UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q

(Mark One)

x

Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2006 or

 

 

o

Transition report pursuant to section 13 or 15(d) of the Securities Exchange act of 1934 for the transition period from _______ to _______

Commission file number 1-10776

CALGON CARBON CORPORATION


(Exact name of registrant as specified in its charter)

 

Delaware

 

25-0530110


 


(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

P.O. Box 717, Pittsburgh, PA  15230-0717


(Address of principal executive offices) (Zip Code)

 

 

 

(412) 787-6700


(Registrant’s telephone number, including area code)

 

 


(Former name, former address and former fiscal year if changed since last report)

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

o

 

No

x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

o

Accelerated filer

x

Non-accelerated filer

o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class

 

Outstanding at December 7, 2006


 


Common Stock, $.01 par value

 

39,980,643 shares




CALGON CARBON CORPORATION

 

Yes

o

 

No

x

 

FORM 10-Q
QUARTER ENDED September 30, 2006

The Quarterly Report on Form 10-Q contains historical information and forward-looking statements.  Statements looking forward in time are included in this Form 10-Q pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.  They involve known and unknown risks and uncertainties that may cause the Company’s actual results in the future to differ from performance suggested herein.  In the context of forward-looking information provided in this Form 10-Q and in other reports, please refer to the discussion of risk factors detailed in, as well as the other information contained in the Company’s filings with the Securities and Exchange Commission.

I N D E X

 

 

Page

 

 


PART 1 – CONDENSED CONSOLIDATED FINANCIAL INFORMATION

 

 

 

Item 1.

Condensed Consolidated Financial Statements

2

 

 

 

 

Introduction to the Condensed Consolidated Financial Statements

2

 

 

 

 

Condensed Consolidated Statements of Operations and Retained Earnings (unaudited)

3

 

 

 

 

Condensed Consolidated Balance Sheets (unaudited)

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows (unaudited)

5

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

6

 

 

 

Item 2.

Management’s Discussion and Analysis of Results of Operations and Financial Condition

29

 

 

 

Item 4.

Controls and Procedures

38

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

38

 

 

 

Item 1a.

Risk Factors

38

 

 

 

Item 6.

Exhibits

50

 

 

 

SIGNATURES

51

 

 

 

CERTIFICATIONS

 




PART I – CONDENSED CONSOLIDATED FINANCIAL INFORMATION

Item 1.

Condensed Consolidated Financial Statements

INTRODUCTION TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

          The unaudited interim condensed consolidated financial statements included herein have been prepared by Calgon Carbon Corporation (the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations.  Management of the Company believes that the disclosures are adequate to make the information presented not misleading when read in conjunction with the Company’s audited consolidated financial statements and the notes included therein for the year ended December 31, 2005 filed with the Securities and Exchange Commission by the Company in Form 10-K.

          In management’s opinion, the unaudited interim condensed consolidated financial statements reflect all adjustments, which are of a normal and recurring nature, which are necessary for a fair presentation, in all material respects, of financial results for the interim periods presented.  Operating results for the first nine months of 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006.

2



CALGON CARBON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Dollars in Thousands Except Share and Per Share Data)
(Unaudited)

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 


 


 

 

 

2006

 

2005

 

2006

 

2005

 

 

 



 



 



 



 

Net sales

 

$

79,680

 

$

68,867

 

$

236,769

 

$

219,578

 

 

 



 



 



 



 

Cost of products sold (excluding depreciation)

 

 

58,897

 

 

51,287

 

 

176,270

 

 

160,194

 

Depreciation and amortization

 

 

4,719

 

 

5,096

 

 

14,311

 

 

16,051

 

Selling, general and administrative expenses

 

 

16,547

 

 

14,073

 

 

47,489

 

 

43,892

 

Research and development expenses

 

 

1,146

 

 

1,074

 

 

3,384

 

 

3,313

 

(Gain) loss on insurance settlement (Note 2)

 

 

(3,173

)

 

1,000

 

 

(8,072

)

 

1,000

 

Gulf Coast Facility impairment charge (Note 4)

 

 

—  

 

 

—  

 

 

—  

 

 

2,158

 

Restructuring charge

 

 

—  

 

 

65

 

 

7

 

 

423

 

 

 



 



 



 



 

 

 

 

78,136

 

 

72,595

 

 

233,389

 

 

227,031

 

 

 



 



 



 



 

Income (loss) from operations

 

 

1,544

 

 

(3,728

)

 

3,380

 

 

(7,453

)

Interest income

 

 

233

 

 

165

 

 

553

 

 

558

 

Interest expense

 

 

(1,530

)

 

(1,248

)

 

(4,628

)

 

(3,578

)

Other expense—net

 

 

(660

)

 

(646

)

 

(2,018

)

 

(1,278

)

 

 



 



 



 



 

Loss before income taxes, equity income, and minority interest

 

 

(413

)

 

(5,457

)

 

(2,713

)

 

(11,751

)

Provision (benefit) for income taxes (Note 16)

 

 

114

 

 

(5,023

)

 

(1,156

)

 

(6,507

)

 

 



 



 



 



 

Loss before equity income and minority interest

 

 

(527

)

 

(434

)

 

(1,557

)

 

(5,244

)

Equity in income from equity investments

 

 

39

 

 

397

 

 

203

 

 

1,020

 

Minority interest

 

 

(8

)

 

—  

 

 

8

 

 

—  

 

 

 



 



 



 



 

Loss from continuing operations

 

 

(496

)

 

(37

)

 

(1,346

)

 

(4,224

)

Income (loss) from discontinued operations

 

 

38

 

 

(316

)

 

1,910

 

 

2,458

 

 

 



 



 



 



 

Net income (loss)

 

 

(458

)

 

(353

)

 

564

 

 

(1,766

)

Common stock dividends

 

 

—  

 

 

(1,190

)

 

—  

 

 

(3,555

)

Retained earnings, beginning of period

 

 

102,855

 

 

109,026

 

 

101,833

 

 

112,804

 

 

 



 



 



 



 

Retained earnings, end of period

 

$

102,397

 

$

107,483

 

$

102,397

 

$

107,483

 

 

 



 



 



 



 

Net income (loss) per Common share

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

$

(.01

)

$

.00

 

$

(.03

)

$

(.11

)

Income (loss) from discontinued operations

 

$

.00

 

$

(.01

)

$

.05

 

$

.06

 

 

 



 



 



 



 

Net income (loss)

 

$

(.01

)

$

(.01

)

$

.01

 

$

(.04

)

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

$

(.01

)

$

.00

 

$

(.03

)

$

(.11

)

Income (loss) from discontinued operations

 

$

.00

 

$

(.01

)

$

.05

 

$

.06

 

 

 



 



 



 



 

Net income (loss)

 

$

(.01

)

$

(.01

)

$

.01

 

$

(.04

)

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

39,881,805

 

 

39,569,277

 

 

39,870,778

 

 

39,421,446

 

Diluted

 

 

39,881,805

 

 

39,569,277

 

 

39,870,778

 

 

39,421,446

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3



CALGON CARBON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands except share data)
(Unaudited)

 

 

September 30,
2006

 

December 31,
2005

 

 

 



 



 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

5,071

 

$

5,446

 

Receivables (net of allowance of $2,210 and $2,172)

 

 

57,828

 

 

51,224

 

Revenue recognized in excess of billings on uncompleted contracts

 

 

6,228

 

 

5,443

 

Inventories

 

 

71,026

 

 

67,655

 

Deferred income taxes – current

 

 

9,827

 

 

8,448

 

Other current assets

 

 

6,149

 

 

6,044

 

Assets held for sale

 

 

—  

 

 

21,340

 

 

 



 



 

Total current assets

 

 

156,129

 

 

165,600

 

Property, plant and equipment, net

 

 

107,068

 

 

108,745

 

Equity investments

 

 

6,975

 

 

7,219

 

Intangibles

 

 

8,848

 

 

10,049

 

Goodwill

 

 

34,513

 

 

33,874

 

Deferred income taxes – long-term

 

 

18,056

 

 

18,684

 

Other assets

 

 

5,580

 

 

3,697

 

 

 



 



 

Total assets

 

$

337,169

 

$

347,868

 

 

 



 



 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

36,468

 

$

36,502

 

Billings in excess of revenue recognized on uncompleted contracts

 

 

1,182

 

 

3,933

 

Payroll and benefits payable

 

 

8,798

 

 

11,396

 

Accrued income taxes

 

 

12,318

 

 

10,783

 

Liabilities held for sale

 

 

—  

 

 

6,683

 

 

 



 



 

Total current liabilities

 

 

58,766

 

 

69,297

 

Long-term debt

 

 

81,693

 

 

83,925

 

Deferred income taxes – long-term

 

 

1,046

 

 

1,389

 

Accrued pension and other liabilities

 

 

40,193

 

 

42,697

 

 

 



 



 

Total liabilities

 

 

181,698

 

 

197,308

 

 

 



 



 

Commitments and contingencies

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Common shares, $.01 par value, 100,000,000 shares authorized, 42,517,566 and 42,459,733 shares issued

 

 

425

 

 

425

 

Additional paid-in capital

 

 

71,265

 

 

69,906

 

Retained earnings

 

 

102,397

 

 

101,833

 

Accumulated other comprehensive income

 

 

9,976

 

 

6,442

 

Deferred compensation

 

 

(1,355

)

 

(917

)

 

 



 



 

 

 

 

182,708

 

 

177,689

 

Treasury stock, at cost, 2,819,690 and 2,787,258 shares

 

 

(27,237

)

 

(27,129

)

 

 



 



 

Total shareholders’ equity

 

 

155,471

 

 

150,560

 

 

 



 



 

Total liabilities and shareholders’ equity

 

$

337,169

 

$

347,868

 

 

 



 



 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4



CALGON CARBON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)

 

 

Nine Months Ended
September 30,

 

 

 


 

 

 

2006

 

2005

 

 

 



 



 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income (loss)

 

$

564

 

$

(1,766

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

(Gain) loss on insurance settlement

 

 

(8,072

)

 

1,000

 

Gain from divestitures

 

 

(6,719

)

 

—  

 

Depreciation and amortization

 

 

14,313

 

 

16,871

 

Equity income from equity investments

 

 

(211

)

 

(1,020

)

Employee benefit plan provisions

 

 

2,283

 

 

3,327

 

Distributions received from Calgon Mitsubishi Chemical Corporation

 

 

—  

 

 

254

 

Non-cash impairment and restructuring charges

 

 

788

 

 

2,373

 

Changes in assets and liabilities - net of effects from purchase of business, non-cash impairment and restructuring:

 

 

 

 

 

 

 

(Increase) decrease in receivables

 

 

(81

)

 

5,959

 

Increase in inventories

 

 

(3,024

)

 

(6,225

)

(Increase) decrease in revenue in excess of billings on uncompleted contracts and other current assets

 

 

(1,772

)

 

3,311

 

Decrease in accounts payable and accrued liabilities

 

 

(4,724

)

 

(11,613

)

Increase (decrease) in long-term deferred income taxes

 

 

835

 

 

(4,412

)

Decrease in accrued pensions

 

 

(10,588

)

 

(3,711

)

Other items – net

 

 

1,327

 

 

1,032

 

 

 



 



 

Net cash (used in) provided by operating activities

 

 

(15,081

)

 

5,380

 

 

 



 



 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchase of business - net of cash

 

 

—  

 

 

(856

)

Proceeds from divestitures

 

 

21,213

 

 

—  

 

Property, plant and equipment expenditures

 

 

(9,989

)

 

(8,166

)

Proceeds from insurance settlement for plant and equipment

 

 

4,595

 

 

—  

 

Proceeds from disposals of property, plant and equipment

 

 

676

 

 

1,118

 

 

 



 



 

Net cash provided by (used in) investing activities

 

 

16,495

 

 

(7,904

)

 

 



 



 

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from borrowings

 

 

150,338

 

 

83,491

 

Repayments of borrowings

 

 

(149,337

)

 

(81,888

)

Debt issuance costs

 

 

(3,233

)

 

—  

 

Treasury stock purchases

 

 

(108

)

 

—  

 

Common stock issued through exercise of stock options

 

 

464

 

 

2,986

 

Common stock dividends

 

 

—  

 

 

(3,555

)

 

 



 



 

Net cash (used in) provided by financing activities

 

 

(1,876

)

 

1,034

 

 

 



 



 

Effect of exchange rate changes on cash

 

 

87

 

 

889

 

 

 



 



 

Decrease in cash and cash equivalents

 

 

(375

)

 

(601

)

Cash and cash equivalents, beginning of period

 

 

5,446

 

 

8,780

 

 

 



 



 

Cash and cash equivalents, end of period

 

$

5,071

 

$

8,179

 

 

 



 



 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5



CALGON CARBON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands)
(Unaudited)

1.

Acquisition

 

 

 

In December 2004, the Company increased its equity ownership in Datong Carbon Corporation from 80% to 100% for a purchase price of $0.7 million, which was paid in the three months ended March 31, 2005.  In May 2005, the Company formed a joint venture company with C. Gigantic Carbon to provide carbon reactivation services to the Thailand market.  The joint venture company was named Calgon Carbon (Thailand) Ltd. and is 20% owned by the Company after an initial investment of $0.2 million and exchange of technology.  It is accounted for in the Company’s financial statements under the equity method.

 

 

2.

Gain on Insurance Settlement

 

 

 

In August 2005, the Company’s plant located in Pearlington, Mississippi was damaged by Hurricane Katrina and the Company recorded $1.0 million of non-reimbursable expense in the quarter ended September 30, 2005.  In accordance with FIN 30, Accounting for Involuntary Conversions of Non-Monetary Assets to Monetary Assets, the Company has written off the net book value of the destroyed inventory and property totaling $1.8 million. The replacement value of the inventory and property exceeded its net book value by approximately $4.9 million, which was recorded as a gain on insurance settlement. As of September 30, 2006, the Company has also settled its business interruption insurance claim with its insurance company for $3.8 million.  This amount, net of costs related to business interruption of $0.6 million, was recorded as a gain on insurance settlement.

 

 

3.

Discontinued Operations and Assets and Liabilities Held for Sale

 

 

 

The Company’s financial statements for all periods presented were significantly impacted by activities relating to the divestiture of two of the Company’s businesses.

 

 

 

The Company reclassified the following businesses from continuing operations to discontinued operations and assets held for sale for all periods presented: Charcoal/Liquid in Bodenfelde, Germany and Solvent Recovery in Columbus, Ohio; Vero Beach, Florida; and Ashton, United Kingdom.  The Charcoal/Liquid and Solvent Recovery businesses were reported in the Company’s Consumer and Equipment segments, respectively.

 

 

 

On February 17, 2006, Calgon Carbon Corporation, through its wholly owned subsidiary Chemviron Carbon GmbH, executed an agreement (the “Charcoal Sale Agreement”) with proFagus GmbH, proFagus Grundstuecksverwaltungs GmbH and proFagus Beteiligungen GmbH (as Guarantor) to sell, and sold, substantially all the assets, real estate, and specified liabilities of the Bodenfelde, Germany facility (the Charcoal/Liquid business).  The facility includes the production of charcoal for consumer use and liquids that are recovered during charcoal production.  The products are sold to retail and industrial markets.  The aggregate sales price, based on an exchange rate of 1.19 Dollars per Euro, consisted of $20.4 million of cash which included a final working capital adjustment of $1.3 million.  The Company provided guarantees to the buyer related to pre-divestiture tax liabilities, future environmental remediation costs related to pre-divestiture activities and other contingencies.  Management believes the ultimate cost of such guarantees is not material.  An additional $5.0 million could be paid contingent upon the business meeting certain earnings targets over the next three years.  As of September 30, 2006, the Company has recorded a pre-tax gain of $5.0 million or $2.0 million, net of tax, on the sale of the Charcoal/Liquid divestiture.

