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PART I

ITEM 1. BUSINESS

(a) General Development of the Business.

Pentair, Inc. (the “Company” or “Pentair”) was incorporated in 1966 under the laws of Minnesota. In the past year, the Company has not changed its form of organization or mode of conducting business. The Company grows through internal development and acquisitions. As in the past, periodic dispositions of assets or business units are possible when they no longer fit with the long-term strategies of the Company.

Effective January 1, 1994, the Company acquired the net assets and the subsidiaries of Schroff GmbH (Schroff) from Fried. Krupp AG Hoesch-Krupp. Schroff manufactures and sells enclosures, cases, subracks and accessories for commercial electronic and instrumentation applications.

In September 1994, Pentair announced that it was exploring strategic alternatives for its paper businesses, including their possible sale. In the second quarter of 1995, all of the Pentair paper businesses were sold. On April 1, 1995 the Company sold its Cross Pointe Paper Corporation subsidiary to Noranda Forest, Inc. On June 30, 1995 the Company sold Niagara of Wisconsin Paper Corporation, its 50% share of Lake Superior Paper Industries (LSPI) joint venture and its 12% share of Superior Recycled Fiber Industries (SRFI) to Consolidated Papers, Inc.

The sale of its paper businesses has permitted Pentair to focus its commitments and resources on its industrial products businesses, building upon the strong growth and leading market positions these businesses have achieved.

Effective November 1, 1995, the Company acquired Fleck Controls, Inc., a manufacturer of control valves, which are major components in residential water softeners, and commercial and industrial water conditioning systems. Fleck Controls was Pentair’s first entry into the water treatment industry.

During 1996, the Company completed four acquisitions that strengthened market positions throughout the world. In January, Myers acquired Aplex to broaden its industrial pump line. In June, Porter-Cable acquired FLEX, a German power tool company. In November, the Company acquired Century Manufacturing, a manufacturer that serves service equipment markets, complementing its Lincoln Automotive subsidiary. In December, Fleck Controls purchased SIATA, an Italian manufacturer of water conditioning control equipment.

During 1997, the Company completed three acquisitions. In January, Schroff France acquired Transrack S.A., a maker of complementary cases and enclosures. In July, Century Manufacturing acquired P & F Technologies, a maker of refrigerant recycling equipment. In August, Pentair acquired the General Signal Pump Group in a significant acquisition designed to create a critical mass in the water and wastewater pump markets.

Also in 1997, in another strategic development, the Company divested its Federal Cartridge sporting ammunition business.

In the fourth quarter of 1997, the Company realigned its subsidiaries into three operating groups to reflect its growing focus in its addressed markets: Professional Tools and Equipment, Water and Fluid Technologies and Electrical and Electronic Enclosures.

During 1998, the Company completed three acquisitions. In January, Pentair acquired ORSCO, Inc., a maker of oil lubrication systems. In April, Century Manufacturing acquired the assets of T-Tech Industries, a maker of automatic transmission fluid exchangers and accessories. In October, Pentair acquired The Walker Dickson Group Limited (now Pentair Enclosures U.K. and its subsidiaries; its US affiliates are now part of Pentair Electronic Packaging), a maker of custom and standard enclosures, subracks and systems.

During 1999, Pentair made three acquisitions. In April, Pentair acquired WEB Tool and Manufacturing (WEB), a designer,

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manufacturer and marketer of custom server subracks and chassis for datacom and telecom networking applications. In August, Pentair acquired the pressure vessel and pool equipment businesses of Essef Corporation. In September, Pentair acquired DeVilbiss Air Power Company, a manufacturer of compressors, generators and pressure washers. In addition, the Company is reviewing strategic alternatives for its industrial lubrication equipment business, Lincoln Industrial.

(b) Financial Information about Industry Segments.

Pentair has three reportable segments: Professional Tools and Equipment (PTE), Water and Fluid Technologies (WFT), and Electrical and Electronic Enclosures (EEE).

The PTE segment includes the tool businesses (Delta and Porter-Cable); and the equipment businesses (Century and the newly-acquired DeVilbiss Air Power Company). Products manufactured include woodworking machinery, portable power tools, battery charging and testing equipment, welding equipment, lubricating and lifting equipment, air compressors, generators and pressure washers.

The WFT segment includes the pump and pool businesses (Pentair Pump Group and one of the newly-acquired Essef businesses), the water treatment businesses (Pentair Water Treatment which consists of Fleck Controls plus the remaining Essef business) and Lincoln Industrial. Products manufactured include pumps for wells and water treatment, sump pumps, pool and spa equipment such as valves, pumps, filters, lights and related equipment, valves and pressure vessels for water treatment products and automated and manual lubrication systems.

The EEE segment includes Hoffman Enclosures, Schroff, Pentair Electronic Packaging (a newly-integrated North American enclosures business, comprised of Schroff US, the newly-acquired WEB and the US affiliates of the former Walker Dickson business) and Pentair Enclosures U.K. Products manufactured include metallic and composite cases, subracks and cabinets that house and protect electrical and electronic controls, instruments and components.

Other includes corporate leadership expenses, captive insurance company, intermediate financial companies, charges that do not relate to current operations, divested operations (Federal Cartridge) and intercompany eliminations. Segment assets exclude all cash and cash equivalents.

In evaluating financial performance, management focuses on operating income as a segment’s measure of profit or loss. Operating income is before interest expense, interest income and income taxes. Management uses a variety of balance sheet ratios to measure the business. The primary focus is on maximizing the return from each segment’s assets, excluding cash and temporary investments. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (Note 1 of Notes to the Consolidated Financial Statements). Most intersegment sales are component parts and are sold at cost plus an equitable division of manufacturing and marketing profits. The remaining intercompany sales are finished product and are sold based on current market pricing to third parties.

Segment Information:
(in thousands)

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(c) Narrative Description of Business.

      Description of the Professional Tools and Equipment Segment: Products; markets; competition

Products include: a full line of homeshop products, contractor tools, general purpose stationary woodworking machinery, and accessories; air-powered nailing products; portable electric tools including saws, routers, sanders, grinders, drills, and cordless tools; and lubricating tools and equipment, battery charging and testing equipment, lifting equipment, portable power supplies, refrigerant and coolant recyclers, automatic transmission fluid exchangers, arc and MIG welders, plasma cutters, welding accessories and air compressors, portable generators and cold water pressure washers and accessories.

The products are sold in the United States, Canada, and overseas under the brand names Delta, Biesemeyer, Porter-Cable, FLEX, Lincoln, Blackhawk Automotive, Marquette, Guardian, Pro-Arc, T-Tech, Century, Solar, Booster Pac, Cobra, Viper, Air America, Charge Air Pro, Ex-Cell and Pro Air II.

Products are sold through various channels, including networks of independent industrial and warehouse distributors, home centers and national retailers, hardware stores, and through mail order and catalogues. Certain service equipment is sold under private label programs. The explosive growth in the home center channel in the last few years has resulted in a significant increase in PTE tool sales through this channel. Nationwide, home centers have become the primary channel for all sales of power and bench top tools to end users. While warehouse distributors continue to be the most significant channel for service equipment sales, product entry into retail and home center stores has continued to grow.

Markets include: do-it-yourself(DIY)/homeshop; residential, commercial, and industrial construction; remodeling and cabinet, case good and furniture makers; industrial fabrication and maintenance, automotive repair and vehicle maintenance, farm and industrial equipment; and aftermarket and retail channels for professional and DIY automotive and body repair.

Each of the businesses in the PTE segment faces a number of competitors, some of whom are larger and have more resources. Competition in the PTE segment has been intense and growing more so for the past few years, especially as these industries consolidate. In most markets, only a few large players remain, each having extensive product lines. The Company’s tool businesses are no longer perceived as niche players, but have become significant general competitors, even though their addressed market of professional users and higher-end DIY customers does not extend into the larger general consumer tool markets. Growth in these markets should come from product development, continued penetration of expanding market channels and acquisitions. Patents and proprietary technology are becoming more significant for this segment.

