FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
( ) 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 0-19983
SYBRON CHEMICALS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0301280
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Birmingham Rd., P.O. Box 66, Birmingham New Jersey 08011
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code (609) 893-1100
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 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 practicable date.
Class Outstanding at September 30, 1998
Common stock, $.01 par value 5,713,095
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SYBRON CHEMICALS INC.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This Form 10-Q Report contains
information that is forward-looking, such as information relating to future
capital expenditures and liquidity. Such forward-looking information involves
important risks and uncertainties that could significantly affect expected
results in the future from those expressed in any forward-looking statements
made by, or on behalf of, the Company. These risks and uncertainties include,
but are not limited to, uncertainties relating to economic conditions,
fluctuations in exchange rates of various foreign currencies, and other risks
associated with foreign operations, changes in governmental and regulatory
policies including environmental regulations, the pricing of raw materials, the
ability of the Company to make and successfully integrate corporate
acquisitions, technological developments, the impact of Year 2000 issues on the
Company and changes in the competitive environment in which the Company
operates.
INDEX
Page No.
Part I Financial information
Item 1 - Financial Statements
Consolidated Balance Sheet -
September 30, 1998 and December 31, 1997 1
Consolidated Statement of Operations -
nine months ended September 30, 1998 and 1997 2
Consolidated Statement of Operations -
three months ended September 30, 1998 and 1997 3
Consolidated Statement of Cash Flows -
nine months ended September 30, 1998 and 1997 4
Notes to Consolidated Financial Statements 5 - 9
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of
Operations 10 - 17
Part II Other information
Item 1 Legal Proceedings 17
Item 2 Changes in Securities 17 - 18
Item 5 Other 18
Item 6 Exhibits and Reports on Form 8-K 19 - 24
Signature 25
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PART I - FINANCIAL INFORMATION
SYBRON CHEMICALS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited in thousands except share and per share data)
ASSETS
Sept. 30, Dec. 31,
1998 1997
Current assets:
Cash and cash equivalents $ 17,749 $ 26,592
Accounts receivable, net 48,541 37,367
Inventories, net 37,660 28,205
Prepaid and other current assets 3,443 3,019
Deferred income taxes 105 140
Total current assets 107,498 95,323
Property, plant and equipment, net 80,265 34,224
Intangible assets, net 80,417 20,086
Other assets 5,415 600
$273,595 $150,233
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 1,280 $ 1,760
Current portion of long-term debt 7,407 2,429
Accounts payable 27,591 27,653
Accrued liabilities 16,906 16,087
Income taxes payable 1,313 3,951
Deferred income taxes 415 12
Total current liabilities 54,912 51,892
Long-term debt 138,771 27,390
Deferred income taxes 2,565 2,502
Postretirement benefits 3,859 3,919
Other liabilities 2,400 2,119
Total liabilities 202,507 87,822
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value -
500,000 shares authorized; none issued
Common stock - $.01 par value -
20,000,000 shares authorized;
issued 5,934,050 and 5,908,260 shares 59 59
Additional paid-in capital 24,089 23,580
Retained earnings 59,069 51,989
Accumulated other comprehensive losses (7,710) (8,544)
Treasury stock, at cost - 220,955
and 233,648 shares (4,419) (4,673)
Total shareholders' equity 71,088 62,411
$273,595 $150,233
The accompanying notes are an integral part of
the financial statements
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SYBRON CHEMICALS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited in thousands except per share amounts)
Nine months
ended
September 30,
1998 1997
Net sales $156,389 $138,429
Cost of sales 98,702 84,513
Selling 27,727 25,153
General and administrative 8,843 8,474
Research and development 3,124 2,764
138,396 120,904
Operating income 17,993 17,525
Other income(expense)
Interest income 238 335
Interest expense (3,048) (1,391)
Amortization of intangible assets (1,870) (1,060)
Other - Net (783) (408)
(5,463) (2,524)
Income before income taxes
and extraordinary item 12,530 15,001
Provision for income taxes 5,137 6,151
Income before extraordinary item 7,393 8,850
Extraordinary item - net of taxes 313 --
Net income $ 7,080 $ 8,850
Income per share before extraordinary item:
Basic $ 1.30 $ 1.56
Diluted $ 1.26 $ 1.54
Loss per share extraordinary item:
Basic $ (.06) $ .00
Diluted $ (.05) $ .00
Net income per share:
Basic $ 1.24 $ 1.56
Diluted $ 1.21 $ 1.54
Weighted average shares outstanding:
Basic 5,692,650 5,664,346
Diluted 5,872,036 5,757,798
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SYBRON CHEMICALS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited in thousands except per share amounts)
Three months
ended
September 30,
1998 1997
Net sales $ 58,834 $ 46,297
Cost of sales 39,948 28,655
Selling 9,246 8,815
General and administrative 3,217 3,229
Research and development 1,138 928
53,549 41,627
Operating income 5,285 4,670
Other income(expense)
Interest income 127 134
Interest expense (2,210) (538)
Amortization of intangible assets (835) (391)
Other - Net (505) (284)
(3,423) (1,079)
Income before income taxes and
extraordinary item 1,862 3,591
Provision for income taxes 744 1,472
Income before extraordinary item 1,118 2,119
Extraordinary item 313 --
Net income $ 805 $ 2,119
Income per share before extraordinary item:
Basic $ .20 $ .37
Diluted $ .19 $ .36
Loss per share extraordinary item:
Basic $ (.06) $ .00
Diluted $ (.05) $ .00
Net income per share:
Basic $ .14 $ .37
Diluted $ .14 $ .36
Weighted average shares outstanding:
Basic 5,710,599 5,670,257
Diluted 5,849,973 5,799,892
The accompanying notes are an integral part of
the financial statements
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SYBRON CHEMICALS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited in thousands)
Nine months
ended
Sept. 30,
1998 1997
Cash flows from operating activities:
