<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended DECEMBER 31, 1998 Commission File No. 1-9328
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------ -------------
ECOLAB INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 41-0231510
- ------------------------------ ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
370 N. Wabasha Street, St. Paul, Minnesota 55102
------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (651) 293-2233
------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock, $1.00 par value New York Stock Exchange, Inc.
Pacific Exchange, Inc.
Preferred Stock Purchase Rights New York Stock Exchange, Inc.
Pacific Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
----- ------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
Aggregate market value of voting stock held by non-affiliates of Registrant
on March 16, 1999: $5,115,683,817 (see Item 12, on page 21 hereof). The
number of shares of Registrant's Common Stock, par value $1.00 per share,
outstanding as of March 16, 1999: 129,597,754 shares.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Registrant's Annual Report to Stockholders for the year
ended December 31, 1998 (hereinafter referred to as "Annual Report")
are incorporated by reference into Parts I, II and IV.
2. Portions of the Proxy Statement for the Annual Meeting of Stockholders
to be held May 14, 1999 and to be filed within 120 days after the
Registrant's fiscal year ended December 31, 1998 (hereinafter referred
to as "Proxy Statement") are incorporated by reference into Part III.
PART I
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements. In this Report on Form 10-K (including the
Management Discussion and Analysis incorporated into Item 7 hereof),
Management discusses expectations regarding future performance of the Company
which may include anticipated financial performance, business prospects,
prospects for international growth, investments in the sales and service
force, year 2000 issues, Euro conversion, the impact of legislation and
environmental compliance, the effect of litigation, production capability,
share repurchases, the effect of new accounting principles and similar
matters. Without limiting the foregoing, words or phrases such as "will
likely result," "are expected to," "will continue," "is anticipated," "we
believe," "estimate," "project" (including the negative or variations
thereof) or similar terminology, generally identify forward-looking
statements.
Forward-looking statements represent challenging goals for the Company. As
such, they are based on certain assumptions and estimates and are subject to
certain risks and uncertainties. The Company cautions that undue reliance
should not be placed on such forward-looking statements which speak only as
of the date made. In order to comply with the terms of the safe harbor, the
Company hereby identifies important factors which could affect the Company's
financial performance and could cause the Company's actual results for future
periods to differ materially from the anticipated results or other
expectations expressed in the forward-looking statements. These factors
should be considered, together with any similar risk factors or other
cautionary language which may be made in the section of this Report on Form
10-K containing the forward-looking statement.
Risks and uncertainties that may affect operating results and business
performance include: pricing flexibility; availability of adequate and
reasonably-priced raw materials; the occurrence of capacity constraints, or the
loss of a key supplier, which in either case limit the production of certain
products; ability to carry out the Company's acquisition strategy, including
difficulties in rationalizing acquired businesses and in realizing related cost
savings and other benefits; the costs and effects of year 2000 computer software
issues (described under the heading "Year 2000 Conversion" beginning on page 30
of the Financial Discussion incorporated from the Annual Report into Item 7
hereof); the costs and effects of complying with: (i) the significant
environmental laws and regulations which apply to the Company's operations and
facilities, (ii) government regulations relating to the manufacture, storage,
distribution and labeling of the Company's products and (iii)
-2-
<PAGE>
changes in tax, fiscal, governmental and other regulatory policies; economic
factors such as the worldwide economy, interest rates, currency movements,
Euro conversion and the development of markets; the occurrence of (i)
litigation or claims, (ii) natural or man-made disasters and (iii) severe
weather conditions affecting the food service and hospitality industry; loss
of, or changes in, executive management; the Company's ability to continue
product introductions and technological innovations; and other uncertainties
or risks reported from time-to-time in the Company's reports to the
Securities and Exchange Commission. In addition, the Company notes that its
stock price can be affected by fluctuations in quarterly earnings. Despite
favorable year-over-year quarterly comparisons in recent years, there can be
no assurances that earnings will continue to increase or that the degree of
improvement will meet investors' expectations.
The year 2000 issue is the result of computer programs having date-sensitive
software which may recognize a date using 00 as the year 1900 rather than the
year 2000. If not detected and corrected, this can result in system failure
or miscalculations causing disruptions of operations, including a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities. The year 2000 issue can arise at any point in the
Company's supply, manufacturing, processing, distribution and any financial
chains. Accordingly, the failure to resolve year 2000 issues could have a
material adverse impact on the Company. The Company has put in place plans
and processes (see "Year 2000 Conversion" on page 30 of the Financial
Discussion incorporated from the Annual Report into Item 7 hereof) which it
believes will be sufficient to evaluate and manage risk associated with year
2000 issues. However, estimates of year 2000 costs, time schedules and the
Company's belief that it can successfully resolve year 2000 issues are based
on presently available information and are subject to certain assumptions and
risks. These include the availability of necessary and trained personnel who
can be hired or retained on a contract basis, the ability to locate and
correct all relevant computer codes and, in particular, uncertainties
surrounding the ability of suppliers, vendors and customers to resolve their
year 2000 issues since their year 2000 conversion processes are not within
the Company's control. The ability of governmental agencies to resolve year
2000 issues is an additional risk and uncertainty.
ITEM 1. BUSINESS
ITEM 1(a) GENERAL DEVELOPMENT OF BUSINESS
Except where the context otherwise requires, the terms "Company" and
"Ecolab," as used herein, include Ecolab Inc. and its subsidiaries. Ecolab
Inc. was incorporated as a Delaware corporation in 1924. The Company's
fiscal year is the calendar year ending December 31.
The Company and Henkel KGaA of Dsseldorf, Germany ("Henkel"), each have a 50%
economic interest in a joint venture which operates institutional and
industrial cleaning and sanitizing businesses in Europe, and which is
referred to hereafter as the "Henkel-Ecolab Joint Venture" or "Joint
Venture." Strategic decisions concerning the Joint Venture require the
agreement of Henkel and the Company. Henkel has a tie-breaking vote on
certain matters pertaining to continuation of business in the event mutual
agreement is not reached. These include the appointment of the Joint Venture
senior executives and adoption of the annual business plan. The Company
accounts for its interest in the Henkel-Ecolab Joint Venture under the equity
method of accounting and therefore does not consolidate the Henkel-Ecolab
Joint Venture balance sheet accounts, revenues and expenses. Financial
statements of the Henkel-Ecolab Joint Venture as listed under Item 14, I(3)
of Part IV hereof are included as a part of this Report and a review of the
financial performance of the Joint Venture is found under the heading
"Henkel-Ecolab Joint Venture" contained in the Financial
-3-
<PAGE>
Discussion which is incorporated from the Annual Report into Item 7 hereof.
Except where the Henkel-Ecolab Joint Venture is specifically referred to, the
description of business in Part I does not include the business of the Joint
Venture.
During 1998, the Company continued to make business acquisitions which
broadened its product and service offerings in line with its Circle the
Customer - Circle the Globe strategy. The integration of the business of
Gibson Chemical Industries Limited located in Melbourne, Australia was
completed. The Company added commercial food equipment service and part
sales to its operations through the acquisition of GCS Service, Inc.
Additional products and services were added to the United States
Institutional and Food & Beverage business units and to the Company's
Japanese operations through business acquisitions. Detail on these
acquisitions is found under the heading "Business Acquisitions" in Note 6,
located on pages 40 and 41 of the Annual Report and incorporated into Item 14
hereof.
ITEM 1(b) FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS
The financial information about reportable segments appearing under the
heading "Operating Segments" in Note 15, located on pages 46 and 47 of the
Annual Report, is incorporated herein by reference.
ITEM 1(c) NARRATIVE DESCRIPTION OF BUSINESS
GENERAL: The Company is engaged in the development and marketing of premium
products and services for the hospitality, institutional and industrial
markets. The Company provides cleaning, sanitizing, pest elimination and
maintenance products, systems and services primarily to hotels and
restaurants, foodservice, healthcare and educational facilities, quickservice
(fast-food and other convenience store units), groceries, commercial and
institutional laundries, light industry, dairy plants and farms, and food and
beverage processors. A strong commitment to service is a distinguishing
characteristic of the Company.
The following description of business is based upon the Company's three
reportable segments ("segments") as reported in the Company's financial
statements. However, the Company pursues a "Circle the Customer - Circle the
Globe" strategy by developing relationships and partnerships with customers
who require a broad range of cleaning and sanitizing services. Therefore,
one customer may utilize the services of all three of the segments and there
is a degree of interdependence among the operating segments--particularly
between the International Cleaning and Sanitizing business and the United
States Cleaning and Sanitizing businesses.
UNITED STATES CLEANING AND SANITIZING SEGMENT
The "United States Cleaning and Sanitizing" segment is comprised of six
divisions which provide cleaning and sanitizing services to United States
markets.
INSTITUTIONAL: The Institutional Division is the Company's largest division
and sells specialized cleaners and sanitizers for washing dishes, glassware,
flatware, foodservice utensils and kitchen equipment ("warewashing"), for
on-premise laundries (typically used by customers having smaller machines and
laundry needs) and for general housekeeping functions, as well as dishwasher
racks and related kitchen sundries to the foodservice, lodging, educational
and healthcare industries and water filters to the foodservice industry. The
Division also provides pool and spa treatment
-4-
<PAGE>
programs for commercial and hospitality customers and products and services
for the vehicle wash industry. The Institutional Division also markets
various chemical dispensing device systems, which are made available to
customers, to dispense the Company's cleaners and sanitizers. Through its
Ecotemp offering, the Institutional Division markets, primarily to smaller
and mid-size customer units, a program comprised of energy-efficient
dishwashing machines, detergents, rinse additives and sanitizers including
full machine maintenance.
The Company believes it is the leading supplier of chemical warewashing
products to institutions in the United States.
The Institutional Division sells its products and services primarily through
Company-employed field sales and service personnel. However, the Company, to
a significant degree, also utilizes food-service distributors to market and
sell its products to smaller accounts or accounts which purchase through food
distributors and the Company provides the same service to accounts served by
food distributors as to direct customers.
KAY: The Kay Division supplies chemical cleaning and sanitizing products
primarily to the quick-service restaurant industry. This includes
traditional fast food restaurants but, increasingly, other retail locations
where "fast food" is prepared and served, such as convenience stores, airport
and shopping center kiosks, discount stores, stadiums, grocery store delis
and other venues. Kay's products include specialty and general purpose hard
surface cleaners, degreasers, sanitizers, polishes, hand care products and
assorted cleaning tools. Products are sold under the "Kay" brand or the
customer's private label. In addition, Kay supports its product sales with
employee training programs and technical support designed to meet the special
needs of its customers which have a relatively high employee turnover. Kay's
customized cleaning and sanitation programs are designed to reduce labor
costs and product usage while increasing sanitation levels, cleaning
performance, equipment life and safety levels.
Kay employs a direct field sales force which primarily calls upon national
and regional quickservice restaurant chains and franchisees, although the
sales are made to distributors who supply the chain or franchisee's
restaurants.
The Company believes that its Kay Division is the leading supplier of
chemical cleaning and sanitizing products to the quickservice restaurant
industry in the United States. While Kay's customer base has been growing,
Kay's business is largely dependent upon a limited number of major
quickservice restaurant chains and franchisees.
FOOD & BEVERAGE: The Food & Beverage Division addresses cleaning and
sanitation at the start of the food chain to facilitate the production of
products safe for human consumption. The Division provides detergents,
cleaners, sanitizers, lubricants, animal health and water treatment products,
as well as cleaning systems, electronic dispensers and chemical injectors for
the application of chemical products, primarily to dairy plants, dairy,
poultry and swine farms, breweries, soft-drink bottling plants, and meat,
poultry and other food processors as well as to pharmaceutical and cosmetic
plants. The Food & Beverage Division also designs, engineers and installs CIP
("clean-in-place") process control systems and facility cleaning systems to
its customer base. Farm products (which include bovine teat products) are
sold through dealers and distributors, while plant products are sold
primarily by the Company's field sales personnel. The Company believes that
it is one of the leading suppliers of cleaning and sanitizing products to the
dairy plant, dairy farm and beverage processor industries in the United
States.
-5-
<PAGE>
TEXTILE CARE: The Textile Care Division provides chemical laundry products
and proprietary dispensing systems, as well as related services, to large
institutional and commercial laundries and to certain smaller laundry
operations. Typically these customers process a minimum of 1,000,000 pounds
of linen each year and include free-standing laundry plants used by
institutions such as hotels, restaurants and healthcare facilities as well as
industrial, textile rental and shirt laundries. Products and services
include laundry cleaning and specialty products and related dispensing
equipment, which are marketed primarily through a Company-employed sales
force and, to a lesser extent, through distributors. The Division's programs
are designed to meet the customer's need for exceptional cleaning, while
extending the useful life of linen and reducing the customer's overall
operating cost. Textile Care offerings complement the Institutional
Division's offerings to small-to-medium size on-premise laundry facilities.
PROFESSIONAL PRODUCTS: The Professional Products Division provides a full
line of infection- prevention and janitorial offerings that are sold to the
medical and janitorial markets in the United States. The Professional
Products Division sells its proprietary products under the brand names Airkem
(detergents, general purpose cleaners, carpet care, furniture polishes,
disinfectants, floor care products, hand soaps and odor counteractants) and
Huntington (infection control and gym floor products).
The Company believes it is among the largest suppliers of
infection-prevention and general cleaners to the United States healthcare
industry as well as one of the market leaders in the overall United States
janitorial market. Products are sold through a Company-employed sales force
as well as a network of independent manufacturing representatives in both
janitorial and medical markets who sell products and services to the
institutional, healthcare and industrial marketplaces. A private-label
program also manufactures non-proprietary janitorial-related products for
resale by major distributor organizations and infection prevention products
to companies selling into consumer markets. In addition, the Division,
through its JaniSource operation, markets brand name products for sale
through mass distribution.
WATER CARE SERVICES: The Water Care Services Division expands the Company's
"Circle the Customer - Circle the Globe" strategy by adding an offering which
is critical to companies in the Company's customer base--water treatment
programs. The Water Care Services Division provides water and wastewater
treatment products, services and systems for commercial/institutional
customers (hospitals, healthcare, commercial real estate, government,
shopping malls and commercial laundries) and light industry (food and
beverage accounts, textile mills, electronic plants and other industries).
As a facet of its growth strategy, Water Care Services works closely with the
Company's Institutional, Textile Care and Food & Beverage Divisions to offer
customized water care strategies to their accounts that have water care
needs, primarily to treat water used in heating and cooling systems and
manufacturing processes and to treat waste water.
-6-
<PAGE>
UNITED STATES OTHER SERVICES SEGMENT
The "United States Other Services" segment is comprised of three business
units: Pest Elimination Division; Jackson Equipment and GCS Service, Inc. In
general, all three businesses provide service or equipment which can augment
or extend the Company's product offering to its business customers as a part
of the Circle the Customer approach.
PEST ELIMINATION: The Pest Elimination Division provides services for the
elimination and prevention of pests to restaurants, food and beverage
processors, educational and healthcare facilities, hotels and other
institutional and commercial customers. These services are sold and
performed by Company-employed sales and service personnel. The Pest
Elimination business acquires all of its insecticides and pesticides from
third-party vendors. The Company believes it is the largest provider of
premium pest elimination services to institutions in the United States.
JACKSON MSC: Jackson MSC designs, manufactures and markets dishwashing and
customized machines for the foodservice industry. Jackson, which
manufactures its equipment at its Barbourville, Kentucky facility, sells
products for use by the Company's other businesses, most notably, the
energy-efficient dishwashing machines used by the Institutional Division in
its Ecotemp offering. Jackson also sells its equipment to third parties
through independent sales representatives and foodservice dealers.
GCS SERVICE, INC.: GCS provides commercial kitchen equipment repair
services. GCS, which was acquired by the acquisition of GCS Service, Inc. in
July, 1998 by the Company, offers both chain account customers of the Company
and equipment manufacturers the benefits of working with a single national
equipment repair service provider.
INTERNATIONAL CLEANING AND SANITIZING SEGMENT
The Company conducts business in approximately 35 countries outside of the
United States through wholly-owned subsidiaries or, in the case of Venezuela,
China and Indonesia, through majority-owned joint ventures with local
partners. In other countries, selected products are sold by the Company's
export operations to distributors, agents or licensees, although those sales
are not significant in terms of the Company's overall sales. The largest
International operations are located in Asia Pacific, Latin America and
Canada with smaller operations in Africa. With limited exceptions, the
Company does not conduct business directly in Europe. In that region,
business is conducted by the Henkel-Ecolab Joint Venture which is described
in Item 1(a) hereof under the heading "General Development of Business."
In general, the businesses conducted internationally are similar to those
conducted in the United States through the United States Cleaning and
Sanitizing Segment. Institutional and Food and Beverage businesses are the
largest businesses and are conducted at virtually all international
locations. The other businesses (Kay, Textile Care, Professional Products
and Water Care) are conducted less extensively in international locations.
Because a significant portion of Kay's international sales are to non-United
States units of United States-based quick service restaurant chains, a
substantial portion of Kay's international sales are made either to domestic
or internationally-located distributors who serve these chains. In general,
all of the businesses conducted in the United States Cleaning and Sanitizing
Segment are operated in Canada.
-7-
<PAGE>
International businesses are subject to the usual risks of foreign operations
including possible changes in trade and foreign investment laws, tax laws,
currency exchange rates and economic and political conditions abroad. The
profitability of International operations is lower than the profitability of
businesses in the United States. This is due to lower International
operating income margins caused by the difference in scale of International
operations where operating locations are smaller in size as well as to the
additional cost of operating in numerous and diverse foreign jurisdictions.
Proportionately larger investments in sales, administrative and technical
personnel are also necessary in order to facilitate growth in International
operations.
ADDITIONAL INFORMATION
COMPETITION: The Company's business units have two significant classes of
competitors. First, each business unit competes with a small number of large
companies selling directly or through distributors on a national or
international scale. Some of these large competitors have substantially
greater assets and financial resources than the Company. Second, all of the
Company's business units have numerous smaller regional or local competitors
which focus on more limited geographies, product lines, and/or end-user
segments.
The Company's objective is to achieve a significant presence in each of its
business markets. In general, competition is based on service, product
performance and price. The Company believes it competes principally by
providing superior value and differentiated products. Value is provided by
state-of-the-art, environmentally-compatible cleaning, sanitation and
maintenance products and systems coupled with high service standards and
dedication to customer satisfaction after the initial sale. This is made
possible, in part, by the Company's significant on-going investment in
training and technology development and by the Company's standard practice of
assisting customers in lowering operating costs and complying with safety,
environmental and sanitation regulations. In addition, the Company
emphasizes its ability to uniformly provide a variety of related premium
cleaning and sanitation services to its customers and to provide that level
of service to multiple locations of chain customer organizations worldwide.
This approach is succinctly stated in the Company's "Circle the Customer -
Circle the Globe" strategy which is discussed above in this Item 1(c) under
the heading "General."
SALES AND SERVICE: Products, systems and services are primarily marketed in
domestic and international markets by Company-trained sales and service
personnel who also advise and assist customers in the proper and efficient
use of the products and systems in order to meet a full range of cleaning and
sanitation needs. Distributors are utilized in several markets, as described
in the business unit descriptions found under the discussion of the three
reportable segments above.
CUSTOMERS AND CLASSES OF SERVICE: The Company believes that its business is
not materially dependent upon a single customer although, as described above
in this Item 1(c) under the description of the Kay business, Kay is largely
dependent upon a limited number of national and international quickservice
chains and franchisees. No material part of the Company's business is
subject to renegotiation or termination at the election of a governmental
unit. The Company sells two classes of products which each constitute 10
percent or more of its sales. Worldwide sales of warewashing products in
1998, 1997 and 1996 approximated 28, 31 and 31 percent, respectively, of the
Company's consolidated net sales. In addition, the Company, through its
Institutional and Textile Care businesses, sells laundry products and
services to a broad range of laundry customers. Total laundry sales in 1998,
1997 and 1996 approximated 13, 14 and 14 percent respectively, of the
Company's consolidated net sales.
-8-
<PAGE>
PATENTS AND TRADEMARKS: The Company owns a number of patents and trademarks.
Management does not believe that the Company's overall business is materially
dependent on any individual patent or trademark.
SEASONALITY: The Company's business has little seasonality.
WORKING CAPITAL: The Company has invested in the past, and will continue to
invest in the future, in merchandising equipment consisting primarily of
systems used by customers to dispense the Company's cleaning and sanitizing
products. The Company, otherwise, has no unusual working capital
requirements. The investment in merchandising equipment is discussed under
the heading "Cash Flows" located on page 33 of the Annual Report and
incorporated into Item 7 hereof.
MANUFACTURING AND DISTRIBUTION: The Company manufactures most of its products
and related equipment in Company-owned manufacturing facilities. Some are
also produced for the Company by third party contract manufacturers. Other
products and equipment are purchased from third party suppliers. Additional
information on product/equipment sourcing is found in the segment discussions
above and additional information on the Company's manufacturing facilities is
located in Item 2 under the heading "Properties" on pages 15 through 17
hereof.
Deliveries to customers are made from the Company's manufacturing plants and
a network of distribution centers and public warehouses. The Company uses
common carriers, its own delivery vehicles and distributors. Additional
information on the Company's plant and distribution facilities is located in
Item 2 under the heading "Properties" on pages 15 through 17 hereof.
RAW MATERIALS: Raw materials purchased for use in manufacturing products for
the Company are inorganic chemicals, including phosphates, silicates,
alkalies, salts and petrochemical-based materials, including surfactants and
solvents. These materials are generally purchased on an annual contract basis
from a diverse group of chemical manufacturers. Pesticides used by the Pest
Elimination Division are purchased as finished products under contract or
purchase order from the producers or their distributors. The Company also
purchases packaging materials for its manufactured products and components
for its specialized cleaning equipment and systems. Most raw materials, or
substitutes for those materials, used by the Company, with the exception of a
few specialized chemicals which the Company manufactures, are available from
several suppliers.
RESEARCH AND DEVELOPMENT: The Company's research and development program
consists principally of devising and testing new products, processes,
techniques and equipment, improving the efficiency of existing ones,
improving service program content, and evaluating the environmental
compatibility of products. Key disciplines include analytical and formulation
chemistry, microbiology, process and packaging engineering and product
dispensing technology. Substantially all of the Company's principal products
have been developed by its research, development and engineering personnel.
Note 12, entitled "Research Expenditures" located on page 44 of the Annual
Report, is incorporated herein by reference.
ENVIRONMENTAL CONSIDERATIONS: This discussion of Environmental
Considerations should be read in light of the Forward-Looking Statements and
Risk Factors discussion found under Part I at the beginning of this Report.
The Company's businesses are subject to various legislative enactments and
regulations relating to the protection of the environment. While the Company
cooperates with governmental authorities and takes commercially practicable
measures to meet regulatory
-9-
<PAGE>
requirements and avoid or limit environmental effects, some risks are
inherent in the Company's businesses. The Company's management believes
these are risks which the Company has in common with other companies engaged
in similar businesses. Among the risks are costs associated with managing
hazardous substances, waste disposal or plant site clean-up, fines and
penalties if the Company were found in violation of law, as well as
modifications, disruptions or discontinuation of certain operations or types
of operations. Although the Company is not currently aware of any such
circumstances, there can be no assurance that future legislation or
enforcement policies will not have a material adverse effect on the Company's
financial condition or results of operations. Environmental matters most
significant to the Company are discussed below.
PHOSPHOROUS LEGISLATION: Various laws and regulations have been enacted by
state, local and foreign jurisdictions pertaining to the sale of products
which contain phosphorous. The primary thrust of such laws and regulations
is to regulate the phosphorous content of home laundry detergents, a market
not served by the Company. However, certain of the Company's products are
affected by such laws and regulations, including some commercial laundry
and warewashing detergents, cleaners and sanitizers. Three types of
legislative restrictions are common: (1) labeling of phosphorous content,
(2) percentage limitation on the amount of phosphorous permitted and (3) a
ban on the use of phosphorous in certain products or in products sold for a
particular purpose. The Company has been able to comply with legislative
requirements and, where necessary, has developed products which, although
typically less effective than the products they replace, contain no
phosphorous or lower amounts of phosphorous to satisfy the legislative
limitations or bans. In limited geographic areas, the Company has obtained
a variance from existing zero-phosphorous legislation. Phosphorous
legislation has not had a material negative effect on the Company's
operations to date.
PESTICIDE LEGISLATION: Various federal and state environmental laws and
regulations govern the manufacture and/or use of pesticides. The Company
manufactures and sells certain disinfecting and sanitizing products which
kill microorganisms (bacteria, viruses, fungi) on environmental surfaces.
Such products constitute "pesticides" or "antimicrobial pesticides" under
the current definitions of the Federal Insecticide Fungicide and
Rodenticide Act ("FIFRA"), as amended by the Food Quality Protection Act of
1996, the principal federal statute governing the manufacture, labeling,
handling and use of pesticides. Approximately 350 of these products must
be registered with the United States Environmental Protection Agency
("EPA"). Registration entails the necessity to meet certain efficacy,
toxicity and labeling requirements and to pay initial and on-going
registration fees. In addition, each state in which these products are
sold requires registration and payment of a fee. In general, the states
impose no substantive requirements different from those required by FIFRA.
However, California does have its own regulatory scheme and certain other
states have regulatory schemes under consideration. In addition,
California imposes a tax on total pesticide sales in that State. While the
cost of complying with rules as to pesticides has not had a material
adverse effect on the Company's financial condition, liquidity or the
results of its operations to date, the costs and delays in receiving
necessary approvals for these products have increased in recent years. The
Company believes that the nature of these costs and regulatory delays are
similar to those encountered by other companies in similar businesses.
Total fees paid to the EPA and the states to obtain or maintain pesticide
registrations, and for the California
-10-
<PAGE>
tax, were approximately $1,386,000 in 1998. Such costs will increase
somewhat in 1999, but not in amounts which are expected to significantly
affect the Company's results of operations, financial position, or
liquidity.
In addition, the Company's Pest Elimination Division applies restricted-use
pesticides which it purchases from third parties. That Division must
comply with certain standards pertaining to the use of such pesticides and
to the licensing of employees who apply such pesticides. Such regulations
are enforced primarily by the states or local jurisdictions in conformity
with federal regulations. The Company has not experienced material
difficulties in complying with these requirements.
OTHER ENVIRONMENTAL LEGISLATION: The Company's manufacturing plants are
subject to federal, state, local or foreign jurisdiction laws and
regulations relating to discharge of hazardous substances into the
environment and to the transportation, handling and disposal of such
substances. The primary federal statutes that apply to the Company's
activities are the Clean Air Act, the Clean Water Act and the Resource
Conservation and Recovery Act ("RCRA"). The Company is also subject to the
Superfund Amendments and Reauthorization Act of 1986, which imposes certain
reporting requirements as to emissions of toxic substances into the air,
land and water. The Company makes capital investments and expenditures to
comply with environmental laws and regulations, to ensure employee safety
and to carry out its announced environmental stewardship principles. To
date, such expenditures have not had a significant adverse effect on the
financial condition of the Company or its results of operations. The
Company's capital expenditures for environmental control projects incurred
for 1998 were approximately $1,502,000 and approximately $2,553,000 has
been budgeted for 1999.
ENVIRONMENTAL REMEDIATION AND PROCEEDINGS: Along with numerous other
potentially responsible parties ("PRPs"), the Company is currently involved
with waste disposal site clean-up activities imposed by the federal
Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") or state equivalents at 14 waste disposal sites which received
nominal amounts of waste materials alleged to have been generated by the
Company or its subsidiaries. In general, under CERCLA, the Company and
each other PRP which actually contributes hazardous substances to a
superfund site are jointly and severally liable for the costs associated
with cleaning up the site. Customarily, the PRPs will work with the EPA to
agree and implement a plan for site remediation.
In addition to the 14 sites noted above, the Illinois Environmental
Protection Agency ("Agency"), in 1996, identified the Company, along with
two other corporations, as PRPs in connection with groundwater
contamination near the Company's South Beloit, Illinois manufacturing
facility. The U.S. Environmental Protection Agency has proposed listing
the site on the National Priority List of federal superfund sites. The
Company has denied liability and has requested that the Agency withdraw its
identification of the Company as a PRP. The Company has recently entered
into a tentative settlement with the EPA, the Agency, and the other two
corporations. The Company anticipates that this settlement will not have a
material effect on the Company's results of operations, financial position
or liquidity.
-11-
<PAGE>
Based on an analysis of the Company's experience with such environmental
proceedings, the Company's estimated share of all hazardous materials
deposited on the 15 sites referred to in the two preceding paragraphs, and
the Company's estimate of the contribution to be made by other PRPs which
the Company believes have the financial ability to pay their shares, the
Company has accrued its best estimate of the Company's future costs
relating to such known sites.
The New South Wales (Australia) Environmental Protection Authority has
identified a property owned by Maxwell Chemicals Pty. Limited, a subsidiary
of the Company, as subject to environmental impacts. A property in Georgia
owned by Puritan Services Inc., a subsidiary of the Company, also has been
identified as subject to environmental impacts. Remediation of a New
Jersey property owned by the Company is on-going as required by New Jersey
environmental authorities. The Company has accrued for estimated future
costs relating to these properties.
A legal action commenced in August, 1989 in the District Court in Zwolle,
Netherlands, by the Netherlands government against a former subsidiary of
the Company remains pending. Netherlands authorities are seeking monetary
damages to cover the cost of investigation and planned clean-up of soil and
groundwater contamination, allegedly resulting from the discharge of
wastewater and chemicals during a period ended in 1981, when the subsidiary
operated a plant on the site. Damages claimed are approximately
$5,000,000. The former subsidiary, now owned by the Henkel-Ecolab Joint
Venture, has denied liability and believes it complied with applicable
Netherlands law. The Company has agreed to indemnify the Henkel-Ecolab
Joint Venture as to any liability associated with this matter.
Accordingly, an accrual has been recorded, reflecting management's best
estimate of future costs.
During 1998, the Company's net expenditures for contamination remediation
were approximately $475,000. The accrual at the end of 1998 for future
remediation expenditures was approximately $13,000,000. The Company
reviews its exposure for contamination remediation costs periodically and
its accruals are adjusted as considered appropriate. In establishing
accruals, potential insurance reimbursements are not included. While the
final resolution of these issues could result in costs below or above
current accruals and, therefore, have an impact on the Company's
consolidated financial results in a future reporting period, the Company
believes the ultimate resolution of these matters will not have a
significant effect on the Company's consolidated financial position or
liquidity or, on an on-going basis, its results of operations.
In addition, the Company has retained responsibility for certain sites
where the Company's former ChemLawn business is a PRP. Currently there are
eight such locations and, at each, ChemLawn is a de minimis party.
Anticipated costs currently accrued for these matters were included in the
Company's loss from its discontinued ChemLawn operations in 1991. The
accrual remaining reflects management's best estimate of future costs.
NUMBER OF EMPLOYEES: The Company currently has approximately 12,000 employees
worldwide.
-12-
<PAGE>
ITEM 1(d) FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
The financial information about geographic areas appearing under the heading
"Operating Segments" in Note 15, located on pages 46 and 47 of the Annual
Report, is incorporated herein by reference.
EXECUTIVE OFFICERS OF THE COMPANY
The persons listed in the following table are the current executive officers of
the Company. Officers are elected annually. There is no family relationship
among any of the directors or executive officers, and none of such persons has
been involved during the past five years in any legal proceedings described in
applicable Securities and Exchange Commission regulations.
<TABLE>
<CAPTION>
Positions Held
Name Age Office Since Jan. 1, 1994
- ---- --- ------ ------------------
<S> <C> <C> <C>
A. L. Schuman 64 President and Chief March 1995 - Present
Executive Officer
President and Chief Jan. 1994 - Feb. 1995
Operating Officer
M. E. Shannon 62 Chairman of the Board, Chief Jan. 1996 - Present
Financial and Administrative
Officer
Vice Chairman, Chief Jan. 1994 - Dec. 1995
Financial and
Administrative Officer
L. T. Bell 51 Vice President-Law Jan. 1998 - Present
and General Counsel
Vice President, Assistant Jan. 1997 - Dec. 1997
General Counsel and
Assistant Secretary
Associate General Counsel July 1995 - Dec. 1996
and Assistant Secretary
Associate General Counsel Jan. 1994 - June 1995
P. D'Almada 51 Senior Vice President - Jan. 1999 - Present
Institutional North America
Senior Vice President - Mar. 1996 - Dec. 1998
Global Accounts
</TABLE>
-13-
<PAGE>
<TABLE>
<CAPTION>
Positions Held
Name Age Office Since Jan. 1, 1994
- ---- --- ------ ------------------
<S> <C> <C> <C>
Vice President - May 1995 - Feb. 1996
Institutional Corporate
Accounts and Distributor
Sales
Vice President - Jan. 1994 - Apr. 1995
Institutional National
Accounts and Distributor
Sales
S. L. Fritze 44 Vice President and Mar. 1995 - Present
Treasurer
Institutional Vice Jan. 1994 - Feb. 1995
President, Planning
and Control
A. E. Henningsen, Jr. 52 Senior Vice President Mar. 1996 - Present
and Controller
Vice President and Jan. 1994 - Feb. 1996
Controller
R. L. Marcantonio 49 Executive Vice President - Jan. 1999 - Present
Industrial Group
Senior Vice President - Mar. 1997 - Dec. 1998
Industrial
J. L. McCarty 61 Senior Executive Vice Jan. 1999 - Present
President - Institutional
Group
Senior Vice President- Jan. 1994 - Dec. 1998
Institutional North America
M. Nisita 58 Senior Vice President- Jan. 1994 - Present
Global Operations
J. P. Spooner 52 Executive Vice President - Jan. 1999 - Present
International Group
Senior Vice President- June 1996 - Dec. 1998
International
Senior Vice President - June 1994 - May 1996
Industrial
</TABLE>
-14-
<PAGE>
<TABLE>
<CAPTION>
Positions Held
Name Age Office Since Jan. 1, 1994
- ---- --- ------ ------------------
<S> <C> <C> <C>
F. W. Tuominen, 56 Senior Vice President Jan. 1994 - Present
Ph.D. and Chief Technical and
Environmental Officer
</TABLE>
Mr. Spooner joined the Company as Senior Vice President-Industrial in June
1994. Prior to joining the Company, Mr. Spooner was employed by PepsiCo, Inc.
for 15 years, holding various positions in operations and business
development, including most recently, President of the North Division of
Frito-Lay, Inc.
Mr. Marcantonio joined the Company as Senior Vice President-Industrial in
March 1997. Prior to joining the Company, Mr. Marcantonio was employed by
subsidiaries of United Biscuits (Holdings) Plc. for 20 years, holding various
positions in sales, marketing and general management including, most
recently, Senior Vice President - Cookies and Crackers of the Keebler Company.
ITEM 2. PROPERTIES
The Company's manufacturing facilities produce chemical products or equipment
for all the Company's businesses, although the Pest Elimination Division and
the GCS business purchase most of their products and equipment from outside
suppliers. The Company's chemical production process consists primarily of
blending and packaging powders and liquids and casting solids. The Company's
equipment manufacturing operations consist primarily of producing chemical
product dispensers and ejectors and other mechanical equipment (South Beloit,
Illinois), dishwasher racks and related sundries (Elk Grove Village, Illinois
and Shika, Japan) and dishwashing machines, a portion of which is sold to
third party dishwashing machine distributors (Barbourville, Kentucky). The
Company's philosophy is to manufacture products wherever an economic, process
or quality assurance advantage exists or where proprietary manufacturing
techniques dictate internal production processes. Currently, most products
sold by the Company are manufactured at Company facilities.
The following chart profiles the Company's manufacturing facilities which are
approximately 50,000 square feet or larger in size.
In general, manufacturing facilities located in the United States serve the
"United States Cleaning and Sanitizing" segment and facilities located
outside of the United States serve the "International Cleaning and
Sanitizing" segment. However, certain of the United States facilities do
manufacture products for export and which are used by the International
segment. The facilities having export involvement are marked with an
asterisk(*). The Barbourville, Kentucky manufacturing facility is operated by
the Jackson MSC unit which is reported herein as a part of the "United States
Other Services" segment.
-15-
<PAGE>
ECOLAB OPERATIONS PLANT PROFILES
<TABLE>
<CAPTION>
SIZE OWNED/
LOCATION (SQ. FT.) TYPES OF PRODUCTS LEASED
- -------- --------- ----------------- ------
<S> <C> <C> <C>
UNITED STATES
*Joliet, IL 610,000 Solids, Liquids, Powders Owned
*Woodbridge, NJ 248,000 Solids, Liquids Owned
*Garland, TX 239,000 Solids, Liquids Owned
*Greensboro, NC 193,000 Liquids, Powders Owned
*Hebron, OH 192,000 Liquids Owned
San Jose, CA 175,000 Liquids Owned
*South Beloit, IL 155,000 Equipment Owned
*McDonough, GA 141,000 Solids, Liquids Owned
Eagan, MN
(pilot plant) 133,000 Solids, Liquids,
Emulsions, Powders Owned
City of Industry, CA 125,000 Liquids Owned
*Barbourville, KY 109,000 Equipment Owned
*Huntington, IN 90,000 Liquids, Powders Owned
*Elk Grove Village, IL 66,000 Equipment Leased
INTERNATIONAL
Santa Cruz, BRAZIL 142,000 Liquids, Powders Owned
Melbourne, AUSTRALIA 130,000 Liquids, Powders Owned
Johannesburg, SOUTH AFRICA 100,000 Liquids, Powders Owned
Botany, AUSTRALIA 97,000 Liquids, Powders Owned
Toronto, CANADA 88,000 Liquids Leased
Shika, JAPAN 60,000 Liquids, Powders Owned
Hamilton, NEW ZEALAND 58,000 Solids, Liquids, Powders Owned
Sydney, AUSTRALIA 51,000 Liquids, Powders Leased
Noda, JAPAN 49,000 Liquids, Powders Owned
</TABLE>
Additional smaller United States manufacturing facilities owned by the
Company are located in North Kansas City, Missouri, Grand Forks, North Dakota
and Dallas, Texas. The Company also owns or leases smaller international
manufacturing facilities in Argentina, Australia, Chile, Columbia, Costa
Rica, Fiji, Indonesia, Japan, Kenya, Mexico, New Zealand, Papua New Guinea,
People's Republic of China, Philippines, Puerto Rico, Singapore, South Korea,
Tanzania and Thailand.
The Company believes its manufacturing facilities are in good condition and
are adequate to meet existing production needs.
-16-
<PAGE>
Most of the Company's manufacturing plants also serve as distribution
centers. In addition, around the world, the Company operates distribution
centers, all of which are leased, and utilizes various public warehouses to
facilitate the distribution of its products and services. In the United
States, the Company's sales associates are located in approximately 110
leased offices. Additional sales offices are located internationally.
The Company's corporate headquarters is comprised of three multi-storied
buildings located adjacent to one another in downtown St. Paul, Minnesota.
The main 19-story building was constructed to the Company's specifications
and is leased through 2003. Thereafter, it is subject to multiple renewals
at the Company's option. The second building is also subject to a long-term
lease by the Company and the third building is owned. In 1998, the Company
completed extensive renovation and expansion of the corporate headquarters
which included a state-of-the-art training center and facilities to add
several hundred additional jobs at the Company's headquarters. The Company
also owns a computer center in St. Paul and a research facility located in a
suburb of St. Paul.
ITEM 3. LEGAL PROCEEDINGS
Proceedings arising under laws relating to protection of the environment are
discussed at Item 1(c) above, under the heading "Environmental
Considerations."
DISTRIBUTOR LITIGATION: As previously reported in the Company's Form 10-K
for the year ended December 31, 1997, and in certain previous quarterly
reports on Form 10-Q, ten distributors of the Company's Airkem Janitorial
product line brought action in 1995 against the Company in Hennepin County
District Court, Minnesota alleging 16 causes of action including anti-trust
violations, breach of contract and breach of the Minnesota Franchise Act. In
April 1997, the Company was granted summary judgment dismissing all but two
of the distributors' claims. Subsequently, the action was divided into
separate trials for each of the plaintiff distributors. The first trial took
place in mid-1997 with a jury verdict in favor of the plaintiff distributor
on the breach of contract claim in the amount of $29,000 and against the
plaintiff distributor on the Minnesota Franchise Act claim.
The Company has reached settlement with four of the other distributors on a
basis which were not adversely material to the Company.
The first of the remaining five distributor cases is scheduled for trial in
August 1999. The five distributors are claiming estimated damages of
$10,000,000.
LUBRICANT LITIGATION: On July 1, 1996, Diversey Lever, Inc. filed suit
against the Company in Federal District Court, Eastern District of Michigan,
Southern Division. The suit alleges that two Company products, which
lubricate plastic beverage bottles, infringe two patents held by Diversey
Lever. The Company believes it has the right under an earlier agreement with
Diversey Lever to make and sell the products.
On June 15, 1998, the District Court issued an order denying the Company's
right to make and sell the products. The court also found that the Company
had infringed the two patents held by Diversey
-17-
<PAGE>
Lever. The court also entered an injunction against the manufacturing or sale
by the Company of the products which were alleged to infringe the patents.
The Company has appealed the District Court's ruling to the Federal Circuit
Court of Appeals. Before that court, the Company is arguing, among other
things, that the District Court ruling was erroneous on the question of
whether the Company had a right under the earlier agreement with Diversey
Lever to make and sell the products. The Company is also arguing that if the
court affirms the District Court holding, then it has a right to challenge
the validity of the underlying patents.
The Company understands Diversey Lever's damage request to be in the range of
$3,000,000 to $5,000,000. Diversey Lever is also requesting that damages be
enhanced to up to three times if willful infringement is found.
The Company has developed, and has been selling since July of 1998, a new
lubricant to replace the allegedly infringing lubricants.
The Company and certain of its subsidiaries are defendants in various other
lawsuits and claims arising out of the normal course of business. Accruals
have been established reflecting management's best estimate of future costs
relating to such matters and, in the opinion of management, the ultimate
resolution of this litigation will not have a material effect on the
Company's results of operations, financial position, or liquidity. However,
the estimated effects of the future result of existing litigation is subject
to certain estimates, assumptions and uncertainties and should be considered
in light of the discussion of Forward-Looking Statements and Risk Factors
found under Part I at the beginning of this Report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders, through the
solicitation of proxies, or otherwise, during the fourth quarter of 1998.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
All per share and number of share data in Item 5, including dividends per
share in Item 5(c), reflect a two-for-one stock split paid January 15, 1998
in the form of a 100% stock dividend to shareholders of record on December
26, 1997 ("Stock Split").
-18-
<PAGE>
ITEM 5(a) MARKET INFORMATION
The Company's Common Stock is listed on the New York Stock Exchange and the
Pacific Exchange, Inc. under the symbol "ECL." The Common Stock is also
traded on an unlisted basis on certain other United States exchanges. The
high and low sales prices of the Company's Common Stock on the consolidated
transaction reporting system during 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
---------------- -------------------
Quarter High Low High Low
------- ---- --- ---- ---
<S> <C> <C> <C> <C>
First $29-5/8 $26-5/8 $19-9/16 $18-1/8
Second $33 $28-3/16 $24-1/32 $19-1/16
Third $33-29/256 $27-1/8 $24-15/16 $21-9/32
Fourth $38 $26-1/8 $28 $23-1/16
The closing stock price on March 1, 1999 was $39-11/16.
</TABLE>
ITEM 5(b) HOLDERS
On March 1, 1999, the Company had 5,544 holders of Common Stock of record.
