FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended DECEMBER 31, 1995 ----------------- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ............ to ............. Commission File No. 1-9328 ------ --------------------- ECOLAB INC. -------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 41-0231510 - ------------------------------- -------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Ecolab Center, St. Paul, Minnesota 55102 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (612) 293-2233 -------------- --------------------- Securities registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- Common Stock, $1.00 par value New York Stock Exchange, Inc. Pacific Stock Exchange, Inc. Preferred Stock Purchase Rights New York Stock Exchange, Inc. Pacific Stock Exchange, Inc. Securities registered pursuant to Section 12(g) of the Act: None --------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] Aggregate market value of voting stock held by non-affiliates of Registrant on March 19, 1996: $1,874,851,677 (see Item 12, on pages 18 and 19 hereof). The number of shares of Registrant's Common Stock, par value $1.00 per share, outstanding as of March 19, 1996: 64,507,350 shares.
DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of Registrant's Annual Report to Stockholders for the year ended December 31, 1995 (hereinafter referred to as "Annual Report") are incorporated by reference into Parts I, II and IV. 2. Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held May 10, 1996 and to be filed within 120 days after the Registrant's fiscal year ended December 31, 1995 (hereinafter referred to as "Proxy Statement") are incorporated by reference into Part III. PART I 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. 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. 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, healthcare and educational facilities, commercial and institutional laundries, - 2 -
light industry, dairy plants and farms, and food and beverage processors. A strong commitment to service is the distinguishing characteristic of the Company. Products, systems 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 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 below under the heading "Properties." As described below, not all of the businesses conducted in the United States and Canada by the Company are conducted in all other international locations, and the extent and nature of such international businesses, as well as the competitive environment, varies by location. European markets, as described under Item 1(a) above under the heading "General Development of Business," are served through the Henkel-Ecolab Joint Venture, although the Kay business does have sales in Europe. In the United States and Canada, the Company operates through seven divisions: Institutional, Kay, Food and Beverage (formerly Klenzade), Pest Elimination, Textile Care, Janitorial and Water Care Services. Institutional and Food and Beverage businesses are operated in virtually all locations outside of the United States and Canada. As described below, the businesses of the remaining divisions are not conducted in all areas outside of the United States and Canada, but these businesses are being introduced in an expanding number of international locations. The Company conducts business in approximately 26 countries outside of the United States, primarily through wholly-owned subsidiaries. In certain other countries, selected products are sold by distributors or agents, although those sales are not significant in terms of the Company's overall revenues. For the year ended December 31, 1995, international sales comprised approximately 23% of the Company's total reported revenues. For purposes of public financial reporting, international operations include Canada, but on an operational basis the businesses in Canada are generally operated as a part of North American operations. - 3 -
BUSINESS DIVISIONS The following descriptions of the Company's divisions include a discussion, where applicable, of the similar business currently conducted outside of the United States. The Company pursues a "Circle the Customer - Circle the Globe" strategy by developing relationships and partnerships with customers who require the services of more than one division. Therefore, a single customer may utilize the services of several of the Company's divisions. INSTITUTIONAL: The Institutional Division is the Company's largest division and sells specialized cleaners and sanitizers for washing dishes, glassware, flatware, food service utensils and kitchen equipment ("warewashing"), for on-premise laundries (typically used by customers having smaller machines and laundry needs) and for general housekeeping functions, as well as dishwasher racks and related kitchen sundries to the food-service, lodging, educational and healthcare industries. The Institutional Division also markets various chemical dispensing device systems, which are generally loaned to customers, to apply the Company's cleaners and sanitizers. Substantially similar businesses are conducted in all international locations although somewhat less extensive product lines are often offered internationally. Also, through its Ecotemp offering, the Institutional Division markets, primarily to smaller and mid-size customer units, a program comprised of energy-efficient dishwashing machines, detergents and rinse additives, including full machine maintenance. The Company believes it is the leading supplier of chemical warewashing products to institutions in the United States and Canada and is one of the leading suppliers worldwide except for Europe where the business is conducted by the Henkel-Ecolab Joint Venture. The Institutional Division sells its products and services primarily through Company-employed field sales and service personnel. The Company also utilizes independent food service distributors to market and sell its products to smaller accounts or accounts which purchase through food distributors. This distribution system encompasses most of the Division's product line and the Company provides the same service to accounts served by food distributors as to direct customers. KAY: The Kay Division was acquired in December, 1994 and is operated through wholly-owned subsidiaries of the Company. Kay supplies chemical cleaning and sanitizing products primarily to the quick-service restaurant ("fast-food") industry. Kay's products include specialty and general purpose hard surface cleaners, degreasers, sanitizers, polishes and hand care products and assorted cleaning tools. Products are sold under the "Kay" brand or the customer's private label. Kay employs a direct field sales force which primarily calls upon national and regional quick service restaurant chains and franchisees, although the sales are - 4 -
made to distributors who supply the chain or franchisee's restaurants. The addition of the Kay business has significantly expanded the Company's presence in the restaurant and food service industry beyond the full service market to the quick-service industry. Kay sales are primarily in the United States but international sales have grown as United States based customers have expanded into international markets. With minor exceptions for product made at international locations by contract manufacturers, Kay's international sales are made either to domestic distributors, who export to international accounts, or by export sales to distributors located at international locations. The Company believes that its Kay Division is the leading supplier of chemical cleaning and sanitizing products to the quick-service industry in the United States as well as in certain international markets. While the Kay customer base has been growing, Kay's business is largely dependent upon a limited number of major national and international quick-service restaurant chains and franchisees. FOOD AND BEVERAGE: The Food and Beverage Division (formerly known as Klenzade) provides detergents, cleaners, sanitizers, lubricants, animal health and water treatment products, as well as cleaning systems, electronic dispensers and chemical injectors for the application of chemical products, primarily to dairy plants, dairy, poultry and swine farms, breweries, soft drink bottling plants, and meat, poultry and other food processors as well as to pharmaceutical and cosmetic plants. The Food and Beverage Division also designs, engineers and installs CIP (clean-in-place) process control systems and facility cleaning systems to its customer base. Farm products (which include bovine teat products) are sold through dealers and distributors, while plant products are sold primarily by the Company's field sales personnel. The Company believes that it is one of the leading suppliers of cleaning and sanitizing products to the dairy plant, dairy farm and beverage processor industries in the United States. The Food and Beverage business operates in most international locations. PEST ELIMINATION: The Pest Elimination Division provides services for the elimination and prevention of pests to restaurants, food and beverage processors, educational and healthcare facilities, hotels and other institutional and commercial customers. These services are sold and performed by Company-employed sales and service personnel. The Company believes it is the largest provider of premium pest elimination services to institutions in the United States. The Pest Elimination business currently is operated primarily in the United States, with limited sales in Puerto Rico and parts of Canada, Mexico, Hong Kong and New Zealand. - 5 -
