<PAGE>
1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended July 31, 1999
Commission File Number 1- 4311
PALL CORPORATION
2200 Northern Boulevard, East Hills, N.Y. 11548
(516) 484-5400
Incorporated in New York State I.R.S. Employer Identification
Number 11-1541330
Securities registered pursuant to Section 12(b) of the Act:
Name of Exchange
Title of Class on Which Registered
------------------------- ---------------------------
Common Stock $.10 par value New York Stock Exchange
Common Share Purchase Rights New York Stock Exchange
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 registrant was required
to file such reports), and (2) has been subject to such filing requirement for
the past 90 days.
Yes X No
------- ------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $2,715,000,000, based on the closing price on October 4, 1999.
The number of common shares, $.10 par value outstanding of the registrant was
124,167,433 shares on October 4, 1999.
Total number of pages - 103 Exhibit index located on page 18
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's Proxy Statement for the 1999 annual meeting of
shareholders, previously filed, (hereinafter referred to as the "Proxy
Statement") are incorporated by reference into Part III.
Portions of the registrant's Annual Report to Shareholders for the fiscal year
ended July 31, 1999, filed as Exhibit 13 hereto, (hereinafter referred to as the
"Annual Report to Shareholders") are incorporated by reference into Parts I, II
and IV of this report.
<PAGE>
2
PART I
------
ITEM 1. BUSINESS.
- ------------------
(a) General development of business.
Pall Corporation, incorporated in July 1946, and its subsidiaries (hereinafter
collectively called "the Company" unless the context requires otherwise) is a
leading supplier of fine filters, principally made by the Company using its
proprietary filter media, and other fluid clarification and separations
equipment for the removal of solid, liquid and gaseous contaminants from a wide
variety of liquids and gases.
The Company's business is best analyzed by the following four principal markets,
or industry segments, in which it sells its products:
(1) BioPharmaceuticals.
(2) Medical.
(3) Aeropower.
(4) Fluid processing.
During the past five years, the Company has continued its development and sale
of fluid clarification and separations products in a wide variety of markets.
(b) Financial information about market segment information.
Reference is made to page 43 of the Annual Report to Shareholders.
(c) Narrative description of business.
1) The Company is a specialty materials and engineering company with the
broadest-based filtration, separations and purification capabilities in the
world. Its proprietary products are used to discover, develop and produce
pharmaceuticals, to protect hospital patients, to enhance the quality and
efficiency of manufacturing processes, to keep equipment running efficiently and
to protect the environment. Reference is made to the section titled "Pall
creates 100's of commercially successful products every year...." on pages 20-23
of the Annual Report to Shareholders. The products sold are principally filters
made with proprietary Pall filter media produced by chemical film casting,
melt-blowing of polymer fibers, papermaking and metallurgical processes. Metal
and plastic housings and a wide variety of appurtenant devices, are also made.
(A) BioPharmaceuticals Segment:
The BioPharmaceuticals segment includes the following markets:
BioPharmaceuticals, Specialty Materials and Food & Beverage. For information
about the BioPharmaceuticals segment, reference is made to the section titled
"Health Care: BioPharmaceuticals" on page 6 and pages 8 and 9 of the Annual
Report to Shareholders.
(B) Medical Segment:
The Medical segment includes the following markets: Blood and Critical Care. For
information about the Medical segment, reference is made to the section titled
"Health Care: Medical" on page 6 and pages 10 and 11 of the Annual Report to
Shareholders.
Sales in the BioPharmaceuticals and the Medical markets are made through the
Company's own personnel and through distributors. Backlog information is
omitted, as it is not considered meaningful to an understanding of these
segments of the Company's business. The Company feels that safety, efficacy,
ease of use, technical support, as well as price, are the principal competitive
factors in this market, although economy of use is important. A principal list
of competitors is included on page 6 of the Annual Report to Shareholders.
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3
(C) Aeropower Segment:
The Aeropower segment includes the following markets: Aerospace and Industrial
Hydraulics. For information about the Aeropower segment, reference is made to
the section titled "Aeropower" on page 7 and pages 12 and 13 of the Annual
Report to Shareholders. Backlog at July 31, 1999 was approximately $73,746,000
and is equal to about three months of sales. The Company's sales to aerospace
and military customers are made principally through its own personnel and
manufacturers' representatives; sales to Industrial Hydraulics customers are
made through Company personnel and through distributors. The Company believes
that product performance and quality, and service to the customer, as well as
price, are the principal competitive factors in this market segment. A principal
list of competitors is included on page 7 of the Annual Report to Shareholders.
(D) Fluid Processing Segment:
The Fluid Processing Segment encompasses the following markets: Microelectronics
and Industrial Process. For information about the Fluid Processing segment,
reference is made to the section titled "Fluid Processing" on page 7 and pages
14-19 of the Annual Report to Shareholders. The Company's products are sold to
customers in these markets through its own personnel, and through distributors
and manufacturers' representatives. Backlog information is omitted, as it is not
considered material for an understanding of this segment of the Company's
business. The Company believes that performance and quality of product and
service, as well as price, are determinative in most sales. A principal list of
competitors is included on page 7 of the Annual Report to Shareholders.
(E) The following comments relate to the four segments discussed above:
(i) Raw materials:
Most raw materials used by the Company are available from multiple sources of
supply. A limited number of materials are proprietary products of major chemical
companies. The Company believes that it could find satisfactory substitutes for
these materials if they should become unavailable, and has in fact done so
several times in the past.
(ii) Patents:
The Company owns a broad range of patents covering its filter media, filter
designs and other products, but it considers these to be mainly defensive, and
relies on its proprietary manufacturing methods and engineering skills. However,
it does act against infringers when it believes such action is economically
justified.
2) The following comments relate to the Company's business in general:
(a) With limited exceptions, research activities conducted by the Company are
company-sponsored. Such expenditures totaled $56,490,000 in 1999,
$58,540,000 in 1998 and $53,747,000 in 1997.
(b) There was no one customer to whom sales were made totaling 10% or
more of consolidated sales in fiscal 1999, 1998 or 1997.
(c) The Company is in substantial compliance with federal, state and local
laws regulating the discharge of materials into the environment or
otherwise relating to the protection of the environment. To date,
compliance with environmental matters has not had a material effect upon
the Company's capital expenditures or competitive position.
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4
The Company continues the clean up of contaminated water at its Ann
Arbor, Michigan facility that began in fiscal 1998. Costs incurred
during this year indicate that the anticipated future costs for
remediation will exceed the estimate originally established. As a
result, the reserve for future environmental remediation costs has been
increased by $6,000. In the opinion of management, the Company is in
substantial compliance with applicable environmental laws. Because
regulatory standards under environmental laws are becoming increasingly
stringent, there can be no assurance that future developments will not
cause the Company to incur material environmental liabilities or costs.
For a further description of the environmental issues see Item 3, Legal
Proceedings.
(d) At July 31, 1999, the Company employed approximately 8,600 persons.
(d) Financial information about geographic areas.
Reference is made to page 44 of the Annual Report to Shareholders.
<PAGE>
5
ITEM 2. PROPERTIES.
- --------------------
<TABLE>
<CAPTION>
Location Type Industry Segment Size (square feet)
- -------- ---- ---------------- ------------------
<S> <C> <C> <C>
OWNED:
East Hills, NY Office, plant & Executive Office &
warehouse All Segments 326,000
Pt. Washington, NY Office, laboratory All 215,000
& training center
Hauppauge, NY Plant, office Medical & Fluid
& laboratory Processing 75,000
Cortland, NY Plants, office BioPharmaceuticals & Fluid
Processing 338,000
Putnam, CT Plant All 62,000
Ft. Myers, FL Plant, warehouse Aeropower 111,000
New Port Richey, FL Plant, office Aeropower 165,000
Pensacola, FL Plant Medical, BioPharmaceuticals 58,000
Covina, CA Plant, office &
laboratory Medical 176,000
Ann Arbor, MI Plant & office Medical, BioPharmaceuticals 180,000
Fajardo, Puerto Rico Plants Medical, BioPharmaceuticals
& Fluid Processing 259,000
Portsmouth, U.K. Plant, office, warehouse All 331,000
Ilfracombe, U.K. Plant & office BioPharmaceuticals & Fluid
Processing 112,000
Redruth, U.K. Plant, warehouse Aeropower 123,000
Newquay, U.K. Plant & office Medical & Fluid
Processing 106,000
Tipperary, Ireland Plant Medical, Aeropower 178,000
Frankfurt, Germany Office & warehouse All 72,000
Paris, France Office & warehouse All 65,000
Limay, France Warehouse All 23,000
Tsukuba, Japan Plant, laboratory &
warehouse All 119,000
Johannesburg, South Africa Office & warehouse All 7,000
LEASED:
Clearwater, FL Office Aeropower 23,000
Houston, TX Plant & office Fluid Processing 40,000
Northborough, MA Plant & office BioPharmaceuticals 38,000
Exton, PA Office BioPharmaceuticals &
Fluid Processing 13,000
Toronto, Montreal, Canada Office & warehouse BioPharmaceuticals, Medical
& Fluid Processing 18,000
Frankfurt, Hamburg, Germany Office & warehouse All 104,000
Oud Beijerland, Netherlands Plant, office, warehouse Fluid Processing 12,000
Milan, Italy Office & warehouses All 54,000
Vienna, Austria Office & warehouse All 13,000
Basel, Switzerland Office & warehouse All 13,000
Madrid, Spain Office & warehouse All 28,000
Brussels, Belgium Office & warehouse All 12,000
Oslo, Norway Office & warehouse All 6,000
Warsaw, Poland Office All 4,000
Buenos Aires, Argentina Office All 3,000
Tokyo, Osaka, Nagoya, Japan Offices All 39,000
Singapore Office & warehouse All 17,000
Seoul, South Korea Office All 7,000
Beijing, China Plant, office, warehouse All 46,000
Melbourne, Sydney
& Perth, Australia Office & warehouse All 21,000
Auckland, New Zealand Office & warehouse All 6,000
</TABLE>
In the opinion of management, these premises are suitable and adequate to meet
the Company's requirements.
<PAGE>
6
ITEM 3. LEGAL PROCEEDINGS.
- --------------------------
In February 1988, an action was filed in the Circuit Court for Washtenaw
County, Michigan ("Court") by the State of Michigan ("State") against Gelman
Sciences Inc. ("Gelman")(a subsidiary acquired by the Company in February 1997)
requesting reimbursement of costs the State had expended in investigating
contamination near Gelman's Ann Arbor facility, which the State alleged was
caused by Gelman's disposal of waste water from its manufacturing process.
Pursuant to a consent judgment entered into by Gelman and the State in October
1992 (amended September 1996 and October 1999), which resolved that litigation,
Gelman is remediating the contamination without admitting wrongdoing. In July
1997 and in October 1997 the State notified Gelman that it believes that Gelman
is not in full compliance with the consent judgment and that Gelman is
potentially liable for stipulated penalties of more than $100,000, which
penalties may continue to accrue. Gelman disputes these assertions and has been
vigorously contesting them.
Reference is also made to Contingencies and Commitments on page 42 of the Annual
Report to Shareholders.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------------------------------------------------------------
There were no matters submitted to a vote of shareholders during the fourth
quarter of fiscal year 1999.
<PAGE>
7
PART II
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS.
- ------------------------------------------------------------
Reference is made to the section titled "Common Stock Prices and Cash Dividends"
on page 46 of the Annual Report to Shareholders.
ITEM 6. SELECTED FINANCIAL DATA.
- --------------------------------
Reference is made to page 47 of the Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
- -------------------------------------------------------------------
Reference is made to pages 25-28 of the Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- -----------------------------------------------------
Reference is made to pages 29-45 of the Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES.
- -------------------------------------------------------------------
None.
<PAGE>
8
PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- ------------------------------------------------------------
(a) Identification of directors:
Reference is made to "Election of Directors" on page 3 of the Proxy
Statement.
None of the persons listed in the section of the Proxy Statement referred to
in the preceding paragraph has been involved in those legal proceedings
required to be disclosed by Item 401(f) of Regulation S-K during the past
five years.
(b) Identification of executive officers:
<TABLE>
<CAPTION>
Year in which
Service as
Age at Officer of
Oct. 15 Pall Corp.
Name 1999 Position Held Began
- ---- ---- ------------- -----
<S> <C> <C> <C>
Eric Krasnoff* 47 Chairman and Chief
Executive Officer 1986
Jeremy Hayward-Surry* 56 President 1989
John Adamovich, Jr. 46 Group Vice President and Treasurer,
Chief Financial Officer 1998
Peter S. Cope 45 Group Vice President 1994
Clifton Hutchings 61 Group Vice President 1993
Paul Kohn 53 Group Vice President 1996
Donald B. Stevens 54 Group Vice President 1996
Gerhard Weich 63 Group Vice President 1993
Marcus Wilson 44 Group Vice President 1998
Samuel T. Wortham 52 Group Vice President 1990
Steven Chisolm 41 Senior Vice President 1998
Charles Grimm 59 Senior Vice President 1998
Erwin Kirnbauer 64 Senior Vice President 1999
Akio Satake 62 Senior Vice President 1995
</TABLE>
* Member of the Executive Committee of the Board of Directors.
None of the persons listed above is related.
Messrs. Krasnoff and Hayward-Surry are directors of Pall Corporation.
For more than the past five years, the principal occupation of each person
listed above has been their employ by the registrant, except for Mr. Adamovich,
who joined the Company in January 1998. Previously, Mr. Adamovich was
partner-in-charge of Professional Practice in the Long Island office of KPMG LLP
and while at that firm, he served as engagement partner for its audits of the
Company's financial statements for each of the years in the seven year period
ending July 29, 1995.
Mr. Kirnbauer also served as executive officer from 1982 until 1992.
Executive officers are elected by the Board of Directors annually, to serve
until the next annual organizational meeting of the Board.
None of the above persons has been involved in those legal proceedings required
to be disclosed by Item 401(f) of Regulation S-K, during the past five years.
<PAGE>
9
ITEM 11. EXECUTIVE COMPENSATION.
- ---------------------------------
Reference is made to "Compensation and Other Benefits of Senior Management"
beginning on page 6 of the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- -------------------------------------------------------------------------
Reference is made to "Beneficial Ownership of Common Stock" beginning on page 26
of the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- ---------------------------------------------------------
None.
Disclosure of information relating to delinquent filers required by Item 405 of
Regulation S-K is set forth on page 28 of the Proxy Statement.
<PAGE>
10
PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- ---------------------------------------------------------------------------
a. Documents filed as part of the Form 10-K:
(1) The following financial statements are incorporated by reference to
the indicated pages of the 1999 Annual Report to Shareholders, filed
as Exhibit 13 hereto.
Page Number in
Annual Report
--------------
Independent Auditors' Report 29
Consolidated Statements of Earnings - years ended
July 31, 1999, August 1, 1998 and August 2, 1997 29
Consolidated Balance Sheets - July 31, 1999
and August 1, 1998 30
Consolidated Statements of Stockholders' Equity -
years ended July 31, 1999, August 1, 1998 and
August 2, 1997 31
Consolidated Statements of Cash Flows - years ended
July 31, 1999, August 1, 1998 and August 2, 1997 32
Notes to Consolidated Financial Statements 33-45
(2) Financial Statement Schedule
The following schedules are filed herewith:
Page Number in
Form 10-K
--------------
Report of Independent Auditors on Financial Statement
Schedule 15
Schedule II - Valuation and Qualifying Accounts 16
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or in the notes thereto.
<PAGE>
11
(3) Exhibits filed herewith:
Exhibit
Number Description of Exhibit
- --------------------------------------------------------------------------------
3(i)* Restated Certificate of Incorporation of the Registrant as amended
through November 23, 1993, filed as Exhibit 3(i) to the Registrant's
Annual Report on Form 10-K for the fiscal year ended July 30, 1994
(the "1994 10-K").
3(ii) By-Laws of the Registrant as amended on October 5, 1999.
4 Note: The exhibits filed herewith do not include the instruments with
respect to long-term debt of the Registrant and its subsidiaries,
inasmuch as the total amount of debt authorized under any such
instrument does not exceed 10% of the total assets of the Registrant
and its subsidiaries on a consolidated basis. The Registrant agrees,
pursuant to Item 601(b) (4) (iii) of Regulation S-K, that it will
furnish a copy of any such instrument to the Securities and Exchange
Commission upon request.
10.1*(a) Amended And Restated Employment Agreement dated October 6, 1997
between the Registrant and Eric Krasnoff, filed as Exhibit 10.3 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
August 2, 1997 (the "1997 10-K").
10.2*(a) Letter agreement dated July 17, 1997 between the Registrant and Eric
Krasnoff, filed as Exhibit 10.4 to the 1997 10-K.
10.3*(a) Amended And Restated Employment Agreement dated October 6, 1997
between the Registrant and Jeremy Hayward-Surry, filed as Exhibit 10.5
to the 1997 10-K.
10.4*(a) Service Agreement dated November 28, 1995 between Pall Europe Limited
and Clifton Stanley Hutchings, filed as Exhibit 10.9 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
August 3, 1996 (the "1996 10-K").
10.5*(a) Service Agreement dated November 28, 1995 between Pall Deutschland
GmbH Holding and Gerhard Friedrich Weich, filed as Exhibit 10.10 to
the 1996 10-K.
10.6*(a) Employment Agreement dated February 1, 1992 between the Registrant and
Samuel Wortham, filed as Exhibit 10.15 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended August 1, 1992 (the
"1992 10-K").
10.7*(a) Amendment dated July 19, 1993 to Employment Agreement dated February
1, 1992 between the Registrant and Samuel Wortham, filed as Exhibit
10.4 to the Registrant's Annual Report on Form 10-K for the fiscal
year ended July 31, 1993 (the "1993 10-K").
10.8*(a) Second Amendment dated August 1, 1995 to Employment Agreement dated
February 1, 1992 between the Registrant and Samuel Wortham, filed as
Exhibit 10.16 to the 1996 10-K.
* Incorporated herein by reference.
(a) Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of Form 10-K.
<PAGE>
12
Exhibit
Number Description of Exhibit
- --------------------------------------------------------------------------------
10.9*(a) Third Amendment dated August 1, 1998 to Employment Agreement dated
February 1, 1992 between the Registrant and Samuel Wortham, filed as
Exhibit 10.15 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended August 1, 1998 (the "1998 10-K").
10.10*(a) Employment Agreement dated August 1, 1994 between the Registrant and
Peter Cope, filed as Exhibit 10.13 to the 1994 10-K.
10.11*(a) Amendment dated August 1, 1995 to Employment Agreement dated August 1,
1994 between the Registrant and Peter Cope, filed as Exhibit 10.18 to
the 1996 10-K.
10.12*(a) Second Amendment dated August 1, 1998 to Employment Agreement dated
August 1, 1994 between the Registrant and Peter Cope, filed as Exhibit
10.18 to the 1998 10-K.
10.13*(a) Employment Agreement dated September 26, 1994 between the Registrant
and Donald B. Stevens, filed as Exhibit 10.17 to the 1994 10-K.
10.14*(a) Amendment dated August 1, 1995 to Employment Agreement dated September
26, 1994 between the Registrant and Donald B. Stevens, filed as
Exhibit 10.24 to the 1996 10-K.
10.15*(a) Second Amendment dated August 1, 1998 to Employment Agreement dated
September 26, 1994 between the Registrant and Donald B. Stevens, filed
as Exhibit 10.24 to the 1998 10-K.
10.16*(a) Employment Agreement dated August 5, 1996 between the Registrant and
Paul Kohn, filed as Exhibit 10.25 to the 1996 10-K.
10.17*(a) First Amendment dated August 1, 1998 to Employment Agreement dated
August 5, 1996 between the Registrant and Paul Kohn, filed as Exhibit
10.26 to the 1998 10-K.
10.18*(a) Employment Agreement made as of January 5, 1998 between the Registrant
and John Adamovich, filed as Exhibit 10 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended November 1, 1997.
10.19*(a) Employment Agreement made as of January 12, 1998 between the
Registrant and Steven Chisolm, filed as Exhibit 10 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended January
31, 1998.
10.20*(a) First Amendment dated August 1, 1998 to Employment Agreement dated
January 12, 1998 between the Registrant and Steven Chisolm, filed as
Exhibit 10.29 to the 1998 10-K.
* Incorporated herein by reference.
(a) Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of Form 10-K.
<PAGE>
13
Exhibit
Number Description of Exhibit
- --------------------------------------------------------------------------------
10.21*(a) Employment Agreement made as of August 1, 1998 between the Registrant
and Charles R. Grimm, filed as Exhibit 10.30 to the 1998 10-K.
10.22*(a) Service Agreement dated August 1, 1998 between Pall Europe Limited and
Marcus Albert Wilson, filed as Exhibit 10.31 to the 1998 10-K.
10.23*(a) Employment Agreement made as of February 1, 1992 between the
Registrant and Erwin A. Kirnbauer, filed as Exhibit 10.26 to the 1992
10-K.
10.24(a) Amendment dated July 19, 1993 to Employment Agreement dated
February 1, 1992 between the Registrant and Erwin A. Kirnbauer.
10.25*(a) Pall Corporation Supplementary Profit Sharing Plan as amended and
restated February 15, 1995, filed as Exhibit 10.26 to the 1996 10-K.
10.26*(a) Pall Corporation Supplementary Pension Plan (As amended effective
October 6, 1997), filed as Exhibit 10.25 to the 1997 10-K.
10.27*(a) Pall Corporation Profit Sharing Plan, as amended and restated as of
January 1, 1997, filed as Exhibit 10.26 to the 1997 10-K.
10.28*(a) Pall Corporation 1988 Stock Option Plan, as amended through October 8,
1991, filed as Exhibit 10.32 to the Registrant's Annual Report on Form
10-K for the fiscal year ended August 3, 1991 (the "1991 10-K").
10.29*(a) Pall Corporation 1991 Stock Option Plan, as amended effective November
19, 1998, filed as Exhibit 10.1 to the Registrant's Quarterly Report
on Form 10-Q for the quarterly period ended October 31, 1998.
10.30*(a) Pall Corporation 1993 Stock Option Plan, as amended effective November
19, 1998, filed as Exhibit 10.2 to the Registrant's Quarterly Report
on Form 10-Q for the quarterly period ended October 31, 1998.
10.31*(a) Pall Corporation 1995 Employee Stock Option Plan, as amended effective
November 19, 1998, filed as Exhibit 10.3 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended October 31, 1998.
10.32*(a) Pall Corporation 1998 Employee Stock Option Plan, filed as Exhibit 99
to the Registrant's Registration Statement on Form S-8 (Registration
No. 333-68371).