Net income $ 7,080 $ 8,850
Adjustments to reconcile net income to net
cash provided by operating activities:
Extraordinary item 313 --
Depreciation and amortization 5,986 4,931
Provision for losses on accounts receivable 436 653
Changes in assets and liabilities:
Accounts receivable (1,078) (5,470)
Inventory 886 (1,996)
Other current assets (54) (329)
Accounts payable and accrued expenses (8,001) 5,800
Income taxes payable (2,677) 2,503
Other assets and liabilities - net 615 394
Net cash (used) provided by operating activities 3,506 15,336
Cash flows from investing activities:
Capital expenditures (7,792) (5,726)
Purchase of business assets (6,817) (13,774)
Acquisition (net of cash acquired) (110,616) --
Net cash used by investing activities (125,225) (19,500)
Cash flows from financing activities:
Net (repayments) borrowings under revolving
credit facilities (17,148) 14,320
Loan proceeds 145,000 --
Repayment of debt (12,643) (2,429)
Direct costs of financing (2,710) --
Proceeds from exercise of stock options 351 29
Net cash (used) provided by financing activities 112,850 11,920
Effect of exchange rate changes on cash 26 (1,634)
Net (decrease) increase in cash and cash
equivalents (8,843) 6,122
Cash and cash equivalents at beginning of period 26,592 14,909
Cash and cash equivalents at end of period $17,749 $21,031
The accompanying notes are an integral part of
the financial statements
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SYBRON CHEMICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited in thousands)
NOTE 1 - ACCOUNTING POLICIES:
The accompanying consolidated financial statements are unaudited and have
been prepared by management pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, these
consolidated financial statements contain all of the adjustments, consisting
only of normal recurring adjustments, necessary to present fairly, in summarized
form, the financial position of the Company at September 30, 1998 and the
results of its operations and changes in its cash flows for the nine months
ended September 30, 1998 and 1997.
The Company presumes that users of this Quarterly Report on Form 10-Q have
read or have access to the audited financial statements for the year ended
December 31, 1997 contained in the Company's Form 10-K which was filed with the
Securities and Exchange Commission on March 31, 1998. Accordingly, footnote
disclosures which would substantially duplicate the disclosures contained
therein have been omitted.
NOTE 2 - COMPREHENSIVE INCOME:
The Company has adopted the Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income", which establishes standards
for the reporting and display of comprehensive income and its components in
general-purpose financial statements.
The tables below set forth "comprehensive income" and each component's
related tax effect for the three and nine months ended September 30:
Statement of Comprehensive Income
Three Months Ended September 30,
1998 1997
Net income $ 805 $ 2,119
Other comprehensive income, net of tax:
Foreign currency translation adjustments 1,815 (410)
Comprehensive income $ 2,620 $ 1,709
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Statement of Comprehensive Income
Nine Months Ended September 30,
1998 1997
Net income $ 7,080 $ 8,850
Other comprehensive income, net of tax:
Foreign currency translation adjustments 834 (3,916)
Comprehensive income $ 7,914 $ 4,934
Related Tax Effects of Each Component
of Other Comprehensive Income
Three Months Ended September 30,
<TABLE>
<CAPTION>
________________ 1998 ___________________ ________________ 1997 ___________________
Tax Net of Tax Net of
Pre-Tax (Expense) Tax Pre-Tax (Expense) Tax
Amount Benefit Amount Amount Benefit Amount
<S> <C> <C> <C> <C> <C> <C>
Foreign currency
translation adjustments 1,815 -- 1,815 (410) -- (410)
Total Other
comprehensive income 1,815 -- 1,815 (410) -- (410)
Related Tax Effects of Each Component
of Other Comprehensive Income
Nine Months Ended September 30,
________________ 1998 __________________ _________________ 1997 __________________
Tax Net of Tax Net of
Pre-Tax (Expense) Tax Pre-Tax (Expense) Tax
Amount Benefit Amount Amount Benefit Amount
Foreign currency
translation adjustments 834 -- 834 (3,916) -- (3,916)
Total Other
comprehensive income 834 -- 834 (3,916) -- (3,916)
</TABLE>
The following table illustrates the components of accumulated other
comprehensive income and their associated changes for the nine month period
ending September 30, 1998:
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Accumulated Other
Comprehensive Income Balances
Nine Months Ending September 30, 1998
Current
Beginning Period Ending
Balance Change Balance
Foreign currency translation adjustments (8,359) 834 (7,525)
Minimum pension liability adjustment (185) -- (185)
Accumulated other comprehensive loss (8,544) 834 (7,710)
NOTE 3 - ACCOUNTING PRONOUNCEMENTS:
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131). This statement establishes
standards for reporting information about operating segments in annual financial
statements and requires the reporting of selected information about operating
segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS No. 131 is effective for financial
statements for periods beginning after December 15, 1997, and in the initial
year of application, comparative information for earlier years is to be
restated. The Company will adopt this statement in the fourth quarter of 1998
and does not expect a significant impact on present segment reporting.
In February 1998, the Financial Accounting Standards Board issued Statement
No. 132, "Employers Disclosure About Pensions and Other Post-retirement
Benefits, an amendment of FASB Statements No. 87, 88, and 106" (SFAS 132). This
statement revises disclosures about pension and other post-retirement benefit
plans. It does not change the measurement or recognition of those plans. The
statement is effective for fiscal years beginning after December 15, 1997. The
Company will adopt SFAS 132 in the fourth quarter of 1998.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" which establishes
accounting and reporting standards for derivative instruments and hedging
activities. SFAS No. 133 requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The Company is assessing
the impact that the adoption of SFAS No. 133 will have on its consolidated
financial statements.