ITEM 5(c) DIVIDENDS
Quarterly cash dividends customarily are paid on the 15th of January, April,
July and October. Dividends of $0.08 per share were declared in February,
May and August, 1997. Dividends of $0.095 per share were declared in
December, 1997 and February, May and August, 1998. A dividend of $0.105 per
share was declared in December 1998.
ITEM 5(d) RECENT SALES OF UNREGISTERED SECURITIES
On November 5, 1998, the Company issued 14,500 shares of Common Stock to a
trust for the benefit of two individual former owners of Schaefer Chemical
Company Inc. in a private transaction. The transaction was the final
installment on a stock purchase transaction in which the Company acquired the
business of Schaefer Chemical Company in 1996. The transaction was exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933.
ITEM 6. SELECTED FINANCIAL DATA
The comparative data for the years ended December 31, 1998, 1997, 1996, 1995
and 1994 inclusive, which are set forth under the heading entitled "Summary
Operating and Financial Data" located on pages 50 and 51 of the Annual
Report, are incorporated herein by reference.
-19-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The material appearing under the heading entitled "Financial Discussion,"
located on pages 24 through 33 of the Annual Report, is incorporated herein
by reference.
ITEM 7(a) QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company enters into contractual arrangements (derivatives) in the
ordinary course of business to manage foreign currency exposure and interest
rate risks. The Company does not enter into derivatives for trading purposes.
The Company's use of derivatives is subject to internal policies which
provide guidelines for control, counterparty risk, and ongoing monitoring and
reporting.
The Company enters into forward contracts, swaps, and foreign currency
options to hedge certain intercompany financing arrangements, and to hedge
against the effect of exchange rate fluctuations on transactions related to
cash flows denominated in currencies other than U.S. dollars.
The Company manages interest expense using a mix of fixed and floating rate
debt. To help manage borrowing costs, the Company may enter into interest
rate swaps. Under these arrangements, the Company agrees to exchange, at
specified intervals, the difference between fixed and floating interest
amounts calculated by reference to an agreed-upon notional principal amount.
Based on a sensitivity analysis (assuming a 10% adverse change in market
rates) of the Company's foreign exchange and interest rate derivatives and
other financial instruments outstanding at December 31, 1998, changes in
exchange rates or interest rates would not materially affect the Company's
results of operations, financial position, or liquidity.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and material which are an integral part of the
financial statements listed under Item 14 I(1) below and located on pages 34
through 49 of the Annual Report, are filed as a part of this Report and are
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 COMPANY
The biographical material located on pages 6 through 11 and the paragraph
relating to understandings concerning the election of directors between
Henkel KGaA and the Company located on page 5 of the Proxy Statement
appearing under the heading entitled "Election of Directors," is incorporated
herein by reference. Information regarding executive officers is presented
under the heading "Executive Officers of the Company" in Part I of this
Report on pages 13 through 15.
-20-
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The material appearing under the heading entitled "Executive Compensation,"
located on pages 12 through 20 of the Proxy Statement, is incorporated herein
by reference. However, pursuant to Securities and Exchange Commission
Regulation S-K, Item 402(a)(9), the material appearing under the headings
entitled "Report of the Compensation Committee on Executive Compensation" and
"Comparison of Five Year Cumulative Total Return," found, respectively, on
pages 12 through 15 and on page 19 of the Proxy Statement, is not
incorporated herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The material appearing under the headings entitled "Security Ownership of
Certain Beneficial Owners" and "Security Ownership of Management" located on
pages 2 and 3 of the Proxy Statement is incorporated herein by reference.
The holdings of Henkel KGaA and HC Investments, Inc. are subject to certain
limitations with respect to the Company's voting securities as more fully
described in the Company's Proxy Statement on page 22, under the heading
"Stockholder Agreement," which is incorporated herein by reference.
A total of 1,103,341 shares of Common Stock held by the Company's directors
and executive officers, some of whom may be affiliates of the Company, have
been excluded from the computation of market value of the Company's Common
Stock on the cover page of this Report. This total represents that portion
of the shares reported as beneficially owned by officers and directors of the
Company in the table entitled "Security Ownership of Management" located on
pages 2 and 3 of the Proxy Statement, which are actually issued and
outstanding.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The material appearing under the headings entitled "Certain Transactions,"
"Stockholder Agreement" and "Company Transactions" on pages 21 through 23 of
the Proxy Statement and the biographical material located on pages 7, 10 and
11 of the Proxy Statement pertaining to Messrs. Roland Schulz, Hugo
Uyterhoeven and Albrecht Woeste is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
I(1). The following financial statements of the Company, included in the
Annual Report, are incorporated in Item 8 hereof.
(i) Consolidated Statement of Income for the years ended
December 31, 1998, 1997 and 1996, Annual Report page 34.
(ii) Consolidated Balance Sheet at December 31, 1998, 1997
and 1996, Annual Report page 35.
(iii) Consolidated Statement of Cash Flows for the years ended
December 31, 1998, 1997 and 1996, Annual Report page 36.
-21-
<PAGE>
(iv) Consolidated Statement of Comprehensive Income and
Shareholders' Equity for the years ended December 31,
1998, 1997 and 1996, Annual Report page 37.
(v) Notes to Consolidated Financial Statements, Annual
Report pages 38 through 48.
(vi) Report of Independent Accountants, Annual Report page
49.
I(2). The following financial statement schedule to the Company's financial
statements listed in Item 14 I(1) for the years ended December 31, 1998,
1997 and 1996 located on page 34 hereof, and the Report of Independent
Accountants on Financial Statement Schedule at page 32 hereof, are filed
as part of this Report.
(i) Schedule II -- Valuation and Qualifying Accounts for the
years ended December 31, 1998, 1997 and 1996.
All other schedules, for which provision is made in the
applicable regulations of the Securities and Exchange
Commission, are not required under the related instructions or
are inapplicable and therefore have been omitted. All
significant majority-owned subsidiaries are included in the
filed consolidated financial statements.
I(3). The following financial statements of the Henkel-Ecolab Joint Venture
located on pages 35 to 58 hereof, are filed as part of this Report.
(i) (a) Report of Independent Accountants -
PricewaterhouseCoopers Gesellschaft mit
beschrankter Haftung
Wirtschaftsprufungsgesellschaft.
(b) Report of Independent Accountants - KPMG
Deutsche Treuhand-Gesellschaft Aktiegesellschaft
Wirtschaftsprufungsgesellchaft.
(ii) Combined Statements of Income for the years ended
November 30, 1998, 1997 and 1996.
(iii) Combined Balance Sheets at November 30, 1998, 1997 and
1996.
(iv) Combined Statements of Cash Flows for the years ended
November 30, 1998, 1997 and 1996.
(v) Combined Statements of Equity for the years ended
November 30, 1998, 1997 and 1996.
(vi) Notes to the Combined Financial Statements.
I(4). The following financial statement schedule to the Henkel-Ecolab Joint
Venture financial statements listed in Item 14 I(3) for the years ended
November 30, 1998, 1997 and 1996
-22-
<PAGE>
located on page 60 hereof, and the Reports of the Independent
Accountants on pages 36 and 59 hereof are filed as part of this
Report.
(i) Schedule -- Valuation and Qualifying Accounts and
Reserves for the years ended November 30, 1998, 1997 and
1996.
All other schedules, for which provision is made in the
applicable regulations of the Securities and Exchange
Commission, are not required under the related instructions or
are inapplicable and therefore have been omitted. All entities
of the Henkel-Ecolab Joint Venture are included in the filed
combined financial statements.
II. The following documents are filed as exhibits to this Report. The
Company will, upon request and payment of a fee not exceeding the rate
at which copies are available from the Securities and Exchange
Commission, furnish copies of any of the following exhibits to
stockholders. The Financial Data Schedule (Exhibit 27) is filed as an
Exhibit to this Report but, pursuant to paragraph (c)(1)(iv) of Item 601
of Regulation S-K, shall not be deemed filed for purposes of Section 11
of the Securities Act of 1933 or Section 18 of the Securities Exchange
Act of 1934.
(3)A. Restated Certificate of Incorporation - Incorporated by
reference to Exhibit (3) to the Company's Current Report
on Form 8-K dated October 22, 1997.
B. By-Laws, as amended through February 18, 1999.
(4)A. Common Stock - see Exhibits (3)A and (3)B.
B. Form of Common Stock Certificate - Incorporated by
reference to Exhibit (4)B of the Company's Form 10-K
Annual Report for the year ended December 31, 1995.
C. Rights Agreement dated as of February 24, 1996 -
Incorporated by reference to Exhibit (4) of the
Company's Current Report on Form 8-K dated February 24,
1996.
D. Note Agreement dated as of October 1, 1991 relating to
$100,000,000 9.68% Senior Notes Due October 1, 2001
between the Company and the insurance companies named
therein - Incorporated by reference to Exhibit (4)F of
the Company's Form 10-K Annual Report for the year ended
December 31, 1991.
E. (i) Multicurrency Credit Agreement ("Credit
Agreement") dated as of September 29, 1993, as
Amended and Restated as of October 17, 1997,
among the Company, the financial institutions
party thereto, Citibank, N.A., as Agent,
Citibank International Plc, as Euro-Agent and
Morgan Guaranty Trust Company of New York as
Co-Agent -
-23-
<PAGE>
Incorporated by reference to Exhibit (4)A of
the Company's Form 10-Q for the quarter ended
September 30, 1997.
(ii) Australian Dollar Local Currency Addendum to the
Credit Agreement - Incorporated by reference to
Exhibit (4)B of the Company's Form 10-Q for the
quarter ended September 30, 1997.
(iii) Amendment No. 1 dated as of June 23, 1998 to
Multicurrency Credit Agreement dated as of
September 29, 1993, as Amended and Restated as
of October 17, 1997, and to Local Currency
Addendum dated as of October 17, 1997, with
respect to the Multicurrency Credit Agreement,
among Ecolab Inc., the Banks parties thereto,
Citibank, N.A., as Agent for the Banks, Citibank
International Plc, as Euro-Agent for the Banks
and Morgan Guaranty Trust Company of New York as
Co-Agent; and with respect to the Local Currency
Addendum among Ecolab Inc., Ecolab PTY Limited,
the Local Currency Banks party thereto,
Citibank, N.A., as Agent and Citisecurities
Limited, as Local Currency Agent - Incorporated
by reference to Exhibit (4)A of the Company's
Form 10-Q for the quarter ended June 30, 1998.
(iv) Australian Dollar Local Currency Addendum dated
as of June 23, 1998 among Ecolab Finance PTY
Limited, Ecolab Inc., Citibank, N.A., the Local
Currency Agent named therein and the Local
Currency Banks party thereto - Incorporated by
reference to Exhibit (4)B of the Company's Form
10-Q for the quarter ended June 30, 1998.
F. Indenture dated as of November 1, 1996 as amended and
supplemented, between the Company and the First National
Bank of Chicago as Trustee - Incorporated by reference
to Exhibit 4.1 of the Company's Amendment No. 1 to Form
S-3 filed November 15, 1996.
G. Form of Underwriting Agreement - Incorporated by
reference to Exhibit 1 of the Company's Amendment No. 1
to Form S-3 filed November 15, 1996.
Copies of other constituent instruments defining the rights of
holders of long-term debt of the Company and its subsidiaries
are not filed herewith, pursuant to Section (b)(4)(iii) of Item
601 of Regulation S-K, because the aggregate amount of
securities authorized under each of such instruments is less
than 10% of the total assets of the Company and its subsidiaries
on a consolidated basis. The Company hereby agrees that it
will, upon request by the Securities and Exchange Commission,
furnish to the Commission a copy of each such instrument.
-24-
<PAGE>
(9) Amended and Restated Stockholder's Agreement - See
Exhibit (10)P(v) hereof.
(10)A. Ecolab Inc. 1977 Stock Incentive Plan, as amended
through November 1, 1996 - Incorporated by reference to
Exhibit (10)A of the Company's Form 10-K Annual Report
for the year ended December 31, 1997.
B. Ecolab Inc. 1993 Stock Incentive Plan - Incorporated by
reference to Exhibit (10)B of the Company's Form 10-K
Annual Report for the year ended December 31, 1992.
C. Amended and Restated Ecolab Inc. 1997 Stock Incentive
Plan. This Plan amendment will become effective only
upon approval by the Stockholders of the Company at the
Company's Annual Meeting scheduled to be held May 14,
1999.
(i) Non-Statutory Stock Option Agreement between the
Company and Allan L. Schuman with respect to
premium-priced option grant effective February
20, 1998 under the Ecolab Inc. 1997 Stock
Incentive Plan. Similar option grants were made
to each of the named executive officers of the
Company covering varying, but smaller number of
shares - Incorporated by reference to Exhibit
(10) of the Company's Form 10-Q for the quarter
ended June 30, 1998.
D. 1988 Non-Employee Director Stock Option Plan as amended
through February 23, 1991 - Incorporated by reference to
Exhibit (10)D of the Company's Form 10-K Annual Report
for the year ended December 31, 1990.
E. 1995 Non-Employee Director Stock Option Plan -
Incorporated by reference to Exhibit (10)D of the
Company's Form 10-K Annual Report for the year ended
December 31, 1994.
F. Ecolab Inc. 1997 Non-Employee Director Deferred
Compensation Plan - Incorporated by reference to Exhibit
(10)F of the Company's Form 10-K for the year ended
December 31, 1996.
G. Form of Director Indemnification Agreement dated August
11, 1989. Substantially identical agreements are in
effect as to each director of the Company - Incorporated
by reference to Exhibit (19)A of the Company's Form 10-Q
for the quarter ended September 30, 1989.
H. (i) Ecolab Executive Death Benefits Plan, as amended
and restated effective March 1, 1994 -
Incorporated by reference to Exhibit (10)J of
the Company's 10-K Annual
-25-
<PAGE>
Report for the year ended December 31, 1994.
See also Exhibit (10)O hereof.
(ii) Amendment No. 1 to Ecolab Executive Death
Benefits Plan.
(iii) Second Declaration of Amendment to Ecolab
Executive Death Benefits Plan, effective March
1, 1998.
I. Ecolab Executive Long-Term Disability Plan, as amended
and restated effective January 1, 1994 - Incorporated by
reference to Exhibit (10)K of the Company's 10-K Annual
Report for the year ended December 31, 1994. See also
Exhibit (10)O hereof.
J. Ecolab Executive Financial Counseling Plan -
Incorporated by reference to Exhibit (10)K of the
Company's Form 10-K Annual Report for the year ended
December 31, 1992.
K. (i) Ecolab Supplemental Executive Retirement Plan,
as amended and restated effective July 1, 1994 -
Incorporated by reference to Exhibit (10)M(i) of
the Company's 10-K Annual Report for the year
ended December 31, 1994. See also Exhibit (10)O
hereof.
(ii) First Declaration of Amendment to Ecolab
Supplemental Executive Retirement Plan effective
as of July 1, 1994 - Incorporated by reference
to Exhibit (10)M(ii) of the Company's 10-K
Annual Report for the year ended December 31,
1994.
(iii) Second Declaration of Amendment to Ecolab
Supplemental Executive Retirement Plan effective
as of July 1, 1994 - Incorporated by reference
to Exhibit (10)M(iii) of the Company's Form 10-K
Annual Report for the year ended December 31,
1995.
(iv) Third Declaration of Amendment to Ecolab
Supplemental Executive Retirement Plan,
effective March 1, 1998.
L. (i) Ecolab Mirror Savings Plan, as amended and
restated effective September 1, 1994 -
Incorporated by reference to Exhibit (10)N of
the Company's 10-K Annual Report for the year
ended December 31, 1994. See also Exhibit (10)O
hereof.
(ii) First Declaration of Amendment to Ecolab Mirror
Savings Plan effective as of January 1, 1995 -
Incorporated by reference to Exhibit (10)N(ii)
of the Company's Form 10-K Annual Report for the
year ended December 31, 1995.
-26-
<PAGE>
(iii) Second Declaration of Amendment to Ecolab Mirror
Savings Plan effective January 1, 1997 -
Incorporated by reference to Exhibit (10)O(iii)
of the Company's Form 10-K Annual Report for the
year ended December 31, 1996.
(iv) Third Declaration of Amendment to Ecolab Mirror
Savings Plan effective November 13, 1997.
(v) Fourth Declaration of Amendment to Ecolab Mirror
Savings Plan, effective September 1, 1998.
M. (i) Ecolab Mirror Pension Plan effective July 1,
1994 - Incorporated by reference to Exhibit
(10)O(i) of the Company's Annual Report on Form
10-K for the year ended December 31, 1994. See
also Exhibit (10)O hereof.
(ii) First Declaration of Amendment to Ecolab Mirror
Pension Plan effective as of July 1, 1994 -
Incorporated by reference to Exhibit (10)O(ii)
of the Company's Annual Report on Form 10-K for
the year ended December 31, 1994.
(iii) Second Declaration of Amendment to Ecolab Mirror
Pension Plan effective as of July 1, 1994 -
Incorporated by reference to Exhibit (10)O(iii)
of the Company's Form 10-K Annual Report for the
year ended December 31, 1995.
(iv) Third Declaration of Amendment to Ecolab Mirror
Pension Plan, effective March 1, 1998.
N. (i) Ecolab Inc. Administrative Document for
Non-Qualified Benefit Plans - Incorporated by
reference to Exhibit (10)P of the Company's 10-K
Annual Report for the year ended December 31,
1994.
(ii) Amendment No. 1 to the Ecolab Inc.
Administrative Document for Non-Qualified
Benefit Plans effective July 1, 1997.
(iii) First Declaration to Amendment to the Ecolab
Inc. Administrative Document for Non-Qualified
Benefit Plans effective November 13, 1997.
O. 1999 Ecolab Inc. Management Performance Incentive Plan.
This Plan will become effective only upon approval by
the Stockholders of the
-27-
<PAGE>
Company at the Company's Annual Meeting scheduled to be
held May 14, 1999.
P. (i) Amended and Restated Umbrella Agreement between
Henkel KGaA and Ecolab Inc. dated June 26, 1991
- Incorporated by reference to Exhibit 13 of HC
Investments, Inc.'s and Henkel KGaA's Amendment
No. 4 to Schedule 13D dated July 16, 1991.
(ii) Amended and Restated Joint Venture Agreement
between Henkel KGaA and Ecolab Inc. dated June
26, 1991 - Incorporated by reference to Exhibit
14 of HC Investments, Inc.'s and Henkel KGaA's
Amendment No. 4 to Schedule 13D dated July 16,
1991.
(iii) Amendment to the Amended and Restated Joint
Venture Agreement between Henkel KGaA and Ecolab
Inc. dated June 13, 1994.
(iv) Amended and Restated ROW Purchase Agreement
between Henkel KGaA and Ecolab Inc. dated June
26, 1991 - Incorporated by reference to Exhibit
(7) of the Company's Current Report on Form 8-K
dated July 11, 1991.
(v) Amended and Restated Stockholder's Agreement
between Henkel KGaA and Ecolab Inc. dated June
26, 1991 - Incorporated by reference to Exhibit
15 of HC Investments, Inc.'s and Henkel KGaA's
Amendment No. 4 to Schedule 13D dated July 16,
1991.
Q. Description of Ecolab Management Incentive Plan.
(13) Those portions of the Company's Annual Report to
Stockholders for the year ended December 31, 1998 which
are incorporated by reference into Parts I, II and IV
hereof.
(21) List of Subsidiaries as of March 16, 1999.
(23)A. Consent of PricewaterhouseCoopers LLP to Incorporation
by Reference at page 33 hereof is filed as a part
hereof.
B. Consent of PricewaterhouseCoopers Gesellschaft mit
beschrankter Haftung Wirschaftsprufungsgesellschaft.
C. Consent of KPMG Deutsche Treuhand-Gesellschaft
Aktiengesellschaft Wirtschaftsprufungsgesellschaft.
(24) Powers of Attorney.
-28-
<PAGE>
(27) Financial Data Schedule for year ended December 31,
1998.
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
Included in the preceding list of exhibits are the following management
contracts or compensatory plans or arrangements:
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
(10)A. Ecolab Inc. 1977 Stock Incentive Plan.
(10)B. Ecolab Inc. 1993 Stock Incentive Plan.
(10)C. Amended and Restated Ecolab Inc. 1997 Stock Incentive Plan.
(10)D. 1988 Non-Employee Director Stock Option Plan.
(10)E. 1995 Non-Employee Director Stock Option Plan.
(10)F. Ecolab Inc. 1997 Non-Employee Director Deferred Compensation
Plan.
(10)H. Ecolab Executive Death Benefits Plan.
(10)I. Ecolab Executive Long-Term Disability Plan.
(10)J. Ecolab Executive Financial Counseling Plan.
(10)K. Ecolab Supplemental Executive Retirement Plan.
(10)L. Ecolab Mirror Savings Plan.
(10)M. Ecolab Mirror Pension Plan.
(10)N. The Ecolab Inc. Administrative Document for Non-Qualified
Benefit Plans.
(10)O. Ecolab Management Performance Incentive Plan.
(10)P. Ecolab Management Incentive Plan.
</TABLE>
-29-
<PAGE>
III. Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended December 31,
1998. Subsequent to the quarter ended December 31, 1998, the Company filed
on March 25, 1999 a Current Report on Form 8-K to amend the Company's Form
S-8 registration statements filed pursuant to the Securities Act of 1933 in
order to obtain the benefits provided by Section 11(b)(3)(C) of the
Securities Act of 1933.
-30-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Ecolab Inc. has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 29th day of
March, 1999.
ECOLAB INC.
(Registrant)
By /s/ Allan L. Schuman
---------------------------------
Allan L. Schuman, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Ecolab
Inc. and in the capacities indicated, on the 29th day of March, 1999.
<TABLE>
<S> <C>
/s/ Allan L. Schuman President and Chief Executive Officer
- ------------------------------- (Principal Executive Officer
Allan L. Schuman and Director)
/s/ Michael E. Shannon Chairman of the Board, Chief
- ------------------------------ Financial and Administrative Officer
Michael E. Shannon (Principal Financial Officer
and Director)
/s/ Arthur E. Henningsen, Jr. Senior Vice President and Controller
- ------------------------------ (Principal Accounting Officer)
Arthur E. Henningsen, Jr.
/s/ Kenneth A. Iverson Directors
- -------------------------------
Kenneth A. Iverson
as attorney-in-fact for
Les S. Biller, Ruth S. Block,
James J. Howard, Joel W. Johnson,
Jerry W. Levin, Reuben F. Richards,
Richard L. Schall, Roland Schulz,
Hugo Uyterhoeven and Albrecht Woeste
Directors not signing:
Jerry A. Grundhofer and
William L. Jews
</TABLE>
-31-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Shareholders and Board of Directors
of Ecolab Inc.
Our report on the consolidated financial statements of Ecolab Inc. has
been incorporated by reference in this Form 10-K from page 49 of the 1998
Annual Report to Shareholders of Ecolab Inc. In connection with our audits of
such financial statements, we have also audited the related financial
statement schedule included on page 34 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
PricewaterhouseCoopers LLP
Saint Paul, Minnesota
February 22, 1999
-32-
<PAGE>
CONSENT OF PRICEWATERHOUSECOOPERS LLP
TO INCORPORATION BY REFERENCE
We consent to the incorporation by reference in the Registration
Statements on Form S-8 of Ecolab Inc. (Registration Nos. 2-60010; 2-74944;
33-1664; 33-41828; 2-90702; 33-18202; 33-55986; 33-56101; 33-26241; 33-34000;
33-56151; 333-18627; 33-39228; 33-56125; 333-70835; 33-60266; 33-65364;
33-59431; 333-18617; 333-21167; 333-35519; 333-40239; 333-50969; and
333-62183) and the Registration Statement of Ecolab Inc. on Form S-3
(Registration No. 333-14771) of our reports dated February 22, 1999 on our
audits of the consolidated financial statements and the related financial
statement schedule of Ecolab Inc. as of December 31, 1998, 1997 and 1996, and
for the years ended December 31, 1998, 1997 and 1996, which reports are
included or incorporated by reference in this Annual Report on Form 10-K. We
also consent to the references to our firm under the caption "Interests of
Named Experts and Counsel" or "Incorporation of Documents by Reference" in
the above-listed Registration Statements on Form S-8 of Ecolab Inc. and under
the caption "Experts" in the above-listed Registration Statement on Form S-3
of Ecolab Inc.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Saint Paul, Minnesota
March 29, 1999
-33-
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ECOLAB INC.
(In Thousands)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ---------------------------------------------------------------------------------------------------------------------------------
Additions
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at Charged to Charged Balance
Beginning Costs and to Other at End
Description of Period Expenses Accounts Deductions (A) of Period
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Year Ended December 31, 1998 $10,878 $8,090 $438 $(6,513) $12,893
Year Ended December 31, 1997 $ 9,343 $6,644 $ 58 $(5,167) $10,878
Year Ended December 31, 1996 $ 8,331 $4,695 $538 $(4,221) $ 9,343
</TABLE>
(A) Uncollectible accounts charged off, net of recovery of accounts
previously written off.
<PAGE>
[LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS
OF HENKEL-ECOLAB JOINT VENTURE
In our opinion, the accompanying combined balance sheet and the related
combined statements of income and of cash flows present fairly, in all
material respects, the financial position of Henkel-Ecolab Joint Venture
("Henkel-Ecolab") at November 30, 1998, and the results of their operations
and their cash flows for the year ended November 30, 1998, in conformity with
generally accepted accounting principles in the United States. The financial
statements of Henkel-Ecolab for the years ended November 30, 1997 and 1996
were audited by other independent auditors, whose reports, dated January 23,
1998 and January 22, 1997, expressed an unqualified opinion on those
statements. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards in the
United States which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
January 26, 1999
PricewaterhouseCoopers
Gesellschaft mit beschrankter Haftung
Wirtschaftsprufungsgesellschaft
/s/ Gunter Betz
/s/ Henri Leveque [SEAL]
-35-
<PAGE>
[LETTERHEAD]
Independent Auditors' Report
The Board of Directors
Henkel-Ecolab Joint Venture:
We have audited the accompanying balance sheets of Henkel-Ecolab Joint
Venture as of November 30, 1997 and 1996, and the related statements of
income, equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Joint Venture's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with German generally accepted auditing
standards which in all material respects are similar to auditing standards
generally accepted in the United States. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Henkel-Ecolab Joint
Venture as of November 30, 1997 and 1996, and the results of its operations
and its cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplementary information
included in the Financial Statement Schedule: Valuation and Qualifying
Accounts and Reserves as of and for the years ended November 30, 1997 and
1996 is presented for purposes of additional analysis and is not a required
part of the basic financial statements. Such information has been subjected
to the auditing procedures applied in the audits of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
Dusseldorf, Germany
January 23, 1998
KPMG Deutsche Treuhand-Gesellschaft
AKTIENGESELLSCHAFT
WIRTSCHAFTSPRUFUNGSGESELLSCHAFT
/s/ Stefan Haas /s/ Bernhard Momken
Stefan Haas Bernhard Momken
Wirtschaftsprufer Wirtschaftsprufer [SEAL]
-36-
<PAGE>
HENKEL-ECOLAB
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Twelve Months ended Twelve Months ended Twelve Months ended
(Thousands) November 30, 1998 November 30, 1997 November 30, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales DM 1,596,572 DM 1,447,443 DM 1,354,809
Cost of Sales 713,535 640,396 610,020
Selling, General and Administrative Expenses 736,197 671,635 620,778
Royalties to Parents 26,568 24,372 22,718
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Income 120,272 111,040 101,293
Other Expenses/Income, net 3,759 2,065 3,851
- -----------------------------------------------------------------------------------------------------------------------------------
Income before Income Taxes 116,513 108,975 97,442
Provision for Income Taxes 48,421 51,267 45,334
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income DM 68,092 DM 57,708 DM 52,108
</TABLE>
See accompanying Notes to Combined Financial Statements
-37-
<PAGE>
HENKEL-ECOLAB
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
November 30, November 30, November 30,
(Thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Cash and Cash Equivalents DM 20,375 DM 34,233 DM 125,645
Accounts Receivable, net 324,140 326,539 284,016
Accounts Receivable from Related Parties 11,133 13,214 12,536
Loans to Related Parties 7,342 6,894 8,007
Inventories 196,807 180,682 183,192
Prepaid Expenses and Other Current Assets 56,519 41,878 34,144
Deferred Taxes 7,380 7,323 5,647
- --------------------------------------------------------------------------------------------------------------------------------
Current Assets 623,696 610,763 653,187
- --------------------------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment, net 183,381 178,125 167,555
Intangible and Other Assets, net 110,341 66,178 40,195
Deferred Taxes 9,473 12,943 10,724
- --------------------------------------------------------------------------------------------------------------------------------
Total Assets DM 926,891 DM 868,009 DM 871,661
- --------------------------------------------------------------------------------------------------------------------------------
Liabilities and Equity
Accounts Payable DM 106,839 DM 103,429 DM 98,274
Accounts Payable to Related Parties 17,808 31,840 82,294
Accrued Liabilities 188,862 180,031 177,668
Income Taxes Payable 47,309 54,600 36,269
Current Portion of Long Term Debt 657 656 652
Short Term Debt 49,066 24,318 72,972
Loans from Related Parties - 1,159 7,445
- --------------------------------------------------------------------------------------------------------------------------------
Current Liabilities 410,541 396,033 475,574
Contingencies and Commitments (Note 9)
- --------------------------------------------------------------------------------------------------------------------------------
Employee Benefit Obligations 131,398 127,818 106,766
Long Term Debt, less Current Maturities 4,768 4,762 5,383
Deferred Taxes 2,747 3,998 3,612
- --------------------------------------------------------------------------------------------------------------------------------
Combined Equity
Contributed Capital 165,889 164,219 162,704
Retained Earnings 235,934 190,046 137,068
Cumulative Foreign Currency Translation (23,641) (18,649) (19,446)
Minimum Pension Liability Adjustment (745) (218) -
-------- ------- -------
377,437 335,398 280,326
- --------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Equity DM 926,891 DM 868,009 DM 871,661
</TABLE>
See accompanying Notes to Combined Financial Statements
-38-
<PAGE>
HENKEL-ECOLAB
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Twelve Months ended Twelve Months ended Twelve Months ended
(Thousands) November 30, 1998 November 30, 1997 November 30, 1996
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME DM 68,092 DM 57,708 DM 52,108
ADJUSTMENTS TO RECONCILE NET INCOME TO CASH
PROVIDED BY OPERATING ACTIVITIES
Depreciation and Amortization 74,534 64,556 59,880
Equity in Income of Affiliated Company (1,421) (406) (320)
Provision for Doubtful Accounts and Other 9,325 6,668 1,477
Gain on Sale of Property and Equipment (976) (996) (1,580)
Deferred Income Taxes 2,162 (3,509) 1,366
CHANGES IN OPERATING ASSETS AND LIABILITIES
(Increase) in Accounts Receivable (6,926) (45,557) (16,333)
Decrease (Increase) in Accounts Receivable from Related Parties 2,081 (2,038) 9,813
(Increase) Decrease in Inventories (11,449) 5,092 (17,588)
Increase in Accounts Payable and Accrued Liabilities 12,199 2,530 50,817
(Decrease) Increase in Accounts Payable to Related Parties (14,032) 14,724 (7,412)
(Decrease) Increase in Income Taxes Payable (7,291) 17,597 (1,727)
(Increase) in Prepaid Expenses and Other Current Assets (16,628) (7,619) (10,275)
Increase in Employee Benefit Obligations 1,418 15,802 12,238
-------- -------- -------
Cash Provided by Operating Activities 111,088 124,552 132,464
-------- -------- -------
INVESTING ACTIVITIES
Expenditures for Property and Equipment (74,847) (72,764) (69,942)
Expenditures for Intangible and Other Assets (28,534) (4,662) (10,920)
Proceeds from Investment in Affiliated Company 700
Purchase of Businesses Net of Cash Acquired (32,748) (32,961)
Proceeds from Sale of Property and Equipment 9,989 12,374 21,444
-------- -------- -------
Cash Used for Investing Activities (125,440) (98,013) (59,418)
-------- -------- -------
FINANCING ACTIVITIES
Proceeds from (Repayments of) Debt, net 24,755 (48,672) 54,695
Proceeds from Capital Contrbutions, net 1,670 1,515
(Decrease) in Loans from Related Parties (1,159) (6,286) (40,992)
(Increase) Decrease in Loans to Related Parties (448) 1,113 7,771
Dividends paid (22,204) (67,045) (33,245)
-------- -------- -------
Cash Provided by (Used for) Financing Activities 2,614 (119,375) (11,771)
-------- -------- -------
EFFECT OF EXCHANGE RATE CHANGES ON NET CASH (2,120) 1,424 (2,902)
-------- -------- -------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (13,858) (91,412) 58,373
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 34,233 125,645 67,272
-------- -------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD DM 20,375 DM 34,233 DM 125,645
-------- -------- -------
</TABLE>
See accompanying Notes to Combined Financial Statements
-39-
<PAGE>
HENKEL-ECOLAB
COMBINED STATEMENTS OF EQUITY
<TABLE>
<CAPTION>
(Thousands)
Contributed Retained Cumulative Cumulative
Capital Earnings Foreign Minimum Total
Currency Pension
Translation Liability
Adjustment
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance
November 30, 1995 DM 211,704 130,005 (23,310) - 318,399
Net Income 52,108 52,108
Dividends (45,045) (45,045)
Equity Withdrawals (49,000) (49,000)
Translation Adjustment 3,864 3,864
--------------------------------------------------------------------------------------------------
Balance
November 30, 1996 DM 162,704 137,068 (19,446) - 280,326
Net Income 57,708 57,708
Dividends (4,730) (4,730)
Contributions 1,515 1,515
Minimum Pension Liability (218) (218)
Translation Adjustment 797 797
--------------------------------------------------------------------------------------------------
Balance
November 30, 1997 DM 164,219 190,046 (18,649) (218) 335,398
Net Income 68,092 68,092
Dividends (22,204) (22,204)
Contributions 1,670 1,670
Minimum Pension Liability (527) (527)
Translation Adjustment (4,992) (4,992)
--------------------------------------------------------------------------------------------------
Balance
November 30, 1998 DM 165,889 235,934 (23,641) (745) 377,437
</TABLE>
See accompanying Notes to Combined Financial Statements
-40-
<PAGE>
1. DESCRIPTION OF BUSINESS
Henkel-Ecolab (the "Company" or the "Joint Venture") is a leading European
company providing total cleaning and hygiene systems and service solutions to
institutional and industrial companies. See Basis of Presentation within Note 2
of the combined financial statements. The Company's offerings include
detergents, sanitation cleaners, dosing and measuring equipment, cleaning
machines, training and service. Customers include hotels and restaurants;
food service, healthcare and educational facilities; commercial laundries;
light industry; dairy plants and farms as well as food and beverage
processors throughout Europe.
The Company was formed in 1991 by Henkel KGaA (Henkel) and Ecolab, Inc.
(Ecolab) as a joint venture of their respective European institutional and
industrial hygiene businesses. Under the terms of the Amended and Restated
Joint Venture Agreement dated June 26, 1991 (Joint Venture Agreement), Henkel
and Ecolab have joint control over the activities of the Joint Venture. The
Joint Venture Agreement also provides that both partners will share an equal
economic interest in the profits or losses of the Joint Venture.
ACQUISITIONS
Ecosan Acquisition: In September 1997 and in December 1997, the Company
acquired 75% and 25%, respectively, of the outstanding shares of Ecosan
Hygiene GmbH (Ecosan) for a cash price of TDM 37,600 (TDM 28,200 in September
1997 and TDM 9,400 in December 1997). Ecosan, located in Hanau, Germany,
distributes institutional products and services in Germany. The acquisition
of Ecosan was recorded under the purchase method of accounting, and,
accordingly, the result of operations of Ecosan for the period from September
16, 1997 are included in the accompanying financial statements. The purchase
price has been allocated to assets acquired and liabilities assumed based on
the fair value at the date of acquisition. The excess of purchase price over
fair value of the assets and liabilities has been allocated to goodwill in
the amount of TDM 36,486 (TDM 27,153 as of November 30, 1997) and is being
amortized over 15 years.
- 41 -
<PAGE>
Darenas Acquisition: In February 1998, the Company acquired certain assets
of ISS-Darenas Limited (Darenas) for a cash price of TDM 23,334. Darenas,
located in Birmingham, England, provides janitorial products and services for
contract and building cleaning as well as the catering industries. The
acquisition of Darenas was recorded under the purchase method of accounting,
and accordingly, the results of operations of Darenas for the period from
February 1, 1998 are included in the accompanying financial statements. The
purchase price has been allocated to assets acquired and liabilities assumed
based on the fair value at the date of the acquisition. The excess of
purchase price over fair value of the assets and liabilities has been
allocated to goodwill in the amount of TDM 17,302 and is being amortized over
15 years.
The Company made additional acquisitions during the fiscal year ended
November 30, 1998; the impact of which was immaterial to the combined
financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The financial statements are presented in accordance with generally accepted
accounting principles in the United States and on a combined basis. The Joint
Venture is comprised of various entities. These entities have varying legal
structures, including stock corporations, limited liability corporations and
partnerships formed under the applicable laws in the jurisdictions in which
the Joint Venture operates. These entities are owned beneficially by
identical shareholders or their wholly- owned subsidiaries and are,
therefore, considered entities under common control. All significant
intergroup or affiliated company accounts and transactions have been
eliminated in combination. The Joint Venture's fiscal year end has been
designated as November 30.
FOREIGN CURRENCY TRANSLATION
The accounts of all foreign subsidiaries and affiliates are generally
measured using the local currency as the functional currency, except for
three countries where, due to hyperinflation, the functional currency (for
one country since 1994 and two beginning in 1998) has been changed to German
Mark. With the exception of the hyperinflation countries, assets and
liabilities are translated into German Marks, the Company's reporting
currency, at period-end exchange rates. Income statement accounts are
translated to German Marks at the average rates of exchange prevailing during
the year.
- 42 -
<PAGE>
Net unrealized exchange gains or losses resulting from such translation are
excluded from net earnings and accumulated in a separate component of
combined equity. Gains and losses from foreign currency transactions are
included in the related income statement category.
The Joint Venture enters into foreign currency forward and option contracts
to hedge specific foreign currency exposures. Gains and losses on these
contracts are deferred and recognized as part of the specific transaction
hedged or included in Other Expenses/Income, net, principally interest
expense. The cash flows from such contracts are classified in the same
category as the transaction hedged in the Combined Statements of Cash Flows.
CASH EQUIVALENTS
Cash equivalents are highly liquid investments with a maturity of three
months or less when purchased. Interest income for the years ended November
30, 1998, 1997, and 1996 totaled TDM 4,800, TDM 4,599, and TDM 4,479,
respectively.
INVENTORIES
Inventories are stated at the lower of cost or market with cost determined on
the first-in first-out and average cost methods.
PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment are stated at original cost. Merchandising
equipment consists primarily of various systems for dispensing cleaning and
sanitizing products. Depreciation and amortization are charged to operations
using the straight-line and declining balance methods over the following
estimated useful lives:
<TABLE>
<S> <C>
Buildings and improvements 8 to 40 years
Machinery and equipment 3 to 20 years
Furniture, fixtures and merchandising equipment 3 to 16 years
</TABLE>
Leasehold improvements are amortized on a straight-line basis over a period
which is the lesser of the useful life of the asset or the remaining term of
the associated lease. Betterments, renewals and extraordinary repairs that
extend the life of the asset are capitalized; other repairs and maintenance
are expensed. The cost and accumulated depreciation / amortization applicable
to the assets retired are removed from the accounts and any gain or loss is
reflected in the Company's net income in the year of disposal.
- 43 -
<PAGE>
Total depreciation expense for property, plant and equipment amounted to TDM
60,948, TDM 53,320, and TDM 47,292 for the years ended November 30, 1998,
1997 and 1996, respectively.
During 1998, the Company adopted Statement of Position (SOP) 98-1,
"Accounting for the Costs of Software Developed or Obtained for Internal
Use." The impact of this adoption was immaterial to the combined financial
statements. In accordance with SOP 98-1, the Company capitalizes costs
associated with purchased software for internal use which is ready for
service and external development costs incurred from the time technological
feasibility of the software is established until the software is ready for
use to provide processing for internal purposes. The software development
costs and costs of purchased software are amortized using the straight-line
method over a maximum of three to five years or the expected life of the
product, whichever is less. The carrying value of a software and development
asset is regularly reviewed by the Company and a loss is recognized if the
unamortized cost is in excess of the net realizable value.
INTANGIBLE ASSETS
Intangible assets primarily consist of amounts by which cost of acquisitions
exceeded the values assigned to net tangible assets. These assets are
amortized on a straight-line basis over their estimated lives, periods from 3
to 15 years. Total amortization expense for all intangible assets amounted to
TDM 13,586, TDM 11,188 and TDM 12,588 during the years ended November 30,
1998, 1997, 1996, respectively.
LONG-LIVED ASSETS
The company periodically assesses the recoverability of long-lived and
intangible assets based on anticipated future earnings and operating cash
flows.
ADVERTISING COSTS
The Company expenses the production costs of advertising in the period in
which the costs are incurred. Advertising expenses were 35,696 TDM, 34,113
TDM and 28,806 TDM for the years ended November 30, 1998, 1997 and 1996,
respectively.
- 44 -
<PAGE>
USE OF ESTIMATES
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results may differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (FAS) No. 130, "Reporting
Comprehensive Income." The standard requires the display of comprehensive
income, which includes all changes in equity with the exception of additional
investments by shareholders and distributions to shareholders. This statement
does not impact the amounts recorded in the combined financial statements and
is effective for fiscal years beginning after December 15, 1997.
In June 1997, the FASB issued Statement of Financial Accounting Standards
(FAS) No. 131, "Disclosures about Segments of an Enterprise and Related
Information." FAS 131 specifies revised guidelines for determining an
entity's operating segments and the type and level of financial information
to be disclosed. FAS 131 is effective for fiscal years beginning after
December 15, 1997.
In February 1998, the FASB issued Statement of Financial Accounting Standards
(FAS) No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits --- an amendment of FASB Statements No. 87, 88 and
106." FAS 132 is effective for fiscal years beginning after December 15, 1997.
On June 16, 1998 the FASB issued Statement of Financial Accounting Standards
(FAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities." FAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
those instruments at fair value.
- 45 -
<PAGE>
If certain conditions are met, a derivative may be specifically designated as
(a) a hedge of the exposure to changes in the fair value of a recognized
asset or liability or an unrecognized firm commitment, (b) a hedge of the
exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation,
an unrecognized firm commitment, and available-for-sale security, or a
foreign-currency-denominated forecasted transaction.
Management expects to adopt FAS 133 in the first quarter of the year ended
November 30, 2001 and is in the process of evaluating the impact on the
financial statements of adoption of this Statement.
REVENUE RECOGNITION
Substantially all revenue is recognized when products are shipped to
customers or distributors.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform with current
year presentation. These reclassifications had no effect on previously
reported net income or combined equity.
