ITEM 1. BUSINESS
ITEM 1(A) GENERAL DEVELOPMENT OF BUSINESS
Except where the context otherwise requires, the terms "Company" and "Ecolab," as used herein, include Ecolab Inc. and its subsidiaries. Ecolab Inc. was incorporated as a Delaware corporation in 1924. The Company's fiscal year is the calendar year ending December 31.
In December, 1994 the Company acquired by merger the shares of Kay Chemical Corporation and certain affiliated companies ("Kay"). The merger has been accounted for as a pooling of interests and, accordingly, periods prior to the merger included in the financial statements and financial statement schedule incorporated by reference into this report have been restated to reflect all accounts and operations of Kay. Kay is a manufacturer and supplier of cleaning and sanitizing products for the quick service restaurant ("fast-food") industry. A description of the Kay business is located at page 5 under the heading "Business Divisions," under Item 1(c). Kay's operations are conducted through the wholly-owned subsidiaries acquired in the merger.
The Company and Henkel KGaA of Dusseldorf, Germany, each have a 50% economic interest in a joint venture which operates institutional and industrial cleaning and sanitizing businesses in Europe, and which is referred to hereafter as the "Henkel-Ecolab Joint Venture" or "Joint Venture." Henkel KGaA, by virtue of a tie-breaking vote on certain operational matters, may control the day-to-day operations of the Joint Venture. Strategic decisions concerning the Joint Venture require the agreement of Henkel and the Company. The Company accounts for its interest in the Henkel-Ecolab Joint Venture under the equity method of accounting and therefore does not consolidate the Henkel-Ecolab Joint Venture revenues and expenses. Except where the Henkel-Ecolab Joint Venture is specifically referred to, the description of business in Part I does not include the business of the Joint Venture.
- 2 -
ITEM 1(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company's operations are all conducted in one industry segment.
ITEM 1(C) NARRATIVE DESCRIPTION OF BUSINESS
The Company is engaged in the development and marketing of premium products and services for the hospitality, institutional and industrial markets. The Company provides cleaning, sanitizing, pest elimination and maintenance products, systems and services primarily to hotels and restaurants, foodservice and healthcare facilities, commercial and institutional laundries and to dairy plants, farms and food and beverage processors.
A strong commitment to service is the distinguishing characteristic of the Company. Products and services are primarily marketed in domestic and international markets by Company-trained sales and service personnel who also advise and assist customers in the proper and efficient use of the products and systems. Distributors are increasingly utilized in several markets.
The Company manufactures most of its products and related equipment in Company-owned manufacturing facilities. Some are also produced for the Company by third party contract manufacturers. Other products and equipment, particularly those used in the Company's pest elimination business, are purchased from third party suppliers. Additional information on the Company's manufacturing facilities is located under Item 2
ITEM 2. PROPERTIES
The Company's manufacturing facilities produce chemical products or equipment for all the Company's businesses except the Pest Elimination Division which purchases products and substantially all its equipment from outside suppliers. The Company's chemical production process consists primarily of blending and packaging powders and liquids and casting solids.
- 14 -
The Company's United States plant facilities devoted primarily to the production of chemical products are located in Joliet, Illinois; Woodbridge, New Jersey; McDonough, Georgia; Garland, Texas and San Jose, California. Smaller plant facilities in Franklin Park, Illinois, and Grand Forks, North Dakota produce certain chemical products primarily for the Company's Textile Care and Janitorial divisions. These facilities are all Company-owned. The Company's Kay business also owns and operates manufacturing facilites in Greensboro, North Carolina and Dallas, Texas.
Additional chemical manufacturing facilities are located in Dorado, Puerto Rico; Santa Cruz, Brazil; Hamilton, New Zealand; Noda and Shika, Japan; Singapore; Sydney, Melbourne and Brisbane, Australia; Seoul, Korea; Mexico City, Mexico, and Toronto, Canada. The buildings and land for the facilities located in Canada, Australia, Puerto Rico and Mexico are leased. A chemical plant, which is co-owned with a Chinese joint venture partner, is located near Shanghai, People's Republic of China, and a leased chemical plant is located in Chile. Smaller chemical plant facilities are located in certain other countries. Additional chemical plants are expected to be added in the Great Lakes region of the United States and in Indonesia.
The Company's plant in South Beloit, Illinois produces chemical product dispensers and injectors and other mechanical equipment. A leased plant, which manufactures dishwasher racks and related sundries, is located in Elk Grove Village, Illinois. Dishwasher racks are also produced at the Shika, Japan plant. A leased facility in Memphis, Tennessee serves as a dishwashing machine refurbishing center.
The Company believes its manufacturing facilities are in good condition and are adequate to meet existing production needs.
Most of the Company's manufacturing plants also serve as distribution centers. In addition, in the United States the Company operates 7 distribution centers, all of which are leased, and utilizes 28 primary public warehouses. Internationally, the Company operates various additional leased or public warehouses to facilitate distribution and, in the United States, operates approximately 119 sales offices, including three Company-owned facilities. Additional sales offices are located internationally.
The Company's corporate headquarters is located in downtown St. Paul, Minnesota. The 19-story building was constructed to the Company's specifications. The building is leased by the Company through 1998 and thereafter is subject to multiple renewals at the Company's option. The Company also owns a building in downtown St. Paul adjacent to its headquarters which is used for general office
- 15 -
purposes, as well as a computer center located in a City of St. Paul industrial development zone several blocks from the Company's headquarters. A Company-owned research and development facility and a chemical pilot plant are located in suburbs of St. Paul.
