EXHIBIT 99.1
COMBINED FINANCIAL STATEMENTS OF THE ECOLOCHEM GROUP
TABLE OF CONTENTS
| Page | |||||
| INDEPENDENT AUDITORS’ REPORT | F-2 | ||||
| COMBINED FINANCIAL STATEMENTS: | |||||
| Combined Balance Sheets as of September 30, 2003 and 2002 | F-3 | ||||
| Combined Statements of Earnings for the years ended September 30, 2003, 2002 and 2001 | F-4 | ||||
| Combined Statements of Stockholders’ Equity and Comprehensive Income for the years ended September 30, 2003, 2002 and 2001 | F-5 | ||||
| Combined Statements of Cash Flows for the years ended September 30, 2003, 2002 and 2001 | F-6 | ||||
| Notes to Combined Financial Statements | F-7 | ||||
F-1
INDEPENDENT AUDITORS’ REPORT
The Board of Directors
We have audited the accompanying combined balance sheets of The Ecolochem Group (the Group) as of September 30, 2003 and 2002, and the related combined statements of earnings, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended September 30, 2003. These combined financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these combined 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of The Ecolochem Group as of September 30, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 2003 in conformity with accounting principles generally accepted in the United States of America.
| KPMG LLP |
Norfolk, Virginia
F-2
THE ECOLOCHEM GROUP
COMBINED BALANCE SHEETS
September 30, 2003 and 2002
| 2003 | 2002 | |||||||||
| ASSETS | ||||||||||
| Current assets: | ||||||||||
| Cash and cash equivalents | $ | 4,074,193 | 5,005,656 | |||||||
| Short-term investments | 11,379,528 | 4,054,074 | ||||||||
| Trade accounts receivable, net | 21,879,247 | 20,657,280 | ||||||||
| Other receivables | 1,187,092 | 681,650 | ||||||||
| Inventories | 3,436,517 | 3,261,592 | ||||||||
| Prepaid expenses | 357,492 | 137,850 | ||||||||
| Total current assets | 42,314,069 | 33,798,102 | ||||||||
| Property, plant and equipment (note 3): | ||||||||||
| Land | 4,417,295 | 4,307,240 | ||||||||
| Buildings and improvements | 25,987,078 | 25,488,915 | ||||||||
| Plant equipment | 15,200,807 | 12,930,301 | ||||||||
| Processing equipment | 109,059,574 | 104,955,313 | ||||||||
| Transportation equipment | 5,635,494 | 6,106,876 | ||||||||
| Furniture and fixtures | 4,220,260 | 3,711,499 | ||||||||
| Construction in progress | 12,176,020 | 5,271,492 | ||||||||
| 176,696,528 | 162,771,636 | |||||||||
| Less accumulated depreciation | 89,818,367 | 79,161,935 | ||||||||
| Net property, plant and equipment | 86,878,161 | 83,609,701 | ||||||||
| Other assets, net | 3,146,229 | 3,418,749 | ||||||||
| $ | 132,338,459 | 120,826,552 | ||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||
| Current liabilities: | ||||||||||
| Notes payable (note 2) | $ | — | 800,000 | |||||||
| Current installments of long-term debt (note 3) | 2,098,967 | 2,296,607 | ||||||||
| Accounts payable | 6,364,166 | 6,357,527 | ||||||||
| Accrued expenses (notes 4 and 5) | 3,644,328 | 2,729,388 | ||||||||
| Total current liabilities | 12,107,461 | 12,183,522 | ||||||||
| Notes payable (note 2) | 4,800,000 | 7,200,000 | ||||||||
| Long-term debt, less current installments (note 3) | 8,700,000 | 11,216,100 | ||||||||
| Deferred income taxes | 1,438,000 | 1,596,000 | ||||||||
| Total liabilities | 27,045,461 | 32,195,622 | ||||||||
| Minority interest | 1,329,045 | 500,000 | ||||||||
| Stockholders’ equity: | ||||||||||
| Ecolochem, Inc. common stock, $1 par value. Authorized 30,000 shares; issued and outstanding 12,000 shares | 12,000 | 12,000 | ||||||||
| Ecolochem International, Inc.: | ||||||||||
| Class A common stock, voting, no par value. Authorized 1,000 shares; issued and outstanding 100 shares | — | — | ||||||||
| Class B common stock, nonvoting, no par value. Authorized 1,000 shares; issued and outstanding 400 shares | — | — | ||||||||
| Moson Holdings, L.L.C. | — | — | ||||||||
| Ecolochem S.A.R.L., $13.51 par value. Authorized 1,048 shares; issued and outstanding 1,048 shares | 14,156 | 14,156 | ||||||||
| Additional paid-in capital | 1,688,316 | 1,688,316 | ||||||||
| Retained earnings | 101,460,859 | 87,033,811 | ||||||||
| Accumulated other comprehensive income (loss) (note 6) | 788,622 | (617,353 | ) | |||||||
| Total stockholders’ equity | 103,963,953 | 88,130,930 | ||||||||
| $ | 132,338,459 | 120,826,552 | ||||||||
See accompanying notes to combined financial statements.
