UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended March 31, 1998
---------------------------------
Commission file Number 1-4591
------
FAIRMOUNT CHEMICAL CO., INC.
----------------------------
(Exact name of registrant as specified in its charter.)
New Jersey 22-0900720
---------- ----------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
117 Blanchard Street, Newark, NJ 07105
- ----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973)-344-5790
-----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [ X ] NO [ ]
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
Common Stock, $1 Par Value - 8,292,866 shares as of May 7, 1998.
Transitional small business disclosure format (check one):
YES [ ] NO [ X ]
<PAGE>
PART I. FINANCIAL INFORMATION
FAIRMOUNT CHEMICAL CO., INC.
Statements Of Income (Loss) and Accumulated Deficit
For The Three Months Ended March 31, 1998 and 1997
(Unaudited)
(Dollar amounts rounded to hundreds, except per share data)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net Sales $3,217,800 $3,156,800
Cost of goods sold 2,465,600 2,742,000
------------------ --------- ---------
Gross Profit 752,200 414,800
Research & development 85,000 116,600
Selling, general and
administrative expense 467,000 509,000
---------------------- ------- -------
Operating income/(loss) 200,200 (210,800)
Interest expense 35,900 19,000
Other expense (income) (16,300) 900
Insurance proceeds (1,140,100) --
- ------------------- ----------- ----------
Net Income/(loss) before provision for 1,320,700 (230,700)
income taxes
Provision for income taxes -- --
- -------------------------- ---------- ---------
Net Income/(loss) $1,320,700 $ (230,700)
Accumulated Deficit
Balance December 31 (14,866,200) (14,570,000)
------------------- ------------ -------------
Accumulated Deficit
Balance March 31 $(13,545,500) $(14,800,700)
================ ============= ============
Basic earnings per share $ .16 $ (.03)
======================== ======== ========
Diluted earnings per share $ .10 $ (.03)
========================== ======== ========
</TABLE>
See Accompanying Notes to Financial Statements
- 2 -
<PAGE>
FAIRMOUNT CHEMICAL CO., INC.
Balance Sheets
(Dollar amounts rounded to hundreds)
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
(Unaudited)
Assets
Current Assets:
<S> <C> <C>
Cash $ 1,930,200 $ 711,800
Accounts receivable-trade 1,874,200 1,845,700
Inventories 2,171,900 1,709,600
Prepaid expenses 290,000 282,500
Other current assets 97,200 102,800
-------------------- ------ -------
Total Current Assets 6,363,500 4,652,400
-------------------- ---------- ---------
Property, plant and equipment
less accumulated depreciation of
$4,114,400 and $3,934,400 4,353,400 4,504,400
Other assets 44,900 44,900
----------------------- --------- ---------
Total Assets $10,761,800 $9,201,700
============ ============ ===========
Liabilities and
Stockholders' Equity
Current Liabilities:
Accounts payable $ 845,700 $ 499,900
Accrued compensation 95,400 55,900
Other pension liability 185,400 194,800
Other accrued liabilities 203,200 127,000
Short-term bank borrowings 187,100 387,100
---------------------------- ------- -------
Total Current Liabilities 1,516,800 1,264,700
------------------------- ------------- --------------
Promissory Notes to affiliated parties 1,571,600 1,571,600
Long-term bank borrowings 21,200 33,900
Accrued pension liability 486,300 486,300
Stockholders' Equity
Preferred stock, par value $1 per share
authorized - 10,000,000 shares; 5,400,000
shares issued and outstanding 5,400,000 5,400,000
Common stock, par value $1 per share
authorized - 15,000,000 shares; 8,293,366 shares
issued and outstanding in 1998 and 1997 8,293,400 8,293,400
Less: Treasury stock (at cost) - 500 shares (500) (500)
Capital in excess of par value 7,316,000 7,316,000
Accumulated deficit (13,545,500) (14,866,200)
Additional minimum liability (297,500) (297,500)
----------------------------- --------- ---------
Total Stockholders' Equity 7,165,900 5,845,200
---------------------------- ---------- ---------
Total Liabilities and
Stockholders' Equity $ 10,761,800 $ 9,201,700
===================== ============ ===========
</TABLE>
See accompanying Notes to Financial Statements.
