SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 29, 2002 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------ ------------ Commission File Number 0-25150 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) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ---- ---- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES X NO ---- ---- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. Common stock, par value $0.01 per share: 3,755,896 shares outstanding as of December 29, 2002.
STRATTEC SECURITY CORPORATION FORM 10-Q December 29, 2002 INDEX Page ---- Part I - FINANCIAL INFORMATION Item 1 Financial Statements Condensed Consolidated Statements of Income 3 Condensed Consolidated Balance Sheets 4 Condensed Consolidated Statements of Cash Flows 5 Notes to Condensed Consolidated Financial Statements 6 Item 2 Management's Discussion and Analysis of Results of Operations and Financial Condition 7-13 Item 3 Quantitative and Qualitative Disclosures About Market Risk 13 Item 4 Controls and Procedures 13 Part II - OTHER INFORMATION Item 1 Legal Proceedings 14 Item 2 Changes in Securities and Use of Proceeds 14 Item 3 Defaults Upon Senior Securities 14 Item 4 Submission of Matters to a Vote of Security Holders 14 Item 5 Other Information 14 Item 6 Exhibits and Reports on Form 8-K 14 2
Item 1 Financial Statements STRATTEC SECURITY CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In Thousands, Except Per Share Amounts) Three Months Ended Six Months Ended ------------------ ---------------- December 29, December 30, December 29, December 30, 2002 2001 2002 2001 ------------- -------------- ------------- ------------- (unaudited) (unaudited) Net sales $ 48,680 $ 49,178 $ 96,586 $ 98,633 Cost of goods sold 37,742 39,072 74,295 78,445 ------------- -------------- ------------- ------------- Gross profit 10,938 10,106 22,291 20,188 Engineering, selling and administrative expenses 4,571 4,874 9,182 9,642 ------------- -------------- ------------- ------------- Income from operations 6,367 5,232 13,109 10,546 Interest income 85 141 183 296 Other income (expense), net (45) (238) (248) 93 ------------- -------------- ------------- ------------- Income before provision for income taxes 6,407 5,135 13,044 10,935 Provision for income taxes 2,371 1,900 4,827 4,046 ------------- -------------- ------------- ------------- Net income $ 4,036 $ 3,235 $ 8,217 $ 6,889 ============= ============== ============= ============= Earnings per share: Basic $ 1.07 $ 0.79 $ 2.15 $ 1.68 ============= ============== ============= ============= Diluted $ 1.05 $ 0.78 $ 2.11 $ 1.66 ============= ============== ============= ============= Average Shares Outstanding: Basic 3,756 4,096 3,816 4,089 Diluted 3,832 4,149 3,889 4,140 The accompanying notes are an integral part of these condensed consolidated statements. 3
STRATTEC SECURITY CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands) December 29, June 30, 2002 2002 ------------ ------------ ASSETS (unaudited) Current Assets: Cash and cash equivalents $ 23,703 $ 34,956 Receivables, net 25,734 27,860 Inventories- Finished products 3,197 2,395 Work in process 9,410 7,909 Raw materials 602 427 LIFO adjustment (2,368) (2,489) ------------ ------------ Total inventories 10,841 8,242 Customer tooling in progress 2,931 3,499 Other current assets 7,790 7,690 ------------ ------------ Total current assets 70,999 82,247 Deferred Income Taxes 469 469 Investment in Joint Venture 276 393 Property, plant and equipment 100,149 100,028 Less: accumulated depreciation (64,322) (61,497) ------------ ------------ Net property, plant and equipment 35,827 38,531 ------------ ------------ $ 107,571 $ 121,640 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 11,599 $ 15,291 Payroll and benefits 7,963 9,725 Environmental 2,723 2,730 Other accrued liabilities 2,397 3,779 ------------ ------------ Total current liabilities 24,682 31,525 Accrued pension and postretirement obligations 16,240 15,448 Shareholders' equity: Common stock, authorized 12,000,000 shares $.01 par value, Issued 6,495,780 shares 65 65 Capital in excess of par value 59,439 59,425 Retained earnings 104,811 96,594 Accumulated other comprehensive loss (2,560) (2,440) Less: treasury stock, at cost (2,739,884 shares at December 29, 2002 and 2,364,145 shares at June 30, 2002) (95,106) (78,977) ------------ ------------ Total shareholders' equity 66,649 74,667 ------------ ------------ $ 107,571 $ 121,640 ============ ============ The accompanying notes are an integral part of these condensed consolidated balance sheets. 4
STRATTEC SECURITY CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) Six Months Ended ---------------- December 29, December 30, 2002 2001 ------------ ------------ (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 8,217 $ 6,889 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 3,916 4,148 Change in operating assets and liabilities: Decrease in receivables 2,095 4,884 Increase in inventories (2,599) (1,903) (Increase) decrease in other assets 378 (15) Increase (decrease) in accounts payable and accrued liabilities (5,917) 100 Tax benefit from options exercised - 527 Other, net 144 (52) ----------- ----------- Net cash provided by operating activities 6,234 14,578 CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment (1,373) (2,285) ----------- ----------- Net cash used in investing activities (1,373) (2,285) CASH FLOWS FROM FINANCING ACTIVITIES: Purchase of treasury stock (16,136) (2,452) Exercise of stock options 22 3,342 ----------- ----------- Net cash provided by (used in) financing activities (16,114) 890 ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (11,253) 13,183 CASH AND CASH EQUIVALENTS Beginning of period 34,956 15,298 ----------- ----------- End of period $ 23,703 $ 28,481 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Income taxes paid $ 6,007 $ 4,162 Interest paid - - The accompanying notes are an integral part of these condensed consolidated statements. 5
STRATTEC SECURITY CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) BASIS OF FINANCIAL STATEMENTS 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 accompanying financial statements reflect the consolidated results of the Company, its wholly owned Mexican subsidiaries, and its foreign sales corporation. In the opinion of management, the accompanying unaudited financial statements contain all adjustments, which are of a normal recurring nature, necessary to present fairly the financial position as of December 29, 2002, and the results of operations and cash flows for the three and six month periods then ended. All significant intercompany transactions have been eliminated. Interim financial results are not necessarily indicative of operating results for an entire year. These financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in the Company's 2002 Annual Report. EARNINGS PER SHARE (EPS) A reconciliation of the components of the basic and diluted per-share computations follows (in thousands, except per share amounts): Six Months Ended ---------------- December 29, 2002 December 30, 2001 ----------------- ----------------- Net Per-Share Net Per-Share Income Shares Amount Income Shares Amount ------ ------ ------ ------ ------ ------ Basic Earnings Per Share $8,217 3,816 $2.15 $6,889 4,089 $1.68 ===== ===== Stock Options 73 51 ----- ----- Diluted Earnings Per Share $8,217 3,889 $2.11 $6,889 4,140 $1.66 ===== ===== ===== ===== Three Months Ended ------------------ December 29, 2002 December 30, 2001 ----------------- ----------------- Net Per-Share Net Per-Share Income Shares Amount Income Shares Amount ------ ------ ------ ------ ------ ------ Basic Earnings Per Share $4,036 3,756 $1.07 $3,235 4,096 $0.79 ===== ===== Stock Options 76 53 ----- ----- Diluted Earnings Per Share $4,036 3,832 $1.05 $3,235 4,149 $0.78 ===== ===== ===== ===== Options to purchase 80,000 shares of common stock at a price of $58.59 per share were outstanding as of December 29, 2002, but were not included in the computation of diluted EPS because the options' exercise prices were greater than the average market price of the common shares. Options to purchase 315,858 shares of common stock at prices ranging from $35.97 to $45.79 per share were outstanding as of December 30, 2001, but were not included in the computation of diluted EPS because the options' exercise prices were greater than the average market price of the common shares. COMPREHENSIVE INCOME The following table presents the Company's comprehensive income (in thousands): Three Months Ended Six Months Ended ------------------ ---------------- December 29, 2002 December 30, 2001 December 29, 2002 December 30, 2001 ----------------- ----------------- ----------------- ----------------- Net Income $4,036 $3,235 $8,217 $6,889 Change in Cumulative Translation Adjustments, net (45) 231 (120) (108) ------ ------ ------ ------ Total Comprehensive Income $3,991 $3,466 $8,097 $6,781 ====== ====== ====== ====== 6