F-3
THE ECOLOCHEM GROUP
COMBINED STATEMENTS OF EARNINGS
| 2003 | 2002 | 2001 | ||||||||||||
| Sales | $ | 108,919,511 | $ | 106,894,407 | $ | 105,254,053 | ||||||||
| Cost of goods sold | 58,818,466 | 55,752,616 | 57,346,141 | |||||||||||
| Gross profit | 50,101,045 | 51,141,791 | 47,907,912 | |||||||||||
| Selling, general and administrative expenses (note 5) | 24,427,174 | 25,386,839 | 21,069,098 | |||||||||||
| Gain on sale of property and equipment | (151,094 | ) | (60,372 | ) | (764,539 | ) | ||||||||
| Operating income | 25,824,965 | 25,815,324 | 27,603,353 | |||||||||||
| Other income (expense): | ||||||||||||||
| Interest expense (note 4) | (539,419 | ) | (924,415 | ) | (1,486,950 | ) | ||||||||
| Interest income | 173,865 | 188,314 | 226,227 | |||||||||||
| Other, net (note 7) | 13,218,770 | 492,057 | 403,737 | |||||||||||
| 12,853,216 | (244,044 | ) | (856,986 | ) | ||||||||||
| Earnings before income taxes | 38,678,181 | 25,571,280 | 26,746,367 | |||||||||||
| Income taxes | 1,810,000 | 1,787,000 | 2,182,000 | |||||||||||
| Net earnings | $ | 36,868,181 | $ | 23,784,280 | $ | 24,564,367 | ||||||||
| Pro forma income data: | ||||||||||||||
| Earnings before income taxes | $ | 38,678,181 | $ | 25,571,280 | $ | 26,746,367 | ||||||||
| Pro forma income taxes (unaudited)(note 8) | 14,275,000 | 10,106,000 | 10,593,000 | |||||||||||
| Pro forma net earnings (unaudited) | $ | 24,403,181 | $ | 15,465,280 | $ | 16,153,367 | ||||||||
See accompanying notes to combined financial statements.