- 46 -
<PAGE>
3. BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
(Thousands) November November November
30, 30, 30,
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ACCOUNTS RECEIVABLE, NET
Accounts Receivable, Trade DM 341,458 DM 349,054 DM 300,215
Allowance for Doubtful Accounts 17,318 22,515 16,199
----------------------------------------------------
DM 324,140 DM 326,539 DM 284,016
-- ------- -- ------- -- -------
INVENTORIES
Raw Materials DM 41,550 DM 40,355 DM 39,097
Work in Process 11,075 11,494 10,673
Finished Goods 144,182 128,833 133,422
----------------------------------------------------
Total DM 196,807 DM 180,682 DM 183,192
-- ------- -- ------- -- -------
PROPERTY, PLANT AND EQUIPMENT, NET
Land DM 6,612 DM 6,380 DM 6,316
Buildings and Improvements 77,437 75,072 73,487
Machinery and Equipment 147,417 139,943 126,852
Merchandising Equipment and Other 273,305 240,151 199,073
Construction in Progress 9,539 6,118 3,828
----------------------------------------------------
514,310 467,664 409,556
Accumulated Depreciation and Amortization 330,929 289,539 242,001
----------------------------------------------------
Total DM 183,381 DM 178,125 DM 167,555
-- ------- -- ------- -- -------
INTANGIBLE AND OTHER ASSETS, NET
Goodwill on Acquisitions prior to July 1,1991 DM 20,941 DM 20,941 DM 20,941
Goodwill on Acquisitions after July 1,1991 79,850 54,112 20,578
Other Intangible Assets, including Capitalized Computer Software 64,803 31,198 32,322
Additional Minimum Pension Liability 5,123 3,487 0
----------------------------------------------------
170,717 109,738 73,841
Accumulated Amortization 66,550 49,736 42,032
----------------------------------------------------
Total Intangible Assets, net 104,167 60,002 31,809
Other Assets, net 6,174 6,176 8,386
----------------------------------------------------
Total DM 110,341 DM 66,178 DM 40,195
-- ------- -- ------- -- -------
</TABLE>
- 47 -
<PAGE>
4. RELATED PARTY TRANSACTIONS
The Joint Venture has entered into various contractual arrange-ments,
including those discussed in the following paragraphs, for the supply of
products, the performance of general and administrative services and the
transfer of technology.
Certain Joint Venture entities purchase institutional and indu-strial hygiene
products (primarily finished goods inventories) from Henkel and its
subsidiaries under a variety of supply agreements. The terms of these
agreements require these entities to purchase specified quantities at agreed
upon prices as defined by an annual supply plan submitted to the related
manufacturing facility. Related purchases totaled TDM 213,758, TDM 221,341
and TDM 232,581 for the years ended November 30, 1998, 1997 and 1996,
respectively.
Henkel also provides certain Joint Venture entities with elective services
which include, but are not limited to, general administration, payroll
administration, accounting and research and development. The cost of services
are charged by Henkel on a monthly basis and may not reflect the costs which
the Joint Venture would incur if it were necessary to procure such services
from outside sources or if such services were performed internally by the
Joint Venture. Fees incurred by the Joint Venture in consideration for these
services amounted to TDM 14,010, TDM 14,807 and TDM 14,228 for the years
ended November 30, 1998, 1997, and 1996, respectively.
Royalty payments are shared equally by both parent companies based upon a
technology transfer agreement which provides for the payment of royalties as
a percentage of third party sales. Royalty expense related to this technology
transfer agreement amounted to TDM 26,568, TDM 24,372 and TDM 22,718 during
the twelve month periods ended November 30, 1998, 1997 and 1996, respectively.
The Joint Venture has entered into agreements with Henkel under which the
Joint Venture can both borrow from and lend to Henkel both on an overdraft
basis and through short term loans of no more than 3 months. There is
currently no maximum level of borrowing specified under these agreements. The
interest rate basis for both arrangements is the London Interbank Offering
Rate (LIBOR) (interest rate for German Marks overdrafts 4.13 % and 3.83 % for
3 month short term German Marks loans at November 30, 1998); on overdrafts,
approximately 0.5 percentage points are paid to compensate Henkel for
administration costs.
- 48 -
<PAGE>
At November 30, 1998, 1997, and 1996, respectively, the Joint Venture had
loans outstanding from Henkel and its subsidiaries of TDM -0-, TDM 1,159 and
TDM 7,445. As of the same dates, the loans receivable from Henkel and its
subsidiaries totaled TDM 7,342, TDM 6,894 and TDM 8,007, respectively. The
fair values of related party loans receivable and payable approximate book
value.
Interest expense to related parties totaled TDM 1,657, TDM 1,302 and TDM
1,463 for the years ended November 30, 1998, 1997 and 1996, respectively. For
the same periods, interest income from related parties totaled TDM 1,335, TDM
982 and TDM 1,180.
During 1997, the Joint Venture began to charge the parents for certain costs
incurred on behalf of the parents which by their nature are not arm's length.
The Joint Venture has reflected such costs, net of tax, in the amount of TDM
1,670 and TDM 1,515 as contributed capital for the years ended November 30,
1998 and 1997, respectively.
5. INCOME TAXES
The components of income before income taxes and the provision for income
taxes for the years ended November 30, 1998, 1997 and 1996, respectively, are
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
TDM TDM TDM
Income before income taxes:
Domestic 19,466 23,887 8,697
Foreign 97,047 85,088 88,745
------- ------- -------
Total 116,513 108.975 97,442
------- ------- -------
------- ------- -------
Income tax provision:
Current
Domestic 8,856 17,627 8,312
Foreign 37,403 37,149 35,656
------- ------- -------
Total current 46,259 54,776 43,968
Deferred
Domestic 2,063 (113) (1,296)
Foreign 99 (3,396) 2,662
------- ------- -------
Total deferred 2,162 (3,509) 1,366
Total income tax provision 48,421 51,267 45,334
------- ------- -------
------- ------- -------
</TABLE>
- 49 -
<PAGE>
The components of the Joint Venture's overall net deferred tax asset at
November 30:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
TDM TDM TDM
Deferred tax assets:
Tax loss carry forwards 7,705 10,256 9,576
Accruals, not deductible for tax purposes 4,668 4,823 3,612
Inventory valuation reserves 4,169 3,316 2,530
Accounts receivable reserves 1,106 968 976
Pension provision, not deductible 8,530 9,292 7,024
Amortization on intangible assets 0 227 1,663
Investment in affiliated company 1,158 1,210 0
Depreciation on fixed assets 5,074 6,606 2,692
Other 1,445 653 629
-------------------------------
Total deferred tax assets 33,855 37,351 28,702
Valuation allowance (11,693) (15,450) (10,387)
-------------------------------
Total deferred tax assets,
net of valuation allowance 22,162 21,901 18,315
-------------------------------
Deferred tax liabilities:
Amortization on intangible assets (1,187) 0 0
Depreciation on fixed assets (4,158) (4,127) (3,995)
Other (2,711) (1,506) (1,561)
-------------------------------
Total deferred tax liabilities (8,056) (5,633) (5,556)
-------------------------------
Net deferred tax asset 14,106 16,268 12,759
-------------------------------
-------------------------------
</TABLE>
At November 30, 1998, 1997, and 1996, the Joint Venture had net foreign
operating loss carry forwards for tax purposes of approximately TDM 24,297,
TDM 30,987 and TDM 27,535, respectively. A significant portion of these
losses have an indefinite carry forward period; the remaining losses have
expiration dates up to five years.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and projections
for future taxable income over the periods which the deferred tax assets are
deductible, management believes it is more likely than not the Joint Venture
will realize the benefits of these deductible differences, net of the
existing valuation allowances at November 30, 1998. During 1998, 1997 and
1998, the valuation allowance increased/(decreased) by TDM (3,757), TDM 5,063
and TDM 2,722, respectively.
- 50 -
<PAGE>
A reconciliation of the statutory German trade tax and federal corporate
income tax rate to the effective income tax rate is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory German rate 45.0% 44.4% 44.4%
Other European rates (7.3) (4.4) (8.0)
Losses and deferred items
without offsetting tax benefits 0.8 1.0 1.9
Provision for taxes arising
from tax examination 1.0 4.6 4.9
Different tax base in Germany 0.9 1.5 1.4
Deferred taxes refundable to
parent 1.0 0.2 0.6
Other 0.2 (0.3) 1.3
---- ---- ----
Effective income tax rate 41.6% 47.0% 46.5%
---- ---- ----
---- ---- ----
</TABLE>
The deferred taxes refundable to parent reflect the Joint Venture Agreement
in which the partners also agreed that all tax benefits realized after the
formation of the Joint Venture should be refunded to the respective parents
if the benefits relate to temporary differences that originated in periods
prior to the formation of the Joint Venture.
Cash paid for taxes for the years ended November 30, 1998, 1997 and 1996 was
TDM 35,897, TDM 32,756 and TDM 19,128, respectively.
6. PENSION AND OTHER BENEFIT PLANS
The Joint Venture's German entities have noncontributory defined benefit
pension plans to provide pension benefits to all eligible employees.
Benefits under the German plans are based upon salary and years of service.
The funding of these pension plans is not a common practice as funding
provides no economic (tax) benefit. Certain other Joint Venture entities have
noncontributory and contributory defined benefit plans, primarily based on
specific laws in particular countries. Plan assets outside of Germany consist
primarily of marketable securities and life insurance policies.
- 51 -
<PAGE>
A summary of all the components of net periodic pension cost concerning the
noncontributory and contributory defined benefit pension plans in Austria,
Belgium, France, Germany, Great Britain, the Netherlands and Spain for the
years ended November 30, 1998, 1997 and 1996 is as follows (TDM):
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Service cost-employee benefits 9,659 8,594 7,131
Interest cost 11,252 10,429 9,109
Actual Return on assets (4,807) (4,178) (3,130)
Net amortization and deferral 661 768 74
Employee contributions (465) (370) (329)
------ ------ ------
Total pension expense 16,300 15,243 12,855
------ ------ ------
------ ------ ------
</TABLE>
The status of the above employee pension benefit plans at November 30, 1998,
1997 and 1996 is summarized below (TDM):
<TABLE>
<CAPTION>
Actuarial present value of: 1998 1997 1996
<S> <C> <C> <C>
Vested benefit obligation 143,650 138,931 105,068
Non-vested accumulated
benefit obligation 7,280 10,458 9,513
------- ------- -------
Accumulated benefit obligation 150,930 149,389 114,581
------- ------- -------
------- ------- -------
Projected benefit obligation 203,804 171,497 138,189
Fair value of plan assets 81,259 61,854 45,839
------- ------- -------
Funded status 122,545 109,643 92,350
Unrecognized net transition
obligation 6,800 7,839 4,709
Unrecognized prior service cost (2,943) 325 0
Unrecognized net (gain)/loss 3,277 605 4,175
Additional minimum pension
liability 5,868 3,705 0
------- ------- -------
Unfunded accrued pension cost 121,279 104,579 83,466
------- ------- -------
------- ------- -------
</TABLE>
The following assumptions have been used to develop net periodic pension
expense and the actuarial present value of projected benefit obligations:
<TABLE>
<CAPTION>
Actuarial present value of: 1998 1997 1996
<S> <C> <C> <C>
Assumed discount rate 4.0-6.0% 7.5-6.0% 7.0- 5.0%
Expected return on plan assets 4.0-8.5% 6.0-10.0% 7.0-10.0%
Rate of increase in future 1.75-4.5% 6.0- 2.5% 5.0- 3.0%
compensation levels
</TABLE>
- 52 -
<PAGE>
Pursuant to the provisions of Statement of Financial Accounting Standards
No. 87, "Employer's Accounting for Pensions", the Joint Venture recorded an
additional minimum pension liability adjustment of TDM 5,868 and TDM 3,709 as
of November 30, 1998 and 1997, respectively, representing the amount by which
the accumulated benefit obligation exceeded the accrued pension liability for
the German plans. The additional liability is offset by an intangible asset
recorded under Intangible and Other Assets, net and Minimum Pension Liability
Adjustment within Combined Equity.
Included in Employee Benefit Obligation in the balance sheet is the Italian
termination indemnity plan which provides a benefit that is payable upon
termination of employment in virtually all cases of termination. The
liability for the Italian termination indemnity plan was TDM 10,119, TDM
10,662 and TDM 10,526 for 1998, 1997 and 1996, respectively.
7. TOTAL INDEBTEDNESS
SHORT TERM DEBT
As of November 30, 1998, 1997 and 1996, respectively, short term debt totaled
TDM 49,066, TDM 24,318 and TDM 72,972, and consists of generally short term
credit facilities with interest rates based on local money market rates. As
of November 30, 1998, the five main facilities are in French Franc in the
equivalent amount of TDM 5,339 at an interest rate of 3,8% p.a., in Italian
Lira in the equivalent amount of TDM 4,600 at an interest rate of 4,9% p.a.,
in German Marks in the equivalent amount of TDM 29,000 at an interest rate of
3,4% p.a., in Dutch Guilders in the equivalent amount of TDM 3,858 at an
interest rate of 3,85% p.a. and in Spanish Peseta in the equivalent amount of
TDM 2,279 at an interest rate of 4,5% p.a.
LONG TERM DEBT
Long term debt of November 30, 1998, 1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
TDM TDM TDM
<S> <C> <C> <C>
Notes 5,425 5,418 6,035
Less current maturities 657 656 652
----- ----- -----
Total 4,768 4,762 5,383
----- ----- -----
----- ----- -----
</TABLE>
- 53 -
<PAGE>
All notes are denominated in Danish Krona at fixed annual interest rates
ranging from 10.07% to 10.30% at November 30, 1998. As of November 30, 1998,
the aggregate annual maturities of long term debt were:
<TABLE>
<S> <C> <C> <C>
1999 - TDM 657 2000 - TDM 657
2001 - TDM 165 2002 - TDM 3,946
</TABLE>
Interest expense related to all debt excluding related party amounts for the
years ended November 30, 1998, 1997 and 1996 was TDM 7,972, TDM 6,146 and TDM
4,133, respectively. Interest paid to external and related parties for the
years ended November 30, 1998, 1997, 1996 was TDM 9,418, TDM 7,643 and TDM
6,408, respectively.
The fair value of short and long term debt approximates the book value.
8. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Joint Venture operates internationally, giving rise to exposure to market
risks from changes in interest rates and foreign exchange rates. Derivative
financial instruments are utilized by the Joint Venture to reduce certain of
these risks. The Joint Venture does not hold or issue financial instruments
for trading purposes. The Joint Venture is exposed to credit-related losses
in the event of nonperformance by counterparties to financial instruments,
but it does not expect any counterparties to fail to meet their obligations
given their high credit ratings.
a) Notional Amounts and Credit Exposures of Derivatives
The notional amounts of derivatives summarized in section b) do not represent
amounts exchanged by the parties and, thus, are not a measure of the exposure
of the Joint Venture through its use of derivatives. The amounts exchanged
are calculated on the basis of the notional amounts and the other terms of
the derivatives, which relate to exchange rates.
- 54 -
<PAGE>
b) Foreign Exchange Risk Management
The Joint Venture enters into various types of foreign exchange contracts in
managing its foreign exchange risk, as indicated in the following table (TDM):
<TABLE>
<CAPTION>
November 30, 1998 November 30,1997
----------------- -----------------
Notional Credit Notional Credit
Amount Exposure Amount Exposure
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Forward exchange
contracts 94,779 0 57,077 0
Options purchased 2,553 0 7,054 0
------ - ------ -
97,332 0 64,131 0
------ - ------ -
------ - ------ -
</TABLE>
The primary purpose of foreign exchange contracts is to hedge various
intercompany loans. The Joint Venture also enters, to a limited extent, into
forward exchange and option contracts to hedge certain existing and
anticipated future net foreign exchange exposures. The anticipated future
foreign exchange exposure of the Joint Venture is the total of the net
balances of all known and planned incoming and outgoing payments of the Joint
Venture's companies in foreign currencies during a twelve month time horizon.
Gains and losses arising on hedged loan transactions are accrued to income
over the period of the hedge. The deferred gains and losses as of November
30, 1998, 1997 and 1996 were not material. Losses on hedges of anticipated
exchange rate exposure are recorded as incurred whereas gains are deferred.
- 55 -
<PAGE>
The table below summarizes by major currency the contractual amounts of the
Joint Venture's forward exchange and option contracts in German Marks.
Foreign currency amounts are translated at rates current at the reporting
date. The "buy" amounts represent the German Marks equivalent of commitments
to purchase foreign currencies, and the "sell" amounts represent the German
Marks equivalent of commitments to sell foreign currencies (TDM):
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
Buy Sell Buy Sell
<S> <C> <C> <C> <C>
Italian Lira/US-Dollar 27,374 27,374 9,494 9,668
Italian Lira/French Franc 6,009 5,977
Italian Lira/Danish Krona 4,488 4,466
Italian Lira/Swedish Krona 3,659 3,651
Pound Sterling/German Mark 44,362 44,661 13,042 12,807
French Franc/German Mark 2,988 2,988
Finmark/Swedish Krona 1,832 1,826
Swiss Franc/German Mark 14,925 14,940 6,182 6,186
Irish Pound/German Mark 3,651 3,623
US Dollar/German Mark 7,489 7,520 10,647 10,551
Swedish Krona/German Mark 2,626 2,625
Czech Krona/German Mark 556 556
Swedish Krona/Belgium Franc 1,015 1,033
Swedish Krona/Danish Krona 1,124 1,154
------ ------ ------ ------
97,332 97,676 64,131 63,930
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
c) Fair Value of Off Balance Sheet Financial Instruments
The fair value of off balance sheet financial instruments is not significant.
9. RESEARCH EXPENDITURES
Research expenditures which relate to the development of new products and
processes, including significant improvements and refinements to existing
products, were TDM 34,6, TDM 35,7, and TDM 31,8 for the years ended November
30, 1998, 1997 and 1996, respectively.
- 56 -
<PAGE>
10. COMMITMENTS AND CONTINGENCIES
The Joint Venture has a number of operating lease agreements primarily
involving motor vehicles, computer and other office equipment. The following
is a schedule by year of the future minimum lease payments required under the
operating leases that have initial or remaining noncancellable lease terms in
excess of one year as of November 30, 1998 (TDM):
<TABLE>
<CAPTION>
<S> <C>
1999 26,270
2000 18,741
2001 6,958
2002 4,086
2003 3,144
thereafter 10,035
------
Total 69,234
------
------
</TABLE>
Rent expense for the twelve month period ended November 30, 1998, 1997 and
1996, was approximately TDM 31,369, TDM 27,416 and TDM 18,503, respectively.
The Joint Venture is subject to lawsuits and claims arising out of the
conduct of its business, including those relating to commercial transactions
and environmental safety. As an integral part of the Joint Venture agreement,
Henkel and Ecolab have provided certain representations and warranties
against future expenditures arising from operations prior to July 1, 1991.
A subsidiary of the Joint Venture is named in an environmental legal action
related to the conduct of its business prior to the formation of the Joint
Venture on July 1, 1991. Based on the facts currently known to the Joint
Venture, and after consultation with legal counsel, management believes that
the Joint Venture is indemnified against any potential liability arising from
such action under the terms and conditions of the Amended and Restated
Umbrella Agreement dated June 26, 1991, by and between Henkel and Ecolab.
Therefore, the Joint Venture does not expect material adverse effects on its
financial position, results of operations or liquidity from the outcome of
these losses and claims.
- 57 -
<PAGE>
The Joint Venture's operations and customers are located throughout Europe
and operate in the industrial and institutional hygiene business. No single
customer accounted for a significant amount of the Joint Venture's sales in
1998, 1997 and 1996, and there were no significant accounts receivable from a
single customer at November 30, 1998, 1997 and 1996. The Joint Venture
establishes an allowance for doubtful accounts based upon factors surrounding
the credit risk of specific customers, historical trends and other
information.
- 58 -
<PAGE>
[LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS
OF HENKEL-ECOLAB JOINT VENTURE
Our audit of the combined financial statements as of and for the year ended
November 30, 1998 referred to in our report dated January 26, 1999 included
herein also included an audit of the financial statement schedule:
"Valuation and Qualifying Accounts and Reserves." In our opinion, this
financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
combined financial statements. The financial statement schedule of
Henkel-Ecolab Joint Venture for the years ended November 30, 1997 and 1996
were audited by other independent auditors, whose reports, dated January 23,
1998 and January 22, 1997, expressed an unqualified opinion on those
schedules, when read in conjunction with the related combined financial
statements.
January 26, 1999
PricewaterhouseCoopers
Gesellschaft mit beschrankter Haftung
Wirtschaftsprufungsgesellschaft
/s/ Gunter Betz
/s/ Henri Leveque
- -------------------
- 59 -
<PAGE>
HENKEL-ECOLAB
Schedule - Valuation and Qualifying Accounts and Reserves
(Thousands)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Description Balance, Additions Deductions Balance,
Beg. of (a) from Close of
Period Reserve Period
(b)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Period Ended
November 30, 1996
Allowance for DM 14,274 5,439 3,514 16,199
doubtful
Accounts
-----------------------------------------------------------------
DM 14,274 5,439 3,514 16,199
-----------------------------------------------------------------
-----------------------------------------------------------------
Period Ended
November 30, 1997
Allowance for DM 16,199 13,400 7,084 22,515
doubtful
Accounts
-----------------------------------------------------------------
DM 16,199 13,400 7,084 22,515
-----------------------------------------------------------------
-----------------------------------------------------------------
Period Ended
November 30, 1998
Allowance for DM 22,515 9,325 14,522 17,318
doubtful
Accounts
-----------------------------------------------------------------
DM 22,515 9,325 14,522 17,318
-----------------------------------------------------------------
-----------------------------------------------------------------
</TABLE>
(a) Provision for doubtful accounts
(charged to expenses)
(b) Items determined to be uncollectible,
less recovery of amounts previously written off.
- 60 -
<PAGE>
EXHIBIT INDEX
The following documents are filed as exhibits to this Report.
<TABLE>
<CAPTION>
Exhibit No. Document Method of Filing
----------- -------- ----------------
<S> <C> <C>
(3)A. Restated Certificate of Incorporated by reference
Incorporation. to Exhibit (3) to the
Company's Current Report
on Form 8-K dated October
22, 1997.
B. By-Laws, as amended through February Filed herewith
18, 1999. electronically.
(4)A. Common Stock. See Exhibits (3)A and
(3)B.
B. Form of Common Stock Certificate. Incorporated by reference
to Exhibit (4)B of the
Company's Form 10-K
Annual Report for the
year ended December 31,
1995.
C. Rights Agreement dated as of Incorporated by reference
February 24, 1996. to Exhibit (4) of the
Company's Current Report
on Form 8-K dated
February 24, 1996.
D. Note Agreement dated as of October 1, Incorporated by reference
1991 relating to $100,000,000 9.68% to Exhibit (4)F of the
Senior Notes Due October 1, 2001 Company's Form 10-K
between the Company and the insurance Annual Report for the
companies named therein. year ended December 31,
1991.
E.(i) Multicurrency Credit Agreement Incorporated by reference
("Credit Agreement") dated as of to Exhibit (4)A of the
September 29, 1993, as Amended and Company's Form 10-Q for
Restated as of October 17, 1997, the quarter ended
among the Company, the financial September 30, 1997.
institutions party thereto, Citibank,
N.A., as Agent, Citibank
International Plc, as Euro-Agent and
Morgan Guaranty Trust Company of New
York as Co-Agent.
(ii) Australian Dollar Local Currency Incorporated by reference
Addendum to the Credit Agreement. to Exhibit (4)B of the
Company's Form 10-Q for
the quarter ended
September 30, 1997.
</TABLE>
- 61 -
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Document Method of Filing
----------- -------- ----------------
<S> <C> <C>
(iii) Amendment No. 1 dated as of June 23, Incorporated by reference
1998 to Multicurrency Credit to Exhibit (4)A of the
Agreement dated as of September 29, Company's Form 10-Q for
1993, as Amended and Restated as of the quarter ended June
October 17, 1997, and to Local 30, 1998.
Currency Addendum dated as of October
17, 1997, with respect to the
Multicurrency Credit Agreement, among
Ecolab Inc., the Banks parties
thereto, Citibank, N.A., as Agent for
the Banks, Citibank International
Plc, as Euro-Agent for the Banks and
Morgan Guaranty Trust Company of New
York as Co-Agent; and with respect to
the Local Currency Addendum among
Ecolab Inc., Ecolab PTY Limited, the
Local Currency Banks party thereto,
Citibank, N.A., as Agent and
Citisecurities Limited, as Local
Currency Agent.
(iv) Australian Dollar Local Currency
Addendum dated as of June 23, 1998 Incorporated by reference
among Ecolab Finance PTY Limited, to Exhibit (4)B of the
Ecolab Inc., Citibank, N.A., the Company's Form 10-Q for
Local Currency Agent named therein the quarter ended June
and the Local Currency Banks party 30, 1998.
thereto.
F. Indenture dated as of November 1, Incorporated by reference
1996 as amended and supplemented, to Exhibit 4.1 of the
between the Company and the First Company's Amendment No. 1
National Bank of Chicago as Trustee. to Form S-3 filed
November 15, 1996.
G. Form of Underwriting Agreement. Incorporated by reference
to Exhibit 1 of the
Company's Amendment No. 1
to Form S-3 filed
November 15, 1996.
(9) Amended and Restated Stockholder's See Exhibit (10)P(v)
Agreement. hereof.
</TABLE>
- 62 -
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Document Method of Filing
----------- -------- ----------------
<S> <C> <C>
(10)A. Ecolab Inc. 1977 Stock Incentive Incorporated by reference
Plan, as amended through November 1, to Exhibit (10)A of the
1996. Company's Form 10-K
Annual Report for the
year ended December 31,
1997.
B. Ecolab Inc. 1993 Stock Incentive Incorporated by reference
Plan. to Exhibit (10)B of the
Company's Form 10-K
Annual Report for the
year ended December 31,
1992.
C. Amended and Restated Ecolab Inc. 1997 Filed herewith
Stock Incentive Plan. This Plan electronically.
amendment will become effective only
upon approval by the Stockholders of
the Company at the Company's Annual
Meeting scheduled to be held May 14,
1999.
(i) Non-Statutory Stock Option Agreement Incorporated by reference
between the Company and Allan L. to Exhibit (10) of the
Schuman with respect to premium- Company's Form 10-Q for
priced option grant effective the quarter ended June
February 20, 1998 under the Ecolab 30, 1998.
Inc. 1997 Stock Incentive Plan.
Similar option grants were made to
each of the named executive officers
of the Company covering varying, but
smaller number of shares.
D. 1988 Non-Employee Director Stock Incorporated by reference
Option Plan as amended through to Exhibit (10)D of the
February 23, 1991. Company's Form 10-K
Annual Report for the
year ended December 31,
1990.
E. 1995 Non-Employee Director Stock Incorporated by reference
Option Plan. to Exhibit (10)D of the
Company's Form 10-K
Annual Report for the
year ended December 31,
1994.
</TABLE>
- 63 -
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Document Method of Filing
----------- -------- ----------------
<S> <C> <C>
F. Ecolab Inc. 1997 Non-Employee Incorporated by reference
Director Deferred Compensation Plan. to Exhibit (10)F of the
Company's Form 10-K for
the year ended December
31, 1996.
G. Form of Director Indemnification Incorporated by reference
Agreement dated August 11, 1989. to Exhibit (19)A of the
Substantially identical agreements Company's Form 10-Q for
are in effect as to each director of the quarter ended
the Company. September 30, 1989.
H.(i) Ecolab Executive Death Benefits Plan, Incorporated by reference
as amended and restated effective to Exhibit (10)J of the
March 1, 1994. Company's 10-K Annual
Report for the year ended
December 31, 1994. See
also Exhibit (10)O
hereof.
(ii) Amendment No. 1 to Ecolab Executive Filed herewith
Death Benefits Plan. electronically.
(iii) Second Declaration of Amendment to Filed herewith
Ecolab Executive Death Benefits Plan, electronically.
effective March 1, 1998.
I. Ecolab Executive Long-Term Disability Incorporated by reference
Plan, as amended and restated to Exhibit (10)K of the
effective January 1, 1994. Company's 10-K Annual
Report for the year ended
December 31, 1994. See
also Exhibit (10)O
hereof.
J. Ecolab Executive Financial Counseling Incorporated by reference
Plan to Exhibit (10)K of the
Company's Form 10-K
Annual Report for the
year ended December 31,
1992.
</TABLE>
- 64 -
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Document Method of Filing
----------- -------- ----------------
<S> <C> <C>
K.(i) Ecolab Supplemental Executive Incorporated by reference
Retirement Plan, as amended and to Exhibit (10)M(i) of
restated effective July 1, 1994. the Company's 10-K Annual
Report for the year ended
December 31, 1994. See
also Exhibit (10)O
hereof.
(ii) First Declaration of Amendment to Incorporated by reference
Ecolab Supplemental Executive to Exhibit (10)M(ii) of
Retirement Plan effective as of July the Company's 10-K Annual
1, 1994. Report for the year ended
December 31, 1994.
(iii) Second Declaration of Amendment to Incorporated by reference
Ecolab Supplemental Executive to Exhibit (10)M(iii) of
Retirement Plan effective as of July the Company's Form 10-K
1, 1994. Annual Report for the
year ended December 31,
1995.
(iv) Third Declaration of Amendment to Filed herewith
Ecolab Supplemental Executive electronically.
Retirement Plan, effective March 1,
1998.
L.(i) Ecolab Mirror Savings Plan, as Incorporated by reference
amended and restated effective to Exhibit (10)N of the
September 1, 1994. Company's 10-K Annual
Report for the year ended
December 31, 1994. See
also Exhibit (10)O
hereof.
(ii) First Declaration of Amendment to Incorporated by reference
Ecolab Mirror Savings Plan effective to Exhibit (10)N(ii) of
as of January 1, 1995. the Company's Form 10-K
Annual Report for the
year ended December 31,
1995.
(iii) Second Declaration of Amendment to Incorporated by reference
Ecolab Mirror Savings Plan effective to Exhibit (10)O(iii) of
January 1, 1997. the Company's Form 10-K
Annual Report for the
year ended December 31,
1996.
</TABLE>
- 65 -
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Document Method of Filing
----------- -------- ----------------
<S> <C> <C>
(iv) Third Declaration of Amendment to Filed herewith
Ecolab Mirror Savings Plan effective electronically.
November 13, 1997.
(v) Fourth Declaration of Amendment to Filed herewith
Ecolab Mirror Savings Plan, effective electronically.
September 1, 1998.
M.(i) Ecolab Mirror Pension Plan effective Incorporated by reference
July 1, 1994. to Exhibit (10)O(i) of
the Company's Annual
Report on Form 10-K for
the year ended December
31, 1994. See also
Exhibit (10)O hereof
(ii) First Declaration of Amendment to Incorporated by reference
Ecolab Mirror Pension Plan effective to Exhibit (10)O(ii) of
as of July 1, 1994. the Company's Annual
Report on Form 10-K for
the year ended December
31, 1994.
(iii) Second Declaration of Amendment to Incorporated by reference
Ecolab Mirror Pension Plan effective to Exhibit (10)O(iii) of
as of July 1, 1994. the Company's Form 10-K
Annual Report for the
year ended December 31,
1995.
(iv) Third Declaration of Amendment to Filed herewith
Ecolab Mirror Pension Plan, effective electronically.
March 1, 1998.
N.(i) Ecolab Inc. Administrative Document Incorporated by reference
for Non-Qualified Benefit Plans. to Exhibit (10)P of the
Company's 10-K Annual
Report for the year ended
December 31, 1994.
(ii) Amendment No. 1 to the Ecolab Inc. Filed herewith
Administrative Document for Non- electronically.
Qualified Benefit Plans effective
July 1, 1997.
</TABLE>
- 66 -
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Document Method of Filing
----------- -------- ----------------
<S> <C> <C>
(iii) First Declaration to Amendment to the Filed herewith
Ecolab Inc. Administrative Document electronically.
for Non-Qualified Benefit Plans
effective November 13, 1997.
O. 1999 Ecolab Inc. Management Filed herewith
Performance Incentive Plan. This electronically.
Plan will become effective only upon
approval by the Stockholders of the
Company at the Company's Annual
Meeting scheduled to be held May 14,
1999.
P.(i) Amended and Restated Umbrella Incorporated by reference
Agreement between Henkel KGaA and to Exhibit 13 of HC
Ecolab Inc. dated June 26, 1991. Investments, Inc.'s and
Henkel KGaA's Amendment
No. 4 to Schedule 13D
dated July 16, 1991.
(ii) Amended and Restated Joint Venture Incorporated by reference
Agreement between Henkel KGaA and to Exhibit 14 of HC
Ecolab Inc. dated June 26, 1991. Investments, Inc.'s and
Henkel KGaA's Amendment
No. 4 to Schedule 13D
dated July 16, 1991.
(iii) Amendment to the Amended and Restated Filed herewith
Joint Venture Agreement between electronically.
Henkel KGaA and Ecolab Inc. dated
June 13, 1994.
(iv) Amended and Restated ROW Purchase Incorporated by reference
Agreement between Henkel KGaA and to Exhibit (7) of the
Ecolab Inc. dated June 26, 1991. Company's Current Report
on Form 8-K dated July
11, 1991.
(v) Amended and Restated Stockholder's Incorporated by reference
Agreement between Henkel KGaA and to Exhibit 15 of HC
Ecolab Inc. dated June 26, 1991. Investments, Inc.'s and
Henkel KGaA's Amendment
No. 4 to Schedule 13D
dated July 16, 1991.
</TABLE>
- 67 -
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Document Method of Filing
----------- -------- ----------------
<S> <C> <C>
Q. Description of Ecolab Management Filed herewith
Incentive Plan. electronically.
(13) Those portions of the Company's Filed herewith
Annual Report to Stockholders for the electronically.
year ended December 31, 1998 which
are incorporated by reference into
Parts I, II and IV hereof.
(21) List of Subsidiaries as of March 16, Filed herewith
1999. electronically.
(23)A. Consent of PricewaterhouseCoopers LLP See page 33 hereof.
to Incorporation by Reference at page
33 hereof is filed as a part hereof.
B. Consent of PricewaterhouseCoopers Filed herewith
Gesellschaft mit beschrankter Haftung electronically.
Wirtschaftsprufungsgesellschaft.
C. Consent of KPMG Deutsche Treuhand- Filed herewith
Gesellschaft Aktiengesellschaft electronically.
Wirtschaftsprufungsgesellschaft.
(24) Powers of Attorney. Filed herewith
electronically.
(27) Financial Data Schedule for year Filed herewith
ended December 31, 1998. electronically.
COVER Cover Letter. Filed herewith
electronically.
</TABLE>
- 68 -
<PAGE>
BY-LAWS
OF
ECOLAB INC.
(A DELAWARE CORPORATION)
AS AMENDED THROUGH FEBRUARY 18, 1999
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office of the Corporation in the
State of Delaware shall be at 1209 Orange Street, City of Wilmington, County of
New Castle, Delaware. The name of the resident agent in charge thereof shall be
The Corporation Trust Company.
SECTION 2. OTHER OFFICES. The Corporation may also have offices at such other
places, within or without the State of Delaware, as the Board of Directors may
from time to time determine or the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 1. PLACE OF MEETINGS. Meetings of stockholders may be held at such
place, within or without the State of Delaware, as the Board of Directors or the
officer calling the same shall designate.
SECTION 2. ANNUAL MEETING. An annual meeting of the stockholders of the
Corporation for the election of directors by written ballot and for the
transaction of such other business as may properly come before the meeting shall
be held at such time and on such day of each year as shall be designated by the
Board of Directors, the Chairman of the Board, the President or the Secretary.
SECTION 3. NOTICE OF STOCKHOLDER NOMINATIONS OF DIRECTORS. Only persons who are
nominated in accordance with the following procedures shall be eligible for
election as directors of the Corporation, except as may be otherwise provided in
the Restated Certificate of Incorporation of the Corporation. Nominations of
persons for election to the Board of Directors may be made at any annual meeting
of stockholders (a) by or at the direction of the Board of Directors (or any
duly authorized Committee thereof) or (b) by any stockholder of the Corporation
(i) who is a stockholder of record on the date of the giving of the notice
provided for in this Section 3 and on the record date for the determination of
stockholders entitled to vote at such annual meeting and (ii) who complies with
the notice procedures set forth in this Section 3.
In addition to any other applicable requirements, for a nomination to
be made by a stockholder, such stockholder must have given timely notice thereof
in proper written form to the Secretary of the Corporation.
<PAGE>
To be timely, a stockholder's notice to the Secretary must be delivered
to or mailed and received at the principal executive offices of the Corporation
not less than ninety (90) days nor more than one hundred thirty-five (135) days
prior to the anniversary date of the immediately preceding annual meeting of
stockholders; PROVIDED, HOWEVER, that in the event that the annual meeting is
called for a date that is not within thirty (30) days before or after such an
anniversary date, notice by the stockholder in order to be timely must be so
received not later than the close of business on the tenth (10th) day following
the day on which such notice of the date of the annual meeting was mailed or
public disclosure of the date of the annual meeting was made, whichever first
occurs. In no event shall the public disclosure of an adjournment of an annual
meeting commence a new time period for the giving of a stockholder's notice as
described above.
To be in proper written form, a stockholder's notice to the Secretary
must set forth (a) as to each person whom the stockholder proposes to nominate
for election as a director (i) the name, age, business address and residence
address of the person, (ii) the principal occupation or employment of the
person, (iii) the class or series and number of shares of capital stock of the
Corporation which are owned beneficially or of record by the person and (iv) any
other information relating to the person that would be required to be disclosed
in a proxy statement or other filings required to be made in connection with
solicitations of proxies for election of directors pursuant to Section 14 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules
and regulations promulgated thereunder; and (b) as to the stockholder giving the
notice (i) the name and record address of such stockholder, (ii) the class or
series and number of shares of capital stock of the Corporation which are owned
beneficially or of record by such stockholder, (iii) a description of all
arrangements or understandings between such stockholder and each proposed
nominee and any other person or persons (including their names) pursuant to
which the nomination(s) are to be made by such stockholder, (iv) a
representation that such stockholder intends to appear in person or by proxy at
the meeting to nominate the persons named in its notice and (v) any other
information relating to such stockholder that would be required to be disclosed
in a proxy statement or other filings required to be made in connection with
solicitations of proxies for election of directors pursuant to Section 14 of the
Exchange Act and the rules and regulations promulgated thereunder. Such notice
must be accompanied by a written consent of each proposed nominee to being named
as a nominee and to serve as a director if elected.
No person shall be eligible for election as a director of the
Corporation unless nominated in accordance with the procedures set forth in this
Section 3. If the Chairman of the meeting determines that a nomination was not
made in accordance with the foregoing procedures, the Chairman shall declare to
the meeting that the nomination was defective and such defective nomination
shall be disregarded.
Notwithstanding anything in the third paragraph of this Section 3 to
the contrary, in the event that the number of directors to be elected to the
Board of Directors of the Corporation is increased and there is no public
disclosure by the Corporation naming all of the nominees for director or
specifying the size of the increased Board of Directors at least 100 days prior
to the first anniversary of the preceding year's annual meeting, a stockholder's
notice required by this
-2-
<PAGE>
By-Law shall also be considered timely, but only with respect to nominees for
any new positions created by such increase, if it shall be delivered to the
Secretary at the principal executive offices of the Corporation not later
than the close of business on the 10th day following the day on which such
public disclosure is first made by the Corporation.
SECTION 4. NOTICE OF STOCKHOLDER PROPOSALS OF BUSINESS. No business may be
transacted at an annual meeting of stockholders, other than business that is
either (a) specified in the notice of meeting (or any supplement thereto) given
by or at the direction of the Board of Directors (or any duly authorized
committee thereof), (b) otherwise properly brought before the annual meeting by
or at the direction of the Board of Directors (or any duly authorized committee
thereof) or (c) otherwise properly brought before the annual meeting by any
stockholder of the Corporation (i) who is a stockholder of record on the date of
the giving of the notice provided for in this Section 4 and on the record date
for the determination of stockholders entitled to vote at such annual meeting
and (ii) who complies with the notice procedures set forth in this Section 4.
In addition to any other applicable requirements, for business to be
properly brought before an annual meeting by a stockholder, such stockholder
must have given timely notice thereof in proper written form to the Secretary of
the Corporation.
To be timely, a stockholder's notice to the Secretary must be delivered
to or mailed and received at the principal executive offices of the Corporation
not less than ninety (90) days nor more than one hundred thirty-five (135) days
prior to the anniversary date of the immediately preceding annual meeting of
stockholders; PROVIDED, HOWEVER, that in the event that the annual meeting is
called for a date that is not within thirty (30) days before or after such
anniversary date, notice by the stockholder in order to be timely must be so
received not later than the close of business on the tenth (10th) day following
the day on which such notice of the date of the annual meeting was mailed or
public disclosure of the date of the annual meeting was made, whichever first
occurs. In no event shall the public disclosure of an adjournment of an annual
meeting commence a new time period for the giving of a stockholder's notice as
described above.
To be in proper written form, a stockholder's notice to the Secretary
must set forth as to each matter such stockholder proposes to bring before the
annual meeting (i) a brief description of the business desired to be brought
before the annual meeting and the reasons for conducting such business at the
annual meeting, (ii) the name and record address of such stockholder, (iii) the
class or series and number of shares of capital stock of the Corporation which
are owned beneficially or of record by such stockholder, (iv) a description of
all arrangements or understandings between such stockholder and any other person
or persons (including their names) in connection with the proposal of such
business by such stockholder and any material interest of such stockholder in
such business and (v) a representation that such stockholder intends to appear
in person or by proxy at the annual meeting to bring such business before the
meeting.
No business shall be conducted at the annual meeting of stockholders
except business brought before the annual meeting in accordance with the
procedures set forth in this Section 4;
-3-
<PAGE>
PROVIDED, HOWEVER, that, once business has been properly brought before the
annual meeting in accordance with such procedures, nothing in this Section 4
shall be deemed to preclude discussion by any stockholder of any such
business. If the Chairman of an annual meeting determines that business was
not properly brought before the annual meeting in accordance with the
foregoing procedures, the Chairman shall declare to the meeting that the
business was not properly brought before the meeting and such business shall
not be transacted.
SECTION 5. DEFINITION. For purposes of Sections 3 and 4 of these By-Laws,
"public disclosure" shall mean disclosure in a press release reported by the Dow
Jones News Service, Associated Press or comparable national news service or in a
document publicly filed by the Corporation with the Securities and Exchange
Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act."
SECTION 6. SPECIAL MEETINGS. Special meetings of the stockholders, for any
purpose or purposes, unless otherwise prescribed by statute, may be called at
any time by the Board of Directors or by the Chairman of the Board, and shall be
called by the Chairman of the Board, the President or the Secretary at the
written request of the majority of the Board of Directors or at the written
request of stockholders owning capital stock having eighty percent (80%) of the
voting power of the entire issued and outstanding capital stock of the
Corporation. Such request shall state the purpose or purposes of the proposed
meeting. No business shall be transacted at any special meeting of the
stockholders except that stated in the notice of the meeting.
SECTION 7. NOTICE OF MEETINGS. Written notice stating the place, date and hour
of each annual and special meeting of the stockholders and, in the case of a
special meeting, the purpose or purposes thereof, shall be given not less than
twenty (20) nor more than sixty (60) days before the date of such meeting to
each stockholder entitled to vote at such meeting. If mailed, notice shall be
deemed given when deposited in the United States mail, postage prepaid, directed
to the stockholder at such address as appears on the records of the Corporation.
Notice of any meeting of stockholders shall not be required to be given to any
stockholder who shall attend such meeting in person or by proxy and shall not,
at the beginning of such meeting, object to the transaction of any business
because the meeting is not lawfully called or convened, or who shall, either
before or after the meeting, submit a signed waiver of notice.
SECTION 8. QUORUM. At all meetings of the stockholders the holders of a majority
of the shares of stock of the Corporation issued and outstanding and entitled to
vote thereat, present in person or represented by proxy, shall be requisite to
constitute a quorum for the transaction of business, except as otherwise
provided by statute or in the Restated Certificate of Incorporation. In the
absence of a quorum, the holders of a majority of the shares of stock present in
person or by proxy and entitled to vote may adjourn the meeting until the
requisite amount of stock shall be present.
