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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, 1999 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.
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(Exact name of registrant as specified in its charter)
DELAWARE 41-0231510
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
370 N. WABASHA STREET, ST. PAUL, MINNESOTA 55102
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(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
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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 1, 2000: $3,720,609,931 (see Item 12, on page 20 hereof). The number of
shares of Registrant's Common Stock, par value $1.00 per share, outstanding as
of March 1, 2000: 129,652,991shares.
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DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Registrant's Annual Report to Stockholders for the
year ended December 31, 1999 (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 12, 2000 and to be filed within 120
days after the Registrant's fiscal year ended December 31, 1999
(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 Management's
Discussion and Analysis of Financial Condition and Results of Operations
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, the impact of legislation and environmental
compliance, the effect of litigation, production capability, share repurchases,
the effect of new accounting pronouncements 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: restraints on pricing flexibility due to competitive
factors and customer consolidations, cost increases due to higher oil prices,
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 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) changes in tax, fiscal,
governmental and other regulatory policies; economic factors such as the
worldwide economy, interest rates, currency movements, Euro
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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.
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 Dusseldorf, 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 "Henkel-Ecolab." Strategic decisions concerning Henkel-Ecolab 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 Henkel-Ecolab senior executives
and adoption of the annual business plan. The Company accounts for its interest
in Henkel-Ecolab under the equity method of accounting and therefore does not
consolidate the Henkel-Ecolab balance sheet accounts, revenues and expenses or
cash flows. Financial statements of Henkel-Ecolab, as listed under Item 14, I(3)
of Part IV hereof, are included as a part of this Report and a review of
Henkel-Ecolab financial performance is found under the heading "Henkel-Ecolab"
contained in the Financial Discussion which is incorporated from the Annual
Report into Item 7 hereof. Except where Henkel-Ecolab is specifically referred
to, the description of business in Part I does not include the business of
Henkel-Ecolab.
During 1999, 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 Company added to its line of products and services in
its Vehicle Care operations through the acquisition of Blue Coral Systems.
Additional products and services were added to the United States commercial
kitchen equipment repair services business and to the Company's South African
operations through business acquisitions. Details of these acquisitions are
found under the heading "Business Acquisitions" in Note 6, located on pages 48
and 49 of the Annual Report and incorporated into Item 14 hereof. In 2000, the
Company expanded its operations in Latin America with the acquisition of Spartan
de Chile Limitada and Spartan de Argentina S.A. In addition, the Company added
to its Kay business in 2000 by acquiring Southwest Sanitary Distributing Company
of Carrolton, Texas.
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 54 and 55 of the Annual
Report, is incorporated herein by reference.
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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, maintenance and
repair products, systems and services primarily to hotels and restaurants,
foodservice, healthcare and educational facilities, quickservice (fast-food and
other convenience store) units, grocery stores, commercial and institutional
laundries, light industry, dairy plants and farms, food and beverage processors,
pharmaceutical and cosmetics facilities and the vehicle wash industry. A strong
commitment to customer support is a distinguishing characteristic of the
Company. Additional information on the Company's business philosophy is found
below under the heading "Additional Information - Competition" of this Item
1(c).
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 providing products, systems and services which serve the
Company's customer base, and does so on a global basis to meet the needs of its
customer's various operations around the world. Therefore, one customer may
utilize the services of all three of the segments. Thus, there is a degree of
interdependence among the operating segments--particularly between the
International Cleaning and Sanitizing and the United States Cleaning and
Sanitizing businesses.
UNITED STATES CLEANING AND SANITIZING SEGMENT
The "United States Cleaning and Sanitizing" segment is comprised of seven
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 programs for commercial and
hospitality customers. 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.
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KAY: The Kay Division (which operates as a wholly-owned subsidiary of the
Company) 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 and other venues. Kay also sells cleaning and
sanitizing products to the food retail (i.e., grocery store) industry. 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. 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 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 for its customer base. Farm
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.
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.
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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 (skin care,
disinfectants, instrument sterilants 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 distributors
and 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.
VEHICLE CARE: The Company's Vehicle Care Division provides vehicle appearance
products which include soaps, polishes, wheel and tire treatments and air
fresheners. Products are sold to vehicle rental, fleet and consumer car wash and
detail operations. The acquisition of Blue Coral Systems in February 1999
significantly expanded product and service offerings, and increased the
Division's sales coverage.
WATER CARE SERVICES: The Water Care Services Division supplements 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 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). 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.
UNITED STATES OTHER SERVICES SEGMENT
The "United States Other Services" segment is comprised of three business units:
Pest Elimination Division; Jackson MSC and GCS Service. 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, quickservice
restaurant and grocery operations 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.
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JACKSON MSC: Jackson MSC (which operates as a wholly-owned subsidiary of the
Company) 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: GCS (which operates as a wholly-owned subsidiary of the Company)
provides commercial kitchen parts and equipment repair services. GCS 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 40 countries outside of the
United States through wholly-owned subsidiaries or, in the case of Venezuela and
China, 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 Henkel-Ecolab 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 & Beverage businesses are the largest
businesses. They are conducted at virtually all international locations, and
relative to the United States, constitute a larger portion of the overall
business. Kay has sales in a number of international locations. A significant
portion of its international sales are to non-United States units of United
States-based quickservice restaurant chains. Consequently, a substantial portion
of Kay's international sales are made either to domestic or
internationally-located distributors who serve these chains. The other
businesses (Textile Care, Professional Products and Water Care Services) as well
as the Pest Elimination business, are conducted less extensively in
international locations. However, in general, all of the businesses conducted in
the United States are operated in Canada.
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.
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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 cleaning, sanitation and maintenance products and systems
coupled with high customer support 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 advising customers on means to lower
operating costs and comply 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 1999, 1998 and 1997
approximated 27, 28 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 1999, 1998 and 1997 approximated 12, 13 and 14
percent, respectively, of the Company's consolidated net sales.
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.
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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 41 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 and 16 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 and 16 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. At times, technology may be licensed from
outside the Company to develop offerings. Note 12, entitled "Research
Expenditures" located on page 52 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 requirements and avoid or limit environmental effects, some risks are
inherent in the Company's 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,
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as well as modifications, disruptions or discontinuation of certain operations
or types of operations. Additionally, 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, results of operations or cash flows.
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. To date, the Company has
been able to comply with legislative requirements and, where
necessary, has developed products which contain no phosphorous or
lower amounts of phosphorous. 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 375 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. Total fees paid to the EPA and the states
to obtain or maintain pesticide registrations, and for the California
tax, were approximately $1,900,000 in 1999. Such costs will increase
somewhat in 2000, but, based on the Company's best information, 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.
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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 1999 were
approximately $1,200,000 and approximately $3,000,000 has been
budgeted for 2000.
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 approximately 18
sites. 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.
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 18 sites referred to in the
preceding paragraph, 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 probable future costs relating to such known sites.
Three manufacturing facility properties owned by the Company in
Australia and New Jersey have been identified as subject to
environmental impacts. The Company has accrued for estimated probable
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 although the
parties are in discussions to reach a final settlement which could
reduce the amount. The former subsidiary, now owned by Henkel-Ecolab,
has denied liability and believes it complied with applicable
Netherlands law. The Company has agreed to indemnify Henkel-Ecolab
as to any liability associated with this matter. Accordingly, an
accrual has been recorded, reflecting management's best estimate of
probable future costs.
- 11 -
<PAGE>
During 1999, the Company's net expenditures for contamination
remediation were approximately $3,100,000. The accrual at the end of
1999 for probable future remediation expenditures was approximately
$8,800,000. 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, results of
operations or liquidity.
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 probable
future costs.
NUMBER OF EMPLOYEES: The Company currently has approximately 12,900 employees
worldwide.
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 54 and 55 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>
Positions Held
Name Age Office Since Jan. 1, 1995
- ---- --- ------ ------------------
<S> <C> <C> <C>
A. L. Schuman 65 Chairman of the Board, President Jan. 2000 - Present
and Chief Executive Officer
President and Chief Mar. 1995 - Dec. 1999
Executive Officer
President and Chief Jan. 1995 - Feb. 1995
Operating Officer
L. T. Bell 52 Vice President-Law Jan. 1998 - Present
and General Counsel
- 12 -
<PAGE>
L. T. Bell (con't.) Vice President, Assistant Jan. 1997 - Dec. 1997
General Counsel and
Assistant Secretary
Associate General Counsel Jul. 1995 - Dec. 1996
and Assistant Secretary
Associate General Counsel Jan. 1995 - Jun. 1995
P. D'Almada 52 Senior Vice President - Jan. 1999 - Present
Institutional North America
Senior Vice President - Mar. 1996 - Dec. 1998
Global Accounts
Vice President - May 1995 - Feb. 1996
Institutional Corporate
Accounts and Distributor Sales
Vice President - Jan. 1995 - Apr. 1995
Institutional National
Accounts and Distributor Sales
S. L. Fritze 45 Vice President and Controller Jul. 1999 - Present
Vice President and Mar. 1995 - Jun. 1999
Treasurer
Institutional Vice Jan. 1995 - Feb. 1995
President, Planning
and Control
A. E. Henningsen, Jr. 53 Senior Vice President and Jul. 1999 - Present
Chief Planning Officer
Senior Vice President Mar. 1996 - Jun. 1999
and Controller
Vice President and Jan. 1995 - Feb. 1996
Controller
R. L. Marcantonio 50 Executive Vice President - Jan. 1999 - Present
Industrial Group
Senior Vice President- Mar. 1997 - Dec. 1998
Industrial
- 13 -
<PAGE>
L. W. Matthews, III 54 Executive Vice President and Jul. 1999 - Present
Chief Financial Officer
J. L. McCarty 62 Senior Executive Vice Jan. 1999 - Present
President - Institutional Group
Senior Vice President- Jan. 1995 - Dec. 1998
Institutional North America
M. Nisita 59 Senior Vice President- Jan. 1995 - Present
Global Operations
M. J. Schumacher 43 Vice President and May 1999 - Present
Chief Technical Officer
Vice President - Marketing and May 1998 - Apr. 1999
New Business Development
Vice President - Marketing Jan. 1997 - Apr.1998
Institutional Vice President, Jan. 1995 - Dec. 1996
Research & Development
J. P. Spooner 53 Executive Vice President - Jan. 1999 - Present
International Group
Senior Vice President- Jun. 1996 - Dec. 1998
International
Senior Vice President - Jan. 1995 - May 1996
Industrial
</TABLE>
Mr. Matthews joined the company in his current position in July 1999. Prior to
joining the Company, Mr. Matthews was employed by Union Pacific for 21 years.
For the most recent nine years, he served as Executive Vice President and Chief
Financial Officer of Union Pacific. He also served as a member of Union
Pacific's Board of Directors.
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.
- 14 -
<PAGE>
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.
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
- 15 -
<PAGE>
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 Tucson, Arizona, North Kansas City, Missouri, Grand Forks, North
Dakota and Memphis, Tennessee. A new U.S. manufacturing facility located in
Martinsburgh, West Virginia is expected to commence operations during 2000. The
Company also owns or leases smaller international manufacturing facilities in
Argentina, Australia, Chile, Columbia, Costa Rica, Fiji, Indonesia, Japan,
Kenya, Mexico, 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.
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 150 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. The corporate headquarters includes
a state-of-the-art training center. 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."
- 16 -
<PAGE>
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 (a
unit of the Professional Products Division) 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.
The Company has reached settlement with eight of the distributors on a basis
which were not adversely material to the Company and paid $29,000 following a
trial on one other case. The remaining distributor case is pending and not
currently scheduled for trial. The Company has accrued best estimates of
probable future costs.
LUBRICANT LITIGATION: Diversey Lever, Inc. filed suit against the Company in
Federal District Court, Eastern District of Michigan, Southern Division on July
1, 1996. The suit alleges that two Company products, which lubricate plastic
beverage bottles, infringe two patents held by Diversey Lever.
As previously reported in the Company's Form 10-Q for the quarter ended
September 30, 1999, the Company had appealed the District Courts 1998 finding
that the Company had infringed the two patents held by Diversey Lever. On
September 10, 1999, the Federal Circuit Court of Appeals ruled against the
Company on its appeal. On October 21, 1999, the Federal Circuit Court of Appeals
ruled against the Company on its requests for rehearing and rehearing EN BANC.
The case will now be remanded back to the District Court for a trial on past
damages. The Company continues to believe Diversey Lever's damage request will
be in the range of $3,000,000 to $5,000,000. Diversey Lever is also requesting
that damages be enhanced up to three times if willful infringement is found. The
Company has accrued best estimates of probable future costs.
OTHER LITIGATION: 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 probable
future costs relating to such matters and, in the opinion of management, the
ultimate resolution of this litigation will not have a material adverse effect
on the Company's results of operations, financial position or liquidity.
However, the estimated effects of the future results 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 1999.
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.
- 17 -
<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 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
Quarter High Low High Low
- ------- ---- --- ---- ----
<S> <C> <C> <C> <C>
First $41-1/4 $34-5/8 $29-5/8 $26-5/8
Second $44-7/16 $34-11/16 $33 $28-3/16
Third $43-7/8 $31-11/16 $33-29/256 $27-1/8
Fourth $39-1/4 $32-1/2 $38 $26-1/8
</TABLE>
The closing stock price on March 1, 2000 was $28-7/8.
ITEM 5(b) HOLDERS
On March 1, 2000, the Company had 5,559 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 $0.095 per share were declared in February, May
and August, 1998. Dividends of $0.105 per share were declared in December, 1998
and February, May and August, 1999. A dividend of $0.12 per share was declared
in December 1999.
ITEM 6. SELECTED FINANCIAL DATA
The comparative data for the years ended December 31, 1999, 1998, 1997, 1996 and
1995 inclusive, which are set forth under the heading entitled "Summary
Operating and Financial Data" located on pages 58 and 59 of the Annual Report,
are incorporated herein by reference.
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 32 through 41 of the Annual Report, is incorporated herein by
reference.
- 18 -
<PAGE>
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, 1999, 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 42
through 57 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 regarding directors and the paragraph relating to
understandings concerning the election of directors between Henkel KGaA and the
Company located in 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 12 through 14.
ITEM 11. EXECUTIVE COMPENSATION
The material appearing under the heading entitled "Executive Compensation"
located in 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" located in the Proxy Statement is not incorporated herein.
- 19 -
<PAGE>
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 in 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 under the heading "Stockholder Agreement," which is incorporated
herein by reference.
A total of 800,699 shares of Common Stock held by the Company's current
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 directors and executive officers of
the Company as of March 1, 2000, 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" located in the Proxy
Statement and the biographical material located in the Proxy Statement appearing
under the heading entitled "Election of Directors" 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, 1999, 1998 and 1997, Annual Report page
42.
(ii) Consolidated Balance Sheet at December 31, 1999, 1998
and 1997, Annual Report page 43.
(iii) Consolidated Statement of Cash Flows for the years
ended December 31, 1999, 1998 and 1997, Annual Report
page 44.
(iv) Consolidated Statement of Comprehensive Income and
Shareholders' Equity for the years ended December 31,
1999, 1998 and 1997, Annual Report page 45.
(v) Notes to Consolidated Financial Statements, Annual
Report pages 46 through 56.
(vi) Report of Independent Accountants, Annual Report page
57.
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, 1999, 1998 and 1997 located on page
- 20 -
<PAGE>
33 hereof, and the Report of Independent Accountants on Financial
Statement Schedule at page 31 hereof, are filed as part of this
Report.
(i) Schedule II -- Valuation and Qualifying Accounts for
the years ended December 31, 1999, 1998 and 1997.
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 34 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
Aktiengesellschaft
Wirtschaftsprufungsgesellschaft.
(ii) Combined Statements of Income and Comprehensive
Income for the years ended November 30, 1999, 1998
and 1997.
(iii) Combined Balance Sheets at November 30, 1999 and
1998.
(iv) Combined Statements of Cash Flows for the years ended
November 30, 1999, 1998 and 1997.
(v) Combined Statements of Equity for the years ended
November 30, 1999, 1998 and 1997.
(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, 1999, 1998 and 1997 located on page 59
hereof, and the Report of the Independent Accountants on page 34
hereof are filed as part of this Report.
(i) Schedule -- Valuation and Qualifying Accounts and
Reserves for the years ended November 30, 1999, 1998
and 1997.
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.
- 21 -
<PAGE>
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 -
Incorporated by reference to Exhibit (3)B of the
Company's Form 10-K Annual Report for the year ended
December 31, 1998.
(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 - 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.
- 22 -
<PAGE>
(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.
(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.
- 23 -
<PAGE>
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 - Incorporated by reference to Exhibit (10)C of
the Company's Form 10-K Annual Report for the year
ended December 31, 1998.
(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. (i) 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.
(ii) Amendment No. 1 to 1995 Non-Employee
Director Stock Option Plan effective
February 25, 2000.
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 Form 10-K Annual Report for
the year ended December 31, 1994. See also
Exhibit (10)N hereof.
- 24 -
<PAGE>
(ii) Amendment No. 1 to Ecolab Executive Death
Benefits Plan - Incorporated by reference
to Exhibit (10)H(ii) of the Company's Form
10-K Annual Report for the year ended
December 31, 1998.
(iii) Second Declaration of Amendment to Ecolab
Executive Death Benefits Plan, effective
March 1, 1998 - Incorporated by reference to
Exhibit (10)H(iii) of the Company's Form
10-K Annual Report for the year ended
December 31, 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)N 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)N 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 - Incorporated by
reference to Exhibit (10)K(iv) of the
Company's Form 10-K Annual Report for the
year ended December 31, 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)N hereof.
- 25 -
<PAGE>
(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.
(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 - Incorporated by reference to Exhibit
(10)L(iv) of the Company's Form 10-K Annual
Report for the year ended December 31, 1998.