F-4
THE ECOLOCHEM GROUP
COMBINED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
| Ecolochem | Ecolochem | Accumulated | |||||||||||||||||||||||||||||||||||
| International, Inc. | International, Inc. | Moson | Additional | Other | Total | ||||||||||||||||||||||||||||||||
| Ecolochem, Inc. | Class A | Class B | Holdings, | Ecolochem | Paid-in | Retained | Comprehensive | Stockholders’ | |||||||||||||||||||||||||||||
| Common Stock | Common Stock | Common Stock | L.L.C. | S.A.R.L. | Capital | Earnings | Income (Loss) | Equity | |||||||||||||||||||||||||||||
| Balance at September 30, 2000 | $ | 12,000 | $ | — | $ | — | $ | — | $ | 14,156 | $ | 1,688,316 | $ | 61,978,118 | $ | (1,130,767 | ) | $ | 62,561,823 | ||||||||||||||||||
| Net earnings | — | — | — | — | — | — | 24,564,367 | — | 24,564,367 | ||||||||||||||||||||||||||||
| Unrealized changes in: | |||||||||||||||||||||||||||||||||||||
| Cash flow hedging derivatives (note 4) | — | — | — | — | — | — | — | (274,389 | ) | (274,389 | ) | ||||||||||||||||||||||||||
| Cumulative foreign currency translation adjustments | — | — | — | — | — | — | — | (117,037 | ) | (117,037 | ) | ||||||||||||||||||||||||||
| Comprehensive income | 24,172,941 | ||||||||||||||||||||||||||||||||||||
| Distributions to stockholders | — | — | — | — | — | — | (10,351,506 | ) | — | (10,351,506 | ) | ||||||||||||||||||||||||||
| Balance at September 30, 2001 | 12,000 | — | — | — | 14,156 | 1,688,316 | 76,190,979 | (1,522,193 | ) | 76,383,258 | |||||||||||||||||||||||||||
| Net earnings | — | — | — | — | — | — | 23,784,280 | — | 23,784,280 | ||||||||||||||||||||||||||||
| Unrealized changes in: | |||||||||||||||||||||||||||||||||||||
| Cash flow hedging derivatives (note 4) | — | — | — | — | — | — | — | (124,914 | ) | (124,914 | ) | ||||||||||||||||||||||||||
| Cumulative foreign currency translation adjustments | — | — | — | — | — | — | — | 1,029,754 | 1,029,754 | ||||||||||||||||||||||||||||
| Comprehensive income | 24,689,120 | ||||||||||||||||||||||||||||||||||||
| Distributions to stockholders | — | — | — | — | — | — | (12,941,448 | ) | — | (12,941,448 | ) | ||||||||||||||||||||||||||
| Balance at September 30, 2002 | 12,000 | — | — | — | 14,156 | 1,688,316 | 87,033,811 | (617,353 | ) | 88,130,930 | |||||||||||||||||||||||||||
| Net earnings | — | — | — | — | — | — | 36,868,181 | — | 36,868,181 | ||||||||||||||||||||||||||||
| Unrealized changes in: | |||||||||||||||||||||||||||||||||||||
| Cash flow hedging derivatives (note 4) | — | — | — | — | — | — | — | 37,596 | 37,596 | ||||||||||||||||||||||||||||
| Cumulative foreign currency translation adjustments | — | — | — | — | — | — | — | 1,368,379 | 1,368,379 | ||||||||||||||||||||||||||||
| Comprehensive income | 38,274,156 | ||||||||||||||||||||||||||||||||||||
| Distributions to stockholders | — | — | — | — | — | — | (22,441,133 | ) | — | (22,441,133 | ) | ||||||||||||||||||||||||||
| Balance at September 30, 2003 | $ | 12,000 | $ | — | $ | — | $ | — | $ | 14,156 | $ | 1,688,316 | $ | 101,460,859 | $ | 788,622 | $ | 103,963,953 | |||||||||||||||||||
See accompanying notes to combined financial statements.