The Company is also the managing partner in a partnership which owns two properties used in the Company's former ChemLawn operations. The properties are currently leased to a subsidiary of ServiceMaster Limited Partnership and used by that entity as a branch office for its lawn care business. The properties are located in suburbs of Columbus and Dayton, Ohio.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Proceedings arising under laws relating to protection of the environment are discussed at Item 1(c) above, under the heading "Environmental Considerations."
As previously reported in last year's Form 10-K, a legal action had been commenced by F.F. Corp. of New York ("Plaintiff") in 1991 in U.S. District Court, Western District of New York in which Plaintiff alleged that a March 1989 fire, which destroyed its rendering plant, was caused by a commercial clothes dryer which was manufactured by the Company and purchased by Plaintiff in 1974. Plaintiff sought in excess of $17,000,000 in damages plus interest and costs. On December 7, 1994, this matter was settled, with the Company's contribution, including its legal fees, totaling $1,000,000. The Company's insurance companies and another defendant made additional contributions to the settlement.
The Company and certain of its subsidiaries are defendants in various other lawsuits and claims arising out of the normal course of business. In the opinion of management, the ultimate resolution of this litigation will not have a material effect on the Company or its operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the solicitation of proxies, or otherwise, during the fourth quarter.
- 16 -
PART II
ITEM 5.
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ITEM 5(A) MARKET INFORMATION
The Company's Common Stock is listed on the New York Stock Exchange and the Pacific Stock Exchange under the symbol ECL. The Common Stock is also traded on the Boston, Cincinnati, Midwest and Philadelphia Exchanges. The high and low sales price of the Company's Common Stock on the consolidated transaction reporting system during 1994 and 1993 was as follows:
The closing stock price on March 9, 1995 was $23-1/8.
ITEM 5(B) HOLDERS
On March 9, 1995 the Company had 4,854 holders of Common Stock of record.
ITEM 5(C) DIVIDENDS
Quarterly cash dividends customarily are paid on the 15th of January, April, July and October. Dividends of $0.095 per share were declared in February, May and August, 1993, $0.011 per share in December, 1993 and February, May and August, 1994. A cash dividend of $0.125 per share was declared in December 1994.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The comparative data for the years ended December 31, 1994, 1993, 1992, 1991 and 1990 inclusive, which are set forth under the heading entitled "Summary Operating and Financial Data" and which are located on pages 46 and 47 of the Annual Report, are incorporated herein by reference.
- 17 -
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The material appearing under the heading entitled "Financial Discussion," located on pages 24 through 30 of the Annual Report, is incorporated herein by reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and material which are an integral part of the financial statements listed under Item 14 I(1) below and located on pages 31 through 45 of the Annual Report, are filed as a part of this Report and are incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The biographical material located on pages 6 through 10 and the paragraph relating to understandings concerning the election of directors between Henkel KGaA and the Company located on page 5 of the Proxy Statement appearing under the heading entitled "Election of Directors," is incorporated herein by reference. Information regarding executive officers is presented under the heading "Executive Officers of the Company" in Part I of this Report on pages 12 through 14.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The material appearing under the heading entitled "Executive Compensation," located on pages 11 through 20 of the Proxy Statement, is incorporated herein by reference. However, pursuant to Securities and Exchange Commission Regulation S-K, Item 402(a)(8), the material appearing under the headings entitled "Report of the Compensation Committee on Executive Compensation" and "Comparison of Five Year Cumulative Total Return," found, respectively, on pages 11 through 13 and on page 17 of the Proxy Statement is not incorporated herein.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The material appearing under the headings entitled "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" located on pages 2 and 3 of the Proxy Statement is incorporated herein by reference. The holdings of Henkel KGaA and HC Investments, Inc. are subject to certain limitations with respect to the Company's voting securities as more fully described in the Company's Proxy Statement on page 20, beginning with the
- 18 -
fourth paragraph under the heading "Certain Transactions," which is incorporated herein by reference.
A total of 2,254,129 shares of Common Stock held by the Company's directors and executive officers, some of whom may be affiliates of the Company, have been excluded from the computation of market value of the Company's Common Stock on the cover page of this Report. This total represents that portion of the shares reported as beneficially owned by officers and directors of the Company in the table entitled "Security Ownership of Management" located on page 3 of the Proxy Statement, which are issued and outstanding.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The material appearing under the headings entitled "Certain Transactions" and "Company Transactions" on pages 20 and 21 of the Proxy Statement and the biographical material located on pages 7 and 9 of the Proxy Statement pertaining to Messrs. Hugo Uyterhoeven, Albrecht Woeste and Roland Schulz is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
I(1). The following financial statements of the Company, included in the Annual Report, are incorporated in Item 8 hereof.
(i) Consolidated Statement of Income for the years ended December 31, 1994, 1993 and 1992, Annual Report page 31.
(ii) Consolidated Balance Sheet at December 31, 1994, 1993 and 1992, Annual Report page 32.
(iii) Consolidated Statement of Cash Flows for the years ended December 31, 1994, 1993 and 1992, Annual Report page 33.
(iv) Consolidated Statement of Shareholders' Equity for the years ended December 31, 1994, 1993 and 1992, Annual Report page 34.
(v) Notes to Consolidated Financial Statements, Annual Report pages 35 through 44.
(vi) Report of Independent Accountants, Annual Report page 45.