SECTION 9. ORGANIZATION AND ORDER OF BUSINESS. At each meeting of the
stockholders, the Chairman of the Board, or in his absence the President, or in
his absence any other person selected by the Board of Directors, shall act as
Chairman of the meeting. The Secretary, or in his absence an Assistant
Secretary, or any person appointed by the Chairman of the meeting, shall act as
-4-
<PAGE>
Secretary of the meeting and keep the minutes thereof. The order of business at
all meetings of the stockholders shall be as determined by the Chairman of the
meeting.
SECTION 10. VOTING. Except as otherwise provided by statute or by the Restated
Certificate of Incorporation, at each meeting of the stockholders each
stockholder having the right to vote thereat shall be entitled to (i) one vote
for each share of common stock of the Corporation standing in his name on the
record of stockholders of the Corporation, and (ii) such voting rights, if any,
as are provided in the applicable Certificate of Designation, Preferences and
Rights with respect to any series of preferred stock of the Corporation standing
in his name on the record of stockholders of the Corporation, in all such
instances on the date fixed by the Board of Directors as the record date for the
determination of the stockholders who shall be entitled to notice of and vote at
such meeting; or if no record date shall have been fixed, then at the close of
business on the day next preceding the day on which notice thereof shall be
given. Each stockholder entitled to vote at any meeting of stockholders may
authorize another person or persons to act for him by a proxy signed or
otherwise authorized in accordance with Section 212 of the General Corporation
Law of Delaware by such stockholder or his attorney-in-fact. No proxy shall be
valid after the expiration of three (3) years from the date thereof, unless
otherwise provided in the proxy. Except as otherwise provided by statute, these
By-Laws or the Restated Certificate of Incorporation, any corporate action to be
taken by vote of the stockholders shall be authorized by a majority of the total
votes cast at a meeting of stockholders by the holders of shares present in
person or represented by proxy and entitled to vote on such action. Unless
required by statute, or determined by the chairman of the meeting to be
advisable, the vote on any question other than elections need not be by written
ballot. On a vote by written ballot, each ballot shall be signed by the
stockholder, his attorney-in-fact, or his proxy if there be such proxy, and
shall state the stockholder's name and the number of shares voted.
SECTION 11. STOCKHOLDER LIST. The Secretary shall prepare and make, at least ten
(10) days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting, arranged in alphabetical order,
and showing the address of each stockholder and the number of shares registered
in the name of each stockholder. Such list shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten (10) days prior to the meeting,
either at a place within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, or, if not so specified, at the
place where the meeting is to be held. This list shall also be produced and kept
at the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
SECTION 12. INSPECTORS. The Board of Directors may, in advance of any meeting of
stockholders, appoint or provide for the appointment of one or more inspectors
to act at such meeting or any adjournments thereof. If the inspector or
inspectors shall not be appointed, or if any of them shall fail to appear or
act, the Chairman of the meeting may, and on the request of any stockholder
entitled to vote thereat shall, appoint one or more inspectors. Each inspector,
before entering upon the discharge of his duties, shall take and sign an oath
faithfully to execute the duties of inspector at such meeting with strict
impartiality and according to the best of his ability. On request of the
Chairman of the meeting or any stockholder entitled to vote thereat, the
inspectors shall make a report in writing of any challenge, request or matter
determined by them and shall execute a
-5-
<PAGE>
certificate of any fact found by them. No director or candidate for the
office of director shall act as inspector of any election of directors.
Inspectors need not be stockholders of the Corporation.
SECTION 13. ADJOURNED MEETINGS. A meeting of stockholders may be adjourned to
another time and to another place by either the chairman of the meeting or by
the stockholders and proxies present. When a meeting is adjourned to another
time or place, notice of such adjourned meeting need not be given if the time
and place to which the meeting shall be adjourned are announced at the meeting
at which the adjournment is taken. At the adjourned meeting, if a quorum is
present any business may be transacted which might have been transacted at the
original meeting. If the adjournment is for more than thirty (30) days or if
after the adjournment a new record date is fixed for the adjourned meeting,
notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote at the meeting.
SECTION 14. CONSENT OF STOCKHOLDERS. Unless otherwise provided in the Restated
Certificate of Incorporation, any action required or permitted to be taken at
any Annual or Special Meeting of Stockholders of the Corporation, may be taken
without a meeting, without prior notice and without a vote, if a consent in
writing, setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. Prompt notice of the taking of
the corporate action without a meeting by less than unanimous written consent
shall be given to those stockholders who have not consented in writing.
ARTICLE III
BOARD OF DIRECTORS
SECTION 1. GENERAL POWERS. The business and affairs of the Corporation shall be
managed by or under the direction of the Board of Directors. The Board of
Directors may exercise all such authority and powers of the Corporation and do
all such lawful acts and things as are not by statute or the Restated
Certificate of Incorporation or these By-Laws directed or required to be
exercised or done by the stockholders.
SECTION 2. NUMBER AND ELECTION OF DIRECTORS. The number of directors of the
Corporation which shall constitute the entire Board of Directors shall be such
number as is fixed by the Board of Directors in accordance with the provisions
of the Restated Certificate of Incorporation. Directors shall be elected and
shall hold office in accordance with the provisions of the Restated Certificate
of Incorporation. Election of directors by the stockholders shall be by a
plurality of the votes cast. Directors need not be stockholders of the
Corporation.
SECTION 3. PLACE OF MEETING. The Board of Directors may hold meetings at such
place, within or without the State of Delaware, as the Board of Directors or the
officer calling the meeting may from time to time determine.
SECTION 4. ORGANIZATION MEETING. Promptly following the adjournment of the
annual meeting of the stockholders, and without other notice than this By-Law,
the newly constituted Board of
-6-
<PAGE>
Directors shall meet for the purpose of organization, the election of
officers, and the transaction of other business, with power to adjourn and
re-adjourn.
SECTION 5. MEETINGS. Regular meetings of the Board of Directors shall be held at
such time and place as the Board of Directors may from time to time determine.
Special meetings of the Board of Directors may be called by the Chairman of the
Board, the President or any two (2) or more Directors.
SECTION 6. NOTICE OF MEETINGS. Notice of regular meetings of the Board of
Directors need not be given except as otherwise required by statute or these
By-Laws. Notice of the place, date and time of the holding of each special
meeting of the Board of Directors, and the purpose or purposes thereof, shall be
delivered to each director either personally or by mail, telephone, telegraph,
cable, or similar means, three (3) days before the day on which such meeting is
to be held, or on such shorter notice as the person or persons calling such
meeting deem appropriate in the circumstances. Such notice shall be deemed to be
given at the time it is dispatched by depositing it in the United States mail
with postage prepaid, by transmission by telephone, telegraph or cable, or by
personal delivery. Notice of any such meeting need not be given to any director
who shall, either before or after the meeting, submit a signed waiver of notice
or who shall attend such meeting without protesting, prior to or at its
commencement, the lack of notice to him.
SECTION 7. QUORUM AND MANNER OF ACTING. Except as otherwise provided by statute,
the Restated Certificate of Incorporation or these By-Laws, at all meetings of
the Board of Directors a majority of the directors then in office shall
constitute a quorum for the transaction of business; provided, however, that if
by reason of catastrophe or emergency, a majority of the entire Board is not
available or capable of acting, one third (1/3) of the entire Board of
Directors, but in any event not less than two (2) directors, shall constitute a
quorum for the transaction of business at any meeting of the Board of Directors.
The act of a majority of the directors present at any meeting at which there is
a quorum, as herein provided, shall be the act of the Board of Directors except
as may be otherwise specifically provided by statute, the Restated Certificate
of Incorporation or these By-Laws. In the absence of a quorum at any meeting of
the Board of Directors, a majority of the directors present thereat, or if no
director be present, the Secretary or an Assistant Secretary, may adjourn such
meeting to another time and place until the quorum is had. Notice of any
adjourned meeting need not be given. At any adjourned meeting at which a quorum
is present, any business may be transacted which might have been transacted at
the meeting as originally called.
SECTION 8. ORGANIZATION AND ORDER OF BUSINESS. At each meeting of the Board of
Directors, the Chairman of the Board, or in his absence the President, or in his
absence, a member of the Board of Directors selected by the directors in
attendance, shall act as Chairman of the meeting. The Secretary, or in his
absence, an Assistant Secretary, or any person appointed by the Chairman of the
meeting, shall act as Secretary of the meeting and keep the minutes thereof. The
order of business at all meetings of the directors shall be as determined by the
Chairman of the meeting.
SECTION 9. ACTION WITHOUT MEETING. Any action required or permitted to be taken
at any meeting of the Board of Directors, or of any committee thereof, may be
taken without a meeting if all members of the Board of Directors or committee,
as the case may be, consent thereto in writing,
-7-
<PAGE>
and the writing or writings are filed with the minutes of the proceedings of
the Board of Directors or committee.
SECTION 10. CONFERENCE TELEPHONE. Members of the Board of Directors, or of any
committee thereof, may participate in a meeting of the Board of Directors or
committee by means of conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and participation in a meeting in this manner shall constitute presence in
person at such meeting.
SECTION 11. COMMITTEES. The Board of Directors may, by resolution passed by a
majority of the whole Board, designate one or more committees, each committee to
consist of three (3) or more of the directors of the Corporation. The Board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. Any
such committee, to the extent provided in the resolution of the Board of
Directors, shall have and may exercise all the powers of the Board of Directors
in the management of the business and affairs of the Corporation which the Board
of Directors may lawfully delegate, and may authorize the seal of the
Corporation to be affixed to all papers which may require it. Meetings of
committees may be called by the committee chairman, if any, or as provided in
Section 5 of this Article III. Notice of such meetings shall be given to each
member of the committee in the manner set forth in Section 6 of this Article
III. Notice of any such meeting need not be given to any committee member who
shall, either before or after the meeting, submit a signed waiver of notice or
who shall attend such meeting without protesting prior to or at its
commencement, the lack of notice to him. A notice or waiver of notice of any
regular or special meeting of any committee need not state the purposes of such
meeting. A majority of any committee may determine its action, unless the Board
of Directors shall otherwise provide. Each committee shall keep written minutes
of its formal proceedings and shall report such proceedings to the Board. All
such proceedings shall be subject to revision or alteration by the Board of
Directors; provided, however, that third parties shall not be prejudiced by such
revision or alteration. The Board of Directors shall have power at any time to
fill vacancies in, to change the membership, duties or authority of, or to
dissolve any such committee.
SECTION 12. RESIGNATIONS. Any director of the Corporation may resign at any time
by giving written notice of his resignation to the Board of Directors, the
Chairman of the Board, the President or the Secretary. Such resignation shall
take effect at the date of the receipt of such notice, or at any later time
specified therein; and unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it effective.
SECTION 13. REMOVAL. Except as otherwise provided in the Restated Certificate of
Incorporation or in these By-Laws, any director may be removed at any time, at a
special meeting of the stockholders called and held for the purpose, but, for so
long as the Board of Directors is classified, only for cause, by the affirmative
vote of the holders of a majority of the shares then entitled to vote at an
election of directors; and the vacancy in the Board caused by any such removal
shall be filled as the Restated Certificate of Incorporation provides.
-8-
<PAGE>
SECTION 14. VACANCIES. Vacancies and newly created directorships resulting from
any increase in the authorized number of directors may be filled by a majority
of the directors then in office, in accordance with the Restated Certificate of
Incorporation.
SECTION 15. COMPENSATION. The Board of Directors shall have authority to fix the
compensation, including fees and reimbursement of expenses, of directors for
services to the Corporation in any capacity and no such payment shall preclude
any director from serving the Corporation in any other capacity and receiving
compensation therefor.
ARTICLE IV
OFFICERS
SECTION 1. NUMBER AND QUALIFICATION. The officers of the Corporation shall be
elected by the Board of Directors. The officers shall be a Chairman of the
Board, a President, one or more Vice Presidents, a Secretary, a Treasurer, and a
Controller. The Board of Directors may also elect a Vice Chairman of the Board,
and one or more Assistant Secretaries, Assistant Treasurers, and Assistant
Controllers, and the Board of Directors may designate any Vice President as an
Executive Vice President, a Senior Vice President or a Group Vice President. The
Board of Directors may also designate from such officers (i) a Chief Executive
Officer who shall have general supervision and authority over the business and
affairs of the Corporation subject to the control of the Board of Directors,
(ii) a Chief Operating Officer who shall have general supervision and authority
over the operations of the Corporation subject to the control of the Chief
Executive Officer, if that designation has been made, and subject to the control
of the Board of Directors, or (iii) both a Chief Executive Officer and a Chief
Operating Officer. The Chairman of the Board, the Vice Chairman of the Board and
the President shall be chosen from among the directors, but no other officer
need be a director. Any two or more offices may be held by the same person.
SECTION 2. ELECTION AND TERM. The officers of the Corporation shall be chosen
annually by the Board of Directors at the first meeting of the Board of
Directors following the annual meeting of stockholders or as soon thereafter as
is conveniently possible. Officers may also be elected from time to time at any
other meeting of the Board of Directors to fill vacancies and otherwise. Each
officer, except such officers as may be appointed in accordance with the
provisions of Section 3 of this Article IV, shall continue in office until his
successor shall have been duly elected and qualified or until his earlier
resignation or removal.
SECTION 3. OTHER OFFICERS AND AGENTS. The Board of Directors or the Chairman of
the Board, or in his absence or disability, the President, may appoint such
other officers and agents, each of whom shall hold office for such period, have
such authority and perform such duties as are provided for in these By-Laws, or
as the Board of Directors or Chairman of the Board, or the President, may from
time to time determine.
SECTION 4. RESIGNATION. Any officer may resign at any time by giving written
notice to the Chairman of the Board, the President or the Secretary of the
Corporation. Such resignation shall take effect at the date of the receipt of
such notice, or at any later time specified therein; and,
-9-
<PAGE>
unless otherwise specified therein, the acceptance of such resignation shall
not be necessary to make it effective.
SECTION 5. REMOVAL. Any officer or agent may be removed, either with or without
cause, at any time by the vote of the majority of the whole Board of Directors.
Any subordinate officer or agent appointed in accordance with the provisions of
Section 3 of this Article IV may be removed, either with or without cause, by a
vote of the majority of the whole Board of Directors or, except in the case of
an officer or agent elected or appointed by the Board of Directors, by the
Chairman of the Board or the President.
SECTION 6. VACANCIES. A vacancy in any office because of death, resignation,
removal, disqualification or any other cause may be filled for the unexpired
portion of the term in the manner prescribed in these By-Laws for the regular
election or appointment to such office.
SECTION 7. COMPENSATION. The compensation of the officers of the Corporation
shall be fixed from time to time by the Board of Directors or by such officers
or a committee of the Board of Directors to which the Board of Directors has
delegated such authority. An officer of the Corporation shall not be prevented
from receiving compensation by reason of the fact that he is also a director of
the Corporation, but any such officer who shall also be a director shall not
have any vote in the determination of the amount of compensation paid to him.
SECTION 8. CHAIRMAN OF THE BOARD. The Chairman of the Board shall preside at all
meetings of the stockholders and of the Board of Directors. He shall perform
such duties with such authority as may be prescribed from time to time by the
Board of Directors.
SECTION 9. PRESIDENT. The President shall be responsible to the Chief Executive
Officer and shall perform such duties with such authority as may be prescribed
in these By-Laws and from time to time by the Board of Directors and the Chief
Executive Officer.
SECTION 10. VICE PRESIDENTS. Each Vice President shall have such powers and
shall perform such duties as shall from time to time be prescribed by the Board
and as shall from time to time be assigned to him by the Chairman of the Board
or the President.
SECTION 11. SECRETARY. The Secretary shall give or cause to be given all
required notices of meetings of stockholders and of the Board of Directors,
shall record all of the proceedings and act as custodian of the minutes of all
such meetings, shall have charge of the corporate seal and the corporate minute
books, and shall make such reports and perform such other duties as may be
assigned from time to time by the Board of Directors, the Chairman of the Board,
or the President. The Secretary shall keep in safe custody the seal of the
Corporation and the Secretary or any Assistant Secretary shall have authority to
affix the same to any instrument requiring it and when so affixed, it may be
attested by the signature of the Secretary or any Assistant Secretary. The
Assistant Secretaries, or any of them, shall perform such of the duties of the
Secretary as may from time to time be assigned to them by the Board of
Directors, the Chairman of the Board, the President, or the Secretary, and in
the absence of the Secretary or in the event of his disability or refusal to
act, shall perform the duties of the Secretary, and when so acting shall have
all the powers of and be subject to all the restrictions upon the Secretary.
-10-
<PAGE>
SECTION 12. TREASURER. The Treasurer shall have custody of all moneys and
securities of the Corporation, shall have responsibility for disbursement of the
funds of the Corporation, shall make payment of the just demands on the
Corporation, shall invest surplus cash of the Corporation and manage its
investment portfolio under the direction of the Board of Directors, and shall
render to the Board of Directors an account of all transactions of the
Corporation and of the financial condition of the Corporation as may be required
of him. The Treasurer shall also perform such other duties as may be assigned to
him from time to time by the Board of Directors, the Chairman of the Board, the
President or by the Chief Financial Officer. The Assistant Treasurers, or any of
them, shall perform such of the duties of the Treasurer as may from time to time
be assigned to them by the Board of Directors, the Chairman of the Board, the
President, the Chief Financial Officer, or the Treasurer, and in the absence of
the Treasurer or in the event of his disability or refusal to act, shall perform
the duties of the Treasurer, and when so acting, shall have all the powers of
and be subject to all the restrictions upon the Treasurer.
SECTION 13. CONTROLLER. The Controller shall provide and maintain a system of
accounts and accounting records of the Corporation, shall provide and administer
a system of internal financial controls, and shall present such financial
statements to the Board of Directors as may be required. The Controller shall
also perform such other duties as may from time to time be assigned to him by
the Board of Directors, the Chairman of the Board, the President or by the Chief
Financial Officer. The Assistant Controllers, or any of them, shall perform such
of the duties of the Controller as may from time to time be assigned to them by
the Board of Directors, the Chairman of the Board, the President, the Chief
Financial Officer, or the Controller, and in the absence of the Controller or in
the event of his disability or refusal to act, shall perform the duties of the
Controller, and when so acting shall have all the powers of and be subject to
all the restrictions upon the Controller.
ARTICLE V
INDEMNIFICATION
SECTION 1. RIGHT TO INDEMNIFICATION. Every person who was or is a party or is
threatened to be made a party to or is involved in any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was a director or officer of
the Corporation or, while a director or officer of the Corporation, is or was
serving at the request of the Corporation or for its benefit as a director,
officer, employee or agent of another corporation, or as its representative in a
partnership, joint venture, trust or other enterprise, including any employee
benefit plan, shall be indemnified and held harmless by the Corporation to the
fullest extent legally permissible under the General Corporation Law of the
State of Delaware in the manner prescribed therein, from time to time, against
all expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection therewith.
Similar indemnification may be provided by the Corporation to an employee or
agent of the Corporation who was or is a party or is threatened to be made a
party to or is involved in any such threatened, pending or completed action,
suit or proceeding, by reason of the fact that he is or was an employee or agent
of the Corporation or is or was serving at the request of the Corporation or for
its benefit as a director, officer, employee, or agent of another
-11-
<PAGE>
corporation or as its representative in a partnership, joint venture, trust
or other enterprise, including any employee benefit plan.
SECTION 2. OTHER INDEMNIFICATION. The rights of indemnification conferred by
this Article shall not be exclusive of any other rights which such directors,
officers, employees or agents may have or hereafter acquire and, without
limiting the generality of such statement, they shall be entitled to their
respective rights of indemnification under any by-law, agreement, vote of
stockholders, provision of law or otherwise, as well as their rights under this
Article.
ARTICLE VI
SHARES AND THEIR TRANSFER
SECTION 1. STOCK CERTIFICATES. Each holder of stock in the Corporation shall be
entitled to have a numbered certificate in such form as shall be approved by the
Board of Directors, certifying the number of shares owned by him and signed in
the name of the Corporation by the Chairman of the Board or the President or a
Vice President and by the Treasurer or an Assistant Treasurer or the Secretary
or an Assistant Secretary, and sealed with the seal of the Corporation (which
seal may be a facsimile, engraved or printed). Any or all the signatures on the
certificate may be a facsimile. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent, or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
as if he were such officer, transfer agent, or registrar at the date of issue.
SECTION 2. TRANSFER OF STOCK. Transfers of shares of stock of the Corporation
shall be made on the stock records of the Corporation only upon authorization by
the registered holder thereof, or by his attorney thereunto authorized by power
of attorney duly executed and filed with the Secretary or with a transfer agent
or transfer clerk, and on surrender of the certificate or certificates for such
shares properly endorsed or accompanied by a duly executed stock transfer power
with reasonable assurances given that such endorsement is genuine and that all
taxes thereon have been paid. Except as otherwise provided by law, the
Corporation shall be entitled to recognize the exclusive right of a person in
whose name any share or shares stand on the record of stockholders as the owner
of such share or shares for all purposes, including, without limitation, the
rights to receive dividends or other distributions, and to vote as such owner,
and the Corporation may hold any such stockholder or record liable for calls and
assessments, and the Corporation shall not be bound to recognize any equitable
or legal claim to or interest in any such share or shares on the part of any
other person whether or not it shall have express or other notice thereof.
SECTION 3. LOST CERTIFICATES. The Corporation may issue a new certificate of
stock in the place of any certificate theretofore issued by it, alleged to have
been lost, stolen or destroyed, or which shall have been mutilated, and the
Board of Directors may, in its discretion, require the owner of the lost,
stolen, destroyed or mutilated certificate, or his legal representative, to give
the Corporation a bond, limited or unlimited, in such sum and in such form and
with such surety or sureties as the Board of Directors in its absolute
discretion shall determine is sufficient to indemnify the Corporation against
any claim that may be made against it on account of the alleged loss, theft,
-12-
<PAGE>
destruction or mutilation of any such certificate, or the issuance of a new
certificate. Anything herein to the contrary notwithstanding, the Board of
Directors in its absolute discretion may refuse to issue any such new
certificate except pursuant to legal proceedings under the laws of the State
of Delaware.
SECTION 4. RULES AND REGULATIONS. The Board of Directors may make such
additional rules and regulations, not inconsistent with these By-Laws, the
Restated Certificate of Incorporation or the laws of the State of Delaware, as
it may deem expedient concerning the issuance, transfer and registration of
certificates for shares of stock of the Corporation. The Board of Directors may
appoint, or authorize any officer or officers of the Corporation to appoint, one
or more independent transfer agents and one or more independent registrars, and
may require all certificates for shares of stock to bear the signature or
signatures of any of them.
SECTION 5. RECORD DATE. In order to determine the stockholders entitled to
notice and to vote at any meeting of stockholders or adjournment thereof, or to
express consent to corporate action in writing without a meeting, or entitled to
receive payment of any dividend or other distribution or allotment of any
rights, or entitled to exercise any rights in respect of any change, conversion
or exchange of stock or for the purpose of any other lawful action, the Board of
Directors may fix, in advance, a record date, which shall not be less than ten
(10) nor more than sixty (60) days before the date of such meeting, nor more
than sixty (60) days prior to any other action. A determination of stockholders
of record entitled to notice of and to vote at a meeting of stockholders shall
apply to any adjournment of the meeting unless the Board of Directors shall
elect to fix a record date for the adjourned meeting.
ARTICLE VII
GENERAL PROVISIONS
SECTION 1. CONTRACTS AND OTHER INSTRUMENTS. The Chairman of the Board, the Vice
Chairman of the Board, the President, the Chief Operating Officer, the Chief
Financial Officer, any Senior Executive Vice President, any Executive Vice
President and any Senior Vice President may enter into any contract or execute
and deliver any instrument in the name of the Corporation and on behalf of the
Corporation except as in these By-Laws or by resolution otherwise provided. The
Board of Directors, except as in these By-Laws otherwise provided, may authorize
any other officer or officers, agent or agents of the Corporation, to enter into
any contract or execute and deliver any instrument in the name of the
Corporation and on behalf of the Corporation, and such authority may be general
or confined to specific instances, and unless so authorized by the Board of
Directors, no such other officer, agent or employee shall have any power or
authority to bind the Corporation by any contract or engagement or to pledge its
credit or to render it liable pecuniarily for any purpose or to any amount.
SECTION 2. LOANS. No loans shall be contracted on behalf of the Corporation and
no negotiable paper shall be issued in its name unless, and on such terms as
shall be, authorized by the Board of Directors.
-13-
<PAGE>
SECTION 3. DISBURSEMENTS. All checks, drafts, demands for money, notes or other
evidences of indebtedness of the Corporation shall be signed by such officer or
officers or such other person or persons as may from time to time be designated
by the Board of Directors or by any officer or officers or person or persons
authorized by the Board of Directors to make such designations. Facsimile
signatures may be authorized in any such case where authorized by the Board of
Directors.
SECTION 4. DEPOSITS. All funds of the Corporation not otherwise employed shall
be deposited from time to time to the credit of the Corporation under such
conditions and in such banks or other depositories as the Board of Directors may
designate, or as may be designated by any officer or officers, agent or agents
of the Corporation to whom such power of designation may from time to time be
delegated by the Board of Directors. For the purpose of deposit and for the
purpose of collection for the account of the Corporation, checks, drafts, and
other orders for the payment of money which are payable to the order of the
Corporation may be endorsed, assigned and delivered by any officer or agent of
the Corporation as the Board of Directors may determine by resolution.
SECTION 5. VOTING SECURITIES OF OTHER CORPORATIONS. Unless otherwise ordered by
the Board of Directors, the Chairman of the Board, the President or any person
either may designate, shall have full power and authority on behalf of the
Corporation, in person or by proxy, to attend and to act and to vote at any
meeting of the security holders of any other corporation in which this
Corporation may hold securities, and at any such meeting he or his proxy shall
possess and may exercise any and all rights and powers incident to the ownership
of such securities and which as the owner thereof the Corporation might have
possessed and exercised if present. The Board of Directors, by resolution from
time to time, may confer like powers upon any other person or persons.
SECTION 6. CORPORATE SEAL. The Board of Directors shall provide a corporate
seal, which shall be in the form of a circle, and which shall bear the words and
figures:
ECOLAB INC.
CORPORATE SEAL
1924
DELAWARE
SECTION 7. FISCAL YEAR. The fiscal year of the Corporation shall be as
determined by the Board of Directors.
SECTION 8. GENDER. Whenever used in these By-Laws, words in the masculine gender
shall include the feminine gender.
-14-
<PAGE>
ARTICLE VIII
AMENDMENTS
Except as otherwise provided in the Restated Certificate of Incorporation or
these By-Laws, the Board of Directors may from time to time, by vote of a
majority of its members, alter, amend or rescind all or any of these By-Laws as
permitted, by law, subject to the power of the stockholders to change or repeal
such By-Laws.
-15-
<PAGE>
ECOLAB INC.
1997 STOCK INCENTIVE PLAN
(AS AMENDED AND RESTATED AS OF MAY 14, 1999)
1. PURPOSE OF PLAN.
The purpose of the Ecolab Inc. 1997 Stock Incentive Plan (the
"Plan") is to advance the interests of Ecolab Inc. (the "Company") and its
stockholders by enabling the Company and its Subsidiaries to attract and
retain persons of ability to perform services for the Company and its
Subsidiaries by providing an incentive to such individuals through equity
participation in the Company and by rewarding such individuals who contribute
to the achievement by the Company of its economic objectives.
2. DEFINITIONS.
The following terms will have the meanings set forth below, unless
the context clearly otherwise requires:
2.1 "BOARD" means the Board of Directors of the Company.
2.2 "BROKER EXERCISE NOTICE" means a written notice pursuant to
which a Participant, upon exercise of an Option, irrevocably instructs a
broker or dealer to sell a sufficient number of shares or loan a sufficient
amount of money to pay all or a portion of the exercise price of the Option
and/or any related withholding tax obligations and remit such sums to the
Company and directs the Company to deliver stock certificates to be issued
upon such exercise directly to such broker or dealer or their nominee.
2.3 "CAUSE" means (i) dishonesty, fraud, misrepresentation,
embezzlement or deliberate injury or attempted injury, in each case related
to the Company or any Subsidiary, (ii) any unlawful or criminal activity of a
serious nature, (iii) any intentional and deliberate breach of a duty or
duties that, individually or in the aggregate, are material in relation to
the Participant's overall duties, or (iv) any material breach of any
employment, service, confidentiality or noncompete agreement entered into
with the Company or any Subsidiary.
2.4 "CHANGE IN CONTROL" means an event described in Section 11.1 of
the Plan.
2.5 "CODE" means the Internal Revenue Code of 1986, as amended.
2.6 "COMMITTEE" means the group of individuals administering the
Plan, as provided in Section 3 of the Plan.
1
<PAGE>
2.7 "COMMON STOCK" means the common stock of the Company, par value
$1.00 per share, or the number and kind of shares of stock or other
securities into which such Common Stock may be changed in accordance with
Section 4.3 of the Plan.
2.8 "DISABILITY" means the disability of the Participant such as
would entitle the Participant to receive disability income benefits pursuant
to the long-term disability plan of the Company or Subsidiary then covering
the Participant or, if no such plan exists or is applicable to the
Participant, the permanent and total disability of the Participant within the
meaning of Section 22(e)(3) of the Code.
2.9 "ELIGIBLE RECIPIENTS" means all employees (including, without
limitation, officers and directors who are also employees) of the Company or
any Subsidiary and any non-employee consultants and advisors of the Company
or any Subsidiary.
2.10 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
2.11 "FAIR MARKET VALUE" means, with respect to the Common Stock, as
of any date (or, if no shares were traded or quoted on such date, as of the
next preceding date on which there was such a trade or quote) the mean
between the reported high and low sale prices of the Common Stock as quoted
in the WALL STREET JOURNAL reports of the New York Stock Exchange - Composite
Transactions.
2.12 "INCENTIVE AWARD" means an Option, Restricted Stock Award or
Performance Stock Award granted to an Eligible Recipient pursuant to the Plan.
2.13 "INCENTIVE STOCK OPTION" means a right to purchase Common Stock
granted to an Eligible Recipient pursuant to Section 6 of the Plan that
qualifies as an "incentive stock option" within the meaning of Section 422 of
the Code.
2.14 "NON-STATUTORY STOCK OPTION" means a right to purchase Common
Stock granted to an Eligible Recipient pursuant to Section 6 of the Plan that
does not qualify as an Incentive Stock Option.
2.15 "OPTION" means an Incentive Stock Option or a Non-Statutory
Stock Option.
2.16 "PARTICIPANT" means an Eligible Recipient who receives one or
more Incentive Awards under the Plan.
2.17 "PERFORMANCE STOCK AWARD" means an award of Common Stock
granted to an Eligible Recipient pursuant to Section 8 of the Plan.
2.18 "PREVIOUSLY ACQUIRED SHARES" means shares of Common Stock that
are already owned by the Participant or, with respect to any Incentive Award,
that are to be issued upon the grant, exercise or vesting of such Incentive
Award.
2
<PAGE>
2.19 "RESTRICTED STOCK AWARD" means an award of Common Stock granted
to an Eligible Recipient pursuant to Section 7 of the Plan that is subject to
the restrictions on transferability and the risk of forfeiture imposed by the
provisions of such Section 7.
2.20 "RETIREMENT" means termination of employment at an age and
length of service such that the Participant would be eligible to an immediate
commencement of benefit payments under the Company's defined benefit pension
plan available generally to its employees, whether or not such individual
actually elects to commence such payments (provided that, if the Participant
is not covered by the Company's defined benefit pension plan, attainment of
the necessary age and length of service for immediate benefit commencement
shall, for purposes of the Plan, be determined as to the Participant as if
such Participant had been covered by such plan and had been credited with
continuous (vesting) service pursuant to such plan rules (a) for the period
of service such Participant was in the employ of the Company and any
Subsidiary, and (b) with respect to a Participant who was in the employ of a
corporation or other organization whose business was acquired by the Company
or any Subsidiary, if (and only to the extent) specifically provided by the
Committee, for the period of service such Participant was in the employ of
such corporation or other organization prior to such acquisition).
2.21 "SECURITIES ACT" means the Securities Act of 1933, as amended.
2.22 "SUBSIDIARY" means any entity that is directly or indirectly
controlled by the Company or any entity in which the Company has a
significant equity interest, as determined by the Committee.
2.23 "TAX DATE" means the date any withholding tax obligation arises
under the Code for a Participant with respect to an Incentive Award.
3. PLAN ADMINISTRATION.
3.1 THE COMMITTEE. The Plan will be administered by the Board or by
a committee of the Board. So long as the Company has a class of its equity
securities registered under Section 12 of the Exchange Act, any committee
administering the Plan will consist solely of two or more members of the
Board who are "non-employee directors" within the meaning of Rule 16b-3 under
the Exchange Act and, if the Board so determines in its sole discretion, who
are "outside directors" within the meaning of Section 162(m) of the Code.
Such a committee, if established, will act by majority approval of the
members (unanimous approval with respect to action by written consent), and a
majority of the members of such a committee will constitute a quorum. As used
in the Plan, "Committee" will refer to the Board or to such a committee, if
established. To the extent consistent with corporate law, the Committee may
delegate to any officers of the Company the duties, power and authority of
the Committee under the Plan pursuant to such conditions or limitations as
the Committee may establish; provided, however, that only the Committee may
exercise such duties, power and authority with respect to Eligible Recipients
who are subject to Section 16 of the
3
<PAGE>
Exchange Act. The Committee may exercise its duties, power and authority
under the Plan in its sole and absolute discretion without the consent of any
Participant or other party, unless the Plan specifically provides otherwise.
Each determination, interpretation or other action made or taken by the
Committee pursuant to the provisions of the Plan will be conclusive and
binding for all purposes and on all persons, and no member of the Committee
will be liable for any action or determination made in good faith with
respect to the Plan or any Incentive Award granted under the Plan.
3.2 AUTHORITY OF THE COMMITTEE.
(a) In accordance with and subject to the provisions of the Plan,
the Committee will have the authority to determine all provisions of
Incentive Awards as the Committee may deem necessary or desirable and
as consistent with the terms of the Plan, including, without
limitation, the following: (i) the Eligible Recipients to be selected
as Participants; (ii) the nature and extent of the Incentive Awards to
be made to each Participant (including the number of shares of Common
Stock to be subject to each Incentive Award, any exercise price, the
manner in which Incentive Awards will vest or become exercisable and
whether Incentive Awards will be granted in tandem with other Incentive
Awards) and the form of written agreement, if any, evidencing such
Incentive Award; (iii) the time or times when Incentive Awards will be
granted; (iv) the duration of each Incentive Award; and (v) the
restrictions and other conditions to which the payment or vesting of
Incentive Awards may be subject. In addition, the Committee will have
the authority under the Plan in its sole discretion to pay the economic
value of any Incentive Award in the form of cash, Common Stock or any
combination of both.
(b) The Committee will have the authority under the Plan to amend
or modify the terms of any outstanding Incentive Award in any manner,
including, without limitation, the authority to modify the number of
shares or other terms and conditions of an Incentive Award, extend the
term of an Incentive Award, accelerate the exercisability or vesting or
otherwise terminate any restrictions relating to an Incentive Award,
accept the surrender of any outstanding Incentive Award or, to the
extent not previously exercised or vested, authorize the grant of new
Incentive Awards in substitution for surrendered Incentive Awards;
provided, however that the amended or modified terms are permitted by
the Plan as then in effect, that no amendment or modification of an
outstanding Incentive Award (other than as may be required pursuant to
Section 4.3 of the Plan) may decrease the per share exercise price of
an Option below the Fair Market Value of the Common Stock on the date
of grant, and that any Participant adversely affected by such amended
or modified terms has consented to such amendment or modification.
(c) In the event of (i) any reorganization, merger, consolidation,
recapitalization, liquidation, reclassification, stock dividend, stock
split, combination of shares, rights offering, extraordinary dividend
or divestiture (including a spin-off) or any other change in corporate
structure or shares, (ii) any purchase, acquisition, sale or
disposition of a
4
<PAGE>
significant amount of assets or a significant business, (iii) any
change in accounting principles or practices, or (iv) any other similar
change, in each case with respect to the Company or any other entity
whose performance is relevant to the grant or vesting of an Incentive
Award, the Committee (or, if the Company is not the surviving
corporation in any such transaction, the board of directors of the
surviving corporation) may, without the consent of any affected
Participant, amend or modify the vesting criteria of any outstanding
Incentive Award that is based in whole or in part on the financial
performance of the Company (or any Subsidiary or division or other
subunit thereof) or such other entity so as equitably to reflect such
event, with the desired result that the criteria for evaluating such
financial performance of the Company or such other entity will be
substantially the same (in the sole discretion of the Committee or the
board of directors of the surviving corporation) following such event
as prior to such event; provided, however, that the amended or modified
terms are permitted by the Plan as then in effect.
4. SHARES AVAILABLE FOR ISSUANCE.
4.1 MAXIMUM NUMBER OF SHARES AVAILABLE. Subject to adjustment as
provided in Section 4.3 of the Plan, the maximum number of shares of Common
Stock that will be available for issuance under the Plan will be 12,000,000
shares of Common Stock. Notwithstanding any other provisions of the Plan to
the contrary, no Participant in the Plan may be granted any Options or any
other Incentive Awards with a value based solely on an increase in the value
of the Common Stock after the date of grant, relating to more than 2,500,000
shares of Common Stock in the aggregate during any 48- month period (subject
to adjustment as provided in Section 4.3 of the Plan). The shares available
for issuance under the Plan may, at the election of the Committee, be either
treasury shares or shares authorized but unissued, and, if treasury shares
are used, all references in the Plan to the issuance of shares will, for
corporate law purposes, be deemed to mean the transfer of shares from
treasury.
4.2 ACCOUNTING FOR INCENTIVE AWARDS. Shares of Common Stock that are
issued under the Plan or that are subject to outstanding Incentive Awards
will be applied to reduce the maximum number of shares of Common Stock
remaining available for issuance under the Plan. Any shares of Common Stock
that are subject to an Incentive Award that lapses, expires, is forfeited or
for any reason is terminated unexercised or unvested and any shares of Common
Stock that are subject to an Incentive Award that is settled or paid in cash
or any form other than shares of Common Stock will automatically again become
available for issuance under the Plan. Any shares of Common Stock that
constitute the forfeited portion of a Restricted Stock Award, however, will
not become available for further issuance under the Plan.
4.3 ADJUSTMENTS TO SHARES AND INCENTIVE AWARDS. In the event of any
reorganization, merger, consolidation, recapitalization, liquidation,
reclassification, stock dividend, stock split, combination of shares, rights
offering, divestiture or extraordinary dividend (including a spin-off) or any
other change in the corporate structure or shares of the Company, the
Committee (or, if the Company is not the surviving corporation in any such
transaction, the board of directors of the
5
<PAGE>
surviving corporation) will make appropriate adjustment (which determination
will be conclusive) as to the number and kind of securities or other property
(including cash) available for issuance or payment under the Plan and, in
order to prevent dilution or enlargement of the rights of Participants, (a)
the number and kind of securities or other property (including cash) subject
to outstanding Incentive Awards, and (b) the exercise price of outstanding
Options.
5. PARTICIPATION.
Participants in the Plan will be those Eligible Recipients who, in
the judgment of the Committee, have contributed, are contributing or are
expected to contribute to the achievement of economic objectives of the
Company or its Subsidiaries. Eligible Recipients may be granted from time to
time one or more Incentive Awards, singly or in combination or in tandem with
other Incentive Awards, as may be determined by the Committee in its sole
discretion. Incentive Awards will be deemed to be granted as of the date
specified in the grant resolution of the Committee, which date will be the
date of any related agreement with the Participant.
6. OPTIONS.
6.1 GRANT. An Eligible Recipient may be granted one or more Options
under the Plan, and such Options will be subject to such terms and
conditions, consistent with the other provisions of the Plan, as may be
determined by the Committee in its sole discretion. The Committee may
designate whether an Option is to be considered an Incentive Stock Option or
a Non-Statutory Stock Option. To the extent that any Incentive Stock Option
granted under the Plan ceases for any reason to qualify as an "incentive
stock option" for purposes of Section 422 of the Code, such Incentive Stock
Option will continue to be outstanding for purposes of the Plan but will
thereafter be deemed to be a Non-Statutory Stock Option.
6.2 EXERCISE PRICE. The per share price to be paid by a Participant
upon exercise of an Option will be determined by the Committee in its
discretion at the time of the Option grant, provided that such price will not
be less than 100% of the Fair Market Value of one share of Common Stock on
the date of grant.
6.3 EXERCISABILITY AND DURATION. An Option will become exercisable
at such times and in such installments and upon such terms and conditions as
may be determined by the Committee in its sole discretion at the time of
grant (including without limitation that (i) the Participant remain in the
continuous employ or service of the Company or a Subsidiary for a certain
period, (ii) the Participant comply with certain requirements, (iii) the
Participant, the Company or any division or subunit thereof, satisfy certain
performance goals or criteria or (iv) the Common Stock satisfy certain
performance goals or criteria); provided, however, that no Option may be
exercisable prior to six months (other than as provided in Section 9.1 of the
Plan) or after 10 years from its date of grant.
6.4 PAYMENT OF EXERCISE PRICE. The total purchase price of the
shares to be purchased upon exercise of an Option will be paid entirely in
cash (including check, bank draft or money order);
6
<PAGE>
provided, however, that the Committee, in its sole discretion and upon terms
and conditions established by the Committee, may allow such payments to be
made, in whole or in part, by tender of a Broker Exercise Notice, by tender
(through actual delivery or attestation) of Previously Acquired Shares or by
a combination of such methods.
6.5 MANNER OF EXERCISE. An Option may be exercised by a Participant
in whole or in part from time to time, subject to the conditions contained in
the Plan and in the agreement evidencing such Option, by delivery in person,
by facsimile or electronic transmission or through the mail of written notice
of exercise to the Company at its principal executive office in St. Paul,
Minnesota and by paying in full the total exercise price for the shares of
Common Stock to be purchased in accordance with Section 6.4 of the Plan.
7. RESTRICTED STOCK AWARDS.
7.1 GRANT. An Eligible Recipient may be granted one or more
Restricted Stock Awards under the Plan, and such Restricted Stock Awards will
be subject to such terms and conditions, consistent with the other provisions
of the Plan, as may be determined by the Committee in its sole discretion.
The Committee may impose such restrictions or conditions, not inconsistent
with the provisions of the Plan, to the vesting of such Restricted Stock
Awards as it deems appropriate, including, without limitation, that (i) the
Participant remain in the continuous employ or service of the Company or a
Subsidiary for a certain period; (ii) the Participant comply with certain
requirements; (iii) the Participant or the Company (or any Subsidiary or
division or other subunit thereof) satisfy certain performance goals or
criteria; or (iv) the Common Stock satisfy certain performance goals or
criteria, provided, however, that other than as provided in Section 9.1 of
the Plan, no Restricted Stock Award may vest prior to six months from its
date of grant.
7.2 RIGHTS AS A STOCKHOLDER; TRANSFERABILITY. Except as provided in
Sections 7.1, 7.3, 7.4 and 12.3 of the Plan, a Participant will have all
voting, dividend, liquidation and other rights with respect to shares of
Common Stock issued to the Participant as a Restricted Stock Award under this
Section 7 upon the Participant becoming the holder of record of such shares
as if such Participant were a holder of record of shares of unrestricted
Common Stock.