10.33*(a) Pall Corporation Stock Option Plan for Non-Employee Directors, as
amended effective November 19, 1998, filed as Exhibit 10.5 to the
Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended October 31, 1998.
* Incorporated herein by reference.
(a) Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of Form 10-K.
<PAGE>
14
Exhibit
Number Description of Exhibit
- --------------------------------------------------------------------------------
10.34*(a) Pall Corporation Management Stock Purchase Plan, filed as Exhibit 99
to the Registrant's Registration Statement on Form S-8 (Registration
No. 333-82469).
10.35*(a) Principal Rules of the Pall Supplementary Pension Scheme, filed as
Exhibit 10.25 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended July 29, 1995.
10.36*(a) Pall Deutschland GmbH Holding, Concept Of An Additional Pension
Plan For Senior Executives, filed as Exhibit 10.35 to the 1996 10-K.
13 Annual Report to Shareholders for the year ended July 31, 1999.
21 Subsidiaries of Pall Corporation.
23 Consent of Independent Auditors.
27 Financial Data Schedule (only filed electronically).
* Incorporated herein by reference.
(a) Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of Form 10-K.
b. Reports on Form 8-K:
The Registrant filed no reports on Form 8-K during its fourth fiscal quarter
ended July 31, 1999.
<PAGE>
15
[KPMG LLP LETTERHEAD]
Independent Auditors' Report on Schedule
The Board of Directors
Pall Corporation:
Under date of September 1, 1999, we reported on the consolidated balance sheets
of Pall Corporation and subsidiaries as of July 31, 1999 and August 1, 1998, and
the related consolidated statements of earnings, stockholders' equity and cash
flows for each of the years in the three-year period ended July 31, 1999, as
contained in the Company's fiscal 1999 annual report to stockholders. These
consolidated financial statements and our report thereon are incorporated by
reference in the Company's annual report on Form 10-K for fiscal year 1999. In
connection with our audits of the aforementioned consolidated financial
statements, we also have audited the related financial statement schedule as
listed in the accompanying index. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
-------------------
KPMG LLP
Melville, New York
September 1, 1999
<PAGE>
16
SCHEDULE II
PALL CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JULY 31, 1999,
AUGUST 1, 1998 AND AUGUST 2, 1997
Balance at Charged to Write-off of Balance
Beginning Costs and Uncollectible at End
Description of Year Expenses Accounts of Year
----------- ---------- ---------- ------------- ----------
Year ended July 31, 1999:
Allowance for doubtful
accounts $5,879,000 $1,891,000 $1,147,000 $6,623,000
Year ended August 1, 1998:
Allowance for doubtful
accounts $6,602,000 $1,915,000 $2,638,000 $5,879,000
Year ended August 2, 1997:
Allowance for doubtful
accounts $5,998,000 $1,417,000 $ 813,000 $6,602,000
<PAGE>
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Pall Corporation
October 27, 1999 By: /s/ Jeremy Hayward-Surry
------------------------------
Jeremy Hayward-Surry
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Eric Krasnoff
- --------------------------- Chairman of the Board and October 27, 1999
Eric Krasnoff Chief Executive Officer
/s/ Jeremy Hayward-Surry
- --------------------------- President and Director October 27, 1999
Jeremy Hayward-Surry
/s/ John Adamovich, Jr.
- --------------------------- Chief Financial Officer October 27, 1999
John Adamovich, Jr. and Treasurer
/s/ Viraj J. Patel
- --------------------------- Chief Accountant October 27, 1999
Viraj J. Patel (Chief Accounting Officer)
/s/ Abraham Appel
- --------------------------- Director October 27, 1999
Abraham Appel
/s/ Daniel J. Carroll, Jr.
- --------------------------- Director October 27, 1999
Daniel J. Carroll, Jr.
/s/ John H. F. Haskell, Jr.
- --------------------------- Director October 27, 1999
John H. F. Haskell, Jr.
/s/ Ulric S. Haynes, Jr.
- --------------------------- Director October 27, 1999
Ulric S. Haynes, Jr.
/s/ Edwin W. Martin
- --------------------------- Director October 27, 1999
Edwin W. Martin
/s/ Katharine L. Plourde
- --------------------------- Director October 27, 1999
Katharine L. Plourde
/s/ Chesterfield F. Seibert
- --------------------------- Director October 27, 1999
Chesterfield F. Seibert
/s/ Heywood Shelley
- --------------------------- Director October 27, 1999
Heywood Shelley
/s/ Alan B. Slifka
- --------------------------- Director October 27, 1999
Alan B. Slifka
/s/ James D. Watson
- --------------------------- Director October 27, 1999
James D. Watson
<PAGE>
18
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- --------------------------------------------------------------------------------
3(i)* Restated Certificate of Incorporation of the Registrant as amended
through November 23, 1993, filed as Exhibit 3(i) to the Registrant's
Annual Report on Form 10-K for the fiscal year ended July 30, 1994
(the "1994 10-K").
3(ii) By-Laws of the Registrant as amended on October 5, 1999.
4 Note: The exhibits filed herewith do not include the instruments with
respect to long-term debt of the Registrant and its subsidiaries,
inasmuch as the total amount of debt authorized under any such
instrument does not exceed 10% of the total assets of the Registrant
and its subsidiaries on a consolidated basis. The Registrant agrees,
pursuant to Item 601(b) (4) (iii) of Regulation S-K, that it will
furnish a copy of any such instrument to the Securities and Exchange
Commission upon request.
10.1*(a) Amended And Restated Employment Agreement dated October 6, 1997
between the Registrant and Eric Krasnoff, filed as Exhibit 10.3 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
August 2, 1997 (the "1997 10-K").
10.2*(a) Letter agreement dated July 17, 1997 between the Registrant and Eric
Krasnoff, filed as Exhibit 10.4 to the 1997 10-K.
10.3*(a) Amended And Restated Employment Agreement dated October 6, 1997
between the Registrant and Jeremy Hayward-Surry, filed as Exhibit 10.5
to the 1997 10-K.
10.4*(a) Service Agreement dated November 28, 1995 between Pall Europe Limited
and Clifton Stanley Hutchings, filed as Exhibit 10.9 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
August 3, 1996 (the "1996 10-K").
10.5*(a) Service Agreement dated November 28, 1995 between Pall Deutschland
GmbH Holding and Gerhard Friedrich Weich, filed as Exhibit 10.10 to
the 1996 10-K.
10.6*(a) Employment Agreement dated February 1, 1992 between the Registrant and
Samuel Wortham, filed as Exhibit 10.15 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended August 1, 1992 (the
"1992 10-K").
10.7*(a) Amendment dated July 19, 1993 to Employment Agreement dated February
1, 1992 between the Registrant and Samuel Wortham, filed as Exhibit
10.4 to the Registrant's Annual Report on Form 10-K for the fiscal
year ended July 31, 1993 (the "1993 10-K").
10.8*(a) Second Amendment dated August 1, 1995 to Employment Agreement dated
February 1, 1992 between the Registrant and Samuel Wortham, filed as
Exhibit 10.16 to the 1996 10-K.
* Incorporated herein by reference.
(b) Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of Form 10-K.
<PAGE>
19
Exhibit
Number Description of Exhibit
- --------------------------------------------------------------------------------
10.9*(a) Third Amendment dated August 1, 1998 to Employment Agreement dated
February 1, 1992 between the Registrant and Samuel Wortham, filed as
Exhibit 10.15 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended August 1, 1998 (the "1998 10-K").
10.10*(a) Employment Agreement dated August 1, 1994 between the Registrant and
Peter Cope, filed as Exhibit 10.13 to the 1994 10-K.
10.11*(a) Amendment dated August 1, 1995 to Employment Agreement dated August 1
1994 between the Registrant and Peter Cope, filed as Exhibit 10.18 to
the 1996 10-K.
10.12*(a) Second Amendment dated August 1, 1998 to Employment Agreement dated
August 1, 1994 between the Registrant and Peter Cope, filed as
Exhibit 10.18 to the 1998 10-K.
10.13*(a) Employment Agreement dated September 26, 1994 between the Registrant
and Donald B. Stevens, filed as Exhibit 10.17 to the 1994 10-K.
10.14*(a) Amendment dated August 1, 1995 to Employment Agreement dated
September 26, 1994 between the Registrant and Donald B. Stevens,
filed as Exhibit 10.24 to the 1996 10-K.
10.15*(a) Second Amendment dated August 1, 1998 to Employment Agreement dated
September 26, 1994 between the Registrant and Donald B. Stevens,
filed as Exhibit 10.24 to the 1998 10-K.
10.16*(a) Employment Agreement dated August 5, 1996 between the Registrant and
Paul Kohn, filed as Exhibit 10.25 to the 1996 10-K.
10.17*(a) First Amendment dated August 1, 1998 to Employment Agreement dated
August 5, 1996 between the Registrant and Paul Kohn, filed as Exhibit
10.26 to the 1998 10-K.
10.18*(a) Employment Agreement made as of January 5, 1998 between the
Registrant and John Adamovich, filed as Exhibit 10 to the
Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended November 1, 1997.
10.19*(a) Employment Agreement made as of January 12, 1998 between the
Registrant and Steven Chisolm, filed as Exhibit 10 to the
Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended January 31, 1998.
10.20*(a) First Amendment dated August 1, 1998 to Employment Agreement dated
January 12, 1998 between the Registrant and Steven Chisolm, filed as
Exhibit 10.29 to the 1998 10-K.
* Incorporated herein by reference.
(b) Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of Form 10-K.
<PAGE>
20
Exhibit
Number Description of Exhibit
- --------------------------------------------------------------------------------
10.21*(a) Employment Agreement made as of August 1, 1998 between the Registrant
and Charles R. Grimm, filed as Exhibit 10.30 to the 1998 10-K.
10.22*(a) Service Agreement dated August 1, 1998 between Pall Europe Limited and
Marcus Albert Wilson, filed as Exhibit 10.31 to the 1998 10-K.
10.23*(a) Employment Agreement made as of February 1, 1992 between the
Registrant and Erwin A. Kirnbauer, filed as Exhibit 10.26 to the 1992
10-K.
10.24(a) Amendment dated July 19, 1993 to Employment Agreement dated
February 1, 1992 between the Registrant and Erwin A. Kirnbauer.
10.25*(a) Pall Corporation Supplementary Profit Sharing Plan as amended and
restated February 15, 1995, filed as Exhibit 10.26 to the 1996 10-K.
10.26*(a) Pall Corporation Supplementary Pension Plan (As amended effective
October 6, 1997), filed as Exhibit 10.25 to the 1997 10-K.
10.27*(a) Pall Corporation Profit Sharing Plan, as amended and restated as of
January 1, 1997, filed as Exhibit 10.26 to the 1997 10-K.
10.28*(a) Pall Corporation 1988 Stock Option Plan, as amended through October 8,
1991, filed as Exhibit 10.32 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended August 3, 1991 (the "1991 10-K").
10.29*(a) Pall Corporation 1991 Stock Option Plan, as amended effective
November 19, 1998, filed as Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended October
31, 1998.
10.30*(a) Pall Corporation 1993 Stock Option Plan, as amended effective
November 19, 1998, filed as Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended October
31, 1998.
10.31*(a) Pall Corporation 1995 Employee Stock Option Plan, as amended
effective November 19, 1998, filed as Exhibit 10.3 to the
Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended October 31, 1998.
10.32*(a) Pall Corporation 1998 Employee Stock Option Plan, filed as Exhibit
99 to the Registrant's Registration Statement on Form S-8
(Registration No. 333-68371).
10.33*(a) Pall Corporation Stock Option Plan for Non-Employee Directors, as
amended effective November 19, 1998, filed as Exhibit 10.5 to the
Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended October 31, 1998.
* Incorporated herein by reference.
(b) Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of Form 10-K.
<PAGE>
21
Exhibit
Number Description of Exhibit
- --------------------------------------------------------------------------------
10.34*(a) Pall Corporation Management Stock Purchase Plan, filed as Exhibit 99
to the Registrant's Registration Statement on Form S-8 (Registration
No. 333-82469).
10.35*(a) Principal Rules of the Pall Supplementary Pension Scheme, filed as
Exhibit 10.25 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended July 29, 1995.
10.36*(a) Pall Deutschland GmbH Holding, Concept Of An Additional Pension
Plan For Senior Executives, filed as Exhibit 10.35 to the 1996 10-K.
13 Annual Report to Shareholders for the year ended July 31, 1999.
21 Subsidiaries of Pall Corporation.
23 Consent of Independent Auditors.
27 Financial Data Schedule (only filed electronically).
* Incorporated herein by reference.
(b) Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of Form 10-K.
<PAGE>
EXHIBIT 3(ii)
PALL CORPORATION
BY-LAWS
(as amended on October 5, 1999)
-------------------------------
ARTICLE I
Offices
-------
Section 1.01 Offices. The principal office of the corporation
shall be as stated in the certificate of incorporation. The corporation may also
have offices and places of business at such other places within and without the
State of New York as the board of directors may from time to time determine.
ARTICLE II
Stockholders
------------
Section 2.01 Annual Meeting. The annual meeting of the
stockholders for the election of directors (and the transaction of such other
business as may properly come before it) shall be held on such date within six
months after the end of each fiscal year of the corporation, and at such time
and place within the State of New York, as are fixed by resolution of the board
of directors and stated in the notice of meeting.
Section 2.02 Special Meetings. Special meetings of the
shareholders for any purpose or purposes may be called by the president (or, in
case of the absence or disability of the president, by any vice president) and
must be called by him on the written request of a majority of the directors in
office or
<PAGE>
of the holders of 50% of the shares then outstanding and entitled to vote. Such
request shall state the date and hour, the place within the City of Glen Cove or
the City of New York, and the purpose or purposes of the meeting, and must be
delivered or mailed to the president or such vice president not later than
fifteen days prior to the proposed date of the meeting.
Section 2.03 Notice of Meetings. Written or printed notice of
each meeting of stockholders, stating the purpose or purposes for which the
meeting is called and the date and hour when and the place within the State of
New York where it is to be held, shall be signed by the president or a vice
president, or by the secretary or an assistant secretary, and a copy thereof
shall be mailed to each stockholder of record entitled to vote at such meeting
not less than ten nor more than forty days before the meeting, directed to his
address as it appears on the books of the corporation, but if a stockholder
shall have requested that notice be sent to another address in a writing
previously filed with the secretary, then to such address. Except as required by
statute, notice of any adjourned meeting shall not be required.
Section 2.04 Quorum. At any meeting of the shareholders, the
holders of a majority of the shares entitled to vote then issued and
outstanding, present in person or represented by proxy, shall constitute a
quorum except as otherwise provided by law or by the certificate of
incorporation. A lesser interest may adjourn any meeting from time to time, and
the meeting may be held as adjourned without further notice.
-2-
<PAGE>
When a quorum is present or represented at any meeting, a majority of the stock
represented thereat shall, except where a larger vote is required by law, by the
certificate of incorporation, or by these by-laws, decide any question brought
before such meeting.
Section 2.05 Proxies and Voting. Each stockholder of record
shall be entitled to one vote for each share of stock registered in the name of
such stockholder on the books of the corporation, and such votes may be cast
either in person or by proxy. Except as otherwise expressly provided herein,
proxies and voting shall be governed by the provisions of the New York Business
Corporation Law as in effect at the time in question.
Section 2.06 Inspectors of Election. Elections of directors
shall be conducted by two inspectors of election, neither of whom shall be a
candidate for the office of director, appointed either by the chief executive
officer, or, if he fails to appoint, by a per capita vote of the stockholders
personally present at the election. The inspectors, before entering on the
discharge of their duties, shall be sworn faithfully to execute the duties of
inspectors with strict impartiality and according to the best of their ability,
and shall execute a written certificate of the results of the election.
ARTICLE III
Board of Directors
------------------
Section 3.01 Number and Term of Office. The board of directors
shall consist of not less than three nor more than twelve
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<PAGE>
directors, all of whom shall be of full age, and at least one of whom shall be a
citizen of the United States and a resident of the State of New York; effective
October 5, 1999, the number of directors shall be twelve. The directors shall
have power from time to time, and at any time, when the stockholders as such are
not assembled in a meeting, regular or special, to increase their own number
within the limits as to number of directors set forth in the certificate of
incorporation. If the number of directors be increased, the additional directors
may be elected by a majority of the directors in office at the time of the
increase, or if not so elected prior to the next annual meeting of the
stockholders, they shall be elected thereat by the stockholders. Directors may,
but need not, be stockholders.
Section 3.02 Powers. The business of the corporation shall be
managed by the board of directors which shall have and may exercise all the
powers of the corporation, except such as are expressly conferred upon the
stockholders by law, by the certificate of incorporation, or by these by-laws.
Section 3.03 Executive Committee. There may be an executive
committee of not less than three directors appointed by the board who may meet
from time to time on notice to all by any one of their own number. They may
consult with and advise the officers of the corporation in the management of its
business and, when the board of directors is not in session, shall have all the
authority of the board, except with respect to those matters as to which Section
712 of the Business Corporation Law of New York
-4-
<PAGE>
withholds authority from any committee of the board. Vacancies shall be filled
by the board of directors at any regular or special meeting. The executive
committee shall keep regular minutes of its proceedings and report the same to
the board when required.
Section 3.04 Regular Meetings. Regular meetings of the board
of directors may be held without call or formal notice at such places either
within or without the State of New York and at such times as the board may from
time to time by vote determine. A regular meeting of the board of directors for
the election of officers and for such other business as may come before the
meeting may be held without call or formal notice immediately after, and at the
same place as, the annual meeting of stockholders or any special meeting of
stockholders at which a board of directors is elected.
Section 3.05 Special Meetings. Special meetings of the board
of directors may be held at any place either within or without the State of New
York at any time when called by the chief executive officer or secretary or a
majority of the directors, written notice of the time and place thereof having
been given to each director as follows: (a) by delivering a copy of such notice
to the director personally no later than the second day preceding the date of
the meeting, or (b) by sending a copy of such notice addressed to the director
at his mailing address as it appears on the books of the corporation, such
notice to be sent no less than ten days before the date of the meeting if sent
by ordinary mail or no later than the third business day before the date of the
meeting
-5-
<PAGE>
if sent by overnight mail or by a courier service (such as Federal Express)
which guarantees next day delivery, or (c) by transmitting such notice to the
director by telecopier (to a telecopier number which has been furnished by him
to the Secretary of the corporation) no later than the second business day
preceding the date of the meeting.
Section 3.06 Quorum. Either of the following shall constitute
a quorum of the board of directors, to wit:
(a) One-half of the total number of directors or
(b) any four directors, of whom at least two shall also be
principal officers of the corporation;
but a lesser number may adjourn any meeting. A quorum of any committee shall be
a majority of the members thereof except that any committee may, by unanimous
action, determine that a lesser number of members (not less than half) shall
constitute a quorum. A majority of the members in attendance at any meeting
shall, except where a larger number is required by law, by the certificate of
incorporation, or by these by-laws, decide any question brought before such
meeting.
Section 3.07 Classification of Directors. Upon election of
directors at the annual meeting of stockholders in 1971, the board of directors
shall be divided into three classes, as nearly equal in number as possible, and
no class shall include less than three directors. The terms of office of the
directors initially classified shall be as follows: that of the first class
shall expire at the next annual meeting of stockholders in 1972, the
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<PAGE>
second class at the annual meeting next following July 31, 1973 and the third
class at the annual meeting next following July 31, 1974.
At each annual meeting after such initial classification and election in
1971, directors to replace those whose terms expire at such annual meeting shall
be elected to hold office until the third succeeding annual meeting after their
election. If after the initial classification of directors the number of
directors is changed:
(a) Any newly created directorships or any decrease in
directorships shall be so apportioned among the classes as to make all classes
as nearly equal in number as possible; and
(b) When the number of directors is increased by the board and
any newly created directorships are filled by the board, there shall be no
classification of the additional directors until the next annual meeting of
stockholders.
Section 3.08 Action by the Board Without a Meeting. Any action
required or permitted to be taken by the board or any committee thereof may be
taken without a meeting if all members of the board or the committee consent in
writing to the adoption of a resolution authorizing the action. The resolution
and the written consents thereto by the members of the board or committee shall
be filed with the minutes of the proceedings of the board or committee.
Section 3.09 Participation in Meetings by Telephone. Any one
or more members of the board or any committee thereof may participate in a
meeting of such board or committee by means of a
-7-
<PAGE>
conference telephone or similar communications equipment allowing all persons
participating in the meeting to hear each other at the same time. Participation
by such means shall constitute presence in person at a meeting.
Section 3.10 Audit, Compensation and Nominating Committees.
There may be an Audit Committee, a Compensation Committee, and a Nominating
Committee, each consisting of not less than three directors appointed by the
Board, each of which Committees may meet from time to time on notice to all
members thereof by any member thereof. Such Committees shall keep regular
minutes of their proceedings and report the same to the Board.
(a) Audit Committee. The Audit Committee shall have such
powers and perform such functions as are customarily performed by audit
committees of publicly owned corporations including but not limited to such
powers and functions as may be prescribed by applicable rules or requirements of
the Securities and Exchange Commission or of any stock exchange on which
securities of the Corporation are listed. Without limiting the generality of the
preceding sentence: (i) the Audit Committee shall also have the authority to
identify, evaluate and monitor significant public policy issues, to review the
corporation's policies and practices with respect to such issues to ensure that
they are consistent with its social responsibility and to recommend to the full
board policies and strategies concerning such issues, and (ii) the Audit
Committee shall have supervisory authority over the corporation's Compliance and
Ethics Program including the right to require
-8-
<PAGE>
periodic reports from the officer in charge of that Program and to make
recommendations to the board and/or the chief executive officer with respect to
such Program.
(b) Compensation Committee. The Compensation Committee shall
have the power and duty to fix the compensation of officers of the Corporation
from time to time and to authorize and approve the making of employment
contracts between the Corporation and its officers and shall have such other
powers and duties as may be assigned to it by resolution of the Board. Effective
November 21, 1995, the Compensation Committee shall also have, with respect to
each Stock Option Plan of the Corporation, the powers and duties which, by the
terms of such Plan, are delegated to and imposed upon the Committee
administering such Plan, irrespective of whether the Plan denominates such
Committee as the Stock Option Committee or the Compensation Committee. In
addition, any Management Employee Benefit Plan (as hereinafter defined) which
would otherwise require board of director approval ("otherwise" meaning by
virtue of a legal requirement imposed by or arising from any source other than
these by-laws) shall be within the jurisdiction of the Compensation Committee;
the adoption, amendment or termination of any such plan shall require the
approval of the Compensation Committee and, except as limited by Business
Corporation Law ss. 712 or any other statutory or regulatory provision, action
by the Compensation Committee shall be deemed action by the board of directors
for all purposes. As used herein, the term "Management Employee Benefit Plan"
shall mean any employee benefit plan or arrangement as to
-9-
<PAGE>
which officers of the corporation constitute 15% or more of those eligible to
participate in or under such plan or arrangement. As used in the preceding
sentence, the term "officer" means only those holding the offices specified in
Section 4.01(a)(i) hereof and the Operating Committee members deemed "officers"
by virtue of Section 4.01(a)(ii).