F-5
THE ECOLOCHEM GROUP
COMBINED STATEMENTS OF CASH FLOWS
| 2003 | 2002 | 2001 | ||||||||||||||
| Cash flows from operating activities: | ||||||||||||||||
| Net earnings | $ | 36,868,181 | $ | 23,784,280 | $ | 24,564,367 | ||||||||||
| Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||||||||||
| Depreciation and amortization | 11,940,405 | 11,850,304 | 10,470,337 | |||||||||||||
| Deferred income taxes | (158,000 | ) | 398,000 | (45,000 | ) | |||||||||||
| Gain on sale of property and equipment, net | (151,094 | ) | (60,372 | ) | (764,539 | ) | ||||||||||
| Changes in assets and liabilities increasing (decreasing) cash flows from operating activities: | ||||||||||||||||
| Trade accounts receivable, net | (1,221,967 | ) | 364,512 | (6,131,813 | ) | |||||||||||
| Other receivables | (505,442 | ) | 1,243,958 | (1,688,994 | ) | |||||||||||
| Inventories | (174,925 | ) | 1,344,619 | (1,282,620 | ) | |||||||||||
| Prepaid expenses | (219,642 | ) | 58,027 | 814,456 | ||||||||||||
| Other assets | 250,803 | (457,003 | ) | (288,000 | ) | |||||||||||
| Accounts payable | 6,639 | (2,833,365 | ) | 347,054 | ||||||||||||
| Accrued expenses | 952,536 | (1,411,440 | ) | 1,045,082 | ||||||||||||
| Net cash provided by operating activities | 47,587,494 | 34,281,520 | 27,040,330 | |||||||||||||
| Cash flows from investing activities: | ||||||||||||||||
| Capital expenditures | (15,359,712 | ) | (12,774,215 | ) | (16,727,927 | ) | ||||||||||
| Proceeds from sale of property and equipment | 323,658 | 407,247 | 1,378,334 | |||||||||||||
| Reductions (additions) to short-term investments, net | (7,325,454 | ) | (2,826,495 | ) | 678,688 | |||||||||||
| Net cash used in investing activities | (22,361,508 | ) | (15,193,463 | ) | (14,670,905 | ) | ||||||||||
| Cash flows from financing activities: | ||||||||||||||||
| Principal repayments on debt | (2,713,740 | ) | (2,818,058 | ) | (3,065,679 | ) | ||||||||||
| Net borrowings (repayments) on notes payable | (3,200,000 | ) | (2,950,000 | ) | 1,450,000 | |||||||||||
| Minority interest contributions | 829,045 | 500,000 | — | |||||||||||||
| Distributions to stockholders | (22,441,133 | ) | (12,941,448 | ) | (10,351,506 | ) | ||||||||||
| Net cash used in financing activities | (27,525,828 | ) | (18,209,506 | ) | (11,967,185 | ) | ||||||||||
| Changes due to exchange rate | 1,368,379 | 1,029,754 | (117,037 | ) | ||||||||||||
| Net increase (decrease) in cash | (931,463 | ) | 1,908,305 | 285,203 | ||||||||||||
| Cash at beginning of year | 5,005,656 | 3,097,351 | 2,812,148 | |||||||||||||
| Cash at end of year | $ | 4,074,193 | $ | 5,005,656 | $ | 3,097,351 | ||||||||||
| Supplemental disclosure of cash flow information — | ||||||||||||||||
| Cash paid during the year for: | ||||||||||||||||
| Interest | $ | 543,000 | $ | 933,000 | $ | 1,496,000 | ||||||||||
| Income taxes | $ | 2,244,000 | $ | 2,119,000 | $ | 2,306,000 | ||||||||||
See accompanying notes to combined financial statements.
F-6
THE ECOLOCHEM GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
| (a) Operations |
The Ecolochem Group (the Group) provides emergency and supplemental water treatment services and long-term outsourced industrial water treatment systems primarily to electric utilities, refineries, petro-chemical plants, and pulp and paper mills. The Group is headquartered in the United States with operations also in Mexico, United Kingdom, France, Brazil, the Philippines, Belgium, Australia and Singapore.
| (b) Principles of Combination |
The combined financial statements include the accounts of Ecolochem, Inc., Ecolochem International, Inc., Moson Holdings, L.L.C., and Ecolochem S.A.R.L. (a French entity). The entities that comprise the Group are under common ownership and management. Ecolochem JV Holdings, Inc., a wholly owned subsidiary of Ecolochem, Inc., owns 50% of the partnership, Process Water Services. Process Water Services is controlled by Ecolochem, Inc.; therefore, it is consolidated with Ecolochem, Inc. All significant intercompany balances and transactions have been eliminated in consolidation and combination.
