SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended DECEMBER 31, 1998 Commission File No. 1-9328 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------ ------------- ECOLAB INC. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 41-0231510 - ------------------------------ ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 370 N. Wabasha Street, St. Paul, Minnesota 55102 ------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (651) 293-2233 ------------------ Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered ------------------- ----------------------------------------- Common Stock, $1.00 par value New York Stock Exchange, Inc. Pacific Exchange, Inc. Preferred Stock Purchase Rights New York Stock Exchange, Inc. Pacific Exchange, Inc. Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ Aggregate market value of voting stock held by non-affiliates of Registrant on March 16, 1999: $5,115,683,817 (see Item 12, on page 21 hereof). The number of shares of Registrant's Common Stock, par value $1.00 per share, outstanding as of March 16, 1999: 129,597,754 shares.
DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of Registrant's Annual Report to Stockholders for the year ended December 31, 1998 (hereinafter referred to as "Annual Report") are incorporated by reference into Parts I, II and IV. 2. Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held May 14, 1999 and to be filed within 120 days after the Registrant's fiscal year ended December 31, 1998 (hereinafter referred to as "Proxy Statement") are incorporated by reference into Part III. PART I FORWARD-LOOKING STATEMENTS AND RISK FACTORS The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In this Report on Form 10-K (including the Management Discussion and Analysis incorporated into Item 7 hereof), Management discusses expectations regarding future performance of the Company which may include anticipated financial performance, business prospects, prospects for international growth, investments in the sales and service force, year 2000 issues, Euro conversion, the impact of legislation and environmental compliance, the effect of litigation, production capability, share repurchases, the effect of new accounting principles and similar matters. Without limiting the foregoing, words or phrases such as "will likely result," "are expected to," "will continue," "is anticipated," "we believe," "estimate," "project" (including the negative or variations thereof) or similar terminology, generally identify forward-looking statements. Forward-looking statements represent challenging goals for the Company. As such, they are based on certain assumptions and estimates and are subject to certain risks and uncertainties. The Company cautions that undue reliance should not be placed on such forward-looking statements which speak only as of the date made. In order to comply with the terms of the safe harbor, the Company hereby identifies important factors which could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. These factors should be considered, together with any similar risk factors or other cautionary language which may be made in the section of this Report on Form 10-K containing the forward-looking statement. Risks and uncertainties that may affect operating results and business performance include: pricing flexibility; availability of adequate and reasonably-priced raw materials; the occurrence of capacity constraints, or the loss of a key supplier, which in either case limit the production of certain products; ability to carry out the Company's acquisition strategy, including difficulties in rationalizing acquired businesses and in realizing related cost savings and other benefits; the costs and effects of year 2000 computer software issues (described under the heading "Year 2000 Conversion" beginning on page 30 of the Financial Discussion incorporated from the Annual Report into Item 7 hereof); the costs and effects of complying with: (i) the significant environmental laws and regulations which apply to the Company's operations and facilities, (ii) government regulations relating to the manufacture, storage, distribution and labeling of the Company's products and (iii) -2-
changes in tax, fiscal, governmental and other regulatory policies; economic factors such as the worldwide economy, interest rates, currency movements, Euro conversion and the development of markets; the occurrence of (i) litigation or claims, (ii) natural or man-made disasters and (iii) severe weather conditions affecting the food service and hospitality industry; loss of, or changes in, executive management; the Company's ability to continue product introductions and technological innovations; and other uncertainties or risks reported from time-to-time in the Company's reports to the Securities and Exchange Commission. In addition, the Company notes that its stock price can be affected by fluctuations in quarterly earnings. Despite favorable year-over-year quarterly comparisons in recent years, there can be no assurances that earnings will continue to increase or that the degree of improvement will meet investors' expectations. The year 2000 issue is the result of computer programs having date-sensitive software which may recognize a date using 00 as the year 1900 rather than the year 2000. If not detected and corrected, this can result in system failure or miscalculations causing disruptions of operations, including a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The year 2000 issue can arise at any point in the Company's supply, manufacturing, processing, distribution and any financial chains. Accordingly, the failure to resolve year 2000 issues could have a material adverse impact on the Company. The Company has put in place plans and processes (see "Year 2000 Conversion" on page 30 of the Financial Discussion incorporated from the Annual Report into Item 7 hereof) which it believes will be sufficient to evaluate and manage risk associated with year 2000 issues. However, estimates of year 2000 costs, time schedules and the Company's belief that it can successfully resolve year 2000 issues are based on presently available information and are subject to certain assumptions and risks. These include the availability of necessary and trained personnel who can be hired or retained on a contract basis, the ability to locate and correct all relevant computer codes and, in particular, uncertainties surrounding the ability of suppliers, vendors and customers to resolve their year 2000 issues since their year 2000 conversion processes are not within the Company's control. The ability of governmental agencies to resolve year 2000 issues is an additional risk and uncertainty. ITEM 1. BUSINESS ITEM 1(a) GENERAL DEVELOPMENT OF BUSINESS Except where the context otherwise requires, the terms "Company" and "Ecolab," as used herein, include Ecolab Inc. and its subsidiaries. Ecolab Inc. was incorporated as a Delaware corporation in 1924. The Company's fiscal year is the calendar year ending December 31. The Company and Henkel KGaA of Dsseldorf, Germany ("Henkel"), each have a 50% economic interest in a joint venture which operates institutional and industrial cleaning and sanitizing businesses in Europe, and which is referred to hereafter as the "Henkel-Ecolab Joint Venture" or "Joint Venture." Strategic decisions concerning the Joint Venture require the agreement of Henkel and the Company. Henkel has a tie-breaking vote on certain matters pertaining to continuation of business in the event mutual agreement is not reached. These include the appointment of the Joint Venture senior executives and adoption of the annual business plan. The Company accounts for its interest in the Henkel-Ecolab Joint Venture under the equity method of accounting and therefore does not consolidate the Henkel-Ecolab Joint Venture balance sheet accounts, revenues and expenses. Financial statements of the Henkel-Ecolab Joint Venture as listed under Item 14, I(3) of Part IV hereof are included as a part of this Report and a review of the financial performance of the Joint Venture is found under the heading "Henkel-Ecolab Joint Venture" contained in the Financial -3-
Discussion which is incorporated from the Annual Report into Item 7 hereof. Except where the Henkel-Ecolab Joint Venture is specifically referred to, the description of business in Part I does not include the business of the Joint Venture. During 1998, the Company continued to make business acquisitions which broadened its product and service offerings in line with its Circle the Customer - Circle the Globe strategy. The integration of the business of Gibson Chemical Industries Limited located in Melbourne, Australia was completed. The Company added commercial food equipment service and part sales to its operations through the acquisition of GCS Service, Inc. Additional products and services were added to the United States Institutional and Food & Beverage business units and to the Company's Japanese operations through business acquisitions. Detail on these acquisitions is found under the heading "Business Acquisitions" in Note 6, located on pages 40 and 41 of the Annual Report and incorporated into Item 14 hereof. ITEM 1(b) FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS The financial information about reportable segments appearing under the heading "Operating Segments" in Note 15, located on pages 46 and 47 of the Annual Report, is incorporated herein by reference. ITEM 1(c) NARRATIVE DESCRIPTION OF BUSINESS GENERAL: The Company is engaged in the development and marketing of premium products and services for the hospitality, institutional and industrial markets. The Company provides cleaning, sanitizing, pest elimination and maintenance products, systems and services primarily to hotels and restaurants, foodservice, healthcare and educational facilities, quickservice (fast-food and other convenience store units), groceries, commercial and institutional laundries, light industry, dairy plants and farms, and food and beverage processors. A strong commitment to service is a distinguishing characteristic of the Company. The following description of business is based upon the Company's three reportable segments ("segments") as reported in the Company's financial statements. However, the Company pursues a "Circle the Customer - Circle the Globe" strategy by developing relationships and partnerships with customers who require a broad range of cleaning and sanitizing services. Therefore, one customer may utilize the services of all three of the segments and there is a degree of interdependence among the operating segments--particularly between the International Cleaning and Sanitizing business and the United States Cleaning and Sanitizing businesses. UNITED STATES CLEANING AND SANITIZING SEGMENT The "United States Cleaning and Sanitizing" segment is comprised of six divisions which provide cleaning and sanitizing services to United States markets. INSTITUTIONAL: The Institutional Division is the Company's largest division and sells specialized cleaners and sanitizers for washing dishes, glassware, flatware, foodservice utensils and kitchen equipment ("warewashing"), for on-premise laundries (typically used by customers having smaller machines and laundry needs) and for general housekeeping functions, as well as dishwasher racks and related kitchen sundries to the foodservice, lodging, educational and healthcare industries and water filters to the foodservice industry. The Division also provides pool and spa treatment -4-
programs for commercial and hospitality customers and products and services for the vehicle wash industry. The Institutional Division also markets various chemical dispensing device systems, which are made available to customers, to dispense the Company's cleaners and sanitizers. Through its Ecotemp offering, the Institutional Division markets, primarily to smaller and mid-size customer units, a program comprised of energy-efficient dishwashing machines, detergents, rinse additives and sanitizers including full machine maintenance. The Company believes it is the leading supplier of chemical warewashing products to institutions in the United States. The Institutional Division sells its products and services primarily through Company-employed field sales and service personnel. However, the Company, to a significant degree, also utilizes food-service distributors to market and sell its products to smaller accounts or accounts which purchase through food distributors and the Company provides the same service to accounts served by food distributors as to direct customers. KAY: The Kay Division supplies chemical cleaning and sanitizing products primarily to the quick-service restaurant industry. This includes traditional fast food restaurants but, increasingly, other retail locations where "fast food" is prepared and served, such as convenience stores, airport and shopping center kiosks, discount stores, stadiums, grocery store delis and other venues. Kay's products include specialty and general purpose hard surface cleaners, degreasers, sanitizers, polishes, hand care products and assorted cleaning tools. Products are sold under the "Kay" brand or the customer's private label. In addition, Kay supports its product sales with employee training programs and technical support designed to meet the special needs of its customers which have a relatively high employee turnover. Kay's customized cleaning and sanitation programs are designed to reduce labor costs and product usage while increasing sanitation levels, cleaning performance, equipment life and safety levels. Kay employs a direct field sales force which primarily calls upon national and regional quickservice restaurant chains and franchisees, although the sales are made to distributors who supply the chain or franchisee's restaurants. The Company believes that its Kay Division is the leading supplier of chemical cleaning and sanitizing products to the quickservice restaurant industry in the United States. While Kay's customer base has been growing, Kay's business is largely dependent upon a limited number of major quickservice restaurant chains and franchisees. FOOD & BEVERAGE: The Food & Beverage Division addresses cleaning and sanitation at the start of the food chain to facilitate the production of products safe for human consumption. The Division provides detergents, cleaners, sanitizers, lubricants, animal health and water treatment products, as well as cleaning systems, electronic dispensers and chemical injectors for the application of chemical products, primarily to dairy plants, dairy, poultry and swine farms, breweries, soft-drink bottling plants, and meat, poultry and other food processors as well as to pharmaceutical and cosmetic plants. The Food & Beverage Division also designs, engineers and installs CIP ("clean-in-place") process control systems and facility cleaning systems to its customer base. Farm products (which include bovine teat products) are sold through dealers and distributors, while plant products are sold primarily by the Company's field sales personnel. The Company believes that it is one of the leading suppliers of cleaning and sanitizing products to the dairy plant, dairy farm and beverage processor industries in the United States. -5-
