a failure resulting from incapacity due to physical or mental illness; or (3) serious misconduct which is demonstrably and substantially injurious to the Company. No act or failure to act will be considered "cause" if such act or failure is done in good faith and with a reasonable belief that it is in the best interests of the Company. In the event of termination for Disability or death, payments of the Employee's Base Salary shall be made to the Employee, his designated beneficiary or Employee's estate for a period of six months after the date of the termination (even if this period would extend beyond the Employment Period); provided, however that the foregoing payments in the event of a Disability shall be reduced by the amount, if any, that is paid to Employee pursuant to a disability plan or policy maintained by the Company. During this period, the Company shall also reimburse the Employee for amounts paid, if any, to continue medical, dental and health coverage pursuant to the provisions of the Consolidated Omnibus Budget Reconciliation Act. During this period, the Company will also continue Employee's life insurance and disability coverage, to the extent permitted under applicable policies, and will pay to the Employee the fringe benefits pursuant to section 5 which have accrued prior to the date of termination. Termination of this Agreement for a Disability shall not change Employee's rights to receive benefits, if any, pursuant to any disability plan or policy then maintained by the Company. (b) Termination Without Cause. If the Employee's employment is terminated by the Company for any reason other than for Cause, Disability or death, or if this Agreement is terminated by the Company for what the Company believes is Cause or Disability, and it is ultimately determined that the Employee was wrongfully terminated, Employee shall, as damages for such a termination, receive Employee's Base Salary, for the remainder of the Employment Period or six months, if longer. During this period, the Company shall also reimburse the Employee for amounts paid, if any, to continue medical, dental and health coverage pursuant to the provisions of the Consolidated Omnibus Budget Reconciliation Act. During this period, the Company will also continue Employee's life insurance and disability coverage, to the extent permitted under applicable policies, and will pay to the Employee the fringe benefits pursuant to section 5 which have accrued prior to the date of termination. The Company's termination of the Employee's employment under this section 6(b) shall immediately relieve the Employee of all obligations under this Agreement (except as provided in sections 7 and 8) and, except as provided below, shall not be construed to require the application of any compensation which the Employee may earn in any such other employment to reduce the Company's obligation to provide severance benefits and liquidated damages under this section 6(b). 3
4 (c) Effect of Termination. The termination of the Employee's employment pursuant to section 6 shall not affect the Employee's obligations as described in sections 7 and 8. 7. Noncompetition. The parties agree that the Company's customer contacts and relations are established and maintained at great expense and by virtue of the Employee's employment with the Company, the Employee will have unique and extensive exposure to and personal contact with the Company's customers, and that Employee will be able to establish a unique relationship with those individuals and entities that will enable Employee, both during and after employment, to unfairly compete with the Company. Further, the parties agree that the terms and conditions of the following restrictive covenants are reasonable and necessary for the protection of the Company's business, trade secrets and confidential information and to prevent great damage or loss to the Company as a result of action taken by the Employee. The Employee acknowledges that the noncompete restrictions and nondisclosure of confidential information restrictions contained in this Agreement are reasonable and the consideration provided for herein is sufficient to fully and adequately compensate the Employee for agreeing to such restrictions. The Employee acknowledges that Employee could continue to actively pursue Employee's career and earn sufficient compensation in the same or similar business without breaching any of the restrictions contained in this Agreement. (a) During Term of Employment. The Employee hereby covenants and agrees that, during Employee's employment with the Company, Employee shall not, directly or indirectly, either individually or as an employee, principal, agent, partner, shareholder, owner, trustee, beneficiary, co-venturer, distributor, consultant or in any other capacity, participate in, become associated with, provide assistance to, engage in or have a financial or other interest in any business, activity or enterprise which is competitive with or a supplier to the Company or any successor or assign of the Company. The ownership of less than a one percent interest in a corporation whose shares are traded in a recognized stock exchange or traded in the over-the-counter market, even though that corporation may be a competitor of the Company, shall not be deemed financial participation in a competitor. (b) Upon Termination of Employment. The Employee agrees that during a period after termination of Employee's employment with the Company equal to the shorter of one year or the duration of Employee's employment with the Company, Employee will not, directly or indirectly, either individually or as an employee, agent, partner, shareholder, owner, trustee, beneficiary, co-venturer, distributor, consultant or in any other capacity: (i) Canvass, solicit or accept from any person or entity who is a customer of the Company (any such person or entity is hereinafter referred to individually as a "Customer" and collectively as the "Customers") any business in competition with the business of the Company or the successors or assigns of the Company, including the canvassing, soliciting or accepting of business from any individual 4
5 or entity which is or was a Customer of the Company within the two-year period preceding the date on which the canvassing, soliciting or accepting of business begins. (ii) Request or advise any of the Customers, suppliers, or other business contacts of the Company who currently have or have had business relationships with the Company within two years preceding the date hereof or within two years preceding the date of such action, to withdraw, curtail or cancel any of their business or relations with the Company. (iii) Induce or attempt to induce any employee, sales representative, consultant or other personnel of the Company to terminate his or her relationship or breach his or her agreements with the Company. (iv) Use, disclose, divulge or transmit or cause to be used by or disclosed, divulged or transmitted to any third party, any information acquired by the Employee during the Employment Period which relates to the trade secrets and confidential information of the Company, except as may be required by law. (v) Participate in, become associated with, provide assistance to, engage in or have a financial or other interest in any business, activity or enterprise which is competitive with the business of the Company or any successor or assign of the Company to the extent such activities relate to products or services which are competitive with the products and services of the Company; provided, however, that the ownership of less than 1% of the stock of a corporation whose shares are traded in a recognized stock exchange or traded in the over-the-counter market, even though that corporation may be a competitor of the Company, shall not be deemed financial participation in a competitor. For purposes of this section 7, a competitive business is defined as a business which is involved in designing, developing, manufacturing or marketing mechanical, electro-mechanical and/or electronic security and access control products in the global motor vehicle industry. 8. Confidential Information. The parties agree that the Company's customers, business connections, suppliers, customer lists, procedures, operations, techniques, and other aspects of its business are established at great expense and protected as confidential information and provide the Company with a substantial competitive advantage in conducting its business. The parties further agree that by virtue of the Employee's employment with the Company, Employee will have access to, and be entrusted with, secret, confidential and proprietary information, and that the Company would suffer great loss and injury if the Employee would disclose this information or use it to compete with the Company. Therefore, the Employee agrees that during the term of Employee's employment, and for a period of two years after the termination of his employment with the Company, Employee will not, directly or indirectly, either individually or as an employee, agent, partner, shareholder, owner, trustee, beneficiary, 5
6 co-venturer, distributor, consultant or in any other capacity, use or disclose, or cause to be used or disclosed, any secret, confidential or proprietary information acquired by the Employee during Employee's employment with the Company whether owned by the Company prior to or discovered and developed by the Company subsequent to the Employee's employment, and regardless of the fact that the Employee may have participated in the discovery and the development of that information. Employee also agrees and acknowledges that Employee will comply with all applicable laws regarding insider trading or the use of material nonpublic information in connection with the trading of securities. 9. Common Law of Torts and Trade Secrets. The parties agree that nothing in this Agreement shall be construed to limit or negate the common law of torts or trade secrets where it provides the Company with broader protection than that provided herein. 10. Specific Performance. The Employee acknowledges and agrees that irreparable injury to the Company may result in the event the Employee breaches any covenant and agreement contained in sections 7 and 8 and that the remedy at law for the breach of any such covenant will be inadequate. Therefore, if the Employee engages in any act in violation of the provisions of sections 7 and 8, the Employee agrees that the Company shall be entitled, in addition to such other remedies and damages as may be available to it by law or under this Agreement, to injunctive relief to enforce the provisions of sections 7 and 8. 11. Waiver. The failure of either party to insist, in any one or more instances, upon performance of the terms or conditions of this Agreement shall not be construed as a waiver or a relinquishment of any right granted hereunder or of the future performance of any such term, covenant or condition. 12. Notices. Any notice to be given hereunder shall be deemed sufficient if addressed in writing, and delivered by registered or certified mail or delivered personally, in the case of the Company, to its principal business office, and in the case of the Employee, to his address appearing on the records of the Company, or to such other address as he may designate in writing to the Company. 13. Severability. In the event that any provision shall be held to be invalid or unenforceable for any reason whatsoever, it is agreed such invalidity or unenforceability shall not affect any other provision of this Agreement and the remaining covenants, restrictions and provisions hereof shall remain in full force and effect and any court of competent jurisdiction may so modify the objectionable provision as to make it valid, reasonable and enforceable. Furthermore, the parties specifically acknowledge the above covenant not to compete and covenant not to disclose confidential information are separate and independent agreements. 5
7 14. Amendment. This Agreement may only be amended by an agreement in writing signed by all of the parties hereto. 15. Governing Law. This Agreement shall be governed by and construed exclusively in accordance with the laws of the State of Wisconsin, regardless of choice of law requirements. The parties hereby consent to the jurisdiction of the state courts of the State of Wisconsin and of any federal court in the venue of Wisconsin for the purpose of any suit, action or proceeding arising out of or related to this Agreement, and expressly waive any and all objections they may have as to venue in any of such courts. 16. Dispute Resolution. The parties hereto shall attempt to resolve disputes arising out of or relating to this Agreement. Any dispute not resolved in writing within 21 days may be referred by either party to mediation involving a mediator (a third party neutral), trained and experienced in the mediation process and mutually agreed to by the parties. The mediator shall ascribe to and follow the AAA/SPIDR or ABA code of ethics for mediators in conduct and management of the mediation process. Expenses for the mediation shall be shared equally by the parties unless otherwise agreed during the mediation process. The parties may be accompanied in the mediation process by legal counsel, and/or other persons mutually agreed to by the parties and the mediator. All participants will openly and honestly participate in the mediation. The mediation may be terminated at any time, for any reason by the mediator or by either party. Any resolution reached by the parties during the mediation shall be recorded in writing and agreed to by the parties. Such resolution may be drafted and/or revised by the parties' legal counsel and shall be legally binding on the parties. 17. Benefit. This Agreement shall be binding upon and inure to the benefit of and shall be enforceable by and against the Company, its successors and assigns and the Employee, his heirs, beneficiaries and legal representatives. It is agreed that the rights and obligations of the Employee may not be delegated or assigned. IN WITNESS WHEREOF, the parties have executed or caused this Agreement to be executed as of the day, month and year first above written. EMPLOYEE STRATTEC SECURITY CORPORATION /s/ Donald P. Klick BY /s/ Harold M. Stratton II - ---------------------------- -------------------------------- Donald P. Klick Harold M. Stratton II, Chairman of the Board and Chief Executive Officer 7