| (c) Cash Equivalents |
Cash equivalents of $733,580 and $861,057 at September 30, 2003 and 2002, respectively, consist of money market funds. For purposes of the combined statement of cash flows, the Group considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents.
| (d) Short-Term Investments |
Short-term investments consist primarily of investments in money market funds. The Group classifies these investments as available for sale. These investments are recorded at cost which approximates fair value.
| (e) Trade Accounts Receivable |
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Management determines the allowance for doubtful accounts based on the Group’s historical write-off experience of credit losses in existing accounts receivable, the financial conditions of the customers, existing economic conditions, and the amount and age of past due accounts. The Group reviews its accounts receivable monthly for collectibility. Past due accounts are generally charged off only after all means of collection have been exhausted and the potential for recovery is considered remote. The Group does not have any off-balance-sheet credit exposure related to its customers.
| (f) Inventories |
Inventories are stated at the lower of cost or market using the average cost method. Inventories consist primarily of parts used for construction projects and various supplies.
F-7
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
| (g) Property, Plant and Equipment |
Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation of property, plant and equipment is calculated on the straight-line method over the estimated useful lives of the assets. The Group uses the following periods for depreciation:
| Buildings and improvements | 7 - 40 years | |||
| Plant equipment | 5 – 20 years | |||
| Processing equipment | 5 – 10 years | |||
| Transportation equipment | 5 – 8 years | |||
| Furniture and fixtures | 3 – 10 years |
| (h) Other Assets |
Other assets are stated at cost less accumulated amortization. They include patents and trademarks which are amortized over their estimated useful lives using the straight-line method and bond issuance costs which are being amortized over the life of the associated debt. Other assets also include cash surrender value of officers’ life insurance policies and tax deposits with the U.S. Treasury. The tax deposits are required to enable Ecolochem, Inc. to maintain a September 30 year end for federal income tax purposes. These deposits approximated $1,621,000 and $1,744,000 at September 30, 2003 and 2002, respectively.
| (i) Impairment or Disposal of Long-Lived Assets |
The Group accounts for long-lived assets in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets. This statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, the impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell and are no longer depreciated. The Group adopted SFAS No. 144 on October 1, 2002. The adoption of SFAS No. 144 did not affect the Group’s combined financial statements.
Prior to the adoption of SFAS No.144, the Group accounted for long-lived assets in accordance with SFAS No. 121,Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
| (j) Income Taxes |
Ecolochem, Inc. and Ecolochem International, Inc. are treated as S corporations for federal and certain state income tax purposes. Moson Holdings, L.L.C. and Ecolochem S.A.R.L. are partnerships for federal and state income tax purposes. Therefore, earnings of the Group are taxable to the individual stockholders rather than to the entities. Certain states and foreign jurisdictions do not recognize S corporation status; thus, income taxes are reported and paid by Ecolochem, Inc. and Ecolochem International, Inc. to those states and foreign jurisdictions. Total foreign and state income tax expense was approximately $1,810,000, $1,787,000 and $2,182,000 for the years ended September 30, 2003, 2002 and 2001, respectively.
F-8
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
Ecolochem, Inc. and Ecolochem International, Inc. file income tax returns in foreign jurisdictions as may be applicable. Deferred income taxes have been recorded for temporary differences arising in those foreign jurisdictions and relate primarily to differences in depreciation of property, plant and equipment.
| (k) Foreign Currency Transactions |
The functional currency of the Group’s foreign operations is the local currency for the applicable foreign entity. These foreign currencies include the British pound, Euro, Philippines’ peso, Brazil’s real and the Australian dollar. Foreign operations were translated into U.S. dollars. Results of operations and cash flows are translated at average exchange rates during the period, and assets and liabilities are translated at the end of period exchange rates. The resulting translation adjustment is excluded from operations and included as a separate component of accumulated other comprehensive income (loss) in stockholders’ equity.
| (l) Derivative Instruments and Hedging Activities |
On October 1, 2000, the Group adopted SFAS No. 133,Accounting for Derivative Instruments and Certain Hedging Activities, and SFAS No. 138,Accounting for Certain Derivative Instruments and Certain Hedging Activity, an Amendment of SFAS No. 133. SFAS No. 133 and SFAS No. 138 require that all derivative instruments be recorded on the balance sheet at their respective fair values.
