-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, POE0QloHJmmsqIE1DoXhWCaaQlGhRnRjJxVJf+n89meeYXLygMmwKs+vuZxspwhU 0VPYm6BFHZAncRFLYgtIpw== 0000109446-97-000015.txt : 19970630 0000109446-97-000015.hdr.sgml : 19970630 ACCESSION NUMBER: 0000109446-97-000015 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970627 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ZURN INDUSTRIES INC CENTRAL INDEX KEY: 0000109446 STANDARD INDUSTRIAL CLASSIFICATION: COGENERATION SERVICES & SMALL POWER PRODUCERS [4991] IRS NUMBER: 251040754 STATE OF INCORPORATION: PA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-05502 FILM NUMBER: 97631488 BUSINESS ADDRESS: STREET 1: ONE ZURN PL STREET 2: P O BOX 2000 CITY: ERIE STATE: PA ZIP: 16514 BUSINESS PHONE: 8144522111 MAIL ADDRESS: STREET 1: ONE ZURN PLACE STREET 2: P O BOX 2000 CITY: ERIE STATE: PA ZIP: 16514 10-K405 1 3/31/97 10-K FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [Fee Required] For the Fiscal Year Ended March 31, 1997 Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] For the Transition Period From To Commission File Number 1-5502 ZURN INDUSTRIES, INC. State of Address and IRS Employer Incorporation Telephone Number Identification Number Pennsylvania One Zurn Place 25-1040754 Erie, Pennsylvania 16505 814-452-2111 Securities Registered Pursuant to Section 12(b) of the Act Title of Each Class Exchange on Which Registered Common Stock, $.50 Par Value New York Stock Exchange, Inc. Pacific Exchange, Inc. 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, 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] The aggregate market value of the voting stock held by nonaffiliates of the registrant was $327,539,000 based on the closing sale price per share for the 12,359,962 shares of Common Stock, $.50 par value, outstanding on May 30, 1997 and excluding the value of 2,072 shares of preferred stock which have no quoted market value. Documents Incorporated by Reference Portions of Annual Report to Shareholders for the year ended March 31, 1997 incorporated by reference in Parts I and II Portions of Proxy Statement dated June 27, 1997 incorporated by reference in Part III -1- PART I ITEM 1 - BUSINESS General Development Of Business Zurn Industries, Inc., founded in 1900 and incorporated in 1932, together with its subsidiaries ("Company") designs, constructs, manufactures, markets, and operates in two industry segments: Building Products and Water Resource Construction. The categorization of the Company's businesses in these segments in fiscal 1997 resulted from the acquisition of Eljer Industries, Inc., a manufacturer and marketer of plumbing and HVAC building products and a decision to sell the Power Systems segment businesses. The first and third paragraphs of "Notes to Consolidated Financial Statements - - Commitments and Contingencies" on page 37 of the Annual Report to Shareholders for the year ended March 31, 1997 which discuss the bankruptcy status of an indirect, wholly-owned subsidiary are incorporated herein by reference. Financial Information About Industry Segments "Industry Segment Data" on page 29 of the Annual Report to Shareholders for the year ended March 31, 1997 is incorporated herein by reference. Narrative Description Of Business "Notes to Consolidated Financial Statements - Business Description" on page 30 of the Annual Report to Shareholders for the year ended March 31, 1997, excluding the last sentence of the first paragraph and the fourth paragraph, is incorporated herein by reference. Product Class Sales Year Ended March 31 Segment And Products 1997 1996 1995 (Thousands) Building Products Plumbing products $202,658 $140,925 $121,133 Fire protection systems 45,415 38,230 34,541 Other products 23,127 1,635 990 Water Resource Construction Construction and construction services 69,145 84,245 58,808 Other products 12,673 19,648 18,380 Building Products - Plumbing and HVAC products for the construction and remodeling markets, including: vitreous china toilets and lavatories, enameled cast iron tubs, lavatories and whirlpools, plumbing connectors, flexible systems and supplies; roof, floor, and trench drains, primers, traps, backwater valves, hair, grease, oil, and solids interceptors and recovery systems, cleanouts, off-the-floor fixture supports, service basins, water hammer arrestors, hydrants, floor and mop sinks, ferrous castings, flush -2- valves, shower heads, faucets, and hand dryers; tubular brass and plastic plumbing supplies, sink strainers, shower heads, and toilet tank accessories; pressure reducing and regulating valves, temperature/pressure relief valves, swing-away ball valves, reduced pressure backflow preventers, pressure vacuum breakers, check valves, double check valves, water gravity flow systems; and, registers, venting grilles and systems, prefabricated chimneys, air difusers, fireplaces. Automatic interior fire protection sprinkler systems for new construction and remodeling projects. Water Resource Construction - Construction of water resource and treatment systems and general construction services for civil, structural, and mechanical piping. Segment Status No new segment or product is being planned or developed which will require the investment of a material amount of the Company's assets, or which otherwise is material. Sources And Availability Of Raw Materials The Company's businesses use clay, ferrous and nonferrous metals, and plastics purchased from various domestic and foreign suppliers. The sources of supply are adequate and the Company is not substantially dependent upon any one supplier. Patents And Licenses The Company owns numerous patents relating to the design and manufacture of its products and systems. From time to time the Company grants licenses to others under certain of its patents and obtains licenses under the patents of others. While the Company considers that, in the aggregate, its patents and licenses are important in the operation of its businesses, it believes that the successful manufacture and sale of its products generally depends more upon its technological know-how and manufacturing, marketing, and construction skills. Seasonal Business Neither of the industry segments is considered to have significant seasonal business. Working Capital Requirements Certain products of the Building Products segment are considered standard items and significant amounts of inventory are required to meet rapid delivery requirements of customers. Customer Dependence Neither of the industry segments has a customer the loss of which would have a material adverse effect on the segment. -3- Customer Identity There are no customers the loss of which would have a material adverse effect on the Company. Backlog The backlog of unshipped orders was as follows: March 31 1997 1996 (Thousands) Building Products $ 50,000 $30,000 Water Resource Construction 81,000 68,000 $131,000 $98,000 Approximately 41% of the Water Resource Construction backlog is expected to be completed in fiscal years ending after March 31, 1998. Government Contracts No material portion of the business of either industry segment is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the Government. Competitive Conditions The Company's major markets are commercial, consumer, industrial, and municipal. The Company competes with a number and variety of diverse manufacturers and distributors, both large and small. Because of the multiplicity and diversity of such markets, it is impracticable to ascertain a proper competitive rating index. In general, all the Company's products and systems are sold for the most part in world-wide markets characterized by substantial price, service, and product quality competition. Research And Development Research and development expenditures were not material in any of the last three years. Impact Of Environmental Laws And Regulations Federal, state, and local regulations enacted to regulate the discharge of materials into the environment are not expected to have any material effect on the Company's capital expenditures, earnings, or competitive position. Number Of Employees The Company has approximately 5,100 employees. -4- Foreign And Domestic Operations And Export Sales The Company's foreign operations represented less than 10% of consolidated sales, operating income, and assets in each of the last three years and exports sales were not significant. ITEM 2 - PROPERTIES The Company principally operates in various locations throughout the United States with other facilities in Canada and Europe all of which are considered to be in good condition, well maintained, and adequate for its purposes. The approximate square feet of floor space utilized at operating capacities ranging from approximately 45% to 95% is as follows: Owned Leased Building Products 4,011,800 1,469,400 Water Resource Construction 42,400 Corporate Headquarters and Others 212,300 4,266,500 1,469,400 ITEM 3 - LEGAL PROCEEDINGS United States Brass Corporation Bankruptcy On May 23, 1994, the Company's indirect, wholly-owned subsidiary, United States Brass Corporation ("US Brass") filed a voluntary petition for reorganization under Chapter 11 of the Federal Bankruptcy Code ("Bankruptcy Code") in the United States Bankruptcy Court for the Eastern District of Texas ("Bankruptcy Court") for the purpose of systematically resolving issues resulting from sales of polybutylene plumbing systems ("Systems") and related litigation and to seek confirmation of a plan of reorganization ("Plan") which, among other things, provides for the payment, satisfaction and discharge of all claims against US Brass involving the Systems. US Brass is conducting its business and managing its properties as a debtor-in-possession under Section 1108 of the Bankruptcy Code subject to the supervision and orders of the Bankruptcy Court. US Brass is a defendant, together in some cases with the Company's wholly- owned subsidiary Eljer Industries, Inc. (Eljer) and its subsidiary, Eljer Manufacturing, Inc. ("EMI"), in a number of lawsuits arising out of the manufacture and sale of the Systems. Other defendants in the Systems lawsuits are Shell Chemical Company ("Shell"), the manufacturer of polybutylene resin from which US Brass extruded the pipe used in the Systems, Hoechst Celanese Corporation ("Hoechst Celanese"), the manufacturer of a resin from which US Brass molded Celcon acetal fittings formerly used in the Systems, other pipe and fittings manufacturers, and builders, developers and plumbing contractors. These lawsuits allege that the Systems leaked and seek recovery based on negligence, breach of warranty, strict tort liability and, in some cases, fraud or misrepresentation. -5- Between 1988 and July 1991, US Brass, Shell, and Hoechst Celanese shared the cost of repairs and replacements of Systems and Shell and Hoechst Celanese have settled and continue to settle cases and repair or replace Systems for which they contend US Brass was or is partially responsible. Litigation filed by Hoechst Celanese and Shell in New Jersey state court against US Brass and EMI relating to the Systems and the sharing of repair and replacement costs remains pending in the Bankruptcy Court on a motion for reconsideration filed by EMI following a decision by the Bankruptcy Court to remand those claims back to New Jersey state court. Since 1985 Eljer has been involved in litigation with its insurance carriers concerning coverage for Systems litigation. In 1992, the United States Court of Appeals for the Seventh Circuit ("Seventh Circuit") issued an opinion holding that the policy period of coverage of a Systems claim is triggered by the date of installation of the System as opposed to the date when the leak occurs. However, significant insurance coverage litigation remains pending and the Seventh Circuit opinion is not necessarily binding on all insurance carriers issuing coverage to Eljer. Various insurance carriers filed state court actions seeking declaratory relief that they are not obligated to provide insurance coverage for Systems litigation. These actions were removed to the Bankruptcy Court for the Northern District of Illinois and, in November 1994, the court denied a US Brass motion to transfer venue to the United States District Court for the Eastern District of Texas and granted the insurer's motion to abstain from hearing the case and to remand to the state courts. The appeal filed by US Brass to the United States District Court for the Northern District of Illinois was denied on July 2, 1996, and US Brass has appealed to the Seventh Circuit which affirmed the lower court's decision on April 2, 1997. The actions have been remanded to the state courts, but remain subject to the automatic stay as a result of the bankruptcy of US Brass. The United States District Court for the Eastern District of Texas has not ruled on US Brass' appeal from the dismissal of an adversary action filed by US Brass in the Bankruptcy Court against all insurance companies involved in the Illinois state court actions as well as one additional carrier. On March 22, 1995, Eljer, EMI, and US Brass filed with the Bankruptcy Court a proposed Plan for US Brass under Chapter 11 of the Bankruptcy Code. The Bankruptcy Court rejected the Plan on the basis that it was not confirmable and an appeal is pending. An Amended Plan of Reorganization ("Amended Brass Plan"), containing proposed settlements with Eljer, EMI and Shell, and an Amended Disclosure Statement ("Amended Brass Disclosure Statement") have been filed. A hearing was held on objections filed by various parties to the Amended Brass Disclosure Statement on August 22, 1995. The Official Polybutylene Claimants Committee ("PB Committee") in the US Brass bankruptcy filed a proposed plan of reorganization ("PB Committee Plan") and proposed disclosure statement ("PB Committee Disclosure Statement"). A hearing was held on June 20, 1995 by the Bankruptcy Court on objections filed by various parties to the PB Committee Disclosure Statement. On April 8, 1996, the Bankruptcy Court approved the Amended Brass Disclosure Statement and the Amended Brass Plan and the PB Committee Plan and the PB Committee Disclosure Statement. However, because significant developments had -6- occurred, the Bankruptcy Court permitted the parties to update disclosure statements and modify their plans. On November 29, 1996, Eljer, EMI, and US Brass filed the Third Amended Brass Plan of Reorganization ("Third Amended Brass Plan") and the Third Amended Disclosure Statement ("Third Amended Brass Disclosure Statement") and the PB Committee filed its Second Amended Disclosure Statement ("Amended PB Committee Disclosure Statement") and its Second Amended Plan of Reorganization ("Amended PB Committee Plan"). The Third Amended Brass Plan contains proposed settlements with Eljer, EMI, Shell, Celanese, and the class in the case entitled "Tina Cox et al. v. Shell Oil Company et al." ("Cox") which includes class members formerly in the case entitled "Garria Spencer, et al. v. Shell Oil Company et al." ("Spencer"). The Bankruptcy Court held a hearing on January 22, 1997 to consider the Third Amended Brass Disclosure Statement, the Amended PB Disclosure Statement, and objections thereto, but has not yet ruled on the two disclosure statements. On October 10, 1996, a motion to lift stay ("Stay Motion") was filed seeking modification of the automatic stay to permit the filing and prosecution of a national class action in the United States District Court for the Eastern District of Texas ("1996 Complaint"). The 1996 Complaint seeks to certify a class of plumbing claims consisting of substantially all plumbing claimants not covered by the settlement in "Cox", plus a vaguely defined subset of the class covered by "Cox". On April 15, 1997, the Stay Motion was denied. On October 28, 1996, the PB Committee filed a Motion to Convert the US Brass Chapter 11 bankruptcy to a case under Chapter 7 of the Bankruptcy Code ("Conversion Motion"). Consideration of the Conversion Motion has been postponed several times without objection by the PB Committee. If the Conversion Motion is granted, US Brass would be liquidated. In connection with settlements reached by various parties in the Cox and Spencer litigation ("Cox-Spencer Agreement"), Eljer, EMI, and US Brass entered into a tentative settlement contingent upon confirming a reorganization plan in the US Brass bankruptcy embodying the terms of the tentative settlement and finalization of an agreement with the parties to the Cox-Spencer Agreement. The tentative settlement provides that EMI and US Brass will contribute an amount equal to any proceeds of their insurance policies and Eljer will contribute $53.4 million in cash and a noninterest bearing note for $20 million payable over 10 years. In exchange for such consideration, Eljer, EMI, and US Brass will receive relief satisfactory to them from claims arising from polybutylene sales to date and US Brass will remain an indirect, wholly- owned operating subsidiary of the Company. The terms of the Cox-Spencer Agreement are contained in the Third Amended Brass Plan. If the tentative settlement does not result in a confirmed Plan of Reorganization, it is not presently possible to estimate the ultimate number or dollar value of Systems claims that may be filed and allowed in the bankruptcy case. As of February 15, 1997, approximately 1,535 claims had been filed with the Bankruptcy Court, asserting the aggregate amount of approximately $2.15 billion, consisting primarily of alleged Systems related damages. Additional claims may be filed. Many claims are disputed or based on contingencies that have not occurred. Other claims have been made which do not specify the amount of damages. -7- Certain parties have alleged that claims exist against EMI and Eljer relating to the Systems. Approximately 59 lawsuits representing approximately 25,000 homes have been filed in state or federal courts in eight different states that name Eljer and/or EMI or its predecessor, Household Manufacturing, Inc., in addition to other parties, as defendants. These claims include allegations of direct and alter ego liability. It is not known what effect the Cox- Spencer Agreement will have on these lawsuits, although it is expected that some of them may be dismissed following finalization of the Cox-Spencer Agreement. Environmental Matters EMI has submitted a closure plan for a brass foundry in Marysville, Ohio which was closed in 1987 to the Ohio Environmental Protection Agency ("Ohio EPA"). Despite meeting certain financial assurance requirements, EMI received correspondence from the Ohio Attorney General threatening commencement of a lawsuit for failure to meet all of its obligations. On July 7, 1995, the Attorney General informed EMI of the intent to assess a $2.5 million civil penalty for financial assurance violations. On December 11, 1995, a Consent Order was entered by the Court of Common Pleas for Union County, Ohio wherein EMI agreed to pay a reduced cash penalty of $750,000, with an additional fine of $500,000 to be suspended pending completion of closure activities at the Marysville site in accordance with a closure plan approved by the Ohio EPA. To meet EMI's remaining financial assurance obligations, the Consent Order also required funding an $8.5 million trust account during 1996 to be used to pay for implementation of the Marysville closure plan. EMI has paid the $750,000 penalty and funded $5.5 million into the trust account. As a result of its failure to timely fund the final payment, the Ohio EPA assessed, and EMI paid, the maximum stipulated penalty of $100,000 as provided in the Consent Order. EMI has since notified the Ohio EPA of its intent to fund the final $3.0 million trust account payment in July 1997. EMI submitted a plan for closure of the hazardous waste management unit at its Salem, Ohio facility to the Ohio EPA on April 30, 1993. Comments received from the Ohio EPA indicate the closure plan will require modifications. The current estimated cost of implementing the closure plan, excluding post- closure care, is approximately $3.2 million. In connection with the anticipated closure plan revisions, a proposal submitted by EMI for the reduction of post-closure care costs from $1.9 million to $1.0 million (undiscounted) was accepted by the Ohio EPA in September 1996. After March 1992, EMI was unable to meet its financial assurance obligations with respect to the Salem site. The United States Department of Justice ("DOJ") sought payment by EMI of a cash penalty of $175,000, with an additional fine of $912,000 to be held in abeyance pending completion of the site closure activities without any further violations of EMI's financial assurance obligations. EMI accepted the offer and amendments to the 1990 consent decree were approved and entered by the United States District Court for the Northern District of Ohio on June 20, 1996 and EMI paid the $175,000 penalty. EMI negotiated a settlement with the DOJ and the United States Environmental Protection Agency ("EPA") for alleged violations of the Clean Water Act for unpermitted discharge of wastewater streams at the Salem, Ohio facility. The -8- settlement called for the payment of a $300,000 cash penalty and performance of certain remedial work at the facility estimated to cost approximately $690,000. On December 8, 1995, a consent decree was entered by the United States District Court for the Northern District of Ohio approving the negotiated settlement. On January 8, 1996, EMI paid the $300,000 civil penalty and, on November 26,1996, EMI's environmental consulting engineers completed implementation of the remedial work at the Salem facility. A final report was submitted to the EPA on January 24, 1997 and is currently awaiting final approval and certification. In November 1996, EMI became aware that two individuals working for environmental engineering consultants retained by EMI had been served with subpoenas to testify before a grand jury. Subsequently, the consultants produced information pursuant to a subpoena that requested documents relating to remedial work performed at the Salem, Ohio facility. EMI also understands the government's investigation is part of a joint environmental enforcement task force consisting of government representatives in Ohio from state and federal agencies. It is unknown at this time whether EMI or any of its subsidiaries or employees are, or will be, the subject or target of the ongoing investigation. It is also unknown what, if any, enforcement action may result from this investigation. The Company received an Administrative Order, effective April 30, 1992, issued by the EPA pursuant to Section 106(a) of the Comprehensive Environmental Response, Compensation and Liability Act of 1980 directing the Company and thirty-five others to implement response activities at the Millcreek Dumpsite in Erie County, Pennsylvania in accordance with a remedial plan. The Company is informed that EPA has secured estimates of the cost of the remedial work which approximate $12 million. The Company and seventeen of the other respondents have notified EPA of their intention to undertake the remedial action. Certain of the Company's plants may have disposed of waste at sites which have or may become a part of federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 clean-up efforts. Through notifications from the EPA, the Company believes its total liabilities are immaterial (approximately $45,000 at March 31, 1997) if liability and contributions are assessed in an equitable manner among all responsible parties. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. -9- EXECUTIVE OFFICERS OF THE REGISTRANT Name Age Positions Period Served Robert R. Womack 59 Chairman Since 1995 Director and Chief Executive Officer Since 1994 Independent Consultant 1993 - 1994 Vice Chairman and Chief Executive Officer - Imo Industries, Inc. (controls, pumps, and engineered power products) 1990 - 1993 Donald L. Butynski 53 Group Vice President Since 1995 President - National Energy Production Corporation (a subsidiary of the Company) Since 1986 Frank E. Sheeder 54 Group Vice President Since 1995 President and Chief Executive Officer - Furmanite, Inc. (engineering and maintenance services), a subsidiary of Kaneb Services, Inc. 1994 - 1995 Independent Consultant 1992 - 1994 John R. Mellett 47 Senior Vice President- Chief Financial Officer Since 1995 Senior Vice President and Chief Financial Officer and Vice President-Finance (1992-1994) - LeFebure (financial institution capital equipment and services), a subsidiary of De La Rue, PLC 1992 - 1995 James A. Zurn 55 Senior Vice President Since 1981 William J. Durbin 52 Vice President-Human Resources Since 1996 Vice President-Human Resources Amcast Industrial Corporation (castings and fittings manufacturer) 1984 - 1996 John E. Rutzler III 56 Vice President-Controller Since 1989 Dennis Haines 44 General Counsel and Secretary Since 1993 Associate General Counsel 1989 - 1993 -10- PART II ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information The principal markets on which the Company's Common Stock is traded are the New York Stock Exchange, Inc. and the Pacific Exchange, Inc. "Unaudited Quarterly Financial Data - Common Stock Market Price" on page 25 of the Annual Report to Shareholders for the year ended March 31, 1997 is incorporated herein by reference. Holders At March 31, 1997, there were 4,993 holders of record of the Company's Common Stock. Dividends "Unaudited Quarterly Financial Data - Common Stock Cash Dividends Declared" on page 25 of the Annual Report to Shareholders for the year ended March 31, 1997 is incorporated herein by reference. ITEM 6 - SELECTED FINANCIAL DATA "Five Year Consolidated Financial Summary - Operating Data," "Five Year Consolidated Financial Summary - Financial Position at Year End - Total Assets and Debt Obligations," and the footnote thereto on page 25 of the Annual Report to Shareholders for the year ended March 31, 1997 are incorporated herein by reference. ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS "Financial Review" on pages 22 through 24 of the Annual Report to Shareholders for the year ended March 31, 1997 is incorporated herein by reference. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements and notes to consolidated financial statements on pages 26 through 37 of the Annual Report to Shareholders for the year ended March 31, 1997 are incorporated herein by reference. "Unaudited Quarterly Financial Data" on page 25 of the Annual Report to Shareholders for the year ended March 31, 1997 is incorporated herein by reference. -11- INDEPENDENT AUDITORS' REPORT Board of Directors and Shareholders Zurn Industries, Inc. Erie, Pennsylvania We have audited the consolidated financial statements and the financial statement schedule of Zurn Industries, Inc. and subsidiaries listed in Item 14. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit 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 listed in Item 14 present fairly, in all material respects, the consolidated financial position of Zurn Industries, Inc. and subsidiaries at March 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Erie, Pennsylvania May 19, 1997 ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There has been no change in independent auditors within twenty-four months prior to the date of the most recent financial statements. -12- PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT "Nominees For a Term of Three Years Each" on page 1 and "Nominee For a Term of Two Years", "Directors Whose Terms of Office Continue Until 1998", and "Directors Whose Terms of Office Continue Until 1999" on page 2 of the Proxy Statement dated June 27, 1997 are incorporated herein by reference. Information with respect to executive officers is presented in Part I. Based solely upon a review of Forms 3, 4, and 5, and amendments thereto, furnished to the Company with respect to its most recent fiscal year, and written representations that no Form 5 was required, no person who, at any time during the fiscal year, was a director, officer, or beneficial owner of more than 10% of any class of equity securities of the Company failed to file on a timely basis reports required by Section 16(a) of the Securities Exchange Act of 1934 during the most recent fiscal year or prior fiscal years. ITEM 11 - EXECUTIVE COMPENSATION "Summary Compensation Table" on page 5, "Stock Option Grants" and "Stock Option Exercises And Fiscal Year End Option Values" on page 6, "Pension Plans" on page 7, "Directors' Compensation" on page 8, "Management Development and Compensation Committee Report" on pages 8 and 9, and "Performance Graph" on page 10 of the Proxy Statement dated June 27, 1997 are incorporated herein by reference. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT "Security Ownership Of Common Stock" on page 4 of the Proxy Statement dated June 27, 1997 is incorporated herein by reference. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS "Related-Party Transactions" on page 8 of the Proxy Statement dated June 27, 1997 is incorporated herein by reference. PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K Financial Statements The following consolidated financial statements included in the Annual Report to Shareholders for the year ended March 31, 1997 are incorporated herein by reference: -13- Consolidated Financial Position - March 31, 1997 and 1996 Consolidated Operations - Years Ended March 31, 1997, 1996, and 1995 Consolidated Cash Flows - Years ended March 31, 1997, 1996, and 1995 Industry Segment Data - Years ended March 31, 1997, 1996, and 1995 Notes to Consolidated Financial Statements Financial Statement Schedules The following consolidated financial statement schedule is included in this Item: Schedule II - Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. Exhibits The exhibits listed in the Exhibit Index to this report are incorporated herein by reference. Management contracts and compensatory plan arrangements are preceded by an asterisk ("*") in the Exhibit Index. Reports on Form 8-K January 22, 1997, as amended on April 7, 1997, reporting the acquisition of Eljer Industries, Inc. -14- SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (Thousands)
Col. A Col. B Col. C Col. D Col. E Additions Balance at (1) (2) Balance Beginning of Charged to Costs Charged to Other Deductions- at End Description Period and Expenses Accounts-Describe Describe of Period Year Ended March 31, 1997 Allowance for doubtful accounts $ 2,647 $ 874 $ 7,193 -A $ 660 -B 1,759 -C $ 8,295 $ 2,647 $ 874 $ 7,193 $2,419 $ 8,295 Reserves: Plant closings $ 460 $ 270 -F $ 190 Warranties 1,389 $ 34 $ 1,393 -A 142 -G 1,281 -C 1,393 Environmental 1,025 14,640 -A 143 -E 15,522 $ 2,874 $ 34 $16,033 $1,836 $17,105 Year Ended March 31, 1996 Allowance for doubtful accounts $ 4,238 $ 487 $ 24 -A $ 694 -B 1,408 -C $ 2,647 $ 4,238 $ 487 $ 24 $2,102 $ 2,647 Reserves: Plant closings $ 1,626 $ 581 -E 585 -F $ 460 Warranties 3,551 $(1,896) 200 -G 66 -C 1,389 $ 5,177 $(1,896) $1,432 $ 1,849 Year Ended March 31, 1995 Allowance for doubtful accounts $ 6,203 $ 1,062 $ 152 -D $3,179 -B $ 4,238 Reserves: Plant closings $ 7,729 $ 283 -D 5,131 -E 689 -F $ 1,626 Warranties 4,382 $ 113 944 -G 3,551 $12,111 $ 113 $7,047 $ 5,177 A-Purchase of business. D-Account transfers. G-Warranty claims allowed. B-Uncollectible accounts written off, net of recoveries. E-Costs incurred. C-Discontinued operations. F-Credit to costs and expenses. -15- /TABLE SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ZURN INDUSTRIES, INC. (Registrant) June 4, 1997 /s/ Robert R. Womack Robert R. Womack Chairman Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. /s/ Robert R. Womack Director, Chairman, and June 4, 1997 Robert R. Womack Chief Executive Officer /s/ John R. Mellett Senior Vice President and June 4, 1997 John R. Mellett Chief Financial Officer /s/ John E. Rutzler III Vice President-Controller June 4, 1997 John E. Rutzler III /s/ Scott G. Arbuckle Director June 4, 1997 Scott G. Arbuckle /s/ Zoe Baird Director June 4, 1997 Zoe Baird /s/ M. K. Brown Director June 4, 1997 Michael K. Brown /s/ William E. Butler Director June 4, 1997 William E. Butler /s/ Edward J. Campbell Director June 4, 1997 Edward J. Campbell /s/ Robert D. Neary Director June 4, 1997 Robert D. Neary -16- EXHIBIT INDEX 3 Articles Of Incorporation And By-laws Restated Articles of Incorporation with Amendments through Incorporated April 22, 1996 filed as Exhibit 3.1 to Form 10-K for the by reference year ended March 31, 1996 By-laws as of August 1995 filed as Exhibit 3.1 to Form Incorporated 10-Q for the quarter ended September 30, 1995 by reference 4 Instruments Defining The Rights Of Security Holders, Including Indentures Description of Common Stock contained in the prospectus Incorporated dated July 26, 1972 beginning on page 18 ("Description of by reference Capital Stock") forming a part of Amendment No. 3 to the Form S-1 Registration Statement No. 2-44631 Description of Common Stock as set forth in the Restated Included in Articles of Incorporation with Amendments through Exhibit 3.1 April 22, 1996 filed as Exhibit 3.1 to Form 10-K for the year ended March 31, 1996 Description of Preferred Share Purchase Rights contained Incorporated in the Form 8-A Registration Statement dated May 17, 1996 by reference 10 Material Contracts * 1986 Stock Option Plan filed as Exhibit 28A to Form S-8 Incorporated Post-Effective Amendment No. 1 Registration Statement No. by reference 33-19103 * 1989 Directors Stock Option Plan filed as Exhibit 28 to Incorporated Form S-8 Registration Statement No. 33-30383 by reference * 1991 Stock Option Plan filed as Exhibit 28 to Form S-8 Incorporated Registration Statement No. 33-49224 by reference * 1995 Directors Stock Option Plan filed as Exhibit 99 to Incorporated Form S-8 Registration Statement No. 33-65219 by reference 10.17* 1996 Employee Stock Plan * Supplemental Executive Retirement Plan of Zurn Incorporated Industries, Inc. filed as Exhibit 10.1 to Form 10-Q for by reference the quarter ended December 31, 1994 * 1986 Retirement Plan for Outside Directors of Zurn Incorporated Industries, Inc. filed as Exhibit 10.16 to Form 10-Q for by reference the quarter ended December 31, 1996 -17- * Agreements Relating to Employment dated June 5, 1989 Incorporated with J.A. Zurn filed as Exhibit 10H to Form 10-Q for the by reference the quarter ended June 30, 1989; dated October 17, 1994 with R.R. Womack filed as Exhibit 10.2 to Form 10-Q for the quarter ended December 31, 1994; dated May 1,1995 with D.L. Butynski and July 1, 1995 with J.R. Mellett filed as Exhibit 10.8 to Form 10-Q for the quarter ended June 30, 1995; dated August 14, 1995 with F.E. Sheeder filed as Exhibit 10.11 to Form 10-Q for the quarter ended September 30, 1995 10.18* Agreements Relating to Employment dated April 21, 1997 with W.J. Durbin, D. Haines, J.A. Harris, and B.F. Sherman * Employment Agreement dated January 22, 1996 with R.R. Incorporated Womack filed as Exhibit 10.13 to Form 10-Q for the by reference quarter ended December 31, 1995 * Zurn Industries, Inc. Deferred Compensation Plan for Non- Incorporated Employee Directors filed as Exhibit 19E to Form 10-Q for by reference the quarter ended June 30, 1989 * Zurn Industries, Inc. Deferred Compensation Plan for Incorporated Salaried Employees filed as Exhibit 10.3 to Form 10-Q for by reference the quarter ended December 31, 1994 * Zurn Industries, Inc. Optional Deferment Plan for Incorporated Incentive Compensation Plan Participants filed as Exhibit by reference 10.4 to Form 10-Q for the quarter ended December 31, 1994 * Zurn Supplemental Pension Plan filed as Exhibit 10.5 to Incorporated Form 10-Q for the quarter ended December 31, 1994 by reference * Indemnity Agreements dated August 14, 1986 with E.J. Incorporated Campbell, and J.A. Zurn filed as Exhibit 19J to Form 10-Q by reference for the quarter ended September 30, 1986; dated October 20, 1986 with J.E. Rutzler III filed as Exhibit 10B to Form 10-Q for the quarter ended December 31, 1988; dated January 25, 1993 with W.E. Butler, April 1, 1993 with D. Haines, and August 6, 1993 with Z. Baird filed as Exhibit 10A to Form 10-Q for the quarter ended June 30, 1993; dated October 17, 1994 with R.R. Womack filed as Exhibit 10.6 to Form 10-Q for the quarter ended December 31, 1994; dated May 1, 1995 with D.L. Butynski, June 8, 1995 with R.D. Neary, and July 1, 1995 with J.R. Mellett filed as Exhibit 10.9 to Form 10-Q for the quarter ended June 30, 1995; dated August 14, 1995 with F.E. Sheeder filed as Exhibit 10.12 to Form 10-Q for the quarter ended September 30, 1995; dated October 30, 1995 with M.K. Brown filed as Exhibit 10.14 to Form 10-Q for the quarter ended December 31, 1995 -18- 10.19 *Indemnity Agreements dated October 28, 1996 with W.J. Durbin, January 28, 1997 with S.G. Arbuckle, and June 4, 1997 with J.M. Sergey * Irrevocable Trust Agreements for the Grantor's: 1986 Incorporated Retirement Plan for Outside Directors of Zurn Industries, by reference Inc.; Deferred Compensation Plan for Non-Employee Directors; Supplemental Executive Retirement Plan for Zurn Industries, Inc.; Zurn Industries, Inc. Supplemental Pension Plan for Participants in the Deferred Compensation Plan for Salaried Employees; Deferred Compensation Plan for Salaried Employees; Optional Deferment Plan for Incentive Compensation Plan Participants filed as Exhibit 19I to Form 10-Q for the quarter ended September 30, 1986 * Second Irrevocable Trust Agreement for the Grantor's Incorporated Indemnity Agreements filed as Exhibit 10A to Form 10-Q by reference for the quarter ended December 31, 1988 10.20* Zurn Industries, Inc. Executive Incentive Plan Credit Agreement dated January 21, 1997 as amended and Incorporated restated as of March 4, 1997 by an among Zurn Industries, by reference Inc., Eljer Manufacturing, Inc., the lenders party thereto from time to time, NationsBank, N.A., as Documentation Agent and Bankers Trust Company, as Administrative Agent filed April 7, 1997 as Exhibit 10 to Form 8-K/A Amendment No. 1 dated January 22, 1997 11 Statement Re Computation Of Per Share Earnings Computation of Earnings Per Share 13 Annual Report To Security Holders Electronic Format of Pages of Annual Report to Shareholders for the Year Ended March 31, 1997 Incorporated by Reference 21 Subsidiaries Of The Registrant Subsidiaries 23 Consents Of Experts And Counsel Consent of Independent Auditors 27 Financial Data Schedule 27.1 Financial Data Schedule Year Ended March 31, 1997 SEC Edgar Filing Only 27.2 Restated Financial Data Schedule Year Ended SEC Edgar March 31, 1997 Interim Quarters Filing Only 27.3 Restated Financial Data Schedule Year Ended SEC Edgar March 31, 1996 Filing Only -19- 27.4 Restated Financial Data Schedule Year Ended SEC Edgar March 31, 1995 Filing Only 99 Additional Exhibits 99.1 Annual Report on Form 11-K of the Zurn Retirement Savings Plan for the year ended December 31, 1996 99.2 Annual Report on Form 11-K of the Zurn/NEPCO Retirement Savings Plan for the year ended December 31, 1996 * - Management contracts and compensatory plan arrangements. -20- EX-10.17 2 EXHIBIT 10.17 - 1996 EMPLOYEE STOCK PLAN EXHIBIT 10.17 - 1996 EMPLOYEE STOCK PLAN Section 1. Purpose The purpose of the Plan is to promote the long-term interests of the Company by: (i) providing incentive compensation to executives and other key Employees who contribute to the growth and success of the Company and its Subsidiaries; (ii) attracting and retaining executives and other key Employees of outstanding ability; and (iii) further aligning the interests of such individuals with the interests of the Company's shareholders. Section 2. Definitions The following terms, as used herein, shall have the meaning specified: a. "Award" means an award granted pursuant to Section 4. b. "Award Agreement" means an agreement described in Section 6 entered into between the Company and a Participant, setting forth the terms and conditions applicable to the award granted to the Participant. c. "Board of Directors" means the Board of Directors of the Company as it may be comprised from time to time. d. "Cause" means (i) a felony conviction of an Employee; (ii) the commission by an Employee of an act of fraud or embezzlement against the Company and/or a Subsidiary; (iii) the Employee's willful misconduct or gross negligence materially detrimental to the Company and/or a Subsidiary; (iv) the Employee's failure to perform his duties and responsibilities in accordance with the standards and criteria established by the Company therefor and communicated to the Employee; (v) the Employee's wrongful dissemination or use of confidential or proprietary information of the Company and/or Subsidiary or of confidential or proprietary information of a third party in breach of a contractual or other obligation of the Company and/or Subsidiary; or (vi) the intentional and habitual neglect by the Employee of his duties to the Company and/or a Subsidiary. e. "Change in Control" means Change in Control as defined in Section 10. f. "Code" means the Internal Revenue Code of 1986, and any successor statute, as it or they may be amended from time to time. g. "Committee" means the Committee as defined in Section 8. h. "Common Stock" means shares of common stock of the Company, $.50 par value, or any security of the Company issued in substitution, exchange or in lieu thereof. i. "Company" means Zurn Industries, Inc., and any successor company. -1- j. "Covered Employee" means a covered employee within the meaning of Code section 162(m)(3). k. "Disability" means (i) total disability within the meaning of the Company's long-term disability plan as an in effect from time to time or (ii) if there is no such plan at the applicable time, physical or mental incapacity as determined solely by the Committee. l. "Effective Date" means the Effective Date as defined in Section 11(k). m. "Employee" means officers, executives and other key employees of the Company or a Subsidiary. n. "Exchange Act" means the Securities Exchange Act of 1934, and any successor statute, as it or they may be amended from time to time. o. "Fair Market Value" means the closing price of the Common Stock as reported on the New York Stock Exchange Composite Tape for the relevant date, or if no sale of such Common Stock is reported for such date, the next preceding day for which there is a reported sale. p. "Insider" means any person who is subject to Section 16 of the Exchange Act, and any successor statutory provision, as it or they may be amended from time to time. q. "Participant" means any Employee who has been granted an award. r. "Plan" means this 1996 Employee Stock Plan. s. "Retirement" means retirement at or after age 65 or, with the advance consent of the Committee, before age 65. t. "Subsidiary" means any company in which the Company, directly or indirectly, controls fifty percent (50%) or more of the total combined voting power of all classes of such company's common stock. u. "Ten-Percent Shareholder" means any person who owns, directly or indirectly, on the relevant date securities having ten percent (10%) or more of the combined voting power of all classes of the Company's securities or the securities of its parent or subsidiaries. For purposes of determining the foregoing ten percent (10%), the rules of Code section 425(d) shall apply. Section 3. Eligibility Persons eligible for awards shall be Employees who contribute to the growth and success of the Company and/or its Subsidiaries as the Committee may in its sole discretion determine. -2- Section 4. Employee Awards The Committee may grant Employees any of the following types of awards, either singly, in tandem, or in combination with other types of awards, as the Committee may in its sole discretion determine: a. Nonqualified Stock Options. A Nonqualified Stock Option is an option to purchase a specific number of shares of Common Stock exercisable at such time or times six months after the grant date, and during such specified time not to exceed ten years, as the Committee may determine, at a price not less than one hundred percent (100%) of the fair market value of the Common Stock on the date that the option is granted. The purchase price of the Common Stock subject to the option may be paid in cash, by the tender of Common Stock which has been owned for more than six months (the value of such Common Stock shall be its Fair Market Value on the date of exercise), or through a combination of Common Stock and cash, or through such other means as the Committee determines are consistent with the Plan's purpose and applicable law. No fractional shares of Common Stock will be issued or accepted. b. Incentive Stock Options. An Incentive Stock Option is an award in the form of an option to purchase a specified number of shares of Common Stock that complies with the requirements of Code section 422, which option shall, subject to the following provisions, be exercisable at such time or times, and during such specified time, as the Committee may determine. For the purposes of the plan, the term Incentive Stock Option includes any option to purchase Common Stock that is granted pursuant to any other plan of the Company or its Subsidiaries that complies with Code section 422. i. The aggregate Fair Market Value (determined at the time of the grant of the award) of the shares of Common Stock subject to Incentive Stock Options which are exercisable by one person for the first time during a particular calendar year shall not exceed $100,000. ii. No Incentive Stock Option may be granted under the Plan on or after the third anniversary of the effective date of the Plan. iii. No Incentive Stock Option may be exercisable more than: A) in the case of an Employee who is not a Ten-Percent Shareholder on the date that the option is granted, ten years after the date the option is granted; and B) in the case of an Employee who is a Ten-Percent Shareholder on the date the option is granted, five years after the date the option is granted. -3- iv. The exercise price of any Incentive Stock Option shall not be less than: A) in the case of an Employee who is not a Ten-Percent Shareholder on the date that the option is granted, the Fair Market Value of the Common Stock subject to the option on such date; and B) in the case of an Employee who is a Ten-Percent Shareholder on the date that the option is granted, one hundred ten percent of the Fair Market Value of the Common Stock subject to the option on such date. v. The Committee may provide that the option price under an Incentive Stock Option may be paid by one or more of the methods available for paying the option price of a Nonqualified Stock Option. c. Stock Equivalent Units. A Stock Equivalent Unit is an award based on the Fair Market Value of one share of Common Stock. All or part of any Stock Equivalent Units award may be subject to conditions and restrictions established by the Committee, including, but not limited to, achievement of specific business objectives, and other measurements of individual, business unit, Company or Subsidiary performance, including, but not limited to, earnings per share, net after-tax income, total shareholder return, cash flow, return on shareholders' equity, and cumulative return on net assets. Without limiting the generality of the foregoing, it is intended that the Committee, as and to the extent it deems advisable to ensure that payments are deductible by the Corporation for federal income tax purposes by reason of Code section 162(m), shall establish performance goals applicable to Stock Equivalent Units granted to Participants who, in the judgment of the Committee, may be Covered Employees in such manner as shall permit payments with respect thereto to qualify as "performance-based compensation" as described in section 162(m)(4)(C) of the Code. The Committee also may provide for automatic awards of additional Stock Equivalent Units on each date that dividends are paid on the Common Stock in an amount equal to (i) the product of the dividend per share on the Common Stock times the total number of Stock Equivalent Units held by the Participant as of the record date with respect to such dividend, divided by (ii) the Fair Market Value of the Common Stock on the dividend payment date. Stock Equivalent Units may be settled in Common Stock or cash or both. d. Performance Units. A Performance Unit is an award denominated in cash, the amount of which may be based on the achievement of specific business objectives, and other measures of individual, business unit, Company or Subsidiary performance over a specified period of time including, but not limited to, earnings per share, net after-tax income, total shareholder return, cash flow, return on shareholders' equity, and cumulative return on net assets. Without -4- limiting the generality of the foregoing, it is intended that the Committee, as and to the extent it deems advisable to ensure that payments are deductible by the Corporation for federal income tax purposes by reason of Code section 162(m), shall establish performance goals applicable to Performance Units granted to Participants who, in the judgment of the Committee, may be Covered Employees in such a manner as shall permit payments with respect thereto to qualify as "performance-based compensation" as described in section 162(m)(4)(C) of the Code and that the maximum amount of such compensation that may be paid to any one Participant with respect to any one year shall be $300,000. Performance Units may be settled in Common Stock or cash or both. e. Annual Incentive Stock Awards. The Committee may from time to time grant Common Stock to Insiders in settlement of awards under the Company's annual incentive plan. Section 5. Shares of Common Stock Available Under Plan a. Subject to the adjustment provisions of Section 9, the number of shares of Common Stock with respect to which awards may be granted under the Plan shall not exceed 500,000 shares. No single Participant shall receive awards (i) in the form of options, whether Nonqualified Stock Options or Incentive Stock Options, with respect to more than 125,000 of the shares of Common Stock available under the Plan in any twelve-month period, (ii) in the form of Stock Equivalent Units, with respect to more than 15,000 shares of Common Stock in any twelve-month period, and (iii) pursuant to Section 4(e), for more than 30,000 shares of Common Stock in any twelve-month period. b. Shares of Common Stock with respect to the unexercised or undistributed portion of any terminated or forfeited award and shares of Common Stock tendered in payment of the purchase price of the Common Stock