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NOTE 4 - INVENTORIES:
Inventories are stated at the lower of cost or market. For U.S. operations,
cost is determined using the last-in, first-out (LIFO) method. For foreign
operations, cost is determined using the first-in, first-out (FIFO) method.
The components of inventories are:
Sept. 30, Dec. 31,
1998 1997
Finished goods $29,415 $21,317
Raw materials 10,306 7,864
39,721 29,181
Less reserves 2,061 976
$37,660 $28,205
NOTE 5 - ACQUISITIONS:
On July 31, 1998, the Company acquired all of the outstanding capital stock
of Ruco Polymer Corporation ("Ruco NY"), and all of the outstanding membership
interests of Ruco Polymer Company of Georgia, LLC ("Ruco GA," and together with
Ruco NY, "Ruco"), pursuant to the Capital Stock and Membership Interest Purchase
Agreement. The aggregate purchase price for the acquisition was $110 million,
including the repayment of bank debt owed by Ruco. The purchase price was
financed by a $185 million senior secured credit facility obtained from
Donaldson, Lufkin & Jenrette Securities Corporation, Morgan Guaranty Trust
Company of New York Incorporated and Mellon Bank, N.A. The facility consists of
a $145 million term facility and a $40 million revolving facility. Proceeds of
the term facility were used to refinance the Company's outstanding indebtedness,
to pay the cash consideration for the acquisition of Ruco and to pay certain
related fees and expenses. The revolving facility will be available to fund the
working capital requirements of the Company.
Results of operations after the acquisition date are included in the 1998
Consolidated Statement of Operations. The following pro forma information has
been prepared assuming that this acquisition had taken place at the beginning of
the respective periods. The pro forma information includes adjustments for
interest expense that would have been incurred to finance the purchase and the
amortization of intangibles arising from the transaction, including non-compete
agreement (estimated life 5 years), customer list (estimated life 10 years), and
goodwill (estimated life 40 years). The pro forma information is presented for
informational purposes only and may not be indicative of the results of
operations as they would have been if the Company and the Ruco business had been
a single entity during 1997 and 1998, nor is it necessarily indicative of the
results of operations which may occur in the future.
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NOTE 5 - ACQUISITIONS: (Continued)
(Unaudited in thousands except per share amounts)
Nine Months Ended
September 30,
1998 1997
Net sales $204,011 $210,952
Operating income 23,952 25,536
Income before extraordinary item 6,704 8,091
Extraordinary item, net of taxes 313 --
Net income $ 6,391 $ 8,091
Income per share before extraordinary item:
Basic $ 1.18 $ 1.43
Diluted $ 1.14 $ 1.41
Net income per share:
Basic $ 1.12 $ 1.43
Diluted $ 1.09 $ 1.41
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Nine Months Ended September 30, 1998 compared to Nine Months Ended
September 30, 1997 and Three Months Ended September 30, 1998 compared to Three
Months Ended September 30, 1997.
The following tables set forth certain information about the Company's
three business segments, Environmental Products and Services, Textile Chemical
Specialties, and Polymer Intermediates.
Nine Months Ended September 30,
1998 1997
-------------- ---------------
% of % of
Amount Sales Amount Sales
------ ----- ------ -----
(in thousands except percentages)
Sales
Environmental Products and Services $ 37,133 23.7% $ 41,967 30.3%
Textile Chemical Specialties 105,353 67.4 96,462 69.7
Polymer Intermediates 13,903 8.9 -- --
________ ________
Total 156,389 100.0 138,429 100.0
Cost of Sales
Environmental Products and Services 24,385 65.7 28,630 68.2
Textile Chemical Specialties 62,723 59.5 55,883 57.9
Polymer Intermediates 11,594 83.4 -- --
Total 98,702 63.1 84,513 61.1
Gross Margin
Environmental Products and Services 12,748 34.3 13,337 31.8
Textile Chemical Specialties 42,630 40.5 40,579 42.1
Polymer Intermediates 2,309 16.6 -- --
Total 57,687 36.9 53,916 38.9
Operating Expense
Environmental Products and Services 8,538 23.0 9,307 22.2
Textile Chemical Specialties 30,459 28.9 27,084 28.1
Polymer Intermediates 697 5.0 -- --
Total 39,694 25.4 36,391 26.3
Operating Income
Environmental Products and Services 4,210 11.3 4,030 9.6
Textile Chemical Specialties 12,171 11.6 13,495 14.0
Polymer Intermediates 1,612 11.6 -- --
Total 17,993 11.5 17,525 12.6
Other Expense, Net (5,463) (3.5) (2,524) (1.8)
Income Before Income Taxes
and extraordinary item 12,530 8.0 15,001 10.8
Provision for Income Taxes 5,137 3.3 6,151 4.4
Income before extraordinary item 7,393 4.7 8,850 6.4
Extraordinary item, net of tax 313 0.2 -- --
Net Income $ 7,080 4.5% $ 8,850 6.4%
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Three Months Ended September 30,
1998 1997
% of % of
Amount Sales Amount Sales
(in thousands except percentages)
Sales
Environmental Products and Services $11,960 20.3% $13,524 29.2%
Textile Chemical Specialties 32,971 56.1 32,773 70.8
Polymer Intermediates 13,903 23.6 -- --
Total 58,834 100.0 46,297 100.0
Cost of Sales
Environmental Products and Services 7,952 66.5 9,167 67.8
Textile Chemical Specialties 20,402 61.9 19,488 59.5
Polymer Intermediates 11,594 83.4 -- --
Total 39,948 67.9 28,655 61.9
Gross Margin
Environmental Products and Services 4,008 33.5 4,357 32.2
Textile Chemical Specialties 12,569 38.1 13,285 40.5
Polymer Intermediates 2,309 16.6 -- --
Total 18,886 32.1 17,642 38.1
Operating Expense
Environmental Products and Services 2,838 23.7 3,395 25.1
Textile Chemical Specialties 10,066 30.5 9,577 29.2
Polymer Intermediates 697 5.0 -- --
Total 13,601 23.1 12,972 28.0
Operating Income
Environmental Products and Services 1,170 9.8 962 7.1
Textile Chemical Specialties 2,503 7.6 3,708 11.3
Polymer Intermediates 1,612 11.6 -- --
Total 5,285 9.0 4,670 10.1