- 19 -
I(2). The following financial statement schedule to the Company's financial statements listed in Item 14 I(1) for the years ended December 31, 1994, 1993 and 1992 located on page 30 hereof, and the Report of Independent Accountants on Financial Statement Schedule at page 29 hereof are filed as part of this Report.
(i) Schedule VIII -- Valuation and Qualifying Accounts for the years ended December 31, 1994, 1993 and 1992.
All other schedules, for which provision is made in the applicable regulations of the Securities and Exchange Commission, are not required under the related instructions or are inapplicable and therefore have been omitted. All significant majority-owned subsidiaries are included in the filed consolidated financial statements.
I(3). The following financial statements of the Henkel-Ecolab Joint Venture located on pages 31 to 50 hereof, are filed as part of this Report.
(i) Report of Independent Accountants.
(ii) Combined Statements of Income for the years ended November 30, 1994, 1993 and 1992.
(iii) Combined Balance Sheets at November 30, 1994, 1993 and 1992.
(iv) Combined Statements of Cash Flows for the years ended November 30, 1994, 1993 and 1992.
(v) Combined Statements of Equity for the years ended November 30, 1994, 1993 and 1992.
(vi) Notes to the Combined Financial Statements.
I(4). The following financial statement schedules to the Henkel-Ecolab Joint Venture financial statements listed in Item 14 I(3) for the years ended November 30, 1994, 1993 and 1992 located on pages 51 to 53 hereof, and the Report of Independent Accountants on pages 31 and 32 hereof are filed as part of this Report.
(i) Schedule I -- Valuation and Qualifying Accounts and Reserves for the years ended November 30, 1994, 1993 and 1992.
- 20 -
(ii) Schedule II -- Property, Plant and Equipment for the yers ended November 30, 1994, 1993 and 1992.
(iii) Schedule III -- Accumulated Depreciation and Amortization of Property, Plant and Equipment for the years ended November 30, 1994, 1993 and 1992.
All other schedules, for which provision is made in the applicable regulations of the Securities and Exchange Commission, are not required under the related instructions or are inapplicable and therefore have been omitted. All significant entities of the Henkel-Ecolab Joint Venture are included in the filed combined financial statements.
II. The following documents are filed as exhibits to this Report. The Company will, upon request and payment of a fee not exceeding the rate at which copies are available from the Securities and Exchange Commission, furnish copies of any of the following exhibits to stockholders.
(3)A. Restated Certificate of Incorporation - Incorporated by reference to Exhibit (3)A of the Company's Form 10-K Annual Report for the year ended December 31, 1992.
B. By-Laws, as amended through February 25, 1995.
(4)A. Common Stock - see Exhibits (3)A and (3)B.
B. Form of Common Stock Certificate - Incorporated by reference to Exhibit (4)A(ii) of the Registrant's Form 10-K Annual Report for the year ended December 31, 1992.
C. (i) Amended and Restated Rights Agreement dated as of February 14, 1986, as amended and restated as of July 15, 1988 - Incorporated by reference to Exhibit (4) of the Company's Form 8-K dated July 15, 1988.
(ii) First Amendment, dated as of September 10, 1990 to the Amended and Restated Rights Agreement - Incorporated by reference to Exhibit (4) of the Company's Current Report on Form 8-K dated September 11, 1990.
- 21 -
D. Note Agreement dated as of October 1, 1991 relating to $100,000,000 9.68% Senior Notes Due October 1, 2001 between the Company and the insurance companies named therein - Incorporated by reference to Exhibit (4)F of the Company's Form 10-K Annual Report for the year ended December 31, 1991.
E. Multicurrency Credit Agreement dated as of September 29, 1993, as Amended and Restated as of January 1, 1995, among the Company, the financial institutions party thereto, Citibank, N.A., as Agent, Citibank International Plc, as Euro-Agent and Morgan Guaranty Trust Company of New York as Co-Agent.
F. Copies of other constituent instruments defining the rights of holders of long-term debt of the Company and its subsidiaries are not filed herewith, pursuant to Section (b)(4)(iii) of Item 601 of Regulation S-K, because the aggregate amount of securities authorized under each of such instruments is less than 10% of the total assets of the Company and its subsidiaries on a consolidated basis. The Company hereby agrees that it will, upon request by the Securities and Exchange Commission, furnish to the Commission a copy of each such instrument.
(9) Amended and Restated Stockholder's Agreement - See Exhibit (10)S(iv) hereof.
(10)A. Ecolab Inc. 1977 Stock Incentive Plan, as amended through May 10, 1991 - Incorporated by reference to Exhibit (10)A of the Company's Form 10-K Annual Report for the year ended December 31, 1990.
B. Ecolab Inc. 1993 Stock Incentive Plan - Incorporated by reference to Exhibit (10)B of the Company's Form 10-K Annual Report for the year ended December 31, 1992.
C. 1988 Non-Employee Director Stock Option Plan as amended through February 23, 1991 - Incorporated by reference to Exhibit (10)D of the Company's Form 10-K Annual Report for the year ended December 31, 1990.
- 22 -
D. 1995 Non-Employee Director Stock Option Plan. This Plan will become effective only upon approval by the Stockholders of the Company at the Company's Annual Meeting scheduled to be held May 12, 1995.
E. Non-Employee Director Stock-For-Retainer Plan - Incorporated by reference to Exhibit (10)E of the Company's Form 10-K Annual Report for the year ended December 31, 1991.
F. Form of Director Indemnification Agreement dated August 11, 1989. Substantially identical agreements are in effect as to each director of the Company - Incorporated by reference to Exhibit (19)A of the Company's Form 10-Q for the quarter ended September 30, 1989.