(c) Nominating Committee. The Nominating Committee shall have
the power and duty to develop policy on the size and composition of the board of
directors and criteria for director nomination, to establish procedures for the
nomination process, to identify and recommend candidates for election to the
board of directors, and to evaluate participation and contribution of current
board members.
Section 3.11 Chairman, etc. The board of directors may elect
from among its members a Chairman, a Founder Chairman (which office may only be
occupied by Dr. David B. Pall) and a Chairman Emeritus, all of whom shall hold
such titles at the pleasure of the board. The persons having the titles Founder
Chairman and Chairman Emeritus shall not thereby be or be deemed officers of the
corporation.
Section 3.12. Planning and Governance Committee. There may be
a Planning and Governance Committee consisting of not less than three nor more
than five non-employee directors appointed by the Board. There shall be a
chairman of such Committee appointed by the Board or, absent such appointment,
elected by the members of the Committee. The Committee may meet from time to
time on notice
-10-
<PAGE>
to all members given by the chairman of the Committee or by any two other
members thereof or by the secretary of the corporation at the request of the
chairman of the Committee or of any two members thereof. The Committee shall
have the power and duty to study and make recommendations to the Board and/or
management with respect to (a) planning, including but not limited to long-range
or strategic planning, and (b) corporate governance issues, including (i) the
organization, practices and performance of the Board and its committees,
including the Board meeting schedule, its agenda and the information furnished
to the Board, and (ii) the performance of directors in both their Board and any
executive capacity with the Company, as well as the corporation's executive
resources and management development and succession plans. The Committee shall
report to the Board periodically on its work and its recommendations to the
Board and management arising therefrom. The Committee shall also have such other
powers and duties as shall be assigned to it by resolution of the Board from
time to time.
ARTICLE IV
Officers and Agents
-------------------
Section 4.01 (a) Corporate Officers and Agents. (i) The
officers of the corporation shall be a chairman, a president, one or more
executive vice presidents (one of whom may be designated the chief operating
officer of the corporation), one or more group vice presidents, a secretary, a
treasurer and a controller. The officers hereinabove in this paragraph referred
to
-11-
<PAGE>
shall be elected annually by the board of directors and shall hold office until
their respective successors are chosen and qualified.
(ii) There may be an Operating Committee of the corporation
consisting of such officers or other employees of the corporation or any
subsidiary as are designated by the chief executive officer. Members of the
Operating Committee shall serve on such Committee at the pleasure of, and may be
removed at any time by action of, the chief executive officer.
(iii) The corporation may have such other officers and agents
as may be deemed necessary who shall be chosen in such manner and hold their
positions for such terms and have such authority and duties as from time to time
may be determined by the board of directors. The salaries of the officers of the
corporation shall be fixed by the board of directors or, if there is a
Compensation Committee of the board, then by said Committee. One person may hold
more than one office except to the extent prohibited by law. In all cases where
the duties of any officer, agent or employee are not specifically prescribed by
the by-laws or by the board of directors, such officer, agent or employee shall
follow the orders and instructions of the chief executive officer or of such
other corporate officer as may be designated by the chief executive officer.
(b) Appointment of Non-Corporate Vice Presidents, etc. In
addition to corporate officers elected by the board of directors pursuant to
subparagraph (a) next above, the chief executive officer may appoint and remove
one or more employees as divisional
-12-
<PAGE>
or non-corporate vice presidents and one or more persons (who may but need not
be employees of the corporation) as assistant secretaries, assistant treasurers
and assistant controllers. The chief executive officer may at his option also
include as part of the title of any such divisional or non-corporate vice
president so appointed a designation which will indicate the principal position
or area of responsibility of such appointee and/or the designation "senior vice
president". Persons so appointed in accordance with this paragraph shall report
to, be under the supervision of and have such authority and duties as may be
specified from time to time by the chief executive officer or by such other
corporate officer as the chief executive officer may designate. Such appointed
vice presidents, assistant secretaries, assistant treasurers and assistant
controllers shall not be or be deemed officers of the corporation. Each such
appointment shall be in writing filed with the secretary. Such appointments
shall expire annually at the organizational meeting of the board of directors
following the annual meeting of shareholders or at such other time as the chief
executive officer may specify or determine.
Section 4.02 Chairman. The chairman shall be the chief
executive officer of the corporation. He shall have supervision of its affairs
and business subject to the direction of the board of directors. The chairman
shall preside at all meetings of the stockholders, of the board of directors and
of the executive committee unless he shall designate another officer or director
to preside at any such meeting. He shall, unless otherwise
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<PAGE>
directed by the board of directors, attend in person or by substitute appointed
by him, or shall execute on behalf of the corporation written instructions
appointing a proxy or proxies to represent the corporation at, all meetings of
the stockholders of any corporation in which the corporation shall hold any
stock and may, on behalf of the corporation, in person or by substitute or by
proxy, execute written waivers of notice and consents with respect to any such
meetings. At all such meetings and otherwise, the chairman in person or by
substitute or proxy as aforesaid, may vote the stock so held by the corporation
and may execute written consents and other instruments with respect to such
stock and may exercise any and all rights and powers incident to the ownership
of said stock, subject however to the instructions, if any, of the board of
directors. The chairman shall have custody of the treasurer's bond, if any.
Section 4.03 President and Vice Presidents. The president and
the vice presidents shall assist the chairman and shall perform such duties as
may be assigned to them by the chairman or by the board of directors. If at any
time the chairman is unavailable (determined as set forth below), the president
shall have the powers and perform the duties of the chairman. If at any time
both the chairman and the president are unavailable, the executive vice
presidents (if any), in order of their seniority, and, next, the group vice
presidents, in order of their seniority, shall have the powers and perform the
duties of the chairman. For purposes of the two preceding sentences, the
chairman or the
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<PAGE>
president, as the case may be, shall be deemed to be unavailable (a) if the
office in question is vacant or (b) if the person holding the office in question
is incapacitated to the extent that, if he or she were president of the United
States, the vice president of the United States could assume the powers and
duties of the president, or (c) if the chairman or the president, as the case
may be, cannot be reached after reasonable efforts utilizing all available means
of communication. Seniority of the executive vice presidents and the group vice
presidents may be determined in accordance with such designation as may be made
for the purpose from time to time by the board of directors, and in the absence
of any designation shall be determined by length of service with the corporation
except that an executive vice president who has been designated chief operating
officer shall thereby be deemed the executive vice president with the greatest
seniority.
Section 4.04 Secretary. The secretary (a) shall keep the
minutes of all proceedings of the directors and of the shareholders; (b) shall
attend to the giving of notices to the shareholders and directors, or of other
notices required by law or by these by-laws; (c) shall have custody of the seal
of the corporation and shall affix such seal to deeds, contracts and other
written instruments when authorized by the board of directors; (d) shall have
charge of the stock certificate book and stock ledger and such other books and
papers as the board may direct, and (e) shall perform all other duties incident
to the office of secretary.
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<PAGE>
Section 4.05 Treasurer. The treasurer shall be the chief
financial officer of the corporation. The treasurer shall have the care and
custody of all funds, securities, evidences of indebtedness and other personal
property of the corporation and shall deposit the same in accordance with the
instructions of the board of directors. He shall receive and give receipts and
acquittances for moneys paid in on account of the corporation, and shall pay out
of the funds on hand all bills, payrolls and other just debts of the corporation
of whatever nature upon maturity of the same. He shall enter regularly in books
belonging to the corporation, to be kept by him for that purpose, full and
accurate accounts of all moneys received and paid out by him on account of the
corporation, and he shall perform all other duties incident to the office of the
treasurer and, upon request of the board, he shall make such reports to it as
may be required at any time. He shall, if required by the board, give the
corporation a bond in such sums and with such sureties as shall be satisfactory
to the board, conditioned upon the faithful performance of his duties and for
the restoration to the corporation in case of his death, resignation, retirement
or removal from office of all books, papers, vouchers, money and other property
of whatever kind in his possession, or under his control belonging to the
corporation.
Section 4.06 Compensation of Officers. The officers shall
receive such salary or compensation as may be determined by the Compensation
Committee.
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<PAGE>
ARTICLE V
Removals, Resignations and Vacancies
------------------------------------
Section 5.01 Directors. Any director may resign at any time by
giving written notice thereof to the chief executive officer, and such
resignation shall take effect at the time therein specified. Whenever any
vacancy shall occur in the board of directors by death, resignation or
otherwise, the same shall be filled without undue delay by a majority vote of
the remaining members of the board at any regular or special meeting. The person
so chosen shall hold office until the next annual meeting or until his successor
shall have been chosen at a special meeting of the stockholders.
Section 5.02 Officers. The board of directors may, at any
meeting called for the purpose, remove from office any officer of the
corporation. Any officer may resign at any time by giving written notice thereof
to the chief executive officer, and such resignation shall take effect at the
time therein specified. Any vacancy occurring in the offices of chairman,
president, executive vice president, group vice president, secretary, treasurer
or any other corporate office, whether owing to removal, resignation, death or
any other reason, may be filled by the board of directors, and the officers so
chosen shall hold office at the pleasure of the board of directors.
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<PAGE>
ARTICLE VI
Stock
-----
Section 6.01 Certificates. Certificates of stock shall be
signed in the name of the corporation by the chairman or the president and by
the secretary or an assistant secretary and shall be sealed with the seal of the
corporation. Certificates for each class of authorized stock shall be
consecutively numbered, and the names and residences of the owners, the date of
issue, the number of shares and the amount paid therefor shall be entered in the
stock books. Certificates of stock shall be in such form consistent with law as
shall be prescribed by the board of directors. The seal of the corporation
attached to any stock certificate may be a facsimile, engraved or printed. Where
any stock certificate is signed by a transfer agent or transfer clerk and by a
registrar, the signatures of any officer of the corporation appearing upon such
certificate may be facsimiles, engraved or printed.
Section 6.02 Lost Certificates. In case of the alleged loss,
destruction or mutilation of a certificate or certificates of stock, the board
of directors may direct the issuance of a new certificate or certificates in
lieu thereof upon such terms and conditions in conformity with law as it may
prescribe.
Section 6.03 Transfer of Shares. Upon surrender to the
corporation or to a transfer agent of the corporation of a certificate of stock
duly endorsed or accompanied by proper
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<PAGE>
evidence of succession, assignment or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the person entitled
thereto, and cancel the old certificate. The corporation shall be entitled to
treat the holder of record of any share or shares of stock as the holder in fact
thereof and, accordingly, shall not be bound to recognize any equitable or other
claim to or interest in such share or shares on the part of any other person
whether or not it shall have express or other notice thereof, except as may be
required by the laws of New York.
Section 6.04 Closing of Transfer Books or Fixing of Record
Date. The board of directors may prescribe a period not exceeding fifty days
prior to the date of a meeting of the stockholders or prior to the last day on
which the consent or dissent of stockholders may be effectively expressed for
any purpose without a meeting, during which no transfer of stock on the books
may be made; or in lieu of prohibiting the transfer of stock, may fix a time not
more than fifty days prior to the date of any meeting of stockholders or prior
to the last day on which the consent or dissent of stockholders may be
effectively expressed for any purpose without a meeting, as the time as of which
stockholders entitled to notice of and to vote at such a meeting or whose
consent or dissent is required or may be expressed for any purpose, as the case
may be, shall be determined; and all persons who were holders of record of
voting stock at such time and no others shall be entitled to notice of and to
vote at such meeting or to express their consent or dissent, as the case may be.
The board of
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<PAGE>
directors may also fix a time not exceeding fifty days preceding the time fixed
for the payment of any dividend or the making of any distribution, or for the
delivery of evidences of rights, or evidences of interests arising out of any
change, conversion or exchange of capital stock, as a record time for the
determination of the stockholders entitled to receive any such dividend,
distribution rights or interest, or, at its option, in lieu of so fixing a
record time, may prescribe a period not exceeding fifty days prior to the date
for such payment, distribution or delivery during which no transfer of stock on
the books of the corporation may be made.
ARTICLE VII
Miscellaneous
-------------
Section 7.01 Waiver of Notice. Whenever, in accordance with
the laws of the State of New York, or the by-laws of the corporation, the
stockholders or directors are required to meet after call, notice, lapse of time
or other prerequisite, a meeting may be held without call, notice, lapse of time
or other prerequisite, upon written waivers signed before or after the meeting
by all persons entitled to notice and stating the time and place of such
meeting. The presence at any meeting of a person or persons entitled to notice
thereof shall be deemed a waiver of such notice as to such person or persons.
Section 7.02 Indemnification. The Corporation shall indemnify
any person made or threatened to be made a party to any
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<PAGE>
action or proceeding, whether civil or criminal (and whether or not by or in the
right of the corporation or of any other corporation of any type or kind,
domestic or foreign, or any partnership, joint venture, trust, employee benefit
plan or other enterprise), by reason of the fact that such person, his testator
or intestate, is or was a director or officer of the corporation or served any
other corporation of any type or kind, domestic or foreign, or any partnership,
joint venture, trust, employee benefit plan or other enterprise in any capacity
at the request of the corporation, against judgments, fines, amounts paid in
settlement and reasonable expenses, including attorneys' fees, actually and
necessarily incurred as a result of such action or proceeding, or any appeal
therein, provided that (i) no indemnification may be made to or on behalf of any
person if a judgment or other final adjudication adverse to such person
establishes that his acts were committed in bad faith or were the result of
active and deliberate dishonesty and were material to the cause of action so
adjudicated, or that he personally gained in fact a financial profit or other
advantage to which he was not legally entitled; (ii) no indemnification shall be
required in connection with the settlement of any pending or threatened action
or proceeding, or any other disposition thereof except a final adjudication,
unless the corporation has consented to such settlement or other disposition,
and (iii) the corporation shall not be obligated to indemnify any person by
reason of the adoption of this Section 7.02 if and to the extent such person is
entitled to be indemnified under a policy of insurance as such policy would
apply in the absence of the adoption of this Section 7.02.
Reasonable expenses, including attorneys' fees, incurred in
defending any action or proceeding, whether threatened or pending, shall be paid
or reimbursed by the corporation in advance of the final disposition thereof
upon receipt of an undertaking by or on behalf of the person seeking
indemnification to repay such amount to the corporation to the extent, if any,
such person is ultimately found not to be entitled to indemnification.
Notwithstanding any other provision hereof, no amendment or
repeal of this Section 7.02, or any other corporate action or agreement which
prohibits or otherwise limits the right of any person to indemnification or
advancement or reimbursement of expenses hereunder, shall be effective as to any
person until the 60th day following notice to such person of such action, and no
such amendment or repeal or other corporate action or agreement shall deprive
any person of any right hereunder arising out of any alleged or actual act or
omission occurring prior to such 60th day.
The corporation is hereby authorized, but shall not be
required, to enter into agreements with any of its directors, officers or
employees providing for rights to indemnification and advancement and
reimbursement of reasonable expenses, including attorneys' fees, to the extent
permitted by law, but the corporation's failure to do so shall not in any manner
affect or limit the rights provided for by this Section 7.02 or otherwise.
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<PAGE>
For purposes of this Section 7.02, the term "the corporation"
shall include any legal successor to the corporation, including any corporation
which acquires all or substantially all of the assets of the corporation in one
or more transactions. For purposes of this Section 7.02, the corporation shall
be deemed to have requested a person to serve an employee benefit plan where the
performance by such person of his duties to the corporation or any subsidiary
thereof also imposes duties on, or otherwise involves services by, such person
to the plan or participants or beneficiaries of the plan, and excise taxes
assessed on a person with respect to an employee benefit plan pursuant to
applicable law shall be considered fines.
The rights granted pursuant to or provided by the foregoing
provisions of this Section 7.02 shall be in addition to and shall not be
exclusive of any other rights to indemnification and expenses to which any such
person may otherwise be entitled by law, contract or otherwise.
ARTICLE VIII
Amendments
----------
Section 8.01 By Stockholders. The stockholders may make, amend
and repeal the by-laws of the corporation at any annual meeting or at any
special meeting called for the purpose.
Section 8.02 By Directors. Subject to the provisions of
Section 8.03 hereof, the board of directors shall have power to make, amend and
repeal the by-laws of the corporation, by vote of a
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<PAGE>
majority of all the directors, at any regular or special meeting of the board.
Section 8.03 By Stockholders Only. The board of directors
shall have no power to amend or repeal any of the provisions of Sections 2.02,
2.03, 2.04, or this Section 8.03, and any such provisions may be amended or
repealed only in the manner provided in Section 8.01. Notwithstanding the
foregoing, however, the board of directors may amend this Section 8.03 if the
sole effect of such amendment is to add to the list of the provisions which may
only be amended in the manner set forth in Section 8.01.
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<PAGE>
EXHIBIT 10.24
[Elected Vice President Form]
Amendment Dated July 19, 1993
to Employment Agreement Dated February 1, 1992
PALL CORPORATION, a New York Corporation ("the Company") and Erwin
Kirnbauer ("Executive") hereby agree that the Employment Agreement between them
dated February 1, 1992 is hereby amended by changing ss. 3(b) thereof to read
and provide as follows:
(b) Bonus Compensation. With respect to each fiscal year of the Company
falling in whole or in part within the Term of Employment beginning with the
fiscal year ending July 31, 1993, Executive shall be entitled to a bonus (in
addition to his Base Salary) in such amount and computed in such manner as shall
be determined by the Board of Directors but in no event shall the bonus payable
to Executive under this ss.3(b) be less than an amount computed by applying to
the fiscal year in question the following bonus formula:
"Bonus Compensation" means the amount, if any, payable to
Executive under this ss.3(b).
"Average Equity" means the average of stockholders' equity as
shown on the fiscal year-end consolidated balance sheet of the Company
as of the end of the fiscal year with respect to which Bonus
Compensation is being computed hereunder and as of the end of the
immediately preceding fiscal year (e.g., "Average Equity" to be used in
computing Bonus Compensation for the fiscal year ending July 31, 1993
will be the average of stockholders' equity as of August 1, 1992 and
July 31, 1993) except that the amount shown as the "equity adjustment
<PAGE>
from foreign currency translation" on each such consolidated balance
sheet shall be disregarded and the amount of $3,744,000 shall be the
equity adjustment (increase) from foreign currency translation used to
determine stockholders' equity at each such year-end balance sheet
date.
"Not Earnings" means the after-tax consolidated net earnings
of the Company and its subsidiaries as certified by its independent
accountants for inclusion in the annual report to stockholders except
that the restructuring charge in the amount of $17,301,000 (after tax)
taken by the Company in fiscal 1993 shall be disregarded (i.e., shall
not be treated as a charge to income) in determining Net Earnings for
that year.
"Return on Equity" means Net Earnings as a percentage of
Average Equity.
For fiscal years 1993, 1994 and 1995, "Zero Bonus Percentage"
shall mean a Return on Equity of 12.5%. For fiscal years 1993 and 1994,
"Maximum Bonus Percentage" shall mean a Return on Equity of the
following respective percentages:
Fiscal year 1993 - 18.5%
Fiscal year 1994 - 19.0%
For fiscal years after fiscal 1995 the Company shall determine the Zero
Bonus Percentage, and for fiscal years after fiscal 1994 the company
shall determine the Maximum Bonus Percentage, consistent in each case
with expected
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<PAGE>
results based upon the Company's normal projection procedures, or based
on sound statistical or trend data, and the determination by the
Company of such percentages shall be conclusive and binding on
Executive.
If Return on Equity for the fiscal year in question is the Zero Bonus Percentage
or less, no Bonus Compensation shall be payable. If Return on Equity equals or
exceeds the Maximum Bonus Percentage, the Bonus Compensation payable to
Executive shall be 70% of his Base Salary. If Return on Equity is more than the
Zero Bonus Percentage and less than the Maximum Bonus Percentage, the Bonus
Compensation shall be increased from zero percent of Base Salary towards 70% of
Base Salary in the same proportion that Return on Equity increases from the Zero
Bonus Percentage to the Maximum Bonus Percentage. Thus, for example, if Return
on Equity for fiscal 1993 is 15.50% (the midpoint between 12.5% and 18.5%) the
Bonus Compensation shall be an amount equal to 35% of Executive's Base Salary
(the midpoint between zero percent of Base Salary and 70% of Base Salary).
The Bonus Compensation shall be paid in installments as follows:
(i) 50% of the estimated amount thereof in July of the fiscal
year with respect to which the Bonus Compensation is payable (e.g., 50%
in July 1993 with respect to Bonus Compensation for the fiscal year
ending July 31, 1993), based on the then current projections of Return
on Equity, and
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<PAGE>
(ii) the balance thereof not later than January 15th next
following the end of the fiscal year with respect to which the Bonus
Compensation is payable.
With respect to any fiscal year of the Company which falls in part but
not in whole within the Term of Employment, the Bonus Compensation to which
Executive is entitled under this ss.3(b) shall be prorated on the basis of the
number of days of such fiscal year falling within the Term of Employment except
that if the Term of Employment ends within five days before or after the end of
a fiscal year, there shall be no proration and the Bonus Compensation shall be
payable with respect to the full fiscal year ending within such five-day period.
* * * * *
Except as expressly amended hereby, said Employment Agreement dated
February 1, 1992 shall remain in full force and effect in accordance with its
terms.
PALL CORPORATION
By /s/ Eric Krasnoff
--------------------------------
Executive Vice President
/s/ Erwin Kirnbauer
--------------------------------
Executive
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<PAGE>
[LOGO] Pall Corporation
1999 Annual Report
- --------------------------------------------------------------------------------
Contamination surrounds you...
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Company Profile:
Pall Corporation is a specialty materials and engineering company with the
broadest-based filtration, separations and purification capabilities in the
world. We serve a diverse, global customer base in four major markets:
BioPharmaceuticals, Medical, Aeropower and Fluid Processing. Our proprietary
products are used to discover, develop and produce pharmaceuticals, to protect
hospital patients, to enhance the quality and efficiency of manufacturing
processes, to keep equipment running efficiently and to protect the environment.
- --------------------------------------------------------------------------------
<PAGE>
Pall protects you.