subject to option shall be available for further awards in addition to the 500,000 shares of Common Stock available under Section 5(a). Additional rules for determining the number of shares of Common Stock granted under the Plan may be adopted by the Committee as it deems necessary and appropriate. c. The Common Stock that may be issued pursuant to an award under the Plan may be treasury or authorized but unissued Common Stock, or Common Stock may be acquired, subsequently or in anticipation of the transaction, in the open market to satisfy the requirements of the Plan. Section 6. Award Agreements Each award under the Plan shall be evidenced by an Award Agreement. Each Award Agreement shall set forth the number of shares of Common Stock, Stock Equivalent Units, and/or Performance Units subject to the award and shall include the terms set forth below and such other terms and conditions applicable -5- to the award, as determined by the Committee, not inconsistent with the terms of the Plan, including but not limited to the term of the award, vesting provisions, any other restrictions or conditions (including performance requirements) on the award and the method by which restrictions or conditions lapse, provisions permitting the surrender of outstanding awards or securities held by the Participant in order to exercise or realize rights under other awards, or in exchange for the grant of new awards under similar or different terms, the effect on the award of a Change in Control of the Company, the price, amount or value of awards, and the terms, if any, pursuant to which a Participant may elect to defer the receipt of cash or Common Stock under an award. In the event of any conflict between an Award Agreement and the Plan, the terms of the Plan shall govern. a. Nonassignability. Except as and to the extent otherwise determined by the Committee, a provision that no award shall be assignable or transferable except by will or by the laws of descent and distribution and that, during the lifetime of a participant, the award shall be exercised only by such Participant or by his or her guardian or legal representative. b. Termination of Service. i. A provision describing the treatment of an award in the event of the Retirement, Disability, death or other termination of a Participant's service with the Company or a Subsidiary, including but not limited to terms relating to the vesting, time for exercise, forfeiture or cancellation of an award in such circumstances. ii. A provision that for purposes of the Plan, (A) a transfer of an Employee from the Company to a Subsidiary or affiliate of the Company, whether or not incorporated, or visa versa, or from one Subsidiary or affiliate of the Company to another, and (B) a leave of absence, duly authorized in writing by the Company, shall not be deemed a termination of service. iii. A provision stating that in the event an Participant's service is terminated for Cause, anything else in the Plan or the Award Agreement to the contrary notwithstanding, all unvested awards granted to such Participant and all unexercised options held by such Participant, whether vested or unvested, shall immediately terminate and be forfeited. c. Rights as a Shareholder. A provision stating that a Participant shall have no rights as a shareholder with respect to any Common Stock covered by an award until the date the Participant becomes the holder of record thereof. Except as provided in Section 9, no adjustment shall be made for dividends or other rights, unless the Award Agreement specifically requires or permits such adjustment. d. Withholding. A provision requiring the withholding of applicable taxes required by law from or with respect to all awards. A -6- participant may satisfy the withholding obligation by paying the amount of any taxes in cash or, with the approval of the Committee, shares of Common Stock may be deducted from the payment to satisfy the obligation in full or in part. The amount of the withholding and the number of shares of Common Stock to be deducted shall be determined with reference to the Fair Market Value of the Common Stock when the withholding is required to be made. e. Execution. A provision stating that no award is enforceable until the Award Agreement has been signed by the Participant and the Company. By executing the Award Agreement, a Participant shall be deemed to have accepted and consented to any action taken under the Plan by the Committee, the Board of Directors or their delegates. f. Holding Period. To the extent necessary to satisfy the applicable requirements of rule 16b-3 under the Exchange Act, in the case of an award to an Insider of: (i) an equity security, a provision stating (or the effect of which is to require) that such security must be held for at least six months (or such longer period as the Committee it its discretion specifies) from the date of acquisition; or (ii) a derivative security with a fixed exercise price within the meaning of Section 16 of the Exchange Act, a provision stating (or the effect of which is to require) that at least six months (or such longer period as the Committee in its discretion specifies) must elapse from the date of acquisition of such derivative security to the date of disposition of the derivative security (other than upon exercise or conversion) or its underlying equity security. g. Treatment of Options. Each award of an option shall state whether it will or will not be treated as an Incentive Stock Option. Section 7. Amendment and Termination The Board of Directors may at any time amend or terminate the Plan, in whole or in part, or amend any or all Award Agreements under the Plan to the extent permitted by law, but no such action shall impair the rights of any holder of an award without the holder's consent, except to preserve the Plan's qualification as a safe harbor plan under Section 16 of the Exchange Act. Section 8. Administration a. The Plan and all awards shall be administered by a Committee of the Board of Directors, which Committee shall consist of not less than three (3) members of the Board of Directors and shall be constituted so as to permit the Plan to comply with the administration requirements of rule 16b-3(c)(2)(I) of the Exchange Act and Code section 162(m)(4)(C). The members of the Committee shall be designated by the Board of Directors. A majority of the members of the Committee shall constitute a quorum. The vote of a majority of a quorum shall constitute action by the Committee. -7- b. The Committee shall have full and complete authority, in its sole and absolute discretion, (i) to exercise all of the powers granted to it under the Plan, (ii) to construe, interpret and implement the Plan and any related document, (iii) to prescribe, amend and rescind rules relating to the Plan, (iv) to make all determinations necessary or advisable in administering the Plan, and (v) to correct any defect, supply any omission and reconcile any inconsistency in the Plan. The actions and determinations of the Committee on all matters relating to the Plan and any awards will be final and conclusive. The Committee's determinations under the Plan need not be uniform and may be made by it selectively among Employees who receive, or who are eligible to receive, awards under the Plan, whether or not such persons are similarly situated. c. The Committee may appoint such accountants, counsel, and other experts as it deems necessary or desirable in connection with the administration of the Plan. The Committee may delegate to the officers or employees of the Company and its Subsidiaries the authority to execute and deliver such instruments and documents, to do all such acts and things, and to take all such other steps deemed necessary, advisable or convenient for the effective administration of the Plan in accordance with its terms and purpose, except that the Committee may not delegate any discretionary authority with respect to substantive decisions or functions regarding the Plan or awards thereunder as these relate to Insiders or Covered Employees, including but not limited to decisions regarding the timing, eligibility, pricing, amount or other material terms of such awards. d. The Committee and others to whom the Committee has delegated such duties shall keep a record of all their proceedings and actions and shall maintain all such books of account, records and other data as shall be necessary for the proper administration of the Plan. e. The Company shall pay all reasonable expenses of administering the Plan, including, but not limited to, the payment of professional fees. f. It is the intent of the Company that the Plan and awards thereunder satisfy, and be interpreted in a manner that satisfy, in the case of Participants who are or may be Insiders, the applicable requirements of rule 16b-3 of the Exchange Act, so that such persons will be entitled to the benefits of rule 16b-3, or other exemptive rules under section 16 of the Exchange Act, and will not be subjected to avoidable liability thereunder. If any provision of the Plan or of any award would otherwise frustrate or conflict with the intent expressed in this Section, that provision to the extent possible shall be interpreted and deemed amended so as to avoid such conflict. To the extent of any remaining irreconcilable conflict with such intent, such provision shall be deemed void as applicable to Insiders. -8- Section 9. Adjustment Provisions If there shall occur any recapitalization, stock split (including a stock split in the form of a stock dividend), reverse stock split, merger combination, consolidation, or other reorganization or any extraordinary dividend or other extraordinary distribution in respect of the Common Stock (whether in the form of cash, Common Stock or other property), or any split- up, spin-off, extraordinary redemption, or exchange of outstanding Common Stock, or there shall occur any other similar corporate transaction or event in respect of the Common Stock, or a sale of substantially all the assets of the Company, then the Committee shall, in the manner and to the extent, if any, as it deems appropriate and equitable to the Participants and consistent with the terms of the Plan, and taking into consideration the effect of the event on the holders of the Common Stock proportionately adjust any or all of: (a) the number and type of shares of Common Stock and Stock Equivalent Units which thereafter may be made the subject of awards (including the specific maximums and numbers of shares of Common Stock or Stock Equivalent Units set forth elsewhere in the Plan); (b) the number and type of shares of Common Stock, other property, Stock Equivalent Units or cash subject to any or all outstanding awards; (c) the grant, purchase or exercise price, or conversion ratio of any or all outstanding awards, or of the Common Stock, other property or Stock Equivalent Units underlying the awards; (d) the securities, cash or other property deliverable upon exercise or conversion of any or all outstanding awards; (e) subject to Sections 4(c) and (d), the performance targets or standards applicable to any outstanding performance-based awards; or (f) any other terms as are affected by the event. Notwithstanding the foregoing, in the case of an Incentive Stock Option, no adjustment shall be made which would cause the Plan to violate section 424(a) of the Code or any successor provisions thereto, without the written consent of the Participant adversely affected thereby. The Committee may act prior to an event described in this Section (including at the time of an award by means of more specific provisions in the Award Agreement) if deemed necessary or appropriate to permit the Participant to realize the benefits intended to be conveyed by an award in respect of the Common Stock. Section 10. Change in Control a. In the event of a Change in Control, in addition to any action required or authorized by the terms of an Award Agreement, the Committee may, in its sole discretion, take any of the following actions as a result, or in anticipation, of any such event to assure fair and equitable treatment of Participants: i. accelerate time periods for purposes of vesting in, or realizing gain from, any outstanding awards made pursuant to the Plan; ii. offer to purchase any outstanding awards made pursuant to the Plan from the holder for their equivalent cash value, as determined by the Committee, as of the date of the Change in Control; or -9- iii. make adjustments or modifications to outstanding awards as the Committee deems appropriate to maintain and protect the rights and interests of Participants following such Change in Control. Any such action approved by the Committee shall be conclusive and binding on the Company and all participants. b. A Change in Control shall be deemed to occur if (i) any "person" (as such term is used in sections 13(d) and 14(d) of the Exchange Act ) other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any Company owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of Common Stock of the Company), becomes the "beneficial owner" (as defined in rule 13d-3 of the Exchange Act), directly or indirectly, of securities of the Company representing twenty percent (20%) or more of the combined voting power of the Company's then outstanding securities; (ii) during any period of two consecutive years (not including any period prior to the grant of an option or award), individuals who at the beginning of such period constitute the Board of Directors, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clauses (i), (iii) or (iv) of this paragraph) whose election by the Board of Directors or nomination for election by the Company's shareholders was approved by a vote at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved cease for any reason to constitute a majority thereof, (iii) the shareholders of the Company approve (A) a merger or consolidation of the Company with any other company, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no "person" (as herein above defined) acquires more than fifty percent (50%) of the combined voting power of the Company's then outstanding securities; or (iv) the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all of substantially all of the Company's assets. Section 11. Miscellaneous a. Other Payments or Awards. Nothing contained in the Plan shall be deemed in any way to limit or restrict the Company or a Subsidiary from making any award or payment to any person under any other plan, -10- arrangement or understanding, whether now existing or hereafter in effect. b. Payments to Other Persons. If payments are legally required to be made to any person other than the person to whom any amount is made available under the Plan, payments shall be made accordingly. Any such payment shall be a complete discharge of the liability hereunder. c. Unfunded Plan. The Plan shall be unfunded. No provision of the Plan or any Award Agreement shall require the Company or a Subsidiary, for the purpose of satisfying any obligations under the Plan, to purchase assets or place any assets in a trust or other entity to which contributions are made or otherwise to segregate any assets, nor shall the Company or a Subsidiary maintain separate bank accounts, books, records or other evidence of the existence of a segregated or separately maintained or administered fund for such purposes. Participants shall have no rights under the Plan other than as unsecured general creditors of the Company or a Subsidiary. d. Limits of Liability. Any liability of the Company or a Subsidiary to any Participant with respect to an award shall be based solely upon contractual obligations created by the Plan and the Award Agreement. Neither the Company or its Subsidiaries, nor any member of the Board of Directors or of the Committee, nor any other person participating in any determination of any question under the Plan, or in the interpretation, administration or application of the Plan, shall have any liability to any party for any action taken, or not taken, in good faith under the Plan. e. Rights of Employees. Status as an eligible Employee shall not be construed as a commitment that any award shall be made under the Plan to such Employee or to Employees generally. Nothing contained in the Plan or in any Award Agreement shall confer upon any Employee any right to continue in the service of the Company or a Subsidiary. f. Section Headings. The section headings contained herein are for the purpose of convenience only, and in the event of any conflict, the text of the Plan, rather than the section headings, shall control. g. Gender, Etc. In interpreting the Plan, the masculine gender shall include the feminine, the neuter gender shall include the masculine or feminine, and the singular shall include the plural unless the context clearly indicates otherwise. h. Validity. If any term or provision contained herein or in any Award Agreement shall to any extent be invalid or unenforceable, such term or provision shall be reformed so that it is valid, and such invalidity or unenforceability shall not affect any other provision or part thereof. i. Applicable Law. The Plan, the Award Agreements and all actions taken -11- hereunder or thereunder shall be governed by, and construed in accordance with, the laws of the Commonwealth of Pennsylvania without regard to the conflict of law principles thereof. j. Compliance with Laws. Notwithstanding anything contained herein or in any Award Agreement to the contrary, the Company shall not be required to sell or issue shares of Common Stock hereunder or thereunder if the issuance thereof would constitute a violation by the Participant or the Company of any provisions of any law or regulation of any governmental authority or any national securities exchange; and, as a condition of any sale or issuance, the Company may require such agreements or undertakings, if any, as the Company may deem necessary or advisable to assure compliance with any such law or regulation. k. Effective Date and Term. The Plan was adopted by the Board of Directors effective as of August 5, 1996, subject to approval by the Company's shareholders. The Plan shall remain in effect until all awards under the Plan have been exercised or terminated under the terms of the Plan and applicable Award Agreements, provided that awards under the Plan may only be granted within three years from the effective date. -12- EX-10.18 3 EXHIBIT 10.18 - AGREEMENTS RELATING TO EMPLOYMENT EXHIBIT 10.18 - AGREEMENTS RELATING TO EMPLOYMENT Agreements Relating to Employment in the form of the attached entered into with the following Employees as of April 21, 1997: W.J. Durbin D. Haines J.A. Harris B.F. Sherman DATE (Name) One Zurn Place Erie, PA 16502 RE: Agreement Relating To Employment Dear Mr. : ZURN INDUSTRIES, INC, (the "Company") considers it in the best interests of its stockholders to foster the continuous employment of key management personnel. In this connection, the Board of Directors of the Company (the "Board") recognizes that, the possibility of a change in control may exist and that such possibility, and the uncertainty and questions which it may arise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders. Therefore, in order to induce you to remain in the employment of the Company, the Company agrees that you shall receive the severance benefits set forth in this letter agreement ("Agreement") in the event your employment with the Company is terminated subsequent to a "change in control of the Company" (as defined in Section 2 hereof) under the circumstances described below. 1. TERM OF AGREEMENT. This Agreement shall commence on the date hereof and shall continue in effect through December 31, 1997; and each January 1, thereafter, the term of this Agreement shall automatically be extended for one additional year, provided, if a change in control of the Company shall have occurred during the original or extended term of this Agreement, this Agreement shall continue in effect for a period of thirty-six (36) months beyond the month in which such change in control occurred. 2. CHANGE IN CONTROL. No benefits shall be payable hereunder unless there shall have been a change in control of the Company, as set forth below. For purposes of this Agreement, a "change in control of the Company" shall be deemed to have occurred if: (a) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended [the "Exchange Act"], other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any Company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company) becomes the "beneficial owner" (as defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities; -1- (b) during any period of two consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clauses (a), (c) or (d) of this Section) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved cease for any reason to constitute a majority thereof; (c) the stockholders of the Company approve a merger or consolidation of the Company with any other Company, other than (1) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (2) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no "person" (as hereinabove defined) acquires more than 50% of the combined voting power of the Company's then outstanding securities; or (d) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all of substantially all of the Company's assets. 3. TERMINATION FOLLOWING CHANGE IN CONTROL. If any of the events described in Section 2 hereof constituting a change in control of the Company shall have occurred, you shall be entitled to the benefits provided in Subsection 4(iv) hereof upon the subsequent termination of your employment during the term of this Agreement unless such termination is (a) because of your death, Disability or Retirement, (b) by the Company for Cause, or (c) by you other than for Good Reason. (i) DISABILITY; RETIREMENT. If, as a result of your incapacity due to physical or mental illness, you shall have been absent from the full-time performance of your duties with the Company for six (6) consecutive months, and within thirty (30) days after written notice of termination is given you shall have not returned to the full-time performance of your duties, your employment may be terminated for "Disability". Termination by the Company or you of your employment based on "Retirement" shall mean termination in accordance with the Company's retirement policy at normal retirement age generally applicable to its salaried employees or in accordance with any retirement arrangement established with your consent with respect to you. -2- (ii) CAUSE. Termination by the Company of your employment for "Cause" shall mean termination upon (a) the willful and continued failure by you to substantially perform your duties with the Company (other than any such failure resulting from your incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination, as defined in Subsection 3(iv), by you for Good Reason) after a written demand for substantial performance is delivered to you by the Board, which demand specifically identifies the manner in which the Board believes that you have not substantially performed your duties, or (b) the willful engaging by you in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise. For purposes (of this Subsection, no act, or failure to act, on your part shall be deemed "willful" unless done, or omitted to be done, by you not in good faith and without reasonable belief that your action or omission was in the best interest of the Company. You may be terminated for Cause only after there shall have been delivered to you a copy of a resolution duly adopted by the affirmative vote of not less then two thirds (2/3) of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of conduct set forth above in clauses (a) or (b) of the first sentence of this Subsection and specifying the particulars thereof in detail. (iii) GOOD REASON. You shall be entitled to terminate your employment for Good Reason. For purposes of this Agreement, "Good Reason" shall mean, without your express written consent, any of the following: (a) a substantial adverse alteration in the nature or status of your responsibilities from those in effect immediately prior to a change in control of the Company other than any such alteration primarily attributable to the fact that the Company may no longer be a public company; (b) a reduction by the Company in your annual base salary as in effect on the date hereof or as the same may be increased from time to time; (c) the failure of the Company, without your consent, to pay to you any portion of your current compensation, or to pay to you any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven (7) days of the date such compensation is due; (d) the failure by the Company to continue in effect any compensation plan in which you participate including but not limited to the Company's Incentive Compensation Plan and the Company's Stock Option Plan, or any substitute plans adopted prior to the change in control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan in connection with the change in control of the Company, or the failure -3- by the Company to continue your participation therein on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of your participation relative to other participants, as existed at the time of the change in control; (e) the failure by the Company to continue to provide you with benefits substantially similar to those enjoyed by you under any of the Company's pension, life insurance, medical, health and accident, or disability plans in which you were participating at the time of a change in control of the Company, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive you of any material fringe benefits enjoyed by you at the time of the change in control of the Company, or the failure by the Company to provide you with the number of paid vacation days to which you are entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the change in control; (f) the failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 5 hereof; or (g) any purported termination of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Subsection (iv) below (and, if applicable, the requirements of Subsection (ii) above); for purposes of this Agreement, no such purported termination shall be effective. (h) a determination by you in good faith that, following a change in control, you are no longer able to perform your duties and responsibilities with the Company. Your right to terminate your employment pursuant to this Subsection shall be affected by your incapacity due to physical or mental illness. Your continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason hereunder. (iv) NOTICE OF TERMINATION. Any purported termination of your employment by the Company or by you shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 6 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. (v) DATE OF TERMINATION, ETC. "Date of Termination" shall mean (a) if your employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that you shall not have returned to the full-time performance of your duties during such thirty (30) day period), and (b) if your employment is terminated -4- pursuant to Subsection (ii) and (iii) above or for any other reason (other than Disability), the date specified in the Notice of Termination which, in the case of a termination pursuant to Subsection (ii) above shall not be less than thirty (30) days, and in the case of a termination pursuant to Subsection (iii) above shall not be less than thirty (30) nor more than sixty (60) days, respectively, from the date such Notice of Termination is given); provided that if within thirty (30) days after any Notice of Termination is given the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or the time for appeal therefrom having expired and no appeal having been perfected); provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Company will continue to pay you your full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, base salary) and continue you as a participant in all compensation, benefit and insurance plans in which you were participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with this Subsection. Amounts paid under this Subsection are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement except to the extent otherwise provided in paragraph (c) of Subsection 4(iv). 