<PAGE>
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED.
<PAGE>
SUBJECT TO COMPLETION. DATED SEPTEMBER 3, 1999.
Prospectus Supplement to Prospectus dated August 5, 1999.
$250,000,000
[LOGO] PENTAIR, INC.
% Senior Notes due
-----------
We will pay interest on the notes on and of each year. The first
payment will be made on . The notes will be issued in denominations of
$1,000 and integral multiples of $1,000.
We have the option to redeem all or a portion of the notes at any time at a
price based on the present value on the redemption date, using a discount rate
based on a U.S. Treasury security having a remaining life to maturity comparable
to the notes, of the then remaining scheduled payments of principal and interest
on the notes to be redeemed, plus 25 basis points, plus accrued interest. The
redemption price will in no event be less than 100% of the principal amount of
the notes to be redeemed.
SEE "RISK FACTORS" ON PAGE 3 OF THE PROSPECTUS TO READ ABOUT FACTORS YOU
SHOULD CONSIDER BEFORE BUYING NOTES.
--------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
--------------
<TABLE>
<CAPTION>
Per Note Total
--------------- ---------------
<S> <C> <C>
Initial public offering price............................. % $
Underwriting discount..................................... % $
Proceeds, before expenses, to Pentair..................... % $
</TABLE>
The initial public offering price set forth above does not include accrued
interest, if any. Interest on the notes will accrue from , 1999 and
must be paid by the purchaser if the notes are delivered after ,
1999.
--------------
The underwriters expect to deliver the notes in book-entry form only through
the facilities of the Depository Trust Company against payment in New York, New
York on , 1999.
GOLDMAN, SACHS & CO. J.P. MORGAN & CO.
BANC ONE CAPITAL MARKETS, INC.
---------
Prospectus Supplement dated September , 1999.
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
This summary highlights selected information from this document and does not
contain all of the information you need to consider in making your investment
decision. To understand all of the terms of this offering and for a more
complete understanding of the business of Pentair, you should read carefully
this entire document, the accompanying prospectus and the documents incorporated
by reference the prospectus. In addition to those described below, we use
certain defined terms in this document for ease of reading and to avoid
repetition. When we use the terms "Pentair," "we," or "us," we are referring to
Pentair, Inc. together with its consolidated subsidiaries, unless the context
otherwise requires. References to pro forma financial data reflect the
acquisitions of Essef Corporation and of Falcon Manufacturing Inc., the parent
company of DeVilbiss Air Power Company, this offering and a concurrent common
stock offering. Unless otherwise specified, all information in this prospectus
supplement assumes no exercise of the over-allotment option granted to the
underwriters in the concurrent common stock offering discussed herein. See
"Summary Historical and Pro Forma Combined Financial Data" beginning on page S-7
and "Unaudited Pro Forma Combined Condensed Financial Data" beginning on page
S-10.
ABOUT PENTAIR
We are a rapidly growing global manufacturer and distributor of high quality
industrial products focused on three principal industry segments:
- professional tools and equipment;
- water and fluid technologies; and
- electrical and electronic enclosures.
Since 1993, our net sales have grown at a compound annual rate of 15.4%,
from $946.6 million in 1993 to $1,937.6 million in 1998. Over the same period we
have achieved compound annual growth in operating income of 23.2%, from $68.1
million in 1993 to $193.2 million in 1998. We have achieved this growth by
continuously introducing new products, completing strategic acquisitions and
implementing cost saving initiatives.
In the first quarter of 1999, we recorded a restructuring charge of $38.0
million. The following table shows, for the year ended December 31, 1998 and for
the six month period ended June 26, 1999, our unaudited pro forma net sales,
operating income (after and before the restructuring charge) and operating
margin (after and before the restructuring charge) including the acquisitions of
Essef Corporation and DeVilbiss Air Power Company, which are discussed in detail
in "Unaudited Pro Forma Combined Condensed Financial Data" beginning on page
S-10 and "Business - Recent Acquisitions" beginning on page S-32, for each of
our three segments:
SELECTED UNAUDITED PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 SIX MONTHS ENDED JUNE 26, 1999
---------------------------------------------- ----------------------------------------------
TOOLS WATER ENCLOSURES TOTAL TOOLS WATER ENCLOSURES TOTAL
--------- --------- ------------- --------- --------- --------- ------------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales......................... $ 1,230.3 $ 840.7 $ 564.0 $ 2,621.4 $ 668.3 $ 474.8 $ 299.6 $ 1,438.4
Operating income:
After restructuring charge...... 123.6 90.1 46.0 241.3 52.2 58.5 10.1 111.8
Before restructuring charge..... 123.6 90.1 46.0 241.3 69.0 63.0 26.8 149.8
Operating margin:
After restructuring charge...... 10.0% 10.7% 8.2% 9.2% 7.8% 12.3% 3.4% 7.8%
Before restructuring charge..... 10.0 10.7 8.2 9.2 10.3 13.3 8.9 10.4
</TABLE>
S-1
<PAGE>
OVERVIEW OF BUSINESS SEGMENTS
PROFESSIONAL TOOLS AND EQUIPMENT. Pro forma sales for our tools segment
(including the acquisition of DeVilbiss) were $1,230.3 million for 1998,
representing 47% of our overall pro forma sales, and were $668.3 million for the
first half of 1999, representing 46% of our overall first half pro forma sales.
Tools segment products include Delta woodworking machinery, Porter-Cable and
FLEX portable power tools, Century battery charging, testing and welding
equipment, Lincoln lubricating and lifting equipment and the newly acquired
compressors, pressure washers and generators of DeVilbiss. Within this segment,
we have leading market positions in woodworking machinery, portable power tools,
portable power supplies, welding equipment, compressors and cold water pressure
washers. The following table shows our tool segment's recent actual and pro
forma financial performance:
TOOLS SEGMENT SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, -------------------------------------
-------------------------------------------- JUNE 26,
1996 1997 1998 1998 PRO JUNE 30, JUNE 26, 1999 PRO
ACTUAL ACTUAL ACTUAL FORMA 1998 ACTUAL 1999 ACTUAL FORMA
--------- --------- --------- ----------- ----------- ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............................... $ 582.7 $ 747.1 $ 849.3 $ 1,230.3 $ 386.2 $ 407.0 $ 668.3
Operating income:
After restructuring charge............ 54.7 76.8 99.6 123.6 39.4 26.0 52.2
Before restructuring charge........... 54.7 76.8 99.6 123.6 39.4 42.8 69.0
Operating margin:
After restructuring charge............ 9.4% 10.3% 11.7% 10.0% 10.2% 6.4% 7.8%
Before restructuring charge........... 9.4 10.3 11.7 10.0 10.2 10.5 10.3
</TABLE>
WATER AND FLUID TECHNOLOGY. Pro forma sales for our water segment (including
the acquisition of Essef) were $840.7 million for 1998, representing 32% of our
overall pro forma sales and were $474.8 million for the first half of 1999,
representing 33% of our overall first half pro forma sales. Water segment
products include Myers, Fairbanks Morse, Aurora and Hydromatic pumps for wells
and water treatment and sump pumps, Fleck valves for water softeners, Lincoln
automated and manual lubrication systems and equipment and our newly acquired
Structural Fibers water tanks and Pac-Fab pool and spa equipment. Our water
segment is one of the largest producers of water and wastewater pumps and of
water conditioning control valves in the world. The following table shows our
water segment's recent actual and pro forma financial performance:
WATER SEGMENT SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, -------------------------------------
-------------------------------------------- JUNE 26,
1996 1997 1998 1998 PRO JUNE 30, JUNE 26, 1999 PRO
ACTUAL ACTUAL ACTUAL FORMA 1998 ACTUAL 1999 ACTUAL FORMA
--------- --------- --------- ----------- ----------- ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales................................ $ 322.3 $ 404.0 $ 537.9 $ 840.7 $ 273.8 $ 275.4 $ 474.8
Operating income:
After restructuring charge............. 41.2 41.9 66.0 90.1 30.4 32.9 58.5
Before restructuring charge............ 41.2 41.9 66.0 90.1 30.4 37.4 63.0
Operating margin:
After restructuring charge............. 12.8% 10.4% 12.3% 10.7% 11.1% 11.9% 12.3%
Before restructuring charge............ 12.8 10.4 12.3 10.7 11.1 13.6 13.3
</TABLE>
S-2
<PAGE>
ELECTRICAL AND ELECTRONIC ENCLOSURES. Sales for our enclosures segment were
$564.0 million for 1998, representing 21% of our overall pro forma sales, and
were $299.6 million for the first half of 1999, representing 21% of our overall
first half pro forma sales. Enclosures segment products include metallic and
composite cases, subracks and cabinets that house and protect electrical and
electronic controls, instruments and components. In our enclosures segment,
Hoffman is a leading brand name in electrical enclosures in North America while
Schroff is a leading brand in standard electronic enclosures in Europe. The
following table shows our enclosures segment's recent financial performance; no
pro forma information has been included since recent acquisitions in our
enclosures segment have not been material:
ENCLOSURES SEGMENT SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, -------------------
---------------------- JUNE 30, JUNE 26,
1996 1997 1998 1998 1999
ACTUAL ACTUAL ACTUAL ACTUAL ACTUAL
------ ------ ------ -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net sales............................... $548.8 $579.4 $564.0 $283.5 $299.6
Operating income:
After restructuring charge............ 53.9 47.3 46.0 26.4 10.1
Before restructuring charge........... 53.9 47.3 46.0 26.4 26.8
Operating margin:
After restructuring charge............ 9.8% 8.2% 8.2% 9.3% 3.4%
Before restructuring charge........... 9.8 8.2 8.2 9.3 8.9
</TABLE>
OUR BUSINESS STRATEGY
We seek to maintain a strong rate of growth across our three diverse
business segments. By concentrating on these core segments, we plan to leverage
our manufacturing and distribution strengths and maintain strong positions in
our target markets. In addition, our three business segments create diversity in
our distribution channels, end markets, customer base and geographic presence
which drives the consistency of our overall financial performance.
INTERNAL GROWTH INITIATIVES. We remain focused on generating internal sales
and profitability growth in our three business segments by pursuing the
following strategies:
- strengthen our market positions, particularly through continued new
product introductions in all of our target markets;
- leverage our sales and distribution capabilities to enter new channels and
expand our presence in existing channels;
- build on our strong customer relationships to expand our customer base;
- increase our efficiency by streamlining administrative services and
concentrating resources on product development, marketing and engineering;
and
- aggressively reduce costs by implementing cross-segment synergies,
particularly in supply management and administrative functions.
GROWTH THROUGH DISCIPLINED ACQUISITIONS. We continue to supplement our
numerous internal growth initiatives with a disciplined acquisition strategy. We
have pursued strategic acquisitions and divestitures historically in our three
business segments to enhance our growth. We take a disciplined approach to
identifying acquisition candidates and rapidly integrating acquired businesses,
both of which have contributed to our successful acquisition history.
S-3
<PAGE>
To complement our existing strong market positions and manufacturing
capabilities, we seek acquisitions that provide:
- access to new or expanded distribution channels;
- strong brand names;
- new or enhanced technologies;
- enhancement to our market share in target markets;
- complements to our core competencies; and
- global expansion opportunities.
RECENT SIGNIFICANT ACQUISITIONS
Since January 1996, we have completed a total of thirteen acquisitions,
representing an overall investment of over $1.2 billion. We have rapidly
integrated acquired businesses by reducing administrative costs, rationalizing
manufacturing and distribution facilities, improving purchasing methods and
implementing other cost-saving initiatives. Our recent significant acquisitions
are as follows:
<TABLE>
<CAPTION>
DATE BUSINESS ACQUIRED SEGMENT PURCHASE PRICE
- --------------- -------------------------- ---------- ---------------
<S> <C> <C> <C>
September 1999 DeVilbiss Tools $ 460 million
August 1999 Essef Water 310 million
April 1999 WEB Tool Enclosures 62 million
October 1998 Walker Dickson Enclosures 42 million
August 1997 General Signal Pump Group Water 190 million
</TABLE>
ACQUISITION OF ESSEF CORPORATION. On August 10, 1999, we acquired all of the
outstanding capital shares of Essef Corporation, which then operated two
businesses, Structural Fibers and Pac-Fab. A third business, formerly owned by
Essef, Anthony & Sylvan, was split off to Essef shareholders at the time of the
acquisition. The acquisition price was approximately $310 million, and we also
refinanced approximately $120 million of Essef indebtedness. Structural Fibers
designs, manufactures and distributes products used in moving, treating and
storing water, including pumps, storage tanks and filtration systems for
residential, commercial, municipal and industrial customers. Pac-Fab is a
leading manufacturer of pool and spa equipment used in residential and
commercial applications. Our acquisition of Essef expands our water segment
product offerings to include tanks and filtration systems and adds the pool and
spa markets to our existing distribution channels.
ACQUISITION OF DEVILBISS AIR POWER COMPANY. On September 3, 1999, we
acquired from Falcon Building Products, Inc. all of the outstanding shares of
Falcon Manufacturing, Inc., the parent company of DeVilbiss Air Power Company,
for a cash purchase price of approximately $460 million. DeVilbiss manufactures
a broad line of air compressors, portable generators, pressure washers and
accessories. Its products are sold to the retail, commercial, contractor and
"do-it-yourself" markets under brand names such as Air
America-Registered Trademark-, Charge Air Pro-Registered Trademark-,
Ex-Cell-Registered Trademark- and Pro Air II-Registered Trademark-. Our
acquisition of DeVilbiss expands our tools segment product offerings and allows
us to leverage our sales force in common distribution channels and to expand the
sale of DeVilbiss' products to new channels.
S-4
<PAGE>
RECENT AND CONCURRENT FINANCINGS
We financed the acquisitions of Essef and DeVilbiss with a combination of
bridge financing and other borrowings. See "Business - Recent Financings"
beginning on page S-34. Two of those facilities, aggregating $450 million, will
mature on March 30, 2000.
Concurrently with this offering, we are offering 5,500,000 shares of common
stock. We expect to receive combined net proceeds of approximately $484 million
from both offerings. The common stock offering is being made by means of a
separate prospectus supplement and this prospectus supplement does not
constitute an offer to sell or the solicitation of an offer to buy the common
stock. The completion of this offering is dependent on the common stock
offering, and we cannot assure you that the common stock offering will be
completed. The common stock offering is not dependent upon the completion of
this offering.
We currently intend to refinance the $450 million of banking facilities
coming due on March 30, 2000 with the net proceeds from this offering and the
concurrent common stock offering. If we are unable to complete both of our
offerings before the maturity of these loans, we will be required to seek
alternative financing arrangements.
Our principal executive offices are located at 1500 County Road B2 West, St.
Paul, Minnesota, 55113-3105, and our telephone number is (651) 636-7920.
S-5
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
The following table presents certain historical and pro forma combined
financial data as of and for each of the periods indicated. The summary pro
forma combined financial data contained herein give effect to the following
transactions and events: (i) our acquisition of all of the stock of Essef for a
cash purchase price of approximately $310 million and refinancing of Essef
indebtedness of approximately $120 million, (ii) our acquisition of all of the
stock of Falcon Manufacturing, Inc., the parent corporation of DeVilbiss, for a
cash purchase price of approximately $460 million and (iii) our sale and
issuance under this offering of an aggregate $250 million principal amount of
notes and our concurrent offering of 5,500,000 shares at an estimated price of
$45 per share, and the application of the estimated net proceeds from the
offerings. References to "DeVilbiss" in the summary pro forma combined financial
data mean Falcon Manufacturing, Inc. and DeVilbiss Air Power Company together.
The summary pro forma combined financial data are based on the estimates and
assumptions set forth in the notes to the unaudited pro forma combined condensed
financial statements. The summary pro forma combined financial data have been
prepared using the purchase method of accounting whereby the total cost of the
Essef acquisition and the DeVilbiss acquisition has been allocated to the
tangible and intangible assets acquired and liabilities assumed based on their
respective fair values at the effective date of the acquisition, assumed for
purposes of the pro forma information to be approximated by historical values.
Such allocations ultimately will be based on further management studies and due
diligence. Accordingly, the allocations reflected in the summary pro forma
combined financial data are preliminary and subject to revision. It is not
expected that the final allocation of purchase price will produce results
materially different from those presented in the pro forma data.
Our consolidated statements of income for the six months ended June 26, 1999
(unaudited) and for the year ended December 31, 1998 have been combined with the
DeVilbiss consolidated statements of income for the six months ended June 30,
1999 (unaudited) and for the year ended December 31, 1998, and with the Essef
consolidated statements of income for the six months ended June 30, 1999
(unaudited) and for the twelve months ended December 31, 1998. Our fiscal year
and that of DeVilbiss end on December 31, while Essef's fiscal year ends on
September 30. Essef's historical consolidated statement of income was conformed
to our fiscal year by adding Essef's December 31, 1998 quarterly results to, and
subtracting its December 31, 1997 quarterly results from, its September 30, 1998
consolidated statements of income amounts. Our June 26, 1999 unaudited
consolidated balance sheet has been combined with DeVilbiss's and Essef's June
30, 1999 unaudited consolidated balance sheets.
The summary pro forma combined income statement data assume that our
acquisition of DeVilbiss, our acquisition of Essef and both this offering and
the concurrent common stock offering occurred on January 1, 1998. The summary
pro forma combined balance sheet data assume that the acquisitions, this
offering and the concurrent common stock offering occurred on June 26, 1999. The
pro forma statement amounts exclude the effect of Essef's discontinued Anthony &
Sylvan operations, which were split off to Essef's shareholders immediately
prior to our purchase of Essef. Additional acquisitions made by Essef and us in
1998 and 1999 do not constitute material business combinations individually or
in the aggregate and have been included in the summary unaudited pro forma
combined financial data only for the periods owned.
The summary pro forma combined financial data have been adjusted to
eliminate interest expense on certain intercompany advances, certain duplicative
general and administrative costs and reduced interest expense attributable to
the common stock offering. No pro forma effect has been given to operational or
other synergies that may be realized from the acquisitions.
S-6
<PAGE>
The summary pro forma combined financial data are presented for illustrative
purposes only and are not necessarily indicative of the operating results or
financial position that might have been achieved had the transactions occurred
as of an earlier date, nor are they necessarily indicative of operating results
or financial position that may occur in the future. These pro forma amounts do
not, therefore, project our financial position or results of operations for any
future date or period. The summary pro forma combined financial data should be
read in conjunction with our historical consolidated financial statements and
notes, and the historical consolidated financial statements and notes of Essef
and DeVilbiss, incorporated by reference in the prospectus, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
beginning on page S-19.
SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
-------------------------------------------- -------------------------------------------
PRO FORMA JUNE 30, PRO FORMA
1998 1998 JUNE 26, 1999 JUNE 26, 1999
1996 1997 1998 (UNAUDITED) (UNAUDITED) (UNAUDITED)(1) (UNAUDITED)(1)
--------- --------- --------- ----------- ----------- -------------- --------------
(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales................... $ 1,567.1 $ 1,839.1 $ 1,937.6 $ 2,621.4 $ 936.8 $ 977.7 $ 1,438.4
Operating costs:
Cost of goods sold........ 1,098.1 1,290.8 1,330.3 1,869.5 645.6 667.9 1,020.3
Selling, general and
administrative.......... 326.1 378.5 414.1 510.6 202.6 211.7 268.3
Restructuring charge...... -- -- -- -- -- 38.0 38.0
--------- --------- --------- ----------- ----------- -------------- --------------
Total operating costs... 1,424.2 1,669.3 1,744.4 2,380.1 848.2 917.6 1,326.6
--------- --------- --------- ----------- ----------- -------------- --------------
Operating income............ 142.9 169.8 193.2 241.3 88.6 60.1 111.8
Gain on sale of business.... -- 10.3 -- -- -- -- --
Interest expense - net 18.3 21.7 22.3 67.7 11.0 12.0 35.3
--------- --------- --------- ----------- ----------- -------------- --------------
Income before income taxes.. 124.6 158.4 170.9 173.6 77.6 48.1 76.5
Provision for income
taxes..................... 50.1 66.8 64.1 70.7 29.5 17.6 31.3
--------- --------- --------- ----------- ----------- -------------- --------------
Income from continuing
operations................ 74.5 91.6 106.8 102.9 48.1 30.5 45.2
Preferred dividend
requirements.............. 4.9 4.9 4.2 4.2 2.3 -- --
--------- --------- --------- ----------- ----------- -------------- --------------
Income available to common
shareholders.............. $ 69.6 $ 86.7 $ 102.6 $ 98.7 $ 45.8 $ 30.5 $ 45.2
--------- --------- --------- ----------- ----------- -------------- --------------
--------- --------- --------- ----------- ----------- -------------- --------------
Diluted earnings per share
from continuing
operations................ $ 1.73 $ 2.11 $ 2.46 $ 2.10 $ 1.10 $ 0.71 $ 0.93
Weighted average shares
outstanding (000's) -
Diluted................... 42,752 43,067 43,149 48,649 43,336 43,056 48,556
OTHER OPERATING DATA:
Depreciation and
amortization.............. $ 59.5 $ 67.8 $ 68.4 $ 98.4 $ 36.9 $ 37.6 $ 53.7
Capital expenditures........ 71.6 77.5 53.8 73.9 15.6 19.0 25.5
Ratio of earnings to fixed
charges(2)................ 6.31 6.73 6.41 3.28 6.40 4.12 2.96
BALANCE SHEET DATA:
Working capital............. $ 312.6 $ 313.2 $ 353.8 $ 388.0 $ 415.4 $ 432.3
Net property, plant and
equipment................. 298.8 293.6 308.3 281.6 301.1 404.7
Total assets................ 1,289.0 1,472.9 1,554.7 1,481.0 1,669.6 2,697.9
Total debt (includes current
portion).................. 312.8 329.3 340.9 362.6 418.5 1,068.4
Shareholders' equity........ 563.8 630.6 709.4 666.0 724.9 960.9
</TABLE>
- ------------------
(1) In the first quarter of 1999, we recorded a restructuring charge of $38.0
million, or $0.56 per share. Excluding the restructuring charge for the
first half of 1999, actual operating income would have been $98.1 million
and actual diluted earnings per common share would have been $1.27.
Excluding the restructuring charge, pro forma operating income would have
been $149.8 million and pro forma diluted earnings per share would have been
$1.49 for the first half of 1999.
(2) The ratio of earnings to fixed charges is computed by dividing income from
continuing operations before income taxes and fixed charges by fixed
charges. Fixed charges consist of interest on debt (including capitalized
interest), amortization of debt discount and expense and a portion of
rentals determined to be representative of interest.