<PAGE>
Our Vision:
We provide integrated solutions to the requirements of our technically demanding
and diverse customer base. Through our size and scope, Pall is uniquely
positioned to address the totality of customer needs. We provide the most
cost-effective products and are a true consultant and partner of our customers.
Financial Highlights:
- --------------------------------------------------------------------------------
Years Ended
(In thousands, except per share data) July 31, 1999 August 1, 1998
- --------------------------------------------------------------------------------
Net Sales $1,147,066 $1,087,285
Earnings Before Income Taxes $ 58,904 $ 134,985
Net Earnings* $ 51,507 $ 93,633
Earnings Per Share* $ .41 $ .75
Total Assets at Year End $1,488,327 $1,363,212
Stockholders' Equity $ 730,664 $ 765,615
Average Shares Outstanding 124,329 125,070
Equity Per Share Outstanding at Year End $ 5.88 $ 6.18
- --------------------------------------------------------------------------------
* Excluding restructuring and other charges, net, and the effect of adopting a
new accounting standard in fiscal 1999, net earnings were $119 million or 95
cents per share compared to $116 million or 92 cents per share last year.
2
<PAGE>
Pall / Chairman's Message
[PHOTO]
Eric Krasnoff, Chairman and Chief Executive Officer (left),
Jeremy Hayward-Surry, President
To Our Shareholders:
The Year 2000 may or may not mark the new millennium. Sages and sentimentalists
can argue on while I welcome fiscal year 2000 as Pall Corporation's official new
era.
This past year has seen some of the biggest upheavals and change in my 25
years with Pall. Our first two quarters were down significantly. We turned this
around and ended with a fourth quarter performance that was up 27% in earnings.
Of great importance is how we responded to significant business challenges and
got it right.
At the beginning of March, Pall announced disappointing earnings for its
second quarter. We simultaneously set out an aggressive restructuring plan. Key
elements included the elimination of close to 500 jobs, manufacturing
consolidations and the melding of our R&D and Scientific and Laboratory Services
groups into a single, multi-functional entity. It also involved major reductions
in expenses, the ratcheting down of capital expenditures and the elimination of
an under-performing business unit, Pall Well Technology, which we sold in March
1999.
The full package amounted to $50 million in annual savings. Remarkably, the
plan was implemented and well along within a month...early enough to impact
positively on our third quarter. Over two thirds of the expected quarterly
savings were reflected in the fourth quarter. We expect to achieve the full
impact of the restructuring right from the start of fiscal 2000.
We established two cardinal rules in the design and execution of the
restructuring plan. The first was that it would not have a negative impact on
revenue growth. The second requirement was that the restructuring not reduce the
stream of new products moving through development and into commercialization.
3
<PAGE>
Pall / Chairman's Message
We are confident that revenue growth and the fertility of our new product
pipeline have been preserved. Nor will we rest on our laurels. Cost reductions
and productivity improvements are not one-time events. We are determined to
continuously drive cost out of our operations.
Preserving employee morale has also been a focal point. To capture the
hearts, minds and attention of our work force, we are recommending two stock
ownership programs for stockholder approval at our Annual Meeting in November.
The first is a universal Employee Stock Purchase Plan that encourages
employee ownership of Pall stock through reasonable discount incentives. The
second is a stock ownership plan for senior management. Unlike the general plan,
senior managers are restricted by long holding periods and are required to
achieve minimum ownership levels over the next three years.
I am wedded to nurturing a culture of stock ownership in our Company. We must
further align the interests of all Pall employees around the world, whatever
their local responsibilities, to the overall success of Pall Corporation. In
this way, we are full partners dedicated to aggressively building shareholder
value.
So, bring on the millennium. Pall is eager to compete for the next thousand
years.
Now let's focus on what happened in fiscal 1999. Our largest single product
line is blood filters. There is little doubt that these products will be an
increasingly important mainstay for years to come. Right now, we are in the
middle of a jarring shift of blood filter sales from hospitals to blood centers.
This is a swap of high profit, low volume hospital business for potentially much
higher volume but lower priced sales to large blood centers such as the American
Red Cross, the Canadian Blood Services and other national organizations around
the world. Pall was caught in a margin whipsaw for much of fiscal 1998 and 1999.
The ramp up in blood filter sales to blood centers finally reached the
crossover point and showed through to the bottom line in the fourth quarter of
this year. The compelling benefits of blood filtration offer a rare win/win to
the health care system. Filtration lowers overall costs and improves patient
outcomes. Europe, North America and Asia are all moving rapidly towards an
inevitable future of 100% filtration of all blood. This is excellent news for
the safety of the blood supply.
Pall's BioPharmaceuticals business posted another very good year. The goal of
linking laboratory filtration to our pharmaceutical drug production business was
the logic that drove our acquisition of Gelman Sciences in 1997. It is now
reality. Customers have welcomed our seamless product offerings that provide
full scaleability from drug discovery and development through to final
production and delivery. Complete service and assistance with regulatory issues
creates value for our customers and saves them grief.
The pharmaceutical industry is moving to finer filtration for terminal
sterilization applications and to virus filtration steps for biotechnology
drugs. In both of these areas, Pall has a sharp technical edge. Customers
increasingly rely on Pall to deliver both the technical goods and the
intangibles that ease regulatory agency acceptance worldwide.
This is the quintessence of market leadership.
In the Fluid Processing group, Microelectronics exemplified the Dickens
statement, "It was the best of times, it was the worst of times..." The
worldwide slump of the semiconductor industry continued. Microelectronics'
revenues were off $25 million from the prior
4
<PAGE>
year. Yet our new product introductions have never been stronger and we
outperformed other suppliers in the market. This increase in muscle and market
share will let Pall benefit disproportionately in the coming recovery. We saw
the first clear signs of that rebound in the last few months of the fiscal year.
The rest of the Fluid Processing group was a grab bag of achievement and
challenge. The basic industrial filtration business was quite healthy, as were
sales to our Power Generation customers. We logged one of our largest
non-military orders ever, of $12 million through our alliance partner, General
Electric, for an Asian nuclear power customer.
Sales of products to hydrocarbon related companies, such as refineries,
suffered through the collapse of crude oil prices. As of this writing, oil
prices have recovered substantially from their nadir and we expect our own sales
to rise apace.
Sales of our membrane-based systems across all markets have grown
substantially over the past few years and now account for over 10% of total
sales. Earnings lagged as primary attention was focused on developing the
industrial systems business. Now that it has attained critical mass, we were
able to restructure our operations to improve margins. These improvements will
become increasingly apparent throughout fiscal 2000.
An exciting subset of the systems business is our new Water Processing
division. Increasing government regulation and deteriorating water quality have
intersected to create one of our largest targets of opportunity. We are
pioneering membrane filtration systems as the solution to the demand for pure
drinking water. Our systems are also serving municipal and industrial wastewater
markets. Together this is a $4 billion potential.
Aeropower posted another reliable year of steady growth and excellent
earnings. In the aerospace and industrial markets, we filter lubrication and
hydraulic systems along with the fuels that power them. Such systems are
becoming increasingly sophisticated. Moreover, Pall has the engineering and
development talent to maintain its status as the vendor of choice for these
complex applications. Indeed our products are so pervasive that the last person
to fly without at least some Pall products on board was probably Icarus.
In all of our markets, our growth is enhanced by customer demands for
quality, ecology and economy. This is a simple formula for our success. Our
filtration, separation and purification technologies are at the heart of new
manufacturing practices that improve product and service quality, minimize
environmental impact and improve profitability. This is as true in the refinery
as it is in the pharmaceutical plant, at the airframe manufacturer or in the
hospital.
This annual report exclusively features products that have been
commercialized in the last three years. The pace of product innovation is
increasing even as you read this letter. It is another measure of our leadership
in filtration.
Pall Corporation has slimmed down its overheads but beefed up its technology.
Our products and services are both more diverse and in greater demand than ever.
The markets for our technologies have expanded well beyond their traditional
borders to include virtually all manufacturing processes. We are truly an asset
to our customers.
So, bring on the millennium. Pall is eager to compete for the next thousand
years.
/s/ Eric Krasnoff
Eric Krasnoff
Chairman and Chief Executive Officer
5
<PAGE>
Pall At A Glance
Health Care:
BioPharmaceuticals
Market Description: Pall is an innovator and leader in the supply of filtration
and separation systems, validation services and proprietary membranes
fundamental to developers and manufacturers of pharmaceuticals,
biopharmaceuticals, blood fractions, therapeutic biologicals and food and
beverages, as well as producers of diagnostic tests and users of
laboratory-scale filtration devices.
Market Potential: $3.2 Billion.
Competitors: Millipore, Sartorius, CUNO
[The following table was depicted as a
bar graph in the printed material]
Market Sales
(amounts in millions)
294.2 332.7
98 99
29%
(Percent of Company Revenues)
[The following table was depicted as a
pie chart in the printed material]
Sales By Market Segment
(amounts in millions)
12% Specialty Materials
1999 Sales: $39.6
1998 Sales: $35.0
16% Food & Beverage
1999 Sales: $54.8
1998 Sales: $49.1
72% BioPharmaceuticals
1999 Sales: $238.3
1998 Sales: $210.1
Health Care: Medical
Market Description: Pall filters provide unparalleled protection from foreign
leukocyte and viral contamination, bacteria and particulates. Used extensively
in blood centers and hospitals for patients requiring blood transfusions, open
heart surgery, organ transplants, dialysis, intravenous feeding and breathing
therapy, they help improve patient outcomes, shorten hospital stays and lower
health care costs. With only 25% of the world's blood supply filtered, there is
abundant room for growth.
Market Potential: $4.3 Billion.
Competitors: Asahi Medical, Maco Pharma,
Terumo, Fresenius
Market Sales
(amounts in millions)
[The following table was depicted as a
bar graph in the printed material]
260.1 272.9
98 99
24%
(Percent of Company Revenues)
[The following table was depicted as a
pie chart in the printed material]
Sales By Market Segment
(amounts in millions)
32% Critical Care
1999 Sales: $86.6
1998 Sales: $82.8
68% Blood
1999 Sales: $186.3
1998 Sales: $177.3
6
<PAGE>
Market Potential:
Pall's sales potential, assuming 100% market penetration for existing products
and for those ready for release from R&D, in each of our markets at our selling
price, is over $18 billion. Market potential is a measure of opportunity and is
not intended to be achievable. Our growth strategy calls for aggressive product
development programs, increasing market share and developing new markets and
geographies.
Aeropower
Market Description: Pall is a leading supplier to the aerospace market for use
on commercial and military aircraft, ships and land-based vehicles. Industrial
customers include power generation plants and manufacturers of aluminum, paper,
automobiles and mobile equipment. Our Total Contamination Control approach helps
extend the useful life of fluids and systems, increasing productivity and
minimizing waste.
Market Potential: $2.8 Billion.
Competitors: Donaldson, Parker Hannifin, Hydac, Schroeder, Taisei
[The following table was depicted as
bar graph in the printed material]
Market Sales
(amounts in millions)
258.5 267.0
98 99
23%
(Percent of Company Revenues)
[The following table was depicted as
pie chart in the printed material]
Sales By Market Segment
(amounts in millions)
51% Aerospace
1999 Sales: $135.6
1998 Sales: $124.5
49% Industrial Hydraulics
1999 Sales: $131.4
1998 Sales: $134.0
Fluid Processing
Market Description: In this diverse market, Pall serves producers of oil, gas,
electricity, chemicals, semiconductors, computer terminals, disc drives, thin
film rigid discs, photographic film, municipal water and others. Our wide range
of sophisticated products enhance fluid purity by removing microscopic and
larger contaminants that can devastate production equipment, product yields and
quality.
Market Potential: $8 Billion.
Competitors: US Filter/Vivendi, CUNO, Millipore, Ronnigen-Petter, Fuji
[The following table was depicted as
bar graph in the printed material]
Market Sales
(amounts in millions)
274.5 274.5
98 99
24%
(Percent of Company Revenues)
[The following table was depicted as
pie chart in the printed material]
Sales By Market Segment
(amounts in millions)
23% Microelectronics
1999 Sales: $62.6
1998 Sales: $87.6
77% Industrial Process
1999 Sales: $211.9
1998 Sales: $186.9
7
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Pall / Health Care / BioPharmaceuticals
Over 500 medicines are in development...
The pharmaceutical industry is pumping billions of dollars into development
programs requiring Pall filtration products.
New recombinant drug products use Pall's virus filters such as the new Ultipor
DV20 virus filters (shown) at the critical virus removal stages of production.
Regulatory authorities mandate virus clearance steps. If not removed, these
viruses will destroy production batches worth as much as $100,000 for a single
liter of product. For more information, visit http://www.pall.com/newdrugs.
8
<PAGE>
[PHOTOS OMITTED]
...Pall helps get them to patients faster.
Pharmaceutical producers adhere to rigorous quality standards. In this market
where nothing can be left to chance, Pall's record of product performance and
innovation has earned Pall preferred supplier status among leading manufacturers
the world over.
9
<PAGE>
[PHOTOS OMITTED]
Pall / Health Care: Medical / Blood
Every 3 seconds, someone needs blood...
Many nations have already mandated routine blood filtration to remove leukocytes
with more to follow.
Pall's new Leukotrap RC PL leukocyte reduction filtration system (shown) is the
only product on the market capable of collecting and filtering packed red cells,
plasma and platelet preparations from whole blood donations. This patented
process provides blood centers the convenience and processing efficiency that is
essential to filtering every unit of blood. The world's largest blood centers
process 3,000 units a day. For more information, visit
http://www.pall.com/safeblood and http://www.bloodtransfusion.com
10
<PAGE>
[PHOTOS OMITTED]
...Pall makes blood transfusions safer.
Pall is the world's blood filtration leader with products for hospitals and
blood centers that consistently and reliably remove contaminating leukocytes
from donor blood. For patients and health care systems, Pall filtered blood
means fewer health complications, faster recoveries and lower costs.
11
<PAGE>
[PHOTOS OMITTED]
Pall / Aeropower / Aerospace
1,247 commercial jets were delivered this year...
Commercial aircraft, regardless of size or service, rely on sophisticated
filtration systems to protect engines and fuel, hydraulic and cabin air systems.
Pall's new lightweight Ultipleat high-flow filter (shown) is being used by
aircraft engine manufacturers that serve the growing regional jet market.
Technically sophisticated small jets are increasingly replacing simpler
propeller planes. This year, Pall worked in concert with an engine manufacturer
to develop the complete filtration system for a new engine for small jets in a
record 10 months. For more information, visit http://www.pall.com/fastjets.
12
<PAGE>
[PHOTOS OMITTED]
...Pall filters are on all of them.
The commercial aerospace market plans to build at least 16,000 jets in the next
20 years. These new jets, with their sophisticated systems, are highly
contamination sensitive. Each will generate 25 years of replacement-filter
business throughout its service life -- good news for Pall, the industry's
leading filter supplier.
13
<PAGE>
[PHOTOS OMITTED]
Pall / Fluid Processing / Water Processing
80% of drinking water comes from surface waters...
Surface waters are rife with virus, bacteria and parasites. Tough new standards
call for their removal.
Pall's Envirochek sampling capsule (shown) is the only product validated by the
US EPA (test methods #1622 and #1623) to test municipal water for
Cryptosporidium and is being used around the world. In the worst
cryptosporidiosis outbreak in modern US history, 403,000 people became sick and
100 died from drinking contaminated water. Outbreaks continue to be reported
throughout the world. Cryptosporidium is highly resistant to chlorine. Pall's
unique membrane filter system exceeds new EPA standards. These drinking water
standards are the strictest in the world. For more information, visit
http://www.pall.com/cleanwater.
14
<PAGE>
[PHOTOS OMITTED]
...Pall makes drinking water purer.
Membrane filtration is new to the municipal water industry but Pall has 53 years
of experience applying it to solve other complex contamination problems. In
side-by-side comparisons, Pall's technologies provide the highest-quality
drinking water at the lowest cost.
15
<PAGE>
[PHOTOS OMITTED]
Pall / Fluid Processing / Microelectronics
600 billion embedded chips are in operation...
The highly filtration-dependent computer chip industry is equated to a 1910
vintage automobile in terms of its development relative to its potential.
Pall's new Ionkleen purifiers (shown) remove critical defect-causing metal ions
from the photoresist chemicals required to etch microscopic circuit patterns on
silicon wafers. This revolutionary new product family enables chip producers to
maximize product yields and conserve chemicals costing up to $12,000 per gallon.
For more information, visit http://www.pall.com/fastchips.
16
<PAGE>
[PHOTOS OMITTED]
...Pall's technologies are essential to making them.
The materials used in semiconductor manufacture are so pure that the equivalent
of a raindrop of contamination in a swimming pool can halt production. Pall's
advanced products remove contaminants to the parts-per-trillion level helping
manufacturers to achieve their twin goals of high product quality and high
product yields.
17
<PAGE>
[PHOTOS OMITTED]
Pall / Fluid Processing / Industrial Process
Cleaner-burning gasolines cut smog 15%...
Gasoline producers must upgrade to equipment that is inherently much more
contamination sensitive in order to meet stringent pollution regulations.
Refiners are seeing huge returns on investments in custom-engineered Pall
backwash filters (shown). Configured into unique systems, they protect the
reactors required to produce cleaner-burning fuels from contaminants and extend
the life of the specialized catalysts used. The elimination of one catalyst
change-out saves producers as much as $10 million. For more information, visit
http://www.pall.com/cleanfuel.
18
<PAGE>
[PHOTOS OMITTED]
...Pall systems help refiners to produce them.
Cleaner-burning fuels are being phased in now. The first to hit the market have
already done more to reduce pollution than any other measure in the last decade.
Pall systems technology helps refiners to lower the cost of meeting these
important regulations.
19
<PAGE>
[PHOTOS OMITTED]
Pall / New Products
Pall creates 100's of commercially successful products every year...
In addition to advancing our core materials and technologies ahead of customer
needs, Pall scientists and engineers collaborate with customers, universities
and governments to assure a steady stream of market-ready innovations. Our
technology is replete with highly differentiated, highly profitable products and
a growing portfolio of new products that are just ready to hit their stride.
20
<PAGE>
[PHOTOS OMITTED]
...Every Pall product shown or named in this
report was introduced within the last three years.
21
<PAGE>
[PHOTOS OMITTED]
Membranes and Materials
In filtration, the magic is in the media. Pall owns technology for over 75 basic
types of filter materials -- far more than anyone in our industry. With this,
our products are developed faster, customers get optimized solutions, and Pall
has a competitive advantage.
Electronics Filtration
Electronics industry producers rely on their suppliers to continuously advance
their own technologies. In Pall, they've found an able partner that allows them
to filter all of their process fluids to the purity levels they require to
produce defect-free microprocessors and related components.
Strategic Technology Platforms Hitting Their Stride
Blood Filtration
A revolution in blood processing is underway with enhanced safety and
availability as its goals. Pall pioneered the leukocyte-reduction technology
that is central to this and offers the widest array of products for hospital and
blood center use. Pall products are consistently selected by researchers and are
preferred by customers for their consistent and reliable performance.
22
<PAGE>
[PHOTOS OMITTED]
Advanced Systems
Pall is combining its proprietary membrane and monitoring
technologies with engineering prowess to develop the filtration and separations
systems market. Self-cleaning systems oscillate, gyrate and vibrate to remove
contaminants or harvest valuable products. Pall systems require less energy and
less space than conventional technologies and are finding diverse applications
in industry.
Aerospace Systems
A dozen critical systems on each commercial and military aircraft require
filtration. Smaller, lighter, faster planes need self-contained,
highly-engineered filtration systems that fit into small spaces and perform
exquisitely. Pall is their key filtration partner.
Pharmaceutical Filtration
Drug manufacturers require filter products that perform at peak performance and
consistency. Pall provides lab-sized products up through full-scale production
sizes. This saves producers time and money and assures faster regulatory
approvals.
23
<PAGE>
FINANCIAL CONTENTS
25 Management's Discussion and Analysis of Financial Condition and Results of
Operations
29 Consolidated Statements of Earnings
29 Independent Auditors' Report
30 Consolidated Balance Sheets
31 Consolidated Statements of Stockholders' Equity
32 Consolidated Statements of Cash Flows
33 Notes to Consolidated Financial Statements
46 Common Stock Prices and Cash Dividends
46 Six-Year Sales
47 Six-Year Financial History
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
1999 Compared to 1998
Review of Consolidated Results
Sales for the year increased by 4 1/2% in local currency to $1,147 million from
$1,087 million last year. Foreign exchange rates increased sales by 1%, however
pricing decreased sales by 1%. The acquisition of Rochem in fiscal 1998
increased current year sales by about 1%.
Year-on-year, cost of sales as a percentage of sales (before restructuring and
other charges, net -- see below) increased by 1.5% mainly due to lower gross
margins on increased blood filter sales to blood centers, and lower margins on
Microelectronics and Industrial systems sales. Selling, general and
administrative expenses and research and development expenses, as a percentage
of sales decreased by 1.2% principally due to the restructuring that was
implemented during the third quarter of fiscal 1999.
During the third quarter of fiscal 1999, the Company announced and implemented a
plan to restructure its operations with targeted payroll and expense cost
reductions of over $50 million per annum. The Company initiated the
restructuring to bring operating costs in line with reducing gross margins. The
major restructuring details included:
o consolidation of European inventory warehousing and distribution functions
o restructuring of Japanese operations
o relocation and consolidation of certain manufacturing operations
o rationalization of the research and development and scientific and laboratory
services functions
o realignment of the Medical division sales forces
o reduction in corporate costs
As a result of the restructuring, the Company's global work force will be
reduced by approximately 500 people. As of the end of fiscal 1999, 450 employees
were terminated with the remaining terminations expected to occur before the end
of the calendar year. Upon consolidation of the European inventory warehousing
and distribution functions and restructuring of the Japanese operations, the
Company identified excess inventory that could not be sold within the normal
product life cycle. Consequently, the Company wrote off inventory of $13,811.
The total cost related to all restructuring related activities resulted in a
charge of $43,912 in the third quarter.
Along with the restructuring, the Company performed a comprehensive review of
its business. Across all business lines, the review identified instances where
certain products were superseded by newer products and some excess inventory
resulting from competitive conditions and adverse changes in product demand. As
a result, the Company wrote off $6,969 in inventory and provided an incremental
reserve of $3,958 to reflect current market conditions and shorter product life
cycles. The review also identified write-downs of $26,961 on certain fixed and
other assets, principally to provide for the impairment of certain
<PAGE>
patents and licenses that are not fully recoverable due to lower than
anticipated market potential; and, to reflect further impairment of land and
building held for sale and write-off of certain redundant fixed assets that are
no longer used.