(v) Fourth Declaration of Amendment to Ecolab
Mirror Savings Plan, effective September 1,
1998 - Incorporated by reference to Exhibit
(10)L(v) of the Company's Form 10-K Annual
Report for the year ended December 31, 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)N 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 to 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
- Incorporated by reference to Exhibit
(10)M(iv) of the Company's Form 10-K Annual
Report for the year ended December 31, 1998.
N. (i) Ecolab Inc. Administrative Document for
Non-Qualified Benefit Plans - Incorporated
by reference to Exhibit (10)N of the
Company's 10-K Annual Report for the year
ended December 31, 1994.
- 26 -
<PAGE>
(ii) Amendment No. 1 to the Ecolab Inc.
Administrative Document for Non-Qualified
Benefit Plans effective July 1, 1997 -
Incorporated by reference to Exhibit
(10)N(ii) of the Company's Form 10-K Annual
Report for the year ended December 31, 1998.
(iii) First Declaration of Amendment to the Ecolab
Inc. Administrative Document for
Non-Qualified Benefit Plans effective
November 13, 1997 - Incorporated by
reference to Exhibit (10)N(iii) of the
Company's Form 10-K Annual Report for the
year ended December 31, 1998.
(iv) Third Declaration of Amendment to the Ecolab
Inc. Administrative Document for
Non-Qualified Benefit Plans effective July
1, 1999.
O. 1999 Ecolab Inc. Management Performance Incentive
Plan - Incorporated by reference to Exhibit (10)O of
the Company's Form 10-K Annual Report for the year
ended December 31, 1998.
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 -
Incorporated by reference to Exhibit (10) P
(iii) of the Company's Form 10-K Annual
Report for the year ended December 31, 1998.
(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.
- 27 -
<PAGE>
Q. Description of Ecolab Management Incentive Plan.
(13) Those portions of the Company's Annual Report to
Stockholders for the year ended December 31, 1999
which are incorporated by reference into Parts I, II
and IV hereof.
(21) List of Subsidiaries as of March 1, 2000.
(23)A. Consent of PricewaterhouseCoopers LLP to
Incorporation by Reference at page 32 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.
(27) Financial Data Schedule for year ended December 31,
1999.
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
Included in the preceding list of exhibits are the following management
contracts or compensatory plans or arrangements:
Exhibit No. Description
- ----------- -----------
(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.
- 28 -
<PAGE>
(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)Q. Ecolab Management Incentive Plan.
III. Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended December
31, 1999.
- 29 -
<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 13th day of March, 2000.
ECOLAB INC.
(Registrant)
By /s/ Allan L. Schuman
--------------------------------
Allan L. Schuman, Chairman of the Board,
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 13th day of March, 2000.
/s/ Allan L. Schuman Chairman of the Board,
- ------------------------------ President and Chief Executive Officer
Allan L. Schuman (Principal Executive Officer
and Director)
/s/ L. White Matthews, III Executive Vice President and
- ------------------------------ Chief Financial Officer
L. White Matthews, III (Principal Financial Officer
and Director)
/s/ Steven L. Fritze Vice President and Controller
- ------------------------------ (Principal Accounting Officer)
Steven L. Fritze
/s/ Kenneth A. Iverson Directors
- ------------------------------
Kenneth A. Iverson
as attorney-in-fact for
Les S. Biller, Ruth S. Block,
Jerry A. Grundhofer, James J. Howard,
William L. Jews, Joel W. Johnson,
Jerry W. Levin, Robert L. Lumpkins,
Reuben F. Richards, Richard L. Schall,
Roland Schulz, Hugo Uyterhoeven and
Albrecht Woeste
- 30 -
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Shareholders and Directors of Ecolab Inc.
Our audits of the consolidated financial statements referred to in our report
dated February 28, 2000 appearing in the 1999 Annual Report to Shareholders
of Ecolab Inc. (which report and consolidated financial statements are
incorporated by reference in this Annual Report on Form 10-K) also included
an audit of the financial statement schedule listed in Item 14.I(2)(i) of
this Form 10-K. 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 consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Saint Paul, Minnesota
February 28, 2000
- 31 -
<PAGE>
CONSENT OF PRICEWATERHOUSECOOPERS LLP
TO INCORPORATION BY REFERENCE
We consent to the incorporation by reference in the Registration Statements
of Ecolab Inc. on Form S-8 (Registration Nos. 2-60010; 2-74944; 33-1664;
33-41828; 2-90702; 33-18202; 33-55986; 33-56101; 333-95043; 33-26241;
33-34000; 33-56151; 333-18627; 33-39228; 33-56125; 333-70835; 33-60266;
333-95041; 33-65364; 33-59431; 333-18617; 333-79449; 333-21167; 333-35519;
333-40239; 333-95037; 333-50969; and 333-62183) and Form S-3 (Registration
No. 333-14771) of our report dated February 28, 2000 relating to the
consolidated financial statements of Ecolab Inc. as of December 31, 1999,
1998 and 1997 and for the years then ended, which appears in the Annual
Report to Shareholders, which is incorporated in this Annual Report on Form
10-K. We also consent to the incorporation by reference of our report dated
February 28, 2000 relating to the financial statement schedule of Ecolab Inc.
as of December 31, 1999, 1998 and 1997 for the years then ended, which
appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Saint Paul, Minnesota
March 13, 2000
- 32 -
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ECOLAB INC.
(In Thousands)
- ------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------
Allowance for Doubtful Accounts:
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1999 $12,893 $14,385 $ 44 $(6,353) $20,969
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
</TABLE>
(A) Uncollectible accounts charged off, net of recovery of accounts previously
written off.
- 33 -
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Henkel-Ecolab
In our opinion, the combined financial statements listed in the index appearing
under Item 14.I(3) of this Form 10-K present fairly, in all material respects,
the financial position of Henkel-Ecolab at November 30, 1999 and 1998, and the
results of its operations and its cash flows for each of the two years in the
period ended November 30, 1999 in conformity with accounting principles
generally accepted in the United States. In addition, in our opinion, the
financial statement schedule listed in the index appearing under Item 14.I(4) of
this Form 10-K presents fairly, in all material respects, the information set
forth therein when read in conjunction with the related combined financial
statements. These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted 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.
/s/Pricewaterhouse Coopers GmbH
- -------------------------------
PricewaterhouseCoopers
Gesellschaft mit beschrankter Haftung
Wirtschaftsprufungsgesellschaft
January 28, 2000
- 34 -
<PAGE>
Independent Auditors' Report
The Board of Directors
Henkel-Ecolab Joint Venture:
We have audited the combined statements of income, equity, and cash flows of
Henkel-Ecolab Joint Venture for the year ended November 30, 1997. These
financial statements are the responsibility of the Joint Venture's
management. Our responsibility is to express an opinion on these combined
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
audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the results of operations and the cash
flows of the Henkel-Ecolab Joint Venture for the year ended November 30, 1997
in conformity with accounting principles generally accepted in the United
States.
Our audit was 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 for the year ended November 30, 1997 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 audit 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
- 35 -
<PAGE>
HENKEL ECOLAB
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Twelve Months ended Twelve Months ended Twelve Months ended
(Thousands DM) November 30, 1999 November 30, 1998 November 30, 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales 1,703,218 1,596,572 1,447,443
Cost of Sales 747,702 713,535 640,396
Selling, General and Administrative Expenses 786,993 736,197 671,635
Royalties to Parents 14,959 26,568 24,372
- ------------------------------------------------------------------------------------------------------------------
Operating Income 153,564 120,272 111,040
Other Expenses / Income, net 3,783 3,759 2,065
- ------------------------------------------------------------------------------------------------------------------
Income before Income Taxes 149,781 116,513 108,975
Provision for Income Taxes 65,128 48,421 51,267
- ------------------------------------------------------------------------------------------------------------------
Net Income 84,653 68,092 57,708
------ ------ ------
Other Comprehensive Income:
Foreign Currency Translation Adjustments 7,530 (4,992) 797
Minimum Pension Liability Adjustments 1,013 (958) (392)
Income Tax (Expense) / Benefit Related to
Minimum Pension Liability Adjustments (456) 431 174
- ------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income, net of Tax 8,087 (5,519) 579
- ------------------------------------------------------------------------------------------------------------------
Comprehensive Income 92,740 62,573 58,287
------ ------ ------
</TABLE>
See accompanying Notes to Combined Financial Statements
- 36 -
<PAGE>
HENKEL ECOLAB
<TABLE>
<CAPTION>
COMBINED BALANCE SHEETS
November 30, November 30,
(Thousands DM) 1999 1998
- -------------------------------------------------------------------------------------------
Assets
<S> <C> <C>
Cash and Cash Equivalents 11,807 20,375
Accounts Receivable, net 382,734 324,140
Accounts Receivable from Related Parties 11,205 11,133
Loans to Related Parties 10,152 7,342
Inventories 203,926 196,807
Prepaid Expenses and Other Current Assets 53,746 56,519
Deferred Taxes 7,029 7,380
- -------------------------------------------------------------------------------------------
Current Assets 680,599 623,696
- -------------------------------------------------------------------------------------------
Property, Plant and Equipment, net 188,244 183,381
Intangible and Other Assets, net 129,502 110,341
Deferred Taxes 27,114 9,473
- -------------------------------------------------------------------------------------------
Total Assets 1,025,459 926,891
--------- -------
- -------------------------------------------------------------------------------------------
Liabilities and Equity
Accounts Payable 122,647 106,839
Accounts Payable to Related Parties 15,835 17,808
Accrued Liabilities 208,224 189,599
Income Taxes Payable 72,249 47,309
Deferred Taxes 887 -
Current Portion of Long Term Debt 657 657
Short Term Debt 47,430 49,066
Current Portion of Employee Benefit Obligations 9,611 9,000
- -------------------------------------------------------------------------------------------
Current Liabilities 477,540 420,278
Contingent Liabilities
- -------------------------------------------------------------------------------------------
Employee Benefit Obligations, less Current Portion 131,733 121,661
Long Term Debt, less Current Maturities 4,108 4,768
Deferred Taxes 7,195 2,747
- -------------------------------------------------------------------------------------------
Combined Equity
Contributed Capital 167,270 165,889
Retained Earnings 253,912 235,934
Other Accumulated Comprehensive Income (16,299) (24,386)
--------------- ---------------
404,883 377,437
- -------------------------------------------------------------------------------------------
Total Liabilities and Equity 1,025,459 926,891
--------- -------
</TABLE>
See accompanying Notes to Combined Financial Statements
- 37 -
<PAGE>
HENKEL ECOLAB
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF CASH FLOWS
Twelve Months ended Twelve Months ended Twelve Months ended
(Thousands DM) November, 30 1999 November, 30 1998 November, 30 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME 84,653 68,092 57,708
ADJUSTMENTS TO RECONCILE NET INCOME TO CASH
PROVIDED BY OPERATING ACTIVITIES
Depreciation and Amortization 87,686 74,534 64,556
Equity in Income of Affiliated Company (571) (1,421) (406)
Provision for Doubtful Accounts and Other 4,222 9,325 6,668
Gain on Sale of Property and Equipment (1,233) (976) (996)
Deferred Income Taxes (11,955) 2,162 (3,509)
CHANGES IN OPERATING ASSETS AND LIABILITIES
(Increase) in Accounts Receivable (60,144) (6,926) (45,557)
(Increase) Decrease in Accounts Receivable from Related Parties (72) 2,081 (2,038)
(Increase) Decrease in Inventories (9,444) (11,449) 5,092
Increase in Accounts Payable and Accrued Liabilities 25,780 12,199 2,530
(Decrease) Increase in Accounts Payable to Related Parties (1,973) (14,032) 14,724
Increase (Decrease) in Income Taxes Payable 26,299 (7,291) 17,597
Decrease (Increase) in Prepaid Expenses and Other Current Assets 3,005 (16,628) (7,619)
Increase in Employee Benefit Obligations 9,946 1,418 15,802
------------- -------------- ------------
Cash Provided by Operating Activities 156,199 111,088 124,552
------------- -------------- ------------
INVESTING ACTIVITIES
Expenditures for Property and Equipment (80,659) (74,847) (72,764)
Expenditures for Intangible and Other Assets (19,626) (28,534) (4,662)
Proceeds from Investment in Affiliated Company 571 700 -
Purchase of Businesses Net of Cash Acquired (15,535) (32,748) (32,961)
Proceeds from Sale of Property and Equipment 15,859 9,989 12,374
------------- -------------- ------------
Cash Used for Investing Activities (99,390) (125,440) (98,013)
------------- --------------- ------------
FINANCING ACTIVITIES
(Repayments) Proceeds from Bank Debt, net (2,296) 24,755 (48,672)
Proceeds from Capital Contributions, net 1,381 1,670 1,515
(Decrease) in Loans from Related Parties - (1,159) (6,286)
(Increase) Decrease in Loans to Related Parties (2,810) (448) 1,113
Dividends paid (68,092) (22,204) (67,045)
------------- -------------- ------------
Cash (Used for) Provided by Financing Activities (71,817) 2,614 (119,375)
------------- -------------- ------------
EFFECT OF EXCHANGE RATE CHANGES ON NET CASH 6,440 (2,120) 1,424
------------- -------------- ------------
(DECREASE) IN CASH AND CASH EQUIVALENTS (8,568) (13,858) (91,412)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 20,375 34,233 125,645
------------- -------------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 11,807 20,375 34,233
============= ============== ============
</TABLE>
See accompanying Notes to Combined Financial Statements
- 38 -
<PAGE>
HENKEL ECOLAB
COMBINED STATEMENTS OF EQUITY
(Thousands DM)
<TABLE>
<CAPTION>
Contributed Retained Cumulative Cumulative
Capital Earnings Foreign Minimum Total
Currency Pension
Translation Liability
Adjustment
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance
November 30, 1996 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 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 165,889 235,934 (23,641) (745) 377,437
Net Income 84,653 84,653
Dividends (66,675) (66,675)
Contributions 1,381 1,381
Minimum Pension Liability 557 557
Translation
Adjustment 7,530 7,530
---------------------------------------------------------------------------------------
Balance
November 30, 1999 167,270 253,912 (16,111) (188) 404,883
</TABLE>
See accompanying Notes to Combined Financial Statements
- 39 -
<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
Gibson Acquisition: In May 1999, the Company acquired certain assets of
Gibson UK Limited for a cash price of approximately TDM 16,089 from Ecolab.
Gibson, located in Reading, England, provides warewashing and surface
hygiene products and services for customers in the retail markets. The
acquisition has been accounted for as a purchase and, accordingly, the
results of operations of Gibson are included in the accompanying financial
statements since the date of acquisition. 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 the fair
market value of net assets acquired has been allocated to goodwill in the
amount of TDM 17,658 and is being amortized over 15 years.
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.
- 40 -
<PAGE>
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 results 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.
The Company made additional acquisitions during the fiscal years ended
November 30, 1999 and 1998; the impact of which was immaterial to the
combined financial statements.
- 41 -
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The financial statements are presented on a combined basis in accordance
with the generally accepted accounting principles in the United States. 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 the
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.
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 arising from foreign currency transactions
during the year 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.
- 42 -
<PAGE>
INVENTORIES
Inventories are stated at the lower of cost or market with cost determined
using the first-in first-out and average cost methods.
PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment are stated at historical 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:
Buildings and improvements 8 to 40 years
Machinery and equipment 3 to 20 years
Furniture, fixtures and merchandising equipment 3 to 16 years
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
costs are expensed. The cost and accumulated depreciation / amortization
applicable to the assets retired or disposed of are removed from the
accounts and any gain or loss is reflected in the Company's net income in
the year of disposal.
Total depreciation expense for property, plant and equipment amounted to TDM
65,083, TDM 60,948, and TDM 53,320 for the years ended November 30, 1999,
1998 and 1997, respectively.
INTANGIBLE ASSETS
Intangible assets primarily consist of goodwill, capitalized software,
concessions and licenses. 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 22,603, TDM
13,586 and TDM 11,188 during the years ended November 30, 1999, 1998, 1997,
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.
- 43 -
<PAGE>
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.
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 TDM 38,504, TDM
35,696 and TDM 34,113 for the years ended November 30, 1999, 1998 and 1997,
respectively.
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
During 1999, the Company adopted Statement of Financial Accounting Standards
No 130, "Reporting Comprehensive Income". The standard requires the display
and reporting of comprehensive income, which includes all changes in
combined equity with the exception of additional investments by shareholders
or distributions to shareholders. Comprehensive income for the Company
includes net income, foreign currency translation and minimum pension
liability adjustment that is charged or credited to the cumulative
translation and minimum pension liability adjustment accounts, respectively,
within combined equity.
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. If certain conditions are met, a derivative
may be specifically designated as (a) a hedge of the exposure to changes in
the fair
- 44 -
<PAGE>
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
fiscal 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.