S-7
<PAGE>
CAUTIONARY STATEMENT ABOUT FORWARD LOOKING STATEMENTS
We provide information and make statements in this prospectus supplement
that are "forward-looking" in nature. Forward-looking information or statements
include statements about the future of the industries represented by our
operating groups, statements about our future business plans and strategies, the
timeliness of product introductions and deliveries, expectations about industry
and market growth and developments, expectations about our growth and
profitability and other statements that are not historical in nature. Many of
these statements contain words such as "may," "will," "expect," "believe,"
"intend," "anticipate," "estimate" or "continue" or other similar words.
Because forward-looking statements involve future risks and uncertainties,
there are many factors that could cause actual results to differ materially from
those expressed or implied. For example, a few of the uncertainties that could
affect the accuracy of forward-looking statements, besides the specific risk
factors identified in the accompanying prospectus, include:
- changes in industry conditions, such as:
- the strength of product demand;
- the intensity of competition;
- pricing pressures;
- market acceptance of new product introductions;
- the introduction of new products by competitors;
- our ability to source components from third parties without interruption
and at reasonable prices; and
- the financial condition of our customers;
- changes in our business strategies;
- general economic conditions, such as the rate of economic growth in our
principal geographic markets or fluctuations in exchange rates;
- changes in operating factors, such as continued improvement in
manufacturing activities and the achievement of related efficiencies and
inventory risks due to shifts in market demand; and
- our ability to accurately evaluate the effects of contingent liabilities
such as taxes, product liability, environmental and other liabilities.
We cannot predict the actual effect these factors will have on our results
and many of the factors and their effects are beyond our control. In addition,
we are under no duty to update any of the forward-looking statements after the
date of this prospectus supplement to conform these statements to actual
performance or results. Given these uncertainties, you should not rely too
heavily on these forward-looking statements.
USE OF PROCEEDS
We estimate that the net proceeds from the sale of $250 million notes in
this offering will be approximately $248 million, after deducting the estimated
underwriting discounts and commissions and estimated offering expenses payable
by us.
Concurrently with this notes offering and by means of a separate prospectus
supplement, we are offering 5,500,000 shares of common stock, plus 825,000
shares to cover the over-allotment option granted to the underwriters for that
offering. The net proceeds from the common stock
S-8
<PAGE>
offering are expected to be approximately $236 million, assuming the
over-allotment option is not exercised.
The completion of this notes offering is dependent upon the completion of
the common stock offering, and we cannot give you any assurance that the common
stock offering will be completed. We estimate that the net proceeds from this
offering and the concurrent common stock offering will be approximately $484
million on a combined basis. If both this offering and the common stock offering
are completed, we intend to use the combined net proceeds from both offerings to
reduce our indebtedness as follows:
- We intend to use approximately $400 million of the combined net proceeds
to repay all amounts outstanding under the $400 million bridge loan
incurred by us with Morgan Guaranty Trust Company of New York to partially
finance our acquisition of Essef. The bridge loan accrues interest at a
floating rate equal to LIBOR plus a variable margin. The margin is 1.25%
through September 30, 1999, increasing to 1.75% from October 1 to November
30, 1999 (or, if the amount outstanding on October 1 is $200 million or
less, increasing to 1.5%), and increasing by an additional 1% from
December 1, 1999 through maturity. The current interest rate under the
bridge loan is 6.56%. The bridge loan matures on March 30, 2000; however,
it is required to be reduced prior to that date upon any sale of assets or
new issuance of debt or equity, including any issuance of notes pursuant
to this offering or issuance of shares pursuant to the concurrent common
stock offering.
- We intend to use approximately $50 million of the combined net proceeds to
repay the amount outstanding under a revolving credit facility with U.S.
Bank National Association, as agent, under which we may draw up to $50
million. The U.S. Bank loan was entered into to provide additional funds
for our acquisition of DeVilbiss and we drew the full $50 million of the
U.S. Bank loan at the time of the closing of the DeVilbiss acquisition.
The U.S. Bank loan accrues interest at a floating rate equal to LIBOR plus
a variable margin. The margin is 1.25% through December 1, 1999 and 2.0%
from December 2, 1999 through March 30, 1999. The U.S. Bank loan matures
on March 30, 2000, but must be repaid (and the bank's commitment
terminates) prior to maturity upon any new issuance of debt or equity,
including any issuance of notes pursuant to this offering or issuance of
shares pursuant to the concurrent common stock offering.
- We intend to use the balance of the combined net proceeds to pay down
amounts which may be outstanding under our two new credit facilities
aggregating $800 million, consisting of a five-year $425 million revolving
credit facility and a 364-day $375 million revolving credit facility. The
$800 million revolving credit facilities replaced our existing $390
million revolving credit facilities and were entered into to partially
fund our acquisition of DeVilbiss and to support our operating needs.
Inclusive of related facilities fees, the $800 million revolving credit
facilities accrue interest at a floating rate equal to LIBOR plus 1.25%
through December 1, 1999 and thereafter based upon the rating of our
long-term senior unsecured debt assigned by Standard & Poor's Ratings
Group and Moody's Investor Service, Inc. The $425 million revolving credit
facility expires September 2, 2004 and the $375 million revolving credit
facility expires August 31, 2000.
S-9
<PAGE>
CAPITALIZATION
The following table sets forth our short-term debt and our consolidated
capitalization as of June 26, 1999, (i) on an actual basis, (ii) as adjusted to
give effect to our acquisitions of Essef and DeVilbiss, and (iii) as adjusted to
give effect to this offering and our concurrent common stock offering and our
application of the proceeds from those offerings as described under "Use of
Proceeds," net of our estimated offering expenses and the underwriting discount.
<TABLE>
<CAPTION>
JUNE 26, 1999
-----------------------------------------------------
ADJUSTMENTS ADJUSTMENTS
FOR FOR
ACTUAL ACQUISITIONS OFFERINGS AS ADJUSTED
--------- ------------- ------------- ------------
(UNAUDITED) (DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Short-term debt:
Current maturities of long-term
debt............................... $ 47.8 $ 0.4 -- $ 48.2
Bridge financing..................... -- 400.0 $ (400.0) -
Short-term revolving credit
borrowings......................... -- 218.0 (84.0) 134.0
--------- ------------- ------------- ------------
Total short-term debt.............. $ 47.8 $ 618.4 $ (484.0) $ 182.2
--------- ------------- ------------- ------------
--------- ------------- ------------- ------------
Long-term debt:
Long-term revolving credit
borrowings......................... $ 159.5 $ 265.5 -- $ 425.0
Other borrowings..................... 211.2 -- -- 211.2
Senior notes......................... -- -- $ 250.0 250.0
--------- ------------- ------------- ------------
Total long-term debt............... 370.7 265.5 250.0 886.2
--------- ------------- ------------- ------------
Shareholders' equity:
Common stock - par value, $.16 2/3
authorized 250,000,000; issued and
outstanding 42,677,375 (48,177,375
as adjusted(1)).................... 7.1 -- 0.9 8.0
Additional paid-in capital........... 237.2 -- 235.1 472.3
Accumulated other comprehensive
income............................. (5.4) -- -- (5.4)
Retained earnings.................... 486.0 -- -- 486.0
--------- ------------- ------------- ------------
Total shareholders' equity......... 724.9 -- 236.0 960.9
--------- ------------- ------------- ------------
Total capitalization............. $ 1,095.6 $ 265.5 $ 486.0 $ 1,847.1
--------- ------------- ------------- ------------
--------- ------------- ------------- ------------
</TABLE>
- --------------
(1) Excludes 1,692,931 shares of common stock reserved for issuance upon
exercise of stock options granted as of June 26, 1999.
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
The following tables present certain historical and pro forma combined
condensed financial data as of and for each of the periods indicated. The
unaudited pro forma combined condensed financial data contained herein give
effect to the following transactions and events: (i) our acquisition of all of
the stock of Essef for a cash purchase price of approximately $310 million and
refinancing of Essef indebtedness of approximately $120 million, (ii) our
acquisition of the stock of Falcon Manufacturing, Inc., the parent corporation
of DeVilbiss, for a cash purchase price of approximately $460 million and (iii)
our sale and issuance under this offering of an aggregate $250 million principal
amount of notes and our concurrent offering of 5,500,000 shares at an estimated
price of $45 per share, and the application of the estimated net proceeds from
the
S-10
<PAGE>
offerings. References to "DeVilbiss" in the unaudited pro forma combined
condensed financial data mean Falcon Manufacturing, Inc. and DeVilbiss Air Power
Company together.
The unaudited pro forma combined condensed financial data are based on the
estimates and assumptions set forth in the notes to the unaudited pro forma
combined condensed financial statements. The unaudited pro forma combined
condensed financial data have been prepared using the purchase method of
accounting whereby the total cost of the Essef acquisition and the DeVilbiss
acquisition has been allocated to the tangible and intangible assets acquired
and liabilities assumed based on their respective fair values at the effective
date of the acquisition, assumed for purposes of the pro forma information to be
approximated by historical values. Such allocations ultimately will be based on
further management studies and due diligence. Accordingly, the allocations
reflected in the unaudited pro forma combined condensed financial data are
preliminary and subject to revision. It is not expected that the final
allocation of purchase price will produce results materially different from
those presented in the pro forma data.
Our consolidated statements of income for the six months ended June 26, 1999
(unaudited) and for the year ended December 31, 1998 have been combined with the
DeVilbiss consolidated statements of income for the six months ended June 30,
1999 (unaudited) and for the year ended December 31, 1998, and with the Essef
consolidated statements of income for the six months ended June 30, 1999
(unaudited) and for the twelve months ended December 31, 1998. Our fiscal year
and that of DeVilbiss end on December 31, while Essef's fiscal year ends on
September 30. Essef's historical consolidated statement of income was conformed
to our fiscal year by adding Essef's December 31, 1998 quarterly results to, and
subtracting its December 31, 1997 quarterly results from, its September 30, 1998
consolidated statements of income amounts. Our June 26, 1999 unaudited
consolidated balance sheet has been combined with DeVilbiss's and Essef's June
30, 1999 unaudited consolidated balance sheets.
The unaudited pro forma combined income statement data assume that our
acquisition of DeVilbiss, our acquisition of Essef and both this offering and
the concurrent common stock offering occurred on January 1, 1998. The unaudited
pro forma combined balance sheet data assume that the acquisitions, this
offering and the concurrent common stock offering occurred on June 26, 1999. The
pro forma statement amounts exclude the effect of Essef's discontinued Anthony &
Sylvan operations, which were split off to Essef's shareholders immediately
prior to our purchase of Essef. Additional acquisitions made by Essef and us in
1998 and 1999 do not constitute material business combinations individually or
in the aggregate and have been included in the summary unaudited pro forma
combined financial data only for the periods owned.
The unaudited pro forma combined condensed financial data have been adjusted
to eliminate interest expense on certain intercompany advances, certain
duplicative general and administrative costs and reduced interest expense
attributable to the common stock offering. No pro forma effect has been given to
operational or other synergies that may be realized from the acquisitions.
The unaudited pro forma combined condensed financial data are presented for
illustrative purposes only and are not necessarily indicative of the operating
results or financial position that might have been achieved had the transactions
occurred as of an earlier date, nor are they necessarily indicative of operating
results or financial position that may occur in the future. These pro forma
amounts do not, therefore, project our financial position or results of
operations for any future date or period. The unaudited pro forma combined
condensed financial data should be read in conjunction with our historical
consolidated financial statements and notes, and the historical consolidated
financial statements and notes of Essef and DeVilbiss, incorporated by reference
in the prospectus, and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" beginning on page S-19.
S-11
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRO FORMA
COMBINED
HISTORICAL STATEMENTS ADJUSTMENTS PRO FORMA ADJUSTMENTS STATEMENT
--------------------------------- FOR COMBINED FOR AFTER
PENTAIR DEVILBISS ESSEF ACQUISITIONS STATEMENT OFFERINGS OFFERINGS
--------- ----------- --------- --------------- ----------- -------------- -----------
(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............................. $ 1,937.6 $ 389.1 $ 302.8 $ (8.1)(1) $ 2,621.4 -- $ 2,621.4
Operating costs:
Cost of goods sold.................. 1,330.3 327.6 219.7 (8.1)(1) 1,869.5 -- 1,869.5
Selling, general and
administrative.................... 414.1 29.6 56.3 10.6 (2)(3 510.6 -- 510.6
--------- ----------- --------- ------ ----------- ------ -----------
Total operating costs............. 1,744.4 357.2 276.0 2.5 2,380.1 -- 2,380.1
--------- ----------- --------- ------ ----------- ------ -----------
Operating income...................... 193.2 31.9 26.8 (10.6) 241.3 -- 241.3
Interest expense - net................ 22.3 -- 7.1 61.6(5) 91.0 $ (23.3)(6) 67.7
Other expense......................... -- 26.8 -- (26.8)(4) -- -- --
--------- ----------- --------- ------ ----------- ------ -----------
Income before income taxes............ 170.9 5.1 19.7 (45.4) 150.3 23.3 173.6
Provision for income taxes............ 64.1 2.2 6.6 (11.3)(7) 61.6 9.1(8) 70.7
--------- ----------- --------- ------ ----------- ------ -----------
Income from continuing operations..... $ 106.8 $ 2.9 $ 13.1 $ (34.1) $ 88.7 $ 14.2 $ 102.9
--------- ----------- --------- ------ ----------- ------ -----------
--------- ----------- --------- ------ ----------- ------ -----------
Earnings per share from continuing
operations:
Basic............................... $ 2.67 -- -- -- $ 2.20 -- $ 2.24
Diluted............................. 2.46 -- -- -- 2.04 -- 2.10
Weighted average shares outstanding
(000's):
Basic............................... 38,444 -- -- -- 38,444 5,500 43,944
Diluted............................. 43,149 -- -- -- 43,149 5,500 48,649
</TABLE>
See Notes to Unaudited Pro Forma Combined Condensed Statements of Income
S-12
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 26, 1999
<TABLE>
<CAPTION>
HISTORICAL STATEMENTS ADJUSTMENTS PRO FORMA ADJUSTMENTS
----------------------------------- FOR COMBINED FOR
PENTAIR DEVILBISS ESSEF ACQUISITIONS STATEMENT OFFERINGS
----------- ----------- --------- --------------- ----------- --------------
(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net sales.............................. $ 977.7 $ 269.4 $ 199.4 $ (8.1)(1) $ 1,438.4 --
Operating costs:
Cost of goods sold................... 667.9 218.3 142.2 (8.1)(1) 1,020.3 --
Selling, general and
administrative..................... 211.7 21.0 30.9 4.7 (2)(3 268.3 --
Restructuring charge................. 38.0 -- -- -- 38.0 --
----------- ----------- --------- ------ ----------- ------
Total operating costs.............. 917.6 239.3 173.1 (3.4) 1,326.6 --
----------- ----------- --------- ------ ----------- ------
Operating income....................... 60.1 30.1 26.3 (4.7) 111.8 --
Interest expense - net................. 12.0 -- 4.2 30.8(5) 47.0 $ (11.7)(6)
Other expense.......................... -- (12.1) -- 12.1(4) -- --
----------- ----------- --------- ------ ----------- ------
Income before income taxes............. 48.1 18.0 22.1 (23.4) 64.8 11.7
Provision for income taxes............. 17.6 7.1 8.5 (6.5)(7) 26.7 4.6(8)
----------- ----------- --------- ------ ----------- ------
Income from continuing operations...... $ 30.5 $ 10.9 $ 13.6 $ (16.9) $ 38.1 $ 7.1
----------- ----------- --------- ------ ----------- ------
----------- ----------- --------- ------ ----------- ------
Earnings per share from continuing
operations:
Basic................................ $ 0.72 -- -- -- $ 0.90 --
Diluted.............................. 0.71 -- -- -- 0.88 --
Weighted average shares outstanding
(000's):
Basic................................ 42,433 -- -- -- 42,433 5,500
Diluted.............................. 43,056 -- -- -- 43,056 5,500
<CAPTION>
PRO FORMA
COMBINED
STATEMENT
AFTER
OFFERINGS
-----------
<S> <C>
Net sales.............................. $ 1,438.4
Operating costs:
Cost of goods sold................... 1,020.3
Selling, general and
administrative..................... 268.3
Restructuring charge................. 38.0
-----------
Total operating costs.............. 1,326.6
-----------
Operating income....................... 111.8
Interest expense - net................. 35.3
Other expense.......................... --
-----------
Income before income taxes............. 76.5
Provision for income taxes............. 31.3
-----------
Income from continuing operations...... $ 45.2
-----------
-----------
Earnings per share from continuing
operations:
Basic................................ $ 0.94
Diluted.............................. 0.93
Weighted average shares outstanding
(000's):
Basic................................ 47,933
Diluted.............................. 48,556
</TABLE>
See Notes to Unaudited Pro Forma Combined Condensed Statements of Income
S-13
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
The following pro forma adjustments are incorporated in the unaudited pro
forma combined condensed statements of income as a result of the acquisition of
DeVilbiss, the acquisition of Essef, this offering and the concurrent common
stock offering:
(1) Reflects the elimination of DeVilbiss sales and cost of sales to us.
(2) Reflects the elimination of cost allocations of $3.5 million and $2.3
million for the periods ended December 31, 1998 and June 26, 1999,
respectively, from Essef's prior corporate structure for services such as
treasury, corporate administration and public relations which we provide for
our subsidiaries, which will not result in additional costs to us after the
acquisition.
(3) Reflects amortization of incremental goodwill of $315.4 million and $246.7
million (see Note 1 of Notes to Unaudited Pro Forma Combined Condensed
Balance Sheet) associated with the DeVilbiss acquisition and the Essef
acquisition, respectively, over 40 years:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER SIX MONTHS ENDED
31, 1998 JUNE 26, 1999
--------------------- -----------------
<S> <C> <C>
DeVilbiss...................... $ 7.9 $ 3.9
Essef.......................... 6.2 3.1
----- ---
$ 14.1 $ 7.0
----- ---
----- ---
</TABLE>
(4) Reflects the elimination of cost allocations from Falcon Building Products,
Inc. for interest expense and for services such as treasury, corporate
administration and public relations which we provide for our subsidiaries,
which will not result in additional costs to us after the acquisition.
(5) Reflects an increase in interest expense upon: (i) incremental borrowings of
$770 million (the cash acquisition price for Essef and DeVilbiss) at an
expected average interest rate of 7.5% inclusive of associated financing
fees, (ii) the refinancing of the long-term debt of Essef and (iii) a 1%
increase in the average interest rate on our other outstanding floating rate
debt due to an increase in our leverage.
(6) Reflects a reduction in interest expense upon: (i) applying the $236 million
of anticipated proceeds from the concurrent common stock offering to pay
down floating rate debt bearing an average interest rate of 7.5% and (ii) a
1% reduction in the average interest rate on our remaining floating rate
debt due to a decrease in our leverage.
(7) Reflects the decrease in the provision for income taxes from applying our
anticipated effective tax rates for DeVilbiss and Essef of 38% and 39% to
their respective earnings, less the effect of pro forma adjustments in Notes
1 through 5 above, except for goodwill amortization in Note 3 which is not
deductible.
(8) Reflects the increase in the provision for income taxes from applying a 39%
effective income tax rate to the pro forma adjustment reflected in Note 6
above.
S-14
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
JUNE 26, 1999
<TABLE>
<CAPTION>
PRO FORMA
COMBINED
HISTORICAL STATEMENTS ADJUSTMENTS PRO FORMA ADJUSTMENTS STATEMENT
---------------------------- FOR COMBINED FOR AFTER
PENTAIR DEVILBISS ESSEF ACQUISITIONS STATEMENT OFFERINGS OFFERINGS
-------- --------- ------ ----------- ---------- ----------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Current assets
Cash and cash equivalents........ $ 41.6 $ 0.1 $ 4.5 -- $ 46.2 -- $ 46.2
Accounts and notes receivable.... 419.6 -- 62.2 $ 102.5(1) 584.3 -- 584.3
Inventories...................... 292.8 55.5 47.6 -- 395.9 -- 395.9
Other current assets............. 56.9 7.9 3.2 -- 68.0 -- 68.0
-------- --------- ------ ----------- ---------- ----------- ---------
Total current assets........... 810.9 63.5 117.5 102.5 1,094.4 -- 1,094.4
Net property, plant and
equipment........................ 301.1 36.1 67.5 -- 404.7 -- 404.7
Goodwill........................... 497.1 18.0 48.6 562.1(1) 1,125.8 -- 1,125.8
Other assets....................... 60.5 0.6 9.9 -- 71.0 $ 2.0(5) 73.0
Net long-term assets of
discontinued operations.......... -- -- 35.9 (35.9)(1) -- -- --
-------- --------- ------ ----------- ---------- ----------- ---------
Total assets................... $1,669.6 $118.2 $279.4 $ 628.7 $2,695.9 $ 2.0 $2,697.9
-------- --------- ------ ----------- ---------- ----------- ---------
-------- --------- ------ ----------- ---------- ----------- ---------
Current liabilities
Accounts and notes payable....... $ 129.2 $ 45.2 $ 26.0 -- $ 200.4 -- $ 200.4
Other accrued liabilities........ 218.5 25.3 35.7 -- 279.5 -- 279.5
Short-term debt.................. 47.8 0.1 0.3 $ 618.0(2) 666.2 $(484.0)(3) 182.2
Net current liabilities of
discontinued operations........ -- -- 3.9 (3.9)(1) -- -- --
-------- --------- ------ ----------- ---------- ----------- ---------
Total current liabilities...... 395.5 70.6 65.9 614.1 1,146.1 (484.0) 662.1
Long-term debt..................... 370.7 0.2 113.3 152.0(2) 636.2 -- 636.2
Senior notes....................... -- -- -- -- -- 250.0(5) 250.0
Other liabilities.................. 178.5 5.3 4.9 -- 188.7 -- 188.7
Advances from parent............... -- 30.4 -- (30.4)(1) -- -- --
-------- --------- ------ ----------- ---------- ----------- ---------
Total liabilities.............. 944.7 106.5 184.1 735.7 1,971.0 (234.0) 1,737.0
Shareholders' equity
Common stock-par value, $.16 2/3
authorized 250,000,000, issued
and outstanding 42,677,375
(48,177,375 as adjusted)....... 7.1 -- -- -- 7.1 0.9(4) 8.0
Additional paid-in capital....... 237.2 -- -- -- 237.2 235.1(4) 472.3
Accumulated other comprehensive
income......................... (5.4) -- -- -- (5.4) -- (5.4)
Retained earnings................ 486.0 11.7 95.3 (107.0)(1) 486.0 -- 486.0
-------- --------- ------ ----------- ---------- ----------- ---------
Total shareholders' equity..... 724.9 11.7 95.3 (107.0) 724.9 236.0 960.9
-------- --------- ------ ----------- ---------- ----------- ---------
Total liabilities and
shareholders' equity......... $1,669.6 $118.2 $279.4 $ 628.7 $2,695.9 $ 2.0 $2,697.9
-------- --------- ------ ----------- ---------- ----------- ---------
-------- --------- ------ ----------- ---------- ----------- ---------
</TABLE>
See Notes to Unaudited Pro Forma Combined Condensed Balance Sheet.
