<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1999
[ ] Transition Report under Section 13 or 15 (d) of the Exchange Act
For the transition period from __________ to _____________
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)
(973)-344-5790
(Issuer's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [ X ] NO [ ]
Indicate 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 August 6, 1999
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I FINANCIAL INFORMATION
Item 1.
Statements of Operations
Three months and Six months ended
June 30, 1999 and 1998 3
Balance Sheets
June 30, 1999 and December 31, 1998 4
Statement of Stockholders' Equity and Comprehensive
Income for the six months ended June 30, 1999 and
1998 5
Statements of Cash Flows
Six months ended June 30, 1999 and 1998 6
Notes to Financial Statements 7 - 10
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operation 11 - 15
PART II OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FAIRMOUNT CHEMICAL CO., INC.
STATEMENTS OF OPERATIONS
For The Three Months and Six Months Ended June 30, 1999 and 1998
(Dollar amounts rounded to hundreds, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 3,188,600 $ 3,427,600 $ 5,434,100 $ 6,645,400
Cost of goods sold 2,529,300 2,670,200 4,548,700 5,135,800
------------ ------------ ------------ ------------
Gross profit 659,300 757,400 885,400 1,509,600
Research and development 89,800 99,900 190,100 184,900
Selling, general and
administrative expense 443,800 479,400 898,600 946,400
------------ ------------ ------------ ------------
Operating income (loss) 125,700 178,100 (203,300) 378,300
Interest expense 33,400 32,500 66,200 68,400
Insurance proceeds -- -- (375,000) (1,140,100)
Other (income) expense (26,200) (7,600) (54,300) (23,900)
------------ ------------ ------------ ------------
Earnings before income
taxes 118,500 153,200 159,800 1,473,900
Income taxes -- -- -- --
------------ ------------ ------------ ------------
Net earnings $ 118,500 $ 153,200 $ 159,800 $ 1,473,900
============ ============ ============ ============
Earnings per share
Basic $ .01 $ .02 $ .02 $ .18
============ ============ ============ ============
Diluted $ .01 $ .01 $ .01 $ .10
============ ============ ============ ============
Common shares and equivalents
outstanding
Basic 8,292,900 8,292,900 8,292,900 8,292,900
============ ============ ============ ============
Diluted 14,352,200 14,437,100 14,292,100 14,065,000
============ ============ ============ ============
</TABLE>
See Accompanying Notes to Financial Statements.
3
<PAGE> 4
FAIRMOUNT CHEMICAL CO., INC.
BALANCE SHEETS
(Dollar amounts rounded to hundreds)
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 2,786,300 $ 2,422,700
Accounts receivable-trade 2,102,800 1,881,400
Inventories 2,761,300 1,941,900
Prepaid expenses 152,900 186,800
Other current assets 18,700 19,100
------------ ------------
Total Current Assets 7,822,000 6,451,900
Property, plant and equipment
less accumulated depreciation of
$4,959,400 and $4,599,400 as of June
30, 1999 and December 31, 1998, respectively 3,905,200 4,185,900
Other assets 700 700
------------ ------------
TOTAL ASSETS $ 11,727,900 $ 10,638,500
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,439,900 $ 508,500
Accrued compensation 131,300 115,700
Pension liability 226,400 145,300
Other accrued liabilities 183,400 156,400
Short-term bank borrowings 8,500 33,900
------------ ------------
Total Current Liabilities 1,989,500 959,800
Promissory notes to affiliated parties 1,571,600 1,571,600
Pension liability 309,000 409,000
STOCKHOLDERS' EQUITY
Preferred stock, par and liquidation 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 1999 and 1998 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 (12,849,400) (13,009,200)
Additional minimum pension liability (301,700) (301,600)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 7,857,800 7,698,100
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,727,900 $ 10,638,500
============ ============
</TABLE>
See accompanying Notes to Financial Statements.
