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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, 2000  

Commission file Number   1-4591  

  FAIRMOUNT CHEMICAL CO., INC.  
(Exact name of registrant as specified in its charter.)

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     [  ]

      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 April 1, 2000

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INDEX

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

FAIRMOUNT CHEMICAL CO., INC.

Statements of Operations

For The Three Months Ended March 31, 2000 and 1999
(Unaudited)

See Accompanying Notes to Financial Statements.

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FAIRMOUNT CHEMICAL CO., INC.

Balance Sheets

See accompanying Notes to Financial Statements.

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FAIRMOUNT CHEMICAL CO., INC.

Statement of Changes in Stockholders’ Equity
and
Comprehensive Income
For Three Months Ended March 31, 2000 and 1999

(Unaudited)

See accompanying notes to financial statements.

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FAIRMOUNT CHEMICAL CO., INC.

Statements of Cash Flows
For The Three Months Ended March 31, 2000 and 1999
(Unaudited)

See accompanying Notes to Financial Statements

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FAIRMOUNT CHEMICAL CO., INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 2000

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 1999 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 2000 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 pass 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 March 31, 2000 and March 31, 1999 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 ended March 31, 2000 and 1999, the statements of cash flows for the three months ended March 31, 2000 and 1999, and the balance sheet as of March 31, 2000 are unaudited. The balance sheet as of December 31, 1999 is audited.

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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 ended March 31, 2000 and 1999. 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 March 31, 2000 and 1999, 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 payable from January 1, 1999 through December 31, 1999 was at the rate of 7.75% per annum. Interest is payable 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, 2000 through December 31, 2000 is at the rate of 8.5 % 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 three months ended March 31, 2000 was $33,400 and $28,400 during the three months ended March 31, 1999.

	Promissory Notes:

Note 4. Bank Borrowings

      The Company had 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 working capital line of credit was amended during the second quarter of 2000. Under the amended loan agreement Fairmount will be able to borrow the lesser of $1,250,000 or up to 80 % of its eligible receivables, as defined. The 80 % limitation on eligible receivables should not have a material effect on Fairmount. The capital expenditure line was not renewed as a result of Fairmount’s losses. The loss of the capital expenditures credit line will limit Fairmount’s options to finance its capital expenditures, however it will not have a material effect on its operations.

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Notes to Financial Statements (Continued)

Note 5. Inventories

      Inventories at March 31, 2000 and December 31, 1999 consisted of the following:

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.

      On November 10, 1999, a fire destroyed some equipment and a portion of the roof in one of the production buildings. Fairmount received $100,000 from its property insurance carrier in March 2000 and an additional $233,100 in May 2000 in partial settlement for its property losses caused by the fire. These payments are in addition to the $100,000 received in December 1999.

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 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 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 cannot 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 of the Company in any one accounting period.

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Notes to Financial Statements (Continued)

      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 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’s commercial general liability and commercial umbrella insurance carrier is defending the Company in that action and the Company is subject to a $25,000 deductible.

      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. On October 21, 1999, the Federal Court granted defendants’ motion to dismiss because of lack of subject matter jurisdiction. Claimants re-filed this cause of action in Texas state court in the District Court of Harrison County, Texas on December 15, 1999. Claimants’ allegations in the state court petition are identical to the allegations discussed above. The discovery process is in the initial phase and the Company is not able to determine potential exposure at this time. The Company’s commercial general liability and commercial umbrella insurance carrier is defending the Company in that action.

      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 of the Company in any one accounting period.

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FAIRMOUNT CHEMICAL CO., INC.

Item 2

MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
March 31, 2000

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. The working capital line of credit was amended during the second quarter of 2000. Under the amended loan agreement Fairmount will be able to borrow the lesser of $1,250,000 or up to 80 % of its eligible receivables, as defined. The 80 % limitation on eligible receivables should not have a material effect on Fairmount. The capital expenditure line was not renewed as a result of Fairmount’s losses. The loss of the capital expenditures credit line will limit Fairmount’s options to finance its capital expenditures, however it will not have a material effect on its operations.

      The Company’s working capital decreased by $76,700 during the first three months of 2000. This decrease was due in part to lower period end cash balance, higher accounts payable of $773,900, higher pension liability of $43,100 and higher other liabilities of $61,000. These decreases in working capital were partially offset by higher accounts receivables of $730,500, higher inventories of $552,800 and a payment of $100,000 received from Fairmount’s property insurance carrier as partial settlement of the property damaged sustained from a fire on November 10, 1999.