TEXTILE CARE: The Textile Care Division provides chemical laundry products and proprietary dispensing systems, as well as related services, to large institutional and commercial laundries and to certain smaller laundry operations. Typically these customers process a minimum of 1,000,000 pounds of linen each year. These products and services include laundry cleaning and specialty products and related dispensing equipment, which are marketed primarily through a Company-employed sales force and, to a lesser extent, through distributors. The Textile Care offerings compliment the Institutional Division's offerings to small-to-medium size on-premise laundry facilities. The Textile Care products are sold primarily in the United States and Canada, but similar product lines are sold in a number of other international locations. JANITORIAL: The Janitorial Division provides a full line of janitorial offerings that includes odor counteractants, disinfectants, floor care or hard surface and carpet care systems, hand care products and general cleaners which are sold to both the industrial and institutional janitorial market in the United States and Canada. The Company believes it is the largest supplier of infection control and general cleaners to the United States healthcare industry. Products are sold in the United States and Canada through a Company-employed sales force as well as a network of independent distributors who sell janitorial-related products and services to the institutional and industrial marketplaces. A private-label program also manufactures non-proprietary janitorial-related products for resale by major distributor organizations in the United States and Canada. Janitorial products are also sold on a limited basis in other international markets. WATER CARE SERVICES: The Water Care Services Division provides water treatment products, services and systems for institutional, commercial and light industrial customers. Operations are presently concentrated in North America, where the Company acquired three existing water care businesses in late 1994 and 1995. Water Care Services works closely with the Company's Institutional, Textile Care and Food and Beverage Divisions to offer customized water care strategies to the hospitality, healthcare markets and to light industry, primarily to treat water used for heating and cooling systems. In selected United States markets, the Division also provides pool and spa treatment programs for commercial and hospitality customers. Water Care Services expects to expand its coverage in North America during 1996 through additional acquisitions and internal growth. In addition to North America operations, certain water treatment businesses are operated at selected international locations, primarily Brazil, South Africa and Southeast Asia. - 6 -
COMPETITION The Company emphasizes its ability to uniformly provide a variety of related premium cleaning and sanitation services to multiple locations of chain customer organizations worldwide. This is succinctly stated in the Company's "Circle the Customer - Circle the Globe" strategy. In executing this strategy, the Company's business units have two significant classes of competitors. First, each business unit competes with a small number of large companies selling directly or through distributors on a national or international scale. Some of these large competitors have substantially greater assets and financial resources than the Company. Second, all of the Company's business units have numerous smaller regional or local competitors focusing on more limited geographies, product lines, and/or end-user segments. The Company's objective is to achieve a significant presence in each of its business markets. In general, competition is based on service, product performance and price. The Company believes it competes principally by providing superior value. Value is provided by state-of-the-art, environmentally-compatible cleaning products and systems coupled with high service standards and dedication to customer satisfaction after the initial sale. This is made possible, in part, by the significant ongoing investment in technology development and by the Company's standard practice of assisting customers in lowering operating costs and complying with environmental and sanitation regulations. RAW MATERIALS Raw materials purchased for use in manufacturing products for the Company are inorganic chemicals, including phosphates, silicates, alkalies, salts and petrochemical-based materials, including surfactants and solvents. These materials are generally purchased on an annual contract basis from a diverse group of chemical manufacturers. Pesticides used by the Pest Elimination Division are purchased as finished products under contract or purchase order from the producers or their distributors. The Company also purchases packaging materials for its manufactured products and components for its specialized cleaning equipment and systems. Most raw materials, or substitutes for those materials, used by the Company, with the exception of a few specialized chemicals which the Company manufactures, are available from several suppliers. ADDITIONAL INFORMATION Deliveries to customers are made from the Company's manufacturing plants and a network of distribution centers and public warehouses. The Company uses both common carriers and its own delivery vehicles. Additional information on the Company's plant and distribution facilities is located under Item 2 below under the heading "Properties." - 7 -
The Company owns a number of patents and trademarks. Management does not believe that the Company's overall business is materially dependent on any individual patent or trademark. The Company believes that its business is not materially dependent upon a single customer although, as described above in this Item 1(c) under the description of the Kay business, Kay is largely dependent upon a limited number of national and international quick-service chains and franchisees. No material part of the Company's business is subject to renegotiation. The Company sells two classes of products which each constitute 10 percent or more of its sales. Worldwide sales of warewashing products in 1995, 1994 and 1993 approximated 35, 35 and 36 percent, respectively, of the Company's consolidated net sales. In addition, the Company, through its Institutional and Textile Care businesses, sells laundry products and services to a broad range of laundry customers as described in more detail under the heading "Business Divisions" beginning on page 4 hereof. Total laundry sales in each of 1995, 1994 and 1993 approximated 15 percent of the Company's consolidated net sales. The Company's business has little seasonality and has no unusual working capital requirements. The Company has in the past, and will continue in the future, to invest in merchandising equipment consisting primarily of systems used by customers to dispense the Company's cleaning and sanitizing products. The investment in merchandising equipment is discussed under the heading "Cash Flows" in Management's Discussion and Analysis of Financial Condition and Results of Operations incorporated into Item 7 hereof. RESEARCH AND DEVELOPMENT The Company's research and development program consists principally of devising or testing new products, processes, techniques and equipment, improving the efficiency of existing ones, improving service program content, and evaluating the environmental compatibility of products. Key disciplines include analytical and formulation chemistry, microbiology, process and packaging engineering and product dispensing technology. Substantially all of the Company's principal products have been developed by its research and development personnel. Note 12, entitled "Research Expenditures" located on page 43 of the Annual Report, is incorporated herein by reference. ENVIRONMENTAL CONSIDERATIONS The Company's businesses are subject to various legislative enactments and regulations relating to the protection of the environment. While the Company cooperates with governmental authorities and takes commercially practicable measures to meet regulatory requirements and avoid or limit environmental effects, - 8 -