Competition at the end-user level focuses primarily on brand names, product performance and features, quality, service and, most importantly, price. The competition for shelf space at home centers and national retailers is particularly intense, demanding continuing product innovation, special inventory and delivery programs, after-sale service capability and competitive pricing. The strategy of the businesses in the PTE segment is to be the price/quality leader in its selected markets. Their success in maintaining their respective positions in the marketplace is largely due to continuing product feature innovations, new products and outsourcing and other cost-reduction measures. As leaders in their markets, these businesses are able to command access for their products in the most important channels in the face of growing competition.

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Description of the Water and Fluid Technologies Segment: Products; markets; competition

Products include: pumps for wells, sump pumps for residential service, submersible non-clog and grinder pumps and systems for residential, commercial, and municipal service, pumps for water treatment and wastewater solid handling, fire pumps, and reciprocating, turbine, submersible, and centrifugal pumps for commercial and industrial services; a complete line of control valves and composite and fiberglass storage tanks and filtration systems used in the manufacture of water softeners and filtration, deionization, and desalination systems; pool and spa equipment such as valves, pumps, filters, lights and related equipment; and automated and manual lubrication systems and equipment and pumps and pumping stations for fluid transfer applications.

The products are sold in the United States, Canada, and overseas under the brand names Myers, Aplex, Fairbanks Morse, Aurora, Water Ace, Shur Dri, Hydromatic, Fleck, Structural, Wellmate, Codeline, Pac-Fab, Purex-Triton, Rainbow Lifegard, American, Compool, Kreepy Krauly, FIBERworks, SIATA, Lincoln, Lincoln Industrial and ORSCO.

Products are sold through various channels, including the DIY market for retail sale through home centers and hardware stores, by specially-qualified systems distributors with design, installation and service capability, through industrial supply and specialty distributors and stores, directly by internal sales organizations, and through national catalog distribution. In the pool market, the Company sells its products primarily to distributors and directly to installers. Sales of spa and jetted tub fittings and pumps are made primarily to OEMs with the balance to distributors.

Markets include wholesale and retail distribution to residential users; commercial HVAC, plumbing, and fire pump markets; municipal waste and water treatment facilities and industrial companies; manufacturers and assemblers who supply residential and commercial markets with standard and custom designed water softener products; pool and spa markets; and heavy industry (steel mills, cement plants, pulp and paper, power plants), automobile manufacturers, commercial vehicles, agriculture, construction equipment, food and beverage, mining, printing and general lubrication markets.

The water and waste water pump industry continues a trend toward consolidation, evidenced in part by the acquisitions of Goulds Pump by ITT Corporation and of the former General Signal Pump Group by Pentair, both in 1997. The latter acquisition by the Company significantly expanded the number, range and targeted markets of the Pentair Pump Group. The Company continues to rationalize the product lines, facilities and manufacturing operations of these businesses to cut costs and increase efficiencies. The water treatment industry is also experiencing rapid consolidation, as evidenced by US Filter Corporation’s 1998 acquisition of Culligan Water Technologies, Inc. (both customers of Pentair Water Treatment) and US Filter’s subsequent acquisition by Vivendi in 1999. No other water conditioning valve supplier in the water treatment market competes directly in both the valve and tank product markets as does the Company. In addition, captive valve manufacturers support their own sales of water conditioning systems in competition with customers of Pentair Water Treatment. Growth will come largely from product development, coordinated marketing programs, increased channel penetration and acquisitions of additional technologies.

Each of the businesses in the WFT segment faces a number of competitors, some of which are larger, have more resources and are more vertically integrated. Competition in the commercial and residential pump markets focuses on brand names, product performance, quality and price. While home center and national retailers are important for residential lines of water and wastewater pumps, they are much less important in commercial pump markets. In municipal pump markets, competition focuses on performance to required specification, service and price. Competition in the water treatment component market focuses on product performance and design, quality, delivery and price. In the pool and spa equipment market, there are a number of competitors with one that the Company considers its major competitor. The Company competes by offering a wide variety of innovative and high quality products which are competitively priced. Its existing distribution channels and reputation for quality also contribute to its continuing market penetration.

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Description of the Electrical and Electronic Enclosures Segment: Products; markets; competition

Products include metallic and composite enclosures that house and protect electrical and electronic controls, instruments, and components. These enclosures include cabinets, cases, subracks and microcomputer packaging systems, as well as a full line of accessories including backplanes and power supplies. Products manufactured fall within two broad groups, standard and modified standard products and custom-designed products.

The products are sold in the United States, Canada, and overseas under the brand names Hoffman, Schroff, Transrack, Optima, Eraba, Electronic Enclosures, Pentair Enclosures and Pentair Electronic Packaging.

Segment products are sold in three primary markets: electrical enclosures in North America, the channel which is primarily served through industrial electrical distribution; electronic enclosures throughout the world, sold primarily through electronic equipment distributors and to original equipment manufacturers (OEMs); and information and communication technology (ICT) products throughout the world, marketed primarily to OEMs. The company is increasingly focusing efforts on serving the latter two faster-growing markets in the US and abroad both through acquisition (the former Walker Dickson and WEB), reorganization of certain businesses (Pentair Electronic Packaging) and through modified standard and custom-designed products.

Industrial markets include manufacturing industries in which electrical and electronic controls require protection from harsh factory floor environments; plant maintenance and repair; commercial construction; and electrical equipment manufacturers. Commercial electronic markets include computer, test and measurement, industrial control and factory automation and medical industries. Finally, ICT products are found in the LAN, datacom and telecom industries.

Competition in product markets can be very intense, especially in electronic and ICT markets, where product design, prototyping, global supply and customer service are very significant factors. Finally, growth in the EEE segment will likely come from continued channel penetration, growth in defined modification product offerings, product development, geographic expansion and acquisitions. Consolidation, globalization and outsourcing are the most important trends in the faster-growing electronic enclosure business. The Company has made several acquisitions in the past few years in this area. The globalization of product demand increasingly requires world-wide local supply capability; no one competitor (including the EEE segment businesses) has successfully established that capability, although each of the major competitors in this market is actively pursuing geographic extension for customer support purposes. In addition to these competitors, there exists a large number of regional suppliers whose capabilities are focused more on small runs of specialized build-to-print products.

Information Regarding All Segments: Status of new products.

The industries in which the segments participate are essentially mature and do not experience the introduction of new products or technologies that materially change the nature of the industry. Nonetheless, new product development or improvement becomes more important for sales growth and channel penetration. The Company emphasizes product development in all its segments; products introduced within the last five years average 30% of company-wide annual sales. No single new product constitutes a material amount of sales.

Raw materials.

The raw materials used in Pentair’s manufacturing processes include steel (bar and sheet), brass, copper, aluminum and various other metals and plastics. Selected motors, castings, plastic parts and components are also purchased. The supply of all raw materials and components is currently adequate. The PTE and WFT segments import a significant amount of selected products and components from Taiwan and China, the supply of which is also currently adequate.

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Patents, trademarks, licenses, franchises and concessions.

Pentair’s businesses own a number of U.S. and foreign patents and trademarks. They have been acquired over many years and relate to many products and improvements. No single patent or trademark is of material importance to any segment, though intellectual property protection is a significant competitive tool in each of the segments.

Seasonal aspects and working capital items.

The PTE segment has historically experienced strong fourth quarter and weaker first quarter sales and billings, due in large part to holiday retail sales. Reflecting the somewhat seasonal impact of the PTE segment and the growing importance of home center retail sales, there is a buildup of inventory in the third quarter in anticipation of fourth quarter shipments, and growth in receivables in the fourth and the following first quarter of each fiscal year. In the WFT segment, the pool and spa equipment business is strongly seasonal. Peak sales are in the March-July time period. There are advance sales in earlier months but with long receivables terms. The August 1999 acquisition date for Essef meant that 1999 calendar results for Pentair do not show the benefit of the peak season for this business.