- 45 -
<PAGE>
3. BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
(Thousands DM) November 30, November 30,
1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ACCOUNTS RECEIVABLE,
Accounts Receivable, Trade 401,784 341,458
Allowance for Doubtful Accounts 19,050 17,318
------------- -------------
382,734 324,140
-------- --------
INVENTORIES
Raw Materials 40,922 41,550
Work in Process 8,945 11,075
Finished Goods 154,059 144,182
------------- -------------
Total 203,926 196,807
------- -------
PROPERTY, PLANT AND EQUIPMENT, NET
Land 5,750 6,612
Buildings and Improvements 79,604 77,437
Machinery and Equipment 162,420 147,417
Merchandising Equipment and Other 309,016 273,305
Construction in Progress 4,641 9,539
------------- -------------
561,431 514,310
Accumulated Depreciation and Amortization 373,187 330,929
------------- -------------
Total 188,244 183,381
------- -------
INTANGIBLE AND OTHER ASSETS, NET
Goodwill on Acquisitions prior to July 1,1991 20,941 20,941
Goodwill on Acquisitions after July 1,1991 101,951 79,850
Other Intangible Assets, including Capitalized 86,594 64,803
Computer Software
Additional Minimum Pension Liability 4,824 5,123
------------- -------------
214,310 170,717
Accumulated Amortization 91,511 66,550
------------- -------------
Total Intangible Assets, net 122,799 104,167
Other Assets, net 6,703 6,174
------------- -------------
Total 129,502 110,341
------- -------
</TABLE>
- 46 -
<PAGE>
4. RELATED PARTY TRANSACTIONS
The Joint Venture has entered into various contractual arrangements,
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 industrial
hygiene products (primarily finished goods inventories) from Henkel and its
subsidiaries under a variety of supply agreements. The terms of these
agreements allow these entities to purchase specified quantities at agreed
upon prices as defined by an annual supply plan submitted to the related
manufacturing facility. 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 costs 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. Related party purchases and
fees incurred by the Joint Venture in consideration for these services
totaled TDM 231,754, TDM 227,768 and TDM 236,148 for the years ended
November 30, 1999, 1998, and 1997, 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. Effective January 1, 1999 the parent
companies agreed to reduce the royalty paid by the Joint Venture from 2% to
1% of net sales (as defined). Royalty expense related to this technology
transfer agreement amounted to TDM 14,959, TDM 26,568 and TDM 24,372 during
the twelve month periods ended November 30, 1999, 1998 and 1997,
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 Euro London Interbank
Offering Rate (EURO-LIBOR). At November 30, 1999 the interest rates were
3.125% for German Mark overdrafts and 3.56 % for 3 month short term German
Mark loans. On overdrafts, approximately 0.5 percentage points are paid to
compensate Henkel for administration costs.
At November 30, 1999 and 1998 loans receivable from Henkel and its
subsidiaries totaled TDM 10,152 and TDM 7,342, respectively. The fair values
of related party loans receivable and payable approximate book value.
- 47 -
<PAGE>
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 1,381, TDM 1,670 and TDM 1,515 as contributed capital for the
years ended November 30, 1999, 1998 and 1997, respectively.
- 48 -
<PAGE>
5. INCOME TAXES
The components of income before income taxes and the provision for income taxes
for the years ended November 30, 1999, 1998 and 1997, respectively, are as
follows:
<TABLE>
1999 1998 1997
---- ---- ----
TDM TDM TDM
<S> <C> <C> <C>
Income before income taxes:
Domestic 35,757 19,466 23,887
Foreign 114,024 97,047 85,088
-------- -------- --------
Total 149,781 116.513 108,975
======== ======== ========
Income tax provision (benefit):
Current
Domestic 23,051 8,856 17,627
Foreign 53,878 37,403 37,149
-------- -------- --------
Total current 76,929 46,259 54,776
Deferred
Domestic (3,346) 2,063 (113)
Foreign (8,455) 99 (3,396)
-------- -------- --------
Total deferred (11,801) 2,162 (3,509)
Total income tax provision 65,128 48,421 51,267
======== ======== ========
</TABLE>
The components of the Joint Venture's overall net deferred tax asset at
November 30:
<TABLE>
1999 1998
---- ----
TDM TDM
Deferred tax assets:
<S> <C> <C>
Tax loss carry forwards 2,958 7,705
Accrued expenses 10,474 4,668
Inventory valuation reserves 2,709 4,169
Accounts receivable reserves 1,825 1,106
Pension provision 14,241 8,530
Investment in affiliated company 0 1,158
Depreciation on fixed assets 3,251 5,074
Other 42 1,445
------------------
Total deferred tax assets 35,500 33,855
Valuation allowance (1,357) (11,693)
-----------------
Total deferred tax assets,
net of valuation allowance 34,143 22,162
----------------
Deferred tax liabilities:
Amortization on intangible assets (1,474) (1,187)
Depreciation on fixed assets (6,144) (4,158)
Other (464) (2,711)
-----------------
Total deferred tax liabilities (8,082) (8,056)
-----------------
Net deferred tax asset 26,061 14,106
===================
</TABLE>
At November 30, 1999 and 1998, the Joint Venture had net foreign operating
loss carry forwards for tax purposes of approximately
- 49 -
<PAGE>
TDM 10,233 and TDM 24,297, 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 and
projected future taxable income 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, 1999 and 1998. During 1999, 1998 and 1997, the
valuation allowance increased/(decreased) by TDM (10,336), TDM (3,757) and
TDM 5,063, respectively.
A reconciliation of the weighted average European effective tax rate to the
effective income tax rate is as follows:
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Weighted average European
statutory rate 39.7 38.8 39.7
Non deductible items,
principally goodwill 4.5 0.8 0.1
Provision for tax examinations 6.3 1.0 4.6
Deferred taxes refundable to
parent 1.1 1.0 0.2
Change in valuation allowance (6.8) (3.2) 4.6
Other (1.3) 3.2 (2.2)
----- ----- -----
Effective income tax rate 43.5% 41.6% 47.0%
===== ===== ======
</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, 1999, 1998 and 1997 was
TDM 51,980, TDM 35,897 and TDM 32,756, respectively.
- 50 -
<PAGE>
6. PENSION AND OTHER BENEFIT PLANS
Henkel Ecolab sponsors several pension plans for its employees throughout
Europe including Germany, France, Netherlands, Belgium, Turkey, Greece, the
United Kingdom, Italy, Spain, Austria, Slovenia, Norway, Switzerland and
Ireland.
The following tables provide a reconciliation of the changes in the plans
benefit obligations and fair value of assets over the two year period ended
November 30, 1999 and November 30, 1998 and a statement of the funded status
as of November 30, 1999 and November 30, 1998 of both years with the
exception of the Italian termination indemnity plan:
<TABLE>
1999 1998
---- ----
TDM TDM
<S> <C> <C>
Reconciliation of benefit obligation:
Obligation at December 1, 1998
and 1997, respectively 228,867 204,673
Service cost 11,144 9,100
Interest cost 11,966 11,187
Participant contributions 1,759 999
Actuarial (gain) loss (2,952) 12,717
Prior service cost 612 (2,723)
Acquisitions 5,533 0
Benefit payments (7,408) (5,773)
Foreign currency translation adjustment 3,374 (1,313)
----- ------
Obligation at November 30, 252,895 228,867
======= =======
1999 1998
---- ----
TDM TDM
Reconciliation of fair value of plan assets:
Fair value of plan assets at December 1, 1998
and 1997, respectively 101,565 82,209
Actual return on plan assets 7,794 11,508
Acquisitions 4,243 0
Company contribution 9,853 13,846
Participant contribution 1,759 999
Benefits payments (7,408) (5,773)
Foreign currency translation adjustment 3,654 (1,224)
------- -------
Fair value of plan assets at November 30, 121,460 101,565
======= =======
1999 1998
---- ----
TDM TDM
Funded status:
Funded status as of November 30, (131,435) (127,302)
Unrecognized transition obligation 7,232 7,529
Unrecognized prior service cost (1,877) (2,196)
Unrecognized net (gain) loss 578 7,295
-------- ---------
Net amount recognized (125,502) (114,674)
======== =========
</TABLE>
- 51 -
<PAGE>
The following table provides the amounts recognized in the statement of
financial position as of November 30, 1999 and November 30,1998:
<TABLE>
1999 1998
---- ----
TDM TDM
<S> <C> <C>
Accrued benefit liability (130,514) (120,542)
Italy termination indemnity plan (10,830) (10,119)
-------- --------
Employee benefit obligation (141,344) (130,661)
Intangible asset 4,824 5,123
Accumulated other comprehensive income 188 745
--- ---
Additional minimum pension liability,
net of tax 5,012 5,868
Net amount recognized (136,332) (124,793)
========= =======
</TABLE>
Included within the Employee Benefit Obligation in the balance sheet is the
Italian termination indemnity plan which provides a benefit that is payable
upon termination of employment virtually in all cases of termination. This
plan has no assets and is not included within the pension disclosures
provided within this footnote with the exception of the information provided
above.
The following table provides the components of net periodic cost for the
plans for the fiscal years ended November 30, 1999, 1998 and 1997:
<TABLE>
1999 1998 1997
---- ---- ----
TDM TDM TDM
<S> <C> <C> <C>
Components of net periodic pension
cost:
Service cost 11,144 9,100 8,224
Interest cost 11,966 11,187 10,429
Expected return on plan assets (6,220) (4,807) (4,178)
Amortization of transition
Obligation 729 674 774
Amortization of net loss (gain) (143) 44 (95)
Amortization of prior service cost 101 (56) 89
------ ------- ------
Net amortization 687 662 768
Net periodic pension cost 17,577 16,142 15,243
====== ======= ======
</TABLE>
Pursuant to the provisions of Statement Of Financial Accounting Standards
No. 87 "Employer`s Accounting for Pensions", the Company has recorded an
additional pension liability adjustment, net of tax of TDM 5,012 and TDM
5,868 as of November 30, 1999 and 1998, respectively, representing the amount
by which the accumulated benefit obligation over the fair value of plan
assets exceeded the accrued pension liability for certain German pension
plans.
- 52 -
<PAGE>
The accumulated benefit obligation for these German plans was TDM 97,107 at
November 30, 1999 and TDM 90,069 at November 30, 1998.
The following amounts, net of tax, have been included within other
comprehensive income arising from a change in the additional minimum pension
liability for the year ended November 30, 1999, 1998 and 1997, respectively
TDM (456), TDM 431 and TDM 174.
The assumptions used in the measurement of the company`s benefit obligation
are shown in the following table:
<TABLE>
1999 1998 1997
<S> <C> <C> <C>
Range of rates used throughout
Europe
Assumed discount rate 4.0-6.25% 4.0-6.0% 6.0- 7.5%
Expected return on plan assets 4.0-8.0% 4.0-8.5% 6.0-10.0%
Rate of increase in future 1.5-5.5% 1.75-4.5% 2.5-6.0%
compensation levels
</TABLE>
- 53 -
<PAGE>
7. TOTAL INDEBTEDNESS
SHORT TERM DEBT
Short term debt payable to banks of TDM 47,430 and TDM 49,066 at November 30,
1999 and 1998, respectively, consists primarily of short term credit
facilities and bank overdrafts. The weighted average interest rate on short
term debt outstanding (in all borrowing entities across Europe) was 6.5% at
November 30, 1999 and 7.5% at November 30, 1998.
At November 30, 1999 the company had TDM 166,318 available through multiple
bank lines of credit under which the company may borrow on an overdraft or
short term basis. Interest rates are based on local money market rates.
LONG TERM DEBT
Long term debt of November 30, 1999 and 1998 consists of the following:
<TABLE>
1999 1998
---- ----
TDM TDM
<S> <C> <C>
Notes 4,765 5,425
Less current maturities 657 657
---- ----
Total 4,108 4,768
===== =====
</TABLE>
All notes are denominated in Danish Krona at fixed annual interest rates
ranging from 10.07% to 10.30% at November 30, 1999. As of November 30, 1999,
the aggregate annual maturities of long term debt were:
2000 - TDM 657 2001 - TDM 165
2002 - TDM 3,943
The fair value of short and long term debt approximates the book value.
- 54 -
<PAGE>
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.
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>
November 30, 1999 November 30,1998
----------------- ----------------
Notional Credit Notional Credit
Amount Exposure Amount Exposure
------ -------- ------ --------
Forward exchange
<S> <C> <C> <C> <C>
contracts 172,943 0 94,779 0
Options purchased 0 0 2,553 0
------- - ------ -
172,943 0 97,332 0
======= = ====== =
</TABLE>
The purpose of foreign exchange contracts and options purchased is to hedge
various intercompany loans and 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, 1999 and 1998
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>
1999 1998
--------------- --------------
Buy Sell Buy Sell
<S> <C> <C> <C> <C>
Pound Sterling/German Mark 95,919 95,919 44,362 44,362
US Dollar/German Mark 56,076 56,076 7,489 7,489
Swiss Franc/German Mark 16,095 16,095 14,925 14,925
Swedish Krona/German Mark 2,936 2,936 2,626 2,626
Danish Krona/German Mark 1,314 1,314 - -
Norwegian Krona/German Mark 603 603 - -
Italian Lira/US Dollar - - 27,374 27,374
Czech Krona/German Mark - - 556 556
--------------------------------
172,943 172,943 97,332 97,332
======= ======= ====== ======
</TABLE>
c) Fair Value of Off Balance Sheet Financial Instruments
The difference between the fair value and contract value of off balance
sheet financial instruments at November 30, 1999 and 1998 is not
significant.
- 56 -
<PAGE>
9. RESEARCH EXPENDITURES
Research expenditures which relate to the development of new products and
processes, including significant improvements and refinements to existing
products, were MDM 36.5, MDM 34.6, and MDM 35.7 for the years ended November
30, 1999, 1998 and 1997, respectively.
- 57 -
<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, 1999 (TDM):
<TABLE>
<S> <C>
2000 25,888
2001 22,158
2002 11,658
2003 4,782
2004 1,775
thereafter 4,317
-----
Total 70,578
======
</TABLE>
Rent expense for the twelve month period ended November 30, 1999, 1998 and
1997, was approximately TDM 31,370, TDM 31,369 and TDM 27,416, 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. Although the outcomes of such matters are
unpredictable, management believes that the final disposition will not have
a material adverse effect on the combined financial position or results of
operations of the Joint Venture.
As an integral part of the Joint Venture agreement, Henkel and Ecolab have
provided certain representations and warranties against future expenditures
related to lawsuits 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
this claim.
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
1999, 1998 or 1997, and there were no significant accounts receivable from a
single customer at November 30, 1999 or 1998. 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>
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, 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
==========================================================
Period Ended
November 30, 1999
Allowance for DM 17,318 4,222 2,490 19,050
doubtful
Accounts
----------------------------------------------------------
DM 17,318 4,222 2,490 19,050
==========================================================
</TABLE>
(a) Provision for doubtful accounts
(charged to expenses)
(b) Items determined to be uncollectible,
less recovery of amounts previously written off.
- 59 -
<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 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, Incorporated by reference to
1999. Exhibit (3)B of the
Company's Form 10-K
Annual Report, for the year
ended December 31, 1998.
(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, Incorporated by reference to
1996 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 Incorporated by reference to
relating to $100,000,000 9.68% Senior Exhibit (4)F of the Company's
Notes Due October 1, 2001 between the Form 10-K Annual Report for
Company and the insurance companies the year ended December 31, 1991.
named therein.
</TABLE>
- 60 -
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Document Method of Filing
- ----------- -------- ----------------
<S> <C> <C>
E.(i) Multicurrency Credit Agreement ("Credit Incorporated by reference to
Agreement") dated as of September 29, Exhibit (4)A of the
1993, as Amended and Restated as of Company's Form 10-Q for the
October 17, 1997, among the Company, the quarter ended September 20,
financial institutions party thereto, Citibank, 1997.
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 to
Addendum to the Credit Agreement. 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 Incorporated by reference to
to Multicurrency Credit Agreement dated as Exhibit (4)A of the
of September the 29, 1993, as Amended and Company's Form 10-Q for the
Restated as of October 17, 1997, and to quarter ended June 30, 1998.
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.
(iv) Australian Dollar Local Currency Incorporated by reference to
Addendum dated as of June 23, 1998 among Exhibit (4)B of the
Ecolab Finance PTY Limited, Ecolab Inc., Company's Form 10-Q for the
Citibank, N.A., the Local Currency Agent quarter ended June 30, 1998.
named therein and the Local Currency Banks party
thereto.
</TABLE>
- 61 -
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Document Method of Filing
- ----------- -------- ----------------
<S> <C> <C>
F. Indenture dated as of November 1, 1996 as Incorporated by reference to
amended and supplemented, between the Exhibit 4.1 of the Company's
Company and the First National Bank of Amendment No. 1 to Form
Chicago as Trustee. 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) hereof.
Agreement.
(10)A. Ecolab Inc. 1977 Stock Incentive Plan, as Incorporated by reference to
amended through November 1, 1996. 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 Incorporated by reference to
Stock Incentive Plan Exhibit (10)C of the
Company's Form 10-K
Annual Report for the year
ended December 31, 1998,
</TABLE>
- 62 -
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Document Method of Filing
- ----------- -------- ----------------
<S> <C> <C>
(i) Non-Statutory Stock Option Agreement Incorporated by reference to
between the Company and Allan L. Exhibit (10) of the Company's
Schuman with respect to premium-priced Form 10-Q for the quarter
option grant effective February 20, 1998 ended June 30, 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.
D. 1988 Non-Employee Director Stock Option Plan as Incorporated by reference to
Plan as amended through February 23, 1991. Exhibit (10)D of the
Company's Form 10-K
Annual Report for the year
ended December 31, 1990.
E.(i) 1995 Non-Employee Director Stock Option Incorporated by reference to
Plan. Exhibit (10)D of the
Company's Form 10-K
Annual Report for the year
ended December 31, 1994.
(ii) Amendment No. 1 to 1995 Non-Employee Filed herewith electronically.
Director Stock Option Plan effective
February 25, 2000.
F. Ecolab Inc. 1997 Non-Employee Director Incorporated by reference to
Deferred Compensation Plan. 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 to
Agreement dated August 11, 1989. Exhibit (19)A of the
Substantially identical agreements are in Company's Form 10-Q for the
effect as to each director of the Company. quarter ended September 30,
1989.
</TABLE>
- 63 -
<PAGE>
<TABLE>
Exhibit No. Document Method of Filing
- ----------- -------- ----------------
<S> <C> <C>
H.(i) Ecolab Executive Death Benefits Plan, as Incorporated by reference to
mended and restated effective March 1, Exhibit (10)J of the
1994. Company's 10-K Annual
Report for the year ended
December 31, 1994. See also
Exhibit (10)N hereof.