G. (i) Deferred Compensation Plan for Non-Employee Directors (1984) - Incorporated by reference to Exhibit (10)F(i) of the Company's Form 10-K Annual Report for the year ended December 31, 1990.
(ii) First Declaration of Amendment to Deferred Compensation Plan for Non-Employee Directors (1984) effective December 13, 1991 - Incorporated by reference to Exhibit (10)G(ii) of the Company's Form 10-K Annual Report for the year ended December 31, 1991.
H. (i) Deferred Compensation Plan for Non-Employee Directors - 1986 - Incorporated by reference to Exhibit (10)F of the Company's Form 10-K Annual Report for the fiscal year ended June 30, 1987.
(ii) First Declaration of Amendment to Deferred Compensation Plan for Non-Employee Directors - 1986, effective December 13, 1991 - Incorporated by reference to Exhibit (10)H(ii) of the Company's Form 10-K Annual Report for the year ended December 31, 1991.
- 23 -
I. Ecolab Non-Employee Directors' Retirement Plan - Incorporated by reference to Exhibit (10)I of the Company's Form 10-K Annual Report for the year ended December 31, 1991.
J. Ecolab Executive Death Benefits Plan, as amended and restated effective March 1, 1994. See also Exhibit (10)P hereof.
K. Ecolab Executive Long-Term Disability Plan, as amended and restated effective January 1, 1994. See also Exhibit (10)P hereof.
L. Ecolab Executive Financial Counseling Plan - Incorporated by reference to Exhibit (10)K of the Company's Form 10-K Annual Report for the year ended December 31, 1992.
M. (i) Ecolab Supplemental Executive Retirement Plan, as amended and restated effective July 1, 1994. See also Exhibit (10)P hereof.
(ii) First Declaration of Amendment to Ecolab Supplemental Executive Retirement Plan effective as of July 1, 1994.
N. Ecolab Mirror Savings Plan (formerly: Ecolab Executive Non- Qualified Deferred Compensation Plan), as amended and restated effective September 1, 1994. See also Exhibit (10)P hereof.
O. (i) Ecolab Mirror Pension Plan effective July 1, 1994. See also Exhibit 10(P) hereof.
(ii) First Declaration of Amendment to Ecolab Mirror Pension Plan effective as of July 1, 1994.
P. The Ecolab Inc. Administrative Document for Non-Qualified Benefit Plans (Exhibit 10(P)) is incorporated by reference in, and is a part of, each of the referenced Plan documents.
Q. Ecolab Management Performance Incentive Plan - Incorporated by reference to Exhibit (10)N of the Company's Form 10-K Annual Report for the year ended December 31, 1993.
- 24 -
R. (i) Severance Agreement dated March 19, 1990, between Pierson M. Grieve and the Company - Incorporated by reference to Exhibit (10)M of the Company's Form 10-K Annual Report for the year ended December 31, 1989.
(ii) Amendment, dated as of February 26, 1994, to Severance Agreement dated March 19, 1994, between Pierson M. Grieve and the Company - Incorporated by reference to Exhibit (10) of the Company's Form 10-Q for the quarter ended September 30, 1994.
S. (i) Amended and Restated Umbrella Agreement between Henkel KGaA and Ecolab Inc. dated June 26, 1991 - Incorporated by reference to Exhibit 13 of HC Investments, Inc.'s and Henkel KGaA's Amendment No. 4 to Schedule 13D dated July 16, 1991.
(ii) Amended and Restated Joint Venture Agreement between Henkel KGaA and Ecolab Inc. dated June 26, 1991 - Incorporated by reference to Exhibit 14 of HC Investments, Inc.'s and Henkel KGaA's Amendment No. 4 to Schedule 13D dated July 16, 1991.
(iii) Amended and Restated ROW Purchase Agreement between Henkel KGaA and Ecolab Inc. dated June 26, 1991 - Incorporated by reference to Exhibit (7) of the Company's Current Report on Form 8-K dated July 11, 1991.
(iv) Amended and Restated Stockholder's Agreement between Henkel KGaA and Ecolab Inc. dated June 26, 1991 - Incorporated by reference to Exhibit 15 of HC Investments, Inc.'s and Henkel KGaA's Amendment No. 4 to Schedule 13D dated July 16, 1991.
T. Agreement and Plan of Merger among Ecolab Inc., EKH, Inc. I, EKH, Inc. II, EKH, Inc. III, Kay Chemical Company, Kay Chemical International, Inc. and Kay Europe, Inc. dated November 2, 1994 - Incorporated by reference
- 25 -
to Exhibit (2) of the Company's Current Report on Form 8-K dated December 7, 1994.
(11) Computation of Primary and Fully Diluted Earnings Per Share.
(13) Those portions of the Company's Annual Report to Stockholders for the year ended December 31, 1994 which are incorporated by reference into Parts I, II and IV hereof.
(21) List of Subsidiaries as of March 9, 1995.
(23)A. Consent of Coopers & Lybrand L.L.P. to Incorporation by Reference at page 29 hereof is filed as a part hereof.
B. Consent of KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft.
(24) Powers of Attorney.
(27) The Financial Data Schedule for the year ended December 31, 1994, was previously filed with the financial statements for that year which were included in the Company's Current Report on Form 8-K dated February 27, 1995, and is omitted from this filing pursuant to Item 601(c)(11) of Regulation S-K.