On the date the derivative contract is entered into, the Group designates the derivative as a hedge of the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge). The Group formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as cash flow hedges to specific assets and liabilities on the balance sheet. The Group also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items.
Changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a cash flow hedge are recorded in accumulated other comprehensive income (loss) until earnings are affected by the variability in cash flows of the designated hedged item.
| (m) Financial Instruments |
The fair values of cash, trade accounts receivable, other receivables, accounts payable, notes payable, accrued expenses and state and foreign income taxes payable approximate their carrying values due to the short maturity of these instruments. The estimated fair values of derivative instruments are calculated based on market rates. The values represent the estimated amounts the Group would receive or pay to terminate agreements, taking into consideration current market rates and the current creditworthiness of the counterparties. The fair value of long-term debt, including the current portion, approximates the carrying value and is estimated based on rates currently offered to the Group for debt of the same remaining maturities.
| (n) 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 disclosures of contingent assets and liabilities at the date of the combined financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
F-9
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
(2) Notes Payable
The Group has a credit facility with maximum borrowings of $20,000,000, expiring October 2004, and had borrowings of $4,800,000 and $7,200,000 at September 30, 2003 and 2002, respectively. The credit facility is unsecured and accrues interest at rates based on LIBOR.
The Group has a line of credit with maximum borrowings of $3,000,000 expiring in March 2004. At September 30, 2003, there were no borrowings on the line of credit. At September 30, 2002 there were borrowings of $800,000. This line was unsecured and accrued interest at rates based on LIBOR.
The Group has an unsecured line of credit with a commercial bank, which allows for borrowings up to $3,000,000 at interest rates based on LIBOR. There were no amounts outstanding on the line of credit at September 30, 2003 or 2002.
The Group obtained an unsecured term loan with a commercial bank during 2002, which allows for borrowings up to $4,000,000 at interest rates based on LIBOR. There were no amounts outstanding on the term loan at September 30, 2003 or 2002.
(3) Long-Term Debt
Long-term debt at September 30, 2003 and 2002 consists of the following:
| 2003 | 2002 | ||||||||
| Industrial revenue bonds maturing on October 1, 2012 with a floating monthly interest rate, secured by certain property and equipment | $ | 3,400,000 | $ | 3,700,000 | |||||
| Industrial revenue bonds maturing March 1, 2014 with a floating monthly interest rate, secured by certain property and equipment | 5,300,000 | 5,600,000 | |||||||
| Note payable to a financial institution, payable in monthly installments of $26,250 plus interest at LIBOR plus 1.25%, with a balloon payment of $1,575,000, due May 1, 2004, secured by a building | 1,798,967 | 1,912,707 | |||||||
| 5.75% term loan, payable in monthly installments of $166,667 plus interest through December 2003, unsecured | 300,000 | 2,300,000 | |||||||
| 10,798,967 | 13,512,707 | ||||||||
| Less current installments of long-term debt | 2,098,967 | 2,296,607 | |||||||
| Long-term debt, excluding current installments | $ | 8,700,000 | $ | 11,216,100 | |||||
The Group is required to meet certain financial covenants, including minimum current ratio, minimum net worth, minimum debt service coverage, minimum funded debt, maximum total liabilities to tangible net worth ratio and minimum fixed charge ratio.
The aggregate annual maturities of long-term debt subsequent to September 30, 2003 are as follows:
| Fiscal years | ||||
| 2004 | $ | 2,098,967 | ||
| 2013 and thereafter | 8,700,000 | |||
| $ | 10,798,967 | |||
The industrial revenue bonds, maturing October 1, 2012, are secured by a building and equipment in St. Charles County, Missouri. The industrial revenue bonds, maturing March 1, 2014, are secured by a building and equipment in Chambers County, Texas.