Item 2 STRATTEC SECURITY CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following Management's Discussion and Analysis should be read in conjunction with the Company's accompanying Financial Statements and Notes thereto and the Company's 2002 Annual Report. Unless otherwise indicated, all references to years refer to fiscal years. Analysis of Results of Operations Three months ended December 29, 2002 compared to the three months ended December 30, 2001 Net sales for the three months ended December 29, 2002, were $48.6 million compared to net sales of $49.2 million for the three months ended December 30, 2001. Overall sales to the Company's largest customers decreased slightly in the current quarter compared to the prior year quarter levels and were impacted by the elimination of certain mechanical and electronic content within the Company's lockset products to help reduce vehicle cost. As a result, sales to Ford Motor Company and DaimlerChrysler Corporation decreased in the current quarter compared to the prior year quarter, with Ford at $10.1 million compared to $10.7 million and DaimlerChrysler at $8.1 million compared to $9.1 million. Sales to Mitsubishi Motor Manufacturing of America, Inc. remained flat at $2.1 million, while sales to General Motors increased to $15.7 million compared to $15.1 million, and sales to Delphi Corporation increased to $7.5 million compared to $6.9 million in the prior year quarter. The increase in sales to General Motors and Delphi was primarily the result of increased vehicle production more than offsetting the impact of the elimination of certain mechanical and electronic content as previously discussed. Gross profit as a percentage of net sales was 22.5 percent in the current quarter compared to 20.5 percent in the prior year quarter. The improvement is primarily due to the Company's on-going manufacturing process improvements at its Milwaukee, Wisconsin and Juarez, Mexico facilities along with a favorable Mexican peso to U.S. dollar exchange rate. Engineering, selling and administrative expenses were relatively consistent between quarters and totaled $4.6 million in the current quarter compared to $4.9 million in the prior year quarter. Income from operations was $6.4 million in the current quarter compared to $5.2 million in the prior year quarter. The increase is primarily the result of the improved gross profit margin as discussed above. The effective income tax rate for the current quarter was 37.0 percent, which is consistent with the prior year quarter. The overall effective tax rate differs from the federal statutory tax rate primarily due to the effects of state income taxes. Six months ended December 29, 2002 compared to the six months ended December 30, 2001 Net sales for the six months ended December 29, 2002, were $96.6 million compared to net sales of $98.6 million for the six months ended December 30, 2001. The current period sales were affected by several factors. Higher overall customer vehicle production as compared to the prior year period was offset by the elimination of certain mechanical and electronic content within the Company's lockset products to help reduce vehicle cost. In addition, the prior year period sales included the after-effects of a June 2001 strike at the Company's Milwaukee facility, which resulted in approximately $1.5 million of past due June orders being shipped in addition to 7
regular quarterly orders. The change in sales to the Company's largest customers in the current year period compared to the prior year period include General Motors Corporation at $30.5 million compared to $30.8 million, Delphi Corporation at $14.3 million compared to $14.0 million, DaimlerChrysler Corporation at $16.5 million compared to $17.8 million, Ford Motor Company at $20.0 million compared to $19.6 million and Mitsubishi Motor Manufacturing of America, Inc. at $4.5 million compared to $4.9 million. Gross profit as a percentage of net sales was 23.1 percent in the current year period compared to 20.5 percent in the prior year period. The improvement is primarily due to the Company's on-going manufacturing process improvements at its Milwaukee, Wisconsin and Juarez, Mexico facilities along with a favorable Mexican peso to U.S. dollar exchange rate. In addition, during the early part of the prior year period, additional costs were incurred to expedite past due orders and rebuild inventories depleted during the June 2001 strike at the Milwaukee facility that reduced gross profit margins. Engineering, selling and administrative expenses were relatively consistent between periods and totaled $9.2 million in the six months ended December 29, 2002, compared to $9.6 million in the prior year period. Income from operations was $13.1 million in the six months ended December 29, 2002, compared to $10.5 million in the prior year period. The increase is primarily the result of the improved gross profit margin discussed above. The effective income tax rate for the current year period was 37.0 percent, which is consistent with the prior year period. 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 $6.2 million in the six months ended December 29, 2002. In the six months ended December 30, 2001, the Company generated $14.6 million in cash from operating activities. The decreased generation of cash between periods is primarily due to the timing of the payment of accounts payable which is based on normal payment terms as well as financial results, which impact the bonus amounts paid to eligible associates. The Company's investment in accounts receivable decreased by approximately $2.2 million to $25.7 million at December 29, 2002, as compared to $27.9 million at June 30, 2002, primarily due to a decrease in sales levels in December resulting from the scheduled holiday shut-down. Inventories increased by approximately $2.6 million at December 29, 2002, as compared to June 30, 2002 in support of increased customer production levels. Capital expenditures during the six months ended December 29, 2002, were $1.4 million compared to $2.3 million during the six months ended December 30, 2001. The Company anticipates that capital expenditures will be approximately $5 million in 2003, 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 3,039,395 outstanding shares. A total of 2,752,192 shares have been repurchased as of December 29, 2002, at a cost of approximately $95.3 million. There were no repurchases during the quarter ended December 29, 2002. Additional repurchases may occur from time to time. Funding for the repurchases was provided by cash flow from operations. The Company has a $20.0 million unsecured, revolving credit facility (the "Credit Facility"), which expires October 31, 2003. The Company previously had an additional $30 million under this Credit Facility, which expired October 31, 2002. The Company is currently in the process of negotiating a new credit facility. There were no outstanding borrowings under the Credit Facility at December 29, 2002. Interest on borrowings under 8
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 covenants 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 is 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 fluctuations in the market price of zinc, which the Company uses at a rate of approximately 1 million pounds per month, and inflation in Mexico, which impacts the U.S. dollar costs of the Mexican assembly operations. Mexican Operations The Company has separate assembly and key finishing 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." Joint Ventures 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 200 million EUROs in their 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. In November 2001, WITTE-STRATTEC do Brasil, a joint venture formed between WITTE-STRATTEC LLC and Ifer Estamparia e Ferramentaria Ltda. was formed to service customers in South America. On March 1, 2002, WITTE-STRATTEC LLC completed the formation of WITTE-STRATTEC China, a joint venture between WITTE-STRATTEC LLC and a unit of Elitech Technology Co. Ltd. of Taiwan. WITTE-STRATTEC China, located in Fuzhou, People's Republic of China, will be the base of operations to service the Company's automotive customers in the Asian market. The joint ventures are accounted for on the equity basis of accounting. The activities related to the joint ventures did not have a material impact on the December 29, 2002 or December 30, 2001 financial statements. Critical Accounting Policies and Estimates The Company believes the following represents its critical accounting policies: Pension and Post-Retirement Health Benefits -- The determination of the obligation and expense for pension and post-retirement health benefits is dependent on the selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions include, among others, the discount rate, expected long term rate of return on plan assets and rates of increase in compensation and health care costs. In accordance with accounting principles generally accepted in the United States of America, actual results that 9