7.3 DIVIDENDS AND DISTRIBUTIONS. Unless the Committee determines
otherwise in its sole discretion (either in the agreement evidencing the
Restricted Stock Award at the time of grant or at any time after the grant of
the Restricted Stock Award), any dividends or distributions (other than
regular quarterly cash dividends) paid with respect to shares of Common Stock
subject to the unvested portion of a Restricted Stock Award will be subject
to the same restrictions as the shares to which such dividends or
distributions relate. The Committee will determine in its sole discretion
whether any interest will be paid on such dividends or distributions. The
Committee, in an agreement evidencing a Restricted Stock Award, may require
that, unless the Participant elects otherwise, regular quarterly cash
dividends paid with respect to shares of Common Stock subject to a portion of
the Restricted Stock Award that has not vested will be reinvested (and in
such case
7
<PAGE>
Participants hereby consent to such reinvestment) in shares of Common Stock
pursuant and in accordance with the Company's regular dividend reinvestment
plan.
7.4 ENFORCEMENT OF RESTRICTIONS. To enforce the restrictions
referred to in this Section 7, the Committee may place a legend on the stock
certificates referring to such restrictions and may require the Participant,
until the restrictions have lapsed, to keep the stock certificates, together
with duly endorsed stock powers, in the custody of the Company or its
transfer agent, or to maintain evidence of stock ownership, together with
duly endorsed stock powers, in a certificateless book-entry stock account
with the Company's transfer agent.
8. PERFORMANCE STOCK AWARDS.
An Eligible Recipient may be granted one or more Performance Stock
Awards under the Plan, and such Performance Stock Awards will be subject to
such terms and conditions, if any, consistent with the other provisions of
the Plan, as may be determined by the Committee in its sole discretion. The
Participant will have all voting, dividend, liquidation and other rights with
respect to the shares of Common Stock issued to a Participant as a
Performance Stock Award under this Section 8 upon the Participant becoming
the holder of record of such shares; provided, however, that the Committee
may impose such restrictions on the assignment or transfer of a Performance
Stock Award as it deems appropriate, and may enforce such restrictions by any
or all of the methods set forth in Section 7.4 of the Plan.
9. EFFECT OF TERMINATION OF EMPLOYMENT OR OTHER SERVICE.
9.1 TERMINATION OF EMPLOYMENT DUE TO DEATH OR DISABILITY. In the
event a Participant's employment with the Company and all Subsidiaries is
terminated by reason of death or Disability:
(a) All outstanding Options then held by the Participant will
become immediately exercisable in full and will remain exercisable for
a period of five years after such termination (but in no event after
the expiration date of any such Option);
(b) All Restricted Stock Awards then held by the Participant will
become fully vested; and
(c) Any assignment or transfer restrictions with respect to
Performance Stock Awards will lapse.
9.2 TERMINATION OF EMPLOYMENT DUE TO RETIREMENT. Subject to Section
9.6 of the Plan, in the event a Participant's employment with the Company and
all Subsidiaries is terminated by reason of Retirement:
(a) All outstanding Options then held by the Participant will, to
the extent exercisable as of such termination, remain exercisable in
full for a period of five years after
8
<PAGE>
such termination (but in no event after the expiration date of any such
Option). Options not exercisable as of such Retirement will be
forfeited and terminate.
(b) All Restricted Stock Awards then held by the Participant that
have not vested as of such termination will be terminated and
forfeited; and
(c) Any assignment or transfer restrictions with respect to
Performance Stock Awards that have not lapsed will continue in effect
in accordance with their terms unless otherwise provided in the
agreement evidencing such Performance Stock Awards.
9.3 TERMINATION OF EMPLOYMENT FOR REASONS OTHER THAN DEATH,
DISABILITY OR RETIREMENT. Subject to Section 9.6 of the Plan, in the event a
Participant's employment is terminated with the Company and all Subsidiaries
for any reason other than death, Disability or Retirement, or a Participant
is in the employ of a Subsidiary and the Subsidiary ceases to be a Subsidiary
of the Company (unless the Participant continues in the employ of the Company
or another Subsidiary):
(a) All outstanding Options then held by the Participant will, to
the extent exercisable as of such termination, remain exercisable in
full for a period of three months after such termination (but in no
event after the expiration date of any such Option). Options not
exercisable as of such termination will be forfeited and terminate.
(b) All Restricted Stock Awards then held by the Participant that
have not vested as of such termination will be terminated and
forfeited; and
(c) Any assignment or transfer restrictions with respect to
Performance Stock Awards that have not lapsed will continue in effect
in accordance with their terms unless otherwise provided in the
agreement evidencing such Performance Stock Awards.
9.4 TERMINATION OF SERVICE AS A NON-EMPLOYEE CONSULTANT OR ADVISOR.
In the event a Participant's service as a non-employee consultant or advisor
is terminated with the Company and all Subsidiaries for any reason, or a
Participant is in the service of a Subsidiary and the Subsidiary ceases to be
a Subsidiary of the Company (unless the Participant continues in the service
of the Company or another Subsidiary), all rights of the Participant under
the Plan and any agreements evidencing an Incentive Award will immediately
terminate without notice of any kind, and (i) no Options then held by the
Participant will thereafter be exercisable, (ii) all Restricted Stock Awards
then held by the Participant that have not vested will be terminated and
forfeited, and (iii) any assignment or transfer restrictions with respect to
Performance Stock Awards that have not lapsed will continue in effect in
accordance with their terms unless otherwise provided in the agreement
evidencing such Performance Stock Awards; provided, however, that if such
termination is due to any reason other than termination by the Company or any
Subsidiary for Cause (as defined in Section 2.3 of the Plan), all outstanding
Options then held by such Participant will remain exercisable to the extent
exercisable as of such termination for a period of three months after such
termination (but in no event after the expiration date of any such Option).
9
<PAGE>
9.5 MODIFICATION OF RIGHTS UPON TERMINATION. Notwithstanding the
other provisions of this Section 9, upon a Participant's termination of
employment or other service with the Company and all Subsidiaries, the
Committee may, in its sole discretion (which may be exercised at any time on
or after the date of grant, including following such termination), cause
Options (or any part thereof) then held by such Participant to become or
continue to become exercisable and/or remain exercisable following such
termination of employment or other service, and Restricted Stock Awards and
Performance Stock Awards then held by such Participant to vest and/or
continue to vest or become free of transfer restrictions, as the case may be,
following such termination of employment or other service, in each case in
the manner determined by the Committee; provided, however, that (a) no
Incentive Award will become exercisable or vest prior to six months from its
date of grant (unless such exercisability or vesting is by reason of death or
Disability), and (b) no Incentive Award may remain exercisable or continue to
vest for more than two years beyond the date such Incentive Award would have
terminated if not for the provisions of this Section 9.5 but in no event
beyond its expiration date.
9.6 EFFECTS OF ACTIONS CONSTITUTING CAUSE. Notwithstanding anything
in the Plan to the contrary, in the event that a Participant is determined by
the Committee, acting in its sole discretion, to have committed any action
which would constitute Cause as defined in Section 2.3, irrespective of
whether such action or the Committee's determination occurs before or after
termination of such Participant's employment or other service with the
Company or any Subsidiary, all rights of the Participant under the Plan and
any agreements evidencing an Incentive Award then held by the Participant
shall terminate and be forfeited without notice of any kind.
9.7 DETERMINATION OF TERMINATION OF EMPLOYMENT OR OTHER SERVICE.
(a) The change in a Participant's status from that of an employee
of the Company or any Subsidiary to that of a non-employee consultant
or advisor of the Company or any Subsidiary will, for purposes of the
Plan, be deemed to result in a termination of such Participant's
employment with the Company and its Subsidiaries, unless the Committee
otherwise determines in its sole discretion.
(b) The change in a Participant's status from that of a
non-employee consultant or advisor of the Company or any Subsidiary to
that of an employee of the Company or any Subsidiary will not, for
purposes of the Plan, be deemed to result in a termination of such
Participant's service as a non-employee consultant or advisor with the
Company and its Subsidiaries, and such Participant will thereafter be
deemed to be an employee of the Company or its Subsidiaries until such
Participant's employment is terminated, in which event such Participant
will be governed by the provisions of this Plan relating to termination
of employment.
(c) Unless the Committee otherwise determines in its sole
discretion, a Participant's employment or other service will, for
purposes of the Plan, be deemed to have terminated
10
<PAGE>
on the date recorded on the personnel or other records of the Company
or the Subsidiary for which the Participant provides employment, as
determined by the Committee in its sole discretion based upon such
records.
10. PAYMENT OF WITHHOLDING TAXES.
10.1 GENERAL RULES. The Company is entitled to (a) withhold
and deduct from future wages of the Participant (or from other amounts
that may be due and owing to the Participant from the Company or a
Subsidiary), or make other arrangements for the collection of, all
legally required amounts necessary to satisfy any and all federal,
state and local withholding and employment-related tax requirements
attributable to an Incentive Award, including, without limitation, the
grant, exercise or vesting of, or payment of dividends with respect to,
an Incentive Award or a disqualifying disposition of stock received
upon exercise of an Incentive Stock Option, or (b) require the
Participant promptly to remit the amount of such withholding to the
Company before taking any action, including issuing any shares of
Common Stock, with respect to an Incentive Award.
10.2 SPECIAL RULES. The Committee may, in its sole discretion
and upon terms and conditions established by the Committee, permit or
require a Participant to satisfy, in whole or in part, any withholding
or employment-related tax obligation described in Section 10.1 of the
Plan by electing to tender Previously Acquired Shares, a Broker
Exercise Notice or a combination of such methods.
11. CHANGE IN CONTROL.
11.1 CHANGE IN CONTROL. For purposes of this Section 11, a "Change in
Control" of the Company will mean the following:
(a) Any "person" as such term is used in Sections 13(d) and 14(d)
of the Exchange Act (other than the Company, any trustee or other
fiduciary holding securities under any employee benefit plan of the
Company, or any corporation owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as
their ownership of stock of the Company), is or becomes, including
pursuant to a tender or exchange offer for shares of Common Stock
pursuant to which purchases are made, the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly,
of securities of the Company representing 25% or more of the combined
voting power of the Company's then outstanding securities, other than
in a transaction arranged or approved by the Board prior to its
occurrence; provided, however, that if any such person will become the
beneficial owner, directly or indirectly, of securities of the Company
representing 34% or more of the combined voting power of the Company's
then outstanding securities, a Change in Control will be deemed to
occur whether or not any or all of such beneficial ownership is
obtained in a transaction arranged or approved by the Board prior to
its occurrence, and other than in a transaction in which such person
will have executed a written agreement with the Company (and approved
by the Board) on or prior to the date on which such person becomes
11
<PAGE>
the beneficial owner of 25% or more of the combined voting power of the
Company's then outstanding securities, which agreement imposes one or
more limitations on the amount of such person's beneficial ownership of
shares of Common Stock, if, and so long as, such agreement (or any
amendment thereto approved by the Board provided that no such amendment
will cure any prior breach of such agreement or any amendment thereto)
continues to be binding on such person and such person is in compliance
(as determined by the Board in its sole discretion) with the terms of
such agreement (including such amendment); provided, however, that if
any such person will become the beneficial owner, directly or
indirectly, of securities of the Company representing 50% or more of
the combined voting power of the Company's then outstanding securities,
a Change in Control will be deemed to occur whether or not such
beneficial ownership was held in compliance with such a binding
agreement.
(b) During any period of two consecutive years, individuals who at
the beginning of such period constitute the Board, and any new director
(other than a director designated by a person who has entered into an
agreement with the Company to effect a transaction which would
constitute a Change in Control pursuant to this Section 11.1) whose
election by the Board or nomination for election by the Company's
stockholders was approved by a vote of at least two-thirds of the
directors then still in office who either were directors at the
beginning of the period or whose election or nomination for election
was previously so approved, cease for any reason to constitute at least
a majority thereof.
(c) The stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than (i)
a merger or consolidation which would result in the voting securities
of the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into
voting securities of the surviving entity) more than 80% of the
combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or
consolidation, or (ii) a merger or consolidation effected to implement
a recapitalization of the Company (or similar transaction) in which no
person acquires a percentage of the combined voting power of the
Company's then outstanding securities which would constitute a Change
in Control pursuant to Section 11.1 above. In case of any consolidation
or merger of another corporation into the Company in which the Company
is the surviving corporation and in which there is a reclassification
or change (including a change to the right to receive cash or other
property) of the shares of Common Stock (other than a change in par
value, or from par value to no par value, or as a result of a
subdivision or combination, but including any change in such shares
into two or more classes or series of shares), Section 4.3 of the Plan
will apply.
(d) The stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition
by the Company of all or substantially all of the Company's assets.
12
<PAGE>
11.2 ACCELERATION OF VESTING. Without limiting the authority
of the Committee under Sections 3.2 and 4.3 of the Plan, if a Change in
Control of the Company occurs, then, if approved by the Committee in
its sole discretion either in an agreement evidencing an Incentive
Award at the time of grant or at any time after the grant of an
Incentive Award, (a) all Options that have been outstanding for at
least six months will become immediately exercisable in full and will
remain exercisable in accordance with their terms; (b) all outstanding
Restricted Stock Awards that have been outstanding for at least six
months will become immediately fully vested and non-forfeitable; and
(c) any transfer restrictions with respect to Performance Stock Awards
will lapse.
11.3 CASH PAYMENT FOR OPTIONS. If a Change in Control of the
Company occurs, then the Committee, if approved by the Committee in its
sole discretion either in an agreement evidencing an Incentive Award at
the time of grant or at any time after the grant of an Incentive Award,
and without the consent of any Participant affected thereby, may
determine that some or all Participants holding outstanding Options
will receive, with respect to some or all of the shares of Common Stock
subject to such Options, as of the effective date of any such Change in
Control of the Company, cash in an amount equal to the excess of the
Fair Market Value of such shares immediately prior to the effective
date of such Change in Control of the Company over the exercise price
per share of such Options.
11.4 LIMITATION ON CHANGE IN CONTROL PAYMENTS. Notwithstanding
anything in Section 11.2 or 11.3 of the Plan to the contrary, if, with
respect to a Participant, any of the payments to be made in connection
with Section 11.2 or 11.3 of the Plan, together with any other payments
or benefits which a Participant has the right to receive from the
Company or any corporation which is a member of an "affiliated group"
(as defined in section 1504(a) of the Code without regard to section
1504(b) of the Code) of which the Company is a member, constitute an
"excess parachute payment" (as defined in section 280G(b) of the Code),
the payments to be made in connection with Section 11.2 or 11.3 of the
Plan shall be reduced to the extent necessary to prevent any portion of
such payments or benefits from becoming subject to the excise tax
imposed under section 4999 of the Code; provided, however, that if a
Participant is subject to a separate agreement with the Company or a
Subsidiary that expressly addresses the potential application of
Sections 280G or 4999 of the Code (including, without limitation, that
"payments" under such agreement or otherwise will be reduced, that such
payments will not be reduced or that the Participant will have the
discretion to determine which "payments" will be reduced), then this
Section 11.4 will not apply, and any "payments" to a Participant
pursuant to Section 11.2 or 11.3 of the Plan will be treated as
"payments" arising under such separate agreement.
13
<PAGE>
12. RIGHTS OF ELIGIBLE RECIPIENTS AND PARTICIPANTS;
TRANSFERABILITY.
12.1 EMPLOYMENT OR OTHER SERVICE. Nothing in the Plan will
interfere with or limit in any way the right of the Company or any
Subsidiary to terminate the employment or Other Service of any Eligible
Recipient or Participant at any time, nor confer upon any Eligible
Recipient or Participant any right to continue in the employ or Other
Service of the Company or any Subsidiary.
12.2 RIGHTS AS A STOCKHOLDER. As a holder of Incentive Awards
(other than Restricted Stock Awards and Performance Stock Awards), a
Participant will have no rights as a stockholder unless and until such
Incentive Awards are exercised for, or paid in the form of, shares of
Common Stock and the Participant becomes the holder of record of such
shares. Except as otherwise provided in the Plan, no adjustment will be
made for dividends or distributions with respect to such Incentive
Awards as to which there is a record date preceding the date the
Participant becomes the holder of record of such shares, except as the
Committee may determine in its discretion.
12.3 RESTRICTIONS ON TRANSFER. Except pursuant to testamentary
will or the laws of descent and distribution or as otherwise expressly
permitted by the Plan, no right or interest of any Participant in an
Incentive Award prior to the exercise or vesting of such Incentive
Award will be assignable or transferable, or subjected to any lien,
during the lifetime of the Participant, either voluntarily or
involuntarily, directly or indirectly, by operation of law or
otherwise. A Participant will, however, be entitled to designate a
beneficiary to receive an Incentive Award upon such Participant's
death, and in the event of a Participant's death, payment of any
amounts due under the Plan will be made to, and exercise of any Options
(to the extent permitted pursuant to Section 9 of the Plan) may be made
by, the Participant's legal representatives, heirs and legatees.
12.4 NON-EXCLUSIVITY OF THE PLAN. Nothing contained in the
Plan is intended to modify or rescind any previously approved
compensation plans or programs of the Company or create any limitations
on the power or authority of the Board to adopt such additional or
other compensation arrangements as the Board may deem necessary or
desirable.
13. SECURITIES LAW AND OTHER RESTRICTIONS.
Notwithstanding any other provision of the Plan or any
agreements entered into pursuant to the Plan, the Company will not be
required to issue any shares of Common Stock under this Plan, and a
Participant may not sell, assign, transfer or otherwise dispose of
shares of Common Stock issued pursuant to Incentive Awards granted
under the Plan, unless (a) there is in effect with respect to such
shares a registration statement under the Securities Act and any
applicable securities laws of a state or foreign jurisdiction or an
exemption from such registration under the Securities Act and
applicable state or foreign securities laws, and (b) there has been
obtained any other consent, approval or permit from any other
regulatory body which the Committee, in its sole discretion, deems
necessary or advisable. The Company may condition such issuance, sale
or transfer upon the receipt of any representations or agreements from
the parties involved, and the placement of any
14
<PAGE>
legends on certificates representing shares of Common Stock, as may be
deemed necessary or advisable by the Company in order to comply with
such securities law or other restrictions.
14. PLAN AMENDMENT, MODIFICATION AND TERMINATION.
The Board may suspend or terminate the Plan or any portion
thereof at any time, and may amend the Plan from time to time in such
respects as the Board may deem advisable in order that Incentive Awards
under the Plan will conform to any change in applicable laws or
regulations or in any other respect the Board may deem to be in the
best interests of the Company; provided, however, that no amendments to
the Plan will be effective without approval of the stockholders of the
Company if stockholder approval of the amendment is then required
pursuant to Section 422 of the Code or the rules of the New York Stock
Exchange. No termination, suspension or amendment of the Plan may
adversely affect any outstanding Incentive Award without the consent of
the affected Participant; provided, however, that this sentence will
not impair the right of the Committee to take whatever action it deems
appropriate under Sections 3.2, 4.3 and 11 of the Plan.
15. EFFECTIVE DATE AND DURATION OF THE PLAN.
The Plan is effective, as amended and restated, as of May 14,
1999 or such later date as the Plan is approved by the Company's
stockholders and shall apply to Incentive Awards granted on or after
such effective date. The Plan will terminate at midnight on June 30,
2005, and may be terminated prior to such time to by Board action, and
no Incentive Award will be granted after such termination. Incentive
Awards outstanding upon termination of the Plan may continue to be
exercised, or become free of restrictions, in accordance with their
terms.
16. MISCELLANEOUS.
16.1 GOVERNING LAW. The validity, construction,
interpretation, administration and effect of the Plan and any rules,
regulations and actions relating to the Plan will be governed by and
construed exclusively in accordance with the laws of the State of
Minnesota, notwithstanding the conflicts of laws principles of any
jurisdictions.
16.2 SUCCESSORS AND ASSIGNS. The Plan will be binding upon and
inure to the benefit of the successors and permitted assigns of the
Company and the Participants.
15
<PAGE>
AMENDMENT NO. 1
TO THE
ECOLAB EXECUTIVE DEATH BENEFITS PLAN
(AS AMENDED AND RESTATED EFFECTIVE MARCH 1, 1994)
Pursuant to Section 1.3 of the Ecolab Executive Death Benefits Plan (As
Amended and Restated Effective March 1, 1994) (the "Plan") and Section 5.1.
of the Ecolab Inc. Administrative Document for Non-Qualified Benefit Plans
(the "Administrative Document"), which is incorporated into the Plan by
reference, Ecolab Inc. (the "Company") hereby amends the Plan as set forth
below. Words and phrases used herein with initial capital letters which are
defined in the Plan or the Administrative Document are used herein as so
defined.
1. Section 2.1 of the Plan is hereby amended in its entirety to read as
follows:
"SECTION 2.1. "DEATH BENEFICIARY." An Executive's Death Beneficiary
shall be the person or persons (natural or otherwise) designated by the
Executive as his primary or contingent Death Beneficiary under this
Plan. Such a designation may be made, revoked or changed at any time
(without the consent of any previously designated Death Beneficiary)
only by a written instrument in a form prescribed by the Administrator
(or, if applicable, an insurance company providing coverage on the
Executive's life), signed by the Executive and delivered to the
Administrator (or, if applicable, an insurance company providing
coverage on the Executive's life) during the Executive's lifetime."
2. Subsection (2)(b) of Section 3.2 of the Plan is hereby amended in its
entirety to read as follows:
"(b) The executive Death Benefit described in paragraph (a) of this
Subsection shall be reduced (but not below zero) by any amount payable
under any life insurance or other death benefit covering the Executive
which is provided by, or payable by or on behalf of a member of the
Controlled Group, or which was funded, directly or indirectly, by a
member of the Controlled Group (by the payment of premiums or
otherwise). If the benefits provided under any such life insurance
contract exceed the Executive Death Benefits described in paragraph (a)
for a particular Executive, such Executive's Death Beneficiary shall be
entitled to receive such additional benefits in addition to the
Executive Death Benefits described herein."
<PAGE>
3. Subsection (2)(b) of Section 3.3 of the Plan is hereby amended in its
entirety to read as follows:
"(b) The executive Death Benefit described in paragraph (a) of this
Subsection shall be reduced (but not below zero) by any amount payable
under any life insurance or other death benefit covering the Executive
which is provided by, or payable by or on behalf of a member of the
Controlled Group, or which was funded, directly or indirectly, by a
member of the Controlled Group (by the payment of premiums or
otherwise). If the benefits provided under any such life insurance
contract exceed the Executive Death Benefits described in paragraph (a)
for a particular Executive, such Executive's Death Beneficiary shall be
entitled to receive such additional benefits in addition to the
Executive Death Benefits described herein."
4. This amendment to the Plan shall be effective as of July 1, 1997.
IN WITNESS WHEREOF, the Company has caused this instrument to be executed by
its authorized officers and its corporate seal affixed, this 11th day of
July, 1997.
ECOLAB INC.
By: /s/ Michael E. Shannon
-----------------------------------------
(Seal) Michael E. Shannon
Chairman of the Board, Chief Financial
and Administrative Officer
/s/ Kenneth A. Iverson
- ----------------------------------
Kenneth A. Iverson
Vice President and Secretary
<PAGE>
ECOLAB
EXECUTIVE DEATH BENEFITS PLAN
SECOND DECLARATION OF AMENDMENT
Pursuant to Section 1.3 of the Ecolab Executive Death Benefits Plan (as
Amended and Restated Effective March 1, 1994) (the "Plan") and Section 5.1 of
the Ecolab Inc. Administrative Document for Non-Qualified Benefit Plans which
is incorporated into the Plan by reference ("Administrative Document"), the
Company amends the Plan as set forth below.
1. Section 2.3 of the Plan is hereby amended in its entirety to read as
follows:
"SECTION 2.3. "EXECUTIVE" shall mean an Employee who is an
elected corporate officer of an Employer and who is selected
by the Administrator to participate in the Plan or such other
Employee who is selected by the Chief Executive Officer of the
Company to participate in the Plan. Notwithstanding the
foregoing, any person who was an Executive on March 1, 1998
shall, subject to the other provisions of the Plan, remain as
an Executive hereunder."
2. This amendment to the Plan shall be effective as of March 1, 1998.
IN WITNESS WHEREOF, the Company has caused this instrument to be executed by
its authorized officers and its corporate seal affixed, this 3rd day of March,
1998.
ECOLAB INC.
By: /s/ Michael E. Shannon
----------------------------------------
Michael E. Shannon
Chairman of the Board, Chief Financial
and Administrative Officer
Attest: /s/ Kenneth A. Iverson
--------------------------------
Kenneth A. Iverson
Vice President and Secretary
<PAGE>
ECOLAB
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
THIRD DECLARATION OF AMENDMENT
Pursuant to Section 1.3 of the Ecolab Supplemental Executive Retirement Plan
(the "SERP") and Section 5.1 of the Ecolab Inc. Administrative Document for
Non-Qualified Benefit Plans which is incorporated into the SERP by reference
("Administrative Document"), the Company amends the SERP as set forth below.
1. Paragraph 1 of Exhibit A to the SERP is hereby deleted in its
entirety and replaced with the following Paragraph:
"7.5% except as provided in item 4 below and provided that,
for purposes of determining the actuarial equivalent value of
a lump sum distribution, the interest rate will be 120% of the
PBGC immediate interest rate for lump sums in effect on the
first day of the Plan Year (i.e., January 1) (1) in which the
retirement or other termination of employment is effective if
the SERP Benefit is to commence immediately following such
retirement or termination of employment or (2) in effect on
the first day of the Plan Year (i.e., January 1) in which the
distribution becomes payable if the payment is to be deferred.
These interest rate assumptions shall be effective as of
January 1, 1998. Notwithstanding the foregoing, for the
twelve-month period from January 1, 1998 through December 31,
1998, an Executive's SERP Benefit (or SERP Pre-Retirement
Benefit) shall be calculated using both the applicable
interest rate described above and the interest rate determined
pursuant to the SERP terms as in effect on December 31, 1997
and the Executive shall receive the larger of the two amounts
as his Benefit hereunder.
2. Section 2.4 of the SERP is hereby amended in its entirety to read as
follows:
"SECTION 2.4. "EXECUTIVE" shall mean an Employee who is an
elected corporate officer of an Employer and who is selected
by the Administrator to participate in the Plan or such other
Employee who is selected by the Chief Executive Officer of the
Company to participate in the Plan. Notwithstanding the
foregoing, any person who was an Executive on March 1, 1998
shall, subject to the other provisions of the Plan, remain as
an Executive hereunder."
<PAGE>
2
3. This amendment to the SERP shall be effective as of March 1, 1998.
IN WITNESS WHEREOF, the Company has caused this instrument to be executed by its
authorized officers and its corporate seal affixed, this 3rd day of March,
1998.
ECOLAB INC.
By: /s/ Michael E. Shannon
----------------------------------------
Michael E. Shannon
Chairman of the Board, Chief Financial
and Administrative Officer
Attest: /s/ Kenneth A. Iverson
--------------------------------
Kenneth A. Iverson
Vice President and Secretary
<PAGE>
ECOLAB
MIRROR SAVINGS PLAN
THIRD DECLARATION OF AMENDMENT
Pursuant to Section 1.3 of the Ecolab Mirror Savings Plan ("Plan") and
Section 5.1 of the Ecolab Inc. Administrative Document for Non-Qualified
Benefit Plans which is incorporated into the Plan by reference
("Administrative Document"), the Company amends the Plan as set forth below.
1. Subsection 4.1(1) of the Plan is hereby amended by adding a new paragraph
(c) to the end thereof, to read as follows:
"(c) Notwithstanding any provision of the Plan to the contrary, if the
payment of all or any portion of an Executive's Account would, in the
sole opinion of the Company on the advice of its counsel, result in a
profit recoverable by the Company under Section 16(b) of the Securities
Exchange Act of 1934, but for the operation of this paragraph, then
such payment (or portion thereof) shall be deferred and made at the
earliest time that such payment (or portion thereof) would no longer be
subject to Section 16(b)."
2. This amendment to the Plan shall be effective as of November 13, 1997.
IN WITNESS WHEREOF, the Company has caused this instrument to be executed by
its authorized officers and its corporate seal affixed, this 11th day of
November, 1997.
ECOLAB INC.
(Seal) By: /s/ Michael E. Shannon
---------------------------------------
Michael E. Shannon
Chairman of the Board, Chief Financial
and Administrative Officer
Attest: /s/ Kenneth A. Iverson
-------------------------------
Kenneth A. Iverson
Vice President and Secretary
<PAGE>
ECOLAB
MIRROR SAVINGS PLAN
FOURTH DECLARATION OF AMENDMENT
Pursuant to Section 1.3 of the Ecolab Mirror Savings Plan ("Plan") and
Section 5.1 of the Ecolab Inc. Administrative Document for Non-Qualified
Benefit Plans which is incorporated into the Plan by reference
("Administrative Document"), the Company amends the Plan as set forth below.
1. Subsection (2) of Section 6.1 of the Plan is hereby amended to read
as follows:
"(2) HYPOTHETICAL INVESTMENT FUNDS FOR EXECUTIVE DEFERRALS.
The Hypothetical Investment Funds for purposes of the portion of an
Executive's Account which is attributable to his Executive Deferrals
shall be those same Investment Funds designated by the Company from
time to time under the Savings Plan. Each Executive (or his Death
Beneficiary) may elect, in a manner prescribed by the Administrator
from time to time, one or more Hypothetical Investment Funds in which
his Executive Deferrals are deemed to have been invested for purposes
of crediting earnings and losses to the portion of the Executive's
Account which is attributable to Executive Deferrals. The Company may
deem an Executive's Executive Deferrals to have been invested in the
Hypothetical Investment Fund elected by the Executive, if any, or may
instead, in its sole discretion, deem such Executive Deferrals to have
been invested in one or more Hypothetical Investment Funds selected by
the Company. Earnings on any amounts deemed to have been invested in
any Hypothetical Investment Fund shall be deemed to have been
reinvested in such Hypothetical Investment Fund. Notwithstanding the
foregoing, any Executive who is subject to Section 16(b) of the
Securities Exchange Act of 1934 may not elect and shall not be deemed
to have directed any Executive Deferrals to the Ecolab Stock Fund. An
Executive shall be deemed, on the day prior to becoming subject to
Section 16(b) or at such other time as he is subject to Section 16(b),
to have elected to have Executive Deferrals then deemed to be invested
in the Ecolab Stock Fund invested in the Hypothetical Investment Fund
known as the Fidelity Retirement Money Market Portfolio unless another
permitted election is in place."
2. This amendment to the Plan shall be effective as of September 1, 1998.
IN WITNESS WHEREOF, the Company has caused this instrument to be executed by
its authorized officers and its corporate seal affixed, this 24th day of
August, 1998.
ECOLAB INC.
(Seal)
By: /s/ Michael E. Shannon
--------------------------------------
Michael E. Shannon
Chairman of the Board, Chief Financial
and Administrative Officer
Attest: /s/ Kenneth A. Iverson
--------------------------------
Kenneth A. Iverson
Vice President and Secretary
<PAGE>
ECOLAB
MIRROR PENSION PLAN
THIRD DECLARATION OF AMENDMENT
Pursuant to Section 1.3 of the Ecolab Mirror Pension Plan (the "Plan") and
Section 5.1 of the Ecolab Inc. Administrative Document for Non-Qualified Benefit
Plans which is incorporated into the Plan by reference ("Administrative
Document"), the Company amends the Plan as set forth below.
1. Paragraph 1 of Exhibit A to the Plan is hereby deleted in its
entirety and replaced with the following Paragraph:
"7.5% except as provided in item 4 below and provided that, for
purposes of determining the actuarial equivalent value of a lump
sum distribution, the interest rate will be 120% of the PBGC
immediate interest rate for lump sums in effect on the first day
of the Plan Year (i.e., January 1) (1) in which the retirement or
other termination of employment is effective if the Mirror
Pension Benefit is to commence immediately following such
retirement or termination of employment or (2) in which the
distribution becomes payable if the payment is to be deferred.
These interest rate assumptions shall be effective as of
January 1, 1998. Notwithstanding the foregoing, for the
twelve-month period from January 1, 1998 through December 31,
1998, an Executive's Mirror Pension Benefit (or Mirror
Pre-Retirement Pension Benefit) shall be calculated using both
the applicable interest rate described above and the interest
rate determined pursuant to the terms of the Plan as in effect
on December 31, 1997 and the Executive shall receive the
larger of the two amounts as his Benefit hereunder.
2. This amendment to the Plan shall be effective as of March 1, 1998.
IN WITNESS WHEREOF, the Company has caused this instrument to be executed by its
authorized officers and its corporate seal affixed, this 3rd day of March, 1998.
ECOLAB INC.
By: /s/ Michael E. Shannon
-------------------------------------
Michael E. Shannon
Chairman of the Board, Chief Financial
and Administrative Officer
Attest: /s/ Kenneth A. Iverson
----------------------------
Kenneth A. Iverson
Vice President and Secretary
<PAGE>
AMENDMENT NO. 1
TO THE
ECOLAB INC.
ADMINISTRATIVE DOCUMENT
FOR NON-QUALIFIED BENEFIT PLANS
Pursuant to Section 5.1 of the Ecolab Inc. Administrative Document for
Non-Qualified Benefit Plans (the "Administrative Document"), Ecolab Inc. (the
"Company") hereby amends the Administrative Document as set forth below. Words
and phrases used herein with initial capital letters which are defined in the
Administrative Document are used herein as so defined.
1. Section 2.2 of the Administrative Document is hereby amended in its
entirety to read as follows:
"SECTION 2.2. WITHHOLDING/TAXES. To the extent required by applicable
law, the Company shall withhold (or cause to be withheld) from the
Benefit payments any taxes required to be withheld by any federal, state
or local government."
2. Subsection (2) of Section 2.4 of the Administrative Document is hereby
amended in its entirety to read as follows:
"(2) AMBIGUOUS DEATH BENEFICIARY DESIGNATION. In the event that the most
recent Death Beneficiary designation filed prior to the Executive's
death is ambiguous or incapable of reasonable construction, the
Administrator may (in his or her sole discretion) (a) construe such
designation in such manner as the Administrator deems closest to the
Executive's intent, (b) determine that such designation is void and
distribute the Benefits as if the Executive had not filed any
designation, or (c) institute proceedings in a court of competent
jurisdiction for construction of such designation and charge any
expenses incurred in such proceedings, including reasonable attorney's
fees, against the Executive's Benefits. Notwithstanding the foregoing,
in the event that any benefits under the Plans are provided by
insurance contracts which are owned by the Executive and under which
the Executives are required to designate a Death Beneficiary, the terms
of such insurance contracts shall govern Death Beneficiary designations
with respect to such Benefits."
3. Section 2.6 of the Administrative Document is hereby amended in its
entirety to read as follows:
"SECTION 2.6. LIABILITY FOR PAYMENT. The Employer by which the
Executive was most recently employed at the time of his termination of
<PAGE>
employment with the Controlled Group shall pay the Benefits (or cause
the Benefits to be paid) to the Executive or his Death Beneficiary under
the Plans. In the event that an Executive transfers employment from one
Employer to another, the Executive's Benefits (and the underlying assets
and liabilities related thereto) shall automatically be transferred from
the Executive's former Employer to the Executive's new Employer."
4. Section 6.1 of the Plan is hereby amended in its entirety to read as
follows:
"SECTION 6.1. NONALIENATION. No right or interest of an Executive or
his Death Beneficiary under any Plan shall be anticipated, assigned
(either in law or in equity) or alienated by the Executive or his Death
Beneficiary, nor shall any such right or interest be subject to
attachment, garnishment, levy, execution or other legal or equitable
process or in any manner be liable for or subject to the debts of any
Executive or Death Beneficiary. The Company shall give no effect to any
instrument purporting to alienate any person's interest in any Benefits
under the Plans. Notwithstanding the foregoing, in the event that any
Benefits under the Plans are provided by insurance contracts which are
owned by the Executives, such Executives may assign ownership of such
contracts to any other person(s), to the extent permitted by law."
5. This amendment to the Administrative Document shall be effective as of
July 1, 1997.
IN WITNESS WHEREOF, the Company has caused this instrument to be executed by its
authorized officers and its corporate seal affixed, this 11th day of July, 1997.
ECOLAB INC.
By: /s/ Michael E. Shannon
--------------------------------------
(Seal) Michael E. Shannon
Chairman of the Board, Chief Financial
and Administrative Officer
/s/ Kenneth A. Iverson
- --------------------------------
Kenneth A. Iverson
Vice President and Secretary
<PAGE>
ECOLAB INC.
ADMINISTRATIVE DOCUMENT
FOR NON-QUALIFIED BENEFIT PLANS
FIRST DECLARATION OF AMENDMENT
Pursuant to Section 5.1 of the Ecolab Inc. Administrative Document for
Non-Qualified Benefit Plans ("Administrative Document"), the Company amends the
Administrative Document as set forth below.
1. Section 2.6 of the Administrative Document is hereby amended by
adding the following sentence to the end thereof.
"Notwithstanding the foregoing, the Company may (but shall not be
required to) guarantee some or all of the obligations of one or more
Employers under any one or all of the Plans, with respect to one or
more Executives or Death Beneficiaries, to the extent determined by the
Company in its sole and absolute discretion."
2. This amendment to the Administrative Document shall be effective as of
November 13, 1997.
IN WITNESS WHEREOF, the Company has caused this instrument to be executed by its
authorized officers and its corporate seal affixed, this 11th day of November,
1997.
ECOLAB INC.
(Seal) By: /s/ Michael E. Shannon
-------------------------------------
Michael E. Shannon
Chairman of the Board, Chief Financial
and Administrative Officer
Attest: /s/ Kenneth A. Iverson
----------------------------
Kenneth A. Iverson
Vice President and Secretary
<PAGE>
1999 ECOLAB INC.
MANAGEMENT PERFORMANCE INCENTIVE PLAN
1. PURPOSE OF PLAN.
The purpose of the 1999 Ecolab Inc. Management Performance Incentive
Plan (the "Plan") is to advance the interests of Ecolab Inc. (the "Company") and
its stockholders by enabling the Company and its Subsidiaries to attract and
retain key executives of outstanding ability, by focusing such key executives on
pre-established, objective performance goals and by providing such key
executives with opportunities to earn financial rewards based on the achievement
of such performance goals. The Plan is intended to constitute a qualified
performance-based compensation plan under Section 162(m)(4)(C) of the Internal
Revenue Code of 1986, as amended (the "Code") and shall be administered and
interpreted so as to ensure such compliance.
2. DEFINITIONS.
For the purposes of the Plan, the following terms will have the
meanings set forth below, unless the context clearly otherwise requires:
2.1 "AWARD" means a right granted to a Participant pursuant to
Section 5 of the Plan to receive a cash payment from the Company (or a
Subsidiary) based upon the extent to which the Participant's Performance
Goal(s) are achieved during the relevant Performance Period and subject to
the Committee's discretion pursuant to Section 3.1.
2.2 "BOARD" means the Board of Directors of the Company.
2.3 "CODE" is defined in Section 1 of the Plan.
2.4 "COMMITTEE" is defined in Section 3 of the Plan.
2.5 "COMPANY" is defined in Section 1 of the Plan.
2.6 "COVERED EMPLOYEE" means an individual who with respect to a
Performance Period is a "covered employee" within the meaning of Section
162(m)(3) of the Code.
2.7 "DISABILITY" means the disability of the Participant such as would
entitle the Participant to receive disability income benefits pursuant to the
long-term disability plan of the Company or Subsidiary then covering the
Participant or, if no such plan exists or is applicable to the Participant, a
determination by the Committee that the Participant is permanently and totally
disabled within the meaning of Section 22(e)(3) of the Code.
2.8 "EXECUTIVE OFFICER" means an executive officer of the Company
within the meaning of Rule 3b-7 under the Securities Exchange Act of 1934, as
amended.
<PAGE>
2.9 "GAAP" means generally accepted accounting principles set forth in
the opinions, statements and pronouncements of the Financial Accounting
Standards Board, United States (or predecessors or successors thereto or
agencies with similar functions), or in such other statements by such other
entity as may be in general use by significant segments of the accounting
profession, which are applicable to the circumstances as of the date of
determination and in any event applied in a manner consistent with the
application thereof used in the preparation of the Company's financial
statements.
2.10 "PARTICIPANT" means an Executive Officer of the Company to whom an
Award is granted by the Committee under the Plan.
2.11 "PERFORMANCE GOAL" means a performance objective established by
the Committee for a particular Participant for a Performance Period pursuant to
Section 5 of the Plan for the purpose of determining the extent to which an
Award has been earned for such Performance Period. Each Performance Goal will
consist of (a) "PERFORMANCE CRITERIA," as defined in Section 5.2 of the Plan,
which are one or more objectively determinable measures related to individual,
business unit or Company performance, and (b) a "PERFORMANCE TARGET," which is
the level at which the relevant Performance Criteria must be achieved for
purposes of determining whether a cash payment is to be made under an Award,
which may be stated as a threshold level below which no payment will be made, a
maximum level at or above which full payment will be made and intermediate
targets which will result in payment between such threshold and maximum level.
2.12 "PERFORMANCE PERIOD" means a Plan Year or, for an Executive
Officer who is first hired as an Executive Officer after the first day of the
Plan Year and who becomes a Participant during the Plan Year, such portion of
the Plan Year as determined by the Committee.
2.13 "PLAN" is defined in Section 1 of the Plan.
2.14 "PLAN YEAR" means the fiscal year of the Company.
2.15 "RETIREMENT" means termination of employment at an age and length
of service such that the Participant would be eligible to an immediate
commencement of benefit payments under the Company's defined benefit pension
plan available generally to its employees, whether or not such individual
actually elects to commence such payments (provided that if the Participant is
not covered by the Company's defined benefit pension plan the Participant will
be deemed to be covered by such plan for purposes of this Plan).
2.16 "SUBSIDIARY" means any entity that is directly or indirectly
controlled by the Company, as determined by the Committee.
2
<PAGE>
3. PLAN ADMINISTRATION.
3.1 THE COMMITTEE. The Plan will be administered by a committee
appointed by the Board consisting solely of two or more directors, each of whom
is an "outside director" within the meaning of Section 162(m)(4)(C)(i) of the
Code (the "Committee"). In accordance with and subject to the provisions of the
Plan, the Committee will have full authority and discretion with respect to
Awards made under the Plan, including without limitation the following: (a)
selecting the Executive Officers to be Participants; (b) establishing the terms
of each Award; (c) determining the time or times when Awards will be granted;
and (d) establishing the restrictions and other conditions to which the payment
of Awards may be subject. The Committee will have no authority under the Plan to
amend or modify, in any manner, the terms of any outstanding Award; provided,
however, that (x) the Committee shall have the authority provided for in Section
3.2 of the Plan; and (y) the Committee shall have the authority to reduce or
eliminate the compensation or other economic benefit due pursuant to an Award
upon the attainment of one or more Performance Goals included in such Award.
Each determination, interpretation or other action made or taken by the
Committee pursuant to the provisions of the Plan will be conclusive and binding
for all purposes and on all persons, and no member of the Committee will be
liable for any action or determination made in good faith with respect to the
Plan or any Award granted under the Plan.