TEXTILE CARE: The Textile Care Division provides chemical laundry products and proprietary dispensing systems, as well as related services, to large institutional and commercial laundries and to certain smaller laundry operations. Typically these customers process a minimum of 1,000,000 pounds of linen each year and include free-standing laundry plants used by institutions such as hotels, restaurants and healthcare facilities as well as industrial, textile rental and shirt laundries. Products and services include laundry cleaning and specialty products and related dispensing equipment, which are marketed primarily through a Company-employed sales force and, to a lesser extent, through distributors. The Division's programs are designed to meet the customer's need for exceptional cleaning, while extending the useful life of linen and reducing the customer's overall operating cost. Textile Care offerings complement the Institutional Division's offerings to small-to-medium size on-premise laundry facilities. PROFESSIONAL PRODUCTS: The Professional Products Division provides a full line of infection- prevention and janitorial offerings that are sold to the medical and janitorial markets in the United States. The Professional Products Division sells its proprietary products under the brand names Airkem (detergents, general purpose cleaners, carpet care, furniture polishes, disinfectants, floor care products, hand soaps and odor counteractants) and Huntington (infection control and gym floor products). The Company believes it is among the largest suppliers of infection-prevention and general cleaners to the United States healthcare industry as well as one of the market leaders in the overall United States janitorial market. Products are sold through a Company-employed sales force as well as a network of independent manufacturing representatives in both janitorial and medical markets who sell products and services to the institutional, healthcare and industrial marketplaces. A private-label program also manufactures non-proprietary janitorial-related products for resale by major distributor organizations and infection prevention products to companies selling into consumer markets. In addition, the Division, through its JaniSource operation, markets brand name products for sale through mass distribution. WATER CARE SERVICES: The Water Care Services Division expands the Company's "Circle the Customer - Circle the Globe" strategy by adding an offering which is critical to companies in the Company's customer base--water treatment programs. The Water Care Services Division provides water and wastewater treatment products, services and systems for commercial/institutional customers (hospitals, healthcare, commercial real estate, government, shopping malls and commercial laundries) and light industry (food and beverage accounts, textile mills, electronic plants and other industries). As a facet of its growth strategy, Water Care Services works closely with the Company's Institutional, Textile Care and Food & Beverage Divisions to offer customized water care strategies to their accounts that have water care needs, primarily to treat water used in heating and cooling systems and manufacturing processes and to treat waste water. -6-
UNITED STATES OTHER SERVICES SEGMENT The "United States Other Services" segment is comprised of three business units: Pest Elimination Division; Jackson Equipment and GCS Service, Inc. In general, all three businesses provide service or equipment which can augment or extend the Company's product offering to its business customers as a part of the Circle the Customer approach. PEST ELIMINATION: The Pest Elimination Division provides services for the elimination and prevention of pests to restaurants, food and beverage processors, educational and healthcare facilities, hotels and other institutional and commercial customers. These services are sold and performed by Company-employed sales and service personnel. The Pest Elimination business acquires all of its insecticides and pesticides from third-party vendors. The Company believes it is the largest provider of premium pest elimination services to institutions in the United States. JACKSON MSC: Jackson MSC designs, manufactures and markets dishwashing and customized machines for the foodservice industry. Jackson, which manufactures its equipment at its Barbourville, Kentucky facility, sells products for use by the Company's other businesses, most notably, the energy-efficient dishwashing machines used by the Institutional Division in its Ecotemp offering. Jackson also sells its equipment to third parties through independent sales representatives and foodservice dealers. GCS SERVICE, INC.: GCS provides commercial kitchen equipment repair services. GCS, which was acquired by the acquisition of GCS Service, Inc. in July, 1998 by the Company, offers both chain account customers of the Company and equipment manufacturers the benefits of working with a single national equipment repair service provider. INTERNATIONAL CLEANING AND SANITIZING SEGMENT The Company conducts business in approximately 35 countries outside of the United States through wholly-owned subsidiaries or, in the case of Venezuela, China and Indonesia, through majority-owned joint ventures with local partners. In other countries, selected products are sold by the Company's export operations to distributors, agents or licensees, although those sales are not significant in terms of the Company's overall sales. The largest International operations are located in Asia Pacific, Latin America and Canada with smaller operations in Africa. With limited exceptions, the Company does not conduct business directly in Europe. In that region, business is conducted by the Henkel-Ecolab Joint Venture which is described in Item 1(a) hereof under the heading "General Development of Business." In general, the businesses conducted internationally are similar to those conducted in the United States through the United States Cleaning and Sanitizing Segment. Institutional and Food and Beverage businesses are the largest businesses and are conducted at virtually all international locations. The other businesses (Kay, Textile Care, Professional Products and Water Care) are conducted less extensively in international locations. Because a significant portion of Kay's international sales are to non-United States units of United States-based quick service restaurant chains, a substantial portion of Kay's international sales are made either to domestic or internationally-located distributors who serve these chains. In general, all of the businesses conducted in the United States Cleaning and Sanitizing Segment are operated in Canada. -7-
International businesses are subject to the usual risks of foreign operations including possible changes in trade and foreign investment laws, tax laws, currency exchange rates and economic and political conditions abroad. The profitability of International operations is lower than the profitability of businesses in the United States. This is due to lower International operating income margins caused by the difference in scale of International operations where operating locations are smaller in size as well as to the additional cost of operating in numerous and diverse foreign jurisdictions. Proportionately larger investments in sales, administrative and technical personnel are also necessary in order to facilitate growth in International operations. ADDITIONAL INFORMATION COMPETITION: The Company's business units have two significant classes of competitors. First, each business unit competes with a small number of large companies selling directly or through distributors on a national or international scale. Some of these large competitors have substantially greater assets and financial resources than the Company. Second, all of the Company's business units have numerous smaller regional or local competitors which focus on more limited geographies, product lines, and/or end-user segments. The Company's objective is to achieve a significant presence in each of its business markets. In general, competition is based on service, product performance and price. The Company believes it competes principally by providing superior value and differentiated products. Value is provided by state-of-the-art, environmentally-compatible cleaning, sanitation and maintenance products and systems coupled with high service standards and dedication to customer satisfaction after the initial sale. This is made possible, in part, by the Company's significant on-going investment in training and technology development and by the Company's standard practice of assisting customers in lowering operating costs and complying with safety, environmental and sanitation regulations. In addition, the Company emphasizes its ability to uniformly provide a variety of related premium cleaning and sanitation services to its customers and to provide that level of service to multiple locations of chain customer organizations worldwide. This approach is succinctly stated in the Company's "Circle the Customer - Circle the Globe" strategy which is discussed above in this Item 1(c) under the heading "General." SALES AND SERVICE: Products, systems and services are primarily marketed in domestic and international markets by Company-trained sales and service personnel who also advise and assist customers in the proper and efficient use of the products and systems in order to meet a full range of cleaning and sanitation needs. Distributors are utilized in several markets, as described in the business unit descriptions found under the discussion of the three reportable segments above. CUSTOMERS AND CLASSES OF SERVICE: The Company believes that its business is not materially dependent upon a single customer although, as described above in this Item 1(c) under the description of the Kay business, Kay is largely dependent upon a limited number of national and international quickservice chains and franchisees. No material part of the Company's business is subject to renegotiation or termination at the election of a governmental unit. The Company sells two classes of products which each constitute 10 percent or more of its sales. Worldwide sales of warewashing products in 1998, 1997 and 1996 approximated 28, 31 and 31 percent, respectively, of the Company's consolidated net sales. In addition, the Company, through its Institutional and Textile Care businesses, sells laundry products and services to a broad range of laundry customers. Total laundry sales in 1998, 1997 and 1996 approximated 13, 14 and 14 percent respectively, of the Company's consolidated net sales. -8-
PATENTS AND TRADEMARKS: The Company owns a number of patents and trademarks. Management does not believe that the Company's overall business is materially dependent on any individual patent or trademark. SEASONALITY: The Company's business has little seasonality. WORKING CAPITAL: The Company has invested in the past, and will continue to invest in the future, in merchandising equipment consisting primarily of systems used by customers to dispense the Company's cleaning and sanitizing products. The Company, otherwise, has no unusual working capital requirements. The investment in merchandising equipment is discussed under the heading "Cash Flows" located on page 33 of the Annual Report and incorporated into Item 7 hereof. MANUFACTURING AND DISTRIBUTION: The Company manufactures most of its products and related equipment in Company-owned manufacturing facilities. Some are also produced for the Company by third party contract manufacturers. Other products and equipment are purchased from third party suppliers. Additional information on product/equipment sourcing is found in the segment discussions above and additional information on the Company's manufacturing facilities is located in Item 2 under the heading "Properties" on pages 15 through 17 hereof. Deliveries to customers are made from the Company's manufacturing plants and a network of distribution centers and public warehouses. The Company uses common carriers, its own delivery vehicles and distributors. Additional information on the Company's plant and distribution facilities is located in Item 2 under the heading "Properties" on pages 15 through 17 hereof. RAW MATERIALS: Raw materials purchased for use in manufacturing products for the Company are inorganic chemicals, including phosphates, silicates, alkalies, salts and petrochemical-based materials, including surfactants and solvents. These materials are generally purchased on an annual contract basis from a diverse group of chemical manufacturers. Pesticides used by the Pest Elimination Division are purchased as finished products under contract or purchase order from the producers or their distributors. The Company also purchases packaging materials for its manufactured products and components for its specialized cleaning equipment and systems. Most raw materials, or substitutes for those materials, used by the Company, with the exception of a few specialized chemicals which the Company manufactures, are available from several suppliers. RESEARCH AND DEVELOPMENT: The Company's research and development program consists principally of devising and testing new products, processes, techniques and equipment, improving the efficiency of existing ones, improving service program content, and evaluating the environmental compatibility of products. Key disciplines include analytical and formulation chemistry, microbiology, process and packaging engineering and product dispensing technology. Substantially all of the Company's principal products have been developed by its research, development and engineering personnel. Note 12, entitled "Research Expenditures" located on page 44 of the Annual Report, is incorporated herein by reference. ENVIRONMENTAL CONSIDERATIONS: This discussion of Environmental Considerations should be read in light of the Forward-Looking Statements and Risk Factors discussion found under Part I at the beginning of this Report. The Company's businesses are subject to various legislative enactments and regulations relating to the protection of the environment. While the Company cooperates with governmental authorities and takes commercially practicable measures to meet regulatory -9-
requirements and avoid or limit environmental effects, some risks are inherent in the Company's businesses. The Company's management believes these are risks which the Company has in common with other companies engaged in similar businesses. Among the risks are costs associated with managing hazardous substances, waste disposal or plant site clean-up, fines and penalties if the Company were found in violation of law, as well as modifications, disruptions or discontinuation of certain operations or types of operations. Although the Company is not currently aware of any such circumstances, there can be no assurance that future legislation or enforcement policies will not have a material adverse effect on the Company's financial condition or results of operations. Environmental matters most significant to the Company are discussed below. PHOSPHOROUS LEGISLATION: Various laws and regulations have been enacted by state, local and foreign jurisdictions pertaining to the sale of products which contain phosphorous. The primary thrust of such laws and regulations is to regulate the phosphorous content of home laundry detergents, a market not served by the Company. However, certain of the Company's products are affected by such laws and regulations, including some commercial laundry and warewashing detergents, cleaners and sanitizers. Three types of legislative restrictions are common: (1) labeling of phosphorous content, (2) percentage limitation on the amount of phosphorous permitted and (3) a ban on the use of phosphorous in certain products or in products sold for a particular purpose. The Company has been able to comply with legislative requirements and, where necessary, has developed products which, although typically less effective than the products they replace, contain no phosphorous or lower amounts of phosphorous to satisfy the legislative limitations or bans. In limited geographic areas, the Company has obtained a variance from existing zero-phosphorous legislation. Phosphorous legislation has not had a material negative effect on the Company's operations to date. PESTICIDE LEGISLATION: Various federal and state environmental laws and regulations govern the manufacture and/or use of pesticides. The Company manufactures and sells certain disinfecting and sanitizing products which kill microorganisms (bacteria, viruses, fungi) on environmental surfaces. Such products constitute "pesticides" or "antimicrobial pesticides" under the current definitions of the Federal Insecticide Fungicide and Rodenticide Act ("FIFRA"), as amended by the Food Quality Protection Act of 1996, the principal federal statute governing the manufacture, labeling, handling and use of pesticides. Approximately 350 of these products must be registered with the United States Environmental Protection Agency ("EPA"). Registration entails the necessity to meet certain efficacy, toxicity and labeling requirements and to pay initial and on-going registration fees. In addition, each state in which these products are sold requires registration and payment of a fee. In general, the states impose no substantive requirements different from those required by FIFRA. However, California does have its own regulatory scheme and certain other states have regulatory schemes under consideration. In addition, California imposes a tax on total pesticide sales in that State. While the cost of complying with rules as to pesticides has not had a material adverse effect on the Company's financial condition, liquidity or the results of its operations to date, the costs and delays in receiving necessary approvals for these products have increased in recent years. The Company believes that the nature of these costs and regulatory delays are similar to those encountered by other companies in similar businesses. Total fees paid to the EPA and the states to obtain or maintain pesticide registrations, and for the California -10-