some risks are inherent in the Company's businesses. The Company's management believes these are risks which the Company has in common with other companies engaged in similar businesses. Among the risks are costs associated with managing hazardous substances, waste disposal or plant site clean-up, fines and penalties if the Company were found in violation of law, as well as modifications, disruptions or discontinuation of certain operations or types of operations. There can be no assurance that future legislation or enforcement policies will not have a material adverse effect on the Company's financial condition or results of operations. Environmental matters most significant to the Company are discussed below. PHOSPHATE LEGISLATION: Various laws and regulations have been enacted by state, local and foreign jurisdictions pertaining to the sale of products which contain phosphorous. The primary thrust of such laws and regulations is to regulate the phosphorous content of home laundry detergents, a market not served by the Company. However, certain of the Company's products are affected by such laws and regulations, including some commercial laundry and warewashing detergents, cleaners and sanitizers. Three types of legislative restrictions are common: (1) labeling of phosphorous content, (2) percentage limitation on the amount of phosphorous permitted and (3) a ban on the use of phosphorous in certain products or in products sold for a particular purpose. The Company has been able to comply with legislative requirements and, where necessary, has developed products which, although typically less effective than the products they replace, contain no phosphorous or lower amounts of phosphorous to satisfy the legislative limitations or bans. In limited geographic areas, the Company has obtained a variance from existing zero-phosphorous legislation. Phosphate legislation has not had a material negative effect on the Company's operations to date. PESTICIDE LEGISLATION: Various federal and state environmental laws and regulations govern the manufacture and/or use of pesticides. The Company manufactures and sells certain disinfecting and sanitizing products which kill microorganisms (bacteria, viruses, fungi) on environmental surfaces. Such products constitute "pesticides" under the current definitions of the Federal Insecticide Fungicide and Rodenticide Act (FIFRA), the principal federal statute governing the manufacture, labeling, handling and use of pesticides. These products must be registered with the United States Environmental Protection Agency ("EPA"). Registration entails the necessity to meet certain efficacy and labeling requirements and to pay initial and on-going registration fees. In addition, each state in which these products are sold requires registration and payment of a fee. In general, the states impose no substantive requirements different from those required by FIFRA. However, California does have its own regulatory scheme and - 9 -
certain other states have regulatory schemes under consideration. In addition, California imposes a tax on total pesticide sales in that state. While the costs of complying with rules as to pesticides has not had a material adverse effect on the Company's financial condition or the results of its operations to date, the costs and delays in receiving necessary approvals for these products has increased in recent years. The Company believes that the nature of these costs and regulatory delays are similar to those encountered by other companies in similar businesses. Total fees paid to the EPA and the states to obtain or maintain pesticide registrations, and for the California tax, in 1995 were approximately $876,000. Such costs may increase somewhat in 1996, but not in amounts which are expected to significantly affect the Company's results of operations, consolidated financial condition or liquidity. In addition, the Company's Pest Elimination Division applies restricted-use pesticides which it purchases from third parties. That Division must comply with certain standards pertaining to the use of such pesticides and to the licensing of employees who apply such pesticides. Such regulations are enforced primarily by the states or local jurisdictions in conformity with federal regulations. The Company has not experienced material difficulties in complying with these requirements. OTHER ENVIRONMENTAL LEGISLATION: The Company's manufacturing plants are subject to federal, state, local or foreign jurisdiction laws and regulations relating to discharge of hazardous substances into the environment and to the transportation, handling and disposal of such substances. The primary federal statutes that apply to the Company's activities are the Clean Air Act, the Clean Water Act and the Resource Conservation and Recovery Act ("RCRA"). The Company makes capital investments and expenditures to comply with environmental laws and regulations, to ensure employee safety and to carry out its announced environmental stewardship principles. To date such expenditures have not had a significant adverse effect on the financial condition of the Company or its results of operations. The Company's capital expenditures for environmental control projects incurred for 1995 and budgeted for 1996 are approximately $900,000 and $300,000, respectively. The Company is also subject to the Superfund Amendments and Reauthorization Act of 1986, which imposes certain reporting requirements as to emissions of toxic substances into the air, land and water. Along with numerous other potentially responsible parties ("PRPs"), the Company is currently involved with waste disposal site clean-up activities imposed by the federal Comprehensive Environmental Response Compensation and Liability Act ("CERCLA") or state equivalents at 12 waste disposal sites which received nominal amounts of waste materials alleged to have been generated by the Company or its subsidiaries. In general, under CERCLA, the Company - 10 -
and each other PRP which actually contributes hazardous substances to a superfund site are jointly and severally liable for the costs associated with cleaning up the site. Customarily, the PRP's will work with the EPA to agree and implement a plan for site remediation and the allocation of each PRP's involvement. The above sites are in various stages of investigation, negotiation or remediation. However, based on an analysis of the Company's experience with such sites, the Company's estimated share of all hazardous materials deposited on the site, and the Company's estimate of the contribution to be made by other PRP's which the Company believes have the financial ability to pay their shares, the Company has accrued its reasonable estimate of the Company's future costs relating to such known sites. Also, the Company is involved in certain continuing clean-up activities as required by New Jersey and Nebraska environmental authorities at two sites currently or formerly used by the Company. The costs associated with these sites are comprised primarily of remediation efforts associated with soil and ground water contamination. In each of these matters, the Company has worked with appropriate authorities to resolve the issues involved and has accrued its reasonable estimate of future costs relating to such sites. A legal action commenced in August, 1989 in the District Court in Zwolle, Netherlands, by the Netherlands government against a former subsidiary of the Company remains pending. Netherlands authorities are seeking monetary damages to cover the cost of investigation and planned cleanup of soil and groundwater contamination, allegedly resulting from the discharge of wastewater and chemicals during a period ended in 1981 when the subsidiary operated a plant on the site. Damages claimed are approximately US$10,000,000. The former subsidiary, now owned by the Henkel-Ecolab joint venture, has denied liability and believes it complied with applicable Netherlands law. Even if the Netherlands government should prevail as to liability, it is believed the reasonable costs of investigation and cleanup are less than that claimed by the government. The Company has indemnified the Henkel-Ecolab joint venture as to any liability associated with this matter. Accordingly, an accrual has been recorded, reflecting management's best estimate of future costs. During 1995, the Company's expenditures for contamination remediation were approximately $500,000. The accrual at the end of 1995 for future remediation expenditures was approximately $8,500,000. The Company reviews its exposure for contamination remediation costs periodically and its accruals are adjusted as considered appropriate. In establishing accruals, the Company does not anticipate recovery of costs from insurance proceeds. While the final resolution of these issues could result in costs below or above current accruals, the Company believes the ultimate resolution of these matters will not have a significant effect on - 11 -