 

 

 

On April 24, 2006, the Company completed the sale of the assets of its Solvent Recovery business to MEGTEC Systems, Inc. (MEGTEC), a subsidiary of Sequa Corporation.  The Solvent Recovery unit provides turnkey on-site regenerable solvent recovery systems, distillation systems, on-site regenerable volatile organic compound concentrators, vapor-phase biological oxidation systems, and related services on a worldwide basis.  The purchase price of $1.8 million included cash proceeds of approximately $0.8 million and $0.7 million of assumed liabilities, primarily accounts payable.  The transaction was also subject to a working capital adjustment which is currently estimated at $0.3 million, which management expects to finalize and record in the fourth quarter of 2006.  As of September 30, 2006, the Company recorded a pre-tax gain of $0.4 million or $0.3 million, net of tax, on the sale of the Solvent Recovery business.

6



 

The following table details selected financial information for the businesses included within the discontinued operations in the Condensed Consolidated Statements of Operations and Retained Earnings:


 

 

Charcoal/Liquid

 

Solvent Recovery

 

 

 


 


 

 

 

Three Months
Ended September 30

 

Nine Months
Ended September 30

 

Three Months
Ended September 30

 

Nine Months
Ended September 30

 

 

 


 


 


 


 

(Dollars in thousands)

 

2006

 

2005

 

2006

 

2005

 

2006

 

2005

 

2006

 

2005

 


 



 



 



 



 



 



 



 



 

Net sales

 

$

—  

 

$

5,291

 

$

1,375

 

$

25,890

 

$

(35

)

$

2,772

 

$

2,775

 

$

11,187

 

 

 



 



 



 



 



 



 



 



 

Income (loss) from operations

 

 

(25

)

 

(290

)

 

(427

)

 

2,514

 

 

(20

)

 

(175

)

 

(161

)

 

1,263

 

Other income (expense)-net

 

 

120

 

 

12

 

 

5,009

 

 

38

 

 

—  

 

 

(30

)

 

430

 

 

(57

)

 

 



 



 



 



 



 



 



 



 

Income (loss) before income taxes

 

 

95

 

 

(278

)

 

4,582

 

 

2,552

 

 

(20

)

 

(205

)

 

269

 

 

1,206

 

Income tax expense (benefit)

 

 

44

 

 

(96

)

 

2,847

 

 

883

 

 

(7

)

 

(71

)

 

94

 

 

417

 

 

 



 



 



 



 



 



 



 



 

Income (loss) from discontinued operations

 

$

51

 

$

(182

)

$

1,735

 

$

1,669

 

$

(13

)

$

(134

)

$

175

 

$

789

 

 

 



 



 



 



 



 



 



 



 

The major classes of assets and liabilities of operations held for sale in the Condensed Consolidated Balance Sheets are as follows:

 

 

Charcoal/Liquid

 

Solvent Recovery

 

 

 


 


 

(Dollars in thousands)

 

September 30, 2006

 

December 31, 2005

 

September 30, 2006

 

December 31, 2005

 


 



 



 



 



 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Receivables

 

$

—  

 

$

1,059

 

$

—  

 

$

4,018

 

Inventories

 

 

—  

 

 

6,924

 

 

—  

 

 

113

 

Property, plant and equipment, net

 

 

—  

 

 

7,310

 

 

—  

 

 

42

 

Goodwill

 

 

—  

 

 

—  

 

 

—  

 

 

1,000

 

Other assets

 

 

—  

 

 

181

 

 

—  

 

 

693

 

 

 



 



 



 



 

Total assets held for sale

 

$

—  

 

$

15,474

 

$

—  

 

$

5,866

 

 

 



 



 



 



 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

 

—  

 

 

2,604

 

 

—  

 

 

3,157

 

Other liabilities

 

 

—  

 

 

922

 

 

—  

 

 

—  

 

 

 



 



 



 



 

Total liabilities held for sale

 

$

—  

 

$

3,526

 

$

—  

 

$

3,157

 

 

 



 



 



 



 


4.

Gulf Coast Facility Impairment Charge

 

 

 

In 2003, the Company temporarily suspended construction of a new facility in the Gulf Coast region of the United States as it evaluated strategic alternatives.  On March 22, 2005, the Company concluded, and the Board of Directors approved, that cancellation of this project was warranted and that construction of such a facility should be suspended for the foreseeable future.  Accordingly, the Company recorded an impairment charge of $2.2 million in 2005.

 

 

5.

Inventories:


 

 

September 30, 2006

 

December 31, 2005

 

 

 



 



 

Raw materials

 

$

16,026

 

$

16,501

 

Finished goods

 

 

55,000

 

 

51,154

 

 

 



 



 

 

 

$

71,026

 

$

67,655

 

 

 



 



 

7



6.

Supplemental Cash Flow Information:


 

 

Nine Months Ended September 30,

 

 

 


 

 

 

 

2006

 

 

2005

 

 

 



 



 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest

 

$

(4,159

)

$

(3,765

)

 

 



 



 

Income taxes paid – net

 

$

(687

)

$

(357

)

 

 



 



 


7.

Dividends:

 

 

 

The Company’s Board of Directors did not declare or pay a dividend for the quarter ended September 30, 2006. Common stock dividends declared and paid during the quarter ended September 30, 2005 were $.03 per common share.

 

 

8.

Comprehensive income (loss)


 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 


 


 

 

 

2006

 

2005

 

2006

 

2005

 

 

 



 



 



 



 

Net income (loss)

 

$

(458

)

$

(353

)

$

564

 

$

(1,766

)

Other comprehensive income (loss), net of taxes

 

 

(209

)

 

825

 

 

3,534

 

 

(4,006

)

 

 



 



 



 



 

Comprehensive income (loss)

 

$

(667

)

$

472

 

$

4,098

 

$

(5,772

)

 

 



 



 



 



 


 

The only matter contributing to the other comprehensive income (loss) during the three and nine months ended September 30, 2006 was the foreign currency translation adjustment of $(0.3) million and $3.6 million, respectively, and the change in the fair value of the derivative instruments of $0.1 million and $(27) thousand, respectively as described in Note 10.  The only matters contributing to the other comprehensive income (loss) during the three and nine months ended September 30, 2005 were the foreign currency translation adjustment of $1.1 million and ($4.1) million, respectively, and the change in the fair value of the derivative instruments of ($0.3) million and $0.1 million, respectively.

 

 

9.

Segment Information:

 

 

 

The Company’s management has identified three segments based on product line and associated services.  Those segments include Activated Carbon and Service, Equipment, and Consumer.  The Company’s chief operating decision maker, its chief executive officer John S. Stanik, receives and reviews financial information in this format.  The Activated Carbon and Service segment manufactures granular activated carbon for use in applications to remove organic compounds from liquids, gases, water, and air.  This segment also consists of services related to activated carbon including reactivation of spent carbon and the leasing, monitoring, and maintenance of carbon fills at customer sites.  The service portion of this segment also includes services related to the Company’s ion exchange technologies for treatment of groundwater and process streams.  The Equipment segment provides solutions to customers’ air and water process problems through the design, fabrication, and operation of systems that utilize the Company’s enabling technologies:  carbon adsorption, ultraviolet light, and advanced ion exchange separation.  The Consumer segment brings the Company’s purification technologies directly to the consumer in the form of products and services including carbon cloth and activated carbon for tarnish prevention and household odors. The following segment information represents the results of the Company’s continuing operations.

8



 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 


 


 

 

 

2006

 

2005

 

2006

 

2005

 

 

 



 



 



 



 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

Carbon and Service

 

$

67,869

 

$

57,936

 

$

200,489

 

$

181,166

 

Equipment

 

 

8,740

 

 

7,972

 

 

26,627

 

 

29,333

 

Consumer

 

 

3,071

 

 

2,959

 

 

9,653

 

 

9,079

 

 

 



 



 



 



 

 

 

$

79,680

 

$

68,867

 

$

236,769

 

$

219,578

 

 

 



 



 



 



 

Income (loss) from operations before depreciation, amortization, impairment, restructuring, and income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

Carbon and Service

 

$

6,776

 

$

3,032

 

$

20,885

 

$

13,373

 

Equipment

 

 

(848

)

 

(1,318

)

 

(4,520

)

 

(2,204

)

Consumer

 

 

335

 

 

(281

)

 

1,333

 

 

10

 

 

 



 



 



 



 

 

 

 

6,263

 

 

1,433

 

 

17,698

 

 

11,179

 

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

Carbon and Service

 

 

4,409

 

 

4,667

 

 

13,309

 

 

14,632

 

Equipment

 

 

180

 

 

243

 

 

598

 

 

794

 

Consumer

 

 

130

 

 

186

 

 

404

 

 

625

 

 

 



 



 



 



 

 

 

 

4,719

 

 

5,096

 

 

14,311

 

 

16,051

 

 

 



 



 



 



 

Income (loss) from operations before impairment, restructuring, and income taxes

 

$

1,544

 

$

(3,663

)

$

3,387

 

$

(4,872

)

 

 



 



 



 



 

Reconciling items:

 

 

 

 

 

 

 

 

 

 

 

 

 

Gulf Coast Facility impairment charge

 

 

—  

 

 

—  

 

 

—  

 

 

(2,158

)

Restructuring charge

 

 

—  

 

 

(65

)

 

(7

)

 

(423

)

Interest income

 

 

233

 

 

165

 

 

553

 

 

558

 

Interest expense

 

 

(1,530

)

 

(1,248

)

 

(4,628

)

 

(3,578

)

Other expense – net

 

 

(660

)

 

(646

)

 

(2,018

)

 

(1,278

)

 

 



 



 



 



 

Consolidated loss before income taxes, equity in income, and minority interest

 

$

(413

)

$

(5,457

)

$

(2,713

)

$

(11,751

)

 

 



 



 



 



 


 

 

September 30,
2006

 

December 31,
2005

 

 

 



 



 

Total Assets

 

 

 

 

 

 

 

Carbon and Service

 

$

284,432

 

$

267,408

 

Equipment

 

 

40,652

 

 

44,607

 

Consumer

 

 

12,085

 

 

14,513

 

 

 



 



 

Total assets from continuing operations

 

$

337,169

 

$

326,528

 

Assets held for sale

 

 

—  

 

 

21,340

 

 

 



 



 

Consolidated total assets

 

$

337,169

 

$

347,868

 

 

 



 



 

9



10.

Derivative Instruments

 

 

 

The Company accounts for its foreign exchange and natural gas derivative instruments under Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended.  This standard requires recognition of all derivatives as either assets or liabilities at fair value and may result in additional volatility in both current period earnings and other comprehensive income as a result of recording recognized and unrecognized gains and losses from changes in the fair value of derivative instruments.

 

 

 

The Company had thirteen derivative instruments outstanding at September 30, 2006 of which one was a foreign currency swap, nine were foreign currency forward exchange contracts, and three were cash flow hedges for forecasted purchases of natural gas.  The Company applied hedge accounting treatment to the foreign currency swap and the three cash flow hedges for forecasted natural gas.  The Company had thirty-one derivative instruments outstanding at September 30, 2005 of which one was a foreign currency swap and thirty were foreign currency forward exchange contracts.  The Company applied hedge accounting treatment to six of the foreign currency forward exchange contracts, which were treated as foreign exchange cash flow hedges regarding payment for inventory purchases, and the foreign currency swap.  The change in the fair market value of the effective hedge portion of the foreign currency forward exchange contracts was ($0.3) million and ($0.1) million, respectively, for the three and nine month periods ended September 30, 2005 and was recorded in other comprehensive (income) loss (see Note 8).  It was released into operations over 12 months based on the timing of the sales of the underlying inventory.  The release to operations was reflected in cost of products sold.  During the periods ended September 30, 2006 and 2005, the Company recorded an immaterial gain in other income for the remaining nine and twenty-four foreign currency forward exchange contracts that did not qualify for hedge accounting treatment.

 

 

 

On April 26, 2004, the Company entered into a ten-year foreign currency swap agreement to fix the foreign exchange rate on a $6.5 million intercompany loan between the Company and its foreign subsidiary, Chemviron Carbon Ltd.  Since its inception, the foreign currency swap has been treated as a foreign exchange cash flow hedge.  Accordingly, the change in the fair value of the effective hedge portion of the foreign currency swap, net of tax, of $0.4 million and $0.3 million, respectively, for the three and nine month periods ended September 30, 2006 and $0.1 million for the three and nine month periods ended September 30, 2005 was recorded in other comprehensive income (loss).  The balance of the effective hedge portion of the foreign currency swap recorded in other long-term liabilities was $0.7 million and $0.3 million, respectively, as of September 30, 2006 and 2005.  The change in fair value and the balance of the effective hedge portion of the cash flow hedges for the forecasted purchase of natural gas recorded in other long-term liabilities was $0.5 million, net of tax, for the three and nine month periods ended September 30, 2006.

 

 

 

No component of the derivatives gains or losses has been excluded from the assessment of hedge effectiveness.  For the periods ended September 30, 2006 and 2005, the net gain or loss recognized due to the amount of hedge ineffectiveness was insignificant.

 

 

11.

Contingencies

 

 

 

In August 2005, the Company’s Pearl River plant was impacted by Hurricane Katrina.  In June 2006, the Company settled its property damage claim with its insurance carrier for approximately $8.8 million, resulting in a pre-tax gain of $4.9 million.  In September 2006, the Company also settled its business interruption claim with its insurance carrier for approximately $3.8 million, resulting in a pre-tax gain of $3.2 million.

 

 

 

On December 31, 1996, the Company purchased the common stock of Advanced Separation Technologies Incorporated (AST) from Progress Capital Holdings, Inc. and Potomac Capital Investment Corporation.  On January 12, 1998, the Company filed a claim for unspecified damages in the United States District Court in the Western District of Pennsylvania alleging among other things that Progress Capital Holdings and Potomac Capital Investment Corporation materially breached various AST financial and operational representations and warranties included in the Stock Purchase Agreement.  Based upon information obtained since the acquisition and corroborated in the course of pre-trial discovery, the Company believes that it has a reasonable basis for this claim and intends to vigorously pursue reimbursement for damages sustained.  Neither the Company nor its counsel can predict with certainty the amount, if any, of recovery that will be obtained from the defendants in this matter.

10



 

The Company is a party in three cases involving challenges to the validity of its U.S. Patent No. 6,129,893 and U.S. Patent No. 6,565,803 B1 (“U.S. Patents”) and its Canadian Patent No. 2,331,525 (the “Canadian Patent”) for the method of preventing infection from cryptosporidium found in drinking water.  In the first case, Wedeco Ideal Horizons, Inc. filed suit against the Company in the United States District Court for the District of New Jersey seeking a declaratory judgment that it does not infringe the Company’s U.S. Patents on the grounds that the U.S. Patents are invalid and alleging unfair competition by the Company.  On June 30, 2006, the District Court granted Wedeco’s motion for summary judgment on the issue of validity of the U.S. Patents, denied the Company’s motion for summary judgment on infringement on the ground that there can be no infringement where there is no valid patent and granted the Company’s motion for summary judgment on Wedeco’s claim of unfair competition.  The Company has appealed the Court’s decision against it to the Federal Circuit Court of Appeals and expects a decision will be rendered by the Court in eighteen to twenty-four months.  In the second case, the Company filed suit against the Town of Ontario, New York, Trojan Technologies, Inc. (“Trojan”) and Robert Wykle, et al. in the United States District Court for the Western District of New York alleging that the defendant is practicing the method claimed within the U.S. Patents without a license.  The District Court has stayed this action pending the outcome of the Company’s appeal in the Wedeco case.  In the third case, the Company filed suit against the City of North Bay, Ontario, Canada (“North Bay”) and Trojan in the Federal Court of Canada alleging infringement of the Canadian Patent by North Bay and inducement of infringement by Trojan.  A bench trial was completed in April 2006.  On November 14, 2006 the Court dismissed the Company’s claim for a declaration that the defendants infringed the Canadian Patent and the Company’s claims for an injunction, compensation, damages, interest, and costs and declared that the Canadian Patent is invalid.  The Court also found that the defendants are entitled to their costs, to be assessed “on the ordinary scale.”  The Company has insufficient information to estimate the amount of defendants’ costs, but expects the defendants to claim that they are entitled to costs exceeding $0.5 million.  The Company intends to appeal the Court’s decision.  The Company cannot predict the ultimate outcome of the three matters.