tax, were approximately $1,386,000 in 1998. Such costs will increase somewhat in 1999, but not in amounts which are expected to significantly affect the Company's results of operations, financial position, or liquidity. In addition, the Company's Pest Elimination Division applies restricted-use pesticides which it purchases from third parties. That Division must comply with certain standards pertaining to the use of such pesticides and to the licensing of employees who apply such pesticides. Such regulations are enforced primarily by the states or local jurisdictions in conformity with federal regulations. The Company has not experienced material difficulties in complying with these requirements. OTHER ENVIRONMENTAL LEGISLATION: The Company's manufacturing plants are subject to federal, state, local or foreign jurisdiction laws and regulations relating to discharge of hazardous substances into the environment and to the transportation, handling and disposal of such substances. The primary federal statutes that apply to the Company's activities are the Clean Air Act, the Clean Water Act and the Resource Conservation and Recovery Act ("RCRA"). The Company is also subject to the Superfund Amendments and Reauthorization Act of 1986, which imposes certain reporting requirements as to emissions of toxic substances into the air, land and water. The Company makes capital investments and expenditures to comply with environmental laws and regulations, to ensure employee safety and to carry out its announced environmental stewardship principles. To date, such expenditures have not had a significant adverse effect on the financial condition of the Company or its results of operations. The Company's capital expenditures for environmental control projects incurred for 1998 were approximately $1,502,000 and approximately $2,553,000 has been budgeted for 1999. ENVIRONMENTAL REMEDIATION AND PROCEEDINGS: Along with numerous other potentially responsible parties ("PRPs"), the Company is currently involved with waste disposal site clean-up activities imposed by the federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") or state equivalents at 14 waste disposal sites which received nominal amounts of waste materials alleged to have been generated by the Company or its subsidiaries. In general, under CERCLA, the Company and each other PRP which actually contributes hazardous substances to a superfund site are jointly and severally liable for the costs associated with cleaning up the site. Customarily, the PRPs will work with the EPA to agree and implement a plan for site remediation. In addition to the 14 sites noted above, the Illinois Environmental Protection Agency ("Agency"), in 1996, identified the Company, along with two other corporations, as PRPs in connection with groundwater contamination near the Company's South Beloit, Illinois manufacturing facility. The U.S. Environmental Protection Agency has proposed listing the site on the National Priority List of federal superfund sites. The Company has denied liability and has requested that the Agency withdraw its identification of the Company as a PRP. The Company has recently entered into a tentative settlement with the EPA, the Agency, and the other two corporations. The Company anticipates that this settlement will not have a material effect on the Company's results of operations, financial position or liquidity. -11-
Based on an analysis of the Company's experience with such environmental proceedings, the Company's estimated share of all hazardous materials deposited on the 15 sites referred to in the two preceding paragraphs, and the Company's estimate of the contribution to be made by other PRPs which the Company believes have the financial ability to pay their shares, the Company has accrued its best estimate of the Company's future costs relating to such known sites. The New South Wales (Australia) Environmental Protection Authority has identified a property owned by Maxwell Chemicals Pty. Limited, a subsidiary of the Company, as subject to environmental impacts. A property in Georgia owned by Puritan Services Inc., a subsidiary of the Company, also has been identified as subject to environmental impacts. Remediation of a New Jersey property owned by the Company is on-going as required by New Jersey environmental authorities. The Company has accrued for estimated future costs relating to these properties. A legal action commenced in August, 1989 in the District Court in Zwolle, Netherlands, by the Netherlands government against a former subsidiary of the Company remains pending. Netherlands authorities are seeking monetary damages to cover the cost of investigation and planned clean-up of soil and groundwater contamination, allegedly resulting from the discharge of wastewater and chemicals during a period ended in 1981, when the subsidiary operated a plant on the site. Damages claimed are approximately $5,000,000. The former subsidiary, now owned by the Henkel-Ecolab Joint Venture, has denied liability and believes it complied with applicable Netherlands law. The Company has agreed to indemnify the Henkel-Ecolab Joint Venture as to any liability associated with this matter. Accordingly, an accrual has been recorded, reflecting management's best estimate of future costs. During 1998, the Company's net expenditures for contamination remediation were approximately $475,000. The accrual at the end of 1998 for future remediation expenditures was approximately $13,000,000. The Company reviews its exposure for contamination remediation costs periodically and its accruals are adjusted as considered appropriate. In establishing accruals, potential insurance reimbursements are not included. While the final resolution of these issues could result in costs below or above current accruals and, therefore, have an impact on the Company's consolidated financial results in a future reporting period, the Company believes the ultimate resolution of these matters will not have a significant effect on the Company's consolidated financial position or liquidity or, on an on-going basis, its results of operations. In addition, the Company has retained responsibility for certain sites where the Company's former ChemLawn business is a PRP. Currently there are eight such locations and, at each, ChemLawn is a de minimis party. Anticipated costs currently accrued for these matters were included in the Company's loss from its discontinued ChemLawn operations in 1991. The accrual remaining reflects management's best estimate of future costs. NUMBER OF EMPLOYEES: The Company currently has approximately 12,000 employees worldwide. -12-
ITEM 1(d) FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS The financial information about geographic areas appearing under the heading "Operating Segments" in Note 15, located on pages 46 and 47 of the Annual Report, is incorporated herein by reference. EXECUTIVE OFFICERS OF THE COMPANY The persons listed in the following table are the current executive officers of the Company. Officers are elected annually. There is no family relationship among any of the directors or executive officers, and none of such persons has been involved during the past five years in any legal proceedings described in applicable Securities and Exchange Commission regulations. <TABLE> <CAPTION> Positions Held Name Age Office Since Jan. 1, 1994 - ---- --- ------ ------------------ <S> <C> <C> <C> A. L. Schuman 64 President and Chief March 1995 - Present Executive Officer President and Chief Jan. 1994 - Feb. 1995 Operating Officer M. E. Shannon 62 Chairman of the Board, Chief Jan. 1996 - Present Financial and Administrative Officer Vice Chairman, Chief Jan. 1994 - Dec. 1995 Financial and Administrative Officer L. T. Bell 51 Vice President-Law Jan. 1998 - Present and General Counsel Vice President, Assistant Jan. 1997 - Dec. 1997 General Counsel and Assistant Secretary Associate General Counsel July 1995 - Dec. 1996 and Assistant Secretary Associate General Counsel Jan. 1994 - June 1995 P. D'Almada 51 Senior Vice President - Jan. 1999 - Present Institutional North America Senior Vice President - Mar. 1996 - Dec. 1998 Global Accounts </TABLE> -13-
<TABLE> <CAPTION> Positions Held Name Age Office Since Jan. 1, 1994 - ---- --- ------ ------------------ <S> <C> <C> <C> Vice President - May 1995 - Feb. 1996 Institutional Corporate Accounts and Distributor Sales Vice President - Jan. 1994 - Apr. 1995 Institutional National Accounts and Distributor Sales S. L. Fritze 44 Vice President and Mar. 1995 - Present Treasurer Institutional Vice Jan. 1994 - Feb. 1995 President, Planning and Control A. E. Henningsen, Jr. 52 Senior Vice President Mar. 1996 - Present and Controller Vice President and Jan. 1994 - Feb. 1996 Controller R. L. Marcantonio 49 Executive Vice President - Jan. 1999 - Present Industrial Group Senior Vice President - Mar. 1997 - Dec. 1998 Industrial J. L. McCarty 61 Senior Executive Vice Jan. 1999 - Present President - Institutional Group Senior Vice President- Jan. 1994 - Dec. 1998 Institutional North America M. Nisita 58 Senior Vice President- Jan. 1994 - Present Global Operations J. P. Spooner 52 Executive Vice President - Jan. 1999 - Present International Group Senior Vice President- June 1996 - Dec. 1998 International Senior Vice President - June 1994 - May 1996 Industrial </TABLE> -14-
<TABLE> <CAPTION> Positions Held Name Age Office Since Jan. 1, 1994 - ---- --- ------ ------------------ <S> <C> <C> <C> F. W. Tuominen, 56 Senior Vice President Jan. 1994 - Present Ph.D. and Chief Technical and Environmental Officer </TABLE> Mr. Spooner joined the Company as Senior Vice President-Industrial in June 1994. Prior to joining the Company, Mr. Spooner was employed by PepsiCo, Inc. for 15 years, holding various positions in operations and business development, including most recently, President of the North Division of Frito-Lay, Inc. Mr. Marcantonio joined the Company as Senior Vice President-Industrial in March 1997. Prior to joining the Company, Mr. Marcantonio was employed by subsidiaries of United Biscuits (Holdings) Plc. for 20 years, holding various positions in sales, marketing and general management including, most recently, Senior Vice President - Cookies and Crackers of the Keebler Company. ITEM 2. PROPERTIES The Company's manufacturing facilities produce chemical products or equipment for all the Company's businesses, although the Pest Elimination Division and the GCS business purchase most of their products and equipment from outside suppliers. The Company's chemical production process consists primarily of blending and packaging powders and liquids and casting solids. The Company's equipment manufacturing operations consist primarily of producing chemical product dispensers and ejectors and other mechanical equipment (South Beloit, Illinois), dishwasher racks and related sundries (Elk Grove Village, Illinois and Shika, Japan) and dishwashing machines, a portion of which is sold to third party dishwashing machine distributors (Barbourville, Kentucky). The Company's philosophy is to manufacture products wherever an economic, process or quality assurance advantage exists or where proprietary manufacturing techniques dictate internal production processes. Currently, most products sold by the Company are manufactured at Company facilities. The following chart profiles the Company's manufacturing facilities which are approximately 50,000 square feet or larger in size. In general, manufacturing facilities located in the United States serve the "United States Cleaning and Sanitizing" segment and facilities located outside of the United States serve the "International Cleaning and Sanitizing" segment. However, certain of the United States facilities do manufacture products for export and which are used by the International segment. The facilities having export involvement are marked with an asterisk(*). The Barbourville, Kentucky manufacturing facility is operated by the Jackson MSC unit which is reported herein as a part of the "United States Other Services" segment. -15-
ECOLAB OPERATIONS PLANT PROFILES <TABLE> <CAPTION> SIZE OWNED/ LOCATION (SQ. FT.) TYPES OF PRODUCTS LEASED - -------- --------- ----------------- ------ <S> <C> <C> <C> UNITED STATES *Joliet, IL 610,000 Solids, Liquids, Powders Owned *Woodbridge, NJ 248,000 Solids, Liquids Owned *Garland, TX 239,000 Solids, Liquids Owned *Greensboro, NC 193,000 Liquids, Powders Owned *Hebron, OH 192,000 Liquids Owned San Jose, CA 175,000 Liquids Owned *South Beloit, IL 155,000 Equipment Owned *McDonough, GA 141,000 Solids, Liquids Owned Eagan, MN (pilot plant) 133,000 Solids, Liquids, Emulsions, Powders Owned City of Industry, CA 125,000 Liquids Owned *Barbourville, KY 109,000 Equipment Owned *Huntington, IN 90,000 Liquids, Powders Owned *Elk Grove Village, IL 66,000 Equipment Leased INTERNATIONAL Santa Cruz, BRAZIL 142,000 Liquids, Powders Owned Melbourne, AUSTRALIA 130,000 Liquids, Powders Owned Johannesburg, SOUTH AFRICA 100,000 Liquids, Powders Owned Botany, AUSTRALIA 97,000 Liquids, Powders Owned Toronto, CANADA 88,000 Liquids Leased Shika, JAPAN 60,000 Liquids, Powders Owned Hamilton, NEW ZEALAND 58,000 Solids, Liquids, Powders Owned Sydney, AUSTRALIA 51,000 Liquids, Powders Leased Noda, JAPAN 49,000 Liquids, Powders Owned </TABLE> Additional smaller United States manufacturing facilities owned by the Company are located in North Kansas City, Missouri, Grand Forks, North Dakota and Dallas, Texas. The Company also owns or leases smaller international manufacturing facilities in Argentina, Australia, Chile, Columbia, Costa Rica, Fiji, Indonesia, Japan, Kenya, Mexico, New Zealand, Papua New Guinea, People's Republic of China, Philippines, Puerto Rico, Singapore, South Korea, Tanzania and Thailand. The Company believes its manufacturing facilities are in good condition and are adequate to meet existing production needs. -16-
Most of the Company's manufacturing plants also serve as distribution centers. In addition, around the world, the Company operates distribution centers, all of which are leased, and utilizes various public warehouses to facilitate the distribution of its products and services. In the United States, the Company's sales associates are located in approximately 110 leased offices. Additional sales offices are located internationally. The Company's corporate headquarters is comprised of three multi-storied buildings located adjacent to one another in downtown St. Paul, Minnesota. The main 19-story building was constructed to the Company's specifications and is leased through 2003. Thereafter, it is subject to multiple renewals at the Company's option. The second building is also subject to a long-term lease by the Company and the third building is owned. In 1998, the Company completed extensive renovation and expansion of the corporate headquarters which included a state-of-the-art training center and facilities to add several hundred additional jobs at the Company's headquarters. The Company also owns a computer center in St. Paul and a research facility located in a suburb of St. Paul. ITEM 3. LEGAL PROCEEDINGS Proceedings arising under laws relating to protection of the environment are discussed at Item 1(c) above, under the heading "Environmental Considerations." DISTRIBUTOR LITIGATION: As previously reported in the Company's Form 10-K for the year ended December 31, 1997, and in certain previous quarterly reports on Form 10-Q, ten distributors of the Company's Airkem Janitorial product line brought action in 1995 against the Company in Hennepin County District Court, Minnesota alleging 16 causes of action including anti-trust violations, breach of contract and breach of the Minnesota Franchise Act. In April 1997, the Company was granted summary judgment dismissing all but two of the distributors' claims. Subsequently, the action was divided into separate trials for each of the plaintiff distributors. The first trial took place in mid-1997 with a jury verdict in favor of the plaintiff distributor on the breach of contract claim in the amount of $29,000 and against the plaintiff distributor on the Minnesota Franchise Act claim. The Company has reached settlement with four of the other distributors on a basis which were not adversely material to the Company. The first of the remaining five distributor cases is scheduled for trial in August 1999. The five distributors are claiming estimated damages of $10,000,000. LUBRICANT LITIGATION: On July 1, 1996, Diversey Lever, Inc. filed suit against the Company in Federal District Court, Eastern District of Michigan, Southern Division. The suit alleges that two Company products, which lubricate plastic beverage bottles, infringe two patents held by Diversey Lever. The Company believes it has the right under an earlier agreement with Diversey Lever to make and sell the products. On June 15, 1998, the District Court issued an order denying the Company's right to make and sell the products. The court also found that the Company had infringed the two patents held by Diversey -17-