the Company's results of operations, consolidated financial position or liquidity. In addition, the Company has retained responsibility for certain sites where the Company's former ChemLawn business is a PRP. Currently there are nine such locations and at each, ChemLawn is a de minimus party. Anticipated costs currently accrued for these matters were included in the Company's loss from its discontinued ChemLawn operations in 1991. NUMBER OF EMPLOYEES The Company currently has approximately 9,000 employees worldwide. ITEM 1(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES The financial information appearing under the heading "Geographic Segments" in Note 14, located on page 43 of the Annual Report, is incorporated herein by reference. Transfers between geographic areas are not significant. A description of the business done outside of the United States is included in Item 1(c), above. International businesses are subject to the usual risks of foreign operations, including possible changes in trade and foreign investment laws, tax laws, currency exchange rates and economic and political conditions abroad. International operations constitute the fastest growing segment of the Company's business. Profitability of international operations is lower than profitability of businesses in the United States because of lower international operating income margins due to the difference in scale of international operations where operating locations are smaller in size and due to the additional costs of operating in numerous and diverse foreign jurisdictions. EXECUTIVE OFFICERS OF THE COMPANY The persons listed in the following table are the current executive officers of the Company. Officers are elected annually. There is no family relationship among any of the directors or executive officers, and none of such persons has been involved during the past five years in any legal proceedings described in applicable Securities and Exchange Commission regulations. <TABLE> <CAPTION> Positions Held Name Age Office Since Jan. 1, 1991 - ---- --- ------ ------------------ <S> <C> <C> <C> A. L. Schuman 61 President and Chief March 1995 - Present Executive Officer President and Chief Aug. 1992 - Feb. 1995 Operating Officer </TABLE> - 12 -
<TABLE> <CAPTION> Positions Held Name Age Office Since Jan. 1, 1991 - ---- --- ------ ------------------ <S> <C> <C> <C> A. L. Schuman (Cont'd) Executive Vice President; Jan. 1991 - July 1992 President-Ecolab Services Group M. E. Shannon 59 Chairman of the Board, Jan. 1996 - Present Chief Financial and Administrative Officer Vice Chairman, Chief Aug. 1992 - Dec. 1995 Financial and Administrative Officer Executive Vice President June 1992 - July 1992 and Chief Financial Officer Executive Vice President Jan. 1991 - May 1992 and Chief Financial Officer; President- Residential Services Group G. K. Carlson 52 Senior Vice President- Jan. 1994 - Present International Senior Vice President Jan. 1991 - Dec. 1993 and General Manager- Institutional North America P. D'Almada 48 Senior Vice President- Mar. 1996 - Present Global Accounts Vice President- May 1994 - Feb. 1996 Institutional Corporate Accounts Vice President- Oct. 1993 - Apr. 1994 Institutional National Accounts and Distributors Sales International Vice Aug. 1992 - Sep. 1993 President-Central America and The Caribbean Institutional Vice Jan. 1991 - Jul. 1992 President-World Accounts A. E. Henningsen, Jr. 49 Senior Vice President Mar. 1996 - Present and Controller Vice President and Aug. 1992 - Feb. 1996 Controller Vice President-Finance, Jan. 1991 - July 1992 Ecolab Services Group </TABLE> - 13 -
<TABLE> <CAPTION> Positions Held Name Age Office Since Jan. 1, 1991 - ---- --- ------ ------------------ <S> <C> <C> <C> J. L. McCarty 58 Senior Vice President- Jan. 1994 - Present Institutional North America Vice President and General Jan. 1991 - Dec. 1993 Manager - Pest Elimination J. M. Millsap 50 Senior Vice President- Mar. 1995 - Present Corporate Development and Treasury Senior Vice President- Aug. 1992 - Feb. 1995 Corporate Development and Treasurer Vice President-Corporate Jan. 1991 - July 1992 Development and Treasurer M. Nisita 55 Senior Vice President- Jan. 1994 - Present Global Operations Vice President-Operations Aug. 1992 - Dec. 1993 Vice President- Jan. 1991 - July 1992 Manufacturing W. R. Rosengren 61 Senior Vice President-Law Aug. 1992 - Present and General Counsel Senior Vice President- Jan. 1991 - July 1992 Law, General Counsel and Secretary J. P. Spooner 49 Senior Vice President- June 1994 - Present Industrial F. W. Tuominen, Ph.D 53 Senior Vice President Aug. 1992 - Present and Chief Technical and Environmental Officer Senior Vice President Jan. 1991 - July 1992 and Chief Technical Officer </TABLE> Mr. Spooner joined the Company as Senior Vice President-Industrial in June 1994. Prior to joining the Company, Mr. Spooner was employed by PepsiCo, Inc. for 15 years, holding various positions in operations and business development, including most recently, President of the North Division of Frito-Lay, Inc. 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 - 14 -
production process consists primarily of blending and packaging powders and liquids and casting solids. 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; San Jose, California; and Hebron, Ohio. Smaller plant facilities in Franklin Park, Illinois; North Kansas City, Missouri; Charlotte, North Carolina and Grand Forks, North Dakota produce certain chemical products primarily for the Company's Textile Care, Water Care Services 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; Jakarta, Indonesia; Sydney, Melbourne and Brisbane, Australia; Seoul, South Korea; Mexico City, Mexico, and Toronto, Canada. The buildings and land for the facilities located in Canada, Australia and Puerto Rico 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 owned in certain other countries including Costa Rica and South Africa. 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 5 distribution centers, all of which are leased, and utilizes approximately 30 primary public warehouses. Internationally, the Company operates various additional leased or public warehouses to facilitate distribution and, in the United States, operates approximately 115 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 - 15 -
Company's option. The Company also owns a building in downtown St. Paul adjacent to its headquarters which is used for general office 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. 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." 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's results of operations, consolidated financial condition or liquidity. 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. 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 1995 and 1994 was as follows: <TABLE> <CAPTION> 1995 1994 ----------------- ----------------- Quarter High Low High Low - ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> First $24-7/8 $20 $23-1/2 $20-1/8 Second $25-1/2 $22-1/2 $23-1/2 $19-3/4 Third $28-1/8 $24-1/4 $23-1/4 $20-1/4 Fourth $31-3/4 $27-1/4 $22 $19-1/4 </TABLE> The closing stock price on March 19, 1996 was $30-3/8. ITEM 5(B) HOLDERS On March 19, 1996 the Company had 4,842 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 $0.11 per share were declared in February, May and August, 1994, $0.125 per share in December, 1994 and February, May and August, 1995. A cash dividend of $0.14 per share was declared in December 1995. ITEM 6. SELECTED FINANCIAL DATA The comparative data for the years ended December 31, 1995, 1994, 1993, 1992 and 1991 inclusive, which are set forth under the heading entitled "Summary Operating and Financial Data" and which are located on page 46 of the Annual Report, are incorporated herein by reference. - 17 -
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. 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. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III 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. 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 14 and on page 18 of the Proxy Statement is not incorporated herein. 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 21, beginning with the - 18 -
fourth paragraph under the heading "Certain Transactions," which is incorporated herein by reference. A total of 2,783,838 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. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The material appearing under the headings entitled "Certain Transactions" and "Company Transactions" on pages 21 and 22 of the Proxy Statement and the biographical material located on pages 7, 9 and 10 of the Proxy Statement pertaining to Messrs. Roland Schulz, Hugo Uyterhoeven and Albrecht Woeste is incorporated herein by reference. PART IV 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, 1995, 1994 and 1993, Annual Report page 31. (ii) Consolidated Balance Sheet at December 31, 1995, 1994 and 1993, Annual Report page 32. (iii) Consolidated Statement of Cash Flows for the years ended December 31, 1995, 1994 and 1993, Annual Report page 33. (iv) Consolidated Statement of Shareholders' Equity for the years ended December 31, 1995, 1994 and 1993, Annual Report page 34. (v) Notes to Consolidated Financial Statements, Annual Report pages 35 through 43. (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, 1995, 1994 and 1993 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, 1995, 1994 and 1993. 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 54 hereof, are filed as part of this Report. (i) Report of Independent Accountants. (ii) Combined Statements of Income for the years ended November 30, 1995, 1994 and 1993. (iii) Combined Balance Sheets at November 30, 1995, 1994 and 1993. (iv) Combined Statements of Cash Flows for the years ended November 30, 1995, 1994 and 1993. (v) Combined Statements of Equity for the years ended November 30, 1995, 1994 and 1993. (vi) Notes to the Combined Financial Statements. I(4). The following financial statement schedule to the Henkel-Ecolab Joint Venture financial statements listed in Item 14 I(3) for the years ended November 30, 1995, 1994 and 1993 located on page 55 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, 1995, 1994 and 1993. All other schedules, for which provision is made in the applicable regulations of the Securities and Exchange - 20 -
