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Previous: BARR ROSENBERG SERIES TRUST, 485BPOS, 2000-05-01 |
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the fiscal year ended December 31, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _______ to _______
Commission File No. 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 Number)
Birmingham Rd., P.O. Box 66, Birmingham, NJ 08011
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of exchange on which registered
------------------- ------------------------------------
Common Stock, par value $0.01 per share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities and 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K/A or any amendment to this
Form 10-K/A. [X]
The aggregate market value of the voting stock held by non-affiliates of the Registrant based upon the closing sale price of the Common Stock on March 15, 2000 as reported on the American Stock Exchange, was approximately $24,700,000. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. At March 15, 2000, there were 5,735,180 shares of the Registrant’s Common Stock outstanding.
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. This Annual Report contains information that is forward-looking, such as information relating to future capital expenditures and funding therefore; the Company’s market position and the growth potential of the Company and its markets; technological developments in the Company’s industry and the anticipated effect of those developments on growth prospects; the effect of recent acquisitions on the Company’s business and results of operations; the effects of foreign regulatory and currency exchange rate fluctuations; the Company’s ability to obtain raw materials and supplies; the outcome of environmental proceedings; the Company’s liability for environmental cleanup and the materiality of environmental cleanup costs; the adequacy and availability of the Company’s manufacturing capacity; capital expenditures; adequacy of cash and credit for future needs; product development plans; as well as the effects of future regulation and competition. Such forward-looking information involves important risks and uncertainties that could significantly affect expected results in the future and cause those results to differ 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 and changes in the competitive environment in which the Company operates.
TABLE OF CONTENTS
Item Page
PART I
1 Business................................................. 1
2 Properties............................................... 13
3 Legal Proceedings........................................ 14
4 Submission of Matters to a Vote of Security Holders...... 15
PART II
5 Market for the Registrant's Common Stock and
Related Stockholder Matters........................... 15
6 Selected Financial Data.................................. 17
7 Management's Discussion and Analysis of
Financial Condition and Results of Operations......... 18
8 Financial Statements and Supplementary Data.............. 25
9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................ 25
PART III
10 Directors and Executive Officers of the
Registrant............................................ 26
11 Executive Compensation................................... 28
12 Security Ownership of Certain Beneficial
Owners and Management................................. 31
13 Certain Relationships and Related
Transactions.......................................... 34
PART IV
14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K............................... 34
Signatures............................................... 37
(i)
PART 1
ITEM 1. BUSINESS
Sybron Chemicals Inc. (the “Company”) is a leading international developer, producer and marketer of specialty chemicals utilized primarily in the textile wet processing, coatings, adhesives, plastics and molded goods, and environmental products and services markets. The Company focuses on using proprietary technology to provide value-added solutions to customer problems through innovative, high quality products and intensive customer service. The Company’s products provide critical performance attributes that enhance the value of its customers’ products while representing only a small portion of the customers’ total costs. The Company’s three operating segments, Textile Chemical Specialties, Polymer Intermediates and Environmental Products and Services, accounted for 49.1%, 32.2% and 18.7%, respectively, of total sales for 1999.
The Company’s Textile Chemical Specialties segment products are used in the wet processing of fabrics made from natural and synthetic fibers to enhance the aesthetic and physical characteristics of such fabrics.
The Company’s subsidiaries, Ruco Polymer Corporation (“Ruco NY”) and Ruco Polymer Company of Georgia, LLC (together with Ruco NY, “Ruco”), constitute the Company’s Polymer Intermediates segment. 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. Ruco’s polymers are used in products that are sold into a variety of end-use markets, including the appliance, automotive and architectural industries.
The Company’s Environmental Products and Services segment products include ion exchange resins for use in home water softening/conditioning and industrial water treatment; biochemicals for treating industrial municipal and sanitary waste, contaminated soil and groundwater and golf turf; and specialty products and services which includes a line of proprietary organic chemicals, specialty cross linking and binding agents and the performance of custom and toll manufacturing services for major chemical companies.
The Company offers over 1,500 products which are sold to over 6,000 active customers through more than 20 locations worldwide. The Company possesses numerous customized and proprietary formulations with unique performance characteristics designed to address specific customer needs. The top 10 customers accounted for approximately 17.2%, 11.7% and 12.9% of sales in 1999, 1998 and 1997, respectively. The largest customer in each such year accounted for less than 5% of consolidated sales.
The Company, a Delaware corporation formerly known as Sybron Chemical Industries Inc., is the successor to a business established in the 1920‘s. That business became a specialty chemical company (the “Sybron Chemical Group”) in the 1960‘s under the ownership of Sybron Corporation. The Company acquired the Sybron Chemical Group from Sybron Corporation in 1987.
The Company uses proprietary technology to provide value-added solutions to customer problems through innovative, high quality products and intensive customer service. Management believes that the Company’s products provide critical performance attributes which enhance the value of its customers’ products while representing only a small portion of the customers’ total product costs. The Company’s extensive field sales force and marketing representatives, most of whom have had direct working experience in the industries they service, function as applications engineers. They work in conjunction with the Company’s research groups and customers to develop and sell products and applications know-how to meet customers’ individual needs.