4
<PAGE> 5
FAIRMOUNT CHEMICAL CO., INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND
COMPREHENSIVE INCOME
FOR SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Dollar amounts rounded to hundreds)
<TABLE>
<CAPTION>
1999 1998
----------------------------- -----------------------------
Comprehensive Comprehensive
Income Income
------------- -------------
<S> <C> <C> <C> <C>
Preferred stock:
Balance at June 30, $ 5,400,000 $ 5,400,000
(5,400,000 shares)
Common stock:
Balance at June 30, 8,293,400 8,293,400
(8,293,366 shares)
Capital in excess of par value: 7,316,000 7,316,000
Balance at June 30,
Accumulated deficit:
Balance at January 1 (13,009,200) (14,866,200)
Net income 159,800 159,800 1,473,900 1,473,900
------------ ------------
Balance at June 30, (12,849,400) (13,392,300)
Accumulated other comprehensive
loss:
Balance at January 1 (301,700) (297,500)
Additional minimum pension
liability -- -- -- --
-------- ----------
Comprehensive income $159,800 $1,473,900
======== ==========
------------ ------------
Balance at June 30 (301,700) (297,500)
Treasury stock:
Balance at June 30, (500) (500)
(500 shares)
------------ ------------
Total Stockholders' Equity $ 7,857,800 $ 7,319,100
============ ============
</TABLE>
See accompanying notes to financial statements
5
<PAGE> 6
FAIRMOUNT CHEMICAL CO., INC.
STATEMENTS OF CASH FLOWS
For The Six Months Ended June 30, 1999 and 1998
(Dollar amounts rounded to hundreds)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net earnings $ 159,800 $ 1,473,900
Adjustments to reconcile net earnings to
net cash provided by operating activities
Depreciation 360,000 360,000
Insurance proceeds (375,000) (1,140,100)
Increase (decrease) from changes in:
Accounts receivable-trade (221,400) (308,900)
Inventories (819,400) (379,400)
Prepaid expenses 33,900 123,400
Other assets 400 (1,000)
Accounts payable 931,400 257,900
Accrued compensation 15,600 4,400
Other liabilities 8,100 143,200
----------- -----------
Cash Flow Provided by Operating
Activities 93,400 533,400
CASH FLOW PROVIDED BY INVESTING ACTIVITIES:
Capital expenditures (79,400) (138,600)
Insurance proceeds 375,000 1,140,100
----------- -----------
Net Cash Provided by Investing Activities 295,600 1,001,500
CASH FLOW USED IN FINANCING ACTIVITIES:
Bank repayment (25,400) (225,300)
----------- -----------
Cash Flow Used in by Financing Activities (25,400) (225,300)
----------- -----------
INCREASE IN CASH 363,600 1,309,600
Cash at Beginning of Period 2,422,700 711,800
----------- -----------
CASH AT END OF PERIOD $ 2,786,300 $ 2,021,400
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 66,200 $ 68,400
=========== ===========
Income taxes paid $ -- $ --
=========== ===========
</TABLE>
See accompanying Notes to Financial Statements
6
<PAGE> 7
FAIRMOUNT CHEMICAL CO., INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
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 1998 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.
The Company's interim results of operations are not necessarily indicative of
what may be expected for the full year.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
1999 presentation.
REVENUE
Revenue is recognized on the date of invoice to a customer and invoices
are prepared on or after the date of shipment. The Company's terms are FOB
shipping point and accordingly title for goods passes to the customer when
product is shipped. Sales are generally final, without a right of return. If the
product does not meet specifications, the Company may accept returns.
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 June 30, 1999 and 1998 for that portion of deferred tax assets which are not
presently considered more likely than not to be realized.
FINANCIAL STATEMENTS
The statements of operations for the three months and six months ended
June 30, 1999 and 1998, the statements of cash flows for six months ended June
30, 1999 and 1998, and the balance sheet as of June 30, 1999 are unaudited. The
balance sheet as of December 31, 1998 is audited.
7
<PAGE> 8
Notes to Financial Statements (Continued)
Note 2. Earnings Per Share
Basic earnings per share are based on the net earnings of the Company
since there were no preferred dividends paid in the periods ending June 30, 1999
and 1998. Diluted earnings per share is calculated by dividing the net earnings
of the Company by the weighted average number of shares outstanding adjusted for
dilutive common share equivalents including preferred stock and shares granted
under stock option arrangements. As of June 30, 1999 and 1998, 1,072,500 stock
options were outstanding, 72,500 with an exercise price of $1.00 per share
1,000,000 with an exercise price of $.11 per share.
Note 3. Long Term Promissory Notes to Affiliated Parties
All promissory notes have similar terms and conditions. Interest paid
from January 1, 1998 through December 31, 1998 was 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. Interest payable from January 1, 1999 through December
31, 1999 is at the rate of 7.75% per annum. All of the promissory notes are
subordinated to the Company's line of credit financing with Summit Bank and are
collateralized by security agreements on the Company's accounts receivable,
inventories and personal property. All promissory notes are due January 1, 2005.
Interest paid on long-term debt to affiliated parties during the six months
ended June 30, 1999 was $60,900 and $55,000 during the six months ended June 30,
1998.