S-15
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
The following pro forma adjustments are incorporated in the unaudited pro
forma combined condensed balance sheet as a result of the acquisition of
DeVilbiss, the acquisition of Essef, this offering and the concurrent common
stock offering:
(1) Reflects the allocation of the purchase prices for the DeVilbiss acquisition
and the Essef acquisition, adds the purchase of securitized accounts
receivable of DeVilbiss from Falcon Building Products, Inc. according to the
terms of the purchase agreement, eliminates advances from Falcon Building
Products, Inc. that will be settled as part of the purchase price,
eliminates the net assets of the discontinued operations of Anthony & Sylvan
that were not acquired and eliminates the investment in the acquired
companies.
<TABLE>
<CAPTION>
DEVILBISS ESSEF TOTAL
----------- --------- ---------
<S> <C> <C> <C>
Net assets - as reported................................ $ 11.7 $ 95.3 $ 107.0
Add securitized accounts receivable acquired from Falcon
Building Products, Inc................................ 102.5 -- 102.5
Add advances from Falcon Building Products, Inc......... 30.4 -- 30.4
Less net assets of discontinued operation............... -- (32.0) (32.0)
----------- --------- ---------
Net assets - acquired................................... 144.6 63.3 207.9
Fair value adjustments:
Record incremental goodwill acquired.................. 315.4 246.7 562.1
----------- --------- ---------
Investment in DeVilbiss and Essef................... $ 460.0 $ 310.0 $ 770.0
----------- --------- ---------
----------- --------- ---------
</TABLE>
For purposes of these allocations, we have assumed that the fair values of
the net assets in the DeVilbiss acquisition and the Essef acquisition are
approximated by historical values, and thus have made no fair value
adjustments. Such allocations ultimately will be based on further management
studies and due diligence. Accordingly these allocations are preliminary and
subject to revision.
(2) Reflects a purchase price of approximately $460 million for the DeVilbiss
acquisition and a purchase price of approximately $310 million for the Essef
acquisition funded with $618 million of short-term debt and $152 million of
long-term debt.
(3) Reflects the paydown of short-term debt with the net proceeds from this
offering and the concurrent common stock offering.
(4) Reflects the issuance of 5,500,000 shares of common stock pursuant to the
concurrent common stock offering. The amounts shown are net of $12 million
of estimated issuance costs.
(5) Reflects the issuance of notes pursuant to this offering. The estimated
issuance costs of $2 million associated with this offering are reflected as
deferred financing costs and included in other assets.
S-16
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following table presents selected historical consolidated financial
information for each of the five years in the period ended December 31, 1998,
which has been derived from our audited consolidated financial statements. The
selected historical consolidated financial information for the six-month period
ended June 30, 1998 and June 26, 1999 is unaudited and, in the opinion of
management, reflects all adjustments (consisting of normal recurring
adjustments) that are necessary to present fairly the financial results for such
periods. The selected historical consolidated financial information does not
purport to indicate results of operations as of any future date or for any
future period. The selected historical consolidated financial information has
been derived from and should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this prospectus supplement and our audited consolidated
financial statements and notes thereto and our unaudited interim consolidated
financial statements and notes thereto incorporated by reference in the
prospectus.
S-17
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, ------------------------
----------------------------------------------------- JUNE 30, JUNE 26,
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- ----------- -----------
(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales:
Tools........................................ $ 453.5 $ 492.4 $ 582.7 $ 747.1 $ 849.3 $ 386.2 $ 407.0
Water........................................ 210.6 237.5 322.3 404.0 537.9 273.8 275.4
Enclosures................................... 460.5 542.5 548.8 579.4 564.0 283.5 299.6
Other........................................ 137.1 130.5 113.3 108.6 (13.6) (6.7) (4.3)
--------- --------- --------- --------- --------- ----------- -----------
Total net sales............................ 1,261.7 1,402.9 1,567.1 1,839.1 1,937.6 936.8 977.7
Operating income:(1)
Tools........................................ 39.5 44.2 54.7 76.8 99.6 39.4 26.0
Water........................................ 15.4 22.7 41.2 41.9 66.0 30.4 32.9
Enclosures................................... 39.6 50.5 53.9 47.3 46.0 26.4 10.1
Other........................................ 11.1 (1.2) (6.9) 3.8 (18.4) (7.6) (8.9)
--------- --------- --------- --------- --------- ----------- -----------
Total operating income..................... 105.6 116.2 142.9 169.8 193.2 88.6 60.1
Gain on sale of business....................... -- -- -- 10.3 -- -- --
Interest expense - net......................... 22.1 14.5 18.3 21.7 22.3 11.0 12.0
--------- --------- --------- --------- --------- ----------- -----------
Income from continuing operations before income
taxes........................................ 83.5 101.7 124.6 158.4 170.9 77.6 48.1
Provision for income taxes..................... 33.4 41.2 50.1 66.8 64.1 29.5 17.6
--------- --------- --------- --------- --------- ----------- -----------
Income from continuing operations.............. 50.1 60.5 74.5 91.6 106.8 48.1 30.5
Discontinued operations........................ 3.5 4.6 -- -- -- -- --
Gain on sale of discontinued operations........ -- 12.1 -- -- -- -- --
--------- --------- --------- --------- --------- ----------- -----------
Net income(1).............................. $ 53.6 $ 77.2 $ 74.5 $ 91.6 $ 106.8 $ 48.1 $ 30.5
--------- --------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- --------- ----------- -----------
OTHER OPERATING DATA:
Depreciation and amortization.................. $ 40.8 $ 48.9 $ 59.5 $ 67.8 $ 68.4 $ 36.9 $ 37.6
Capital expenditures........................... 57.8 63.8 71.6 77.5 53.8 15.6 19.0
Ratio of earnings to fixed charges(2).......... 4.19 4.88 6.31 6.73 6.41 6.40 4.12
BALANCE SHEET DATA:
Working capital................................ $ 498.6 $ 250.4 $ 312.6 $ 313.2 $ 353.8 $ 388.0 $ 415.4
Net property, plant and equipment.............. 231.2 266.7 298.8 293.6 308.3 281.6 301.1
Total assets................................... 1,161.1 1,252.5 1,289.0 1,472.9 1,554.7 1,481.0 1,669.6
Total debt..................................... 412.1 238.9 312.8 329.3 340.9 362.6 418.5
Shareholders' equity........................... 432.0 502.9 563.8 630.6 709.4 666.0 724.9
</TABLE>
- ------------------
(1) In the first quarter of 1999, we recorded a restructuring charge of $38.0
million. Excluding the restructuring charge for the first half of 1999,
operating income would have been $42.8 million for tools, $37.4 million for
water, $26.8 million for enclosures and $98.1 million in total. Net income
would have been $54.6 million for the first half of 1999 excluding the
restructuring charge.
(2) The ratio of earnings to fixed charges is computed by dividing income from
continuing operations before income taxes and fixed charges by fixed
charges. Fixed charges consist of interest on debt (including capitalized
interest), amortization of debt discount and expense and a portion of
rentals determined to be representative of interest.
S-18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
The following is a brief discussion of our historical results of operations
and financial condition and has been excerpted from the Management's Discussion
and Analysis of Results of Operations and Financial Condition included in our
Form 10-Q for the quarter ended June 26, 1999 and our Form 10-K for the fiscal
year ended December 31, 1998. You should read those discussions and our
consolidated financial statements for more complete information.
In the first quarter of this year, we changed to a "4-4-5 week" fiscal
calendar, which has four quarters with an equal duration of 13 weeks each. The
first two months of each fiscal quarter have a set four weeks and the third
month has a set five weeks, regardless of the duration of the actual calendar
months. Consequently, in comparing historical quarters, there is often a
discrepancy in the actual number of days reflected in the quarters being
compared. Our fiscal year will continue to end on December 31. Beginning in the
first quarter of 1999, the cost of administrative support services provided by
the corporate office are no longer reported in the "Other" segment and are
allocated to the operating segments. As a result, the prior years' segment
information in the table below has been restated to conform to the 1999
presentation.
BUSINESS SEGMENT INFORMATION
Selected information for our business segments (including our $38.0 million
restructuring charge recorded in the first quarter of 1999) for the years ended
December 31, 1996, 1997 and 1998 and the two six-month periods ended June 26,
1999 and June 30, 1998 follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------
YEAR ENDED DECEMBER 31, JUNE 30, JUNE 26,
---------------------------------- 1998 1999
1996 1997 1998 (UNAUDITED) (UNAUDITED)
---------- ---------- ---------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NET SALES:
Tools....................... $ 582,689 $ 747,066 $ 849,294 $ 386,235 $ 407,000
Water....................... 322,252 403,979 537,880 273,817 275,408
Enclosures.................. 548,798 579,366 564,045 283,524 299,624
Other(1).................... 113,326 108,645 (13,641) (6,821) (4,314)
---------- ---------- ---------- ----------- -----------
Total..................... $1,567,065 $1,839,056 $1,937,578 $ 936,755 $ 977,718
---------- ---------- ---------- ----------- -----------
---------- ---------- ---------- ----------- -----------
OPERATING INCOME:(2)
Tools....................... $ 54,656 $ 76,784 $ 99,621 $ 39,374 $ 26,046
Water....................... 41,245 41,947 65,976 30,427 32,946
Enclosures.................. 53,892 47,282 46,026 26,441 10,055
Other(3).................... (6,874) 3,789 (18,431) (7,655) (8,983)
---------- ---------- ---------- ----------- -----------
Total..................... $ 142,919 $ 169,802 $ 193,192 $ 88,587 $ 60,064
---------- ---------- ---------- ----------- -----------
---------- ---------- ---------- ----------- -----------
</TABLE>
- --------------
(1) Other includes sales that do not relate to current operations and
intercompany eliminations.
(2) In the first quarter of 1999, we recorded a restructuring charge of $38.0
million. Excluding the restructuring charge for the first half of 1999,
operating income would have been $42.8 million for tools, $37.4 million for
water, $26.8 million for enclosures and $98.1 million in total.
(3) Other includes corporate and administrative expenses, charges that do not
relate to current operations and intercompany eliminations.
S-19
<PAGE>
RESULTS OF OPERATIONS
FIRST HALF ENDED JUNE 26, 1999 COMPARED TO FIRST HALF ENDED JUNE 30, 1998
CONSOLIDATED RESULTS. Consolidated net sales increased to $977.7 million in
the first half of 1999, representing a 4.4% increase over the corresponding 1998
period. Operating income in the first half of 1999 after the restructuring
charge ($38 million) was $60.1 million, a decline of $28.5 million from the
corresponding 1998 period; operating income as a percent of sales decreased from
9.5% to 6.1%. Operating income before the restructuring charge was $98.1 million
for the first half of 1999, up 10.7% over the corresponding 1998 period, and as
a percent of sales improved from 9.5% in the 1998 period to 10.0% in the 1999
period.
Gross profit margins increased in first half 1999 to 31.7% versus 31.1% for
the same period a year ago. This is primarily due to internal cost reduction
efforts. Selling, general and administrative expense as a percent of sales was
21.7% in first half 1999 as compared to 21.6% in the 1998 period.
Net income for the first half 1999 after the restructuring charge ($24.1
million after-tax or $.56 per share) declined from $48.1 million to $30.5
million for a decrease of 36.6% from the same 1998 period; before the
restructuring charge, net income was $54.6 million, up 13.5% over the 1998
period. Diluted earnings per share for the 1999 period after the restructuring
charge declined from $1.10 to $0.71, a decrease of 35.5% from the 1998 period;
diluted earnings per share before the restructuring charge was $1.27, an
increase of 15.5% over the 1998 period. Diluted earnings per share for 1999
year-to-date was negatively impacted 1 cent compared to the prior year period as
a result of a weak Canadian dollar.
The tax rate reduction to 36.5% is consistent with the pattern of reductions
effected over the last two years. We expect that the tax rate in future quarters
of 1999 after the effects of the Essef and DeVilbiss acquisitions will increase
to approximately 39% due to the non-deductibility of goodwill amortization for
tax purposes.
PROFESSIONAL TOOLS AND EQUIPMENT SEGMENT. Net sales increased to $407.0
million in the first half of 1999, representing a 5.4% increase over the
corresponding period in 1998. Operating income in the first half of 1999 after
the restructuring charge was $26.0 million, a decline of $13.4 million and such
operating income as a percent of sales decreased from 10.2% to 6.4%. Operating
income before the restructuring charge increased to $42.8 million, up 8.8% over
the same period in 1998, and as a percent of sales improved from 10.2% to 10.5%.
Sales in our professional tools and equipment segment were relatively
strong, driven by a good domestic economy and a healthy demand for newly
introduced products. First half 1999 sales and income increased over the same
period in 1998 which included the introduction of the popular Bammer-TM-
cordless nailer.
For the power tool businesses, housing starts are a key factor driving
performance. Although starts in 1999 are down in the first two quarters and are
expected to continue to be down slightly from the high levels experienced in
1998, retail markets are projected to make up for slower construction markets.
In particular, second half sales and operating income should improve due to new
product introductions and expanded distribution through Sears retail stores. The
DeVilbiss acquisition, which closed on September 3, 1999, will be integrated
into this segment.
WATER AND FLUID TECHNOLOGIES SEGMENT. Net sales increased to $275.4 million
in the first half of 1999, representing a 0.6% increase over the corresponding
period in 1998. Operating income in the first half of 1999 after the
restructuring charge was $32.9 million, an increase of $2.5 million and such
operating income as a percent of sales increased from 11.1% to 11.9%. Operating
income
S-20
<PAGE>
before the restructuring charge increased to $37.4 million, up 23.0% over the
same period in 1998, and as a percent of sales improved from 11.1% to 13.6%.
The relatively constant level of sales growth in the first half of 1999
compared to the previous year is largely attributable to the deliberate
reduction in sales of the formerly unprofitable Layne & Bowler pump line, begun
in 1998. Profits in this segment benefitted from offshore sourcing and continued
productivity improvements and cost reductions. The Essef acquisition, which
closed on August 10, 1999, will be integrated into this segment.
ELECTRICAL AND ELECTRONIC ENCLOSURES SEGMENT. Net sales increased to $299.6
million in the first half of 1999, representing a 5.7% increase over the
corresponding period in 1998. The increase was due to the acquisition of Pentair
Enclosures UK (the former Walker Dickson Group) in October 1998 and WEB in April
1999, offset by a reduction in sales in the existing businesses. These
businesses were affected by continued weakness in capital spending in many North
American industrial markets, as well as slow economic growth in Germany
generally.
Operating income in the first half of 1999 after the restructuring charge
was $10.1 million, a decline of $16.3 million and such operating income as a
percent of sales decreased from 9.3% to 3.4%. Operating income before the
restructuring charge increased to $26.8 million, up 1.4% over the same period in
1998, and as a percent of sales declined from 9.3% to 8.9%. Operating margins
were impacted in the first half of 1999 by lower initial margins from newly
acquired businesses.
Operating improvements for the balance of 1999 are expected as a result of
continued productivity gains in North America and of the restructuring actions
taken earlier this year in Europe. In July 1999, Pentair Electronic Packaging
was formed, combining the strengths of our five electronic enclosure operations
in North America, in order to better target opportunities in fast-growing
datacom and telecom markets.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Consolidated net sales increased to $1,937.6 million in 1998, representing a
5.4% increase over 1997 (up over 13% excluding the 1997 sales of Federal
Cartridge Company, divested in November 1997). Our tools segment and our water
segment posted double-digit growth rates, with the latter including the full
year effect of a 1997 pump business acquisition. Our enclosures segment
experienced lower sales due to soft capital spending environments in the U.S.
and the overall German and Asian economies.
Operating income increased to $193.2 million in 1998, up 13.8% over 1997,
which as a percent of sales improved from 9.2% to 10.0%. Profitability improved
due to volume efficiencies, favorable outsourcing opportunities, and
manufacturing/purchasing efficiencies resulting from the integration of acquired
pump businesses. Gross profit margins improved to 31.3% in 1998 versus 29.8% in
1997. Research and development expenses were 1.2% of net sales versus 1.2% in
1997. Selling, general and administrative expense as a percent of sales was
20.2% in 1998 as compared to 19.4% in 1997. We continue to incur costs to
support major information system upgrades (which are starting to be offset by
the associated cost improvements). We incurred expenses in 1998 and the first
half of 1999 to implement company-wide process improvement and cost savings
programs.
Interest expense was higher in 1998 as compared to 1997 due to slightly
higher effective interest rates.
Our effective income tax rate was 37.5% in 1998. The comparable 1997 tax
rate (excluding the unusual tax impact on the sale of Federal Cartridge) was
39.0%.
Net income increased 16.6% to $106.8 million versus $91.6 million in 1997.
Earnings per share of $2.46 in 1998 represented an increase of 16.6% over 1997
earnings per share of $2.11.
S-21
<PAGE>
Excluding the $0.03 gain from the sale of Federal Cartridge in 1997, there was
an 18.3 % increase over 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Consolidated net sales increased to $1,839.1 million in 1997, representing a
17.4% increase over 1996. The double-digit growth rate is attributable to
additional strategic acquisitions and continued growth in North America. Outside
of North America, difficult European markets and weak local currencies limited
the growth of sales in dollar terms.
Operating income increased to $169.8 million in 1997, up 18.8% over 1996.
Operating income as a percent of sales improved slightly from 9.1% to 9.2%.
Significant margin gains in most existing businesses were nearly offset by the
lower operating margins of our recent acquisitions. Strategic investments were
made throughout all the operating segments to position us for continued
productivity gains, increased capacity and improved customer service and
satisfaction. Gross profit margins were maintained, remaining nearly flat at
29.8% in 1997 versus 29.9% in 1996. Research and development expenses increased
to 1.2% of net sales versus 1.0% in 1996 due to the increasing stream of new
products. Selling, general and administrative expense as a percent of sales was
19.4% in 1997 as compared to 19.8% in 1996. We continued to incur costs to
support major information system upgrades, which are starting to be offset by
the associated cost improvements.
Interest expense was higher in 1997 as compared to 1996 due to slightly
higher effective interest rates and higher average outstanding debt levels in
1997, influenced by the acquisition of the pump business in August and the sale
of Federal Cartridge in November.
We sold Federal Cartridge to Blount International, Inc., in November 1997,
realizing a $10.3 million pre-tax gain. This gain was reduced by $9.1 million of
taxes, resulting in a net gain of $1.2 million, or $.03 per share. Sales and
operating income for Federal Cartridge through the first 10 months of 1997
improved over the levels of their very difficult 1996.
Taxes on the gain from the sale of Federal Cartridge were greater than our
normal tax rate due to non-deductible goodwill created as part of the original
structure of the 1988 Federal-Hoffman acquisition. Our effective income tax rate
of 42.2% includes this incremental tax from the gain on sale. The tax rate
excluding the gain on the sale of Federal Cartridge was 39.0% as compared to
40.2% in 1996.
Net income increased 22.9% to $91.6 million versus $74.5 million in 1996.
Earnings per share of $2.11 in 1997 represented an increase of 22.0% over 1996
earnings per share of $1.73. Earnings per share without the gain from the sale
of Federal Cartridge was $2.08, a 20% increase over 1996.
SPECIAL RESTRUCTURING CHARGE
In the first quarter of 1999, we recorded a special restructuring charge of
$38.0 million ($24.1 million after-tax or $.56 per share). As shown below, $3.0
million was spent through June 26, 1999.
The restructuring plan comprises consolidation of certain operations,
overhead reductions and outsourcing of specific product lines in each of our
three business segments. We anticipate a reduction of approximately 1,050 jobs,
as detailed below, offset by approximately 350 new jobs at our other facilities
in connection with consolidation and rationalization. The restructuring plan
does not contemplate that we will exit any of our current lines of business; the
projects involved are designed to make our existing businesses more efficient.
S-22
<PAGE>
Our tools segment will consolidate North American distribution operations
and combine the headquarters of the two power tool businesses, Delta and
Porter-Cable, in Jackson, Tennessee. In the service equipment businesses,
products are being outsourced to offshore manufacturers or transferred to other
North American facilities. The Jonesboro, Arkansas manufacturing operation of
Lincoln Automotive will be closed. These actions will result in the termination
of more than 600 employees. Restructuring charges for our tools segment amounted
to $16.8 million, $10 million of which is attributable to employee terminations,
and the balance of which relates to asset write-downs and other exit costs.
Management currently estimates the benefits will be approximately $14.8 million
in 2000 and $15.5 million in 2001.
Our water segment will reduce the workforce at its Lincoln Industrial
business and outsource some product manufacturing, resulting in headcount
reduction of approximately 100 employees. Lincoln Industrial plans to eliminate
approximately 50% of the manufacturing space at its U.S. manufacturing
facilities. The charge for our water segment was $4.5 million, approximately
$1.2 million of which relates to terminated employees, and the balance of which
is attributable to demolition and other exit costs. Management currently
estimates the benefits will be approximately $0.4 million in 1999, $2.1 million
in 2000 and $2.1 million in 2001.
Our enclosures segment initiated termination of employees in its European
enclosure businesses and adopted a plan to rationalize manufacturing at its
North American facilities. These actions will result in the reduction of
approximately 350 employees. Our tools segment absorbed $16.7 million of the
charge, largely related to employee terminations. Management currently estimates
the benefits will be approximately $4.6 million in 1999, $9.2 million in 2000
and $12.2 million in 2001.
The components of the restructuring charge and related reserve balances
remaining at June 26, 1999 were:
<TABLE>
<CAPTION>
PERSONNEL ASSET
COSTS DISPOSALS EXIT COSTS TOTAL
------------- ------------- ------------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
1999 Restructuring charge....... $ 27.5 $ 7.0 $ 3.5 $ 38.0
1999 Spending to date
Cash spending................. (2.9) (0.1) (0.0) (3.0)
Non-cash spending............. (0.0) (0.1) (0.0) (0.1)
----- ----- ----- ---------
Remaining reserve............... $ 24.4 $ 6.8 $ 3.5 $ 34.9
----- ----- ----- ---------
----- ----- ----- ---------
</TABLE>
"Personnel Costs" consists of severance, medical plan continuation, pension
cash-outs, and outplacement per company policy for the 1,050 employees planned
to be terminated. As of June 26, 1999, 185 employees were terminated (or in
Europe were working under statutory notice periods).