(ii) Amendment No. 1 to Ecolab Executive Incorporated by reference to Exhibit
Death Benefits Plan. Exhibit (10)H(ii) of the
Company's 10-K Annual
Report for the year ended
December 31, 1998.
(iii) Second Declaration of Amendment to Incorporated by reference to
Ecolab Executive Death Benefits Plan, Exhibit (10)H(iii) of the
effective March 1, 1998. Company's 10-K Annual
Report for the year ended
December 31, 1998.
I. Ecolab Executive Long-Term Disability Incorporated by reference to
Plan, as amended and restated effective Exhibit (10)K of the
January 1, 1994. Company's 10-K Annual
Report for the year ended
December 31, 1994. See also
Exhibit (10)N 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 Incorporated by reference to
Plan, as amended and restated effective Exhibit (10)M(i) of the
July 1, 1994. Company's 10-K Annual
Report for the year ended
December 31, 1994. See also
Exhibit (10)N hereof.
</TABLE>
- 64 -
<PAGE>
<TABLE>
Exhibit No. Document Method of Filing
- ----------- -------- ----------------
<S> <C> <C>
(ii) First Declaration of Amendment to Ecolab Incorporated by reference to
Supplemental Executive Retirement Plan Exhibit (10)M(ii) of the
effective as of July 1, 1994 Company's 10-K Annual
Report for the year ended
December 31, 1994.
(iii) Second Declaration of Amendment to Incorporated by reference to
Ecolab Supplemental Executive Retirement Plan Exhibit (10)M(iii) of the
effective as of July 1, 1994. Company's Form 10-K
Annual Report for the year
ended December 31, 1995.
(iv) Third Declaration of Amendment to Ecolab Incorporated by reference to
Supplemental Executive Retirement Plan, Exhibit (10)M(iii) of the
effective March 1, 1998. Company's Form 10-K
Annual Report for the year
ended December 31, 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)N hereof.
(ii) First Declaration of Amendment to Ecolab Incorporated by reference to
Mirror Savings Plan effective as of Exhibit (10)N(ii) of the
January 1, 1995. Company's Form 10-K
Annual Report for the year
ended December 31, 1995.
(iii) Second Declaration of Amendment to Incorporated by reference to
Ecolab Mirror Savings Plan effective Exhibit (10)O(iii) of the
January 1, 1997. Company's Form 10-K
Annual Report for the year
ended December 31, 1996.
</TABLE>
- 65 -
<PAGE>
<TABLE>
Exhibit No. Document Method of Filing
- ----------- -------- ----------------
<S> <C> <C>
(iv) Third Declaration of Amendment to Ecolab Incorporated by reference to
Mirror Savings Plan effective November 13, Exhibit (10)L(iv) of the
1997. Company's Form 10-K
Annual Report for the year
ended December 31, 1998.
(v) Fourth Declaration of Amendment to Ecolab Incorporated by reference to
Mirror Savings Plan, effective September 1, Exhibit (10)L(v) of the
1998. Company's Form 10-K
Annual Report for the year
ended December 31, 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)N hereof.
(ii) First Declaration of Amendment to Ecolab Incorporated by reference to
Mirror Pension Plan effective as of July 1, Exhibit (10)O(ii) of the
1994. Company's Annual Report on
Form 10-K for the year
ended December 31, 1994.
(iii) Second Declaration of Amendment to Ecolab Incorporated by reference to
Mirror Pension Plan effective as of Exhibit (10)O(iii) of the
July 1, 1994. Company's Form 10-K
Annual Report for the year
ended December 31, 1995.
(iv) Third Declaration of Amendment to Ecolab Incorporated by reference to
Mirror Pension Plan, effective March 1, Exhibit (10)M(iv) of the
1998. Company's Form 10-K
Annual Report for the year
ended December 31, 1998.
</TABLE>
- 66 -
<PAGE>
<TABLE>
Exhibit No. Document Method of Filing
- ----------- -------- ----------------
<S> <C> <C>
N.(i) Ecolab Inc. Administrative Document for Incorporated by reference to
Non-Qualified Benefit Plans. 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. Incorporated by reference to
Administrative Document for Non-Qualified Exhibit (10)N(ii) of the
Benefit Plans effective July 1, 1997. Company's Form 10-K
Annual Report for the year
ended December 31, 1998.
(iii) First Declaration to Amendment to the Incorporated by reference to
Ecolab Inc. Administrative Document for Exhibit (10)N(iii) of the
Non-Qualified Benefit Plans effective Company's Form 10-K
November 13, 1997. Annual Report for the
year ended December 31, 1998.
(iv) Third Declaration of Amendment to the Filed herewith electronically.
Ecolab Inc. Administrative document for
Non-Qualified Benefit Plans effective July 1, 1999.
O. 1999 Ecolab Inc. Management Performance Incorporated by reference to
Incentive Plan. Exhibit (10)O of the
Company's Form 10-K
Annual Report for the year
ended December 31, 1998.
P.(i) Amended and Restated Umbrella Incorporated by reference to
Agreement between Henkel KGaA and Exhibit 13 of HC Investments,
Ecolab Inc. dated June 26, 1991. Inc.'s and Henkel KGaA's
Amendment No. 4 to
Schedule 13D dated July 16,
1991.
</TABLE>
- 67 -
<PAGE>
<TABLE>
Exhibit No. Document Method of Filing
- ----------- -------- ----------------
<S> <C> <C>
(ii) Amended and Restated Joint Venture Incorporated by reference to
Agreement between Henkel KGaA and Exhibit 14 of HC Investments,
Ecolab Inc. dated June 26, 1991. Inc.'s and Henkel KGaA's
Amendment No. 4 to
Schedule 13D dated July 16,
1991.
(iii) Amendment to the Amended and Restated Incorporated by reference to
Joint Venture Agreement between Henkel Exhibit (10)P(iii) of the
KGaA and Ecolab Inc. dated June 13, 1994. Company's Form 10-K
Annual Report for the year
ended December 31, 1998.
(iv) Amended and Restated ROW Purchase Incorporated by reference to
Agreement between Henkel KGaA and Exhibit (7) of the Company's
Ecolab Inc. dated June 26, 1991. Current Report on Form 8-K
dated July 11, 1991.
(v) Amended and Restated Stockholder's Incorporated by reference to
Agreement between Henkel KGaA and Exhibit 15 of HC Investments,
Ecolab Inc. dated June 26, 1991. Inc.'s and Henkel KGaA's
Amendment No. 4 to
Schedule 13D dated July 16,
1991.
Q. Description of Ecolab Management Filed herewith electronically.
Incentive Plan.
(13) Those portions of the Company's Annual Filed herewith electronically.
Report to Stockholders for the year ended
December 31, 1999 which are incorporated
by reference into Parts I, II and IV hereof.
(21) List of Subsidiaries as of March 1, 2000. Filed herewith electronically.
(23)A. Consent of PricewaterhouseCoopers LLP to See page 32 hereof.
Incorporation by Reference at page 32
hereof is filed as a part hereof.
</TABLE>
- 68 -
<PAGE>
<TABLE>
Exhibit No. Document Method of Filing
- ----------- -------- ----------------
<S> <C> <C>
B. Consent of PricewaterhouseCoopers Filed herewith electronically.
Gesellschaft mit beschrankter Haftung
Wirtschaftsprufungsgesellschaft.
C. Consent of KPMG Deutsche Treuhand- Filed herewith electronically.
Gesellschaft Aktiengesellschaft
Wirtschaftsprufungsgesellschaft.
(24) Powers of Attorney. Filed herewith electronically.
(27) Financial Data Schedule for year ended Filed herewith electronically.
December 31, 1999.
COVER Cover Letter. Filed herewith electronically.
</TABLE>
- 69 -
<PAGE>
ECOLAB INC.
1995 NON-EMPLOYEE DIRECTOR
STOCK OPTION PLAN
AMENDMENT NO. 1
Pursuant to Paragraph 7 of the Ecolab Inc. 1995 Non-Employee Director Stock
Option Plan ("Plan") and resolutions of the Company's Board of Directors, dated
February 25, 2000, the Company amends the Plan as set forth below. Words and
phrases used herein with initial capital letters which are defined in the Plan
are used herein as so defined.
1. Paragraph 8 of the Plan is amended in its entirety to read as follows:
"8. EFFECTIVE DATE AND DURATION OF THE PLAN. The Plan shall be effective
on the date of adoption by the stockholders of the Company. The Plan shall
terminate at midnight on June 30, 2001, and may be terminated prior thereto
by action of the Board of Directors, and no Option shall be granted after
such termination. Options outstanding upon termination of the Plan may
continue to be exercised in accordance with their terms."
2. This amendment shall be effective as of February 25, 2000.
IN WITNESS WHEREOF, the Company has caused this instrument to be executed by its
authorized officers and its corporate seal affixed, this 2nd day of March, 2000.
ECOLAB INC.
(Seal) By: /s/ Kenneth A. Iverson
----------------------------------
Kenneth A. Iverson
Vice President and Secretary
Attest: /s/ Sheila B. Holt
----------------------------------
Sheila B. Holt
<PAGE>
ECOLAB INC.
ADMINISTRATIVE DOCUMENT
FOR NON-QUALIFIED BENEFIT PLANS
THIRD DECLARATION OF AMENDMENT
Pursuant to Sections 5.1 and 2.6 of the Ecolab Inc. Administrative Document for
Non-Qualified Benefit Plans ("Administrative Document") and the authority
delegated to the Chief Financial Officer of the Company by resolutions of the
Company's Board of Directors, dated May 14, 1999, the Company 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 2.6 of the Administrative Document is amended in its entirety to
read as follows:
"SECTION 2.6. LIABILITY OF PAYMENT.
(1) The Employer by which the Executive was most recently employed at the
time of his termination of 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.
(2) Notwithstanding subsection (1) above, 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.
(3) The Company hereby guarantees all of the Employer obligations of
Ecolab Finance Inc. under all of the Plans, with respect to Executives or
Death Beneficiaries."
2. This amendment is designated the "Third Declaration of Amendment" because
two amendments precede it, which preceding amendments are designated "Amendment
No. 1" and "First Declaration of Amendment."
3. This amendment to the Administrative Document shall be effective as of
July 1, 1999.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be executed by its
authorized officers and its corporate seal affixed, this 30th day of June, 1999.
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
2
<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 annual
incentive targets which are expressed as a percentage of base salary. These
targets are set at a level which approximates the 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 performance goals will result in a median award, while
achievement of performance levels below or above the 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 and maximum
awards. Economic projections and historical compounded annual EPS growth
measured over three-year periods for the Standard & Poor's 500 Index, is the
basis for the EPS goals. In addition to the above, a portion of the incentive is
also earned based on the achievement of operating income goals for the Company.
Executives with business-unit responsibility earn MIP awards primarily 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
performance criteria as the Committee determines appropriate.
<PAGE>
FINANCIAL DISCUSSION
The following discussion and analysis provides information that management
believes is useful in understanding Ecolab'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 include expectations
concerning investments in the sales-and-service force, business prospects for
Professional Products and Textile Care operations, customer consolidations,
global economic conditions and liquidity requirements. These statements, which
represent Ecolab's expectations or beliefs concerning various future events, are
based on current expectations. Therefore, they involve a number of risks and
uncertainties that 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, 1999, for further discussion of these matters. Additional risk factors may
be described from time to time in Ecolab's filings with the Securities and
Exchange Commission.
- --------------------------------------------------------------------------------
1999 OVERVIEW
1999 was the eighth consecutive year that Ecolab achieved exceptionally
strong financial results and established new records in a number of areas.
The company's more significant accomplishments included:
- - The company came very close to exceeding all three of its long-term financial
objectives for the fourth year in a row. These objectives include 15 percent
growth in diluted income per common share, 20 percent return on beginning
shareholders' equity and an investment grade balance sheet.
- - Income from continuing operations increased 14 percent to a record $176
million, or $1.31 per diluted share. 1999 was Ecolab's seventh consecutive year
of double-digit growth in earnings per share. The company also reached its
twentieth consecutive quarter of double-digit earnings per share growth in the
fourth quarter of 1999.
- - Return on beginning shareholders' equity was 25 percent for 1999 and exceeded
the company's long-term objective for the eighth consecutive year.
[GRAPH]
- - The company continued to maintain its long-term financial objective of an
investment grade balance sheet. This was the seventh consecutive year that
thecompany's debt continued to be rated within the "A" categories by the major
rating agencies. In addition, Moody's Investors Service upgraded the company's
debt and commercial paper ratings during 1999.
- - Net sales were nearly $2.1 billion, a new record level, and increased 10
percent over the prior year.
- - Operating income rose 11 percent for 1999 to reach a new all-time high of $290
million. As a percent of net sales, operating income was 13.9 percent, unchanged
from the record level set in 1998.
- - The company's equity in earnings of Henkel-Ecolab rose at double-digit rates
for the second year in a row to a new all-time high.
- - Cash provided by continuing operations rose 7 percent, reaching a record level
of $293 million.
- - The company increased its annual dividend rate for the eighth consecutive
year. The annual dividend rate rose 14 percent to an annual rate of $0.48 per
common share.
- - Ecolab's stock price rose to record levels during 1999 and closed out the year
with a gain of 8 percent. Including dividends, Ecolab's stock yielded a return
of 9 percent to shareholders.
32
<PAGE>
[GRAPH]
- - 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. During 1999, the company added to its Vehicle Care
operations with the acquisition of Blue Coral Systems, a leading manufacturer of
branded vehicle cleaning, appearance and specialty products to the commercial
vehicle wash industry. Also during the year, the company added to its commercial
kitchen equipment repair services operations and to its Food & Beverage
operations in Africa through small acquisitions.
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.
- --------------------------------------------------------------------------------
OPERATING RESULTS
CONSOLIDATED
<TABLE>
<CAPTION>
(thousands, except per share) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $2,080,012 $1,888,226 $1,640,352
Operating income $ 289,951 $ 261,980 $ 218,504
Income
Continuing operations $ 175,786 $ 154,506 $ 133,955
Discontinued operations 38,000
- --------------------------------------------------------------------------------
Net income $ 175,786 $ 192,506 $ 133,955
- --------------------------------------------------------------------------------
Diluted income per common share
Continuing operations $ 1.31 $ 1.15 $ 1.00
Discontinued operations 0.28
Net income $ 1.31 $ 1.44 $ 1.00
- --------------------------------------------------------------------------------
</TABLE>
Consolidated net sales approached $2.1 billion for 1999 and increased 10
percent over net sales of nearly $1.9 billion in 1998. Nearly all of the
company's operating segments contributed to the company's growth in sales for
1999, with strong growth from the core U.S. Institutional and Food & Beverage
operations. Business acquisitions also contributed to overall sales growth for
1999. Businesses acquired in 1999 and the annualized effect of businesses
acquired in 1998 accounted for approximately one-third of the growth in
consolidated sales for 1999. Changes in currency translation had a very modest
negative effect on the consolidated sales growth rate for 1999. The growth in
sales also reflected the benefits of new products, new customers, and a larger
and better trained sales-and-service force. A continuation of generally good
conditions in the hospitality and lodging industries, particularly in the United
States, also had a favorable effect on sales for 1999.
The company's consolidated gross profit margin was 54.9 percent of net sales
for 1999 and was unchanged from the prior year. The benefits from increased
sales of the higher margin products of the company's U.S. core operations, an
improved margin in the Asia Pacific region, and sales volume growth of new
products were generally offset by the effects of the lower gross profit margins
of businesses acquired. Selling price increases during 1999 were not
significant.
For 1999, selling, general and administrative expenses were 41.0 percent of
net sales, unchanged from the prior year. Selling, general and administrative
expenses included two unusual items in 1999. During the third quarter of 1999,
the company recognized a non-taxable gain of $1.5 million, or $0.01 per share,
on the receipt of shares from an insurance company that demutualized and issued
shares in a public offering. During the fourth quarter, the company recognized
approximately $4 million of bad debt expense related to a large distributor. In
addition to these two items, the selling, general and administrative expense
margin reflected the benefits of synergies from the effects of business
acquisitions, tight cost controls, lower investments in international areas
experiencing difficult economic conditions and strong sales growth. These
benefits were offset by increased expenses related to the company's retirement
plans, and higher investments in the sales-and-service force and new business
development. The company expects to continue to invest in its sales-and-service
force, including investments in training and productivity.
Consolidated operating income increased 11 percent for 1999 and reached $290
million compared with $262 million in 1998. Business acquisitions contributed to
the growth in operating income and accounted for approximately one-tenth of the
increase. The consolidated operating income margin was unchanged from 1998Os
record level of 13.9 percent. Operating income improvement reflected continued
strong growth trends in the U.S. Institutional, Food & Beverage and Pest
Elimination operations, and significant growth in the Asia Pacific region for
1999.
33
<PAGE>
FINANCIAL DISCUSSION
Income from continuing operations rose to $176 million, or $1.31 per diluted
share, an increase of 14 percent over income of $155 million, or $1.15 per
diluted share in 1998. The increase in income reflected double-digit growth in
operating income and in the company's equity in earnings of Henkel-Ecolab. As a
percentage of net sales, income from continuing operations improved to 8.5
percent of net sales, compared with 8.2 percent of net sales in the prior year.
1998 COMPARED WITH 1997
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 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 negatively impacted the consolidated growth rate by 3 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.
The gross profit margin was 54.9 percent of net sales for 1998, down slightly
from 1997's record gross profit margin of 56.0 percent. The decrease in gross
profit margin reflected a comparison against an exceptionally strong period in
1997, 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 were
constrained due to competitive conditions in several of the markets in which the
company does business.
Selling, general and administrative expenses were 41.0 percent of net sales
in 1998, a decrease 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.
Consolidated operating income reached $262 million for 1998, an increase of
20 percent over operating income of $219 million in 1997. Business acquisitions
accounted for approximately one-fifth of the increase in operating income. 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.