Dependence on limited number of customers.

The homecenters and mass retailers constitute the single most important distribution channel for the Company, however, the Company as a whole is not dependent on a single customer or on a few customers. The loss of a limited number of customers would not have a material adverse impact on the Company’s results of operations. The single largest customer of the Company as a whole accounted for less than 10% of sales in 1999.

Backlog.

As of December 31, 1999, the Company had approximately $235 million in order backlog; substantially all of which are expected to be fulfilled by the end of 2000. As of December 31, 1998, the Company had approximately $135 million in order backlog; substantially all of which were fulfilled by the end of 1999. The increase in backlog is largely due to 1999 acquisitions and long-term orders with OEMs for Enclosure products.

Production and sourcing is geared towards providing adequate inventories in order to meet customer forecast requirements and minimize customer back orders. Therefore, order rates and inventory management are more significant factors than backlogs. For most of the Company’s businesses, backlogs are an indication of near-term demand, but are generally subject to cancellation by the customer. Other than for some municipal water system pumps, the segments normally have few products with long lead times. With the addition of the pool and spa equipment products, certain advance sales are made in the fourth quarter.

Government contracts.

The Company has no significant portion of sales under federal government contracts that may be subject to renegotiation of profits or termination of contracts at the election of the government.

Research and development.

Pentair’s businesses have not historically undertaken any significant basic or applied research, since the products and processes involve traditional technologies which are well known to all competitors. As discussed above, however, each of the segments, especially PTE, undertakes extensive product development and design work in order to drive improvements in features and manufacturing costs. Overall, Pentair’s businesses spent over 1.1% of sales on such development in 1999, 1998 and 1997. See also Note 1 of Notes to the Consolidated Financial Statements included in Item 8.

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Environmental matters.

See Management’s Discussion and Analysis and Note 9 of Notes to the Consolidated Financial Statements included in Item 8.

Employees.

As of December 31, 1999, the Company and its subsidiaries employed approximately 13,900 persons worldwide. Total employees in the United States were approximately 10,935 of which 2,331 (21%) were represented by trade unions having collective bargaining agreements.

Labor contracts negotiated in 1999: International Union of Electrical Workers – Jonesboro, Arkansas (extended to April 3, 2002) approximately 250 employees.

Contracts expiring in 2000: Teamsters Local 984 — Memphis, Tennessee (expires March 31, 2000) approximately 85 employees;

GMP Local 45 — Ashland, Ohio (expires April 1, 2000) approximately 70 employees; UAW Local 691 — St. Louis, Missouri (expires June 2, 2000) approximately 150 employees; Teamsters Local 848 – El Segundo, California (expires October 31, 2000) approximately 50 employees.

The Company considers its employee and labor relations to be good and believes future contracts will be able to be negotiated on terms beneficial to the businesses and their employees.

(d) Financial Information about Foreign Operations.

The Company operates primarily in North America, Europe and Asia.

Revenues are attributed to countries based on location of customer. Assets are based on the geographic location of the subsidiary and have been translated into U.S. dollars.

EXECUTIVE OFFICERS OF THE REGISTRANT

The following are the executive officers of the Registrant. Their term of office extends until the next annual meeting of the Board of Directors, scheduled for April 26, 2000.

Louis L. Ainsworth 52

Senior Vice President and General Counsel since July 1997; Shareholder and Officer of the law firm of Henson & Efron, P.A., November 1985 — June 1997.

Winslow H. Buxton 60

Chairman since January 1993; Chief Executive Officer since August 1992; President August 1992 – November 1999.

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Richard J. Cathcart 55

Executive Vice President since February 1996; Executive Vice President, Corporate Development March 1995 — January 1996; Vice President, Business Development of Honeywell, Inc. 1994 — March 1995.

Joseph R. Collins 58

Vice-Chairman since November 1998; Executive Vice President March 1995 – October 1998; Acting Chief Financial Officer, June 1993 — March 1994; Senior Vice President — Specialty Products August 1991 — February 1995.

George M. Danko 49

Senior Vice President Corporate Development & Central Operating Services since September 1999; Vice President, Corporate Development October 1997 – August 1999; General Manager of Sales Operations of General Electric’s Electrical Distribution and Control Division September 1994 — October 1997; General Manager Tektronix Test & Measurement Division June 1992 — August 1994.

Karen A. Durant 40

Vice President, Controller since September 1997; Controller January 1996 - August, 1997; Assistant Controller September 1994 — December 1995; Director of Financial Planning and Control of Hoffman Enclosures Inc. (subsidiary of Registrant) October 1989 — August 1994.

David D. Harrison 52

Executive Vice President and Chief Financial Officer since March 2000; Executive Vice President and Chief Financial Officer of The Scotts Company, August 1999 — February 2000; Executive Vice President and Chief Financial Officer of Coltec Industries, Inc., August 1996 – August 1999; Executive Vice President of Pentair, Inc. March 1995 – August 1996 and Chief Financial Officer of Pentair, Inc. March 1994 – August 1996; Senior Vice President of Pentair, Inc. March 1994 — February 1995; Vice-President, Finance and Information Technology of the GE Canada Appliance Component subsidiary of General Electric, August 1992 — March 1994.

Randall J. Hogan 44

President and Chief Operating Officer since December 1999; Executive Vice President March 1998 – November 1999; President of United Technologies’ Carrier Transicold Division 1995 – 1997; Vice President and General Manager Pratt & Whitney Turbo Power & Marine Division 1994 — 1995.

Debby S. Knutson 45

Vice President, Human Resources since September 1994; Assistant Vice President, Human Resources , August 1993 — September 1994.

Roy T. Rueb 59

Vice President, Treasurer since October 1986 and Secretary since June 1994.

James A. White 54

Executive Vice President since November 1998; Senior Vice President, Professional Tools Businesses July 1997 – October 1998; President of Porter-Cable Corporation (subsidiary of Registrant) December 1991 — June 1997.

There is no family relationship between any of the executive officers or directors.

Item 2. Properties

The Company and its subsidiaries operate in 82 manufacturing and distribution locations in North America, Europe and Asia. The Company owns most of its facilities with the exception of the following major facilities which are leased or leased under special tax increment financing: in the United States - Mt. Sterling, KY; Jackson, TN (Porter-Cable); Kansas City, KS; Aurora, IL; Ashland, OH (Hydromatic); Moorpark, CA; Warwick, RI and in Europe — Betschdorf, France (Schroff).

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The number, type, location and estimated size of the Company’s properties are shown on the following charts, by segment. (Professional Tools and Equipment - PTE; Water and Fluid Technologies — WFT; Electrical and Electronic Enclosures — EEE)

Management believes that its owned and leased facilities are well maintained and suitable for the operations conducted.

Item 3. Legal Proceedings.

The Company or its subsidiaries have been made parties to a number of actions filed or have been given notice of potential claims relating to the conduct of its business, including those pertaining to product liability, environmental, safety and health, patent infringement, and employment matters. Major matters that may have an impact on the Company are discussed below. The Company believes that the outcome of such legal proceedings and claims will not have a material adverse effect on the Company’s financial position, liquidity, or future results of operations, based on current circumstances known to the Company.

Environmental Claims. The Company and its current subsidiaries have been named as defendants, targets or potentially responsible parties (PRPs) in a small number of environmental cleanups, in which the Company or its current or former business units have generally been given de minimis status. None of these claims have resulted to date in cleanup costs, fines, penalties or damages in an amount material to the Company’s financial condition or results of operations. The Company has disposed of a number of businesses over the past ten years; in certain cases, such as the disposition of Company’s Cross Pointe Paper Corporation uncoated paper business in 1995 and the disposition of its Federal Cartridge Company ammunition business in 1997, the Company has retained responsibility for some or all environmental obligations and potential liability. The Company has established what it believes to be, based on current circumstances known to it, adequate accruals for potential liabilities arising out of these retained responsibilities.