The Company continues the clean up of contaminated water at its Ann Arbor,
Michigan facility that began in fiscal 1998. Costs incurred during this year
indicate that the anticipated future costs for remediation will exceed the
estimate originally established. As a result, the reserve for future
environmental remediation costs was increased by $6,000.
A summary table of the above charges is included in the notes to the
consolidated financial statements.
During the third quarter of fiscal 1999, the Company adopted the AICPA's
Statement of Position 98-5, Reporting the Costs of Start-Up Activities,
retroactive to the beginning of the fiscal year. As a result, previously
capitalized start-up costs of approximately $5,767 were expensed and recorded in
cost of sales. The effect of adopting this statement resulted in a charge of
$1,567 and $4,200 in the first and second quarters of fiscal 1999, respectively.
Other charges, net, for fiscal 1998 represent a $27 million write-off of
in-process research and development acquired in connection with the Company's
purchase of Rochem and non-recurring income of $13.5 million related to the
payment by Micron Separations Inc. ("MSI") to Pall in settlement of patent
litigation, net of certain one-time costs.
Year-on-year, net interest expense for fiscal 1999 is higher than in fiscal 1998
as the Company's average debt, net of cash and short-term investments, was also
higher for the same period; the weighted average borrowing rate for fiscal 1999
and 1998 was about the same. The underlying tax rate for fiscal 1999 was 23%
compared to 25% last year. The decrease in the tax rate reflects reductions in
the statutory tax rates in the United Kingdom, Germany and Japan, as well as an
increase in products manufactured in Puerto Rico and Ireland, which have lower
tax rates. The Company expects to maintain this rate through the end of fiscal
2000.
For the year, net earnings, excluding the restructuring and other charges, net,
and the effect of adopting the new accounting standard this year, were $119
million or 95 cents per share compared to $116 million or 92 cents per share
last year. The reported net earnings amounted to $52 million or 41 cents per
share for the year compared to $94 million or 75 cents per share last year. The
reported net earnings for this year include a charge of 51 cents per share
(after pro forma tax effect) related to the restructuring and one-time charges
mentioned above. The earnings this year also include a charge of 3 cents per
share (after pro forma tax effect) to write-off previously capitalized start-up
costs retroactive to the beginning of this fiscal year. The reported net
earnings for last year include 17 cents per share (after pro forma tax effect)
of other charges, net.
25
<PAGE>
Review of Market and Geographic Segments
Sales in the Medical market increased 4% in local currency. Growth in this
market was affected by price reductions in blood filters of about 5%.
Sequentially the Company has seen prices stabilize over the last three quarters.
Sales to blood centers were up 22% reflecting the shift away from sales to
hospitals; blood filter sales to hospitals declined by 11%. Year-on-year blood
filter sales increased 4 1/2% in local currency. By geography, Europe's sales to
blood centers increased 46% as more and more countries began to adopt universal
blood filtration; blood filter sales to hospitals in Europe declined by 24%. In
the Western Hemisphere, blood filter sales to blood centers increased 13%
reflecting momentum towards universal filtration. Blood filter sales to
hospitals declined by 11%. In Asia, where the majority of the blood filter sales
were to hospitals, sales increased 7%. On a global basis, blood filter sales to
blood centers now represent 53% of the total blood filter sales, compared to 45%
in fiscal 1998. Critical Care sales increased 3% in local currency.
Sales in the BioPharmaceuticals market increased by 12 1/2% in local currency.
Across all sub-markets, sales increased in double-digits. By geography,
BioPharmaceuticals segment sales grew 8% in the Western Hemisphere, 14% in
Europe and 24% in Asia.
Sales in the Aeropower market increased by 3% led by 8 1/2% growth in the
Aerospace sub-market and a 2 1/2% decline in Industrial Hydraulics. Within
Aerospace, military sales increased by 17% and commercial sales increased by 3%.
The split between military and commercial sales is 45% and 55%, which is about
the same as in fiscal 1998. By geography, military aerospace sales increased by
18% in the Western Hemisphere and 21% in Europe. Industrial Hydraulics sales in
the Western Hemisphere declined by 17% but increased in Europe by 5%. Sales in
Asia were flat.
Sales in the Fluid Processing market decreased by 1% in local currency. Sales
increased 12 1/2% in the traditional Industrial Process area; however, this
increase was offset by a 30% decrease in Microelectronics sales and the sale of
the Well Technology division. Across all geographies Microelectronics sales
decreased by about 30%. In the Industrial Process sub-market, sales to
Hydrocarbon, Chemical and Polymer (HCP) customers increased by 16% and sales to
Power Generation customers increased by 18%. Sales to customers in the Water
division increased by 105%. Across geographies, sales in the Industrial Process
market for Europe increased by 45%, led by the Water division, up 81%; HCP, up
59% and Power Generation, up 25%. Sales in the Western Hemisphere declined by
6%; this was mainly due to the sale of the Well Technology division. Industrial
Process sales in Asia increased by 3%.
<PAGE>
The consolidated operating profit (before restructuring and other charges, net)
for fiscal 1999 was 20.2% compared to 20.4% in fiscal 1998. By market, the
operating profit for Medical is about the same as last year; the decrease in
prices was offset by the benefits resulting from the restructuring that took
place in the Medical division as well as the substantial increase in sales
volume. The increase in BioPharmaceuticals' operating profit level is mainly due
to increased volume as mentioned above. The operating profit rate in the Fluid
Processing market declined by 3.2% reflecting lower margins on Microelectronics
and Industrial systems sales.
Sales in the Western Hemisphere decreased by 1% mainly due to the sale of the
Well Technology business and reduction in Microelectronics sales. Sales in
Europe increased by 13 1/2% as all the principal markets experienced
double-digit growth. Sales in Asia increased by 2% mainly due to sales increases
in the BioPharmaceuticals and Medical markets; this increase was partially
offset by a decrease in Microelectronics sales. By geography, the operating
profit rate in the Western Hemisphere declined by 1.1% mainly as a result of the
shift of blood filter sales from hospitals to blood centers and reduced margins
on Microelectronics sales. In Europe, the operating profit rate improved
slightly. The operating profit rate in Asia increased by 1.4% mainly as a result
of the improving economic situation in the Asian countries.
1998 Compared to 1997
Review of Consolidated Results
Sales for fiscal 1998 increased 2 1/2% to $1,087 million compared to $1,062
million in 1997. Local currency sales increased 6 1/2% including $15 million of
Rochem related business. Adverse foreign currency exchange rates reduced sales
by 4% or $43 million.
Year-on-year, cost of sales (excluding inventory write-downs in 1997) as a
percentage of sales increased by 1.6% mainly due to the adverse effects of
exchange rates. Selling, general and administrative expenses and research and
development expenses, as a percentage of sales increased by 1%.
Other charges, net in 1998 represent a $27 million write-off of in-process
research and development acquired in connection with the Rochem acquisition and
non-recurring income of $13.5 million related to the payment by MSI to Pall in
settlement of patent litigation, net of certain one-time costs. In the third
quarter of 1997, the Company completed its merger with Gelman Sciences. The
total cost related to this merger was $34 million. Also in the same quarter the
Company recorded a charge of $62 million related to the restructuring of its
other business segments, environmental cleanup costs and to provide for a
judgment awarded against it.
26
<PAGE>
Year-on-year, net interest expense is higher principally because the Company's
average debt, net of cash and short-term investments, was also higher for the
same comparable periods. Proceeds from borrowings were used to finance the
Company's share buy-backs and the Rochem acquisition.
Pretax margins before restructuring and other charges, net, declined by nearly
3% due to the adverse effect of exchange rates, higher research and development
expenses and the increase in net interest expense. The underlying tax rate for
1998 was 25% compared to 29% in 1997 reflecting the Company's efforts to move
production into its manufacturing facilities in Ireland and Puerto Rico, as well
as proportionately lower profits in high tax rate countries.
Net earnings for 1998 were $94 million, equal to 75 cents per share compared to
$67 million or 53 cents per share in 1997. Earnings for 1998 included
non-recurring income of $8 million (pretax), equal to 4 cents per share (after
pro forma tax effect), reflecting a payment received in settlement of a
successful patent litigation, net of certain one-time costs, and a one-time
charge of $27 million, equal to 21 cents per share to write off the in-process
research and development related to the acquisition of Rochem. Net earnings for
1997 include the effects of the Gelman Sciences merger and restructuring and
other one-time charges aggregating $96 million (pretax), equal to 49 cents per
share (after pro forma tax effect). Excluding restructuring and other charges,
net, earnings for 1998 were 92 cents per share compared to $1.02 per share in
1997.
Review of Market and Geographic Segments
Sales in the Health Care market increased by 4% in local currency. Growth in
this market was affected by price reductions in blood filters by 2% in the
Medical segment. By geography, Health Care sales in Europe increased by 11%, in
the Western Hemisphere by 2%, while sales in Asia declined by 6%. Sales in the
Fluid Processing market increased 9%. Growth in this market was held back by the
Microelectronics segment where sales declined by 1/2% including a 9% decline in
Western Hemisphere sales. This decline was primarily due to curtailment of new
fabrication plant construction. Sales in the Industrial Process segment
increased by 14 1/2% helped by the acquisition of Rochem along with the
double-digit increases in both Europe and Asia. Sales in the Aeropower market
increased by 9 1/2% led by the Aerospace segment by 13 1/2%. Commercial
aerospace sales increased 21% and military sales increased 4%, respectively. By
geography, Aerospace sales in all three regions increased in double-digits.
The consolidated operating profit rate for fiscal 1998 (before restructuring and
other charges, net) came in at 20.4% compared to 22.4% for 1997. Profit rates
for all markets were affected by the adverse effects of exchange rates. Health
Care's profit rate declined by nearly 3% and was also affected by the continued
price pressures in the Medical segment. The profit rate in the Aeropower market
came in at 23.6% which was the same as fiscal 1997. Fluid Processing's profit
rate declined by 2.3% and was affected by product mix as well as exchange rates.
<PAGE>
Sales in the Western Hemisphere increased 3% mainly led by growth in the
Aeropower market. Sales in Europe increased 14% as all markets experienced
double-digit growth; Europe sales also included the acquisition of Rochem. Sales
in Asia increased 2%; growth in this region was held back due to the general
economic climate. By geography, the profit rate in the Western Hemisphere came
in nearly 1% below last year's due to lower margins on Microelectronics sales
and price reductions in the Medical segment. Profit rates in Europe and Asia
were adversely affected by exchange rates. Europe's profit rate declined by
nearly 2% as it was also affected by continued price pressures in the Medical
segment. Asia's profit rate declined by 5.5% due once again to the effects of
exchange rates as well as the unsettled general economic climate in that part of
the world.
Liquidity and Capital Resources
The Company's balance sheet is affected by spot exchange rates used at the end
of fiscal 1999 for translating local currency amounts into U.S. dollars. In
comparing spot exchange rates at the end of last year, the European currencies
have weakened against the U.S. dollar, whereas the Asian currencies have
strengthened against the U.S. dollar.
Debt and short-term borrowings, net of cash and short-term investments increased
by $51 million during the year. Net debt as a percentage of net debt and equity
increased to 30% at the end of fiscal 1999 from 26% at the end of fiscal 1998.
In fiscal 1999, the Company acquired assets of its distributors in Argentina and
South Africa for approximately $7 million. The Company also purchased
approximately $40 million of its shares; these buy-backs were principally funded
through proceeds from stock option exercises. At the end of fiscal 1999, $25
million of treasury stock buy-backs remain authorized; the Company resumed stock
buy-backs in August 1999.
Capital expenditures and depreciation and amortization for the year were $71
million and $75 million respectively. The Company anticipates that it will spend
approximately $70 - $75 million in capital expenditures in fiscal 2000. The
Company considers its existing lines of credit along with the cash it generates
from operations to be sufficient for its future growth.
Other Matters
Year 2000 Compliance
In 1996, the Company began to assess the impact that the Year 2000 (Y2K) issue
will have on its information systems. In March 1998, a formal Y2K Committee was
established. The Y2K Committee is chaired by the Company's Chief Financial
Officer. The Committee has a comprehensive plan to enable the Company to achieve
Y2K compliance and is responsible to regularly determine that training, guidance
and resources are available to carry out the plan on a consistent basis,
worldwide. Throughout the process, the Committee has utilized the Company's
internal audit department, a team of geographic leaders and support personnel to
visit numerous global locations to conduct training and assess the progress
being made toward location Y2K readiness.
27
<PAGE>
To date, the Company has inventoried its critical and non-critical systems that
may be impacted by Y2K, and inquired of those vendors who support these systems,
as to their Y2K readiness. Most of those vendors queried have acknowledged that
their current systems are compliant or are expected to be Y2K compliant. In
addition, the Company has tested its critical and certain non-critical systems
to ensure Y2K compliance. (The Company does not plan to test systems of service
providers such as the New York Stock Exchange, utility companies and similar
service providers, as it does not have the resources to test their systems). The
Company believes that its systems are either compliant or has contingency plans
in place or in development. The expenditures necessary to achieve compliance
have not been material to the Company's financial statements.
The Company has also surveyed critical suppliers and distributors to determine
the status of their Y2K compliance programs. The Company is evaluating the
responses it has received and is taking appropriate steps as necessary.
Contingency plans are being finalized. The Company's reliance on suppliers and
distributors, and therefore, proper functioning of their products, information
systems and software means that failure by such suppliers and distributors to
address their own Y2K issues could have a material impact on the Company's plan
to achieve Y2K compliance.
The failure to correct a material Y2K problem could result in an interruption
in, or a failure of, certain normal business activities or operations. Such
failures could materially and adversely affect the Company's results of
operations. Due to the uncertainty inherent in the Y2K problem, the Company is
unable to determine, at this time, whether the consequences of Y2K failures will
have a material impact on the Company's results of operations. The Y2K project
is expected to reduce the Company's level of uncertainty about the Y2K problem
and, in particular, about the Y2K compliance and readiness of its vendors and
distributors. The Company believes that, with the completion of the project as
scheduled, the possibility of a material interruption of normal operations
should be reduced.
<PAGE>
Euro Currency Conversion
A new European currency (Euro) was introduced in January 1999 to replace the
separate (legacy) currencies of eleven individual countries. This will entail
changes in our operations as we modify systems and commercial arrangements to
deal with the new currency. Modifications will be necessary in operations such
as payroll, benefits and pension systems, contracts with suppliers and customers
and internal financial reporting systems. A three-year transition period is
expected during which transactions can be made in the legacy currencies. This
may require dual currency processes for our operations. We have identified
issues involved and are developing and implementing solutions. The cost of this
effort is not expected to have a material effect on our business or results of
operations. There is no guarantee, however, that all problems will be foreseen
and corrected, or that no material disruption of our business will occur. The
conversion to the Euro may have competitive implications on our pricing and
marketing strategies; however, any such impact is not known at this time.
Accounting Standards Not Yet Adopted
The Financial Accounting Standards Board issued Statement No. 133 related to
Accounting for Derivative Instruments and Hedging Activities. The Company will
adopt this statement in fiscal 2001.
Risk Management
The Company considers its foreign operations to be of major importance to its
future growth prospects, and does not believe the risk of its foreign business
differs materially from its domestic business, except for the risk of currency
fluctuations. Inasmuch as changes in foreign currency rates affect the Company's
operations around the world the Company monitors them closely and takes
necessary steps to minimize the risk that this will not materially affect its
financial statements; some of these measures include hedging balance sheet
exposures through forward exchange contracts and borrowing in local currency,
monitoring of customer account balances and assessment of customers' financial
strengths. In addition, the Company's diverse manufacturing and customer base
limits its exposures so that any one event is not likely to have a material
impact on its financial statements.
28
<PAGE>
CONSOLIDATED STATEMENTS OF EARNINGS
Pall Corporation and Subsidiaries
<TABLE>
<CAPTION>
Years Ended
- -----------------------------------------------------------------------------------------------------------------
(In thousands, except per share data) July 31, 1999 August 1, 1998 August 2, 1997
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
Revenues:
Net sales $1,147,066 $1,087,285 $1,062,008
- -----------------------------------------------------------------------------------------------------------------
Costs and Expenses:
Cost of sales 548,006 473,859 468,413
Selling, general and administrative expenses 405,956 392,809 376,904
Research and development 56,490 58,540 53,747
Restructuring and other charges, net 64,695 19,222 73,981
Interest expense, net 13,015 7,870 2,836
----------------------------------------------------------
Total Costs and Expenses 1,088,162 952,300 975,881
- -----------------------------------------------------------------------------------------------------------------
Earnings Before Income Taxes 58,904 134,985 86,127
Provision for income taxes 7,397 41,352 18,809
- -----------------------------------------------------------------------------------------------------------------
Net Earnings $ 51,507 $ 93,633 $ 67,318
- -----------------------------------------------------------------------------------------------------------------
Earnings Per Share:
Basic $ 0.41 $ 0.75 $ 0.53
Diluted $ 0.41 $ 0.75 $ 0.53
- -----------------------------------------------------------------------------------------------------------------
Average Shares Outstanding:
Basic 124,329 125,070 126,319
Diluted 124,755 125,681 127,470
=================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
INDEPENDENT AUDITORS' REPORT
Board of Directors
Pall Corporation:
We have audited the accompanying consolidated balance sheets of Pall Corporation
and subsidiaries as of July 31, 1999 and August 1, 1998, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the years in the three-year period ended July 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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
<PAGE>
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pall Corporation and
subsidiaries as of July 31, 1999 and August 1, 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended July 31, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Melville, New York
September 1, 1999
29
<PAGE>
CONSOLIDATED BALANCE SHEETS
Pall Corporation and Subsidiaries
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
(In thousands, except per share data) July 31, 1999 August 1, 1998
<S> <C> <C>
- -----------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 86,677 $ 12,125
Short-term investments 50,500 16,800
Accounts receivable, net of allowances for doubtful
accounts of $6,623 and $5,879, respectively 326,197 291,535
Inventories 205,867 227,254
Prepaid expenses 21,723 22,705
Taxes receivable 12,648 6,941
Deferred income taxes 33,412 15,915
Other current assets 7,165 9,214
----------------------------------
Total Current Assets 744,189 602,489
- -----------------------------------------------------------------------------------------
Property, Plant and Equipment:
Land 30,341 29,263
Buildings and improvements 323,452 313,094
Machinery and equipment 500,494 498,661
Furniture and fixtures 66,176 64,307
Transportation equipment 15,565 15,088
----------------------------------
936,028 920,413
Less: Accumulated depreciation and amortization 429,012 399,821
----------------------------------
Property, Plant and Equipment, Net 507,016 520,592
- -----------------------------------------------------------------------------------------
Other Assets 237,122 240,131
- -----------------------------------------------------------------------------------------
Total Assets $1,488,327 $1,363,212
=========================================================================================
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable $ 301,647 $ 134,615
Accounts payable 63,525 66,773
Accrued liabilities:
Salaries and commissions 44,515 39,998
Payroll taxes 6,517 6,969
Interest 2,215 1,897
Pension and profit sharing plans 17,418 17,415
Other 44,918 34,990
----------------------------------
115,583 101,269
Income taxes 20,147 38,232
Current portion of long-term debt 37,506 50,292
Dividends payable 19,871 19,202
----------------------------------
Total Current Liabilities 558,279 410,383
- -----------------------------------------------------------------------------------------
Long-term Debt, Net of Current Portion 116,815 111,469
Deferred Income Taxes 21,232 21,514
Other Non-Current Liabilities 61,337 54,231
----------------------------------
Total Liabilities 757,663 597,597
- -----------------------------------------------------------------------------------------
Stockholders' Equity:
Common stock, par value $.10 per share; 500,000 shares
authorized; 127,958 shares issued 12,796 12,796
Capital in excess of par value 92,893 92,893
Retained earnings 732,970 764,927
Treasury stock, at cost (1999; 3,748 shares, 1998;
4,039 shares) (82,283) (87,281)
Stock option loans (7,216) (7,140)
Accumulated other comprehensive (loss) income:
Foreign currency translation (12,149) (10,416)
Minimum pension liability (1,937) (4,062)
Unrealized investment (losses) gains (4,410) 3,898
----------------------------------
(18,496) (10,580)
- -----------------------------------------------------------------------------------------
Total Stockholders' Equity 730,664 765,615
- -----------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $1,488,327 $1,363,212
=========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Pall Corporation and Subsidiaries
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands) Accumulated
Capital in Stock Other
Years Ended August 2, 1997, Common Excess of Retained Treasury Option Comprehensive
August 1, 1998 and July 31, 1999 Stock Par Value Earnings Stock Loans (Loss) Income Total
<S> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at August 3, 1996 $12,771 $90,362 $755,864 $(50,410) $(8,802) $ (2,797) $796,988
Comprehensive income:
Net earnings 67,318 67,318
Other comprehensive (loss) income:
Translation adjustment (6,782) (6,782)
Minimum pension liability 281 281
Unrealized investment gains 176 176
Comprehensive income
Cash dividends declared (65,928) (65,928)
Issuance of 1,978 shares for stock
options and employee plans 25 2,361 (7,331) 34,368 29,423
Sale of 150 treasury shares 170 3,205 3,375
Stock option loans (18) (18)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at August 2, 1997 12,796 92,893 749,923 (12,837) (8,820) (9,122) 824,833
Comprehensive income:
Net earnings 93,633 93,633
Other comprehensive (loss) income:
Translation adjustment (5,694) (5,694)
Minimum pension liability 286 286
Unrealized investment gains 3,950 3,950
Comprehensive income
Cash dividends declared (75,501) (75,501)
Issuance of 488 shares for stock
options (3,128) 10,554 7,426
Purchase of 3,928 shares (84,998) (84,998)
Stock option loans 1,680 1,680
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at August 1, 1998 12,796 92,893 764,927 (87,281) (7,140) (10,580) 765,615
Comprehensive income:
Net earnings 51,507 51,507
Other comprehensive (loss) income:
Translation adjustment (1,734) (1,734)
Minimum pension liability 2,125 2,125
Unrealized investment losses (8,307) (8,307)
Comprehensive income
Cash dividends declared (78,980) (78,980)
Issuance of 2,087 shares for stock
options and employee plans (4,484) 45,202 40,718
Purchase of 1,796 shares (40,204) (40,204)
Stock option loans (76) (76)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1999 $12,796 $92,893 $732,970 $(82,283) $(7,216) $(18,496) $730,664
===================================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------
(In thousands)
Years Ended August 2, 1997, Comprehensive
August 1, 1998 and July 31, 1999 Income
<S> <C>
- -------------------------------------------- -------------
Balance at August 3, 1996
Comprehensive income:
Net earnings $67,318
Other comprehensive (loss) income:
Translation adjustment (6,782)
Minimum pension liability 281
Unrealized investment gains 176
-------
Comprehensive income $60,993
-------
Cash dividends declared
Issuance of 1,978 shares for stock
options and employee plans
Sale of 150 treasury shares
Stock option loans
- --------------------------------------------
Balance at August 2, 1997
Comprehensive income:
Net earnings $93,633
Other comprehensive (loss) income:
Translation adjustment (5,694)
Minimum pension liability 286
Unrealized investment gains 3,950
-------
Comprehensive income $92,175
-------
Cash dividends declared
Issuance of 488 shares for stock
options
Purchase of 3,928 shares
Stock option loans
- --------------------------------------------
Balance at August 1, 1998
Comprehensive income:
Net earnings $51,507
Other comprehensive (loss) income:
Translation adjustment (1,734)
Minimum pension liability 2,125
Unrealized investment losses (8,307)
-------
Comprehensive income $43,591
-------
Cash dividends declared
Issuance of 2,087 shares for stock
options and employee plans
Purchase of 1,796 shares
Stock option loans
- --------------------------------------------
Balance at July 31, 1999
============================================
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Pall Corporation and Subsidiaries
<TABLE>
<CAPTION>
Years Ended
- ---------------------------------------------------------------------------------------------------------------------
(In thousands) July 31, 1999 August 1, 1998 August 2, 1997
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
Operating activities:
Net earnings $ 51,507 $ 93,633 $ 67,318
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Restructuring and other charges, net 77,957 27,000 69,609
Depreciation and amortization of property,
plant and equipment 64,857 64,587 55,854
Amortization of intangibles 9,914 8,492 6,972
Deferred income taxes (16,134) (19,932) (22,636)
Provision for doubtful accounts 1,891 1,915 1,417
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable (31,861) (20,159) (20,038)
Inventories (7,474) (31,351) (20,762)
Other assets (13,225) 17,722 (30,627)
Accounts payable (6,974) 10,714 (11,252)
Accrued expenses (4,188) 8,269 6,111
Income taxes payable (18,096) (2,423) (4,260)
Other liabilities 2,887 2,315 1,025
-------------------------------------------------------
Net Cash Provided by Operating Activities 111,061 160,782 98,731
- ---------------------------------------------------------------------------------------------------------------------
Investing activities:
Acquisitions, net of cash acquired (6,831) (64,747) --
Investments and licenses (2,548) (18,400) (13,865)
Sale of Well Technology Division 5,600 -- --
Capital expenditures (71,196) (85,121) (88,605)
Disposals of fixed assets 5,673 3,672 1,300
Short-term investments (33,700) 20,700 33,950
Benefits protection trust (2,286) (4,241) (1,319)
-------------------------------------------------------
Net Cash Used by Investing Activities (105,288) 148,137) (68,539)
- ---------------------------------------------------------------------------------------------------------------------
Financing activities:
Notes payable 166,737 8,888 (6,933)
Long-term borrowings 31,836 119,959 15,768
Payments on long-term debt (51,990) (13,798) (17,515)
Net proceeds from exercise of stock options 40,642 9,106 29,405
Purchase of treasury stock (40,204) (84,998) --
Sale of treasury stock -- -- 3,375
Dividends paid (78,311) (56,299) (80,061)
-------------------------------------------------------
Net Cash Provided (Used) by Financing Activities 68,710 (17,142) (55,961)
- ---------------------------------------------------------------------------------------------------------------------
Cash Flow for Year 74,483 (4,497) (25,769)
Cash and Cash Equivalents at Beginning of Year 12,125 17,972 44,118
Effect of Exchange Rate Changes on Cash 69 (1,350) (377)
- ---------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 86,677 $ 12,125 $ 17,972
=====================================================================================================================
Supplemental disclosures:
Interest paid (net of amount capitalized) $ 18,098 $ 14,242 $ 9,180
Income taxes paid (net of refunds) 49,989 34,370 66,718
Value of shares issued upon acquisition of Gelman -- -- 267,615
=====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pall Corporation and Subsidiaries
(In thousands, except per share data)
Accounting Policies and Related Matters
The Company
The Company manufactures and markets filtration and separation products and
systems throughout the world to a diverse group of customers within four markets
- -- Medical, BioPharmaceuticals, Aeropower and Fluid Processing.