- 3 -
<PAGE>
FAIRMOUNT CHEMICAL CO., INC.
Statements of Cash Flows
For The Three Months Ended March 31, 1998 and 1997
(Unaudited)
(Dollar amounts rounded to hundreds)
<TABLE>
<CAPTION>
1998 1997
---- ----
Cash Flow From Operating Activities:
<S> <C> <C>
Net income/(loss) $ 1,320,700 $ (230,700)
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 180,000 143,800
Increase (decrease) from changes in:
Accounts receivable-trade (28,500) 22,200
Inventories (462,300) (306,800)
Prepaid expenses (7,500) (500)
Other assets 5,600 11,400
Accounts payable 345,800 371,300
Accrued compensation 39,500 52,000
Other liabilities 66,800 (11,300)
----------------- ----------- ---------
Cash Flow Provided by Operating Activities 1,460,100 51,400
- -------------------------------------------- ----------- ---------
Cash Flow Used in Investing Activities:
Capital expenditures (29,000) (117,100)
-------------------- ------------- ---------
Cash Flow Used in Financing Activities:
Bank loan (212,700) (12,700)
--------------- --------- --------
Net Cash Used in Financing Activities (212,700) (12,700)
------------------------------------- ------------- --------
Increase/(Decrease) in Cash 1,218,400 (78,400)
Cash at Beginning of Period 711,800 427,900
- --------------------------- -------- -------
Cash at End of Period $ 1,930,200 $ 349,500
===================== ============ ===========
Supplemental Disclosure of Cash Flow Information:
Interest paid $ 35,900 $ 19,000
======= ======
Income taxes paid $ -- $ --
======== ==========
</TABLE>
See accompanying Notes to Financial Statements.
- 4 -
<PAGE>
FAIRMOUNT CHEMICAL CO., INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
Note 1. Summary of Significant Accounting Policies
- ------- ------------------------------------------
ORGANIZATION
The accompanying financial statements, which should be read in
conjunction with the financial statements of Fairmount Chemical Co., Inc. ("the
Company") included in the 1997 Annual Report filed on Form 10-KSB, are unaudited
but have been prepared in the ordinary course of business for the purpose of
providing information with respect to the interim period. The Company believes
that all adjustments (none of which were other than normal recurring accruals)
necessary for a fair presentation for such periods have been included.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
1998 presentation.
REVENUE
Revenue is recognized on the date of invoice to a customer (invoices
are prepared on or after the date of shipment).
INCOME TAXES
The Company accounts for income taxes in accordance with the asset and
liability method. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
No provisions for income taxes have been recorded by the Company as a
result of net operating losses utilized. A valuation allowance has been recorded
at March 31, 1998 and 1997 for that portion of deferred tax assets which are not
presently considered more likely than not to be realized.
FINANCIAL STATEMENTS
The statements of income (loss) and accumulated deficit for the three
months ended March 31, 1998 and 1997, the statements of cash flows for the three
months ended March 31, 1998 and 1997, and the balance sheet as of March 31, 1998
are unaudited. The balance sheet as of December 31, 1997 is audited.
- 5 -
<PAGE>
Notes to Financial Statements (Continued)
Note 2. Earnings Per Share
- ---------------------------
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share" ("SFAS 128"). SFAS 128 became effective for financial statements for
both interim and annual periods ending after December 15, 1997. It also required
all prior period earnings per share data presented to be restated. Under SFAS
128, basic earnings per share are based on the net income/(loss) of the Company
since there were no preferred dividends paid in the periods ending March 31,1998
or March 31, 1997. The net income of the Company for the period ending March 31,
1998 is divided by the weighted average number of shares of common stock
outstanding adjusted for dilutive common stock equivalents. Common stock
equivalents include shares outstanding under stock option plans and preferred
stock, as converted to common stock in the ratio of one-to-one. The share base
for the period ending March 31, 1998 was 13,693,366 (based on 8,293,366 of
common shares and 5,400,000 of convertible preferred shares). The net loss of
the Company for the period ending March 31, 1997 is divided by only the weighted
average number of shares of common stock outstanding (8,293,366 shares). Due to
the Company reporting a loss for the period ending March 31, 1997, the
conversion of the preferred stock is not assumed as the result is anti-dilutive.