In addition to retained obligations relating to these disposed operations, there are pending environmental issues concerning a site in Jackson, Tennessee, on which the state environmental agency has opened an investigation. The Company acquired the site from Rockwell International Corporation, with whom the Company has agreed on division of responsibility for remediation and other future costs relating to the site. The Company does not believe, however, that projected response costs, as currently known, will result in material liability or material changes in operations.

Product Liability Claims. As of February 28, 2000, the Company or its subsidiaries are defendants in approximately 111

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product liability lawsuits and have been notified of approximately 191 additional claims. The Company has had and currently has in place insurance coverage it deems adequate for its needs. A substantial number of these lawsuits and claims are insured and accrued for by Penwald Insurance Company (“Penwald”), a regulated insurance company wholly owned by the Company. See discussion in Item 7 (Management’s Discussion & Analysis — Insurance Subsidiary) and Item 8 (Note 1 of Notes to the Consolidated Financial Statements – Insurance Subsidiary). Accounting accruals covering the deductible portion of liability claims not covered by Penwald have been established and are reviewed on a regular basis. The Company has not experienced unfavorable trends in either the severity or frequency of product liability claims.

Horizon Litigation. Twenty-eight separate lawsuits involving 29 primary plaintiffs, a class action and claims for indemnity by Celebrity, were brought against Essef Corporation and certain of its subsidiaries which concern alleged exposure to Legionnaires bacteria by passengers aboard the cruise ship M/V Horizon, a ship operated by Celebrity Cruise Lines. The lawsuits included a class action brought on behalf of all passengers aboard the ship during the relevant time period, individual “opt-out” passenger suits, and a suit by Celebrity Cruise Lines, Inc.

The claims against Essef and its involved subsidiaries, are based upon the allegation that Essef designed, manufactured and marketed two sand swimming pool filters that were installed as a part of the spa system on the Horizon, and allegations that the spa, and filters, contained bacteria that infected certain passengers on cruises from December, 1993 through July of 1994.

A settlement was reached in the class action litigation whereunder Essef agreed to pay monetary damages in the aggregate amount of $575,000 and Celebrity agreed to provide class members with coupons and other non-monetary consideration valued at approximately $1.2 million.

Essef and Celebrity have jointly attempted to resolve claims brought by “opt-out” plaintiffs. To date, eleven of these claims have been settled, for nominal amounts, leaving 18 primary plaintiffs. Essef and Celebrity have borne the cost of these settlements equally, subject to later allocation. The first trial for a primary plaintiff has been set to start on May 1, 2000.

Celebrity Cruises, Inc. is alleging that it has sustained economic damages due to loss of usage of the M/V Horizon while it was dry docked.

Claims asserted against Essef and the other defendants, in aggregate, exceed $200 million. However, trial counsel is optimistic that all of the pending suits will be resolved within available insurance coverage.

Essef’s insurance carriers are presently defending the Horizon litigations subject to a reservation of rights, and they have filed a Declaratory Judgment action to determine to what extent they have responsibility for making payments in the event Essef is found liable.

Patent Infringement Claims. In late 1998, The Black & Decker Corporation (“Black & Decker”), a competitor of the Company in its PTE segment, commenced litigation against the Company’s Porter-Cable business claiming patent infringement over the new Porter-Cable plate joiner. In order to minimize the likelihood of future claims, Porter-Cable changed the design of the plate joiner involved shortly after its introduction. At trial, Black & Decker sought $14 million in compensatory damages and removal of the plate joiner from the market. In late February 1999, the jury found for Black & Decker on a limited number of its claims and awarded $1 million in damages. Porter-Cable filed an appeal from the judgment, as it believed that there was no infringement of the Black & Decker patent at issue. The appeal was denied in January of 2000.

Item 4. Submission of Matters to a Vote of Security Holders.

During the fourth quarter, no matter was submitted to a vote of security holders.

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PART II

Item 5. Market for Registrant’s Common Equity and Related Shareholder Matters.

(a)

Market Information Pentair Common Stock is listed on the New York Stock Exchange under the symbol “PNR”.

(b)		Holders of the Corporation’s Capital Stock As of December 31, 1999, there were 4,395 holders of record of the Corporation’s Common Stock.
(c)		Dividends In January 2000, the board of directors approved the cash dividend of $.16 per share quarterly for an indicated annual rate of $.64 per share. Pentair has now paid 96 consecutive quarterly dividends. See Note 6 of Notes to the Consolidated Financial Statements for certain dividend restrictions.

      Quarterly dividends per common share for the most recent two years are as follows:

(d)

Annual Meeting of Stockholders The 2000 Annual Meeting of Shareholders of the Corporation is scheduled to be held on April 26, 2000 at 10:00 a.m. at the Lutheran Brotherhood Building, Minneapolis, Minnesota.

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Item 6. Selected Financial Data.

SELECTED FINANCIAL DATA

Pentair, Inc. and Subsidiaries
(In millions, except per share data)			1999				1998				1997				1996				1995
Income Statement Data
Net Sales
	Professional Tools and Equipment			1,073.8				849.3				747.1				582.7				492.4
	Water and Fluid Technologies			669.6				537.9				404.0				322.3				237.5
	Electrical and Electronic Enclosures			633.7				564.0				579.4				548.8				542.5
	Other			(9.3	)			(13.6	)			108.6				113.3				130.5
	Total			2,367.8				1,937.6				1,839.1				1,567.1				1,402.9
Operating Income
	Professional Tools and Equipment			105.4				99.6				76.8				54.7				44.2
	Water and Fluid Technologies			81.3				66.0				41.9				41.2				22.7
	Electrical and Electronic Enclosures			46.3				46.0				47.3				53.9				50.5
	Other			(18.7	)			(18.4	)			3.8				(6.9	)			(1.2	)
	Total			214.3				193.2				169.8				142.9				116.2
Earnings before income taxes				166.5				170.9				158.4				124.6				101.7
Income From:
	Continuing Operations			103.3				106.8				91.6				74.5				60.5
Net Income (a)				103.3				106.8				91.6				74.5				77.2
Common Share Data
EPS — Diluted (a) (b)				2.33				2.46				2.11				1.73				1.41
Cash Dividends				.64				.60				.54				.50				.40
Stock Dividend %				—				—				—				100				—
Book Value				20.56				17.03				15.12				13.69				12.37
Stock Price				38 1/2				39 13/16				35 15/16				32 1/4				24 7/8
Market Capitalization				1,860				1,718				1,548				1,378				1,045
Balance Sheet Data
Preferred Equity (net)				—				53.6				53.4				47.6				44.6
Common Equity				993.2				655.8				577.2				516.2				458.3
ROE %(a)				12.5				16.6				15.9				14.3				16.9
Capital Expenditures				60.6				53.8				77.5				71.6				63.8
Total Assets				2,803.0				1,554.7				1,472.9				1,289.0				1,252.5
Long-Term Debt				857.3				288.0				294.5				279.9				219.9
Total Debt				1,035.1				340.9				329.3				312.8				238.8
Long-Term Debt to Capital %				46				29				32				33				31
Total Debt to Capital %				51				33				34				36				32

[Additional columns below]

[Continued from above table, first column(s) repeated]