The Company's fiscal year ends on the Saturday closest to July 31, except that
the Company's foreign subsidiaries are on a July 31 fiscal year. The years ended
July 31, 1999, August 1, 1998 and August 2, 1997 each comprise 52 weeks.
Presentation and Use of Estimates
The financial statements of the Company are presented on a consolidated basis
with its subsidiaries, all of which are wholly-owned. All significant
intercompany balances and transactions have been eliminated in consolidation.
Investments (which are less than 20% owned) are considered available-for-sale
securities; as such, these investments are carried at fair value. Unrealized
gains and losses on these securities are reported as a separate component of
stockholders' equity, until realized. Realized gains and losses are recognized
in earnings upon sale.
To prepare the Company's financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that may affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Certain prior year amounts have been reclassified to conform with the current
year presentation.
Translation of Foreign Currencies
Financial statements of foreign subsidiaries have been translated into U.S.
dollars at exchange rates as follows: (i) balance sheet accounts at year-end
rates, and (ii) income statement accounts at weighted average rates. Translation
gains and losses are reflected in stockholders' equity, while transaction gains
and losses are reflected in income. Transaction gains (losses) in fiscal years
1999, 1998 and 1997 amounted to $2,893, $(1,075) and $(2,108), respectively.
The equity in, and advances to, foreign subsidiaries approximately totaled
$232,000 and $306,000 at July 31, 1999 and August 1, 1998, respectively.
Cash and Cash Equivalents
All financial instruments purchased with a maturity of three months or less,
other than investments held in Puerto Rico, are considered cash equivalents.
Cash equivalents are held until maturity.
Short-Term Investments
Short-term investments, consisting principally of certificates of deposit and
repurchase agreements secured by government obligations, are held to maturity
and are carried at cost, which approximates fair value.
<PAGE>
Inventories
Inventories are valued at the lower of cost (principally on the first-in,
first-out method) or market.
Long-Lived Assets
Property, plant and equipment are stated at cost. Depreciation of plant and
equipment is provided over the estimated useful lives of the respective assets,
principally on the straight-line basis. Costs related to patents and trademarks
are amortized using the straight-line method over the estimated useful lives,
generally for periods ranging up to 20 years.
The Company periodically reviews its long-lived assets for impairment whenever
events or circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of the expected cash flows, undiscounted and without
interest, is less than the carrying amount of the asset, an impairment loss is
recognized as the amount by which the carrying amount of the asset exceeds its
fair value.
Revenue Recognition
Revenue is recognized when a product is shipped or a service is performed.
Stock Options
Stock option plans are accounted for using Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB No. 25), and related
interpretations. Accordingly, no compensation expense is recognized when options
are granted. As permitted by SFAS No. 123, Accounting for Stock-Based
Compensation, the Company decided to retain the accounting prescribed by APB No.
25 for its stock option plans and to present the SFAS No. 123 information in the
footnotes to its financial statements.
Income Taxes
The Company and its domestic
subsidiaries file a consolidated Federal income tax return.
Taxes on income are provided using the asset and liability method. Under this
method, deferred tax assets and liabilities are determined based on the
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the years in which the
differences are expected to reverse.
Earnings Per Share
The consolidated statements of earnings present basic and diluted earnings per
share. Basic earnings per share is determined by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Dilutive earnings per share considers the potential effect of
dilution on basic earnings per share assuming exercise of all stock options that
meet certain criteria.
33
<PAGE>
Acquisitions
Effective January 1, 1998, the Company acquired all the outstanding capital
stock of the Swiss holding company Argentaurum AG, including its Rochem
subsidiaries ("Rochem"). Rochem manufactures and sells proprietary advanced
design reverse osmosis nanofiltration and ultrafiltration systems for treating
and desalinizing sea water, purifying landfill leachate and other municipal and
industrial wastewater applications. This acquisition was accounted for under the
purchase method of accounting and, accordingly, the operations of Rochem are
included in the Company's financial statements from the date of acquisition. The
purchase price of approximately $63,000 exceeded the fair market value of the
net assets acquired by approximately $49,000. The Company wrote off $27,000 of
the excess purchase price attributable to in-process research and development
acquired and the remaining amount was allocated to goodwill and patents. The
acquisition of Rochem would not have materially affected the financial
statements of the Company had the results of operations been included in the
Company's financial statements of prior years.
On February 3, 1997, the Company acquired Gelman Sciences Inc. ("Gelman"). The
acquisition was effected through the exchange of 1.3047 shares of Company common
stock for each share of Gelman common stock. The Company issued 10,607 shares of
its common stock for the acquisition. The transaction was accounted for as a
pooling-of-interests and, accordingly, all financial data for prior periods have
been restated.
Restructuring and Other Charges
During the third quarter of fiscal 1999, the Company announced and implemented a
plan to restructure its operations with targeted payroll and expense cost
reductions of over $50 million per annum. The Company initiated the
restructuring to bring operating costs in line with reducing gross margins. The
major restructuring details included:
o consolidation of European inventory warehousing and distribution functions
o restructuring of Japanese operations
o relocation and consolidation of certain manufacturing operations
o rationalization of the research and development and scientific and laboratory
services functions
o realignment of the Medical division sales forces
o reduction in corporate costs
As a result of the restructuring, the Company's global work force will be
reduced by approximately 500 people. As of July 31, 1999, 450 employees were
terminated, with the remaining terminations expected to occur before the end of
the calendar year. Upon consolidation of the European inventory warehousing and
distribution functions and restructuring of the Japanese operations, the Company
identified excess inventory that could not be sold within the normal product
life cycle. Consequently, the Company wrote off inventory of $13,811. The total
cost related to all restructuring related activities resulted in a charge of
$43,912 in the third quarter.
Along with the restructuring, the Company performed a comprehensive review of
its business. Across all business lines the review identified instances where
<PAGE>
certain products have been superseded by newer products, and some excess
inventory resulting from competitive conditions and adverse changes in product
demand. As a result, the Company wrote off $6,969 in inventory and provided an
incremental reserve of $3,958 to reflect current market conditions and shorter
product life cycles. The review also identified write-downs of $26,961 on
certain fixed and other assets, principally to provide for the impairment of
certain patents and licenses that are not fully recoverable due to lower than
anticipated market potential; and, to reflect further impairment of land and
building held for sale and write-off of certain redundant fixed assets that are
no longer used.
The Company continues the clean-up of contaminated water at its Ann Arbor,
Michigan facility that began in fiscal 1998. Costs incurred during this year
indicate that the anticipated future costs for remediation will exceed the
estimate originally established. As a result, the reserve for future
environmental remediation costs was increased by $6,000.
A summary of the restructuring and other charges included in the third quarter
of fiscal 1999 is presented below.
Other
Restructuring Charges Total
- -----------------------------------------------------------------------------
Severance $18,243 $ -- $18,243
Fixed asset write-offs 4,977 14,208 19,185
Other asset write-offs -- 12,753 12,753
Lease termination costs 2,877 -- 2,877
Environmental -- 6,000 6,000
Other 4,004 1,633 5,637
- -----------------------------------------------------------------------------
Subtotal 30,101 34,594 64,695
Inventory write-down 13,811 10,927 24,738(a)
- -----------------------------------------------------------------------------
Total pretax charges $43,912 $45,521 $89,433
=============================================================================
Cash $25,124 $ 7,633 $32,757
Non-cash 18,788 37,888 56,676
- -----------------------------------------------------------------------------
Total $43,912 $45,521 $89,433
=============================================================================
(a) Amount included in cost of sales; $21 million of inventory was identified
for scrap ($16 million has been scrapped and the remaining $5 million will
be scrapped by the end of the calendar year).
At the end of fiscal 1999 approximately $9,500 of accruals related to current
year's restructuring and other charges (excluding environmental matters) are
reflected on the balance sheet. These accruals relate primarily to severance,
lease and distributor termination obligations pertaining to the consolidation of
European inventory warehousing and distribution functions. This restructuring is
expected to be completed by the end of the calendar year.
During the third quarter of fiscal 1999, the Company adopted the AICPA's
Statement of Position 98-5, Reporting the Costs of Start-Up Activities,
retroactive to the beginning of the fiscal year. As a result, previously
capitalized start-up costs of approximately $5,767 were expensed and recorded in
cost of sales. The effect of adopting this statement resulted in a charge of
$1,567 and $4,200 in the first and second quarters of fiscal 1999, respectively.
34
<PAGE>
Other charges, net in fiscal 1998, included the $27,000 write-off in the third
quarter, attributable to in-process research and development the Company
acquired as part of the Rochem acquisition and one-time income of $13,500 in the
second quarter of 1998 from Micron Separations Inc., which was found to have
infringed the Company's Nylon Membrane patent. The one-time income from the
patent litigation settlement is reported net of legal and professional fees
related to the patent litigation; a settlement, including costs, of $2,500 with
the Department of Defense concerning a long standing disagreement over a sale
dating back nearly ten years and write-offs of $2,200 of inventory and equipment
due to the acquisition of new technology.
In February 1997, the Company completed its merger with Gelman. The combined
companies incurred merger-related expenses of $10,519. These expenses include
amounts paid to investment advisors, attorneys, accountants, change in control
payments to certain executive officers of Gelman and other incidental expenses
related to the merger. Also, during the first quarter of fiscal 1997, Gelman
paid $3,911 in connection with the termination of its proposed merger
transaction with Memtec Ltd.
Upon consummation of the merger, the combined companies restructured their
operations to streamline the manufacturing, sales and overhead functions. As a
result, the combined companies recorded a charge of $19,645 in the third quarter
of 1997.
Along with the Gelman restructuring, the Company performed a review of its
existing business segments. In the Aeropower segment, the Company decided to
further consolidate its U.S. production and operating facilities to maintain
greater efficiency in manufacturing and overhead functions and to recognize
inventory write-downs due to changes in demand. As a result, the Company
recorded a charge of $6,114 in the third quarter. In the Health Care and Fluid
Processing segments, the review identified certain products that have been
superseded by the introduction of new products. As the gross margins on the
older products continued to decline, the Company decided to write-down these
products. The review also identified certain manufacturing, sales and overhead
personnel who were made redundant. The total charge related to these items was
$23,670, which the Company recorded in the third quarter of 1997. The Company
also wrote down machinery and equipment and recorded a charge of $15,571 in the
third quarter. Factors leading to the write-down were new product introductions,
a decline in the gross margins of older products and inadequate cash flows. As a
result of these actions, approximately 250 positions were made redundant.
On April 19, 1995, a jury verdict of $7,000 was rendered against the Company.
The Company appealed the judgment; however, on April 9, 1997, the judgment was
affirmed. The Company estimated that its obligation under the judgment,
including insurance recoveries and legal costs, would be approximately $6,500.
The judgment awarded was paid in the fourth quarter of fiscal 1997.
<PAGE>
On May 9, 1997, Gelman received a permit from the State of Michigan to clean up
contaminated water. The permit requires that all processed water discharged meet
the standards set by the State. Based on the permit obtained from the State of
Michigan and upon review of environmental issues at its other facilities, the
Company recorded a charge of $10,000 in the third quarter.
A detailed summary of all the fiscal 1997 charges is given below.
Gelman
Merger and
Restructuring Other Charges
Charges Aeropower Other Total
- -----------------------------------------------------------------------------
Merger-related
expenses $14,430 $ -- $ -- $14,430
Asset write-offs 11,662 2,625 15,571 29,858
Severance 1,514 771 4,091 6,376
Environmental and legal -- -- 16,500 16,500
Other 3,015 242 3,560 6,817
- -----------------------------------------------------------------------------
Subtotal 30,621 3,638 39,722 73,981
Inventory write-down 3,454 2,476 16,019 21,949(a)
- -----------------------------------------------------------------------------
Total pretax charges $34,075 $6,114 $55,741 $95,930
=============================================================================
Cash $18,003 $1,013 $22,688 $41,704
Non-cash 16,072 5,101 33,053 54,226
- -----------------------------------------------------------------------------
Total $34,075 $6,114 $55,741 $95,930
=============================================================================
(a) Amount included in cost of sales; all inventory has been scrapped.
The balance sheet at the end of fiscal 1998 does not include any accruals
related to the fiscal 1997 restructuring and other charges with the exception of
environmental matters.
Inventories
The major classes of inventory are as follows:
1999 1998
- -----------------------------------------------------------------------------
Raw materials and components $ 77,092 $ 95,861
Work-in-process 25,127 24,168
Finished goods 103,648 107,225
- -----------------------------------------------------------------------------
Total inventory $205,867 $227,254
=============================================================================
35
<PAGE>
Other Assets
Other assets consist of the following:
1999 1998
- -----------------------------------------------------------------------------
Goodwill and other intangibles, net of
accumulated amortization of
$16,968 and $12,234, respectively $ 54,731 $ 55,037
Patents and trademarks, net of
accumulated amortization of
$15,782 and $19,340, respectively 38,143 47,175
Investments 25,294 29,218
Benefits protection trust 28,726 29,001
Prepaid pension expenses 24,716 21,229
Intangible pension assets 5,192 4,129
Deferred income taxes 35,020 30,873
Other 25,300 23,469
- -----------------------------------------------------------------------------
Total $237,122 $240,131
=============================================================================
Goodwill and other intangibles represent the cost in excess of the tangible net
assets of businesses acquired.
Patents and trademarks include costs related to successfully defending certain
Pall patents, and expenditures made to register new patents and trademarks, as
well as paid-up licenses for third-party patents.
Investments represent amounts the Company has invested in certain companies to
form strategic alliances which will enable the Company to broaden its portfolio
of products. In fiscal 1998, the Company entered into agreements with V.I.
Technologies, Inc. ("VITEX"). VITEX is a leading developer of a broad portfolio
of blood products and systems using its proprietary viral inactivation
technologies. Under the terms of the agreements, the Company made payments
aggregating $9,000 for a 7.5% interest in VITEX' common shares and the companies
agreed to share the costs to jointly develop VITEX' pathogen inactivation
technology for red blood cells and platelets. The Company gets exclusive
worldwide marketing and distribution rights to pathogen inactivation systems
developed under the agreements. The agreements contemplate that the Company will
make milestone-driven equity payments to VITEX of up to another $17,000 over
five years at the then-current market price of VITEX common shares.
The Company completed the sale of its Well Technology Division to Oiltools
International Limited ("Oiltools") during the third quarter of fiscal 1999.
Coincident with this transaction, Oiltools was recapitalized. The
recapitalization resulted in a loss of control and, as such, the Company no
longer accounts for its investment in Oiltools under the equity method. The
sales transaction was not material to the Company's financial statements.
The benefits protection trust was established for the purpose of satisfying
certain previously unfunded pension obligations, in the event of a change of
control of the Company. The July 31, 1999 and August 1, 1998 balance sheets
reflect related liabilities in the amounts of $31,300 and $31,452, respectively.
The trust primarily holds investments in U.S. government obligations, debt
obligations of corporations and financial institutions with high credit ratings
and equity mutual
<PAGE>
fund shares. The Company considers investments held in the trust to be
available-for-sale securities. Contractual maturity dates range from 1999 -
2029.
Pertinent information related to the trust for fiscal years 1999, 1998 and 1997
follows:
1999 1998 1997
- -------------------------------------------------------------------------------
Annual contributions $ 2,286 $ 4,241 $ 1,319
Total purchases 16,836 49,477 49,357
Total proceeds from sales 21,603 53,438 51,632
Net gains (losses) recognized 228 (29) (18)
===============================================================================
Prepaid pension expenses represent the non-current amounts arising from the
excess of cumulative employer contributions and earnings thereon, over accrued
net pension expenses.
Intangible pension assets represent, for certain domestic pension arrangements,
the excess of unfunded accumulated benefits over unrecognized prior service
costs. The July 31, 1999 and August 1, 1998 balance sheets reflect additional
long-term pension liabilities of $8,172 and $10,379, respectively, and a
reduction in stockholders' equity, net of deferred tax benefits, of $1,937 and
$4,062, respectively.
Notes Payable and Long-Term Debt
At July 31, 1999, the Company had lines of credit totaling approximately
$515,000, of which $301,647 in notes payable had been drawn. Such lines of
credit do not represent legal commitments on the parts of the financial
institutions and no compensating balances are required. The weighted average
interest rates at the end of fiscal 1999 and 1998 were 5.1% and 5.4%,
respectively.
Long-term debt consists of:
1999 1998
- -----------------------------------------------------------------------------
1.00% - 2.6% bank loans in Japan,
due through 2004 $ 78,379 $ 43,872
7.23% term loan, due on June 30, 1999 -- 20,000
6.31% bank loan, due through 2002 26,000 34,000
5.99% bank loan, due through 2003 37,500 47,500
7.38% sale-and-leaseback obligation,
due through 2001 6,525 10,052
5.89% Industrial development bonds due
on July 1, 2004 4,415 4,415
7.5% note payable-- State of Michigan
due through January 6, 2002 319 425
Capitalized leases, 11.25% to 11.4% due in
varying amounts through the year 2005 1,106 1,469
Other 77 28
- -----------------------------------------------------------------------------
Total long-term debt 154,321 161,761
Less: current portion 37,506 50,292
- -----------------------------------------------------------------------------
Long-term debt, net of current portion $116,815 $111,469
=============================================================================
36
<PAGE>
In October 1997, the Company entered into a long-term debt agreement to borrow
$40,000 at 6.31%. Payments are due in installments through the year 2002. In
March 1998, the Company entered into a long-term debt agreement to borrow
$50,000 at 5.99%. Payments are due in installments through the year 2003.
Proceeds from the borrowings were principally used to repurchase shares and to
acquire Rochem.
The aggregate annual maturities of long-term debt during the fiscal years 2000
through 2004 are approximately as follows: 2000, $37,506; 2001, $74,190; 2002,
$21,023; 2003, $12,887; and 2004, $8,628.
Interest expense for 1999, 1998 and 1997 amounted to $18,416, $13,329 and
$9,556, respectively. Interest income for 1999, 1998 and 1997 amounted to
$5,401, $5,459 and $6,720, respectively.