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 Henkel-Ecolab. Earnings were
negatively affected by increased net interest expense compared with the prior
year. Income from continuing operations was 8.2 percent of net sales in both
1998 and 1997.
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.
34
<PAGE>
<TABLE>
<CAPTION>
OPERATING SEGMENT PERFORMANCE
(thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales
United States
Cleaning & Sanitizing $ 1,424,037 $ 1,296,797 $ 1,156,625
Other Services 211,562 160,063 119,203
- -----------------------------------------------------------------------------------------------------
Total 1,635,599 1,456,860 1,275,828
International Cleaning & Sanitizing 438,013 419,898 316,889
- -----------------------------------------------------------------------------------------------------
Total 2,073,612 1,876,758 1,592,717
Effect of foreign currency translation 6,400 11,468 47,635
- -----------------------------------------------------------------------------------------------------
Consolidated $ 2,080,012 $ 1,888,226 $ 1,640,352
- -----------------------------------------------------------------------------------------------------
Operating income
United States
Cleaning & Sanitizing $ 230,520 $ 218,500 $ 180,975
Other Services 25,114 19,084 14,655
- -----------------------------------------------------------------------------------------------------
Total 255,634 237,584 195,630
International Cleaning & Sanitizing 37,807 27,478 20,274
- -----------------------------------------------------------------------------------------------------
Total 293,441 265,062 215,904
Corporate (4,570) (4,347) (4,088)
Effect of foreign currency translation 1,080 1,265 6,688
- -----------------------------------------------------------------------------------------------------
Consolidated $ 289,951 $ 261,980 $ 218,504
- -----------------------------------------------------------------------------------------------------
Operating income as a percent of sales
United States
Cleaning & Sanitizing 16.2% 16.8% 15.6%
Other Services 11.9 11.9 12.3
Total 15.6 16.3 15.3
International Cleaning & Sanitizing 8.6% 6.5% 6.4%
- -----------------------------------------------------------------------------------------------------
</TABLE>
The company's operating segments have 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: United
States Cleaning & Sanitizing, United States Other Services, and International
Cleaning & Sanitizing. The company evaluates the performance of its
International operations based on fixed management rates of currency exchange.
Therefore, International sales and operating income totals, 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 1999. 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.
[GRAPH]
Sales of the company's United States Cleaning & Sanitizing operations reached
$1.4 billion in 1999, an increase of 10 percent over sales of nearly $1.3
billion in 1998. Sales benefited from business acquisitions and the continued
strong performances of the core Institutional and Food & Beverage operations.
Business acquisitions accounted for approximately one-fourth of the growth in
United States Cleaning & Sanitizing sales for 1999. Sales growth also included
the benefits from sales of new products, investments the company has made in the
sales-and-service force, and generally good conditions in the hospitality and
lodging industries. Selling price increases during 1999 were not significant.
Sales of the company's U.S. Institutional operations increased 8 percent for
1999. Institutional's growth reflected new customer business, good customer
retention, continued double-digit growth in sales of its Ecotemp, specialty and
housekeeping programs, and good growth in warewashing sales. Sales for Kay's
U.S. operations increased 9 percent for 1999 and reflected the continued
expansion of its food retail business and good growth in sales to its core
quickservice customers. Sales of Textile Care operations were up 5 percent for
1999 and included benefits from new product offerings and new customers. Textile
Care continued to be challenged by consolidations and pricing pressures in its
markets and the company expects these difficult conditions to continue in the
near term. Professional Products reported a 3 percent decrease in sales for
1999. Lower sales to the specialty and government education markets were
partially offset by growth in sales to corporate accounts. The company is
focusing on improving its Professional Products operations. Sales of
35
<PAGE>
FINANCIAL DISCUSSION
Water Care Services operations increased 4 percent for 1999. Water Care sales
included new customer business, however, results were limited by a very
competitive business environment. The company's Food & Beverage operations
reported sales growth of 11 percent for 1999. Excluding the annualized effect of
businesses acquired in 1998, Food & Beverage sales increased 8 percent with
particularly strong growth in sales to the meat processing and agribusiness
markets. In February 1999, the company acquired substantially all of the assets
of Blue Coral Systems, a leading manufacturer of branded vehicle cleaning,
appearance and specialty products to the commercial vehicle wash industry. Blue
Coral Systems was combined with the company's existing Vehicle Care operations.
Sales of the company's United States Other Services operations totaled $212
million for 1999, an increase of 32 percent over sales of $160 million in 1998.
Excluding sales of GCS Service, Inc. (GCS) which was acquired in July 1998,
sales of United States Other Services increased 12 percent for 1999. Pest
Elimination reported sales growth of 12 percent for 1999 reflecting good growth
across all business lines. Pest Elimination sales benefited from a larger number
of service offerings and gains from new customer business. The recently-acquired
GCS kitchen equipment repair business continued to report solid growth, and the
company is focusing on coordinating their operations with the other Ecolab
businesses and expanding operations to provide national coverage. Sales of the
Jackson equipment business increased 13 percent for 1999.
[GRAPH]
Management rate sales for the company's International Cleaning & Sanitizing
operations were $438 million for 1999 and were up 4 percent over sales of $420
million in 1998. The benefits of business acquisitions were more than offset by
the negative effects of a Gibson business which was sold during 1999. Excluding
these business changes, International Cleaning & Sanitizing sales increased 6
percent for 1999. Sales for the Asia Pacific region, International's largest
area of operation, increased 6 percent for 1999. Asia Pacific sales included
good growth in Japan, Australia and New Zealand, and double-digit growth in
Southeast Asia. Asia Pacific sales reflected good growth in sales to both the
food and beverage and institutional markets. Latin America reported sales growth
of 7 percent for 1999 which included significant double-digit growth in Mexico
and Central America, partially offset by modestly lower sales in Brazil which
was affected by a currency devaluation. Institutional and Food & Beverage sales
showed good improvement in the Latin America region. Sales in Canada were up 4
percent for 1999 with higher sales to both the food and beverage and
institutional markets. Sales of Africa/Export operations increased 19 percent
for 1999 due to an acquisition early in the year in South Africa, and solid
growth in Export operations.
Operating income of the company's United States Cleaning & Sanitizing
operations increased 6 percent to $231 million in 1999, compared with operating
income of $219 million in 1998. Business acquisitions accounted for
approximately one-fifth of the growth in operating income for 1999. Operating
income growth reflected continued strong growth in the core Institutional and
Food & Beverage operations and improved performances by Textile Care and Water
Care during 1999. Operating income of Professional Products decreased during
1999 and income of Kay's U.S. operations was modestly lower than the prior year.
The operating income margin for United States Cleaning & Sanitizing operations
decreased to 16.2 percent of net sales in 1999 from 16.8 percent in 1998. This
decrease reflected disappointing results of Professional Products operations,
investments in the sales-and-service force to support new business development
and the effects of the lower margins of businesses acquired. The operating
income margin benefited from the strong core operations performance, higher
sales volume, sales of new products, modest increases in raw material costs and
tight cost controls. The company added 370 sales-and-service associates to its
United States Cleaning & Sanitizing operations during 1999.
36
<PAGE>
Operating income of United States Other Services operations totaled $25
million for 1999 and increased 32 percent over 1998 operating income of $19
million. Excluding GCS, which was acquired in July of 1998, operating income of
United States Other Services increased 22 percent for 1999. The operating income
margin for United States Other Services was 11.9 percent for 1999, unchanged
from the prior year. The operating income margin for 1999 reflected
substantially increased income of the Jackson business and an improved Pest
Elimination margin due to good sales growth and productivity improvements. These
benefits were offset by the addition of the lower margin GCS business. During
1999, the company added 185 sales-and-service associates to its United States
Other Services operations.
[GRAPH]
Operating income for the company's International Cleaning & Sanitizing
operations was $38 million for 1999, an increase of 38 percent over operating
income of $27 million in 1998. The operating income margin for International
operations rose to 8.6 percent of net sales in 1999 from 6.5 percent in 1998.
Operating income increased significantly during 1999 in Asia Pacific, Latin
America and Africa/Export operations reflecting good sales growth and tight cost
controls. Overall, the total number of sales-and-service associates in
International Cleaning & Sanitizing operations at year-end 1999 was unchanged
from the prior year.
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.
1998 COMPARED WITH 1997
Sales of the company's United States Cleaning & 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 one-third of the growth in sales of the United States Cleaning &
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 and high customer retention. 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. 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 cruise ship business,
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 the 1997 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.
37
<PAGE>
FINANCIAL DISCUSSION
For 1998, sales of the company's United States Other Services operations
increased 34 percent to $160 million, compared with $119 million in 1997. Sales
for 1998 included the mid-year acquisition of GCS, a nationwide provider of
commercial kitchen equipment repair services. Other 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 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 market.
Management rate sales of the company's International Cleaning & Sanitizing
operations were $420 million for 1998, up 33 percent over sales of $317 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 sales
growth for 1998. The Asia Pacific region reported sales growth of 54 percent for
1998. Excluding business acquisitions, Asia Pacific sales increased 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 9
percent over the prior year. The region continued to be led by 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 & 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 one-tenth 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 U.S. 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 United States Cleaning & 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 added 255 sales-and-service associates to its United States Cleaning &
Sanitizing operations during 1998.
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 the
prior 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 United States Other
Services operations in 1998, including GCS associates.
International Cleaning & Sanitizing operations reported operating income of
$27 million for 1998, an increase of 36 percent over 1997 operating income of
$20 million. Business acquisitions accounted for approximately 90 percent of the
growth in operating income for 1998. Operating income margins for the
International Cleaning & Sanitizing operations were 6.5 percent of net sales in
1998 compared with 6.4 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 added 300 sales-and-service
associates to its International Cleaning & Sanitizing operations during 1998,
including associates of businesses acquired.
38
<PAGE>
HENKEL-ECOLAB
[GRAPH]
The company operates cleaning and sanitizing businesses in Europe through a 50
percent economic interest in Henkel-Ecolab. 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 the deduction of intangible amortization, increased 14 percent
to $18 million in 1999 from $16 million in 1998. When measured in Deutsche
marks, earnings of Henkel-Ecolab increased 24 percent and reflected the benefits
of good sales growth, improved European economies, and tight cost controls which
more than offset investments made in the sales-and-service force and expenses
related to the Year 2000 and euro conversions.
Henkel-Ecolab sales, although not consolidated in Ecolab's financial
statements, increased 7 percent for 1999 when measured in Deutsche marks.
Excluding the effects of business acquisitions and a business sold during the
year, sales increased 6 percent for 1999. Henkel-Ecolab sales reflected growth
across all of its major businesses, the benefits of new product introductions
and a larger and better trained sales-and-service force. Henkel-Ecolab sales
increased 4 percent for 1999 when measured in U.S. dollars.
1998 COMPARED WITH 1997
The company's equity in earnings of Henkel-Ecolab 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.
Henkel-Ecolab sales increased 10 percent for 1998 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 were 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.
CORPORATE
Corporate operating expense was $5 million in 1999 and $4 million in 1998 and
1997. Corporate operating expense includes overhead costs directly related to
Henkel-Ecolab.
INTEREST AND INCOME TAXES
Net interest expense was $23 million for 1999 and increased 4 percent over net
interest expense of $22 million in 1998. This increase reflected lower interest
income on lower average levels of cash and cash equivalents. Total debt levels
during 1999 were generally consistent with the prior year.
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.
The company's effective income tax rate was 41.1 percent for 1999, down from
the effective income tax rate of 42.4 percent in 1998. This decrease was
principally due to a lower overall effective rate on earnings of International
operations. International's effective income tax rate varies from year to year
with the pre-tax income mix of the various countries in which the company
operates. The 1999 effective income tax rate also benefited slightly from a
non-taxable one-time gain of $1.5 million related to the demutualization of an
insurance company.
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.
39
<PAGE>
FINANCIAL DISCUSSION
YEAR 2000 CONVERSION
The company has not, to date, experienced any significant problems in its
operating or business systems as a result of the "Year 2000 issue." Likewise,
the company has not encountered material Year 2000 problems with customers,
suppliers or common carriers. Henkel-Ecolab reported similar results. Overall,
the Year 2000 rollover proceeded in accordance with the company's expectations.
However, it is possible that the full impact of the date change has not been
fully recognized. For example, it is possible that currently undetected Year
2000 problems may occur at future dates. The company believes that any such
problems are likely to be minor and correctable. In addition, the company could
still be negatively affected if its customers or suppliers are adversely
affected by the Year 2000 or similar issues.
The company's aggregate expenditures on Year 2000 readiness efforts from 1997
to 1999 did not have a significant effect on the company's consolidated results
of operations, financial position or liquidity.
EURO CURRENCY CONVERSION
The company's principal activities in Europe are not conducted directly. Rather,
such activities are conducted through Henkel-Ecolab, a joint venture operation.
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 June 30, 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
Henkel-Ecolab.
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 exposures, the company does not, at this time, believe that the
transition to the euro will have a significant effect on the company's
consolidated 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 continued to be rated within
the "A" categories by the major rating agencies during 1999. Significant changes
during 1999 and 1998 related to the company's balance sheet included the
following:
- - Total assets were approximately $1.6 billion as of December 31, 1999, an
increase from total asset levels of $1.5 billion at year-end 1998 and $1.4
billion at year-end 1997. The increase in asset levels reflects growth in
ongoing operations and assets added through business acquisitions over the last
two years. The increases in other noncurrent assets are primarily due to the
acquisition of Blue Coral in 1999, and GCS and a cleaning and sanitizing
business acquired in Japan in 1998. Accounts receivable, inventories and
property, plant, and equipment were also added during 1999 and 1998 as a result
of these business acquisitions.
- - Working capital levels have remained fairly constant over the last three years
and totaled $107 million at year-end 1999 and $104 million and $105 million at
year-end 1998 and 1997, respectively.
- - The lower level of the company's investment in Henkel-Ecolab at year-end 1999
was principally due to the effects of changes in currency translation and
dividends which were received from Henkel-Ecolab.
[GRAPH]
40
<PAGE>
[GRAPH]
- - Total debt was $281 million at year-end 1999, down slightly from total debt of
$295 million at year-end 1998 and $308 million at year-end 1997. During 1998,
the company replaced a portion of the long-term debt outstanding 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.
During 1999, the company repaid the remaining debt under its Multicurrency
Credit Agreement and reduced debt by a scheduled repayment on its 9.68 percent
Senior Notes. Total debt included increases in notes payable during each of the
last two years. As of December 31, 1999, the ratio of total debt to
capitalization was 27 percent, compared to 30 percent at year-end 1998 and 36
percent at year-end 1997. In addition to lower debt levels, the improvements in
the total debt to capitalization ratios reflected increased shareholders'
equity, which resulted from strong earnings performances and the 1998 gain from
discontinued operations.
- - Other noncurrent liabilities totaled $87 million at December 31, 1999 and $68
million and $125 million at year-end 1998 and 1997, respectively. 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
Cash flow provided by continuing operating activities reached a record $293
million for 1999, an increase from $275 million in 1998 and $235 million in
1997. Operating cash flows have benefited from strong earnings growth including
additional earnings and cash flows from businesses acquired. Operating cash
flows for 1999 included higher dividends from Henkel-Ecolab compared with the
prior year. In 1997, operating cash flows 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.
Cash used for discontinued operating activities in 1998 reflects income taxes
paid related to a business which was discontinued in 1992.
Cash flows used for investing activities included capital expenditures of
$146 million in 1999, $148 million in 1998 and $122 million in 1997. 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 continued to invest in additional
manufacturing facilities through construction and business acquisitions in order
to meet sales requirements more efficiently. Cash used for businesses acquired
included Blue Coral in 1999, a cleaning and sanitizing business acquired in
Japan in 1998, and the Gibson acquisition in 1997. Investing activities cash
flows for 1999 and 1998 also include 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 used to reacquire shares and
to pay dividends, and in 1999 and 1998, net cash used to reduce long-term debt.
In 1999, the company increased its annual dividend rate for the eighth
consecutive year. The company has paid dividends on its common stock for 63
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>
1999 $0.105 $0.105 $0.105 $0.12 $0.435
1998 0.095 0.095 0.095 0.105 0.39
1997 0.08 0.08 0.08 0.095 0.335
- ----------------------------------------------------------
</TABLE>
LIQUIDITY
The company maintains a $275 million committed line of credit under its
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
Henkel-Ecolab, available credit, and additional credit available based on a
strong financial position, are more than adequate to fund all of the
requirements which are reasonably foreseeable for 2000 for growth, possible
acquisitions, new program investments, scheduled debt repayments and dividend
payments.