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. (i) 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. (ii) Amended Certificate of Designation, Preferences and Rights, Including Increase in Number of Shares, of the Series A Junior Participating Preferred Stock of the Company. B. By-Laws, as amended through December 18, 1995. (4)A. Common Stock - see Exhibits (3)A and (3)B. B. Form of Common Stock Certificate. C. Rights Agreement dated as of February 24, 1996 - Incorporated by reference to Exhibit (4) of the Company's Current Report on Form 8-K dated February 24, 1996. 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 - Incorporated by reference to Exhibit (4)E of - 21 -
the Company's Form 10-K Annual Report for the year ended December 31, 1994. 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. D. 1995 Non-Employee Director Stock Option Plan - Incorporated by reference to Exhibit (10)D of the Company's Form 10-K Annual Report for the year ended December 31, 1994. 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 - 22 -
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. 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 - Incorporated by reference to Exhibit (10)J of the Company's 10-K Annual Report for the year ended December 31, 1994. See also Exhibit (10)P hereof. K. Ecolab Executive Long-Term Disability Plan, as amended and restated effective January 1, 1994 - Incorporated by reference to Exhibit (10)K of the Company's 10-K Annual Report for the - 23 -
year ended December 31, 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 - Incorporated by reference to Exhibit (10)M(i) of the Company's 10-K Annual Report for the year ended December 31, 1994. See also Exhibit (10)P hereof. (ii) First Declaration of Amendment to Ecolab Supplemental Executive Retirement Plan effective as of July 1, 1994 - Incorporated by reference to Exhibit (10)M(ii) of the Company's 10-K Annual Report for the year ended December 31, 1994. (iii) Second Declaration of Amendment to Ecolab Supplemental Executive Retirement Plan effective as of July 1, 1994. N. (i) Ecolab Mirror Savings Plan (formerly: Ecolab Executive Non-Qualified Deferred Compensation Plan), as amended and restated effective September 1, 1994 - Incorporated by reference to Exhibit (10)N of the Company's 10-K Annual Report for the year ended December 31, 1994. See also Exhibit (10)P hereof. (ii) First Declaration of Amendment to Ecolab Mirror Savings Plan effective as of January 1, 1995. O. (i) Ecolab Mirror Pension Plan effective July 1, 1994 - Incorporated by reference to Exhibit (10)O(i) of the Company's Annual Report on Form 10-K for the year ended December 31, 1994. See also Exhibit 10(P) hereof. (ii) First Declaration of Amendment to Ecolab Mirror Pension Plan effective as of July 1, 1994 - Incorporated by - 24 -
reference to Exhibit (10)O(ii) of the Company's Annual Report on Form 10-K for the year ended December 31, 1994. (iii) Second 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 - Incorporated by reference to Exhibit (10)P of the Company's 10-K Annual Report for the year ended December 31, 1994. 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. 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. (iii) Description of Pierson M. Grieve's retirement benefit - Incorporated by reference to written description of Consulting Agreement contained on pages 19 and 20 of the Proxy Statement. 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 - 25 -
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 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, 1995 which are incorporated by reference into Parts I, II and IV hereof. (21) List of Subsidiaries as of March 19, 1996. (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) Financial Data Schedule. - 26 -
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS Included in the preceding list of exhibits are the following management contracts or compensatory plans or arrangements: <TABLE> <CAPTION> Exhibit No. Description <S> <C> (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). (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 and Consulting Agreements between Pierson M. Grieve and the Company. </TABLE> III. Reports on Form 8-K: The Company filed no Current Reports on Form 8-K for the quarter ended December 31, 1995. Subsequent to the quarter, the Company filed one Current Report on Form 8-K, dated February 24, 1996 reporting the extension of the benefits afforded by the Company's former shareholder rights plan by adoption of a new rights plan. - 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 27th day of March, 1996. 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 27th day of March, 1996. /s/ Allan L. Schuman President and Chief Executive - ----------------------------- Officer (Principal Executive Allan L. Schuman Officer and Director) /s/ Michael E. Shannon Chairman of the Board, Chief - ----------------------------- Financial and Administrative Officer Michael E. Shannon (Principal Financial Officer and Director) /s/ Arthur E. Henningsen, Jr. Senior 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, 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, 1995, 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 31 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 26, 1996 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; 33-65364; and 33-59431) and the Registration Statement on Form S-3 of Ecolab Inc. (Registration No. 33-57197) of our reports dated February 26, 1996 on our audits of the consolidated financial statements and the related financial statement schedule of Ecolab Inc. as of December 31, 1995, 1994 and 1993, and for the years ended December 31, 1995, 1994 and 1993, which reports are included or incorporated by reference in this Annual Report on Form 10-K. We also consent to the references to our firm under the caption "Interests of Named Experts and Counsel" in certain Registration Statements on Form S-8 of Ecolab Inc. (Registration Nos. 33-56101; 33-56151; 33- 56125; and 33-59431) and under the caption "Experts" in the Registration Statement on Form S-3 of Ecolab Inc. (Registration No. 33-57197). /s/ Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. Saint Paul, Minnesota March 27, 1996 - 29 -
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS ECOLAB INC. (In Thousands) <TABLE> <CAPTION> COL. A COL. B COL. C COL. D COL. E - --------------------------------- ---------- -------------------------- ------------ ---------- Additions -------------------------- Balance at Charged to Charged to Deductions Balance at Beginning Costs and Other From End Description of Period Expenses Accounts (A) Reserves (B) of Period - ----------- ---------- ---------- ------------ ------------ ---------- <S> <C> <C> <C> <C> <C> Allowance for Doubtful Accounts: Year Ended December 31, 1995 $8,703 $4,011 $ 127 $(4,510) $8,331 Year Ended December 31, 1994 $7,994 $3,910 $ 233 $(3,434) $8,703 Year Ended December 31, 1993 $7,586 $3,152 $ (64) $(2,680) $7,994 </TABLE> (A) Reflects foreign currency translation adjustments and the effect of acquisitions. The year ended December 31, 1993, includes a deduction of $184 related to the sale of the Canadian G.H. Wood janitorial distribution business. (B) Uncollectible accounts charged off, net of recovery of accounts previously written off. - 30 -
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 schedule as listed in the accompanying index. These combined financial statements and financial statement schedule are the responsibility of the Joint Venture's management. Our responsibility is to express an opinion on these combined financial statements and financial statement schedule 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. - 31 -
- 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, 1995, 1994 and 1993, and the results of its operations and its cash flows for the periods beginning December 1, 1994, 1993 and 1992, and ended November 30, 1995, 1994 and 1993, in conformity with accounting principles generally accepted in the United States. Also in our opinion, the related financial statement schedule, when considered in relation to the basic combined financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Dusseldorf, Germany, January 19, 1996 KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft [SEAL] Wirtschaftsprufungsgesellschaft [SIGNATURE] [SIGNATURE] Dr. Kuhr Haas Wirtschaftsprufer Wirtschaftsprufer - 32 -
Henkel-Ecolab Joint Venture INDEX TO COMBINED FINANCIAL STATEMENTS FOR THE YEARS ENDED NOVEMBER 30, 1995, NOVEMBER 30, 1994 AND NOVEMBER 30, 1993 _____________________________________________________________________________ Report of Independent Accountants Combined Statements of Income Combined Balance Sheets Combined Statements of Cash Flows Combined Statements of Equity Notes to the Combined Financial Statements Financial Statement Schedule : Valuation and Qualifying Accounts and Reserves - 33 -