Pentair, Inc. and Subsidiaries
(In millions, except per share data)			1994				1993				1992				1991				1990
Income Statement Data
Net Sales
	Professional Tools and Equipment			453.5				408.1
	Water and Fluid Technologies			210.6				184.4
	Electrical and Electronic Enclosures			460.5				236.7
	Other			137.1				117.4
	Total			1,261.7				946.6				864.0				802.9				805.2
Operating Income
	Professional Tools and Equipment			39.5				33.7
	Water and Fluid Technologies			15.4				8.4
	Electrical and Electronic Enclosures			39.6				18.3
	Other			11.1				7.7
	Total			105.6				68.1				61.9				53.1				47.9
Earnings before income taxes				83.5				55.1				47.7				38.4				31.6
Income From:
	Continuing Operations			50.1				32.7				27.2				18.8				16.9
Net Income (a)				53.6				46.6				42.8				41.1				33.0
Common Share Data
EPS — Diluted (a) (b)				1.17				.76				.64				.47				.42
Cash Dividends				.36				.34				.32				.30				.29
Stock Dividend %				—				50				—				—				—
Book Value				10.71				9.29				8.21				8.79				7.97
Stock Price				21 3/8				16 1/2				13 3/16				13 7/16				8 1/4
Market Capitalization				899				692				549				558				342
Balance Sheet Data
Preferred Equity (net)				40.9				33.9				77.4				74.1				68.4
Common Equity				391.1				336.9				260.0				275.7				247.8
ROE %(a)				13.2				13.6				12.8				13.3				11.1
Capital Expenditures				57.8				28.1				28.0				26.5				28.0
Total Assets				1,161.1				863.1				769.5				698.4				696.5
Long-Term Debt				408.5				236.7				209.3				191.2				217.5
Total Debt				412.1				237.5				214.3				198.2				226.7
Long-Term Debt to Capital %				49				39				38				35				41
Total Debt to Capital %				49				39				39				36				42

      All Share and Per Share Data adjusted for stock dividends. (a) 1992 - before the cumulative effects of accounting changes. (b) From continuing operations.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Management’s Discussion and Analysis

Strategic Direction

Pentair grows its businesses through innovative marketing and product design and intensive productivity improvement, coupled with capital investment, and employee training and participation. Pentair has chosen to focus these skills on its three core markets of Professional Tools and Equipment (PTE), Water and Fluid Technologies (WFT), and Electrical and Electronic Enclosures (EEE). During the last five years, Pentair has divested its paper businesses (1995) and Federal Cartridge (1997) and has made fifteen acquisitions in its three core markets.

Beginning in 1999, the cost of certain support services provided by the corporate office is no longer reflected in the “Other” segment and is allocated to the operating segments. As a result, the prior years segment information has been restated to conform to the 1999 presentation with no effect on previously reported total operating income, net income or shareholders’ equity.

Results of Operations

*		Other includes corporate leadership expenses, captive insurance company, intermediate financial companies, charges that do not relate to current operations, divested operations (Federal) and intercompany eliminations.
**		Including net restructuring charge of $38 million taken in 1999. Before restructuring charge, operating income for the segments and for Pentair as a whole were: PTE — $122,170; WFT — $85,731; EEE — $63,089; and Pentair total — $252,331.

CONSOLIDATED
1999 VERSUS 1998

Consolidated net sales increased over 1998 levels to $2,367.8 million in 1999, or 22.2%, attributable in part to healthy markets as well as three acquisitions in 1999. Net sales in each of the three segments increased over 10% for the full year, with the largest increase posted by PTE. For the fourth quarter of 1999, sales growth accelerated dramatically, with consolidated net sales up 49.8% over the prior year quarter. This growth was significantly enhanced by the third-quarter acquisitions of the Essef and DeVilbiss Air Power businesses, with WFT up 63.9% and PTE up 56.9%; while, excluding

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acquisitions, sales growth in the fourth quarter was over 9% for Pentair as a whole, with each of the three segments contributing impressive increases.

Operating income increased $21.1 million to $214.3 million in 1999, up 10.9% over 1998, after the restructuring charge, and increased by $59.1 million or 30.6% over 1998, excluding the charge. Operating income before acquisitions increased over 20% compared to 1998 performance. Return on sales was 9.1% after the restructuring charge and 10.7% excluding the charge. Profitability (before the charge) improved due to volume and other manufacturing efficiencies, material cost savings, offset in part by continuing pricing pressures, increasing employment costs, costs of special selling programs and other sales expenses. Gross profit margins declined to 31.0% in 1999 versus 31.3% in 1998, largely attributable to the 1999 acquisitions. Excluding acquisitions, gross margins improved by 130 basis points year-over-year. Research and development declined slightly in percentage terms to 1.1% from 1.2% of net sales in 1998. Selling, general and administrative expense (SG&A) as a percent of sales was 19.3% in 1999 as compared to 20.2% in 1998.

Fourth-quarter operating income increased 58.1% to $91.6 million over the same period in 1998; even without the benefit of the 1999 acquisitions, operating income for the quarter increased dramatically by over 30%. Return on sales in the quarter improved to 11.7%, largely as a result of the acquisitions, volume and other manufacturing efficiencies and material savings.

Interest expense was significantly higher in 1999 and in the fourth quarter as compared to the same periods in 1998, due primarily to much higher borrowings incurred in connection with the 1999 acquisitions.

The Company’s effective income tax rate was 38.0% in 1999, an increase from the comparable 1998 rate of 37.5%. A one percent improvement to 36.5% (reflected in the first two quarters) was more than offset by the impact of non-deductible goodwill incurred as a result of the acquisitions of the three businesses in 1999.

Net income decreased slightly to $103.3 million in 1999 from $106.8 million in 1998, including the $38 million ($24.1 million after-tax) restructuring charge in 1999. Net income before the charge was $127.4 million, or an increase of 19.3%. Net income in the fourth quarter was up 30.5% to $43.0 million. Full-year EPS was $2.33 compared to $2.46 in 1998 after the restructuring charge; excluding the restructuring charge, EPS increased 17.5% to $2.89. Fourth-quarter EPS in 1999 increased 18.4% from $.76 to $.90.

1998 VERSUS 1997
Consolidated net sales increased to $1,937.6 million in 1998, representing a 5.4% increase over 1997(up over 13% excluding the 1997 sales of Federal Cartridge, divested in November 1997). PTE and WFT posted double-digit growth rates, with the latter including the full year effect of a 1997 pump business acquisition. EEE segment experienced lower sales due to soft capital spending environments in the U.S. and the overall German and Asian economies.

Operating income increased to $193.2 million in 1998, up 13.8% over 1997, which as a percent of sales improved from 9.2% to 10.0%. Profitability improved due to volume efficiencies, favorable outsourcing opportunities, and manufacturing/purchasing efficiencies resulting from the integration of acquired pump businesses. Gross profit margins improved to 31.3% in 1998 versus 29.8% in 1997. Research and development expenses were 1.2% of net sales versus 1.2% in 1997. Selling, general and administrative expense (SG&A) as a percent of sales was 20.2% in 1998 as compared to 19.4% in 1997. The Company continues to incur costs to support major information system upgrades (which are starting to be offset by the associated cost improvements) and expenses were incurred to implement company-wide process improvement and cost savings programs with benefits beginning in 1999.

Interest expense was higher in 1998 as compared to 1997 due to slightly higher effective interest rates.

The Company’s effective income tax rate was 37.5% in 1998. The comparable 1997 tax rate (excluding the unusual tax impact on the sale of Federal) was 39.0%.

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Net income increased 16.6% to $106.8 million versus $91.6 million in 1997. EPS of $2.46 in 1998 represented an increase of 16.6% over 1997 EPS of $2.11. Excluding the $0.03 gain from the sale of Federal in 1997, there was an 18.3 percent increase over 1997.

OUTLOOK

Pentair is focused on three core markets. This diversification enables the Company to consistently improve results despite difficult markets in one or another segment. Continuing demand for power tools and service equipment, ever-rising needs for clean water throughout the world, and the critical importance of protecting sensitive electronics give Pentair’s chosen businesses excellent prospects for strong long-term performance. The Company’s basic operating strategies – ongoing cost containment, new product development, multi-channel distribution, and the pursuit of value-added acquisitions – drive the businesses in both growing and softer economies. Pentair is focusing on implementation of its corporate-wide process redesign and cost savings programs initiated in 1998 which management believes will continue to improve operating efficiencies and therefore performance.