1 EXHIBIT 10.3 EMPLOYMENT AGREEMENT AGREEMENT by and between STRATTEC SECURITY CORPORATION, a Wisconsin corporation (the "Company") and Donald P. Klick (the "Executive"), dated as of the 22nd day of November, 1999. The Board of Directors of the Company (the "Board"), has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive's full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control which ensure that the compensation and benefits expectations of the Executive will be satisfied and which are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Certain Definitions. (a) The "Effective Date" shall mean the first date during the Change of Control Period (as defined in Section l(b)) on which a Change of Control (as defined in Section 2) occurs. Anything in this Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Executive's employment with the Company or this Agreement is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment or of this Agreement (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or (ii) otherwise arose in connection with or anticipation of a Change of Control, then for all purposes of this Agreement the "Effective Date" shall mean the date immediately prior to the date of such termination of employment or purported termination of this Agreement. (b) The "Change of Control Period" shall mean the period commencing on the date hereof and ending on the third anniversary of the date hereof; provided, however, that commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the "Renewal Date"), unless previously terminated, the Change of Control Period shall be automatically extended so as to terminate three years from such Renewal Date, unless at least 60 days prior to the Renewal Date the Company
2 shall give notice to the Executive that the Change of Control Period shall not be so extended. 2. Change of Control. For the purpose of this Agreement, a "Change of Control" shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Approval by the shareholders of the Company of a reorganization, merger or consolidation (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, 2
3 as the case may be, (ii) no Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (d) Approval by the shareholders of the Company of (i) a complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation, with respect to which following such sale or other disposition, [a] more than 60% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, [b] less than 20% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by any Person (excluding any employee benefit plan (or related trust) of the Company or such corporation), except to the extent that such Person owned 20% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities prior to the sale or disposition, and [c] at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such sale or other disposition of assets of the Company or were elected, appointed or nominated by the Board. 3. Employment Period. The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the third anniversary of such date (the "Employment Period"). 4. Terms of Employment. (a) Position and Duties. 3
4 (i) During the Employment Period, [a] the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 120-day period immediately preceding the Effective Date and [b] the Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or any office or location less than 35 miles from such location. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to [a] serve on corporate, civic or charitable boards or committees, [b] deliver lectures, fulfill speaking engagements or teach at educational institutions and [c] manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) Compensation. (i) Base Salary. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid at a monthly rate, at least equal to twelve times the highest monthly base salary paid or payable, including any base salary which has been earned but deferred, to the Executive by the Company and its affiliated companies in respect of the 12-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date and thereafter at least annually and shall be first increased no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date and thereafter at least annually by the higher of (x) the average increase (excluding promotional increases) in base salary awarded to the Executive for each of the three full fiscal years (annualized in the case of any fiscal year consisting of less than twelve full months or during which the Executive was employed for less than twelve months) prior to the Effective Date, and (y) the percentage increase (excluding promotional increases) in base salary generally awarded to peer executives of the Company and its affiliated companies for the year of determination. Any increase in Annual Base Salary shall not serve to limit or reduce any 4
5 other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (ii) Annual Bonus. In addition to Annual Base Salary, the Executive shall be awarded, for each fiscal year ending during the Employment Period, an annual bonus (the "Annual Bonus") in cash at least equal to the higher of (x) the average of the three highest bonuses paid or payable, including any bonus or portion thereof which has been earned but deferred, to the Executive by the Company and its affiliated companies in respect of the five fiscal years (or such shorter period during which the Executive has been employed by the Company) immediately preceding the fiscal year in which the Effective Date occurs (annualized for any fiscal year during such period consisting of less than twelve full months or with respect to which the Executive has been employed by the Company for less than twelve full months) and (y) the bonus paid or payable (annualized as described above), including any bonus or portion thereof which has been earned but deferred, to the Executive by the Company and its affiliated companies in respect of the most recently completed fiscal year prior to the Effective Date (such higher amount being referred to as the "Recent Annual Bonus"). Each such Annual Bonus shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus. (iii) Incentive, Savings and Retirement Plans. During the Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Effective Date or if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (iv) Welfare Benefit Plans. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated 5
6 companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (v) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and the affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vi) Fringe Benefits. During the Employment Period, the Executive shall be entitled to fringe benefits, including, without limitation, tax and financial planning services, payment of club dues, and, if applicable, use of automobile and payment of related expenses, in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vii) Office and Support Staff. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (viii) Vacation. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. 5. Termination of Employment. (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. If the 6
7 Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 12(b) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative (such agreement as to acceptability not to be withheld unreasonably). (b) Cause. The Company may terminate the Executive's employment during the Employment Period for Cause. For the sole and exclusive purposes of this Agreement, "Cause" shall mean: (i) The willful and continued failure of the Executive to perform substantially the Executive's duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company which specifically identifies the manner in which the Board or Chief Executive Officer believes that the Executive has not substantially performed the Executive's duties, or (ii) The willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the 7
8 Executive is guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail. (c) Good Reason. The Executive's employment may be terminated by the Executive for Good Reason. For the sole and exclusive purposes of this Agreement, "Good Reason" shall mean: (i) The assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 4(a) of this Agreement, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (ii) Any failure by the Company to comply with any of the provisions of Section 4(b) of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) The Company's requiring the Executive to be based at any office or location other than as provided in Section 4(a)(i)(b) hereof or the Company's requiring the Executive to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date; (iv) Any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (v) Any failure by the Company to comply with and satisfy Section 11(c) of this Agreement. For purposes of this Section 5(c), any good faith determination of "Good Reason" made by the Executive shall be conclusive. Anything in this Agreement to the contrary notwithstanding, a termination by the Executive for any reason during the 30-day period immediately following the first anniversary of the Effective Date shall be deemed to be a termination for Good Reason for all purposes of this Agreement. (d) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment 8
9 under the provision so indicated, and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) Date of Termination. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination, and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 6. Obligations of the Company upon Termination. (a) Good Reason; Other Than for Cause, Death or Disability. If, during the Employment Period, the Company shall terminate the Executive's employment other than for Cause, death or Disability or the Executive shall terminate employment for Good Reason: (i) The Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: [a] The sum of [i] the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, [ii] the product of (x) the higher of [A] the Recent Annual Bonus and [B] the Annual Bonus paid or payable, including any bonus or portion thereof which has been earned but deferred (and annualized for any fiscal year consisting of less than 12 full months or during which the Executive was employed for less than 12 full months), for the most recently completed fiscal year during the Employment Period, if any (such higher amount being referred to as the "Highest Annual Bonus") and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365 and [iii] any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses [i], [ii] and [iii] shall be hereinafter referred to as the "Accrued Obligations"); and 9
10 [b] The amount equal to the product of [i] three and [ii] the sum of (x) the Executive's Annual Base Salary and (y) the Highest Annual Bonus; and [c] An amount equal to the difference between [i] the actuarial equivalent of the benefit (utilizing actuarial assumptions no less favorable to the Executive than those in effect under the Retirement Plan (as defined below) immediately prior to the Effective Date, except as specified below with respect to increases in base salary and annual bonus) under the qualified defined benefit retirement plan in which the Executive participates (the "Retirement Plan") and any excess or supplemental retirement plan in which the Executive participates (together, the "SERP") which the Executive would receive if the Executive's employment continued for three years after the Date of Termination assuming for this purpose that all accrued benefits are fully vested, and, assuming that (x) the Executive's base salary increased in each of the three years by the amount required by Section 4(b)(i) (in the case of Section 4-(b)(i)(y) based on increases (excluding promotional increases) in base salary for the most recently completed fiscal year prior to the Date of Termination) had the Executive remained employed, and (y) the Executive's annual bonus (annualized for any fiscal year consisting of less than twelve full months or during which the Executive was employed for less than twelve full months) in each of the three years bears the same proportion to the Executive's base salary in such year or fraction thereof as it did for the last full year prior to the Date of Termination, and [ii] the actuarial equivalent of the Executive's actual benefit (paid or payable), if any, under the Retirement Plan and the SERP as of the Date of Termination; (ii) For three years after the Executive's Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4(b)(iv) of this Agreement if the Executive's employment had not been terminated in accordance with the most favorable plans, practices, programs or policies of the Company and its affiliated companies applicable generally to other peer executives and their families during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families, provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. For purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until two and one-half years after the Date of Termination and to have retired on the last day of such period; 10
11 (iii) The Company shall, at its sole expense as incurred, provide the Executive with outplacement services the scope and provider of which shall be selected by the Executive in his sole discretion; and (iv) To the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). (b) Death. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(b) shall include, without limitation, and the Executives estate and/or beneficiaries shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company and affiliated companies to the estates and beneficiaries of peer executives of the Company and such affiliated companies under such plans, programs, practices and policies relating to death benefits, if any, as in effect with respect to other peer executives and their beneficiaries at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive's estate and/or the Executive's beneficiaries, as in effect on the date of the Executive's death with respect to other peer executives of the Company and its affiliated companies and their beneficiaries. (c) Disability. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits at least equal to the most favorable of those generally provided by the Company and its affiliated companies to disabled executives and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, as in effect generally with respect to other peer executives and their families at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive's family, as in effect at any time thereafter generally with respect to other peer executives of the Company and its affiliated companies and their families. 11