The exercise price exceeded the average market price for all of the outstanding
stock options of the Company during the periods ending March 31, 1998 and March
31, 1997 and therefore, it is not assumed that any options are exercisable for
purposes of calculating earnings per share.
Note 3. Long Term Debt To Affiliated Parties
- ---------------------------------------------
A. As of January 1, 1993 the Company owed William E. Leistner
$5,603,700 (the "Leistner Loan"). At the Board Meeting following the 1993 Annual
Meeting, the board approved the sale of 5,400,000 shares of cumulative
convertible Preferred Stock, $1.00 par value per share, in a private transaction
to Leistner, the Company's principal stockholder, in consideration of retirement
of debt owed to Leistner of $5,400,000. The balance of the Leistner Loan was
paid out of corporate funds of approximately $203,700 during May 1993. This
transaction retired the principal of the Leistner Loan. Accrued interest of
$491,600 remained. On July 2, 1997 the Company replaced the $491,600 balance of
the Leistner Loan, that was due April 1, 1998, with a promissory note to the
Leistner Estate for the same amount, due January 1, 2005.
B. On March 20, 1992, a Credit Facility Loan Agreement ("Credit
Facility") was created with monies contributed to a fund ("the Fairmount Fund")
by William E. Leistner and the Estate of Olga H. Knoepke. At that date, the
Fairmount Fund provided the Company with a $2,494,000 credit facility under
which all borrowings paid interest at the rate of 5% per annum. The outstanding
borrowings from the Credit Facility were $1,080,000. On July 2, 1997 the Credit
Facility was terminated and the Company replaced the $1,080,000 of credit
facility borrowings with new promissory notes due January 1, 2005. The Leistner
Estate received a note for $648,000. Three notes were issued to beneficiaries of
the Knoepke Estate. These three notes were issued to the da Mota Family
Partnership - $224,640, Glen da Mota - $142,560 and Lynn da Mota - $64,800.
- 6 -
<PAGE>
Notes to Financial Statements (Continued)
All of the promissory notes described above have similar terms and
conditions. Interest on the unpaid principal from January 1, 1997 through
December 31, 1997 is at the rate of 6% per annum. Interest payable from January
1, 1998 through December 31, 1998 is at the rate of 7% per annum. Interest
payable thereafter commencing with 1999, is at the corporate base rate posted by
Citibank, N.A. (or its successor) on the last banking day of the previous
calendar year. All of the promissory notes are subordinated to the Company's
line of credit financing with Summit Bank and are collaterized by security
agreements on the Company's accounts receivables, inventories and personal
property.
The promissory note to the Leistner Estate for $491,600 is subordinated
to the Company's line of credit financing with Summit Bank and to the new
promissory notes, totaling $1,080,000, that replaced the Credit Facility.
Interest paid on the promissory notes/long-term debt to affiliated parties was
$27,500 and $15,000 for the three months ended March 31, 1998 and March 31,
1997, respectively.
On October 9, 1997 the executors of the Leistner Estate endorsed two
promissory notes of $648,000 and $491,600 to the order of the Howard Leistner,
Hedi Mizrack and Gilbert Leistner Irrevocable Grantor Trust (the "Trust"). The
Trust was established to expedite the settlement of the Leistner Estate and to
be the repository of the common and preferred shares of Fairmount Chemical, as
well as the promissory notes held by the Leistner Estate. The Trust will
terminate on June 19, 2002.
All loans payable and future borrowings under the Credit Facility have
been collateralized by the accounts receivable and machinery and equipment of
the Company.
Note 4. Majority Stockholder
- -----------------------------
The Howard R. Leistner, Hedi Mizrack and Gilbert Leistner Irrevocable
Grantor Trust owns approximately 57.8% of the common stock of the Company.
Howard R. Leistner, Hedi Mizrack and Gilbert Leistner each have sole voting and
investment power over 1,596,400 common shares of the total of 4,789,200
of common shares held in the Trust. The Trust also owns all 5,400,000
outstanding shares of the cumulative convertible preferred stock.