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
Included in the preceding list of exhibits are the following management contracts or compensatory plans or arrangements:
Exhibit No. Description ----------- ----------- (10)A. Ecolab Inc. 1977 Stock Incentive Plan.
(10)B. Ecolab Inc. 1993 Stock Incentive Plan.
(10)C. 1988 Non-Employee Director Stock Option Plan.
(10)D. 1995 Non-Employee Director Stock Option Plan.
(10)E. Non-Employee Director Stock-For-Retainer Plan.
(10)G. Deferred Compensation Plan for Non-Employee Directors (1984).
- 26 -
Exhibit No. Description ----------- -----------
(10)H. Deferred Compensation Plan for Non-Employee Directors (1986).
(10)I. Ecolab Non-Employee Directors' Retirement Plan.
(10)J. Ecolab Executive Death Benefits Plan.
(10)K. Ecolab Executive Long-Term Disability Plan.
(10)L. Ecolab Executive Financial Counseling Plan.
(10)M. Ecolab Supplemental Executive Retirement Plan.
(10)N. Ecolab Mirror Savings Plan.
(10)O. Ecolab Mirror Pension Plan.
(10)P. The Ecolab Inc. Administrative Document for Non-Qualified Benefit Plans.
(10)Q. Ecolab Management Performance Incentive Plan.
(10)R. Severance Agreement between Pierson M. Grieve and the Company.
III. Reports on Form 8-K:
The Company filed two Current Reports on Form 8-K, dated November 2, 1994 and December 7, 1994, during the quarter ended December 31, 1994, reporting, respectively: (i) its agreement to acquire by merger Kay Chemical Company, Kay Chemical International, Inc. and Kay Europe, Inc. (the "Kay Companies"), privately held manufacturers and marketers of janitorial cleaning and sanitizing products, and to account for the transaction as a pooling of interests; and (ii) the closing of the merger with the Kay Companies and the issuance of approximately 4.5 million shares of the Company's Common Stock. Subsequent to the quarter the Company filed a Current Report on Form 8-K, dated February 27, 1995, to file: (i) consolidated financial statements for the Company for the years ended December 31, 1994, 1993 and 1992; and (ii) to file a condensed consolidated statement of income reflecting post-merger unaudited consolidated operations of the Company and the Kay Companies for the one-month period ended January 31, 1995.
- 27 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Ecolab Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 14th day of March, 1995.
ECOLAB INC. (Registrant)
By /s/ Allan L. Schuman ------------------------------------ Allan L. Schuman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Ecolab Inc. and in the capacities indicated, on the 14th day of March, 1995.
/s/ Allan L. Schuman President and Chief Executive ---------------------------- Officer (Principal Executive Allan L. Schuman Officer and Director)
/s/ Michael E. Shannon Vice Chairman, Chief Financial ---------------------------- and Administrative Officer Michael E. Shannon (Principal Financial Officer and Director)
/s/ Arthur E. Henningsen, Jr. Vice President and Controller ----------------------------- (Principal Accounting Officer) Arthur E. Henningsen, Jr.
/s/ Kenneth A. Iverson Directors ---------------------------- Kenneth A. Iverson as attorney-in-fact for Ruth S. Block, Russell G. Cleary, John H. Dasburg, Pierson M. Grieve, James J. Howard, Jerry W. Levin, Reuben F. Richards, Richard L. Schall, Roland Schulz, Philip L. Smith, Hugo Uyterhoeven, and Albrecht Woeste
- 28 -
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Shareholders and Board of Directors of Ecolab Inc.
Our report on the consolidated financial statements of Ecolab Inc. has been incorporated by reference in this Form 10-K from the Annual Report to Shareholders of Ecolab Inc. for the year ended December 31, 1994, on page 45 therein. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index on page 20 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
/s/ Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P.
Saint Paul, Minnesota February 27, 1995
CONSENT TO INCORPORATION BY REFERENCE
We consent to the incorporation by reference in the Registration Statements on Form S-8 of Ecolab Inc. (Registration Nos. 2-60010; 2-74944; 33-1664; 33- 41828; 2-90702; 33-18202; 33-55986; 33-56101; 33-26241; 33-34000; 33-56151; 33-39228; 33-56125; 33-55984; 33-60266; and 33-65364) and the Registration Statement on Form S-3 of Ecolab Inc. (Registration No. 33-57197) of our reports dated February 27, 1995 on our audits of the consolidated financial statements and the related financial statement schedule of Ecolab Inc. as of December 31, 1994, 1993 and 1992, and for the years ended December 31, 1994, 1993 and 1992, which reports are included or incorporated by reference in this Annual Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P.
Saint Paul, Minnesota March 14, 1995
- 29 -
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
ECOLAB INC. (In Thousands)
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors Henkel-Ecolab Joint Venture
We have audited the combined financial statements of Henkel-Ecolab Joint Venture as listed in the accompanying index. In connection with our audit of the combined financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These combined financial statements and financial statement schedules are the responsibility of the Joint Venture's management. Our responsibility is to express an opinion on these combined financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with German generally accepted auditing standards which in all material respects are similar to auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
- 2 -
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of the Henkel-Ecolab Joint Venture as of November 30, 1994, 1993 and 1992, and the results of its operations and its cash flows for the periods beginning December 1, 1993, 1992 and 1991, and ended November 30, 1994, 1993 and 1992, in conformity with accounting principles generally accepted in the United States. Also in our opinion, the related financial statement schedules, when considered in relation to the basic combined financial statements taken as whole, present fairly, in all material respects, the information set forth therein.