Lever. The court also entered an injunction against the manufacturing or sale by the Company of the products which were alleged to infringe the patents. The Company has appealed the District Court's ruling to the Federal Circuit Court of Appeals. Before that court, the Company is arguing, among other things, that the District Court ruling was erroneous on the question of whether the Company had a right under the earlier agreement with Diversey Lever to make and sell the products. The Company is also arguing that if the court affirms the District Court holding, then it has a right to challenge the validity of the underlying patents. The Company understands Diversey Lever's damage request to be in the range of $3,000,000 to $5,000,000. Diversey Lever is also requesting that damages be enhanced to up to three times if willful infringement is found. The Company has developed, and has been selling since July of 1998, a new lubricant to replace the allegedly infringing lubricants. The Company and certain of its subsidiaries are defendants in various other lawsuits and claims arising out of the normal course of business. Accruals have been established reflecting management's best estimate of future costs relating to such matters and, in the opinion of management, the ultimate resolution of this litigation will not have a material effect on the Company's results of operations, financial position, or liquidity. However, the estimated effects of the future result of existing litigation is subject to certain estimates, assumptions and uncertainties and should be considered in light of the discussion of Forward-Looking Statements and Risk Factors found under Part I at the beginning of this Report. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the security holders, through the solicitation of proxies, or otherwise, during the fourth quarter of 1998. PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS All per share and number of share data in Item 5, including dividends per share in Item 5(c), reflect a two-for-one stock split paid January 15, 1998 in the form of a 100% stock dividend to shareholders of record on December 26, 1997 ("Stock Split"). -18-
ITEM 5(a) MARKET INFORMATION The Company's Common Stock is listed on the New York Stock Exchange and the Pacific Exchange, Inc. under the symbol "ECL." The Common Stock is also traded on an unlisted basis on certain other United States exchanges. The high and low sales prices of the Company's Common Stock on the consolidated transaction reporting system during 1998 and 1997 were as follows: <TABLE> <CAPTION> 1998 1997 ---------------- ------------------- Quarter High Low High Low ------- ---- --- ---- --- <S> <C> <C> <C> <C> First $29-5/8 $26-5/8 $19-9/16 $18-1/8 Second $33 $28-3/16 $24-1/32 $19-1/16 Third $33-29/256 $27-1/8 $24-15/16 $21-9/32 Fourth $38 $26-1/8 $28 $23-1/16 The closing stock price on March 1, 1999 was $39-11/16. </TABLE> ITEM 5(b) HOLDERS On March 1, 1999, the Company had 5,544 holders of Common Stock of record. ITEM 5(c) DIVIDENDS Quarterly cash dividends customarily are paid on the 15th of January, April, July and October. Dividends of $0.08 per share were declared in February, May and August, 1997. Dividends of $0.095 per share were declared in December, 1997 and February, May and August, 1998. A dividend of $0.105 per share was declared in December 1998. ITEM 5(d) RECENT SALES OF UNREGISTERED SECURITIES On November 5, 1998, the Company issued 14,500 shares of Common Stock to a trust for the benefit of two individual former owners of Schaefer Chemical Company Inc. in a private transaction. The transaction was the final installment on a stock purchase transaction in which the Company acquired the business of Schaefer Chemical Company in 1996. The transaction was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. ITEM 6. SELECTED FINANCIAL DATA The comparative data for the years ended December 31, 1998, 1997, 1996, 1995 and 1994 inclusive, which are set forth under the heading entitled "Summary Operating and Financial Data" located on pages 50 and 51 of the Annual Report, are incorporated herein by reference. -19-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The material appearing under the heading entitled "Financial Discussion," located on pages 24 through 33 of the Annual Report, is incorporated herein by reference. ITEM 7(a) QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company enters into contractual arrangements (derivatives) in the ordinary course of business to manage foreign currency exposure and interest rate risks. The Company does not enter into derivatives for trading purposes. The Company's use of derivatives is subject to internal policies which provide guidelines for control, counterparty risk, and ongoing monitoring and reporting. The Company enters into forward contracts, swaps, and foreign currency options to hedge certain intercompany financing arrangements, and to hedge against the effect of exchange rate fluctuations on transactions related to cash flows denominated in currencies other than U.S. dollars. The Company manages interest expense using a mix of fixed and floating rate debt. To help manage borrowing costs, the Company may enter into interest rate swaps. Under these arrangements, the Company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount. Based on a sensitivity analysis (assuming a 10% adverse change in market rates) of the Company's foreign exchange and interest rate derivatives and other financial instruments outstanding at December 31, 1998, changes in exchange rates or interest rates would not materially affect the Company's results of operations, financial position, or liquidity. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and material which are an integral part of the financial statements listed under Item 14 I(1) below and located on pages 34 through 49 of the Annual Report, are filed as a part of this Report and are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The biographical material located on pages 6 through 11 and the paragraph relating to understandings concerning the election of directors between Henkel KGaA and the Company located on page 5 of the Proxy Statement appearing under the heading entitled "Election of Directors," is incorporated herein by reference. Information regarding executive officers is presented under the heading "Executive Officers of the Company" in Part I of this Report on pages 13 through 15. -20-
ITEM 11. EXECUTIVE COMPENSATION The material appearing under the heading entitled "Executive Compensation," located on pages 12 through 20 of the Proxy Statement, is incorporated herein by reference. However, pursuant to Securities and Exchange Commission Regulation S-K, Item 402(a)(9), the material appearing under the headings entitled "Report of the Compensation Committee on Executive Compensation" and "Comparison of Five Year Cumulative Total Return," found, respectively, on pages 12 through 15 and on page 19 of the Proxy Statement, is not incorporated herein. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The material appearing under the headings entitled "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" located on pages 2 and 3 of the Proxy Statement is incorporated herein by reference. The holdings of Henkel KGaA and HC Investments, Inc. are subject to certain limitations with respect to the Company's voting securities as more fully described in the Company's Proxy Statement on page 22, under the heading "Stockholder Agreement," which is incorporated herein by reference. A total of 1,103,341 shares of Common Stock held by the Company's directors and executive officers, some of whom may be affiliates of the Company, have been excluded from the computation of market value of the Company's Common Stock on the cover page of this Report. This total represents that portion of the shares reported as beneficially owned by officers and directors of the Company in the table entitled "Security Ownership of Management" located on pages 2 and 3 of the Proxy Statement, which are actually issued and outstanding. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The material appearing under the headings entitled "Certain Transactions," "Stockholder Agreement" and "Company Transactions" on pages 21 through 23 of the Proxy Statement and the biographical material located on pages 7, 10 and 11 of the Proxy Statement pertaining to Messrs. Roland Schulz, Hugo Uyterhoeven and Albrecht Woeste is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K I(1). The following financial statements of the Company, included in the Annual Report, are incorporated in Item 8 hereof. (i) Consolidated Statement of Income for the years ended December 31, 1998, 1997 and 1996, Annual Report page 34. (ii) Consolidated Balance Sheet at December 31, 1998, 1997 and 1996, Annual Report page 35. (iii) Consolidated Statement of Cash Flows for the years ended December 31, 1998, 1997 and 1996, Annual Report page 36. -21-
(iv) Consolidated Statement of Comprehensive Income and Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996, Annual Report page 37. (v) Notes to Consolidated Financial Statements, Annual Report pages 38 through 48. (vi) Report of Independent Accountants, Annual Report page 49. I(2). The following financial statement schedule to the Company's financial statements listed in Item 14 I(1) for the years ended December 31, 1998, 1997 and 1996 located on page 34 hereof, and the Report of Independent Accountants on Financial Statement Schedule at page 32 hereof, are filed as part of this Report. (i) Schedule II -- Valuation and Qualifying Accounts for the years ended December 31, 1998, 1997 and 1996. All other schedules, for which provision is made in the applicable regulations of the Securities and Exchange Commission, are not required under the related instructions or are inapplicable and therefore have been omitted. All significant majority-owned subsidiaries are included in the filed consolidated financial statements. I(3). The following financial statements of the Henkel-Ecolab Joint Venture located on pages 35 to 58 hereof, are filed as part of this Report. (i) (a) Report of Independent Accountants - PricewaterhouseCoopers Gesellschaft mit beschrankter Haftung Wirtschaftsprufungsgesellschaft. (b) Report of Independent Accountants - KPMG Deutsche Treuhand-Gesellschaft Aktiegesellschaft Wirtschaftsprufungsgesellchaft. (ii) Combined Statements of Income for the years ended November 30, 1998, 1997 and 1996. (iii) Combined Balance Sheets at November 30, 1998, 1997 and 1996. (iv) Combined Statements of Cash Flows for the years ended November 30, 1998, 1997 and 1996. (v) Combined Statements of Equity for the years ended November 30, 1998, 1997 and 1996. (vi) Notes to the Combined Financial Statements. I(4). The following financial statement schedule to the Henkel-Ecolab Joint Venture financial statements listed in Item 14 I(3) for the years ended November 30, 1998, 1997 and 1996 -22-
located on page 60 hereof, and the Reports of the Independent Accountants on pages 36 and 59 hereof are filed as part of this Report. (i) Schedule -- Valuation and Qualifying Accounts and Reserves for the years ended November 30, 1998, 1997 and 1996. All other schedules, for which provision is made in the applicable regulations of the Securities and Exchange Commission, are not required under the related instructions or are inapplicable and therefore have been omitted. All entities of the Henkel-Ecolab Joint Venture are included in the filed combined financial statements. II. The following documents are filed as exhibits to this Report. The Company will, upon request and payment of a fee not exceeding the rate at which copies are available from the Securities and Exchange Commission, furnish copies of any of the following exhibits to stockholders. The Financial Data Schedule (Exhibit 27) is filed as an Exhibit to this Report but, pursuant to paragraph (c)(1)(iv) of Item 601 of Regulation S-K, shall not be deemed filed for purposes of Section 11 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934. (3)A. Restated Certificate of Incorporation - Incorporated by reference to Exhibit (3) to the Company's Current Report on Form 8-K dated October 22, 1997. B. By-Laws, as amended through February 18, 1999. (4)A. Common Stock - see Exhibits (3)A and (3)B. B. Form of Common Stock Certificate - Incorporated by reference to Exhibit (4)B of the Company's Form 10-K Annual Report for the year ended December 31, 1995. C. Rights Agreement dated as of February 24, 1996 - Incorporated by reference to Exhibit (4) of the Company's Current Report on Form 8-K dated February 24, 1996. D. Note Agreement dated as of October 1, 1991 relating to $100,000,000 9.68% Senior Notes Due October 1, 2001 between the Company and the insurance companies named therein - Incorporated by reference to Exhibit (4)F of the Company's Form 10-K Annual Report for the year ended December 31, 1991. E. (i) Multicurrency Credit Agreement ("Credit Agreement") dated as of September 29, 1993, as Amended and Restated as of October 17, 1997, among the Company, the financial institutions party thereto, Citibank, N.A., as Agent, Citibank International Plc, as Euro-Agent and Morgan Guaranty Trust Company of New York as Co-Agent - -23-
Incorporated by reference to Exhibit (4)A of the Company's Form 10-Q for the quarter ended September 30, 1997. (ii) Australian Dollar Local Currency Addendum to the Credit Agreement - Incorporated by reference to Exhibit (4)B of the Company's Form 10-Q for the quarter ended September 30, 1997. (iii) Amendment No. 1 dated as of June 23, 1998 to Multicurrency Credit Agreement dated as of September 29, 1993, as Amended and Restated as of October 17, 1997, and to Local Currency Addendum dated as of October 17, 1997, with respect to the Multicurrency Credit Agreement, among Ecolab Inc., the Banks parties thereto, Citibank, N.A., as Agent for the Banks, Citibank International Plc, as Euro-Agent for the Banks and Morgan Guaranty Trust Company of New York as Co-Agent; and with respect to the Local Currency Addendum among Ecolab Inc., Ecolab PTY Limited, the Local Currency Banks party thereto, Citibank, N.A., as Agent and Citisecurities Limited, as Local Currency Agent - Incorporated by reference to Exhibit (4)A of the Company's Form 10-Q for the quarter ended June 30, 1998. (iv) Australian Dollar Local Currency Addendum dated as of June 23, 1998 among Ecolab Finance PTY Limited, Ecolab Inc., Citibank, N.A., the Local Currency Agent named therein and the Local Currency Banks party thereto - Incorporated by reference to Exhibit (4)B of the Company's Form 10-Q for the quarter ended June 30, 1998. F. Indenture dated as of November 1, 1996 as amended and supplemented, between the Company and the First National Bank of Chicago as Trustee - Incorporated by reference to Exhibit 4.1 of the Company's Amendment No. 1 to Form S-3 filed November 15, 1996. G. Form of Underwriting Agreement - Incorporated by reference to Exhibit 1 of the Company's Amendment No. 1 to Form S-3 filed November 15, 1996. Copies of other constituent instruments defining the rights of holders of long-term debt of the Company and its subsidiaries are not filed herewith, pursuant to Section (b)(4)(iii) of Item 601 of Regulation S-K, because the aggregate amount of securities authorized under each of such instruments is less than 10% of the total assets of the Company and its subsidiaries on a consolidated basis. The Company hereby agrees that it will, upon request by the Securities and Exchange Commission, furnish to the Commission a copy of each such instrument. -24-
(9) Amended and Restated Stockholder's Agreement - See Exhibit (10)P(v) hereof. (10)A. Ecolab Inc. 1977 Stock Incentive Plan, as amended through November 1, 1996 - Incorporated by reference to Exhibit (10)A of the Company's Form 10-K Annual Report for the year ended December 31, 1997. B. Ecolab Inc. 1993 Stock Incentive Plan - Incorporated by reference to Exhibit (10)B of the Company's Form 10-K Annual Report for the year ended December 31, 1992. C. Amended and Restated Ecolab Inc. 1997 Stock Incentive Plan. This Plan amendment will become effective only upon approval by the Stockholders of the Company at the Company's Annual Meeting scheduled to be held May 14, 1999. (i) Non-Statutory Stock Option Agreement between the Company and Allan L. Schuman with respect to premium-priced option grant effective February 20, 1998 under the Ecolab Inc. 1997 Stock Incentive Plan. Similar option grants were made to each of the named executive officers of the Company covering varying, but smaller number of shares - Incorporated by reference to Exhibit (10) of the Company's Form 10-Q for the quarter ended June 30, 1998. D. 1988 Non-Employee Director Stock Option Plan as amended through February 23, 1991 - Incorporated by reference to Exhibit (10)D of the Company's Form 10-K Annual Report for the year ended December 31, 1990. E. 1995 Non-Employee Director Stock Option Plan - Incorporated by reference to Exhibit (10)D of the Company's Form 10-K Annual Report for the year ended December 31, 1994. F. Ecolab Inc. 1997 Non-Employee Director Deferred Compensation Plan - Incorporated by reference to Exhibit (10)F of the Company's Form 10-K for the year ended December 31, 1996. G. Form of Director Indemnification Agreement dated August 11, 1989. Substantially identical agreements are in effect as to each director of the Company - Incorporated by reference to Exhibit (19)A of the Company's Form 10-Q for the quarter ended September 30, 1989. H. (i) Ecolab Executive Death Benefits Plan, as amended and restated effective March 1, 1994 - Incorporated by reference to Exhibit (10)J of the Company's 10-K Annual -25-