12 (d) Cause; Other than for Good Reason. If the Executive's employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive (i) his Annual Base Salary through the Date of Termination, (ii) the amount of any compensation previously deferred by the Executive, and (iii) Other Benefits, in each case to the extent theretofore unpaid. If the Executive voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than for Accrued Obligations and the timely payment or provision of Other Benefits. In such case, all Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. 7. Nonexclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. 8. Full Settlement. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). 9. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed 12
13 or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 9(c), all determinations required to be made under this Section 9, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Arthur Andersen & Co. or such other certified public accounting firm as may be designated by the Executive (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 9(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as 13
14 practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) Give the Company any information reasonably requested by the Company relating to such claim, (ii) Take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) Cooperate with the Company in good faith in order effectively to contest such claim, and (iv) Permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 9(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. 14
15 (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 9(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 10. Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 10 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 11. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its 15
16 business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 12. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Wisconsin, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive, to his address appearing on the records of the Company. If to the Company: STRATTEC SECURITY CORPORATION 3333 West Good Hope Road Milwaukee, WI 53209 Attn: President or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision hereof or any other provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. 16
17 (f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will" and, prior to the Effective Date, the Executive's employment and this Agreement may be terminated by either the Executive or the Company at any time prior to the Effective Date, in which case the Executive shall have no further rights under this Agreement. From and after the Effective Date this Agreement shall supersede any other agreement between the parties with respect to the subject matter hereof. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. /s/ Donald P. Klick ---------------------------------- Donald P. Klick STRATTEC SECURITY CORPORATION BY /s/ Harold M. Stratton, II -------------------------------- Harold M. Stratton, II, Chairman of the Board and Chief Executive Officer 17
1 EXHIBIT 10.15 ECONOMIC VALUE ADDED PLAN FOR EXECUTIVE OFFICERS AND SENIOR MANAGERS Effective February 27, 1995 as Amended August 24, 1999 and August 21, 2001
2 ECONOMIC VALUE ADDED PLAN FOR EXECUTIVE OFFICERS AND SENIOR MANAGERS TABLE OF CONTENTS Page I. Plan Objectives 1 II. Plan Administration 1 III. Definitions 1 IV. Eligibility 4 V. Individual Participation Levels 5 VI. Performance Factors 5 VII. Change in Status During Plan Year 8 VIII. Bonus Paid and Bonus Bank 9 IX. Administrative Provisions 12 X. Miscellaneous 13 Exhibit A
3 I. PLAN OBJECTIVES A. To promote the maximization of shareholder value over the long term by providing incentive compensation to key employees of STRATTEC SECURITY CORPORATION (the "Company") in a form which is designed to financially reward participants for an increase in the value of the Company. B. To provide competitive levels of compensation that enable the Company to attract and retain employees who can have a positive impact on the economic value of the Company. C. To encourage teamwork and cooperation in the achievement of Company goals. II. PLAN ADMINISTRATION The Compensation Committee of the Company's Board of Directors (the "Compensation Committee") shall be responsible for the design, administration, and interpretation of the Plan. III. DEFINITIONS A. "Accrued Bonus" means the bonus, which may be negative or positive, which is calculated in the manner set forth in Section V.A. B. "Actual EVA" means the EVA as calculated for the relevant Plan Year. C. "Capital" means the Company's average monthly net operating capital employed for the Plan Year, calculated as follows: Current Assets - Current Interest Bearing Assets + Bad Debt Reserve + LIFO Reserve - Future Income Tax Benefits - Current Noninterest-Bearing Liabilities + Property, Plant, Equipment, (Net) - Construction in Progress (+/-) Unusual Capital Items 1
4 D. "Capital Charge" means the deemed opportunity cost of employing Capital in the Company's business, determined as follows: Capital Charge = Capital x Cost of Capital E. "Company" means STRATTEC SECURITY CORPORATION. The Company's Compensation Committee may act on behalf of the Company with respect to this Plan. F. "Cost of Capital" means the weighted average of the cost of equity and the after tax cost of debt for the relevant Plan Year. The Cost of Capital will be determined by the Compensation Committee prior to each Plan Year, consistent with the following methodology: (a) Cost of Equity = Risk Free Rate + (Business Risk Index x Average Equity Risk Premium) (b) Debt Cost of Capital = Debt Yield x (1 - Tax Rate) (c) The weighted average of the Cost of Equity and the Debt Cost of Capital is determined by reference to the expected debt-to-capital ratio where the Risk Free Rate is the average daily closing yield rate on 30 year U.S. Treasury Bonds for an appropriate period (determined by the Compensation Committee from time to time) preceding the relevant Plan Year, the Business Risk Index is determined by reference to an auto supply industry factor selected by the Compensation Committee, the Average Equity Risk Premium is 6%, the Debt Yield is the weighted average yield of all borrowing included in the Company's permanent capital, and the tax rate is the combination of the relevant corporate Federal and state income tax rates. The Compensation Committee will review the Cost of Capital annually and make appropriate adjustments only if the calculated Cost of Capital changes by more than 1% from that used during the prior Plan Year. G. "Earned Wages" includes all wages paid in the Plan Year, excluding employment signing bonuses, EVA bonus payments, reimbursement or other expense allowances, imputed income, value of fringe benefits (cash and noncash), moving reimbursements, welfare benefits and special payments. 2
5 H. "Economic Value Added" or "EVA" means the NOPAT that remains after subtracting the Capital Charge, expressed as follows: EVA = NOPAT - Capital Charge EVA may be positive or negative. I. Effective Date. February 27, 1995, the date as of which the Plan first applies to the Company. J. "EVA Leverage Factor" means the adjustment factor reflecting deviation in the use of capital employed as a percentage of capital employed. For purposes of this Plan, the Company's EVA Leverage Factor is determined to be 5% of the monthly average net operating capital employed during the prior Plan year. K. "NOPAT" means cash adjusted net operating profits after taxes for the Plan Year, calculated as follows: Net Sales - Cost of Goods Sold (+ -) Change in LIFO Reserve - Engineering/Selling & Admin. (+ -) Change in Bad Debt Reserve (+ -) Other Income & Expense excluding Interest Income or Expense (+ -) Other Unusual Income or Expense Items (See Section VI. B.) (+ -) Amortization of Unusual Income or Expense Items - Cash Taxes on the Above (+/- change in deferred tax liability) L. "Participant" means individual who has satisfied the eligibility requirements of the Plan as provided in Section IV. M. "Plan Year" means the one-year period coincident with the Company's fiscal year. N. "Executive Officers" means those Participants designated as Executive Officers by the Compensation Committee with respect to any Plan Year. 3
6 O. "Senior Managers" means those Participants designated as Senior Managers by the Compensation Committee with respect to any Plan Year. P. "Target EVA" means the target level of EVA for the Plan Year, determined as follows: Current Plan Prior Year Prior Year Expected Year Target EVA = Target EVA + Actual EVA + Improvement ----------------------- 2 Expected Improvement will be approved by the Board of Directors, annually. IV. ELIGIBILITY A. Eligible Positions. In general, only Executive Officers and Senior Managers selected by the Compensation Committee may be eligible for participation in the Plan. However, actual participation will depend upon the contribution and impact each eligible employee may have on the Company's value to its shareholders, as determined by the Compensation Committee. B. Nomination and Approval. Each Plan Year, the Chairman and President will nominate eligible employees to participate in the Plan for the next Plan Year. The Compensation Committee will have the final authority to select Plan participants (the "Participants") among the eligible employees nominated by the Chairman and President. Continued participation in the Plan is contingent on approval of the Compensation Committee. C. Employee Performance Requirement. Employees whose performance is rated "Needs Improvement" on their annual performance review will not be eligible for an EVA bonus applicable to the year covered by such performance review. However, if the employee so rated is subject to a performance improvement plan, and successfully meets the requirement of the plan in the time frame prescribed, the employee's EVA eligibility will be reinstated, and the EVA bonus will be paid with the next regular payroll check following reinstatement. 4
7 V. INDIVIDUAL PARTICIPATION LEVELS A. Calculation of Accrued Bonus. Each Participant's Accrued Bonus will be determined as a function of the Participant's Earned Wages, the Participant's Target Incentive Award (provided in Section V.B., below), Company Performance Factor (provided in Section VI.A.) and the Individual Performance Factor (provided in Section VI.C.) for the Plan Year. Each Participant's Accrued Bonus will be calculated as follows: Target Company Individual Participant's x Incentive x Performance + Performance Earned Wages Award Factor Factor -------------------------------- 2 B. Target Incentive Award. The Target Incentive Award will be determined according to the following schedule: Target Incentive Award Position (% of Base Salary) -------- ------------------ Chairman (if also CEO of Company) 75% President 65% Executive Vice President 50% Vice President 35% Senior Managers (as specified in Exhibit A) 12%-20% VI. PERFORMANCE FACTORS A. Company Performance Factor Calculation. For any Plan Year, the Company Performance Factor will be calculated as follows: Company Performance Factor = 1.00 + Actual EVA - Target EVA ----------------------- EVA Leverage Factor B. Adjustments to Company Performance. When Company performance is based on Economic Value Added or other quantifiable financial or accounting measure, it may be necessary to exclude significant, unusual, unbudgeted or noncontrollable gains or losses from actual financial results in order to measure performance properly. The 5
8 Compensation Committee will decide those items that shall be considered in adjusting actual results. For example, some types of items that may be considered for exclusion are: (1) Any gains or losses which will be treated as extraordinary in the Company's financial statements. (2) Profits or losses of any entities acquired by the Company during the Plan Year, assuming they were not included in the budget and/or the goal. (3) Material gains or losses not in the budget and/or the goal which are of a nonrecurring nature and are not considered to be in the ordinary course of business Some of these would be as follows: (a) Gains or losses from the sale or disposal of real estate or property. (b) Gains resulting from insurance recoveries when such gains relate to claims filed in prior years. (c) Losses resulting from natural catastrophes, when the cause of the catastrophe is beyond the control of the Company and did not result from any failure or negligence on the Company's part. C. Individual Performance Factor Calculation. Determination of the Individual Performance Factor will be the responsibility of the individual to whom the participant reports. This determination will be subject to approval by the Chairman and President (or the Compensation Committee with respect to the Chairman and President) and shall conform with the process set forth below: (1) Quantifiable Supporting Performance Factors. The Individual Performance Factor of the Accrued Bonus calculation will be based on the accomplishment of individual, financial and/or other goals ("Supporting Performance Factors"). Whenever possible, individual performance will be evaluated according to quantifiable benchmarks of success. These Supporting Performance Factors will be enumerated from 0 to 2.0 based on the levels of achievement for each goal per the schedule in VI 6
9 C. (2). Provided, however, that if the quantifiable Supporting Performance Factor is based on the Company Performance Factor as set forth in Section VI.A., then the Supporting Performance Factor may be unlimited. (2) Non-Quantifiable Supporting Performance Factors. When performance cannot be measured according to a quantifiable monitoring system, an assessment of the Participant's performance shall be made based on a non-quantifiable Supporting Performance Factor (or Factors). The individual to whom the participant reports (or the Compensation Committee with respect to the Chairman) will evaluate the Participant's performance based on behavioral attributes and overall performance and this evaluation will determine the Participant's Supporting Performance Factor (or Factors) according to the following schedule: --------------------------------- -------------------- ------------------------- Non Quantifiable Quantifiable Supporting Supporting Supporting Performance Rating Performance Factor Performance Rating --------------------------------- -------------------- ------------------------- Significantly Exceeds 1.8-2.0 Significantly Exceeds Requirements Goal Exceeds Requirements 1.4-1.7 Exceeds Goal Meets Requirements .7-1.3 Meets Goal Marginally Meets Requirements .3-.6 Goal Not Met, but Significant Progress Made Needs Improvement 0-.2 0 Goal Not Met (3) Aggregate Individual Performance Factor. The Individual Performance Factor to be used in the calculation of the Accrued Bonus shall be equal to the sum of the quantifiable and/or non-quantifiable Supporting Performance Factor(s), divided by two as follows: Quantifiable Non-Quantifiable Supporting + Supporting Individual Performance Performance Performance = Factor Factor ----------------------------- Factor 2 Notwithstanding the foregoing, the individual to whom the Participant reports (with the approval of the Chairman and President or the Compensation Committee with respect to the Chairman and President), shall have the authority to weight the Supporting Performance Factors, according to relative 7