Promissory Notes:
<TABLE>
<S> <C>
Leistner Trust $ 491,600
Leistner Trust $ 648,000
da Mota Family Partnership $ 224,600
Glen da Mota $ 142,600
Lynn da Mota $ 64,800
----------
$1,571,600
==========
</TABLE>
Note 4. Bank Borrowings
The Company has a $1,250,000 line of credit from Summit Bank. The line
of credit is comprised of two separate available balances. There is $750,000
available for working capital purposes and $500,000 available to finance capital
expenditures. Interest on the borrowings is at the bank's prime rate plus 1%.
Borrowings and repayments under the working capital line of credit are handled
on a revolving credit basis. Borrowings against the capital expenditure line of
credit are treated as a three-year note. The line of credit is subject to an
annual review for renewal. The bank has been given a first security interest in
the accounts receivable, inventories and personal property of the Company. The
line of credit was renewed during the second quarter of 1999 with the same terms
and conditions.
8
<PAGE> 9
Notes to Financial Statements (Continued)
Note 5. Inventories
Inventories at June 30, 1999 and December 31, 1998 consisted of the
following:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Finished goods and intermediates $2,256,100 $1,715,700
Raw materials 505,200 226,200
---------- ----------
$2,761,300 $1,941,900
========== ==========
</TABLE>
Note 6. Insurance Proceeds
During February 1999 the Company received a payment of $375,000 from
its property insurance carrier as final settlement for the property damages
sustained from the March 25, 1997 dryer explosion. This payment is in addition
to $1,140,000 received in January 1998 and $200,000 received during the second
quarter of 1997. The destroyed assets, principally property, plant and
equipment, were fully depreciated at the time of the incident.
Note 7. 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 USEPA 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 the
Company alleging that it is at least partially responsible for the
contamination. To date, no litigation has commenced with respect to these
matters.
It is the Company's policy to accrue and charge against earnings,
environmental cleanup costs when it is probable that a liability has been
incurred and an amount is reasonably estimable. These accruals are reviewed
periodically and adjusted, if necessary, as additional information becomes
available. These accruals can change substantially due to such factors as
additional information on the nature or extent of the contamination, methods of
remediation required and other actions by government agencies or private
parties. Cash expenditures often lag behind the period in which an accrual is
recorded by a number of years. The Company has not accrued costs associated with
the above two matters, because the amounts can not be reasonably estimated.
Management does not believe that the resolution of such matters will
have a material adverse affect on the financial position of the Company but
could be material to the results of operations and cash flows of the Company in
any one accounting period.
A bodily injury claim was filed against the Company on December 2, 1998
in the Superior Court of New Jersey Law Division, Hudson County. The plaintiff
alleges that on March
9
<PAGE> 10
25, 1997, the date of an explosion at the Company's plant, the force of the
explosion threw him backward and resulted in injuries. The plaintiff was an
invitee upon the adjoining property to the Company. The Company has not received
details as to the extent of the injuries or for the dollar value of the claim.
On May 13, 1999 a toxic tort case was brought against the Company and
other defendants by former employees, family members of the former employees or
heirs of deceased former employees of La Gloria and Gas Company and the La
Gloria Refinery located in Tyler, Texas. The claimants contend that the
employee, plaintiffs and their families were exposed to a number of toxic
chemicals by working in and around them or with them at the La Gloria Plant and
by second-hand exposure occurring as a result of the toxic substance being
brought home on the clothing and bodies of the employee plaintiffs. Plaintiffs
have sued the employer defendants and numerous manufacturers, suppliers, and
distributors of chemicals, solvents and products supplied to the La Gloria
Plant. The Company sold a hydrazine blend to La Gloria during 1990 and 1991. The
discovery process is in the initial phase and the Company is not able to
determine potential exposure at this time.
The Company is subject to various claims, and other routine litigation
arising in the normal course of its business. Management believes that the
resolution of such matters will not have a material adverse affect on the
financial position of the Company but could be material to the results of
operations and cash flows of the Company in any one accounting period.
10
<PAGE> 11
FAIRMOUNT CHEMICAL CO., INC.
Item 2 MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
June 30, 1999
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 was renewed during the second quarter of 1999 with the same terms and
conditions.
The Company's working capital increased by $340,400 during the first
six months of 1999. The increase during the first six months of 1999 was due in
part to net earnings, including a payment of $375,000 received from the
Company's property insurance carrier as final settlement for property damages
sustained from a dryer explosion during March, 1997. In addition, contributing
to the increase in working capital was higher accounts receivable of $221,400,
and higher inventories of $819,400. The increase in working capital was
partially offset by higher accounts payable of $931,400.