Dusseldorf, Germany, January 19, 1995
KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprufungsgesellschaft
/s/Dr. Kuhr /s/Haas
Dr. Kuhr Haas Wirtschaftsprufer Wirtschaftsprufer
HENKEL-ECOLAB JOINT VENTURE
INDEX TO COMBINED FINANCIAL STATEMENTS FOR THE YEARS ENDED NOVEMBER 30, 1994, NOVEMBER 30, 1993 AND NOVEMBER 30, 1992 _____________________________________________________________________________
Combined Statements of Income Combined Balance Sheets Combined Statements of Cash Flows Combined Statements of Equity Notes to the Combined Financial Statements Financial Statement Schedules Schedule I Valuation and Qualifying Accounts and Reserves Schedule II Property, Plant and Equipment Schedule III Accumulated Depreciation and Amortization of Property, Plant, and Equipment
HENKEL-ECOLAB JOINT VENTURE
COMBINED STATEMENTS OF INCOME
Henkel-Ecolab Joint Venture
Combined Balance Sheets
HENKEL-ECOLAB JOINT VENTURE
COMBINED STATEMENTS OF CASH FLOWS
HENKEL-ECOLAB JOINT VENTURE
COMBINED STATEMENTS OF EQUITY
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
On July 1, 1991, Henkel KGaA (Henkel) and Ecolab, Inc. (Ecolab) formed a joint venture of their respective European institutional and industrial hygiene businesses.
Under the terms of the Amended and Restated Joint Venture Agreement dated June 26, 1991 (Joint Venture Agreement), Henkel and Ecolab have joint control over the activities of the Joint Venture. The Joint Venture Agreement also provides that both partners will share an equal economic interest in the profits or losses of the Joint Venture.
The financial statements are presented on a combined basis as each Joint Venture entity is owned beneficially by identical shareholders or their wholly owned subsidiaries. All significant intercompany or affiliated company accounts and transactions have been eliminated in combination. The Joint Venture's fiscal year end has been designated as November 30.
The financial statements are presented on the basis of generally accepted accounting principles in the United States.
FOREIGN CURRENCY TRANSLATION
The accounts of all foreign subsidiaries and affiliates are generally measured using local currency as the functional currency. For those operations, assets and liabilities are translated into German Marks at period-end exchange rates. Income statement accounts are translated at the average rates of exchange prevailing during the period. Net exchange gains or losses resulting from such translation are excluded from net earnings and accumulated in a separate component of combined equity. Gains and losses from foreign currency transactions are included in the related income statement category.
The Joint Venture enters into foreign currency forward contracts and options to hedge specific foreign currency exposures. Gains and losses on these contracts are deferred and recognized as part of the specific transaction hedged or included in other expenses, principally interest expense, net. The cash flows from such contracts are classified in the same category as the transaction hedged in the Combined Statement of Cash Flows.
CASH EQUIVALENTS
Cash equivalents are highly liquid investments with a maturity of three months or less when purchased. Interest income for the period totalled TDM 3,877 in 1994, TDM 4,976 in 1993 and TDM 7,684 in 1992.
INVENTORIES
Inventories are stated at the lower of cost or market. The method of determining cost varies between the First-in First-out method, and the average cost method.
INVESTMENT IN AFFILIATED COMPANY
Investment in the common stock of one affiliated company is accounted for by the equity method. The excess of cost of this affiliate over the Company's share of its net assets at the acquisition date is being amortized on a straight-line basis over 10 years.
The investment in an affiliated company consists of 33 percent of the common stock of Comac SpA, Verona. The unamortized portion of the excess of cost over the Joint Venture's share of net assets of Comac amounts to TDM 5,444 at November 30, 1994, TDM 6,192 at November 30, 1993 and TDM 6,943 at November 30, 1992 The market value of the investment cannot be determined.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at original cost. Merchandise equipment consists primarily of various systems for dispensing cleaning and sanitizing products. Depreciation and amortization are charged to operations using the straight-line and declining balance methods over the following estimated useful lives:
Buildings and improvements 8 to 40 years Machinery and equipment 3 to 20 years Furniture, fixtures and equipment 3 to 16 years
Leasehold improvements are amortized over a period which is the lesser of the useful life of the asset or the remaining term of the associated lease. Betterments, renewals and extraordinary repairs that extend the life of the asset are capitalized; other repairs and maintenance are expensed. The cost and accumulated depreciation applicable to the assets retired are removed from the accounts and any gain or loss credited or charged to income.
INTANGIBLE ASSETS
Intangible assets primarily consist of amounts by which cost of acquisitions exceeded the values assigned to net tangible assets. These assets are amortized over their estimated lives, periods from 3 to 10 years. Total amortization of all intangible assets amounted to TDM 6,407, TDM 4,283 in 1993 and TDM 2,467 in 1992.
HENKEL-ECOLAB JOINT VENTURE
2. BALANCE SHEET INFORMATION
3. RELATED PARTY TRANSACTIONS
The Joint Venture has entered into a variety of contractual arrangements, including those discussed in the following paragraphs for the supply of products, the performance of general and administrative services and the transfer of technology.
Certain Joint Venture entities purchase institutional and industrial hygiene products (primarily finished goods inventory) from Henkel and its subsidiaries under a variety of supply agreements. The terms of these agreements require these entities to purchase specified quantities as defined by an annual supply plan submitted to the related manufacturing facility. Product purchases are priced on the basis of costs incurred and amounted to TDM 259,882 in 1994, TDM 278,693 in 1993 and TDM 319,913 in 1992.