"Asset Disposals" consists of the write-down of the carrying value of the
Delta headquarters building which is held for resale and the write-off of
special-use manufacturing and support assets which will no longer be needed and
which will be scrapped or abandoned. The real estate held for resale is expected
to be disposed of by mid-2000. All of these assets are currently classified as
property, plant and equipment. No charge has been taken with respect to the
Jonesboro real estate since we believe it will be able to be sold for book value
within a reasonable period.
"Exit Costs" consists of maintenance and security costs of surplus buildings
until leases expire or demolition or disposal of certain buildings, including
the Jonesboro building.
"Personnel Costs" and "Exit Costs" are cash costs and the "Asset Disposals"
are primarily non-cash costs. Our currently anticipated schedule projects cash
expenditures of $14.1 million in
S-23
<PAGE>
1999, $15.3 million in 2000 and $1.6 million in 2001. These requirements will be
funded through cash from operations or borrowings under our existing credit
facilities.
During the first half of 1999, restructuring benefits (largely personnel
cost savings) of approximately $1.9 million were realized. Currently anticipated
benefits are projected to be a total of $5.0 million in 1999, $26.1 million in
2000 and $29.8 million in 2001. The major components of anticipated benefits are
in reductions in labor costs and efficiencies in consolidating distribution and
administrative functions.
The anticipated benefits noted above are net of the costs of adding 350
employees at other of our locations. The benefits do not, however, take into
account one-time costs associated with these restructuring plans. We anticipate
that the associated one-time costs will amount to approximately $6.2 million,
one-half of which is contemplated to be incurred in fiscal 1999, with most of
the balance to be incurred in the first quarter of 2000. These costs are not
included in the restructuring charge, since they relate to asset relocations,
start-up costs and training and recruiting of employees at other locations.
LIQUIDITY AND CAPITAL RESOURCES
Cash from operating activities for the first half generated $10.1 million in
1999 compared to the use of $0.2 million in the same period in 1998. We believe
that cash flow from operations will exceed our needs for capital expenditures,
smaller acquisitions and dividends for the full year.
Capital expenditures were $19.0 million in the first half of 1999 compared
to $15.6 million in the first half of 1998. We currently expect that our capital
expenditures will remain approximately 3% of net sales for the coming fiscal
year.
We had a negative free cash flow of $8.9 million in the first half of 1999
compared to a negative $15.8 million in the first half of 1998. Free cash flow,
a measure of the internal financing of operational cash needs, is defined as
cash from operations less capital expenditures. We are targeting continued
growth in free cash flow as a percent of sales through improved profitability
and working capital management. Historically, free cash flow is negative during
the first half of each fiscal year and positive thereafter.
Borrowings in the first half of 1999 financed operating needs, capital
expenditures and the acquisition in April of WEB. The percentage of long-term
debt to total capital was 34% at June 26, 1999 compared to 29% at December 31,
1998. We are authorized to repurchase stock to offset the dilution caused by
stock issuances under employee stock compensation plans. In 1999, we acquired
117,000 shares of its common stock for approximately $4.0 million. As of June
26, 1999, we had available to us approximately $240 million under our current
revolving credit agreements.
RECENT DEVELOPMENTS
On August 10, 1999, we acquired all of the outstanding capital shares of
Essef. Essef's pool installation business, Anthony & Sylvan, was split off to
Essef shareholders at the time of the acquisition. The acquisition was accounted
for using the purchase method of accounting. The acquisition price was
approximately $310 million, and we refinanced approximately $120 million of
Essef indebtedness.
On September 3, 1999, we acquired all of the outstanding shares of Falcon
Manufacturing, Inc., the parent company of DeVilbiss, for a cash purchase price
of approximately $460 million. The acquisition will be accounted for using the
purchase method of accounting.
On August 2, 1999, we entered into the $400 million bridge loan agreement
with Morgan Guaranty Trust Company of New York, that together with approximately
$30 million from our revolving credit facilities was used to finance the Essef
acquisition. The bridge loan accrues interest
S-24
<PAGE>
at a floating rate equal to LIBOR plus a variable margin. The margin is 1.25%
through September 30, 1999, increasing to 1.75% from October 1 to November 30,
1999 (or, if the amount outstanding on October 1 is $200 million or less,
increasing to 1.5%), and increasing by an additional 1% from December 1, 1999
through maturity. The current interest rate under the bridge loan is 6.56%. The
bridge loan matures on March 30, 2000, though it is required to be reduced in
the event of any material sale of assets or any new issuance of debt or equity,
including any issuance of notes pursuant to this offering or issuance of shares
pursuant to the concurrent common stock offering.
On August 13, 1999, we entered into a new $100 million revolving credit
agreement with U.S. Bank National Association, as agent, under which we may draw
up to $50 million. The balance of the bank's commitment expired with the
execution of our $800 million revolving credit facilities. We drew the full $50
million to partially finance the DeVilbiss acquisition. The U.S. Bank loan
accrues interest at a floating rate equal to LIBOR plus a variable margin. The
margin is 1.25% through December 1, 1999 and 2.0% from December 2, 1999 through
March 30, 2000. The U.S. Bank loan matures on March 30, 2000; provided, that the
bank's commitment will be permanently reduced by $50 million, and related
borrowings repaid, prior to maturity upon any new issuance of debt or equity,
including any issuance of notes pursuant to this offering or issuance of shares
pursuant to the concurrent common stock offering.
We have entered into two new credit facilities aggregating $800 million,
consisting of a five-year $425 million revolving credit facility and a new
364-day $375 million revolving credit facility. The $800 million revolving
credit facilities entirely replaced our previous $390 million credit facilities
and were entered into to partially fund the acquisition of DeVilbiss and to
support our operating needs. Inclusive of related facilities fees, the $800
million revolving credit facilities accrue interest at a floating rate equal to
LIBOR plus 1.25% through December 1, 1999 and thereafter based upon the rating
of our long-term senior unsecured debt assigned by Standard & Poor's Ratings
Group and Moody's Investor Service, Inc., or if not in effect, a leverage ratio.
The $425 million revolving credit facility expires September 2, 2004 and the
$375 million revolving credit facility expires August 31, 2000.
OUTLOOK
Our revenue growth in the coming months will be driven by new product
introductions and expanded distribution. Our acquisition of Essef, which closed
on August 10, 1999 significantly increases sales in our water segment, while our
acquisition of DeVilbiss, which closed on September 3, 1999, significantly
expands sales in our tools segment. We expect that the profitability of all
three of our business segments will be strengthened by the net benefits of our
cost savings projects initiated in 1998 and the restructuring plans announced in
the first quarter of 1999. However, we have incurred higher interest costs and
related financing fees as a result of our recent acquisitions. These
acquisitions, taken together, are anticipated to be modestly dilutive over the
balance of 1999, due to the seasonality of the Essef pool and spa equipment
businesses and due to associated interest costs and financing fees for these
acquisitions. However, we expect that the acquired businesses will be accretive
in the first full twelve months of our ownership and in fiscal 2000.
YEAR 2000
BACKGROUND
The Year 2000 issue is the result of computer programs and embedded computer
chips originally having been designed and developed using two digits rather than
four digits to define the applicable year. Any of our internal use computer
programs and hardware as well as our products that are date sensitive may
recognize a date using "00" as the year 1900 rather than the year 2000.
S-25
<PAGE>
This could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions or engage in normal business activities for us, our suppliers and
our customers.
STATE OF READINESS
Our businesses have had "Y2K Project" programs in place since as long ago as
1995 to address Year 2000 problems in critical business areas for information
management systems, non-information systems with embedded technology, suppliers
and customers. We have completed our review and compliance planning for our
critical information systems (IS). Most of our larger businesses have completed
the implementation of required actions for compliance; the balance of the
business units are in the final stages of implementation.
As of June 26, 1999, 16 out of the current 37 computing locations have
completed their Year 2000 compliance implementation for all systems, including
non-IS automated communications and manufacturing systems. The 16 completed
locations represent approximately 60% of our revenues. All but four of the
remaining locations do not require additional resources to complete
implementation by the end of the third quarter of 1999. The remaining four
locations, which represent approximately 6% of our revenues, have been provided
additional internal or external resources to finish on a timely basis. No
significant difficulties have been encountered to date as a result of Year 2000
non-compliance in any of our businesses. We have also reviewed the Year 2000
compliance status of our recent Essef and DeVilbiss acquisitions as a part of
the due diligence review of those businesses. We believe that these operations
will be Year 2000 compliant on a timely basis.
In many cases, implementation includes installation or updating of new
Enterprise Resource Planning ("ERP") systems for our 34 current manufacturing
locations designed to enable these businesses to operate more efficiently and to
provide better management reporting. We anticipate that implementation and
testing phases for the installation of the ERP system company-wide will be
substantially complete by the end of the third quarter of 1999. We have
installed and tested our ERP systems in 13 locations. Installation is continuing
at another 9 locations, all but one of which is anticipated to have been
completed by the end of the third quarter, with that remaining site scheduled
for completion in October 1999.
The remaining 12 manufacturing locations have not converted and did not
intend to convert their ERP systems at this time, but have completed their Year
2000 compliance actions for their current systems. All manufacturing sites will
be converted to the new ERP system over the next few years as the IS development
plan is concluded.
Less than 0.1% of our products are believed to be date dependent and
consequently should not be affected by the Year 2000 issue.
We have close working relationships with a large number of suppliers and
customers. These include, among others, utility and telecommunication providers,
raw materials and components suppliers, and financial institutions, managed care
organizations and large retail establishments. We have been reviewing, and
continue to review, with our critical suppliers and major customers the status
of their Year 2000 readiness. Our business units have established plans for
ongoing monitoring of suppliers during 1999.
COSTS TO ADDRESS THE YEAR 2000 ISSUE
As a result of the numerous different IS systems used by businesses that we
have acquired over the years and also as a result of changing business
requirements, we have an ongoing development plan with scheduled replacements of
hardware and software occurring over the past
S-26
<PAGE>
few years and continuing into the future throughout the organization. Year 2000
compliance is a by-product of our IS development plan.
The estimated cost associated with the total IS development plan over the
five-year period from 1995 to 1999 is anticipated to be approximately $61
million; the plan is approximately 83% complete. This cost estimate is an
increase of approximately $6 million over the budgeted amount as of the end of
1998. The forecasted increase is attributable largely to the cost of additional
consulting services for installation or updating of ERP systems both for recent
acquisitions and ERP installations that have taken longer to complete than
planned. The estimated cost specifically attributable to Year 2000 compliance,
apart from other IS development activities, amounts to approximately $15.5
million, of which $13 million had been spent through June 1999. We have not
deferred any significant IS projects as a result of the implementation of our
Year 2000 project.
CONTINGENCY PLANS
Our businesses are in the process of developing Year 2000 contingency plans,
based on their review of their internal and external compliance progress. A full
review is underway to assess our vulnerability to internal noncompliance and
potential third-party failures and actions that can be taken to reduce
unfavorable impacts. Possible plans may include arranging alternative or
additional suppliers and service providers, increasing inventory levels,
providing additional back-up systems and replacing or upgrading equipment and
software.
RISKS REPRESENTED BY THE YEAR 2000 ISSUE
We believe that completed and planned modifications and conversions of our
internal systems and equipment will allow us to be Year 2000 compliant in a
timely manner. However, there can be no assurance that our systems or equipment,
nor those of third parties on which we rely, will be Year 2000 compliant, in all
material respects, in a timely manner, nor that attainment of compliance can be
done for the amount budgeted by the company. Nor can we give any assurance that
our own or third parties' contingency plans will mitigate the effects of any
noncompliance. We believe that non-compliance with Year 2000 issues would likely
result in some reduction of our operations for the first part of the year 2000,
which could have a material adverse effect on our businesses or our financial
condition.
Based on our assessments to date, we believe we will not experience any
material disruption as a result of Y2K issues in internal manufacturing
processes, information processing, interfacing with major customers or
processing orders and billing. However, if critical utility service providers
experience difficulties that affect us or our business units, a shutdown of some
or all operations at individual facilities could occur. We are developing
contingency plans to provide for continuity of processing (in the event of a Y2K
disruption) which will be based on the outcome of our Y2K compliance reviews and
the results of third party verification efforts. Assuming no major disruption in
service from utility companies or similar critical third-party providers, we
believe that we will be able to manage our Year 2000 transition without material
effect on our results of operations or financial condition.
The most reasonably likely worst case scenario of failure by us or our
suppliers or customers to resolve Year 2000 issues would be a temporary slowdown
or cessation of manufacturing operations at one or more of our facilities,
and/or a temporary inability on our part to timely process orders and to deliver
finished products to customers. Delays in meeting customer orders would reduce
or delay sales and affect the timing of billings to and payments received from
customers and could result in complaints, charges or claims, or temporarily
increasing working capital.
S-27
<PAGE>
BUSINESS
We are a rapidly growing, global manufacturer and distributor of high
quality industrial products in three principal industry segments:
- professional tools and equipment;
- water and fluid technologies; and
- electrical and electronic enclosures.
Since 1993, our sales have grown at a compound annual rate of 15.4%, from
$946.6 million in 1993 to $1,937.6 million in 1998. Over the same period, we
have achieved growth in operating income of 23.2%, from $68.1 million in 1993 to
$193.2 million in 1998. We have achieved this growth through continuous new
product introductions, strategic acquisitions and multiple cost saving
initiatives. We market thousands of products, most of which we also design and
manufacture. The end markets for our products are diverse, consisting of the
construction, woodworking, electronics, water conditioning, automotive and
industrial markets.
OVERVIEW OF BUSINESS SEGMENTS
PROFESSIONAL TOOLS AND EQUIPMENT
Pro forma sales for our tools segment (including the acquisition of
DeVilbiss) were $1,230.3 million for 1998, representing 47% of our overall pro
forma sales, and were $668.3 million for the first half of 1999, representing
46% of our overall first half pro forma sales. The following table lists some of
our products, brand names, distribution channels and markets:
<TABLE>
<CAPTION>
PRODUCTS BRAND NAMES DISTRIBUTION CHANNELS MARKETS
- ----------------------- ----------------- ----------------------- -----------------------
<S> <C> <C> <C>
- - Woodworking - Delta - Home Centers - Construction/
Machinery - Porter-Cable - Retail Chains Renovation
- - Portable Power Tools - FLEX - Industrial Tool - Professional
- - Lubricating and - Lincoln Distributors Contractors
Lifting Equipment - Century - Hardware Stores - Cabinet Shops
- - Battery Charging and - Warehouse - Upscale Hobbyists
Testing Equipment Distributors - Do-It-Yourselfers
- - Welding Equipment - Auto Parts Chains - Automotive Service
- Major Oil Companies Professionals
- Farm Fleet Stores - Oil Change Centers
- Mail Order - Farmers
</TABLE>
Our tool product lines are positioned at the high end of the market and
target professionals and upscale hobbyists. As a result of our internal product
development, we are a leading innovator of new products and features, with new
products developed in the past five years representing 50% of our sales in this
segment last year. Significant new products include Porter-Cable's Bammer-TM-
and air nailer products and Century's Booster Pac-TM-.
S-28
<PAGE>
Our markets are growing due to retail and demographic trends, including the
rapid expansion of home centers, increased purchases of high-end
professional-quality tools by do-it-yourselfers, growth in home renovation
projects and new housing starts. Consolidation in the retail channel continues
to be significant, and we believe our broad product offerings and high level of
customer service have strengthened our relationships in this channel. We have
received over 70 industry awards since January 1998, including Home Depot's
"Partner of the Year" award, which Porter-Cable has won for three years in a
row, Lowe's "Supplier of the Year" award, won by Porter-Cable for 1998, and
Sears "Partner in Progress" award, won by Century for 1998.
Since January 1996, we have aggressively pursued acquisitions to broaden our
product lines and have completed five acquisitions in our tools segment during
this period. Our acquisition of DeVilbiss expands our tools product offerings,
allows us to leverage our sales force and expands the sale of DeVilbiss'
products to new distribution channels. The following table lists some of
DeVilbiss' products, brand names, distribution channels and markets:
<TABLE>
<CAPTION>
PRODUCTS BRAND NAMES DISTRIBUTION CHANNELS MARKETS
- --------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
- - Compressors - Air America - Home Centers - Construction/
- - Generators - Ex-Cell - Retail Chains Renovation
- - Pressure Washers - ProAir II - Hardware Stores - Professional
- Charge Air Pro Contractors
- Do-It-Yourselfers
- Consumers
</TABLE>
WATER AND FLUID TECHNOLOGY
Pro forma sales for our water segment (including the acquisition of Essef)
were $840.7 million for 1998, representing 32% of our overall pro forma sales
and were $474.8 million for the first half of 1999, representing 33% of our
overall first half pro forma sales. The following table lists some of our
products, brand names and markets:
<TABLE>
<CAPTION>
PRODUCTS BRAND NAMES MARKETS
- ----------------------------- ----------------------------- -----------------------------
<S> <C> <C>
- - Water and Wastewater Pumps - Myers - Residential
- - Control Valves - Fairbanks Morse - Commercial HVAC
- - Automated and Manual - Aurora Pumps - Plumbing
Lubrication Systems - Hydromatic - Fire Pump
- - Pumps and Pumping Stations - Fleck - Municipal Waste and Water
for Thick Fluid Transfer - Lincoln Industrial Treatment Facilities
Applications - Residential and Commercial
Water Treatment
- Industrial Plant
- Food and Beverage Plants
- Industrial and Commercial
Equipment
</TABLE>
The water handling and treatment market has been growing, primarily as a
result of the need for potable water in residential use, increased
specifications for highly purified water in industrial applications,
environmental regulations, consumer awareness of water quality and the need for
clean water in developing nations. The market is consolidating as suppliers seek
to provide integrated solutions and expand their product offerings to serve
global markets.
In 1995, we targeted the water business as a key, long-term growth
opportunity. Since then, we have aggressively pursued acquisitions in this area,
purchasing Fleck Controls (water treatment
S-29
<PAGE>
valves) in 1995 and General Signal Pump Group (residential and commercial pumps)
in 1997. These strategic acquisitions of large, established businesses, together
with F. E. Myers, owned since 1986, form the foundation of our water segment.
Fleck Controls currently holds a leading position in the worldwide water
treatment control valve market. We are also a leading water and wastewater pump
manufacturer in North America and the world.
Our acquisition of Essef, completed on August 10, 1999, expands our water
segment product offerings to include tanks and filtration systems and adds the
pool and spa markets to our existing distribution channels. In addition, through
Essef, we added new product development capabilities and expanded our expertise
in composite and resin technologies. The following table lists some of Essef's
representative products, brand names and markets:
<TABLE>
<CAPTION>
PRODUCTS BRAND NAMES MARKETS
- ----------------------------- ----------------------------- -----------------------------
<S> <C> <C>
- - Storage Tanks - Structural Fibers - Residential
- - Pumps - WellMate - Commercial
- - Filtration Systems - Pac-Fab - Industrial
- - Pool Accessories - Municipal
</TABLE>
ELECTRICAL AND ELECTRONIC ENCLOSURES
Sales for our enclosures segment were $564.0 million for 1998, representing
21% of the overall pro forma sales, and were $299.6 million for the first half
of 1999, representing 21% of the overall first half pro forma sales. The
following table lists some of our products, brand names and markets:
<TABLE>
<CAPTION>
PRODUCTS BRAND NAMES MARKETS
- ----------------------------- ----------------------------- -----------------------------
<S> <C> <C>
- - Metallic and Composite - Hoffman - Automotive
Enclosures - Schroff - Petroleum and
- - Cabinets - Pentair Enclosures Petrochemical
- - Cases - Optima - Machine Tool
- - Subracks - Eraba - Control OEMs
- - Backplanes - Transrack - Datacom
- - Power Supplies - Networking/LANs
- - Technical Workstations - Computer Servers
- - Accessories - General Electronics
- Telecom
</TABLE>
The enclosures market is expanding primarily due to the growth in the data
communications, networking and telecommunications sectors. The industry is large
and fragmented, although a trend toward consolidation has emerged, and this
market continues to consolidate as suppliers seek to perform electronic contract
manufacturing for high volume original equipment manufacturer customers.
Responsiveness to customers' product needs and overall customer service is
particularly important. Our enclosures segment provides a broad range of
electrical and electronic enclosures and packaging solutions. Our high product
quality and reputation for customer service, together with our strong
distribution network and global capabilities, contribute to our strengths in
this industry.
In 1994, we acquired Schroff to expand our product offerings and geographic
presence. We have continued to focus on high-growth applications in the
enclosure market by acquiring The Walker Dickson Group in 1998 and WEB Tool &
Manufacturing in 1999. These acquisitions addressed the custom and original
equipment manufacturer markets, especially for networking, telecom and datacom
applications. In July, we formed Pentair Electronic Packaging, combining the
S-30
<PAGE>
strengths of our five North American electronic enclosure operations, in order
to better target opportunities in fast-growing datacom and telecom markets. This
new division will provide a unified, customer-focused sales team, a wide
selection of electronic packaging solutions and an extensive range of design and
integration services.
OUR BUSINESS STRATEGY
Our principal operating strategy is to continue to maintain a strong rate of
growth in our three diverse business segments. By concentrating on these core
segments, we are able to leverage our strengths and achieve significant
positions within our target markets. In addition, our three segments create
diversity in our distribution channels, end markets, customers and geographic
presence which drives the consistency of our overall financial performance.
INTERNAL GROWTH INITIATIVES
We remain focused on generating internal sales and profitability growth in
our three business segments by pursuing the following strategies:
- strengthen our market positions, particularly through continued new
product introductions in all of our target markets;
- leverage our sales and distribution capabilities to enter new channels and
expand our presence in existing channels;
- build on our strong customer relationships to expand our customer base;
- increase our efficiency by streamlining administrative services and
concentrating resources on product development, marketing and engineering;
and
- aggressively reduce costs by implementing cross-segment synergies,
particularly in supply management and administrative functions.