The inventory was higher as of June 30, 1999 as compared to December
31, 1998 due to increased purchases of raw materials and the increase in labor
and overhead absorbed into inventory. This increase in labor and overhead in
inventory resulted in a net inventory value increase of $351,900, a 14.6 %
increase in overall inventory value. The increased labor and overhead absorbed
into inventory was the result of lower production, without a corresponding
decrease in actual labor and overhead expenses. The accounts payable increase
was the result of increased raw material purchases.
Year 2000 Compliance
Historically, certain computer programs have been written using two
digits rather than four digits to define the applicable year, which could result
in computers recognizing a date using "00" as the year 1900 rather than the year
2000. This could result in major system failures or miscalculations, and is
generally referred to as the "Year 2000" problem or issue and could have a
materially adverse impact on Fairmount's operations.
Fairmount has reviewed its information technology systems to identify
any system that could be affected by the "Year 2000" issue and has developed a
plan to resolve the issue. Fairmount completed its computer conversions and
modifications and is operating with a Year 2000 compliant system as of January
1, 1999. Therefore, Fairmount presently expects the Year 2000 problem will not
pose significant operational problems for Fairmount's information technology
systems. Additionally, Fairmount has reviewed its non-information technology
systems and does not expect Year 2000 related problems from such systems.
Fairmount is also exposed to risk to the extent that suppliers of
products, materials and services purchased by the company and others with whom
Fairmount transacts business do not comply with Year 2000 requirements. Although
this risk is lessened with respect to suppliers by the availability of
alternative suppliers, the disruption of certain services, such as utilities,
could, depending upon the extent of the disruption, potentially have a material
adverse impact on Fairmount's operations. As part of its Year 2000 plan,
Fairmount is communicating directly with its significant suppliers, service
providers, vendors, customers and government entities that are believed to be
critical to business operations to determine their Year 2000 capability.
Fairmount
11
<PAGE> 12
is currently in the process of evaluating responses and will send follow-up
requests to those who have not responded.
Due to the general uncertainty inherent in the Year 2000 problem,
Fairmount is unable to determine at this time whether the consequences of Year
2000 problems will have a material adverse effect on Fairmount. Fairmount will
continue to monitor its Year 2000 situation, and Fairmount will develop
contingency plans if it appears that Fairmount or its suppliers will not be Year
2000 compliant and that such non-compliance could have a material adverse impact
on Fairmount's operations.
A written contingency plan has not been developed for dealing with the
most reasonable likely worse case scenario and such scenario has not yet been
clearly identified. While the Company believes that it would be most exposed to
the Year 2000 problem in the areas of receipt of raw materials and production
supplies and the production and the delivery of its product to customers, its
exposure should be limited. Most of the Company's raw materials and production
supplies are available from a variety of sources and the loss of any one
supplier would not adversely effect the Company's ability to conduct its
business. In addition, the Company has a few sole source suppliers and they have
all advised the Company that they are Year 2000 compliant. The Company's ability
to deliver its product to its customer is dependent upon third party common
carriers. The Company believes it has a variety of common carriers to choose
from, if its current carrier has a Year 2000 failure. Finally, the Company's
production does not rely on computers or equipment with imbedded chips,
therefore the Company believes its Year 2000 exposure is limited with respect to
production facilities. However, the Company's production is dependent on the
disposal of production waste using the local sewer authority and the
availability of utilities, primarily gas, electric and water. If the Company's
utilities are interrupted or it was unable to dispose of its waste, production
would be adversely effected. Fairmount completed its computer conversions and
modifications and is operating with a Year 2000 compliant system as of January
1, 1999. In the worst case, if the Company's computer systems failed the Company
would be able to continue to conduct its business through the use of manual
systems.
As of June 30, 1999 Fairmount has spent approximately $75,000 on the
its Year 2000 initiative and does not anticipate any additional material
expenses.
Results of Operations
Net sales for the three months ended June 30, 1999 were $3,188,600, a
decrease of $239,000 or 7% as compared to 1998.