 

 

 

The Company has received a demand from the Pennsylvania Department of Environmental Protection (PADEP) that the Company reimburse PADEP for response costs the agency alleges have been taken at a site owned by a third party and located in Allegheny County, Pennsylvania (“Site”).  The letter also included an unspecified amount for interest and for any future costs that might be incurred by PADEP at the Site. The Company understands that the response costs are approximately $1.3 million.  Based on information provided by PADEP, the Site is approximately 8 acres and was used from the 1950s until the 1960s as a disposal site for coke or carbon sweepings and other industrial wastes.  The Company has been in discussions with PADEP regarding the Company’s position that it is not the entity that disposed of materials containing the contaminants identified by PADEP at the Site and that any materials that may have been deposited by the Company’s predecessor did not contain actionable levels of hazardous substances identified by PADEP.  The Company and the PADEP have agreed to a settlement of the matter, subject to written documentation, requiring the Company to pay $515,000 in two installments to resolve the matter.  This amount has been charged to earnings for the second quarter ended June 30, 2006. The terms of the settlement have been published for public comment.  The initial public comment period has expired and PADEP has received comments on the proposed settlement. PADEP is expected to timely respond to these comments. If there are no further appeals filed after PADEP’s responses to the comments are issued, the Company expects to receive notification from PADEP sometime in the first quarter of 2007 that the settlement has been approved and the first installment payment will be made.

 

 

 

In September 2004, a customer of one of the Company’s distributors demanded payment by the Company of approximately $340,000 as reimbursement for losses allegedly caused by activated carbon produced by the Company and sold by the distributor.  The claimant contends that the activated carbon contained contamination which adversely impacted its production process.  The Company is evaluating the claim, and at this time, cannot predict the outcome of this matter.

 

 

 

The Company is involved in various other legal proceedings, lawsuits and claims, including employment, product warranty and environmental matters of a nature considered normal to its business.  It is the Company’s policy to accrue for amounts related to these legal matters if it is probable that a liability has been incurred and an amount is reasonably estimable.  Management believes, after consulting with counsel, that the ultimate liabilities, if any, resulting from such lawsuits and claims will not materially affect the consolidated results of operations, cash flows, or financial position of the Company.

11



 

In conjunction with the February 2004 purchase of substantially all of Waterlink’s operating assets and the stock of Waterlink’s U.K. subsidiary, several environmental studies were performed on the Columbus, Ohio property by environmental consulting firms which identified and characterized areas of contamination.  In addition, these firms identified alternative methods of remediating the property, identified feasible alternatives and prepared cost evaluations of the various alternatives.  The Company concluded from the information in the studies that a loss at this property is probable and recorded the liability as a component of noncurrent other liabilities in the Company’s consolidated balance sheet.  At December 31, 2005, the balance recorded was $5.3 million.  Liability estimates are based on an evaluation of, among other factors, currently available facts, existing technology, presently enacted laws and regulations, and the remediation experience of other companies.  During the first four months of 2006, the Company undertook a process of evaluating contractors and securing bids to perform the remediation work on the Columbus, Ohio property.  As a result of the evaluation of the additional information gathered during that process, the Company reduced its estimate of its liability by $1.3 million to $4.0 million as of March 31, 2006. The reduction of the liability was recorded as a reduction of selling, general and administrative expenses on the Company’s condensed consolidated statement of operations and retained earnings for the three months ended March 31, 2006.  The Company has not incurred any environmental remediation expense for the nine months ended September 30, 2006 and has incurred a total of $0.2 million of environmental remediation expense to date.

 

 

 

It is reasonably possible that a change in the estimate of this obligation will occur as remediation preparation and remediation activity commences over the upcoming months.  The ultimate remediation costs are dependent upon, among other things, the requirements of any state or federal environmental agencies, the remediation methods employed, the final scope of work being determined, and the extent and types of contamination which will not be fully determined until experience is gained through remediation and related activities.  The accrued amounts are expected to be paid out over the course of several years once work has commenced.  The Company has yet to make a determination that it will proceed with remediation efforts in 2006.

 

 

 

The Company owns a 49% interest in a joint venture, Calgon Mitsubishi Chemical Corporation, which was formed on October 1, 2002.  At September 30, 2006, Calgon Mitsubishi Chemical Corporation had $8.5 million in borrowings from an affiliate of the majority owner of the joint venture. The Company has agreed with the joint venture and the lender that, upon request by the lender, the Company will execute a guarantee for up to 49% of such borrowings.  At September 30, 2006, the lender had not requested, and the Company has not provided, such guarantee.

 

 

12.

Goodwill & Intangible Assets

 

 

 

The Company accounts for goodwill and intangible assets in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.”  This standard requires that goodwill and intangible assets with indefinite useful lives not be amortized but should be tested for impairment at least annually.  Management has elected to do the annual impairment test on December 31 of each year.  As required by SFAS No. 142, management has allocated goodwill to the Company’s reporting units.  No such impairment existed based on the Company’s most recent test at December 31, 2005.

 

 

 

The following is the categorization of the Company’s intangible assets as of September 30, 2006 and December 31, 2005 respectively:


 

 

 

 

 

September 30, 2006

 

December 31, 2005

 

 

 

Weighted
Average
Amortization
Period

 


 


 

 

 

 

Gross
Carrying
Amount

 

Foreign
Exchange

 

Accumulated
Amortization

 

Gross
Carrying
Amount

 

Foreign
Exchange

 

Accumulated
Amortization

 

 

 



 



 



 



 



 



 



 

Amortized Intangible Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Patents

 

 

15.4 Years

 

$

1,369

 

$

—  

 

$

(771

)

$

1,369

 

$

—  

 

$

(711

)

Customer Relationships

 

 

17.0 Years

 

 

9,323

 

 

(59

)

 

(3,305

)

 

9,323

 

 

(206

)

 

(2,316

)

Customer Contracts

 

 

2.8 Years

 

 

664

 

 

(18

)

 

(641

)

 

664

 

 

(19

)

 

(577

)

License Agreement

 

 

5.0 Years

 

 

500

 

 

—  

 

 

(292

)

 

500

 

 

—  

 

 

(217

)

Unpatented Technology

 

 

20.0 Years

 

 

2,875

 

 

—  

 

 

(1,154

)

 

2,875

 

 

—  

 

 

(1,031

)

Product Certification

 

 

7.9 Years

 

 

665

 

 

—  

 

 

(308

)

 

665

 

 

—  

 

 

(270

)

 

 



 



 



 



 



 



 



 

Total

 

 

16.0 Years

 

$

15,396

 

$

(77

)

$

(6,471

)

$

15,396

 

$

(225

)

$

(5,122

)

 

 

 

 

 



 



 



 



 



 



 

12



 

For the three and nine months ended September 30, 2006, the Company recognized $0.4 million and $1.3 million, respectively, of amortization expense.  For the three and nine months ended September 30, 2005, the Company recognized $0.5 million and $1.5 million, respectively, of amortization expense.  The Company estimates amortization expense to be recognized during the next five years as follows:


For the year ending December 31:

 

 

 

 


 

 

 

 

2006

 

$

1,763

 

2007

 

$

1,530

 

2008

 

$

1,330

 

2009

 

$

1,057

 

2010

 

$

914

 


 

The changes in the carrying amounts of goodwill by segment for the nine months ended September 30, 2006 are as follows:


 

 

Carbon &
Service
Segment

 

Equipment
Segment

 

Consumer
Segment

 

Total

 

 

 



 



 



 



 

Balance as of January 1, 2006

 

$

20,534

 

$

13,280

 

$

60

 

$

33,874

 

Foreign exchange

 

 

334

 

 

305

 

 

—  

 

 

639

 

 

 



 



 



 



 

Balance as of September 30, 2006

 

$

20,868

 

$

13,585

 

$

60

 

$

34,513

 

 

 



 



 



 



 


13.

Borrowing Arrangements

 

 

 

 

 

On August 18, 2006, the Company issued $75.0 million of Convertible Senior Notes (the “Notes”) due in 2036 and entered into a new revolving credit facility (the “Credit Facility”).  The Company used $68.4 million of the net proceeds from its offering of the Notes to fully repay indebtedness under the Company’s prior revolving credit facility.  Accordingly, all parties completed their obligations under the Amended and Restated Credit Agreement, dated as of January 30, 2006 (the “Old Credit Agreement”).  The material terms and conditions of the Old Credit Agreement are more fully discussed in Note 13 to the Company’s unaudited condensed consolidated financial statements contained in its Quarterly Report on Form 10-Q/A for the fiscal quarter ended June 30, 2006.  As part of the aforementioned repayment, the Company wrote-off $0.3 million of deferred financing fees as well as $0.1 million in fees associated with the repayment.

 

 

 

5.00% Convertible Senior Notes due 2036

 

 

 

The Company initially issued $65.0 million in aggregate principal amount of 5.00% Notes due in 2036 and granted the initial purchaser a 30-day option to purchase up to an additional $10.0 million principal amount of Notes solely to cover over-allotments, if any.  The initial purchaser exercised this option in full.  Accordingly, $75.0 million in aggregate principal amount of Notes were issued and sold to the initial purchaser upon completion of the offering on August 18, 2006.  The Notes accrue interest at the rate of 5.00% per annum and are payable in cash semi-annually in arrears on each February 15 and August 15, commencing February 15, 2007.  The Notes will mature on August 15, 2036.

13



 

The Notes can be converted under the following circumstances: (1) during any calendar quarter (and only during such calendar quarter) commencing after September 30, 2006, if the last reported sale price of the Company’s common stock is greater than or equal to 120% of the conversion price of the Notes for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the preceding calendar quarter; (2) during the five business day period after any 10 consecutive trading-day period (the “measurement period”) in which the trading price per Note for each day in the measurement period was less than 103% of the product of the last reported sale price of the Company’s common stock and the conversion rate on such day; or (3) upon the occurrence of specified corporate transactions described in the Offering Memorandum.  On or after June 15, 2011, holders may convert their Notes at any time on the business day immediately preceding the maturity date.  Upon conversion, the Company will pay cash and shares of its common stock, if any, based on a daily conversion value (as described herein) calculated on a proportionate basis for each day of the 25 trading-day observation period.

 

 

 

The initial conversion rate will be 196.0784 shares of the Company’s common stock per $1,000 principal amount of Notes, equivalent to an initial conversion price of approximately $5.10 per share of common stock.  The conversion rate will be subject to adjustment in some events but will not be adjusted for accrued interest, including any additional interest.  In addition, following certain fundamental changes that occur prior to August 15, 2011, the Company will increase the conversion rate for holders who elect to convert Notes in connection with such fundamental changes in certain circumstances.

 

 

 

The Company may not redeem the Notes before August 20, 2011.  On or after that date, the Company may redeem all or a portion of the Notes at any time.  Any redemption of the Notes will be for cash at 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, including any additional interest, to, but excluding, the redemption date.

 

 

 

Holders may require the Company to purchase all or a portion of their Notes on each of August 15, 2011, August 15, 2016, and August 15, 2026.  In addition, if the Company experiences specified types of fundamental changes, holders may require it to purchase the Notes.  Any repurchase of the Notes pursuant to these provisions will be for cash at a price equal to 100% of the principal amount of the Notes to be purchased plus any accrued and unpaid interest, including any additional interest, to, but excluding, the purchase date.

 

 

 

The Notes will be the Company’s senior unsecured obligations, and will rank equally in right of payment with all of its other existing and future senior indebtedness.  The Notes will be guaranteed by certain of the Company’s domestic subsidiaries on a senior unsecured basis.  The subsidiary guarantees will be general unsecured senior obligations of the subsidiary guarantors and will rank equally in right of payment with all of the existing and future senior indebtedness of the subsidiary guarantors.  If the Company fails to make payment on the Notes, the subsidiary guarantors must make them instead.  The Notes will be effectively subordinated to any indebtedness of the Company’s non-guarantor subsidiaries.  The Notes will be effectively junior to all of the Company’s existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness.

 

 

 

The Company sold the Notes at a discount of $3.3 million that will be amortized over a period of five years.  The discount will be reflected as a deduction from the face amount of the debt.  The Company recorded interest expense of $0.5 million of which $0.1 million related to the amortization of the discount and $0.4 million which related to the Notes.  The Company incurred issuance costs of $1.5 million which have been deferred and will be amortized over a five year period.

 

 

 

The Notes and the Guarantees were sold only to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”).  The notes offered hereby, the subsidiary guarantees and the common stock issuable upon conversion of the notes have not been registered. This offering is being conducted in reliance upon an exemption from registration under the Securities Act and applicable state securities laws. We and the subsidiary guarantors have agreed, however, to use reasonable best efforts to file a shelf registration statement with the SEC within 90 days of the issue date, and to use reasonable efforts to cause such registration statement to become effective within 240 days from the issue date, in order to register resales of the notes, the subsidiary guarantees and common stock issuable upon conversion of the notes under the Securities Act. The 90-day period expired on November 16, 2006.  The Company did not file a registration statement within the time period and, as a result, is obligated to pay predetermined additional interest to holders of the notes as described in the registration rights agreement.

 

 

 

Credit Facility

 

 

 

The Credit Facility initially is a $50.0 million facility and includes a separate U.K. sub-facility and a separate Belgian sub-facility.  The Administrative Agent will use commercially reasonable efforts to obtain commitments from a syndicate of lenders, permitting the total revolving credit commitment to be increased up to $75.0 million. 

14



 

The Company is currently discussing the syndication of its revolving credit facility and plans to increase the total commitment of the current facility.  The terms of the Credit Facility are subject to change in the event that the credit facility is syndicated.  Availability for domestic borrowings under the Credit Facility is based upon the value of eligible inventory, accounts receivable and property, plant and equipment, with separate borrowing bases to be established for foreign borrowings under a separate U.K. sub-facility and a separate Belgian sub-facility.  Availability under the Credit Facility is conditioned upon various customary conditions.

 

 

 

The Credit Facility is secured by a first perfected security interest in substantially all of the Company’s assets, with limitations under certain circumstances in the case of capital stock of foreign subsidiaries.  Certain of the Company’s domestic subsidiaries unconditionally guarantee all indebtedness and obligations related to domestic borrowings under the Credit Facility.  The Company and certain of its domestic subsidiaries also unconditionally guarantee all indebtedness and obligations under the U.K. sub-facility.

 

 

 

As of September 30, 2006, the carrying amount of assets pledged as collateral was $53.4 million.  The carrying amount as of September 30, 2006 for domestic, U.K., and Belgian borrowers were $43.0 million, $5.6 million, and $4.8 million, respectively.  The Credit Facility contains a fixed charge coverage ratio covenant which becomes effective when total domestic availability falls below $11.0 million.  As of September 30, 2006, total availability was $28.6 million.  Availability as of September 30, 2006 for domestic, U.K., and Belgian borrowers were $24.3 million, $4.3 million, and zero, respectively.