We continue to focus intensively on our company-wide cost savings
initiatives, in particular supply management and shared administrative services
such as human resources and computing services. In addition, in April we
announced a restructuring plan to consolidate certain operations, reduce
overhead and outsource specific product lines in each of our three business
segments, including an anticipated net reduction of approximately 700 jobs. The
restructuring plan is in addition to, and separate from, our other cost saving
initiatives. We expect to achieve pre-tax savings of approximately $5 million in
1999, $26 million in 2000 and $30 million in 2001 from the restructuring. We
believe there will be a 12-month payback from the time the restructuring funds
are spent to the time they are returned to us in the form of greater
efficiencies and lower costs.
GROWTH THROUGH DISCIPLINED ACQUISITIONS
We have supplemented our numerous internal growth initiatives with a
disciplined acquisition strategy. We have focused on acquisitions that
complement our existing strong market positions and leverage our core strengths
for rapid integration of acquired businesses. We have reduced administrative
costs, rationalized manufacturing and distribution facilities, improved
purchasing methods and implemented other cost-saving initiatives to realize
synergies in our acquisitions. Through acquisitions we also seek to expand our
product lines and technologies and gain access to additional distribution
channels to expand our sales.
S-31
<PAGE>
We have developed stringent criteria to maintain a disciplined approach when
evaluating potential acquisitions. We seek acquisitions that provide:
- strong sales growth opportunities;
- access to new or expanded distribution channels;
- strong brand names;
- new or enhanced technologies;
- enhancement to our market share in target markets;
- complements to our core competencies; and
- global expansion opportunities.
RECENT ACQUISITIONS
Since January 1996, we have completed thirteen acquisitions, representing an
overall investment of over $1.2 billion. Our acquisition history includes:
<TABLE>
<CAPTION>
PROFESSIONAL TOOLS AND
EQUIPMENT GROUP
- ------------------------------------
<S>
DeVilbiss (1999)
- air compressors, portable
generators, pressure washers
T-Tech Industries, Inc. (1998)
- automatic transmission fluid
exchangers and accessories
P&F Technologies Ltd. (1997)
- refrigerant recycling equipment
Century Mfg. (1996)
- service automotive equipment
FLEX GmbH (1996)
- power tools
Biesemeyer Manufacturing (1995)
- woodworking accessories
Hein Werner Automotive (1992)
- automotive equipment
Delta International Machinery (1984)
- stationary woodworking
equipment
Porter-Cable (1981)
- portable power tools
<CAPTION>
WATER AND FLUID
TECHNOLOGIES GROUP
- ------------------------------------
<S>
Essef Corporation (1999)
- water treatment, pool & spa
equipment
ORSCO (1998)
- oil lubrication systems
General Signal Pump Group (1997)
- pumps
S.I.A.T.A. SpA (1996)
- water conditioning control
equipment
Aplex Industries, Inc. (1996)
- industrial pumps
Fleck Controls, Inc. (1995)
- control valves
Expert Pumps (1990)
- sump pumps
McNeil (1986)
- pumps and lubrication equipment
<CAPTION>
ELECTRICAL AND ELECTRONIC
ENCLOSURES GROUP
- ------------------------------------
<S>
WEB Tool & Manufacturing (1999)
- custom server subracks and
chassis
Walker Dickson Group (1998)
- enclosures, subracks and
systems
Transrack (1997)
- complementary cases and
enclosures
Schroff (1994)
- enclosures, cases and
accessories
Federal-Hoffman (1988)
- electrical and electronic
enclosures
</TABLE>
We are continuously investigating other acquisition candidates and typically
have several acquisitions at various stages of discussions or negotiations at
any given time. We have considered in the past and will continue to consider
large acquisitions that could significantly expand our three current segments
or, in appropriate cases, add a new business segment.
ACQUISITION OF ESSEF
On August 10, 1999, we acquired all of the outstanding capital shares of
Essef, which then operated two businesses, Structural Fibers and Pac-Fab. A
third business formerly owned by Essef, Anthony & Sylvan, was split off to Essef
shareholders at the time of the acquisition. The acquisition
S-32
<PAGE>
price was approximately $310 million, and we refinanced approximately $120
million of Essef indebtedness. Sales for the Structural and Pac-Fab businesses
were $296 million for Essef's fiscal year ended September 30, 1998 and were $261
million for Essef's first three quarters ended June 30, 1999. Operating income
was $26 million for Essef's fiscal year ended September 30, 1998 and was $28
million for the first three quarters ended June 30, 1999.
Structural Fibers designs, manufactures and distributes products used in
moving, treating and storing water, including pumps, storage tanks and
filtration systems for residential, commercial, municipal and industrial
customers. Pac-Fab is a leading manufacturer of pool and spa equipment used in
residential and commercial applications. These two businesses expand our water
segment product offerings to include tanks and filtration systems, and extend
our distribution channels to include the pool and spa markets. We believe the
acquisition of these businesses significantly strengthens our position in global
water markets and in the residential and industrial water equipment business.
We believe the acquisition of Essef provides us with many opportunities for
revenue growth in our water segment, including:
- expanding our distribution coverage to serve the pool and spa equipment
markets;
- offering integrated water systems by combining certain of our existing
products with those of Essef;
- gaining technical expertise in composite and resin technologies; and
- providing immediate access to certain international markets we do not
currently serve.
We have identified a number of actions to rapidly integrate the Essef
businesses into our existing water segment, including:
- streamlining management in the water treatment business;
- rationalizing facilities;
- leveraging our ongoing supply management program to reduce purchase costs
for motors and resins;
- outsourcing certain products to Asia, as we currently do for some of our
other water products;
- combining pumps, filters and other equipment currently utilized by Pac-Fab
in its pool markets to provide complete water systems for industrial
users; and
- integrating the North American and European operations of Structural
Fibers and Fleck, our water control valve business.
ACQUISITION OF DEVILBISS
On September 3, 1999, we acquired from Falcon Building Products, Inc. all of
the shares of Falcon Manufacturing, Inc., the parent company of DeVilbiss Air
Power Company, for a cash purchase price of approximately $460 million. The
DeVilbiss acquisition will be accounted for using the purchase method of
accounting. Sales of DeVilbiss were $389 million for the year ended December 31,
1998 and were $269 million for DeVilbiss' first two quarters ended June 30,
1999. Operating income before corporate charges and interest expense was $32
million for the year ended December 31, 1998 and was $30 million for DeVilbiss'
first two quarters ended June 30, 1999.
S-33
<PAGE>
DeVilbiss manufactures a broad line of air compressors, portable generators,
pressure washers and accessories. Its products are sold to the retail,
commercial, contractor and "do-it-yourself" markets under brand names such as
Air America-Registered Trademark-, Charge Air Pro-Registered Trademark-,
Ex-Cell-Registered Trademark- and Pro Air II-Registered Trademark-. The
acquisition of DeVilbiss significantly expands our tools product line and
reinforces our position in the rapidly growing retail channel.
We believe the acquisition of the DeVilbiss offers us multiple opportunities
for revenue growth in our tools segment, including:
- expanding our tools segment product offerings;
- leveraging our in-house retail sales force to increase account penetration
and the number of accounts served; and
- introducing certain acquired products into wholesale industrial and
automotive service markets not currently served by DeVilbiss.
We also expect to be able to generate significant cost savings from this
acquisition through several initiatives, including:
- consolidating physical distribution resulting in significant freight and
overhead cost savings, as well as improved customer and delivery services;
- combining headquarters and administrative functions to reduce costs;
- using our purchasing and sourcing capabilities through Delta and
Porter-Cable's existing organizations in the Far East to lower product
costs; and
- servicing DeVilbiss products through Porter-Cable's existing network to
increase service and productivity and reduce costs.
RECENT FINANCINGS
BRIDGE LOAN. On August 2, 1999, we entered into a $400 million bridge loan
agreement with Morgan Guaranty Trust Company of New York, that together with
approximately $30 million from our revolving credit facilities was used to
finance the Essef acquisition. The bridge loan accrues interest at a floating
rate equal to LIBOR plus a variable margin. The margin is 1.25% through
September 30, 1999, increasing to 1.75% from October 1 to November 30, 1999 (or,
if the amount outstanding on October 1 is $200 million or less, increasing to
1.5%), and increasing by an additional 1% from December 1, 1999 through
maturity. The current interest rate under the bridge loan is 6.56%. The bridge
loan matures on March 30, 2000; however, it is required to be reduced in the
event of any prior sale of assets or new issuance of debt or equity, including
any issuance of notes pursuant to this offering or issuance of shares pursuant
to the concurrent common stock offering. Under the terms of the bridge loan, we
will be restricted from making additional acquisitions over $25 million until
that financing is paid off. A copy of the bridge loan was filed as Exhibit 10.1
to our Quarterly Report on Form 10-Q for the period ended June 26, 1999, filed
August 5, 1999, incorporated by reference in the prospectus.
U.S. BANK LOAN. On August 13, 1999, we entered into a new $100 million
revolving credit agreement with U.S. Bank National Association, as agent, under
which we can draw up to $50 million. The balance of the commitment expired with
the execution of our $800 million revolving credit facilities. The U.S. Bank
loan was entered into to provide additional funds for our acquisition of
DeVilbiss and we drew the full $50 million of the U.S. Bank loan at the time of
the closing of the DeVilbiss acquisition. The U.S. Bank loan accrues interest at
a floating rate equal to LIBOR plus a variable margin. The margin is 1.25%
through December 1, 1999 and 2.0% from December 2, 1999 to March 30, 2000. The
U.S. Bank loan matures on March 30, 2000; provided, that the bank's
S-34
<PAGE>
commitment will be permanently reduced by $50 million, and related borrowings
repaid, prior to maturity upon any new issuance of debt or equity, including any
issuance of notes pursuant to this offering or issuance of shares pursuant to
the concurrent common stock offering. A copy of the U.S. Bank loan was filed as
Exhibit 10.2 to our Form 8-K filed August 25, 1999, incorporated by reference in
the prospectus.
$800 MILLION CREDIT FACILITIES. We have entered into two new credit
facilities aggregating $800 million, consisting of a five-year $425 million
revolving credit facility and a new 364-day $375 million revolving credit
facility. The $800 million revolving credit facilities entirely replaced our
previous $390 million credit facilities and were entered into to partially fund
the acquisition of DeVilbiss and to support our operating needs. Inclusive of
related facilities fees, the $800 million revolving credit facilities accrue
interest at a floating rate equal to LIBOR plus 1.25% through December 1, 1999
and thereafter based upon the rating of our long-term senior unsecured debt
assigned by Standard & Poor's Ratings Group and Moody's Investor Service, Inc.,
or if not in effect, a leverage ratio. The $425 million revolving credit
facility expires September 2, 2004 and the $375 million revolving credit
facility expires August 31, 2000. Copies of the $800 million credit facilities
were filed as Exhibits 4.1 and 10.1 to our Form 8-K filed September 3, 1999
incorporated by reference in the prospectus.
EFFECTS OF RECENT FINANCINGS. Our increased debt levels as a result of the
borrowings described above may affect certain other five to seven year
fixed-rate term loan financing agreements we entered into in the years from 1992
to 1999. Under the most restrictive of these agreements, we will have to
maintain our debt to total capital ratio below 65%.
The bridge loan, the U.S. Bank loan and the $800 million revolving credit
facilities will be sufficient to fund the Essef and DeVilbiss acquisitions and
for us to finance our normal operating needs for the balance of the year,
including working capital, capital expenditures, dividends and small
acquisitions. The bridge loan and the U.S. Bank loan mature on March 30, 2000.
We currently intend to refinance these loans with the proceeds from this
offering and the concurrent common stock offering. If we are unable to do so
before maturity of these loans, we will be required to seek alternative
financing arrangements.
S-35
<PAGE>
DESCRIPTION OF THE NOTES
The following description of the particular terms of the notes supplements,
and to the extent different replaces, the description of the general terms and
provisions of the debt securities in the accompanying prospectus under the
caption "Description of Debt Securities." Certain capitalized terms are defined
in the prospectus or below under "Certain Definitions."
GENERAL
The notes offered hereby will be limited to $250,000,000 aggregate principal
amount at any time outstanding and will mature on . The notes will
bear interest from , 1999 at a rate of % per annum, or from the
most recent Interest Payment Date to which interest has been provided for.
Interest will be payable semi-annually on and of each
year (each such day an "Interest Payment Date"), beginning . The
"Regular Record Dates" shall be the or , as the case
may be, next preceding the applicable Interest Payment Dates. Interest on the
notes will be computed on the basis of a 360-day year of twelve 30-day months.
If any Interest Payment Date or maturity date of the notes falls on a day
which is not a Business Day, the related payment of principal or interest shall
be made on the next succeeding Business Day with the same force and effect as if
made on the date such payment was due, and no interest shall accrue on the
amount so payable for the period from and after such Interest Payment Date or
maturity date, as the case may be.
The notes constitutes a separate series of debt securities under the
indenture and will be issued only in fully registered form without coupons, in
denominations of $1,000 and any integral multiple in excess thereof.
OPTIONAL REDEMPTION
The notes will be redeemable, in whole or in part, at our option, at any
time at a redemption price equal to the greater of:
- 100% of the principal amount of such notes; or
- as determined by a Quotation Agent (as defined below), the sum of the
present values of the remaining scheduled payments of principal and
interest thereon (not including any portion of such payments of interest
accrued as of the date of redemption) discounted to the redemption date on
a semiannual basis (assuming a 360-day year consisting of twelve 30-day
months) at the Adjusted Treasury Rate plus 25 basis points, plus, in each
case, accrued interest thereon to the date of redemption.
"Adjusted Treasury Rate" means, with respect to any redemption date, the
rate per annum equal to the semiannual equivalent yield to maturity of the
Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue
(expressed as a percentage of its principal amount) equal to the Comparable
Treasury Price for such redemption date.
"Comparable Treasury Issue" means the United States Treasury security
selected by a Quotation Agent as having a maturity comparable to the remaining
term of the notes to be redeemed that would be utilized, at the time of
selection and in accordance with customary financial practice, in pricing new
issues of corporate debt securities of comparable maturity to the remaining term
of such notes.
"Quotation Agent" means the Reference Treasury Dealer appointed by the
trustee after consultation with us.
S-36
<PAGE>
"Reference Treasury Dealer" means:
- Goldman, Sachs & Co. and its respective successors; provided, however,
that if the foregoing shall cease to be a primary U.S. Government
securities dealer in New York City (a "Primary Treasury Dealer"), we shall
substitute therefor another Primary Treasury Dealer; and
- any other Primary Treasury Dealer selected by the trustee after
consultation with us.
"Comparable Treasury Price" means, with respect to any redemption date:
- the average of the Reference Treasury Dealer Quotations for such
redemption date, after excluding the highest and lowest such Reference
Treasury Dealer Quotations; or
- if the trustee obtains fewer than three such Reference Treasury Dealer
Quotations, the average of all such Quotations.
"Reference Treasury Dealer Quotations" means, with respect to each Reference
Treasury Dealer and any redemption date, the average, as determined by the
trustee, of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) quoted in
writing to the trustee by such Reference Treasury Dealer at 5:00 p.m. on the
third Business Day preceding such redemption date.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each holder of the notes to be redeemed.
Unless we default in payment of the redemption price, on and after the
redemption date, interest will cease to accrue on the notes or portions thereof
called for redemption.
The notes will not be entitled to the benefit of any sinking fund.
RANKING
The notes will be our senior unsecured obligations and will rank on a parity
in right of payment with all of our other senior unsecured indebtedness for
borrowed money.
CERTAIN COVENANTS
RESTRICTIONS ON SECURED DEBT. Unless we specify, neither we nor any
restricted subsidiary will incur, issue, assume or guarantee any debt secured by
a mortgage, lien, pledge or other encumbrance upon any principal property
without providing that the debt securities will be secured equally and ratably
or prior to the debt. The indenture defines a principal property as any
manufacturing plant, office facility, warehouse of distribution center
consisting of real estate, buildings and fixtures located within the United
States of America and owned by us or any of our subsidiaries, that has a gross
book value, without deduction of any depreciation reserves, of more than $10
million. A principal property does not include any plant to the extent financed
by obligations issued by a state or local governmental unit under certain
provisions of the Internal Revenue Code or any plant which is not of material
importance to the business conducted by us and our subsidiaries. A restricted
subsidiary is any subsidiary of ours that owns a principal property. Debt
includes any notes, bonds, debentures or other similar evidences of indebtedness
for money borrowed. Consolidated shareholders' equity is our consolidated
shareholders' equity as shown on our most recent reported consolidated balance
sheet and computed in accordance with generally accepted accounting principles.
However, this provision shall not apply to the following:
S-37
<PAGE>
- Liens existing on the date of the indenture;
- Liens on any principal property that secure or pay the costs of an
acquisition, construction or improvement of that property by us or our
subsidiaries and are created or assumed at the time of, or within 120 days
of, the acquisition, construction or improvement;
- Liens of or upon any property, shares of capital stock or debt existing at
the time of acquisition, whether by merger, consolidation, purchase, lease
or some other method;
- Liens in favor of us or any restricted subsidiary;
- Liens in favor of the any state or federal government, any agency,
department or subdivision of any state or federal government or any other
country or political subdivision of that country, to secure obligations
pursuant to any contract or statute or to secure any debt incurred to
finance the cost of acquiring, constructing or improving the property that
is subject to the lien;
- Liens imposed by law, including mechanics', workmen's, materialmen's
carriers' warehousemen's vendors' or other liens arising in the ordinary
course of business or federal, state or municipal liens arising out of
contracts of the sale of products or services by us or our subsidiaries,
or deposits or pledges to release such liens;
- Pledges or deposits under workmen's compensation or similar laws and liens
of judgments under such laws which are not currently dischargeable;
- Good faith deposits in connection with bids, tenders, contracts or leases
to which we or our restricted subsidiaries are a party or deposits to
secure public or statutory obligations of us or our restricted
subsidiaries;
- Deposits to obtain or maintain self-insurance or to obtain the benefits of
any laws, regulations or arrangements relating to unemployment insurance,
pensions, social security or similar matters;
- Deposits of cash or U.S. obligations to secure surety, appeal or customs
bonds to which we or any of our subsidiaries that own or lease a principal
property are a party;
- Liens created by or as a result of any litigation or other proceeding
which is being contested in good faith by appropriate proceedings or liens
incurred to obtain a stay or discharge of any litigation or other
proceeding;
- Liens for taxes or assessments or governmental charges or levies not yet
due or delinquent, or which can be paid without penalty or are being
contested in good faith by appropriate proceedings;
- Liens consisting of restrictions on the use of real property which do not
interfere materially with the property's use or materially detract from
its value, except for liens resulting from governmental action; and
- Any extension, renewal or replacement of any of the liens referred to
above.
The limitation on liens also does not apply if at the time and after giving
effect to any debt secured by a lien and any retirement of a lien:
- the total amount of all existing debt secured by liens that does not
equally and ratably secure the debt securities and is not subject to the
exceptions described above; plus
- the total net amount of rent, discounted at the rate of interest implicit
in the lease, required to be paid during the remaining term of all leases
that we and our subsidiaries have entered
S-38
<PAGE>
into as sale and leaseback transactions, described below in "Restrictions
on Sale and Leaseback Transactions";
- does not exceed 7.5% of our consolidated shareholders' equity.
RESTRICTIONS ON SALE AND LEASEBACK TRANSACTIONS. Unless we specify, neither
we nor any restricted subsidiary of ours will enter into a sale and leaseback
transaction. A sale and leaseback transaction occurs when we or a subsidiary of
ours must sell or plan to sell or transfer a principal property to the lender or
investor or to any person or organization to which funds have been or are to be
advanced by a lender or investor and we or a restricted subsidiary will in turn
lease the principal property for the lender or investor for a period of three or
more years.
The restrictions on sale and leaseback transactions do not apply where
either: (a) we or our restricted subsidiary would be entitled to create debt
secured by a lien on the property to be leased, without equally and ratably
securing the debt securities, or (b) we, within four months after the effective
date of the sale and lease-back transaction, apply to the retirement of debt of
ours maturing by its terms more than one year after its original creation, an
amount equal to the greater of:
- the net proceeds of the sale of the real property leased pursuant to the
transaction, or
- the fair market value of the real property leased at the time of entering
into the transaction.
The limitation on sale and leaseback transactions also does not apply if at the
time of the sale and leaseback:
- the present value of the net amount of rent, discounted at the rate of
interest implicit in the applicable lease, required to be paid during the
remaining term of all leases that we and our subsidiaries have entered
into as sale and leaseback transactions; plus
- the total amount of all existing debt secured by liens that does not
equally and ratably secure the debt securities and is not subject to the
exceptions described above in "Limitations on Liens"
- does not exceed 7.5% of our consolidated shareholders' equity.
BOOK-ENTRY PROCEDURES
DTC will act as securities depositary for all of the notes. We will issue
the notes only as fully-registered securities registered in the name of Cede &
Co. (DTC's nominee). We will issue and deposit with DTC one or more
fully-registered global certificates for the notes representing in the
aggregate, the total number of the notes.
DTC is a limited purpose trust company organized under the New York Banking
Law, a "banking organization" under the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" under the meaning
of the New York Uniform Commercial Code, and a "clearing agency" registered
under the provisions of Section 17A of the Exchange Act. DTC holds securities
that its participants deposit with DTC. DTC also facilitates the settlement
among participants of securities transactions, like transfers and pledges, in
deposited securities through electronic computerized book-entry changes in the
participants' accounts, eliminating in this manner the need for physical
movement of securities certificates. "Direct Participants" include securities
brokers and dealers, banks, trust companies, clearing corporations and other
organizations. DTC is owned by a number of its direct participants and by the
New York Stock Exchange, Inc., the American Stock Exchange, Inc. and the
National Association of Securities Dealers, Inc. Others like securities brokers
and dealers, banks and trust companies that clear through or maintain custodial
relationships with direct participants, either directly or indirectly
S-39
<PAGE>
("Indirect Participants") also have access to the DTC system. The rules
applicable to DTC and its participants are on file with the SEC.
Purchases of notes within the DTC system must be made by or through direct
participants, who will receive a credit for the notes on DTC's records. The
ownership interest of each actual purchaser of each debt security ("Beneficial
Owner") is in turn to be recorded on the direct and indirect participants'
records. DTC will not send written confirmation to Beneficial Owners of their
purchases, but Beneficial Owners are expected to receive written confirmations
providing details of the transactions, as well as periodic statements of their
holdings, from the direct or indirect participants through which the Beneficial
Owners purchased notes. Transfers of ownership interests in the notes are to be
accomplished by entries made on the books of participants acting on behalf of
Beneficial Owners. Beneficial Owners will not receive certificates representing
their ownership interests in notes, unless the book-entry system for the notes
is discontinued.