Other Expense, Net (3,423) (5.8) (1,079) (2.3)
Income Before Income Taxes
and extraordinary item 1,862 3.2 3,591 7.8
Provision for Income Taxes 744 1.3 1,472 3.2
Income before extraordinary item 1,118 1.9 2,119 4.6
Extraordinary item 313 0.5 -- --
Net Income $ 805 1.4% $ 2,119 4.6%
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Operations
Sales for the nine months and quarter ending September 30, 1998 were $156.4
million and $58.8 million, respectively; an improvement of 13.0% and 27.1%,
compared with the same periods in 1997. Both the nine months and quarter
included two months of operations of Ruco Polymer Corporation and Ruco Polymer
Company of Georgia LLC (together "Ruco"), which were acquired by the Company on
July 31, 1998. The Textile Chemical Specialties segment sales increased 9.2% for
the nine months and 0.6% for the third quarter, compared with the same periods
last year, as a direct result of the acquisitions of the garment processing
chemicals businesses of Ocean Wash Inc. and Ocean Wash de Mexico S.A. de C.V. in
April 1998 and Ivax Industries, Inc. in July, 1997. Nine months sales in the
Environmental Products and Services segment dropped 11.5% as compared with the
similar period in 1997, while quarterly sales decreased 11.6%. Almost half of
the decline in both periods was due to the sale of the Company's reverse osmosis
membrane business in December 1997.
In the Textile Chemical Specialties segment, combined North America/Asia
textile chemical sales for the nine months and third quarter improved 14.6% and
1.3%, respectively, compared with the same periods in 1997 as a direct result of
the aforementioned Ocean Wash and Ivax acquisitions. These improvements more
than offset the continued soft conditions in the North America textile
marketplace, the unfavorable impact on sales of the Company's stonewash denim
products from a style change in the garment sector from light to dark colored
denim, and reduced activity in the organics toll manufacturing business. Europe
Division textile chemical sales for the nine months, expressed in U.S. dollars,
improved 2.0%, while the third quarter was flat. For the first nine months of
this year, physical volume improved 5.3% as a result of strong sales in the
Middle East and several Western European countries, while physical volumes
slipped 1.0% in the quarter. During the nine-month period, the U.S. dollar
remained stronger versus the Dutch guilder resulting in a negative currency
effect of 4.4% on Europe's nine-month sales as compared to the prior year;
however, the recent strengthening of the guilder had a minor favorable impact on
the quarter.
Sales in the Environmental Product and Services segment, after the effect
of the sale of the reverse osmosis membranes business, declined 6.3% and 6.0%
versus the nine months and third quarter of 1997. Both periods were negatively
impacted by the continued soft conditions in the ion exchange markets in the
U.S. and Far East. Reduced requirements from two major toner polymer customers
also contributed to the quarters' downturn. Sales for Biochemicals were flat in
both periods.
Sales in the new Polymer Intermediates segment, formed from the
above-mentioned Ruco acquisitions, were $13.9 million for both periods.
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The overall gross margin for the nine months and third quarter ending
September 30, 1998 were 36.9% and 32.1%, respectively, versus last year's
similar period margins of 38.9% and 38.1%. The decrease in margins was heavily
influenced by the acquisition of the new Polymer Intermediates segment, which
realizes substantially lower margins. In the Textile Chemical Specialties
segment, both the nine months margin of 40.5% and the quarter's 38.1% were under
their respective prior year levels of 42.1% and 40.5%, respectively. Margins for
both periods in North America/Asia were lower than the similar 1997 periods due
to the impact of the lower margin sales from Ocean Wash, one-time termination
costs relating to staff reductions, reduced average U.S. selling prices, and
increased freight costs, partially offset by lower material costs and
manufacturing efficiencies. Margins also fell in the organics product line
primarily as a result of reduced sales of higher margin toll manufactured
products. Margins in Europe for the first nine months of 1998 equaled margins
for the same period last year due to the continued favorable impact of a weak
guilder compared to certain other European currencies, and a small selling price
increase which offset higher raw material costs and an unfavorable product mix.
For the quarter, margins improved in Europe primarily due to favorable
manufacturing variances, lower raw material costs and slightly lower employee
incentives.
The gross margin in the Environmental Products and Services segment for the
nine months and quarter ending September 30, 1998 increased to 34.3% and 33.5%,
respectively, versus the 31.8% and 32.2% experienced in the same periods in
1997. Both periods continue to be positively impacted by the results of several
strategic action plans implemented in 1997 including: the alliance with Dow
Chemical for the manufacture of anion exchange resins; the switch from
purchasing a major raw material to manufacturing in- house; and the
aforementioned divestiture of the reverse osmosis membrane business, which
carried substantially lower margins. Also affecting the ion exchange product
line in both periods was an approximately 5% average price reduction in the
third quarter and one-time termination costs associated with selective staff
reductions, only partially offset by lower production costs. Margins in the
biochemical product line for both the nine months and quarter were lower than
the respective periods in 1997 primarily due to unfavorable production variances
in the U.S. which were somewhat offset by a favorable product/customer mix in
France. Margins in the new Polymer Intermediates segment were 16.6%.