differ from these assumptions are accumulated and amortized over future periods. While the Company believes that the assumptions used are appropriate, significant differences in the actual experience or significant changes in the assumptions may materially affect the pension and post-retirement health obligations and future expense. Other Reserves -- The Company has reserves such as an environmental reserve, returns reserve, incurred but not reported claim reserves for self-insured health plans, and a repair and maintenance supply parts reserve. These reserves require the use of estimates and judgement with regard to risk exposure, ultimate liability, and net realizable value. The Company believes such reserves are estimated using consistent and appropriate methods. However, changes to the assumptions could materially affect the recorded reserves. Recently Issued Accounting Pronouncements In June 2002, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which is effective for exit or disposal activities initiated after December 31, 2002. The provisions of this Statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred as opposed to the date management commits to an exit plan. The adoption of SFAS No. 146 is not expected to have an impact on the Company's financial position or its results of operations. In December 2002, the Financial Accounting Standards Board authorized the issuance of SFAS No. 148, "Accounting for Stock-Based Compensation." This statement amends SFAS No. 123, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company does not intend to adopt the recognition provisions of SFAS No. 123, as amended by SFAS No. 148. In November 2002, the Financial Accounting Standards Board authorized the issuance of Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others." Interpretation No. 45, the accounting under which is effective for guarantees issued or modified after December 31, 2002, also requires additional disclosure. The Company has not yet completed the evaluation of the application of the accounting provisions of these new rules. Risk Factors The Company understands it is subject to the following risk factors based on its operations and the nature of the automotive industry in which it operates: Loss of Significant Customers or Vehicle Content -- Sales to General Motors Corporation, Ford Motor Company, DaimlerChrysler Corporation and Delphi Corporation represent approximately 85 percent of the Company's annual sales. The contracts with these customers provide for supplying the customer's requirements for a particular model. The contracts do not specify a specific quantity of parts. The contracts typically cover the life of a model, which averages approximately 4 to 5 years. Certain customer models may also be market tested annually. Therefore, the loss of any one of these customers, the loss of a contract for a specific vehicle model, reduction in vehicle content, technological changes or a significant reduction in demand for certain key models could have a material adverse effect on the Company's existing and future revenues and net income. Cost Reduction -- There is continuing pressure from the Company's major customers to reduce costs, including the cost of components purchased from outside suppliers. If the Company is unable to generate sufficient production cost savings in the future to offset programmed price reductions, the Company's gross margin and profitability would be adversely affected. 10
Cyclicality and Seasonality in the Automotive Market -- The automotive market is highly cyclical and is dependent on consumer spending and to a certain extent on customer sales incentives. Economic factors adversely affecting consumer demand for automobiles and automotive production could adversely impact the Company's revenues and net income. The Company typically experiences decreased revenue and operating income during the first fiscal quarter of each year due to the impact of scheduled customer plant shut-downs in July and new model changeovers. Foreign Operations -- As discussed under Joint Ventures, the Company has joint venture investments in both Brazil and China. These operations are currently not material. However, as these operations expand, their success will depend, in part, on the ability to anticipate and effectively manage certain risks inherent in international operations including: enforcing agreements and collecting receivables through certain foreign legal systems, payment cycles of foreign customers, compliance with foreign tax laws, general economic and political conditions in these countries, and compliance with foreign laws and regulations. Currency Exchange Rate Fluctuations -- The Company incurs a portion of its expenses in Mexican pesos. Exchange rate fluctuations between the U.S. dollar and the Mexican peso could have an adverse effect on financial results. Sources of and Fluctuations in Market Prices of Raw Materials -- The primary raw materials used by the Company are high-grade zinc, brass, steel and plastic resins. 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 of raw materials are reliable and adequate for its needs. However, the development of future sourcing issues related to the availability of these materials as well as significant fluctuations in the market prices of these materials may have an adverse affect on the Company's financial results. Disruptions Due to Work Stoppages and Other Labor Matters -- The Company's major customers and many of their suppliers have unionized work forces. Work stoppages or slow-downs experienced by the Company's customers or their suppliers could result in slow-downs or closures of assembly plants where the Company's products are included in assembled vehicles. For example, strikes by the United Auto Workers led to a shut-down of most of General Motors Corporation's North American assembly plants in June and July of 1998. A material work stoppage experienced by one or more of the Company's customers could have an adverse effect on the Company's business and its financial results. In addition, all production associates at the Company's Milwaukee facility are unionized. A 16-day strike by these associates in June 2001 resulted in increased costs by the Company as all salaried associates worked with additional outside resources to produce the components necessary to meet customer requirements. The current contract with the unionized associates is effective through June 26, 2005. The Company may encounter further labor disruption after the effective date of this contract and may also encounter unionization efforts in its other plants or other types of labor conflicts, any of which could have an adverse effect on the Company's business and its financial results. Environmental and Safety Regulations -- The Company is subject to federal, state, local and foreign laws and other legal requirements related to the generation, storage, transport, treatment and disposal of materials as a result of its manufacturing and assembly operations. These laws include the Resource Conservation and Recovery Act (as amended), the Clean Air Act (as amended), and the Comprehensive Environmental Response, Compensation and Liability Act (as amended). The Company has an environmental management system that is ISO-14001 certified. The Company believes that its existing environmental management system is adequate and it has no current plans for substantial capital expenditures in the environmental area. An environmental reserve was established in 1995 for estimated costs to remediate a site at the Company's Milwaukee facility that was contaminated by a former above-ground solvent storage tank, located on the east side of the facility. The contamination occurred in 1985. This is being monitored 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 11