DTC has no knowledge of the actual Beneficial Owners of the notes. DTC's
records reflect only the identity of the direct participants to whose accounts
the notes are credited, which may or may not be the Beneficial Owners. The
participants will remain responsible for keeping account of their holdings on
behalf of their customers.
Conveyance of notices and other communications by DTC to direct
participants, by direct participants to indirect participants, and by direct
participants and indirect participants to Beneficial Owners and the voting
rights of direct participants, indirect participants and Beneficial Owners,
subject to any statutory or regulatory requirements as is in effect from time to
time, will be governed by arrangements among them.
We will send redemption notices to Cede & Co. as the registered holder of
the notes. If less than all of the junior subordinated notes are redeemed, DTC's
current practice is to determine by lot the amount of the interest of each
direct participant to be redeemed.
Although voting on the notes is limited to the holders of record of the
notes, in those instances in which a vote is required, neither DTC nor Cede &
Co. will itself consent or vote on notes. Under its usual procedures, DTC would
mail an omnibus proxy (the "Omnibus Proxy") to the trustee as soon as possible
after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or
voting rights to direct participants for whose accounts the notes are credited
on the record date (identified in a listing attached to the Omnibus Proxy).
The trustee will make distribution payments on the notes to DTC. DTC's
practice is to credit direct participants' accounts on the relevant payment date
in accordance with their respective holdings shown on DTC's records unless DTC
has reason to believe that it will not receive payments on the payment date.
Standing instructions and customary practices will govern payments from
participants to Beneficial Owners. Subject to any statutory or regulatory
requirements, participants, and not DTC, the trustee or us, will be responsible
for the payment. The trustee is responsible for payment of distributions to DTC.
Direct and Indirect Participants are responsible for the disbursement of the
payments to the Beneficial Owners.
DTC may discontinue providing its services as securities depositary on any
of the notes at any time by giving reasonable notice to the trustee and to us.
If a successor securities depositary is not obtained, final certificates must be
printed and delivered. We may, at our option, decide to discontinue the use of
the system of book-entry transfers through DTC (or a successor depositary).
After an event of default, the holders of an aggregate principal amount of notes
may discontinue the system of book-entry transfers through DTC. In this case,
final certificates for the notes will be printed and delivered.
We have obtained the information in this section concerning DTC and DTC's
book-entry system from sources that we believe to be accurate, but we assume no
responsibility for the accuracy of
S-40
<PAGE>
the information. We have no responsibility for the performance by DTC or its
participants of their respective obligations as described in this prospectus or
under the rules and procedures governing their respective operations.
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the notes will be made by the underwriters in immediately
available funds. All payments of principal and interest will be made by us in
immediately available funds or the equivalent, so long as DTC continues to make
its Same-Day Funds Settlement System available to us.
TAXATION - UNITED STATES NOTEHOLDERS
The following is a summary of the material United States federal income tax
consequences of the purchase, ownership and disposition of the notes. It deals
only with notes held as capital assets by the initial holders, and does not
address the federal income tax consequences to holders subject to special
treatment, such as partnerships and other pass-through entities, dealers in
securities, financial institutions, insurance companies and tax-exempt
organizations. The discussion below is based on current laws, regulations and
administrative and judicial decisions. These authorities may be repealed,
revoked or modified, possibly retroactively, in which case the federal income
tax consequences could differ from those discussed below.
For purposes of the following summary, the term United States holder refers
to a holder of notes that is, for United States federal income tax purposes:
- a citizen or resident of the United States;
- a corporation created or organized under the laws of the United States or
any State, including the District of Columbia;
- an estate whose income is includable in gross income for United States
federal income tax purposes regardless of its source; or
- a trust, if a U.S. court is able to exercise primary supervision over the
administration of the trust and one or more United States persons have the
authority to control all substantial decisions of the trust.
Notwithstanding the preceding sentence, trusts in existence on August 20,
1996, which are treated as United States persons prior to that date and
elect to continue to be treated as United States persons, are also United
States holders for purposes of this discussion.
The term non-United States holder refers to a holder of notes that is not a
United States holder.
WE URGE YOU TO CONSULT YOUR TAX ADVISOR REGARDING THE SPECIFIC TAX
CONSEQUENCES TO YOU OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE NOTES, AS
WELL AS ANY TAX CONSEQUENCES ARISING UNDER ANY STATE, LOCAL OR FOREIGN LAWS.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO UNITED STATES HOLDERS
INTEREST
Interest paid on the notes generally will be taxable as ordinary income to a
United States holder at the time the interest is received or accrued, in
accordance with the United States holder's method of accounting for federal
income tax purposes.
S-41
<PAGE>
SALE, EXCHANGE OR RETIREMENT OF NOTES
A United States holder of a note generally will recognize gain or loss upon
the sale, exchange, redemption or other taxable disposition of a note equal to
the difference between the amount of cash and the fair market value of any
property received for the note and the holder's adjusted tax basis in the note.
This gain or loss will be capital gain or loss, and will be long-term capital
gain or loss if the note has been held for more than one year. However, any cash
or property received on disposition of a note which is attributable to or
taxable as accrued and unpaid interest on the note will be taxable as ordinary
income.
BACKUP WITHHOLDING AND INFORMATION REPORTING
In general, information reporting requirements will apply to interest paid
on notes owned by United States holders, other than exempt holders such as
corporations, and to proceeds realized by United States holders on dispositions
of notes. These amounts will ordinarily not be subject to withholding of United
States federal income tax. A 31% backup withholding tax will apply to these
amounts only if the United States holder: (a) fails to furnish its Social
Security or taxpayer identification number (TIN) within a reasonable time after
request; (b) furnishes an incorrect TIN; (c) fails to report properly interest
or dividend income; or (d) fails, under certain circumstances, to provide a
certified statement, signed under penalty of perjury, that the TIN provided is
its correct number and that it is not subject to backup withholding. Any amount
withheld under the backup withholding rules may be refunded or credited against
the United States holder's United States federal income tax liability, if the
holder furnishes the required information to the Internal Revenue Service.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS
INTEREST
Interest which we pay on a note to a non-United States holder will not be
subject to United States federal income or withholding tax if the interest is
not effectively connected with the conduct of a trade or business within the
United States by the non-United States holder and the non-United States holder:
(a) does not actually or constructively own 10% or more of the total combined
voting power of all classes of our stock; (b) is not a controlled foreign
corporation to which we are directly or indirectly related for United States tax
purposes; and (c) certifies, under penalties of perjury, that the holder is not
a United States person and provides the holder's name and address.
A non-United States holder that does not qualify for exemption from
withholding under the preceding paragraph generally will be subject to a 30%
United States federal withholding tax, or lower applicable treaty rate, on
payments of interest on the notes.
If a non-United States holder is engaged in a trade or business in the
United States and interest on the note is effectively connected with the conduct
of this trade or business, the non-United States holder, although exempt from
the withholding tax discussed above, may be subject to United States federal
income tax on the interest in the same manner as if it were a United States
holder. In addition, if the non-United States holder is a foreign corporation,
it may be subject to a branch profits tax of 30%, or a lower applicable treaty
rate, of its effectively connected earnings and profits for the taxable year,
subject to adjustments. For this purpose, the foreign corporation's earnings and
profits will include interest on a note.
Recently finalized regulations, which, subject to transition rules, are
effective for payments made after December 31, 2000, provide alternative
procedures which a non-United States holder must follow to establish eligibility
for a withholding tax reduction or exemption.
PURCHASERS OF NOTES THAT ARE NON-UNITED STATES HOLDERS SHOULD CONSULT THEIR
OWN TAX ADVISORS REGARDING THE POSSIBLE APPLICABILITY OF UNITED STATES
WITHHOLDING AND OTHER TAXES UPON INTEREST INCOME REALIZED IN CONNECTION WITH THE
NOTES.
S-42
<PAGE>
SALE, EXCHANGE OR RETIREMENT OF NOTES
A non-United States holder will generally not be subject to United States
federal income tax on gain recognized on a sale, exchange, retirement (including
redemption) or other disposition of a note unless: (a) the gain is effectively
connected with the conduct of a trade or business within the United States by
the non-United States holder; or (b) in the case of a non-United States holder
who is a nonresident alien individual and holds the note as a capital asset, the
holder is present in the United States for 183 or more days in the taxable year
and the holder meets other requirements.
FEDERAL ESTATE TAXES
If interest on the notes is exempt from withholding of United States federal
income tax under the rules described above, the notes will not be included in
the estate of a deceased non-United States holder for United States federal
estate tax purposes.
INFORMATION REPORTING AND BACKUP WITHHOLDING
We will, where required, report to the non-United States holders of notes
and the Internal Revenue Service the amount of any interest paid on the notes in
each calendar year and the amounts of tax withheld, if any, with respect to
these payments.
Temporary regulations provide that the 31% backup withholding tax and
information reporting requirements will not apply to payments of interest to
non-United States holders, if the holder has given us the required
certification, as described above, that the holder is not a United States
person, or has otherwise established an exemption, provided that neither we nor
our paying agent has actual knowledge that the holder is a United States person
or that the conditions of any other exemption are not in fact satisfied. Under
temporary regulations, these information reporting and backup withholding
requirements will apply, however, to the gross proceeds paid to a non-United
States holder on the disposition of the notes by or through a United States
office of a United States or foreign broker, unless the holder certifies to the
broker under penalties of perjury as to its name, address and status as a
foreign person or the holder otherwise establishes an exemption. Information
reporting requirements, but not backup withholding, will also apply to a payment
of the proceeds of a disposition of the notes by or through a foreign office of
a United States broker or foreign brokers with certain types of relationships to
the United States, unless the broker has documentary evidence in its files that
the holder of the notes is not a United States person, and the broker has no
actual knowledge to the contrary, or the holder establishes an exception.
Neither information reporting nor backup withholding generally will apply to a
payment of the proceeds of a disposition of the notes by or through a foreign
office of a foreign broker not subject to the preceding sentence.
Final regulations, which, subject to transition rules, are effective for
payments made after December 31, 2000, alter these regulations in some respects.
Among other things, the final regulations provide presumptions under which a
non-United States holder will be subject to information reporting and backup
withholding at the rate of 31% unless we or our paying agent receive
certification from the holder of non-U.S. status. Depending on the
circumstances, this certification must be provided: (a) directly by the
non--United States holder; (b) in the case of a non-United States holder that is
treated as a partnership or other fiscally transparent entity, by the partners,
shareholders or other beneficiaries of the entity; or (c) by qualified financial
institutions or other qualified entities on behalf of the non-United States
holder.
Backup withholding is not an additional tax. Any amounts which we or our
paying agent withhold under the backup withholding rules may be refunded or
credited against the non-United States holder's United States federal income tax
liability, provided the holder furnishes the required information to the
Internal Revenue Service.
S-43
<PAGE>
UNDERWRITING
We have entered into an underwriting agreement and a pricing agreement with
the underwriters named below with respect to the notes. Subject to certain
conditions, each underwriter has severally agreed to purchase the principal
amount of notes indicated in the following table.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITERS OF NOTES
- --------------------------------------------------------- -----------------
<S> <C>
Goldman, Sachs & Co...................................... $
J.P. Morgan Securities Inc...............................
Banc One Capital Markets, Inc............................
-----------------
Total................................................ $ 250,000,000
-----------------
-----------------
</TABLE>
Notes sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus
supplement. Any notes sold by the underwriters to securities dealers may be sold
at a discount from the initial public offering price of up to % of the
principal amount of the notes. Any such securities dealers may resell any shares
purchased from the underwriters to certain other brokers or dealers at a
discount from the initial public offering price of up to % of the principal
amount of the notes. If all the notes are not sold at the initial offering
price, the underwriters may change the offering price and the other selling
terms.
The notes are a new issue of securities with no established trading market.
We have been advised by the underwriters that the underwriters intend to make a
market in the notes, but they are not obligated to do so and may discontinue
market making at any time without notice. No assurance can be given as to the
liquidity of the trading market for the notes.
In connection with the offering, the underwriters may purchase and sell
notes in the open market. These transactions may include short sales,
stabilizing transactions and purchases to cover positions created by short
sales. Short sales involve the sale by the underwriter of a greater aggregate
principal amount of notes than they are required to purchase in the offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the notes
while the offering is in progress.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the underwriters have repurchased notes sold by
or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price in the notes. As a result, the price of the notes may be
higher than the price that otherwise might exist in the open market. If these
activities are commenced, they may be discontinued by the underwriters at any
time. These transactions may be effected in the over-the-counter market or
otherwise.
We estimate that our share of the total expenses of the offerings, excluding
underwriting discounts and commissions, will be approximately $2 million.
We have agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
Concurrently with this offering and by a separate prospectus supplement, we
are offering 5,500,000 shares of common stock, plus up to an additional 825,000
shares pursuant to an overallotment option granted by us to the underwriters.
The underwriters will receive customary compensation in connection with the
common stock offering. The completion of this offering is
S-44
<PAGE>
dependent upon completion of the concurrent common stock offering. The
completion of the common stock offering is not dependent on the completion of
this offering.
Certain of our underwriters and their affiliates have from time to time
provided investment banking, financial advisory, commercial banking and other
services to us, for which they have received customary compensation, and may
continue to do so in the future. Affiliates of J.P. Morgan Securities Inc. and
Banc One Capital Markets, Inc. are lenders under our credit facilities and have
received and will receive customary fees under these credit facilities.
Affiliates of some of the underwriters are lenders under the bridge loan and/or
the credit facilities and will receive a portion of the amounts repaid under the
bridge loan and/or certain credit facilities with net proceeds received from the
sale of the notes in this offering and/or the sale of common stock in the
concurrent common stock offering. Because more than ten percent of such net
proceeds will be paid to members or affiliates of members of the NASD
participating in the offering, the offering will be conducted in accordance with
Conduct Rule 2710(c)(8) of the National Association of Securities Dealers, Inc.
S-45
<PAGE>
PROSPECTUS
$700,000,000
[LOGO]
Pentair, Inc.
1500 County Road B2 West, Suite 400
St. Paul, Minnesota 55113-3105
(651) 636-7920
COMMON STOCK
DEBT SECURITIES
Pentair, Inc. may offer and sell from time to time, together or separately,
up to $700,000,000 of debt securities and shares of common stock. These
securities may be offered in amounts, at prices and on terms set forth in
supplements to this prospectus. This prospectus describes the general terms that
will apply to the shares of common stock and debt securities we intend to offer
at one or more times under this registration statement. It must be accompanied
by a supplement at the time of sale. Supplements will be available at the time
of each later offering of securities and will describe the specific terms of the
debt securities and common stock being offered. You should read this prospectus
and the supplements carefully before you invest.
CONSIDER CAREFULLY THE "RISK FACTORS" BEGINNING ON PAGE 3 OF THIS PROSPECTUS
BEFORE INVESTING IN THE COMMON STOCK OR DEBT SECURITIES.
The common stock is listed on the New York Stock Exchange under the symbol
"PNR."
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR
ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
This Prospectus is dated August 5, 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Risk Factors............................................................................................... 3
Cautionary Statement About Forward Looking Statements...................................................... 6
About Pentair.............................................................................................. 6
Use of Proceeds............................................................................................ 8
Ratio of Earnings to Fixed Charges......................................................................... 8
The Securities We May Offer................................................................................ 8
Description of Debt Securities............................................................................. 9
Description of Common Stock, Preferred Stock And Rights Plan............................................... 15
Provisions Relating to Changes in Control.................................................................. 17
Plan of Distribution....................................................................................... 19
Where You Can Find More Information........................................................................ 20
Legal Matters.............................................................................................. 21
Experts.................................................................................................... 21
</TABLE>
You should rely only on the information incorporated by reference or set
forth in this prospectus and that is set forth in the applicable prospectus
supplement. We have not authorized anyone else to provide you with different
information. We are only offering our common stock and debt securities in states
where the offer is permitted. You should not assume that the information in this
prospectus or the applicable prospectus supplement is accurate as of any date
other than the dates on the front of those documents.
2
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors and warnings before
making an investment decision. If any of the risks described below actually
occur, our business, financial condition, results of operations or prospects
could be materially adversely affected. In that case, the price of our
securities could decline and you could lose all or part of your investment. You
should also refer to the other information set forth or incorporated by
reference in this prospectus, as well as our audited consolidated financial
statements and notes thereto and our unaudited interim consolidated financial
statements and notes thereto, which have been incorporated in this prospectus by
reference.
OUR INABILITY TO SUSTAIN CONSISTENT INTERNAL GROWTH COULD ADVERSELY AFFECT OUR
FINANCIAL PERFORMANCE.
From 1993 through 1998, our net sales grew at a compound annual rate of
15.4%, approximately half of which was from internal growth. This growth was
generated primarily from entering new distribution channels and introducing new
products. To grow more rapidly than our markets, we will have to expand our
geographic reach, increase our market shares, further diversify our distribution
channels and continue to introduce new products. We may not be able to
successfully meet those challenges, which could adversely affect our ability to
sustain consistent internal growth. If we are unable to sustain consistent
internal growth, we will be less likely to meet our stated revenue growth
targets. Any shortfall in anticipated sales growth could adversely affect our
net income growth, and, in turn, the market price of our stock.
OUR INABILITY TO COMPLETE OR SUCCESSFULLY INTEGRATE FUTURE ACQUISITIONS COULD
ADVERSELY AFFECT OUR FINANCIAL PERFORMANCE.
Approximately half of our net sales growth in the period from 1993 through
1998 was generated from businesses which we acquired in that period. We may not
be able to sustain this level of growth from acquisition activity in the future.
We intend to continue to evaluate strategic acquisitions primarily in our three
current business segments, and we may consider acquisitions outside of these
segments as well. Our ability to expand through acquisitions is subject to
various risks, including the following:
- increased competition for acquisitions, especially in the enclosures
industry;
- higher acquisition prices;
- lack of suitable acquisition candidates in targeted product or market
areas;
- diversion of management time and attention to acquisitions and acquired
businesses;
- inability to integrate acquired businesses effectively or profitably; and
- inability to achieve anticipated benefits from acquisitions.
Acquisitions could have a material adverse effect on our operating results,
particularly in the fiscal quarters immediately following the acquisitions,
while we attempt to integrate operations of the acquired businesses into our
operations. Once integrated, acquired operations may not achieve profitability.
WITHOUT SIGNIFICANT CAPITAL, WE WILL NOT BE ABLE TO ACHIEVE OUR PLANNED GROWTH.
Our plans to continue our growth in our chosen markets will require
additional capital for:
- future acquisitions
- capital expenditures for existing businesses
- growth of working capital
3
<PAGE>
- expansion into new geographic regions
In the past we have financed our growth primarily through debt financings.
Significant future acquisitions will require us to expand our debt financing
resources or to issue equity securities. Our financial results will be adversely
affected if interest costs under our debt financings are higher than the income
generated by acquisitions or other internal growth. In addition, future
acquisitions could be dilutive to your equity investment if we issue additional
stock to fund acquisitions. We cannot assure you that we will be able to sell
equity or to obtain future debt financing at favorable terms. Without sufficient
financing, we will not be able to pursue our growth strategy, which will limit
our growth and revenues in the future.
OUR OPERATIONS WILL SUFFER IF WE ARE UNABLE TO COMPLETE OUR INTERNAL
TRANSFORMATION INITIATIVES.
We are in the process of transforming how we view and operate our existing
businesses and those we acquire. Historically, we operated our subsidiaries as
stand-alone entities. We recently have started to share services among all
businesses and consolidate some operations. In 1998, we launched a cost control
program under which we began to coordinate supply management programs and
administrative functions such as human resources and information technology. In
addition, in April 1999, we publicly announced a restructuring plan to
consolidate some of our subsidiary headquarters, distribution facilities and
manufacturing operations, reduce overhead, outsource specific product lines and
reduce net headcount by approximately 700 jobs. As of June 26, we had incurred
$3.1 million in charges under the restructuring plan. We face the following
risks in implementing these programs across existing and newly acquired
businesses:
- inability to successfully consolidate management, operations, product
lines, distribution networks, sales forces and manufacturing facilities;
- increased employee turnover or inability to retain key employees;
- inability to retain key customers or to maintain sales momentum; and
- potential disruption in inventory and product supply, or in administrative
services.
We may not be able to complete these programs without unexpected costs, delays
or the need for the increased management time and effort. If we do not
successfully implement these programs on a timely basis, we will not achieve the
operational efficiencies and cost savings we have planned for.
OUR RELIANCE ON FOREIGN SOURCING ARRANGEMENTS POSES RISKS TO OUR PRODUCT SUPPLY.
We currently outsource about $300 million per year in sales value of our
products, primarily for our professional tools and equipment segment. Most of
these outsourcing arrangements are with manufacturers in Taiwan and China. In
the event of political unrest or significant economic instability, we may not be
able to obtain product supply on a timely basis. A significant disruption in
product supply could have material and adverse consequences on our level of
sales and on ongoing relationships with our customers.
OUR INCREASING DEPENDENCE ON LARGE RETAIL CHAIN CUSTOMERS MAKES US MORE
VULNERABLE TO THEIR BUYING DECISIONS.
The largest single channel for distribution of our products in our
professional tools and equipment segment is large retail stores, particularly
those serving the "do-it-yourself" market, such as The Home Depot, Lowe's and
other large home centers and national retailers. While none of these customers
currently account for more than 10% of our sales individually, maintaining and
expanding these relationships is very important to the future success of our
business. We could lose a number of these relationships, through industry
developments, such as competitive products replacing ours or limiting
4
<PAGE>
the volumes of our products purchased, or through our own actions. If we were to
lose one of our significant retail customers or a number of our other retailer
customers, it could have a material adverse effect on our financial results and
future prospects. In addition, the large size of these companies and their
dominant position in the marketplace gives them substantial leverage in the
terms they offer to their suppliers.
OUR INTERNATIONAL OPERATIONS ARE SUBJECT TO FOREIGN MARKET AND CURRENCY
FLUCTUATION RISKS.
Sales outside of North America accounted for 17% of our net sales in 1998,
and this percentage is expected to increase in the future. Over the past few
years, the economies of many of the foreign countries in which we do business
have had slower growth than the U.S. economy. The European Union currently
accounts for the bulk of our foreign sales and income. Our most significant
European market is Germany, where the capital goods market has been very slow.
We cannot predict how changing European market conditions will impact our
financial results.
We are also exposed to the risk of fluctuation of foreign currency exchange
rates. We have entered into financial arrangements, including foreign currency
swaps and hedging transactions, to manage and reduce the impact of some of these
risks, but we cannot assure you that these arrangements will eliminate the risk
that currency fluctuations may affect our financial results.