Operating expenses as a percent of sales decreased in both the nine-month
and third quarter periods to 25.4% and 23.1%, respectively, as compared with the
26.3% and 28.0% experienced in the similar periods in 1997. This improvement was
primarily due to the new Polymer Intermediates segment, which has lower
operating
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expenses. In addition, the Environmental Products and Services segment
expenses as a percent of sales for the quarter were lower as compared to the
third quarter of 1997, in which the Company recorded increased provisions for
doubtful accounts and legal and environmental expenses. While sales volumes
increased overall in the Textile Chemical Specialties segment, operating
expenses grew at a faster pace, in both periods, primarily due to the added
costs for the Ocean Wash acquisition and computer upgrading expenses in Europe,
somewhat offset, in the nine month period, by the favorable currency impact in
Europe on fixed costs.
Income Taxes and Other Items
The Company's provision for income taxes is computed using applicable
prevailing income tax rates.
The Company's effective tax rate of 41.0% for the nine months was equal to
the same period in 1997 while the third quarter 1998 rate of 40.0% was slightly
under last year's equivalent rates of 41.0%.
Other income (expense) before an extraordinary item was ($5.5) million and
($3.4) million for the year-to-date and third quarter, respectively, versus
($2.5) million and ($1.1) million experienced in last year's comparable periods.
The increase for both periods was primarily due to the amortization costs
relating to the three acquisitions and higher interest costs resulting from the
Ruco acquisition financing. The extraordinary cost of $0.3 million, after taxes,
reflects the cost of early debt retirement that was refinanced with debt
incurred for the acquisition of the Ruco companies.
Liquidity and Capital Resources
Cash and cash equivalents were $17.8 million as of September 30, and $26.6
million at December 31, 1997.
Operating activities generated net cash of $3.5 million for the first nine
months of 1998 as compared to $15.3 million for the same period in 1997. This
was primarily the result of a substantial reduction in accounts payable and
accrued expenses in 1998 due to: the return to the taxing authorities of an
erroneous tax refund in the Netherlands; executive bonus payouts; annual pension
funding; and payments for the terminated going private transaction. In addition,
unusually high inventory and capital equipment purchased during the latter part
of 1997 were paid for in 1998.
Net cash used by investing activities totaled $125.2 million for the first
nine months of 1998 as compared with $19.5 million for the comparable 1997
period. The year-to-year increase was
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<PAGE>
primarily the result of the aforementioned purchase of the Ruco and Ocean
Wash businesses, coupled with the purchase of property adjacent to the
manufacturing site in Ede, Holland which could be used for future expansion.
Financing activities provided $112.9 million in net cash through September
1998 which were primarily used for the funding of the Ocean Wash and Ruco
acquisitions. The $11.9 million provided in the comparable 1997 period was
primarily used for the Ivax acquisition.
On July 31, 1998 the Company purchased for $110 million in cash all of the
capital stock of Ruco Polymer Corporation and all of the equity interests in
Ruco Polymer Company of Georgia LLC. This acquisition was pursued as part of the
Company's strategic initiative to develop a "third leg" business to complement
its existing Textile Chemical Specialties and Environmental Products and
Services segments. Ruco produces and markets polymers for powder and high-solids
coatings applications.
Also on July 31, 1998, the Company obtained from Donaldson, Lufkin &
Jenrette Securities Corporation, J.P. Morgan Securities Inc., and Mellon Bank
N.A. a $185 million Senior Secured Credit Facility. The Senior Secured Credit
Facility consists of a $40 million Revolving Credit Facility, which replaced a
CoreStates Bank revolver, and a $145 million six-year Term Loan Facility. The
Term Loan was used to finance the $110 million acquisition of Ruco, refinance
existing debt, and pay certain fees and expenses. At September 30, 1998, the
Revolving Credit Facility was undrawn. The Company may elect to refinance or
restructure a portion of the $145 million Term Loan Facility with proceeds from
an offering of senior subordinated notes or by some other means, if market
conditions are favorable.
The Company believes that its capital expenditures for existing operations
for 1998 will approximate 1997 levels, adjusted for acquisitions, and can be
funded from operations. The Company further believes that it will be able to
meet both short-term and long-term financial obligations in the foreseeable
future from its anticipated operating income and present credit facilities.
Foreign Exchange
The Company has foreign subsidiaries in Europe, Asia, Africa and the
Americas and, for all subsidiaries, except the Company's Mexican and Colombian
subsidiaries, the Company has determined the functional currencies are the
subsidiaries' local currency. The functional currency of the Mexican and
Colombian subsidiaries are considered to be the U.S. dollar because of those
countries' designation as highly inflationary economies. The Company has a large
manufacturing facility in Ede, Holland where chemicals are
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<PAGE>
manufactured and sold either directly to customers or to various
subsidiaries, which are principally in Europe. Intercompany balances arise
between the Dutch operation and various subsidiaries. Overall, the Company
recognized an exchange gain of $0.1 million in the first nine months of 1998
versus $0.1 million exchange loss in the similar period in 1997.