Pentair began implementation in 1999 of a program to consolidate a number of its businesses into larger, more effective units which will be better positioned to compete in their respective markets. Pentair’s tool businesses, Porter-Cable and Delta, will consolidate their operations in the first quarter of 2000, following an earlier combination of their sales organizations. Also underway in 1999 and to be completed in 2000 is the consolidation of two service equipment businesses (Century and Lincoln Automotive), including the closing of one manufacturing facility. The tool businesses also have completed construction of a new 650,000 square foot warehouse facility in Jackson, Tennessee. The warehouse is expected to go into full operation in the first quarter of 2000, when two smaller warehouses for Delta and Porter-Cable will close.

The acquisition of Essef in August 1999 has increased the complexity and opportunities in the WFT businesses. Pentair has closed one of the acquired facilities and relocated manufacturing operations; over the next few quarters, Pentair intends to continue reorganization and consolidation of units in order to improve manufacturing efficiencies and financial performance.

In addition, the Company’s EEE segment combined five separate North American facilities into one business, Pentair Electronic Packaging, in order to focus on the high-growth custom and modified enclosure market for datacom and telecom products.

The Company continues to look for synergistic acquisitions in each of its business segments, in line with its pattern over the past five years. Of the fifteen acquisitions made since 1994, most were smaller businesses or product lines, which fit with existing operations, offering new products or expanded geographic scope. Three recent transactions in 1997 and 1999, however, were stand-alone acquisitions of large established businesses, two in Pentair’s WFT segment (General Signal Pump Group and Essef) and one in its PTE segment (DeVilbiss Air Power Company). Pentair intends to continue to pursue smaller, bolt-on purchases, but will also carefully review larger targets that have the capability to significantly expand its current segments, or in appropriate cases, that establish an additional business segment.

SEGMENT DISCUSSION

Pentair operates in three segments: Professional Tools and Equipment (PTE), Water and Fluid Technologies (WFT), and Electrical and Electronic Enclosures (EEE).

PROFESSIONAL TOOLS and EQUIPMENT

The PTE segment includes the tool businesses (Delta and Porter-Cable); and the equipment businesses (Century and the newly-acquired DeVilbiss Air Power Company). Products manufactured include woodworking machinery, portable power

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tools, battery charging and testing equipment, welding equipment, lubricating and lifting equipment, air compressors, generators and pressure washers.

1999 VERSUS 1998

Net sales increased substantially in 1999, from $849.3 million to $1,073.8 million, or 26.4%. Net sales in the fourth quarter increased 56.9%. The DeVilbiss Air Power Company acquisition accounted for a significant portion of the sales increase. The increase in internal growth in 1999 is attributable in large part to continued innovation and new product introductions by each of the businesses in this segment.

PTE operating income for the year increased to $105.4 million, after the restructuring charge, or 5.8%. Excluding the restructuring charge, operating income was $122.2 million, or an increase of 22.6%. For the fourth quarter, operating income for the segment was $50.8 million or 33.0% better than 1998, attributable to the DeVilbiss Air Power Company acquisition. Both full-year and fourth-quarter operating income for the segment was unfavorably impacted by two factors: one-time costs not covered by the restructuring charge incurred as a result of the consolidation of operations as well as severe competitive pressures for certain automotive and service products.

Segment return on sales (before restructuring charge) was down 30 basis points to 11.4% for the full year, although operating margins for the segment excluding acquisitions was comparable to the 11.7% recorded for 1998. Segment return on sales after the restructuring charge was 9.8%. For the fourth quarter, return on sales for the entire segment was 12.6% compared to 14.8% in the same period in 1998, attributable in part to the new acquisition.

1998 VERSUS 1997
PTE sales increased by $102.2 million or 13.7%. These businesses continue to outperform their markets, upholding a performance record that includes three consecutive years of double-digit sales growth and five consecutive years of double-digit operating income growth. The tool businesses continued to introduce innovative new products such as a plate joiner and jigsaw and expanded its offering of pneumatic nailers, staplers and accessories. The service equipment business increased sales of Booster Pacs and expanded its automotive offering with the product line acquisition of T-Tech automatic transmission fluid exchangers.

Operating income as a percent of sales increased to 11.7% in 1998 from 10.3% in 1997. Profitability increased in the tool business due to favorable sourcing opportunities and volume efficiencies. Profitability also increased in the service equipment business due to productivity improvements and facility rationalizations.

OUTLOOK

The Professional Tools and Equipment segment is expected to continue to realize sales growth in 2000, both as a result of the DeVilbiss Air Power Company acquisition and, more importantly, continued organic growth as a result of continued new product introductions and increased cross-selling of products, including acquired products, across all major distribution channels. Operations will be adversely impacted for the first half of 2000 as a result of continuing one-time costs for consolidations of segment business units and start-up costs at the new Jackson, Tennessee distribution center. Nonetheless, Pentair expects continued improvement in operating margins and income throughout the coming year, as a result of the acquisition and of other manufacturing, purchasing and distribution efficiencies.

WATER and FLUID TECHNOLOGIES

The WFT segment includes the pump and pool businesses (Pentair Pump Group and one of the newly-acquired Essef businesses), the water treatment businesses (Pentair Water Treatment which consists of Fleck Controls plus the remaining Essef business) and Lincoln Industrial. Products manufactured include pumps for wells and water treatment, sump pumps, pool and spa equipment such as valves, pumps, filters, lights and related equipment, valves and pressure

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vessels for water treatment products and automated and manual lubrication systems.

1999 VERSUS 1998

Net sales increased substantially in 1999, from $537.9 million to $669.6 million, or 24.5%. The Essef acquisition accounted for the majority of the increase for the year. Net sales in the fourth quarter increased 63.9%, with organic growth accelerating to over 6% of prior-period sales.

WFT operating income for the year increased to $81.3 million, after the restructuring charge, or 23.2%. Excluding the restructuring charge, operating income was $85.7 million, or an increase of 29.9% and excluding acquisitions, operating income increased nearly 20%. For the fourth quarter, operating income for the segment was $25.5 million or 50.5% better than 1998, while excluding acquisitions, operating income was up over 30% from the prior year. Both full-year and fourth-quarter operating income for the segment increased as a result of supply management initiatives and strong labor productivity.

Segment return on sales (before restructuring charge) improved 50 basis points to 12.8% for the full year, although operating margins for the segment excluding acquisitions increased over 200 basis points over 1998. Segment return on sales after the restructuring charge was 12.1%. For the fourth quarter, return on sales for the entire segment was 12.1%, down from the year-earlier quarter which was 13.2%. This decrease is entirely attributable to the Essef acquisition; excluding acquisitions this segment’s return on sales for the period increased nearly 300 basis points.

1998 VERSUS 1997

WFT sales increased by $133.9 million or 33.1%, primarily due to the full year effect of the 1997 pump business acquisitions; internal growth accounted for approximately 5% of the sales increase. Net revenues were adversely impacted in part by the deliberate elimination in 1998 of the unprofitable sales from the Layne & Bowler product line, acquired as part of the General Signal pump acquisition in 1997.

Operating income as a percent of sales increased to 12.3% in 1998 from 10.4% in 1997. The Group’s performance benefited from improved performance at the water conditioning control valve business, increased profitability at European operations, and over $10 million worth of manufacturing and purchasing efficiencies resulting from the integration of the acquired pump businesses.

OUTLOOK

As a result of the Essef acquisition, the WFT segment greatly expanded its product and geographic capabilities. The segment plans to focus more resources on its growth in overseas markets, especially by Pentair Water Treatment, while continuing to implement its operating improvement initiatives previously adopted and while integrating the newly acquired businesses into its ongoing operations. As a result of the increasing importance of the water markets to the segment following the Essef acquisition, Pentair announced that it is investigating strategic alternatives for its Lincoln Industrial business.