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. Highly Competitive Automotive Supply Industry -- The automotive component supply industry is highly competitive. Some of the Company's competitors are companies, or divisions or subsidiaries of companies, that are larger than the Company and have greater financial and other resources. The Company's products may not be able to compete successfully with the products of these other companies, which could result in loss of customers and, as a result, decreased revenues and profitability. In addition, the Company's competitive position in the North American automotive component supply industry could be adversely affected in the event that it is unsuccessful in making strategic acquisitions, alliances or establishing joint ventures that would enable it to expand globally. The Company principally competes for new business at the beginning of the development of new models and upon the redesign of existing models by its major customers. New model development generally begins two to five years prior to the marketing of such new models to the public. The failure to obtain new business on new models or to retain or increase business on redesigned existing models could adversely affect the Company's business and financial results. In addition, as a result of relatively long lead times for many of its components, it may be difficult in the short-term for the Company to obtain new sales to replace any unexpected decline in the sale of existing products. The Company may incur significant product development expense in preparing to meet anticipated customer requirements which may not be recovered. Program Volume and Pricing Fluctuations -- The Company incurs costs and makes capital expenditures for new program awards based upon certain estimates of production volumes over the anticipated program life for certain vehicles. While the Company attempts to establish the price of its products for variances in production volumes, if the actual production of certain vehicle models is significantly less than planned, the Company's revenues and net income may be adversely affected. The Company cannot predict its customers' demands for the products it supplies either in the aggregate or for particular reporting periods. Investments in Customer Program Specific Assets -- The Company makes investments in machinery and equipment used exclusively to manufacture products for specific customer programs. This machinery and equipment is capitalized and depreciated over the expected useful life of each respective asset. Therefore, the loss of any one of the Company's major customers or specific vehicle models could result in impairment in the value of these assets and have a material adverse effect on the Company's financial results. Prospective Information A number of the matters and subject areas discussed in this Form 10-Q 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," "would," "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, 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, costs of operations and other matters described under "Risk Factors" above. 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. 12
The forward-looking statements made herein are only made as of the date of this Form 10-Q 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 Form 10-Q. Item 3 Quantitative and Qualitative Disclosures About Market Risk The Company does not utilize financial instruments for trading purposes and holds no derivative financial instruments which would expose the Company to significant market risk. The Company has not had outstanding borrowings since December 1997. The Company has been in an investment position since this time and expects to remain in an investment position for the foreseeable future. There is therefore no significant exposure to market risk for changes in interest rates. The Company is subject to foreign currency exchange rate exposure related to the Mexican assembly operations. Item 4 Controls and Procedures Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's chief executive officer and chief financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended). Based upon that evaluation, the chief executive officer and chief financial officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company's periodic SEC filings. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date the Company carried out its evaluation. 13
Part II Other Information Item 1 Legal Proceedings - None Item 2 Changes in Securities and Use of Proceeds - None Item 3 Defaults Upon Senior Securities - None Item 4 Submission of Matters to a Vote of Security Holders At the Company's Annual Meeting held on October 8, 2002, the shareholders voted to elect Michael J. Koss and John G. Cahill as directors for a term to expire in 2005. The number of votes cast for and withheld in the election of Michael J. Koss were 3,083,212 and 495,293, respectively. The number of votes cast for and withheld in the election of John G. Cahill were 3,300,030 and 278,474, respectively. Directors whose term continued after the meeting include Harold M. Stratton II and Robert Feitler each with a term expiring in 2003, and Frank J. Krejci with a term expiring in 2004. The shareholders also voted to approve an amendment to the STRATTEC SECURITY CORPORATION Stock Incentive Plan to increase the aggregate number of shares of the Company's Common Stock that may be issued or transferred upon exercise, payment or vesting of stock options and other equity incentive awards granted under such plan from 1,200,000 to 1,600,000. The number of votes cast for, against and withheld in the approval of the amendment were 2,115,248, 1,068,329 and 394,928, respectively. Item 5 Other Information - None Item 6 Exhibits and Reports on Form 8-K (a) Exhibits 3.1* Amended and Restated Articles of Incorporation of the Company 3.2* By-Laws of the Company 4.1* Rights Agreement dated as of February 6, 1995 between the Company and Firstar Trust Company, as Rights Agent 10.1 STRATTEC SECURITY CORPORATION Stock Incentive Plan, as amended 99.1 Certification Pursuant to 18 U.S.C. Section 1350 (b) Reports on Form 8-K - None - ---------------------------- * Incorporated by reference to Amendment No. 2 to the Company's Form 10 filed on February 6, 1995. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. STRATTEC SECURITY CORPORATION (Registrant) Date: February 5, 2003 By /S/ Patrick J. Hansen ----------------------- Patrick J. Hansen Vice President, Chief Financial Officer, Treasurer and Secretary (Principal Accounting and Financial Officer) 14
CERTIFICATION I, Harold M. Stratton II, certify that: 1. I have reviewed this quarterly report on Form 10-Q of STRATTEC SECURITY CORPORATION; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: February 5, 2003 /s/ Harold M. Stratton II -------------------------------------- Harold M. Stratton II, Chairman and Chief Executive Officer 15
CERTIFICATION I, Patrick J. Hansen, certify that: 1. I have reviewed this quarterly report on Form 10-Q of STRATTEC SECURITY CORPORATION; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: February 5, 2003 /s/ Patrick J. Hansen ------------------------------------ Patrick J. Hansen, Chief Financial Officer 16
STRATTEC SECURITY CORPORATION STOCK INCENTIVE PLAN (As amended effective October 8, 2002) 1. Purpose; Definitions. The purpose of the Plan is to enable key employees of the Company, its subsidiaries and affiliates to participate in the Company's future by offering them proprietary interests in the Company. The Plan also provides a means through which the Company can attract and retain key employees of merit. For purposes of the Plan, the following terms are defined as set forth below: (a) "Board" means the Board of Directors of the Company. (b) "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. (c) "Commission" means the Securities and Exchange Commission or any successor agency. (d) "Committee" means the Committee referred to in Section 2. (e) "Company" means STRATTEC SECURITY CORPORATION, a corporation organized under the laws of the State of Wisconsin, or any successor corporation. (f) "Disability" means permanent and total disability as determined under procedures established by the Committee for purposes of the Plan. (g) "Early Retirement" means retirement, with the consent of and for purposes of the Company, from active employment with the Company, a subsidiary or affiliate pursuant to the early retirement provisions of the applicable pension plan of such employer. (h) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, and any successor thereto. (i) "Fair Market Value" means, except as provided in Sections 5(k) and 6(b)(ii): (i) with respect to Non-Qualified Stock Options granted in connection with the distribution of Stock made by Briggs & Stratton Corporation to its shareholders, the average closing price of the Stock on the NASDAQ National Market System during the five trading days after the effective date of such distribution; and (ii) in all other instances, the mean, as of any given date, between the highest and lowest reported sales prices of the Stock on the NASDAQ National Market System or, if no such sale of Stock occurs on the NASDAQ National Market System on such date, the fair market value of the Stock as determined by the Committee in good faith.