Income Taxes
The components of earnings before income taxes are as follows:
1999 1998 1997
- -------------------------------------------------------------------------------
Domestic operations $(7,716) $ 51,899 $ 4,581
Foreign operations 66,620 83,086 81,546
- -------------------------------------------------------------------------------
Total $58,904 $134,985 $86,127
===============================================================================
The provisions for income taxes consist of the following items:
1999 1998 1997
- -------------------------------------------------------------------------------
Current:
Federal and Puerto Rico $ 1,431 $ 34,156 $ 13,491
State 900 1,500 500
Foreign 21,200 25,628 27,454
- -------------------------------------------------------------------------------
Total 23,531 61,284 41,445
- -------------------------------------------------------------------------------
Deferred:
Federal and Puerto Rico (14,873) (19,662) (23,829)
Foreign (1,261) (270) 1,193
- -------------------------------------------------------------------------------
Total (16,134) (19,932) (22,636)
- -------------------------------------------------------------------------------
Total income tax expense $ 7,397 $ 41,352 $ 18,809
===============================================================================
<PAGE>
A reconciliation of the provisions for income taxes follows:
1999 1998 1997
- -------------------------------------------------------------------------------
% of % of % of
Pretax Pretax Pretax
Earnings Earnings Earnings
- -------------------------------------------------------------------------------
Computed "expected" tax expense 35.0% 35.0% 35.0%
Tax benefit of Section 936
Puerto Rico operations (6.4) (2.2) (9.0)
Federal tax credits and other effects (0.8) -- (0.6)
Change in valuation allowance -- (0.8) 2.7
In-process research and development
write-off, foreign -- 7.0 --
Foreign income and withholding taxes,
net of U.S. foreign tax credits (16.2) (9.1) (6.7)
State income taxes, net of Federal
income tax benefit 1.0 0.7 0.4
- -------------------------------------------------------------------------------
Total and effective tax rate 12.6% 30.6% 21.8%
===============================================================================
The Company has two Puerto Rico subsidiaries that are organized as "possessions
corporations" as defined in Section 936 of the Internal Revenue Code. In fiscal
1997, both 936 corporations elected to change from the so-called "percentage
limitation" to the so-called "economic-activity limitation" in computing the
allowable credit against their underlying U.S. tax liability. The former
limitation restricts the credit to a stipulated percentage of their pre-credit
U.S. tax liability. The latter equates the credit to the sum of three separate
gauges of activity, by far the most significant of which to the companies is 60%
of qualified possession wages and fringe benefits. The exemption from Puerto
Rico income tax remains at 90%. Repatriation of these earnings results in the
imposition of a withholding tax of no more than 10%.
A third Puerto Rico entity, initially incorporated under Puerto Rico law in
November 1996, has, since August 1998, operated as a branch of a wholly-owned
controlled foreign corporation (CFC) of the Company. Under U.S. tax principles,
the earnings of a CFC are normally subject to U.S. tax only upon repatriation.
In the reconciliation of the computed "expected" tax expense to the total and
effective tax rate, outlined above, the "benefit" attributable to this
subsidiary is combined with the effects of other controlled foreign
corporations.
The Small Business Job Protection Act of 1996 repealed Section 936 of the
Internal Revenue Code which provided a tax credit for U.S. companies with
operations in certain U.S. possessions, including Puerto Rico. For existing
qualifying Puerto Rico operations, such as Pall, Section 936 will be phased out
over a period of several years, with a decreasing credit being available through
the last taxable year beginning before January 1, 2006.
37
<PAGE>
The tax effects of temporary differences and loss carry-forwards that give rise
to significant portions of the net deferred tax asset at July 31, 1999 and
August 1, 1998 are as follows:
1999 1998
- -----------------------------------------------------------------------------
Deferred tax asset:
Tax loss and tax credit carry-forwards $ 43,765 $ 34,068
Inventories 11,332 9,331
Pension liabilities 17,682 16,358
Accrued expenses 12,215 10,723
Other 6,184 2,709
- -----------------------------------------------------------------------------
Gross deferred tax asset 91,178 73,189
Valuation allowance (1,450) (1,450)
- -----------------------------------------------------------------------------
Net deferred tax asset 89,728 71,739
- -----------------------------------------------------------------------------
Deferred tax liability:
Plant and equipment (34,471) (37,601)
Pension assets (6,264) (5,438)
Other (1,793) (3,426)
- -----------------------------------------------------------------------------
Total deferred tax liability (42,528) (46,465)
- -----------------------------------------------------------------------------
Net deferred tax asset $ 47,200 $ 25,274
=============================================================================
There has been no change in the valuation allowance as of July 31, 1999 versus
the prior year. In evaluating the reasonableness of the valuation allowance,
management assesses whether it is more likely than not that some portion, or
all, of the deferred tax assets will not be realized. Ultimately, the
realization of deferred tax assets is dependent upon generation of future
taxable income during those periods in which temporary differences become
deductible and/or credits can be utilized. To this end, management considers the
level of historical taxable income, the scheduled reversal of deferred tax
liabilities, tax planning strategies and projected future taxable income. Based
on these considerations, and the indefinite carry-forward availability of
certain deferred tax credits (principally related to alternative minimum tax),
management believes it is more likely than not that the Company will realize the
benefit of these items, net of the July 31, 1999 valuation allowance.
United States income taxes have not been provided on the retained earnings of
foreign subsidiaries (including the Puerto Rico CFC referred to above), which
totaled $149,000, at July 31, 1999 ($202,000 at August 1, 1998). Foreign
subsidiaries have paid, and are expected to continue to pay, dividends out of
accumulated earnings. A portion of such earnings will however be permanently
reinvested and any additional U.S. taxes arising from the repatriation of
earnings available for distribution, less applicable credits for taxes paid
abroad, would not be material.
Other Non-Current Liabilities
This consists primarily of accruals for deferred compensation plans and
arrangements, the benefits of which are, and will continue to be, paid to
covered officers and employees. Also included are accruals for environmental
remediation costs.
<PAGE>
Common Stock
Shareholder Rights Plan
In 1989, the Board of Directors adopted a Shareholder Rights Plan. Under the
Plan, as amended April 20, 1999, one right is attached to each outstanding share
of the Company's common stock. Each right, when it becomes exercisable, will
entitle the registered holder to purchase one share of the Company's common
stock at an initial exercise price of $80 per share, subject to adjustment in
certain events. The rights will become exercisable and will trade separately
from the common stock (1) ten days after any person or group acquires 20% or
more of the Company's outstanding common stock (an Acquiring Person), or (2) ten
business days after any person or group commences or announces a tender offer
for 20% or more of the outstanding common stock. If any person or group becomes
an Acquiring Person, each holder of a right, other than rights owned by the
Acquiring Person, would thereafter be entitled, upon exercise of the right at
the exercise price, to receive a number of shares of common stock of the Company
having a market value at that time of twice the exercise price of the right.
Alternatively, the Board of Directors could exchange the rights not owned by the
Acquiring Person for common stock at an exchange ratio of one share of common
stock per right. In addition, if the Company is acquired in a merger or other
business combination, or 50% or more of its consolidated assets or earning power
are sold, each holder of a right would thereafter be entitled, upon exercise of
the right at the exercise price, to receive a number of shares of the most
powerful voting capital stock of the acquiring company which at the time of the
business combination or sale had a market value of twice the exercise price of
the right.
The rights will expire on December 1, 2009, unless earlier redeemed. The rights
are redeemable by the Board of Directors for one-third of a cent per right at
any time until a person or group becomes an Acquiring Person.
Stock Repurchase Programs
On October 6, 1997, the Company's Board of Directors authorized the expenditure
of up to $150,000 to repurchase shares of the Company's common stock. In the
current fiscal year, the Company purchased 1,796 shares at an aggregate cost of
$40,204. In fiscal 1998 the Company bought 3,928 shares at an aggregate cost of
$84,998.
Repurchased shares are held in treasury for use in connection with the exercise
of options granted under the Company's stock option plans, and for general
corporate purposes. At July 31, 1999, the Company held 3,748 treasury shares.
Stock Purchase Plans
In June 1999, the Board of Directors approved two plans (a management stock
purchase plan -- MSPP and an employee stock purchase plan -- ESPP) which enable
employees of the Company to purchase Company stock. Participation in the MSPP is
limited to certain executives as designated by the Compensation Committee of the
Board of Directors, which also established common stock ownership targets for
participants. Participation in the ESPP is available to all employees except
those who are included in the MSPP. Both plans are subject to shareholders'
approval.
38
<PAGE>
Incentive Compensation Plan
The plan provides additional compensation to officers and key employees of the
Company and its subsidiaries based upon the achievement of specified management
goals. The Compensation Committee of the Board of Directors establishes the
goals on which the Company's executive officers are compensated, and management
establishes the goals for other covered employees. The aggregate amounts charged
to expense in connection with the plan were $8,900, $7,200 and $6,800 for fiscal
years 1999, 1998 and 1997, respectively.
Stock Option Plans
The Company has adopted several plans that provide for the granting of stock
options to officers, employees and non-employee directors at option prices equal
to the market price of the common stock at date of grant. The forms of option
adopted provide that the options may not be exercised within one year from the
date of grant, and expire if not completely exercised within five years from the
date of grant. For the most part, in any year after the first year, the options
can be exercised only up to 25% of the shares subject to the option, computed
cumulatively.
1999 1998
- -----------------------------------------------------------------------------
Options exercisable 2,395 3,409
Options available for grant 1,454 416
=============================================================================
Changes in the options outstanding during fiscal years
1997, 1998 and 1999 are summarized in the following table:
Weighted
Number of Price Average
Options Range Price
- ---------------------------------------------------------------------------
Balance-- August 3, 1996 7,191 $ 2.60 - 27.25 $19.34
Fiscal 1997:
Options granted 137 17.53 - 26.75 21.77
Options exercised (1,926) 2.60 - 24.25 16.12
Options terminated (158) 2.81 - 26.06 19.84
- ---------------------------------------------------------------------------
Balance-- August 2, 1997 5,244 2.60 - 27.25 20.58
Fiscal 1998:
Options granted 3,081 19.88 - 21.28 20.40
Options exercised (488) 2.60 - 21.33 15.36
Options terminated (198) 10.63 - 24.25 21.94
- ---------------------------------------------------------------------------
Balance-- August 1, 1998 7,639 2.60 - 27.25 20.81
Fiscal 1999:
Options granted 3,313 17.38 - 25.66 17.81
Options exercised (2,211) 2.64 - 24.25 18.22
Options terminated (432) 5.45 - 26.44 20.98
- ---------------------------------------------------------------------------
Balance-- July 31, 1999 8,309 $ 2.60 - 27.25 $20.29
===========================================================================
As of July 31, 1999, 9,763 shares of common stock of the Company were reserved
for the exercise of stock options. To the extent treasury shares are used to
satisfy option exercises, these reserved shares will not be issued.
<PAGE>
Using the Black-Scholes option-pricing model, the disclosures required under
SFAS No. 123 are as follows:
1999 1998 1997
- -------------------------------------------------------------------------------
Average fair value of options granted $ 5.20 $ 4.90 $ --
Valuation assumptions:
Expected dividend yield 3.0% 3.0% --
Expected volatility 35.0% 25.0% --
Expected life (years) 5 5 --
Risk-free interest rate 5.6% 5.9% --
===============================================================================
Pro forma effect
Reduction in net earnings $5,700 $2,721 $2,576
Reduction in earnings per share,
basic and diluted $ 0.05 $ 0.02 $ 0.02
===============================================================================
The above calculations reflect only the impact of grants since the beginning of
fiscal 1996, and reflect only the compensation expense that the Company would
amortize over the vesting period of the grants. In future years, therefore, the
pro forma effect on net earnings and earnings per share may differ from those
shown above.
Pension and Profit Sharing Plans and Arrangements
Pension Plans
The Company adopted SFAS No. 132, Employer's Disclosures about Pensions and
Other Postretirement Benefits, which revises disclosures about pensions and
other postretirement benefits and requires presentation of information about
such plans in a standardized format. The Statement addresses disclosure only. It
does not address liability measurement or expense recognition. There was no
effect on the Company's financial statements as a result of adopting SFAS No.
132.
The Company and its subsidiaries provide substantially all domestic and foreign
employees with pension benefits. Pension costs charged to operations totaled
$14,162, $12,414 and $10,739 in fiscal years 1999, 1998 and 1997, respectively.
The Company's pension plans provide benefits based on salary and length of
service. Funding policy for domestic plans is in accordance with ERISA funding
standards; for foreign plans, funding is determined by local tax laws and
regulations. Plan assets are invested primarily in common stocks, bonds and cash
instruments.
39
<PAGE>
The following table reflects the change in benefit obligations and change in
plan assets for the Company's defined benefit pension plans:
<TABLE>
<CAPTION>
U.S. Plans Foreign Plans
- -----------------------------------------------------------------------------------------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
Change in Benefit Obligation
Benefit obligation-- beginning of year $106,232 $ 87,098 $ 86,134 $ 76,720
Service cost 5,974 4,365 6,114 5,307
Interest cost 7,244 6,720 6,160 5,136
Plan participant contributions -- -- 1,740 2,094
Plan amendments 3,222 3,726 -- 247
Actuarial (gain) loss (7,212) 10,172 7,968 1,227
Total benefits paid (6,350) (5,849) (4,014) (1,973)
Effect of exchange rates -- -- 2,419 (2,624)
- -----------------------------------------------------------------------------------------------------
Benefit obligation-- end of year $109,110 $106,232 $106,521 $ 86,134
=====================================================================================================
Change in Plan Assets
Fair value of plan assets-- beginning of year $ 69,109 $ 61,572 $116,448 $101,127
Actual return on plan assets 10,374 9,961 9,991 12,615
Company contributions 3,491 3,425 4,529 4,852
Plan participant contributions -- -- 1,740 2,086
Benefits paid from plan assets (6,350) (5,849) (4,014) (1,973)
Effect of exchange rates -- -- 1,225 (2,259)
- -----------------------------------------------------------------------------------------------------
Fair value of plan assets-- end of year $ 76,624 $ 69,109 $129,919 $116,448
=====================================================================================================
Funded Status $(32,486) $(37,123) $ 23,398 $ 30,314
Unrecognized actuarial (gain) or loss (10,601) 2,379 (13,428) (21,077)
Unrecognized prior service cost 7,986 5,553 341 380
Unrecognized transition (asset) or obligation (1,401) (1,567) (1,624) (2,168)
- -----------------------------------------------------------------------------------------------------
Net amount recognized $(36,502) $(30,758) $ 8,687 $ 7,449
=====================================================================================================
Amount recognized in the balance sheet consists of:
Prepaid benefit $ -- $ -- $ 24,716 $ 21,229
Accrued benefit liability (44,674) (41,137) (16,029) (13,780)
Intangible asset 5,192 4,129 -- --
Accumulated other comprehensive income 2,980 6,250 -- --
- -----------------------------------------------------------------------------------------------------
Net amount recognized $(36,502) $(30,758) $ 8,687 $ 7,449
=====================================================================================================
Plans with accumulated benefit obligations in excess
of plan assets consist of the following:
Accumulated benefit obligation $ 31,300 $ 31,452 $ 10,312 $ 11,476
Projected benefit obligation 38,711 38,729 12,010 13,422
Plan assets at fair value -- -- -- --
=====================================================================================================
</TABLE>
40
<PAGE>
Net periodic benefit costs for the Company's defined benefit pension plans
include the following components:
<TABLE>
<CAPTION>
U.S. Plans Foreign Plans
- -------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
Service cost $ 5,974 $ 4,365 $ 3,949 $ 6,114 $ 5,307 $ 4,346
Interest cost 7,244 6,720 6,051 6,160 5,136 5,039
Expected return on plan assets (6,023) (5,101) (3,875) (8,449) (7,163) (6,765)
Amortization of prior service cost 789 652 478 39 39 21
Amortization of net transition asset (166) (166) (166) (551) (554) (547)
Recognized actuarial loss (gain) 1,417 1,254 1,009 16 (235) (265)
- -------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 9,235 $ 7,724 $ 7,446 $ 3,329 $ 2,530 $ 1,829
===============================================================================================================================
</TABLE>
The following table provides the weighted average assumptions used to determine
plan liabilities and expense:
<TABLE>
<CAPTION>
U.S. Plans Foreign Plans
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average discount rate 7.50% 7.00% 7.50% 2.50 - 6.50% 2.50 - 7.50% 3.50 - 8.50%
Expected long-term rate of return on plan assets 10.00% 10.00% 9.00% 4.50 - 7.00% 4.50 - 7.75% 4.50 - 9.00%
Rate of compensation increase 4.75% 4.75% 4.75% 2.50 - 3.00% 2.30 - 4.50% 3.00 - 5.50%
====================================================================================================================================
</TABLE>
The Company and its subsidiaries also participate in certain pension plans
primarily for the benefit of its employees who are union members. Contributions
to these plans were $1,598, $2,160 and $1,464 for fiscal years 1999, 1998 and
1997, respectively.
Profit Sharing Plan
The Company's profit sharing and 401(k) plan covers substantially all domestic
employees of the Company and its participating subsidiaries, other than those
employees covered by a union retirement plan. The plan provides that, unless the
Board of Directors decides otherwise, the Company contribute annually the lesser
of (a) the amount which, when added to forfeitures for the year, equals 7.5% of
the amount by which the consolidated net operating income before income taxes of
the Company and its participating subsidiaries exceeds $500, or (b) the amount
deductible for Federal income tax purposes. The expense associated with the plan
for fiscal years 1999, 1998 and 1997 was $3,348, $4,581 and $5,207,
respectively.
<PAGE>
Other Comprehensive Income
During fiscal year 1999, the Company adopted SFAS No. 130, Reporting
Comprehensive Income, and has elected to report Comprehensive Income in the
Consolidated Statement of Stockholders' Equity. The statement requires
disclosures of the amount of income tax expense or benefit allocated to each
component of other comprehensive income. The changes in the components of other
comprehensive income (loss) are as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
Pretax Tax Exp. Net Pretax Tax Exp. Net
Amount (Credit) Amount Amount (Credit) Amount
- ----------------------------------------------------------------------------------------------------------------------
Unrealized translation adjustment $ (1,966) $ 232 $(1,734) $(5,545) $ (149) $(5,694)
Minimum pension liability adjustment 3,269 (1,144) 2,125 439 (153) 286
Unrealized investment (losses) gains (12,780) 4,473 (8,307) 6,065 (2,115) 3,950
- ----------------------------------------------------------------------------------------------------------------------
$(11,477) $ 3,561 $(7,916) $ 959 $(2,417) $(1,458)
======================================================================================================================
1997
<S> <C> <C> <C>
- ----------------------------------------------------------------------------
Pretax Tax Exp. Net
Amount (Credit) Amount
- ----------------------------------------------------------------------------
Unrealized translation adjustment $(7,692) $910 $(6,782)
Minimum pension liability adjustment 432 (151) 281
Unrealized investment (losses) gains 281 (105) 176
- ----------------------------------------------------------------------------
$(6,979) $654 $(6,325)
============================================================================
</TABLE>
41
<PAGE>
Contingencies and Commitments
In May 1997, Gelman received a permit to clean up contaminated water at its Ann
Arbor, Michigan, facility. The permit requires that all processed water
discharged meet the standards set by the State. Certain other facilities of the
Company are also involved in environmental proceedings. The situations at these
sites are similar, in that they relate to the acts of third parties and are not
related to ongoing Company operations. The Company's insurers have been notified
and are evaluating coverage. Based on the permit obtained from the State and
upon review of the environmental issues at other facilities the Company decided
to increase its environmental remediation reserves by an additional $10,000 and
recorded a charge in the third quarter of fiscal 1997. The Company started the
clean-up process at its Ann Arbor facility in fiscal 1998 and continues to do
so. Costs incurred during the current fiscal year indicate that the anticipated
future costs for remediation will exceed the estimate originally established. As
a result, the reserve for future environmental remediation costs has been
increased by an additional $6,000 in fiscal 1999. At the end of fiscal 1999,
approximately $11,500 of accruals related to environmental matters are reflected
on the balance sheet. In the opinion of management, the Company expects to be in
substantial compliance with applicable environmental laws. Because regulatory
standards under environmental laws are becoming increasingly stringent, there
can be no assurance that future developments will not cause the Company to incur
material environmental liabilities or costs.
The Company and its subsidiaries are subject to certain other legal actions that
arise in the normal course of business. It is management's opinion that these
other actions will not have a material effect on the Company's financial
position.
The Company and its subsidiaries lease office and warehouse space, automobiles,
computers and office equipment. Rent expense for all operating leases amounted
to approximately $18,900 in 1999, $17,300 in 1998 and $17,600 in 1997. Future
minimum rental commitments at July 31, 1999 for all noncancelable operating
leases with initial terms exceeding one year are $12,900 in 2000; $9,800 in
2001; $7,500 in 2002; $5,700 in 2003; $3,200 in 2004 and $1,200 thereafter.
The Company has employment agreements with its executive officers, the terms of
which expire at various times through January 2003. Such agreements, which have
been revised from time to time, provide for minimum salary levels, adjusted
annually for cost-of-living changes, as well as for incentive bonuses that are
payable if specified management goals are attained. The aggregate commitment for
future salaries at July 31, 1999, excluding bonuses, was approximately $11,700.
Financial Instruments and Risks and Uncertainties
The Company considers the fair value of all financial instruments to be not
materially different from their carrying value at year-end.
The Company's cash and cash equivalents and investments are in high-quality
securities placed with a wide array of financial institutions with high credit
ratings. This investment policy limits the Company's exposure to concentration
of credit risks.
<PAGE>
The Company's products are sold to a diverse group of customers throughout the
world. As such, the Company is subject to certain risks and uncertainties as a
result of changes in general economic conditions, sources of supply,
competition, foreign exchange rates, tax reform, litigation and regulatory
developments. The diversity and breadth of the Company's products and geographic
operations mitigate the risk that adverse changes in any event would materially
affect the Company's financial position. Additionally, as a result of the
diversity of its customer base, the Company does not consider itself exposed to
concentration of credit risks. These risks are further minimized by placing
credit limits, ongoing monitoring of the customers' account balances, and
assessment of the customers' financial strengths.
The Company enters into forward exchange contracts, generally with terms of 90
days or less, to manage its foreign currency transaction exposures. Effects of
changes in currency rates on those transactions are therefore minimized and
hedges are accounted for as part of the underlying transactions. The total value
of open contracts at year-end was not material.
Quarterly Financial Information
Unaudited quarterly financial information appears on page 45.
Market and Geographic Segment Information
In fiscal 1999, the Company adopted SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information (SFAS No. 131). SFAS No. 131 supersedes
previously issued segment reporting disclosure rules and requires the reporting
of certain information about the Company's operating segments (markets) on a
basis consistent with the way in which the Company is managed and operated. The
segment disclosures for prior years have been restated to the extent practical.