 

 

 

The Credit Facility interest rate is based upon Euro-based (LIBOR) rates with other interest rate options available.  The applicable Euro Dollar margin in effect when the Company is in compliance with the terms of the facility ranges from 1.25% to 2.25% and is based upon the Company’s overall availability under the credit facility.  The unused commitment fee is equal to 0.375% per annum and is based upon the unused portion of the revolving commitment.

 

 

 

The Company incurred debt issuance costs of $0.5 million which have been deferred and will be amortized over a five year period.  Borrowings under the Credit Facility were being charged a weighted average interest rate of 7.08% at September 30, 2006.

 

 

14.

Stock Compensation Plans

 

 

 

The Company has two stock-based compensation plans which are more fully described in Note 12 of the Company’s 2005 Annual Report on Form 10-K.  Prior to January 1, 2006, the Company accounted for awards granted under those plans following the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (APB No. 25) and related interpretations.

 

 

 

The Company adopted SFAS No. 123(R), “Share-based Payments,” on January 1, 2006 using the modified prospective application method.  Under this transition method, compensation cost recognized in the quarter and year-to-date ended September 30, 2006 includes the applicable amounts of compensation cost of all stock-based payments granted prior to, but not yet vested as of January 1, 2006 (based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123 and previously presented in the pro forma footnote disclosures).  Compensation cost in the future will also include stock-based payments granted subsequent to January 1, 2006 (based on the grant-date fair value estimated in accordance with the new provisions of SFAS No. 123(R)).  Results for prior periods have not been restated.  Prior to the adoption of SFAS No. 123(R), no compensation cost was reflected in net income for stock options or stock appreciation rights (SARS) as all options and SARS granted had an exercise price equal to the market value of the underlying common stock on the date of grant.  In accordance with SFAS No. 123(R), compensation expense for stock options and SARS is now recorded over the vesting period using the fair value on the date of grant, as calculated by the Company using the Black-Scholes model.  The nonvested restricted stock grant date fair value, which is the market price of the underlying common stock, is expensed over the vesting period.

15



 

Stock-based compensation expense

 

 

 

The following table summarizes the total compensation expense recognized for stock-based compensation awards:


(Dollars in thousands except per share data)

 

Three Months Ended
September 30
2006

 

Nine Months Ended
September 30
2006

 


 



 



 

Stock-based compensation expense recognized:

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

$

409

 

$

874

 

 

 



 



 

Total

 

 

409

 

 

874

 

 

 



 



 

Tax effect

 

 

161

 

 

344

 

 

 



 



 

Increase in net loss/decrease in net income, respectively

 

$

248

 

$

530

 

 

 



 



 

Decrease in basic and diluted earnings per share

 

$

0.01

 

$

0.01

 

 

 



 



 

Prior period pro forma presentations

The following pro forma information is provided for comparative purposes and illustrates the pro forma effect on net income and earnings per share as if the fair value recognition provision of SFAS No. 123 had been applied to stock-based compensation prior to January 1, 2006:

(Dollars in thousands except per share data)

 

Three Months Ended
September 30
2005

 

Nine Months Ended
September 30
2005

 


 



 



 

Net Loss

 

 

 

 

 

 

 

As reported

 

$

(353

)

$

(1,766

)

Stock-based employee compensation Expense included in reported net income, net of tax effect

 

 

65

 

 

159

 

Stock-based compensation at fair value, net of tax effects

 

 

(159

)

 

(563

)

 

 



 



 

Pro forma

 

$

(447

)

$

(2,170

)

 

 



 



 

Weighted average shares outstanding

 

 

 

 

 

 

 

Basic

 

 

39,569,277

 

 

39,421,446

 

Effect of dilutive securities

 

 

—  

 

 

—  

 

 

 



 



 

Diluted

 

 

39,569,277

 

 

39,421,446

 

 

 



 



 

Net loss per common share

 

 

 

 

 

 

 

Basic and Diluted

 

 

 

 

 

 

 

As reported

 

$

(.01

)

$

(.04

)

Pro forma

 

$

(.01

)

$

(.06

)

 

 



 



 

The above disclosures of the effect of stock-based compensation expense for the three and nine months ended September 30, 2006 and the pro forma effect as if SFAS No. 123 had been applied to the three and nine months ended September 30, 2005, are based on the fair value of stock option awards estimated on the date of grant using the Black-Scholes option valuation model with the assumptions listed below:

 

 

Nine Months Ended September 30

 

 

 


 

 

 

2006

 

2005

 

 

 



 



 

Average grant date exercise price per share of stock appreciation rights

 

$

6.19

 

$

0.00

 

Average grant date exercise price per share of unvested awards – options

 

$

7.48

 

$

7.43

 

Dividend yield

 

 

.00-.70

%

 

.70%-1.79

%

Expected volatility

 

 

34-37

%

 

37%-46

%

Risk-free interest rates

 

 

3.62%-5.20

%

 

3.03%-3.62

%

Expected lives of options

 

 

3 -6 years

 

 

5 years

 

Average grant date fair value per share of stock appreciation rights

 

$

1.85

 

$

0.00

 

Average grant date fair value per share of unvested option awards

 

$

3.06

 

$

2.77

 

 

 



 



 

16



The Dividend yield is based on the latest annualized dividend rate and the current market price of the underlying common stock at the date of grant.

Expected volatility is based on the historical volatility of the Company’s stock and the implied volatility calculated from traded options on the Company’s stock.

The Risk-free interest rates are based on the U.S. Treasury strip rate for the expected life of the option.

The Expected lives of options are determined from primarily historical stock option exercise data.  The Company applied the simplified method in accordance with Staff Accounting Bulletin No. 107 for all plain-vanilla options.

Stock Appreciation Rights

Stock appreciation rights (SARS) granted to employees are valued at the grant date fair value which is the market price of common stock on the date of grant.  The grants vest over a service period of three years and are payable in cash.  The following table shows a summary of the status and activity of stock appreciation rights for the nine months ended September 30, 2006:

 

 

Shares

 

Weighted-
Average
Exercise
Price

 

Weighted-
Average
Remaining
Contractual
Term
(in years)

 

Aggregate
Intrinsic
Value
(in thousands)

 

 

 



 



 



 



 

Outstanding at beginning of year

 

 

—  

 

$

—  

 

 

 

 

 

 

 

Granted

 

 

37,000

 

 

6.19

 

 

 

 

 

 

 

Exercised

 

 

—  

 

 

—  

 

 

 

 

 

 

 

Canceled

 

 

—  

 

 

—  

 

 

 

 

 

 

 

 

 



 



 



 



 

Outstanding at September 30, 2006

 

 

37,000

 

$

6.19

 

 

2.75

 

$

—  

 

 

 



 



 



 



 

Exercisable at September 30, 2006

 

 

—  

 

$

—  

 

 

—  

 

$

—  

 

 

 



 



 



 



 

The weighted-average grant-date fair value of employee stock appreciation rights granted during the nine months ended September 30, 2006 was $1.33 per share or $0.1 million.

Stock option activity

The following tables show a summary of the status and activity of stock options for the nine months ended September 30, 2006:

Employee Stock Option Plan:

 

 

Shares

 

Weighted-
Average
Exercise
Price

 

Weighted-
Average
Remaining
Contractual
Term
(in years)

 

Aggregate
Intrinsic
Value
(in thousands)

 

 

 



 



 



 



 

Outstanding at beginning of year

 

 

2,138,900

 

$

6.67

 

 

 

 

 

 

 

Granted

 

 

120,700

 

 

7.07

 

 

 

 

 

 

 

Exercised

 

 

(5,250

)

 

5.07

 

 

 

 

 

 

 

Canceled

 

 

(208,650

)

 

6.73

 

 

 

 

 

 

 

 

 



 



 



 



 

Outstanding at September 30, 2006

 

 

2,045,700

 

$

6.70

 

 

6.19

 

$

4

 

 

 



 



 



 



 

Exercisable at September 30, 2006

 

 

1,876,700

 

$

6.62

 

 

5.91

 

$

—  

 

 

 



 



 



 



 

The weighted-average grant-date fair value of employee stock options granted during the nine months ended September 30, 2006 was $2.99 per share or $0.4 million.  The total fair value of options vested during the nine months ended September 30, 2006 was $2.70 per share or $0.7 million.

17



Non-Employee Directors’ Stock Option Plan:

 

 

Shares

 

Weighted-
Average
Exercise
Price

 

Weighted-
Average
Remaining
Contractual
Term
(in years)

 

Aggregate
Intrinsic
Value
(in thousands)

 

 

 



 



 



 



 

Outstanding at beginning of year

 

 

450,737

 

$

7.14

 

 

 

 

 

 

 

Granted

 

 

59,520

 

 

7.28

 

 

 

 

 

 

 

Exercised

 

 

—  

 

 

—  

 

 

 

 

 

 

 

Canceled

 

 

—  

 

 

—  

 

 

 

 

 

 

 

 

 



 



 



 



 

Outstanding at September 30, 2006

 

 

510,257

 

$

7.16

 

 

6.13

 

$

—  

 

 

 



 



 



 



 

Exercisable at September 30, 2006

 

 

450,737

 

$

7.14

 

 

5.67

 

$

—  

 

 

 



 



 



 



 

The weighted-average grant-date fair value of non-employee director stock options granted during the nine months ended September 30, 2006 was $3.15 per share or $0.2 million.  The total fair value of options vested during the nine months ended September 30, 2006 was $2.06 per share or $11 thousand.

During the nine months ended September 30, 2006, the total intrinsic value of stock options exercised (i.e., the difference between the market price at exercise and the price paid by the employee to exercise the option) was $11 thousand.  The total amount of cash received from the exercise of options was $27 thousand, and the related net tax benefit realized from the exercise of these options was immaterial.

Nonvested Restricted stock activity

Nonvested restricted stock granted to employees with a zero exercise price under the Company’s Employee Stock Option Plan is valued at the grant date fair value, which is the market price of the underlying common stock, and vest over service periods that range from one to three years.

The following table shows a summary of the status and activity of nonvested restricted stock grants for the nine months ended September 30, 2006:

 

 

Shares

 

Weighted-
Average
Grant-Date
Fair-Value
(per share)

 

 

 



 



 

Nonvested at January 1, 2006

 

 

240,800

 

$

7.10

 

Granted

 

 

194,400

 

 

5.91

 

Vested

 

 

(49,903

)

 

6.91

 

Cancelled

 

 

(56,972

)

 

6.46

 

 

 



 



 

Nonvested at September 30, 2006

 

 

328,325

 

$

6.48

 

 

 



 



 

Compensation expense related to nonvested restricted stock totaled $0.4 million for the nine month period ended September 30, 2006.  The related net tax benefit related to restricted awards was immaterial for the nine month period ended September 30, 2006.

Total Shareholder Return (TSR) performance stock awards

Performance stock awards vest, subject to the satisfaction of performance goals, at the end of a three-year performance period.  The number of performance stock awards that are scheduled to vest is a function of Total Shareholder Return (TSR) performance. Under the terms of the TSR performance stock award, the Company’s actual TSR for the performance period is compared to the results of its peer companies for the same period with the Company’s relative position in the group determined by percentile rank.  The actual award payout is determined by multiplying the target award by the performance factor percentage provided for the Company’s percentile ranking and can vest at between zero and 200 percent of the target award.  The value of the TSR performance stock is determined using a Monte Carlo simulation model.  The following significant assumptions were used:  dividend rate of 0%, volatility of 45.6%, risk-free interest rate of 4.69%, and a term of three years.  The Monte Carlo value is expensed on a straight-line basis over the three-year performance period. 

18



The following table shows a summary of the TSR performance stock awards granted during the nine months ended September 30, 2006 and outstanding as of September 30, 2006:

Performance Period

 

Fair Value
(in thousands)

 

Unrecognized
Compensation
Expense
(in thousands)

 

Minimum
Shares

 

Target
Shares

 

Maximum
Shares

 


 



 



 



 



 



 

2006-2008

 

$

798

 

$

653

 

 

—  

 

 

62,800

 

 

125,600

 

 

 



 



 



 



 



 

As of September 30, 2006, there was $2.6 million of total future compensation cost related to nonvested share-based compensation arrangements and the weighted-average period over which this cost is expected to be recognized is approximately three years.

15.

Pensions

 

 

 

U.S. Plans:

 

 

 

For U.S. plans, the following table provides the components of net periodic pension costs of the plans for the three and nine months ended September 30, 2006 and 2005:


 

 

Three Months Ended September 30

 

Nine Months Ended September 30

 

 

 


 


 

Pension Benefits (in thousands)

 

2006

 

2005

 

2006

 

2005

 


 



 



 



 



 

Service cost

 

$

617

 

$

729

 

$

1,873

 

$

2,225

 

Interest cost

 

 

1,237

 

 

1,181

 

 

3,690

 

 

3,534

 

Expected return on plan assets

 

 

(1,152

)

 

(1,021

)

 

(3,281

)

 

(3,085

)

Amortization of prior service cost

 

 

88

 

 

114

 

 

225

 

 

345

 

Net amortization

 

 

188

 

 

165

 

 

644

 

 

469

 

Settlement

 

 

509

 

 

—  

 

 

509

 

 

—  

 

Curtailment

 

 

279

 

 

—  

 

 

279

 

 

237

 

 

 



 



 



 



 

Net periodic pension cost

 

$

1,766

 

$

1,168

 

$

3,939

 

$

3,725

 

 

 



 



 



 



 


 

The expected long-term rate of return on plan assets is 8.25% in 2006.

 

 

 

Employer Contributions

 

 

 

In its 2005 financial statements, the Company disclosed that it expected to contribute $4.4 million to its U.S. pension plans in 2006.  As of September 30, 2006, the Company has contributed the $4.4 million as well as an additional $4.7 million.  No further contributions are expected to be made for the remainder of the year.

19



 

European Plans:

 

 

 

For European plans, the following table provides the components of net periodic pension costs of the plans for the three and nine months ended September 30, 2006 and 2005:


 

 

Three Months Ended September 30

 

Nine Months Ended September 30

 

 

 


 


 

Pension Benefits (in thousands)

 

2006

 

2005

 

2006

 

2005

 


 



 



 



 



 

Service cost

 

$

249

 

$

241

 

$

747

 

$

723

 

Interest cost

 

 

389

 

 

430

 

 

1,167

 

 

1,290

 

Expected return on plan assets

 

 

(272

)

 

(302

)

 

(816

)

 

(906

)

Amortization of prior service cost

 

 

12

 

 

14

 

 

36

 

 

42

 

Net amortization

 

 

44

 

 

23

 

 

132

 

 

69

 

 

 



 



 



 



 

Net periodic pension cost

 

$

422

 

$

406

 

$

1,266

 

$

1,218

 

 

 



 



 



 



 


 

The expected long-term rate of return on plan assets ranges from 5.00% to 7.10% in 2006.

 

 

 

Employer Contributions

 

 

 

In its 2005 financial statements, the Company disclosed that it expected to contribute $2.0 million to its European pension plans in 2006.  As of September 30, 2006, the Company contributed $1.5 million.  The Company expects to contribute the remaining $0.5 million as well as an additional $0.1 million over the remainder of the year.

 

 

 

Defined Contribution Plans

 

 

 

The Company also sponsors a defined contribution pension plan for certain U.S. employees that permits employee contributions of up to 50% of eligible compensation in accordance with Internal Revenue Service guidance.  As of January 1, 2006, for all U.S. salaried employees that elected to “freeze” their benefits under the Company’s defined benefit plans, the Company makes a fixed contribution of 2% of employee eligible compensation and matches contributions made by each participant in an amount equal to 100% of the employee contribution up to a maximum of 2% of employee compensation.  In addition, each of these employees is eligible for an additional Company contribution of up to 4% of employee compensation based upon annual Company performance at the discretion of the Company’s Board of Directors. In September 2006, the Company announced the freezing of its defined benefit pension plans for salaried employees replacing it with the aforementioned defined contribution plan. For all other U.S. salaried employees, the Company makes matching contributions on behalf of each participant in an amount equal to 25% of the employee contribution up to a maximum of 4% of employee eligible compensation.  Employer matching contributions vest immediately. Total expenses related to this defined contribution plan for the three months ended September 30, 2006 and 2005 were $0.1 million and $45 thousand, respectively, and for the nine months ended September 30, 2006 and 2005 were $0.3 million and $0.1 million, respectively.