4. COMPENSATION UPON TERMINATION OR DURING DISABILITY. Following a change in Control of the Company, as defined by Section 2, upon termination of your employment or during a period of disability you shall be entitled to the following benefits: (i) During any period that you fail to perform your full-time duties with the Company as a result of incapacity due to physical or mental illness, you shall continue to receive your base salary at the rate in effect at the commencement of any such period, together with all compensation payable to you under the Company's long-term disability insurance program or other [plan during such period, until this Agreement is terminated pursuant to Section 3(i) hereof. Thereafter, your benefits shall be determined in accordance with the Company's insurance and retirement programs then in effect. (ii) If your employment shall be terminated by the Company for Cause or by you other than for Good Reason, Disability, death or Retirement, the Company shall pay you your full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, plus all other amounts to which you are entitled under any compensation plan of the Company at the time such payments are due, -5- and the Company shall have no further obligations to you under this Agreement. (iii) if your employment shall be terminated by you for Retirement, or by reason of your death, your benefits shall be determined in accordance with the Company's retirement and insurance programs then in effect. (iv) If your employment by the Company shall be terminated (a) by the Company other than for Cause or Disability or (b) by you for Good Reason or Retirement, then you shall be entitled to the benefits provided below: (A) the Company shall pay you your full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, plus other amounts to which you are entitled under any compensation plan of the Company, at the time such payments are due except as otherwise provided below; (B) in lieu of any further salary payments to you for periods subsequent to the Date of Termination, the Company shall pay as severance pay to you a lump sum severance payment (together with payments provided in paragraphs C, D, and E below, the "Severance Payment") equal to 300% of the greater of (i,) your annual base salary in effect on the Date of Termination or (ii) your annual base salary in effect immediately prior to the change in control of the Company and 300% of the average of the annual bonus paid to you for the three full fiscal years preceding the termination. (C) If any of the Severance Payments will be subject to the tax (the "Excise Tax") imposed by section 4999 of the Internal Revenue Code, (or any similar tax that may hereafter be imposed) the Company shall pay to you at the time specified in Subsection (D), below, an additional amount (the "Gross-Up Payment") such that the net amount retained by you, after deduction of any Excise Tax on the Total Payments (as hereinafter defined) and any federal, state and local income tax and Excise Tax upon the payment provided for by this subsection, shall be equal to the Total Severance Payments. For purposes of determining whether any of the Severance Payments will be subject to the Excise Tax and the amount of such Excise Tax, (a) any other payments or benefits received or to be received by you in connection with a change in control of the Company or your termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a change in control of the Company or any person affiliated with the Company or such person) (which together with the Severance Payments, constitute the "Total Payments") shall be treated as "parachute payments" within the meaning of section 28OG(b)(2) of the Code, and all "excess parachute payments" within the meaning of section 28OG(b)(1) shall be treated as subject to the Excise Tax, unless in the opinion of tax counsel selected by the Company's independent auditors and acceptable to you such other payments or benefits (in whole or in part) do not -6- constitute parachute payments, or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered within the meaning of section 28OG(b)(4) of the Code in excess of the base amount within the meaning of section 28OG(b)(3) of the Code, or are otherwise not subject to the Excise Tax, (b) the amount of the Total Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (1) the total amount of the Total Payments of (2) the amount of excess parachute payments within the meaning of section 28OG(b)(1) (after applying clause (q) above, and (c) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Company's independent auditors in accordance with the principles of section 28OG(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, you shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of your residence on the Date of Termination, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time of termination of your employment, you shall repay to the Company at the time that the amount of such reduction in Excise Tax is finally determined the portion of the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax and federal and state and local income tax imposed on the Gross-Up Payment being repaid by you if such repayment results in a reduction in Excise Tax and/or a federal and state and local income tax deduction) plus interest on the amount of such repayment at the rate provided in section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of your employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional gross-up payment in respect of such excess (plus any interest payable with respect to such excess) at the time that the amount of such excess is finally determined. (D) The payment provided for in paragraph (B), above, shall be made not later than the fifth day following the Date of Termination, provided, however, that if the amounts of such payments, and the limitation on such payments set forth in paragraph (C), above, cannot be finally determined on or before such day, the Company shall pay to you on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments and shall pay the remainder of such payments (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to -7- you, payable on the fifth day after demand by the Company (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). (E) The Company shall also pay to you all legal fees and expenses incurred by you as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce early right or benefit provided by this Agreement). (v) If your employment shall be terminated (a) by the Company other than for Cause, Retirement or Disability or (b) by you for Good Reason, then for a twenty-four (24) month period after such termination, the Company shall arrange to provide you with life, disability, accident and health insurance benefits substantially similar to those which you are receiving immediately prior to the Notice of Termination. (vi) You shall not be required to mitigate the amount of any payment provided for in this Section 4 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 4 be reduced by any compensation earned by you as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owing by you to the Company, or otherwise. (vii) In addition to all other amounts payable to you under this Section 4, you shall be entitled to receive all benefits payable to you under the Company's retirement programs. 5. SUCCESSORS; BINDING AGREEMENT (i) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle you to compensation from the Company in the same amount and on the same terms as you would be entitled hereunder if you terminate your employment for Good Reason following a change in control of the Company, except for purposes of implementing the foregoing, the date on which any succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. (ii) This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, -8- successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or, if there is no such designee, to your estate. 6. PRIOR AGREEMENT. This Agreement is in full and complete substitution for any prior employment agreement including, if applicable, the certain Employment Agreement dated December 1, 1981 and the certain agreement dated October 20, 1988. 7. NOTICE. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notice to the Company shall be directed to the attention of the Board with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 8. MISCELLANEOUS. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by you and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the Commonwealth of Pennsylvania. All reference to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law. The obligations of the Company under Section 4 shall survive the expiration of the term of this Agreement. 9. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 10. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 11. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Erie, Pennsylvania in accordance with the rules of the American Arbitration -9- Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that you shall be entitled to seek specific performance of your right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. Upon your acceptance of the terms set forth in this letter by signing and returning a copy to the Secretary of the Company, this letter will then constitute an agreement of the Company. Very truly yours, Chairman, Management Development and Compensation Committee of the Board of Directors AGREED TO this day of 1997. SIGNATURE -10- EX-10.19 4 EXHIBIT 10.19 - INDEMNITY AGREEMENTS EXHIBIT 10.19 - INDEMNITY AGREEMENTS Indemnity Agreements in the form of the attached entered into with the following Indemnitees as of the dates indicated: W.J. Durbin - October 28, 1996 S.G. Arbuckle - January 28, 1997 J.M. Sergey - June 4, 1997 INDEMNITY AGREEMENT This Agreement is made as of the day of , 1997, by and between ZURN INDUSTRIES, INC., a Pennsylvania corporation (the "Corporation"), and , ("Indemnitee"), a Director. WHEREAS, it is essential to the Corporation to retain and attract as Directors and Officers the most capable persons available, and WHEREAS, the substantial increase in corporate litigation subjects Directors and Officers to expensive litigation risks and Directors' and Officers' liability insurance is expensive and contains many limitations, deductibles, and exclusions, and WHEREAS, it is now and has always been the express policy of the Corporation to indemnify its Directors and Officers so as to provide them with the maximum possible protection permitted by the Pennsylvania Business Corporation Law (the "Law") and the Corporation's By-Laws, and WHEREAS, the parties recognize the potential inadequacy of the protection available under the Law, the Corporation's By-Laws, and by Directors' and Officers' liability insurance, and WHEREAS, such Law and By-Laws specifically provide that they are not exclusive, and thereby contemplate that agreements may be entered into between the Corporation and Directors and Officers with respect to indemnification of such Directors and Officers, and WHEREAS, in order to resolve such questions and thereby induce Directors and Officers to serve in their respective capacities, the Corporation has determined and agreed to enter into this Agreement with the Indemnitee. NOW THEREFORE, in consideration of Indemnitee's continued service after the date hereof, the Corporation and Indemnitee do hereby agree as follows: 1. Agreement to Serve. Indemnitee agrees to serve as a Director or Officer (as applicable) of the Corporation for so long as he is duly elected or appointed or until such time as he tenders his resignation in writing. 2. Definitions. As used in this Agreement: (a) The term "Proceeding" shall include any threatened, pending or completed action, suit or proceeding, whether brought by or in the right of the Corporation or otherwise and whether of a civil, criminal, administrative or investigative nature, in which Indemnitee may be or may have been involved as a party or otherwise, by reason of the fact -1- that Indemnitee is or was a Director or Officer of the Corporation, by reason of any action taken by his or of any inaction on his part while acting as a Director or Officer, or by reason of the fact that he is or was serving at the request of the Corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise; in each case whether or not he is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification or reimbursement can be provided under this Agreement. (b) The term "Expenses" shall include, without limitation, expenses of investigations, judicial or administrative proceedings, or appeals, judgments, fines and penalties, amounts paid in settlement by or on behalf of Indemnitee, attorneys' fees and disbursements, and any expenses of establishing a right to indemnification under Paragraph 7. 3. Indemnity in Third-Party Proceedings. The Corporation shall indemnify Indemnitee in accordance with the provisions of this Paragraph 3 if Indemnitee is a party to or threatened to be made a party to or otherwise involved in any Proceeding (other than a Proceeding by or in the right of the Corporation) by reason of the fact that Indemnitee is or was a Director or Officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against all Expenses actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such Proceeding, but only if Indemnitee acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation and, in the case of a criminal proceeding, in addition, had no reasonable cause to believe that his conduct was unlawful. The termination of any such Proceeding by judgment, order of court, settlement, conviction, or upon a plea of nolo contendere, or its equivalent, shall not, of itself, create a presumption that Indemnitee did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and with respect to any criminal proceeding, that such person had reasonable cause to believe that his conduct was unlawful. 4. Indemnity in Proceedings by or in the Right of the Corporation. (a) In the event the Corporation has purchased and has in effect policies of Directors' and Officers' liability insurance at the time of request by Indemnitee for indemnification thereunder, the Corporation shall, subject to the provisions of Paragraph 4(c), indemnify Indemnitee as follows: if Indemnitee is a party to or threatened to be made a party to any Proceeding by or in the right of the Corporation by reason of the fact that Indemnitee is or was a Director or Officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against all Expenses actually and reasonably incurred by -2- Indemnitee in connection with the defense or settlement of such Proceeding, but only if he acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation. (b) In the event the Corporation is not covered by policies of Directors' and Officers' Liability insurance which are applicable to the indemnification claim being made by Indemnitee for indemnification thereunder, the Corporation shall, subject to the provisions of Paragraph 4(c), indemnify Indemnitee as follows: 1) to the fullest extent of the coverage provided for the benefit of Directors and Officers in the case of a Proceeding by or in the right of the Corporation pursuant to the policy of insurance in effect on the date of this Agreement; 2) if Indemnitee is a party to or threatened to be made a party to any Proceeding by or in the right of the Corporation by reason of the fact that Indemnitee is or was a Director or Officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against all Expenses actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such Proceeding, but only if he acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation; and 3) to the fullest extent as may be provided to Indemnitee by the Corporation under the Agreement, the By-Laws of the Corporation, and the Law. The foregoing provisions shall be taken cumulatively and construed as being consistent with one another. (c) No indemnification for Expenses shall be made under Paragraphs 4(a) and 4(b): (1) in respect to remuneration paid to Indemnitee if it shall be determined by a final judgment or other final adjudication that such remuneration was in violation of law; (2) on account of any suit in which judgment is rendered against Indemnitee for an accounting of profits made from the purchase or sale by Indemnitee of securities of Corporation pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any federal, state, or local law; (3) on account of Indemnitee's conduct which is finally adjudged to have been knowingly fraudulent, deliberately dishonest, or willful misconduct; (4) if a final decision by a Court having jurisdiction in the matter shall determine that such indemnification is not lawful. -3- 5. Indemnification of Expenses of Successful Party. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any Proceeding or in defense of any claim, issue, or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified against all Expenses incurred in connection therewith. 6. Advances of Expenses. Expenses incurred by the Indemnitee pursuant to Paragraphs 3 and 4 shall be paid by the Corporation in advance upon the written request of the Indemnitee if Indemnitee shall undertake to repay such amount to the extent that it is ultimately determined that Indemnitee is not entitled to indemnification. 7. Right of Indemnitee to Indemnification Upon Application. Any indemnification under Paragraphs 3 and 4 shall be made no later than 45 days after receipt by the Corporation of the written request of Indemnitee, unless a determination is made within said 45-day period by (1) the Board of Directors by a majority vote of a quorum consisting of directors who are not parties to such Proceeding or (2) independent legal counsel, which counsel shall be appointed if the quorum of the Board of Directors specified in Paragraph 7(1) is not obtainable, in a written opinion that the Indemnitee has not met the relevant standards for indemnification set forth in Paragraphs 3 and 4. The right to indemnification or advances as provided by this Agreement shall be enforceable by Indemnitee in any court of competent jurisdiction. The burden of proving that indemnification is not appropriate shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors or independent legal counsel) to have made a determination prior to the commencement of such action that indemnification is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor an actual determination by the Corporation (including its Board of Directors or independent legal counsel) that Indemnitee has not met such applicable standard of conduct, shall bar the action or create an irrefutable presumption that Indemnitee has not met the applicable standard of conduct. Indemnitee's expenses reasonably incurred in connection with successfully establishing his right to indemnification, in whole or in part, in any such Proceeding shall also be indemnified by the Corporation. 8. Indemnification Thereunder Not Exclusive. The indemnification provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may be entitled under the Bylaws, any agreement, any vote of shareholders or disinterested Directors, Law, or otherwise, both as to action in his official capacity and as to action in any capacity while holding such office. The indemnification under this Agreement shall continue as to Indemnitee even though Indemnitee may have ceased to be a Director or Officer. -4- 9. Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Corporation for a portion of the Expenses actually and reasonably incurred by him in the investigation, defense, appeal, or settlement of any Proceeding but not, however, for the total amount thereof, the Corporation shall nevertheless indemnify Indemnitee for the portion of such Expenses to which Indemnitee is entitled. The Corporation shall not be liable to indemnify Indemnitee under this Agreement for any amounts paid in settlement of any action or claim effected without its written consent. The Corporation shall not settle any action or claim in any manner which would impose any penalty or limitation on Indemnitee without Indemnitee's written consent. Neither the Corporation nor the Indemnitee will unreasonably withhold their consent to any proposed settlement. 10. Saving Clause. If this Agreement or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, the Corporation shall nevertheless indemnify Indemnitee as to Expenses with respect to any Proceeding to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated or by any other applicable law. 11. Notice. Indemnitee shall, as a condition precedent to his right to be indemnified under this Agreement, give to the Corporation notice in writing as soon as practicable of any claim for which indemnification will or could be sought under this Agreement. Notice to the Corporation shall be directed to Zurn Industries, Inc., One Zurn Place, P.O. Box 2000, Erie, PA 16514-2000, Attention: President (or such other address as the Corporation shall designate in writing to Indemnitee). Notice shall be deemed received three days after the date postmarked if sent by prepaid mail properly addressed. In addition, Indemnitee shall give the Corporation such information and cooperation as it may reasonably require. 12. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall constitute the original. 13. Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. 14. Successors and Assigns. This Agreement shall be binding upon the Indemnitee and upon the Corporation, its successors and assigns, and shall inure to the benefit of the Indemnitee's heirs, personal representatives, and assigns and to the benefit of Corporation, its successors and assigns. -5- IN WITNESS WHEREOF, the parties thereby have caused this Agreement to be duly executed and signed as of the day and year first above written. ZURN INDUSTRIES, INC. By: Chairman, Management Development and Compensation Committee INDEMNITEE: This Agreement was approved by stockholders of Zurn Industries, Inc. at the Annual Meeting on August 1, 1986. -6- EX-10.20 5 EXHIBIT 10.20 - ZURN IND., INC. EXECUTIVE INCENTIVE PLAN EXHIBIT 10.20 - ZURN INDUSTRIES, INC. EXECUTIVE INCENTIVE PLAN ZURN INDUSTRIES, INC. EXECUTIVE INCENTIVE PLAN Effective April 1, 1996 Section 1: Purposes The purposes of the Plan are to promote the profitability of the Company thereby building Shareholder Value; to provide key Employees with an opportunity to receive incentive compensation dependent upon that profitability; and to attract, retain and motivate such individuals. Section 2: Definitions 2.1 "Award" means an incentive award made pursuant to the Plan. 2.2 "Beneficiary" means the person(s) designated by the Participant, in writing on the Company's life insurance beneficiary form, to receive payments under the Plan in the event of his/her death while a Participant or, in the absence of such designation, the Participant's estate. 