Report for the year ended December 31, 1994. See also Exhibit (10)O hereof. (ii) Amendment No. 1 to Ecolab Executive Death Benefits Plan. (iii) Second Declaration of Amendment to Ecolab Executive Death Benefits Plan, effective March 1, 1998. I. Ecolab Executive Long-Term Disability Plan, as amended and restated effective January 1, 1994 - Incorporated by reference to Exhibit (10)K of the Company's 10-K Annual Report for the year ended December 31, 1994. See also Exhibit (10)O hereof. J. Ecolab Executive Financial Counseling Plan - Incorporated by reference to Exhibit (10)K of the Company's Form 10-K Annual Report for the year ended December 31, 1992. K. (i) Ecolab Supplemental Executive Retirement Plan, as amended and restated effective July 1, 1994 - Incorporated by reference to Exhibit (10)M(i) of the Company's 10-K Annual Report for the year ended December 31, 1994. See also Exhibit (10)O hereof. (ii) First Declaration of Amendment to Ecolab Supplemental Executive Retirement Plan effective as of July 1, 1994 - Incorporated by reference to Exhibit (10)M(ii) of the Company's 10-K Annual Report for the year ended December 31, 1994. (iii) Second Declaration of Amendment to Ecolab Supplemental Executive Retirement Plan effective as of July 1, 1994 - Incorporated by reference to Exhibit (10)M(iii) of the Company's Form 10-K Annual Report for the year ended December 31, 1995. (iv) Third Declaration of Amendment to Ecolab Supplemental Executive Retirement Plan, effective March 1, 1998. L. (i) Ecolab Mirror Savings Plan, as amended and restated effective September 1, 1994 - Incorporated by reference to Exhibit (10)N of the Company's 10-K Annual Report for the year ended December 31, 1994. See also Exhibit (10)O hereof. (ii) First Declaration of Amendment to Ecolab Mirror Savings Plan effective as of January 1, 1995 - Incorporated by reference to Exhibit (10)N(ii) of the Company's Form 10-K Annual Report for the year ended December 31, 1995. -26-
(iii) Second Declaration of Amendment to Ecolab Mirror Savings Plan effective January 1, 1997 - Incorporated by reference to Exhibit (10)O(iii) of the Company's Form 10-K Annual Report for the year ended December 31, 1996. (iv) Third Declaration of Amendment to Ecolab Mirror Savings Plan effective November 13, 1997. (v) Fourth Declaration of Amendment to Ecolab Mirror Savings Plan, effective September 1, 1998. M. (i) Ecolab Mirror Pension Plan effective July 1, 1994 - Incorporated by reference to Exhibit (10)O(i) of the Company's Annual Report on Form 10-K for the year ended December 31, 1994. See also Exhibit (10)O hereof. (ii) First Declaration of Amendment to Ecolab Mirror Pension Plan effective as of July 1, 1994 - Incorporated by reference to Exhibit (10)O(ii) of the Company's Annual Report on Form 10-K for the year ended December 31, 1994. (iii) Second Declaration of Amendment to Ecolab Mirror Pension Plan effective as of July 1, 1994 - Incorporated by reference to Exhibit (10)O(iii) of the Company's Form 10-K Annual Report for the year ended December 31, 1995. (iv) Third Declaration of Amendment to Ecolab Mirror Pension Plan, effective March 1, 1998. N. (i) Ecolab Inc. Administrative Document for Non-Qualified Benefit Plans - Incorporated by reference to Exhibit (10)P of the Company's 10-K Annual Report for the year ended December 31, 1994. (ii) Amendment No. 1 to the Ecolab Inc. Administrative Document for Non-Qualified Benefit Plans effective July 1, 1997. (iii) First Declaration to Amendment to the Ecolab Inc. Administrative Document for Non-Qualified Benefit Plans effective November 13, 1997. O. 1999 Ecolab Inc. Management Performance Incentive Plan. This Plan will become effective only upon approval by the Stockholders of the -27-
Company at the Company's Annual Meeting scheduled to be held May 14, 1999. P. (i) Amended and Restated Umbrella Agreement between Henkel KGaA and Ecolab Inc. dated June 26, 1991 - Incorporated by reference to Exhibit 13 of HC Investments, Inc.'s and Henkel KGaA's Amendment No. 4 to Schedule 13D dated July 16, 1991. (ii) Amended and Restated Joint Venture Agreement between Henkel KGaA and Ecolab Inc. dated June 26, 1991 - Incorporated by reference to Exhibit 14 of HC Investments, Inc.'s and Henkel KGaA's Amendment No. 4 to Schedule 13D dated July 16, 1991. (iii) Amendment to the Amended and Restated Joint Venture Agreement between Henkel KGaA and Ecolab Inc. dated June 13, 1994. (iv) Amended and Restated ROW Purchase Agreement between Henkel KGaA and Ecolab Inc. dated June 26, 1991 - Incorporated by reference to Exhibit (7) of the Company's Current Report on Form 8-K dated July 11, 1991. (v) Amended and Restated Stockholder's Agreement between Henkel KGaA and Ecolab Inc. dated June 26, 1991 - Incorporated by reference to Exhibit 15 of HC Investments, Inc.'s and Henkel KGaA's Amendment No. 4 to Schedule 13D dated July 16, 1991. Q. Description of Ecolab Management Incentive Plan. (13) Those portions of the Company's Annual Report to Stockholders for the year ended December 31, 1998 which are incorporated by reference into Parts I, II and IV hereof. (21) List of Subsidiaries as of March 16, 1999. (23)A. Consent of PricewaterhouseCoopers LLP to Incorporation by Reference at page 33 hereof is filed as a part hereof. B. Consent of PricewaterhouseCoopers Gesellschaft mit beschrankter Haftung Wirschaftsprufungsgesellschaft. C. Consent of KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprufungsgesellschaft. (24) Powers of Attorney. -28-
(27) Financial Data Schedule for year ended December 31, 1998. EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS Included in the preceding list of exhibits are the following management contracts or compensatory plans or arrangements: <TABLE> <CAPTION> Exhibit No. Description - ----------- ----------- <S> <C> (10)A. Ecolab Inc. 1977 Stock Incentive Plan. (10)B. Ecolab Inc. 1993 Stock Incentive Plan. (10)C. Amended and Restated Ecolab Inc. 1997 Stock Incentive Plan. (10)D. 1988 Non-Employee Director Stock Option Plan. (10)E. 1995 Non-Employee Director Stock Option Plan. (10)F. Ecolab Inc. 1997 Non-Employee Director Deferred Compensation Plan. (10)H. Ecolab Executive Death Benefits Plan. (10)I. Ecolab Executive Long-Term Disability Plan. (10)J. Ecolab Executive Financial Counseling Plan. (10)K. Ecolab Supplemental Executive Retirement Plan. (10)L. Ecolab Mirror Savings Plan. (10)M. Ecolab Mirror Pension Plan. (10)N. The Ecolab Inc. Administrative Document for Non-Qualified Benefit Plans. (10)O. Ecolab Management Performance Incentive Plan. (10)P. Ecolab Management Incentive Plan. </TABLE> -29-
III. Reports on Form 8-K: No reports on Form 8-K were filed during the quarter ended December 31, 1998. Subsequent to the quarter ended December 31, 1998, the Company filed on March 25, 1999 a Current Report on Form 8-K to amend the Company's Form S-8 registration statements filed pursuant to the Securities Act of 1933 in order to obtain the benefits provided by Section 11(b)(3)(C) of the Securities Act of 1933. -30-
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Ecolab Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 29th day of March, 1999. ECOLAB INC. (Registrant) By /s/ Allan L. Schuman --------------------------------- Allan L. Schuman, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Ecolab Inc. and in the capacities indicated, on the 29th day of March, 1999. <TABLE> <S> <C> /s/ Allan L. Schuman President and Chief Executive Officer - ------------------------------- (Principal Executive Officer Allan L. Schuman and Director) /s/ Michael E. Shannon Chairman of the Board, Chief - ------------------------------ Financial and Administrative Officer Michael E. Shannon (Principal Financial Officer and Director) /s/ Arthur E. Henningsen, Jr. Senior Vice President and Controller - ------------------------------ (Principal Accounting Officer) Arthur E. Henningsen, Jr. /s/ Kenneth A. Iverson Directors - ------------------------------- Kenneth A. Iverson as attorney-in-fact for Les S. Biller, Ruth S. Block, James J. Howard, Joel W. Johnson, Jerry W. Levin, Reuben F. Richards, Richard L. Schall, Roland Schulz, Hugo Uyterhoeven and Albrecht Woeste Directors not signing: Jerry A. Grundhofer and William L. Jews </TABLE> -31-
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Shareholders and Board of Directors of Ecolab Inc. Our report on the consolidated financial statements of Ecolab Inc. has been incorporated by reference in this Form 10-K from page 49 of the 1998 Annual Report to Shareholders of Ecolab Inc. In connection with our audits of such financial statements, we have also audited the related financial statement schedule included on page 34 of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. PricewaterhouseCoopers LLP Saint Paul, Minnesota February 22, 1999 -32-
CONSENT OF PRICEWATERHOUSECOOPERS LLP TO INCORPORATION BY REFERENCE We consent to the incorporation by reference in the Registration Statements on Form S-8 of Ecolab Inc. (Registration Nos. 2-60010; 2-74944; 33-1664; 33-41828; 2-90702; 33-18202; 33-55986; 33-56101; 33-26241; 33-34000; 33-56151; 333-18627; 33-39228; 33-56125; 333-70835; 33-60266; 33-65364; 33-59431; 333-18617; 333-21167; 333-35519; 333-40239; 333-50969; and 333-62183) and the Registration Statement of Ecolab Inc. on Form S-3 (Registration No. 333-14771) of our reports dated February 22, 1999 on our audits of the consolidated financial statements and the related financial statement schedule of Ecolab Inc. as of December 31, 1998, 1997 and 1996, and for the years ended December 31, 1998, 1997 and 1996, which reports are included or incorporated by reference in this Annual Report on Form 10-K. We also consent to the references to our firm under the caption "Interests of Named Experts and Counsel" or "Incorporation of Documents by Reference" in the above-listed Registration Statements on Form S-8 of Ecolab Inc. and under the caption "Experts" in the above-listed Registration Statement on Form S-3 of Ecolab Inc. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Saint Paul, Minnesota March 29, 1999 -33-
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS ECOLAB INC. (In Thousands) <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------------------------------------------- COL. A COL. B COL. C COL. D COL. E - --------------------------------------------------------------------------------------------------------------------------------- Additions - --------------------------------------------------------------------------------------------------------------------------------- Balance at Charged to Charged Balance Beginning Costs and to Other at End Description of Period Expenses Accounts Deductions (A) of Period - --------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Allowance for Doubtful Accounts: Year Ended December 31, 1998 $10,878 $8,090 $438 $(6,513) $12,893 Year Ended December 31, 1997 $ 9,343 $6,644 $ 58 $(5,167) $10,878 Year Ended December 31, 1996 $ 8,331 $4,695 $538 $(4,221) $ 9,343 </TABLE> (A) Uncollectible accounts charged off, net of recovery of accounts previously written off.
[LETTERHEAD] REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS OF HENKEL-ECOLAB JOINT VENTURE In our opinion, the accompanying combined balance sheet and the related combined statements of income and of cash flows present fairly, in all material respects, the financial position of Henkel-Ecolab Joint Venture ("Henkel-Ecolab") at November 30, 1998, and the results of their operations and their cash flows for the year ended November 30, 1998, in conformity with generally accepted accounting principles in the United States. The financial statements of Henkel-Ecolab for the years ended November 30, 1997 and 1996 were audited by other independent auditors, whose reports, dated January 23, 1998 and January 22, 1997, expressed an unqualified opinion on those statements. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. January 26, 1999 PricewaterhouseCoopers Gesellschaft mit beschrankter Haftung Wirtschaftsprufungsgesellschaft /s/ Gunter Betz /s/ Henri Leveque [SEAL] -35-
[LETTERHEAD] Independent Auditors' Report The Board of Directors Henkel-Ecolab Joint Venture: We have audited the accompanying balance sheets of Henkel-Ecolab Joint Venture as of November 30, 1997 and 1996, and the related statements of income, equity, and cash flows for the years then ended. These financial statements are the responsibility of the Joint Venture's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with German generally accepted auditing standards which in all material respects are similar to auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Henkel-Ecolab Joint Venture as of November 30, 1997 and 1996, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary information included in the Financial Statement Schedule: Valuation and Qualifying Accounts and Reserves as of and for the years ended November 30, 1997 and 1996 is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. Dusseldorf, Germany January 23, 1998 KPMG Deutsche Treuhand-Gesellschaft AKTIENGESELLSCHAFT WIRTSCHAFTSPRUFUNGSGESELLSCHAFT /s/ Stefan Haas /s/ Bernhard Momken Stefan Haas Bernhard Momken Wirtschaftsprufer Wirtschaftsprufer [SEAL] -36-
HENKEL-ECOLAB COMBINED STATEMENTS OF INCOME <TABLE> <CAPTION> Twelve Months ended Twelve Months ended Twelve Months ended (Thousands) November 30, 1998 November 30, 1997 November 30, 1996 - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Net Sales DM 1,596,572 DM 1,447,443 DM 1,354,809 Cost of Sales 713,535 640,396 610,020 Selling, General and Administrative Expenses 736,197 671,635 620,778 Royalties to Parents 26,568 24,372 22,718 - ----------------------------------------------------------------------------------------------------------------------------------- Operating Income 120,272 111,040 101,293 Other Expenses/Income, net 3,759 2,065 3,851 - ----------------------------------------------------------------------------------------------------------------------------------- Income before Income Taxes 116,513 108,975 97,442 Provision for Income Taxes 48,421 51,267 45,334 - ----------------------------------------------------------------------------------------------------------------------------------- Net Income DM 68,092 DM 57,708 DM 52,108 </TABLE> See accompanying Notes to Combined Financial Statements -37-
HENKEL-ECOLAB COMBINED BALANCE SHEETS <TABLE> <CAPTION> November 30, November 30, November 30, (Thousands) 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Assets Cash and Cash Equivalents DM 20,375 DM 34,233 DM 125,645 Accounts Receivable, net 324,140 326,539 284,016 Accounts Receivable from Related Parties 11,133 13,214 12,536 Loans to Related Parties 7,342 6,894 8,007 Inventories 196,807 180,682 183,192 Prepaid Expenses and Other Current Assets 56,519 41,878 34,144 Deferred Taxes 7,380 7,323 5,647 - -------------------------------------------------------------------------------------------------------------------------------- Current Assets 623,696 610,763 653,187 - -------------------------------------------------------------------------------------------------------------------------------- Property, Plant and Equipment, net 183,381 178,125 167,555 Intangible and Other Assets, net 110,341 66,178 40,195 Deferred Taxes 9,473 12,943 10,724 - -------------------------------------------------------------------------------------------------------------------------------- Total Assets DM 926,891 DM 868,009 DM 871,661 - -------------------------------------------------------------------------------------------------------------------------------- Liabilities and Equity Accounts Payable DM 106,839 DM 103,429 DM 98,274 Accounts Payable to Related Parties 17,808 31,840 82,294 Accrued Liabilities 188,862 180,031 177,668 Income Taxes Payable 47,309 54,600 36,269 Current Portion of Long Term Debt 657 656 652 Short Term Debt 49,066 24,318 72,972 Loans from Related Parties - 1,159 7,445 - -------------------------------------------------------------------------------------------------------------------------------- Current Liabilities 410,541 396,033 475,574 Contingencies and Commitments (Note 9) - -------------------------------------------------------------------------------------------------------------------------------- Employee Benefit Obligations 131,398 127,818 106,766 Long Term Debt, less Current Maturities 4,768 4,762 5,383 Deferred Taxes 2,747 3,998 3,612 - -------------------------------------------------------------------------------------------------------------------------------- Combined Equity Contributed Capital 165,889 164,219 162,704 Retained Earnings 235,934 190,046 137,068 Cumulative Foreign Currency Translation (23,641) (18,649) (19,446) Minimum Pension Liability Adjustment (745) (218) - -------- ------- ------- 377,437 335,398 280,326 - -------------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Equity DM 926,891 DM 868,009 DM 871,661 </TABLE> See accompanying Notes to Combined Financial Statements -38-