ELECTRICAL and ELECTRONIC ENCLOSURES

The EEE segment includes Hoffman Enclosures, Schroff, Pentair Electronic Packaging (a newly-integrated North American enclosures business, comprised of Schroff US, the newly-acquired WEB and the US affiliates of the former Walker Dickson business) and Pentair Enclosures U.K. Products manufactured include metallic and composite cases, subracks and cabinets that house and protect electrical and electronic controls, instruments and components.

1999 VERSUS 1998

Net sales increased 12.3% in 1999, to $633.7 million, most of which is attributable to the 1998 acquisition of Walker

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Dickson and the 1999 acquisition of WEB. Overall net sales in the fourth quarter increased 22.0%, with internal growth up nearly 15% from prior-period sales. The improvement in internal growth in the fourth quarter was largely attributable to expanded distribution in North America of standard electrical enclosure products and increased penetration into the faster-growing datacom and telecom product markets, as well as accelerating growth of standard electronic enclosures in Europe. Fourth quarter sales in local currency in Europe improved 18% quarter-over-quarter, although in US dollar terms the growth amounted to 8%.

EEE operating income for the year after the restructuring charge increased slightly to $46.3 million. Excluding the restructuring charge, however, operating income improved 37.1% and operating income, excluding acquisitions, increased over 45%. For the fourth quarter, operating income for the segment was $19.9 million or 149.9% better than 1998, while excluding acquisitions, operating income was up nearly 200% from the prior year.

Segment return on sales (before restructuring charge) improved significantly for the full year, from 8.2% to 10.0%, although operating margins for the segment excluding acquisitions increased nearly 360 basis points over 1998. Segment return on sales after the restructuring charge was 7.3%. For the fourth quarter, return on sales for the entire segment was 11.5%, up dramatically from the very weak year-earlier quarter which was only 5.6%. Excluding acquisitions, however, the increase was even stronger, which is largely attributable to vastly improved performance at the European enclosure businesses and to strong performance of all of the North American businesses.

1998 VERSUS 1997

EEE sales decreased $15.3 million or 2.6%. Enclosures Americas sales were lower in 1998 largely due to lower automotive and machine tool capital spending. Enclosures Europe sales also decreased due to slow sales of standard product throughout Europe, while Enclosures Asia sales were below 1997 due to the weak Asian economy. With the October 1998 acquisition of Pentair Enclosures U.K., Pentair strengthened its position in markets serving high-growth manufacturers in information and communication technology markets.

Operating income as a percent of sales was flat at 8.2%, the same overall profitability as 1997, despite a decrease in sales. Enclosures Americas increased profits due to overhead reductions and repositioning of the sales force to focus on high growth customers and leverage modification capabilities. Enclosures Europe earnings declined in part due to lower volumes and unfavorable product mix throughout Europe. In addition, the closing of one facility in France and resultant headcount reductions were delayed by a lengthy government approval process until the fourth quarter of 1998. Enclosures Asia profitability decreased due to the weak Asian economy.

OUTLOOK

Pentair plans to continue process improvement and reorganization at all of the businesses in the EEE segment. While no further significant headcount reductions are currently planned, the expansion of the enclosure businesses around the world will be critical to the segment’s future success in the rapidly expanding datacom and telecom fields, especially in creating a world-wide capability to serve these markets, whether in the Americas, Europe or Asia.

SPECIAL RESTRUCTURING CHARGE

In the first quarter of 1999, the Company recorded a special restructuring charge of $38.0 million ($24.1 million after-tax or $.56 per share). As shown below, $12.8 million has been spent or charged through December 31, 1999. The remaining balance is classified within Accrued Liabilities and Other Expenses on the balance sheet.

The restructuring plan comprises consolidation of certain operations, overhead reductions, and outsourcing of specific product lines in each of the Company’s three business segments. Pentair anticipates a reduction of approximately 1,050 jobs, as detailed below, offset by approximately 350 new jobs at other Pentair facilities in connection with consolidation and rationalization. The restructuring plan does not contemplate the Company exiting any of its current lines of business; the projects involved are designed to make the Company’s existing businesses more efficient.

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The Professional Tools and Equipment segment is consolidating North American distribution operations and combining the headquarters of the two power tool businesses, Delta and Porter-Cable, in Jackson, Tennessee. In the service equipment businesses, products are being outsourced to offshore manufacturers or transferred to other North American facilities. The Jonesboro, Arkansas manufacturing operation of Lincoln Automotive will be closed. These actions will result in the termination of more than 600 employees. Restructuring charges for this segment amounted to $16.8 million, $10 million of which is attributable to employee terminations, and the balance of which relates to asset write-downs and other exit costs. Management estimates the benefits under the restructuring plan will be approximately $16 million in 2000 and $15 million in 2001.

The Water and Fluid Technologies segment has reduced the workforce at its Lincoln Industrial business and is outsourcing some product manufacturing, resulting in headcount reductions of approximately 100 employees. Lincoln Industrial plans to eliminate approximately 50 percent of the manufacturing space at its U.S. manufacturing facilities. The charge for this segment was $4.5 million, approximately $1.2 million of which relates to terminated employees, and the balance of which is attributable to demolition and other exit costs. Management estimates the benefits under the restructuring plan will be approximately $2 million in 2000 and $2 million in 2001.

The Electrical and Electronic Enclosures segment reduced its workforce in Europe and adopted a plan to rationalize manufacturing at its North American facilities. These actions will result in the reduction of approximately 350 employees. This segment absorbed $16.7 million of the charge, largely related to employee terminations. Management estimates the benefits under the restructuring plan will be approximately $9 million in 2000 and $12 million in 2001.

The components of the restructuring charge and related reserve balances remaining at December 31, 1999 were (in millions):

“Personnel Costs” consists of severance, medical plan continuation, pension cash-outs, and outplacement per company policy for the 1,050 employees planned to be terminated. As of December 31, 1999, approximately 400 employees have been terminated (or in Europe are working under statutory notice periods).

“Asset Disposals” consists of the write-down of the carrying value of the Delta headquarters building which is held for resale and the write-off of special-use manufacturing and support assets which will no longer be needed and which will be scrapped or abandoned. The real estate held for resale is expected to be disposed of by mid-2000. All of these assets are currently classified as property, plant and equipment. No charge has been taken with respect to the Jonesboro real estate since the Company believes it will be able to be sold for book value within a reasonable period.

“Exit Costs” consists of maintenance and security costs of surplus buildings until leases expire or demolition or disposal of certain buildings, including the Jonesboro building.

“Personnel Costs” and “Exit Costs” are cash costs and the “Asset Disposals” are primarily non-cash costs. Our currently anticipated schedule projects cash expenditures of $19 million in 2000 and $2 million in 2001. These requirements will be funded through cash from operations or borrowings under our existing credit facilities.

During 1999, restructuring benefits (largely personnel cost savings) of approximately $6 million were realized. Anticipated benefits are projected to be $26 million in 2000 and $30 million in 2001. The major components of anticipated benefits are

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in reductions in labor costs and efficiencies in consolidating distribution and administrative functions.

The anticipated benefits noted above are net of the costs of adding 350 employees at other Pentair locations. The benefits do not, however, take into account one-time costs associated with these restructuring plans. The Company anticipates that the associated one-time costs will amount to approximately $6 million, one-quarter of which was incurred in 1999, with most of the balance to be incurred in the first quarter of 2000. These costs are not included in the restructuring charge, since they relate to asset relocations, start-up costs and training and recruiting of employees at other locations.

Liquidity and Capital Resources

The Company incurred approximately $800 million of indebtedness in 1999 in order to complete the acquisitions of Essef and DeVilbiss Air Power. As a result of these borrowings, Pentair’s total debt to capital ratio at the end of the third quarter of 1999 was 63%. Following the successful common stock offering in October 1999 and application of cash flow from operations in the fourth quarter, the Company’s total debt to capital ratio was 51% at December 31, 1999. This compares with a 33% total debt to capital ratio at the end of 1998. The Company has targeted a total debt to capital ratio in the range of 30% to 40% as appropriate for its financing needs and current business plans, although Pentair will exceed this target ratio from time-to-time as needed for operational purposes and/or acquisitions.

Of the total indebtedness of the Company at the end of 1999, more than 85% (approximately $885 million, including $27.2 million in current maturities) is long-term and has an average life to maturity of 6 years. This long-term indebtedness has interest rates varying from 4.0% to 9.0%, with an average interest rate of 7.22%. The Company believes that currently outstanding long-term indebtedness is and will continue to be adequate for its financing needs for the foreseeable future. The Company also believes that it will be able to obtain additional long-term indebtedness as its needs may increase or its current indebtedness matures.

Short-term indebtedness (included in current maturities of long-term debt) stands at $150.6 million as of the end of 1999 with interest rates that range from 6.37% to 8.5%, with an average interest rate of 7.0%. The Company believes that it will generate substantial cash flow from operations and from any asset dispositions which will be used in part to reduce current indebtedness during 2000. The Company has no reason to believe that it would not be able to renew its current short-term credit agreements, at the time of their expiration in August 2000. In addition, the Company has entered into a commercial paper program in January 2000 for the issuance of short-term notes at what it believes are favorable interest rates.

The Company expects capital spending in 2000 to be in the $90-100 million range. Contemplated uses include computer hardware and software, manufacturing cost reduction projects, new product development, e-business initiatives and reconfiguration of manufacturing facilities.

The Company declared its anticipated 2000 quarterly dividend of $.16 per share or an indicated annual rate of $.64 per share.

INFLATION

The impact of inflation on the Company’s results of operations is not considered material given the current inflationary outlook.

INSURANCE SUBSIDIARY

The Company’s captive insurance subsidiary provides a cost effective means of obtaining insurance coverage for general and product liability, product recall, workers’ compensation and auto liability. The insurance subsidiary insures directly and reinsures an admitted carrier. Loss reserves are established based on actuarial projections of ultimate loss.

ENVIRONMENTAL MATTERS

Under current laws and regulations, Pentair’s obligations relating to environmental matters are not expected to have a material impact on the Company’s operations, financial condition or operating results. Some subsidiaries face remediation

21

of soil and groundwater as a result of predecessors’ or their own previous disposal practices. In addition, Pentair subsidiaries have been named as potentially responsible parties at a small number of Superfund or other sites being studied or remediated. Generally, the affected business has been deemed to be a de minimis defendant or its share of remediation costs has not been material to Pentair. Pentair contractually retained certain obligations pertaining to environmental issues of discontinued paper businesses and the divested sporting ammunition business. Costs and capital expenditures related to environmental obligations were not material to the Company’s operations in either 1999 or 1998, and are not anticipated to be material in 2000.

Pentair engages environmental professionals to perform periodic audits of its facilities to assist Pentair in complying with the various environmental laws and regulations faced by its businesses. For purposes of maintaining appropriate reserves against liabilities associated with environmental issues, whether involving on- or off-site locations, Pentair management reviews each individual site, taking into consideration the number of parties involved with the site, the joint and several liability imposed by certain environmental laws, the expected level of contributions of the other parties, the nature and quantities of wastes involved, the expected method and extent of remediation, the estimated professional expenses involved and the time period over which any costs would be incurred. Based on this evaluation, reserves are established when loss amounts are probable and reasonably estimable. Insurance recoveries are recorded only when claims for recovery are settled.

YEAR 2000

The Company pursued an extensive Year 2000 program in order to anticipate and correct Y2K computer problems. As a result of this program, the Company suffered only very minor computer-related problems at any of its businesses in early 2000, all of which have since been corrected.

As a result of the numerous different information systems used by businesses that the Company has acquired over the years and also as a result of changing business requirements, the Company has an ongoing development plan with scheduled replacements of hardware and software occurring over the past few years and continuing into the future throughout the organization. Year 2000 compliance was a by-product of the Company’s information systems (IS) development plan. This plan calls for the installation or updating of new Enterprise Resource Planning (ERP) systems for its current manufacturing and headquarters locations designed to enable these facilities and the related businesses to operate more efficiently and to provide better management reporting. The Company has already installed its ERP systems in 22 locations. The Company’s remaining manufacturing locations and businesses will be converted to the new ERP system over the next few years as the information system development plan progresses.

The costs specifically attributable to Year 2000 compliance, apart from other IS development activities, amounted to approximately $13 million. The cost associated with the total IS development plan over the five-year period from 1995 to 1999 was approximately $60 million. The Company estimates that the cost to convert the remaining facilities and businesses to the new ERP systems will amount to approximately $10-12 million and will be completed over the next three to four years for the Company’s current businesses. Acquisition or establishment of new business units would also require the conversion or updating of ERP systems as necessary.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company is exposed to various market risks, including changes in pricing of raw materials and sourced components, foreign currency exchange rates and interest rates. Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange and interest rates. The Company enters into financial instruments to manage and reduce the impact of some of these risks. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes.

The Company is exposed to cash flow and fair value risk arising out of changes in interest rates with respect to its long-

22

term debt. The table below presents principal cash flows and related weighted average interest rates of the Company’s long-term debt at December 31, 1999 by expected maturity dates. Weighted average variable rates are based on implied forward rates in the yield curve at December 31, 1999 plus the Company’s borrowing spread. Implied forward rates should not be considered a predictor of actual future interest rates.

The Company has entered into interest rate swap agreements with major financial institutions to exchange variable rate interest payment obligations for fixed rate obligations without the exchange of the underlying principal amounts.

The Company hedges net investments in significant foreign subsidiaries by borrowing in those subsidiaries’ functional currencies. The Company has also entered into foreign currency swap agreements, principally to Deutschemarks and Italian Lira, with major financial institutions to hedge firm foreign currency commitments. During 2000, the Company intends to redraft its agreements to convert to the Euro currency.

See also Notes 6 & 7 of Notes to Consolidated Financial Statements.

(1) The foreign exchange information is presented in local currency by maturity, however, the fair value is presented in US dollars.

NOTIFICATION REGARDING FORWARD-LOOKING INFORMATION

It should be noted that certain statements herein which are not historical facts, including without limitation those regarding 1) the timeliness of product introductions and deliveries; 2) expectations regarding market growth and developments; 3) expectations for growth and profitability; 4) implementation of plans; 5) anticipated savings; 6) results achieved from

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acquisitions; and 7) statements preceded by “believes”, “anticipates”, “expects”, “estimates”, “will” or similar expressions are forward-looking statements. Because such statements involve risks and uncertainties, actual results may differ materially from the results currently expected by the Company.

Factors that could cause such differences include, but are not limited to, 1) general economic conditions, such as the rate of economic growth in the Company’s principal geographic markets or fluctuations in exchange rates or interest rates; 2) industry conditions, such as the strength of product demand, the intensity of competition, pricing pressures, the acceptability of new product introductions, the introduction of new products by competitors, changes in technology or the ability of the Company to source components from third parties without interruption and at reasonable prices and the financial condition of the Company’s customers; 3) operating factors, such as continued improvement in manufacturing and distribution activities and the achievement of related efficiencies, as well as inventory risks due to shifts in market demand; and 4) integration of new businesses.

The Company undertakes no obligation to revise any forward-looking statements in order to reflect events or circumstances that may arise after the date hereof. Readers are urged to carefully review and consider the various disclosures made by the Company in this report and in the Company’s other filings with the Securities and Exchange Commission from time to time that advise interested parties of the risks and uncertainties that may affect the Company’s financial condition and results of operations.

Item 8. Financial Statements and Supplementary Data.

The following consolidated financial statements of the Corporation and its subsidiaries are included herein as indicated below:

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CONSOLIDATED STATEMENTS OF INCOME

Pentair, Inc. and Subsidiaries

See Notes to Consolidated Financial Statements.

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CONSOLIDATED BALANCE SHEETS

Pentair, Inc. and Subsidiaries