INTELLECTUAL PROPERTY CHALLENGES MAY HINDER PRODUCT DEVELOPMENT AND MARKETING.
We rely on a combination of copyright, trademark, trade secret, unfair
competition and other intellectual property laws, as well as nondisclosure
agreements and other protective measures, to protect our intellectual property,
particularly our brand names and product lines. Such protection, however, may
not preclude competitors from developing products similar to ours or from
challenging our names or products. Over the past few years, we have noticed an
increasing tendency for participants in our markets to use conflicts over and
challenges to intellectual property as means to compete. Patent and trademark
challenges increase our costs to develop, engineer and market our products. In
late February 1999, a jury awarded $1 million in damages against us, which we
currently are appealing, in a lawsuit for patent infringement. We may be subject
to these types of lawsuits in the future. Defending these challenges can be
costly to us.
YEAR 2000 PROBLEMS COULD DISRUPT OUR OPERATIONS.
We have undertaken a project to review all of our computer systems for Year
2000 compliance. This includes the replacement of a number of business
enterprise software systems. We may not be able to complete installation of
these systems or complete corrections of identified problems in our other
software and computers on a timely basis. In addition, our customers or
suppliers may experience business interruptions which would also adversely
affect our operations. It is also possible that we have failed to anticipate or
discover all of the problems that may arise, particularly in our recently
acquired businesses.
PROVISIONS OF OUR RESTATED ARTICLES OF INCORPORATION, BYLAWS AND MINNESOTA LAW
COULD DETER TAKEOVER ATTEMPTS.
Our Restated Articles of Incorporation and Bylaws include provisions
relating to the election, appointment and removal of directors, as well as
shareholder notice and shareholder voting requirements which could delay,
prevent or make more difficult a merger, tender offer, proxy contest or other
change of control. In addition, our common share purchase rights could cause
substantial dilution to a person or group that attempts to acquire us, which
could deter some acquirers from making takeover proposals or tender offers.
Also, the Minnesota Business Corporations Act contains control share acquisition
and business combination provisions which could delay, prevent or make more
5
<PAGE>
difficult a merger, tender offer, proxy contest or other change of control. Our
shareholders might view any such a transaction as being in their best interests
since the transaction could result in a higher stock price than the current
market price for our common stock. These provisions and laws are discussed in
detail later in this prospectus in "Provisions Relating to Changes in Control."
CAUTIONARY STATEMENT ABOUT FORWARD LOOKING STATEMENTS
We provide information and make statements in this prospectus that are
"forward-looking" in nature. Forward-looking information or statements include
statements about the future of the industries represented by our operating
groups, statements about our future business plans and strategies, the
timeliness of product introductions and deliveries, expectations about industry
and market growth and developments, expectations about our growth and
profitability and other statements that are not historical in nature. Many of
these statements contain words such as "may," "will," "expect," "believe,"
"intend," "anticipate," "estimate" or "continue" or other similar words.
Because forward-looking statements involve future risks and uncertainties,
there are many factors that could cause actual results to differ materially from
those expressed or implied. For example, a few of the uncertainties that could
affect the accuracy of forward-looking statements, besides the specific risk
factors identified in the section entitled "Risk Factors" (which begins on page
3), include:
- changes in industry conditions, such as
- the strength of product demand;
- the intensity of competition;
- pricing pressures;
- market acceptance of new product introductions;
- the introduction of new products by competitors;
- our ability to source components from third parties without
interruption and at reasonable prices; and
- the financial condition of our customers;
- changes in our business strategies;
- general economic conditions, such as the rate of economic growth in our
principal geographic markets or fluctuations in exchange rates;
- changes in operating factors, such as continued improvement in
manufacturing activities and the achievement of related efficiencies and
inventory risks due to shifts in market demand; and
- our ability to accurately evaluate the effects of contingent liabilities
such as taxes, product liability and other liabilities.
We cannot predict the actual effect these factors will have on our results
and many of the factors and their effects are beyond our control. In addition,
we are under no duty to update any of the forward-looking statements after the
date of this prospectus to conform these statements to actual performance or
results. Given these uncertainties, you should not rely too heavily on these
forward-looking statements.
ABOUT PENTAIR
We are a global, diversified manufacturer operating in three principal
industry segments: professional tools and equipment; water and fluid
technologies; and electrical and electronic enclosures. We have grown these
three segments through a combination of internal development and acquisitions.
6
<PAGE>
PROFESSIONAL TOOLS AND EQUIPMENT. Our tools segment accounted for 43% of
our sales in 1998. In this segment, we manufacture products including:
- a full line of homeshop products, contractor tools, general purpose
stationary woodworking machinery and accessories;
- portable electric tools including saws, routers, sanders, grinders and
drills; air-powered nailing products; and cordless tools; and
- lubricating tools and equipment, battery charging and testing equipment,
lifting equipment, portable power supplies, refrigerant and coolant
recyclers, automatic transmission fluid exchangers and welding equipment
and accessories.
Our tools and equipment products are sold in the United States, Canada and
overseas under the brand names Delta-Registered Trademark-,
Biesemeyer-Registered Trademark-, Porter-Cable-Registered Trademark-, FLEX-TM-,
Lincoln-Registered Trademark-, Blackhawk-Registered Trademark-,
Marquette-Registered Trademark-, Guardian-TM-, Pro-Arc-TM-,
T-Tech-Registered Trademark-, Century-Registered Trademark-,
Solar-Registered Trademark-, Booster Pac-TM-, Cobra-Registered Trademark- and
Viper-TM-. We sell these products through various channels, including networks
of independent industrial and warehouse distributors, home centers and national
retailers and hardware stores, as well as through mail order and catalogues.
WATER AND FLUID TECHNOLOGY. Our water segment accounted for 28% of our
sales in 1998. In this segment, we manufacture products including:
- a wide variety of water and wastewater pumps for residential, commercial
and municipal uses;
- a complete line of control valves used in the manufacture of water
softeners and filtration, deionization and desalination systems; and
- automated and manual lubrication systems and equipment, pumps and pumping
stations for fluid transfer applications.
Our water and fluid technology products are sold in the United States,
Canada and overseas under the brand names Myers-Registered Trademark-,
Aplex-Registered Trademark-, Fairbanks Morse-Registered Trademark-,
Aurora-Registered Trademark-, Water Ace-Registered Trademark-, Shur Dri-TM-,
Hydromatic-Registered Trademark-, Fleck-Registered Trademark-, SIATA-TM-,
Lincoln-Registered Trademark- and ORSCO-TM-. We sell these products through
various wholesale and retail channels, including home centers and hardware
stores for the retail "do-it-yourself" market, qualified systems distributors
who have design, installation and service capabilities, industrial supply and
specialty distributors and direct sales by internal sales organizations, as well
as through catalogs.
As announced on April 30, 1999 and described in our Form 10-Q for the
quarterly period ended March 27, 1999, we have entered into a merger agreement
to acquire Essef Corporation, which will expand our water segment. Essef
Corporation is a manufacturer of composite water tanks, pumps, filters and other
water equipment and accessories. The merger is subject to a number of
conditions, and we cannot assure you that the deal will actually be closed.
ELECTRICAL AND ELECTRONIC ENCLOSURES. Our enclosures segment accounted for
29% of our sales in 1998. In this segment, we manufacture standard and
custom-designed products including:
- metallic and composite enclosures and cabinets, which house electrical and
electronic controls, instruments and components;
- cases, subracks and microcomputer packaging systems; and
- a full line of accessories including backplanes, power supplies and
technical workstations.
Our electrical and electronic enclosure products are sold in the United
States, Canada and overseas under the brand names Hoffman-Registered Trademark-,
Schroff-Registered Trademark-, Transrack-Registered Trademark-, Optima-TM-,
Eraba-TM- and Pentair Enclosures-TM-. We sell electrical enclosures through
industrial electrical distributors; electronic enclosures through electronic
equipment distributors and to original equipment manufacturers; and information
and communication technology products primarily to original equipment
manufacturers.
7
<PAGE>
GROWTH STRATEGY. From 1993 through 1998, our net sales grew at a compound
annual rate of 15.4%, approximately half of which was from internal growth. This
internal growth was generated primarily from entering new distribution channels
and introducing new products. The channels of distribution for our products are
primarily industrial, which generally grow at a rate consistent with the gross
domestic product of our geographic markets, which are primarily in North America
and Europe. To grow more rapidly than our markets, we will have to expand our
geographic reach, increase our market shares, further diversify our distribution
channels and continue to introduce new products. Acquisitions also remain an
important part of our ongoing growth strategy. Acquisitions can help us achieve
a critical mass in our three segments more quickly than relying solely on
internal development. As part of our acquisition strategy, we regularly review
acquisition opportunities and have discussions with potential acquisition
candidates. Acquisition transactions could arise at any time and from time to
time.
Our principal executive offices are located at 1500 County Road B2 West, St.
Paul, Minnesota, 55113-3105, and our telephone number is (651) 636-7920.
USE OF PROCEEDS
Unless otherwise indicated in the applicable prospectus supplement, we
anticipate that any net proceeds from the sale of the offered securities will be
used to fund expansion of our business, including:
- repayment of debt, including amounts we may have borrowed under our senior
credit facility;
- acquisitions;
- working capital;
- capital expenditures; and
- other general corporate purposes.
When we offer a particular series of the offered securities, the prospectus
supplement relating to that series will set forth the intended use of the net
proceeds received for those securities. Pending the application of the net
proceeds, we expect to invest the proceeds from the sale of offered securities
in short-term, interest-bearing instruments or other investment-grade debt
securities.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth our historical ratio of earnings to fixed
charges for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------- THREE MONTHS ENDED
1994 1995 1996 1997 1998 MARCH 27, 1999
--------- --------- --------- --------- --------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges................ 4.19x 4.88x 6.31x 6.73x 6.41x 1.52x
</TABLE>
For the three months ended March 27, 1999, the ratio of earnings to fixed
charges would have been 7.1x if it had been calculated on the basis of income
before the special restructuring charge of $38 million taken during the quarter.
The ratio of earnings to fixed charges is computed by dividing income from
continuing operations before income taxes and fixed charges by fixed charges.
Fixed charges consist of interest on debt (including capitalized interest),
amortization of debt discount and expense and a portion of rentals determined to
be representative of interest.
THE SECURITIES WE MAY OFFER
This prospectus, together with the applicable prospectus supplement,
summarize the material terms of the securities we may sell in this offering. If
specified in the applicable prospectus supplement, the terms of the debt
securities and common stock as described in this prospectus may be changed.
Under
8
<PAGE>
this prospectus and with a prospectus supplement, we may sell at one time or at
various times and in various combinations shares of common stock and debt
securities. The debt securities may be in different series and forms and may
have different terms. The total dollar amount of securities that we may issue in
this offering will not exceed $700,000,000. However, if we issue debt securities
at a discount from their stated principal amount, the amount will be calculated
using the discounted amount and the aggregate amount of the offering would be
increased by the difference between the face amount and the discounted price.
DESCRIPTION OF DEBT SECURITIES
We will provide information to you about the debt securities in up to three
separate documents that progressively provide more detail:
- This prospectus provides general information that may not apply to each
series of debt securities.
- The prospectus supplement is more specific than this prospectus. If the
information provided in the prospectus supplement differs from this
prospectus, you should rely on the prospectus supplement.
- The pricing supplement, if used, provides final details about a specific
series of debt securities. If the pricing supplement differs from this
prospectus or the prospectus supplement, you should rely on the pricing
supplement.
The debt securities will be issued under an indenture between us and U.S.
Bank Trust National Association, as trustee. For each issuance of securities, we
may enter into a supplemental indenture with more specific terms of the debt
securities issued.
GENERAL
The indenture does not limit the aggregate principal amount of debt
securities that we may issue under it. The debt securities may be issued in one
or more series as we may authorize at various times. All debt securities will be
unsecured and will have the same rank as all of our other unsecured and
unsubordinated debt. The debt securities may be issued as original issue
discount debt securities and sold at a substantial discount below their
principal amount. The prospectus supplement relating to the particular series of
debt securities being offered will specify the amounts, prices and terms of
those debt securities. These terms may include:
- the title and the limit on the aggregate principal amount of the debt
securities;
- the date or dates on which the debt securities will mature;
- the person to whom interest is payable, if other than the person in whose
name the debt security is registered as of the record date for payment of
interest;
- any rate or rates, which may be fixed or variable, or the method of
determining any rate or rates, at which the debt securities will bear
interest;
- the date or dates from which interest shall accrue and the date or dates
on which interest will be payable;
- the place or places where the principal of and any premium and interest on
the debt securities will be payable;
- the currency, currencies or currency units in which the debt securities
are denominated and principal and interest may be payable, and for which
the debt securities may be purchased, if other than United States dollars;
- any redemption or sinking fund terms;
9
<PAGE>
- any event of default or covenant with respect to the debt securities of a
particular series, if not set forth in this prospectus;
- any index used to determine the amount of principal, premium or interest
payable with respect to the debt securities;
- whether the debt securities are to be issued in whole or in part in the
form of one or more global securities and the depositary for the global
security or securities;
- if other than denominations of $1,000 or multiples of $1,000, the
denominations in which debt securities will be issued;
- the part of the principal amount of debt securities which will be payable
upon acceleration if less than the entire amount;
- if the principal amount of the debt securities or interest paid on the
debt securities are set forth or payable in a currency other than U.S.
dollars, whether and under what terms and conditions we may discharge the
debt securities; and
- any other terms of the series, which will not conflict with the terms of
the indenture.
Principal, any premium and any interest will be payable and the debt
securities will be transferable at the corporate trust office of the trustee,
unless we specify otherwise in the accompanying prospectus supplement. At our
option, however, payment of interest may be made by check mailed to the
registered holders of the debt securities at their registered addresses.
We will issue the debt securities in fully registered form without coupons.
Unless we specify otherwise in the applicable prospectus supplement, we will
issue debt securities denominated in U.S. dollars in denominations of $1,000 or
multiples of $1,000. No service charge will be made for any transfer or exchange
of debt securities, but we may require payment beforehand of any related taxes
or other governmental charges. Debt securities may also be issued pursuant to
the indenture in transactions exempt from the registration requirements of the
Securities Act. Those debt securities will not be considered in determining the
aggregate amount of securities issued under the registration statement of which
this prospectus is a part.
We will describe special federal income tax and other considerations
relating to debt securities denominated in foreign currencies in the applicable
prospectus supplement.
Unless we specify otherwise in the applicable prospectus supplement, the
covenants contained in the indenture and the debt securities will not provide
special protection to holders of debt securities if we enter into a highly
leveraged transaction, recapitalization or restructuring.
EXCHANGE, REGISTRATION AND TRANSFER
Debt securities of any series that are not global securities will be
exchangeable for other registered securities of the same series and of like
aggregate principal amount and tenor in different authorized denominations. This
may be done without service charge and upon payment of any taxes and other
governmental charges as described in the applicable indenture. The security
registrar or the transfer agent will effect the transfer or exchange upon being
satisfied with the documents of title and identity of the person making the
request. We have appointed the trustee as security registrar for the indenture.
If a prospectus supplement refers to any transfer agents, in addition to the
security registrar, initially designated by us with respect to any series of
debt securities, we may at any time rescind the designation of any such transfer
agent or approve a change in the location through which such transfer agent
acts. We may at any time designate additional transfer agents with respect to
any series of debt securities.
10
<PAGE>
PAYMENT AND PAYING AGENTS
Unless we specify otherwise in the applicable prospectus supplement, payment
of principal, any premium and any interest on debt securities will be made at
the office of the paying agent or paying agents that we designate at various
times. However, at our option, we may make interest payments by check mailed to
the address, as it appears in the security register, of the person entitled to
the payments. Unless we specify otherwise in the applicable prospectus
supplement, we will make payment of any installment of interest on debt
securities to the person in whose name that registered security is registered at
the close of business on the regular record date for such interest.
GLOBAL SECURITIES
The debt securities of a series may be issued in whole or in part in the
form of one or more global certificates that we will deposit with a depositary
identified in the applicable prospectus supplement. Global securities may be
issued in either temporary or permanent form. Unless and until it is exchanged
in whole or in part for the individual debt securities it represents, a global
security may not be transferred except as a whole:
- by the applicable depositary to a nominee of the depositary;
- by any nominee to the depositary itself or another nominee; or
- by the depositary or any nominee to a successor depositary or any nominee
of the successor.
We will describe the specific terms of the depositary arrangement with
respect to a series of debt securities in the applicable prospectus supplement.
We anticipate that the following provisions will generally apply to depositary
arrangements.
When we issue a global security, the depositary for the global security or
its nominee will credit, on its book-entry registration and transfer system, the
respective principal amounts of the individual debt securities represented by
that global security to the accounts of persons that have accounts with the
depositary, known as "participants." Those accounts will be designated by the
dealers, underwriters or agents with respect to the underlying debt securities
or by us if those debt securities are offered and sold directly by us. Ownership
of beneficial interests in a global security will be limited to participants or
persons that may hold interests through participants. For interests of
participants, ownership of beneficial interests in the global security will be
shown on records maintained by the applicable depositary or its nominee. For
interests of persons other than participants, that ownership information will be
shown on the records of participants. Transfer of that ownership will be
effected only through those records. The laws of some states require that
certain purchasers of securities take physical delivery of securities in
definitive form. These limits and laws may impair our ability to transfer
beneficial interests in a global security.
As long as the depositary for a global security, or its nominee, is the
registered owner of that global security, the depositary or nominee will be
considered the sole owner or holder of the debt securities represented by the
global security for all purposes under the applicable indenture. Except as
provided below, owners of beneficial interests in a global security:
- will not be entitled to have any of the underlying debt securities
registered in their names;
- will not receive or be entitled to receive physical delivery of any of the
underlying debt securities in definitive form; and
- will not be considered the owners or holders under the indenture relating
to those debt securities.
Payments of principal of, any premium and any interest on individual debt
securities represented by a global security registered in the name of a
depositary or its nominee will be made to the
11
<PAGE>
depositary or its nominee as the registered owner of the global security
representing such debt securities. Neither we, the trustee for the debt
securities, any paying agent nor the registrar for the debt securities will be
responsible for any aspect of the records relating to or payments made by the
depositary or any participants on account of beneficial interests of the global
security.
We expect that the depositary or its nominee, upon receipt of any payment of
principal, any premium or interest relating to a permanent global security
representing any series of debt securities, immediately will credit
participants' accounts with the payments. Those payments will be credited in
amounts proportional to the respective beneficial interests of the participants
in the principal amount of the global security as shown on the records of the
depositary or its nominee. We also expect that payments by participants to
owners of beneficial interests in the global security held through those
participants will be governed by standing instructions and customary practices.
This is now the case with securities held for the accounts of customers in
bearer form or registered in "street name." Those payments will be the sole
responsibility of those participants.
If the depositary for a series of debt securities is at any time unwilling,
unable or ineligible to continue as depositary and we do not appoint a successor
depositary within 90 days, we will issue individual debt securities of that
series in exchange for the global security or securities representing that
series. In addition, we may at any time in our sole discretion determine not to
have any debt securities of a series represented by one or more global
securities. In that event, we will issue individual debt securities of that
series in exchange for the global security or securities. Further, if we
specify, an owner of a beneficial interest in a global security may, on terms
acceptable to us, the trustee and the applicable depositary, receive individual
debt securities of that series in exchange for those beneficial interests. The
foregoing is subject to any limitations described in the applicable prospectus
supplement. In any such instance, the owner of the beneficial interest will be
entitled to physical delivery of individual debt securities equal in principal
amount to the beneficial interest and to have the debt securities registered in
its name. Those individual debt securities will be issued in denominations,
unless we specify otherwise, of $1,000 or integral multiples of $1,000.
RESTRICTIVE COVENANTS
Under the indenture, we may not consolidate or merge with any other person
or convey or transfer all or substantially all of our properties and assets to
another person or permit another corporation to merge into us, unless:
- the successor is a person organized under the laws of the United States or
any state;
- the successor person, if not us, assumes our obligations on the debt
securities and under the indenture;
- after giving effect to the transaction and treating any debt which becomes
our obligation as a result of the transaction as incurred by us at that
time, no event of default exists under the indenture; and
- we supply the trustee with documents certifying our compliance with these
conditions.
MODIFICATION OF THE INDENTURE
Under the indenture our rights and obligations and the rights of the holders
may be modified with the consent of the holders of at least a majority in
principal amount of the then outstanding debt securities of each series affected
by the modification. None of the following modifications, however, is effective
against any holder without the consent of the holders of all of the affected
outstanding debt securities:
- changing the maturity, installment or interest rate of any of the debt
securities;
12
<PAGE>
- reducing the principal amount, any premium or the rate of interest of any
of the debt securities;
- reducing the principal amount of an original issue discount debt security
due and payable upon acceleration of its maturity;
- changing the place for payment of or the currency, currencies or currency
unit or units in which any principal, premium or interest of any of the
debt securities is payable;
- impairing any right to take legal action for an overdue payment;
- reducing the percentage required for modifications or waivers of
compliance with the indenture; or
- with some exceptions, modifying any of the above provisions or the
provisions for the waiver of covenants and defaults.
Any actions we or the trustee may take toward adding to our covenants,
adding events of default or establishing the structure or terms of the debt
securities as permitted by the indentures will not require the approval of any
holder of debt securities. In addition, we or the trustee may cure ambiguities
or inconsistencies in the indenture or make other provisions without the
approval of any holder as long as no holder's interests are materially and
adversely affected.
WAIVER OF COVENANTS
The indenture provides that we will not be required to comply with covenants
relating to our corporate existence, the maintenance of our properties or the
payment of taxes and other claims, if the holders of at least a majority in
principal amount of each series of outstanding debt securities affected waive
compliance with these covenants.
EVENTS OF DEFAULT, NOTICE AND WAIVER
"Event of default" when used in the indenture, will mean any of the
following in relation to a series of debt securities:
- failure to pay interest on any debt security for 30 days after the
interest becomes due;
- failure to pay the principal or any premium on any debt security when due;
- failure to deposit any sinking fund payment when due;
- an event of default under the terms of any indenture or instrument for
borrowed money under which we or any subsidiary of ours that owns or
leases a principal property has outstanding an aggregate principal amount
of $50,000,000, which default results in an acceleration of the payment of
all or a portion of such indebtedness for money borrowed (which
acceleration is not rescinded or annulled within 10 days after notice of
such acceleration);
- failure to perform or breach of any other covenant or warranty in the
indenture that continues for 60 days after our being given notice from the
trustee or the holders of at least 25% in principal amount of the
outstanding debt securities of the series;
- events of bankruptcy, insolvency or reorganization relating to us or our
property, or our written admission that we are unable to pay our debts
generally as they become due; or
- any other event of default provided for debt securities of that series.