 

 

16.

Taxation

 

 

 

The effective tax rate for the nine month period ended September 30, 2006 was a benefit of 42.6% compared to a benefit of 55.4% for the period ended September 30, 2005.  The period ended September 30, 2006 tax rate was higher than the statutory Federal Income Tax Rate due to our lower than expected profit and certain benefits, principally the exclusion provided under United States income tax laws with respect to the Extraterritorial Income Exclusion Benefit, benefits related to foreign tax credits, and recognition of state income tax benefits combined with a change in estimate of the Company’s full year pre-tax earnings.  The nine month period ended September 30, 2005 tax rate was higher than the statutory Federal Income Tax Rate due to the Extraterritorial Income Exclusion Benefit, recognition of foreign tax credit benefits, and recognition of state income tax benefits. The primary items that contributed to the change in the effective tax rate between the nine month period ended September 30, 2006 and the similar period for 2005 was the reduction in estimate of the Company’s full year 2006 pre-tax earnings and its impact on the tax effect of the aforementioned permanent items.

20



 

During the preparation of its effective tax rate, the Company uses an annualized estimate of pre-tax earnings.  Throughout the year this annualized estimate may change based on actual results and annual earnings estimate revisions.  Because the Company’s permanent tax benefits are relatively constant, changes in the annualized estimate may have a significant impact on the effective tax rate in future periods.

 

 

 

The Company provides an estimate for income taxes based on an evaluation of the underlying accounts, its tax filing positions and interpretations of existing law.  Changes in estimates are reflected in the year of settlement or expiration of the statute of limitations.  The Company does not believe that resolution of existing unresolved tax matters will have a material impact on the consolidated financial condition of the Company, although a resolution could have a material impact on the Company’s consolidated statement of income and comprehensive income for a particular future period and on the Company’s effective tax rate.

 

 

17.

New Accounting Pronouncements

 

 

 

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs – an amendment of ARB No. 43, Chapter 4,” which requires the recognition of costs of idle facilities, excessive spoilage, double freight and re-handling costs as a component of current-period expenses.  The provisions of SFAS No. 151 are effective for inventory costs incurred during fiscal years beginning after June 15, 2005.  The Company adopted SFAS No. 151 effective January 1, 2006 as required.  Such adoption had no material impact on the accompanying financial statements.

 

 

 

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which changes the requirements for the accounting for and reporting of a change in accounting principle.  SFAS No. 154 applies to all voluntary changes in accounting principle.  It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions.  When a pronouncement includes specific transition provisions, those provisions should be followed.  The Company adopted SFAS No. 154 effective January 1, 2006 as required.  Such adoption had no material impact on the accompanying financial statements.

 

 

 

In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment,” which establishes the accounting for transactions in which an entity exchanges its equity instruments or certain liabilities based upon an entity’s equity instruments for goods or services.  SFAS No. 123R generally requires that publicly traded companies measure the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award at the grant date.  That cost will be recognized over the period during which an employee is required to provide service in exchange for the award which is usually the vesting period.  Management adopted SFAS No. 123R beginning January 1, 2006 as required and the related costs are reflected in the accompanying financial statements.

 

 

 

In June 2006, the FASB issued FASB Interpretation no. 48 (“FIN No. 48”), “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Standard No. 109”.  FIN No. 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  FIN No. 48 is effective for fiscal years beginning after December 15, 2006.  The Company is in the process of evaluating the financial impact of adopting FIN No. 48.

 

 

 

In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosure about fair value measurements.  SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  The Company expects to adopt SFAS No. 157 as required for the fiscal year 2008 and that adoption will not have material impact on the financial statements.

 

 

 

In September 2006, the FASB issued SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – An amendment of FASB Statements No. 87, 88, 106, and 132(R).”  SFAS No. 158 requires recognition of the funded status of a benefit plan on the balance sheet;  the recognition in other comprehensive income of gains or losses and prior service costs or credits arising during the period but which are not included as components of periodic benefit cost; the measurement of defined benefit plan assets and obligations as of the balance sheet date; and disclosure of additional information about the effects on periodic benefit cost for the following fiscal year arising from delayed recognition of gains and losses in the current period. SFAS No. 158 is effective the Company’s year ended December 31, 2006.  The Company is in the process of evaluating the financial impact of adopting SFAS No. 158.  However, based on the funded status of the Company’s defined benefit pension plans and other postretirement plan as of December 31, 2005 (the Company’s most recent measurement date), the Company would be required to increase its net liabilities for pension and other postretirement benefits, which would result in a decrease in stockholders’ equity of approximately $29.0 million.  The actual impact may vary from the estimated impact  as the ultimate amounts recorded will depend on a number of assumptions, including, but not limited to, the discount rates in effect at December 31, 2006, the actual rate of return on the Company’s pension plan assets for the year then ended and the impact of the Company’s pension contributions during the year ended December 31, 2006.  Changes in these assumptions since the Company’s last measurement date could increase or decrease the impact of adopting SFAS No. 158 on the Company’s consolidated financial statements at December 31, 2006.

21



 

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements in Current Year Financial Statements (“SAB No. 108”). SAB No. 108 provides guidance on how prior year misstatements should be taken into consideration when quantifying misstatements in current year financial statements for purposes of determining whether the current year’s financial statements are materially misstated. SAB 108 becomes effective during fiscal year 2006.

 

 

18.

Earnings Per Share

 

 

 

Calgon Carbon Corporation’s obligation under the Senior Convertible Notes is to settle the par value of the Notes in cash and to settle the amount in excess of par value in its common shares.  Therefore the Company is not required to include any shares underlying the Notes in its diluted weighted average shares outstanding until the average stock price per share for the quarter exceeds the $5.10 conversion price. At such time, only the number of shares that would be issuable (under the “treasury stock” method of accounting for share dilution) will be included, which is based upon the amount by which the average stock price exceeds the conversion price.  For the first $0.50 per share that the Company’s average stock price exceeds the $5.10 conversion price of the Notes, it will include approximately 1,300,000 additional shares in its diluted share count.  For the second $0.50 per share that the Company’s average stock price exceeds the $5.10 conversion price, it will include approximately 1,100,000 additional shares, for a total of approximately 2,400,000 shares, in its diluted share count, and so on, with the additional shares’ dilution decreasing for each $1 per share that the Company’s average stock price exceeds $5.10 if the stock price rises further above $5.10 (see table below).  As of September 30, 2006, the average stock price was $4.32, which was lower than the conversion price of $5.10, therefore zero shares were included in the dilutive share calculation for the period of time the Notes were outstanding for the quarter ended September 30, 2006.

22



“Treasury Stock” Method of Accounting for Share Dilution

Conversion Price:

 

$

5.10

 

Number of underlying shares:

 

 

14,705,880

 

Principal Amount:

 

$

75,000,000

 


Formula:

Number of extra dilutive shares

 

=((Stock Price * Underlying Shares) - Principal)/Stock Price

 

 

Condition:

Only applies when share price exceeds $5.10


Stock
Price

 

Conversion
Price

 

Price
Difference

 

Included in
Share
Count

 

Share Dilution Per
Price Difference

 


 



 



 



 



 

$    5.10

 

 

$    5.10

 

 

$    0.00

 

 

—  

 

 

—  

 

$    5.60

 

 

$    5.10

 

 

$    0.50

 

 

1,313,023

 

 

2,626,046

 

$    6.10

 

 

$    5.10

 

 

$    1.00

 

 

2,410,798

 

 

2,410,798

 

$    7.10

 

 

$    5.10

 

 

$    2.00

 

 

4,142,500

 

 

2,071,250

 

$    8.10

 

 

$    5.10

 

 

$    3.00

 

 

5,446,621

 

 

1,815,540

 

$    9.10

 

 

$    5.10

 

 

$    4.00

 

 

6,464,122

 

 

1,616,031

 

$   10.10

 

 

$    5.10

 

 

$    5.00

 

 

7,280,137

 

 

1,456,027

 


19.

Other Financial Information

 

 

 

Calgon Carbon Corporation has issued $75.0 million in aggregate principal amount of 5.00% Convertible Senior Notes due in 2036.  The Notes are fully and unconditionally guaranteed  by certain of our domestic subsidiaries on a senior unsecured basis.  All of the subsidiary guarantors are wholly owned by the parent company and the guarantees are joint and several.  The subsidiary guarantees will be general unsecured senior obligations of the subsidiary guarantors and will rank equally in right of payment with all of the existing and future senior indebtedness of the subsidiary guarantors.  If the Company fails to make payment on the Notes, the subsidiary guarantors must make them instead.  The Notes will be effectively subordinated to any indebtedness of the Company’s non-guarantor subsidiaries.  The Notes will be effectively junior to all of the Company’s existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness.  The Notes and the Guarantees were sold only to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”).

23



 

Condensed consolidating financial information for Calgon Carbon Corporation (issuer); Calgon Carbon Investments Inc., Chemviron Carbon Ltd., Waterlink (UK) Holdings Ltd., Sutcliffe Speakman Ltd., Lakeland Processing Ltd., Charcoal Cloth (International) Ltd., BSC Columbus LLC, and CCC Columbus LLC (guarantor subsidiaries); and the non-guarantor subsidiaries are as follows:


 

 

Condensed Consolidating Statements of Operations
Three months ended September 30, 2006

 

 

 


 

 

 

Issuer

 

Guarantor
Subsidiaries

 

Non-Guarantor
Subsidiaries

 

Consolidating and
Eliminating
Entries

 

Consolidated

 

 

 



 



 



 



 



 

Net sales

 

$

68,788

 

$

12,287

 

$

8,569

 

$

(9,964

)

$

79,680

 

Cost of products sold

 

 

51,297

 

 

10,356

 

 

7,208

 

 

(9,964

)

 

58,897

 

Depreciation and amortization

 

 

4,279

 

 

357

 

 

83

 

 

—  

 

 

4,719

 

Selling, general and administrative expenses

 

 

11,254

 

 

1,269

 

 

851

 

 

—  

 

 

13,374

 

Research and development expense

 

 

1,055

 

 

91

 

 

—  

 

 

—  

 

 

1,146

 

Restructuring

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

Interest expense – net

 

 

5,260

 

 

(3,774

)

 

(189

)

 

—  

 

 

1,297

 

Other expense – net

 

 

209

 

 

130

 

 

321

 

 

—  

 

 

660

 

 

 



 



 



 



 



 

Provision (benefit) for income taxes

 

 

(733

)

 

4

 

 

843

 

 

—  

 

 

114

 

Results of affiliates’ operations

 

 

(3,381

)

 

117

 

 

—  

 

 

3,264

 

 

—  

 

Equity in income from equity investments

 

 

—  

 

 

—  

 

 

39

 

 

—  

 

 

39

 

Minority interest

 

 

—  

 

 

—  

 

 

—  

 

 

(8

)

 

(8

)

 

 



 



 



 



 



 

Income (loss) from continuing operations

 

 

(452

)

 

3,737

 

 

(509

)

 

(3,272

)

 

(496

)

 

 



 



 



 



 



 

Income (loss) from discontinued operations

 

 

(6

)

 

(7

)

 

51

 

 

—  

 

 

38

 

 

 



 



 



 



 



 

Net income (loss

 

 

(458

)

 

3,730

 

 

(458

)

 

(3,272

)

 

(458

)

 

 



 



 



 



 



 


 

 

Condensed Consolidating Statements of Operations
Three months ended September 30, 2005

 

 

 


 

 

 

Issuer

 

Guarantor
Subsidiaries

 

Non-Guarantor
Subsidiaries

 

Consolidating and
Eliminating
Entries

 

Consolidated

 

 

 



 



 



 



 



 

Net sales

 

$

59,523

 

$

11,127

 

$

9,413

 

$

(11,196

)

$

68,867

 

Cost of products sold

 

 

46,193

 

 

8,338

 

 

7,952

 

 

(11,196

)

 

51,287

 

Depreciation and amortization

 

 

4,655

 

 

386

 

 

55

 

 

—  

 

 

5,096

 

Selling, general and administrative expenses

 

 

13,042

 

 

1,235

 

 

796

 

 

—  

 

 

15,073

 

Research and development expense

 

 

976

 

 

98

 

 

—  

 

 

—  

 

 

1,074

 

Restructuring

 

 

65

 

 

—  

 

 

—  

 

 

—  

 

 

65

 

Interest (income) expense – net

 

 

4,237

 

 

(3,123

)

 

(31

)

 

—  

 

 

1,083

 

Other expense – net

 

 

117

 

 

173

 

 

356

 

 

—  

 

 

646

 

 

 



 



 



 



 



 

Provision (benefit) for income taxes

 

 

(5,638

)

 

261

 

 

354

 

 

—  

 

 

(5,023

)

Results of affiliates’ operations

 

 

(3,676

)

 

358

 

 

—  

 

 

3,318

 

 

—  

 

Equity in income (loss) from equity investments

 

 

—  

 

 

—  

 

 

403

 

 

(6

)

 

397

 

Minority interest

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

 



 



 



 



 



 

Income (loss) from continuing operations

 

 

(448

)

 

3,401

 

 

334

 

 

(3,324

)

 

(37

)

 

 



 



 



 



 



 

Income (loss) from discontinued operations

 

 

95

 

 

(229

)

 

(182

)

 

—  

 

 

(316

)

 

 



 



 



 



 



 

Net income (loss)

 

$

(353

)

$

3,172

 

$

152

 

$

(3,324

)

$

(353

)

 

 



 



 



 



 



 

24



 

 

Condensed Consolidating Statements of Operations
Nine months ended September 30, 2006

 

 

 


 

 

 

Issuer

 

Guarantor
Subsidiaries

 

Non-Guarantor
Subsidiaries

 

Consolidating and
Eliminating
Entries

 

Consolidated

 

 

 



 



 



 



 



 

Net sales

 

$

208,518

 

$

33,052

 

$

32,399

 

$

(37,200

)

$

236,769

 

Cost of products sold

 

 

158,874

 

 

27,734

 

 

26,862

 

 

(37,200

)

 

176,270

 

Depreciation and amortization

 

 

12,928

 

 

1,147

 

 

236

 

 

—  

 

 

14,311

 

Selling, general and administrative expenses

 

 

34,212

 

 

2,575

 

 

2,630

 

 

—  

 

 

39,417

 

Research and development expense

 

 

3,119

 

 

265

 

 

—  

 

 

—  

 

 

3,384

 

Restructuring

 

 

7

 

 

—  

 

 

—  

 

 

—  

 

 

7

 

Interest (income) expense - net

 

 

15,444

 

 

(10,845

)

 

(524

)

 

—  

 

 

4,075

 

Other expense – net

 

 

941

 

 

358

 

 

719

 

 

—  

 

 

2,018

 

 

 



 



 



 



 



 

Provision (benefit) for income taxes

 

 

(209

)

 

(35

)

 

(912

)

 

—  

 

 

(1,156

)

Results of affiliates’ operations

 

 

(17,254

)

 

(5,493

)

 

—  

 

 

22,747

 

 

—  

 

Equity in income from equity investments

 

 

—  

 

 

—  

 

 

203

 

 

—  

 

 

203

 

Minority interest

 

 

—  

 

 

—  

 

 

—  

 

 

8

 

 

8

 

 

 



 



 



 



 



 

Income (loss) from continuing operations

 