Henkel also provides certain Joint Venture entities with elective services which include, but are not limited to General Administration, Payroll Administration, Accounting, Research and Development. The cost of services are charged by Henkel on a monthly basis and may not reflect the costs which the Joint Venture would incur if it were necessary to procure such services from outside sources or if such services were performed internally by the Joint Venture. Fees paid by the Joint Venture in consideration for these services amounted to TDM 20,326 in 1994, TDM 23,353 in 1993 and TDM 34,063 in 1992.
Royalty payments are shared equally by both parent companies based upon a technology transfer agreement which provides for the payment of royalties as a percentage of third party sales. Royalty expense related to this technology transfer agreement amounted to TDM 31,874 in 1994, TDM 36,460 in 1993 and TDM 33,034 in 1992.
The Joint Venture has entered into agreements with Henkel under which the Joint Venture can both borrow from and lend to Henkel both on an over-draft basis and through short term loans of more than 3 months. There is currently no maximum level of borrowing specified under this agreement. The interest rate basis for both arrangements is the London Interbank Offering Rate (interest rate for German Marks overdrafts 5.75 % per November 30, 1994 and 5.32 % for 3 month short term German Marks loans per November 30, 1994); on overdrafts, approximately between 0.4 - 1.5 percentage point is paid to compensate Henkel for administration costs.
At November 30, 1994 the Joint Venture had borrowed TDM 63,810, from Henkel Group Companies, TDM 75,910 in 1993 and TDM 79,735 in 1992. The loans receivable from Henkel Group Companies had totalled TDM 38,140 in 1994, TDM 12,297 in 1993 and TDM 15,937 in 1992. The fair values of intercompany loans receivable and payable approximate book value.
Interest expense to related companies totalled TDM 6,304 in the year ended November 30, 1994, TDM 9,819 in 1993 and TDM 12,418 in 1992. Interest income from related companies amounted to TDM 1,989 for the year ended November 30, 1994, TDM 1,503 in 1993 and TDM 5,389 in 1992.
4. INCOME TAXES
The provision for income taxes totalled TDM 36,287, compared to November 30, 1993 TDM 35,966 and November 30, 1992 TDM 28,613. The net deferred taxes included in the provision for income taxes for 1994 were TDM 1,993 credit and for 1993 TDM 2,770 credit, whereas in prior years they were insignificant.
Effective December 1, 1992, the Joint Venture adopted the provisions of Statement of Financial Accounting Standards of No. 109, "Accounting for Income Taxes" (FAS 109). FAS 109 requires a change from the deferred to the asset and liability method of computing deferred income taxes. Under the asset and liability method, deferred income taxes are recognized to reflect the tax consequences on future years of temporary differences between the tax bases of assets and liabilities and their financial reporting amounts, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Income tax expense is the tax payable for the year and the change during the year in deferred tax assets and liabilities.
The cumulative effect of this change in accounting principle as of December 1, 1992 amounted to TDM 9,771. Prior years' financial statements were not restated.
The components of the Joint Venture's overall net deferred tax asset at November 30, 1994, at November 30, 1993 and at December 1, 1992 are as follows:
At November 30, 1994, the Joint Venture had net foreign operating loss carryforwards for tax purposes of approximately TDM 17,847 compared to November 30, 1993 to TDM 16,577 and compared to TDM 15,822 as at December 1, 1992. A significant portion of these losses have an indefinite carryforward period; the remaining losses have expiration dates up to five years. As of November 30, 1994 and 1993 the tax benefits of the loss carryforwards have been reserved 100% in Great Britain, 80% in Switzerland and 20% in Italy. As at December 1, 1992 all loss carryforwards had been reserved 100%. The changes in the valuation allowance were made due to turnarounds in the profitability of the Joint Venture companies in the respective countries.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Joint Venture will realize the benefits of these deductible differences, net of the existing valuation allowances at November 30, 1994.
A reconciliation of the statutory German trade tax and federal corporate income tax rate to the effective income tax rate was:
The deferred taxes refundable to parent reflect the Joint Venture Agreement in which the partners also agreed that all tax benefits realized after the formation of the Joint Venture should be refunded to the respective parents if the benefits relate to temporary differences that originated in periods prior to the formation of the Joint Venture. The amount refundable in 1993 covers the period from July 1, 1991 to November 30, 1993.
In 1994, the tax payments were TDM 21,368, in 1993 TDM 29,846 and in 1992 TDM 17,949.
5. RETIREMENT PLANS
The Joint Venture's German entities have noncontributory defined benefit pension plans to provide pension benefits to substantially all eligible employees. Employees of countries outside of Germany participate in various local plans, principally contributory plans.
Benefits for the German plans are based upon salary and years of service. The funding of these pension plans is not a common practice as funding provides no economic (tax) benefit.
A summary of the components of net periodic pension cost for the German plans for the twelve months ended November 30, 1994, 1993 and 1992 follows (TDM):
The status of the employee pension benefit plans for Germany at November 30, 1994, 1993 and 1992 is summarized below (TDM):
The following assumptions have been used to develop net periodic pension expense and the actuarial present value of projected benefit obligations:
The Joint Venture also sponsors other defined benefit plans, defined contribution plans and participation in government-sponsored programs in certain European countries. Expenses under these plans amounted to approximately TDM 13,433 for the twelve months ended November 30, 1994, TDM 12,863 in 1993 and TDM 5,748 in 1992.