10 importance. The weighting of each Supporting Performance Factor shall be expressed as a percentage, and the sum of the percentages applied to all of the Supporting Performance Factors shall be 100%. The Individual Performance Factor, if weighted factors are used, will then be equal to the weighted average of such Supporting Performance Factors. VII. CHANGE IN STATUS DURING THE PLAN YEAR A. New Hires and Promotions. A newly hired employee or an employee promoted during the Plan Year to a position qualifying for participation (or leaving the participating class) may accrue (subject to discretion of the Compensation Committee) a pro rata Accrued Bonus based on Base Salary received. B. Discharge. An employee discharged during the Plan Year shall not be eligible for an Accrued Bonus, even though his or her service arrangement or contract extends past year-end, unless the Compensation Committee determines that the conditions of the termination indicate that a prorated Accrued Bonus is appropriate. The Compensation Committee shall have full and final authority in making such a determination. C. Resignation. An employee who resigns during the Plan Year to accept employment elsewhere (including self-employment) will not be eligible for an Accrued Bonus, unless the Compensation Committee determines that the conditions of the termination indicate that a prorated Bonus is appropriate. The Compensation Committee shall have full and final authority in making such a determination. D. Death, Disability and Retirement. If a Participant's employment is terminated during a Plan Year by reason of death, disability, or normal or early retirement under the Company's retirement plan, a tentative Accrued Bonus will be calculated as if the Participant had remained employed as of the end of the Plan Year. The final Accrued Bonus will be calculated based upon the Base Salary received. Each employee may name any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under this Plan is to be paid in case of the employee's death. 8
11 Each such designation shall revoke all prior designations by the employee, shall be in the form prescribed by the Compensation Committee, and shall be effective only when filed by the employee in writing with the Compensation Committee during his or her lifetime. In the absence of any such designation, benefits remaining unpaid at the employee's death shall be paid to the employee's estate. E. Leave of Absence. An employee whose status as an active employee is changed during a Plan Year as a result of a leave of absence may, at the discretion of the Compensation Committee, be eligible for a pro rata Accrued Bonus determined in the same way as in paragraph D of this Section. VIII. BONUS PAID AND BONUS BANK All or a portion of the Accrued Bonus will be either paid to the Participant or credited to or charged against the Bonus Bank as provided in this Article. A. Participants Who Are Not Executives Officers. All positive Accrued Bonuses of Participants who are not Executive Officers for the Plan Year shall be paid in full, less amounts required by law to be withheld for income and employment tax purposes, as soon as administratively feasible following the end of the Plan Year in which the Accrued Bonus was earned. Participants who are not Executive Officers shall not be charged or otherwise assessed for negative Accrued Bonuses nor shall such Participants have any portion of their Accrued Bonuses banked. B. Participants Who Are Executive Officers. The Total Bonus Payout to Participants who are Executive Officers for the Plan Year shall be as follows: Total Bonus Payout = [Accrued Bonus - Extraordinary Bonus Accrual] + Bank Payout The Total Bonus Payout for each Plan Year, less amounts required by law to be withheld for income tax and employment tax purposes, shall be paid as soon as administratively feasible following the end of the Plan Year in which the Accrued Bonus was earned. 9
12 C. Establishment of a Bonus Bank. To encourage a long term commitment to the enhancement of shareholder value by Executive Officers, "Extraordinary Bonus Accruals" shall be credited to an "at risk" deferred account ("Bonus Bank") for each such Participant, and all negative Accrued Bonuses shall be charged against the Bonus Bank, as determined in accordance with the following: 1. "Bonus Bank" means, with respect to each Executive Officer, a bookkeeping record of an account to which Extraordinary Bonus Accruals are credited, and negative Accrued Bonuses debited as the case may be, for each Plan Year, and from which bonus payments to such Executive Officers are debited. 2. "Bank Balance" means, with respect to each Executive Officer, a bookkeeping record of the net balance of the amounts credited to and debited against such Executive Officer's Bonus Bank. The Bank Balance shall initially be equal to zero. 3. "Extraordinary Bonus Accrual" shall mean the amount of the Accrued Bonus for any year that exceeds 1.25 times the portion of the Executive Officer's Base Salary which is represented by the Target Incentive Award in the event that the beginning Bank Balance is positive or zero, and .75 times the portion of the Executive Officer's Base Salary which is represented by the Target Incentive Award in the event that the beginning Bank Balance is negative. 4. Annual Allocation. Each Executive Officer's Extraordinary Bonus Accrual or negative Accrued Bonus is credited or debited to the Bonus Bank maintained for that Executive Officer. Such Annual Allocation will occur as soon as administratively feasible after the end of each Plan Year. Although a Bonus Bank may, as a result of negative Accrual Bonuses have a deficit, no Executive Officer shall be required, at any time, to reimburse his/her Bonus Bank. 5. "Available Balance" means the Bank Balance at the point in time immediately after the Annual Allocation has been made. 6. "Payout Percentage" means the percentage of the Available Balance that may be paid out in cash to the Participant. The Payout Percentage will equal 33%. 10
13 7. "Bank Payout" means the amount of the Available Balance that may be paid out in cash to the Executive Officer for each Plan Year. The Bank Payout is calculated as follows: Bank Payout = Available Balance x Payout Percentage The Bank Payout is subtracted from the Bank Balance. 8. Treatment of Available Balance Upon Termination (a) Resignation or Termination With Cause. Executive Officers leaving voluntarily to accept employment elsewhere (including self-employment) or who are terminated with cause will forfeit their Available Balance. B. Retirement, Death, Disability or Termination Without Cause. In the event of an Executive Officer's normal or early retirement under the STRATTEC SECURITY CORPORATION Retirement Plan, death, disability, or termination without cause, the Available Balance, less amounts required by law to be withheld for income tax and employment tax purposes shall be paid to the Executive Officer as soon as administratively feasible following the end of the Plan Year in which the termination for one of such events occurred. B. (C)For purposes of this Plan "cause" shall mean: B. The willful and continued failure of a Participant to perform substantially the Participant's duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Participant by the Board or the Chief Executive Officer of the Company which specifically identifies the manner in which the Board or Chief Executive Officer believes that the Participant has not substantially performed the Participant's duties, or 11
14 B. The willful engaging by the Participant in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. For purposes of this provision, no act or failure to act, on the part of the Participant, shall be considered "willful" unless it is done, or omitted to be done, by the Participant in bad faith or without reasonable belief that the Participant's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Participant in good faith and in the best interests of the Company. The cessation of employment of the Participant shall not be deemed to be for cause unless and until there shall have been delivered to the Participant a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Participant and the Participant is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Participant is guilty of the conduct described in subparagraph (I) or (ii) above, and specifying the particulars thereof in detail. IX. ADMINISTRATIVE PROVISIONS A. Amendments. The Compensation Committee or full Board of Directors of the Company shall have the right to amend or restate the Plan at any time from time to time. The Company reserves the right to suspend or terminate the Plan at any time. No such modification, 12
15 amendment, suspension, or termination may, without the consent of any affected participants (or beneficiaries of such participants in the event of death), reduce the rights of any such participants (or beneficiaries, as applicable) to a payment or distribution already earned under Plan terms in effect prior to such change. The provisions of the Plan as in effect at the time of a Participant's termination of employment shall control as to that Participant, unless otherwise specified in the Plan. B. Authority to Act. The Compensation Committee or full Board of Directors may act on behalf of the Company for purposes of the Plan. C. Interpretation of Plan. Any decision of the Compensation Committee with respect to any issues concerning individuals selected for awards, the amounts, terms, form and time of payment of awards, and interpretation of any Plan guideline, definition, or requirement shall be final and binding. D. Effect of Award on Other Employee Benefits. By acceptance of a bonus award, each recipient agrees that such award is special additional compensation and that it will not affect any employee benefit, e.g., life insurance, etc., in which the recipient participates, except as provided in paragraph E. below. E. Retirement Programs. Awards made under this Plan shall be included in the employee's compensation for purposes of the STRATTEC SECURITY CORPORATION Retirement Plan and STRATTEC SECURITY CORPORATION Employee Savings Investment Plan. F. Right to Continued Employment; Additional Awards. The receipt of a bonus award shall not give the recipient any right to continued employment, and the right and power to dismiss any employee is specifically reserved to the Company. In addition, the receipt of a bonus award with respect to any Plan Year shall not entitle the recipient to an award with respect to any subsequent Plan Year. X. MISCELLANEOUS A. Indemnification. The Compensation Committee shall not be liable for, and shall be indemnified and held harmless by the Company 13
16 from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred in connection with any claim, action, suit, or proceeding to which the Compensation Committee may be a party by reason of any action taken or failure to act under this Plan. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such person(s) may be entitled under the Company's Certificate of Incorporation of By-Laws, as a matter of law, or otherwise, or any power that the Company may have to indemnify such person(s) or hold such person(s) harmless. B. Expenses of the Plan. The expenses of administering this Plan shall be borne by the Company. C. Withholding Taxes. The Company shall have the right to deduct from all payments under this Plan any Federal or state taxes required by law to be withheld with respect to such payments. D. Governing Law. This Plan shall be construed in accordance with and governed by the laws of the State of Wisconsin. 14
17 EXHIBIT A The Senior Managers and corresponding Target Incentive Awards referenced in Section V.B. are as follows: Target Incentive Award Senior Manager (% of Base Pay) 1
1 2001 ANNUAL REPORT [STRATTEC LOGO] STRATTEC
2 FORGING AHEAD IN A GLOBAL ENVIRONMENT When STRATTEC produced its first ignition lock back in 1915, the idea of a truly international marketplace for automotive technology would have seemed far-fetched. But the Company kept pace with the development of the American automobile industry through decades of growth; as technology advanced, STRATTEC was in the vanguard. And as markets expanded and diversified, STRATTEC evolved with the industry. Today, the Company is positioned for global growth with new technologies, new partnerships, new markets ... these are the elements from which our success is forged. CONTENTS Financial Highlights ....................................................... 1 Letter to Shareholders ..................................................... 2 Company Description ........................................................ 4 STRATTEC Equipped Vehicle List ............................................. 9 Management's Discussion and Analysis ....................................... 10 Financial Statements ....................................................... 13 Report of Independent Public Accountants ................................... 22 Report of Management ....................................................... 22 Financial Summary .......................................................... 23 Directors/Officers/Shareholders Information ................................ 24 STRATTEC SECURITY CORPORATION STRATTEC SECURITY CORPORATION designs, develops, manufactures and markets mechanical locks, electro-mechanical locks and related access control products for global automotive manufacturers. Our products are shipped to customer locations in the United States, Canada, Mexico, Europe and South America, and we provide full service and aftermarket support. We also supply products for the heavy truck, recreational vehicle, marine and industrial markets, as well as precision die castings for the transportation, security and recreational products industries.