 

456

 

 

17,346

 

 

3,591

 

 

(22,739

)

 

(1,346

)

 

 



 



 



 



 



 

Income (loss) from discontinued operations

 

 

108

 

 

67

 

 

2,723

 

 

(988

)

 

1,910

 

 

 



 



 



 



 



 

Net income (loss)

 

$

564

 

$

17,413

 

$

6,314

 

$

(23,727

)

$

564

 

 

 



 



 



 



 



 


 

 

Condensed Consolidating Statements of Operations
Nine months ended September 30, 2005

 

 

 


 

 

 

Issuer

 

Guarantor
Subsidiaries

 

Non-Guarantor
Subsidiaries

 

Consolidating and
Eliminating
Entries

 

Consolidated

 

 

 



 



 



 



 



 

Net sales

 

$

194,298

 

$

32,736

 

$

26,272

 

$

(33,728

)

$

219,578

 

Cost of products sold

 

 

145,705

 

 

25,762

 

 

22,455

 

 

(33,728

)

 

160,194

 

Depreciation and amortization

 

 

14,611

 

 

1,221

 

 

219

 

 

—  

 

 

16,051

 

Selling, general and administrative expenses

 

 

38,779

 

 

3,873

 

 

2,240

 

 

—  

 

 

44,892

 

Research and development expense

 

 

3,045

 

 

268

 

 

—  

 

 

—  

 

 

3,313

 

Restructuring

 

 

2,581

 

 

—  

 

 

—  

 

 

—  

 

 

2,581

 

Interest (income) expense - net

 

 

11,941

 

 

(8,825

)

 

(96

)

 

—  

 

 

3,020

 

Other expense – net

 

 

89

 

 

253

 

 

936

 

 

—  

 

 

1,278

 

 

 



 



 



 



 



 

Provision (benefit) for income taxes

 

 

(7,038

)

 

330

 

 

201

 

 

—  

 

 

(6,507

)

Results of affiliates’ operations

 

 

(13,122

)

 

(1,937

)

 

—  

 

 

15,059

 

 

—  

 

Equity in income (loss) from equity investments

 

 

—  

 

 

—  

 

 

1,031

 

 

(11

)

 

1,020

 

Minority interest

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

 



 



 



 



 



 

Income (loss) from continuing operations

 

 

(2,293

)

 

11,791

 

 

1,348

 

 

(15,070

)

 

(4,224

)

 

 



 



 



 



 



 

Income (loss) from discontinued operations

 

 

527

 

 

261

 

 

1,670

 

 

—  

 

 

2,458

 

 

 



 



 



 



 



 

Net income (loss)

 

$

(1,766

)

$

12,052

 

$

3,018

 

$

(15,070

)

$

(1,766

)

 

 



 



 



 



 



 

25



 

 

Condensed Consolidating Balance Sheets
September 30, 2006

 

 

 


 

 

 

Issuer

 

Guarantor
Subsidiaries

 

Non-Guarantor
Subsidiaries

 

Consolidating and
Eliminating
Entries

 

Consolidated

 

 

 



 



 



 



 



 

Cash & Cash Equivalents

 

$

1,675

 

$

1,751

 

$

17,303

 

$

(15,658

)

$

5,071

 

Receivables

 

 

47,073

 

 

13,836

 

 

4,946

 

 

(8,027

)

 

57,828

 

Inventories

 

 

58,790

 

 

6,552

 

 

5,651

 

 

33

 

 

71,026

 

Other current assets

 

 

17,948

 

 

1,993

 

 

2,263

 

 

—  

 

 

22,204

 

 

 



 



 



 



 



 

Total current assets

 

 

125,486

 

 

24,132

 

 

30,163

 

 

(23,652

)

 

156,129

 

Intercompany accounts receivable

 

 

54,464

 

 

154,891

 

 

568

 

 

(209,923

)

 

—  

 

Property, plant, and equipment, net

 

 

92,805

 

 

6,855

 

 

7,408

 

 

—  

 

 

107,068

 

Intangibles

 

 

5,100

 

 

3,748

 

 

—  

 

 

—  

 

 

8,848

 

Goodwill

 

 

17,764

 

 

8,093

 

 

8,656

 

 

—  

 

 

34,513

 

Equity investments

 

 

221,740

 

 

107,043

 

 

6,790

 

 

(328,598

)

 

6,975

 

Other assets

 

 

12,503

 

 

7,475

 

 

3,658

 

 

—  

 

 

23,636

 

 

 



 



 



 



 



 

Total assets

 

$

529,862

 

$

312,237

 

$

57,243

 

$

(562,173

)

$

337,169

 

 

 



 



 



 



 



 

Accounts payable

 

$

29,221

 

$

17,076

 

$

3,739

 

$

(12,878

)

$

37,158

 

Other current liabilities

 

 

31,225

 

 

4,880

 

 

2,867

 

 

(17,364

)

 

21,608

 

 

 



 



 



 



 



 

Total current liabilities

 

 

60,446

 

 

21,956

 

 

6,606

 

 

(30,242

)

 

58,766

 

Intercompany accounts payable

 

 

143,478

 

 

49,112

 

 

10,775

 

 

(203,365

)

 

—  

 

Long-term debt

 

 

81,693

 

 

—  

 

 

—  

 

 

—  

 

 

81,693

 

Other non-current liabilities

 

 

88,774

 

 

11,252

 

 

9,740

 

 

(68,527

)

 

41,239

 

Shareholders’ equity

 

 

155,471

 

 

229,917

 

 

30,122

 

 

(260,039

)

 

155,471

 

 

 



 



 



 



 



 

Total liabilities and shareholders’ equity

 

$

529,862

 

$

312,237

 

$

57,243

 

$

(562,173

)

$

337,169

 

 

 



 



 



 



 



 

26



 

 

Condensed Consolidating Balance Sheets
December 31, 2005

 

 

 


 

 

 

Issuer

 

Guarantor
Subsidiaries

 

Non-Guarantor
Subsidiaries

 

Consolidating and
Eliminating
Entries

 

Consolidated

 

 

 



 



 



 



 



 

Cash & Cash Equivalents

 

$

3,048

 

$

3,681

 

$

9,837

 

$

(11,120

)

$

5,446

 

Receivables

 

 

45,802

 

 

15,307

 

 

3,486

 

 

(13,371

)

 

51,224

 

Inventories

 

 

57,099

 

 

6,713

 

 

3,810

 

 

33

 

 

67,655

 

Other current assets

 

 

17,100

 

 

1,921

 

 

914

 

 

—  

 

 

19,935

 

Assets held for sale

 

 

5,165

 

 

702

 

 

15,473

 

 

—  

 

 

21,340

 

 

 



 



 



 



 



 

Total current assets

 

 

128,214

 

 

28,324

 

 

33,520

 

 

(24,458

)

 

165,600

 

Intercompany accounts receivable

 

 

51,085

 

 

139,772

 

 

436

 

 

(191,293

)

 

—  

 

Property, plant, and equipment, net

 

 

91,088

 

 

6,952

 

 

5,099

 

 

5,606

 

 

108,745

 

Intangibles

 

 

5,991

 

 

4,058

 

 

—  

 

 

—  

 

 

10,049

 

Goodwill

 

 

17,764

 

 

7,757

 

 

8,353

 

 

—  

 

 

33,874

 

Equity investments

 

 

213,606

 

 

103,005

 

 

7,034

 

 

(316,426

)

 

7,219

 

Other assets

 

 

11,798

 

 

6,864

 

 

3,719

 

 

—  

 

 

22,381

 

 

 



 



 



 



 



 

Total assets

 

$

519,546

 

$

296,732

 

$

58,161

 

$

(526,571

)

$

347,868

 

 

 



 



 



 



 



 

Accounts payable

 

$

33,820

 

$

16,777

 

$

1,571

 

$

(11,733

)

$

40,435

 

Other current liabilities

 

 

28,660

 

 

7,060

 

 

991

 

 

(14,532

)

 

22,179

 

Liabilities held for sale

 

 

2,156

 

 

1,001

 

 

3,526

 

 

—  

 

 

6,683

 

 

 



 



 



 



 



 

Total current liabilities

 

 

64,636

 

 

24,838

 

 

6,088

 

 

(26,265

)

 

69,297

 

Intercompany accounts payable

 

 

129,654

 

 

47,665

 

 

8,440

 

 

(185,759

)

 

—  

 

Long-term debt

 

 

83,925

 

 

—  

 

 

—  

 

 

—  

 

 

83,925

 

Other non-current liabilities

 

 

90,771

 

 

11,253

 

 

10,000

 

 

(67,938

)

 

44,086

 

Shareholders’ equity

 

 

150,560

 

 

212,976

 

 

33,633

 

 

(246,609

)

 

150,560

 

 

 



 



 



 



 



 

Total liabilities and shareholders’ equity

 

$

519,546

 

$

296,732

 

$

58,161

 

$

(526,571

)

$

347,868

 

 

 



 



 



 



 



 

27



 

 

Condensed Consolidating Statements of Cash Flows
Nine months ended September 30, 2006

 

 

 


 

 

 

Issuer

 

Guarantor
Subsidiaries

 

Non-Guarantor
Subsidiaries

 

Consolidating and
Eliminating
Entries

 

Consolidated

 

 

 



 



 



 



 



 

Net cash (used in) provided by operating activities

 

$

(24,667

)

$

12,413

 

$

(2,986

)

$

159

 

$

(15,081

)

 

 



 



 



 



 



 

Investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from insurance settlement for property and equipment

 

 

4,595

 

 

—  

 

 

—  

 

 

—  

 

 

4,595

 

Proceeds from sale of assets

 

 

778

 

 

—  

 

 

20,435

 

 

—  

 

 

21,213

 

Property, plant and equipment expenditures

 

 

(9,459

)

 

(116

)

 

(414

)

 

—  

 

 

(9,989

)

Investment from (in) affiliates

 

 

11,217

 

 

(823

)

 

(10,394

)

 

—  

 

 

—  

 

Other

 

 

676

 

 

—  

 

 

—  

 

 

—  

 

 

676

 

 

 



 



 



 



 



 

Net cash provided by (used in) investing activities

 

 

7,807

 

 

(939

)

 

9,627

 

 

—  

 

 

16,495

 

 

 



 



 



 



 



 

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net borrowings (repayments)

 

 

6,121

 

 

(607

)

 

25

 

 

(4,538

)

 

1,001

 

Debt issuance costs

 

 

(3,233

)

 

—  

 

 

—  

 

 

—  

 

 

(3,233

)

Intercompany and equity transactions

 

 

10,444

 

 

(13,672

)

 

3,228

 

 

—  

 

 

—  

 

Other

 

 

356

 

 

30

 

 

—  

 

 

(30

)

 

356

 

 

 



 



 



 



 



 

Net cash provided by (used in) financing activities

 

 

13,688

 

 

(14,249

)

 

3,253

 

 

(4,568

)

 

(1,876

)

 

 



 



 



 



 



 

Effect of exchange rate changes on cash and cash equivalents

 

 

1,798

 

 

844

 

 

(2,426

)

 

(129

)

 

87

 

(Decrease) increase in cash and cash equivalents

 

 

(1,374

)

 

(1,931

)

 

7,468

 

 

(4,538

)

 

(375

)

Cash and cash equivalents, beginning of period

 

 

3,049

 

 

3,681

 

 

9,836

 

 

(11,120

)

 

5,446

 

 

 



 



 



 



 



 

Cash and cash equivalents, end of period

 

$

1,675

 

$

1,750

 

$

17,304

 

$

(15,658

)

$

5,071

 

 

 



 



 



 



 



 


 

 

Condensed Consolidating Statements of Cash Flows
Nine months ended September 30, 2005

 

 

 


 

 

 

Issuer

 

Guarantor
Subsidiaries

 

Non-Guarantor
Subsidiaries

 

Consolidating and
Eliminating
Entries

 

Consolidated

 

 

 



 



 



 



 



 

Net cash (used in) provided by operating activities

 

$

(7,870

)

$

16,833

 

$

(2,430

)

$

(1,153

)

$

5,380

 

 

 



 



 



 



 



 

Investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from insurance settlement for property and equipment

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

Proceeds from sales of assets

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

Property, plant and equipment expenditures

 

 

(7,396

)

 

(102

)

 

(668

)

 

—  

 

 

(8,166

)

Investment from (in) affiliates

 

 

—  

 

 

858

 

 

(858

)

 

—  

 

 

—  

 

Other

 

 

(116

)

 

378

 

 

—  

 

 

—  

 

 

262

 

 

 



 



 



 



 



 

Net cash (used in) provided by investing activities

 

 

(7,512

)

 

1,134

 

 

(1,526

)

 

—  

 

 

(7,904

)

 

 



 



 



 



 



 

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net borrowings (repayments)

 

 

(964

)

 

(77

)

 

—  

 

 

2,644

 

 

1,603

 

Debt issuance costs

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

 

—  

 

Intercompany and equity transactions

 

 

6,822

 

 

(17,192

)

 

6,818

 

 

(3

)

 

(3,555

)

Other

 

 

2,986

 

 

(154

)

 

154

 

 

—  

 

 

2,986

 

 

 



 



 



 



 



 

Net cash provided by (used in) financing activities

 

 

8,844

 

 

(17,423

)

 

6,972

 

 

2,641

 

 

1,034

 

 

 



 



 



 



 



 

Effect of exchange rate changes on cash and cash equivalents

 

 

1,369

 

 

(1,345

)

 

(291

)

 

1,156

 

 

889

 

(Decrease) increase in cash and cash equivalents

 

 

(5,169

)

 

(801

)

 

2,725

 

 

2,644

 

 

(601

)

Cash and cash equivalents, beginning of period

 

 

11,243

 

 

6,923

 

 

8,316

 

 

(17,702

)

 

8,780

 

 

 



 



 



 



 



 

Cash and cash equivalents, end of period

 

$

6,074

 

$

6,122

 

$

11,041

 

$

(15,058

)

$

8,179

 

 

 



 



 



 



 



 

28



Item 2.

Management’s Discussion and Analysis of Results of Operations and Financial Condition

This discussion should be read in connection with the information contained in the Unaudited Condensed Consolidated Financial Statements and Notes to the Unaudited Condensed Consolidated Financial Statements.

Results of Operations

Continuing Operations:

Consolidated net sales increased by $10.8 million or 15.7% and $17.2 million or 7.8% for the quarter and year-to-date period ended September 30, 2006, respectively, versus the quarter and year-to-date periods ended September 30, 2005.  Net sales for the quarter and year-to-date periods ended September 30, 2006 for the Carbon and Service segment increased $9.9 million or 17.1% and $19.3 million or 10.7%, respectively, versus the similar 2005 period.  The increase for both periods was primarily due to increased demand for activated carbon in the industrial process, food, environmental water treatment, and respirator markets. Higher prices for certain carbon and service products also contributed to the increase for both the quarter and year-to-date periods.  Increased sales of activated carbon in Japan to the Company’s joint venture company also contributed to the year-to-date increase versus the comparable 2005 period.  Sales for this segment were adversely affected by sales losses due to Hurricane Katrina for the comparative 2005 quarter and year-to date periods.  Foreign currency translation had a positive impact of $1.2 million for the quarter and had a negative impact of $0.4 million for the year-to-date period.  Net sales for the Equipment segment increased $0.8 million or 9.6% for the quarter and decreased $2.7 million or 9.2% for the year-to-date period versus the comparable 2005 periods.  The increase for the quarter was primarily due to higher demand for carbon adsorption systems in the U.S. and ISEP® systems in Asia partially offset by the reduced demand for odor control systems in the U.S.  The decrease for the year-to-date period was primarily due to non-repeat sales of equipment for perchlorate removal from ground water and the aforementioned odor control systems. Foreign currency translation had a negligible impact on sales for the quarter, but a positive impact on year-to-date sales of $0.1 million.  Net sales for the quarter and year-to-date periods ended September 30, 2006 for the Consumer segment increased by $0.1 million or 3.8% and $0.6 million or 6.3% versus the similar periods of 2005.  The increase for the quarter was attributable to higher demand for PreZerve® products.  The increase for the year-to-date period was due to the aforementioned increase in demand for PreZerve® products as well as increased sales of activated carbon cloth.  Foreign currency translation had a positive impact on the quarter sales of $0.1 million, but had a negative impact on year-to-date sales of $0.1 million.  The total impact of foreign currency translation on consolidated net sales for the quarter ended September 30, 2006 was favorable $1.3 million, however, it had a negative impact on net sales for the year-to-date period of $0.4 million. Net sales in the future could be affected by the anti-dumping ruling as described in the Company’s Form 8-K filed on October 6, 2006.  The Company received notification from the United States Department of Commerce (the “DOC”) announcing the imposition of preliminary anti-dumping duties on all imports of steam activated carbon from China.  The DOC  immediately ordered U.S. Customs and Border Protection to require importers to post a bond or cash deposit in the amount of the duties.  Over the next several months the DOC will verify information submitted by various respondents.  A final determination is expected in April 2007.  The final dumping duties could be imposed for up to five years.