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1999 1998 Change
---------- ---------- ----------
<S> <C> <C> <C>
Imaging & photographic
chemicals $ 862,100 $ 813,500 $ 48,600
Hydrazine blends 657,100 506,300 150,800
Hydrazine derivatives 443,100 374,400 68,700
Plastic additives 598,500 1,217,300 (618,800)
Specialty chemicals 627,800 516,100 111,700
---------- ---------- ----------
Total $3,188,600 $3,427,600 $ (239,000)
========== ========== ==========
</TABLE>
12
<PAGE> 13
Net sales for the six months June 30, 1999 were $5,434,100, a decrease
of $1,211,300 or 18.2% as compared to 1998.
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1999 1998 Change
----------- ----------- -----------
<S> <C> <C> <C>
Imaging & photographic
chemicals $ 1,098,200 $ 1,733,600 $ (635,400)
Hydrazine blends 1,252,000 1,068,800 183,200
Hydrazine derivatives 550,300 694,400 (144,100)
Plastic additives 1,389,200 2,089,900 (700,700)
Specialty chemicals 1,144,400 1,058,700 85,700
----------- ----------- -----------
Total $ 5,434,100 $ 6,645,400 $(1,211,300)
=========== =========== ===========
</TABLE>
The decrease in imaging and photographic chemical sales was due in part
to delayed shipments from the first quarter to the second and third quarters of
1999. The Company anticipated increased sales during the second quarter of 1999;
however those sales were delayed pending customer approval. The Company has now
received such customer approval and anticipates increased sales during the
second half of 1999. The Company believes that its imaging and photographic
chemical sales for the year will be about the same as 1998.
The demand for certain types of chemicals used in photographic films is
expected to decrease during the coming years as consumer demand changes due to
new imaging technologies. Fairmount is taking steps to substitute new products
and increase its market share of existing products.
The hydrazine derivative sales decrease in the second quarter of 1999
was due to the softening in that market and customers consolidating and reducing
their inventories. One of the Company's major hydrazine derivative customers has
moved the production of their products to other plants around the world and
Fairmount anticipates that it will no longer sell the same volume of product to
this customer as it has done in the past. However, the Company believes that its
hydrazine derivatives business will return to its 1998 level in the second half
of 1999, and it has not lost market position.
Due to a change to a more cost efficient process for making plastic
additives, Fairmount experienced a slower production rate than anticipated in
the first six months of 1999. The process change resulted in higher than normal
reprocessing and an increase of raw materials, intermediates and finished
product in inventory. However, Fairmount expects that any sales short fall in
the first half of 1999 will be made up during the second half of 1999.
As in prior years, lower prices and volume for plastic additives due to
competitive pressures from foreign competitors contributed to decreases in
sales. Fairmount expects that the downward pressure on plastic additive prices
will continue.
In the first quarter of 1999, a specialty chemical customer required a
re-qualification of one of the Company's products as part of their
re-certification program. Raw material was purchased, and the product was
produced in the first quarter of 1999; however the sale was postponed to the
second quarter of 1999.
13
<PAGE> 14
Each class of similar products contributed the following percentage of
total sales in each of the following periods:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Imaging & photographic chemicals 27.0% 23.7% 20.2% 26.1%
Hydrazine blends 20.6% 14.8% 23.0% 16.1%
Hydrazine derivatives 13.9% 10.9% 10.1% 10.5%
Plastic additives 18.8% 35.5% 25.6% 31.4%
Specialty chemicals 19.7% 15.1% 21.1% 15.9%
------ ------ ------ ------
100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
</TABLE>
The gross profit for the three months of June 30, 1999 was $659,300, a
decrease of $98,100 or 13% compared to the same period in 1998. As a percent of
sales the gross margin was 20.7% compared to 22.1% during 1998. The decrease
in gross profit was in part due to the decrease in sales of plastic additives,
which have higher gross margins than the Company's other product lines. The
negative effect of the decrease in plastic additives sales was somewhat by the
effects of increased labor and overhead absorbed into inventory. (See Liquidity
and Capital Resources.)
The gross profit for the six months ended June 30, 1999 was $885,400, a
decrease of $624,200 or 41.3% compared to 1998. As a percent of gross sales,
the gross margin during the first six months of 1999 was 16.3% compared to 22.7%
during 1998. The decrease in gross profit was in part due to decrease in sales
of imaging chemicals and plastic additives, which have a higher gross margin
than the Company's other product lines. In addition to lower sales volume, lower
production also had a negative impact on gross profit. (See Liquidity and
Capital Resources.)
Research and development expenses decreased by $10,100 in the quarter
ended June 30, 1999 compared to the same period in 1998. For the six months
ended June 30, 1999 expenses were $190,100 compared to $184,900 for the six
months ended June 30 1998, an increase of $5,200.