Other Joint Venture-specific savings plans, post-retirement and post-employment benefit plans requiring contribution by the Joint Venture are not material.
6. TOTAL INDEBTEDNESS
Short Term Debt
As of November 30, 1994 short term debt totalled TDM 19,256 compared to November 30, 1993 TDM 45,505 and compared to November 30, 1992 TDM 37,226, generally in overdraft facilities with interest rates based on local money market rates. As of November 30, 1994 the three main balances are in Italian Lira in the equivalent amount of TDM 5,433 at an interest rate of 8.5 % p.a., in Spanish Peseta in the equivalent amount of TDM 2,414 at an interest rate of 5.45 % p.a. and in French Franc in the equivalent amount of TDM 2,410 at an interest rate of 5.72 % p.a..
Long term debt
Of the total long term debt amount, the equivalent of TDM 6,454 is borrowed in Danish Krona at an average interest rate of 10.19 % p.a.. As of November 30, 1994, the aggregate annual maturities of long-term debt for the next five years were:
1995 - TDM 727 1996 - TDM 705 1997 - TDM 638 1998 - TDM 638 1999 - TDM 638 after 1999 - TDM 3,902
Interest expense related to all debt was TDM 4,584 in 1994, compared to November 30, 1993 TDM 6,700 and compared to November 30, 1992 TDM 13,479. No significant differences existed between interest expense and interest paid.
The fair value of short and long term debt approximates the book value.
7. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Joint Venture operates internationally, giving rise to exposure to market risks from changes in interest rates and foreign exchange rates. Derivative financial instruments are utilized by the Joint Venture to reduce certain of these risks, as explained in this note. The Joint Venture does not hold or issue financial instruments for trading purposes. The Joint Venture is exposed to credit-related losses in the event of nonperformance by counterparties to financial instruments, but it does not expect any counterparties to fail to meet their obligations given their high credit ratings.
a) Notional Amounts and Credit Exposures of Derivatives
The notional amounts of derivatives summarized in section b) do not represent amounts exchanged by the parties and, thus, are not a measure of the exposure of the Joint Venture through its use of derivatives. The amounts exchanged are calculated on the basis of the notional amounts and the other terms of the derivatives, which relate to exchange rates.
b) Foreign Exchange Risk Management
The Joint Venture enters into various types of foreign exchange contracts in managing its foreign exchange risk, as indicated in the following table (TDM):
The primary purpose of foreign exchange contracts is to hedge various intercompany loans. The Joint Venture also enters to a limited extent into forward exchange contracts and options to hedge certain existing and anticipated future net foreign exchange exposures. The anticipated future foreign exchange exposure of the Joint Venture is the total of the net balances of all known and planned incoming and outgoing payments of the Joint Venture's companies in foreign currencies during a 12 months time horizon. The table below summarizes by major currency the contractual amounts of the Joint Venture's forward exchange and option contracts in German Marks. Foreign currency amounts are translated at rates current at the reporting date. The "buy" amounts represent the German Marks equivalent of commitments to purchase foreign currencies, and the "sell" amounts represent the German Marks equivalent of commitments to sell foreign currencies (TDM):
c) Fair Value of Off Balance Sheet Financial Instruments
The following table presents the carrying amounts and fair values of the Joint Venture's off balance sheet financial instruments at November 30, 1994. The fair value is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale (TDM):
8. RESEARCH EXPENDITURES
Research expenditures which relate to the development of new products and processes, including significant improvements and refinements to existing products, were DM 34.1 million in 1994, DM 28.3 million in 1993 and DM 32.9 million in 1992.
9. COMMITMENTS AND CONTINGENCIES
The Joint Venture has a number of operating lease agreements primarily involving motor vehicles, computer and other office equipment. The following is a schedule by year of the future minimum lease payments required under the operating leases that have initial or remaining noncancellable lease terms in excess of one year as of November 30, 1994 (TDM):
Rent expense for the twelve month period ended November 30, 1994, was approximately TDM 16,372, compared to November 30, 1993 approximately TDM 13,415 and compared to November 30, 1992 approximately TDM 10,341.
The Joint Venture is subject to lawsuits and claims arising out of the conduct of its business, including those relating to commercial transactions and environmental safety. As an integral part of the Joint Venture agreement, Henkel and Ecolab have provided certain representations and warranties against future expenditures arising from operations prior to July 1, 1991.
A subsidiary of the Joint Venture is named in an environmental legal action related to the conduct of its business prior to the formation of the Joint Venture on July 1, 1991. Based on the facts currently known to the Joint Venture, and after consultation with Legal Counsel, management believes that the Joint Venture is indemnified against any potential liability arising from such action under the terms and conditions of the Amended and Restated Umbrella Agreement dated June 26, 1991, by and between Henkel and Ecolab.
Therefore, the Joint Venture does not expect material adverse effects on its financial position, results of operations or liquidity from the outcome of these losses and claims.
The Joint Venture's customers are concentrated in Europe and operate in the industrial and institutional hygiene business. No single customer accounted for a significant amount of the Joint Venture's sales in 1994, 1993 and 1992, and there were no significant accounts receivable from a single customer at November 30, 1994, 1993 and 1992. The Joint Venture establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.
HENKEL-ECOLAB JOINT VENTURE
HENKEL-ECOLAB JOINT VENTURE
HENKEL-ECOLAB JOINT VENTURE
Schedule III - Accumulated Depreciation and Amortization of Property, Plant, and Equipment (Thousands)
EXHIBIT INDEX
The following documents are filed as exhibits to this Report.
- 62 -