The Company manufactures and markets filtration and separation products and
systems throughout the world in four principal markets -- Medical,
BioPharmaceuticals, Aeropower and Fluid Processing, each managed by a worldwide
business leader.
The Company's underlying accounting records are maintained on a legal entity
basis for statutory and public reporting purposes. Most of the legal entities
operate in more than one market. For internal reporting purposes the Company has
historically categorized sales in sub-markets within its four principal markets;
however, the Company does not categorize other SFAS No. 131 disclosures by
sub-markets within its four principal markets. Nor does the Company manage and
categorize all assets within its Health Care market between its Medical and
BioPharmaceuticals markets. Depreciation and amortization of shared productive
assets are allocated to Medical and BioPharmaceuticals markets based on
estimated usage. Prior to 1998, the Company did not determine operating profit
for its Medical and BioPharmaceuticals markets. Certain assets managed at the
corporate level, including property and equipment, intangible assets and
investments are not allocated to the identifiable markets, accordingly,
operating profits for markets exclude general corporate expenses. The Company
also does not use restructuring and other charges to measure and evaluate
operating profitability by markets.
42
<PAGE>
Market Segment Information
- -------------------------------------------------------------------------------
(In thousands) 1999 1998 1997
- -------------------------------------------------------------------------------
Sales to Unaffiliated Customers:
Blood $ 186,266 $ 177,310 $ 177,307
Critical Care 86,647 82,814 79,177
-----------------------------------
Medical 272,913 260,124 256,484
-----------------------------------
BioPharmaceuticals 238,313 210,077 206,690
Food and Beverage 54,846 49,073 52,512
Specialty Materials 39,570 35,052 39,692
-----------------------------------
BioPharmaceuticals 332,729 294,202 298,894
-----------------------------------
Health Care 605,642 554,326 555,378
-----------------------------------
Aerospace 135,543 124,449 110,784
Industrial Hydraulics 131,415 134,041 132,423
-----------------------------------
Aeropower 266,958 258,490 243,207
-----------------------------------
Microelectronics 62,540 87,608 93,893
Industrial Process 211,926 186,861 169,530
-----------------------------------
Fluid Processing 274,466 274,469 263,423
-----------------------------------
Total $1,147,066 $1,087,285 $1,062,008
===============================================================================
Operating Profit:
Medical $ 72,459 $ 68,986 $ --
BioPharmaceuticals 57,602 45,132 --
-----------------------------------
Health Care 130,061 114,118 130,265
Aeropower 64,040 60,982 57,300
Fluid Processing 37,771 46,531 50,683
-----------------------------------
Subtotal 231,872 221,631 238,248
Restructuring and other charges, net (95,200) (19,222) (95,930)
General corporate expenses (64,753) (59,554) (53,355)
Interest expense, net (13,015) (7,870) (2,836)
-----------------------------------
Earnings before income taxes $ 58,904 $ 134,985 $ 86,127
===============================================================================
Depreciation and Amortization:
Medical $ 7,396 $ 7,867 $ --
BioPharmaceuticals 20,408 20,924 --
-----------------------------------
Health Care 27,804 28,791 26,511
Aeropower 10,937 10,809 9,466
Fluid Processing 20,743 19,900 16,012
-----------------------------------
Subtotal 59,484 59,500 51,989
Corporate 5,373 5,087 3,865
-----------------------------------
Total $ 64,857 $ 64,587 $ 55,854
===============================================================================
Identifiable Assets:
Health Care $ 571,979 $ 542,947 $ 502,480
Aeropower 219,502 210,760 195,113
Fluid Processing 306,661 292,403 276,627
-----------------------------------
Subtotal 1,098,142 1,046,110 974,220
Corporate 390,185 317,102 305,404
-----------------------------------
Total $1,488,327 $1,363,212 $1,279,624
===============================================================================
Capital Expenditures:
Health Care $ 38,473 $ 43,234 $ 46,165
Aeropower 8,335 9,414 8,544
Fluid Processing 20,972 25,271 24,302
-----------------------------------
Subtotal 67,780 77,919 79,011
Corporate 3,416 7,202 9,594
-----------------------------------
Total $ 71,196 $ 85,121 $ 88,605
===============================================================================
43
<PAGE>
Geographic Segment Information
- -------------------------------------------------------------------------------
(In thousands) 1999 1998 1997
- -------------------------------------------------------------------------------
Sales to Unaffiliated Customers:
Western Hemisphere $ 509,191 $ 515,295 $ 501,214
Europe 455,088 397,880 368,767
Asia 182,787 174,110 192,027
-----------------------------------
Total $1,147,066 $1,087,285 $1,062,008
===============================================================================
Operating Profit:
Western Hemisphere $ 108,118 $ 115,317 $ 116,077
Europe 106,924 91,670 91,817
Asia 18,289 14,974 27,131
Eliminations (1,459) (330) 3,223
-----------------------------------
Subtotal 231,872 221,631 238,248
Restructuring and other charges, net (95,200) (19,222) (95,930)
General corporate expenses (64,753) (59,554) (53,355)
Interest expense, net (13,015) (7,870) (2,836)
-----------------------------------
Earnings before income taxes $ 58,904 $ 134,985 $ 86,127
===============================================================================
Identifiable Assets:
Western Hemisphere $ 554,450 $ 550,091 $ 523,012
Europe 394,095 374,810 314,680
Asia 163,247 133,622 149,484
Eliminations (13,650) (12,413) (12,956)
-----------------------------------
Subtotal 1,098,142 1,046,110 974,220
Corporate 390,185 317,102 305,404
-----------------------------------
Total $1,488,327 $1,363,212 $1,279,624
===============================================================================
Export sales to unaffiliated customers by the Company's U.S. operations
approximately totaled $63,000, $74,000, and $65,000 in fiscal years 1999, 1998
and 1997, respectively. The Company considers its foreign operations to be of
major importance to its future growth prospects, and does not believe the risk
of its foreign business differs materially from its domestic business, except
for the risk of currency fluctuations.
Transfers between geographic areas are generally priced on the basis of a markup
of manufacturing costs to achieve an appropriate sharing of the profit between
the parties.
44
<PAGE>
Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth Full
(In thousands, except per share data) Quarter Quarter Quarter Quarter Year
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
1999(a)(b):
Net sales $249,850 $278,255 $299,896 $319,065 $1,147,066
Gross profit 132,510 144,491 140,367 181,692 599,060
Earnings before income taxes 17,740 20,738 (44,902) 65,328 58,904
Net earnings 13,461 15,974 (28,323) 50,395 51,507
Earnings per share
Basic 0.11 0.13 (0.23) 0.40 0.41
Diluted 0.11 0.13 (0.23) 0.40 0.41
1998(c):
Net sales $237,351 $259,004 $289,171 $301,759 $1,087,285
Gross profit 131,740 143,620 166,380 171,686 613,426
Earnings (loss) before income taxes 25,575 37,479 20,222 51,709 134,985
Net earnings (loss) 18,414 27,546 7,947 39,726 93,633
Earnings (loss) per share
Basic 0.15 0.22 0.06 0.32 0.75
Diluted 0.14 0.22 0.06 0.32 0.75
===================================================================================================================
</TABLE>
(a) During the third quarter, the Company recorded $89,433 in restructuring and
other charges (including $24,738 reflected in cost of sales), decreasing
full-year basic and diluted earnings by 51 cents per share after pro forma
tax effect.
(b) During the third quarter, the Company adopted the AICPA's Statement of
Position 98-5, Reporting the Costs of Start-Up Activities, retroactive to
the beginning of the fiscal year. Previously capitalized start-up costs of
$1,567 and $4,200 in the first and second quarters of fiscal 1999,
respectively, were expensed and recorded as cost of sales. This decreased
full-year basic and diluted earnings by 3 cents per share after pro forma
tax effect (1 cent and 2 cents per share in quarters one and two,
respectively).
(c) Includes a one-time charge of $27,000 in the third quarter (decreased basic
and diluted earnings per share by 22 cents, each) to write off in-process
research and development related to the acquisition of Rochem, offset by
$7,778 of other income, net, recorded in the second quarter (increased basic
and diluted earnings per share by 4 cents, each after pro forma tax effect).
These items reduced full-year basic and diluted earnings per share by 18
cents and 17 cents, after pro forma tax effect, respectively.
45
<PAGE>
COMMON STOCK PRICES AND CASH DIVIDENDS
Pall Corporation's Common Stock is listed on the New York and London Stock
Exchanges. The table below sets forth quarterly data relating to the Company's
Common Stock prices and cash dividends declared per share for the past two
fiscal years.
<TABLE>
<CAPTION>
Cash dividends
1999 1998 per common share
- ----------------------------------------------------------------------------------------------
Price per share High Low High Low 1999 1998
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
Quarter: First $25.75 $19.56 $25.56 $19.50 $0.1550 $0.1400
Second 26.63 21.63 22.25 19.44 0.1600 0.1550
Third 23.25 15.75 21.75 19.38 0.1600 0.1550
Fourth 22.81 17.25 22.63 19.38 0.1600 0.1550
==============================================================================================
</TABLE>
There are approximately 6,900 holders of record of the Company's Common Stock.
SIX-YEAR SALES
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Health Care $ 605,642 $ 554,326 $ 555,378 $ 570,835 $489,347 $437,324
Aeropower 266,958 258,490 243,207 235,075 212,806 179,508
Fluid Processing 274,466 274,469 263,423 266,523 224,173 178,979
- ----------------------------------------------------------------------------------------------
Total $1,147,066 $1,087,285 $1,062,008 $1,072,433 $926,326 $795,811
==============================================================================================
</TABLE>
46
<PAGE>
SIX-YEAR FINANCIAL HISTORY
Pall Corporation and Subsidiaries
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
(In millions, except per share data and number of employees) 1999 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Results for the Year:
Sales $1,147.1 $1,087.3 $1,062.0 $1,072.4 $ 926.3 $ 795.8
Cost of sales 548.0 473.9 468.4 429.7 355.2 304.9
Selling, general and administrative expenses 406.0 392.8 376.9 378.8 338.7 295.0
Research and development 56.5 58.5 53.8 53.8 50.6 46.2
Other charges, net 64.7 19.2(b) 74.0 2.8(d) -- 3.7(f)
Interest expense, net 13.0 7.9 2.8 3.6 4.1 3.4
Earnings before taxes 58.9(a) 135.0 86.1(c) 203.7 177.7 142.6
Income taxes 7.4 41.4 18.8 60.9 51.8 38.8
Accounting changes -- -- -- -- (0.8)(e) --
Net earnings 51.5 93.6 67.3 142.8 125.1 103.8
Earnings per share:
Basic 0.41 0.75 0.53 1.14 1.00 0.84
Diluted 0.41 0.75 0.53 1.13 1.00 0.84
Dividends declared per share 0.64 0.61 0.54 0.47 0.41 0.36
Capital expenditures 71.2 85.1 88.6 88.5 74.3 80.0
Depreciation $ 64.9 $ 64.6 $ 55.9 $ 51.5 $ 46.2 $ 41.2
- ------------------------------------------------------------------------------------------------------------------------------------
Year-End Position:
Working capital $ 185.9 $ 192.1 $ 291.6 $ 286.1 $ 264.4 $ 234.8
Property, plant and equipment, net 507.0 520.6 504.0 498.0 460.5 426.8
Total assets 1,488.3 1,363.2 1,279.6 1,295.8 1,161.2 1,033.9
Long-term debt 116.8 111.5 62.1 54.4 74.3 75.9
Total Liabilities 757.7 597.6 454.8 498.8 450.6 416.2
Equity $ 730.7 $ 765.6 $ 824.8 $ 797.0 $ 710.6 $ 617.7
- ------------------------------------------------------------------------------------------------------------------------------------
Other Ratios and Statistics:
Net earnings (excluding other charges
and accounting changes) as % of:
Sales 10.4 10.6 12.3 13.5 13.6 13.3
Average total assets 8.3 8.8 10.1 11.8 11.5 10.6
Average equity 15.9 14.5 16.1 19.2 18.9 18.0
Average shares outstanding:
Basic 124.3 125.1 126.3 125.1 124.6 123.9
Diluted 124.8 125.7 127.5 126.7 125.5 123.9
Equity per share $ 5.88 $ 6.18 $ 6.48 $ 6.36 $ 5.70 $ 5.01
Number of employees at year-end 8,600 8,900 8,500 8,500 7,300 7,000
Price range of stock during the year:
High $ 26.63 $ 25.56 $ 28.25 $ 29.38 $ 24.00 $ 21.25
Low $ 15.75 $ 19.38 $ 20.75 $ 19.63 $ 15.75 $ 13.63
====================================================================================================================================
</TABLE>
(a) Includes restructuring and other charges of $89.4 million and a charge of
$5.8 million as a result of adopting SOP 98-5 (Reporting the Costs of
Start-Up Activities).
(b) Includes a one-time charge of $27.0 million to write off in-process research
and development related to the Rochem acquisition, offset by $7.8 million of
the other income, net.
(c) Includes a charge of $95.9 million related to Gelman merger, restructuring
and other charges.
(d)Represents a charge related to Gelman's environmental remediation costs.
(e)Represents a decrease in net earnings as a result of adopting SFAS No. 112
(Employer's Accounting for Postemployment Benefits).
(f)Represents principally the cost of restructuring the German operations and of
writing off a bad debt in the Aeropower operations.
47
<PAGE>
CORPORATE DIRECTORY
Senior Officers
Eric Krasnoff
Chairman and Chief Executive Officer
Jeremy Hayward-Surry
President
John Adamovich
Chief Financial Officer,
Group Vice President and Treasurer
Senior Operating Officers
Steven Chisolm
Peter Cope
Charles Grimm
Clifton Hutchings
Erwin Kirnbauer
Paul Kohn
Akio Satake
Donald Stevens
Gerhard Weich
Marcus Wilson
Samuel Wortham
Board of Directors
Abraham Appel
Daniel J. Carroll, Jr.
Ulric Haynes, Jr.
John H.F. Haskell, Jr.
Jeremy Hayward-Surry
Eric Krasnoff
Dr. Edwin Martin, Jr.
Katharine Plourde
Chesterfield Seibert
Heywood Shelley
Alan Slifka
Dr. James Watson
<PAGE>
Corporate Officers
Dr. Joseph Adiletta
Dr. Leonard Bensch
Jane Block
Thomas Bormann
Dr. Harvey Brandwein
Claude Broussy
Terry Flack
Stephen Geibel
Dr. Thomas Gsell
Dr. Richard Gutman
Richard Haas
Attila Herczeg
Patricia Iannucci
Sakae Isohata
Dr. Hyman Katz
Neil MacDonald
John Miller
William Palmer
Dr. John Pearson
Reed Sarver
Robert Simkins
Dr. Saied Tousi
Clarence Treppa
Dr. Barry Wenz
Charles Wolowitz
Mary Ann Bartlett, Secretary and
Assistant General Counsel
Gilbert Weiner, General Counsel
48
<PAGE>
CORPORATE INFORMATION
Corporate Headquarters
2200 Northern Boulevard
East Hills, NY 11548-1289
Telephone 516.484.5400
Toll Free: 1.800.645.6532
Fax: 516.484.3529
Principal Plants
Cortland and Long Island, New York
Fort Myers, New Port Richey and Pensacola, Florida
Covina, California
Putnam, Connecticut
Northborough, Massachusetts
Ann Arbor, Michigan
Fajardo, Puerto Rico
Houston, Texas
Beijing, China
Hamburg, Germany
Tipperary, Ireland
Tsukuba, Japan
Ilfracombe, Newquay, Portsmouth and Redruth, United Kingdom
Auditors
KPMG LLP, Melville, New York
Registrar & Transfer Agent
Equiserve Trust Company, N.A.
The transfer agent is responsible for shareholder records, changes of address,
stock transfers, changes of ownership, issuance of stock certificates, and
distribution of dividends and IRS Forms 1099.
Requests concerning these matters are most efficiently answered by contacting:
Equiserve Trust Company, N.A.
P.O. Box 8218
Boston, MA 02266-8218
Telephone: 1.800.633.4236
The papers used in this annual report were manufactured in mills that use Pall
filters in their paper machines.
<PAGE>
Investor Relations
Investor relations inquiries should be directed to:
Pall Corporation
Diane Foster
25 Harbor Park Drive
Port Washington, New York 11050-4630
Telephone: 516 484.3600
Fax: 516.484.3649
E-mail: [email protected]
Requests for financial materials: Telephone 1. 800. 205. 7255
Information on company results can be obtained through conventional press
coverage, SEC filings or through Pall's Internet web site at
http://www.pall.com.
Dividend Reinvestment Plan
Pall Corporation's Dividend Reinvestment Plan allows shareholders to reinvest
dividends and invest additional cash to purchase Pall Corporation Common Stock.
You must be a registered shareholder with a minimum of 50 shares in order to
participate. For more information, contact Equiserve Trust Company, N.A., Pall's
Transfer Agent, or Pall's Investor Relations Department.
Forward-Looking Statements
This annual report contains forward-looking statements that are based on current
Company expectations and are subject to a number of factors that could cause
actual results to differ materially. Such risks include, but are not limited to,
fluctuations in foreign exchange rates, regulatory approval and market
acceptance of new technologies, market demand, competitive pricing
considerations and global and regional economic conditions and the Year 2000
issue discussed above in "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Trademarks
All trademarks owned by Pall Corporation are shown in type form different from
that of the surrounding text.
<PAGE>
- --------------------------------------------------------------------------------
Pall protects you.
- --------------------------------------------------------------------------------
- ----
PALL Pall Corporation
- ----
Corporate Headquarters
2200 Northern Blvd.
East Hills, New York 11548 USA
800.645.6532 toll free
516.484.5400 phone
516.484.3529 fax
Filtration. Separation. Solution.(SM)
Visit us on the web at www.pall.com
- --------------------------------------------------------------------------------
Pall Corporation has offices and plants throughout the world in locations
including: Argentina, Australia, Austria, Belgium, Brazil, Canada, China,
France, Germany, Hong Kong, India, Indonesia, Ireland, Italy, Japan, Korea,
Malaysia, Mexico, the Netherlands, New Zealand, Norway, Poland, Puerto Rico,
Russia, Singapore, South Africa, Spain, Sweden, Switzerland, Taiwan, Thailand,
United Kingdom, United Stated and Venezuela. Distributors are located in all
major industrial areas of the world.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF PALL CORPORATION
Pall Corporation owns 100% of the outstanding capital stock of those companies
listed below, except where otherwise noted:
<TABLE>
<CAPTION>
State or Other Jurisdiction
Name of Company of Incorporation
- --------------- ---------------------------
<S> <C>
Medsep Corporation Delaware
Pall Aeropower Corporation Delaware
Pall Biomedical, Inc. Delaware
Pall International Corporation Delaware
Pall Puerto Rico, Inc. Delaware
Russell Associates Inc. Delaware
Rochem Separations California
Pall Filtron Corporation Massachusetts
Gelman Sciences, Inc. Michigan
Pall Technologies S.A. (e) Argentina
Pall (Canada) Limited Canada
Pall BVBA (e) Belgium
Pall Europe Limited England
Pall Deutschland GmbH Holding Germany
Pall GmbH (a) Germany
Pall Rochem GmbH (a) Germany
Vertriebs Membranfilter GmbH (d) Germany
Pall Italia S.R.L. Italy
Gelman Ireland Ltd. Ireland
Pall France S.A. France
Pall Netherlands B.V. The Netherlands
Romaco B.V. (d) The Netherlands
Pall Norge AS Norway
Pall (Schweiz) A.G. Switzerland
Argentaurum A.G. Switzerland
Pall Austria Filter Ges.m.b.H. Austria
Pall Espana S.A. Spain
Pall Filtron AB (c) Sweden
Pall Filtron Technology B.V. (c) The Netherlands
Pall Poland Limited (a) Poland
Nihon Pall Ltd. Japan
Pall Filtration Pte. Ltd. Singapore
Pall Korea Limited South Korea
Pall Filter (Beijing) Co., Ltd. China
Pall Asia International Ltd. Hong Kong
Gelman Sciences Ltd. (b) Australia
Pall Export Sales Corporation, Limited Jamaica
Pall South Africa (Pty) Ltd. (e) South Africa
</TABLE>
(a) 100% owned by Pall Deutschland GmbH Holding.
(b) 100% owned by Gelman Sciences Inc., Michigan
(c) 100% owned by Pall Filtron Corporation.
(d) 100% owned by Argentaurum BV
(e) 100% owned by Pall Netherlands BV
All subsidiaries listed above are included in the consolidated financial
statements for the fiscal years 1999, 1998 and 1997, or, in the case of
corporations organized since July 31, 1996, from the date of incorporation. The
list does not include inactive subsidiaries.
<PAGE>
EXHIBIT 23
[KPMG LLP LETTERHEAD]
Consent of Independent Auditors
Board of Directors
Pall Corporation:
We consent to incorporation by reference in Pall Corporation's Registration
Statements Nos. 33-25640, 33-44399, 33-51151, 33-64751, 333-68371, 333-82469 and
333-87655 on Form S-8, and Registration Statement No. 333-17417 on Form S-3, of
our reports dated September 1, 1999, relating to the consolidated balance sheets
of Pall Corporation and subsidiaries as of July 31, 1999 and August 1, 1998 and
the related consolidated statements of earnings, stockholders' equity and cash
flows and related schedules for each of the years in the three-year period ended
July 31, 1999, which reports are incorporated by reference or appear in the
annual report on Form 10-K of Pall Corporation for the fiscal year ended July
31, 1999.
/s/ KPMG LLP
------------
KPMG LLP
Melville, New York
October 27, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-END> JUL-31-1999
<EXCHANGE-RATE> 1
<CASH> 86,677
<SECURITIES> 50,500
<RECEIVABLES> 332,820
<ALLOWANCES> 6,623
<INVENTORY> 205,867
<CURRENT-ASSETS> 744,189
<PP&E> 936,028
<DEPRECIATION> 429,012
<TOTAL-ASSETS> 1,488,327
<CURRENT-LIABILITIES> 558,279
<BONDS> 0
0
0
<COMMON> 12,796
<OTHER-SE> 717,868
<TOTAL-LIABILITY-AND-EQUITY> 1,488,327
<SALES> 1,147,066
<TOTAL-REVENUES> 1,147,066
<CGS> 548,006
<TOTAL-COSTS> 1,088,162
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,015
<INCOME-PRETAX> 58,904
<INCOME-TAX> 7,397
<INCOME-CONTINUING> 51,507
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51,507
<EPS-BASIC> 0.41
<EPS-DILUTED> 0.41
</TABLE>