HENKEL-ECOLAB JOINT VENTURE COMBINED STATEMENTS OF INCOME <TABLE> <CAPTION> (Thousands) 1994/95 1993/94 1992/93 - ------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> Net Sales DM 1,308,935 DM 1,264,985 DM 1,245,446 Cost of Sales 585,002 546,706 562,586 Selling, General and Administrative Expenses 624,032 600,779 569,376 Royalties to Parents 28,180 31,874 36,460 - ------------------------------------------------------------------------------------------------------------------------ Operating Income 71,721 85,626 77,024 Other Expenses/Income, principally Interest Expense, net 7,977 6,426 10,207 Equity in Gain/(Loss) of Affiliate 132 (391) (582) - ------------------------------------------------------------------------------------------------------------------------ Income before Income Taxes 63,876 78,809 66,235 Provision for Income Taxes 31,637 36,287 35,966 - ------------------------------------------------------------------------------------------------------------------------ Income before Cumulative Effect of Change in Accounting Principle 32,239 42,522 30,269 Cumulative Effect at December 1, 1992 of the Change in Accounting for Income Taxes _ _ 9,771 - ------------------------------------------------------------------------------------------------------------------------ Net Income DM 32,239 DM 42,522 DM 40,040 -- --------- -- --------- -- --------- </TABLE> See accompanying Notes to Combined Financial Statements - 34 -
Henkel-Ecolab Joint Venture COMBINED BALANCE SHEETS <TABLE> <CAPTION> November 30, November 30, November 30, (Thousands) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> Assets Cash and Cash Equivalents DM 67,272 DM 60,978 DM 41,051 Accounts Receivable, net 269,160 260,696 266,299 Accounts Receivable from Related Parties 22,349 15,631 33,917 Loans to Related Parties 15,778 38,140 12,297 Inventories 165,604 162,414 152,988 Prepaid Expenses and Other Current Assets 23,869 22,528 20,088 Deferred Taxes 5,275 6,011 6,714 - ------------------------------------------------------------------------------------------------------------------ Current Assets 569,307 566,398 533,354 - ------------------------------------------------------------------------------------------------------------------ Investment in Affiliated Company, net 8,330 8,987 9,470 Property, Plant and Equipment, net 160,118 153,837 146,877 Intangible and Other Assets, net 31,098 26,818 20,043 Deferred Taxes 11,339 10,195 6,821 - ------------------------------------------------------------------------------------------------------------------ Total Assets DM 780,192 DM 766,235 DM 716,565 -- ------- -- ------- -- ------- -- ------- -- ------- -- ------- - ------------------------------------------------------------------------------------------------------------------ Liabilities and Equity Current Portion of Long Term Debt DM 712 DM 727 DM 796 Short Term Debt 17,695 19,256 45,505 Loans from Related Parties 48,437 63,810 75,910 Accounts Payable 84,764 83,432 79,944 Accounts Payable to Related Parties 28,906 33,070 35,019 Accrued Liabilities 140,361 125,629 103,593 Income Taxes 37,996 41,378 28,162 - ------------------------------------------------------------------------------------------------------------------ Current Liabilities 358,871 367,302 368,929 - ------------------------------------------------------------------------------------------------------------------ Employee Benefit Obligations 94,528 84,549 71,392 Long Term Debt, less Current Maturities 5,905 6,521 7,090 Deferred Taxes 2,489 2,705 2,027 - ------------------------------------------------------------------------------------------------------------------ Combined Equity 318,399 305,158 267,127 - ------------------------------------------------------------------------------------------------------------------ Total Liabilities and Equity DM 780,192 DM 766,235 DM 716,565 -- ------- -- ------- -- ------- -- ------- -- ------- -- ------- </TABLE> See accompanying Notes to Combined Financial Statements - 35 -
HENKEL-ECOLAB JOINT VENTURE COMBINED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> (Thousands) 1994/95 1993/94 1992/93 - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> NET INCOME DM 32,239 DM 42,522 DM 40,040 Cumulative Effect of Change in Accounting for Income Taxes - - (9,771) ----------- ------------ ------------ Income before Cumulative Effect of Change in Accounting Principle 32,239 42,522 30,269 ADJUSTMENTS TO RECONCILE NET INCOME TO CASH PROVIDED BY OPERATING ACTIVITIES Depreciation and Amortization 54,153 45,208 39,648 Equity in (Gain) / Loss of Affiliated Company (132) 391 582 Provision for Doubtful Accounts and Other 791 1,032 3,484 Gain on Sale of Property and Equipment (1,075) (762) (1,076) Deferred Income Taxes (624) (1,993) (2,770) CHANGES IN OPERATING ASSETS AND LIABILITIES (Increase) / Decrease in Accounts Receivable (9,255) 4,571 (5,670) (Increase) /Decrease in Due from Related Parties (6,718) 18,286 (16,287) (Increase) in Inventories (3,190) (9,426) (19,845) Increase in Accounts Payable and Accrued Liabilities 16,064 25,524 45,007 (Decrease) in Due to Related Parties (4,164) (1,949) (25,244) (Decrease) / Increase in Income Taxes Payable (3,382) 13,216 543 (Increase) / Decrease in Other Current Assets (1,341) (2,440) 12,895 Increase in Employee Benefit Obligations 9,979 13,157 12,488 ----------- ------------ ------------ Cash Provided by Operating Activities 83,345 147,337 74,024 ----------- ------------ ------------ INVESTING ACTIVITIES Expenditures for Property and Equipment (63,024) (48,237) (66,283) Expenditures for Intangible and Other Assets (11,825) (13,900) (8,884) Proceeds from Sale of Property and Equipment 8,070 5,045 3,680 Decrease / (Increase) in Loans to Related Parties 22,362 (25,843) 3,640 ----------- ------------ ------------ Cash Used for Investing Activities (44,417) (82,935) (67,847) ----------- ------------ ------------ FINANCING ACTIVITIES (Repayments of) / Proceeds from Bank Debt, net (2,192) (26,887) 6,295 (Decrease) in Loans from Related Parties (15,373) (12,100) (3,825) Dividends Paid (17,063) (1,411) (9,535) Equity Allocations - - 6,826 Equity Withdrawals - - (1,785) ----------- ------------ ------------ Cash Used for Financing Activities (34,628) (40,398) (2,024) ----------- ------------ ------------ EFFECT OF EXCHANGE RATE CHANGES ON NET CASH 1,994 (4,077) (3,192) ----------- ------------ ------------ INCREASE IN CASH AND CASH EQUIVALENTS 6,294 19,927 961 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 60,978 41,051 40,090 ----------- ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD DM 67,272 DM 60,978 DM 41,051 ----------- ------------ ------------ ----------- ------------ ------------ </TABLE> See accompanying Notes to Combined Financial Statements - 36 -
HENKEL-ECOLAB JOINT VENTURE COMBINED STATEMENTS OF EQUITY (Thousands) <TABLE> <CAPTION> Contributed Retained Cumulative Capital Earnings Foreign Total Currency Translation ____________________________________________________ <S> <C> <C> <C> <C> <C> Balance November 30, 1992 DM 206,663 43,213 (11,779) 238,097 Net Income 40,040 40,040 Equity Allocations 6,826 6,826 Equity Withdrawals (1,785) (1,785) Dividends Paid (9,535) (9,535) Translation (6,516) (6,516) Adjustment ____________________________________________________ Balance November 30, 1993 DM 211,704 73,718 (18,295) 267,127 Net Income 42,522 42,522 Dividends Paid (1,411) (1,411) Translation (3,080) (3,080) Adjustment ____________________________________________________ Balance November 30, 1994 DM 211,704 114,829 (21,375) 305,158 Net Income 32,239 32,239 Dividends Paid (17,063) (17,063) Translation (1,935) (1,935) Adjustment ____________________________________________________ Balance November 30, 1995 DM 211,704 130,005 (23,310) 318,399 - ---------------------------------------- ------- ------- ------- ------- - ---------------------------------------- ------- ------- ------- ------- </TABLE> See accompanying Notes to Combined Financial Statements - 37 -
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 the local currency as the functional currency, except for one country, where due to hyperinflation the functional currency since 1994 has been changed to DEM. 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. - 38 -
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 3,494 in 1995, TDM 3,877 in 1994 and TDM 4,976 in 1993. 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 4,696 at November 30, 1995, TDM 5,444 at November 30, 1994 and TDM 6,192 at November 30, 1993. 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: Building 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. - 39 -
INTANGIBLE ASSETS Intangible assets primarily consist of amounts by which cost of acquisitions exceed the values assigned to net tangible assets. These assets are amortized over their estimated lives, periods from 3 to 15 years. Total amortization of all intangible assets amounted to TDM 7,469, TDM 6,407 in 1994 and TDM 4,283 in 1993. - 40 -