2.3 "Board of Directors" means the Board of Directors of the Company. 2.4 "Cause" means (i) a felony conviction of the Participant; (ii) the commission by the Participant of an act of fraud or embezzlement against the Company; (iii) the Participant's willful misconduct or gross negligence materially detrimental to the Company; (iv) the Participant's failure to perform his duties and responsibilities in accordance with the standards and criteria established by the Company therefor and communicated to the Participant; (v) the Participant's wrongful dissemination or use of confidential or proprietary information of the Company or of confidential or proprietary information of a third party in breach of a contractual or other obligation of the Company, where the Participant knew or had reason to know of such obligation; or (vi) the intentional and habitual neglect by the Participant of his duties to the Company. 2.5 "Change of Control" means the earliest to occur of the following events: (i) the date the stockholders of the Company approve a plan or other arrangement pursuant to which the Company will be dissolved or liquidated; (ii) the date the stockholders of the Company approve a definitive agreement to sell or otherwise dispose of fifty percent (50%) or more of the assets of the Company; or -1- (iii) the date of approval by the stockholders of the Company and, if required, by the stockholders of the other constituent corporation of a definitive agreement to merge or consolidate the Company with or into such other corporation, other than, in either case, a merger or consolidation of the Company in which holders of shares of the Company's common stock immediately prior to the merger or consolidation will have at least a majority of the ownership of, or voting control over, common stock of the surviving corporation (and, if one class of common stock is not the only class of voting securities entitled to vote for the election of directors of the surviving corporation, a majority of the voting power of, or voting control over, the surviving corporations voting securities) immediately after the merger or consolidation. 2.6 "CEO" means the Chief Executive Officer of the Company. 2.7 "Committee" means the Management Development and Compensation Committee of the Board of Directors. 2.8 "Company" means Zurn Industries, Inc. and its successors and shall include any wholly-owned subsidiaries of the Company, except where the context indicates otherwise. 2.9 "Disability" means (i) total disability within the meaning of the Company's long-term disability plan as in effect from time to time or (ii) if there is no such plan at the applicable time, physical or mental incapacity as determined solely by the Committee. 2.10 "Earnings" means the Company's profit before tax (PBT) income or net income (NI), as the case may be, for the Plan Year determined in accordance with generally accepted accounting principles consistently applied by the Company, but excluding, in the Committee's discretion, unusual or extraordinary items, discontinued operations, and the cumulative effect of accounting changes. 2.11 "Earnings Threshold" means the level of Earnings for the Plan Year below which no Awards based on PBT or NI will be payable. The Earnings Threshold may vary from Plan Year to Plan Year and from business entity to business entity. 2.12 "Employee" means an employee of the Company. 2.13 "Good Reason" means, except where the Participant has given his/her prior written consent, (i) a material adverse change in the nature or scope of the Participant's responsibilities, authorities, duties and/or position other than by reason of Cause or Disability; (ii) the failure of the Company to pay the Participant any amounts otherwise vested and due hereunder; (iii) the termination of this Plan; (iv) a reduction in the Participant's base salary in effect immediately prior to the Change of Control; (v) the failure of the Company to provide the Participant with benefits which are substantially similar in the aggregate to those enjoyed by the Participant under the -2- Company's pension, life insurance, medical, health and accident, disability, deferred compensation or savings or similar plans and fringe benefit programs (including vacation) in which the Participant was participating immediately prior to the Change of Control; or (vi) the relocation of the Participant's office outside of a 50-mile radius of its location immediately prior to the Change of Control. The Company shall have thirty (30) days from the date of receipt of notice from the Participant to effect a cure of an event described therein, and upon cure thereof by the Company to the Participant's reasonable satisfaction, such event shall no longer constitute Good Reason. 2.14 "Material Transaction" means acquisitions and/or divestitures of business operations by the Company which in the aggregate, as reasonably determined by the Committee, have the effect of increasing or decreasing by 20% or more the sales volume of the continuing business operations of the Company (on a consolidated basis) compared to those which existed on the first day of the Plan Year but which do not result in a Change of Control. 2.15 "Maximum Award" means 200% of the participant's target award as approved by the Committee. 2.16 "Other Performance Goals" means any goals (other than Earnings) to measure corporate, group, subsidiary, division, unit and/or individual performance for a Plan Year. Other Performance Goals may vary from Participant to Participant and Plan Year to Plan Year. 2.17 "Participant" means an Employee designated by the CEO from time to time and approved by the Committee pursuant to Section 3 to participate in the Plan. 2.18 "Payout Factor" means, with respect to Earnings and each of the Other Performance Goals, a percentage from 0% to 200%, used for purposes of determining Awards based on the extent to which the applicable Performance Goal has been achieved. 2.19 "Performance Goal" means the level of performance established as the Performance Goal with respect to Earnings and any Other Performance Goals. Performance Goals may vary from Plan Year to Plan Year. Performance Goals may also vary, with respect to other Performance Goals, from Participant to Participant, and, with respect to Earnings, among one or more of the Company's subsidiaries, divisions or units. 2.20 "Plan" means the Zurn Industries, Inc. Executive Incentive Plan. 2.21 "Plan Year" means the fiscal year of the Company. 2.22 "Profit Before Taxes" means, with respect to any subsidiary, division or unit of the Company, such subsidiary's, division's or unit's income (including external interest income [expense], other external -3- investment earnings [losses], and an investment return charge) for the Plan Year before income taxes. 2.23 "Retirement" means retirement from the employ of the Company (other than for Cause) at or after pension Normal Retirement Age or, with the advance consent of the Committee, at or after age 55. 2.24 "Salary" means the base annual salary in effect at April 1st of the same fiscal year. 2.25 "Target Award" means an amount recommended by the CEO and approved by the Committee as a Participant's Target Award for purposes of the Plan. Target Awards may vary from Participant to Participant and Plan Year to Plan Year. 2.26 "Weighting" means the percentage that Earnings and Other Performance Goals are weighted for purposes of determining Awards. Weightings may vary from Plan Year to Plan Year and Participant to Participant. The Weighting of Earnings cannot be less than seventy percent (70%) and the Weightings of Other Performance Goals cannot exceed a total of thirty percent (30%). Section 3: Participation 3.1 Participants shall be selected by the Committee from among those executive and other management Employees recommended by the senior management of the Company and approved by the CEO who, in the opinion of the Committee, are in a position to make significant contributions to the profitability of the Company. If, due to hiring, promotion, or demotion, the Committee determines that an Employee becomes eligible to participate in the Plan for a Plan Year, or that a Participant ceases to be so eligible, then the Committee shall have the discretion to provide that such individual shall be eligible for a prorated Award, as and to the extent it may determine. The selection of an Employee as a Participant for a Plan Year shall not entitle such individual to be selected as a Participant with respect to any other Plan Year. Section 4: Awards 4.1. Target Awards and Performance Goals. (a) For each Plan Year, the Committee shall approve (i) an earnings target and earnings threshold and weighting and, (ii) two or more Performance Goals and weightings for each Participant. (b) For each Plan Year, the CEO will approve the Performance Goals and Weightings with respect to two or more other Performance Goals for each Participant, other than the CEO. For the CEO, the Committee will establish appropriate Performance Goals. In establishing such items, the CEO will take into account such factors as he deems advisable, including the recommendations of other senior management -4- Employees of the Company (and of the Company's subsidiaries, divisions and units, as appropriate). (c) Once established for a Plan Year, a Participant's Target Award, Performance Goals and Weightings may not be amended or otherwise modified in any manner that may adversely affect the Participant without CEO approval and written notification, except as provided in Section 6.2. 4.2 Determination of Awards. The actual Award payable to a Participant will be determined in accordance with the following formula: The sum of (T x P) for each of the goals. T is the Participant's Target Award for Earnings or other Performance Goals. P is the Performance Accomplishment (expressed in a percent) with respect to Earnings and each other Performance Goal by the Weighting established therefor. Notwithstanding the foregoing, no Awards based on PBT or NI will be payable for a Plan Year unless the Earnings Threshold for such Plan Year has been achieved. All determinations regarding the achievement of the Earnings Threshold will be made by the CEO and approved by the Committee. If the Earnings Threshold is not achieved, a participant may still be awarded an incentive compensation payout for achieving other Performance Goals. 4.3. Payment of Awards. Awards will be paid in a lump sum payment as soon as practicable after the close of the Plan Year for which they are made but in no event prior to completion of an audit of the Company's financial statements. Except as otherwise provided in Sections 5 and 6, no Award will be payable to any Participant who is not an Employee on the day the awards are made. The Committee may, subject to such terms and conditions and within such limits as it may from time to time establish, permit one or more Participants to defer the receipt of amounts due under the Plan. Section 5: Termination of Employment 5.1 Death, Disability, Retirement and Other Than Cause. If a Participant's employment with the Company terminates due to death, Disability or Retirement, or is terminated by the Company other than for Cause, the Participant or his Beneficiary, as the case may be, will be paid a prorated Award provided the participant worked at least six (6) months during the Plan Year. 5.2 Cause. If a Participant's employment with the Company is terminated for Cause, his right to the payment of an Award and all other rights under this Plan will be forfeited, and no amount will be paid or payable hereunder to or in respect of such Participant. -5- Section 6: Change of Control and Material Transactions 6.1 Change of Control. If within one (1) year after the date of a Change of Control of the Company, a Participant's employment with the Company is terminated (i) by the Company other than for Cause, or (ii) upon notice to the Company, by the Participant for Good Reason, the Participant will, within ten (10) days after such termination of employment, be paid a prorated Award in cash with respect to the Plan Year in which his employment is terminated, as determined in accordance with Section 5.1. 6.2 Material Transactions. Anything in this Plan to the contrary notwithstanding, in the event of a Material Transaction prior to a Change of Control, the Committee may, within thirty (30) days following such transaction, take one or more of the following actions: (a) with respect to an acquisition, exclude from the calculation of the Earnings Threshold, Earnings, and any Other Performance Criteria, the post-transaction operations of the acquired business operation; (b) with respect to a divestiture, adjust the Earnings Threshold, and any Other Performance Criteria and any Performance Goal to account for such divestiture and exclude from the calculation of the Earnings Threshold, Earnings, and any Other Performance Criteria, the pre-transaction operations of the divested business operation; or (c) treat any Participant who terminates employment as the result of a divestiture of a business operation by Company as an Employee for purposes of the Plan; or (d) take such other actions in respect of such acquisition or divestiture, in lieu of or in addition to those set forth in (a) or (b) or (c) above, as the Committee shall reasonably consider necessary or desirable to accomplish the purposes of the Plan. Any Committee action pursuant to this Section shall be promptly communicated to Participants, and the Board of Directors shall amend the Plan to the extent necessary to implement the Committee's actions. Section 7: Administration 7.1. In General. Except as otherwise provided in the Plan, the Committee will have full and complete authority, in its sole and absolute discretion, (i) to exercise all of the powers granted to it under the Plan, (ii) to construe, interpret and implement the Plan and any related document, (iii) to prescribe, amend and rescind rules relating to the Plan, (iv) to make all determinations necessary or -6- advisable in administering the Plan, and (v) to correct any defect, supply any omission and reconcile any inconsistency in the Plan. 7.2 Determinations. The actions and determinations of the Committee or its designee on all matters relating to the Plan and any Awards will be final and conclusive. Such determinations need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, Awards under the Plan, whether or not such persons are similarly situated. 7.3 Appointment of Experts. The Committee may appoint such accountants, counsel, and other experts as it deems necessary or desirable in connection with the administration of the Plan. 7.4 Delegation. The Committee may delegate to Employees the authority to execute and deliver such instruments and documents, to do all such acts and things, and to take all such other steps deemed necessary, advisable or convenient for the effective administration of the Plan in accordance with its terms and purposes. 7.5 Books and Records. The Committee and others to whom the Committee has delegated such duties shall keep a record of all their proceedings and actions and shall maintain all such books of account, records and other data as shall be necessary for the proper administration of the Plan. 7.6 Payment of Expenses. The Company shall pay all reasonable expenses of administering the Plan, including, but not limited to, the payment of professional and expert fees. Section 8: Miscellaneous 8.1. Nonassignability. No Award will be assignable or transferable (including pursuant to a pledge or security interest) other than by will or by laws of descent and distribution. 8.2 Withholding Taxes. Whenever payments under the Plan are to be made or deferred, the Company will withhold therefrom, or from any other amounts payable to or in respect of the Participant, an amount sufficient to satisfy any applicable governmental withholding tax requirements related thereto. 8.3 Amendment or Termination of the Plan. The Plan may be amended or terminated by the Board of Directors in any respect except that no amendment may be made after the date on which an Employee is selected as a Participant for a Plan Year which would adversely affect the rights of such Participant with respect to such Plan Year, except as provided in Section 6.2 and, in addition, following any Change in Control, no such amendment may be made which would adversely affect the rights of a Participant in the event of a termination of his employment for Good Reason (including, without limitation, the definition of what constitutes "Good Reason.") -7- 8.4 Other Payments or Awards. Nothing contained in the Plan will be deemed in any way to limit or restrict the Company from making any award or payment to any person under any other plan, arrangement or understanding, whether now existing or hereafter in effect. 8.5 Payments to Other Persons. If payments are legally required to be made to any person other than the person to whom any amount is payable under the Plan, such payments will be made accordingly. Any such payment will be a complete discharge of the liability of the Company under the Plan. 8.6 Unfunded Plan. Nothing in this Plan will require the Company to purchase assets or place assets in a trust or other entity to which contributions are made or otherwise to segregate any assets for the purpose of satisfying any obligations under the Plan. Participants will have no rights under the Plan other than as unsecured general creditors of the Company. 8.7 Limits of Liability. Neither the Company nor any other person participating in any determination of any question under the Plan, or in the interpretation, administration or application of the Plan, will have any liability to any party for any action taken or not taken in good faith under the Plan. 8.8 No Right of Employment. Nothing in this Plan will be construed as creating any contract of employment or conferring upon any Employee or Participant any right to continue in the employ or other service of the Company or limit in any way the right of the Company to change such person's compensation or other benefits or to terminate the employment or other service of such person with or without Cause. 8.9 Section Headings. The section headings contained herein are for convenience only, and in the event of any conflict, the text of the Plan, rather than the section headings, will control. 8.10 Invalidity. If any term or provision contained herein is to any extent invalid or unenforceable, such term or provision will be reformed so that it is valid, and such invalidity or unenforceability will not affect any other provision or part hereof. 8.11 Applicable Law. The Plan will be governed by the laws of the Commonwealth of Pennsylvania as determined without regard to the conflict of law principles thereof. 8.12 Effective Date. The Plan shall be effective as of April 1, 1996. APPROVED BY BOARD OF DIRECTORS: April 22, 1996 -8- EX-11 6 EXHIBIT 11- COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE (Thousands Except Per Share Amounts) Year Ended March 31 1997 1996 1995 Primary Earnings Per Share Net income $ 5,300 $16,670 $ 9,324 Preferred stock dividends 2 2 3 $ 5,298 $16,668 $ 9,321 Shares outstanding Weighted average common shares 12,347 12,341 12,354 Net common shares issuable on exercise of stock options 84 37 1 Average common shares outstanding as adjusted 12,431 12,378 12,355 Primary earnings per share $ .43 $ 1.35 $ .76 Fully Diluted Earnings Per Share Net income $ 5,300 $16,670 $ 9,324 Interest on convertible debentures, net of applicable income taxes 8 $ 5,300 $16,670 $ 9,332 Shares outstanding Average common shares as adjusted for primary computation 12,431 12,378 12,355 Common shares issuable if the preferred stock and convertible debentures were converted at the beginning of the year 4 5 32 Additional common shares issuable on exercise of stock options 19 13 1 Average common shares outstanding as adjusted 12,454 12,396 12,388 Fully diluted earnings per share $ .43 $ 1.35 $ .75 EX-13 7 ELECTRONIC FORMAT OF ANNUAL REPORT PAGES TO SHAREHOLDERS EXHIBIT 13 ELECTRONIC FORMAT OF PAGES OF ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED MARCH 31, 1997 INCORPORATED BY REFERENCE ANNUAL REPORT PAGE 22 FINANCIAL REVIEW Business Restructuring Decisions were made to sell the Lynx Golf and Mechanical Power Transmission segments and the Power Systems segment businesses in the fourth quarter of fiscal 1996 and second quarter of fiscal 1997, respectively. In January 1997 the Company acquired Eljer Industries, Inc., a manufacturer and marketer of plumbing and heating, ventilating and air conditioning (HVAC) building products. Following these events, the Company's operations are now categorized in two industry segments: Building Products and Water Resource Construction. The consolidated financial statements include Eljer since the date of acquisition following the purchase method of accounting. The three former segments are reported as discontinued operations. Their assets and liabilities have been removed from the consolidated accounts and are presented in the statement of financial position as a single net asset. The statements of consolidated operations and cash flows, industry segment data, and quarterly financial data have been restated to present separately for all periods the continuing operations of the Building Products and Water Resource Construction segments and the discontinued operations. Sales And Earnings Sales of Building Products increased $90.4 million, with $59.5 million coming from Eljer's operations during the 68 days of fiscal 1997 it was owned by the Company. Zurn Plumbing Products and Fire Protection Systems achieved sales increases of 17% and 19%. Revenues in fiscal 1996 increased $24.1 million, with 82% being derived from Zurn Plumbing Products. Water Resource Construction revenues were off $22.1 million as the result of a low beginning- of-the-year backlog and the sale of one of the segment's two businesses while its revenues increased $26.7 million in fiscal 1996. The pro forma results of operations presented in the notes to consolidated financial statements for comparative purposes indicate the Company's total sales might have been in the $660 to $670 million range in each of the last two years if Eljer had been acquired at the beginning of that two-year period. The overall gross profit margin percentage increase in fiscal 1997 was attributable to a greater percentage of the Company's sales being derived from Building Products. That segment's margin percentage was lower, however, as the products of businesses acquired in the last two years generally are sold at lower margins. While marketing and administration expenses, which include sales commissions, have averaged 19% of sales over the last three years, their dollar amount has increased in each of those years as a result of the Building -1- ANNUAL REPORT PAGE 22 CONTINUED Products sales growth and new product introduction costs and, in the last two years, the acquisition of businesses. Inflation's effect on the Company's costs over the last three years has not been as great as the consumer price index change due to cost containment measures and outsourcing programs which reduced the costs of many manufactured products. Most cost increases have been recovered currently. Interest expense was greater as a consequence of the Company's borrowings to finance the purchase of Eljer and the debt obligations assumed in the transaction. Goodwill amortization is primarily attributable to the acquisition of Eljer. The higher interest income level in fiscal 1995 came from interest on federal income tax refunds. The greater amount of other income in fiscal 1996 is attributable to sales of an investment and underutilized assets which contributed $.07 per share to earnings while a somewhat smaller amount was recognized in fiscal 1997 from the sale of a Water Resource Construction business. Goodwill amortization, which is not deductible, increased the fiscal 1997 effective tax rate compared to the prior two years when tax exempt investment income, which was a larger percentage of pretax income, had a greater impact on the effective tax rate. Settlement of prior year state tax assessments significantly reduced the effective tax rate in fiscal 1995 and increased earnings by $.04 per share. Discontinued operations reduced net income by $1.34, $.39, and $.76 per share in each of the three years. The losses were less in fiscal 1996 primarily as the result of actions taken to lower operating expenses being incurred by the Lynx Golf segment. In fiscal 1997, the Power Systems segment incurred significant costs as it worked toward completion of two foreign