Net sales less cost of products sold, as a percentage of net sales, was 26.1% and 25.6% for the quarter and year-to-date periods ended September 30, 2006, respectively, compared to 25.5% and 27.0% for the similar 2005 periods, a 0.6 percent increase for the quarter and a 1.4 percentage point decrease for the year-to-date period.  The increase for the quarter was primarily due to price increases for certain carbon and service products, while the decline in the year-to-date periods was primarily due to higher raw material, energy, and transportation costs, as well as inefficiencies at the Company’s production facilities brought about by dealing with the after effects of Hurricane Katrina which could only be partially offset by the aforementioned price increases.  The Company’s cost of products sold excludes depreciation, therefore it may not be comparable to that of other companies.

29



The depreciation and amortization decrease of $0.4 million and $1.7 million during the quarter and year-to-date periods ended September 30, 2006 versus the periods ended September 30, 2005 was primarily decreased depreciation due to an increase in fully depreciated fixed assets.

Selling, general and administrative expenses for the quarter and year-to-date periods ended September 30, 2006 increased versus the comparable 2005 periods by $2.5 million and $3.6 million, respectively.  The increase for the quarter ended September 30, 2006 period versus the similar 2005 period was primarily due to an increase in legal expense of $0.5 million, severance related costs of $0.9 million, and pension curtailment and settlement charges of $0.8 million.  The increase for the year-to-date period is primarily attributable to an increase in legal expense of approximately $3.2 million, the aforementioned severance related costs, and pension settlement and curtailment charges. Partially offsetting this increase was a decrease due to the change in the estimate of the Company’s environmental liabilities assumed in the Waterlink acquisition of approximately $1.3 million.

Research and development expenses for the quarter and year-to-date periods ended September 30, 2006 were comparable to the similar 2005 periods.

The gain from insurance settlement is due to Hurricane Katrina as discussed in Note 2.  The non-recoverable costs of approximately $1.0 million related to damage caused at the Company’s Pearl River plant by Hurricane Katrina were recorded for the year-to-date period ended September 30, 2005.

The impairment charge of $2.2 million for the year-to-date period ended September 30, 2005 was as a result of the Company’s decision on March 22, 2005 to cancel the construction of a reactivation facility on the U.S. Gulf Coast and to suspend the construction of such facility for the foreseeable future.

Restructuring charges for the quarter and year-to-date periods ended September 30, 2006 decreased $0.1 million and $0.4 million versus the comparable 2005 periods.  The restructuring charges for the quarter ended September 30, 2005 were attributable to the Company’s closure of two small manufacturing facilities.  The 2005 year-to-date period includes pension curtailment charges as a result of employee separations from the Company’s 2005 re-engineering plan as well as the aforementioned facility closures.

Other expense for the quarter ended September 30, 2006 was comparable to the similar 2005 period, however increased $0.7 million for the year-to-date period ended September 30, 2006, as compared to September 30, 2005.  This increase was due to a gain on sale of an asset of $0.2 million which occurred in the period ended September 30, 2005 and the write-off of approximately $0.6 million of deferred financing fees associated with the Company’s old credit facility during the period ended September 30, 2006.

Interest expense, net of interest income, increased $0.2 million and $1.1 million for the quarter and year-to-date periods ended September 30, 2006 versus the similar 2005 periods.  The increase for the quarter and year-to-date periods was primarily the result of higher interest rates paid on the Company’s borrowings under its old credit facility as a result of the increase in LIBOR rates from 2005.  Also contributing to the quarter increase were higher interest rates related to the Company’s new credit facility and convertible senior notes. The year-to-date increase was also impacted by the Company paying higher interest spreads on its borrowings under its old credit facility during the first six months of 2006 as a result of a lower trailing twelve months EBITDA. 

The effective tax rate for the nine month period ended September 30, 2006 was a benefit of 42.6% compared to a benefit of 55.4% for the period ended September 30, 2005.  The period ended September 30, 2006 tax rate was higher than the statutory Federal Income Tax Rate due to our lower than expected profit and certain benefits, principally the exclusion provided under United States income tax laws with respect to the Extraterritorial Income Exclusion Benefit, benefits related to foreign tax credits, and recognition of state income tax benefits combined with a change in estimate of the Company’s full year pre-tax earnings.  The nine month period ended September 30, 2005 tax rate was higher than the statutory Federal Income Tax Rate due to the Extraterritorial Income Exclusion Benefit, recognition of foreign tax credit benefits, and recognition of state income tax benefits. The primary items that contributed to the change in the effective tax rate between the nine month period ended September 30, 2006 and the similar period for 2005 was the reduction in estimate of the Company’s full year 2006 pre-tax earnings and its impact on the tax effect of the aforementioned permanent items.

30



During the preparation of its effective tax rate, the Company uses an annualized estimate of pre-tax earnings.  Throughout the year this annualized estimate may change based on actual results and annual earnings estimate revisions.  Because the Company’s permanent tax benefits are relatively constant, changes in the annualized estimate may have a significant impact on the effective tax rate in future periods.

The Company provides an estimate for income taxes based on an evaluation of the underlying accounts, its tax filing positions and interpretations of existing law.  Changes in estimates are reflected in the year of settlement or expiration of the statute of limitations.  The Company does not believe that resolution of existing unresolved tax matters will have a material impact on the consolidated financial condition of the Company, although a resolution could have a material impact on the Company’s consolidated statement of income and comprehensive income for a particular future period and on the Company’s effective tax rate.

Equity in income from equity investments decreased $0.4 million and $0.8 million for the quarter and year-to-date periods ended September 30, 2006 versus the similar 2005 periods.  The decrease was due to reduced margins as a result of increased sales of its higher cost inventory that was produced at the former carbon production facility in Japan that was shutdown in December 2005.

Discontinued Operations:

Income from discontinued operations increased $0.4 million and decreased $0.5 million, respectively, for the quarter and year-to-date periods ended September 30, 2006 versus the similar 2005 periods.  The increase for the quarter is as a result of a net loss in the third quarter of 2005 related to both of the Company’s divested Charcoal/Liquid and Solvent Recovery businesses.  The year-to-date increase is primarily due to the $2.3 million net of tax gain recognized on the sale of the Company’s Charcoal/Liquid and Solvent Recovery businesses.  Partially offsetting this increase was lower net income for the first nine months of 2006 due to the divestiture of both the Charcoal/Liquid and Solvent Recovery businesses that occurred in the first and second quarter of 2006.

Financial Condition

Working Capital and Liquidity

The cash flows discussed for the quarter and year-to-date periods ended September 30, 2006 and 2005 include discontinued operations.  Cash flows used in operations were ($15.1) million for the period ended September 30, 2006 compared to cash flows provided by operations of $5.4 million for the comparable 2005 period. 

The $20.5 million decrease was primarily due to the inclusion of the cash generated from the divested businesses in 2005 for the full nine months, where in 2006 the cash flows from the divested businesses were only included pre-divestiture.  Also contributing to the decrease was the gain from insurance settlement of $5.3 million – net of cash received related to Hurricane Katrina, gain from divestitures of $6.7 million, decreased depreciation and amortization of $2.6 million, and decreased accrued pensions net of employee benefit plan provisions of $7.9 million.  Operating working capital (exclusive of debt) increased $1.0 million.  The divestitures are expected to decrease cash flows from operations by approximately $3.0 million on an annual, on-going basis.

Common stock dividends were not paid during the quarter ended September 30, 2006 as compared to dividends that were paid during the quarter ended September 30, 2005 which represented $.03 per common share.

On August 18, 2006, the Company issued $75.0 million of Convertible Senior Notes (the “Notes”) due in 2036 and entered into a new revolving credit facility (the “Credit Facility”).  The Company used $68.4 million of the net proceeds from its offering of the Notes to fully repay indebtedness under the Company’s prior revolving credit facility.  Accordingly, all parties have completed their obligations under the Amended and Restated Credit Agreement, dated as of January 30, 2006 (the “Old Credit Agreement”).  The material terms and conditions of the Old Credit Agreement are more fully discussed in Note 13 to the Company’s unaudited condensed consolidated financial statements contained in its Quarterly Report on Form 10-Q/A for the fiscal quarter ended June 30, 2006.  As part of the aforementioned repayment, the Company wrote-off $0.3 million of deferred financing fees as well as $0.1 million in fees associated with the repayment.   

31



5.00% Convertible Senior Notes due 2036

The Company initially issued $65.0 million in aggregate principal amount of 5.00% Notes due in 2036 and granted the initial purchaser a 30-day option to purchase up to an additional $10.0 million principal amount of Notes solely to cover over-allotments, if any.  The initial purchaser exercised this option in full.  Accordingly, $75.0 million in aggregate principal amount of Notes were issued and sold to the initial purchaser upon completion of the offering on August 18, 2006.  The Notes accrue interest at the rate of 5.00% per annum and are payable in cash semi-annually in arrears on each February 15 and August 15, commencing February 15, 2007.  The Notes will mature on August 15, 2036. 

The Notes can be converted under the following circumstances: (1) during any calendar quarter (and only during such calendar quarter) commencing after September 30, 2006, if the last reported sale price of the Company’s common stock is greater than or equal to 120% of the conversion price of the Notes for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the preceding calendar quarter; (2) during the five business day period after any 10 consecutive trading-day period (the “measurement period”) in which the trading price per Note for each day in the measurement period was less than 103% of the product of the last reported sale price of the Company’s common stock and the conversion rate on such day; or (3) upon the occurrence of specified corporate transactions described in the Offering Memorandum.  On or after June 15, 2011, holders may convert their Notes at any time on the business day immediately preceding the maturity date.  Upon conversion, the Company will pay cash and shares of its common stock, if any, based on a daily conversion value (as described herein) calculated on a proportionate basis for each day of the 25 trading-day observation period.

The initial conversion rate will be 196.0784 shares of the Company’s common stock per $1,000 principal amount of Notes, equivalent to an initial conversion price of approximately $5.10 per share of common stock.  The conversion rate will be subject to adjustment in some events but will not be adjusted for accrued interest, including any additional interest.  In addition, following certain fundamental changes that occur prior to August 15, 2011, the Company will increase the conversion rate for holders who elect to convert Notes in connection with such fundamental changes in certain circumstances.

The Company may not redeem the Notes before August 20, 2011.  On or after that date, the Company may redeem all or a portion of the Notes at any time.  Any redemption of the Notes will be for cash at 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, including any additional interest, to, but excluding, the redemption date.

Holders may require the Company to purchase all or a portion of their Notes on each of August 15, 2011, August 15, 2016, and August 15, 2026.  In addition, if the Company experiences specified types of fundamental changes, holders may require it to purchase the Notes.  Any repurchase of the Notes pursuant to these provisions will be for cash at a price equal to 100% of the principal amount of the Notes to be purchased plus any accrued and unpaid interest, including any additional interest, to, but excluding, the purchase date. 

The Notes will be the Company’s senior unsecured obligations, and will rank equally in right of payment with all of its other existing and future senior indebtedness.  The Notes will be guaranteed by certain of the Company’s domestic subsidiaries on a senior unsecured basis.  The subsidiary guarantees will be general unsecured senior obligations of the subsidiary guarantors and will rank equally in right of payment with all of the existing and future senior indebtedness of the subsidiary guarantors.  If the Company fails to make payment on the Notes, the subsidiary guarantors must make them instead.  The Notes will be effectively subordinated to any indebtedness of the Company’s non-guarantor subsidiaries.  The Notes will be effectively junior to all of the Company’s existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness.

The Company sold the Notes at a discount of $3.3 million that will be amortized over a period of five years.  The discount will be reflected as a deduction from the face amount of the debt.  The Company recorded interest expense of $0.5 million of which $0.1 million related to the amortization of the discount and $0.4 million which related to the Notes.  The Company incurred issuance costs of $1.5 million which have been deferred and will be amortized over a five year period.

The Notes and the Guarantees were sold only to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). The notes offered hereby, the subsidiary guarantees and the common stock issuable upon conversion of the notes have not been registered. This offering is being conducted in reliance upon an exemption from registration under the Securities Act and applicable state securities laws. We and the subsidiary guarantors have agreed, however, to use reasonable best efforts to file a shelf registration statement with the SEC within 90 days of the issue date, and to use reasonable efforts to cause such registration statement to become effective within 240 days from the issue date, in order to register resales of the notes, the subsidiary guarantees and common stock issuable upon conversion of the notes under the Securities Act. The 90-day period expired on November 16, 2006.  The Company did not file a registration statement within the time period and, as a result, is obligated to pay predetermined additional interest to holders of the notes as described in the registration rights agreement.

32



Credit Facility

The Credit Facility initially is a $50.0 million facility and includes a separate U.K. sub-facility and a separate Belgian sub-facility.  The Administrative Agent will use commercially reasonable efforts to obtain commitments from a syndicate of lenders, permitting the total revolving credit commitment to be increased up to $75.0 million.  The Company is currently discussing the syndication of its revolving credit facility and plans to increase the total commitment of the current facility.  The terms of the Credit Facility are subject to change in the event that the credit facility is syndicated.  Availability for domestic borrowings under the Credit Facility is based upon the value of eligible inventory, accounts receivable and property, plant and equipment, with separate borrowing bases to be established for foreign borrowings under a separate U.K. sub-facility and a separate Belgian sub-facility.  Availability under the Credit Facility is conditioned upon various customary conditions.

The Credit Facility is secured by a first perfected security interest in substantially all of the Company’s assets, with limitations under certain circumstances in the case of capital stock of foreign subsidiaries.  Certain of the Company’s domestic subsidiaries unconditionally guarantee all indebtedness and obligations related to domestic borrowings under the Credit Facility.  The Company and certain of its domestic subsidiaries also unconditionally guarantee all indebtedness and obligations under the U.K. sub-facility. 

As of September 30, 2006, the carrying amount of assets pledged as collateral was $53.4 million.  The carrying amount as of September 30, 2006 for domestic, U.K., and Belgian borrowers were $43.0 million, $5.6 million, and $4.8 million, respectively.  The Credit Facility contains a fixed charge coverage ratio covenant which becomes effective when total domestic availability falls below $11.0 million.  As of September 30, 2006, total availability was $28.6 million.  Availability as of September 30, 2006 for domestic, U.K., and Belgian borrowers were $24.3 million, $4.3 million, and zero, respectively.