HENKEL-ECOLAB JOINT VENTURE 2. BALANCE SHEET INFORMATION <TABLE> <CAPTION> (Thousands) November 30, November 30, November 30, 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> ACCOUNTS RECEIVABLE, NET Accounts Receivable, Trade DM 283,434 DM 274,179 DM 278,750 Allowance for Doubtful Accounts 14,274 13,483 12,451 ------------------------------------------------------ DM 269,160 DM 260,696 DM 266,299 ------- ------- ------- ------- ------- ------- INVENTORIES Raw Materials DM 41,646 DM 36,777 DM 36,087 Work in Process 10,773 10,180 9,931 Finished Goods 113,185 115,457 106,970 ------------------------------------------------------ Total DM 165,604 DM 162,414 DM 152,988 ------- ------- ------- ------- ------- ------- PROPERTY, PLANT AND EQUIPMENT, NET Land DM 6,273 DM 6,164 DM 6,130 Buildings and Improvements 75,122 68,060 61,235 Machinery and Equipment 112,230 106,629 95,150 Merchandising Equipment, Furniture and Fixtures 199,713 172,510 151,039 Construction in Progress 3,204 2,086 6,117 ------------------------------------------------------ 396,542 355,449 319,671 Accumulated Depreciation and Amortization 236,424 201,612 172,794 ------------------------------------------------------ Total DM 160,118 DM 153,837 DM 146,877 ------- ------- ------- ------- ------- ------- INTANGIBLE AND OTHER ASSETS, NET Goodwill on Acquisitions prior to July 1, 1991 DM 20,941 DM 20,941 DM 20,941 Goodwill on Acquisitions after July 1, 1991 16,469 13,500 6,197 Other Intangible Assets, including Capitalized Computer Software 19,542 10,811 3,547 ------------------------------------------------------ 56,952 45,252 30,685 Accumulated Depreciation 27,367 21,454 15,439 ------------------------------------------------------ Total Intangible Assets, net 29,585 23,798 15,246 Other Assets, net 1,513 3,020 4,797 ------------------------------------------------------ Total DM 31,098 DM 26,818 DM 20,043 ------- ------- ------- ------- ------- ------- </TABLE> - 41 -
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. Since 1995 products are purchased at agreed upon prices between the parties involved, prior to that on the basis of costs incurred. Purchases totalled TDM 239,819 in 1995, TDM 259,882 in 1994 and TDM 278,693 in 1993. 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 20,365 in 1995, TDM 20,326 in 1994 and TDM 23,353 in 1993. 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 28,180 in 1995, TDM 31,874 in 1994 and TDM 36,460 in 1993. 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 5.25 % per November 30, 1995 and 4.25 % for 3 month short term German Marks loans per November 30, 1995); on overdrafts, approximately between 0.4 - 1.5 percentage point is paid to compensate Henkel for administration costs. - 42 -
At November 30, 1995 the Joint Venture had borrowed TDM 48,437, from Henkel Group Companies, TDM 63,810 in 1994 and TDM 75,910 in 1993. The loans received from Henkel Group Companies had totalled TDM 15,778 in 1995, TDM 38,140 in 1994 and TDM 12,297 in 1993. The fair values of intercompany loans receivable and payable approximate book value. Interest expense to related companies totalled TDM 6,235 in the year ended November 30, 1995, TDM 6,304 in 1994 and TDM 9,819 in 1993. Interest income from related companies amounted to TDM 3,251 for the year ended November 30, 1995, TDM 1,989 in 1994 and TDM 1,503 in 1993. - 43 -
4. INCOME TAXES The provision for income taxes totalled TDM 31,637, compared to November 30, 1994 TDM 36,287 and November 30, 1993 TDM 35,966. The net deferred taxes included in the provision for income taxes for 1995 were TDM 624 credit, for 1994 TDM 1,993 credit and for 1993 TDM 2,770 credit. Effective December 1, 1992, the Joint Venture adopted the provisions of Statement of Financial Accounting Standards of Nov. 109, "Accounting for Income Taxes" (FAS 109). 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, 1995, at November 30, 1994 and at November 30, 1993 are as follows: Deferred tax assets: November November November 30, 1995 30, 1994 30, 1993 -------- -------- -------- TDM TDM TDM Goodwill amortization 642 2,213 6,226 Tax loss carryforwards 7,894 5,614 5,774 Accruals, not permitted for tax purposes 3,355 2,921 2,148 Inventory valuation 1,847 1,345 1,084 Pension provision, not deductible 4,926 4,746 3,784 Intangible assets (other than goodwill) amortization 1,535 2,024 693 Fixed assets 5,203 4,853 0 Other 1,516 3,275 2,912 --------------------------------- Total gross deferred tax assets 26,918 26,991 22,591 Valuation allowance (7,665) (8,023) (6,369) --------------------------------- Total deferred tax assets 19,521 18,968 16,222 --------------------------------- Deferred tax liabilities: Depreciation on tangible assets (3,555) (3,547) (2,578) Other (1,573) (1,920) (2,136) --------------------------------- Total deferred tax liabilities (5,128) (5,467) (4,714) --------------------------------- Net deferred tax asset 14,125 13,501 11,508 --------------------------------- --------------------------------- At November 30, 1995, the Joint Venture had net foreign operating loss carryforwards for tax purposes of approximately TDM 25,163 compared to November 30, 1994 to TDM 17,847 and compared to November 30, 1993 to TDM 16,577. A significant portion of these losses have an indefinite carryforward period; the remaining losses have expiration dates up to five years. - 44 -
As of November 30, 1995, 1994 and 1993 the tax benefits of the loss carryforwards have been reserved 100% in Great Britain, 20% in Italy, 60% in Switzerland in 1995 and 80% in 1994 and 1993. 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, 1995. A reconciliation of the statutory German trade tax and federal corporate income tax rate to the effective income tax rate was: 1995 1994 1993 ---- ---- ---- Statutory German rate 44.4% 44.4% 45.3% Other European rates (7.5) (6.6) (7.4) Losses and deferred items without offsetting tax benefits 5.8 3.6 5.0 Provision for taxes arising from tax examination 5.9 0.0 0.0 Different tax base in Germany 0.5 3.8 3.8 Deferred taxes refundable to parent 3.8 3.1 9.2 Change of valuation allowance (1.5) 0.0 (6.4) Other (1.9) (2.3) 4.8 ---- ---- ---- Effective income tax rate 49.5% 46.0% 54.3% ---- ---- ---- ---- ---- ---- - 45 -
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 1995, the tax payments were TDM 24,503, in 1994 TDM 21,368 and in 1993 TDM 29,846. - 46 -
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, 1995, 1994 and 1993 follows (TDM): 1995 1994 1993 Service cost-employee benefits 3,646 3,174 2,890 Interest cost 5,567 4,952 4,258 Net amortization and deferral 546 546 546 ----- ----- ----- Total Pension expense 9,759 8,672 7,694 ----- ----- ----- ----- ----- ----- The status of the employee pension benefit plans for Germany at November 30, 1995, 1994 and 1993 is summarized below (TDM): Actuarial present value of: 1995 1994 1993 Vested benefit obligation 60,927 47,578 38,321 Non-vested accumulated benefit obligation 3,433 2,799 2,112 ------ ------ ------ Accumulated benefit obligation 64,360 50,377 40,433 ------ ------ ------ ------ ------ ------ Projected benefit obligation 80,074 66,354 56,975 Unrecognized net transition obligation 7,700 8,246 8,790 Unrecognized net (gain)/loss 6,172 124 (942) ------ ------ ------ Unfunded accrued pension cost 66,202 57,984 49,127 ------ ------ ------ ------ ------ ------ The following assumptions have been used to develop net periodic pension expense and the actuarial present value of projected benefit obligations: 1995 1994 1993 Assumed discount rate 7.0 % 7.5 % 7.5 % Rate of increase in future 4.0 % 4.5 % 5.0 % Compensation levels - 47 -
The Joint Venture also sponsors other defined benefit plans, defined contribution plans and participation government-sponsored programs in certain European countries. Expenses under these plans amounted to approximately TDM 7,767 for the twelve months ended November 30, 1995, TDM 13,433 in 1994 and TDM 12,863 in 1993. Other Joint Venture-specific savings plans, post-retirement and post-employment benefit plans requiring contribution by the Joint Venture are not material. - 48 -
6. TOTAL INDEBTEDNESS Short Term Debt As of November 30, 1995 short term debt totalled TDM 17,695 compared to November 30, 1994 TDM 19,256 and compared to November 30, 1993 TDM 45,505, generally in overdraft facilities with interest rates based on local money market rates. As of November 30, 1995 the three main balances are in French Franc in the equivalent amount of TDM 7,599 at an interest rate of 6.5 %-7 % p.a., in Italian Lira in the equivalent amount of TDM 3,291 at an interest rate of 11 % p.a. and in Spanish Peseta in the equivalent amount of TDM 2,458 at an interest rate of 7.15 % p.a.. Long Term Debt 1995 1994 1993 ---- ---- ---- TDM TDM TDM Notes 6,617 7,248 7,886 Less current maturities 712 727 796 ----- ----- ----- Total 5,905 6,521 7,090 ----- ----- ----- ----- ----- ----- The total long term debt amount is borrowed in Danish Krona at an average interest rate of 10.18 % p.a.. As of November 30, 1995, the aggregate annual maturities of long term debt for the next five years were: 1996 - TDM 712 1997 - TDM 645 1998 - TDM 645 1999 - TDM 645 2000 - TDM 645 after 2000 - TDM 3,325 Interest expense related to all debt was TDM 4,329 in 1995, compared to November 30, 1994 TDM 4,584 and compared to November 30, 1993 TDM 6,700. No significant differences existed between interest expense and interest paid. The fair value of short and long term debt approximates the book value. - 49-