Selling, general and administrative expenses decreased by $35,600 in
the second quarter of 1999 compared to the same period in 1998. Selling expenses
decreased $3,500, and general and administrative expenses decreased by $32,100
in the second quarter of 1999 compared to the second quarter of 1998. For the
six months ended June 30, 1999 selling, general and administrative expenses
decreased by $47,800 compared to the same period in 1998. Selling expenses
increased by $6,800 and general and administrative expenses decreased by $54,600
for the six months ended June 30, 1999 compared to the same period in 1998.
Operating income was $125,700 in the three months ended June 30, 1999
compared to $178,100 in 1998. For the six months ended June 30, 1999 there was
an operating loss of 203,300 compared to operating income of $378,300 for the
six months ended June 30, 1998. The change in operating income was due to the
aforementioned changes.
During 1999, the Company received gross insurance proceeds of $375,000,
compared to $1,140,100 in 1998, for the property losses sustained from the March
25, 1997 explosion.
The Company was subject to a routine tax audit by the State of New
Jersey, Department of the Treasury, Division of Taxation. The audit is completed
and the Company has been assessed approximately $58,800 in additional sales and
use tax and interest for the years 1995
14
<PAGE> 15
through 1998. The financial statements of the three months and six months ended
June 30, 1999 include a provision for the assessment.
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 June 30, 1999 and 1998 for that portion of deferred tax assets, which are not
presently considered more likely than not to be realized.
Forward Looking Statements
This report contains and incorporates by reference forward-looking
statements within the meaning of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. These include statements regarding the
present intent, belief and expectations of Fairmount's management. All
statements that address expectations or projections about the future, including
statements about Fairmount's strategy for growth, product development, market
position, expected expenditures and financial results, are forward-looking
statements. Some of the forward-looking statements may be identified by words
like "expects," "anticipates," "plans," "believes," "intends," "projects,"
"indicates," and similar expressions. These statements are not guarantees of
future performance and involve a number of risks, uncertainties and assumptions.
Many factors could cause results to differ materially from those stated. These
factors include, but are not limited to, changes in the laws, regulations,
policies and economic conditions; competitive pressures; failure of Fairmount or
related third parties to become Year 2000 compliant; research and development of
new products, including any required regulatory approval, and market acceptance
of Fairmount's products. Risks and uncertainties include, but are not limited
to, the ability of Fairmount to maintain existing relationships with customers,
the ability of Fairmount to successfully implement productivity improvements,
cost reduction initiatives, facilities expansion, the risk of loss of executive
officers and other key employees, and the ability of Fairmount to develop,
market and sell new products and to continue to comply with environmental laws,
rules and regulations. In accordance with the provisions of the Private
Securities Litigation Reform Act of 1995, Fairmount is making investors aware
that such forward-looking statements, because they relate to future events, are
by their very nature only predictions and that actual events or results may
differ materially. In evaluating such statements, you should specifically
consider the various factors that could cause actual events or results to differ
materially from those indicated by the forward-looking statements.
15
<PAGE> 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
During the quarter ended June 30, 1999, there have been no material
changes in the potential claims reported by the Company in its Annual Report on
Form 10-KSB in "Item 1. Business - Environmental Laws and Government
Regulations".
Item 4. Submission of Matters to Vote of Security Holders
On May 18, 1999 the Company held its annual meeting of stockholders at
its offices, 117 Blanchard Street Newark, NJ 07105. There were two issues that
shareholders voted on; the election of the Board of Directors and the
appointment of independent auditors for 1999. There were 8,292,866 shares
eligible to vote. All three nominees were elected to the Board of Directors as
follows:
<TABLE>
<CAPTION>
Nominee In Favor Withheld
------- -------- --------
<S> <C> <C>
Howard R. Leistner 6,284,134 1,101
Dr. Reidar T. Halle 6,284,284 951
Richard Mizrack 6,284,134 1,101
</TABLE>
KPMG LLP was ratified as independent auditors for 1999 as follows:
<TABLE>
<S> <C>
In Favor: 6,284,333
Against: 702
Abstain: 200
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Restated Certificate of Incorporation filed May 11, 1982 with
Secretary of State of New Jersey, incorporated by reference
from Fairmount's Form 10-K for the fiscal year ending December
31, 1982, (Exhibit 3.3).
3.2 Restated Certificate of Incorporation filed May 13, 1993 with
the Secretary of State of New Jersey, incorporated by
reference from Fairmount's Form 10-KSB or the fiscal year
ending December 31, 1993, (Exhibit 3.1.).