      The inventory was higher as of March 31, 2000 as compared to December 31, 1999 due to increased purchases of raw materials and production in excess of shipment in anticipation of increased shipments during the second and third quarters. The accounts payable increase was a result of increased raw material and supply purchases. The increase in accounts receivable was due to increased shipments during the first quarter of 2000, with March 2000 being the month with the highest level of shipments.

      On March 25, 1997, equipment used to dry some of Fairmount’s products was destroyed in an explosion. No employees were injured. The damage to both the building housing the equipment and the equipment was extensive and the building has been razed. Other surrounding buildings experienced minor collateral damage. Fairmount has discontinued drying the product that was being dried at the time of the explosion. This product has been reformulated for safety concerns. Fairmount has lost some orders because of the reformulation, but the effect on its operations is immaterial.

      On November 10, 1999, a fire destroyed some equipment and a portion of the roof in one of the production buildings. No employees were injured. The total amount of the damage is not known at this time, however Fairmount believes that its insurance is sufficient to cover the property losses sustained. The fire had an adverse effect on operations during the fourth quarter of 1999, and this adverse effect is expected to continue through the first half of 2000. Fairmount expects to be able to conduct normal operations in this building during second quarter of 2000.

      Fairmount was notified by its insurance carrier that when its property and boiler insurance policy expires on February 1, 2000, it would not be renewed because of adverse loss experience.

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      Fairmount has obtained coverage through another carrier, though at a substantially higher premium.

Year 2000 Compliance

      As of April 30, 2000, Fairmount has not encountered any year 2000 problems with its computer systems. Since January 1, 2000 all vendors, supplies and contractors have supplied services and material on a routine basis. Fairmount spent $75,000 in replacing hardware and software for its Year 2000 initiative. It is not expected that any funds will be spent for year 2000 compliances during the year 2000.

Results of Operations

      Net sales for the first three months of 2000 were $3,464,100, an increase of $1,218,600 or 54.3 % as compared to 1999.

      The increase in imaging chemical sales was due in part to increased shipments to the photographic industry. The demand for certain types of chemicals used in photographic films is expected to decrease during the coming years as the market for film diminishes due in part to new digital imaging technologies. Fairmount is aware of this possibility and is taking steps to substitute new products that are used in making photographic paper and increase its market share of existing products by broadening its customer base.

      Sales of plastics additives increased from $790,700 in the first quarter of 1999 to $1,405,500 in the first quarter of 2000, an increase of $614,800 or 78%. The increase in the sales amount is net of price decreases effective during the second half of 1999. This sales value increase was due to increased volume to a major European customer. As in prior years, Fairmount expects the downward pressure on plastics additive prices to continue.

      Each class of similar products contributed the following percentage of total sales in each of the following two quarters:

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      The gross profit for the first three months of 2000 was $755,700, an increase of $529,600 compared to 1999. As a percent of sales the gross margin during the first three months of 2000 was 21.8 % compared to 10.0 % during 1999. The increase in gross profit was in part due to the increase in sales of imaging chemicals, which traditionally have higher gross margins than the Company’s other product lines and increase sales of plastic additives. In addition to higher sales volume, higher production had a positive impact on gross profit.

      Selling, general and administrative expenses increased by $83,800 in the first quarter of 2000 compared to the same period in 1999. Selling expenses increased $8,400, and general and administrative expenses increased by $75,400.

      Interest expense was higher in the first three months of 2000 versus 1999 due to the increased interest rate on the remaining debt owed to affiliated parties per the new promissory note agreements and increased other interest charges.

      During the first quarter of 2000, Fairmount received gross insurance proceeds of $100,000 as partial settlement of the property losses sustained from a fire on November 10, 1999. During the first quarter of 1999, Fairmount received gross insurance proceeds of $375,000, for property losses sustained from the March 25, 1997 explosion.

      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, 2000 and March 31, 1999 for that portion of deferred tax assets, which are not presently considered more likely than not to be realized.

Forward Looking Statements

      This document contains forward-looking statements that involve risks and uncertainties that could cause the results of Fairmount to differ materially from those expressed or implied by such forward-looking statements. These risks include the timely development, production and acceptance of new products and services; competition; the flow of products into third-party distribution channels; and other risks detailed from time to time in Fairmount’s Securities and Exchange Commission filings. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “will,” and similar expressions, as they relate to Fairmount or our management, may identify forward-looking statements. Such statements reflect the current views of Fairmount with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary from those described herein as anticipated, believed, estimated or expected. Fairmount does not intend to update these forward-looking statements.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

      During the quarter ended March 31, 2000, 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 6. Exhibits and Reports on Form 8-K

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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

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