F-10
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
(4) Derivative Instruments and Hedging Activities
At September 30, 2003 and 2002, the Group had two interest rate swap agreements. The first agreement had a notional amount of approximately $3,300,000 at September 30, 2003, wherein the Group pays a 4.5% fixed rate of interest and receives LIBOR plus 1.58%. This contract is scheduled to mature in March 2012. The second agreement had a notional amount of approximately $1,700,000 at September 30, 2003, wherein the Group pays a 4.6% fixed rate of interest and receives LIBOR plus 1.25%. This contract is scheduled to mature in May 2004.
The Group has interest rate related derivative instruments to manage its exposure on its debt instruments. The Group does not enter into derivative instruments for any purpose other than cash flow hedging purposes. That is, the Group does not speculate using derivative instruments.
By using derivative financial instruments to hedge exposures to changes in interest rates, the Group exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Group, which creates credit risk for the Group. When the fair value of a derivative contract is negative, the Group owes the counterparty and, therefore, it does not possess credit risk. The Group minimizes the credit risk in derivative instruments by entering into transactions with high-quality counterparties.
The Group uses variable-rate debt to finance its operations. The debt obligations expose the Group to variability in interest payments due to changes in interest rates. Management believes it is prudent to limit the variability of a portion of its interest payments. To meet this objective, management enters into interest rate swap agreements to manage fluctuations in cash flows resulting from interest rate risk. These swaps change the variable-rate cash flow exposure on the debt obligations to fixed cash flows. Under the terms of the interest rate swaps, the Group receives variable interest rate payments and makes fixed interest rate payments, thereby creating the equivalent of fixed-rate debt.
Changes in the fair value of interest rate swaps designated as hedging instruments that effectively offset the variability of cash flows associated with variable-rate, long-term debt obligations are reported in accumulated other comprehensive income (loss). These amounts subsequently are reclassified into interest expense as a yield adjustment of the hedged debt obligation in the same period in which the related interest affects earnings. For the year ended September 30, 2003, the Group reclassified approximately $47,000 into interest expense for the period. For the years ended September 30, 2002 and 2001, the Group reclassified approximately $56,000 into interest expense for each year.
The fair values of the interest rate agreements were $361,707 and $399,303 at September 30, 2003 and 2002, respectively. As a result, the Group recorded both a liability, which is included in accrued expenses, and an unrecognized loss in accumulated other comprehensive income (loss) at September 30, 2003 and 2002.
If interest rates remain unchanged during fiscal 2004, the Group would expect to reclassify a charge of approximately $64,000 into earnings in the next 12 months associated with the interest payments on LIBOR-based debt.
(5) Profit Sharing and 401(k) Retirement Plan
Ecolochem, Inc. maintains a 401(k) profit sharing plan (the Plan) covering all full-time employees who have completed 12 months and 1,000 hours of service. Participants become fully vested in the Plan upon: (1) completion of six years of continuous employment; (2) permanent disability; (3) death; or (4) the termination of the Plan or permanent discontinuance of contributions by Ecolochem, Inc.
F-11
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
The Plan covers all eligible employees of Ecolochem, Inc. Each employee is eligible to make deferral contributions in the Plan after 90 days of service. Employees are eligible to participate in the matching and profit sharing portions of the Plan after completion of one year of service, as defined in the Plan. For each plan year, Ecolochem, Inc. may contribute to the Plan a matching contribution determined by the Board of Directors at its discretion. In addition, the Sponsor may choose to make separate discretionary contributions to the profit sharing component of the Plan. Contributions to the Plan amounted to $1,080,000, $1,200,000 and $1,100,000, respectively, for the years ended September 30, 2003, 2002 and 2001, and are included in selling, general and administrative expenses.