Year 2000 Readiness Disclosure
Many currently installed computer systems are not capable of distinguishing
21st century dates from 20th century dates. As a result, in less than fifteen
months, computer systems and/or software used by many companies in a wide
variety of applications will experience operating difficulties unless they are
modified or upgraded to adequately process information involving, related to or
dependent upon the century change. Significant uncertainty exists concerning the
scope and magnitude of problems associated with the century change.
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures and has established a project
team to address Year 2000 risks. The project team has coordinated the
identification of and will coordinate the implementation of changes to computer
hardware and software applications that will attempt to ensure availability and
integrity of the Company's information systems and the reliability of its
operational systems and manufacturing processes. The Company is also assessing
the potential overall impact of the impending century change on its business,
results of operations and financial position.
The Company has reviewed its information and operational systems and
manufacturing processes in order to identify those products, services or systems
that are not Year 2000 compliant. As a result of this review, the Company has
determined that it will be required to modify or replace certain information and
operational systems so they will be Year 2000 compliant. These modifications and
replacements are being and will continue to be, made in conjunction with the
Company's overall systems initiatives. The total cost of these Year 2000
compliance activities, estimated at less than $500,000, has not been, and is not
anticipated to be, material to the Company's financial position or its results
of operations. The Company expects to complete its Year 2000 project during
1999. Based on available information, the Company does not believe any material
exposure to significant business interruption exists as a result of Year 2000
compliance issues. Accordingly, the Company has not adopted any formal
contingency plan in the event its year 2000 project is not completed in a timely
manner. These costs and the timing in which the Company plans to complete its
Year 2000 modification and testing processes are based on management's best
estimates. However, there can be no assurance
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<PAGE>
that the Company will timely identify and remediate all significant Year
2000 problems, that remedial efforts will not involve significant time and
expense, or that such problems will not have a material adverse effect on the
Company's business, results of operations or financial position.
The Company also faces risk to the extent that suppliers of products,
services and systems not purchased by the Company and others with whom the
Company transacts business on a worldwide basis do not comply with Year 2000
requirements. The Company has initiated formal communications with significant
suppliers and customers to determine the extent to which the Company is
vulnerable to these third parties failure to remediate their own Year 2000
issues. In the event any such third parties cannot provide the company with
products, services, or systems that meet the Year 2000 requirements on a timely
basis, or in the event Year 2000 issues prevent such third parties from timely
delivery of products or services required by the Company, the Company's results
of operations could be materially adversely affected. To the extent Year 2000
issues cause significant delays in, or cancellation of, decisions to purchase
the Company's products or services, the Company's business, results of
operations and financial position would be materially adversely affected.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material developments in connection with any pending
legal proceedings as reported in the Registrant's Form 10-K Annual Report which
was filed with the Securities and Exchange Commission on March 31, 1998.
Item 2. Changes in Securities
On August 7, 1998, the Company's Board of Directors adopted a Stockholder
Rights Plan (the "Plan"). The Plan was adopted in an effort to protect
stockholders and their equity investment from potential acquirers who would use
coercive or unfair tactics to gain control of the Company. The Plan would not
preclude any fair acquisition proposal.
Under the Plan, which is similar to those adopted by many other companies,
Rights will be distributed as a dividend at the rate of one Right for each share
of Common Stock of the Company held by shareholders of record as of the close of
business on August 27, 1998. Each Right entitles the registered holder to
purchase from the Company one unit representing one ten-thousandth of a share of
Series A Junior Participating Preferred Stock, par value $0.01 per share, at a
Purchase Price of $150.00 per unit, subject to adjustment ("Purchase Price").
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The Rights will separate from the Common Stock and will be distributed upon
the earlier of (i) ten days following a public announcement that a person or
group of affiliated or associated persons, excluding certain exempt persons, has
acquired, or obtained the right to acquire, beneficial ownership of 20% or more
of the outstanding shares of Common Stock; or (ii) ten business days (or such
later date as may be determined by the Board of Directors) following the
commencement of a tender offer or exchange offer that would result in a person
or group beneficially owning 20% or more of such outstanding shares of Common
Stock. Following either of the above events, each holder of a Right, except the
person or group triggering such event, will thereafter have the right to
receive, upon exercise, Common Stock (or, in certain circumstances, cash,
property or other securities of the Company) having a value equal to two times
the Purchase Price.
The description and terms of the Plan are set forth more fully in the
Rights Agreement dated as of August 7, 1998, between the Company and BankBoston,
N.A., as Rights Agent, which is attached as an exhibit to the Company's
Registration Statement on Form 8-A, filed on August 13, 1998 with the Securities
and Exchange Commission, and incorporated herein by reference.
Item 5. Other
Acquisition
On July 31, 1998, the Company acquired all of the outstanding capital stock
of Ruco Polymer Corporation ("Ruco NY"), and all of the outstanding membership
interests of Ruco Polymer Company of Georgia, LLC ("Ruco GA," and together with
Ruco NY, "Ruco") pursuant to the Capital Stock and Membership Interest Purchase
Agreement, dated July 30, 1998, effective July 31, 1998, by and among the
Company, Louis T. Camilleri, Anthony F. Forgione, Joseph Mitola and Joseph A.
Ruffing, a copy of which has been filed previously by the Company and is
incorporated herein by reference. Messrs. Camilleri, Forgione, Mitola and
Ruffing hereinafter are referred to as the "Sellers." Ruco is a leading North
American polymer intermediates company that produces polyester polyols,
polyester powder coating resins, polyurethane latexes and specialty polymers
which are intermediate chemical products used in the formulation and production
of coatings and plastics. The aggregate purchase price for the acquisition,
determined through arms-length negotiations between the parties, was $110
million, including the repayment of bank debt owed by Ruco. The purchase price
is subject to certain post-closing adjustments. The acquisition was pursued as
part of the Company's strategic initiative to develop a "third leg" business to
complement its existing Textile Chemical Specialties and Environmental Products
and Services segments. The Company intends to continue the business of Ruco and
the use of Ruco's facilities, equipment and physical property obtained through
the acquisition.