3.3 Restated Certificate of Incorporation filed June 8, 1994 with
the Secretary of the State of New Jersey, incorporated by
reference from Fairmount's Form 10-KSB for the fiscal year
ending December 31, 1994, (Exhibit 3.1.).
3.4 Certificate of Amendment to Certificate of Incorporation filed
June 9, 1986 with Secretary of State of New Jersey,
incorporated by reference from Fairmount's Form 10-KSB for the
fiscal year ending December 31, 1986, (Exhibit 3.1.).
3.5 Certificate of Amendment to Certificate of Incorporation filed
June 1, 1988 with Secretary of State of New Jersey,
incorporated by reference from
16
<PAGE> 17
Fairmount's Form 10-K for the fiscal year ending December 31,
1988, (Exhibit 3).
3.6 By-laws as last amended February 21, 1984, incorporated by
reference from Fairmount's Form 10-K for the fiscal year
ending December 31, 1983, (sequentially numbered pages 56
through 69).
4.1 Letter Agreement extending the date for maturity of current
indebtedness to Fairmount Fund and the Estate of Leistner to
April 1, 1998 incorporated by reference from the Company's
Form 10-KSB for the fiscal year ending December 31, 1996,
(Exhibit 4(a)).
4.2 Employment agreement between Todd K. Walker (Employee) and
Fairmount incorporated by reference from Fairmount's Form
10-KSB for the fiscal year ending December 31, 1994, (Exhibit
4(b)).
4.3 Termination of the 1992 Credit Facility Loan Agreement
incorporated by reference from Fairmount's Form 10-KSB for the
fiscal year ended December 31, 1997, (Exhibit 4(a)).
10.1 Amendment No. 10, dated September 10, 1987, to the Statement
on Schedule 13D, previously filed by Phoenix Chemical Company
and the Phoenix Chemical Corporation with the Securities and
Exchange Commission on March 19, 1982 and April 9, 1982,
respectively, and the American Stock Exchange on March 22,
1982 and April 12, 1982, respectively, with respect to
Fairmount's issuance to Phoenix Chemical Company of 100,000
shares of Fairmount's common stock in cancellation of current
debt to Phoenix.
10.2 Amendment No. 11, dated December 17, 1987, to the Statement on
Schedule 13D, previously filed by Phoenix Chemical Company and
Phoenix Chemical Corporation with the Securities and Exchange
Commission on March 19, 1982 and April 9, 1982, respectively,
and the American Stock Exchange on March 22, 1982 and April
12, 1982, respectively, with respect to Fairmount's issuance
to Phoenix Chemical Company of 133,334 shares of Fairmount's
common stock in cancellation of current debt to Phoenix.
10.3 Amendment No. 12, dated July 7, 1988, to the Statement on
Schedule 13D, previously filed by Phoenix Chemical Company and
Phoenix Chemical Corporation with the Securities and Exchange
Commission on March 19, 1982, and April 9, 1982, respectively,
and the American Stock Exchange on March 22, 1982 and April
12, 1982, respectively, with respect to Fairmount's issuance
to Phoenix Chemical Company of 1,000,000 shares of Fairmount's
common stock in cancellation of current debt to Phoenix.
10.4 Amendment No. 13, dated August 7, 1989 to the Statement on
Schedule 13D, previously filed by Phoenix Chemical Company and
Phoenix Chemical Corporation with the Securities and Exchange
Commission on March 19, 1982 and April 9, 1982, respectively,
and the American Stock Exchange on March 22, 1982, and April
12, 1982, respectively, with respect to Fairmount's issuance
to Phoenix Chemical Company of 1,000,000 shares of Fairmount's
common stock in cancellation of current debt to Phoenix.
17
<PAGE> 18
10.5 Amendment No. 14, dated May 23, 1990, to the Statement on
Schedule 13D, previously filed by Phoenix Chemical Company and
Phoenix Chemical Corporation with the Securities and Exchange
Commission on March 19, 1982 and April 9, 1982, respectively,
and the American Stock Exchange on March 22, 1982 and April
12, 1982, respectively, with respect to Fairmount's issuance
to Phoenix Chemical Company of 1,500,000 shares of Fairmount's
common stock in cancellation of current debt to Phoenix.
10.6 Amendment No. 15, dated December 5, 1990, to the Statement on
Schedule 13D, previously filed by Phoenix Chemical Company and
Phoenix Chemical Corporation with the Securities and Exchange
Commission on March 19, 1982 and April 9, 1982, respectively,
and the American Stock Exchange on March 22, 1982 and April
12, 1982, respectively, with respect to Fairmount's issuance
to Phoenix Chemical Company of 1,000,000 shares of Fairmount's
common stock in cancellation of current debt to Phoenix.