The United Kingdom branch of Ecolochem International, Inc. maintains a defined contribution post-retirement plan covering all employees after a three-month period of full time employment. The branch’s contributory portion of the plan is available to any employee who has been employed for one year and has made a minimum employee contribution of 2% to the plan. There is no vesting requirement. The branch contributions were $77,500, $75,220 and $32,271 for the years ended September 30, 2003, 2002 and 2001, respectively.
(6) Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss) at September 30, 2003 and 2002 and are as follows:
| 2003 | 2002 | |||||||
| Loss on change in fair value of interest rate swaps | $ | (361,707 | ) | $ | (399,303 | ) | ||
| Cumulative foreign currency translation adjustments | 1,150,329 | (218,050 | ) | |||||
| $ | 788,622 | $ | (617,353 | ) | ||||
(7) Litigation Settlement
In January 2003, Ecolochem, Inc. settled a patent infringement suit. The courts upheld Ecolochem, Inc.’s exclusive patent rights and Ecolochem, Inc. recovered damages. The damages recovered are included in other income on the accompanying combined statements of earnings for the year ended September 30, 2003.
(8) Income Taxes (Unaudited)
The unaudited pro forma provision for income taxes presented on the combined statements of earnings for the years ended September 30, 2003, 2002 and 2001 represents the estimated taxes that would have been recorded had the Group been a C corporation for the years ended September 30, 2003, 2002 and 2001. The components of other comprehensive income have not been tax effected on a pro forma basis.
The pro forma income tax expense (benefit) from earnings before income taxes for the years ended September 30, 2003, 2002 and 2001 consisted of the following:
| September 30, 2003 | ||||||||||||
| Current | Deferred | Total | ||||||||||
| U.S. Federal | $ | 10,950,000 | $ | 88,000 | $ | 11,038,000 | ||||||
| State | 1,983,000 | 31,000 | 2,014,000 | |||||||||
| Foreign | 1,469,000 | (246,000 | ) | 1,223,000 | ||||||||
| $ | 14,402,000 | $ | (127,000 | ) | $ | 14,275,000 | ||||||
F-12
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
| September 30, 2002 | ||||||||||||
| Current | Deferred | Total | ||||||||||
| U.S. Federal | $ | 5,679,000 | $ | 1,742,000 | $ | 7,421,000 | ||||||
| State | 1,055,000 | 182,000 | 1,237,000 | |||||||||
| Foreign | 1,146,000 | 302,000 | 1,448,000 | |||||||||
| $ | 7,880,000 | $ | 2,226,000 | $ | 10,106,000 | |||||||
| September 30, 2001 | ||||||||||||
| Current | Deferred | Total | ||||||||||
| U.S. Federal | $ | 5,966,000 | $ | 1,427,000 | $ | 7,393,000 | ||||||
| State | 1,122,000 | 232,000 | 1,354,000 | |||||||||
| Foreign | 1,890,000 | (44,000 | ) | 1,846,000 | ||||||||
| $ | 8,978,000 | $ | 1,615,000 | $ | 10,593,000 | |||||||
The pro forma income tax expense (benefit) differed from the amounts computed by applying the U.S. Federal income tax rates of 35% to earnings before income taxes as a result of the following:
| 2003 | 2002 | 2001 | ||||||||||||
| Computed “expected” tax expense | $ | 13,537,000 | $ | 8,950,000 | $ | 9,361,000 | ||||||||
| Increase (decrease) in income taxes resulting from: | ||||||||||||||
| State income tax expense, net of federal tax | 1,309,000 | 804,000 | 880,000 | |||||||||||
| Foreign tax benefit | (429,000 | ) | (168,000 | ) | (92,000 | ) | ||||||||
| Nondeductible expenses (nontaxable income) | (49,000 | ) | 536,000 | 374,000 | ||||||||||
| Change in valuation allowance | (76,000 | ) | 40,000 | 70,000 | ||||||||||
| Other | (17,000 | ) | (56,000 | ) | — | |||||||||
| Total income tax expense | $ | 14,275,000 | $ | 10,106,000 | $ | 10,593,000 | ||||||||
F-13