If any event of default relating to outstanding debt securities of any
series occurs and is continuing, either the trustee or the holders of at least
25% in principal amount of the outstanding debt securities of that series may
declare the principal of all of the outstanding debt securities of such series
to be due and immediately payable. At any time after an acceleration of any debt
securities of a
13
<PAGE>
series is made, but before a judgment for payment of money is obtained, the
holders of at least a majority in principal amount of the outstanding debt
securities of that series may, under certain circumstances, rescind such
acceleration if two conditions are met. First, we must have paid or deposited
with the trustee a sum sufficient to pay the following:
- all overdue interest on all debt securities of that series;
- the principal of (and premium, if any, on) any debt security of that
series that have become due otherwise than by the declaration of
acceleration and interest on those debt securities;
- to the extent payment of such interest is lawful, interest on overdue
interest; and
- all sums paid or advanced by or due to the trustee under the indenture and
reasonable compensation, expenses, disbursements and advances of the
trustee, its agents and counsel.
Second, all other events of default relating to debt securities of that series
must have been cured or waived.
The indenture provides that the holders of at least a majority in principal
amount of the outstanding debt securities of any series may direct the time,
method and place of conducting any proceeding for any remedy available to the
trustee, or of exercising any trust or power conferred on the trustee, with
respect to the debt securities of that series. The trustee may act in any way
that is consistent with those directions and may decline to act if any of the
directions is contrary to law or to the indenture or would involve the trustee
in personal liability.
The indenture provides that the holders of at least a majority in principal
amount of the outstanding debt securities of any series may on behalf of the
holders of all of the outstanding debt securities of the series waive any past
default (and its consequences) under the indenture relating to the series,
except a default (a) in the payment of the principal of or any premium or
interest on any of the debt securities of the series or (b) with respect to a
covenant or provision of such indentures which, under the terms of such
indenture cannot be modified or amended without the consent of the holders of
all of the outstanding debt securities of the series affected.
The indenture contains provisions entitling the trustee, subject to the duty
of the trustee during an event of default to act with the required standard of
care, to be indemnified by the holders of the debt securities of the relevant
series before proceeding to exercise any right or power under the indenture at
the request of those holders.
The indenture requires the trustee to, within 90 days after the occurrence
of a default known to it with respect to any series of outstanding debt
securities, give the holders of that series notice of the default if uncured and
unwaived. However, the trustee may withhold this notice if it in good faith
determines that the withholding of this notice is in the interest of those
holders. However, the trustee may not withhold this notice in the case of a
default in payment of principal, premium, interest or sinking fund installment
with respect to any debt securities of the series. The above notice shall not be
given until at least 30 days after the occurrence of a default in the
performance of or a breach of a covenant or warranty in the applicable indenture
other than a covenant to make payment. The term "default" for the purpose of
this provision means any event that is, or after notice or lapse of time, or
both, would become, an event of default with respect to the debt securities of
that series.
The indenture requires us to file annually with the trustee a certificate,
executed by one of our officers, indicating whether the officer has knowledge of
any default under the indenture.
NOTICES
Notices to holders of debt securities will be sent by mail to the addresses
of those holders as they appear in the security register.
14
<PAGE>
REPLACEMENT OF SECURITIES
We will replace any mutilated debt security at the expense of the holder
upon surrender of the mutilated debt security to the trustee. We will replace
debt securities that are destroyed, stolen or lost at the expense of the holder
upon delivery to the trustee of evidence of the destruction, loss or theft of
the debt securities satisfactory to us and to the trustee. In the case of a
destroyed, lost or stolen debt security, an indemnity satisfactory to the
trustee and us may be required at the expense of the holder of the debt security
before a replacement debt security will be issued.
DEFEASANCE
The indenture contains provisions that, if made applicable to any series of
debt securities, permits us to elect (a) to defease and be discharged from all
of our obligations (subject to limited exceptions) with respect to any series of
debt securities then outstanding, which we refer to below as "legal defeasance,"
or (b) to be released from our obligations under the restrictive covenants
described above under "Restrictive Covenants," which we refer to below as
"covenant defeasance." To make either of the above elections, we must
- deposit in trust with the trustee, money, U.S. government obligations
which through the payment of principal and interest in accordance with
their terms will provide sufficient money without reinvestment, or a
combination of money and U.S. government obligations to repay in full
those debt securities and mandatory sinking fund payments (and this
deposit in trust must not cause specified conflicts, breaches or defaults
to occur, or the delisting from the New York Stock Exchange of any of our
outstanding debt securities, nor can there be an event of default under
the indenture existing at the time of the deposit in trust);
- deliver to the trustee an opinion of counsel that holders of the debt
securities will not recognize income, gain or loss for federal income tax
purposes as a result of the deposit and related defeasance and will be
subject to federal income tax in the same amount, in the same manner and
at the same times as would have been the case if such deposit and related
defeasance had not occurred in the case of legal defeasance only, such
opinion of counsel to be based on a ruling of the Internal Revenue Service
or other change in applicable Federal income tax law; and
- deliver to the trustee required certificates and opinions as to our
compliance with these defeasance conditions.
GOVERNING LAW
The indenture, the debt securities and the coupons will be governed by, and
construed in accordance with, the laws of the State of New York.
THE TRUSTEE
U.S. Bank Trust National Association is trustee under the indenture. The
trustee participates in our credit agreement and has other customary banking
relationships with us and our affiliates.
DESCRIPTION OF COMMON STOCK, PREFERRED STOCK AND RIGHTS PLAN
Our restated articles of incorporation provide that we may issue up to
250,000,000 shares of common stock. Our board of directors may designate up to
15,000,000 of those shares as preferred stock.
As of March 1, 1999, we had 42,700,179 shares of common stock outstanding
and an equal number of shares of common stock reserved for issuance under
Pentair's common share purchase rights
15
<PAGE>
agreement. We also had 4,149,612 shares of common stock reserved for issuance
upon exercise of options under various stock option plans and an equal number of
shares of common stock reserved for issuance under the rights associated with
those options. Options to purchase 979,132 shares of common stock were
exercisable as of March 1, 1999. We do not have any shares of preferred stock
outstanding.
COMMON STOCK
Each outstanding share of common stock is entitled to one vote on all
matters to be submitted to a vote of the shareholders. Because holders of common
stock do not have cumulative voting rights, the holders of a simple majority of
the shares voted at a meeting at which a quorum is present can elect all of the
directors to be elected at that meeting. The shares of common stock are neither
redeemable nor convertible and the holders thereof have no preemptive rights to
subscribe for or purchase any additional shares of capital stock issued by
Pentair.
The right of holders of our common stock to receive dividends may be
restricted by the terms of any shares of our preferred stock issued in the
future or by the terms of our senior credit facility. If we were to liquidate,
dissolve or wind up our affairs, holders of common stock would share
proportionally in our assets that remain after payment of all of our debts and
liabilities and after any liquidation payments with respect to preferred stock.
PREFERRED STOCK
We can issue shares of preferred stock in series with such preferences and
designations as our board of directors may determine. Our board can, without
shareholder approval, issue preferred stock with voting, dividend, liquidation,
redemption and conversion rights it deems appropriate. However, shares of
preferred stock cannot be given more than one vote per share. Issuance of stock
by the board could dilute the voting strength of the holders of common stock,
give the holders of preferred stock priority over the holders of common stock
with respect to the payment of dividends or grant the holders of preferred stock
preference with respect to liquidation rights. It also may help our management
impede a takeover or attempted change in control.
RIGHTS AGREEMENT
We have entered into a rights agreement dated as of July 31, 1995 with
Norwest Bank Minnesota, N.A. Under this agreement, each outstanding share of our
common stock has one common share purchase right attached to it. Each share of
common stock we issue before the rights agreement expires (including the shares
of common stock we are selling in this offering) also will have one common share
purchase right attached to it. A complete description of the common share
purchase rights and all the specific terms of the common share purchase rights
are set forth in the rights agreement. In this prospectus, unless the context
otherwise requires, all references to the common stock include the accompanying
common share purchase rights.
When the common share purchase rights become exercisable, each common share
purchase right will initially entitle the holder to purchase one share of our
common stock, at the current purchase price of $80 per share. The purchase price
is subject to adjustment by the board to prevent dilution. However, the common
share purchase rights are not exercisable if they are held by a person or group
that beneficially owns more than 15% of our outstanding common stock. Currently,
the common share purchase rights are not exercisable and trade automatically
with the shares of common stock to which they are attached. The common share
purchase rights will only become exercisable if a person or group has acquired,
or announced an intention to acquire, 15% or more of our outstanding common
stock. Under certain circumstances, including the existence of a 15% acquiring
party, each holder of a common share purchase right, other than the acquiring
party, will then be entitled to purchase at the applicable purchase price,
common stock having a market value of two times the purchase price. In the
16
<PAGE>
event we are acquired by another company after the common share purchase rights
have become exercisable, each holder of a common share purchase right will be
entitled to receive shares of the acquiring company having a market value of two
times the purchase price.
The common share purchase rights do not have voting or dividend rights and,
until they become exercisable, have no dilutive effect on our earnings. Unless
we redeem or exchange the common share purchase rights, they will expire on July
31, 2005. We may redeem all, but not part of, the common share purchase rights
at any time before they become exercisable, at a price of $0.01 per common share
purchase right. The board has the discretion to determine the effective date of
the redemption and the terms and conditions of the redemption. Once the common
share purchase rights become exercisable, but before a person or group acquires
50% or more of our outstanding common stock, we may decide to exchange all or
part of the common share purchase rights at a rate of one share of common stock
per common share purchase right.
The board may amend the common share purchase rights without the consent of
the holders, except that we cannot change the redemption price, the purchase
price or the final expiration date. We can lower the threshold for
exercisability of the common share purchase rights from 15% to 10%, except that
the new threshold will not apply to a person who meets the new threshold at the
time we lower it, and if the common share purchase rights are already
exercisable, we cannot lower the threshold if it will adversely affect the
interests of the common share purchase rights holders.
TRANSFER AGENT AND REGISTRAR
Norwest Bank Minnesota, N.A. is the transfer agent and registrar for our
common stock.
PROVISIONS RELATING TO CHANGES IN CONTROL
This section describes some provisions and laws that can delay, deter or
prevent a third party from acquiring control of Pentair through a tender offer,
open market purchases, a proxy contest or other mechanism. Our shareholders
might view any such transaction as being in their best interests since the
transaction could result in a higher stock price than the current market price
for our common stock.
RESTATED ARTICLES OF INCORPORATION AND BYLAWS PROVISIONS. The provisions in
our Restated Articles of Incorporation and Bylaws that could have an
anti-takeover effect include the following:
- We have a staggered board of directors with three classes. One class is
elected each year for three-year terms. We believe that a classified board
of directors helps assure the continuity and stability of our board and
business strategies and policies. The classified board, however, also
increases the likelihood that, in the event of a takeover, some incumbent
directors will retain their positions; that is, a potential acquirer
probably will not be able to take control of the board in one proxy
contest. In addition, the classified board provision helps ensure that our
board, if confronted with an unsolicited proposal from a third party that
has acquired a block of our voting stock, will have sufficient time to
review the proposal and appropriate alternatives and to seek the best
available result for all shareholders.
- Directors can fill any vacant directorships. However, directors appointed
by the board to fill a vacancy come up for election at the next annual
meeting, even if the term would not normally expire.
- Directors may only be removed for good cause.
- There are advance notice requirements for nominating candidates for the
board of directors.
- Holders of 25% of the outstanding voting shares are required to call a
special meeting to consider any action to facilitate or effect a business
combination.
17
<PAGE>
- There are notice and shareholder approval requirements for persons
acquiring 20% or more of the outstanding voting power. If they are not
complied with, the acquired shares, for a period of one year after
acquisition, are denied voting rights, are not transferable and are
subject to our option to redeem the shares at the price at which they were
acquired.
- A super-majority representing two-thirds of our outstanding common stock
is required to approve a consolidation or merger.
- If a 20% shareholder acquires more shares or any shareholder acquires more
than 50% of the outstanding shares, shareholders have the right to request
that we repurchase their shares at the higher of the tender offer price,
the acquisition price or the highest market price over a specified period
of time. The obligation to repurchase does not apply in the event that:
- the board recommends that a pending tender offer be accepted or
- if no tender offer is pending, the board announces that it does not
oppose the accumulation of shares.
This provision is intended to prevent potential acquirers from paying some
shareholders less than other shareholders.
- The board of directors could use the unissued and unreserved shares to
discourage a takeover attempt.
RIGHTS AGREEMENT. The common share purchase rights, described above, can
have anti-takeover effects. They could cause substantial dilution to a person or
group that attempts to acquire us. Accordingly, the existence of the common
share purchase rights may deter some acquirers from making takeover proposals or
tender offers. The common share purchase rights are not intended to prevent a
takeover, but rather are designated to enhance the ability of our board of
directors to negotiate with an acquirer on behalf of all of our shareholders.
PROVISIONS OF MINNESOTA LAW. The Minnesota Business Corporation Act has two
provisions that could delay or prevent a change in control. Generally, if any
person acquires 20% or more of our outstanding voting stock, such acquisition
must be approved by a majority vote of our shareholders, as required by Section
302A.671 of the Minnesota Business Corporation Act. If the acquisition is not
approved, the number of shares exceeding the 20% level will be denied voting
rights and we would have the right to redeem the shares at their fair market
value within 30 days if the owner of the shares fails to comply with the
procedural requirements of Section 302A.671 or our shareholders do not vote to
grant voting rights to the shares. This provision does not apply to mergers and
exchanges if we are a party to the transaction. This provision also does not
apply to shares acquired directly from us. Section 302A.673 of the Minnesota
Business Corporation Act does not allow us to enter into any business
combination, such as a merger, with any shareholder who owns 10% or more of our
voting shares for four years following the date the shares were acquired, unless
the business combination is approved by a committee of all of our disinterested
directors before the shares are acquired.
In addition, Minnesota Statutes, Chapter 80B requires a person proposing to
acquire 10% or more of the outstanding shares to file materials with and obtain
approval from the Minnesota Department of Commerce under certain circumstances.
18
<PAGE>
PLAN OF DISTRIBUTION
DISTRIBUTION
We may sell the offered securities through agents, underwriters or dealers,
or directly to one or more purchasers. The applicable prospectus supplement will
set forth the terms of the offering of any securities, including:
- the names of any underwriters or agents;
- the purchase price of the securities;
- the proceeds to us from the sale;
- any underwriting discounts;
- any other items of underwriters' compensation;
- any initial public offering price; and
- any discounts or concessions allowed or reallowed or paid to dealers.
AGENTS
We may designate agents to sell securities from time to time, who will agree
to use their reasonable efforts to solicit purchases for the period of their
appointment or to sell securities on a continuing basis. We may sell securities
through agents designated by us from time to time.
DEALERS
If we use dealers for the sale of any securities, we will sell such
securities to the dealers as principal. Any dealer may then resell such
securities to the public at varying prices to be determined by such dealer at
the time of resale. The name of any dealer and the terms of the transaction will
be set forth in the prospectus supplement with respect to such securities being
offered thereby.
UNDERWRITERS
If we use underwriters for a sale of securities, the underwriters will
acquire the securities for their own account. The underwriters may resell the
securities in one or more transactions, including negotiated transactions, at a
fixed public offering price or at varying prices determined at the time of sale.
The obligations of the underwriters to purchase the securities will be subject
to the conditions set forth in the applicable underwriting agreement. The
underwriters will be obligated to purchase all the securities of the series
offered if any of the securities of that series are purchased. Any initial
public offering price and any discounts or concessions allowed or re-allowed or
paid to dealers may be changed from time to time. The securities may be offered
to the public either through underwriting syndicates represented by managing
underwriters or by underwriters without a syndicate. Only underwriters named in
a supplement will be underwriters for that offering.
DIRECT SALES
We may also sell securities directly to one or more purchasers without using
underwriters, dealers or agents.
COMPENSATION AND INDEMNIFICATION OF UNDERWRITERS, DEALERS AND AGENTS
Underwriters, dealers and agents that participate in the distribution of the
securities may be underwriters as defined in the Securities Act and any
discounts or commissions they receive from us and any profit on their resale of
the securities may be treated as underwriting discounts and
19
<PAGE>
commissions under the Securities Act. The applicable prospectus supplement will
identify any underwriters, dealers or agents and will describe their
compensation. We may have agreements with the underwriters, dealers and agents
to indemnify them against certain civil liabilities, including liabilities under
the Securities Act. Underwriters, dealers and agents may engage in transactions
with or perform services for us or our subsidiaries in the ordinary course of
their businesses.
TRADING MARKETS AND LISTING OF SECURITIES
Unless otherwise specified in the applicable prospectus supplement, each
class or series of securities will be a new issue with no established trading
market, other than the common stock, which is listed on the New York Stock
Exchange. We may elect to list any other class or series of securities on any
exchange, but we are not obligated to do so. It is possible that one or more
underwriters may make a market in a class or series of securities, but the
underwriters will not be obligated to do so and may discontinue any market
making at any time without notice. We cannot give any assurance as to the
liquidity of the trading market for any of the securities.
DELAYED DELIVERY CONTRACTS
If so indicated in a prospectus supplement, we will authorize agents,
underwriters or dealers to solicit offers by certain institutions to purchase
such securities from us at the public offering price set forth in the prospectus
supplement pursuant to delayed delivery contracts providing for payment and
delivery on the date or dates stated in the prospectus supplement. Each contract
will be for an amount not less than, and the aggregate principal amount of the
securities sold pursuant to the contracts shall be not less nor more than, the
respective amounts stated in the prospectus supplement. Institutions with whom
the contracts, when authorized, may be made include commercial and savings
banks, insurance companies, pension funds, investment companies, educational and
charitable institutions and other institutions, but will in all cases be subject
to our approval. The contracts will not be subject to any conditions except:
- the purchase by an institution of the securities covered by its contract
shall not at the time of delivery be prohibited under the laws of any
jurisdiction in the United States to which such institution is subject;
and
- if the securities are being sold to underwriters, we shall have sold to
such underwriters the total principal amount of the debt securities less
the principal amount thereof covered by the contracts.
The underwriters will not have any responsibility in respect of the validity
or performance of the contracts.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the information requirements of the Exchange Act and,
accordingly, file reports, proxy statements and other information with the SEC.
We have also filed a registration statement that includes this prospectus with
the SEC. This prospectus does not contain all of the information set forth in
the registration statement. The registration statement contains additional
information about us and the securities we are offering. For example, in this
prospectus we've summarized or referred to contracts, agreements and other
documents that have been filed as exhibits to the registration statement. All
materials that we file with the SEC, including the registration statement, may
be read and copied (at prescribed rates) at the SEC's Public Reference Room
located at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC
at 1-800-SEC-0330 for further information about its Public Reference Room. You
can also obtain these documents on the SEC's website (HTTP://WWW.SEC.GOV).
20
<PAGE>
Our common stock is listed on the New York Stock Exchange and our reports,
proxy materials and other information can also be inspected at their offices at
20 Broad Street, New York, New York 10005 or on their website
(HTTP://WWW.NYSE.COM).
We "incorporate by reference" into this prospectus the information we file
with the SEC. That means that, rather than reprinting here all of the
information contained in other documents filed with the SEC, we can disclose
important information to you by referring you to those documents. The
information incorporated by reference is an important part of this prospectus.
Any information that we file with the SEC in the future will automatically
update and supersede what is printed in this prospectus. We incorporate by
reference the following documents that we have filed or will file with the SEC
under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act:
- Annual Report on Form 10-K for the year ended December 31, 1998.
- Quarterly Report on Form 10-Q for the quarter ended March 27, 1999.
- Current Report on Form 8-K as filed on April 8, 1999.
- Quarterly Report on Form 10-Q for the quarter ended June 26, 1999.
- All future filings with the SEC under Sections 13(a), 13(c), 14 or 15(d)
of the Exchange Act until we have sold all of the securities offered by
this prospectus.
- The descriptions of our common stock and common share purchase rights
contained in our Registration Statements on Form 8-A and any amendments or
reports filed to update these descriptions.
We will provide you with a copy of these filings, at no cost, if you write
us at Pentair, Inc., 1500 County Road B2 West, St. Paul, Minnesota 55113-3105,
Attention: Corporate Secretary or call (651) 636-7920.
LEGAL MATTERS
The validity of the common stock and debt securities covered by this
prospectus will be passed upon for us by Henson & Efron, P.A., Minneapolis,
Minnesota. Certain shareholders of Henson & Efron, P.A. own shares of common
stock.
EXPERTS
The consolidated financial statements and the related financial statement
schedule incorporated in this prospectus by reference from the Pentair, Inc.
Annual Report on Form 10-K for the year ended December 31, 1998 have been
audited by Deloitte & Touche, independent auditors, as stated in their report,
which is incorporated herein by reference, and have been so incorporated in
reliance on the report of such firm given upon their authority as experts in
accounting and auditing.
21
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus in an offer to
sell only the securities offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information in this prospectus is
current only as of its date.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary........ S-1
Cautionary Statement About Forward
Looking Statements.................. S-8
Use of Proceeds...................... S-8
Capitalization....................... S-10
Unaudited Pro Forma Combined
Condensed Financial Data............ S-10
Selected Historical Consolidated
Financial Information............... S-17
Management's Discussion And Analysis
of Results of Operations and
Financial Condition................. S-19
Business............................. S-28
Description of the Notes............. S-36
Taxation - United States
Noteholders......................... S-41
Underwriting......................... S-44
PROSPECTUS
Risk Factors......................... 3
Cautionary Statement About Forward
Looking Statements.................. 6
About Pentair........................ 6
Use of Proceeds...................... 8
Ratio of Earnings to Fixed Charges... 8
The Securities We May Offer.......... 8
Description of Debt Securities....... 9
Descriptions of Common Stock,
Preferred Stock and Rights Plan..... 15
Provisions Relating to Changes in
Control............................. 17
Plan of Distribution................. 19
Where You Can Find More Information.. 20
Legal Matters........................ 21
Experts.............................. 21
</TABLE>
$250,000,000
PENTAIR, INC.
% Senior Notes due
------------
[LOGO]
------------
GOLDMAN, SACHS & CO.
J.P. MORGAN & CO.
BANC ONE CAPITAL
MARKETS, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