The Credit Facility interest rate is based upon Euro-based (LIBOR) rates with other interest rate options available.  The applicable Euro Dollar margin in effect when the Company is in compliance with the terms of the facility ranges from 1.25% to 2.25% and is based upon the Company’s overall availability under the credit facility.  The unused commitment fee is equal to 0.375% per annum and is based upon the unused portion of the revolving commitment.

The Company incurred debt issuance costs of $0.5 million which have been deferred and will be amortized over a five year period.  Borrowings under the Credit Facility were being charged a weighted average interest rate of 7.08% at September 30, 2006.

In its 2005 financial statements, the Company disclosed that it expected to contribute $6.4 million to its U.S. and European pension plans in 2006.  As of September 30, 2006, the Company has contributed $10.6 million.  The Company expects to contribute $0.6 million to its European pension plans over the remainder of the year.

The Company is obligated to make future payments under various contracts such as debt agreements, lease agreements, and unconditional purchase obligations.  As of September 30, 2006, with the exception of the convertible senior notes and new credit facility as noted above, there have been no further changes in the payment terms of other long-term debt, lease agreements, and unconditional purchase obligations since December 31, 2005.  The following table represents the significant cash contractual obligations and other commercial commitments.

 

 

Due in

 

 

 

 

 

 


 

 

 

 

(Thousands)

 

2006

 

2007

 

2008

 

2009

 

2010

 

Thereafter

 

Total

 


 



 



 



 



 



 



 



 

Debt

 

$

—  

 

$

—  

 

$

—  

 

$

2,925

 

$

—  

 

$

78,768

 

$

81,693

 

Operating leases

 

 

5,019

 

 

3,781

 

 

3,029

 

 

2,694

 

 

2,539

 

 

12,245

 

 

29,307

 

Unconditional purchase obligations*

 

 

26,755

 

 

21,626

 

 

16,887

 

 

8,041

 

 

7,753

 

 

5,711

 

 

86,773

 

 

 



 



 



 



 



 



 



 

Total contractual cash Obligations

 

$

31,774

 

$

25,407

 

$

19,916

 

$

13,660

 

$

10,292

 

$

96,724

 

$

197,773

 

 

 



 



 



 



 



 



 



 



*Primarily for the purchase of raw materials, transportation, and information systems services.

Note:  Interest is not included in the above schedule.  As of September 30, 2006 the Company’s interest rate was 6.08% and the Company projects interest payments of approximately $2.0 million for the year ending December 31, 2006.

33



Capital Expenditures and Investments

Capital expenditures for property, plant and equipment totaled $10.0 million for the nine months ended September 30, 2006 compared to expenditures of $8.2 million for the same period in 2005.  The expenditures for the period ended September 30, 2006 consisted primarily of improvements to the Company’s manufacturing facilities of $6.1 million, $2.3 million related to the repair of the Company’s Pearl River plant as a result of Hurricane Katrina, and additional customer capital of $1.4 million.  The comparable 2005 expenditures consisted primarily of $7.4 million for improvements to manufacturing facilities and $0.4 million for customer capital.  Capital expenditures for 2006 are projected to be approximately $16.0 million.

The September 30, 2005 purchase of business cash usage of $0.9 million, as shown on the statement of cash flows, represents primarily the Company’s increased equity ownership in Datong Carbon Corporation from 80% to 100% for a purchase price of $0.7 million.

In 2003, the Company temporarily suspended construction of a new facility in the Gulf Coast region of the United States as it evaluated strategic alternatives.  On March 22, 2005, the Company concluded, and the Board of Directors approved, that cancellation of this project was warranted and that construction of such a facility should be suspended for the foreseeable future.  Accordingly, the Company recorded an impairment charge of $2.2 million for the period ended September 30, 2005.

In January 2006, the Company announced the temporary idling of its reactivation facility in Blue Lake, California in an effort to reduce operating costs and to more efficiently utilize the capacity at its other existing locations.  The Company conducted an impairment review of the plant’s assets having a net book value of $1.7 million in connection with the temporary idling of the facility and concluded that the assets were not impaired.  It is management’s intention to resume operation of the plant in the second half of 2007.  If management should conclude that the idling of the plant beyond 2007 is warranted, operating results may be adversely affected by impairment charges.

Regulatory Matters

Each of the Company’s domestic production facilities has permits and licenses regulating air emissions and water discharges.  All of the Company’s domestic production facilities are controlled under permits issued by local, state and federal air pollution control entities.  The Company is presently in compliance with these permits. Continued compliance will require administrative control and will be subject to any new or additional standards.  In May 2003, the Company partially discontinued operation of one of its three activated carbon lines at its Catlettsburg, Kentucky facility.  The Company will need to install pollution abatement equipment estimated at approximately $7.0 million in order to remain in compliance with state requirements regulating air emissions before resuming full operation of this line.  Management has not determined its plan of action for compliance related to this activated carbon line; however, if it is determined that a shutdown of the full operation of the activated carbon line is warranted, the impact to current operating results would be insignificant.

New Accounting Pronouncements

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs – an amendment of ARB No. 43, Chapter 4,” which requires the recognition of costs of idle facilities, excessive spoilage, double freight and re-handling costs as a component of current-period expenses.  The provisions of SFAS No. 151 are effective for inventory costs incurred during fiscal years beginning after June 15, 2005.  The Company adopted SFAS No. 151 effective January 1, 2006 as required.  Such adoption had no material impact on the accompanying financial statements.

34



In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment,” which establishes the accounting for transactions in which an entity exchanges its equity instruments or certain liabilities based upon an entity’s equity instruments for goods or services.  SFAS No. 123R generally requires that publicly traded companies measure the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award at the grant date.  That cost will be recognized over the period during which an employee is required to provide service in exchange for the award which is usually the vesting period.  Management adopted SFAS No. 123R beginning January 1, 2006 as required and the related costs are reflected in the accompanying financial statements as discussed in Note 14. 

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which changes the requirements for the accounting for and reporting of a change in accounting principle.  SFAS No. 154 applies to all voluntary changes in accounting principle.  It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions.  When a pronouncement includes specific transition provisions, those provisions should be followed.  The Company adopted SFAS No. 154 effective January 1, 2006 as required.  Such adoption had no material impact on the accompanying financial statements.

In June 2006, the FASB issued FASB Interpretation no. 48 (“FIN No. 48”), “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Standard No. 109”.  FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  FIN 48 is effective for fiscal years beginning after December 15, 2006.  The Company is in the process of evaluating the financial impact of adopting FIN 48.

In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosure about fair value measurements.  SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  The Company expects to adopt SFAS No. 157 as required for the fiscal year 2008 and that adoption will not have material impact on the financial statements.

In September 2006, the FASB issued SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – An amendment of FASB Statements No. 87, 88, 106, and 132(R).”  SFAS No. 158 requires recognition of the funded status of a benefit plan on the balance sheet;  the recognition in other comprehensive income of gains or losses and prior service costs or credits arising during the period but which are not included as components of periodic benefit cost; the measurement of defined benefit plan assets and obligations as of the balance sheet date; and disclosure of additional information about the effects on periodic benefit cost for the following fiscal year arising from delayed recognition of gains and losses in the current period.   SFAS No. 158 is effective the Company’s year ended December 31, 2006.  The Company is in the process of evaluating the financial impact of adopting SFAS No. 158.  However, based on the funded status of the Company’s defined benefit pension plans and other postretirement plan as of December 31, 2005 (the Company’s most recent measurement date), the Company would be required to increase its net liabilities for pension and other postretirement benefits, which would result in a decrease in stockholders’ equity of approximately $29.0 million.  The actual impact may vary from the estimated impact  as the ultimate amounts recorded will depend on a number of assumptions, including, but not limited to, the discount rates in effect at December 31, 2006, the actual rate of return on the Company’s pension plan assets for the year then ended and the impact of the Company’s pension contributions during the year ended December 31, 2006.  Changes in these assumptions since the Company’s last measurement date could increase or decrease the impact of adopting SFAS No. 158 on the Company’s consolidated financial statements at December 31, 2006.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements in Current Year Financial Statements (“SAB No. 108”). SAB No. 108 provides guidance on how prior year misstatements should be taken into consideration when quantifying misstatements in current year financial statements for purposes of determining whether the current year’s financial statements are materially misstated. SAB 108 becomes effective during fiscal year 2006.

35



Critical Accounting Policies

Management of the Company has evaluated the accounting policies used in the preparation of the financial statements and related footnotes and believes the policies to be reasonable and appropriate.  The preparation of the financial statements in accordance with accounting principles generally accepted in the United States requires management to make judgments, estimates, and assumptions regarding uncertainties that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses.  Management uses historical experience and all available information to make these judgments and estimates, and actual results will inevitably differ from those estimates and assumptions that are used to prepare the Company’s financial statements at any given time.  Despite these inherent limitations, management believes that Management’s Discussion and Analysis (MD&A) and the financial statements and related footnotes provide a meaningful and fair perspective of the Company’s financial condition and results of operations.

The following are the critical accounting policies impacted by management’s judgments, assumptions, and estimates. Management believes that the application of these policies on a consistent basis enables the Company to provide the users of the financial statements with useful and reliable information about the Company’s operating results and financial condition.

Revenue Recognition

The Company recognizes revenue and related costs when goods are shipped or services are rendered to customers provided that ownership and risk of loss have passed to the customer. Revenue for major equipment projects is recognized under the percentage of completion method by comparing actual costs incurred to total estimated costs to complete the respective projects. 

Allowance for Doubtful Accounts

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments.  The amount of allowance recorded is based upon a quarterly review of specific customer transactions that remain outstanding at least three months beyond their respective due dates.  If the financial condition of the Company’s customers were to deteriorate resulting in an impairment of their ability to make payments, additional allowances may be required. 

Inventories

The Company’s inventories are carried at the lower of cost or market and adjusted to net realizable value.  The inventory obsolescence adjustment is recorded quarterly based upon a review of specific products that have remained unsold for a prescribed period of time. 

Goodwill and Other Intangible Assets

The Company tests goodwill for impairment at least annually by initially comparing the fair value of the Company’s reporting units to their related carrying values.  If the fair value of a reporting unit were less than its carrying value, additional steps would be necessary to determine the amount, if any, of goodwill impairment.  Fair values are estimated using discounted cash flow and other valuation methodologies that are based on projections of the amounts and timing of future revenues and cash flows.

Environmental Costs

Liabilities for environmental costs are recorded when it is probable that obligations have been incurred and the amounts can be reasonably estimated.  These liabilities are not reduced by possible recoveries from third parties, and projected cash expenditures are not discounted.

Pensions

Accounting for pensions involves estimating the cost of benefits to be provided well into the future and attributing that cost over the time period each employee works.  To accomplish this, extensive use is made of assumptions about inflation, investment returns, mortality, turnover and discount rates.  These assumptions are reviewed annually.  In determining the expected return on plan asset assumption, the Company evaluates long-term actual return information, the mix of investments that comprise plan assets and future estimates of long-term investment returns.

36



Income Taxes

During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain.  Significant judgment is required in determining the Company’s annual tax rate and in evaluating tax positions.  The Company establishes reserves when, despite management’s belief that the Company’s tax return positions are fully supportable, it believes that certain positions are probable to be challenged upon review by tax authorities.  Changes in estimates are reflected in the year of settlement or expiration of the statute of limitations or changes in facts and circumstances.  While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, the Company believes that its reserves reflect the probable outcome of known tax contingencies.  The resolution of tax matters will not have a material impact on the consolidated financial condition of the Company, although a resolution could have a material impact on the Company’s consolidated statements of operations and comprehensive income for a particular future period and on the Company’s effective tax rate.

The Company is subject to varying statutory tax rates in the countries where it conducts business.  Fluctuations in the mix of the Company’s income between countries result in changes to the Company’s overall effective tax rate.

Litigation

The Company is involved in various asserted and unasserted legal claims.  An estimate is made to accrue for a loss contingency relating to any of these legal claims if it is probable that a liability was incurred at the date of the financial statements and the amount of loss can be reasonably estimated.  Because of the subjective nature inherent in assessing the outcome of legal claims and because the potential that an adverse outcome in a legal claim could have material impact on the Company’s legal position or results of operations, such estimates are considered to be critical accounting estimates.  After review, it was determined at September 30, 2006, that for each of the various unresolved legal claims in which the Company is involved, the conditions mentioned above were not met.  As such, no accrual was recorded.  The Company will continue to evaluate all legal matters as additional information becomes available. 

Long-Lived Assets

The Company evaluates long-lived assets under the provisions of Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which addresses financial accounting and reporting for the impairment of long-lived assets, and for long-lived assets to be disposed of.  For assets to be held and used, the Company groups a long-lived asset or assets with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities.  The Company performs an impairment assessment whenever events or changes indicate a long-lived asset’s carrying value might not be recoverable.  An impairment loss for an asset group reduces only the carrying amounts of a long-lived asset or assets of the group being evaluated.  The loss is allocated to the long-lived assets of the group on a pro-rata basis using the relative carrying amounts of those assets, except that the loss allocated to an individual long-lived asset of the group does not reduce the carrying amount of that asset below its fair value whenever that fair value is determinable without undue cost and effort.  Estimates of future cash flows used to test the recoverability of a long-lived asset group include only the future cash flows that are associated with and that are expected to arise as a direct result of the use and eventual disposition of the asset group.  The future cash flow estimates used by the Company exclude interest charges.

37



Item 4:

Controls and Procedures

Disclosure Controls and Procedures:

The Company’s principal executive officer and principal financial officer have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), at the end of the period covered by this Quarterly Report on Form 10-Q. Based upon their evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are ineffective.

On October 30, 2006, management and the Audit Committee of the Company determined that the Unaudited Condensed Consolidated Financial Statements for the fiscal quarters ended March 31, and June 30, 2006 contained errors and should no longer be relied upon.  The errors were as a result of an error made in the calculation of the Company’s interim tax provision for the quarters ended March 31 and June 30, 2006.  Our interim preparation and review controls surrounding income taxation failed to fully consider the impact of the disposition that occurred in the period.

In connection with these restatements, management evaluated the effectiveness of our disclosure controls and procedures.  Solely as a result of this material weakness, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were not effective as of the end of the fiscal quarter ended September 30, 2006. 

Changes in Internal Control:

There have not been any changes in the Company’s internal controls over financial reporting that occurred during the period ended September 30, 2006 that have significantly affected, or are reasonably likely to significantly affect, the Company’s internal controls over financial reporting.

     PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

 

 

 

See Note 11 to the unaudited interim Condensed Consolidated Financial Statements contained herein.

 

 

Item 1a.

Risk Factors

Risk relating to our business

Our pension plans are currently underfunded, and we expect to be subject to significant increases in pension contributions to our defined benefit pension plans, thereby restricting our cash flow.

We sponsor various pension plans in the United States and Europe that are underfunded and require significant cash payments. We contributed $4.0 million and $2.4 million to our U.S. Pension plans and $1.0 million and $2.1 million to our European pension plans in 2004 and 2005, respectively. We are required to make minimum aggregate contributions of $6.4 million in 2006 but plan to contribute $9.1 million during 2006. We currently expect to be required to contribute approximately $3.1 million to our U.S. pension plans in 2007. If our cash flow from operations is insufficient to fund our worldwide pension liability, we may be forced to reduce or delay capital expenditures, seek additional capital or restructure or refinance our indebtedness.

The funding status of our pension plans is determined using many assumptions, such as inflation, investment rates, mortality, turnover and discount rates, any of which could prove to be different than projected. If the performance of the assets in our pension plans does not meet our expectations, or if other actuarial assumptions are modified, we may be required to contribute more to our pension plans than we currently expect. For example, an approximate 25-basis point decline in the current liability interest rate, which is used under the Employee Retirement Income Security Act of 1974, or ERISA, for funding purposes, would increase our minimum required contribution to o