3 FINANCIAL HIGHLIGHTS (In Millions) 2001 2000 1999 ---- ---- ---- Net Sales $ 203.0 $ 224.8 $ 202.6 Gross Profit 40.2 49.4 46.8 Income from Operations 20.6 29.1 26.6 Net Income 13.0 18.5 17.0 Total Assets 101.6 109.0 128.2 Total Debt - - - Shareholders' Equity 60.0 60.4 82.3 (In Millions) [NET SALES GRAPH] [NET INCOME GRAPH] [ECONOMIC VALUE ADDED EVA(R) GRAPH] ECONOMIC VALUE ADDED (EVA(R)) All U.S. associates and many of our Mexico-based salaried associates participate in incentive plans that are based upon our ability to add economic value to the enterprise. During 2001, $5.6 million of positive economic value was generated, a decrease of $5.0 million compared to the economic value the business generated in 2000. We continue to believe that EVA(R) represents STRATTEC's ultimate measure of success and shareholder value. Net Operating Profit After Cash-Based Taxes $12.9 Average Net Capital Employed $61.0 Capital Cost 12% ----- 7.3 Economic Value Added $ 5.6 ===== EVA is a registered trademark of Stern, Stewart & Co. 2001 STRATTEC Annual Report 1
4 A LETTER TO THE SHAREHOLDERS Fellow Shareholders: Fiscal 2001 was one of those years a business would rather not experience, but comes along every once in a while anyway during the existence of a corporation. After a record production and sales year in fiscal 2000, we started fiscal 2001 at a fast pace. By late fall, however, the slumping economy significantly affected new-vehicle sales, and by mid-November, our customers responded by cutting their production. The reductions in vehicle production in November, December, January and February had the obvious effect on us, resulting in reduced production at both our manufacturing locations and temporary layoffs of our operations associates. While the economic slowdown has been an unpleasant experience for us as well as most businesses in North America, it was not entirely unexpected. Some forecasts had predicted a slowdown, and the incredible vigor of the auto industry in the preceding several years made some kind of adjustment likely. We therefore made it one of our missions for the fiscal year to optimize our processes and eliminate costs in a more organized and focused manner. The resulting cost-reduction teams made significant progress during the year, identifying and implementing cost cutting amounting to an annualized $8 million. These reductions came from finding and eliminating waste, revising operating methods, and reducing employment levels. Had we not achieved these cost reductions, the effects of the economic slowdown on our business would have been more dramatic. In late December, one of our major customers abruptly announced that it was unilaterally reducing all of its material purchase orders by 5%, effective January 1st. We viewed this action as an arbitrary and unreasonable attempt to mitigate that customer's negative financial condition resulting from its own internal issues. Our position on this action is that we should not and cannot allow our shareholders to suffer as a result of our customers' self-induced problems. Nevertheless, that customer's partial success in forcing this action on its supply base has encouraged other customers suffering under the economic slowdown to increase pressure for price reductions as well. While we recognize our customers' rationale for this price reduction pressure, we are looking, and will continue to look, at solutions that are strategically fair and equitable for STRATTEC, its shareholders and its customers. In March, we began negotiations with PACE Local 7-0232, the union representing our hourly operations associates. These negotiations were conducted in anticipation of the expiration of our then existing labor contract on May 31, 2001. On that date, both sides reached a tentative agreement for a new contract which included an extension of the current contract until June 6, 2001 to allow the union time to organize and call a ratification meeting of its members. Despite the endorsement of the tentative agreement by both the union Bargaining Committee and Executive Committee, the membership rejected the proposed contract by a narrow margin, and a strike against the company began. The strike lasted 16 days, during which time we operated the Milwaukee facility under a Strike Contingency Plan devised several months earlier. This plan included the build-up of certain component and finished goods inventories prior to May 31st, as well as an operating plan that used our salaried work force to produce parts. Thanks to this plan and the dedication and enthusiasm of our salaried employees, we were able to support our major customers' requirements without interrupting their production processes. On June 22nd, after mediated negotiations, the union took another tentative agreement before the membership. This agreement was again endorsed by both the union Bargaining Committee and Executive Committee, and this time was ratified by the members. Despite the strike and its effects on our fourth quarter results, we believe the resulting 4-year contract is fair to both the Company and its hourly represented associates, and should provide us opportunities to continue to make changes for more efficient operations in our Milwaukee facility. The pricing pressure we are receiving from our customers is a continuation of prior years' experience, but is now heightened by the need for these customers to reduce costs in the face of a very competitive but stagnate market, and reduced automotive production at some of our their 2001 STRATTEC Annual Report 2
5 A LETTER TO THE SHAREHOLDERS assembly plants. To this end, we are seeing some attempts to reduce vehicle cost by de-contenting - a tactic which reduces the overall amount of standard and/or optional equipment on a vehicle. This is having an effect on our product by reducing the number of locks per vehicle on certain models. While this does cut cost for our customers, it reduces volume for us, on top of the already reduced volumes resulting from the current market conditions. De-contenting of our lock set packages is a trend that is likely to continue, as electronic remote key device usage increases as standard equipment on new vehicles. We have been anticipating this potential, and the actions we have taken to broaden our vehicle access product line were put in place partially as a defense against this slow erosion of our traditional product line. Expansion of our product line with additional access control products is an important part of our Alliance with WiTTE. The Alliance was formalized with the signing of legal agreements on November 28, 2000. To date, we have several Alliance programs under way, including a lockset program with Saab in Sweden and a hood latch program for Volkswagen in Mexico. Additionally, our WiTTE-STRATTEC LLC joint venture has signed letters of intent with intended partners in Brazil and China, and we are proceeding to formalize these relationships. We have one committed vehicle program for Brazil, and four committed programs for China. In addition, we are receiving quote requests for "global" vehicle programs. With these developments, we are encouraged that our globalization strategy is working for our customers and us. It is clear that the strategic challenges we have discussed in previous annual reports are still before us. But we believe we have put into place the necessary foundation upon which to build our future. In addition to the Alliance structure we have created with Witte, we are actively seeking relationships with other strategic partners that can further our interests and strengthen our position as a global provider of vehicle access control components and systems. We continue to develop our own in-house capabilities for designing, testing and producing these products. And we continue to emphasize cost reduction and efficiency enhancements in our existing processes to support our traditional product business. As the ultimate measure of our performance, our goal was to deliver a fifth consecutive year of increased EVA. Although we did not attain that goal, we still created $5.6 million positive EVA in fiscal 2001, our third best year. And we were able to deliver our second best year of earnings per share. We are pleased to be able to continue adding value to your investment in STRATTEC. For a more detailed discussion of financial operating results, please read the Management's Discussion and Analysis of operating results on pages 10, 11 and 12 of this report. Despite fiscal 2001 being a difficult year for a number of reasons, we have weathered the storm reasonably well, and look to the future with optimism. We believe we are doing the right things to position our Company for additional economic value creation in the immediate and long-term future. Your support during this past year has been quite heartening, and we appreciate your confidence in us. We look forward to justifying that confidence. Sincerely, /s/ Harold M. Stratton II /s/ John G. Cahill Harold M. Stratton II John G. Cahill Chairman and Chief Executive Officer President and Chief Operating Officer August, 2001 2001 STRATTEC Annual Report 3
6 COMPANY DESCRIPTION BASIC BUSINESS STRATTEC SECURITY CORPORATION designs, develops, manufactures and markets mechanical locks, electro-mechanical locks, latches and related access control products for major North American and global automotive manufacturers. We also supply these products for the heavy truck, recreational vehicle, marine and industrial markets. Through our alliance partner, WiTTE-Velbert Gmbh in Germany, both companies' access control products are manufactured and marketed globally. We also provide full service and aftermarket support. [STRATTEC LOGO] HISTORY STRATTEC formerly was a division of Briggs & Stratton Corporation. On February 27, 1995, STRATTEC was spun off from Briggs & Stratton through a tax-free distribution to the then-existing Briggs shareholders. STRATTEC received substantially all of the assets and liabilities related to the lock and key business owned by Briggs & Stratton. Starting as a division of Briggs & Stratton, and continuing today as a totally separate and independent company, we have a history in the automotive lock manufacturing business spanning over 85 years. We also have been in the zinc die-casting business for more than 75 years. STRATTEC has been the world's largest producer of automotive locks and keys since the late 1920s, and we currently maintain a dominant share of the North American markets for these products. PRODUCTS Our principal products are locks and keys for cars and trucks. A typical automobile contains a set of five locks: a steering column/ignition lock, a glove box lock, two front door locks and a deck lid (trunk) lock. Pickup trucks typically use three to four locks, while sport utility vehicles and vans use five to seven locks. Some vehicles have additional locks for under-floor compartments or folding rear seat latches. T-top locks, spare tire locks and burglar alarm locks also are offered as options. Usually two keys are provided with each vehicle lockset. Additional products include zinc die cast steering column lock housings, and an electronic Vehicle Access Control System (VACS). [PICTURE OF KEY] VACS is a passive security system for commercial delivery vehicles. It's an example of our ability to effectively integrate mechanical and electronic components such as Radio Frequency Identification (RFID) and Hall Effect sensors. 2001 STRATTEC Annual Report 4