HENKEL-ECOLAB COMBINED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> Twelve Months ended Twelve Months ended Twelve Months ended (Thousands) November 30, 1998 November 30, 1997 November 30, 1996 <S> <C> <C> <C> - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME DM 68,092 DM 57,708 DM 52,108 ADJUSTMENTS TO RECONCILE NET INCOME TO CASH PROVIDED BY OPERATING ACTIVITIES Depreciation and Amortization 74,534 64,556 59,880 Equity in Income of Affiliated Company (1,421) (406) (320) Provision for Doubtful Accounts and Other 9,325 6,668 1,477 Gain on Sale of Property and Equipment (976) (996) (1,580) Deferred Income Taxes 2,162 (3,509) 1,366 CHANGES IN OPERATING ASSETS AND LIABILITIES (Increase) in Accounts Receivable (6,926) (45,557) (16,333) Decrease (Increase) in Accounts Receivable from Related Parties 2,081 (2,038) 9,813 (Increase) Decrease in Inventories (11,449) 5,092 (17,588) Increase in Accounts Payable and Accrued Liabilities 12,199 2,530 50,817 (Decrease) Increase in Accounts Payable to Related Parties (14,032) 14,724 (7,412) (Decrease) Increase in Income Taxes Payable (7,291) 17,597 (1,727) (Increase) in Prepaid Expenses and Other Current Assets (16,628) (7,619) (10,275) Increase in Employee Benefit Obligations 1,418 15,802 12,238 -------- -------- ------- Cash Provided by Operating Activities 111,088 124,552 132,464 -------- -------- ------- INVESTING ACTIVITIES Expenditures for Property and Equipment (74,847) (72,764) (69,942) Expenditures for Intangible and Other Assets (28,534) (4,662) (10,920) Proceeds from Investment in Affiliated Company 700 Purchase of Businesses Net of Cash Acquired (32,748) (32,961) Proceeds from Sale of Property and Equipment 9,989 12,374 21,444 -------- -------- ------- Cash Used for Investing Activities (125,440) (98,013) (59,418) -------- -------- ------- FINANCING ACTIVITIES Proceeds from (Repayments of) Debt, net 24,755 (48,672) 54,695 Proceeds from Capital Contrbutions, net 1,670 1,515 (Decrease) in Loans from Related Parties (1,159) (6,286) (40,992) (Increase) Decrease in Loans to Related Parties (448) 1,113 7,771 Dividends paid (22,204) (67,045) (33,245) -------- -------- ------- Cash Provided by (Used for) Financing Activities 2,614 (119,375) (11,771) -------- -------- ------- EFFECT OF EXCHANGE RATE CHANGES ON NET CASH (2,120) 1,424 (2,902) -------- -------- ------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (13,858) (91,412) 58,373 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 34,233 125,645 67,272 -------- -------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD DM 20,375 DM 34,233 DM 125,645 -------- -------- ------- </TABLE> See accompanying Notes to Combined Financial Statements -39-
HENKEL-ECOLAB COMBINED STATEMENTS OF EQUITY <TABLE> <CAPTION> (Thousands) Contributed Retained Cumulative Cumulative Capital Earnings Foreign Minimum Total Currency Pension Translation Liability Adjustment -------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Balance November 30, 1995 DM 211,704 130,005 (23,310) - 318,399 Net Income 52,108 52,108 Dividends (45,045) (45,045) Equity Withdrawals (49,000) (49,000) Translation Adjustment 3,864 3,864 -------------------------------------------------------------------------------------------------- Balance November 30, 1996 DM 162,704 137,068 (19,446) - 280,326 Net Income 57,708 57,708 Dividends (4,730) (4,730) Contributions 1,515 1,515 Minimum Pension Liability (218) (218) Translation Adjustment 797 797 -------------------------------------------------------------------------------------------------- Balance November 30, 1997 DM 164,219 190,046 (18,649) (218) 335,398 Net Income 68,092 68,092 Dividends (22,204) (22,204) Contributions 1,670 1,670 Minimum Pension Liability (527) (527) Translation Adjustment (4,992) (4,992) -------------------------------------------------------------------------------------------------- Balance November 30, 1998 DM 165,889 235,934 (23,641) (745) 377,437 </TABLE> See accompanying Notes to Combined Financial Statements -40-
1. DESCRIPTION OF BUSINESS Henkel-Ecolab (the "Company" or the "Joint Venture") is a leading European company providing total cleaning and hygiene systems and service solutions to institutional and industrial companies. See Basis of Presentation within Note 2 of the combined financial statements. The Company's offerings include detergents, sanitation cleaners, dosing and measuring equipment, cleaning machines, training and service. Customers include hotels and restaurants; food service, healthcare and educational facilities; commercial laundries; light industry; dairy plants and farms as well as food and beverage processors throughout Europe. The Company was formed in 1991 by Henkel KGaA (Henkel) and Ecolab, Inc. (Ecolab) as a joint venture of their respective European institutional and industrial hygiene businesses. Under the terms of the Amended and Restated Joint Venture Agreement dated June 26, 1991 (Joint Venture Agreement), Henkel and Ecolab have joint control over the activities of the Joint Venture. The Joint Venture Agreement also provides that both partners will share an equal economic interest in the profits or losses of the Joint Venture. ACQUISITIONS Ecosan Acquisition: In September 1997 and in December 1997, the Company acquired 75% and 25%, respectively, of the outstanding shares of Ecosan Hygiene GmbH (Ecosan) for a cash price of TDM 37,600 (TDM 28,200 in September 1997 and TDM 9,400 in December 1997). Ecosan, located in Hanau, Germany, distributes institutional products and services in Germany. The acquisition of Ecosan was recorded under the purchase method of accounting, and, accordingly, the result of operations of Ecosan for the period from September 16, 1997 are included in the accompanying financial statements. The purchase price has been allocated to assets acquired and liabilities assumed based on the fair value at the date of acquisition. The excess of purchase price over fair value of the assets and liabilities has been allocated to goodwill in the amount of TDM 36,486 (TDM 27,153 as of November 30, 1997) and is being amortized over 15 years. - 41 -
Darenas Acquisition: In February 1998, the Company acquired certain assets of ISS-Darenas Limited (Darenas) for a cash price of TDM 23,334. Darenas, located in Birmingham, England, provides janitorial products and services for contract and building cleaning as well as the catering industries. The acquisition of Darenas was recorded under the purchase method of accounting, and accordingly, the results of operations of Darenas for the period from February 1, 1998 are included in the accompanying financial statements. The purchase price has been allocated to assets acquired and liabilities assumed based on the fair value at the date of the acquisition. The excess of purchase price over fair value of the assets and liabilities has been allocated to goodwill in the amount of TDM 17,302 and is being amortized over 15 years. The Company made additional acquisitions during the fiscal year ended November 30, 1998; the impact of which was immaterial to the combined financial statements. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The financial statements are presented in accordance with generally accepted accounting principles in the United States and on a combined basis. The Joint Venture is comprised of various entities. These entities have varying legal structures, including stock corporations, limited liability corporations and partnerships formed under the applicable laws in the jurisdictions in which the Joint Venture operates. These entities are owned beneficially by identical shareholders or their wholly- owned subsidiaries and are, therefore, considered entities under common control. All significant intergroup or affiliated company accounts and transactions have been eliminated in combination. The Joint Venture's fiscal year end has been designated as November 30. FOREIGN CURRENCY TRANSLATION The accounts of all foreign subsidiaries and affiliates are generally measured using the local currency as the functional currency, except for three countries where, due to hyperinflation, the functional currency (for one country since 1994 and two beginning in 1998) has been changed to German Mark. With the exception of the hyperinflation countries, assets and liabilities are translated into German Marks, the Company's reporting currency, at period-end exchange rates. Income statement accounts are translated to German Marks at the average rates of exchange prevailing during the year. - 42 -
Net unrealized exchange gains or losses resulting from such translation are excluded from net earnings and accumulated in a separate component of combined equity. Gains and losses from foreign currency transactions are included in the related income statement category. The Joint Venture enters into foreign currency forward and option contracts to hedge specific foreign currency exposures. Gains and losses on these contracts are deferred and recognized as part of the specific transaction hedged or included in Other Expenses/Income, net, principally interest expense. The cash flows from such contracts are classified in the same category as the transaction hedged in the Combined Statements of Cash Flows. CASH EQUIVALENTS Cash equivalents are highly liquid investments with a maturity of three months or less when purchased. Interest income for the years ended November 30, 1998, 1997, and 1996 totaled TDM 4,800, TDM 4,599, and TDM 4,479, respectively. INVENTORIES Inventories are stated at the lower of cost or market with cost determined on the first-in first-out and average cost methods. PROPERTY, PLANT AND EQUIPMENT, NET Property, plant and equipment are stated at original cost. Merchandising equipment consists primarily of various systems for dispensing cleaning and sanitizing products. Depreciation and amortization are charged to operations using the straight-line and declining balance methods over the following estimated useful lives: <TABLE> <S> <C> Buildings and improvements 8 to 40 years Machinery and equipment 3 to 20 years Furniture, fixtures and merchandising equipment 3 to 16 years </TABLE> Leasehold improvements are amortized on a straight-line basis over a period which is the lesser of the useful life of the asset or the remaining term of the associated lease. Betterments, renewals and extraordinary repairs that extend the life of the asset are capitalized; other repairs and maintenance are expensed. The cost and accumulated depreciation / amortization applicable to the assets retired are removed from the accounts and any gain or loss is reflected in the Company's net income in the year of disposal. - 43 -
Total depreciation expense for property, plant and equipment amounted to TDM 60,948, TDM 53,320, and TDM 47,292 for the years ended November 30, 1998, 1997 and 1996, respectively. During 1998, the Company adopted Statement of Position (SOP) 98-1, "Accounting for the Costs of Software Developed or Obtained for Internal Use." The impact of this adoption was immaterial to the combined financial statements. In accordance with SOP 98-1, the Company capitalizes costs associated with purchased software for internal use which is ready for service and external development costs incurred from the time technological feasibility of the software is established until the software is ready for use to provide processing for internal purposes. The software development costs and costs of purchased software are amortized using the straight-line method over a maximum of three to five years or the expected life of the product, whichever is less. The carrying value of a software and development asset is regularly reviewed by the Company and a loss is recognized if the unamortized cost is in excess of the net realizable value. INTANGIBLE ASSETS Intangible assets primarily consist of amounts by which cost of acquisitions exceeded the values assigned to net tangible assets. These assets are amortized on a straight-line basis over their estimated lives, periods from 3 to 15 years. Total amortization expense for all intangible assets amounted to TDM 13,586, TDM 11,188 and TDM 12,588 during the years ended November 30, 1998, 1997, 1996, respectively. LONG-LIVED ASSETS The company periodically assesses the recoverability of long-lived and intangible assets based on anticipated future earnings and operating cash flows. ADVERTISING COSTS The Company expenses the production costs of advertising in the period in which the costs are incurred. Advertising expenses were 35,696 TDM, 34,113 TDM and 28,806 TDM for the years ended November 30, 1998, 1997 and 1996, respectively. - 44 -
USE OF ESTIMATES The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results may differ from those estimates. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (FAS) No. 130, "Reporting Comprehensive Income." The standard requires the display of comprehensive income, which includes all changes in equity with the exception of additional investments by shareholders and distributions to shareholders. This statement does not impact the amounts recorded in the combined financial statements and is effective for fiscal years beginning after December 15, 1997. In June 1997, the FASB issued Statement of Financial Accounting Standards (FAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information." FAS 131 specifies revised guidelines for determining an entity's operating segments and the type and level of financial information to be disclosed. FAS 131 is effective for fiscal years beginning after December 15, 1997. In February 1998, the FASB issued Statement of Financial Accounting Standards (FAS) No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits --- an amendment of FASB Statements No. 87, 88 and 106." FAS 132 is effective for fiscal years beginning after December 15, 1997. On June 16, 1998 the FASB issued Statement of Financial Accounting Standards (FAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." FAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. - 45 -
If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, and available-for-sale security, or a foreign-currency-denominated forecasted transaction. Management expects to adopt FAS 133 in the first quarter of the year ended November 30, 2001 and is in the process of evaluating the impact on the financial statements of adoption of this Statement. REVENUE RECOGNITION Substantially all revenue is recognized when products are shipped to customers or distributors. RECLASSIFICATION Certain prior year amounts have been reclassified to conform with current year presentation. These reclassifications had no effect on previously reported net income or combined equity. - 46 -
3. BALANCE SHEET INFORMATION <TABLE> <CAPTION> (Thousands) November November November 30, 30, 30, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> ACCOUNTS RECEIVABLE, NET Accounts Receivable, Trade DM 341,458 DM 349,054 DM 300,215 Allowance for Doubtful Accounts 17,318 22,515 16,199 ---------------------------------------------------- DM 324,140 DM 326,539 DM 284,016 -- ------- -- ------- -- ------- INVENTORIES Raw Materials DM 41,550 DM 40,355 DM 39,097 Work in Process 11,075 11,494 10,673 Finished Goods 144,182 128,833 133,422 ---------------------------------------------------- Total DM 196,807 DM 180,682 DM 183,192 -- ------- -- ------- -- ------- PROPERTY, PLANT AND EQUIPMENT, NET Land DM 6,612 DM 6,380 DM 6,316 Buildings and Improvements 77,437 75,072 73,487 Machinery and Equipment 147,417 139,943 126,852 Merchandising Equipment and Other 273,305 240,151 199,073 Construction in Progress 9,539 6,118 3,828 ---------------------------------------------------- 514,310 467,664 409,556 Accumulated Depreciation and Amortization 330,929 289,539 242,001 ---------------------------------------------------- Total DM 183,381 DM 178,125 DM 167,555 -- ------- -- ------- -- ------- INTANGIBLE AND OTHER ASSETS, NET Goodwill on Acquisitions prior to July 1,1991 DM 20,941 DM 20,941 DM 20,941 Goodwill on Acquisitions after July 1,1991 79,850 54,112 20,578 Other Intangible Assets, including Capitalized Computer Software 64,803 31,198 32,322 Additional Minimum Pension Liability 5,123 3,487 0 ---------------------------------------------------- 170,717 109,738 73,841 Accumulated Amortization 66,550 49,736 42,032 ---------------------------------------------------- Total Intangible Assets, net 104,167 60,002 31,809 Other Assets, net 6,174 6,176 8,386 ---------------------------------------------------- Total DM 110,341 DM 66,178 DM 40,195 -- ------- -- ------- -- ------- </TABLE> - 47 -