(j) "Incentive Stock Option" means any Stock Option intended to be and designated as an "incentive stock option" within the meaning of Section 422 of the Code. (k) "Non-Employee Director" shall have the meaning set forth in Rule 16b-3(b)(3)(i), as promulgated by the Commission under the Exchange Act, or any successor definition adopted by the Commission. (l) "Non-Qualified Stock Option" means any Stock Option that is not an Incentive Stock Option. (m) "Normal Retirement" means retirement from active employment with the Company, a subsidiary or affiliate at or after age 65. (n) "Plan" means the STRATTEC SECURITY CORPORATION Stock Incentive Plan, as set forth herein and as hereinafter amended from time to time. (o) "Retirement" means Normal Retirement or Early Retirement. (p) "Rule 16b-3" means Rule 16b-3, as promulgated by the Commission under Section 16(b) of the Exchange Act, as amended from time to time. (q) "Stock" means the Common Stock, $.01 par value per share, of the Company. (r) "Stock Appreciation Right" means a right granted under Section 6. (s) "Stock Option" or "Option" means an Option or Leveraged Stock Option granted under Section 5. In addition, the terms "Change in Control" and "Change in Control Price" have the meanings set forth in Sections 7(b) and (c), respectively, and other capitalized terms used herein shall have the meanings ascribed to such terms in the relevant section of this Plan. 2. Administration. The Plan shall be administered by the Compensation Committee of the Board or such other committee of the Board, composed solely of two or more Non-Employee Directors, who shall be appointed by the Board and who shall serve at the pleasure of the Board. If at any time no Committee shall be in office, the functions of the Committee specified in the Plan shall be exercised by the Board. The Committee shall have plenary authority to grant to eligible employees, pursuant to the terms of the Plan, Stock Options and Stock Appreciation Rights. In particular, the Committee shall have the authority, subject to the terms of the Plan: 2
(a) to select the officers and other key employees to whom Stock Options and Stock Appreciation Rights may from time to time be granted; (b) to determine whether and to what extent Incentive Stock Options, Non-Qualified Stock Options and Stock Appreciation Rights or any combination thereof are to be granted hereunder, (c) to determine the number of shares to be covered by each award granted hereunder, (d) to determine the terms and conditions of any award granted hereunder (including, but not limited to, the share price, any restriction or limitation and any vesting acceleration or forfeiture waiver regarding any Stock Option or other award and the shares of Stock relating thereto, based on such factors as the Committee shall determine); (e) to adjust the performance goals and measurements applicable to performance-based awards pursuant to the terms of the Plan; (f) to determine under what circumstances a Stock Option may be settled in cash under Section 5(k); and (g) to determine to what extent and under what circumstances Stock and other amounts payable with respect to an award shall be deferred. The Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable, to interpret the terms and provisions of the Plan and any award issued under the Plan (and any agreement relating thereto) and to otherwise supervise the administration of the Plan. The Committee may act only by a majority of its members then in office, except that the members thereof may authorize any one or more of their number or any officer of the Company to execute and deliver documents on behalf of the Committee. Any determination made by the Committee pursuant to the provisions of the Plan with respect to any award shall be made in its sole discretion at the time of the grant of the award or, unless in contravention of any express term of the Plan, at any time thereafter. All decisions made by the Committee pursuant to the provisions of the Plan shall be final and binding on all persons, including the Company and Plan participants. 3. Stock Subject to Plan. The total number of shares of Stock reserved and available for distribution under the Plan shall be 1,600,000 shares. Such shares may consist, in whole or in part, of authorized and unissued shares or treasury shares. Subject to Section 6(b)(iv), if any shares of Stock that have been optioned cease to be subject to a Stock Option or if any Stock Option or other award otherwise terminates 3
without a payment being made to the participant in the form of Stock, such shares shall again be available for distribution in connection with awards under the Plan. In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, stock split or other change in corporate structure affecting the Stock, such substitution or adjustments shall be made in the aggregate number of shares reserved for issuance under the Plan, in the number and option price of shares subject to outstanding Stock Options and in the number of shares subject to other outstanding awards granted under the Plan as may be determined to be appropriate by the Board, in its sole discretion; provided, however, that the number of shares subject to any award shall always be a whole number. Such adjusted option price shall also be used to determine the amount payable by the Company upon the exercise of any Stock Appreciation Right associated with any Stock Option. 4. Eligibility. Officers and other key employees of the Company, its subsidiaries and affiliates (but excluding members of the Committee and any person who serves only as a director) who are responsible for or contribute to the management, growth and profitability of the business of the Company, its subsidiaries or affiliates are eligible to be granted awards under the Plan. 5. Stock Options. Stock Options may be granted alone or in addition to other awards granted under the Plan and may be of two types: Incentive Stock Options and Non-Qualified Stock Options. Any Stock Option granted under the Plan shall be in such form as the Committee may from time to time approve. The Committee shall have the authority to grant to any optionee Incentive Stock Options, Non-Qualified Stock Options or both types of Stock Options (in each case with or without Stock Appreciation Rights). Incentive Stock Options may be granted only to employees of the Company and its subsidiaries (within the meaning of Section 425(f) of the Code). To the extent that any Stock Option does not qualify as an Incentive Stock Option, it shall constitute a separate Non-Qualified Stock Option. Stock Options shall be evidenced by option agreements, the terms and provisions of which may differ. An option agreement shall indicate on its face whether it is an agreement for Incentive Stock Options or NonQualified Stock Options. The grant of a Stock Option shall occur on the date the Committee by resolution selects an employee as a participant in any grant of Stock Options, determines the number of Stock Options to be granted to such employee and specifies the terms and provisions of the option agreement. The Company shall notify a participant of any grant of Stock Options, and a written option agreement or agreements shall be duly executed and delivered by the Company. Anything in the Plan to the contrary notwithstanding, no term of the Plan relating to Incentive Stock Options shall be interpreted, amended or altered nor shall any discretion or authority granted under the Plan be exercised so as to disqualify the Plan under 4