Note 5. Inventory
- ------------------
Inventories at March 31, 1998 and December 31, 1997 consisted of the
following:
March 31, 1998 December 31, 1997
--------------- -----------------
Finished Goods $1,662,000 $ 1,452,800
Raw Material 509,900 256,800
------------- -----------
$2,171,900 $ 1,709,600
============ ===========
- 7 -
<PAGE>
Notes to Financial Statements (Continued)
Note 6. Contingencies
- ------- -------------
The Company has received notice from the New Jersey Department of
Environmental Protection ("NJDEP") that the NJDEP is investigating whether any
material from the Company has caused or contributed to the contamination
detected at the Ciuba landfill property in Newark. The NJDEP alleges that there
is a possibility that during the 1970's the Company disposed of waste generated
at the Company's facility through contracts with certain garbage removal
companies located at the Ciuba landfill. The Company has also received notice
from the United States Environmental Protection Agency ("USEPA") that the USEPA
has information indicating that hazardous substances from the Company may have
been discharged into the Passaic River. It is the Company's understanding that
these allegations by the EPA are related to historical rather than present
events. The Company has taken the position that its material neither caused nor
contributed to the contamination of the Passaic River and that it has not
discharged hazardous substances into the Passaic River. In both cases, it is
possible that potentially responsible parties will bring claims against
Fairmount alleging that it is at least partially responsible for the
contamination.
- 8 -
<PAGE>
FAIRMOUNT CHEMICAL CO., INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
March 31, 1998
Liquidity and Capital Resources
- -------------------------------
To meet its liquidity requirements, including its capital program, the
Company accesses funds generated from operations, its available cash balances
and its bank line of credit with Summit Bank in Hackensack, New Jersey. The line
of credit is due for renewal during the second quarter of 1998. Management is
not aware of any issue that would violate the covenants in the credit agreement
with Summit Bank or prevent the renewal of the Company's line of credit.
The Company's working capital increased by $1,412,000 in the first
three months of 1998 compared to a decrease of $216,700 for the same period in
1997. The increase was primarily due to a payment of $1,140,100 received form
the Company's property insurance carrier as part of the settlement for the
property damages sustained from a dryer explosion during March, 1997. Also
contributing to the increase in working capital was higher inventory - $462,300
and lower bank borrowings - $200,000. The inventory was higher due to increased
production of two major products. One product's production was increased to
avoid projected production bottlenecks around mid-year and the other product's
inventory was higher due to a large scheduled shipment due to be made early in
the second quarter of 1998. Bank borrowings were lower during the first quarter
of 1998 as the Company paid down some of its borrowings from the working capital
line of credit. The increase in working capital in these areas was partially
offset by higher accounts payable - $345,800 and higher other accrued expenses -
$76,200. Accounts payable were higher due to the Company's biweekly check run
not being due to go out until early in the month of April. Other accrued
expenses increased due mainly to the accrual of plant shutdown expenses for a
planned two week maintenance shutdown during July. As a result of this plant
maintenance shutdown, shipments will be curtailed during July. This accrual more
evenly matches revenues with expenses, by allocating the two weeks of payroll
costs during the July shutdown to the other months of the year.
On January 13, 1998, Mr. Todd K. Walker resigned as President, Chief
Executive Officer, Chairman of the Board of Directors and as a director of
Fairmount Chemical Co., Inc. Dr. Reidar Halle, a director of the Company, was
retained to serve as Chief Executive Officer of the Company on an interim basis
until an employment agreement is negotiated. Howard R. Leistner, also a director
of the Company, was appointed as Chairman of the Board. One of the current
directors, James F. Gilday, declined to stand for reelection at the Company's
upcoming annual meeting of shareholders. The Company has not identified a
successor at this time, and there will be a vacancy on the Board in the interim.
- 9 -
<PAGE>
Liquidity and Capital Resources (Continued)
The Company's capital expenditures in 1998 have been for the purchase
of computers, production pumps and filters and a laboratory effluent system.
Results of Operations
- ---------------------
Net sales for the first three months of 1998 were $3,217,800, an
increase of $61,000 or 1.9% versus the same period in 1997. The increase in net
sales was primarily due to an increase in sales volumes of imaging chemicals -
$573,500; partially offset by lower volumes of specialty chemicals - $298,200,
lower volumes and prices of polymer additives - $117,500 and lower volumes,
partially offset by higher prices of hydrazine derivatives - $52,900 and
hydrazine blends - $43,900.