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<PAGE>
In connection with the acquisition of Ruco, each of the Sellers entered
into five-year non-compete agreements with the Company. In addition, the Company
entered into an agreement with Anthony F. Forgione, the President and Chief
Executive Officer of Ruco prior to the acquisition, pursuant to which Mr.
Forgione will serve as President of Ruco. The employment agreement anticipates a
minimum term of two years and will continue in full force and effect until
terminated by either party.
Financing
On July 31, 1998, the Company obtained from Donaldson, Lufkin & Jenrette
Securities Corporation, Morgan Guaranty Trust Company of New York Incorporated
and Mellon Bank, N.A. a $185 million senior secured credit facility. The
facility consists of a $145 million term facility and a $40 million revolving
facility. Proceeds of the term facility were used to refinance the Company's
outstanding indebtedness, to pay the cash consideration for the acquisition of
Ruco and to pay certain related fees and expenses. The revolving facility will
be available to fund the working capital requirements of the Company.
Item 6. Exhibits and Reports on Form 8-K
On October 13, 1998, the Company filed a Form 8-K report containing
financial information relating to the July 31, 1998 acquisition of all of the
outstanding capital stock of Ruco Polymer Corporation and all of the outstanding
membership interests of Ruco Polymer Company of Georgia, LLC.
Exhibit Description
2.1 Capital Stock and Membership Interest Purchase Agreement,
effective as of July 31, 1998, by and among Sybron
Chemicals Inc., Louis T. Camilleri, Anthony F. Forgione,
Joseph Mitola, and Joseph A. Ruffing, with exhibits:
A. Non-Competition Agreement, effective as of July 31,
1998, by and among Sybron Chemicals Inc., Ruco NY,
Ruco GA and Anthony Forgione (substantially similar
agreements with Messrs. Mitola, Camilleri and
Mitola not included).
B. Employment Agreement by and among Ruco Polymer
Corp., Ruco Polymer Company of Georgia, LLC, Sybron
Chemicals Inc. and Anthony F. Forgione, dated as of
July 31, 1998, with exhibits (attached as Exhibit
10.1).
C. Form Opinion of Jacobson, Mermelstein & Squire,
dated as of July 31, 1998.
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<PAGE>
D. Amendment to Employment Agreement of Michael J.
McCann and Waiver of Certain Rights Thereunder,
dated as of July 31, 1998.
4 Rights Agreement, dated as of August 7, 1998, by and
between Sybron Chemicals Inc. and the Rights Agent, with
exhibits (incorporated herein by reference to Exhibit 1
to the Registration Statement on Form 8-A, filed on
August 14, 1998 with the Securities and Exchange
Commission).
10.1 Employment Agreement by and among Ruco Polymer Corp.,
Ruco Polymer Company of Georgia LLC, Sybron Chemicals
Inc. and Anthony F. Forgione, dated as of July 31, 1998,
with material exhibits:
C. Bonus Incentive Plan for Mr. Forgione.
10.2 Credit Agreement, dated as of July 31, 1998, by and among
Sybron Chemicals Inc., DLJ Capital Funding, Inc., Morgan
Guaranty Trust Company of New York and Mellon Bank, N.A.
10.3 Promissory Notes, dated as of July 31, 1998, by Sybron
Chemicals Inc. in favor of DLJ Capital Funding, Inc.,
Morgan Guaranty Trust Company of New York and Mellon
Bank, N.A.
10.4 Security Agreement, dated as of July 31, 1998, among
Sybron Chemicals Inc. and Mellon Bank, N.A.
10.5 Trademark Security Agreement, dated as of July 31, 1998,
among Sybron Chemicals Inc., the Subsidiary Guarantors to
the Credit Agreement, and Mellon Bank, N.A. re: Sybron
Chemicals Inc.'s trademarks and licenses.
10.6 Trademark Security Agreement, dated as of July 31, 1998,
among Sybron Chemicals Inc., the Subsidiary Guarantors to
the Credit Agreement, and Mellon Bank, N.A. re: Ruco NY's
trademarks and licenses.
10.7 Trademark Security Agreement, dated as of July 31, 1998,
among Sybron Chemicals Inc., the Subsidiary Guarantors to
the Credit Agreement, and Mellon Bank, N.A. re: Ruco GA's
trademarks and licenses.
10.8 Patent Security Agreement, dated as of July 31, 1998,
among Sybron Chemicals Inc., the Subsidiary Guarantors to
the Credit Agreement, and Mellon Bank, N.A. re: Sybron
Chemicals Inc.'s patents and licenses.
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<PAGE>
10.9 Patent Security Agreement, dated as of July 31, 1998,
among Sybron Chemicals Inc., the Subsidiary Guarantors to
the Credit Agreement, and Mellon Bank, N.A. re: Ruco NY's
patents and licenses.
10.10 Patent Security Agreement, dated as of July 31, 1998,
among Sybron Chemicals Inc., the Subsidiary Guarantors to
the Credit Agreement, and Mellon Bank, N.A. re: Ruco GA's
patents and licenses.
10.11 Subsidiary Guaranty Agreement, dated as of July 31, 1998,
by and among Sybron Chemical Holdings Inc., Ruco NY, Ruco
GA and DLJ Capital Funding, Inc., Morgan Guaranty Trust
Co. of New York and Mellon Bank, N.A.