41
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year ended December 31 (thousands, except per share) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $2,080,012 $1,888,226 $1,640,352
Cost of sales 937,612 851,173 722,084
Selling, general and administrative expenses 852,449 775,073 699,764
- ---------------------------------------------------------------------------------------------------
Operating income 289,951 261,980 218,504
Interest expense, net 22,713 21,742 12,637
- ---------------------------------------------------------------------------------------------------
Income from continuing operations before
income taxes and equity in earnings of Henkel-Ecolab 267,238 240,238 205,867
Provision for income taxes 109,769 101,782 85,345
Equity in earnings of Henkel-Ecolab 18,317 16,050 13,433
- ---------------------------------------------------------------------------------------------------
Income from continuing operations 175,786 154,506 133,955
Gain from discontinued operations 38,000
- ---------------------------------------------------------------------------------------------------
Net income $ 175,786 $ 192,506 $ 133,955
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
Basic income per common share
Income from continuing operations $ 1.36 $ 1.20 $ 1.03
Gain from discontinued operations 0.29
Net income $ 1.36 $ 1.49 $ 1.03
Diluted income per common share
Income from continuing operations $ 1.31 $ 1.15 $ 1.00
Gain from discontinued operations 0.28
Net income $ 1.31 $ 1.44 $ 1.00
Weighted-average common shares outstanding
Basic 129,550 129,157 129,446
Diluted 134,419 134,047 133,822
- ---------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
42
<PAGE>
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31 (thousands, except per share) 1999 1998 1997
- -----------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C>
Current assets
Cash and cash equivalents $ 47,748 $ 28,425 $ 61,169
Accounts receivable, net 299,751 246,695 246,041
Inventories 176,369 165,627 154,831
Deferred income taxes 41,701 36,256 34,978
Other current assets 11,752 26,511 12,482
- -----------------------------------------------------------------------------------------------
Total current assets 577,321 503,514 509,501
Property, plant and equipment, net 448,116 420,205 395,562
Investment in Henkel-Ecolab 219,003 253,646 239,879
Other assets 341,506 293,630 271,357
- -----------------------------------------------------------------------------------------------
Total assets $1,585,946 $1,470,995 $1,416,299
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt $ 112,060 $ 67,991 $ 48,884
Accounts payable 122,701 124,646 130,682
Compensation and benefits 90,618 79,431 74,317
Income taxes 5,743 244 13,506
Other current liabilities 139,552 127,479 137,075
- -----------------------------------------------------------------------------------------------
Total current liabilities 470,674 399,791 404,464
Long-term debt 169,014 227,041 259,384
Postretirement health care and pension benefits 97,527 85,793 76,109
Other liabilities 86,715 67,829 124,641
Shareholders' equity (common stock,
par value $1.00 per share;
shares outstanding:
1999 - 129,416; 1998 - 129,479; 1997 - 129,127) 762,016 690,541 551,701
- -----------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,585,946 $1,470,995 $1,416,299
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
43
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31 (thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 175,786 $ 192,506 $ 133,955
Less: gain from discontinued operations 38,000
- -------------------------------------------------------------------------------------------------
Income from continuing operations 175,786 154,506 133,955
Adjustments to reconcile income from
continuing operations to cash provided by
continuing operations:
Depreciation 109,946 99,276 84,415
Amortization 24,584 22,695 16,464
Deferred income taxes (3,903) (2,012) (2,074)
Equity in earnings of Henkel-Ecolab (18,317) (16,050) (13,433)
Henkel-Ecolab royalties and dividends 21,826 10,451 25,367
Other, net (303) 1,526 4,630
Changes in operating assets and liabilities:
Accounts receivable (44,643) 1,352 (21,231)
Inventories (8,913) (11,667) (14,395)
Other assets (23,842) (7,631) (10,993)
Accounts payable (4,512) (7,794) 20,876
Other liabilities 65,785 29,877 11,517
- -------------------------------------------------------------------------------------------------
Cash provided by continuing operations 293,494 274,529 235,098
Cash used for discontinued operations (38,887)
- -------------------------------------------------------------------------------------------------
Cash provided by operating activities 293,494 235,642 235,098
- -------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (145,622) (147,631) (121,667)
Property disposals 6,293 7,060 3,424
Businesses acquired (45,991) (40,206) (157,234)
Sale of Gibson businesses and assets 12,090 14,226
Other, net (1,246) 4,766 (1,240)
- -------------------------------------------------------------------------------------------------
Cash used for investing activities (174,476) (161,785) (276,717)
- -------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Notes payable 43,896 24,820 9,280
Long-term debt borrowings 62,552 117,740 117,000
Long-term debt repayments (122,096) (151,143) (15,210)
Reacquired shares (42,395) (52,984) (60,795)
Cash dividends on common stock (54,333) (49,000) (41,456)
Other, net 13,263 5,679 26,278
- -------------------------------------------------------------------------------------------------
Cash provided by (used for) financing activities (99,113) (104,888) 35,097
- -------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (582) (1,713) (1,584)
- -------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 19,323 (32,744) (8,106)
Cash and cash equivalents, beginning of year 28,425 61,169 69,275
- -------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 47,748 $ 28,425 $ 61,169
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
44
<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, 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
Net income 175,786 175,786
Foreign currency translation (29,483) (29,483)
------------
Comprehensive income 146,303
Cash dividends on common stock (56,332) (56,332)
Stock options 850 15,211 16,061
Stock awards 9,867 (8,006) 874 2,735
Business acquisitions (187) (187)
Reacquired shares (42,395) (42,395)
Amortization 5,290 5,290
- -------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1999 $ 145,556 $ 223,290 $ 756,601 $ (13,714) $ (59,363) $(290,354) $ 762,016
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
COMMON STOCK ACTIVITY
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
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 144,705,783 (15,227,043) 142,796,652 (13,669,624) 70,750,741 (5,950,518)
Stock options 850,676 1,058,686 648,085
Stock awards 196,546 206,366 124,440
Business acquisitions (5,976) 850,445 33,083 308,343
Reacquired shares (1,103,771) (1,796,868) (1,317,077)
Stock dividend 71,397,826 (6,834,812)
- ------------------------------------------------------------------------------------------------------------------------------------
Shares, end of year 145,556,459 (16,140,244) 144,705,783 (15,227,043) 142,796,652 (13,669,624)
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- - 1. NATURE OF BUSINESS
The company is the leading global developer and marketer of premium cleaning,
sanitizing, pest elimination, maintenance and repair 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.
- --------------------------------------------------------------------------------
- - 2. 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
Henkel-Ecolab under the equity method of accounting. International subsidiaries
and Henkel-Ecolab 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 Henkel-Ecolab 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 41 percent, 45 percent and 40 percent of consolidated
inventories at year-end 1999, 1998 and 1997, 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 of 5 to 50 years for buildings, 3 to 7 years for
merchandising equipment, and 3 to 11 years for machinery and equipment.
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) 1999 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from continuing operations $175,786 $154,506 $133,955
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
Weighted-average common shares outstanding
Basic (actual shares outstanding) 129,550 129,157 129,446
Effect of dilutive stock options 4,869 4,890 4,376
- --------------------------------------------------------------------------------------------------
Diluted 134,419 134,047 133,822
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
Income from continuing operations
per common share
Basic $ 1.36 $ 1.20 $ 1.03
Diluted $ 1.31 $ 1.15 $ 1.00
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
Stock options to purchase approximately 3.6 million shares and 2.2 million
shares for 1999 and 1998, respectively, were not dilutive and, therefore, were
not included in the computations of diluted income per common share amounts.
COMPREHENSIVE INCOME
For the company, comprehensive income includes net income and foreign currency
translation adjustments that are charged or credited to the accumulated other
comprehensive income account in shareholders' equity.
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.
46
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
- - 3. BALANCE SHEET INFORMATION
December 31 (thousands) 1999 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
ACCOUNTS RECEIVABLE, NET
Accounts receivable $ 320,720 $ 259,588 $ 256,919
Allowance for doubtful accounts (20,969) (12,893) (10,878)
- --------------------------------------------------------------------------------------
Total $ 299,751 $ 246,695 $ 246,041
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
INVENTORIES
Finished goods $ 71,395 $ 73,983 $ 67,823
Raw materials and parts 106,239 93,862 89,716
Excess of fifo cost over lifo cost (1,265) (2,218) (2,708)
- --------------------------------------------------------------------------------------
Total $ 176,369 $ 165,627 $ 154,831
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET
Land $ 13,516 $ 12,584 $ 18,184
Buildings and leaseholds 162,955 157,302 145,021
Machinery and equipment 273,101 258,107 232,940
Merchandising equipment 492,160 435,998 379,531
Construction in progress 15,522 11,038 19,862
- --------------------------------------------------------------------------------------
957,254 875,029 795,538
Accumulated depreciation and
amortization (509,138) (454,824) (399,976)
- --------------------------------------------------------------------------------------
Total $ 448,116 $ 420,205 $ 395,562
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
OTHER ASSETS
Intangible assets, net $ 249,756 $ 236,659 $ 217,120
Investments in securities 5,000
Deferred income taxes 24,591 27,256 23,444
Other 67,159 29,715 25,793
- --------------------------------------------------------------------------------------
Total $ 341,506 $ 293,630 $ 271,357
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
SHORT-TERM DEBT
Notes payable $ 96,992 $ 52,441 $ 33,440
Long-term debt, current maturities 15,068 15,550 15,444
- --------------------------------------------------------------------------------------
Total $ 112,060 $ 67,991 $ 48,884
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
LONG-TERM DEBT
7.19% senior notes, due 2006 $ 75,000 $ 75,000 $ 75,000
9.68% senior notes, due 1995-2001 28,571 42,857 57,143
6.00% medium-term notes, due 2001 63,500 62,761
Multicurrency Credit Agreement, due 2002 44,000 116,450
Other 17,011 17,973 26,235
- --------------------------------------------------------------------------------------
184,082 242,591 274,828
Long-term debt, current maturities (15,068) (15,550) (15,444)
- --------------------------------------------------------------------------------------
Total $ 169,014 $ 227,041 $ 259,384
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
</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. 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
7.2 percent for 1999, 7.4 percent for 1998 and 5.4 percent for 1997.
As of December 31, 1999, the aggregate annual maturities of long-term debt
for the next five years were: 2000 - $15,068,000; 2001 - $79,508,000; 2002 -
$1,820,000; 2003 - $10,374,000 and 2004 - $417,000.
Interest expense was $25,053,000 in 1999, $25,012,000 in 1998 and $18,043,000
in 1997. Total interest paid was $24,451,000 in 1999, $25,198,000 in 1998 and
$18,168,000 in 1997.
Other noncurrent liabilities included income taxes payable of $34 million at
December 31, 1999, $30 million at December 31, 1998, and $82 million at December
31, 1997. 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.
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
- --------------------------------------------------------------------------------
- - 4. 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 $77
million at December 31, 1999, $71 million at December 31, 1998, and $70 million
at December 31, 1997. The unrealized gains and losses on these contracts were
not significant.
During 1998, the company 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 year-end 1999 and 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) 1999 1998 1997
- --------------------------------------------------------------------------------
Carrying amount
<S> <C> <C> <C>
Cash and cash equivalents $ 47,748 $ 28,425 $ 61,169
Long-term investments in securities 5,000
Short-term debt 112,060 67,991 48,884
Long-term debt 169,014 227,041 259,384
Fair value
Long-term debt $167,203 $235,131 $266,926
- --------------------------------------------------------------------------------
</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 2001. 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.
- --------------------------------------------------------------------------------
- - 5. 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.
- --------------------------------------------------------------------------------
- - 6. 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.
48
<PAGE>
The following unaudited pro forma financial information reflects the combined
results of the company and the retained Gibson businesses for the year ended
December 31, 1997, assuming the acquisition had occurred at the beginning of
1997. Pro forma adjustments have been included to 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 February 1999, the company purchased substantially all of the assets of Blue
Coral Systems, a subsidiary of the Pennzoil-Quaker State Company. Blue Coral
Systems is a leading marketer of a broad line of branded vehicle cleaning,
appearance and specialty products to the commercial vehicle wash industry, with
annual sales of approximately $30 million. Pennzoil-Quaker State Company
retained all consumer applications for the Blue Coral products and provided the
company with exclusive rights to the United States and Canadian commercial
markets.
The company also added to its Food & Beverage operations in South Africa and
to its commercial kitchen equipment repair services business through business
acquisitions during fiscal 1999. Each of the businesses acquired had annual
sales of approximately $5 million.
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.
- --------------------------------------------------------------------------------
- - 7. HENKEL-ECOLAB
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. Henkel-Ecolab's results of
operations and the company's equity in earnings of Henkel-Ecolab included:
<TABLE>
<CAPTION>
(thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------
Henkel-Ecolab
<S> <C> <C> <C>
Net sales $ 937,817 $ 904,217 $ 844,689
Gross profit 526,486 500,107 470,698
Income before income taxes 82,529 65,946 63,640
Net income $ 46,643 $ 38,540 $ 33,701
Ecolab equity in earnings
Ecolab equity in net income $ 23,322 $ 19,270 $ 16,851
Ecolab royalty income
from Henkel-Ecolab,
net of income taxes 2,570 4,550 4,583
Amortization expense for the
excess of cost over the
underlying net assets of
Henkel-Ecolab (7,575) (7,770) (8,001)
- ------------------------------------------------------------------------------------
Equity in earnings of Henkel-Ecolab $ 18,317 $ 16,050 $ 13,433
- ------------------------------------------------------------------------------------
</TABLE>
The company's investment in Henkel-Ecolab includes the unamortized excess of
the company's investment over its equity in Henkel-Ecolab's net assets. This
excess was $117 million at December 31, 1999, and is being amortized on a
straight-line basis over estimated economic useful lives of up to 30 years.
Condensed balance sheet information for Henkel-Ecolab was:
<TABLE>
<CAPTION>
December 31 (thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current assets $351,189 $368,604 $345,692
Noncurrent assets 177,855 179,188 145,601
Current liabilities 246,411 242,630 224,155
Noncurrent liabilities $ 73,807 $ 82,097 $ 77,303
- --------------------------------------------------------------------------------
</TABLE>
49
<PAGE>
- --------------------------------------------------------------------------------
- - 8. INCOME TAXES
Income from continuing operations before income taxes and equity in earnings of
Henkel-Ecolab consisted of:
<TABLE>
<CAPTION>
(thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $232,684 $213,781 $173,851
Foreign 34,554 26,457 32,016
- --------------------------------------------------------------------------------
Total $267,238 $240,238 $205,867
- --------------------------------------------------------------------------------
</TABLE>
The provision for income taxes consisted of:
<TABLE>
<CAPTION>
(thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal and state $ 106,582 $ 92,094 $ 76,399
Foreign 7,090 11,700 11,020
- --------------------------------------------------------------------------------
Currently payable 113,672 103,794 87,419
- --------------------------------------------------------------------------------
Federal and state (10,229) (3,596) (3,675)
Foreign 6,326 1,584 1,601
- --------------------------------------------------------------------------------
Deferred (3,903) (2,012) (2,074)
- --------------------------------------------------------------------------------
Provision for income taxes $ 109,769 $ 101,782 $ 85,345
- --------------------------------------------------------------------------------
</TABLE>
The company's overall net deferred tax assets (current and noncurrent) were
comprised of the following:
<TABLE>
<CAPTION>
December 31 (thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax assets
Postretirement health care
and pension benefits $ 36,664 $ 34,940 $ 30,991
Other accrued liabilities 46,024 47,601 41,611
Loss carryforwards 2,145 3,999 3,541
Other, net 14,401 9,821 12,766
Valuation allowance (1,462) (1,462) (1,462)
- --------------------------------------------------------------------------------
Total 97,772 94,899 87,447
- --------------------------------------------------------------------------------
Deferred tax liabilities
Property, plant and equipment
basis differences 27,001 26,605 27,606
Other, net 4,479 4,782 1,419
- --------------------------------------------------------------------------------
Total 31,480 31,387 29,025
- --------------------------------------------------------------------------------
Net deferred tax assets $ 66,292 $ 63,512 $ 58,422
- --------------------------------------------------------------------------------
</TABLE>
A reconciliation of the statutory U.S. federal income tax rate to the
company's effective income tax rate was:
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory U.S. rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 4.2 4.3 4.2
Foreign operations 0.6 1.4 0.6
Other, net 1.3 1.7 1.7
- --------------------------------------------------------------------------------
Effective income tax rate 41.1% 42.4% 41.5%
- --------------------------------------------------------------------------------
</TABLE>
Cash paid for income taxes was approximately $94 million in 1999, $122
million in 1998 and $100 million in 1997. 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, 1999, undistributed earnings of international subsidiaries
and Henkel-Ecolab of approximately $32 million and $55 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 substantially
offset by available foreign tax credits.
- --------------------------------------------------------------------------------
- - 9. 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 6,291,653 for 1999, 1,835,714 for 1998 and 5,274,652 for 1997. Common
shares available for grant reflect 6 million shares approved during 1999 for
issuance under the plans.
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 1999 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Granted 1,688,190 3,342,555 1,031,760
Exercised (850,676) (1,058,686) (1,295,170)
Canceled (381,844) (174,800) (63,416)
- -----------------------------------------------------------------------------------------------------
December 31:
Outstanding 11,445,161 10,989,491 8,880,422
- -----------------------------------------------------------------------------------------------------
Exercisable 6,619,361 6,134,840 5,922,150
- -----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Average exercise price per share 1999 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Granted $ 40.06 $ 43.33 $ 21.72
Exercised 9.92 8.05 8.50
Canceled 44.26 37.47 14.07
December 31:
Outstanding 24.28 21.44 11.92
Exercisable $ 13.83 $ 11.01 $ 9.66
- -----------------------------------------------------------------------------------------------------
</TABLE>
50
<PAGE>
Information related to stock options outstanding and stock options
exercisable as of December 31, 1999, is as follows:
<TABLE>
<CAPTION>
Options Outstanding
- ---------------------------------------------------------------------------------------------------------------------
Weighted-Average
Range of Options Remaining Weighted- Average
Exercise Prices Outstanding Contractual Life Exercise Price
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 5.69 - $10.94 2,137,600 2.6 years $ 8.98
$10.97 - $13.41 2,721,804 5.0 years 11.95
$14.88 - $21.89 2,020,862 7.0 years 18.84
$26.91 - $33.31 970,855 8.6 years 30.00
$35.81 - $41.59 1,579,040 9.6 years 40.00
$49.00 2,015,000 3.4 years $ 49.00
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable
- ---------------------------------------------------------------------------
Range of Weighted-Average
Exercise Prices Options Exercisable Exercise Price
- ---------------------------------------------------------------------------
<S> <C> <C>
$ 5.69 - $10.94 2,137,600 $ 8.98
$10.97 - $13.41 2,721,804 11.95
$14.88 - $21.89 1,385,554 18.20
$26.91 - $33.31 299,403 29.98
$35.81 - $41.59 75,000 $41.59
- ---------------------------------------------------------------------------
</TABLE>
Stock awards are generally subject to restrictions, including forfeiture in the
event of termination of employment. The value of a stock award at the 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 1999, 1998 and
1997 would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
(thousands, except per share) 1999 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from continuing operations
As reported $175,786 $154,506 $133,955
Pro forma 170,654 150,773 131,763
Diluted income from continuing
operations per common share
As reported 1.31 1.15 1.00
Pro forma $ 1.27 $ 1.12 $ 0.98
- ------------------------------------------------------------------------------------------
</TABLE>
The weighted-average grant-date fair value of options granted in 1999, 1998 and
1997, 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>
1999 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted-average grant-date fair value
of options granted
Granted at market prices $11.32 $7.65 $5.94
Granted at prices
exceeding market $ 8.25 $1.78
Assumptions
Risk-free interest rate 6.2% 5.5% 6.2%
Expected life 6 years 6 years 6 years
Expected volatility 17.8% 17.8% 19.6%
Expected dividend yield 1.2% 1.5% 1.8%
- ------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
- - 10. 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
1999, 1998 and 1997. Treasury stock is stated at cost. Dividends declared per
share of common stock were $0.435 for 1999, $0.39 for 1998 and $0.335 for 1997.
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,
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- - 10. SHAREHOLDERS' EQUITY (CONTINUED)
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.
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, 1999, there were approximately 3.1
million shares remaining to be purchased under this program. The company
reacquired 998,200 shares of its common stock in 1999, 1,626,900 shares in 1998
and 2,561,400 shares in 1997 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.
- --------------------------------------------------------------------------------
- - 11. 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 $49,164,000 in 1999,
$42,076,000 in 1998 and $38,155,000 in 1997. As of December 31, 1999, future
minimum payments under operating leases with noncancelable terms in excess of
one year were:
<TABLE>
<S><C>
(thousands)
- --------------------------------------------------------------
2000 $12,826
2001 8,769
2002 6,047
2003 4,664
2004 3,832
Thereafter 12,804
- --------------------------------------------------------------
Total $48,942
- --------------------------------------------------------------
- --------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
- - 12. RESEARCH EXPENDITURES
Research expenditures that related to the development of new products and
processes, including significant improvements and refinements to existing
products, were $34,983,000 in 1999, $32,815,000 in 1998 and $30,420,000 in 1997.
- --------------------------------------------------------------------------------
- - 13. 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
in the company's accruals for environmental liabilities. 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.
- --------------------------------------------------------------------------------
- - 14. RETIREMENT PLANS
PENSION AND POSTRETIREMENT HEALTH CARE BENEFITS 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.
52
<PAGE>
A reconciliation of changes in the benefit obligations and fair value of assets
of the company's U.S. pension and postretirement health care benefits plans is
as follows:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Health Care Benefits
------------------------------------- ----------------------------------------
(thousands) 1999 1998 1997 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Benefit obligation, beginning of year $ 343,825 $ 287,027 $ 240,116 $ 106,677 $ 91,121 $ 71,549
Service cost 20,049 16,336 13,330 6,999 5,668 4,325
Interest cost 22,926 20,563 18,371 7,062 6,382 5,711
Participant contributions 1,029 741 767
Changes in assumptions (67,573) 27,194 22,495 (20,939) 9,768 6,957
Actuarial loss (gain) (1,586) 732 (1,402) (1,562) (4,431) 5,057
Benefits paid (9,664) (8,027) (8,534) (3,769) (2,572) (3,245)
Business acquisitions 2,651
- -----------------------------------------------------------------------------------------------------------------------------------
Benefit obligation, end of year $ 307,977 $ 343,825 $ 287,027 $ 95,497 $ 106,677 $ 91,121
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets, beginning of year $ 278,921 $ 237,304 $ 196,839 $ 20,433 $ 16,764 $ 11,885
Actual return on plan assets 53,586 32,256 28,531 4,114 2,261 1,609
Company contributions 14,383 17,388 17,453 5,309 3,239 5,748
Participant contributions 1,029 741 767
Benefits paid (9,664) (8,027) (8,534) (3,769) (2,572) (3,245)
Business acquisitions 3,015
- -----------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets, end of year $ 337,226 $ 278,921 $ 237,304 $ 27,116 $ 20,433 $ 16,764
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A reconciliation of the funded status and the actuarial assumptions for the U.S.
pension and postretirement plans is as follows:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Health Care Benefits
-------------------------------------- ---------------------------------------
(thousands) 1999 1998 1997 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Funded status $ 29,249 $(64,904) $(49,723) $(68,381) $(86,244) $(74,357)
Unrecognized actuarial loss (gain) (42,972) 59,647 46,028 (3,866) 21,468 17,280
Unrecognized prior service cost (benefit) 14,294 16,175 18,056 (7,995) (8,546) (9,097)
Unrecognized net transition asset (7,717) (9,120) (10,523)
- -----------------------------------------------------------------------------------------------------------------------------------
Prepaid (accrued) benefit costs $ (7,146) $ 1,798 $ 3,838 $(80,242) $(73,322) $(66,174)
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted-average actuarial assumptions
Discount rate for service and interest
cost, at beginning of year 6.75% 7.25% 7.75% 6.75% 7.25% 7.75%
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 8.00% 6.75% 7.25% 8.00% 6.75% 7.25%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
53
<PAGE>
- --------------------------------------------------------------------------------
- - 14. Retirement Plans (continued)
For postretirement benefit measurement purposes, 7.5 percent (for pre-age 65
retirees) and 6.2 percent (for post-age 65 retirees) annual rates of increase in
the per capita cost of covered health care were assumed for 2000. 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.
Pension and postretirement health care benefits expense for the company's
U.S. and International operations was:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Health Care Benefits
------------------------------- -----------------------------------
(thousands) 1999 1998 1997 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost - employee benefits earned during the year $ 20,049 $ 16,336 $ 13,330 $ 6,999 $ 5,668 $ 4,325
Interest cost on benefit obligation 22,926 20,563 18,371 7,062 6,382 5,711
Expected return on plan assets (23,247) (20,128) (17,183) (1,786) (1,463) (1,016)
Recognition of net actuarial loss 3,120 2,179 1,407 505 351 125
Amortization of prior service cost (benefit) 1,881 1,881 1,905 (551) (551) (551)
Amortization of net transition asset (1,403) (1,403) (1,403)
- ------------------------------------------------------------------------------------------------------------------------------------
Total U.S. expense 23,326 19,428 16,427 12,229 10,387 8,594
International expense 1,390 1,251 1,112
- ------------------------------------------------------------------------------------------------------------------------------------
Total expense $ 24,716 $ 20,679 $ 17,539 $ 12,229 $ 10,387 $ 8,594
- ------------------------------------------------------------------------------------------------------------------------------------
</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 $14
million at December 31, 1999. The annual expense for these plans was
approximately $3 million in 1999 and 1998, and approximately $2 million in 1997.
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 $ 408 $ (367)
Effect on postretirement benefit obligation 4,706 (4,253)
- -------------------------------------------------------------------------------------------------------------------------
</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 $8,475,000 in 1999, $7,383,000 in 1998 and
$7,156,000 in 1997.
- --------------------------------------------------------------------------------
- - 15. OPERATING SEGMENTS
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, Vehicle Care, 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, equipment repair and
maintenance, and commercial dishwashing services through its Pest Elimination,
GCS 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 back cover, in the
Business Overview section of this Annual Report.
54
<PAGE>
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.
Financial information for each of the company's reportable segments is as
follows:
<TABLE>
<CAPTION>
United States Other
---------------------------------------- -------------------------
International Foreign
Cleaning & Total Cleaning & Currency
(thousands) Sanitizing Other Services United States Sanitizing Translation Corporate Consolidated
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales
1999 $ 1,424,037 $ 211,562 $ 1,635,599 $ 438,013 $ 6,400 $ 2,080,012
1998 1,296,797 160,063 1,456,860 419,898 11,468 1,888,226
1997 1,156,625 119,203 1,275,828 316,889 47,635 1,640,352
Operating income
1999 230,520 25,114 255,634 37,807 1,080 $ (4,570) 289,951
1998 218,500 19,084 237,584 27,478 1,265 (4,347) 261,980
1997 180,975 14,655 195,630 20,274 6,688 (4,088) 218,504
Depreciation & amortization
1999 96,346 4,442 100,788 25,726 1,703 6,313 134,530
1998 87,456 3,145 90,601 24,054 1,727 5,589 121,971
1997 76,130 2,716 78,846 15,691 2,191 4,151 100,879
Total assets
1999 831,494 85,617 917,111 344,142 14,181 310,512 1,585,946
1998 701,341 77,491 778,832 318,763 22,592 350,808 1,470,995
1997 641,441 36,448 677,889 348,921 45,786 343,703 1,416,299
Capital expenditures
1999 109,889 4,182 114,071 26,236 4,670 645 145,622
1998 109,976 4,383 114,359 31,192 1,383 697 147,631
1997 $ 90,914 $ 3,539 $ 94,453 $ 23,121 $ 3,228 $ 865 $ 121,667
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Corporate operating expense includes overhead costs directly related to
Henkel-Ecolab. Corporate assets are principally cash and cash equivalents and
the company's investment in Henkel-Ecolab.
The company has two classes of products and services within its United States
and International Cleaning & Sanitizing operations which comprise 10 percent or
more of consolidated net sales. Worldwide sales of warewashing products were
approximately 27 percent, 28 percent and 31 percent of consolidated net sales in
1999, 1998 and 1997, respectively. Sales of laundry products and services on a
worldwide basis were approximately 12 percent, 13 percent and 14 percent of
consolidated net sales in 1999, 1998 and 1997, respectively.
Long-lived assets of the company's United States and International operations
were as follows:
<TABLE>
<CAPTION>
December 31 (thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
United States $360,541 $332,072 $294,372
International 82,937 81,207 74,809
Corporate 2,047 3,931 3,812
Effect of foreign currency translation 2,591 2,995 22,569
- ----------------------------------------------------------------------------------------
Consolidated $448,116 $420,205 $395,562
- ----------------------------------------------------------------------------------------
</TABLE>
55
<PAGE>
- --------------------------------------------------------------------------------
- - 16. QUARTERLY FINANCIAL DATA (Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
(thousands, except per share) Quarter Quarter Quarter Quarter Year
- ------------------------------------------------------------------------------------------------------------------------------------
1999
<S> <C> <C> <C> <C> <C>
Net sales
United States
Cleaning & Sanitizing $ 336,822 $ 358,272 $ 385,508 $ 343,435 $ 1,424,037
Other Services 47,328 53,313 56,467 54,454 211,562
International Cleaning & Sanitizing 102,759 108,279 111,580 115,395 438,013
Effect of foreign currency translation 2,395 552 956 2,497 6,400
- ------------------------------------------------------------------------------------------------------------------------------------
Total 489,304 520,416 554,511 515,781 2,080,012
Cost of sales 220,425 234,725 247,619 234,843 937,612
Selling, general and administrative expenses 206,616 213,949 219,037 212,847 852,449
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income
United States
Cleaning & Sanitizing 50,863 57,558 70,479 51,620 230,520
Other Services 4,551 6,149 8,207 6,207 25,114
International Cleaning & Sanitizing 7,618 9,160 10,078 10,951 37,807
Corporate (1,099) (1,234) (1,111) (1,126) (4,570)
Effect of foreign currency translation 330 109 202 439 1,080
- ------------------------------------------------------------------------------------------------------------------------------------
Total 62,263 71,742 87,855 68,091 289,951
Interest expense, net 5,750 6,209 4,860 5,894 22,713
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and equity in earnings
of Henkel-Ecolab 56,513 65,533 82,995 62,197 267,238
Provision for income taxes 23,622 26,905 33,555 25,687 109,769
Equity in earnings of Henkel-Ecolab 2,147 4,756 5,581 5,833 18,317
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 35,038 $ 43,384 $ 55,021 $ 42,343 $ 175,786
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted net income per common share $ 0.26 $ 0.32 $ 0.41 $ 0.32 $ 1.31
Weighted-average common shares outstanding
Basic 129,539 129,596 129,546 129,517 129,550
Diluted 134,626 134,666 134,394 133,981 134,419
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 97,936 105,137 108,173 108,652 419,898
Effect of foreign currency translation 5,812 4,069 (443) 2,030 11,468
- ------------------------------------------------------------------------------------------------------------------------------------
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 6,198 7,380 8,375 5,525 27,478
Corporate (910) (1,479) (1,149) (809) (4,347)
Effect of foreign currency translation 896 470 (88) (13) 1,265
- ------------------------------------------------------------------------------------------------------------------------------------
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 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
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
56
<PAGE>
MANAGEMENT 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
Chairman of the Board, President and Chief Executive Officer
/s/ L. White Matthews III
L. White Matthews III
Executive Vice President and
Chief Financial 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 consolidated
financial position of Ecolab Inc. as of December 31, 1999, 1998 and 1997, and
the consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. 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 auditing standards
generally accepted 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.