power plant projects and it continued to seek resolution of the effects of the March 1996 repeal of the State of Illinois Retail Rate Law of 1987 which affected the construction of two power plants for one of its customers. Pro forma income from continuing operations for fiscal 1997 assuming Eljer had been included for the entire year was $24.5 million, or $1.97 per share, compared to the reported earnings of $22.0 million, or $1.77 per share. Included in the pro forma earnings is a $.25 per share litigation settlement gain recognized by Eljer prior to the acquisition. ANNUAL REPORT PAGE 23 Oral and written comments by the Company's management and Board of Directors in this annual report and elsewhere about the results of operations reported in the financial statements and the Company's future are made based on assumptions and estimates in light of the information available at the time. Actual results could differ from the estimates and future operations may be affected by a variety of factors including: changes in objectives, plans, and strategies; competitive pricing and new product offerings by the Company and its competitors; and product cost changes. -2- ANNUAL REPORT PAGE 23 CONTINUED Backlog 1997 1996 1995 (Millions) Building Products $ 50 $30 $ 26 Water Resource Construction 81 68 96 $131 $98 $122 Completion after fiscal 1998 is expected for 41% of the Water Resource Construction amount at March 31, 1997. Building Products Sales of Zurn Plumbing Products had year-over-year increases of 17% and 16% in the last two years. Sanitary-Dash, a maker of brass and plastic plumbing fittings and hardware which was acquired in fiscal 1996's third quarter, contributed about 5 of those percentage points and $.09 per share to fiscal 1997's earnings. Other sales increase contributors in both years were higher volumes, new products introduced over the last several years, and market increases. Revenues from the installation of Fire Protection Systems were up 19% in fiscal 1997 and 11% in 1996 after declining in each of the two previous years as the result of a depressed West Coast commercial construction market. The Eljer Plumbingware and Selkirk HVAC businesses contributed $59.5 million to the segment's sales following their acquisition in fiscal 1997's fourth quarter. Their annual revenues for the calendar year prior to being purchased were $216.0 and $156.9 million, respectively, after adjustment to conform with the Company's accounting for product delivery costs. The segment's operating profits increased $7.8 and $5.7 million in fiscal 1997 and 1996, but those amounts are a smaller percentage of sales primarily because Eljer and Sanitary-Dash obtain lower margins in the remodeling, repair, and do-it-yourself markets. As a result of increased revenues and cost reduction efforts, the Fire Protection Systems businesses' operating profit in 1997 was 58% greater than the fiscal 1995 level. For the short period between the acquisition date and the Company's fiscal year end, Eljer reduced continuing operations earnings per share by $.08 as its income for that seasonally soft period was not sufficient to offset the interest expense and goodwill amortization arising from the acquisition. Looking to the future, marketing and manufacturing synergies should boost the segment's sales and, over time, reduce costs as a percentage of sales. Traditionally Zurn Plumbing Products have been sold primarily in the United States nonresidential construction market while Eljer Plumbingware and Selkirk HVAC have focused on the wholesale and retail markets and Selkirk HVAC also has had a substantial presence in Europe. Selective introduction of each unit's products into the other's markets has already begun. Water Resource Construction Advanco Constructors, a builder of water infrastructure projects in southern -3- ANNUAL REPORT PAGE 23 CONTINUED California with revenues of $69.1, $84.2, and $58.8 million in each of the last three years, is the segment's sole business following the sale of Gary Concrete in fiscal 1997. An operating loss was incurred in 1997 and the Company's income from continuing operations was $.07 per share lower as a result of Advanco Constructors' loss which was attributable primarily to subcontractor performance deficiencies on several projects. Margins on water resource construction projects were low in the prior two years due to the effects of unanticipated contract costs in 1996 and delays experienced in 1995's fourth quarter caused by severe flooding in California. Many of the segment's water resource construction projects span several fiscal years and its year-to-year success is highly dependent on the backlog level. Because the southern California market it serves has a continuing need to expand and upgrade its water and wastewater infrastructure, there should be new projects that can be bid successfully and managed profitably. Corporate Compared to earlier years, the fiscal 1997 expense was greater as a result of the interest expense associated with the purchase of Eljer. In fiscal 1996, Corporate expense was reduced by the gain from selling a minority interest investment in another company. ANNUAL REPORT PAGE 24 Financial Condition The business restructuring in fiscal 1997 significantly changed the Company's financial position and cash flows. The purchase of Eljer involved cash expenditures of $178.5 million, net of $16.7 million in unrestricted cash obtained in the acquisition. The total purchase price, including $303.2 million of assumed liabilities, was $479.5 million. Funds for the expenditures were obtained from long-term and revolving loan borrowings of $106.8 million, net of $3.3 million in loan origination costs, sales of discontinued operations, and cash provided by continuing operations and investing activities. In addition to the borrowings to finance the acquisition, additional amounts were obtained to refinance $64.7 million of Eljer's debt which carried higher interest rates. Based on preliminary purchase price allocations, the fair values of the Eljer assets acquired include $200.6 million in current assets, $70.4 million in property, plant, and equipment, and $193.4 of goodwill. Among the other liabilities assumed were those for litigation, insurance, and environmental obligations. During the year, the Company sold the Lynx Golf and Mechanical Power Transmission segments, certain units of the Power Systems segment, and Gary Concrete. The remainder of the Power Systems segment is expected to be sold in fiscal 1998. The greater amount of cash from continuing operations in fiscal 1997 is attributable to increased sales, the offset of currently payable taxes and tax refund from the utilization of the discontinued operations' losses, and the -4- ANNUAL REPORT PAGE 24 CONTINUED reduction in receivables, 44% of which resulted from the collection of long- term trade notes. Only a minor deferred tax asset valuation allowance has been provided in the financial statements as management has determined it is more likely than not that the benefits of tax loss carryforwards of acquired businesses and the temporary differences between financial and tax reporting will be realized by offsetting future taxable income from continuing operations. The current income tax liability assumed in the Eljer acquisition relates to potential adverse tax consequences arising from pre-acquisition transactions. Cash provided by continuing operations in fiscal 1996 was adversely affected by receivable increases in the Water Resource Construction and Fire Protection Systems businesses. In addition to supplementing the cash used by discontinued operations in fiscal 1996, the marketable securities reduction was the source of the increase in cash and equivalents and provided funds for capital expenditures, the Sanitary-Dash acquisition, and the payment of dividends to shareholders. The greater amount of capital expenditures in 1996 was for two new Zurn Plumbing Products facilities. In fiscal 1995, the cash from investing activities provided 51% of the funds needed to pay dividends. As described in the commitments and contingencies note to the consolidated financial statements, United States Brass Corporation, an Eljer indirect wholly-owned subsidiary, has sought bankruptcy court protection while attempting to resolve significant litigation. The assets, liabilities, and operations of US Brass are included in the financial statements as management believes the litigation and bankruptcy will be satisfactorily resolved. The amounts provided for such resolution should preclude any material effect on the Company's financial position; however, if US Brass is liquidated, the loss of its earnings would significantly affect the Company's future results of operations. Part of the term loan commitment mentioned in the debt and lines of credit note to the financial statements is designated for payment of US Brass litigation liabilities and 53% of the amount accrued for the environmental obligations described in the financial statement commitments and contingencies note has been set aside in trusts. Total capital employed at March 31, 1997 amounted to $426.2 million which includes $230.7 million ($18.67 per share of common stock) of shareholders' equity. -5- ANNUAL REPORT PAGE 25 FIVE YEAR CONSOLIDATED FINANCIAL SUMMARY Year Ended March 31 1997 1996 1995 1994 1993 (Thousands of Dollars Except Per Share Amounts) OPERATING DATA Net sales $353,018 $284,683 $233,852 $247,177 $244,444 Continuing operations income 22,002 21,527 18,842 13,416 20,384 Per share 1.77 1.74 1.52 1.08 1.63 Common stock cash dividends declared per share .40 .40 .88 .88 .88 FINANCIAL POSITION AT YEAR END Liquid assets $ 20,892 $ 30,031 $ 54,838 $ 65,433 $ 90,643 Working capital 108,220 173,836 155,535 160,516 183,778 Property, plant, and equipment 105,180 42,054 56,162 57,003 70,423 Total assets 726,357 394,647 414,696 447,893 490,178 Debt obligations 195,505 7,549 11,553 13,806 20,934 Shareholders' equity 230,718 230,955 218,930 221,583 249,098 Per share of common stock 18.67 18.71 17.73 17.86 20.03 GENERAL STATISTICS Capital expenditures $ 6,297 $ 9,155 $ 5,513 $ 4,147 $ 5,015 Depreciation 6,588 5,202 4,700 4,376 4,230 Shareholders of record 5,023 4,822 5,355 6,277 6,278 Average common shares outstanding (thousands) 12,431 12,378 12,355 12,438 12,521 Common stock price range: High 29 26 23 3/8 39 1/2 40 3/4 Low 18 1/2 18 3/8 16 3/4 22 3/4 27 3/4 Fiscal 1997 includes Eljer Industries, Inc. since the date of its acquisition. Data has been restated for the effects of decisions to discontinue the Lynx Golf, Mechanical Power Transmission, and Power Systems segments. -6- ANNUAL REPORT PAGE 25 CONTINUED UNAUDITED QUARTERLY FINANCIAL DATA
Year Ended March 31, 1997 Year Ended March 31, 1996 First Second Third Fourth First Second Third Fourth Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter (Thousands Except Per Share Amounts) Net sales $82,235 $81,229 $65,686 $123,868 $60,156 $70,187 $76,399 $77,941 Gross profit 22,637 22,340 19,795 37,803 18,836 19,732 18,997 21,813 Continuing operations income 6,521 5,534 4,877 5,070 4,928 4,565 4,430 7,604 Discontinued operations (4,309) (4,255) 2,164 (10,302) (279) (490) (936) (3,152) Net income (loss) 2,212 1,279 7,041 (5,232) 4,649 4,075 3,494 4,452 Earnings per share: Continuing operations .53 .44 .39 .41 .40 .37 .36 .61 Net income (loss) .18 .10 .57 (.42) .38 .33 .28 .36 Common stock: Cash dividends declared .10 .10 .10 .10 .10 .10 .10 .10 Market price: High 21 5/8 22 1/2 29 26 1/4 20 7/8 26 25 5/8 23 1/4 Low 19 1/2 18 1/2 22 1/8 23 3/8 18 3/8 19 7/8 20 1/4 19 3/8 Fiscal 1997 includes Eljer Industries, Inc. since its acquisition on January 22, 1997 (sales - $59,507; pretax income - $1,152). Fiscal 1996 fourth quarter includes gains of $1,337 ($.07 per share) from sales of an investment and underutilized assets and benefited from an unusually low effective tax rate. Data has been restated for the effects of the fiscal 1997 second quarter decision to discontinue the Power Systems segment and, for the first nine months of 1997, to conform the Company-wide accounting for product delivery costs by reducing both sales and marketing expenses with no effect on net income. Common stock market prices as reported in The Wall Street Journal. -7- /TABLE ANNUAL REPORT PAGE 26 CONSOLIDATED FINANCIAL POSITION March 31 1997 1996 (Thousands) ASSETS Current Assets Cash and equivalents $ 12,403 $ 16,195 Restricted cash 10,505 Marketable securities 8,489 13,836 Accounts receivable 110,194 93,713 Inventories and contracts in progress 134,266 69,753 Income taxes 59,551 32,340 Discontinued operations' net assets 4,313 57,253 Other assets 8,323 3,904 Total Current Assets 348,044 286,994 Property, Plant, And Equipment 105,180 42,054 Goodwill 194,064 1,957 Investments 38,524 37,611 Other Assets 40,545 26,031 $726,357 $394,647 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Trade accounts payable $ 49,243 $ 48,441 Litigation 57,471 Debt obligations 34,548 838 Insurance 33,180 14,200 Salaries, wages, and payroll items 18,974 10,404 Income taxes 17,402 1,796 Advance billings on contracts in progress 4,151 13,787 Other liabilities 24,855 23,692 Total Current Liabilities 239,824 113,158 Debt Obligations 160,957 6,711 Retirement Obligations 68,346 43,823 Other Liabilities 26,512 Shareholders' Equity Common stock, $.50 par value per share 100,000 authorized - 12,570 issued 6,285 6,285 Capital in excess of par value 35,525 35,617 Retained earnings 193,935 194,418 Treasury stock - 218 and 229 shares (5,027) (5,365) 230,718 230,955 Commitments And Contingencies $726,357 $394,647 See notes to consolidated financial statements. -8- ANNUAL REPORT PAGE 27 CONSOLIDATED OPERATIONS Year Ended March 31 1997 1996 1995 (Thousands Except Per Share Amounts) Net Sales $353,018 $284,683 $233,852 Cost of sales 250,443 205,305 166,854 Marketing and administration 68,519 51,719 46,210 Interest expense 4,340 1,147 1,132 Goodwill amortization 1,248 Interest income (3,308) (3,081) (5,035) Other income (3,626) (4,212) (2,841) Continuing Operations Income Before Income Taxes 35,402 33,805 27,532 Income taxes 13,400 12,278 8,690 Continuing Operations Income 22,002 21,527 18,842 Discontinued operations: Loss from operations (9,164) (4,257) (9,518) Loss on disposal (7,538) (600) Net Income $ 5,300 $ 16,670 $ 9,324 Earnings Per Share Continuing operations $1.77 $1.74 $1.52 Discontinued operations (1.34) (.39) (.76) Net income $ .43 $1.35 $ .76 See notes to consolidated financial statements. -9- ANNUAL REPORT PAGE 28 CONSOLIDATED CASH FLOWS Year Ended March 31 1997 1996 1995 (Thousands) OPERATIONS Net income $ 5,300 $ 16,670 $ 9,324 Items not affecting cash from continuing operations: Discontinued operations 16,702 4,857 9,518 Depreciation and amortization 7,836 5,202 4,700 Deferred income taxes 3,540 2,810 1,600 Miscellaneous (3,248) (5,251) (1,196) Changes in operating assets and liabilities: Receivables 9,795 (17,554) 6,703 Inventories and prepaid expenses (9,032) (6,967) (5,640) Trade accounts payable and accrued expenses (2,527) 6,820 (7,584) Income taxes and interest 16,543 (2,393) (886) Total continuing operations 44,909 4,194 16,539 Discontinued operations (38,121) (8,247) (4,952) Total From (Used By) Operations 6,788 (4,053) 11,587 INVESTING Purchases of businesses (178,476) (5,967) Capital expenditures (6,297) (8,055) (5,513) Marketable securities 6,087 34,868 14,679 Sales of operations 4,628 1,391 521 Property, plant, and equipment disposals 2,424 80 270 Long-term investments 2,039 1,900 (1,463) Discontinued operations 68,306 (1,444) (2,981) Total (Used For) From Investing (101,289) 22,773 5,513 FINANCING Borrowings 106,801 Debt payments (8,627) (1,408) (1,035) Dividends paid (4,919) (6,415) (10,888) Treasury stock purchased (1,926) Stock options exercised 160 33 Discontinued operations (2,250) (1,062) (1,061) Total From (Used For) Financing 91,165 (8,885) (14,877) CASH AND EQUIVALENTS (Decrease) increase (3,336) 9,835 2,223 Foreign exchange rate effect (456) Beginning of year 16,195 6,360 4,137 End Of Year $ 12,403 $ 16,195 $ 6,360 See notes to consolidated financial statements. -10- ANNUAL REPORT PAGE 29 INDUSTRY SEGMENT DATA Water Building Resource Corporate Products Construction and Others Total (Thousands) Year Ended March 31, 1997 Net sales $271,200 $81,818 $353,018 Operating profit (loss) 40,183 (877) 39,306 Corporate expense 3,904 Income before income taxes 35,402 Identifiable assets: Continuing operations 601,984 33,168 $ 76,022 Discontinued operations and total 15,183 726,357 Capital expenditures 4,523 816 958 6,297 Depreciation 4,531 1,307 750 6,588 Year Ended March 31, 1996 Net sales $180,790 $103,893 $284,683 Operating profit 32,358 2,347 34,705 Corporate expense 900 Income before income taxes 33,805 Identifiable assets: Continuing operations 111,098 44,231 $ 91,204 Discontinued operations and total 148,114 394,647 Capital expenditures 6,115 2,908 132 9,155 Depreciation 3,159 1,366 677 5,202 Year Ended March 31, 1995 Net sales $156,664 $77,188 $233,852 Operating profit 26,663 1,905 $ 283 28,851 Corporate expense 1,319 Income before income taxes 27,532 Identifiable assets: Continuing operations 91,130 37,419 110,337 Discontinued operations and total 175,810 414,696 Capital expenditures 4,422 980 111 5,513 Depreciation 2,779 1,222 699 4,700 See notes to consolidated financial statements. -11- ANNUAL REPORT PAGE 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BUSINESS DESCRIPTION The Company and its subsidiaries operate in two industry segments. Its products and services are marketed by the Company's sales organizations and through factory sales offices and independent representatives and agents. Generally credit is extended based on evaluations of customers' financial condition. The Building Products segment manufactures and distributes plumbing and heating, ventilating and air conditioning (HVAC) products for the construction and remodeling markets in the United States, Canada, and Europe, with significant suppliers being located in China and the Pacific Rim. It also designs and installs fire sprinkler systems in the states of California, Hawaii, Texas, Utah, and Washington. The Water Resource Construction segment constructs a wide variety of systems to control and treat water and wastewater principally for government agencies in southern California. In January 1997 the Company purchased Eljer Industries, Inc., a manufacturer and marketer of plumbing and HVAC building products. The decisions to sell the Lynx Golf and Mechanical Power Transmission segments and the Power Systems segment were made in the fiscal 1996 fourth quarter and fiscal 1997 second quarter, respectively. SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The financial statements include the accounts of the Company and its subsidiaries, including Eljer following purchase accounting since January 22, 1997, after elimination of significant intercompany transactions. They have been restated for the decisions to discontinue three industry segments with certain reclassifications in prior years to conform to the current presentation. The reporting of amounts in the financial statements and related disclosures in conformity with generally accepted accounting principles requires management to make assumptions and estimates. Actual results could differ from the estimates. Investments Marketable and irrevocable trust securities are available-for- sale and are carried at their estimated fair values with unrealized gains and losses included in shareholders' equity as a component of retained earnings. Debt securities maturing within three months of purchase are cash equivalents. Notes receivable are carried at cost with interest recognized as it accrues. The sales-type lease represents the present value of future minimum rental payments. Business ventures are accounted for by the equity method, or carried at cost if less than 20% of the stock is owned. Financial Instrument Fair Values No class of instrument has a significant difference between its carrying value and estimated fair value based on market quotations, projected cash flows, and other estimating methods. Engineering and Construction Contracts Revenue and costs on long-term contracts are recognized by the cost-to-cost percentage-of-completion method, -12- ANNUAL REPORT PAGE 30 CONTINUED commencing when progress is sufficient to determine earnings with reasonable accuracy, based on estimates of total sales value and cost at completion. Earnings adjustments arising from changes in estimates are recognized currently. Estimated losses are recorded when identified. Inventories Inventories are valued at the lower of cost, which includes material, labor, and manufacturing overhead, or market. Properties Property, plant, and equipment are stated at cost with depreciation being provided over their estimated useful lives by the straight- line method. Goodwill The excess of the purchase price over the fair value of acquired businesses' net assets is amortized by the straight-line method principally over thirty years (accumulated amortization: 1997 - $1,351,000; 1996 - $103,000). Foreign Currency Translation Translation adjustments of foreign subsidiaries, whose local currencies are their functional currencies, are included in shareholders' equity as a component of retained earnings. Stock-Based Compensation The expense recognized in connection with stock options is based on Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and its Interpretations. Earnings Per Share Earnings per share are based on income and the average shares of common stock and dilutive stock options outstanding during the year (1997 - 12,431,000; 1996 - 12,378,000; 1995 - 12,355,000). Statement of Financial Accounting Standards No. 128, "Earnings per Share," becomes retroactively effective in the Company's fiscal 1998 third quarter and is expected to marginally increase amounts reported herein. Industry Segment Data Operating profit is net sales less operating costs and certain corporate administrative expenses, allocated to the segments in relation to their sales, payrolls, and assets, and excludes interest expense. Corporate amounts include gains from sales of businesses, investment income, interest expense, and administrative expenses allocated to discontinued operations and unallocated. Corporate assets consist principally of cash and equivalents, short-term marketable securities, long-term investments, and corporate headquarters and rental properties. ANNUAL REPORT PAGE 31 ACQUISITIONS All the outstanding common stock of Eljer Industries, Inc. was purchased in January 1997 for $171.7 million and transaction expenses of $4.6 million. Concurrent with the purchase, a substantial portion of Eljer's debt was refinanced. Presented below are the fair values of the assets acquired and liabilities assumed after preliminary allocation of the purchase price. Also -13- ANNUAL REPORT PAGE 31 CONTINUED presented are unaudited pro forma results of operations for the Company giving effect to the purchase as if it had occurred at the beginning of each of the 1997 and 1996 fiscal years. These pro forma results are for comparative purposes only and do not purport to be indicative of the results which actually would have resulted or may result in the future. They include pre- acquisition litigation amounts for Eljer (1997 pro forma - $.25 per share settlement gain; 1996 - $.41 per share in expenses). ASSET AND LIABILITY FAIR VALUES (Thousands) Current assets $200,572 Property, plant, and equipment 70,351 Goodwill 193,369 Other assets 15,252 Current liabilities (190,483) Long-term liabilities (112,755) $176,306 PRO FORMA RESULTS OF OPERATIONS Year Ended March 31 1997 1996 (Thousands Except Per Share Amounts) Net sales $666,400 $660,100 Continuing operations income 24,500 15,500 Net income 7,798 10,643 Earnings per share: Continuing operations 1.97 1.25 Net income .63 .86 The Building Products segment purchased a plumbing products business (fiscal 1995: sales - $14.2 million; net income $.8 million) in fiscal 1996's third quarter. FINANCIAL INSTRUMENTS (Thousands) Restricted cash supports letters of credit securing certain long-term debt. The marketable securities at March 31, 1997 were pledged in lieu of customers holding construction contract retainage. Irrevocable trust securities include mortgage-backed instruments maturing from 1997 to 2023 carried at a fair value of $6,559 which was $2,300 less than their cost at March 31, 1997. -14- ANNUAL REPORT PAGE 31 CONTINUED ACCOUNTS RECEIVABLE (Thousands) At March 31, 1997 accounts receivable include retainage on long-term contracts expected to be collected in fiscal 1998 - $4,312, 1999 - $961, and 2000 - $1,055. Allowances deducted are: 1997 - $8,295; 1996 - $2,647. INVENTORIES AND CONTRACTS IN PROGRESS March 31 1997 1996 (Thousands) Finished products $ 80,473 $ 45,386 Work in process 13,722 3,708 Raw materials and supplies 28,604 5,430 Contracts in progress 11,467 15,229 $134,266 $ 69,753 Last-in, first-out (LIFO) method 85% 77% First-in, first-out (FIFO) method 15 23 Inventory increase if only the FIFO method, which approximates replacement costs, had been used $ 6,474 $ 7,104 PROPERTY, PLANT, AND EQUIPMENT March 31 1997 1996 (Thousands) Land and land improvements $ 7,963 $ 6,621 Buildings and leasehold improvements 50,483 31,183 Machinery and equipment 95,903 64,491 154,349 102,295 Depreciation 49,169 60,241 $105,180 $ 42,054 -15- ANNUAL REPORT PAGE 31 CONTINUED INVESTMENTS March 31 1997 1996 (Thousands) Irrevocable trust securities for: Nonqualified pension, deferred compensation, and other employee plans $ 9,838 $ 15,403 Environmental obligations 8,178 Notes receivable 8,779 11,690 Sales-type lease 7,186 7,441 Business ventures 4,543 3,058 Other 19 $ 38,524 $ 37,611 ANNUAL REPORT PAGE 32 DEBT AND LINES OF CREDIT The Company entered into a $250 million credit agreement in January 1997 with a group of banks for revolving loans and letters of credit up to $50 million and up to $200 million in term loans to acquire Eljer, refinance existing debt of Eljer subsidiaries, and fund a proposed trust in connection with the US Brass bankruptcy settlement. Interest is at prime or Eurodollar rates plus 0% to 1.5% and .75% to 2.5%, respectively, based on the defined ratio of debt to earnings before interest, taxes, depreciation, and amortization. Fees up to .375% are payable on unutilized loan commitments. Outstanding letters of credit ($20 million at March 31, 1997) may not exceed the lesser of the available revolving loan commitment and $40 million prior to 1998 and $30 million thereafter. All amounts become due if there is a change in control, as defined (generally if 20% or more of the Company's common stock is acquired), and scheduled term loan payments are required to be reduced by annual excess cash flow, as defined and, in inverse order, by proceeds from sales of specified assets and investments. As required by the credit agreement, the Company entered into two-year 8.78% fixed interest rate swaps for $105 million and a 10.5% interest rate cap for $20 million. -16- ANNUAL REPORT PAGE 32 CONTINUED DEBT OBLIGATIONS March 31 1997 1996 (Thousands) Current Industrial revenue bonds due in 1997 - 10.24% and 14% interest $ 9,700 US Brass revolving loan due in 1998 6,780 German bank credit line 780 Current portion of long-term obligations 17,288 $ 838 $ 34,548 $ 838 Long-Term Term loans due 1997-2002, net of $3,278 discount - 8.44% effective rate $149,807 Revolving loans due 2002 17,250 Unsecured note - 8.46% interest 6,364 $6,805 Foreign bank term loan due 1997-1999 4,197 Capital lease obligations 627 685 Other 59 178,245 7,549 Current portion 17,288 838 $160,957 $6,711 Long-term debt obligation principal payments due in future fiscal years: 1998 - -$17,288; 1999 - $22,384; 2000 - $26,597; 2001 - $38,077; 2002 - $51,983; thereafter - $25,194. Operating lease rental payments due in future years: 1998 - $4,569; 1999 - $3,433; 2000 - $1,320; 2001 - $681; 2002 - $461; thereafter - $3,907. Year Ended March 31 1997 1996 1995 (Thousands) Interest incurred $4,340 $1,147 $1,132 Interest paid 3,780 2,155 750 The industrial revenue bonds are secured by letters of credit supported by cash subject to withdrawal restrictions until the debt is repaid ($8.7 million was repaid in April 1997 and $9.4 million of restricted cash was released). A subsidiary in Germany has unsecured bank credit lines approximating $5 million, without scheduled maturity, which the banks review annually for renewal, with a year-end interest rate of 7%. The US Brass revolving loan is debtor-in-possession financing for up to $20 million based on a percentage of accounts receivable and inventories with interest at the prime rate plus 1.75%. A subsidiary in the United Kingdom has a bank agreement for British pound sterling or German deutsche mark revolving loans equivalent to approximately $4 million until September 1997 and for a term loan, both with LIBOR interest plus 1.5% to 1.75% based on the subsidiary's operating cash flow to debt servicing ratios. Payment of the unsecured note is guaranteed by the lessee under a sales-type lease. -17- ANNUAL REPORT PAGE 32 CONTINUED Substantially all assets and the Company's investments in domestic subsidiaries, other than those comprising discontinued operations, are pledged as security under the loan agreements. Restrictive covenants imposed by the agreements include maintenance of specified capitalization, net worth, interest expense, and fixed charge ratios. Also, they limit: annual capital expenditures to $22 million, decreasing to $18 million in fiscal 2000; common stock dividends, redemptions and purchases to $6 million per year; incurrence of additional debt; and acquisitions. Certain facilities and equipment are subject to operating leases, none of which contain significant contingent rent or renewal options or impose material restrictions on the Company. ANNUAL REPORT PAGE 33 RETIREMENT OBLIGATIONS Substantially all employees are covered by noncontributory Company sponsored or multiemployer defined benefit plans. Benefits of stated amounts for each year of service are provided by the multiemployer plans and to 33% of the participants in the Company's domestic plans, while benefits for others are based on years of service and compensation. The compensation base for 63% of active participants in domestic plans has been frozen at 1995 levels and those under age 50 at that time do not receive future service credit. Funding of Company sponsored plans, invested primarily in listed stocks and bonds and cash equivalents, is the minimum required by law and additional amounts as deemed appropriate from time to time. Contributions to multiemployer plans are related to hours worked or compensation levels. The Company also sponsors defined contribution plans for certain domestic employees and matches their contributions in cash or common stock of equivalent value up to 3% or 6% of their compensation, with those whose pension benefits have been frozen receiving and additional 2% to 9% of compensation based on years of service. Postretirement medical and death benefits for certain domestic retirees and their spouses are provided by the Company from unfunded plans. Employees eligible for these benefits are those participating in the Company's pension plans prior to specified dates in the 1986-1989 period and certain employees of businesses acquired after 1995, with their retirees required to contribute toward the plan's costs. The accumulated medical and life plan obligation is attributable to: retirees - 83%; fully-eligible employees - 7%; other active employees - 10%. The assumed health care cost trend rate declines 1/2% each year to 5% in 2005. A 1% greater rate would increase the accumulated obligation by $3.2 million and the annual expense, which would have been $4.1 million if Eljer were included for a full year, by $343,000. -18- ANNUAL REPORT PAGE 33 CONTINUED The fiscal 1997 changes in the actuarial present values of projected benefits generally are attributable to overfunded plan curtailments associated with discontinued operations and underfunded plans assumed in the acquisition of Eljer. The increase in the plans' assets is attributable to the Eljer acquisition and the assets' earnings which increased the net unrecognized gain to the extent they exceeded the assumed return rate. -19- ANNUAL REPORT PAGE 33 CONTINUED FUNDING STATUS March 31 1997 1996 Pension Plans Medical Pension Plans Medical Over Under And Life Over Under And Life Funded Funded Plans Funded Funded Plans (Thousands) Actuarial present value of benefits: Vested $ 90,476 $ 30,269 $40,608 $ 89,766 $ 10,863 $21,606 Nonvested 1,328 2,518 4,405 1,319 63 5,256 Accumulated 91,804 32,787 45,013 91,085 10,926 26,862 Salary increases 6,558 3,038 9,356 18 Projected 98,362 35,825 45,013 100,441 10,944 26,862 Plans' assets 181,494 23,586 160,611 1,063 Asset excess (deficiency) 83,132 (12,239) (45,013) 60,170 (9,881) (26,862) Unrecognized: Net (gain) loss (55,593) 1,595 (10,802) (37,536) 1,575 (4,743) Initial (asset) obligation (1,787) (1,311) 463 Prior service cost (1,275) 349 (2,724) (1) Minimum liability (68) (2,158) Prepaid (accrued) cost $ 24,477 $(10,363) $(55,815) $ 18,599 $(10,002) $(31,605) CONTINUING OPERATIONS' COSTS Company Defined Benefit Plans Pension Medical and Life Year Ended March 31 1997 1996 1995 1997 1996 1995 (Thousands) Service cost $ 1,541 $ 874 $ 1,180 $ 345 $ 268 $ 459 Interest 8,383 7,990 7,644 2,245 2,075 2,103 Curtailment gain (34) (Return) loss on assets (27,238) (38,165) 3,764 Other 14,592 26,405 (14,991) (185) (309) (Income) expense $(2,756) $(2,896) $(2,403) $2,405 $2,034 $2,562 Other Plans Year Ended March 31 1997 1996 1995 (Thousands) Multiemployer $2,398 $2,157 $1,841 Defined contribution 576 18 -20- ANNUAL REPORT PAGE 33 CONTINUED ACTUARIAL ASSUMPTIONS Year Ended March 31 1997 1996 1995 Obligation discount 7.5% 7.25% 8.5% Compensation increase 4.6 to 7.75 4.35 to 7.5 4.85 to 8.0 Asset long-term return 9.0 9.0 9.0 Health care cost trend rate 9.0 12.0 12.5 ANNUAL REPORT PAGE 34 SHAREHOLDERS' EQUITY There are 1.5 million shares of unreserved authorized preferred stock and 2 million shares of common stock are reserved for stock and option grants and the exercise of outstanding stock options. Second Series Junior Participating Preferred Stock (3.5 million shares, $1.00 par value, $2.00 liquidation preference to common stock, aggregate liquidation payment of four times common stock payment, redeemable at the greater of $360 or four times the current common stock market price) is reserved for issuance on exercise of rights attached to outstanding common stock. The rights may be redeemed at $.01 per right and expire in May 2006. If 15% or more of the Company's common stock becomes beneficially owned by a person or group (subject to the Board of Directors' authority to defer distribution and exercise of the rights until 20% is acquired), or if an exchange or tender offer which would result in 15% or more ownership is commenced, the rightholders, except such beneficial owners, may purchase one- quarter share of the preferred stock for $90 or, for $90, they may purchase shares of the Company's common stock at one-half their market value. If other change in control events occur, the same rightholders may, for $90, purchase shares of the acquirer's common stock at one-half their market value. The Company's 1996 Employee Stock Plan provides for awarding no more than 500,000 shares of common stock (485,000 available at March 31, 1997), with maximum award limits for each participant during any twelve month period, in the form of: nonqualified and incentive stock options to purchase common stock at its market value on the award date (125,000 share limit); stock equivalent units based on common stock fair market values with settlement in common stock or cash on the achievement of established performance goals (15,000 share limit); performance units denominated in cash with settlement in common stock or cash not exceeding $300,000 per participant per year on the achievement of specific business objectives; and annual incentive stock awards (30,000 share limit) to insiders, as defined, in settlement of incentive compensation plan awards. Under previous stock option plans, nonqualified stock options were granted to key employees to purchase shares of common stock at its market value on the grant date. Another plan provides to each director who is not employed by the Company an annual award of 500 shares of common stock ($52,000 total fair value in fiscal 1997) restricted as to sale for five years or, if earlier, until the director attains age 65 and completes five years of service as a director or -21- ANNUAL REPORT PAGE 34 CONTINUED the occurrence of a change in control or other events. The plan also provides for the annual distribution of a nonqualified option for 2,000 shares of common stock at its market value on the distribution date. In fiscal 1997, 1,649 shares of restricted common stock ($34,000 fair value) were issued to directors for their unvested accrued pension benefits upon the termination of future service accruals under the directors pension plan. STOCK OPTIONS March 31, 1997 Outstanding Weighted Average Exercisable Remaining Weighted Exercise Contractual Exercise Average Price Range Shares Life (Years) Price Shares Price (Thousands of Shares) $18.25 - $25.25 764 7.8 $20.50 105 $20.93 28.75 - 35.00 398 2.9 32.82 398 32.82 36.75 - 45.375 253 3.6 39.58 171 40.70 $18.25 - $45.375 1,415 5.7 $27.37 674 $32.96 Weighted Average Exercise Price Shares Or Price Range (Thousands of Shares) Year Ended March 31, 1997 Granted 316 $20.45 Exercised 7 20.75 Forfeited 52 30.59 At year end: Outstanding 1,415 27.37 Exercisable 674 32.96 Year Ended March 31, 1996 Granted 220 $21.10 Forfeited 10 27.17 At year end: Outstanding 1,158 29.37 Exercisable 547 34.78 Year Ended March 31, 1995 Granted 262 $18.25 - $22.00 Exercised 2 21.125 Forfeited 15 21.125 - 21.25 The estimated fair value of options granted and pro forma net income and -22- ANNUAL REPORT PAGE 34 CONTINUED earnings per share that would have been reported if Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," had been followed in the accounting for stock options granted since April 1, 1995 are presented below. These estimates were computed using the Black-Scholes option pricing model with weighted-average assumptions of: risk-free interest rate - 6.6%; dividend yield - 1.9%; expected option life - 7.1 years; expected common stock volatility - 25.5%. Year Ended March 31 1997 1996 (Thousands Except Per Share Amounts) Options Granted Estimated weighted-average fair value per share $ 6.99 $ 7.18 Net Income Reported $5,300 $16,670 Per share .43 1.35 Pro forma 4,760 16,443 Per share .38 1.33 -23- ANNUAL REPORT PAGE 35 CONSOLIDATED SHAREHOLDERS' EQUITY Capital in Common Excess of Retained Treasury Stock Par Value Earnings Stock Total (Thousands) Balance April 1, 1994 $6,285 $36,226 $183,670 $(4,598) $221,583 Net income 9,324 9,324 Cash dividends declared - $.88 per common share (10,870) (10,870) Treasury stock purchased - 103 shares (1,926) (1,926) Conversion of debentures - 37 shares (577) 1,095 518 Stock options - 2 shares (12) 44 32 Investment unrealized loss (823) (823) Pension minimum liability 716 716 Currency translation 376 376 Balance March 31, 1995 6,285 35,637 182,393 (5,385) 218,930 Net income 16,670 16,670 Cash dividends declared - $.40 per common share (4,938) (4,938) Conversion of preferred stock - 1 shares (20) 20 Investment unrealized gain 1,255 1,255 Pension minimum liability (773) (773) Currency translation (189) (189) Balance March 31, 1996 6,285 35,617 194,418 (5,365) 230,955 Net income 5,300 5,300 Cash dividends declared - $.40 per common share (4,942) (4,942) Stock options and awards - 11 shares (92) 338 246 Investment unrealized loss (631) (631) Pension minimum liability 1,025 1,025 Currency translation (1,235) (1,235) Balance March 31, 1997 $6,285 $35,525 $193,935 $(5,027) $230,718 -24- ANNUAL REPORT PAGE 35 CONTINUED RETAINED EARNINGS COMPONENTS March 31 1997 1996 1995 (Thousands) Investment unrealized loss $ (1,440) $ (809) $ (2,064) Pension minimum liability (39) (1,064) (291) Currency translation (2,336) (1,101) (912) Retained earnings 197,750 197,392 185,660 ANNUAL REPORT PAGE 36 INCOME TAXES NET DEFERRED TAX ASSET COMPONENTS March 31 1997 1996 (Thousands) Litigation $25,370 $ 270 Retirement obligations 21,800 12,700 Insurance 8,840 4,830 Discontinued operations 5,650 4,280 Environmental obligations 5,440 420 Deferred compensation 4,780 1,530 Tax carryforward benefits 4,700 560 Engineering and construction contracts 3,240 5,980 Miscellaneous 3,000 4,840 82,820 35,410 Inventories (5,110) Depreciation (13,810) (4,950) $63,900 $30,460 Tax carryforward benefits are amounts recognized in the financial statements for $8.3 million of net operating loss carryforwards of acquired businesses expiring in 2011 and 2012 and $1.4 million of minimum tax credit carryforwards with no expiration which will be realized when they are used to reduce future federal taxable income and income taxes, respectively. No federal or state income taxes have been provided on $5.3 million of foreign subsidiaries' undistributed earnings as the Company intends to indefinitely reinvest the earnings in foreign operations, or to repatriate them only when doing so would be tax effective, and it is not practicable to determine the amount of such deferred taxes. -25- ANNUAL REPORT PAGE 36 CONTINUED PRETAX INCOME AND TAX PROVISIONS Year Ended March 31 1997 1996 1995 (Thousands) Income Before Income Taxes Domestic $35,182 $33,795 $24,942 Foreign 220 10 (70) $35,402 $33,805 $24,872 Tax Provisions Current federal $ 8,750 $ 9,340 $ 7,260 Current state 960 120 550 Current foreign 150 8 10 Prior year state tax settlement (730) 9,860 9,468 7,090 Deferred federal 5,580 2,130 1,370 Deferred state 240 680 230 Deferred foreign 30 Loss carryforward benefit (2,310) 3,540 2,810 1,600 $13,400 $12,278 $8,690 TAX RATE RECONCILEMENT Year Ended March 31 1997 1996 1995 Federal statutory rate 35.0% 35.0% 35.0% State income taxes, net of federal tax benefit 2.2 1.6 2.0 Goodwill amortization 1.2 Tax exempt investment income (1.1) (1.8) (3.0) Prior year state tax settlement (1.7) Miscellaneous .6 1.5 (.7) Effective rate 37.9% 36.3% 31.6% TAXES PAID Year Ended March 31 1997 1996 1995 (Thousands) $1,296 $4,473 $3,525 ANNUAL REPORT PAGE 37 COMMITMENTS AND CONTINGENCIES United States Brass Corporation, an Eljer indirect wholly-owned subsidiary, filed in 1994 a voluntary petition for reorganization under Chapter 11 of the -26- ANNUAL REPORT PAGE 37 CONTINUED United States Bankruptcy Code for the purpose of systematically resolving issues resulting from sales of polybutylene plumbing systems and related litigation. US Brass has proposed a reorganization plan which provides for payment, satisfaction, and discharge of all claims involving the polybutylene systems and, currently, it operates as a debtor-in-possession under Section 1108 of the Bankruptcy Code subject to the supervision and orders of the bankruptcy court. The polybutylene system lawsuits allege the systems leaked and seek recovery based on negligence, breach of warranty, strict tort liability and, in some cases, fraud or misrepresentation. Defendants in various of the cases among others include: US Brass; Eljer and its wholly-owned subsidiary Eljer Manufacturing, Inc. (EMI), neither of which ever manufactured or sold the systems; Shell Chemical Company, the polybutylene resin manufacturer; and Hoechst Celanese Corporation, the manufacturer of a resin for system fittings. Data is not currently available to permit estimating the number of installations that have failed or the number of claims that have been settled by parties other than US Brass. Until July 1991, US Brass, Shell, and Hoechst Celanese shared the costs of system repairs and replacements with insurance carriers reimbursing substantial portions of the amounts paid by US Brass. Some reimbursement of insurance payments may be required under reservations of rights, retrospective premium adjustments, or indemnification agreements. The polybutylene claimants committee in the bankruptcy proceeding has filed a motion to convert the case from Chapter 11 to Chapter 7 of the Bankruptcy Code which, if granted, would cause US Brass to be liquidated. In connection with settlements by various parties in two national class actions dealing with polybutylene plumbing systems, Eljer, EMI, and US Brass have entered into a tentative settlement, contingent on confirmation of a bankruptcy plan embodying the tentative settlement terms, which would require contribution to a settlement fund of insurance proceeds, $53.4 million in cash, and a $20 million noninterest bearing note payable over ten years. In consideration for such contribution, which has been provided for in the statement of consolidated financial position, Eljer, EMI, and US Brass would receive relief from polybutylene claims satisfactory to them and US Brass would remain an indirect, wholly-owned operating subsidiary. The Company operates plants that generate hazardous and nonhazardous wastes which are subject to federal and state disposal laws and believes it is in material compliance with such laws and related regulations. Several of the Eljer facilities have implemented required remediation programs to remedy the effects of past waste disposal and others have not undergone comprehensive environmental studies. Included in the statement of financial position is a $15.5 million reserve for environmental, health, and safety matters which management believes is adequate and expects payments of substantial portions to be made over the next three years. Environmental trusts amounting to $8.2 million have been funded to secure obligations with respect to specified sites. In the normal course of business, financial and performance guarantees are made in connection with major engineering and construction contracts and a liability is recognized when a probable loss occurs. Also, there are various other claims, legal, and environmental proceedings which management believes will have no material effect on the Company's financial position or results of operations when they are resolved. -27- ANNUAL REPORT PAGE 37 CONTINUED DISCONTINUED OPERATIONS In fiscal 1997, the Lynx Golf and Mechanical Power Transmission segments, and portions of the Power Systems segment, were sold. The remainder of the Power Systems segment is expected to be disposed of in fiscal 1998. The net sales and loss from operations of the three segments prior to the dates of the decisions to discontinue them, the net assets of the two segments discontinued as of March 1996 and the remaining net assets at March 31, 1997, and the components of the disposal net losses were: Year Ended March 31 1997 1996 1995 (Thousands) Net sales $181,243 $221,330 $227,733 Loss from operations before income taxes (14,364) (7,337) (14,148) Income tax benefit 5,200 3,080 4,630 Net loss $ (9,164) $ (4,257) $ (9,518) Loss on disposal before income taxes $ (9,138) $ (1,700) Income tax benefit 1,600 1,100 Net loss $ (7,538) $ (600) Receivables $ 46,591 $ 24,224 Inventories and other assets 2,458 30,498 Property, plant, and equipment 2,109 16,537 Trade accounts payable (16,227) (6,763) Contract advance billings (14,403) Other liabilities (16,215) (7,243) Net assets $ 4,313 $ 57,253 The Company has agreed to reimburse a third party for all payments it might be required to make to the issuer of a $27.6 million letter of credit provided to secure the payment of potential liquidated damages in connection with a power plant construction project recently begun in Pakistan. -28- EX-21 8 EXHIBIT 21 - SUBSIDIARIES EXHIBIT 21 - SUBSIDIARIES State or Other Jurisdiction Subsidiary of Incorporation Cosco Fire Protection, Inc. -A California Eljer Industries, Inc. Delaware Eljer Industries, Limited -B United Kingdom Eljer Manufacturing Canada, Inc. -C Canada Eljer Manufacturing, Inc. -B Delaware Environmental Energy Company California Firetrol Protection Systems, Inc. Utah HL Capital Corp. California Industrias Eljer de Mexico, S.A. de C.V. -D Mexico National Energy Production Corporation Washington Operational Energy Corp. -E California Sanitary-Dash Manufacturing Co., Inc. Delaware Selkirk Canada U.S.A., Inc. -B Delaware Selkirk Europe U.S.A., Inc. -B Delaware Selkirk Manufacturing France S.A.R.L. -F France Selkirk Manufacturing Limited -G United Kingdom Selkirk Schornsteintechnik GmbH -H Germany Selkirk S.R.L. -I Italy Sharyn Steam, Inc. California United States Brass Corporation -J Delaware Zurco, Inc. Delaware Zurn Constructors, Inc. California Zurn Export, Inc. U.S. Virgin Islands Zurn Industries Limited Canada A-Subsidiary of Zurn Constructors, Inc. B-Subsidiary of Eljer Industries, Inc. C-Subsidiary of Selkirk Canada U.S.A., Inc. D-Subsidiary of Eljer Manufacturing, Inc. and Selkirk Canada U.S.A., Inc. E-Subsidiary of National Energy Production Corporation F-Subsidiary of Selkirk Europe U.S.A., Inc. and Eljer Industries Limited G-Subsidiary of Eljer Industries Limited H-Subsidiary of Selkirk Europe U.S.A., Inc. I-Subsidiary of Selkirk Europe U.S.A., Inc. and Selkirk Manufacturing Limited J-Subsidiary of Eljer Manufacturing, Inc. EX-23 9 EXHIBIT 23 - CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 - CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement on Form S-8 No. 33-19103 pertaining to the 1986 Stock Option Plan, the Registration Statement on Form S-8 No. 33-30383 pertaining to the 1989 Directors Stock Option Plan, the Registration Statement on Form S-8 No. 33- 49224 pertaining to the 1991 Stock Option Plan, and the Registration Statement on Form S-8 No. 033-65219 pertaining to the 1995 Directors Stock Option Plan of Zurn Industries, Inc., in Registration Statement on Form S-8 No. 333-00823 pertaining to the Zurn Retirement Savings Plan, and in Registration Statement on Form S-8 No. 333-00813 pertaining to the Zurn/NEPCO Retirement Savings Plan of our report dated May 19, 1997 included in Item 8 with respect to the consolidated financial statements and financial statement schedule incorporated by reference or included in the Annual Report on Form 10-K of Zurn Industries, Inc. /s/ Ernst & Young LLP Erie, Pennsylvania June 27, 1997 EX-27.1 10 EXHIBIT 27 - FINANCIAL DATA SCHEDULE YEAR ENDED MARCH 31, 1997
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENTS OF CONSOLIDATED FINANCIAL POSITION AND CONSOLIDATED OPERATIONS LISTED IN ITEM 14 OF THIS REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 MAR-31-1997 MAR-31-1997 YEAR 22,908 8,489 118,489 8,295 134,266 348,044 154,349 49,169 726,357 239,824 160,957 0 0 6,285 224,433 726,357 353,018 0 250,443 0 0 0 4,340 35,402 13,400 22,002 (16,702) 0 0 5,300 .43 0
EX-27.2 11 EXHIBIT 27 - RESTATED FINANCIAL DATA SCHEDULE YEAR ENDED MARCH 31, 1997 INTERIM QUARTERS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE RESTATED STATEMENTS OF CONSOLIDATED FINANCIAL POSITION AND CONSOLIDATED OPERATIONS FOR THE INTERIM QUARTERS OF THE YEAR ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 MAR-31-1997 MAR-31-1997 MAR-31-1997 JUN-30-1996 SEP-30-1996 DEC-31-1996 3-MOS 6-MOS 9-MOS 6,596 11,938 49,636 24,143 30,340 39,815 97,084 60,046 56,402 0 0 0 67,580 58,093 56,398 281,950 238,978 245,063 102,551 86,947 82,705 61,521 49,336 47,065 389,479 341,195 344,549 106,673 58,781 56,689 6,606 6,403 6,304 0 0 0 0 0 0 6,285 6,285 6,285 225,833 232,142 232,165 389,479 341,195 344,549 82,235 163,464 229,150 0 0 0 59,598 118,487 164,378 0 0 0 0 0 0 0 0 0 317 651 1,092 10,411 19,145 27,232 3,890 7,090 10,300 6,521 12,055 16,932 (4,309) (8,564) (6,400) 0 0 0 0 0 0 2,212 3,491 10,532 .18 .28 .85 0 0 0
EX-27.3 12 EXHIBIT 27 - RESTATED FINANCIAL DATA SCHEDULE YEAR ENDED MARCH 31, 1996
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE RESTATED STATEMENTS OF CONSOLIDATED FINANCIAL POSITION AND CONSOLIDATED OPERATIONS FOR THE YEAR ENDED MARCH 31, 1996 LISTED IN ITEM 14 OF THIS REPORT ON FORM 10-K AND FOR INTERIM QUARTERS OF FISCAL 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 MAR-31-1996 MAR-31-1996 MAR-31-1996 MAR-31-1996 JUN-30-1995 SEP-30-1995 DEC-31-1995 MAR-31-1996 3-MOS 6-MOS 9-MOS YEAR 11,282 5,348 13,507 16,195 41,941 44,333 16,225 13,836 115,420 108,819 105,204 96,360 0 0 0 2,647 88,960 96,638 108,133 69,753 300,188 296,483 283,821 286,994 146,157 149,859 152,282 102,295 89,630 91,345 92,468 60,241 417,395 417,051 411,467 394,647 141,547 138,227 130,506 113,158 9,089 9,002 8,400 6,711 0 0 0 0 0 0 0 0 6,285 6,285 6,285 6,285 216,754 219,858 222,314 224,670 417,395 417,051 411,467 394,647 60,156 130,343 206,742 284,683 0 0 0 0 41,320 91,775 149,177 205,305 0 0 0 0 0 0 0 0 0 0 0 0 343 669 962 1,147 8,118 15,463 22,583 33,805 3,190 5,970 8,660 12,278 4,928 9,493 13,923 21,527 (279) (769) (1,705) (4,857) 0 0 0 0 0 0 0 0 4,649 8,724 12,218 16,670 .38 .71 .99 1.35 0 0 0 0
EX-27.4 13 EXHIBIT 27 - RESTATED FINANCIAL DATA SCHEDULE YEAR ENDED MARCH 31, 1995
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE RESTATED STATEMENTS OF CONSOLIDATED FINANCIAL POSITION AND CONSOLIDATED OPERATIONS FOR THE YEAR ENDED MARCH 31, 1995 LISTED IN ITEM 14 OF THIS REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 MAR-31-1995 MAR-31-1995 YEAR 6,360 48,478 119,611 4,238 84,264 298,379 143,606 87,444 414,696 142,844 9,525 0 0 6,285 212,645 414,696 233,852 0 166,854 0 0 0 1,132 27,532 8,690 18,842 (9,518) 0 0 9,324 .76 0
EX-99.1 14 EX-99.1 - FORM 11-K ZURN RETIREMENT SAVINGS PLAN EXHIBIT 99.1 FORM 11-K SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 X Annual Report Pursuant to Section 15(d) of the Securities Exchange Act of 1934 [Fee Required] For the Fiscal Year Ended December 31, 1996 ___ Transition Report Pursuant to Section 15(d) of the Securities Exchange Act of 1934 [No Fee Required] For the Transition Period From ___________ To __________ Commission File Number 1-5502 ZURN RETIREMENT SAVINGS PLAN (Full title of the Plan) ZURN INDUSTRIES, INC. One Zurn Place, Erie, Pennsylvania 16505 (Name and address of issuer of securities held pursuant to the Plan) -1- Pension Committee Zurn Industries, Inc. Erie, Pennsylvania We have audited the accompanying statements of net assets available for benefits of the Zurn Retirement Savings Plan as of December 31, 1996 and 1995, and the related statements of changes in net assets available for benefits for the years then ended. These financial statements are the responsibility of the Plan's administrator. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the administrator, 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 net assets available for benefits of the Zurn Retirement Savings Plan as of December 31, 1996 and 1995, and the changes in its net assets available for benefits for the years then ended, in conformity with generally accepted accounting principles. Our audits were made for the purpose of expressing an opinion on the basic financial statements taken as a whole. The supplemental schedules of assets held for investment purposes at December 31, 1996, and loans or fixed income obligations for the year then ended, are presented for the purpose of additional analysis and are not a required part of the basic financial statements but are supplementary information required by the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. The supplemental schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. /s/ Pashke Twargowski & Lee Erie, Pennsylvania June 26, 1997 -2- STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS ZURN RETIREMENT SAVINGS PLAN December 31 1996 1995 ASSETS Investments in T. Rowe Price Funds: U.S. Treasury Money $ 2,458,129 $2,608,541 U.S. Treasury Intermediate 99,049 69,515 New Income 712,818 658,843 Balanced 355,925 223,059 Capital Appreciation 3,294,948 2,871,205 Equity Index 3,534,246 2,582,553 International Stock 546,469 424,092 Small-Cap Stock 588,538 205,270 Zurn Stock Fund 50,718 11,640,840 9,643,078 Contributions receivable 31,537 24,080 Participants' loans 258,072 210,856 NET ASSETS AVAILABLE FOR BENEFITS $11,930,449 $9,878,014 See notes to financial statements. -3- STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS ZURN RETIREMENT SAVINGS PLAN Year Ended December 31, 1996
T. Rowe Price Funds U.S. Treasury New Capital Money Intermediate Income Balanced Appreciation ADDITIONS Investment income: Dividends $ 116,946 $ 5,162 $ 45,589 $ 13,808 $ 309,502 Net appreciation (depreciation) in value of investments (2,713) (28,403) 24,903 168,524 116,946 2,449 17,186 38,711 478,026 Participants' contributions 433,845 35,603 147,238 113,200 482,575 Participants' loan interest 3,279 1,304 677 1,983 4,098 TOTAL ADDITIONS 554,070 39,356 165,101 153,894 964,699 BENEFITS PAID TO PARTICIPANTS 431,483 542 73,789 61,938 348,733 NET ADDITIONS 122,587 38,814 91,312 91,956 615,966 NET ASSETS AVAILABLE FOR BENEFITS Beginning of year 2,608,541 69,515 658,843 223,059 2,871,205 Transfers (272,999) (9,280) (37,337) 40,910 (192,223) End of year $2,458,129 $99,049 $712,818 $355,925 $3,294,948 See notes to financial statements. -4- /TABLE STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS - Continued ZURN RETIREMENT SAVINGS PLAN Year Ended December 31, 1996
T. Rowe Price Funds Zurn Equity International Small-Cap Stock Index Stock Stock Fund Other Total ADDITIONS Investment income: Dividends $ 119,082 $ 14,639 $ 49,750 $ 674,478 Net appreciation in value of investments 517,788 54,199 19,899 $ 4,341 758,538 636,870 68,838 69,649 4,341 1,433,016 Participants' contributions 448,986 129,052 118,209 11,740 $ 7,457 1,927,905 Participants' loan interest 5,833 577 341 18,092 TOTAL ADDITIONS 1,091,689 198,467 188,199 16,081 7,457 3,379,013 BENEFITS PAID TO PARTICIPANTS 286,908 79,704 13,538 29,943 1,326,578 NET ADDITIONS (DEDUCTIONS) 804,781 118,763 174,661 16,081 (22,486) 2,052,435 NET ASSETS AVAILABLE FOR BENEFITS Beginning of year 2,582,553 424,092 205,270 234,936 9,878,014 Transfers 146,912 3,614 208,607 34,637 77,159 End of year $3,534,246 $546,469 $588,538 $50,718 $289,609 $11,930,449 See notes to financial statements. -5- /TABLE STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS ZURN RETIREMENT SAVINGS PLAN Year Ended December 31, 1995
T. Rowe Price Funds U.S. Treasury New Capital Money Intermediate Income Balanced Appreciation ADDITIONS Investment income: Dividends $ 125,150 $ 3,260 $ 36,488 $ 7,590 $ 224,572 Net appreciation in value of investments 4,035 53,407 21,570 270,135 125,150 7,295 89,895 29,160 494,707 Participants' contributions 538,334 80,697 161,506 76,928 508,542 Participants' loan interest 2,972 1,006 577 1,036 3,788 TOTAL ADDITIONS 666,456 88,998 251,978 107,124 1,007,037 BENEFITS PAID TO PARTICIPANTS 275,850 764 52,008 3,998 128,003 NET ADDITIONS 390,606 88,234 199,970 103,126 879,034 NET ASSETS AVAILABLE FOR BENEFITS Beginning of year 2,232,858 26,922 445,518 58,186 2,070,228 Transfers (14,923) (45,641) 13,355 61,747 (78,057) End of year $2,608,541 $ 69,515 $658,843 $223,059 $2,871,205 See notes to financial statements. -6- /TABLE STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS - Continued ZURN RETIREMENT SAVINGS PLAN Year Ended December 31, 1995
T. Rowe Price Funds Equity International Small-Cap Index Stock Stock Other Total ADDITIONS Investment income: Dividends $ 99,425 $ 12,780 $ 23,671 $ 532,936 Net appreciation in value of investments 553,875 25,783 14,782 943,587 653,300 38,563 38,453 1,476,523 Participants' contributions 444,790 120,500 53,309 $ (6,289) 1,978,317 Participants' loan interest 4,871 530 55 14,835 TOTAL ADDITIONS 1,102,961 159,593 91,817 (6,289) 3,469,675 BENEFITS PAID TO PARTICIPANTS 117,529 3,424 1,476 1,729 584,781 NET ADDITIONS (DEDUCTIONS) 985,432 156,169 90,341 (8,018) 2,884,894 NET ASSETS AVAILABLE FOR BENEFITS Beginning of year 1,611,665 306,343 84,488 156,912 6,993,120 Transfers (14,544) (38,420) 30,441 86,042 End of year $2,582,553 $424,092 $205,270 $234,936 $9,878,014 See notes to financial statements. -7- /TABLE NOTES TO FINANCIAL STATEMENTS ZURN RETIREMENT SAVINGS PLAN December 31, 1996 PLAN DESCRIPTION The Zurn Retirement Savings Plan is a defined contribution plan providing retirement benefits through participant-directed investments to participants in the Zurn Industries Retirement Plan and Cosco Fire Protection Plan for Salaried Employees. It is subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). The Company has agreed to contribute participants' elective deferrals of up to 20% of eligible compensation. Participants also may contribute non-taxed distributions from other employers' qualified plans and they may borrow from their accounts subject to specified limitations. Information about the Plan agreement and the benefit provisions is contained in the "Summary Plan Description" which may be obtained from Zurn Industries, Inc., the Plan Administrator. SIGNIFICANT ACCOUNTING POLICIES T. Rowe Price Investments The investments are stated at market value as determined by the funds. Zurn Stock Fund Zurn Industries, Inc. common stock (1,893 shares) is stated at its quoted market value. A percentage of the Fund is invested in the T. Rowe Price Prime Reserve Fund ($1,076) for investment diversification liquidity. Dividend income from these investments is included in investment income as a component of the net appreciation in the value of investments. Investment Transactions Investment transactions are recorded as of the date the order to buy or sell is executed with realized gains and losses being included in investment income as a component of the net appreciation (depreciation) in the value of investments. Participants' Loans Participants' loans are stated at the principal amount due from the participants. Dividends Dividend income is recognized on the ex-dividend date. Expenses Administrative expenses are paid by the Plan Administrator. -8- INCOME TAX STATUS The Internal Revenue Service has ruled that the Plan qualifies under Section 401(a) of the Internal Revenue Code and is, therefore, not subject to tax under present income tax law. Once qualified, the Plan is required to operate in conformity with the Code to maintain its qualification. The Plan Administrator is not aware of any course of action or series of events that might adversely affect the Plan's qualified status. -9- SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES ZURN RETIREMENT SAVINGS PLAN December 31, 1996 ASSETS OWNED AT YEAR-END Cost Current Value T. Rowe Price Funds: U.S. Treasury Money $2,458,129 $2,458,129 U.S. Treasury Intermediate 99,100 99,049 New Income 717,891 712,818 Balanced 317,794 355,925 Capital Appreciation 2,962,705 3,294,948 Equity Index 2,533,257 3,534,246 International Stock 499,914 546,469 Small-Cap Stock 566,351 588,538 Zurn Stock Fund 46,377 50,718 Participants' loans - 7% to 10% interest -0- 258,072 -10- SCHEDULE OF LOANS OR FIXED INCOME OBLIGATIONS ZURN RETIREMENT SAVINGS PLAN Year Ended December 31, 1996 Amount Received Original During The Year Unpaid Amount Overdue Amount Principal Interest Balance Principal Interest Michael P. Higgins $6,000 $ 40 $16 $-0- $5,109 $-0- 2766 Rippling Participant loan - 8.25% Brook Place Distributed to participant Ontario, CA 91761 Robert V. Seibel 6,000 170 16 -0- 2,483 -0- 5650 Gardner Drive Participant loan - 7% Erie, PA 16509 3,000 120 18 -0- 2,065 -0- Participant loan - 10% Distributed to participant James M. Wittmaak 3,000 93 28 -0- 2,078 -0- 5973 Buman Road Participant loan - 7.75% McKean, PA 16426 Distributed to participant -11- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Pension Committee of Zurn Industries, Inc. has duly caused this annual report to be signed on its behalf by the undersigned thereunto duly authorized. ZURN RETIREMENT SAVINGS PLAN (Plan) June 26, 1997 /s/ James A. Zurn James A. Zurn, Chairman Pension Committee of Zurn Industries, Inc. -12- CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement on Form S-8 No. 333-00823 pertaining to the Zurn Retirement Savings Plan of our report dated June 26, 1997 with respect to the financial statements and supplemental schedules included in the Annual Report on Form 11-K of the Zurn Retirement Savings Plan. /s/ Pashke Twargowski & Lee Erie, Pennsylvania June 27, 1997 -13- EX-99.2 15 EXHIBIT 99.2 - FORM 11-K ZURN/NEPCO RETIREMENT SAVINGS PLAN EXHIBIT 99.2 FORM 11-K SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 X Annual Report Pursuant to Section 15(d) of the Securities Exchange Act of 1934 [Fee Required] For the Fiscal Year Ended December 31, 1996 ___ Transition Report Pursuant to Section 15(d) of the Securities Exchange Act of 1934 [No Fee Required] For the Transition Period From ___________ To __________ Commission File Number 1-5502 ZURN/NEPCO RETIREMENT SAVINGS PLAN (Full title of the Plan) ZURN INDUSTRIES, INC. One Zurn Place, Erie, Pennsylvania 16505 (Name and address of issuer of securities held pursuant to the Plan) -1- Pension Committee Zurn Industries, Inc. Erie, Pennsylvania We have audited the accompanying statements of net assets available for benefits of the Zurn/NEPCO Retirement Savings Plan as of December 31, 1996 and 1995, and the related statements of changes in net assets available for benefits for the years then ended. These financial statements are the responsibility of the Plan's administrator. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the administrator, 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 net assets available for benefits of the Zurn/NEPCO Retirement Savings Plan as of December 31, 1996 and 1995, and the changes in its net assets available for benefits for the years then ended, in conformity with generally accepted accounting principles. Our audits were made for the purpose of expressing an opinion on the basic financial statements taken as a whole. The supplemental schedules of assets held for investment purposes at December 31, 1996, and loans or fixed income obligations for the year then ended, are presented for the purpose of additional analysis and are not a required part of the basic financial statements but are supplementary information required by the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. The supplemental schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. /s/ Pashke Twargowski & Lee Erie, Pennsylvania June 26, 1997 -2- STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS ZURN/NEPCO RETIREMENT SAVINGS PLAN December 31 1996 1995 ASSETS Investments in T. Rowe Price Funds: U.S. Treasury Money $1,097,515 $1,034,694 U.S. Treasury Intermediate 59,212 29,088 New Income 391,234 329,704 Balanced 206,872 156,206 Capital Appreciation 2,992,055 2,549,859 Equity Index 2,731,746 2,019,045 International Stock 768,724 514,214 Small-Cap Stock 491,591 201,807 Zurn Stock Fund 48,676 8,787,625 6,834,617 Participants' loans 352,036 373,881 Contributions receivable: Participants' 40,779 41,905 Employers' 10,366 10,171 TOTAL ASSETS 9,190,806 7,260,574 FORFEITED EMPLOYERS' CONTRIBUTIONS 70,043 24,151 NET ASSETS AVAILABLE FOR BENEFITS $9,120,763 $7,236,423 See notes to financial statements. -3- STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS ZURN/NEPCO RETIREMENT SAVINGS PLAN Year Ended December 31, 1996
T. Rowe Price Funds U.S. Treasury New Capital Money Intermediate Income Balanced Appreciation ADDITIONS Investment income: Dividends $ 50,081 $ 2,897 $ 23,249 $ 9,074 $ 280,414 Net appreciation (depreciation) in value of investments (1,405) (14,584) 18,522 152,518 50,081 1,492 8,665 27,596 432,932 Contributions: Participants' 164,317 17,258 83,278 70,588 419,462 Employers' 41,852 2,911 19,835 13,042 88,590 Participants' loan interest 3,939 44 991 1,258 6,397 TOTAL ADDITIONS 260,189 21,705 112,769 112,484 947,381 DEDUCTIONS Benefits paid to participants 203,155 3,113 20,870 47,233 242,645 Forfeited employers' contributions (32,101) 1,053 7,529 1,915 22,767 TOTAL DEDUCTIONS 171,054 4,166 28,399 49,148 265.412 NET ADDITIONS 89,135 17,539 84,370 63,336 681,969 NET ASSETS AVAILABLE FOR BENEFITS Beginning of year 1,034,694 29,088 329,704 156,206 2,549,859 Transfers (26,314) 12,585 (22,840) (12,670) (239,773) End of year $1,097,515 $59,212 $391,234 $206,872 $2,992,055 See notes to financial statements. -4- /TABLE STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS - Continued ZURN/NEPCO RETIREMENT SAVINGS PLAN Year Ended December 31, 1996
T. Rowe Price Funds Zurn Equity International Small-Cap Stock Index Stock Stock Fund Other Total ADDITIONS Investment income: Dividends $ 91,593 $ 20,401 $ 41,555 $ 519,264 Net appreciation in value of investments 397,387 76,109 19,417 $ 1,916 649,880 488,980 96,510 60,972 1,916 1,169,144 Contributions: Participants' 321,986 138,597 98,944 704 $ (1,126) 1,314,008 Employers' 76,201 30,997 20,302 71 195 293,996 Participants' loan interest 8,154 2,252 1,220 24,255 TOTAL ADDITIONS 895,321 268,356 181,438 2,691 (931) 2,801,403 DEDUCTIONS Benefits paid to participants 242,550 29,558 7,864 46,075 843,063 Forfeited employers' contributions 20,984 4,355 1,607 45,891 74,000 TOTAL DEDUCTIONS 263,534 33,913 9,471 91,966 917,063 NET ADDITIONS (DEDUCTIONS) 631,787 234,443 171,967 2,691 (92,897) 1,884,340 NET ASSETS AVAILABLE FOR BENEFITS Beginning of year 2,019,045 514,214 201,807 401,806 7,236,423 Transfers 80,914 20,067 117,817 45,985 24,229 End of year $2,731,746 $768,724 $491,591 $48,676 $333,138 $9,120,763 See notes to financial statements. -5- /TABLE STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS ZURN/NEPCO RETIREMENT SAVINGS PLAN Year Ended December 31, 1995
T. Rowe Price Funds U.S. Treasury New Capital Money Intermediate Income Balanced Appreciation ADDITIONS Investment income: Dividends $ 52,207 $ 1,620 $ 19,015 $ 6,319 $ 199,497 Net appreciation in value of investments 2,014 27,427 18,772 239,574 52,207 3,634 46,442 25,091 439,071 Contributions: Participants' 194,690 14,071 94,624 53,638 468,247 Employers' 53,980 2,633 20,382 8,441 99,679 Participants' loan interest 4,004 27 533 583 5,991 TOTAL ADDITIONS 304,881 20,365 161,981 87,753 1,012,988 DEDUCTIONS Benefits paid to participants 153,935 607 36,475 5,179 175,464 Forfeited employers' contributions 3,244 12 4,416 397 8,261 TOTAL DEDUCTIONS 157,179 619 40,891 5,576 183,725 NET ADDITIONS 147,702 19,746 121,090 82,177 829,263 NET ASSETS AVAILABLE FOR BENEFITS Beginning of year 960,357 14,646 219,579 77,858 1,757,743 Transfers (73,365) (5,304) (10,965) (3,829) (37,147) End of year $1,034,694 $29,088 $329,704 $156,206 $2,549,859 See notes to financial statements. -6- /TABLE STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS - Continued ZURN/NEPCO RETIREMENT SAVINGS PLAN Year Ended December 31, 1995
T. Rowe Price Funds Equity International Small-Cap Index Stock Stock Other Total ADDITIONS Investment income: Dividends $ 78,000 $ 15,496 $ 23,271 $ 395,425 Net appreciation in value of investments 430,321 32,551 11,687 762,346 508,321 48,047 34,958 1,157,771 Contributions: Participants' 348,541 164,940 69,919 $ 3,721 1,412,391 Employers' 71,042 33,642 11,256 (300) 300,755 Participants' loan interest 7,267 1,776 326 20,507 TOTAL ADDITIONS 935,171 248,405 116,459 3,421 2,891,424 DEDUCTIONS Benefits paid to participants 141,596 13,080 7,141 15,613 549,090 Forfeited employers' contributions 4,052 2,569 1,834 589 25,374 TOTAL DEDUCTIONS 145,648 15,649 8,975 16,202 574,464 NET ADDITIONS (DEDUCTIONS) 789,523 232,756 107,484 (12,781) 2,316,960 NET ASSETS AVAILABLE FOR BENEFITS Beginning of year 1,226,294 360,970 55,369 246,647 4,919,463 Transfers 3,228 (79,512) 38,954 167,940 End of year $2,019,045 $514,214 $201,807 $401,806 $7,236,423 See notes to financial statements. -7- /TABLE NOTES TO FINANCIAL STATEMENTS ZURN/NEPCO RETIREMENT SAVINGS PLAN December 31, 1996 PLAN DESCRIPTION The Zurn/NEPCO Retirement Savings Plan is a defined contribution plan providing retirement benefits through participant-directed investments to participants in the National Energy Production Corporation Pension Plan. It is subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). The Company has agreed to contribute participants' elective deferrals of up to 18% of eligible compensation plus one-half of such amounts up to 2% of eligible compensation. Participants also may contribute non-taxed distributions from other employers' qualified plans and they may borrow from their accounts subject to specified limitations. Information about the Plan agreement and the benefit provisions is contained in the "Summary Plan Description" which may be obtained from Zurn Industries, Inc., the Plan Administrator. SIGNIFICANT ACCOUNTING POLICIES T. Rowe Price Investments The investments are stated at market value as determined by the funds. Zurn Stock Fund Zurn Industries, Inc. common stock (1,817 shares) is stated at its quoted market value. A percentage of the Fund is invested in the T. Rowe Price Prime Reserve Fund ($1,032) for investment diversification liquidity. Dividend income from these investments is included in investment income as a component of the net appreciation in the value of investments. Investment Transactions Investment transactions are recorded as of the date the order to buy or sell is executed with realized gains and losses being included in investment income as a component of the net appreciation (depreciation) in the value of investments. Participants' Loans Participants' loans are stated at the principal amount due from the participants. Dividends Dividend income is recognized on the ex-dividend date. Expenses Administrative expenses are paid by the Plan Administrator. -8- INCOME TAX STATUS The Internal Revenue Service has ruled that the Plan qualifies under Section 401(a) of the Internal Revenue Code and is, therefore, not subject to tax under present income tax law. Once qualified, the Plan is required to operate in conformity with the Code to maintain its qualification. The Plan Administrator is not aware of any course of action or series of events that might adversely affect the Plan's qualified status. -9- SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES ZURN/NEPCO RETIREMENT SAVINGS PLAN December 31, 1996 ASSETS OWNED AT YEAR-END Cost Current Value T. Rowe Price Funds: U.S. Treasury Money $1,097,515 $1,097,515 U.S. Treasury Intermediate 59,667 59,212 New Income 393,057 391,234 Balanced 184,211 206,872 Capital Appreciation 2,718,449 2,992,055 Equity Index 1,986,108 2,731,746 International Stock 691,930 768,724 Small-Cap Stock 473,762 491,591 Zurn Stock Fund 46,761 48,676 Participants' loans - 7% to 10% interest -0- 352,036 -10- SCHEDULE OF LOANS OR FIXED INCOME OBLIGATIONS ZURN/NEPCO RETIREMENT SAVINGS PLAN Year Ended December 31, 1995 Amount Received Original During The Year Unpaid Amount Overdue Amount Principal Interest Balance Principal Interest Oscar E. Daubenspeck $7,447 $-0- $-0- $-0- $7,336 $-0- P.O. Box 471 Participant loan - 10% Wallingford, VT 05773 Distributed to participant Charles W. Nelson 8,000 -0- -0- -0- 7,881 -0- 17490 Olinda Road Participant loan - 10% Anderson, CA 96007 Distributed to participant William F. Walker 2,000 -0- -0- -0- 1,889 -0- 2440 Lawndale Road Participant loan - 8.75% Lakeland, FL 33803 Distributed to participant David T. Wolford 7,500 -0- -0- -0- 6,889 -0- 1713 Arbogast #O-D Participant loan - 8.75% Griffith, IN 46319 Distributed to participant -11- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Pension Committee of Zurn Industries, Inc. has duly caused this annual report to be signed on its behalf by the undersigned thereunto duly authorized. ZURN/NEPCO RETIREMENT SAVINGS PLAN (Plan) June 26, 1997 /s/ James A. Zurn James A. Zurn, Chairman Pension Committee of Zurn Industries, Inc. -12- CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement on Form S-8 No. 333-00813 pertaining to the Zurn/NEPCO Retirement Savings Plan of our report dated June 26, 1997 with respect to the financial statements and supplemental schedules included in the Annual Report on Form 11-K of the Zurn/NEPCO Retirement Savings Plan. /s/ Pashke Twargowski & Lee Erie, Pennsylvania June 27, 1997 -13- -----END PRIVACY-ENHANCED MESSAGE-----