10.7 Statement on Schedule 13D, dated April 6, 1992, previously
filed by William E. Leistner with the Securities and Exchange
Commission on April 15, 1992 with respect to the liquidation
and winding up of Phoenix Chemical Company and the
distribution of 3,789, 200 shares of Fairmount's common stock
to Leistner, who was a 60% partner in Phoenix, as the result
of such liquidation is incorporated into Part III.
10.8 Statement on Schedule 13D, dated April 6, 1992, previously
filed by the Estate of Olga H. Knoepke, with the Securities
and Exchange Commission on May 4, 1992, with respect to
liquidation and winding up of Phoenix Chemical Company and the
distribution of 2,526,134 shares to the Estate of Olga H.
Knoepke, who was a 40% partner in Phoenix, as the result of
such liquidation is incorporated into Part III.
10.9 Statement on Schedule 13D, dated September 19, 1993,previously
filed by the Estate of William E. Leistner with Securities and
Exchange Commission on March 30, 1994 with respect to the
Estate of William E. Leistner acquiring direct beneficial
ownership of William E. Leistner's shares of Common Stock and
5,400,000 shares of Preferred Stock of Fairmount Chemical Co.,
Inc. upon his death on September 19, 1993 is incorporated into
Part III.
10.10 Amendment No. 1, dated December 28, 1992, to the Statement on
Schedule 13D, previously filed by William E. Leistner with the
Securities and Exchange Commission on April 14, 1992, with
respect to Fairmount's issuance to Leistner of 1,000,000
shares of Fairmount's Common Stock in cancellation of current
debt to Leistner is incorporated into Part III.
10.11 Form 8-K of the Company, previously filed September 10, 1987,
with respect to Issuer's issuance to Phoenix Chemical Company
of 100,000 shares of Fairmount's common stock in cancellation
of current debt to Phoenix.
10.12 Incentive Stock Option Plan, incorporated by reference to
Fairmount's Definitive Proxy Statement for its Annual Meeting
of Stockholders held April 19, 1983 (Exhibit A), and amendment
thereto, incorporated by reference from the Fairmount's
Definitive Proxy Statement for its Annual Meeting of
Stockholders held May 15, 1985 (Exhibit A); Incentive Stock
Option Plan, as amended in 1988, incorporated by reference
from Fairmount's Form 10-K for
18
<PAGE> 19
the fiscal year ending December 31, 1988 (Exhibit 10); and
amendment to Incentive Stock Option Plan in 1991, incorporated
by reference to Fairmount's Definitive Proxy Statement for its
Annual Meeting of Stockholders held May 6, 1991 (Exhibit A).
10.13 Employment agreement by and between Reidar Halle Ph.D. and
Fairmount Chemical Co., Inc. incorporated by reference from
Fairmount's Form 10-QSB for the quarter year ending June 30,
1998. (Exhibit 10).
27.1 Financial Data Schedule
(b) No reports have been filed on Form 8-K during the quarter ended June
30, 1999.
19
<PAGE> 20
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
August 13, 1999 /s/ Reidar Halle
- --------------- -------------------------
Date Reidar T. Halle
Chief Executive Officer &
President
August 13, 1999 /s/ William C. Kaltnecker
- --------------- -------------------------
Date William C. Kaltnecker
Controller
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1999 AND THE CONSOLIDATED STATEMENT
OF OPERATIONS FOR SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,786,300
<SECURITIES> 0
<RECEIVABLES> 2,102,800
<ALLOWANCES> 0
<INVENTORY> 2,761,300
<CURRENT-ASSETS> 7,822,000
<PP&E> 8,864,600
<DEPRECIATION> 4,959,400
<TOTAL-ASSETS> 11,727,900
<CURRENT-LIABILITIES> 1,989,500
<BONDS> 0
0
5,400,000
<COMMON> 8,293,400
<OTHER-SE> (5,835,600)
<TOTAL-LIABILITY-AND-EQUITY> 11,727,900
<SALES> 5,434,100
<TOTAL-REVENUES> 5,434,100
<CGS> 4,548,700
<TOTAL-COSTS> 4,548,700
<OTHER-EXPENSES> 659,400
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 66,200
<INCOME-PRETAX> 159,800
<INCOME-TAX> 0
<INCOME-CONTINUING> 159,800
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 159,800
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