4. RELATED PARTY TRANSACTIONS The Joint Venture has entered into various contractual arrange-ments, including those discussed in the following paragraphs, for the supply of products, the performance of general and administrative services and the transfer of technology. Certain Joint Venture entities purchase institutional and indu-strial hygiene products (primarily finished goods inventories) from Henkel and its subsidiaries under a variety of supply agreements. The terms of these agreements require these entities to purchase specified quantities at agreed upon prices as defined by an annual supply plan submitted to the related manufacturing facility. Related purchases totaled TDM 213,758, TDM 221,341 and TDM 232,581 for the years ended November 30, 1998, 1997 and 1996, respectively. Henkel also provides certain Joint Venture entities with elective services which include, but are not limited to, general administration, payroll administration, accounting and research and development. The cost of services are charged by Henkel on a monthly basis and may not reflect the costs which the Joint Venture would incur if it were necessary to procure such services from outside sources or if such services were performed internally by the Joint Venture. Fees incurred by the Joint Venture in consideration for these services amounted to TDM 14,010, TDM 14,807 and TDM 14,228 for the years ended November 30, 1998, 1997, and 1996, respectively. Royalty payments are shared equally by both parent companies based upon a technology transfer agreement which provides for the payment of royalties as a percentage of third party sales. Royalty expense related to this technology transfer agreement amounted to TDM 26,568, TDM 24,372 and TDM 22,718 during the twelve month periods ended November 30, 1998, 1997 and 1996, respectively. The Joint Venture has entered into agreements with Henkel under which the Joint Venture can both borrow from and lend to Henkel both on an overdraft basis and through short term loans of no more than 3 months. There is currently no maximum level of borrowing specified under these agreements. The interest rate basis for both arrangements is the London Interbank Offering Rate (LIBOR) (interest rate for German Marks overdrafts 4.13 % and 3.83 % for 3 month short term German Marks loans at November 30, 1998); on overdrafts, approximately 0.5 percentage points are paid to compensate Henkel for administration costs. - 48 -
At November 30, 1998, 1997, and 1996, respectively, the Joint Venture had loans outstanding from Henkel and its subsidiaries of TDM -0-, TDM 1,159 and TDM 7,445. As of the same dates, the loans receivable from Henkel and its subsidiaries totaled TDM 7,342, TDM 6,894 and TDM 8,007, respectively. The fair values of related party loans receivable and payable approximate book value. Interest expense to related parties totaled TDM 1,657, TDM 1,302 and TDM 1,463 for the years ended November 30, 1998, 1997 and 1996, respectively. For the same periods, interest income from related parties totaled TDM 1,335, TDM 982 and TDM 1,180. During 1997, the Joint Venture began to charge the parents for certain costs incurred on behalf of the parents which by their nature are not arm's length. The Joint Venture has reflected such costs, net of tax, in the amount of TDM 1,670 and TDM 1,515 as contributed capital for the years ended November 30, 1998 and 1997, respectively. 5. INCOME TAXES The components of income before income taxes and the provision for income taxes for the years ended November 30, 1998, 1997 and 1996, respectively, are as follows: <TABLE> <CAPTION> 1998 1997 1996 ------- ------- ------- <S> <C> <C> <C> TDM TDM TDM Income before income taxes: Domestic 19,466 23,887 8,697 Foreign 97,047 85,088 88,745 ------- ------- ------- Total 116,513 108.975 97,442 ------- ------- ------- ------- ------- ------- Income tax provision: Current Domestic 8,856 17,627 8,312 Foreign 37,403 37,149 35,656 ------- ------- ------- Total current 46,259 54,776 43,968 Deferred Domestic 2,063 (113) (1,296) Foreign 99 (3,396) 2,662 ------- ------- ------- Total deferred 2,162 (3,509) 1,366 Total income tax provision 48,421 51,267 45,334 ------- ------- ------- ------- ------- ------- </TABLE> - 49 -
The components of the Joint Venture's overall net deferred tax asset at November 30: <TABLE> <CAPTION> 1998 1997 1996 ------- ------- ------- <S> <C> <C> <C> TDM TDM TDM Deferred tax assets: Tax loss carry forwards 7,705 10,256 9,576 Accruals, not deductible for tax purposes 4,668 4,823 3,612 Inventory valuation reserves 4,169 3,316 2,530 Accounts receivable reserves 1,106 968 976 Pension provision, not deductible 8,530 9,292 7,024 Amortization on intangible assets 0 227 1,663 Investment in affiliated company 1,158 1,210 0 Depreciation on fixed assets 5,074 6,606 2,692 Other 1,445 653 629 ------------------------------- Total deferred tax assets 33,855 37,351 28,702 Valuation allowance (11,693) (15,450) (10,387) ------------------------------- Total deferred tax assets, net of valuation allowance 22,162 21,901 18,315 ------------------------------- Deferred tax liabilities: Amortization on intangible assets (1,187) 0 0 Depreciation on fixed assets (4,158) (4,127) (3,995) Other (2,711) (1,506) (1,561) ------------------------------- Total deferred tax liabilities (8,056) (5,633) (5,556) ------------------------------- Net deferred tax asset 14,106 16,268 12,759 ------------------------------- ------------------------------- </TABLE> At November 30, 1998, 1997, and 1996, the Joint Venture had net foreign operating loss carry forwards for tax purposes of approximately TDM 24,297, TDM 30,987 and TDM 27,535, respectively. A significant portion of these losses have an indefinite carry forward period; the remaining losses have expiration dates up to five years. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Joint Venture will realize the benefits of these deductible differences, net of the existing valuation allowances at November 30, 1998. During 1998, 1997 and 1998, the valuation allowance increased/(decreased) by TDM (3,757), TDM 5,063 and TDM 2,722, respectively. - 50 -
A reconciliation of the statutory German trade tax and federal corporate income tax rate to the effective income tax rate is as follows: <TABLE> <CAPTION> 1998 1997 1996 ---- ---- ---- <S> <C> <C> <C> Statutory German rate 45.0% 44.4% 44.4% Other European rates (7.3) (4.4) (8.0) Losses and deferred items without offsetting tax benefits 0.8 1.0 1.9 Provision for taxes arising from tax examination 1.0 4.6 4.9 Different tax base in Germany 0.9 1.5 1.4 Deferred taxes refundable to parent 1.0 0.2 0.6 Other 0.2 (0.3) 1.3 ---- ---- ---- Effective income tax rate 41.6% 47.0% 46.5% ---- ---- ---- ---- ---- ---- </TABLE> The deferred taxes refundable to parent reflect the Joint Venture Agreement in which the partners also agreed that all tax benefits realized after the formation of the Joint Venture should be refunded to the respective parents if the benefits relate to temporary differences that originated in periods prior to the formation of the Joint Venture. Cash paid for taxes for the years ended November 30, 1998, 1997 and 1996 was TDM 35,897, TDM 32,756 and TDM 19,128, respectively. 6. PENSION AND OTHER BENEFIT PLANS The Joint Venture's German entities have noncontributory defined benefit pension plans to provide pension benefits to all eligible employees. Benefits under the German plans are based upon salary and years of service. The funding of these pension plans is not a common practice as funding provides no economic (tax) benefit. Certain other Joint Venture entities have noncontributory and contributory defined benefit plans, primarily based on specific laws in particular countries. Plan assets outside of Germany consist primarily of marketable securities and life insurance policies. - 51 -
A summary of all the components of net periodic pension cost concerning the noncontributory and contributory defined benefit pension plans in Austria, Belgium, France, Germany, Great Britain, the Netherlands and Spain for the years ended November 30, 1998, 1997 and 1996 is as follows (TDM): <TABLE> <CAPTION> 1998 1997 1996 <S> <C> <C> <C> Service cost-employee benefits 9,659 8,594 7,131 Interest cost 11,252 10,429 9,109 Actual Return on assets (4,807) (4,178) (3,130) Net amortization and deferral 661 768 74 Employee contributions (465) (370) (329) ------ ------ ------ Total pension expense 16,300 15,243 12,855 ------ ------ ------ ------ ------ ------ </TABLE> The status of the above employee pension benefit plans at November 30, 1998, 1997 and 1996 is summarized below (TDM): <TABLE> <CAPTION> Actuarial present value of: 1998 1997 1996 <S> <C> <C> <C> Vested benefit obligation 143,650 138,931 105,068 Non-vested accumulated benefit obligation 7,280 10,458 9,513 ------- ------- ------- Accumulated benefit obligation 150,930 149,389 114,581 ------- ------- ------- ------- ------- ------- Projected benefit obligation 203,804 171,497 138,189 Fair value of plan assets 81,259 61,854 45,839 ------- ------- ------- Funded status 122,545 109,643 92,350 Unrecognized net transition obligation 6,800 7,839 4,709 Unrecognized prior service cost (2,943) 325 0 Unrecognized net (gain)/loss 3,277 605 4,175 Additional minimum pension liability 5,868 3,705 0 ------- ------- ------- Unfunded accrued pension cost 121,279 104,579 83,466 ------- ------- ------- ------- ------- ------- </TABLE> The following assumptions have been used to develop net periodic pension expense and the actuarial present value of projected benefit obligations: <TABLE> <CAPTION> Actuarial present value of: 1998 1997 1996 <S> <C> <C> <C> Assumed discount rate 4.0-6.0% 7.5-6.0% 7.0- 5.0% Expected return on plan assets 4.0-8.5% 6.0-10.0% 7.0-10.0% Rate of increase in future 1.75-4.5% 6.0- 2.5% 5.0- 3.0% compensation levels </TABLE> - 52 -
Pursuant to the provisions of Statement of Financial Accounting Standards No. 87, "Employer's Accounting for Pensions", the Joint Venture recorded an additional minimum pension liability adjustment of TDM 5,868 and TDM 3,709 as of November 30, 1998 and 1997, respectively, representing the amount by which the accumulated benefit obligation exceeded the accrued pension liability for the German plans. The additional liability is offset by an intangible asset recorded under Intangible and Other Assets, net and Minimum Pension Liability Adjustment within Combined Equity. Included in Employee Benefit Obligation in the balance sheet is the Italian termination indemnity plan which provides a benefit that is payable upon termination of employment in virtually all cases of termination. The liability for the Italian termination indemnity plan was TDM 10,119, TDM 10,662 and TDM 10,526 for 1998, 1997 and 1996, respectively. 7. TOTAL INDEBTEDNESS SHORT TERM DEBT As of November 30, 1998, 1997 and 1996, respectively, short term debt totaled TDM 49,066, TDM 24,318 and TDM 72,972, and consists of generally short term credit facilities with interest rates based on local money market rates. As of November 30, 1998, the five main facilities are in French Franc in the equivalent amount of TDM 5,339 at an interest rate of 3,8% p.a., in Italian Lira in the equivalent amount of TDM 4,600 at an interest rate of 4,9% p.a., in German Marks in the equivalent amount of TDM 29,000 at an interest rate of 3,4% p.a., in Dutch Guilders in the equivalent amount of TDM 3,858 at an interest rate of 3,85% p.a. and in Spanish Peseta in the equivalent amount of TDM 2,279 at an interest rate of 4,5% p.a. LONG TERM DEBT Long term debt of November 30, 1998, 1997 and 1996 consists of the following: <TABLE> <CAPTION> 1998 1997 1996 TDM TDM TDM <S> <C> <C> <C> Notes 5,425 5,418 6,035 Less current maturities 657 656 652 ----- ----- ----- Total 4,768 4,762 5,383 ----- ----- ----- ----- ----- ----- </TABLE> - 53 -
All notes are denominated in Danish Krona at fixed annual interest rates ranging from 10.07% to 10.30% at November 30, 1998. As of November 30, 1998, the aggregate annual maturities of long term debt were: <TABLE> <S> <C> <C> <C> 1999 - TDM 657 2000 - TDM 657 2001 - TDM 165 2002 - TDM 3,946 </TABLE> Interest expense related to all debt excluding related party amounts for the years ended November 30, 1998, 1997 and 1996 was TDM 7,972, TDM 6,146 and TDM 4,133, respectively. Interest paid to external and related parties for the years ended November 30, 1998, 1997, 1996 was TDM 9,418, TDM 7,643 and TDM 6,408, respectively. The fair value of short and long term debt approximates the book value. 8. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT The Joint Venture operates internationally, giving rise to exposure to market risks from changes in interest rates and foreign exchange rates. Derivative financial instruments are utilized by the Joint Venture to reduce certain of these risks. The Joint Venture does not hold or issue financial instruments for trading purposes. The Joint Venture is exposed to credit-related losses in the event of nonperformance by counterparties to financial instruments, but it does not expect any counterparties to fail to meet their obligations given their high credit ratings. a) Notional Amounts and Credit Exposures of Derivatives The notional amounts of derivatives summarized in section b) do not represent amounts exchanged by the parties and, thus, are not a measure of the exposure of the Joint Venture through its use of derivatives. The amounts exchanged are calculated on the basis of the notional amounts and the other terms of the derivatives, which relate to exchange rates. - 54 -
b) Foreign Exchange Risk Management The Joint Venture enters into various types of foreign exchange contracts in managing its foreign exchange risk, as indicated in the following table (TDM): <TABLE> <CAPTION> November 30, 1998 November 30,1997 ----------------- ----------------- Notional Credit Notional Credit Amount Exposure Amount Exposure -------- -------- -------- -------- <S> <C> <C> <C> <C> Forward exchange contracts 94,779 0 57,077 0 Options purchased 2,553 0 7,054 0 ------ - ------ - 97,332 0 64,131 0 ------ - ------ - ------ - ------ - </TABLE> The primary purpose of foreign exchange contracts is to hedge various intercompany loans. The Joint Venture also enters, to a limited extent, into forward exchange and option contracts to hedge certain existing and anticipated future net foreign exchange exposures. The anticipated future foreign exchange exposure of the Joint Venture is the total of the net balances of all known and planned incoming and outgoing payments of the Joint Venture's companies in foreign currencies during a twelve month time horizon. Gains and losses arising on hedged loan transactions are accrued to income over the period of the hedge. The deferred gains and losses as of November 30, 1998, 1997 and 1996 were not material. Losses on hedges of anticipated exchange rate exposure are recorded as incurred whereas gains are deferred. - 55 -
The table below summarizes by major currency the contractual amounts of the Joint Venture's forward exchange and option contracts in German Marks. Foreign currency amounts are translated at rates current at the reporting date. The "buy" amounts represent the German Marks equivalent of commitments to purchase foreign currencies, and the "sell" amounts represent the German Marks equivalent of commitments to sell foreign currencies (TDM): <TABLE> <CAPTION> 1998 1997 -------------- -------------- Buy Sell Buy Sell <S> <C> <C> <C> <C> Italian Lira/US-Dollar 27,374 27,374 9,494 9,668 Italian Lira/French Franc 6,009 5,977 Italian Lira/Danish Krona 4,488 4,466 Italian Lira/Swedish Krona 3,659 3,651 Pound Sterling/German Mark 44,362 44,661 13,042 12,807 French Franc/German Mark 2,988 2,988 Finmark/Swedish Krona 1,832 1,826 Swiss Franc/German Mark 14,925 14,940 6,182 6,186 Irish Pound/German Mark 3,651 3,623 US Dollar/German Mark 7,489 7,520 10,647 10,551 Swedish Krona/German Mark 2,626 2,625 Czech Krona/German Mark 556 556 Swedish Krona/Belgium Franc 1,015 1,033 Swedish Krona/Danish Krona 1,124 1,154 ------ ------ ------ ------ 97,332 97,676 64,131 63,930 ------ ------ ------ ------ ------ ------ ------ ------ </TABLE> c) Fair Value of Off Balance Sheet Financial Instruments The fair value of off balance sheet financial instruments is not significant. 9. RESEARCH EXPENDITURES Research expenditures which relate to the development of new products and processes, including significant improvements and refinements to existing products, were TDM 34,6, TDM 35,7, and TDM 31,8 for the years ended November 30, 1998, 1997 and 1996, respectively. - 56 -