3.2 ADJUSTMENTS. In the event of (a) any merger, reorganization,
consolidation, recapitalization, liquidation, reclassification, stock dividend,
stock split, combination of shares, rights, offering, extraordinary dividend
(including a spin-off) or other similar change affecting the Company's shares,
(b) any purchase, acquisition, sale or disposition of a significant amount of
assets other than in the ordinary course of business, or of a significant
business, (c) any change resulting from the accounting effects of discontinued
operations, extraordinary income or loss, changes in accounting as determined
under GAAP, or restatement of earnings or (d) any charge or credit resulting
from an item which is classified as "non-recurring," "restructuring," or similar
unusual item on the Company's audited annual Statement of Income which, in the
case of (a) - (d), results in a change in the components of the calculations of
any of the Performance Criteria, as established by the Committee, in each case
with respect to the Company or any other entity whose performance is relevant to
the achievement of any Performance Goal included in an Award, the Committee (or,
if the Company is not the surviving corporation in any such transaction, a
committee of the board of directors of the surviving corporation consisting
solely of two or more "outside directors" within the meaning of Section
162(m)(4)(C)(i) of the Code) shall, without the consent of any affected
Participant, amend or modify the terms of any outstanding Award that includes
any Performance Goal based in whole or in part on the financial performance of
the Company (or any Subsidiary or division thereof) or such other entity so as
equitably to reflect such event or events, such that the criteria for evaluating
such financial performance of the Company or such other entity (and the
achievement of the corresponding Performance Goal) will be substantially the
same (as determined by the Committee or the committee of the board of directors
of the surviving corporation) following such event as prior to such event;
provided, however, that the Committee shall not take any action pursuant to this
3
<PAGE>
Section which would constitute an impermissible exercise of discretion pursuant
to Section 162(m) of the Code.
4. PARTICIPATION.
The Participants for any Performance Period shall be those Executive
Officers who are granted Awards by the Committee under the Plan for such
Performance Period.
5. GRANT OF AWARDS.
5.1 NATURE OF AWARDS. An Award granted under the Plan shall provide for
a cash payment to be made solely on account of the attainment of one or more
pre-established, objective Performance Goals included in such Award, subject to
the Committee's authority pursuant to Sections 3 and 10 of the Plan.
5.2 PERFORMANCE CRITERIA. Performance Criteria which the Committee may
include in Awards made under the Plan include the following measurements, or
changes in such measurements between different Plan Years (or combination
thereof) as applied to the Company as a consolidated entity or, except as to
Diluted Earnings Per Share, a business division or business or staff unit
thereof:
(a) "DILUTED EARNINGS PER SHARE" ("EPS") means net income (loss) per
common share, diluted, as reported in the Company's audited year-end
Consolidated Statement of Income ("Statement of Income") for the Plan
Year;
(b) "OPERATING INCOME" means "operating income" as reported or included
in the Company's Statement of Income;
(c) "NET SALES" means "net sales" as reported or included in the
Company's Statement of Income;
(d) "DAYS SALES OUTSTANDING" ("DSO") means the 12 point average of
month-end DSO numbers, and month-end DSO numbers shall mean monthly
performance for days sales invested in trade accounts receivable,
determined by using the "exhaustion method" ;
(e) "CAPITAL EXPENDITURES" means "capital expenditures" reported or
included in the Company's year-end audited Consolidated Statement of
Cash Flows for the Plan year;
(f) "INVENTORY DAYS ON HAND" ("DOH") means, by category of inventory,
the average of the 12 month-end DOH numbers, and the month-end DOH
numbers shall mean, by category of inventory, (i) inventory on hand at
standard cost, divided by (ii) cost of goods at standard cost based on
either forecasted requirements or historical shipments;
4
<PAGE>
(g) "CONTROLLABLE EXPENSES" means expenses under the control of the
Participant;
(h) "RETURN ON BEGINNING EQUITY" means net income (loss) as reported or
included in the Company's Statement of Income divided by beginning of
the year "shareholders equity" as reported or included in the Company's
year-end audited financial statements for the Plan year; and
(i) "RETURN ON NET ASSETS" means (i) Operating Income, less income
taxes at the applicable effective rate, divided by (ii) total assets
less cash and cash equivalents, investments is securities and
non-interest bearing liabilities as reported or included in the
Company's year-end audited financial statements for the Plan year,
including footnotes.
5.3 ESTABLISHMENT OF PERFORMANCE GOALS. Not later than 90 days after
the commencement of the Plan Year (or such earlier date as may be required
pursuant to Section 162(m) of the Code) the Committee shall determine in writing
for each Participant:
(a) the Performance Goal(s) for the Participant, including in each case
one or more of the Performance Criteria set forth in Section 5.2 of the
Plan and the Performance Target for each Performance Criteria;
(b) if more than one Performance Goal is specified for a Participant,
the relative weight assigned to each Performance Goal; and
(c) the cash award expressed as threshold, maximum and intermediate
percentages of the base salary for the Participant for the Performance
Period, ranging from 10% to 250% of such base salary to be received by
the Participant to the extent such Performance Goals are achieved,
provided that the Committee shall also place a maximum dollar amount on
such cash award which may not exceed $2.5 million.
For an Executive Officer who is first hired as an Executive Officer and
who becomes a Participant after the first day of the Plan Year, the Performance
Goals shall be established by the Committee as set forth in this Section within
the time period permitted by Section 162(m) of the Code.
6. PAYMENT OF AWARDS.
As soon as practicable after the Committee has received the appropriate
financial and other data after the end of a Plan Year, the Committee will for
each Participant certify in writing the extent to which the applicable
Performance Goals for such Participant have been met and the corresponding
amount of the Award earned by such Participant. Payment of each Award in a cash
lump sum, less applicable withholding taxes pursuant to Section 8 of the Plan,
shall be
5
<PAGE>
made as soon as practicable thereafter. Notwithstanding anything in the
Plan to the contrary, no payment made pursuant to any Award in respect of any
Performance Period shall exceed $2.5 million. If the Committee determines in
good faith that there is a reasonable likelihood that any compensation paid or
payable to a Participant by the Company or a Subsidiary pursuant to the Plan for
a Plan Year would not be deductible by the Company or the Subsidiary solely by
reason of the limitation under Section 162(m) of the Code, the Committee may
defer all or a portion of the amounts otherwise payable pursuant to the Plan to
the extent deemed necessary by the Committee to ensure that the entire amount of
any distribution to such Participant is deductible. If so determined by the
Committee, such deferred amounts, when paid to the Participant, may be
accompanied by interest at a reasonable rate (as determined by the Committee).
7. EFFECT OF TERMINATION OF EMPLOYMENT.
7.1 TERMINATION DUE TO DEATH, DISABILITY OR RETIREMENT. In the event a
Participant's employment with the Company and all Subsidiaries is terminated by
reason of death, Disability or Retirement during a Performance Period, the
Participant (or the Participant's estate) (subject to the Committee's discretion
as allowed by clause (y) of Section 3.1 of the Plan) shall be paid (pursuant to
Section 6 of the Plan after the completion of the Plan Year) a percentage of the
amount earned according to the terms of the Award equal to the portion of the
Performance Period through the Participant's death, Disability or Retirement, as
the case may be, as determined by the Committee.
7.2 TERMINATION FOR REASONS OTHER THAN DEATH, DISABILITY OR RETIREMENT.
In the event a Participant's employment is terminated with the Company and all
Subsidiaries prior to the end of the Performance Period for any reason other
than death, Disability or Retirement, or a Participant is in the employ of a
Subsidiary and the Subsidiary ceases to be a Subsidiary of the Company (unless
the Participant continues in the employ of the Company or another Subsidiary),
the Participant's Award for such Performance Period shall be immediately
forfeited and the Participant shall have no right to any payment thereafter;
provided, however, that under such circumstances the Committee may pay the
Participant an amount not to exceed a percentage of the amount earned according
to the terms of the Award equal to the portion of the Performance Period through
the Participant's termination.
8. PAYMENT OF WITHHOLDING TAXES.
The Company is entitled to withhold and deduct from the payment made
pursuant to an Award or from future wages of the Participant (or from other
amounts that may be due and owing to the Participant from the Company or a
Subsidiary), or make other arrangements for the collection of, all legally
required amounts necessary to satisfy any and all federal, state and local
withholding and employment-related tax requirements attributable to any payment
made pursuant to an Award.
9. RIGHTS OF ELIGIBLE EXECUTIVE OFFICERS AND PARTICIPANTS; TRANSFERABILITY.
6
<PAGE>
9.1 EMPLOYMENT. Nothing in the Plan will interfere with or limit in any
way the right of the Company or any Subsidiary to terminate the employment or
otherwise modify the terms and conditions of the employment of any Executive
Officer or Participant at any time, nor confer upon any Executive Officer or
Participant any right to continue in the employ of the Company or any
Subsidiary.
9.2 RESTRICTIONS ON TRANSFER. Except pursuant to testamentary will or
the laws of descent and as otherwise expressly permitted by the Plan, no right
or interest of any Participant in an Award will be assignable or transferable,
or subjected to any lien, during the lifetime of the Participant, either
voluntarily or involuntarily, directly or indirectly, by operation of law or
otherwise.
9.3 NON-EXCLUSIVITY OF THE PLAN. Nothing contained in the Plan is
intended to modify or rescind any previously approved compensation plans or
programs of the Company or any Subsidiary or create any limitations on the power
or authority of the Board or any committee thereof to adopt such additional or
other compensation arrangements as the Board or committee may deem necessary or
appropriate.
10. PLAN AMENDMENT, MODIFICATION AND TERMINATION.
The Board may suspend or terminate the Plan or any portion thereof at
any time, and may amend the Plan from time to time in such respects as the Board
may deem advisable in order that Awards under the Plan will conform to any
change in applicable laws or regulations or in any other respect the Board may
deem to be in the best interests of the Company; provided, however, that no
amendments to the Plan will be effective without the approval of the
stockholders of the Company if stockholder approval of the amendment is then
required for the Plan to continue to be a qualified performance-based
compensation plan pursuant to Section 162(m) of the Code. Any termination,
suspension or amendment of the Plan may adversely affect any outstanding Award
without the consent of the affected Participant.
11. UNFUNDED, UNSECURED OBLIGATION.
A Participant's only interest under the Plan shall be the right to
receive a cash payment under an Award pursuant to the terms of the Award and the
Plan (subject to the authority of the Committee pursuant to Sections 3 and 10 of
the Plan). No portion of the amount payable to Participants upon the achievement
of any Performance Goal therein shall be held by the Company or any Subsidiary
in trust or escrow or any other form of asset segregation. To the extent that a
participant acquires a right to receive such a cash payment under the Plan, such
right shall be no greater than the right of any unsecured, general creditor of
the Company.
12. EFFECTIVE DATE AND DURATION OF THE PLAN.
7
<PAGE>
The Plan, as amended and restated, was approved by the Board on
February 19, 1999, subject to the approval of the stockholders of the Company as
required by Section 162(m) of the Code. No benefits will be granted or amounts
will be paid pursuant to the Plan unless and until such approval of the Plan by
the stockholders of the Company. The Plan shall be effective for the Plan Year
beginning on January 1, 1999 and will remain in effect through and including the
Plan Year ending December 31, 2003. The Plan may be terminated at any time by
the Board. Any payments pursuant to Awards outstanding upon termination of the
Plan may continue to be made in accordance with the terms of the Awards, subject
to the authority of the Committee pursuant to Sections 3 and 10 of the Plan.
13. MISCELLANEOUS.
13.1 GOVERNING LAW. The validity, construction, interpretation,
administration and effect of the Plan and any rules, regulations and actions
relating to the Plan will be governed by and construed exclusively in accordance
with the internal, substantive laws of the State of Minnesota, without regard to
the conflict of law rules of the State of Minnesota or any other jurisdiction.
13.2 SUCCESSORS. The Plan will be binding upon and inure to the benefit
of the successors of the Company and the Participants.
8
<PAGE>
AMENDMENT
to the Amended and Restated JOINT VENTURE AGREEMENT
made between
Ecolab Inc., 370 Wabasha Street, St. Paul, MN 55102, USA
- Ecolab -
and
Henkel KGaA, Henkelstrasse 67, 40191 Dusseldorf, Deutschland
- Henkel -
1. Section 6.02(a) of the Amended and Restated Joint Venture Agreement
dated 26 June 1991, shall be deleted in its entirety and the following
paragraph substituted in its place.
6.02 AUDITING, ACCOUNTING SYSTEM, INSPECTION AND INFORMATION; FINANCIAL
POLICIES.
(a) The auditors for the Venture shall be KPMG for an initial term
ending on 30 November 1995. After this initial term for KPMG,
either party may cause a change in the auditors for the
Venture by providing written notice to the other party at
least six months prior to the end of any fiscal year of the
Venture. Within 90 days of receipt of a notice of a change in
auditors, the parties shall select a new auditor which shall
be reasonably acceptable to both parties. Any replacement
auditor selected by the parties shall serve beginning on the
first day of the fiscal year following notice, except that the
auditor being replaced shall complete the year-end audit for
the fiscal year just completed. Thereafter, any further
changes of the auditor shall be in accordance with the
procedures set forth in this Section. In the change and
selection of an auditor, the parties shall give due
consideration to the disruption and costs associated with
frequent changes in the auditor. Henkel and Ecolab shall cause
the Venture, for a transition period, to have a fiscal
year-end of 30 November for each year, and the Venture shall
not be permitted to alter such year-end; PROVIDED, HOWEVER,
that Henkel and Ecolab shall cause the Venture to change to a
fiscal year-end of 31 December upon Ecolab's reasonable
satisfaction that the Venture will be able to supply Ecolab
with information, in a timely fashion, in order to allow
Ecolab to comply with all Securities Exchange Commission
disclosure and other financial reporting requirements with the
Venture having a 31 December fiscal year-end.
<PAGE>
2. This Agreement is done in three (3) originals, one for each party and
one for the Joint Venture Henkel Ecolab.
St. Paul / Dusseldorf 13 June 1994
ECOLAB INC. HENKEL KGaA
by
/s/ Michael E. Shannon /s/ Dr. Grunewald /s/ Dr. Gruter
- ---------------------- ----------------- --------------
Michael E. Shannon Dr. Grunewald Dr. Gruter
<PAGE>
EXHIBIT (10)Q
DESCRIPTION OF ECOLAB INC.
MANAGEMENT INCENTIVE PLAN
The Ecolab Inc. Management Incentive Plan ("MIP") is not set forth in a formal
plan document. Set forth below is a description of the MIP as it applies to the
executive officers of Ecolab Inc. (the "Company").
The MIP is a cash-based annual incentive plan that focuses executives'
attention on achieving competitive annual business goals. The Compensation
Committee of the Company's Board of Directors (the "Committee"), with input
from management, sets specific performance goals at the beginning of each year
and communicates them to the Company's executives. The Committee also
establishes median awards, which are set at a level which approximates median
annual incentive targets expressed as a percentage of base salary of a
comparator group consisting of a broad range of United States manufacturing
and service companies. Achievement of median performance goals will result in
a median award, while achievement of performance levels below or above the
median performance goal will result in minimum, premium or maximum awards.
Executives with corporate-wide responsibility earn awards based primarily on
the achievement of Earnings Per Share ("EPS") goals. The Committee establishes
annual EPS levels that must be achieved to receive minimum, median, premium
and maximum awards. Economic projections and historical compounded annual EPS
growth, measured over three-year periods for the Standard & Poor's 500 Index,
are the basis for the EPS goals.
Executives with business-unit responsibility earn MIP awards by meeting
unit-specific operating income goals. Other financial or strategic factors
including, but not limited to, sales, cash flow and management of assets,
working capital and inventory, may also affect the size of the awards provided
that the operating income thresholds are met. The weight of each performance
measure varies among business units. Notwithstanding the above, the performance
measures for certain executives with business-unit responsibility will also
include achievement of EPS goals.
The Committee, in general, makes awards based strictly on level of achievement
against pre-established goals. However, under the MIP, the Committee may, in
its sole discretion, make awards at a level higher or lower than that
determined by strict application of achievement against goals based upon such
other business criteria as the Committee determines appropriate.
<PAGE>
FINANCIAL DISCUSSION
The following discussion and analysis provides information that management
believes is useful in understanding the company's operating results, cash flows
and financial condition. The discussion should be read in conjunction with the
consolidated financial statements and related notes.
The financial discussion and other portions of this Annual Report to
Shareholders contain various "Forward-Looking Statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. These statements, which
represent Ecolab's expectations or beliefs concerning various future events, are
based on current expectations that involve a number of risks and uncertainties
which could cause actual results to differ materially from those of such
Forward-Looking Statements. We refer readers to the company's statement entitled
"Forward-Looking Statements and Risk Factors" which is contained under Part I of
the company's Annual Report on Form 10-K for the year ended December 31, 1998.
Additional risk factors may be described from time to time in Ecolab's filings
with the Securities and Exchange Commission.
1998 OVERVIEW
During 1998, Ecolab achieved its seventh consecutive year of record financial
results and the company's stock outperformed the Standard & Poor's 500 index for
the fourth year in a row. The company's more significant accomplishments for
1998 included:
- - Ecolab's stock price rose 31 percent during 1998 and, including dividends,
yielded a return of nearly 32 percent to shareholders.
[GRAPH]
- - For the third year in a row, the company exceeded all three of its
long-term financial objectives of 15 percent growth in income per common
share, 20 percent return on beginning shareholders' equity and an investment
grade balance sheet.
- - Income from continuing operations rose 15 percent to a record $155 million,
or $1.15 per diluted share.
[GRAPH]
- - Return on beginning shareholders' equity reached a record 28 percent and
the company recorded its seventh consecutive year of exceeding its long-term
financial objective of a 20 percent return on beginning shareholders' equity.
- - Cash provided by continuing operations increased 17 percent and also
reached an all-time high. Strong cash flow and moderate debt levels allowed the
company to maintain its long-term financial objective of an investment grade
balance sheet for the sixth consecutive year, and the company's debt continued
to be rated within the "A" categories by the major rating agencies.
- - Net sales increased 15 percent and reached a record level of $1.9 billion.
- - Operating income was a record $262 million for 1998 and increased 20
percent over the prior year. As a percent of net sales, operating income also
reached an all-time high of 13.9 percent.
- - The company's equity in earnings of the Henkel-Ecolab joint venture rose 19
percent for 1998 to a record level.
- - The company increased its annual dividend rate for the seventh consecutive
year. The annual dividend rate was increased 11 percent to an annual rate of
$0.42 per common share. The company has paid dividends on its common stock for
62 consecutive years.
- - The company continued to make strategic business acquisitions in order to
broaden its product and service offerings in line with its Circle the
Customer -- Circle the Globe strategy. The integration of the Gibson business,
which was acquired at the end of 1997, was completed and the business exceeded
the company's expectations for 1998. Also during 1998, the company added
commercial kitchen equipment repair services to its operations through the
acquisition of GCS Service, Inc., and products and services were added to the
U.S. Institutional and Food & Beverage businesses and in Japan through business
acquisitions.
24
<PAGE>
All of these acquisitions have been accounted for as purchases and,
accordingly, the results of their operations have been included in the company's
financial statements from the dates of acquisition. Additional information
related to these acquisitions is included in Note 6 of the notes to consolidated
financial statements.
OPERATING RESULTS
CONSOLIDATED
<TABLE>
<CAPTION>
(thousands, except per share) 1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 1,888,226 $ 1,640,352 $ 1,490,009
Operating income $ 261,980 $ 218,504 $ 185,317
Income
Continuing operations $ 154,506 $ 133,955 $ 113,185
Discontinued operations 38,000
--------------------------------------------
Net income $ 192,506 $ 133,955 $ 113,185
- -----------------------------------------------------------------------------
Diluted income per common share
Continuing operations $ 1.15 $ 1.00 $ 0.85
Discontinued operations 0.28
Net income $ 1.44 $ 1.00 $ 0.85
</TABLE>
Consolidated net sales were nearly $1.9 billion for 1998, an increase of
15 percent over net sales of $1.6 billion in 1997. Both the company's United
States and International operations reported double-digit sales growth and
contributed to the consolidated sales improvement. Business acquisitions in
1998 and the annualized effect of businesses acquired in 1997 were
significant to the company's growth accounting for approximately one-half of
the overall sales growth for 1998. Changes in currency translation had a
negative effect on sales growth and decreased the consolidated growth rate by
three percentage points. The growth in sales also reflected the benefits of
new products, new customers, competitive gains, investments in the growth and
training of the sales-and-service force and a continuation of generally good
conditions in the hospitality and lodging industries, particularly in the
United States.
Consolidated operating income reached $262 million for 1998, an increase
of 20 percent over operating income of $219 million in 1997. Business
acquisitions contributed to the growth in operating income and accounted for
approximately one-fifth of the increase. The consolidated operating income
margin rose to 13.9 percent for 1998 and surpassed 1997's operating income
margin of 13.3 percent to reach a new all-time high. A continuation of
particularly strong growth in the U.S. Institutional and Food & Beverage
operations and solid performances by the U.S. Pest Elimination and Kay
businesses were the major contributors to the company's overall profit
improvement. Operating income margin growth reflected lower selling, general
and administrative expenses as a percentage of net sales, partially offset by
a decrease in the gross profit margin from last year's all-time high.
Selling, general and administrative expenses were 41.0 percent of net sales
in 1998, a decease from 42.7 percent of net sales in 1997. Selling, general
and administrative expense margins were down for both the company's United
States and International operations with a significant decrease in the Asia
Pacific region. The improvement in the selling, general and administrative
expense margin reflected the benefits of tight cost controls, synergies from
the integration of businesses acquired, improved sales productivity and
strong sales growth. These benefits were partially offset by continued
investments in the training and growth of the sales-and-service force. The
gross profit margin was 54.9 percent of net sales for 1998, down slightly
from last year's record gross profit margin of 56.0 percent. The decrease in
gross profit margin reflected a comparison against an exceptionally strong
period last year, the effects of business acquisitions and lower margins in
the Asia Pacific region which was affected by economic and monetary problems.
These negative effects on the gross profit margin were partially offset by
the effects of sales of new products and good sales volume growth. Selling
price increases continued to be constrained due to competitive pricing
conditions in several of the markets in which the company does business.
Income from continuing operations for 1998 rose 15 percent to $155 million,
or $1.15 per diluted share from $134 million, or $1.00 per diluted share in
1997. This improvement reflected double-digit growth in operating income and an
increase in the company's equity in earnings of the Henkel-Ecolab joint venture.
Earnings were negatively affected by increased net interest and income tax
expenses compared with last year. Income from continuing operations was 8.2
percent of net sales in both 1998 and 1997.
25
<PAGE>
In addition to ongoing operations, a tax issue related to the disposal of a
business in 1992 was resolved during 1998, resulting in a one-time gain from
discontinued operations of $38 million, or $0.28 per diluted share. As a result
of tax losses on the disposition of this business, the company's U.S. federal
income tax payments were reduced in 1992 through 1995 by approximately $58
million. However, pending final acceptance of the company's treatment of the
losses, no income tax benefit was recognized for financial reporting purposes.
During 1998, an agreement was reached with the Internal Revenue Service on the
final tax treatment for the losses. This agreement resulted in the payment of
approximately $39 million of income taxes and interest, and the recognition of
the gain from discontinued operations.
Net income for 1998 totaled $193 million, or $1.44 per diluted share,
compared with $134 million, or $1.00 per diluted share in 1997.
1997 COMPARED WITH 1996
Consolidated net sales for 1997 were over $1.6 billion, an increase of 10
percent compared to net sales of nearly $1.5 billion in 1996. Both the company's
U.S. and International operations contributed to this sales growth. Business
acquisitions accounted for approximately one-fourth of the growth in sales for
1997. New product introductions, a larger sales-and-service force, new customers
and competitive gains also added to the 1997 sales improvement.
Consolidated operating income increased 18 percent for 1997 and reached
$219 million compared to consolidated operating income of $185 million in 1996.
This growth included the benefits of business acquisitions, which accounted for
approximately 20 percent of the increase. The consolidated operating income
margin was 13.3 percent in 1997, a substantial improvement over the 1996
consolidated operating income margin of 12.4 percent. Most of the company's
businesses contributed to these income improvements; however, strong
performances by the core U.S. Institutional and Food & Beverage businesses
during 1997 were the major contributors to the company's overall profit
improvement. An improved and record level gross profit margin, reflecting good
sales volume growth and a more stable raw material cost environment, more than
offset a modestly higher selling, general and administrative expense margin and
limited selling price increases.
Net income for 1997 reached $134 million, or $1.00 per share on a diluted
basis, and increased 18 percent over last year's net income of $113 million, or
$0.85 per share. Net income improved to 8.2 percent of net sales, compared to
7.6 percent in 1996. The increase in net income reflected the benefits of strong
operating income performance, lower net interest expense and modestly higher
equity in earnings of the Henkel-Ecolab joint venture, which were partially
offset by increased income taxes.
OPERATING SEGMENT PERFORMANCE
<TABLE>
<CAPTION>
(thousands) 1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales
United States
Cleaning & Sanitizing $1,296,797 $1,156,625 $1,040,823
Other Services 160,063 119,203 107,955
------------------------------------------
Total 1,456,860 1,275,828 1,148,778
International Cleaning
& Sanitizing 440,668 335,337 305,938
------------------------------------------
Total 1,897,528 1,611,165 1,454,716
Effect of foreign
currency translation (9,302) 29,187 35,293
------------------------------------------
Consolidated $1,888,226 $1,640,352 $1,490,009
- -----------------------------------------------------------------------------
Operating income
United States
Cleaning & Sanitizing $ 218,500 $ 180,975 $ 152,979
Other Services 19,084 14,655 11,907
------------------------------------------
Total 237,584 195,630 164,886
International Cleaning
& Sanitizing 29,787 22,519 19,151
------------------------------------------
Total 267,371 218,149 184,037
Corporate (4,347) (4,088) (3,440)
Effect of foreign
currency translation (1,044) 4,443 4,720
------------------------------------------
Consolidated $ 261,980 $ 218,504 $ 185,317
- -----------------------------------------------------------------------------
Operating income as a percent of
sales
United States
Cleaning & Sanitizing 16.8% 15.6% 14.7%
Other Services 11.9 12.3 11.0
Total 16.3 15.3 14.4
International Cleaning
& Sanitizing 6.8% 6.7% 6.3%
</TABLE>
26
<PAGE>
During 1998, the company adopted Statement of Financial Accounting
Standards No. 131. As a result, the company defined its reportable segments and
changed the information it reports about its operating segments. Operating
segment information for prior years has been restated to conform to the 1998
presentation.
[GRAPH]
The company's operating segments have generally similar products and
services and, generally, the company is organized to manage its operations
geographically. Pursuant to the new standard, the company's operating segments
have been aggregated into three reportable segments: United States Cleaning and
Sanitizing operations, United States Other Services, and International Cleaning
and Sanitizing operations. The company evaluates the performance of its
International operations based on fixed management rates of currency exchange.
Therefore, International sales and operating income totals shown above, as well
as the International financial information included in this financial
discussion, are based on translation into U.S. dollars at the fixed currency
exchange rates used by management for 1998. All other accounting policies of the
reportable segments are consistent with generally accepted accounting principles
and the accounting policies of the company described in Note 2 of the notes to
consolidated financial statements. Additional information about the company's
reportable segments is included in Note 15 of the notes to consolidated
financial statements.
Sales of the company's United States Cleaning and Sanitizing operations
were nearly $1.3 billion for 1998 and increased 12 percent over sales
approaching $1.2 billion in 1997. This sales increase reflected benefits from
business acquisitions, a continuation of particularly strong performances by the
company's core Institutional and Food & Beverage operations and double-digit
growth in sales reported by Kay. Business acquisitions accounted for
approximately 30 percent of the growth in sales of the United States Cleaning
and Sanitizing operations. Sales in 1998 also benefited from new product
introductions, new customers, competitive gains, a larger and better trained
sales-and-service force and favorable trends in the hospitality and lodging
industries. Selling price increases continued to be constrained due to
competitive pricing conditions in several of the markets in which the company
does business. Sales of the company's Institutional operations increased 11
percent for 1998. Institutional reported strong double-digit growth in its
Ecotemp, laundry, specialty and housekeeping programs and solid growth in sales
to warewashing markets. Institutional benefited from new customers, competitive
gains, high customer retention and the addition of the Grace-Lee vehicle wash
business, which added approximately 2 percentage points to the Institutional
sales growth rate. Kay's U.S. operations reported sales growth of 10 percent for
1998 reflecting new business, continued growth in its food retail services
business and retention of key customers. Textile Care sales increased 1 percent
for 1998. Textile Care has a number of new product offerings, but continues to
experience pressures from consolidations in the commercial laundry market and a
difficult pricing environment. The company expects the U.S. Textile Care
business to continue to experience challenging market conditions over the near
term. Professional Products sales were up 6 percent, with double-digit growth in
its specialty and brand name program and infection prevention products, and
modest growth in its core janitorial business. Sales of the company's Water Care
operations increased 6 percent for 1998, reflecting double-digit growth in its
pool and spa and cruise ship businesses, partially offset by lower distributor
sales to municipal markets. Food & Beverage reported sales growth of 15 percent
for 1998. Food & Beverage sales growth included the benefits of businesses
acquired in 1998 and the annualized effect of last year's acquisition of
Chemidyne. Excluding the effect of these business acquisitions, Food & Beverage
sales increased 8 percent and included strong growth in sales to the beverage
and food processing markets and good growth in sales to the dairy markets,
despite challenging consolidation and pricing conditions.
For 1998, sales of the company's United States Other Services operations
increased 34 percent to $160 million, compared with $119 million last year.
Sales for 1998 included the mid-year acquisition of GCS Service Inc. (GCS), a
nationwide provider of commercial kitchen equipment repair services. Other
27
<PAGE>
Services sales grew 14 percent excluding the GCS business acquisition. Pest
Elimination reported sales growth of 14 percent for 1998 with strong sales
across all of its business lines, including its core contract services business,
its flying insect defense program and ancillary services. Pest Elimination had
very good new contract growth during 1998, continued its high customer retention
and benefited from weather conditions that contributed to greater pest
elimination needs during 1998. Sales of the Jackson equipment business increased
18 percent for 1998, reflecting good sales to the quickservice or fast-food
market.
[GRAPH]
Management rate sales of the company's International Cleaning and
Sanitizing operations were $441 million for 1998, up 31 percent over sales of
$335 million in 1997. Sales in 1998 benefited from the acquisition of Gibson at
the end of 1997 and from the addition of a business in Japan during 1998. These
business acquisitions accounted for approximately two-thirds of International's
sales growth for 1998. The Asia Pacific region, International's largest area of
operation, reported sales growth of 56 percent. Excluding business acquisitions,
Asia Pacific sales increased approximately 10 percent and reflected double-digit
growth in Japan and Southeast Asia, modest growth in Australia and a decrease in
sales in New Zealand. Sales to the Asia Pacific food and beverage markets were
up significantly and the region recorded modest growth in sales to institutional
markets. Latin America sales for 1998 increased 8 percent over the prior year.
The region continued to be led by significant double-digit growth in Mexico.
Sales were also up at double-digit rates in Venezuela and in Central America,
while sales growth in Brazil was modest. Latin America recorded good growth in
sales to both the institutional and food and beverage markets. Sales in Canada
increased 9 percent for 1998 and included high single-digit growth in sales to
both the institutional and food and beverage markets. Sales for the company's
operations in Africa decreased 6 percent for 1998 as the company focused on
integrating the various businesses acquired over the last couple of years.
Operating income of the company's United States Cleaning and Sanitizing
operations was $219 million in 1998, an increase of 21 percent over operating
income of $181 million in 1997. Business acquisitions accounted for
approximately 10 percent of the growth in operating income for 1998. Operating
income growth in the core Institutional and Food & Beverage businesses remained
very strong and operating income in the Kay and Professional Products businesses
was also up at double-digit rates. Textile Care and Water Care reported a
decrease in operating income for 1998. The operating income margin for the U.S.
Cleaning and Sanitizing operations improved to 16.8 percent of net sales,
compared with 15.6 percent in 1997. The increased operating income margin
reflected strong sales growth, including a continuation of strong performance in
the core operations and in sales of new products, modest increases in raw
material costs and the benefits of tight cost controls. The company continued to
invest in its sales-and-service force during 1998 and added 255 associates to
its U.S. Cleaning and Sanitizing operations.
United States Other Services reported an increase of 30 percent in
operating income, to $19 million in 1998 from $15 million in the prior year.
Excluding the GCS acquisition, operating income was up 27 percent. The operating
income margin was down slightly, to 11.9 percent of net sales in 1998 from 12.3
percent last year, due in part to the addition of GCS. The increase in operating
income for 1998 was driven by sales growth, productivity improvements and tight
cost controls. 365 sales-and-service associates were added to the U.S. Other
Services operations in 1998, including GCS associates.
International Cleaning and Sanitizing operations reported operating
income of $30 million for 1998, an increase of 32 percent over 1997 operating
income of $23 million. Business acquisitions accounted for approximately 90
percent of the growth in operating income for 1998. Operating income margins
for the International Cleaning and Sanitizing operations were 6.8 percent of
net sales in 1998 compared with 6.7 percent in the prior year. Operating
income reflected significant double-digit growth in Latin America, good
growth in Canada and a decrease in operating income in Africa and in the Asia
Pacific region when the Gibson acquisition is excluded. The company continues
to be cautious about near-term growth in Asia Pacific due to the lingering
uncertain economic conditions in the region. The recent currency devaluation
in Brazil is also expected to slow growth in Latin America during 1999. The
company added 300 sales-and-service associates to its International Cleaning
and Sanitizing operations during 1998, including associates of businesses
acquired.
28
<PAGE>
[GRAPH]
Operating income margins of the company's International operations are
substantially less than the operating income margins realized for the company's
U.S. operations. The lower International margins are due to the difference in
scale of International operations, where operating locations are smaller in
size, and to the additional costs of operating in numerous and diverse foreign
jurisdictions. Proportionately larger investments in sales, technical support
and administrative personnel are also necessary in order to facilitate growth of
International operations.
1997 COMPARED WITH 1996
Sales of the company's United States Cleaning and Sanitizing operations
approached $1.2 billion in 1997 and increased 11 percent over sales of $1.0
billion in 1996. Sales reflected strong growth in the core Institutional and
Food & Beverage operations and included benefits from business acquisitions
and significant new product introductions. Business acquisitions accounted
for approximately 25 percent of the sales growth for 1997. Sales of the U.S.
Institutional division increased 10 percent for 1997. Institutional's growth
reflected strong sales in all of its business units, significant new customer
business and competitive gains, continued strong growth in its Ecotemp
program and the successful rollout of its new Keystone product line sold
through partnership with a distributor. Sales of Kay's U.S. operations
increased 6 percent for 1997. Kay was unfavorably affected by a more
competitive quickservice market; however, Kay added another major
quickservice chain customer in 1997 and had good growth in sales to the food
retail market, which it entered in 1996. Sales of Textile Care decreased 3
percent for 1997. Continued plant consolidations, particularly in laundries
serving the healthcare market, increased competitive activity and comparison
against periods that benefited significantly from new product introductions
unfavorably affected Textile Care's sales growth. Professional Products
reported sales growth of 12 percent for 1997. This sales improvement
reflected the annualized effect of the 1996 acquisition of Huntington
Laboratories, good growth in sales to corporate accounts, and the addition of
new products to its commercial mass distribution line. Water Care sales were
down 2 percent for 1997 and reflected the elimination of low margin business,
consolidation of business acquisitions made over the past three years,
integration of disparate product lines, and the refining of sales efforts.
Food & Beverage reported a sales increase of 24 percent for 1997. Food &
Beverage sales growth included the benefits ofChemidyne, a provider of
cleaning and sanitizing products and equipment to the meat, poultry and
processed food markets, which was acquired in August of 1997, and the
annualized effect of the acquisition of Monarch in August of 1996. Excluding
these business acquisitions, Food & Beverage sales growth was 9 percent for
1997 and included growth in sales to all of its markets with double-digit
growth in sales to the food processing and beverage markets.
Sales of the United States Other Services operations were $119 million for
1997, up 10 percent over sales of $108 million in 1996. Pest Elimination
reported 10 percent sales growth for 1997, despite increased competitive
activity. Pest Elimination continued to develop new programs to leverage its
alliances with Ecolab's other operations. Sales of the Jackson business
increased 18 percent for 1997.
International Cleaning and Sanitizing sales were $335 million for 1997 and
increased 10 percent over sales of $306 million in 1996. Sales growth included
the benefits of business acquisitions and significant new product introductions.
Businesses acquired in Canada and Africa in 1997 and the annualization of 1996
Canadian business acquisitions accounted for approximately 50 percent of
International's sales growth for 1997. Asia Pacific had sales growth of 9
percent for 1997 with double-digit growth in Japan, modest growth in New Zealand
and flat results in Australia. Latin America reported sales growth of 9 percent
for 1997. Growth in the Latin America region was led by significant double-digit
growth in Mexico and included good growth in Brazil. Canada had sales growth of
16 percent for 1997, with approximately 70 percent of its growth due to business
acquisitions. International sales results also benefited from businesses
acquired in Central Africa during 1997. Sales in South Africa decreased during
1997, principally due to the elimination of low margin business.
Operating income of the United States Cleaning and Sanitizing operations
reached $181 million in 1997, an increase of 18 percent over operating income of
$153 million in 1996. Business acquisitions accounted for approximately 20
percent of operating income growth for 1997. With the exception of Textile Care,
all of the company's U.S. Cleaning and Sanitizing operations
29
<PAGE>
reported increased operating income, with particularly strong growth in the
core Institutional and Food & Beverage operations. The U.S. Cleaning and
Sanitizing operating income margin improved to 15.6 percent of net sales from
14.7 percent in 1996. The improved operating income margin reflected the
benefits of strong core business sales, sales of new products, stable raw
material costs, sales productivity improvements and tight cost controls,
which were partially offset by investments in the sales-and-service force.
United States Other Services operating income was $15 million for 1997, up
23 percent over operating income of $12 million in 1996. The operating income
margin improved from 11.0 percent of net sales in 1996 to 12.3 percent of net
sales in 1997. The improvement in operating income reflected strong sales,
productivity improvements and tight cost controls.
Operating income of the company's International Cleaning and Sanitizing
operations totaled $23 million in 1997, an increase of 18 percent over operating
income of $19 million in 1996. Operating income margins improved to 6.7 percent
of net sales in 1997 compared with 6.3 percent in 1996. Double-digit operating
income growth in Asia Pacific and Canada more than offset a decrease in
operating income in the Latin America region which was principally due to
investments in Brazil and Argentina.
HENKEL-ECOLAB JOINT VENTURE
The company operates cleaning and sanitizing businesses in Europe through a 50
percent economic interest in the Henkel-Ecolab joint venture. The company
includes the operations of Henkel-Ecolab in its financial statements using the
equity method of accounting. The company's equity in earnings of Henkel-Ecolab,
including royalty income and after deduction of intangible amortization, was $16
million in 1998, a 19 percent increase over 1997. When measured in Deutsche
marks, net income of Henkel-Ecolab increased 18 percent for 1998. This
improvement reflected increased sales, the benefits of cost controls and a lower
overall effective income tax rate.
[GRAPH]
Henkel-Ecolab sales, although not consolidated in Ecolab's financial
statements, increased 10 percent when measured in Deutsche marks. Excluding
businesses acquired in the United Kingdom and Germany, sales increased 5 percent
for 1998 with good growth across most divisions and regions. Sales in Germany
continued to be weak due in part to government and private spending cutbacks.
When measured in U.S. dollars, Henkel-Ecolab sales were up 7 percent for 1998.
1997 COMPARED WITH 1996
The company's equity in earnings of Henkel-Ecolab was $13 million for 1997, a 3
percent increase over 1996. Results were negatively affected by the stronger
U.S. dollar. When measured in Deutsche marks, Henkel-Ecolab's net income
increased 11 percent and reflected increased sales, improved gross margins and
lower interest expense. Henkel-Ecolab sales increased 7 percent when measured in
Deutsche marks. When measured in U.S. dollars, sales were negatively affected by
the strengthening U.S. dollar and decreased 7 percent.
CORPORATE
Corporate operating expense was $4 million in 1998 and 1997 and $3 million in
1996. Corporate operating expense includes overhead costs directly related to
the joint venture.
INTEREST AND INCOME TAXES
Net interest expense for 1998 was $22 million, an increase of 72 percent over
net interest expense of $13 million in 1997. This increase was due to debt
incurred at the end of 1997 for the Gibson business acquisition and for
additional borrowings related to other business acquisitions, income tax
payments to settle an outstanding tax issue and share repurchases during 1998.
Net interest expense decreased 12 percent to less than $13 million in 1997,
compared to net interest expense of over $14 million in 1996. This decrease was
principally due to a scheduled debt repayment on the company's 9.68 percent
senior notes and to increased interest income earned on higher average levels of
cash and cash equivalents held during 1997.
The company's effective income tax rate was 42.4 percent for 1998, and
increased from an effective income tax rate of 41.5 percent in 1997. This
increase was principally due to a higher overall effective rate on earnings of
International operations and to the effects of business acquisitions.
International's effective
30
<PAGE>
income tax rate varies from year to year with the pre-tax income mix of the
various countries in which the company operates.
The company's effective income tax rate was 41.5 percent for 1997, a modest
increase from the 1996 effective income tax rate of 41.4 percent. This increase
was due to a slightly higher overall effective rate on earnings of International
operations.
YEAR 2000 CONVERSION
The company has completed an assessment of Year 2000 compliance for its critical
operating and application systems located at its St. Paul-based headquarters.
These include customer-oriented systems such as sales and order processing,
billing and collections and associated infrastructure. As a result, the company
has remediated or is replacing portions of its software and hardware. The
company has tested these systems by simulating the occurrence of the Year 2000
in an orchestrated manner. Approximately 95 percent of the systems proved
compliant and the goal is to complete the remaining renovation and testing by
July 1999. The costs related to complete this activity are not expected to
exceed $7.0 million, in both capital and expense, of which approximately $5.5
million has been incurred to date. The company does not consider these costs to
be material to results of operations, financial position, or liquidity.
Each business unit not on the St. Paul system is responsible for developing
and implementing a Year 2000 compliance plan for its critical operating and
application systems (including assessment, remediation, validation and
implementation) subject to the oversight and coordination of a special
corporate-wide Year 2000 management team. The goal was for these business units
to complete all compliance activities by December 31, 1998. The business units
have reported approximately 90 percent achievement of Year 2000 compliance.
Where compliance has not been achieved, appropriate remedial plans have been
adopted. The Year 2000 management team is currently auditing the plans as
presented by the business units to ensure corporate-wide consistency in these
efforts and, to the extent determined necessary, will participate in tests based
on the simulation of Year 2000. The goal is to achieve full compliance by July
1999.
The company has completed an assessment of its dispensing and cleaning
systems which are at customer locations, for date/time sensitivity. The
installed base of such cleaning and dispensing systems which has not been
determined to be Year 2000 compliant is estimated at less than 0.5 percent of
all systems in place at customer sites. The company believes that Year 2000
compliant alternatives have been designed and identified and that the systems
can be retrofitted by July 1999.
The company has completed the assessment stage of analyzing its
manufacturing and building maintenance operations for date/time sensitivity
relative to Year 2000. While some issues have been identified, the company
believes that it can modify its processes or retrofit equipment to become Year
2000 compliant and is in the process of doing so with the intention of
completing the process by July 1999.
The company does not have final estimates for the costs of full Year 2000
remediation other than for St. Paul-based operating and application systems but
it believes the costs, when aggregated with costs for the St. Paul-based
systems, will not be material to the company's results of operations, financial
position, or liquidity. The costs will be funded by operating cash flows.
The company intends to complete its Year 2000 remediation efforts primarily
with in-house resources, but has and will continue to use consultants for
specific tasks.