7 COMPANY DESCRIPTION Through our alliance with WiTTE-Velbert in Germany, we are expanding our automotive access control product offerings to include hood latches, trunk or liftgate latches, door latches, door handles, and vehicle access modules that contain some or all of these components. MARKETS We are a direct supplier to OEM auto and light truck manufacturers, to over-the-road heavy truck manufacturers and recreational vehicle manufacturers, as well as to other transportation-related manufacturers. For the 2001 model year, we enjoyed a 62% market share in the North American automotive industry, supplying locks and keys for approximately 84% of General Motors' production, 63% of Ford's, 97% of DaimlerChrysler's and 100% of Mitsubishi's production. We also are an OEM components supplier to other "Tier 1" automotive suppliers and a wide array of smaller industrial manufacturers. Direct sales to various OEMs represent approximately 82% of our total sales. The remainder of the company's revenue is received primarily through sales to the OEM service channels, and the locksmith aftermarket. [PICTURE OF WAREHOUSE] Sales to our major automotive customers are coordinated through our direct sales personnel located in our Detroit-area office. Sales also are partially facilitated through daily interaction between our application engineers located in Detroit and customer engineering departments. Sales to other OEM customers are accomplished through a combination of our own sales personnel and manufacturer representative agencies. STRATTEC's products are supported by an extensive staff of experienced lock and latch engineers. This staff, which includes product design, quality and manufacturing engineers, is capable of providing complete design, development and testing services of new products for our customers. This staff also is available for customer problem solving, warranty analysis and other activities that arise during a product's life cycle. Our customers receive aftersales support in the form of special field service kits, service manuals, and specific in-plant production repair programs. The majority of our OEM products are sold in North America. However, our dominance in the North American market translates into a world market share of around 20%, making STRATTEC the largest producer of automotive locks and keys in the world. While a modest amount of exporting is done to automotive assembly plants in Europe and South America, we are in the process of expanding our presence in these markets and elsewhere through our alliance with WiTTE-Velbert Gmbh. 2001 STRATTEC Annual Report 5
8 COMPANY DESCRIPTION OEM service and replacement parts are sold to the OEM's own service operations. In addition, we distribute our components and security products to the automotive aftermarket through approximately 60 authorized wholesale distributors, as well as other marketers and users of component parts, including export customers. These aftermarket activities are serviced through a warehousing operation integral to our Milwaukee headquarters and manufacturing facility. CUSTOMER FOCUS Since the majority of the company's sales are to the "Big Three" North American automotive manufacturers, STRATTEC is organized to assure that our activities are focused on these major customers and their associated entities. We have customer-focused teams for General Motors, for Ford, for DaimlerChrysler/Mitsubishi and for Delphi Automotive Systems. A fifth team deals with programs and new products associated with our alliance partner, WiTTE-Velbert, while a sixth team handles our industrial and service customers, including such heavy truck manufacturers as Peterbilt, Kenworth, Mack, Freightliner, Navistar and Volvo. [STRATTEC LOGO] Each of the six teams possesses all of the necessary disciplines required to meet their customers' needs. Leading each team's efforts are Product Business Managers who handle the overall coordination of various product programs. The Product Business Managers work closely with their team's quality engineers, cost engineers, purchasing agents, internal and external customer service representatives, service manager, and engineering manager. The engineering manager in turn helps coordinate the efforts of design engineers, product and process engineers, component engineers, and electrical engineers. STRATTEC uses a formalized product development process to identify and meet customer needs in the shortest possible time. By creating and following this streamlined development system, we shorten product lead times, tighten our response to market changes, and provide our customers with the optimum value solution to their security requirements. STRATTEC also is QS-9000/ISO 9001 certified. This means we embrace the philosophy that quality should exist not only in the finished product, but in every step of our process as well. OPERATIONS Most of the components that go into our products are manufactured at our main facility and headquarters in Milwaukee, Wisconsin. This facility [PICTURE OF MANUFACTURING FACILITY] 2001 STRATTEC Annual Report 6
9 COMPANY DESCRIPTION also makes zinc die cast components for other manufacturers. Assembly is performed at the Milwaukee location and at our primary assembly facility, located in Jurez, Mexico. [PHOTO OF ASSEMBLY FACILITY IN MEXICO] ADVANCED DEVELOPMENT Research and development activities are centered around a dedicated research engineering staff we call our Advanced Development Group. This Group has the responsibility for developing future products and processes that will keep us in the forefront of the markets we serve. Projects we are pursuing focus on electronic and mechanical access control products, modularization of related access control components, and new manufacturing processes to reduce costs for ourselves and our customers. ALLIANCE Our alliance with WiTTE-Velbert Gmbh consists of two main initiatives. The first is a set of cross-licensing agreements which allows STRATTEC to manufacture, market and sell WiTTE products in North America, and allows WiTTE to manufacture, market and sell STRATTEC products in Europe. In this way, both STRATTEC and WiTTE have established international reach for their respective products and services, while sharing the potential profits of those products sold outside of their respective home markets. [CAR GRAPHIC] [WITTE STRATTEC LOGO] The second initiative is a 50-50 joint venture company, WiTTE-STRATTEC LLC, which is the corporate entity through which we and WiTTE are pursuing emerging markets outside of Europe and North America. Additionally, through WiTTE-STRATTEC LLC, the two companies will jointly own the intellectual property rights for any products that result from the coordinated activities of their respective research and development resources. 2001 STRATTEC Annual Report 7
10 COMPANY DESCRIPTION CYCLICAL NATURE OF THE BUSINESS The manufacturing of components used in automobiles is driven by the normal peaks and valleys associated with the automotive industry. Typically, the months of July and August are relatively slow as summer vacation shutdowns and model year changeover occur at the automotive assembly plants. September volumes increase rapidly as the new model year begins. This volume strength continues through October and into early November. As the holiday and winter seasons approach, the demand for automobiles slows. March usually brings a major sales and production increase, which then continues through most of June. This results in our first fiscal quarter (ending in September) sales and operating results typically being our weakest, with the remaining quarters being more consistent. ECONOMIC VALUE COMMITMENT The underlying philosophy of our business, and the means by which we measure our performance, is Economic Value Added (EVA(R)). Simply stated, economic value is created when our business enterprise yields a return greater than the cost of capital we and our shareholders have invested in STRATTEC. The amount by which our return exceeds the cost of our capital is EVA(R). In line with this philosophy, EVA(R) bonus plans are in effect for our associates and our outside directors as an incentive to help positively drive the business. STRATTEC's significant market share is the result of an eight-decade-long commitment to creating quality products and systems that are responsive to changing needs. As technologies advance and markets grow, STRATTEC retains that commitment to meeting and exceeding the expectations of our customers, and providing economic value to our shareholders. GLOBAL PARTNERS [GLOBAL MAP] 1. STRATTEC - Milwaukee, Wisconsin 4. WITTE - Nejdek, Czech Republic 2. STRATTEC de Mexico - Juarez, Mexico 5. IFER - Sao Paulo, Brazil 3. WITTE - Velbert, Germany 6. ZU YIH - Fuzhou, China 2001 STRATTEC Annual Report 8
11 VEHICLE LIST 2002 VEHICLES We're proud of the quality vehicles that use STRATTEC components. They include over-the-road trucks like Peterbilt, Kenworth, Mack, Freightliner, Navistar and Volvo. And recreational vehicles such as Winnebago. Also, the following model year 2002 cars and light trucks: CARS Buick Century Chrysler Concorde Jaguar S-Type Buick La Sabre Chrysler 300M Lincoln Continental Buick Park Avenue Chrysler LHS Lincoln LS Buick Regal Chrysler Prowler Mercury Sable Cadillac Deville Chrysler PT Cruiser Mitsubishi Eclipse Cadillac Eldorado Chrysler Sebring Mitsubishi Galant Chevrolet Camaro Dodge Intrepid Oldsmobile Alero Chevrolet Cavalier Dodge Neon Oldsmobile Intrigue Chevrolet Corvette Dodge Stratus Pontiac Firebird Chevrolet Impala Dodge Viper Pontiac Grand Am Chevrolet Lumina Ford Taurus Pontiac Grand Prix Chevrolet Malibu Ford Thunderbird Pontiac Sunfire Chevrolet Monte Carlo GM Impact EV1 Saturn L Series LIGHT TRUCKS, VANS AND SPORT UTILITY VEHICLES Cadillac Escalade Dodge Ramcharger GMC Sonoma Pickup Cadillac EXT Dodge Ram Pickup GMC Yukon Chevrolet Astro Dodge Ram Van/Wagon GMC Yukon XL Chevrolet Avalanche Ford Excursion Isuzu Hombre Pickup Chevrolet Silverado Pickup Ford Expedition Jeep Grand Cherokee Chevrolet Express Ford Explorer Jeep Liberty Chevrolet S-10 Pickup Ford Explorer Sport Jeep Wrangler Chevrolet Suburban Ford Explorer Sport Trac Lincoln Blackwood Chevrolet Tahoe Ford F-Series Pickup Lincoln Navigator Chevrolet Trailblazer Ford Ranger Pickup Mazda B-Series Pickup Chevrolet Venture GMC Envoy Mercury Mountaineer Chrysler Town & Country GMC Denali Mercury Villager Chrysler Voyager GMC Jimmy Nissan Quest Dodge Caravan/Grand Caravan GMC Safari Oldsmobile Bravada Dodge Dakota Pickup GMC Savana Oldsmobile Silhouette Dodge Durango GMC Sierra Pickup Pontiac Montana 2001 STRATTEC Annual Report 9