10.12 Subordination Agreement, dated as of July 31, 1998 by
Sybron Chemie Nederland B.V.
10.13 Subordination Agreement, dated as of July 31, 1998 by
Sybron Chemical Industries Nederland B.V.
20.1 Press Release dated July 31, 1998
Re: The Company's Purchase of Ruco.
20.2 Press Release dated August 7, 1998
Re: The Company's Adoption of Stockholder Rights Plan.
27 Financial Data Schedule
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<PAGE>
EXHIBIT INDEX
Exhibit Method of Filing
2.1 Capital Stock and Membership Interest *
Purchase Agreement, effective as of
July 31, 1998, by and among Sybron
Chemicals Inc., Louis T. Camilleri,
Anthony F. Forgione, Joseph Mitola,
and Joseph A. Ruffing, with exhibits:
A. Non-Competition Agreement, effec-
tive as of July 31, 1998, by and
among Sybron Chemicals Inc., Ruco
NY, Ruco GA and Anthony Forgione
(substantially similar agreements
with Messrs. Mitola, Camilleri
and Mitola not included).
B. Employment Agreement by and among
Ruco Polymer Corp., Ruco Polymer
Company of Georgia, LLC, Sybron
Chemicals Inc. and Anthony F.
Forgione, dated as of July 31,
1998, with exhibits (attached as
Exhibit 10.1).
C. Form Opinion of Jacobson,
Mermelstein & Squire, dated as of
July 31, 1998.
D. Amendment to Employment Agreement
of Michael J. McCann and Waiver of
Certain Rights Thereunder, dated as
of July 31, 1998.
4 Rights Agreement, dated as of August 7, (2)
1998, by and between Sybron Chemicals
Inc. and the Rights Agent, with exhibits
(incorporated herein by reference to
Exhibit 1 to the Registration Statement
on Form 8-A, filed on August 14, 1998
with the Securities and Exchange Commission).
10.1 Employment Agreement by and among Ruco *
Polymer Corp., Ruco Polymer Company of
Georgia LLC, Sybron Chemicals Inc. and
Anthony F. Forgione, dated as of July 31,
1998, with material exhibits:
C. Bonus Incentive Plan for Mr. Forgione.
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<PAGE>
10.2 Credit Agreement, dated as of July 31, *
1998, by and among Sybron Chemicals
Inc., DLJ Capital Funding, Inc., Morgan
Guaranty Trust Company of New York and
Mellon Bank, N.A.
10.3 Promissory Notes, dated as of July 31, *
1998, by Sybron Chemicals Inc. in
favor of DLJ Capital Funding, Inc.,
Morgan Guaranty Trust Company of New
York and Mellon Bank, N.A.
10.4 Security Agreement, dated as of July 31, *
1998, among Sybron Chemicals Inc. and
Mellon Bank, N.A.
10.5 Trademark Security Agreement, dated as *
of July 31, 1998, among Sybron
Chemicals Inc., the Subsidiary Guarantors
to the Credit Agreement, and Mellon Bank,
N.A. re: Sybron Chemicals Inc.'s trademarks
and licenses.
10.6 Trademark Security Agreement, dated as of *
July 31, 1998, among Sybron Chemicals
Inc., the Subsidiary Guarantors to the
Credit Agreement, and Mellon Bank, N.A.
re: Ruco NY's trademarks and licenses.
10.7 Trademark Security Agreement, dated as of *
July 31, 1998, among Sybron Chemicals
Inc., the Subsidiary Guarantors to the
Credit Agreement, and Mellon Bank, N.A.
re: Ruco GA's trademarks and licenses.
10.8 Patent Security Agreement, dated as of *
July 31, 1998, among Sybron Chemicals
Inc., the Subsidiary Guarantors to the
Credit Agreement, and Mellon Bank, N.A.
re: Sybron Chemicals Inc.'s patents and
licenses.
10.9 Patent Security Agreement, dated as of *
July 31, 1998, among Sybron Chemicals
Inc., the Subsidiary Guarantors to the
Credit Agreement, and Mellon Bank, N.A.
re: Ruco NY's patents and licenses.
10.10 Patent Security Agreement, dated as of *
July 31, 1998, among Sybron Chemicals
Inc., the Subsidiary Guarantors to the
Credit Agreement, and Mellon Bank, N.A.
re: Ruco GA's patents and licenses.
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<PAGE>
10.11 Subsidiary Guaranty Agreement, dated as *
of July 31, 1998, by and among Sybron
Chemical Holdings Inc., Ruco NY, Ruco
GA and DLJ Capital Funding, Inc.,
Morgan Guaranty Trust Co. of New York
and Mellon Bank, N.A.
10.12 Subordination Agreement, dated as of *
July 31, 1998 by Sybron Chemie Nederland B.V.
10.13 Subordination Agreement, dated as of *
July 31, 1998 by Sybron Chemical
Industries Nederland B.V.
20.1 Press Release dated July 31, 1998 *
Re: The Company's Purchase of Ruco.
20.2 Press Release dated August 7, 1998 *
Re: The Company's Adoption of Stockholder
Rights Plan.
27 Financial Data Schedule (1)
* Previously filed as an Exhibit to the Registrant's Quarterly
report on Form 10-Q for the quarter ended June 30, 1998 and
incorporated herein by reference.
(1) Filed electronically herewith.
(2) Previously filed as an Exhibit to the Company's Registration
Statement on Form 8-A, filed on August 14, 1998.
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<PAGE>
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.
SYBRON CHEMICALS INC.
/s/ Steven F. Ladin
Steven F. Ladin
Vice President, Finance and
Chief Financial Officer
Date: November 16, 1998
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<PAGE>
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