Section 422 of the Code or, without the consent of the optionee affected, to disqualify any Incentive Stock Option under such Section 422. Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions as the Committee shall deem desirable: (a) Option Price. The option price per share of Stock purchasable under a Stock Option shall be equal to the Fair Market Value of the Stock at time of grant or such higher price as shall be determined by the Committee at grant. (b) Option Term. The term of each Stock Option shall be fixed by the Committee, but no Incentive Stock Option shall be exercisable more than 10 years after the date the Option is granted, and no Non-Qualified Stock Option shall be exercisable more than 10 years and one day after the date the Option is granted. (c) Exercisability. Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee. If the Committee provides that any Stock Option is exercisable only in installments, the Committee may at any time waive such installment exercise provisions, in whole or in part, based on such factors as the Committee may determine. (d) Method of Exercise. Subject to the provisions of this Section 5, Stock Options may be exercised, in whole or in part, at any time during the option period by giving written notice of exercise to the Company specifying the number of shares to be purchased. Such notice shall be accompanied by the payment in full of the purchase price for such shares or, to the extent authorized by the Committee, by irrevocable instructions to a broker to promptly pay to the Company in full the purchase price for such shares. Such payment shall be made in cash, outstanding shares of Stock, in combinations thereof, or any other method of payment approved by the Committee; provided, however, that the deposit of any withholding tax shall be made in accordance with applicable law. If shares of Stock are being used in part or full payment for the shares to be acquired upon exercise of the Stock Option, such shares shall be valued for the purpose of such exchange as of the date of exercise of the Stock Option at the Fair Market Value of the shares. Any certificates evidencing shares of Stock used to pay the purchase price shall be accompanied by stock powers duly endorsed in blank by the registered holder of the certificate (with signatures thereon guaranteed). In the event the certificates tendered by the holder in such payment cover more shares than are required for such payment, the certificate shall also be accompanied by instructions from the holder to the Company's transfer agent with regard to the disposition of the balance of the shares covered thereby. No shares of Stock shall be issued until full payment therefor has been made. An optionee shall have all of the rights of a stockholder of the Company, including the right to vote the shares and the right to receive dividends, with respect to shares subject to the 5
Stock Option when the optionee has given written notice of exercise, has paid in full for such shares and, if requested, has given the representation described in Section 11(a). (e) Non-transferability of Options. No Stock Option shall be transferable by the optionee other than by will or by laws of descent and distribution, and all Stock Options shall be exercisable, during the optionee's lifetime, only by the optionee or by the guardian or legal representative of the optionee, it being understood that the terms "holder" and "optionee" include the guardian and legal representative of the optionee named in the option agreement and any person to whom an option is transferred by will or the laws of descent and distribution. (f) Termination by Death. Subject to Section 5(j), if an optionee's employment terminates by reason of death, any Stock Option held by such optionee may thereafter be exercised, to the extent then exercisable or on such accelerated basis as the Committee may determine, for a period of one year (or such other period as the Committee may specify) from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. (g) Termination by Reason of Disability. Subject to Section 5(j), if an optionee's employment terminates by reason of Disability, any Stock Option held by such optionee may thereafter be exercised by the optionee, to the extent it was exercisable at the time of termination or on such accelerated basis as the Committee may determine, for a period of three years (or such shorter period as the Committee may specify at grant) from the date of such termination of employment or until the expiration of the stated term of such Stock Option, whichever period is the shorter; provided, however, that, if the optionee dies within such three-year period (or such shorter period), any unexercised Stock Option held by such optionee shall, notwithstanding the expiration of such three-year (or such shorter) period, continue to be exercisable to the extent to which it was exercisable at the time of death for a period of 12 months from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. In the event of termination of employment by reason of Disability, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option will thereafter be treated as a Non-Qualified Stock Option. (h) Termination by Reason of Retirement. Subject to Section 5(j), if an optionee's employment terminates by reason of Retirement, any Stock Option held by such optionee may thereafter be exercised by the optionee, to the extent it was exercisable at the time of such Retirement or on such accelerated basis as the Committee may determine, for a period of three years (or such shorter period as the Committee may specify at grant) from the date of such termination of employment or until the expiration of the stated term of such Stock Option, whichever period is the shorter, provided, however, that, if the optionee dies within such three-year (or such shorter) period any unexercised Stock option held by such optionee shall, notwithstanding the expiration of such three-year (or such shorter) period, continue to be exercisable to the extent to which it was exercisable at the time of death for a period of 12 months from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. In the event of termination of employment by reason of 6
Retirement, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option will thereafter be treated as a Non-Qualified Stock Option. (i) Other Termination. Unless otherwise determined by the Committee, if an optionee's employment terminates for any reason other than death, Disability or Retirement, the Stock Option shall thereupon terminate, except that such Stock Option, to the extent then exercisable, may be exercised for the lesser of three months or the balance of such Stock Option's term if the optionee is involuntarily terminated by the Company, a subsidiary or affiliate without cause. Notwithstanding the foregoing, if an optionee's employment terminates at or after a Change in Control (as defined in Section 7(b)), other than by reason of death, Disability or Retirement, any Stock Option held by such optionee shall be exercisable for the lesser of (x) six months and one day, and (y) the balance of such Stock Option's term pursuant to Section 5(b). (j) Incentive Stock Option Limitations. To the extent required for "incentive stock option" status under Section 422 of the Code, the aggregate Fair Market Value (determined as of the time of grant) of the Stock with respect to which Incentive Stock Options granted after 1986 are exercisable for the first time by the optionee during any calendar year under the Plan and any other stock option plan of any subsidiary or parent corporation (within the meaning of Section 425 of the Code) after 1986 shall not exceed $100,000. The Committee is authorized to provide at grant that, to the extent permitted under Section 422 of the Code, if a participant's employment with the Company and its subsidiaries is terminated by reason of death, Disability or Retirement and the portion of any Incentive Stock Option that is otherwise exercisable during the post-termination period specified under Sections 5(f), (g), or (h), applied without regard to this Section 5(j), is greater than the portion of such option that is exercisable as an "incentive stock option" during such post-termination period under Section 422, such post-termination period shall automatically be extended (but not beyond the original option term) to the extent necessary to permit the optionee to exercise such Incentive Stock Option (either as an. Incentive Stock Option or, if exercised after the expiration periods that apply for the purposes of Section 422, as a Non-Qualified Stock Option). (k) Cashing Out of Option. On receipt of written notice of exercise, the Committee may elect to cash out all or part of the portion of any Stock Option to be exercised by paying the optionee an amount, in cash or Stock, equal to the excess of the Fair Market Value of the Stock over the option price (the "Spread Value") on the effective date of such cash out. Cash outs relating to options held by optionees who are actually or potentially subject to Section 16(b) of the Exchange Act shall comply with the provisions of Rule 16b-3, to the extent applicable, and, in the case of cash outs of Non-Qualified Stock Options held by such optionees, the Committee may determine Fair Market Value under the pricing rule set forth in Section 6(b)(ii). 7
(l) Leveraged Stock Options. Any of the shares of Stock reserved and available for distribution under the Plan may be used for grants of "Leveraged Stock Options" pursuant to the Company's Leveraged Stock Option Program described below (the "LSO Program"). (i) Objectives. The LSO Program is designed to build upon the Company's Economic Value Added Incentive Compensation Plan ("EVA Plan") by tying the interests of certain senior executives ("Senior Executives") to the long term consolidated results of the Company. In this way, the objectives of Senior Executives will be more closely aligned with the Company's shareholders. Whereas the EVA Plan provides for near and intermediate term rewards, the LSO Program provides a longer term focus by allowing Senior Executives to participate in the long-term appreciation in the equity value of the Company. In general, the LSO Program is structured such that each year an amount equivalent to the Total Bonus Payout under the EVA Plan is invested on behalf of Senior Executives in options on the Company's Stock ("LSOs"). These LSOs become exercisable after they have been held for three years, and they expire at the end of five years. The LSO Program is also structured so that a fair return must be provided to the Company's shareholders before the options become valuable. (ii) Leveraged Stock Option Grant. For fiscal 1995 and subsequent years, the dollar amount to be invested in LSOs for each Senior Executive shall be equal to the amount of each Senior Executive's Total Bonus Payout determined under the EVA Plan effective for the applicable fiscal year. The number of LSOs awarded shall be determined by dividing (a) the dollar amount of such LSO award by (b) 10% of the Fair Market Value of Company stock on the date of the grant, as determined by the Committee, rounded (up or down) to the nearest 10 shares. (iii) Term. All LSOs shall be exercisable beginning on the third anniversary of the date of. grant, and shall terminate on the fifth anniversary of the date of grant unless sooner exercised, unless the Committee determines other dates. (iv) Exercise Price. The exercise price for LSOs shall be the product of 90% of the Fair Market Value per share as determined above, times the sum taken to the fifth (5th) power of (a) 1, plus (b) the Estimated Annual Growth Rate, but in no event may the exercise price be less than Fair Market Value on the date of grant. The Estimated Annual Growth Rate (intended to represent annual percentage stock appreciation at least in the amount of the Company's cost of capital, with due consideration for dividends paid, risk and illiquidity) is the average daily closing 30-year U.S. Treasury bond yield rate for the month of April immediately preceding the relevant Plan year, plus 2%. So, Exercise Price = (.9 X FMV) X (1 + Estimated Annual Growth Rate)(5) Example: $15 share price; 9.75% Estimated Annual Growth Rate (7.75% 30-year U.S. Treasury bond rate, plus 2%): $13.50 (90% FMV) X (1.0975)(5) = $21.50 (v) Limitations on LSO Grants and Carryover. Notwithstanding subsection (l)(ii), the maximum number of LSOs that may be granted to all 8
Senior Executives for any Plan year during the five (5) year term of this LSO Program, shall be 80,000. In the event that the 80,000 limitation shall be in effect for any Plan year, the dollar amount to be invested for each Senior Executive shall be reduced by proration based on the aggregate Total Bonus Payouts of all Senior Executives so that the limitation is not exceeded. The amount of any such reduction shall be carried forward to subsequent years and invested in LSOs to the extent the annual limitation is not exceeded in such years. (vi) The Plan. Except as modified herein, LSOs are Incentive Stock Options to the extent they are eligible for treatment as such under Section 422 of the Internal Revenue Code. If not eligible for Incentive Stock Option treatment, the LSOs shall constitute Non-Qualified Stock Options. Except as specifically modified herein, LSOs shall be governed by the terms of the Plan. 6. Stock Appreciation Rights. (a) Grant and Exercise. Stock Appreciation Rights may be granted in conjunction with all or part of any Stock Option granted under the Plan. In the case of a Non-Qualified Stock Option, such rights may be granted either at or after the time of grant of such Stock Option. In the case of an Incentive Stock Option, such rights may be granted only at the time of grant of such Stock Option. A Stock Appreciation Right or applicable portion thereof granted with respect to a given Stock Option shall terminate and no longer be exercisable upon the termination or exercise of the related Stock Option, except that, unless otherwise determined by the Committee at the time of grant, a Stock Appreciation Right granted with respect to less than the full number of shares covered by a related Stock Option shall not be reduced until the number of shares covered by an exercise or termination of the related Stock Option exceeds the number of shares not covered by the Stock Appreciation Right. A Stock Appreciation Right may be exercised by an optionee in accordance with Section 6(b) by surrendering the applicable portion of the related Stock Option in accordance with procedures established by the Committee. Upon such exercise and surrender, the optionee shall be entitled to receive an amount determined in the manner prescribed in Section 6(b). Stock Options which have been so surrendered shall no longer be exercisable to the extent the related Stock Appreciation Rights have been exercised. (b) Terms and Conditions. Stock Appreciation Rights shall be subject to such terms and conditions as shall be determined by the Committee, including the following: (i) Stock Appreciation Rights shall be exercisable only at such time or times and to the extent that the Stock Options to which they relate are exercisable in accordance with the provisions of Section 5 and this Section 6. (ii) Upon the exercise of a Stock Appreciation Right, an optionee shall be entitled to receive an amount in cash, shares of Stock or both equal in value to the excess of the Fair Market Value of one share of Stock over the option price per share 9