12 MANAGEMENT'S DISCUSSION AND ANALYSIS The following Discussion and Analysis should be read in conjunction with the Company's Financial Statements and Notes thereto. Unless otherwise indicated, all references to years refer to fiscal years. RESULTS OF OPERATIONS 2001 COMPARED TO 2000 Net sales were $203.0 million in 2001 compared to $224.8 million in 2000. The prior year included one additional shipping week, which contributed to the overall sales reduction. Sales to the Company's largest customers overall decreased in the current year compared to the record prior year levels, with General Motors at $60.2 million compared to $69.0 million, Delphi Automotive Systems Corporation at $26.9 million compared to $31.5 million, DaimlerChrysler Corporation at $33.9 million compared to $35.1 million, and Ford Motor Company at $45.3 million compared to $54.5 million. Sales to Mitsubishi Motor Manufacturing of America actually increased from $9.4 million to $11.8 million. The overall sales decrease is the result of reduced vehicle production at our customer's assembly plants. Gross profit as a percentage of net sales was 19.8 percent in 2001 compared to 22.0 percent in 2000. The lower gross margin is the result of several factors, including a 16-day strike in June 2001 at the Company's Milwaukee facility which resulted in additional costs to support customer requirements; reduced efficiencies at the Company's Mexican facility; and reduced sales due to delayed shipments. Also negatively impacting the current year margin was less favorable absorption of manufacturing costs due to reduced production volumes resulting from customer plant shutdowns, an overall decline in automotive production, and a reduction in the Company's inventory levels in comparison to the prior year. Additional items impacting the gross margin include an increase in the cost of zinc, and increased U.S. dollar costs at the Company's Mexico assembly facility. The average cost of zinc per pound, which the Company uses at a rate of approximately 1 million pounds per month, increased to approximately $.57 in 2001, from approximately $.55 in 2000. The increased U.S. dollar costs at the Company's Mexico assembly facility are the result of the appreciation of the Mexican peso and overall inflation in Mexico in the current year. The inflation rate in Mexico for the 12 months ended June 2001 was approximately 7 percent while the U.S. dollar/Mexican peso exchange rate fell to approximately 9.4 in 2001, from approximately 9.5 in 2000. Engineering, selling and administrative expenses were $19.7 million, or 9.7 percent of net sales in 2001, compared to $20.3 million, or 9.0 percent of net sales in 2000. The decreased operating expenses are attributed to one less week of operating expenses in the current year compared to the prior year and the impact of cost savings realized as a result of the human resources realignment, which took place in the third quarter of fiscal 2001. Income from operations was $20.6 million in 2001, compared to $29.1 million in 2000, reflecting the decreased sales volume and reduced gross margin as discussed above. The effective income tax rate in 2001 was 37.0 percent compared to 39.0 percent in 2000. The reduction is due to an increase in the foreign sales benefit. The overall effective rate differs from the federal statutory tax rate primarily due to the effects of state income taxes. RESULTS OF OPERATIONS 2000 COMPARED TO 1999 Net sales were $224.8 million in 2000, an increase of 11 percent compared to net sales of $202.6 million in 1999. Fiscal 2000 included one additional shipping week, which contributed to the overall sales growth. Sales to General Motors Corporation and Delphi Automotive Corporation increased 10 percent to $100.5 million as a result of increased unit production by these customers. In addition, labor disruptions at General Motors Corporation during July 1998 reduced sales to this customer by an estimated $3 million during the fiscal 1999 September quarter. Sales to DaimlerChrysler Corporation increased 14 percent to $35.1 million. The increase was due primarily to increased vehicle production schedules and higher value mechanical and electrical content in the locksets the Company supplies. Sales to Mitsubishi Motor Manufacturing of America increased to $9.4 million in 2000 compared to $2.2 million in 1999. This is due to an increase in the Company's share of this customer's production requirements with the launch of the 2000 Eclipse. Sales to the Ford Motor Company were comparable to 1999. Gross profit as a percentage of net sales was 22.0 percent in 2000 compared to 23.1 percent in 1999. The lower gross margin is the result of several factors including higher production start-up costs relating to the launch of the new model year 2000 vehicles, investment 2001 STRATTEC Annual Report 10
13 MANAGEMENT'S DISCUSSION AND ANALYSIS 2001 in process changes, facilities rearrangement and training associated with Lean Manufacturing initiatives, product mix, and increased U.S. dollar costs at the Company's Mexico assembly facility. The major portion of the facility's rearrangement was completed during the first three months of fiscal 2001, and benefits were being realized in the form of cost reduction, inventory reduction and the enhanced ability to meet continually increasing customer requirements for productivity and quality. The increased U.S. dollar costs at the Company's Mexico assembly facility are the result of the appreciation of the Mexican peso and higher wage inflation in comparison to 1999. The inflation rate in Mexico for the 12 months ended June 2000 was approximately 10 percent while the U.S. dollar/Mexican peso exchange rate fell to approximately 9.5 in 2000, from approximately 9.8 in 1999. In addition, the average cost of zinc per pound, which the Company uses at a rate of approximately 1 million pounds per month, increased to approximately $.55 in 2000, from approximately $.52 in 1999. Engineering, selling and administrative expenses were $20.3 million, or 9.0 percent of net sales in 2000, compared to $20.2 million, or 10.0 percent of net sales in 1999. Fiscal 2000 expense levels reflect the favorable impact of moving the Company's service aftermarket warehouse and distribution to the Milwaukee facility in April 1999. Also, included in current year expenses are development activities associated with new products and the Company's globalization activities with its alliance partner, WiTTE-Velbert GmbH & Co. KG. Income from operations was $29.1 million in 2000, compared to $26.6 million in 1999, reflecting the increased sales volume as previously discussed. The effective income tax rate in 2000 was 39.0 percent compared to 38.1 percent in 1999. This is due to an increase in the state effective tax rate. The overall effective rate differs from the federal statutory tax rate primarily due to the effects of state income taxes. LIQUIDITY AND CAPITAL RESOURCES The Company generated cash from operating activities of $23.2 million in 2001 compared to $36.0 million in 2000. The reduction in the generation of cash is due to several factors including decreased sales levels as previously discussed and a reduction in accounts payable and accrued liabilities in 2001 as opposed to an increase in 2000. The changes in accounts payable and accrued liabilities each year were primarily in response to production levels and financial results. In addition, accounts receivable decreased by approximately $1.5 million at July 1, 2001, as compared to July 2, 2000, primarily due to decreased sales. Inventory balances decreased by approximately $5.7 million during the same period as a result of decreased customer vehicle production levels, company focused efforts and the 16-day strike during June 2001 at the Milwaukee facility. Capital expenditures in 2001 were $7.5 million, compared to $9.4 million in 2000. Expenditures primarily were in support of requirements for new product programs and the upgrade and replacement of existing equipment. The Company anticipates that capital expenditures will be approximately $8 million in fiscal 2002, primarily in support of requirements for new product programs and the upgrade and replacement of existing equipment. The Board of Directors of the Company has authorized a stock repurchase program to buy back up to 2,639,395 outstanding shares. A total of 2,160,026 shares have been repurchased as of July 1, 2001, at a cost of approximately $69.0 million. Additional repurchases may occur from time to time. Funding for the repurchases was provided primarily from cash flow from operations and to a lesser extent from borrowings under existing credit facilities. The Company has a $50.0 million unsecured, revolving credit facility (the "Credit Facility"), of which $30 million expires October 31, 2001, and $20 million expires October 31, 2003. There were no outstanding borrowings under the Credit Facility at July 1, 2001. Interest on borrowings under the Credit Facility are at varying rates based, at the Company's option, on the London Interbank offering rate, the Federal Funds Rate, or the bank's prime rate. The Credit Facility contains various restrictive covenants including those that require the Company to maintain minimum levels for certain financial ratios such as tangible net worth, ratio of indebtedness to tangible net worth and fixed charge coverage. The Company believes that the Credit Facility will be adequate, along with cash flow from operations, to meet its anticipated capital expenditure, working capital and operating expenditure requirements. The Company has not been significantly impacted by inflationary pressures over the last several years, except for zinc and Mexican assembly operations as noted elsewhere in this Management's Discussion and Analysis. 2001 STRATTEC Annual Report 11