/s/ PricewaterhouseCoopers LLP
Saint Paul, Minnesota
February 28, 2000
57
<PAGE>
<TABLE>
<CAPTION>
SUMMARY OPERATING AND FINANCIAL DATA
December 31 (thousands, except per share) 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATIONS
NET SALES
United States $ 1,635,599 $ 1,456,860 $ 1,275,828 $ 1,148,778
International (at average rates of currency exchange
during the year) 444,413 431,366 364,524 341,231
Europe (at average rates of currency exchange during
the year)
- ------------------------------------------------------------------------------------------------------------------------------
Total 2,080,012 1,888,226 1,640,352 1,490,009
Cost of sales 937,612 851,173 722,084 674,953
Selling, general and administrative expenses 852,449 775,073 699,764 629,739
Merger costs and nonrecurring expenses
- ------------------------------------------------------------------------------------------------------------------------------
Operating income 289,951 261,980 218,504 185,317
Interest expense, net 22,713 21,742 12,637 14,372
- ------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes
and equity in earnings of Henkel-Ecolab 267,238 240,238 205,867 170,945
Provision for income taxes 109,769 101,782 85,345 70,771
Equity in earnings of Henkel-Ecolab 18,317 16,050 13,433 13,011
- ------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 175,786 154,506 133,955 113,185
Income (loss) from discontinued operations 38,000
Extraordinary loss and changes in accounting principles
- ------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 175,786 192,506 133,955 113,185
Preferred stock dividends
- ------------------------------------------------------------------------------------------------------------------------------
Net income (loss) to common shareholders, as reported 175,786 192,506 133,955 113,185
Pro forma adjustments
- ------------------------------------------------------------------------------------------------------------------------------
Pro forma net income (loss) to common shareholders $ 175,786 $ 192,506 $ 133,955 $ 113,185
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) per common share, as reported
Basic-- continuing operations $ 1.36 $ 1.20 $ 1.03 $ 0.88
Basic-- net income (loss) 1.36 1.49 1.03 0.88
Diluted-- continuing operations 1.31 1.15 1.00 0.85
Diluted-- net income (loss) 1.31 1.44 1.00 0.85
Pro forma income (loss) per common share
Basic-- continuing operations 1.36 1.20 1.03 0.88
Basic-- net income (loss) 1.36 1.49 1.03 0.88
Diluted-- continuing operations 1.31 1.15 1.00 0.85
Diluted-- net income (loss) $ 1.31 $ 1.44 $ 1.00 $ 0.85
Weighted-average common shares outstanding-- basic 129,550 129,157 129,446 128,991
Weighted-average common shares outstanding-- diluted 134,419 134,047 133,822 132,817
SELECTED INCOME STATEMENT RATIOS
Gross profit 54.9% 54.9% 56.0% 54.7%
Selling, general and administrative expenses 41.0 41.0 42.7 42.3
Operating income 13.9 13.9 13.3 12.4
Income from continuing operations before income taxes 12.8 12.7 12.6 11.5
Income from continuing operations 8.5 8.2 8.2 7.6
Effective income tax rate 41.1% 42.4% 41.5% 41.4%
FINANCIAL POSITION
Current assets $ 577,321 $ 503,514 $ 509,501 $ 435,507
Property, plant and equipment, net 448,116 420,205 395,562 332,314
Investment in Henkel-Ecolab 219,003 253,646 239,879 285,237
Other assets 341,506 293,630 271,357 155,351
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,585,946 $ 1,470,995 $ 1,416,299 $ 1,208,409
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Current liabilities $ 470,674 $ 399,791 $ 404,464 $ 327,771
Long-term debt 169,014 227,041 259,384 148,683
Postretirement health care and pension benefits 97,527 85,793 76,109 73,577
Other liabilities 86,715 67,829 124,641 138,415
Shareholders' equity 762,016 690,541 551,701 519,963
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,585,946 $ 1,470,995 $ 1,416,299 $ 1,208,409
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
SELECTED CASH FLOW INFORMATION
Cash provided by operating activities $ 293,494 $ 235,642 $ 235,098 $ 254,269
Depreciation and amortization 134,530 121,971 100,879 89,523
Capital expenditures 145,622 147,631 121,667 111,518
EBITDA from continuing operations 424,481 383,951 319,383 274,840
Cash dividends declared per common share $ 0.435 $ 0.39 $ 0.335 $ 0.29
SELECTED FINANCIAL MEASURES/OTHER
Total debt and preferred stock $ 281,074 $ 295,032 $ 308,268 $ 176,292
Total debt and preferred stock to capitalization 26.9% 29.9% 35.8% 25.3%
Book value per common share $ 5.89 $ 5.33 $ 4.27 $ 4.01
Return on beginning equity 25.5% 28.0% 25.8% 24.8%
Dividends/diluted net income per common share 33.2% 33.9% 33.5% 34.1%
Annual common stock price range $44.44-31.69 $38.00-26.13 $28.00-18.13 $19.75-14.56
Number of employees 12,870 12,007 10,210 9,573
- ------------------------------------------------------------------------------------------------------------------------------
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 1993. Other assets includes
net assets of Ecolab Europe and discontinued operations prior to 1992. Other
liabilities includes $110 million of convertible preferred stock at year-end
1989 and 1990. The ratios of return on beginning
58
<PAGE>
SUMMARY OPERATING AND FINANCIAL DATA
<CAPTION>
December 31 (thousands, except per share) 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATIONS
NET SALES
United States $ 1,030,126 $ 942,070 $ 867,415 $ 816,405
International (at average rates of currency exchange
during the year) 310,755 265,544 234,981 241,229
Europe (at average rates of currency exchange during
the year)
- ------------------------------------------------------------------------------------------------------------------------------
Total 1,340,881 1,207,614 1,102,396 1,057,634
Cost of sales 603,167 533,143 491,306 485,206
Selling, general and administrative expenses 575,028 529,507 481,639 446,814
Merger costs and nonrecurring expenses 8,000
- ------------------------------------------------------------------------------------------------------------------------------
Operating income 162,686 136,964 129,451 125,614
Interest expense, net 11,505 12,909 21,384 35,334
- ------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes
and equity in earnings of Henkel-Ecolab 151,181 124,055 108,067 90,280
Provision for income taxes 59,694 50,444 33,422 27,392
Equity in earnings of Henkel-Ecolab 7,702 10,951 8,127 8,600
- ------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 99,189 84,562 82,772 71,488
Income (loss) from discontinued operations
Extraordinary loss and changes in accounting principles 715
- ------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 99,189 84,562 83,487 71,488
Preferred stock dividends
- ------------------------------------------------------------------------------------------------------------------------------
Net income (loss) to common shareholders, as reported 99,189 84,562 83,487 71,488
Pro forma adjustments 5,902 (2,667) (2,797)
- ------------------------------------------------------------------------------------------------------------------------------
Pro forma net income (loss) to common shareholders $ 99,189 $ 90,464 $ 80,820 $ 68,691
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) per common share, as reported
Basic-- continuing operations $ 0.75 $ 0.63 $ 0.61 $ 0.53
Basic-- net income (loss) 0.75 0.63 0.62 0.53
Diluted-- continuing operations 0.73 0.62 0.60 0.52
Diluted-- net income (loss) 0.73 0.62 0.61 0.52
Pro forma income (loss) per common share
Basic-- continuing operations 0.75 0.67 0.59 0.51
Basic-- net income (loss) 0.75 0.67 0.60 0.51
Diluted-- continuing operations 0.73 0.66 0.58 0.50
Diluted-- net income (loss) $ 0.73 $ 0.66 $ 0.59 $ 0.50
Weighted-average common shares outstanding-- basic 132,193 135,100 135,056 134,408
Weighted-average common shares outstanding-- diluted 134,956 137,306 137,421 136,227
SELECTED INCOME STATEMENT RATIOS
Gross profit 55.0% 55.9% 55.4% 54.1%
Selling, general and administrative expenses 42.9 44.6 43.7 42.2
Operating income 12.1 11.3 11.7 11.9
Income from continuing operations before income taxes 11.3 10.3 9.8 8.5
Income from continuing operations 7.4 7.0 7.5 6.8
Effective income tax rate 39.5% 40.7% 30.9% 30.3%
FINANCIAL POSITION
Current assets $ 358,072 $ 401,179 $ 311,051 $ 264,512
Property, plant and equipment, net 292,937 246,191 219,268 207,183
Investment in Henkel-Ecolab 302,298 284,570 255,804 289,034
Other assets 107,573 88,416 105,607 98,135
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,060,880 $ 1,020,356 $ 891,730 $ 858,864
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Current liabilities $ 310,538 $ 253,665 $ 201,498 $ 192,023
Long-term debt 89,402 105,393 131,861 215,963
Postretirement health care and pension benefits 70,666 70,882 72,647 63,393
Other liabilities 133,616 128,608 93,917 29,179
Shareholders' equity 456,658 461,808 391,807 358,306
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,060,880 $ 1,020,356 $ 891,730 $ 858,864
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
SELECTED CASH FLOW INFORMATION
Cash provided by operating activities $ 166,463 $ 169,346 $ 175,674 $ 120,217
Depreciation and amortization 76,279 66,869 60,609 60,443
Capital expenditures 109,894 88,457 68,321 59,904
EBITDA from continuing operations 238,965 203,833 190,060 186,057
Cash dividends declared per common share $ 0.2575 $ 0.2275 $ 0.1975 $ 0.17875
SELECTED FINANCIAL MEASURES/OTHER
Total debt and preferred stock $ 161,049 $ 147,213 $ 151,281 $ 236,695
Total debt and preferred stock to capitalization 26.1% 24.2% 27.9% 39.8%
Book value per common share $ 3.53 $ 3.41 $ 2.90 $ 2.66
Return on beginning equity 21.5% 21.6% 23.3% 23.3%
Dividends/diluted net income per common share 35.3% 36.7% 32.4% 34.4%
Annual common stock price range $15.88-10.00 $ 11.75-9.63 $ 11.91-9.07 $ 9.57-6.66
Number of employees 9,026 8,206 7,822 7,601
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SUMMARY OPERATING AND FINANCIAL DATA
December 31 (thousands, except per share) 1991 1990 1989
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATIONS
NET SALES
United States $ 757,564 $ 712,579 $ 646,895
International (at average rates of currency exchange
during the year) 201,738 184,220 179,705
Europe (at average rates of currency exchange during
the year) 150,809 122,871
- --------------------------------------------------------------------------------------------------------------
Total 959,302 1,047,608 949,471
Cost of sales 447,356 495,086 461,256
Selling, general and administrative expenses 393,700 425,983 383,512
Merger costs and nonrecurring expenses 12,978
- --------------------------------------------------------------------------------------------------------------
Operating income 118,246 126,539 91,725
Interest expense, net 30,489 28,321 31,628
- --------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes
and equity in earnings of Henkel-Ecolab 87,757 98,218 60,097
Provision for income taxes 29,091 32,494 19,411
Equity in earnings of Henkel-Ecolab 4,573
- --------------------------------------------------------------------------------------------------------------
Income from continuing operations 63,239 65,724 40,686
Income (loss) from discontinued operations (274,693) (4,408) (29,379)
Extraordinary loss and changes in accounting principles (24,560)
- --------------------------------------------------------------------------------------------------------------
Net income (loss) (236,014) 61,316 11,307
Preferred stock dividends (4,064) (7,700) (429)
- --------------------------------------------------------------------------------------------------------------
Net income (loss) to common shareholders, as reported (240,078) 53,616 10,878
Pro forma adjustments (2,933) (2,956) (3,196)
- --------------------------------------------------------------------------------------------------------------
Pro forma net income (loss) to common shareholders $ (243,011) $ 50,660 $ 7,682
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Income (loss) per common share, as reported
Basic-- continuing operations $ 0.51 $ 0.56 $ 0.34
Basic-- net income (loss) (2.05) 0.52 0.09
Diluted-- continuing operations 0.50 0.56 0.34
Diluted-- net income (loss) (2.05) 0.51 0.09
Pro forma income (loss) per common share
Basic-- continuing operations 0.48 0.53 0.31
Basic-- net income (loss) (2.08) 0.49 0.06
Diluted-- continuing operations 0.48 0.53 0.31
Diluted-- net income (loss) $ (2.08) $ 0.49 $ 0.06
Weighted-average common shares outstanding-- basic 117,050 103,298 118,516
Weighted-average common shares outstanding-- diluted 118,178 104,258 120,196
SELECTED INCOME STATEMENT RATIOS
Gross profit 53.4% 52.7% 51.4%
Selling, general and administrative expenses 41.1 40.6 41.7
Operating income 12.3 12.1 9.7
Income from continuing operations before income taxes 9.1 9.4 6.3
Income from continuing operations 6.6 6.3 4.3
Effective income tax rate 33.1% 33.1% 32.3%
FINANCIAL POSITION
Current assets $ 293,053 $ 216,612 $ 370,875
Property, plant and equipment, net 198,086 187,735 203,056
Investment in Henkel-Ecolab 296,292
Other assets 152,857 480,911 420,115
- --------------------------------------------------------------------------------------------------------------
Total assets $ 940,288 $ 885,258 $ 994,046
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Current liabilities $ 240,219 $ 177,643 $ 201,585
Long-term debt 325,492 208,147 228,632
Postretirement health care and pension benefits 56,427 8,742 12,859
Other liabilities 11,002 138,792 135,343
Shareholders' equity 307,148 351,934 415,627
- --------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 940,288 $ 885,258 $ 994,046
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
SELECTED CASH FLOW INFORMATION
Cash provided by operating activities $ 128,999 $ 154,208 $ 123,215
Depreciation and amortization 55,653 61,024 53,113
Capital expenditures 53,752 58,069 54,430
EBITDA from continuing operations 173,899 187,563 144,838
Cash dividends declared per common share $ 0.175 $ 0.1675 $ 0.165
SELECTED FINANCIAL MEASURES/OTHER
Total debt and preferred stock $ 407,221 $ 353,886 $ 382,764
Total debt and preferred stock to capitalization 57.0% 50.1% 47.9%
Book value per common share $ 2.30 $ 3.41 $ 3.55
Return on beginning equity 13.6% 12.9% 2.5%
Dividends/diluted net income per common share 42.7% 32.8% 183.3%
Annual common stock price range $ 8.38-4.88 $ 7.78-4.16 $ 8.94-6.22
Number of employees 7,428 8,106 7,845
- --------------------------------------------------------------------------------------------------------------
</TABLE>
equity and dividends/diluted net income per common share exclude the change
in accounting principle and the loss on the ChemLawn divestiture in 1991.
EBITDA from continuing operations is the total of operating income, and
depreciation and amortization for the year. Number of employees excludes
ChemLawn operations.
59
<PAGE>
APPENDIX: GRAPHIC AND IMAGE MATERIAL
<TABLE>
<CAPTION>
PAGE NUMBER DESCRIPTION
----------- -----------
<S> <C>
32 Bar graph illustrating return on beginning
equity for the last five fiscal years as
follows:
1999 25.5%
1998 28.0%
1997 25.8%
1996 24.8%
1995 21.5%
33 Bar graph illustrating total return to
shareholders (share appreciation plus
dividends) for the last five fiscal years as
follows:
1999 9.3%
1998 31.9%
1997 49.0%
1996 27.3%
1995 46.1%
35 Pie chart illustrating the United States
Cleaning & Sanitizing business mix for 1999
as well as consolidated net sales (in
millions) for the last three fiscal years as
follows:
1999 Institutional mix 58%
1999 Food & Beverage mix 19%
1999 Professional Products mix 7%
1999 Kay mix 7%
1999 Textile Care mix 4%
1999 Vehicle Care mix 3%
1999 Water Care Services mix 2%
1999 sales $1,424
1998 sales $1,297
1997 sales $1,157
36 Pie chart illustrating United States Other
Services consolidated business mix for 1999
as well as consolidated net sales (in
millions) for the last three fiscal years as
follows:
1999 Pest Elimination mix 66%
1999 GCS Service mix 27%
1999 Jackson mix 7%
1999 sales $212
1998 sales $160
1997 sales $119
<PAGE>
<CAPTION>
PAGE NUMBER DESCRIPTION
----------- -----------
<S> <C>
37 Pie chart illustrating the International
Cleaning & Sanitizing business mix for 1999
as well as consolidated net sales (in
millions) for the last three fiscal years as
follows:
1999 Asia Pacific mix 52%
1999 Latin America mix 18%
1999 Canada mix 18%
1999 Africa, Export and Other mix 12%
1999 sales $438
1998 sales $420
1997 sales $317
39 Pie chart illustrating the Henkel-Ecolab
business mix for 1999 as well as Ecolab's
equity in earnings of Henkel-Ecolab (in
millions) for the last three fiscal years as
follows:
1999 Institutional mix 36%
1999 Professional Hygiene mix 26%
1999 Food & Beverage P3 mix 25%
1999 Textile Hygiene mix 13%
1999 Ecolab equity $18
1998 Ecolab equity $16
1997 Ecolab equity $13
40 Pie chart illustrating mix of shareholders'
equity and total debt for 1999 as well as
total debt to capitalization ratio for the
last three fiscal years as follows:
1999 Shareholders' Equity mix 73%
1999 Total Debt mix 27%
1999 debt/capitalization ratio 27%
1998 debt/capitalization ratio 30%
1997 debt/capitalization ratio 36%
41 Bar graph illustrating cash from continuing
operating activities (in millions) for the
last five fiscal years as follows:
1999 $293
1998 $275
1997 $235
1996 $254
1995 $163
</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
Spartan de Argentina S.A. Argentina 100
Ecolab Australia Pty Limited Australia 100
Ecolab Finance Pty Limited Australia 100
Ecolab Pty Limited Australia 100
Gibson Chemical Industries Pty Limited Australia 100
Gibson Chemicals Pty 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
<PAGE>
Ecolab Emprecendimentos E Participacoes Ltda. Brazil 100
Ecolab Ltd. Canada 100
Ecolab Finance Ltd. Canada 100
Ecolab S.A. Chile 100
Spartan de Chile Productos Quimicos Limitada Chile 100
Ecolab Colombia S.A. Columbia 100
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 100
Eclab 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
<PAGE>
Ecolab S.A. de C.V. Mexico 100
Ecolab Holdings Mexico, S.A. de C.V. Mexico 100
Ecolab Morocco Morocco 100
Ecolab (Proprietary) Limited Namibia 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
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
Ecolab (Pty) Ltd. South Africa 100
Ecolab (St. Lucia) Limited St. Lucia 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
Ecolab Zimbabwe (Pvt) Ltd. Zimbabwe 100
UNITED STATES
BCS Sales Inc. Delaware 100
<PAGE>
Kay Chemical Company North Carolina 100
Kay Chemical International, Inc. North Carolina 100
Ecolab Finance Inc. Delaware 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
Ecolab Marketing LLC Delaware 100
FastSource Leasing, Inc. Delaware 100
GCS Service, Inc. Delaware 100
Jackson MSC Inc. Delaware 100
Puritan Services Inc. Georgia 100
Southwest Sanitary Distributing Company Texas 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 of
Ecolab Inc. on Form S-8 (Registration Nos. 2-60010; 2-74944; 33-1664; 33-41828;
2-90702; 33-18202; 33-55986; 33-56101; 333-95043; 33-26241; 33-34000; 33-56151;
333-18627; 33-39228; 33-56125; 333-70835; 33-60266; 333-95041; 33-65364;
33-59431; 333-18617; 333-79449; 333-21167; 333-35519; 333-40239; 333-95037;
333-50969; and 333-62183) and Form S-3 (Registration No. 333-14771) of our
report dated January 28, 2000 relating to the combined financial statements and
financial statement schedule of the Henkel-Ecolab Joint Venture as of November
30, 1999 and 1998 and for the years then ended, which appears in this Annual
Report on Form 10-K
/s/ PricewaterhouseCoopers GmbH
PricewaterhouseCoopers Gesellschaft
mit beschrankter Haftung
Wirtschaftsprufungsgesellschaft
Dusseldorf, Germany
March 13, 2000
<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; 333-95043; 33-26241; 33-34000; 33-56151;
333-18627; 33-39228; 33-56125; 333-70835; 33-60266; 333-95041; 33-65364;
33-59431; 333-18617; 333-79449; 333-21167; 333-35519; 333-40239; 333-95037;
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 statements of income, equity and cash flows of Henkel-Ecolab
Joint Venture for the period December 1, 1996 through November 31, 1997 and
related schedule, which report appears in the December 31, 1999 annual report on
From 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 the above-listed Registration Statements on Form S-8 of Ecolab
Inc. and under the caption "Experts" in the Registration Statement on Form S-3
of Ecolab Inc. (Registration No. 333-14771).
Dusseldorf, Germany
March 13, 2000
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, 1999 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 25 day of
February, 2000.
/s/Les S. Biller
---------------------------------
Les S. Biller
/s/Ruth S. Block
---------------------------------
Ruth S. Block
/s/Jerry A. Grundhofer
---------------------------------
Jerry A. Grundhofer
/s/James J. Howard
---------------------------------
James J. Howard
/s/William L. Jews
---------------------------------
William L. Jews
/s/Joel W. Johnson
---------------------------------
Joel W. Johnson
/s/Jerry W. Levin
---------------------------------
Jerry W. Levin
/s/Robert L. Lumpkins
---------------------------------
Robert L. Lumpkins
/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-31-1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 47,748
<SECURITIES> 0
<RECEIVABLES> 320,720
<ALLOWANCES> 20,969
<INVENTORY> 176,369
<CURRENT-ASSETS> 577,321
<PP&E> 957,254
<DEPRECIATION> 509,138
<TOTAL-ASSETS> 1,585,946
<CURRENT-LIABILITIES> 470,674
<BONDS> 169,014
0
0
<COMMON> 145,556
<OTHER-SE> 616,460
<TOTAL-LIABILITY-AND-EQUITY> 1,585,946
<SALES> 2,080,012
<TOTAL-REVENUES> 2,080,012
<CGS> 937,612
<TOTAL-COSTS> 937,612
<OTHER-EXPENSES> 852,449
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 25,053
<INCOME-PRETAX> 267,238
<INCOME-TAX> 109,769
<INCOME-CONTINUING> 175,786
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 175,786
<EPS-BASIC> 1.36
<EPS-DILUTED> 1.31
<FN>
<F1>THE AMOUNT OF "LOSS PROVISION" IS NOT SIGNIFICANT AND HAS BEEN INCLUDED IN
"OTHER EXPENSES."
</FN>
</TABLE>