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): November 30, 1995 November 30, 1994 ----------------- ----------------- Notional Credit Notional Credit Amount Exposure Amount Exposure ------ -------- ------ -------- Forwards 36,105 0 30,753 203 Options purchased 0 0 3,142 131 ------ - ------ --- 36,105 0 33,895 334 ------ - ------ --- ------ - ------ --- 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. Gains and losses arising on hedged loan transactions are accrued to income over the period of the hedge. - 50 -
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): 1995 1994 ----------------- ---------------- Buy Sell Buy Sell Italian Lira/US-Dollar 9,759 9,936 11,044 10,739 Belgium Franc/Dutch Guilders 4,866 4,865 0 0 Pound Sterling 4,840 4,792 7,319 7,364 US-Dollar 4,120 4,224 3,142 3,000 Finmark/Swedish Krona 2,641 2,531 0 0 Danish Krona 2,574 2,582 8,170 7,997 Swiss Franc 2,449 2,462 0 0 Greek Drachme/French Franc 2,024 2,060 3,148 3,248 Irish Pound 1,434 1,441 0 0 Portuguese Escudo 864 874 677 685 Finmark 331 336 0 0 Norwegian Krona 203 204 0 0 Swedish Krona 0 0 395 367 ----------------- ---------------- 36,105 36,307 33,895 33,400 ------ ------ ------ ------ ------ ------ ------ ------ c) Fair Value of Off Balance Sheet Financial Instruments The fair value of off balance sheet financial instruments is not significant. - 51 -
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 33.0 million in 1995, DM 34.1 million in 1994 and DM 28.3 million in 1993. - 52 -
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, 1995 (TDM): 1996 14,943 1997 9,119 1998 5,839 1999 4,513 2000 4,069 thereafter 5,362 ------ Total 43,845 ------ ------ Rent expense for the twelve month period ended November 30, 1995, was approximately TDM 17,790, compared to November 30, 1994 approximately TDM 16,372 and compared to November 30, 1993 approximately TDM 13,415. 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. - 53 -
The Joint Venture's operations and customers are located throughout 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 1995, 1994 and 1993, and there were no significant accounts receivable from a single customer at November 30, 1995, 1994 and 1993. The Joint Venture establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. - 54 -
HENKEL-ECOLAB JOINT VENTURE Schedule I - Valuation and Qualifying Accounts and Reserves (Thousands) <TABLE> <CAPTION> - ---------------------------------------------------------------------------------- Description Balance, Additions Deductions Balance, Beg. of (a) from Close of Period Reserve Period (b) - ---------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Period Ended November 30, 1993 Allowance for DM 8,967 6,616 3,132 12,451 doubtful Accounts ------ ----- ----- ------ DM 8,967 6,616 3,132 12,451 ------ ----- ----- ------ ------ ----- ----- ------ Period Ended November 30, 1994 Allowance for DM 12,451 5,245 4,213 13,483 doubtful Accounts ------ ----- ----- ------ DM 12,451 5,245 4,213 13,483 ------ ----- ----- ------ ------ ----- ----- ------ Period Ended November 30, 1995 Allowance for DM 13,483 5,365 4,574 14,274 doubtful Accounts ------ ----- ----- ------ DM 13,483 5,365 4,574 14,274 ------ ----- ----- ------ ------ ----- ----- ------ </TABLE> (a) Provision for doubtful accounts (charged to expenses) (b) Items determined to be uncollectible, less recovery of amounts previously written off. - 55 -
EXHIBIT INDEX The following documents are filed as exhibits to this Report. <TABLE> <CAPTION> Paper (P) or Exhibit No. Document Electronic (E) ----------- -------- -------------- <S> <C> <C> (3)A.(i) 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. (ii) Amended Certificate of E Designation, Preferences and Rights, Including Increase in Number of Shares, of the Series A Junior Participating Preferred Stock of the Company. B. By-Laws, as amended through E December 18, 1995. (4)A. Common Stock - see Exhibits -- (3)A and (3)B. B. Form of Common Stock E Certificate. C. Rights Agreement dated as of -- February 24, 1996 - Incorporated by reference to Exhibit (4) of the Company's Current Report on Form 8-K dated February 24, 1996. 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. - 56 -
<CAPTION> Paper (P) or Exhibit No. Document Electronic (E) ----------- -------- -------------- <S> <C> <C> 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 - Incorporated by reference to Exhibit (4)E of the Company's Form 10-K Annual Report for the year ended December 31, 1994. 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. - 57 -
<CAPTION> Paper (P) or Exhibit No. Document Electronic (E) ----------- -------- -------------- <S> <C> <C> (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. D. 1995 Non-Employee Director -- Stock Option Plan - Incorporated by reference to Exhibit (10)D of the Company's Form 10-K Annual Report for the year ended December 31, 1994. 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. - 58 -
<CAPTION> Paper (P) or Exhibit No. Document Electronic (E) ----------- -------- -------------- <S> <C> <C> 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. - 59 -
<CAPTION> Paper (P) or Exhibit No. Document Electronic (E) ----------- -------- -------------- <S> <C> <C> 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 - Incorporated by reference to Exhibit (10)J of the Company's 10-K Annual Report for the year ended December 31, 1994. See also Exhibit (10)P hereof. K. Ecolab Executive Long-Term -- Disability Plan, as amended and restated effective January 1, 1994 - Incorporated by reference to Exhibit (10)K of the Company's 10-K Annual Report for the year ended December 31, 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 - Incorporated by reference to Exhibit (10)M(i) of the Company's 10- K Annual Report for the year ended December 31, 1994. See also Exhibit (10)P hereof. - 60 -
<CAPTION> Paper (P) or Exhibit No. Document Electronic (E) ----------- -------- -------------- <S> <C> <C> (ii) First Declaration of -- Amendment to Ecolab Supplemental Executive Retirement Plan effective as of July 1, 1994 - Incorporated by reference to Exhibit (10)M(ii) of the Company's 10-K Annual Report for the year ended December 31, 1994. (iii) Second Declaration of E Amendment to Ecolab Supplemental Executive Retirement Plan effective as of July 1, 1994. N.(i) Ecolab Mirror Savings Plan -- (formerly: Ecolab Executive Non-Qualified Deferred Compensation Plan), as amended and restated effective September 1, 1994 - Incorporated by reference to Exhibit (10)N of the Company's 10-K Annual Report for the year ended December 31, 1994. See also Exhibit (10)P hereof. (ii) First Declaration of E Amendment to Ecolab Mirror Savings Plan effective as of January 1, 1995. O.(i) Ecolab Mirror Pension Plan -- effective July 1, 1994 - Incorporated by reference to Exhibit (10)O(i) of the Company's Annual Report on Form 10-K for the year ended December 31, 1994. See also Exhibit 10(P) hereof. - 61 -
<CAPTION> Paper (P) or Exhibit No. Document Electronic (E) ----------- -------- -------------- <S> <C> <C> (ii) First Declaration of -- Amendment to Ecolab Mirror Pension Plan effective as of July 1, 1994 - Incorporated by reference to Exhibit (10)O(ii) of the Company's Annual Report on Form 10-K for the year ended December 31, 1994. (iii) Second Declaration of E 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 - Incorporated by reference to Exhibit (10)P of the Company's 10-K Annual Report for the year ended December 31, 1994. 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. 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. - 62 -
<CAPTION> Paper (P) or Exhibit No. Document Electronic (E) ----------- -------- -------------- <S> <C> <C> (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. (iii) Description of Pierson M. -- Grieve's retirement benefit - Incorporated by reference to written description of Consulting Agreement contained on pages 19 and 20 of the Proxy Statement. 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. - 63 -
<CAPTION> Paper (P) or Exhibit No. Document Electronic (E) ----------- -------- -------------- <S> <C> <C> (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 to Exhibit (2) of the Company's Current Report on Form 8-K dated December 7, 1994. (11) Computation of Primary and E Fully Diluted Earnings Per Share. (13) Those portions of the E Company's Annual Report to Stockholders for the year ended December 31, 1995 which are incorporated by reference into Parts I, II and IV hereof. (21) List of Subsidiaries as of E March 19, 1996. (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 E Treuhand-Gesellschaft Aktiengesellschaft. - 64 -
<CAPTION> Paper (P) or Exhibit No. Document Electronic (E) ----------- -------- -------------- <S> <C> <C> (24) Powers of Attorney. E (27) Financial Data Schedule. E COVER Cover Letter. E </TABLE> - 65 -