14 MANAGEMENT'S DISCUSSION AND ANALYSIS MEXICAN OPERATIONS The Company has assembly operations in Juarez, Mexico. Since December 28, 1998, the functional currency of the Mexican operation has been the Mexican peso. The effects of currency fluctuations result in adjustments to the U.S. dollar value of the Company's net assets and to the equity accounts in accordance with Statement of Financial Accounting Standard (SFAS) No. 52, "Foreign Currency Translation." OTHER On November 28, 2000, the Company signed certain alliance agreements with E. WiTTE Verwaltungsgesellschaft GMBH, and its operating unit, WiTTE-Velbert GmbH & Co. KG ("WiTTE"). WiTTE, of Velbert, Germany, is a privately held, QS 9000 and VDA 6.1 certified automotive supplier with sales of DM313 million in its last fiscal year. WiTTE designs, manufactures and markets components including locks and keys, hood latches, rear compartment latches, seat back latches, door handles and specialty fasteners. WiTTE's primary market for these products has been Europe. The WiTTE-STRATTEC alliance provides a set of cross-licensing agreements for the manufacture, distribution and sale of WiTTE products by the Company in North America, and the manufacture, distribution and sale of the Company's products by WiTTE in Europe. Additionally, a joint venture company ("WiTTE-STRATTEC LLC") in which each company holds a 50 percent interest has been established to seek opportunities to manufacture and sell both companies' products in other areas of the world outside of North America and Europe. These activities did not have a material impact on the July 1, 2001, financial statements. PROSPECTIVE INFORMATION A number of the matters and subject areas discussed in this Annual Report contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of forward-looking words or phrases such as "anticipate," "believe," "could," "expect," "intend," "may," "planned," "potential," "should," "will," and "could." These include expected future financial results, product offerings, global expansion, liquidity needs, financing ability, planned capital expenditures, management's or the Company's expectations and beliefs, and similar matters discussed in the Company's Management's Discussion and Analysis. The discussions of such matters and subject areas are qualified by the inherent risk and uncertainties surrounding future expectations generally, and also may materially differ from the Company's actual future experience. The Company's business, operations and financial performance are subject to certain risks and uncertainties, which could result in material differences in actual results from the Company's current expectations. These risks and uncertainties include, but are not limited to, general economic conditions, in particular those relating to the automotive industry, customer demand for the Company's and its customers' products, competitive and technological developments, customer purchasing actions, foreign currency fluctuations and costs of operations. Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are only made as of the date of this Annual Report and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances occurring after the date of this Annual Report. 2001 STRATTEC Annual Report 12
15 CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS) Fiscal Years Ended --------------------------------------------- July 1, 2001 July 2, 2000 June 27, 1999 ------------ ------------ ------------- NET SALES $ 202,973 $224,817 $ 202,625 Cost of goods sold 162,735 175,459 155,821 --------- -------- --------- GROSS PROFIT 40,238 49,358 46,804 Engineering, selling and administrative expenses 19,676 20,254 20,191 --------- -------- --------- INCOME FROM OPERATIONS 20,562 29,104 26,613 Interest income 628 1,056 1,132 Interest expense - - - Other income (expense), net (514) 189 (239) --------- -------- --------- INCOME BEFORE PROVISION FOR INCOME TAXES 20,676 30,349 27,506 Provision for income taxes 7,650 11,836 10,491 --------- -------- --------- NET INCOME $ 13,026 $ 18,513 $ 17,015 ========= ======== ========= EARNINGS PER SHARE: BASIC $ 3.02 $ 3.75 $ 3.02 ========= ======== ========= DILUTED $ 2.96 $ 3.65 $ 2.94 ========= ======== ========= The accompanying notes are an integral part of these consolidated statements. 2001 STRATTEC Annual Report 13
16 CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) July 1, 2001 July 2, 2000 ------------ ------------ ASSETS CURRENT ASSETS Cash and cash equivalents $ 15,298 $ 13,915 Receivables, less allowance for doubtful accounts of $250 at July 1, 2001, and July 2, 2000 27,189 28,731 Inventories 8,605 14,342 Customer tooling in progress 2,588 4,248 Future income tax benefits 1,880 2,092 Other current assets 4,107 3,273 --------- --------- Total current assets 59,667 66,601 DEFERRED INCOME TAXES 130 - PROPERTY, PLANT, AND EQUIPMENT, NET 41,851 42,381 --------- --------- $ 101,648 $ 108,982 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 14,178 $ 19,694 Accrued liabilities: Payroll and benefits 7,501 10,394 Environmental 2,749 2,770 Income taxes 354 47 Other 1,711 1,196 --------- --------- Total current liabilities 26,493 34,101 DEFERRED INCOME TAXES - 299 BORROWINGS UNDER REVOLVING CREDIT FACILITY - - ACCRUED PENSION OBLIGATIONS 10,617 9,839 ACCRUED POST-RETIREMENT OBLIGATIONS 4,528 4,293 SHAREHOLDERS' EQUITY Common stock, authorized 12,000,000 shares $.01 par value, issued 6,195,889 shares at July 1, 2001, and 6,120,788 shares at July 2, 2000 62 61 Capital in excess of par value 49,545 47,924 Retained earnings 80,990 67,964 Accumulated other comprehensive loss (1,749) (2,239) Less: Treasury stock, at cost (2,149,800 shares at July 1, 2001, and 1,668,179 shares at July 2, 2000) (68,838) (53,260) --------- --------- Total shareholders' equity 60,010 60,450 --------- --------- $ 101,648 $ 108,982 ========= ========= The accompanying notes are an integral part of these consolidated balance sheets 2001 STRATTEC Annual Report 14
17 CONSOLIDATED STATEMENTS OF CHANGE IN EQUITY (IN THOUSANDS) Accumulated Capital in Other Common Excess of Retained Comprehensive Treasury Comprehensive Stock Par Value Earnings Loss Stock Income ----- --------- -------- ------------- -------- ------------- BALANCE, JUNE 28, 1998 $59 $42,489 $32,436 $(1,863) $(2,723) Net income - - 17,015 - - $17,015 Translation adjustments - - - (218) - (218) ------- Comprehensive income $16,797 ======= Purchase of common stock - - - - (6,416) Exercise of stock options, including tax benefit of $415 - 1,510 - - 56 --- ------- ------- ------- ------- BALANCE, JUNE 27, 1999 59 43,999 49,451 (2,081) (9,083) === ======= ======= ======= ======= Net income - - 18,513 - - $18,513 Translation adjustments - - - (158) - (158) ------- Comprehensive income $18,355 ======= Purchase of common stock - - - - (44,230) Exercise of stock options, including tax benefit of $1,109 2 3,925 - - 53 --- ------- ------- ------- -------- BALANCE, JULY 2, 2000 61 47,924 67,964 (2,239) (53,260) === ======= ======= ======= ======== Net income - - 13,026 - - $13,026 Translation adjustments - - - 490 - 490 ------- Comprehensive income $13,516 ======= Purchase of common stock - - - - (15,620) Exercise of stock options, including tax benefit of $436 1 1,621 - - 42 --- ------- ------- ------- -------- BALANCE, JULY 1, 2001 $62 $49,545 $80,990 $(1,749) $(68,838) === ======= ======= ======= ======== The accompanying notes are an integral part of these consolidated statements. 2001 STRATTEC Annual Report 15
18 CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) Fiscal Years Ended July 1, 2001 July 2, 2000 June 27, 1999 ------------ ------------ ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $13,026 $18,513 $17,015 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 7,939 7,576 7,107 Loss on disposition of property, plant and equipment 201 254 463 Deferred taxes (312) 392 (7) Change in operating assets and liabilities: (Increase) decrease in receivables 1,639 7,294 (10,788) (Increase) decrease in inventories 5,737 (538) 1,158 (Increase) decrease in other assets 960 (1,284) 4,510 Increase (decrease) in accounts payable and accrued liabilities (6,830) 2,957 8,156 Tax benefit from options exercised 436 1,109 415 Other, net 439 (260) (91) ------- ------ ------ Net cash provided by operating activities 23,235 36,013 27,938 ======= ====== ====== CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment (7,548) (9,357) (8,831) Proceeds received on sale of property, plant and equipment 88 7 15 ------- ------ ------ Net cash used in investing activities (7,460) (9,350) (8,816) ======= ====== ====== CASH FLOWS FROM FINANCING ACTIVITIES Purchase of common stock (15,620) (44,230) (6,416) Exercise of stock options 1,228 2,871 1,151 ------- ------ ------ Net cash used in financing activities (14,392) (41,359) (5,265) ======= ====== ====== NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,383 (14,696) 13,857 CASH AND CASH EQUIVALENTS Beginning of year 13,915 28,611 14,754 ------- ------ ------ End of year $15,298 $13,915 $28,611 ======= ====== ====== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Income taxes paid $7,101 $10,880 $ 9,882 Interest paid - - - The accompanying notes are an integral part of these consolidated statements. 2001 STRATTEC Annual Report 16
19 NOTES TO FINANCIAL STATEMENTS ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES STRATTEC SECURITY CORPORATION (the "Company") designs, develops, manufactures and markets mechanical locks, electro-mechanical locks and related access-control products for North American and global automotive manufacturers. The significant accounting policies followed by the Company in the preparation of these financial statements, as summarized in the following paragraphs, are in conformity with accounting principles generally accepted in the United States. PRINCIPLES OF CONSOLIDATION AND PRESENTATION: The accompanying financial statements reflect the consolidated results of the Company, its wholly owned Mexican subsidiary, and its foreign sales corporation. Certain amounts previously reported have been reclassified to conform to the July 1, 2001, presentation. These reclassifications have no effect on previously reported net income or retained earnings. FISCAL YEAR: The Company's fiscal year ends on the Sunday nearest June 30. The years ended July 1, 2001, July 2, 2000, and June 27, 1999 are comprised of 52, 53 and 52 weeks, respectively. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS: The fair value of financial instruments does not materially differ from their carrying values. CASH AND CASH EQUIVALENTS: Cash and cash equivalents include all short-term investments with an original maturity of three months or less. INVENTORIES: Inventories are stated at cost, which does not exceed market. The last-in, first-out (LIFO) method was used for determining the cost of the inventories at the end of each period. Inventories consist of the following (thousands of dollars): July 1, July 2, 2001 2000 ------- ------- Finished products $ 1,737 $ 3,630 Work in process 8,456 12,374 Raw materials 594 1,054 LIFO adjustment (2,182) (2,716) ------- ------- $ 8,605 $14,342 ======= ======= CUSTOMER TOOLING IN PROGRESS: The Company accumulates its costs for development of certain tooling used in component production and assembly. The costs, which are primarily from third-party tool vendors, are accumulated on the Company's balance sheet. These amounts are then billed to the customer upon formal acceptance by the customer of products produced with the individual tool. PROPERTY, PLANT, AND EQUIPMENT: Property, plant, and equipment are stated at cost, and depreciation is computed using the straight-line method over the following estimated useful lives: