Exhibit 99.2
CHEMICAL SPECIALISTS
AND DEVELOPMENT, INC.
& SUBSIDIARIES
CONROE, TEXAS
CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTARY INFORMATION
YEARS ENDED
JANUARY 31, 2013 AND 2012
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CHEMICAL SPECIALISTS AND DEVELOPMENT, INC. & SUBSIDIARIES
TABLE OF CONTENTS
JANUARY 31, 2013 AND 2012
| Page |
| |
INDEPENDENT AUDITORS’ REPORT | 1 |
FINANCIAL STATEMENTS | 4 |
CONSOLIDATED BALANCE SHEETS | 5 |
CONSOLIDATED BALANCE SHEETS | 6 |
CONSOLIDATED STATEMENTS OF INCOME | 7 |
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY | 8 |
CONSOLIDATED STATEMENTS OF CASH FLOWS | 9 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | 10 |
SUPPLEMENTARY INFORMATION | 16 |
CONSOLIDATED SUPPORTING SCHEDULES OF GENERAL AND ADMINISTRATIVE EXPENSES | 18 |
i
HLSK
Hereford, Lynch, Sellars & Kirkham
Certified Public Accountants · A Professional Corporation
Conroe 1406 Wilson Rd., Suite 100 Conroe, Texas 77304 Tel 936-756-8127 Metro 936-441-1338 Fax 936-756-8132 | Members of the
American Institute of Certified Public Accountants Texas Society of Certified Public Accounts
Private Companies Practice Section
of the AICPA Division for Firms | Cleveland 111 East Boothe Cleveland, Texas 77327 Tel 281-592-6443 Fax 281-592-7706 |
INDEPENDENT AUDITORS’ REPORT
To the Board of Directors of
Chemical Specialist and Development, Inc. & Subsidiaries
9733 Meador Road
Conroe, TX 77303
We have audited the accompanying consolidated financial statements of Chemical Specialist and Development, Inc. & Subsidiaries (a Texas corporation) and subsidiaries, which comprise the consolidated balance sheets as of January 31, 2013 and 2012, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Chemical Specialist and Development, Inc. & Subsidiaries and subsidiaries as of January 31, 2013 and 2012, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
1
Report on Consolidating Information
Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The consolidating information in Schedule of General and Administrative Expenses is presented for purposes of additional analysis of the consolidated financial statements rather than to present the financial position, results of operations, and cash flows of the individual companies, and it is not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The consolidating information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the consolidating information is fairly stated in all material respects in relation to the consolidated financial statements as a whole.
Hereford, Lynch, Sellars & Kirkham, P.C.
HEREFORD, LYNCH, SELLARS & KIRKHAM, P.C.
Certified Public Accountants
Conroe, Texas
April 1, 2013
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CHEMICAL SPECIALISTS AND DEVELOPMENT, INC. & SUBSIDIARIES
CONROE, TEXAS
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2013 AND 2012
| | 2013 | | 2012 | |
ASSETS | | | | | |
Current Assets | | | | | |
Cash | | $ | 715,987 | | $ | 1,126,020 | |
Accounts receivable, net | | 23,676,544 | | 19,328,882 | |
Due from employees | | 18,063 | | 25,378 | |
Miscellaneous receivables | | — | | 20,052 | |
Inventories | | 8,684,002 | | 8,447,546 | |
Prepaid expenses | | 833,585 | | 520,174 | |
Current deferred tax asset | | 293,075 | | — | |
Total Current Assets | | 34,221,256 | | 29,468,052 | |
Property and Equipment | | | | | |
Property and equipment (net of accumulated depreciation of $7,289,877) | | 11,363,406 | | 10,181,564 | |
Total Property and Equipment | | 11,363,406 | | 10,181,564 | |
Other Assets | | | | | |
Deposits | | 23,766 | | 23,766 | |
Trademark | | 350,000 | | 350,000 | |
Goodwill and other | | 526,487 | | 526,487 | |
| | 900,253 | | 900,253 | |
TOTAL ASSETS | | $ | 46,484,915 | | $ | 40,549,869 | |
The accompanying notes are an integral part of these consolidated financial statements.
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CHEMICAL SPECIALISTS AND DEVELOPMENT, INC. & SUBSIDIARIES
CONROE, TEXAS
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2013 AND 2012
| | 2013 | | 2012 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | |
Current Liabilities | | | | | |
Accounts payable | | $ | 17,617,361 | | $ | 14,044,366 | |
Revolving line of credit | | 10,120,000 | | 8,020,000 | |
Accrued expenses | | 6,268,442 | | 4,050,447 | |
Corporate income tax payable | | — | | 78,294 | |
Current portion of long-term debt | | 373,162 | | 400,002 | |
Total Current Liabilities | | 34,378,965 | | 26,593,109 | |
Long-term Liabilities | | | | | |
Long-term debt | | 1,696,282 | | 2,020,948 | |
Deferred income taxes | | 769,048 | | 367,222 | |
Total Long-term Liabilities | | 2,465,330 | | 2,388,170 | |
Total Liabilities | | 36,844,295 | | 28,981,279 | |
STOCKHOLDERS’ EQUITY | | | | | |
Controlling interest | | | | | |
Common stock; $1 par; 1,000,000 shares authorized; 42,000 shares issued; 42,000 outstanding | | 30,000 | | 30,000 | |
Additional paid-in capital | | 417,694 | | 417,694 | |
Retained earnings | | 9,898,905 | | 11,850,945 | |
| | 10,346,599 | | 12,298,639 | |
Treasury stock; 6,000 shares at cost | | (662,974 | ) | (662,974 | ) |
| | 9,683,625 | | 11,635,665 | |
Noncontrolling interest | | (43,005 | ) | (67,075 | ) |
Total Stockholders’ Equity | | 9,640,620 | | 11,568,590 | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | $ | 46,484,915 | | $ | 40,549,869 | |
The accompanying notes are an integral part of these consolidated financial statements.
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CHEMICAL SPECIALISTS AND DEVELOPMENT, INC. & SUBSIDIARIES
CONROE, TEXAS
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JANUARY 31, 2013 AND 2012
| | 2013 | | 2012 | |
NET SALES | | $ | 199,072,963 | | $ | 167,355,385 | |
COST OF SALES | | | | | |
Chemicals, packing, and shipping materials | | 154,634,215 | | 131,096,310 | |
Freight | | 10,535,651 | | 8,569,747 | |
Labor | | 5,163,238 | | 4,971,268 | |
Other | | 535,645 | | 274,005 | |
| | 170,868,749 | | 144,911,330 | |
GROSS PROFIT | | 28,204,214 | | 22,444,055 | |
GENERAL AND ADMINISTRATIVE EXPENSES | | 23,889,856 | | 17,954,279 | |
OPERATING INCOME | | 4,314,358 | | 4,489,776 | |
OTHER INCOME (EXPENSE) | | | | | |
Interest income | | 24 | | 30 | |
Miscellaneous income | | 438,715 | | 775,726 | |
| | 438,739 | | 775,756 | |
INCOME BEFORE INCOME TAXES | | 4,753,097 | | 5,265,532 | |
PROVISION FOR INCOME TAXES | | 1,676,067 | | 1,750,721 | |
CONSOLIDATED NET INCOME | | 3,077,030 | | 3,514,811 | |
LESS: NET (INCOME) LOSS ATTRIBUTABLE TO THE NONCONTROLLING INTEREST | | (24,070 | ) | (7,480 | ) |
NET INCOME ATTRIBUTABLE TO THE CONTROLLING INTEREST | | $ | 3,052,960 | | $ | 3,507,331 | |
The accompanying notes are an integral part of these consolidated financial statements.
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CHEMICAL SPECIALISTS AND DEVELOPMENT, INC. & SUBSIDIARIES
CONROE, TEXAS
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED JANUARY 31, 2013 AND 2012
| | Controlling Interest | | | | | |
| | Common
Stock | | Additional
Paid-in
Capital | | Retained
Earnings | | Treasury
Stock | | Non-
Controlling
Interest | | Total | |
BALANCE AS OF JANUARY 31, 2011 | | $ | 30,000 | | $ | 417,694 | | $ | 9,953,614 | | $ | (662,974 | ) | $ | (74,555 | ) | $ | 9,663,779 | |
Dividends declared | | — | | — | | (1,610,000 | ) | — | | — | | (1,610,000 | ) |
Net income (loss) | | — | | — | | 3,507,331 | | — | | 7,480 | | 3,514,811 | |
BALANCE AS OF JANUARY 31, 2012 | | 30,000 | | 417,694 | | 11,850,945 | | (662,974 | ) | (67,075 | ) | 11,568,590 | |
Dividends declared | | — | | — | | (5,005,000 | ) | — | | — | | (5,005,000 | ) |
Net income (loss) | | — | | — | | 3,052,960 | | — | | 24,070 | | 3,077,030 | |
BALANCE AS OF JANUARY 31, 2013 | | $ | 30,000 | | $ | 417,694 | | $ | 9,898,905 | | $ | (662,974 | ) | $ | (43,005 | ) | $ | 9,640,620 | |
The accompanying notes are an integral part of these consolidated financial statements.
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CHEMICAL SPECIALISTS AND DEVELOPMENT, INC. & SUBSIDIARIES
CONROE, TEXAS
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31, 2013 AND 2012
| | 2013 | | 2012 | |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | |
Cash received from customers | | $ | 194,752,668 | | $ | 162,778,130 | |
Cash paid to suppliers and employees | | (187,521,395 | ) | (158,778,666 | ) |
Interest received | | 24 | | 30 | |
Interest paid | | (338,001 | ) | (430,147 | ) |
Federal income taxes paid | | (1,900,000 | ) | (1,413,000 | ) |
State income taxes paid | | (456,805 | ) | (126,483 | ) |
Other income received | | 438,715 | | 775,726 | |
Net cash provided (used) by operating activities | | 4,975,206 | | 2,805,590 | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | |
Purchase of property and equipment | | (2,128,733 | ) | (740,428 | ) |
Net cash provided (used) by investing activities | | (2,128,733 | ) | (740,428 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | |
Net borrowing (payments) on revolving line of credit | | 2,100,000 | | 280,000 | |
Principal payment on long-term debt | | (351,506 | ) | (627,478 | ) |
Dividends paid | | (5,005,000 | ) | (1,610,000 | ) |
Net cash provided (used) by financing activities | | (3,256,506 | ) | (1,957,478 | ) |
Net increase (decrease) in cash | | (410,033 | ) | 107,684 | |
Cash at beginning of year | | 1,126,020 | | 1,018,336 | |
Cash at end of year | | $ | 715,987 | | $ | 1,126,020 | |
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES: | | | | | |
Net income | | $ | 3,077,030 | | $ | 3,514,811 | |
Depreciation and amortization | | 946,891 | | 846,669 | |
Provision for deferred income taxes | | 401,826 | | 44,878 | |
(Increase) Decrease in: | | | | | |
Accounts receivable | | (4,347,662 | ) | (4,644,187 | ) |
Other receivables | | 27,366 | | 66,932 | |
Inventories | | (236,456 | ) | 186,191 | |
Prepaid expenses | | (313,411 | ) | 583,301 | |
Deposits | | — | | (2,277 | ) |
Deferred tax asset | | (293,075 | ) | — | |
Increase (Decrease) in: | | | | | |
Accounts payable | | 3,572,995 | | 1,413,676 | |
Accrued expenses | | 2,217,996 | | 717,302 | |
Corporate income tax payable | | (78,294 | ) | 78,294 | |
Net cash provided (used) by operating activities | | $ | 4,975,206 | | $ | 2,805,590 | |
The accompanying notes are an integral part of these consolidated financial statements.
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CHEMICAL SPECIALISTS AND DEVELOPMENT, INC. & SUBSIDIARIES
CONROE, TEXAS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2013 AND 2012
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Chemical Specialists and Development, Inc., and its subsidiaries: Startex Chemical, Inc. and Startex Distribution West, LLC. All significant intercompany transactions have been eliminated in consolidation.
Nature of Activities
Chemical Specialists and Development, Inc. was organized in the State of Texas on April 26, 1976, and is engaged in the packaging and distribution of chemicals, solvents, and other materials for governmental and industrial use. The Company sells its products to various departments of the federal government and to domestic and international customers through its various divisions. Operations were expanded in October 2009 with the purchase of a plant in Baton Rouge, Louisiana.
Startex Chemical, Inc. is a wholly owned subsidiary of Chemical Specialists and Development, Inc. that was formed in 1985 to sell to distributors and retail outlets.
Startex Distribution West, LLC was formed July 1, 2009 to expand sales, consistent with current operations, along the west coast of the United States. Operations in California are conducted via a logistics support chemical management warehouse facility located in the southern part of that state. Chemical Specialists and Development, Inc. has an eighty percent (80%) controlling interest in Startex Distribution West, LLC. The remaining twenty percent (20%) minority interest is owned by an individual.
Buckeye Properties, Inc., owned by the same principals of the Company, was formed in 1994 and owns two (2) dwellings located in Conroe, Texas.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less at the date of acquisition to be “cash equivalents.”
Accounts Receivable
The Company generally charges off any account deemed to be uncollectible. In the opinion of management, reserves for uncollectible accounts of $776,845 and $349,404 were adequate as of January 31, 2013 and 2012, respectively. This reserve is based on the Company’s past experience with its customers. Accounts receivable are stated at their net realizable value, which approximates their fair value.
Inventory
Inventory is stated at the lower of cost or market, using the first-in, first-out method of accounting.
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CHEMICAL SPECIALISTS AND DEVELOPMENT, INC. & SUBSIDIARIES
CONROE, TEXAS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2013 AND 2012
Advertising Costs
The Company expenses advertising costs as they are incurred. Advertising expenses for the years ended January 31, 2013 and 2012 were $80,730 and $82,731, respectively.
Property and Equipment
Property, plant and equipment are recorded at cost. Depreciation and amortization are provided using the accelerated and straight-line methods of depreciation over the useful lives of the assets. Expenditures for repairs and maintenance of the property and equipment are expensed as incurred unless they materially extend the useful lives of the assets; such expenses are capitalized and depreciated over the remaining life of the asset.
Income Taxes
Taxes are provided on all revenue and expense items included in income, regardless of the period in which such items may be recognized for income tax purposes, except for items representing a permanent difference between pre-tax accounting income and tax income.
Shipping and Handling Costs
Freight billed to customers is considered sales revenue and the related freight costs are considered a cost of sales.
NOTE 2 — CASH
The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash and cash equivalents.
NOTE 3 — INVENTORY
Inventory consisted of the following as of January 31, 2013 and 2012:
| | 2013 | | 2012 | |
Finished goods | | $ | 5,474,611 | | $ | 4,797,463 | |
Raw materials | | 3,609,618 | | 4,037,723 | |
Reserve for obsolete and slow-moving inventory | | (400,227 | ) | (387,640 | ) |
Total Inventory | | $ | 8,684,002 | | $ | 8,447,546 | |
NOTE 4 — PROPERTY AND EQUIPMENT
Property and equipment is composed of the following as of January 31, 2013 and 2012:
| | 2013 | | 2012 | |
Land | | $ | 1,071,917 | | $ | 1,071,917 | |
Buildings and improvements | | 10,412,565 | | 9,722,171 | |
Storage tanks | | 1,997,050 | | 1,383,312 | |
Machinery and equipment | | 5,098,925 | | 4,274,324 | |
Transportation equipment | | 72,826 | | 72,826 | |
| | 18,653,283 | | 16,524,550 | |
Less accumulated depreciation | | (7,289,877 | ) | (6,342,986 | ) |
Property and Equipment, Net | | $ | 11,363,406 | | $ | 10,181,564 | |
Depreciation expense amounted to $946,891 and $846,669 for the years ended January 31, 2013 and 2012, respectively.
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CHEMICAL SPECIALISTS AND DEVELOPMENT, INC. & SUBSIDIARIES
CONROE, TEXAS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2013 AND 2012
NOTE 5 — REVOLVING LINE OF CREDIT
The Company has a $20,000,000 revolving bank line of credit that expires on June 28, 2015. Of the $20,000,000 line of credit, $750,000 may be used as standby letters of credit. Advances under the line of credit bear interest at prime less applicable margin (0.50 to 1.00) and are secured by accounts receivable, inventory, equipment and property owned by the Company. Under the terms of the line of credit, the Company is required to maintain certain debt-to-worth ratios and fixed charge coverage ratios. Advances outstanding on the line of credit at January 31, 2013 and 2012 were $10,120,000 and $8,020,000, respectively. Of the $750,000 in standby letters of credit, $71,649 and $138,236 had been issued at January 31, 2013 and 2012, respectively.
NOTE 6 — LONG-TERM OBLIGATIONS
Long-term debt consisted of the following at January 31:
| | 2013 | | 2012 | |
Term notes | | | | | |
Current portion | | $ | 353,996 | | $ | 353,996 | |
Long-term portion | | 1,696,282 | | 2,006,393 | |
Capital leases payable | | | | | |
Current portion | | 19,166 | | 46,006 | |
Long-term portion | | — | | 14,555 | |
| | 19,166 | | 60,561 | |
Total Long-term Debt | | $ | 2,069,444 | | $ | 2,420,950 | |
The term notes consist of the following:
· A note for the original amount of $2,100,000 signed by the Company commenced on November 30, 2005 with equal monthly payments of $17,500 principal and interest, which accrues at a rate of prime less the applicable margin (0.50 to 1.00). The entire unpaid principal sum and all interest accrued and unpaid was extended until June 28, 2015. The proceeds of the note were used to refinance the Company’s previously existing notes. The loan is secured by accounts receivable, inventory, equipment and property owned by the Company.
· A note for the original amount of $1,360,000 signed by the Company commenced on September 21, 2006 with equal quarterly payments of $22,667 principal and interest, which accrues at a rate of prime less the applicable margin (0.50 to 1.00). The entire unpaid principal sum and all interest accrued and unpaid was extended until June 28, 2015. The proceeds of the note were used for new construction, which also serve as its collateral.
· A note for the original amount of $800,000 signed by the Company commenced on January 13, 2010 with equal monthly payments of $4,444 principal and interest, which accrues at a rate of prime less the applicable margin (0.50 to 1.00). The entire unpaid principal sum and all interest accrued and unpaid thereon was extended until June 28, 2015. The proceeds of the note were used to finance the purchase of a production facility in Baton Rouge, Louisiana.
Principal payments due on term notes for each of the subsequent three years are as follows as of January 31, 2013:
Year Ending
January 31 | | | |
2014 | | $ | 353,996 | |
2015 | | 353,996 | |
2016 | | 1,342,286 | |
Total | | $ | 2,050,278 | |
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CHEMICAL SPECIALISTS AND DEVELOPMENT, INC. & SUBSIDIARIES
CONROE, TEXAS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2013 AND 2012
The Company is also obligated under one capital lease. The lease is a 36 (thirty-six) month lease for lab equipment with a monthly payment of $1,686 expiring in October of 2013. A 12 (twelve) month lease for computer workstations with a monthly payment of $6,052 was paid off in June of 2012. The total cost and accumulated depreciation of equipment under capital lease was $164,307 and $70,072, respectively, at January 31, 2013.
The future minimum lease payments due under capital leases are as follows at January 31, 2013.
| | 2013 | |
Future minimum lease payments | | $ | 20,180 | |
Less: amount representing interest | | (1,014 | ) |
Present value of net minimum lease payments | | 19,166 | |
Less: current portion due within one year | | (19,166 | ) |
Long-term Capital Lease Obligation | | $ | — | |
NOTE 7 — COMMITMENTS AND CONTINGENCIES
Contingencies
The Company is party to litigation and claims arising in the normal course of business. Management, after consultation with legal counsel, believes that the liabilities, if any, arising from such litigation and claims will not be material to the financial statements.
The Company is party to an environmental claim regarding purchased property in Georgia, which may require the Company to incur the liability for costs associated with the reporting, testing, clean-up and/or remediation of such property. To date, expenses related to this contingency have been paid by a third party.
The Company leases lab facilities in Pasadena, Texas under a non-cancelable operating lease. The lease commenced on August 17, 2009 and will extend for sixty-eight (68) months, expiring on April 30, 2015. One five-year extension is allowed. Monthly rent is $4,500. The following is a schedule by years of future minimum rentals under the lease at January 31, 2013:
Year Ending
January 31 | | | |
2014 | | $ | 54,000 | |
2015 | | 54,000 | |
2016 | | 13,500 | |
Total | | $ | 121,500 | |
NOTE 8 — FEDERAL INCOME TAXES
The provision for income taxes consists of the following:
| | 2013 | | 2012 | |
Current Taxes | | $ | 1,567,316 | | $ | 1,705,843 | |
Deferred Taxes | | 108,751 | | 44,878 | |
| | $ | 1,676,067 | | $ | 1,750,721 | |
The tax provision differs from amounts that would be calculated by applying federal statutory rates to income before income taxes primarily because no tax benefits have been recorded for nondeductible expenses totaling $132,376.
Deferred tax liabilities recognized for taxable temporary differences total $769,048. Deferred tax assets recognized for deductible temporary differences total $293,075.
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CHEMICAL SPECIALISTS AND DEVELOPMENT, INC. & SUBSIDIARIES
CONROE, TEXAS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2013 AND 2012
The Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2011.
NOTE 9 — RETIREMENT PLAN
The Company has a 401(k) Plan (Plan) to provide retirement and incidental benefits for its employees. Employees may contribute from one percent (1%) to twenty percent (20%) of their annual compensation to the Plan, limited to a maximum annual amount as set periodically by the Internal Revenue Service.
The Company matches employee contributions equal to 100% of salary deferrals each payroll period that do not exceed four percent (4%) of eligible compensation. All matching contributions vest immediately.
Company matching contributions to the Plan totaled $269,195 and $236,120 in 2013 and 2012, respectively.
NOTE 10 — WELFARE BENEFIT PLAN
On January 1, 2010, the Company board of directors voted to rescind the single employer welfare benefit plan covering individuals who are actively employed by the Company, who are members of a select group of management or highly compensated employees, who are not sole proprietors, and who own more than fifty percent (50%) ownership interest in the Company. This corporate resolution was made in response to an IRS audit that disallowed the deductions taken on the 2006, 2007 and 2008 Federal income tax returns.
An alternative plan of deferred compensation for named key employees was adopted. For a period of 6 (six) years, beginning January 1, 2010 and ending December 31, 2015, 5 (five) key employees shall share $350,000 that shall be due and payable on or before January 31 of each calendar year during the term of this agreement while employed by the Company. This compensation is taxable at the individual level and is subject to payroll tax at the Company level.
NOTE 11 — RELATED PARTY TRANSACTIONS
On May 1, 2010, ST Laboratories Group, LLC (STLG) was formed. The 10 (ten) members of STLG, are all employees and/or owners of the Company. On a monthly basis, the Company pays STLG $50,000 to perform laboratory testing services for the Company, and STLG pays the Company $11,000 rent for laboratory facilities and equipment. STLG generated approximately 30% (thirty percent) and 27% (twenty-seven percent) of its gross revenue from the Company for the years ended January 31, 2013 and 2012, respectively. The Company did not owe any amounts to STLG for the years ended January 31, 2013 and 2012, respectively.
The Consolidation Topic of the FASB Accounting Standards Codification requires nonpublic companies with a variable interest in a variable interest entity (VIE) to make certain disclosures and/or consolidate the VIE into its financial statements. The Company has evaluated its relationship with STLG and has determined that the entity does not meet the criteria to be considered a VIE; therefore, the application of this interpretation is not applicable to the Company for the years ended January 31, 2013 and 2012.
NOTE 12 — MAJOR CUSTOMERS
The Company’s sales to various branches of the federal government accounted for approximately 12% (twelve percent) and 9% (nine percent) of the total sales for the years ended January 31, 2013 and 2012, respectively.