specified in the related Stock Option multiplied by the number of shares in respect of which the Stock Appreciation Right shall have been exercised, with the Committee having the right to determine the form of payment. In the case of Stock Appreciation Rights relating to Stock Options held by optionees who are actually or potentially subject to Section 16(b) of the Exchange Act, the Committee may require that such Stock Appreciation Rights be exercised only in accordance with the applicable provisions of Rule 16b-3. (iii) Stock Appreciation Rights shall be transferable only when and to the extent that the underlying Stock Option would be transferable under Section 5(e). (iv) Upon the exercise of a Stock Appreciation Right, the Stock Option or part thereof to which such Stock Appreciation Right is related shall be deemed to have been exercised for the purpose of the limitation set forth in Section 3 on the number of shares of Stock to be issued under the Plan, but only to the extent of the number of shares issued under the Stock Appreciation Right at the time of exercise based on the value of the Stock Appreciation Right at such time. 7. Change In Control Provisions. (a) Impact of Event. Notwithstanding any other provision of the Plan to the contrary, in the event of a Change in Control (as defined in Section 7(b)), any Stock Appreciation Rights and Stock Options outstanding as of the date such Change in Control is determined to have occurred and not then exercisable and vested shall become fully exercisable and vested to the full extent of the original grant. (b) Definition of Change in Control. For purposes of the Plan, a "Change in Control" shall mean the happening of any of the following events: (i) 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 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 in 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 described in clauses (i), (ii) and (iii) of paragraph (3) of this subsection (b) of this Section 7; or (ii) Individuals who, as of February 27, 1995, 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 February 27, 10
1995 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 (iii) 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, 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 (iv) 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 11
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. (c) Change in Control Price. For purposes of the Plan, "Change in Control Price" means the highest price per share paid in any transaction reported on the NASDAQ National Market System or paid or offered in any bona fide transaction related to a potential or actual change in control of the Company at any time during the preceding 60 day period as determined by the Committee, except that, in the case of Incentive Stock Options and Stock Appreciation Rights relating to Incentive Stock Options, such price shall be based only on transactions reported for the date on which the Committee decides to cash out such options. 8. Amendments and Termination. The Board may amend, alter or discontinue the Plan but no amendment, alteration or discontinuation shall be made (i) which would impair the rights of an optionee under a Stock Option or a recipient of a Stock Appreciation Right theretofore granted without the optionee's or recipient's consent or (ii) which, without the approval of the Company's stockholders, would: (a) except as expressly provided in the Plan, increase the total number of shares reserved for the purpose of the Plan; (b) except as expressly provided in the Plan, decrease the option price of any Stock Option to less than the Fair Market Value on the date of grant; (c) change the class of employees eligible to participate in the Plan; (d) extend the maximum option period under Section 5(b); (e) otherwise materially increase the benefits to participants in the Plan; or (f) amend Section 9 or this Section 8. The Committee may amend the terms of any Stock Option or other award theretofore granted, prospectively or retroactively, but no such amendment shall impair the rights of any holder without the holder's consent. Subject to the above provisions, the Board shall have authority to amend the Plan to take into account changes in law and tax and accounting rules, as well as other developments. 9. Repricing. Except for adjustments pursuant to Section 3, neither the per share option price for any Stock Option granted pursuant to Section 5 or the per share grant price 12
for any Stock Appreciation Right granted pursuant to Section 6 may be decreased after the date of grant nor may an outstanding Stock Option or an outstanding Stock Appreciation Right be surrendered to the Company as consideration for the grant of a new Stock Option or new Stock Appreciation Right with a lower exercise or grant price without the approval of the Company's stockholders. 10. Unfunded Status of Plan. It is presently intended that the Plan constitute an "unfunded" plan for incentive and deferred compensation. The Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Stock or make payments; provided, however, that, unless the Committee otherwise determines, the existence of such trusts or other arrangements is consistent with the "unfunded" status of the Plan. 11. General Provisions. (a) The Committee may require each person purchasing shares pursuant to a Stock Option to represent to and agree with the Company in writing that the optionee or participant is acquiring the shares without a view to the distribution thereof. The certificates for such shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer. All certificates for shares of Stock or other securities delivered under the Plan shall be subject to such stock transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations and other requirements of the Commission, any stock exchange upon which the Stock is then listed and any applicable federal or state securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (b) Nothing contained in this Plan shall prevent the Company, a subsidiary or affiliate from adopting other or additional compensation arrangements for its employees. (c) The adoption of the Plan shall not confer upon any employee any right to continued employment nor shall it interfere in any way with the right of the Company, a subsidiary or affiliate to terminate the employment of any employee at any time. (d) No later than the dates as of which an amount first becomes includable in the gross income of the participant for federal income tax purposes with respect to any award under the Plan, the participant shall pay to the Company, or make arrangements satisfactory to the Company regarding the payment of, any federal, state, local or foreign taxes of any kind required by law to be withheld with respect to such amount. Unless otherwise determined by the Company, withholding obligations may be settled with Stock, including Stock that is part of the award that gives rise to the withholding requirement. The obligations of the Company under the Plan shall be conditional on such payment or arrangements, and the Company, its subsidiaries and affiliates shall, to the extent permitted by law, have the right to deduct any such taxes from any payment otherwise due to the participant. 13
(e) At the time of grant, the Committee may provide in connection with any grant made under this Plan that the shares of Stock received as a result of such grant shall be subject to a right of first refusal pursuant to which the participant shall be required to offer to the Company any shares that the participant wishes to sell at the then Fair Market Value of the Stock, subject to such other terms and conditions as the Committee may specify at the time of grant. (f) The Committee shall establish such procedures as it deems appropriate for a participant to designate a beneficiary to whom any amounts payable in the event of the participant's death are to be paid. (g) The Plan and all awards made and actions taken thereunder shall be governed by and construed in accordance with the laws of the State of Wisconsin. 14
CERTIFICATION OF PERIODIC FINANCIAL REPORT PURSUANT TO 18 U.S.C. SECTION 1350 Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of STRATTEC SECURITY CORPORATION (the "Company") certifies that the Quarterly Report on Form 10-Q of the Company for the quarter ended December 29, 2002 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and information contained in that report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: February 5, 2003 /s/ Harold M. Stratton II -------------------------------------- Harold M. Stratton II, Chairman and Chief Executive Officer Date: February 5, 2003 /s/ Patrick J. Hansen -------------------------------------- Patrick J. Hansen, Chief Financial Officer This certification is made solely for purpose of 18 U.S.C. Section 1350, subject to the knowledge standard contained therein, and not for any other purpose.