The gross profit for the first three months of 1998 was $752,200 an
increase of $337,400 or 81.3% versus the same period in 1997. The increase was
mainly due to the higher sales volume of high margin imaging chemicals, coupled
with lower manufacturing payroll expenses due to the Company restructuring
during the second quarter of 1997; partially offset by lower volumes of
specialty chemicals, polymer additives and hydrazine derivatives, coupled with
higher environmental expenses mainly due to increased waste disposal costs.
Research and development expenses and selling, general and
administrative expenses decreased due to reductions in payroll expenditures due
to the restructuring during the second quarter of 1997.
Interest expense was higher during the first quarter of 1998 versus
1997 due to an increase of 1% in the interest rate on the remaining debt owed to
affiliated parties per the new promissory note agreements, coupled with higher
bank borrowings for most of the first quarter of 1998 from the Company's working
capital line of credit.
During January, 1998 the Company received a payment of $1,140,100 from
its property insurance carrier as part of the settlement for the property
damages sustained from a March, 1997 dryer explosion. This payment was an
addition to a $200,000 initial payment received during the second quarter of
1997. The Company is continuing to negotiate with its carrier for an additional
amount in final settlement of this claim. The amount the Company is negotiating
for is somewhere between the two amounts already received. The outcome of the
final resolution of this claim is uncertain. For the period ending March 31,
1998 the effect of the $1,140,100 payment on basic earnings per share and
diluted earnings per share was $.14 per share and $.08 per share, respectively.
Basic earnings and diluted earnings per share for the period ending
March 31, 1998, excluding the receipt of the $1,140,100 of insurance proceeds
was $.02 per share and $.01 per share, respectively.
No provisions for income taxes have been recorded by the Company as a
result of net operating losses utilized. A valuation allowance has been recorded
at March 31, 1998 and 1997 for that portion of deferred tax assets which are not
presently considered more likely than not to be realized.
- 10 -
<PAGE>
PART II - OTHER INFORMATION
Reports on Form 8-K
A report on Form 8-K, dated January 13, 1998, was filed during the first quarter
of 1998, reporting the resignation of Todd K. Walker as President, Chief
Executive Officer, Chairman of the Board of Directors and as a director of
Fairmount Chemical Co., Inc. Dr. Reidar Halle, a director of the Company was
retained at this time to serve as Chief Executive Officer of the Company on an
interim basis until a President and Chief Executive Officer was chosen by the
Board. Howard R. Leistner, also a director of the Company, was appointed
Chairman of the Board.
- 11 -
<PAGE>
FAIRMOUNT CHEMICAL CO., INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FAIRMOUNT CHEMICAL CO., INC.
----------------------------
Registrant
May 7, 1998 S/Dr. Reidar Halle
- ----------- ------------------
Date Dr. Reidar Halle
Chief Executive Officer and President
May 7, 1998 S/James F. Gilday
- ----------- -----------------
Date James F. Gilday
Chief Financial Officer &
Secretary
- 12 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1998 AND THE
CONSOLIDATED STATEMENT OF OPERATIONS FOR THREE MONTHS ENDED MARCH
31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000034296
<NAME> Fairmount Chemical Co. Inc.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,930,200
<SECURITIES> 0
<RECEIVABLES> 1,874,200
<ALLOWANCES> 0
<INVENTORY> 2,171,900
<CURRENT-ASSETS> 6,363,500
<PP&E> 8,467,800
<DEPRECIATION> 4,114,400
<TOTAL-ASSETS> 10,761,800
<CURRENT-LIABILITIES> 1,516,800
<BONDS> 0
0
5,400,000
<COMMON> 8,293,400
<OTHER-SE> (6,527,500)
<TOTAL-LIABILITY-AND-EQUITY> 10,761,800
<SALES> 3,217,800
<TOTAL-REVENUES> 3,217,800
<CGS> 2,465,600
<TOTAL-COSTS> 2,465,600
<OTHER-EXPENSES> 552,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,900
<INCOME-PRETAX> 1,320,700
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,320,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,320,700
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.10
</TABLE>