The Company continued a contract with a major paint supply company, which comprised 11% (eleven percent) of the total sales for the years ended January 31, 2013 and 2012.
Additionally, the Company secured a contract with an international chemical company that develops specialty fuels, which comprised approximately 9% (nine percent) and 10% (ten percent) of the total sales for the years ended January 31, 2013 and 2012, respectively. All sales transactions with this company are conducted in U.S. currency.
14
CHEMICAL SPECIALISTS AND DEVELOPMENT, INC. & SUBSIDIARIES
CONROE, TEXAS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2013 AND 2012
NOTE 13 — ASSET ACQUISITION
The Company acquired the assets of Theo Arapoglou, Inc. on December 31, 1996. The acquisition was recorded using the purchase method of accounting for mergers and acquisitions as outlined under the Intangibles — Goodwill and Others Topic of the FASB Accounting Standards Codification.
The purchase was made by issuing common stock to the stockholder of the purchased company for the fair market value of the assets. The effect of the transaction was to increase common stock $6,000 and increase additional paid in capital $417,694 totaling the purchase price of $423,694. The difference between the fair market value of the net assets and the purchase price was recorded as goodwill of $158,530. The legal and other administrative costs associated with the transaction totaling $17,274 were also capitalized. The total goodwill and associated capitalized purchase costs of $175,860 will be tested for impairment annually.
NOTE 14 — ACQUISITION OF TREASURY STOCK
The Company purchased twenty percent (20%) of its 30,000 outstanding shares from one stockholder. The cost was $662,974 and has been accounted for using the cost method. The cost method was used to account for this transaction because the shares were not retired and their final disposition was not known at the time of purchase.
NOTE 15 — SUBSEQUENT EVENTS
Events occurring after January 31, 2013 have been evaluated through April 1, 2013, the date when these financial statements were available to be issued. No events requiring financial statement recognition or disclosure had occurred at that time, except as disclosed in Note 6.
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SUPPLEMENTARY INFORMATION
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CHEMICAL SPECIALISTS AND DEVELOPMENT, INC. & SUBSIDIARIES
CONROE, TEXAS
CONSOLIDATED SUPPORTING SCHEDULES
OF GENERAL AND ADMINISTRATIVE EXPENSES
FOR THE YEARS ENDED JANUARY 31, 2013 AND 2012
| | 2013 | | 2012 | |
Advertising | | $ | 80,730 | | $ | 82,731 | |
Auto expense | | 478,635 | | 487,069 | |
Bad debt expense | | 483,736 | | 107,902 | |
Bank fees | | 41,402 | | 37,313 | |
Commissions | | 692,197 | | 792,571 | |
Contributions | | 53,511 | | 21,573 | |
Depreciation | | 946,891 | | 846,669 | |
Dues and subscriptions | | 122,771 | | 122,613 | |
Insurance | | 899,778 | | 767,020 | |
Interest | | 338,001 | | 430,147 | |
Lab inspections and tests | | 1,010,354 | | 782,362 | |
Legal and accounting fees | | 300,051 | | 420,336 | |
Licenses and permits | | 32,734 | | 14,644 | |
Miscellaneous | | 18,664 | | 17,229 | |
Office expense | | 147,697 | | 135,610 | |
Officers’ salaries | | 8,294,454 | | 4,352,913 | |
Other taxes | | 499,805 | | 469,648 | |
Payroll administration fees | | 56,941 | | 75,221 | |
Postage | | 11,772 | | 11,636 | |
Equipment rental | | 543,360 | | 466,686 | |
Repairs and maintenance | | 616,278 | | 426,386 | |
Salaries and wages | | 5,334,832 | | 4,774,596 | |
Shop expenses | | 1,636,944 | | 1,164,060 | |
Telephone and telegraph | | 158,558 | | 154,665 | |
Trash hauling | | 35,860 | | 24,686 | |
Travel and entertainment | | 892,839 | | 764,735 | |
Utilities | | 161,061 | | 203,258 | |
Total General and Administrative Expenses | | $ | 23,889,856 | | $ | 17,954,279 | |
See notes to consolidated financial statements.
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