Failures caused by the Year 2000 of key suppliers and vendors could cause
supply interruptions. Therefore, the company has contacted key suppliers and
vendors in order to determine the status of their Year 2000 remediation plans.
In the company's experience, its key suppliers and vendors are aware of the Year
2000 issue and represent that they have plans for being compliant on a timely
basis. The company intends to continue to monitor progress and may take further
actions to verify the accuracy of vendor and supplier representations.
The company is dependent upon its customers for sales and cash flow and
customers' Year 2000 failures could result in reduced sales, increased inventory
or receivable levels and cash flow reductions. While these events are possible,
the company's customer base is wide and diverse and the company does not, at
this point, believe that customers' Year 2000 failures will have a material
effect on the company. The company will continue to monitor this issue and will
consider further actions as may be warranted in the circumstances.
The company recognizes the need for Year 2000 contingency plans and will be
developing such plans during 1999.
The Henkel-Ecolab joint venture is conducting its own Year 2000 compliance
program.
The company recognizes that issues related to Year 2000 constitute a
material known uncertainty. The company also recognizes the importance of
ensuring its operations will not be adversely affected by Year 2000 issues. It
believes that the processes described above will be effective to manage the
risks
31
<PAGE>
associated with Year 2000 compliance. However, there can be no assurance that
the process can be completed on the timetable described above, that it will
be 100 percent effective in identifying all Year 2000 issues, or that the
remediation processes for its own operations will be completely effective.
The issues related to vendors or suppliers are more difficult because their
Year 2000 compliance programs are not within the company's direct control.
These uncertainties relating to Year 2000, however, are ones which the
company believes it shares with companies in similar businesses. Additional
information is found under the company's statement entitled "Forward-Looking
Statements and Risk Factors" which is contained under Part I of the company's
Annual Report on Form 10-K for the year ended December 31, 1998.
The failure to identify and remediate Year 2000 problems or, the failure of
key third parties who do business with the company or governmental/regulatory
agencies to timely remediate their Year 2000 issues could cause system failures
or errors, business interruptions and in a worst case scenario, the inability to
engage in normal business practices for an unknown length of time. Litigation
could also ensue. The effect on the company's results of operations, financial
position, or liquidity could be materially adverse.
EURO CURRENCY CONVERSION
The company's principal activities in Europe are not conducted directly. Rather,
such activities are conducted through its Henkel-Ecolab joint venture.
On January 1, 1999, 11 of the 15 member countries of the European Monetary
Union established fixed conversion rates between their existing currencies and a
new currency, the Euro. During a transition period from January 1, 1999 through
January 1, 2002, the Euro will replace the national currencies that exist in the
participating countries.
The transition to the Euro creates a number of sales, marketing, finance
and accounting issues. These issues are being addressed by the management of the
Henkel-Ecolab joint venture.
While the company will continue to evaluate the impact of the Euro
introduction over time, based on currently available information and the nature
of the company's exposures, the company does not, at this time, believe that the
transition to the Euro will have a material adverse impact on the company's
results of operations, financial position, or liquidity.
FINANCIAL POSITION, CASH FLOWS AND LIQUIDITY
FINANCIAL POSITION
The company has maintained its long-term financial objective of an investment
grade balance sheet since 1993. The company's debt was rated within the "A"
categories by the major rating agencies throughout 1998. Significant changes to
the company's balance sheet during 1998 included the following:
- - The company has added assets and liabilities to its balance sheet during
the last two years through business acquisitions. Other noncurrent assets
reflect significant additions for the GCS business and a cleaning and sanitizing
business acquired in Japan during 1998, and the acquisitions of Gibson and
Chemidyne in 1997. Significant levels of accounts receivable, inventories,
property, plant and equipment and other current liabilities were also added
during 1998 and 1997 as a result of these business acquisitions. During 1998,
net assets (principally accounts receivable, inventories and property, plant and
equipment) related to certain Gibson businesses and duplicate facilities were
reclassified to other current assets and the majority of these net assets were
sold.
[GRAPH]
- - Total debt was $295 million at December 31, 1998, compared with total
debt of $308 million at year-end 1997 and $176 million at year-end 1996. The
increase in total debt during 1997 included $116 million of borrowings
incurred under the company's Multicurrency Credit Agreement to finance the
purchase of the outstanding common shares of Gibson, and $22 million of debt
which was included on Gibson's balance sheet at the time of acquisition.
During 1998, the company replaced long-term debt under its Multicurrency
Credit Agreement with approximately $60 million of
Australian-dollar-denominated debt under a medium-term note agreement and
approximately $30 million of Australian-dollar-denominated commercial paper.
At December 31, 1998, the company had $44 million of U.S.-dollar-denominated
debt outstanding
32
<PAGE>
under its Multicurrency Credit Agreement related primarily to business
acquisitions, funding for income tax payments to settle an outstanding tax
issue and share repurchases. As of December 31, 1998, the ratio of total debt
to capitalization was 30 percent compared to 36 percent at year-end 1997 and
25 percent at year-end 1996. The improvement in the total debt to
capitalization ratio for 1998 was principally due to increased shareholders'
equity, which resulted from strong earnings performance and the 1998 gain
from discontinued operations.
- - Working capital levels have remained fairly constant over the last three
year ends. Working capital was $104 million at year-end 1998, compared with
working capital levels of $105 million and $108 million at year-end 1997 and
1996, respectively.
- - Other noncurrent liabilities decreased to $68 million at December 31, 1998
from $125 million at year-end 1997 and $138 million at year-end 1996. During
1998, the company resolved a tax issue related to the disposal of a business in
1992. As a result, the company reduced its noncurrent liabilities through the
payment of income taxes of approximately $39 million and the recognition of a
gain from discontinued operations of $38 million.
CASH FLOWS
For 1998, cash flows from continuing operating activities reached a record $275
million, compared to $235 million in 1997 and $254 million in 1996. Operating
cash flows for 1998 included strong earnings performance and the additional cash
flows from businesses acquired. Operating cash flows for 1997 were unfavorably
affected by a cash outflow due to an $18 million income tax deposit against
outstanding federal income tax issues that had been accrued for in other
noncurrent liabilities, and the reversal of favorable timing of payments which
affected the fourth quarter of 1996. Operating cash flows for 1997 also included
higher dividends from the Henkel-Ecolab joint venture.
Cash used for discontinued operating activities in 1998 reflects income
taxes paid related to a business which was discontinued in 1992.
CASH USED FOR DISCONTINUED OPERATING ACTIVITIES IN 1998 REFLECTS
[GRAPH]
Cash flows used for investing activities included capital expenditures of
$148 million in 1998, $122 million in 1997 and $112 million in 1996. Worldwide
additions of merchandising equipment, primarily cleaning and sanitizing product
dispensers, accounted for approximately 70 percent of each year's capital
expenditures. The company has also expanded its manufacturing facilities over
the last few years through construction and business acquisitions in order to
meet sales requirements more efficiently. The majority of cash flows used in
1998 for businesses acquired were related to the year-end 1997 Gibson
acquisition and a cleaning and sanitizing business acquired in Japan in early
1998. Cash flows used for businesses acquired included Gibson in 1997 and
Huntington and Monarch in 1996. Investing activities cash flows for 1998 also
included the proceeds from the sale of certain Gibson businesses and duplicate
facilities which the company chose not to retain.
Cash used for financing activities included cash flows used for reacquired
shares, cash dividends and net cash used of $9 million to reduce short-term and
long-term debt during 1998.
In 1998, the company increased its annual dividend rate for the seventh
consecutive year. The company has paid dividends on its common stock for 62
consecutive years. Cash dividends declared per share of common stock, by
quarter, for each of the last three years were as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 $0.095 $0.095 $0.095 $0.105 $0.39
1997 0.08 0.08 0.08 0.095 0.335
1996 0.07 0.07 0.07 0.08 0.29
</TABLE>
LIQUIDITY
The company maintains a committed line of credit under the Multicurrency Credit
Agreement for general corporate financing needs. The agreement includes a
competitive bid feature to minimize the cost of the company's borrowings. The
company also has a $200 million shelf registration as an additional source of
liquidity. The company believes its existing cash balances, cash generated by
operating activities, including cash flows from the Henkel-Ecolab joint venture,
available credit, and additional credit available based on a strong financial
position, are more than adequate to fund all of its 1999 requirements for
growth, possible acquisitions, new program investments, scheduled debt
repayments and dividend payments.
33
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year ended December 31 (thousands,
except per share) 1998 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $ 1,888,226 $ 1,640,352 $1,490,009
Cost of Sales 851,173 722,084 674,953
Selling, General and Administrative Expenses 775,073 699,764 629,739
------------------------------------------
Operating Income 261,980 218,504 185,317
Interest Expense, Net 21,742 12,637 14,372
------------------------------------------
Income From Continuing Operations Before
Income Taxes and Equity in Earnings
of Henkel-Ecolab 240,238 205,867 170,945
Provision for Income Taxes 101,782 85,345 70,771
Equity in Earnings of Henkel-Ecolab Joint
Venture 16,050 13,433 13,011
------------------------------------------
Income From Continuing Operations 154,506 133,955 113,185
Gain From Discontinued Operations 38,000
------------------------------------------
Net Income $ 192,506 $ 133,955 $ 113,185
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
Basic Income Per Common Share
Income From Continuing Operations $ 1.20 $ 1.03 $ 0.88
Gain From Discontinued Operations 0.29
Net Income $ 1.49 $ 1.03 $ 0.88
Diluted Income Per Common Share
Income From Continuing Operations $ 1.15 $ 1.00 $ 0.85
Gain From Discontinued Operations 0.28
Net Income $ 1.44 $ 1.00 $ 0.85
Weighted-Average Common Shares Outstanding
Basic 129,157 129,446 128,991
Diluted 134,047 133,822 132,817
</TABLE>
See notes to consolidated financial statements.
34 Ecolab 1998 Annual Report
<PAGE>
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31 (thousands, except per share) 1998 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 28,425 $ 61,169 $ 69,275
Accounts receivable, net 246,695 246,041 205,026
Inventories 165,627 154,831 122,248
Deferred income taxes 36,256 34,978 29,344
Other current assets 26,511 12,482 9,614
------------------------------------------
Current Assets 503,514 509,501 435,507
Property, Plant and Equipment, Net 420,205 395,562 332,314
Investment in Henkel-Ecolab Joint Venture 253,646 239,879 285,237
Other Assets 293,630 271,357 155,351
------------------------------------------
Total Assets $ 1,470,995 $ 1,416,299 $1,208,409
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt $ 67,991 $ 48,884 $ 27,609
Accounts payable 124,646 130,682 103,803
Compensation and benefits 79,431 74,317 71,533
Income taxes 244 13,506 26,977
Other current liabilities 127,479 137,075 97,849
------------------------------------------
Current Liabilities 399,791 404,464 327,771
Long-Term Debt 227,041 259,384 148,683
Postretirement Health Care and Pension Benefits 85,793 76,109 73,577
Other Liabilities 67,829 124,641 138,415
Shareholders' Equity (common stock, par
value $1.00 per share;
shares outstanding:
1998 - 129,479; 1997 - 129,127;
1996 - 129,600) 690,541 551,701 519,963
------------------------------------------
Total Liabilities and Shareholders' Equity $ 1,470,995 $ 1,416,299 $1,208,409
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
Ecolab 1998 Annual Report 35
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31 (thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 192,506 $ 133,955 $ 113,185
Less: gain from discontinued operations 38,000
------------------------------------------
Income from continuing operations 154,506 133,955 113,185
Adjustments to reconcile income from
continuing operations to cash
provided by continuing operations:
Depreciation 99,276 84,415 75,185
Amortization 22,695 16,464 14,338
Deferred income taxes (2,012) (2,074) (6,878)
Equity in earnings of joint venture (16,050) (13,433) (13,011)
Joint venture royalties and dividends 10,451 25,367 15,769
Other, net 1,526 4,630 1,023
Changes in operating assets and
liabilities:
Accounts receivable 1,352 (21,231) 2,809
Inventories (11,667) (14,395) (6,852)
Other assets (7,631) (10,993) (5,255)
Accounts payable (7,794) 20,876 16,397
Other liabilities 29,877 11,517 47,559
------------------------------------------
Cash provided by continuing operations 274,529 235,098 254,269
Cash used for discontinued operations (38,887)
------------------------------------------
Cash provided by operating activities 235,642 235,098 254,269
------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (147,631) (121,667) (111,518)
Property disposals 7,060 3,424 3,284
Businesses acquired (40,206) (157,234) (54,911)
Sale of Gibson businesses and assets 14,226
Other, net 4,766 (1,240) (1,449)
------------------------------------------
Cash used for investing activities (161,785) (276,717) (164,594)
------------------------------------------
FINANCING ACTIVITIES
Notes payable 24,820 9,280 (42,045)
Long-term debt borrowings 117,740 117,000 75,000
Long-term debt repayments (151,143) (15,210) (35,690)
Reacquired shares (52,984) (60,795) (22,790)
Cash dividends on common stock (49,000) (41,456) (36,096)
Other, net 5,679 26,278 17,088
------------------------------------------
Cash provided by (used for) financing
activities (104,888) 35,097 (44,533)
------------------------------------------
Effect of exchange rate changes on cash (1,713) (1,584) (585)
------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (32,744) (8,106) 44,557
Cash and cash equivalents, beginning of year 61,169 69,275 24,718
------------------------------------------
Cash and cash equivalents, end of year $ 28,425 $ 61,169 $ 69,275
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
</TABLE>
Bracketed amounts indicate a use of cash.
See notes to consolidated financial statements.
36 Ecolab 1998 Annual Report
<PAGE>
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Other
Additional Comprehensive
Common Paid-in Retained Deferred Income: Treasury
(thousands) Stock Capital Earnings Compensation Translation Stock Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1995 $ 70,078 $171,765 $325,674 $ (6,484) $ 16,272 $(120,647) $456,658
Net income 113,185 113,185
Foreign currency translation (9,485) (9,485)
--------
Comprehensive income 103,700
Cash dividends on common stock (37,409) (37,409)
Stock options 673 14,824 15,497
Stock awards 522 2,912 (3,638) 1,779 1,575
Reacquired shares (22,790) (22,790)
Amortization 2,732 2,732
--------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1996 70,751 187,111 404,362 (7,390) 6,787 (141,658) 519,963
Net income 133,955 133,955
Foreign currency translation (35,730) (35,730)
--------
Comprehensive income 98,225
Cash dividends on common stock (43,367) (43,367)
Stock options 648 15,877 16,525
Stock awards 5,093 (5,200) 1,427 1,320
Business acquisitions 12,454 3,946 16,400
Reacquired shares (60,795) (60,795)
Amortization 3,430 3,430
Stock dividend 71,398 (71,398)
--------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1997 142,797 149,137 494,950 (9,160) (28,943) (197,080) 551,701
Net income 192,506 192,506
Foreign currency translation (937) (937)
--------
Comprehensive income 191,569
Cash dividends on common stock (50,309) (50,309)
Stock options 1,059 16,047 17,106
Stock awards 6,833 (6,163) 1,198 1,868
Business acquisitions 850 26,195 220 27,265
Reacquired shares (52,984) (52,984)
Amortization 4,325 4,325
--------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1998 $144,706 $198,212 $637,147 $(10,998) $ (29,880) $(248,646) $690,541
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
</TABLE>
COMMON STOCK ACTIVITY
<TABLE>
1998 1997 1996
---------------------------------------------------------------------------------
Common Treasury Common Treasury Common Treasury
Year ended December 31 (shares) Stock Stock Stock Stock Stock Stock
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares, beginning of year 142,796,652 (13,669,624) 70,750,741 (5,950,518) 70,078,398 (5,376,917)
Stock options 1,058,686 648,085 672,343
Stock awards 206,366 124,440 150,010
Business acquisitions 850,445 33,083 308,343
Reacquired shares (1,796,868) (1,317,077) (723,611)
Stock dividend 71,397,826 (6,834,812)
---------------------------------------------------------------------------------
Shares, end of year 144,705,783 (15,227,043) 142,796,652 (13,669,624) 70,750,741 (5,950,518)
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
Ecolab 1998 Annual Report 37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ONE: NATURE OF BUSINESS
The company is the leading global developer and marketer of premium cleaning
and sanitizing products and services for the hospitality, institutional and
industrial markets. Customers include hotels and restaurants; foodservice,
healthcare and educational facilities; quickservice (fast-food) units;
commercial laundries; light industry; dairy plants and farms; and food and
beverage processors around the world.
TWO: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the company and
all majority-owned subsidiaries. The company accounts for its investment in the
Henkel-Ecolab joint venture under the equity method of accounting. International
subsidiaries and the Henkel-Ecolab joint venture are included in the financial
statements on the basis of their November 30 fiscal year ends.
FOREIGN CURRENCY TRANSLATION
Financial position and results of operations of the company's international
subsidiaries and the Henkel-Ecolab joint venture generally are measured using
local currencies as the functional currency. Assets and liabilities of these
operations are translated at the exchange rates in effect at each fiscal year
end. Income statement accounts are translated at the average rates of exchange
prevailing during the year. Translation adjustments arising from the use of
differing exchange rates from period to period are included in accumulated other
comprehensive income in shareholders' equity.
CASH AND CASH EQUIVALENTS
Cash equivalents include highly liquid investments with a maturity of three
months or less when purchased.
INVENTORY VALUATIONS
Inventories are valued at the lower of cost or market. Domestic chemical
inventory costs are determined on a last-in, first-out (lifo) basis. Lifo
inventories represented 45 percent, 40 percent and 44 percent of consolidated
inventories at year-end 1998, 1997 and 1996, respectively. All other inventory
costs are determined on a first-in, first-out (fifo) basis.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Merchandising equipment
consists principally of various systems that dispense cleaning and sanitizing
products and low-temperature dishwashing machines. The dispensing systems are
accounted for on a mass asset basis, whereby equipment is capitalized and
depreciated as a group and written off when fully depreciated. Depreciation and
amortization are charged to operations using the straight-line method over the
assets' estimated useful lives.
INTANGIBLE ASSETS
Intangible assets arise principally from business acquisitions and are stated at
cost. The assets are amortized on a straight-line basis over their estimated
economic lives, generally not exceeding 30 years.
LONG-LIVED ASSETS
The company periodically assesses the recoverability of long-lived and
intangible assets based on anticipated future earnings and operating cash flows.
INCOME PER COMMON SHARE
The computations of the basic and diluted per share amounts for the company's
continuing operations were as follows:
<TABLE>
<CAPTION>
(thousands, except per share) 1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Income from continuing
operations $ 154,506 $ 133,955 $ 113,185
- -----------------------------------------------------------------------------
Weighted-average common
shares outstanding
Basic (actual shares
outstanding) 129,157 129,446 128,991
Effect of dilutive
stock options 4,890 4,376 3,826
--------------------------------------------
Diluted 134,047 133,822 132,817
- -----------------------------------------------------------------------------
Income from continuing operations
per common share
Basic $ 1.20 $ 1.03 $ 0.88
Diluted $ 1.15 $ 1.00 $ 0.85
</TABLE>
Stock options granted in 1998 for approximately 2.2 million shares were not
dilutive and, therefore, were not included in the computation of diluted income
per common share amounts for 1998.
USE OF ESTIMATES
The preparation of the company's financial statements requires management to
make certain estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the financial statements and the
reported amounts of revenues and expenses during the reporting periods. Actual
results could differ from these estimates.
38
<PAGE>
THREE: BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
December 31 (thousands) 1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
ACCOUNTS RECEIVABLE, NET
Accounts receivable $ 259,588 $ 256,919 $ 214,369
Allowance for doubtful accounts (12,893) (10,878) (9,343)
--------------------------------------------
Total $ 246,695 $ 246,041 $ 205,026
- -----------------------------------------------------------------------------
INVENTORIES
Finished goods $ 73,983 $ 67,823 $ 52,232
Raw materials and parts 93,862 89,716 73,060
Excess of fifo cost over lifo cost (2,218) (2,708) (3,044)
--------------------------------------------
Total $ 165,627 $ 154,831 $ 122,248
- -----------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET
Land $ 12,584 $ 18,184 $ 7,969
Buildings and leaseholds 157,302 145,021 129,781
Machinery and equipment 258,107 232,940 208,704
Merchandising equipment 435,998 379,531 330,277
Construction in progress 11,038 19,862 11,745
--------------------------------------------
875,029 795,538 688,476
Accumulated depreciation
and amortization (454,824) (399,976) (356,162)
--------------------------------------------
Total $ 420,205 $ 395,562 $ 332,314
- -----------------------------------------------------------------------------
OTHER ASSETS
Intangible assets, net $ 236,659 $ 217,120 $ 96,865
Investments in securities 5,000 5,000
Deferred income taxes 27,256 23,444 26,582
Other 29,715 25,793 26,904
--------------------------------------------
Total $ 293,630 $ 271,357 $ 155,351
- -----------------------------------------------------------------------------
SHORT-TERM DEBT
Notes payable $ 52,441 $ 33,440 $ 12,333
Long-term debt, current maturities 15,550 15,444 15,276
--------------------------------------------
Total $ 67,991 $ 48,884 $ 27,609
- -----------------------------------------------------------------------------
LONG-TERM DEBT
7.19% senior notes, due 2006 $ 75,000 $ 75,000 $ 75,000
9.68% senior notes, due
1995-2001 42,857 57,143 71,429
6.00% medium-term notes,
due 2001 62,761
Multicurrency Credit Agreement,
due 2002 44,000 116,450
Other 17,973 26,235 17,530
--------------------------------------------
242,591 274,828 163,959
Long-term debt,
current maturities (15,550) (15,444) (15,276)
--------------------------------------------
Total $ 227,041 $ 259,384 $ 148,683
- -----------------------------------------------------------------------------
</TABLE>
The 9.68 percent senior notes include covenants regarding consolidated
shareholders' equity and amounts of certain long-term debt.
The company has a $275 million Multicurrency Credit Agreement with a
consortium of banks. The company may borrow varying amounts from time to time on
a revolving credit basis, with loans denominated in G-7 currencies, Australian
dollars or certain other currencies, if available. The company has the option of
borrowing based on various short-term interest rates. The agreement includes a
covenant regarding the ratio of total debt to capitalization. Amounts
outstanding under the agreement at year-end 1998 were denominated in U.S.
dollars and had an average annual interest rate of 6.7 percent and amounts
outstanding at year-end 1997 were denominated in Australian dollars and had an
average annual interest rate of 5.2 percent.
In August 1998, the company issued approximately $60 million of
Australian-dollar-denominated medium-term notes that mature in November 2001.
The company also issued approximately $30 million of
Australian-dollar-denominated commercial paper (notes payable). The proceeds
from these debt issuances were used to reduce debt under the company's
Multicurrency Credit Agreement.
In October 1996, the company filed a shelf registration with the
Securities and Exchange Commission for the issuance of up to $200 million of
debt securities. The filing is intended to enhance the company's future
financial flexibility in funding general business needs.
As of December 31, the weighted-average interest rate on notes payable was
7.4 percent for 1998, 5.4 percent for 1997 and 5.1 percent for 1996.
As of December 31, 1998, the aggregate annual maturities of long-term debt
for the next five years were: 1999 - $15,550,000; 2000 - $15,714,000; 2001 -
$77,799,000; 2002 - $45,820,000 and 2003 - $10,374,000.
Interest expense was $25,012,000 in 1998, $18,043,000 in 1997 and
$19,084,000 in 1996. Total interest paid was $25,198,000 in 1998, $18,168,000 in
1997 and $16,897,000 in 1996.
Other noncurrent liabilities included income taxes payable of $30 million
at December 31, 1998, $82 million at December 31, 1997 and $100 million at
December 31, 1996. During 1998, the company resolved a tax issue related to the
disposal of a business in 1992. The company paid approximately $39 million and
recognized a gain from discontinued operations of $38 million related to the
settlement of this issue.
39
<PAGE>
FOUR: FINANCIAL INSTRUMENTS
FOREIGN CURRENCY AND INTEREST RATE INSTRUMENTS
The company uses hedging and derivative financial instruments to limit financial
risk related to foreign currency exchange rates, interest rates and other market
risks. The company does not hold hedging or derivative financial instruments of
a speculative nature.
The company enters into foreign currency forward and option contracts to
hedge specific foreign currency exposures related to intercompany debt,
Henkel-Ecolab and subsidiary royalties and other intercompany transactions.
These contracts generally expire within one year. Gains and losses on these
contracts are deferred and recognized as part of the specific transactions
hedged. The cash flows from these contracts are classified in the same
category as the transaction hedged in the Consolidated Statement of Cash
Flows.
The company had foreign currency forward exchange contracts with a face
amount denominated primarily in Deutsche marks and totaling approximately $71
million at December 31, 1998, $70 million at December 31, 1997 and $115 million
at December 31, 1996. The unrealized gains and losses on these contracts were
not significant.
At December 31, 1998, the company had entered into an interest rate swap
agreement which is effective November 2001 through November 2004. This agreement
provides for a fixed rate of interest on an amount equal to one-half of the debt
under the company's medium-term notes. The fair value of the company's interest
rate swap agreement was not significant as of December 31, 1998.
FAIR VALUE OF OTHER FINANCIAL INSTRUMENTS
The carrying amount and the estimated fair value of other financial instruments
held by the company were:
<TABLE>
<CAPTION>
December 31 (thousands) 1998 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Carrying amount
Cash and cash equivalents $ 28,425 $ 61,169 $ 69,275
Long-term investments
in securities 5,000 5,000
Short-term debt 67,991 48,884 27,609
Long-term debt 227,041 259,384 148,683
Fair Value
Long-term debt $ 235,131 $ 266,926 $ 155,558
</TABLE>
The carrying amounts of cash equivalents and short-term debt approximate
fair value because of their short maturities.
The fair value of long-term debt is based on quoted market prices for the
same or similar issues.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, a new standard of accounting and
reporting for derivative instruments and hedging activities. The company is
required to adopt the new standard in the first quarter of 2000. Although a full
analysis of all of the requirements of the new standard has not been completed,
the company's use of derivative and hedging financial instruments is limited
and, therefore, the company does not anticipate that the impact of the new
standard will be significant.
FIVE: GAIN FROM DISCONTINUED OPERATIONS
During the third quarter of 1998, the company resolved a tax issue related to
the disposal of a business in 1992. As a result of tax losses on the disposition
of this business, the company's U.S. federal income tax payments were reduced in
1992 through 1995 by a total of approximately $58 million. However, pending
final acceptance of the company's treatment of the losses, no income tax benefit
was recognized for financial reporting purposes. During 1998, an agreement was
reached with the Internal Revenue Service on the final tax treatment for the
losses. This agreement resulted in the payment of approximately $39 million of
income taxes and interest, and the recognition of a gain from discontinued
operations of $38 million or $0.28 per diluted share for the year ended December
31, 1998.
SIX: BUSINESS ACQUISITIONS
GIBSON BUSINESS ACQUISITION
During 1997, the company completed a public tender offer for all of the
outstanding stock of Gibson Chemical Industries Limited (Gibson) located in
Melbourne, Australia. Gibson is a manufacturer and marketer of cleaning and
sanitizing products, primarily for the Australian and New Zealand institutional,
healthcare and industrial markets.
The acquisition was accounted for as a purchase. The purchase price of the
shares and the direct costs of the transaction totaled approximately $130
million and were initially financed through the company's Multicurrency Credit
Agreement. The excess of the purchase price over the net tangible assets
acquired was approximately $88 million and is being amortized on a straight-line
basis over useful lives averaging 25 years. The assets acquired and the
liabilities assumed in the transaction were included in the company's
Consolidated Balance Sheet as of the November 30, 1997 effective date.
The following unaudited pro forma financial information reflects the
combined results of the company and the retained Gibson businesses assuming the
acquisition had occurred at the beginning of 1997. Pro forma adjustments have
been included to
40
<PAGE>
give effect to amortization of the excess of the purchase price over the net
tangible assets acquired, interest expense on debt incurred to finance the
acquisition and the related income tax effects. In accordance with the pro
forma adjustment guidelines, cost savings from efficiencies and synergies
have not been reflected in the information shown below.
<TABLE>
<CAPTION>
(thousands, except per share) 1997
- -------------------------------------------------------------------------------
<S> <C>
Net sales $ 1,741,006
Income from continuing operations 131,455
Diluted income from continuing operations
per common share $ 0.98
</TABLE>
The pro forma results are presented for information purposes only and are
not necessarily indicative of the results of operations which actually would
have resulted had the combination occurred at the beginning of 1997 or of future
results of operations of the consolidated businesses.
OTHER BUSINESS ACQUISITIONS
In December 1997, the company acquired a cleaning and sanitizing business in
Japan from Henkel KGaA. Sales of the acquired business were approximately $10
million in 1997.
In June 1998, the company acquired certain assets of American Fluid
Technologies (AFT), which is based in Hopkins, Minnesota. AFT provides cleaning
and optimization products and services for membrane systems used to process
water for food, beverage, pharmaceutical and industrial applications. AFT has
become part of the company's Food & Beverage operations. AFT sales were
approximately $3 million in 1997.
Also in June 1998, the company acquired certain assets of Puremark
International, a Fairfield, New Jersey-based manufacturer of systems which help
purify and condition water used in foodservice soda fountain dispensers, ice
makers, coffee makers and similar items. The acquired business had sales of
approximately $2 million in 1997, and has become part of the company's
Institutional operations.
In July 1998, the company issued approximately 850,000 shares of common
stock to purchase GCS Service, Inc., a Danbury, Connecticut-based provider of
commercial kitchen equipment repair services. GCS Service, Inc. sales were $48
million in 1997.
In November 1998, the company acquired selected assets of Vulcan Chemical
Technologies, Inc. of Sacramento, California. This business supplies chlorine
dioxide generator technology for the food processing industry and has become
part of the company's Food & Beverage operations. Annual sales of the business
acquired were approximately $6 million in 1997.
These acquisitions have been accounted for as purchases and, accordingly,
the results of their operations have been included in the financial statements
of the company from the dates of acquisition. Net sales and operating income of
these businesses were not significant to the company's consolidated results of
operations, financial position and cash flows.
SEVEN: HENKEL-ECOLAB JOINT VENTURE
The company and Henkel KGaA, Dusseldorf, Germany, each own 50 percent of
Henkel-Ecolab, a joint venture of their respective European institutional and
industrial cleaning and sanitizing businesses. The joint venture's results of
operations and the company's equity in earnings of the joint venture
included:
<TABLE>
<CAPTION>
(thousands) 1998 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Joint venture
Net sales $ 904,217 $ 844,689 $ 905,402
Gross profit 500,107 470,698 497,909
Income before income taxes 65,946 63,640 65,091
Net income $ 38,540 $ 33,701 $ 34,808
Ecolab equity in earnings
Ecolab equity in net income $ 19,270 $ 16,851 $ 17,404
Ecolab royalty income from
joint venture, net of
income taxes 4,550 4,583 4,730
Amortization expense for the
excess of cost over the
underlying net assets
of the joint venture (7,770) (8,001) (9,123)
-------------------------------------------
Equity in earnings of
Henkel-Ecolab joint
venture $ 16,050 $ 13,433 $ 13,011
- ----------------------------------------------------------------------------
</TABLE>
The company's investment in the Henkel-Ecolab joint venture includes the
unamortized excess of the company's investment over its equity in the joint
venture's net assets. This excess was $142 million at December 31, 1998, and is
being amortized on a straight-line basis over estimated economic useful lives of
up to 30 years.
Condensed balance sheet information for the Henkel-Ecolab joint venture
was:
<TABLE>
<CAPTION>
December 31 (thousands) 1998 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Current assets $ 368,604 $ 345,692 $ 425,225
Noncurrent assets 179,188 145,601 142,227
Current liabilities 242,630 224,155 309,599
Noncurrent liabilities $ 82,097 $ 77,303 $ 75,360
</TABLE>
41
<PAGE>
EIGHT: INCOME TAXES
Income from continuing operations before income taxes and equity in earnings of
Henkel-Ecolab consisted of:
<TABLE>
<CAPTION>
(thousands) 1998 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $ 213,781 $ 173,851 $ 144,888
Foreign 26,457 32,016 26,057
-------------------------------------------
Total $ 240,238 $ 205,867 $ 170,945
- ----------------------------------------------------------------------------
</TABLE>
The provision for income taxes consisted of:
<TABLE>
<CAPTION>
(thousands) 1998 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Federal and state $ 92,094 $ 76,399 $ 66,868
Foreign 11,700 11,020 10,781
-------------------------------------------
Currently payable 103,794 87,419 77,649
-------------------------------------------
Federal and state (3,596) (3,675) (6,748)
Foreign 1,584 1,601 (130)
-------------------------------------------
Deferred (2,012) (2,074) (6,878)
-------------------------------------------
Provision for income taxes $ 101,782 $ 85,345 $ 70,771
- ----------------------------------------------------------------------------
</TABLE>
The company's overall net deferred tax assets (current and noncurrent) were
comprised of the following:
<TABLE>
<CAPTION>
December 31 (thousands) 1998 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax assets
Postretirement health care
and pension benefits $ 34,940 $ 30,991 $ 29,596
Other accrued liabilities 47,601 41,611 39,151
Loss carryforwards 3,999 3,541 4,780
Other, net 9,821 12,766 8,814
Valuation allowance (1,462) (1,462) (1,462)
-------------------------------------------
Total 94,899 87,447 80,879
-------------------------------------------
Deferred tax liabilities
Property, plant and
equipment basis
differences 26,605 27,606 23,496
Other, net 4,782 1,419 1,457
-------------------------------------------
Total 31,387 29,025 24,953
-------------------------------------------
Net deferred tax assets $ 63,512 $ 58,422 $ 55,926
- ----------------------------------------------------------------------------
</TABLE>
A reconciliation of the statutory U.S. federal income tax rate to the
company's effective income tax rate was:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory U.S. rate 35.0% 35.0% 35.0%
State income taxes, net of
federal benefit 4.3 4.2 4.2
Foreign operations 1.4 0.6 0.5
Other, net 1.7 1.7 1.7
-------------------------------------------
Effective income tax rate 42.4% 41.5% 41.4%
- ----------------------------------------------------------------------------
</TABLE>
Cash paid for income taxes was approximately $122 million in 1998, $100
million in 1997 and $72 million in 1996. In 1998, approximately $39 million of
payments resulted from the settlement of a tax issue related to the disposal of
a business in 1992.
As of December 31, 1998, undistributed earnings of international
subsidiaries and the Henkel-Ecolab joint venture of approximately $30 million
and $50 million, respectively, were considered to have been reinvested
indefinitely and, accordingly, the company has not provided U.S. income taxes on
such earnings. If those earnings were remitted to the company, applicable income
taxes would be offset substantially by available foreign tax credits.
NINE: STOCK INCENTIVE AND OPTION PLANS
The company's stock incentive and option plans provide for grants of stock
options and stock awards. Common shares available for grant as of December 31
were 1,835,714 for 1998, 5,274,652 for 1997 and 840,096 for 1996.
Options may be granted to purchase shares of the company's stock at not
less than fair market value at the date of grant. Options generally become
exercisable over periods of up to four years from date of grant and expire
within ten years from date of grant. A summary of stock option activity and
average exercise prices is as follows:
<TABLE>
<CAPTION>
Shares 1998 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Granted 3,342,555 1,031,760 1,266,680
Exercised (1,058,686) (1,295,170) (1,344,686)
Canceled (174,800) (63,416) (102,666)
-------------------------------------------
December 31:
Outstanding 10,989,491 8,880,422 9,207,248
- ----------------------------------------------------------------------------
Exercisable 6,134,840 5,922,150 5,859,968
</TABLE>
<TABLE>
<CAPTION>
Average exercise price per share 1998 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Granted $ 43.33 $ 21.72 $ 15.26
Exercised 8.05 8.50 7.65
Canceled 37.47 14.07 12.16
December 31:
Outstanding 21.44 11.92 10.35
Exercisable $ 11.01 $ 9.66 $ 8.75
</TABLE>
Information related to stock options outstanding and stock options
exercisable as of December 31, 1998 is as follows:
<TABLE>
<CAPTION>
Options Outstanding
- -----------------------------------------------------------------------------
Weighted- Weighted-
Range of Average Average
Exercise Options Remaining Exercise
Prices Outstanding Contractual Life Price
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
$ 5.69-$ 9.31 1,846,329 2.6 years $ 7.23
$10.13-$11.59 2,850,450 5.4 years $11.10
$13.41-$18.91 2,119,525 7.1 years $14.65
$20.63-$33.31 1,938,187 9.1 years $26.68
$49.00 2,235,000 9.2 years $49.00
- -----------------------------------------------------------------------------
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
Options Exercisable
- -----------------------------------------------------------------------------
Weighted-
Range of Average
Exercise Options Exercise
Prices Exercisable Price
- -----------------------------------------------------------------------------
<S> <C> <C>
$ 5.69-$ 9.31 1,846,329 $ 7.23
$10.13-$11.59 2,741,250 $11.08
$13.41-$18.91 1,302,005 $14.42
$20.63-$33.31 245,256 $21.88
</TABLE>
Stock awards are generally subject to restrictions, including forfeiture in
the event of termination of employment. The value of a stock award at date of
grant is charged to income over the periods during which the restrictions lapse.
The company measures compensation cost for its stock incentive and option
plans using the intrinsic value-based method of accounting.
Had the company used the fair value-based method of accounting to measure
compensation expense for its stock incentive and option plans beginning in 1995
and charged compensation cost against income, over the vesting periods, based on
the fair value of options at the date of grant, income from continuing
operations and the related diluted per common share amounts for 1998, 1997 and
1996 would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
(thousands, except per share) 1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Income from continuing operations
As reported $ 154,506 $ 133,955 $ 113,185
Pro forma 150,773 131,763 111,761
Diluted income from continuing
operations per common share
As reported 1.15 1.00 0.85
Pro forma $ 1.12 $ 0.98 $ 0.84
</TABLE>
The weighted-average grant-date fair value of options granted in 1998, 1997
and 1996 and the significant assumptions used in determining the underlying fair
value of each option grant on the date of grant utilizing the Black-Scholes
option-pricing model were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted-average grant-date fair
value of options granted
Granted at market prices $ 7.65 $ 5.94 $ 4.15
Granted at prices
exceeding market $ 1.78
Assumptions
Risk-free interest rate 5.5% 6.2% 6.2%
Expected life 6 years 6 years 6 years
Expected volatility 17.8% 19.6% 20.9%
Expected dividend yield 1.5% 1.8% 1.9%
</TABLE>
TEN: SHAREHOLDERS' EQUITY
During 1998, the company adopted Statement of Financial Accounting Standards No.
130, a new standard for reporting comprehensive income, which includes all
changes in shareholders' equity with the exception of additional investments by
shareholders or distributions to shareholders. The format of the Consolidated
Statement of Comprehensive Income and Shareholders' Equity has been changed to
present information about comprehensive income. For the company, comprehensive
income includes net income and foreign currency translation that is charged or
credited to shareholders' equity.
The company's common stock was split two for one in the form of a 100
percent stock dividend paid January 15, 1998 to shareholders of record on
December 26, 1997. All per share and number of share data have been
retroactively restated to reflect the stock split, except for the Consolidated
Statement of Comprehensive Income and Shareholders' Equity.
Authorized common stock, par value $1.00 per share, was 200 million shares
in 1998 and 1997 and 100 million shares in 1996. Treasury stock is stated at
cost. Dividends declared per share of common stock were $0.39 for 1998, $0.335
for 1997 and $0.29 for 1996.
The company has 15 million shares, without par value, of authorized but
unissued preferred stock.
Each share of outstanding common stock entitles the holder to one-half of a
preferred stock purchase right. A right entitles the holder, upon occurrence of
certain events, to buy one one-hundredth of a share of Series A Junior
Participating Preferred Stock at a purchase price of $115, subject to
adjustment. The rights, however, will not become exercisable unless and until,
among other things, any person or group acquires 15 percent or more of the
outstanding common stock of the company, or the company's board of directors
declares a holder of 10 percent or more of the outstanding common stock to be an
"adverse person" as defined in the rights plan. Upon the occurrence of either of
these events, the rights will become exercisable for common stock of the company
(or in certain cases common stock of an acquiring company) having a market value
of twice the exercise price of a right. The rights provide that the holdings by
Henkel KGaA or its affiliates, subject to compliance by Henkel with certain
conditions, will not cause the rights to become exercisable nor cause Henkel to
be an "adverse person." The rights are redeemable under certain circumstances at
one cent per right and, unless redeemed earlier, will expire on March 11, 2006.
43
<PAGE>
TEN: SHAREHOLDERS' EQUITY (CONTINUED)
The company maintains a share repurchase program which is intended to
offset the dilutive effect of shares issued for employee benefit plans. The
company also reacquires shares for general corporate purposes under a
separate program established in 1995. As of December 31, 1998 there were
approximately 3.6 million shares remaining to be purchased under this
program. The company reacquired 1,626,900 shares of its common stock in 1998,
2,561,400 shares in 1997 and 1,260,400 shares in 1996 under these programs
through open and private market purchases. The company anticipates that it
will continue to periodically reacquire shares under its share repurchase
programs.
ELEVEN: RENTALS AND LEASES
The company leases sales and administrative office facilities, distribution
center facilities, automobiles and computers and other equipment under operating
leases. Rental expense under all operating leases was $42,076,000 in 1998,
$38,155,000 in 1997 and $35,071,000 in 1996. As of December 31, 1998, future
minimum payments under operating leases with noncancelable terms in excess of
one year were:
<TABLE>
<CAPTION>
(thousands)
- --------------------------------------------------------------
<S> <C>
1999 $ 13,032
2000 8,727
2001 5,932
2002 3,925
2003 2,827
Thereafter 15,420
--------------
Total $ 49,863
</TABLE>
TWELVE: RESEARCH EXPENDITURES
Research expenditures that related to the development of new products and
processes, including significant improvements and refinements to existing
products, were $32,815,000 in 1998, $30,420,000 in 1997 and $28,676,000 in 1996.
THIRTEEN: ENVIRONMENTAL COMPLIANCE COSTS
The company and certain subsidiaries are party to various environmental actions
that have arisen in the ordinary course of business. These include possible
obligations to investigate and mitigate the effects on the environment of the
disposal or release of certain chemical substances at various sites, such as
Superfund sites and other operating or closed facilities. The effect of these
actions on the company's financial position, results of operations and cash
flows to date has not been significant. The company is currently participating
in environmental assessments and remediation at a number of locations and
environmental liabilities have been accrued reflecting management's best
estimate of future costs. Potential insurance reimbursements are not
anticipated. While the final resolution of these contingencies could result in
expenses different than current accruals, and therefore have an impact on the
company's consolidated financial results in a future reporting period,
management believes the ultimate outcome will not have a significant effect on
the company's consolidated results of operations, financial position or
liquidity.
FOURTEEN: RETIREMENT PLANS
The company has a noncontributory defined benefit pension plan covering
substantially all of its U.S. employees. Plan benefits are based on years of
service and highest average compensation for five consecutive years of
employment. Various international subsidiaries also have defined benefit pension
plans.
The company provides postretirement health care benefits to substantially
all U.S. employees. The plan is contributory based on years of service and
family status, with retiree contributions adjusted annually. Employees outside
the U.S. are generally covered under government-sponsored programs and the cost
for providing benefits under company plans was not significant.