10. COMMITMENTS AND CONTINGENCIES The Joint Venture has a number of operating lease agreements primarily involving motor vehicles, computer and other office equipment. The following is a schedule by year of the future minimum lease payments required under the operating leases that have initial or remaining noncancellable lease terms in excess of one year as of November 30, 1998 (TDM): <TABLE> <CAPTION> <S> <C> 1999 26,270 2000 18,741 2001 6,958 2002 4,086 2003 3,144 thereafter 10,035 ------ Total 69,234 ------ ------ </TABLE> Rent expense for the twelve month period ended November 30, 1998, 1997 and 1996, was approximately TDM 31,369, TDM 27,416 and TDM 18,503, respectively. The Joint Venture is subject to lawsuits and claims arising out of the conduct of its business, including those relating to commercial transactions and environmental safety. As an integral part of the Joint Venture agreement, Henkel and Ecolab have provided certain representations and warranties against future expenditures arising from operations prior to July 1, 1991. A subsidiary of the Joint Venture is named in an environmental legal action related to the conduct of its business prior to the formation of the Joint Venture on July 1, 1991. Based on the facts currently known to the Joint Venture, and after consultation with legal counsel, management believes that the Joint Venture is indemnified against any potential liability arising from such action under the terms and conditions of the Amended and Restated Umbrella Agreement dated June 26, 1991, by and between Henkel and Ecolab. Therefore, the Joint Venture does not expect material adverse effects on its financial position, results of operations or liquidity from the outcome of these losses and claims. - 57 -
The Joint Venture's operations and customers are located throughout Europe and operate in the industrial and institutional hygiene business. No single customer accounted for a significant amount of the Joint Venture's sales in 1998, 1997 and 1996, and there were no significant accounts receivable from a single customer at November 30, 1998, 1997 and 1996. The Joint Venture establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. - 58 -
[LETTERHEAD] REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS OF HENKEL-ECOLAB JOINT VENTURE Our audit of the combined financial statements as of and for the year ended November 30, 1998 referred to in our report dated January 26, 1999 included herein also included an audit of the financial statement schedule: "Valuation and Qualifying Accounts and Reserves." In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related combined financial statements. The financial statement schedule of Henkel-Ecolab Joint Venture for the years ended November 30, 1997 and 1996 were audited by other independent auditors, whose reports, dated January 23, 1998 and January 22, 1997, expressed an unqualified opinion on those schedules, when read in conjunction with the related combined financial statements. January 26, 1999 PricewaterhouseCoopers Gesellschaft mit beschrankter Haftung Wirtschaftsprufungsgesellschaft /s/ Gunter Betz /s/ Henri Leveque - ------------------- - 59 -
HENKEL-ECOLAB Schedule - Valuation and Qualifying Accounts and Reserves (Thousands) <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------------- Description Balance, Additions Deductions Balance, Beg. of (a) from Close of Period Reserve Period (b) - ---------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Period Ended November 30, 1996 Allowance for DM 14,274 5,439 3,514 16,199 doubtful Accounts ----------------------------------------------------------------- DM 14,274 5,439 3,514 16,199 ----------------------------------------------------------------- ----------------------------------------------------------------- Period Ended November 30, 1997 Allowance for DM 16,199 13,400 7,084 22,515 doubtful Accounts ----------------------------------------------------------------- DM 16,199 13,400 7,084 22,515 ----------------------------------------------------------------- ----------------------------------------------------------------- Period Ended November 30, 1998 Allowance for DM 22,515 9,325 14,522 17,318 doubtful Accounts ----------------------------------------------------------------- DM 22,515 9,325 14,522 17,318 ----------------------------------------------------------------- ----------------------------------------------------------------- </TABLE> (a) Provision for doubtful accounts (charged to expenses) (b) Items determined to be uncollectible, less recovery of amounts previously written off. - 60 -
EXHIBIT INDEX The following documents are filed as exhibits to this Report. <TABLE> <CAPTION> Exhibit No. Document Method of Filing ----------- -------- ---------------- <S> <C> <C> (3)A. Restated Certificate of Incorporated by reference Incorporation. to Exhibit (3) to the Company's Current Report on Form 8-K dated October 22, 1997. B. By-Laws, as amended through February Filed herewith 18, 1999. electronically. (4)A. Common Stock. See Exhibits (3)A and (3)B. B. Form of Common Stock Certificate. Incorporated by reference to Exhibit (4)B of the Company's Form 10-K Annual Report for the year ended December 31, 1995. C. Rights Agreement dated as of Incorporated by reference February 24, 1996. to Exhibit (4) of the Company's Current Report on Form 8-K dated February 24, 1996. D. Note Agreement dated as of October 1, Incorporated by reference 1991 relating to $100,000,000 9.68% to Exhibit (4)F of the Senior Notes Due October 1, 2001 Company's Form 10-K between the Company and the insurance Annual Report for the companies named therein. year ended December 31, 1991. E.(i) Multicurrency Credit Agreement Incorporated by reference ("Credit Agreement") dated as of to Exhibit (4)A of the September 29, 1993, as Amended and Company's Form 10-Q for Restated as of October 17, 1997, the quarter ended among the Company, the financial September 30, 1997. institutions party thereto, Citibank, N.A., as Agent, Citibank International Plc, as Euro-Agent and Morgan Guaranty Trust Company of New York as Co-Agent. (ii) Australian Dollar Local Currency Incorporated by reference Addendum to the Credit Agreement. to Exhibit (4)B of the Company's Form 10-Q for the quarter ended September 30, 1997. </TABLE> - 61 -
<TABLE> <CAPTION> Exhibit No. Document Method of Filing ----------- -------- ---------------- <S> <C> <C> (iii) Amendment No. 1 dated as of June 23, Incorporated by reference 1998 to Multicurrency Credit to Exhibit (4)A of the Agreement dated as of September 29, Company's Form 10-Q for 1993, as Amended and Restated as of the quarter ended June October 17, 1997, and to Local 30, 1998. Currency Addendum dated as of October 17, 1997, with respect to the Multicurrency Credit Agreement, among Ecolab Inc., the Banks parties thereto, Citibank, N.A., as Agent for the Banks, Citibank International Plc, as Euro-Agent for the Banks and Morgan Guaranty Trust Company of New York as Co-Agent; and with respect to the Local Currency Addendum among Ecolab Inc., Ecolab PTY Limited, the Local Currency Banks party thereto, Citibank, N.A., as Agent and Citisecurities Limited, as Local Currency Agent. (iv) Australian Dollar Local Currency Addendum dated as of June 23, 1998 Incorporated by reference among Ecolab Finance PTY Limited, to Exhibit (4)B of the Ecolab Inc., Citibank, N.A., the Company's Form 10-Q for Local Currency Agent named therein the quarter ended June and the Local Currency Banks party 30, 1998. thereto. F. Indenture dated as of November 1, Incorporated by reference 1996 as amended and supplemented, to Exhibit 4.1 of the between the Company and the First Company's Amendment No. 1 National Bank of Chicago as Trustee. to Form S-3 filed November 15, 1996. G. Form of Underwriting Agreement. Incorporated by reference to Exhibit 1 of the Company's Amendment No. 1 to Form S-3 filed November 15, 1996. (9) Amended and Restated Stockholder's See Exhibit (10)P(v) Agreement. hereof. </TABLE> - 62 -
<TABLE> <CAPTION> Exhibit No. Document Method of Filing ----------- -------- ---------------- <S> <C> <C> (10)A. Ecolab Inc. 1977 Stock Incentive Incorporated by reference Plan, as amended through November 1, to Exhibit (10)A of the 1996. Company's Form 10-K Annual Report for the year ended December 31, 1997. B. Ecolab Inc. 1993 Stock Incentive Incorporated by reference Plan. to Exhibit (10)B of the Company's Form 10-K Annual Report for the year ended December 31, 1992. C. Amended and Restated Ecolab Inc. 1997 Filed herewith Stock Incentive Plan. This Plan electronically. amendment will become effective only upon approval by the Stockholders of the Company at the Company's Annual Meeting scheduled to be held May 14, 1999. (i) Non-Statutory Stock Option Agreement Incorporated by reference between the Company and Allan L. to Exhibit (10) of the Schuman with respect to premium- Company's Form 10-Q for priced option grant effective the quarter ended June February 20, 1998 under the Ecolab 30, 1998. Inc. 1997 Stock Incentive Plan. Similar option grants were made to each of the named executive officers of the Company covering varying, but smaller number of shares. D. 1988 Non-Employee Director Stock Incorporated by reference Option Plan as amended through to Exhibit (10)D of the February 23, 1991. Company's Form 10-K Annual Report for the year ended December 31, 1990. E. 1995 Non-Employee Director Stock Incorporated by reference Option Plan. to Exhibit (10)D of the Company's Form 10-K Annual Report for the year ended December 31, 1994. </TABLE> - 63 -
<TABLE> <CAPTION> Exhibit No. Document Method of Filing ----------- -------- ---------------- <S> <C> <C> F. Ecolab Inc. 1997 Non-Employee Incorporated by reference Director Deferred Compensation Plan. to Exhibit (10)F of the Company's Form 10-K for the year ended December 31, 1996. G. Form of Director Indemnification Incorporated by reference Agreement dated August 11, 1989. to Exhibit (19)A of the Substantially identical agreements Company's Form 10-Q for are in effect as to each director of the quarter ended the Company. September 30, 1989. H.(i) Ecolab Executive Death Benefits Plan, Incorporated by reference as amended and restated effective to Exhibit (10)J of the March 1, 1994. Company's 10-K Annual Report for the year ended December 31, 1994. See also Exhibit (10)O hereof. (ii) Amendment No. 1 to Ecolab Executive Filed herewith Death Benefits Plan. electronically. (iii) Second Declaration of Amendment to Filed herewith Ecolab Executive Death Benefits Plan, electronically. effective March 1, 1998. I. Ecolab Executive Long-Term Disability Incorporated by reference Plan, as amended and restated to Exhibit (10)K of the effective January 1, 1994. Company's 10-K Annual Report for the year ended December 31, 1994. See also Exhibit (10)O hereof. J. Ecolab Executive Financial Counseling Incorporated by reference Plan to Exhibit (10)K of the Company's Form 10-K Annual Report for the year ended December 31, 1992. </TABLE> - 64 -
<TABLE> <CAPTION> Exhibit No. Document Method of Filing ----------- -------- ---------------- <S> <C> <C> K.(i) Ecolab Supplemental Executive Incorporated by reference Retirement Plan, as amended and to Exhibit (10)M(i) of restated effective July 1, 1994. the Company's 10-K Annual Report for the year ended December 31, 1994. See also Exhibit (10)O hereof. (ii) First Declaration of Amendment to Incorporated by reference Ecolab Supplemental Executive to Exhibit (10)M(ii) of Retirement Plan effective as of July the Company's 10-K Annual 1, 1994. Report for the year ended December 31, 1994. (iii) Second Declaration of Amendment to Incorporated by reference Ecolab Supplemental Executive to Exhibit (10)M(iii) of Retirement Plan effective as of July the Company's Form 10-K 1, 1994. Annual Report for the year ended December 31, 1995. (iv) Third Declaration of Amendment to Filed herewith Ecolab Supplemental Executive electronically. Retirement Plan, effective March 1, 1998. L.(i) Ecolab Mirror Savings Plan, as Incorporated by reference amended and restated effective to Exhibit (10)N of the September 1, 1994. Company's 10-K Annual Report for the year ended December 31, 1994. See also Exhibit (10)O hereof. (ii) First Declaration of Amendment to Incorporated by reference Ecolab Mirror Savings Plan effective to Exhibit (10)N(ii) of as of January 1, 1995. the Company's Form 10-K Annual Report for the year ended December 31, 1995. (iii) Second Declaration of Amendment to Incorporated by reference Ecolab Mirror Savings Plan effective to Exhibit (10)O(iii) of January 1, 1997. the Company's Form 10-K Annual Report for the year ended December 31, 1996. </TABLE> - 65 -
<TABLE> <CAPTION> Exhibit No. Document Method of Filing ----------- -------- ---------------- <S> <C> <C> (iv) Third Declaration of Amendment to Filed herewith Ecolab Mirror Savings Plan effective electronically. November 13, 1997. (v) Fourth Declaration of Amendment to Filed herewith Ecolab Mirror Savings Plan, effective electronically. September 1, 1998. M.(i) Ecolab Mirror Pension Plan effective Incorporated by reference July 1, 1994. to Exhibit (10)O(i) of the Company's Annual Report on Form 10-K for the year ended December 31, 1994. See also Exhibit (10)O hereof (ii) First Declaration of Amendment to Incorporated by reference Ecolab Mirror Pension Plan effective to Exhibit (10)O(ii) of as of July 1, 1994. the Company's Annual Report on Form 10-K for the year ended December 31, 1994. (iii) Second Declaration of Amendment to Incorporated by reference Ecolab Mirror Pension Plan effective to Exhibit (10)O(iii) of as of July 1, 1994. the Company's Form 10-K Annual Report for the year ended December 31, 1995. (iv) Third Declaration of Amendment to Filed herewith Ecolab Mirror Pension Plan, effective electronically. March 1, 1998. N.(i) Ecolab Inc. Administrative Document Incorporated by reference for Non-Qualified Benefit Plans. to Exhibit (10)P of the Company's 10-K Annual Report for the year ended December 31, 1994. (ii) Amendment No. 1 to the Ecolab Inc. Filed herewith Administrative Document for Non- electronically. Qualified Benefit Plans effective July 1, 1997. </TABLE> - 66 -
<TABLE> <CAPTION> Exhibit No. Document Method of Filing ----------- -------- ---------------- <S> <C> <C> (iii) First Declaration to Amendment to the Filed herewith Ecolab Inc. Administrative Document electronically. for Non-Qualified Benefit Plans effective November 13, 1997. O. 1999 Ecolab Inc. Management Filed herewith Performance Incentive Plan. This electronically. Plan will become effective only upon approval by the Stockholders of the Company at the Company's Annual Meeting scheduled to be held May 14, 1999. P.(i) Amended and Restated Umbrella Incorporated by reference Agreement between Henkel KGaA and to Exhibit 13 of HC Ecolab Inc. dated June 26, 1991. Investments, Inc.'s and Henkel KGaA's Amendment No. 4 to Schedule 13D dated July 16, 1991. (ii) Amended and Restated Joint Venture Incorporated by reference Agreement between Henkel KGaA and to Exhibit 14 of HC Ecolab Inc. dated June 26, 1991. Investments, Inc.'s and Henkel KGaA's Amendment No. 4 to Schedule 13D dated July 16, 1991. (iii) Amendment to the Amended and Restated Filed herewith Joint Venture Agreement between electronically. Henkel KGaA and Ecolab Inc. dated June 13, 1994. (iv) Amended and Restated ROW Purchase Incorporated by reference Agreement between Henkel KGaA and to Exhibit (7) of the Ecolab Inc. dated June 26, 1991. Company's Current Report on Form 8-K dated July 11, 1991. (v) Amended and Restated Stockholder's Incorporated by reference Agreement between Henkel KGaA and to Exhibit 15 of HC Ecolab Inc. dated June 26, 1991. Investments, Inc.'s and Henkel KGaA's Amendment No. 4 to Schedule 13D dated July 16, 1991. </TABLE> - 67 -
<TABLE> <CAPTION> Exhibit No. Document Method of Filing ----------- -------- ---------------- <S> <C> <C> Q. Description of Ecolab Management Filed herewith Incentive Plan. electronically. (13) Those portions of the Company's Filed herewith Annual Report to Stockholders for the electronically. year ended December 31, 1998 which are incorporated by reference into Parts I, II and IV hereof. (21) List of Subsidiaries as of March 16, Filed herewith 1999. electronically. (23)A. Consent of PricewaterhouseCoopers LLP See page 33 hereof. to Incorporation by Reference at page 33 hereof is filed as a part hereof. B. Consent of PricewaterhouseCoopers Filed herewith Gesellschaft mit beschrankter Haftung electronically. Wirtschaftsprufungsgesellschaft. C. Consent of KPMG Deutsche Treuhand- Filed herewith Gesellschaft Aktiengesellschaft electronically. Wirtschaftsprufungsgesellschaft. (24) Powers of Attorney. Filed herewith electronically. (27) Financial Data Schedule for year Filed herewith ended December 31, 1998. electronically. COVER Cover Letter. Filed herewith electronically. </TABLE> - 68 -