44
<PAGE>
A reconciliation of changes in the benefit obligations and fair value of
assets of its U.S. pension and postretirement health care benefits plans is as
follows:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
-------------------------------------------------------------------------------------------------
(thousands) 1998 1997 1996 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Benefit obligation,
beginning of year $ 287,027 $ 240,116 $ 217,008 $ 91,121 $ 71,549 $ 59,447
Service cost 16,336 13,330 12,615 5,668 4,325 3,298
Interest cost 20,563 18,371 16,084 6,382 5,711 4,398
Plan participants' contributions 741 767 578
Changes in assumptions 27,194 22,495 1,189 9,768 6,957 5,675
Actuarial loss (gain) 732 (1,402) (644) (4,431) 5,057 1,615
Benefits paid (8,027) (8,534) (6,136) (2,572) (3,245) (3,462)
Business acquisitions 2,651
-------------------------------------------------------------------------------------------------
Benefit obligation, end of year $ 343,825 $ 287,027 $ 240,116 $ 106,677 $ 91,121 $ 71,549
- ----------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets,
beginning of year $ 237,304 $ 196,839 $ 167,231 $ 16,764 $ 11,885 $ 9,269
Actual return on plan assets 32,256 28,531 20,389 2,261 1,609 863
Company contributions 17,388 17,453 15,355 3,239 5,748 4,637
Plan participants' contributions 741 767 578
Benefits paid (8,027) (8,534) (6,136) (2,572) (3,245) (3,462)
Business acquisitions 3,015
-------------------------------------------------------------------------------------------------
Fair value of plan assets,
end of year $ 278,921 $ 237,304 $ 196,839 $ 20,433 $ 16,764 $ 11,885
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A reconciliation of the funded status and the actuarial assumptions for
the U.S. pension and postretirement health care benefits plans is as follows:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
-------------------------------------------------------------------------------------------------
(thousands) 1998 1997 1996 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Funded status $ (64,904) $ (49,723) $ (43,277) $ (86,244) $ (74,357) $ (59,664)
Unrecognized actuarial loss 59,647 46,028 37,763 21,468 17,280 5,984
Unrecognized prior service cost 16,175 18,056 20,325 (8,546) (9,097) (9,648)
Unrecognized net transition asset (9,120) (10,523) (11,926)
-------------------------------------------------------------------------------------------------
Prepaid (accrued) benefit costs $ 1,798 $ 3,838 $ 2,885 $ (73,322) $ (66,174) $ (63,328)
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted-average actuarial
assumptions
Discount rate for service
and interest cost,
at beginning of year 7.25% 7.75% 7.50% 7.25% 7.75% 7.50%
Projected salary increases 5.1 5.1 5.1
Expected return on assets 9.0 9.0 9.0 9.0 9.0 9.0
Discount rate for year-end
benefit obligation 6.75% 7.25% 7.75% 6.75% 7.25% 7.75%
</TABLE>
For postretirement benefit measurement purposes, 8.5 percent (for pre-age
65 retirees) and 6.9 percent (for post-age 65 retirees) annual rates of increase
in the per capita cost of covered health care were assumed for 1999. The rates
were assumed to decrease gradually to 6.5 percent and 5.5 percent, respectively,
at 2001 and remain at that level thereafter. Health care costs which are
eligible for subsidy by the company are limited to a 4 percent annual increase
beginning in 1996 for most employees.
45
<PAGE>
FOURTEEN: RETIREMENT PLANS (CONTINUED)
Pension and postretirement health care benefits expense for the company's
U.S. and International operations was:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
-------------------------------------------------------------------------------------------------
(thousands) 1998 1997 1996 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost -- employee
benefits earned
during the year $ 16,336 $ 13,330 $ 12,615 $ 5,668 $ 4,325 $ 3,298
Interest cost on benefit
obligation 20,563 18,371 16,084 6,382 5,711 4,398
Expected return on plan assets (20,128) (17,183) (14,983) (1,463) (1,016) (525)
Recognition of net actuarial loss 2,179 1,407 1,634 351 125
Amortization of prior service
cost (benefit) 1,881 1,905 1,905 (551) (551) (551)
Amortization of net transition asset (1,403) (1,403) (1,403)
-------------------------------------------------------------------------------------------------
Total U.S. expense 19,428 16,427 15,852 10,387 8,594 6,620
International expense 1,251 1,112 1,261
-------------------------------------------------------------------------------------------------
Total expense $ 20,679 $ 17,539 $ 17,113 $ 10,387 $ 8,594 $ 6,620
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The company also has noncontributory non-qualified defined benefit plans
which provide for benefits to employees in excess of limits permitted under
its U.S. pension plan. The recorded obligation for these plans was
approximately $12 million at December 31, 1998 and the annual expense for
these plans was approximately $3 million in 1998 and approximately $2 million
in 1997 and 1996.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the company's postretirement health care benefits plan.
A one-percentage point change in the assumed health care cost trend rates
would have the following effects:
<TABLE>
<CAPTION>
1 Percentage Point
-----------------------------
(thousands) Increase Decrease
- -----------------------------------------------------------------------------
<S> <C> <C>
Effect on total of postretirement
service and interest cost components $ 440 $ (386)
Effect on postretirement benefit obligation 6,056 (5,350)
</TABLE>
SAVINGS PLAN
The company provides a 401(k) savings plan for substantially all U.S. employees.
Employee contributions of up to 6 percent of eligible compensation are matched
50 percent by the company. The company's contributions are invested in Ecolab
common stock and amounted to $7,383,000 in 1998, $7,156,000 in 1997 and
$6,622,000 in 1996.
FIFTEEN: OPERATING SEGMENTS
During 1998, the company adopted Statement of Financial Accounting Standards No.
131. The new standard changes the information the company reports about its
operating segments. Operating segment information for prior years has been
restated to conform to the 1998 presentation.
The company's operating segments have generally similar products and
services and the company is organized to manage its operations geographically.
The company's operating segments have been aggregated into three reportable
segments.
The "United States Cleaning & Sanitizing" segment provides cleaning and
sanitizing products and services to United States markets through its
Institutional, Kay, Textile Care, Professional Products, Water Care and Food &
Beverage operations.
The "United States Other Services" segment includes all other U.S.
operations of the company. This segment provides pest elimination and commercial
dishwashing and equipment services through its Pest Elimination, GCS Service and
Jackson operations.
The company's "International Cleaning & Sanitizing" segment provides
cleaning and sanitizing product and service offerings to international markets
in Asia Pacific, Latin America, Africa, Canada and through its Export
operations.
Information on the customers, markets and products and services of each of
the company's operating segments is included on the inside front cover, in the
Business Overview section of this Annual Report.
The company evaluates the performance of its international operations based
on fixed management currency exchange rates. All other accounting policies of
the reportable segments are consistent with generally accepted accounting
principles and the accounting policies of the company described in Note 2 of
these notes to consolidated financial statements. The profitability of the
company's operating segments is evaluated by management based on operating
income. Intersegment sales and transfers were not significant.
46
<PAGE>
Financial information for each of the company's reportable segments is as
follows:
<TABLE>
<CAPTION>
United States Other
---------------------------------------- ----------------------------
International Foreign
Cleaning & Other Total Cleaning & Currency
(thousands) Sanitizing Services United States Sanitizing Translation Corporate Consolidated
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales
1998 $1,296,797 $160,063 $1,456,860 $440,668 $ (9,302) $1,888,226
1997 1,156,625 119,203 1,275,828 335,337 29,187 1,640,352
1996 1,040,823 107,955 1,148,778 305,938 35,293 1,490,009
Operating income
1998 218,500 19,084 237,584 29,787 (1,044) $ (4,347) 261,980
1997 180,975 14,655 195,630 22,519 4,443 (4,088) 218,504
1996 152,979 11,907 164,886 19,151 4,720 (3,440) 185,317
Depreciation & amortization
1998 87,456 3,145 90,601 25,638 143 5,589 121,971
1997 76,130 2,716 78,846 17,604 278 4,151 100,879
1996 67,793 2,167 69,960 15,968 207 3,388 89,523
Total assets
1998 701,341 77,491 778,832 334,606 6,749 350,808 1,470,995
1997 641,441 36,448 677,889 374,136 20,571 343,703 1,416,299
1996 564,735 31,762 596,497 182,293 20,190 409,429 1,208,409
Capital expenditures
1998 109,976 4,383 114,359 32,182 393 697 147,631
1997 90,914 3,539 94,453 24,821 1,528 865 121,667
1996 $ 86,582 $ 1,707 $ 88,289 $ 22,375 $ 290 $ 564 $ 111,518
</TABLE>
Corporate operating expense includes overhead costs directly related to the
Henkel-Ecolab joint venture. Corporate assets are principally cash and cash
equivalents and the company's investment in the Henkel-Ecolab joint venture.
The company has two classes of products and services within its United
States and International Cleaning and Sanitizing operations which comprise 10
percent or more of consolidated net sales. Worldwide sales of warewashing
products were approximately 28 percent, 31 percent and 31 percent of
consolidated net sales in 1998, 1997 and 1996, respectively. Sales of laundry
products and services on a worldwide basis were approximately 13 percent, 14
percent and 14 percent of consolidated net sales in 1998, 1997 and 1996
respectively.
Long-lived assets of the company's United States and International
operations were as follows:
<TABLE>
<CAPTION>
December 31 (thousands) 1998 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
United States $ 332,072 $ 294,372 $ 269,065
International 81,046 99,069 53,783
Corporate 3,931 3,812 3,214
Effect of foreign currency
translation 3,156 (1,691) 6,252
----------------------------------------
Consolidated $ 420,205 $ 395,562 $ 332,314
- ----------------------------------------------------------------------------
</TABLE>
47
<PAGE>
SIXTEEN: QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
(thousands, except per share) Quarter Quarter Quarter Quarter Year
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998
Net sales
United States
Cleaning & Sanitizing $ 303,435 $ 324,347 $ 343,771 $ 325,244 $ 1,296,797
Other Services 29,179 34,907 48,536 47,441 160,063
International Cleaning &
Sanitizing 102,963 109,696 113,560 114,449 440,668
Effect of foreign currency
translation 785 (490) (5,830) (3,767) (9,302)
--------------------------------------------------------------------------
Total 436,362 468,460 500,037 483,367 1,888,226
Cost of sales 195,909 210,116 224,365 220,783 851,173
Selling, general and
administrative expenses 186,733 194,604 196,501 197,235 775,073
--------------------------------------------------------------------------
Operating income
United States
Cleaning & Sanitizing 44,606 52,644 65,128 56,122 218,500
Other Services 2,930 4,725 6,905 4,524 19,084
International Cleaning &
Sanitizing 6,995 7,881 8,935 5,976 29,787
Corporate (910) (1,479) (1,149) (809) (4,347)
Effect of foreign currency
translation 99 (31) (648) (464) (1,044)
--------------------------------------------------------------------------
Total 53,720 63,740 79,171 65,349 261,980
Interest expense, net 5,406 5,400 5,069 5,867 21,742
--------------------------------------------------------------------------
Income from continuing operations
before income taxes and equity
in earnings of Henkel-Ecolab 48,314 58,340 74,102 59,482 240,238
Provision for income taxes 20,289 24,475 31,794 25,224 101,782
Equity in earnings of Henkel-Ecolab
joint venture 2,563 3,824 4,704 4,959 16,050
--------------------------------------------------------------------------
Income from continuing
operations 30,588 37,689 47,012 39,217 154,506
Gain from discontinued
operations 38,000 38,000
--------------------------------------------------------------------------
Net income $ 30,588 $ 37,689 $ 85,012 $ 39,217 $ 192,506
- -----------------------------------------------------------------------------------------------------------
Diluted income per common share
Income from continuing
operations $ 0.23 $ 0.28 $ 0.35 $ 0.29 $ 1.15
Gain from discontinued
operations 0.28 0.28
Net income $ 0.23 $ 0.28 $ 0.63 $ 0.29 $ 1.44
Weighted-average common shares
outstanding
Basic 128,958 128,667 129,573 129,431 129,157
Diluted 133,934 133,803 134,319 134,154 134,047
1997
Net sales
United States
Cleaning & Sanitizing $ 264,623 $ 289,974 $ 306,129 $ 295,899 $ 1,156,625
Other Services 26,080 29,659 32,635 30,829 119,203
International Cleaning &
Sanitizing 74,465 84,406 86,484 89,982 335,337
Effect of foreign currency
translation 8,592 7,771 7,625 5,199 29,187
--------------------------------------------------------------------------
Total 373,760 411,810 432,873 421,909 1,640,352
Cost of sales 165,726 183,322 188,178 184,858 722,084
Selling, general and administrative
expenses 164,604 175,685 177,899 181,576 699,764
--------------------------------------------------------------------------
Operating income
United States
Cleaning & Sanitizing 36,262 44,137 55,665 44,911 180,975
Other Services 2,179 3,047 5,073 4,356 14,655
International Cleaning &
Sanitizing 4,444 5,493 5,938 6,644 22,519
Corporate (881) (1,050) (1,044) (1,113) (4,088)
Effect of foreign currency
translation 1,426 1,176 1,164 677 4,443
--------------------------------------------------------------------------
Total 43,430 52,803 66,796 55,475 218,504
Interest expense, net 2,998 3,054 3,351 3,234 12,637
--------------------------------------------------------------------------
Income before income taxes
and equity in earnings of
Henkel-Ecolab 40,432 49,749 63,445 52,241 205,867
Provision for income taxes 16,577 20,397 26,613 21,758 85,345
Equity in earnings of
Henkel-Ecolab joint venture 2,349 3,542 3,657 3,885 13,433
--------------------------------------------------------------------------
Net income $ 26,204 $ 32,894 $ 40,489 $ 34,368 $ 133,955
- -----------------------------------------------------------------------------------------------------------
Diluted net income per common
share $ 0.20 $ 0.25 $ 0.30 $ 0.26 $ 1.00
Weighted-average common shares
outstanding
Basic 129,548 129,779 129,462 128,993 129,446
Diluted 133,520 133,963 133,930 133,740 133,822
- -----------------------------------------------------------------------------------------------------------
</TABLE>
48
<PAGE>
MANAGEMENTS AND ACCOUNTANTS' REPORTS
REPORT OF MANAGEMENT
Management is responsible for the integrity and objectivity of the consolidated
financial statements. The statements have been prepared in accordance with
generally accepted accounting principles and, accordingly, include certain
amounts based on management's best estimates and judgments.
To meet its responsibility, management has established and maintains a
system of internal controls that provides reasonable assurance regarding the
integrity and reliability of the financial statements and the protection of
assets from unauthorized use or disposition. These systems are supported by
qualified personnel, by an appropriate division of responsibilities and by an
internal audit function. There are limits inherent in any system of internal
controls since the cost of monitoring such systems should not exceed the desired
benefit. Management believes that the company's system of internal controls is
effective and provides an appropriate cost/benefit balance.
The Board of Directors, acting through its Audit Committee composed solely
of outside directors, is responsible for determining that management fulfills
its responsibilities in the preparation of financial statements and maintains
financial control of operations. The Audit Committee recommends to the Board of
Directors the appointment of the company's independent accountants, subject to
ratification by the shareholders. It meets regularly with management, the
internal auditors and the independent accountants.
The independent accountants provide an objective, independent review as to
management's discharge of its responsibilities insofar as they relate to the
fair presentation of the consolidated financial statements. Their report is
presented separately.
/s/Allan L. Schuman
- -------------------
Allan L. Schuman
PRESIDENT AND CHIEF EXECUTIVE OFFICER
/s/Michael E. Shannon
- ---------------------
Michael E. Shannon
CHAIRMAN OF THE BOARD,
CHIEF FINANCIAL AND ADMINISTRATIVE OFFICER
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors
Ecolab Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, comprehensive income and shareholders' equity
and cash flows present fairly, in all material respects, the financial position
of Ecolab Inc. as of December 31, 1998, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of Ecolab Inc.'s management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/PricewaterhouseCoopers LLP
- -----------------------------
PricewaterhouseCoopers LLP
FEBRUARY 22, 1999
SAINT PAUL, MINNESOTA
<PAGE>
SUMMARY OPERATING AND FINANCIAL DATA
<TABLE>
<CAPTION>
December 31 (thousands, except per share) 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C>> <C> <C> <C>
OPERATIONS
Net sales
United States $ 1,456,860 $ 1,275,828 $ 1,148,778 $ 1,030,126
International (at average rates of currency
exchange during the year) 431,366 364,524 341,231 310,755
Europe (at average rates of currency
exchange during the year)
- -----------------------------------------------------------------------------------------------------------------------
Total 1,888,226 1,640,352 1,490,009 1,340,881
Cost of sales 851,173 722,084 674,953 603,167
Selling, general and administrative expenses 775,073 699,764 629,739 575,028
Merger costs and nonrecurring expenses
- -----------------------------------------------------------------------------------------------------------------------
Operating income 261,980 218,504 185,317 162,686
Interest expense, net 21,742 12,637 14,372 11,505
- -----------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income
taxes and equity in earnings of Henkel-Ecolab 240,238 205,867 170,945 151,181
Provision for income taxes 101,782 85,345 70,771 59,694
Equity in earnings of Henkel-Ecolab joint venture 16,050 13,433 13,011 7,702
- -----------------------------------------------------------------------------------------------------------------------
Income from continuing operations 154,506 133,955 113,185 99,189
Income (loss) from discontinued operations 38,000
Extraordinary loss and changes in accounting principles
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) 192,506 133,955 113,185 99,189
Preferred stock dividends
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) to common shareholders, as reported 192,506 133,955 113,185 99,189
Pro forma adjustments
- -----------------------------------------------------------------------------------------------------------------------
Pro forma net income (loss) to common shareholders $ 192,506 $ 133,955 $ 113,185 $ 99,189
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) per common share, as reported
Basic -- continuing operations $ 1.20 $ 1.03 $ 0.88 $ 0.75
Basic -- net income (loss) 1.49 1.03 0.88 0.75
Diluted -- continuing operations 1.15 1.00 0.85 0.73
Diluted -- net income (loss) 1.44 1.00 0.85 0.73
Pro forma income (loss) per common share
Basic -- continuing operations 1.20 1.03 0.88 0.75
Basic -- net income (loss) 1.49 1.03 0.88 0.75
Diluted -- continuing operations 1.15 1.00 0.85 0.73
Diluted -- net income (loss) $ 1.44 $ 1.00 $ 0.85 $ 0.73
Weighted-average common shares outstanding -- basic 129,157 129,446 128,991 132,193
Weighted-average common shares outstanding -- diluted 134,047 133,822 132,817 134,956
SELECTED INCOME STATEMENT RATIOS
Gross profit 54.9% 56.0% 54.7% 55.0%
Selling, general and administrative expenses 41.0 42.7 42.3 42.9
Operating income 13.9 13.3 12.4 12.1
Income from continuing operations before income taxes 12.7 12.6 11.5 11.3
Income from continuing operations 8.2 8.2 7.6 7.4
Effective income tax rate 42.4% 41.5% 41.4% 39.5%
FINANCIAL POSITION
Current assets $ 503,514 $ 509,501 $ 435,507 $ 358,072
Property, plant and equipment, net 420,205 395,562 332,314 292,937
Investment in Henkel-Ecolab joint venture 253,646 239,879 285,237 302,298
Other assets 293,630 271,357 155,351 107,573
- -----------------------------------------------------------------------------------------------------------------------
Total assets $ 1,470,995 $ 1,416,299 $ 1,208,409 $ 1,060,880
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Current liabilities $ 399,791 $ 404,464 $ 327,771 $ 310,538
Long-term debt 227,041 259,384 148,683 89,402
Postretirement health care and pension benefits 85,793 76,109 73,577 70,666
Other liabilities 67,829 124,641 138,415 133,616
Shareholders' equity 690,541 551,701 519,963 456,658
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,470,995 $ 1,416,299 $ 1,208,409 $ 1,060,880
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
SELECTED CASH FLOW INFORMATION
Cash provided by operating activities $ 235,642 $ 235,098 $ 254,269 $ 166,463
Depreciation and amortization 121,971 100,879 89,523 76,279
Capital expenditures 147,631 121,667 111,518 109,894
EBITDA from continuing operations 383,951 319,383 274,840 238,965
Cash dividends declared per common share $ 0.39 $ 0.335 $ 0.29 $ 0.2575
SELECTED FINANCIAL MEASURES/OTHER
Total debt and preferred stock $ 295,032 $ 308,268 $ 176,292 $ 161,049
Total debt and preferred stock to capitalization 29.9% 35.8% 25.3% 26.1%
Book value per common share $ 5.33 $ 4.27 $ 4.01 $ 3.53
Return on beginning equity 28.0% 25.8% 24.8% 21.5%
Dividends/diluted net income per common share 33.9% 33.5% 34.1% 35.3%
Annual common stock price range $38.00-26.13 $28.00-18.13 $19.75-14.56 $15.88-10.00
Number of employees 12,007 10,210 9,573 9,026
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
December 31 (thousands, except per share) 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATIONS
Net sales
United States $ 942,070 $ 867,415 $ 816,405 $ 757,564
International (at average rates of currency
exchange during the year) 265,544 234,981 241,229 201,738
Europe (at average rates of currency
exchange during the year)
- -----------------------------------------------------------------------------------------------------------------------
Total 1,207,614 1,102,396 1,057,634 959,302
Cost of sales 533,143 491,306 485,206 447,356
Selling, general and administrative expenses 529,507 481,639 446,814 393,700
Merger costs and nonrecurring expenses 8,000
- -----------------------------------------------------------------------------------------------------------------------
Operating income 136,964 129,451 125,614 118,246
Interest expense, net 12,909 21,384 35,334 30,489
- -----------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income
taxes and equity in earnings of Henkel-Ecolab 124,055 108,067 90,280 87,757
Provision for income taxes 50,444 33,422 27,392 29,091
Equity in earnings of Henkel-Ecolab joint venture 10,951 8,127 8,600 4,573
- -----------------------------------------------------------------------------------------------------------------------
Income from continuing operations 84,562 82,772 71,488 63,239
Income (loss) from discontinued operations (274,693)
Extraordinary loss and changes in accounting principles 715 (24,560)
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) 84,562 83,487 71,488 (236,014)
Preferred stock dividends (4,064)
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) to common shareholders, as reported 84,562 83,487 71,488 (240,078)
Pro forma adjustments 5,902 (2,667) (2,797) (2,933)
- -----------------------------------------------------------------------------------------------------------------------
Pro forma net income (loss) to common shareholders $ 90,464 $ 80,820 $ 68,691 $ (243,011)
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) per common share, as reported
Basic -- continuing operations $ 0.63 $ 0.61 $ 0.53 $ 0.51
Basic -- net income (loss) 0.63 0.62 0.53 (2.05)
Diluted -- continuing operations 0.62 0.60 0.52 0.50
Diluted -- net income (loss) 0.62 0.61 0.52 (2.05)
Pro forma income (loss) per common share
Basic -- continuing operations 0.67 0.59 0.51 0.48
Basic -- net income (loss) 0.67 0.60 0.51 (2.08)
Diluted -- continuing operations 0.66 0.58 0.50 0.48
Diluted -- net income (loss) $ 0.66 $ 0.59 $ 0.50 $ (2.08)
Weighted-average common shares outstanding -- basic 135,100 135,056 134,408 117,050
Weighted-average common shares outstanding -- diluted 137,306 137,421 136,227 118,178
SELECTED INCOME STATEMENT RATIOS
Gross profit 55.9% 55.4% 54.1% 53.4%
Selling, general and administrative expenses 44.6 43.7 42.2 41.1
Operating income 11.3 11.7 11.9 12.3
Income from continuing operations before income taxes 10.3 9.8 8.5 9.1
Income from continuing operations 7.0 7.5 6.8 6.6
Effective income tax rate 40.7% 30.9% 30.3% 33.1%
FINANCIAL POSITION
Current assets $ 401,179 $ 311,051 $ 264,512 $ 293,053
Property, plant and equipment, net 246,191 219,268 207,183 198,086
Investment in Henkel-Ecolab joint venture 284,570 255,804 289,034 296,292
Other assets 88,416 105,607 98,135 152,857
- -----------------------------------------------------------------------------------------------------------------------
Total assets $ 1,020,356 $ 891,730 $ 858,864 $ 940,288
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Current liabilities $ 253,665 $ 201,498 $ 192,023 $ 240,219
Long-term debt 105,393 131,861 215,963 325,492
Postretirement health care and pension benefits 70,882 72,647 63,393 56,427
Other liabilities 128,608 93,917 29,179 11,002
Shareholders' equity 461,808 391,807 358,306 307,148
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,020,356 $ 891,730 $ 858,864 $ 940,288
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
SELECTED CASH FLOW INFORMATION
Cash provided by operating activities $ 169,346 $ 175,674 $ 120,217 $ 128,999
Depreciation and amortization 66,869 60,609 60,443 55,653
Capital expenditures 88,457 68,321 59,904 53,752
EBITDA from continuing operations 203,833 190,060 186,057 173,899
Cash dividends declared per common share $ 0.2275 $ 0.1975 $ 0.17875 $ 0.175
SELECTED FINANCIAL MEASURES/OTHER
Total debt and preferred stock $ 147,213 $ 151,281 $ 236,695 $ 407,221
Total debt and preferred stock to capitalization 24.2% 27.9% 39.8% 57.0%
Book value per common share $ 3.41 $ 2.90 $ 2.66 $ 2.30
Return on beginning equity 21.6% 23.3% 23.3% 13.6%
Dividends/diluted net income per common share 36.7% 32.4% 34.4% 42.7%
Annual common stock price range $11.75-9.63 $11.91-9.07 $9.57-6.66 $8.38-4.88
Number of employees 8,206 7,822 7,601 7,428
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31 (thousands, except per share) 1990 1989 1988
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATIONS
Net sales
United States $ 712,579 $ 646,895 $ 589,715
International (at average rates of currency
exchange during the year) 184,220 179,705 159,374
Europe (at average rates of currency
exchange during the year) 150,809 122,871 122,250
- -----------------------------------------------------------------------------------------------------------------------
Total 1,047,608 949,471 871,339
Cost of sales 495,086 461,256 433,734
Selling, general and administrative expenses 425,983 383,512 337,707
Merger costs and nonrecurring expenses 12,978
- -----------------------------------------------------------------------------------------------------------------------
Operating income 126,539 91,725 99,898
Interest expense, net 28,321 31,628 31,097
- -----------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income
taxes and equity in earnings of Henkel-Ecolab 98,218 60,097 68,801
Provision for income taxes 32,494 19,411 21,285
Equity in earnings of Henkel-Ecolab joint venture
- -----------------------------------------------------------------------------------------------------------------------
Income from continuing operations 65,724 40,686 47,516
Income (loss) from discontinued operations (4,408) (29,379) 4,238
Extraordinary loss and changes in accounting principles
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) 61,316 11,307 51,754
Preferred stock dividends (7,700) (429)
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) to common shareholders, as reported 53,616 10,878 51,754
Pro forma adjustments (2,956) (3,196) (2,622)
- -----------------------------------------------------------------------------------------------------------------------
Pro forma net income (loss) to common shareholders $ 50,660 $ 7,682 $ 49,132
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) per common share, as reported
Basic -- continuing operations $ 0.56 $ 0.34 $ 0.41
Basic -- net income (loss) 0.52 0.09 0.44
Diluted -- continuing operations 0.56 0.34 0.40
Diluted -- net income (loss) 0.51 0.09 0.43
Pro forma income (loss) per common share
Basic -- continuing operations 0.53 0.31 0.38
Basic -- net income (loss) 0.49 0.06 0.42
Diluted -- continuing operations 0.53 0.31 0.38
Diluted -- net income (loss) $ 0.49 $ 0.06 $ 0.41
Weighted-average common shares outstanding -- basic 103,298 118,516 117,188
Weighted-average common shares outstanding -- diluted 104,258 120,196 119,586
SELECTED INCOME STATEMENT RATIOS
Gross profit 52.7% 51.4% 50.2%
Selling, general and administrative expenses 40.6 41.7 38.7
Operating income 12.1 9.7 11.5
Income from continuing operations before income taxes 9.4 6.3 7.9
Income from continuing operations 6.3 4.3 5.5
Effective income tax rate 33.1% 32.3% 30.9%
FINANCIAL POSITION
Current assets $ 216,612 $ 370,875 $ 265,291
Property, plant and equipment, net 187,735 203,056 194,509
Investment in Henkel-Ecolab joint venture
Other assets 480,911 420,115 444,827
- -----------------------------------------------------------------------------------------------------------------------
Total assets $ 885,258 $ 994,046 $ 904,627
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Current liabilities $ 177,643 $ 201,585 $ 181,758
Long-term debt 208,147 228,632 257,500
Postretirement health care and pension benefits 8,742 12,859 12,768
Other liabilities 138,792 135,343 11,590
Shareholders' equity 351,934 415,627 441,011
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 885,258 $ 994,046 $ 904,627
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
SELECTED CASH FLOW INFORMATION
Cash provided by operating activities $ 154,208 $ 123,215 $ 113,514
Depreciation and amortization 61,024 53,113 48,282
Capital expenditures 58,069 54,430 62,125
EBITDA from continuing operations 187,563 144,838 148,180
Cash dividends declared per common share $ 0.1675 $ 0.165 $ 0.16
SELECTED FINANCIAL MEASURES/OTHER
Total debt and preferred stock $ 353,886 $ 382,764 $ 300,448
Total debt and preferred stock to capitalization 50.1% 47.9% 40.5%
Book value per common share $ 3.41 $ 3.55 $ 3.73
Return on beginning equity 12.9% 2.5% 12.9%
Dividends/diluted net income per common share 32.8% 183.3% 37.2%
Annual common stock price range $7.78-4.16 $8.94-6.22 $6.94-5.32
Number of employees 8,106 7,845 7,684
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Pro forma results for 1994 and prior years reflect adjustments to
eliminate unusual items associated with Ecolab's merger with Kay Chemical
Company in December 1994. All per share, shares outstanding and market price
data reflect the two-for-one stock splits declared in 1997 and 1998. Other
assets includes net assets of Econo Europe and discontinued operations prior
to 1992. Other liabilities includes $110 million of convertible preferred
stock at year-end 1989 and 1990. The rates of return on beginning equity and
dividends diluted net income per common share exclude the change in
accounting principle and the loss on the ChemLawn divestiture in 1991. Number
of employees excludes ChemLawn operations.
<PAGE>
APPENDIX: GRAPHIC AND IMAGE MATERIAL
<TABLE>
<CAPTION>
PAGE
NUMBER DESCRIPTION
- ------ -----------
<S> <C> <C>
24 Bar graph illustrating total return to shareholders (share
appreciation plus dividends) for the last five fiscal years
as follows:
1998 31.9%
1997 49.0%
1996 27.3%
1995 46.1%
1994 (5.3)%
24 Bar graph illustrating return on beginning equity for the
last five fiscal years as follows:
1998 28.0%
1997 25.8%
1996 24.8%
1995 21.5%
1994 21.6%
27 Pie chart illustrating the United States Cleaning and
Sanitizing business mix for 1998 as well as consolidated
net sales (in millions) for the last three fiscal years
as follows:
1998 Institutional mix 60%
1998 Food & Beverage mix 18%
1998 Professional Products mix 8%
1998 Kay mix 7%
1998 Textile Care mix 5%
1998 Water Care mix 2%
1998 sales $1,297
1997 sales $1,157
1996 sales $1,041
28 Pie chart illustrating United States Other Services
consolidated business mix for 1998 as well as consolidated
net sales (in millions) for the last three fiscal years as
follows:
1998 Pest Elimination mix 77%
1998 GCS Service mix 15%
1998 Jackson mix 8%
1998 sales $160
1997 sales $119
1996 sales $108
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
NUMBER DESCRIPTION
- ------ -----------
<S> <C> <C>
29 Pie chart illustrating the International Cleaning and
Sanitizing business mix for 1998 as well as consolidated
net sales (in millions) for the last three fiscal years
as follows:
1998 Asia Pacific mix 48%
1998 Latin America mix 20%
1998 Canada mix 19%
1998 Africa, Export and Other mix 13%
1998 sales $441
1997 sales $335
1996 sales $306
30 Pie chart illustrating the Henkel-Ecolab Joint Venture
business mix for 1998 as well as Ecolab's equity in
earnings of Henkel-Ecolab (in millions) for the last
three fiscal years as follows:
1998 Institutional mix 36%
1998 Professional Hygiene mix 26%
1998 Food & Beverage P3 mix 25%
1998 Textile Hygiene (Textile Care) mix 13%
1998 Henkel-Ecolab equity $16
1997 Henkel-Ecolab equity $13
1996 Henkel-Ecolab equity $13
32 Pie chart illustrating mix of shareholders' equity
and total debt for 1998 as well as total debt to
capitalization ratio for the last three fiscal years
as follows:
1998 Shareholders' Equity mix 70%
1998 Total Debt mix 30%
1998 debt/equity ratio 30%
1997 debt/equity ratio 36%
1996 debt/equity ratio 25%
33 Bar graph illustrating cash from continuing operating
activities (in millions) for the last five fiscal years
as follows:
1998 $275
1997 $235
1996 $254
1995 $163
1994 $154
</TABLE>
<PAGE>
Exhibit (21)
REGISTRANT
ECOLAB INC.
<TABLE>
<CAPTION>
STATE OR OTHER PERCENTAGE
JURISDICTION OF OF
NAME OF AFFILIATE INCORPORATION OWNERSHIP
- ----------------- --------------- -----------
<S> <C> <C>
Ecolab S.A. Argentina 100
Ecolab Australia Pty Limited Australia 100
Ecolab Finance Pty Limited Australia 100
Ecolab Pty Limited Australia 100
Gibson Chemical Industries Limited Australia 100
Gibson Chemicals Limited Australia 100
Gibson Chemicals (NSW) Pty Limited Australia 100
Gibson Chemicals Fiji Pty Limited Australia 100
Gibson Chemicals Great Britain Pty Limited Australia 100
Intergrain Timber Finishes Pty Limited Australia 100
Leonard Chemical Products Pty Limited Australia 100
Maxwell Chemicals Pty Limited Australia 100
Nippon Thermochemical Pty Limited Australia 60
Puritan/Churchill Chemical Holdings Pty Ltd. Australia 100
Vessey Chemicals (Holdings) Pty Limited Australia 100
Vessey Chemicals Pty Limited Australia 100
Vessey Chemicals (Vic.) Pty Limited Australia 100
Ecolab Limited Bahamas 100
Ecolab (Barbados) Limited Barbados 100
Kay N.V. Belgium 100
Ecolab Quimica Ltda. Brazil 100
Ecolab Ltd. Canada 100
Ecolab S.A. Chile 100
Ecolab Colombia S.A. Columbia 100
<PAGE>
<CAPTION>
STATE OR OTHER PERCENTAGE
JURISDICTION OF OF
NAME OF AFFILIATE INCORPORATION OWNERSHIP
- ----------------- --------------- -----------
<S> <C> <C>
Ecolab Sociedad Anonima Costa Rica 100
Ecolab, S.A. de C.V. El Salvador 100
Ecolab S.A. France 100
Ecolab GmbH Germany 100
Ecolab Export GmbH Germany 100
Ecolab, Sociedad Anonima Guatemala 100
Quimicas Ecolab, S.A. Honduras 100
Ecolab Limited Hong Kong 100
P.T. Ecolab Indonesia Indonesia 80
Ecolab Export Limited Ireland 100
Ecolab Co. Ireland 100
Ecolab Limited Jamaica 100
Ecolab K.K. Japan 100
Ecolab East Africa (Kenya) Limited Kenya 100
Ecolab Korea Ltd. Korea 100
Ecolab Lebanon S.a.r.l. Lebanon 100
Ecolab Sdn. Bhd. Malaysia 100
Ecolab S.A. de C.V. Mexico 100
Ecolab Holdings Mexico, S.A. de C.V. Mexico 100
Ecolab Morocco Morocco 100
Ecolab Finance N.V. Netherlands Antilles (Curacao) 100
Ecolab International B.V. Netherlands 100
Ecolab Limited New Zealand 100
Ecolab Nicaragua, S.A. Nicaragua 100
Ecolab S.A. Panama 100
<PAGE>
<CAPTION>
STATE OR OTHER PERCENTAGE
JURISDICTION OF OF
NAME OF AFFILIATE INCORPORATION OWNERSHIP
- ----------------- --------------- -----------
<S> <C> <C>
Gibson Chemicals (PNG) Pty. Limited Papua New Guinea 100
Ecolab Chemicals Ltd. People's Republic of China 85
Ecolab Philippines, Inc. Philippines 100
Ecolab Pte. Ltd. Singapore 100
Klenzade South Africa (Proprietary) Ltd. South Africa 100
Ecolab Ltd. Taiwan 100
Ecolab East Africa (Tanzania) Limited Tanzania 100
Ecolab Limited Thailand 100
Ecolab East Africa (Uganda) Limited Uganda 100
Ecolab Foreign Sales Corp. U.S. Virgin Islands 100
Ecolab S.A. Venezuela 51
UNITED STATES
- -------------
BCS Sales Inc. Delaware 100
Kay Chemical Company North Carolina 100
Kay Chemical International, Inc. North Carolina 100
Ecolab Finance (Australia) Inc. Delaware 100
Ecolab Manufacturing Inc. Delaware 100
Ecolab Holdings Inc. Delaware 100
Ecolab Investment Inc. Delaware 100
Ecolab Foundation Minnesota 100
Ecolab Leasing Corporation Delaware 100
FastSource Leasing, Inc. Delaware 100
GCS Service, Inc. Delaware 100
Jackson MSC Inc. Delaware 100
Puritan Services Inc. Georgia 100
</TABLE>
Certain additional subsidiaries, which are not significant in the aggregate, are
not shown.
<PAGE>
CONSENT OF PRICEWATERHOUSECOOPERS GMBH
TO INCORPORATION BY REFERENCE
We consent to the incorporation by reference in the Registration
Statements on Form S-8 of Ecolab Inc. (Registration Nos. 2-60010; 2-74944;
33-1664; 33-41828; 2-90702; 33-18202; 33-55986; 33-56101; 33-26241; 33-34000;
33-56151; 333-18627; 33-39228; 33-56125; 333-70835; 33-60266; 33-65364;
33-59431; 333-18617; 333-21167; 333-35519; 333-40239; 333-50969; and 333-62183)
and the Registration Statement of Ecolab Inc. on Form S-3 (Registration No.
333-14771) of our reports dated January 26, 1999 on our audits of the combined
financial statements and the related financial statement schedule of
Henkel-Ecolab Joint Venture as of November 30, 1998 and for the year ended
November 30, 1998, which reports are included or incorporated by reference in
this Annual Report on Form 10-K. We also consent to the references to our firm
under the caption "Interests of Named Experts and Counsel" or "Incorporation of
Documents by Reference" in the above-listed Registration Statements on Form S-8
of Ecolab Inc.
Dusseldorf, Germany
March 29, 1999
PricewaterhouseCoopers Gesellschaft
mit beschrankter Haftung
Wirtschaftsprufungsgesellschaft
/s/ Gunter Betz /s/ Henri Leveque
Betz Leveque
Wirtschaftsprufer Certified Public Accountant
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements on
Form S-8 of Ecolab Inc. (Registration Nos. 2-60010; 2-74944; 33-1664; 33-41828;
2-90702; 33-18202; 33-55986; 33-56101; 33-26241; 33-34000; 33-56151; 333-18627;
33-39228; 33-56125; 333-70835; 33-60266; 33-65364; 33-59431; 333-18617;
333-21167; 333-35519; 333-40239; 333-50969; and 333-62183) and the Registration
Statement on Form S-3 of Ecolab Inc. (Registration No. 333-14771) of our report
dated January 23, 1998 relating to the combined balance sheets of
Henkel-Ecolab Joint Venture as of November 30, 1997, and 1996, and the
related combined statements of income, equity and cash flows for each of the
periods beginning December 1, 1997 and 1996 and ended November 30, 1997 and
1996, and related schedule, which report appears in the December 31, 1998,
annual report on Form 10-K of Ecolab Inc. We also consent to the references
to our firm under the caption "Interests of Named Experts and Counsel" or
"Incorporation of Documents by Reference" in certain Registration Statements
on Form S-8 of Ecolab Inc. (Registration Nos. 33-56101; 33-56151; 33-56125;
33-59431; 333-18617; 333-18627; 333-21167; 333-35519; 333-40239; 333-50969;
333-62183 and 333-70835) and under the caption "Experts" in the Registration
Statement on Form S-3 of Ecolab Inc. (Registration No. 333-14771).
Dusseldorf, Germany
March 29, 1999
KPMG Deutsche Treuhand-Gesselschaft
Aktiengesellschaft
Wirtschaftsprufungsgesellschaft
/s/Stefan Haas /s/Bernhard Momken
- -------------------- ----------------------
Stefan Haas Bernhard Momken
Wirtschaftsprufer Wirtschaftsprufer
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, That the undersigned, a Director of
Ecolab Inc., a Delaware corporation, does hereby make, nominate and appoint
KENNETH A. IVERSON and LAWRENCE T. BELL, and each of them, to be my
attorney-in-fact, with full power and authority to sign his name to the Annual
Report on Form 10-K of Ecolab Inc. for the fiscal year ended December 31, 1998,
and all amendments thereto, provided that the Annual Report and any amendments
thereto, in final form, be approved by said attorney-in-fact; and his name, when
thus signed, shall have the same force and effect as though I had manually
signed said document.
IN WITNESS WHEREOF, I have hereunto affixed my signature this 19th day
of February, 1999.
/s/Les S. Biller
------------------------
Les S. Biller
/s/Ruth S. Block
------------------------
Ruth S. Block
/s/James J. Howard
------------------------
James J. Howard
/s/Joel W. Johnson
------------------------
Joel W. Johnson
/s/Jerry W. Levin
------------------------
Jerry W. Levin
/s/Reuben F. Richards
------------------------
Reuben F. Richards
/s/Richard L. Schall
------------------------
Richard L. Schall
/s/Roland Schulz
------------------------
Roland Schulz
/s/Hugo Uyterhoeven
------------------------
Hugo Uyterhoeven
/s/Albrecht Woeste
------------------------
Albrecht Woeste
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DEC-31-1998 AND THE RELATED STATEMENT OF INCOME
AND CASH FLOWS FOR THE 12-MONTH PERIOD THEN ENDED AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 28,425
<SECURITIES> 0
<RECEIVABLES> 259,588
<ALLOWANCES> 12,893
<INVENTORY> 165,627
<CURRENT-ASSETS> 503,514
<PP&E> 875,029
<DEPRECIATION> 454,824
<TOTAL-ASSETS> 1,470,995
<CURRENT-LIABILITIES> 399,791
<BONDS> 227,041
0
0
<COMMON> 144,706
<OTHER-SE> 545,835
<TOTAL-LIABILITY-AND-EQUITY> 1,470,995
<SALES> 1,888,226
<TOTAL-REVENUES> 1,888,226
<CGS> 851,173
<TOTAL-COSTS> 851,173
<OTHER-EXPENSES> 775,073
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 25,012
<INCOME-PRETAX> 240,238
<INCOME-TAX> 101,782
<INCOME-CONTINUING> 154,506
<DISCONTINUED> 38,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 192,506
<EPS-PRIMARY> 1.49<F2>
<EPS-DILUTED> 1.44<F3>
<FN>
<F1>THE AMOUNT OF "LOSS PROVISION" IS NOT SIGNIFICANT AND HAS BEEN INCLUDED IN
"OTHER EXPENSES."
<F2>BASIC EPS FROM CONTINUING OPERATIONS IS $1.20 PER SHARE.
<F3>DILUTED EPS FROM CONTINUING OPERATIONS IS $1.15 PER SHARE.
</FN>
</TABLE>