The following table sets forth the Company’s sales, operating income, operating income as a percentage of sales and identifiable assets by segment for the periods indicated:
Year ended December 31,
(in thousands, except percentages)
1999 1998 1997
Sales
Textile Chemical Specialties ............. $132,118 $139,581 $133,452
Polymer Intermediates .................... 86,567 34,162
Environmental Products and Services ...... 50,438 49,079 55,362
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Total .................................. $269,123 $222,822 $188,814
======== ======== ========
Operating Income
Textile Chemical Specialties * ........... $ 562 $ 13,073 $ 16,697
Polymer Intermediates .................... 11,415 3,517
Environmental Products and Services ...... 5,806 4,747 5,154
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Total * ................................ $ 17,783 $ 21,337 $ 21,851
======== ======== ========
Operating Income as a Percentage of Sales
Textile Chemical Specialties * ........... 0.4% 9.3% 12.5%
Polymer Intermediates .................... 13.2% 10.3%
Environmental Products and Services ...... 11.5% 9.7% 9.3%
Total * ................................ 6.6% 9.6% 11.6%
Identifiable Assets
Textile Chemical Specialties ............. $100,238 $113,418 $118,299
Polymer Intermediates .................... 121,830 121,817
Environmental Products and Services ...... 35,063 35,049 31,934
------ ------ ------
Total .................................. $257,131 $270,284 $150,233
======== ======== ========
*Includes a non-recurring charge of $10,954 in the fourth quarter of 1999 to reflect the Company’s assessment that certain intangible assets related to the garment processing chemicals business have been permanently impaired as a result of long-term changes in the industry.
All other financial information about business segments and foreign operations is included in Items 7 and 8 to this Annual Report on Form 10-K/A and is incorporated herein by reference.
Unless noted otherwise, market share estimates contained in this Annual Report have been developed by the Company from internal sources and no assurances can be given regarding the accuracy of such estimates.
The Company’s textile chemical specialty products business consists of textile chemicals and related organic products. The following table sets forth net sales by product line for the years indicated:
Years ended December 31,
Product Line 1999 1998 1997
(in thousands)
Textile Chemicals $122,091 $133,045 $ 126,551
Organics 10,027 6,536 6,901
$132,118 $139,581 $133,452
Textile Chemicals. The Company’s textile chemical products are used in the largest segment of the textile chemical specialties industry, wet processing, and are designed to improve the wet processing and enhance the aesthetic and physical characteristics of carpets, fabrics and garments made from natural and synthetic fibers. The Company manufactures products that are utilized for the preparation, dyeing, finishing and printing in the wet processing area of carpets, fabrics and garments. For example, the Company manufactures products that make whites “whiter” on bleaching, provide wrinkle resistance to fabrics, provide level and increased yield in dyeings, greater stain resistance to carpet and allow high-speed machines to print intricate patterns on carpets.
The textile industry is characterized by constant developments and changes in textile fibers, fashions, manufacturing processes and regulatory requirements, which create a continuing need for new chemical formulations. The Company capitalizes on these changing industry dynamics through an ongoing and proactive process of research and development, its focus being on value-added products and growing international operations.
The textile manufacturing industry in Europe tends to be characterized by producers that are smaller and more oriented to fashion and quality than the producers in the U.S. European customers rely, to a large extent, on the expertise and product development capabilities of their suppliers of dyehouse products. As a result, the Company believes that its technological capabilities and customer support services have contributed to its growth and have helped gain it a significant share of the dyehouse products market in Europe.
The U.S. textile chemicals market in which the Company competes is highly fragmented and, according to industry estimates, is in excess of $700 million. U.S. textile mills purchase their preparation and dyeing chemicals from large dyehouse suppliers and many specialty chemical companies. Products sold by the Company in these market areas include surfactants for wetting agents and scouring to remove impurities, peroxide stabilizers for use in bleaching, auxiliaries to increase dye yield and level dyed shades, buffers for pH control and chemical agents that prevent dye from washing out or degrading.
A few large suppliers of commodity products, which include glyoxal and melamine resins and acrylic polymers, dominate the fabric finishing market segment. The Company participates in the higher value-added segment as a supplier to special niche areas which include high performance permanent press resins, hand modifiers (for textile products such as acetate linings, nylon active wear, and high end lace material), softeners to achieve both a silky touch and improved physical characteristics, and stain blockers to provide greater stain resistance and printing for carpet. In Europe, the Company also has developed proprietary technologies and substantial market share in the high quality fabric and carpet printing industry.
The Company serves its customers primarily through its direct sales forces throughout North America and Western Europe, which is supplemented by a network of distributors and agents in Eastern Europe and the Middle East. The Company also services the Canadian, Mexican, Argentinean and Colombian markets through its own local organizations in these countries, and uses various agents and licensees to access other Latin American markets. The company serves the Asian textile chemical market from its manufacturing facility in Taiwan and its sales offices in Korea, China and Hong Kong. The Company accesses other Asian markets through a number of agents and distributors in the region. The Company also services the South African textile market through a direct sales force.
Organics. The organics product line was developed to capitalize on the Company’s proprietary manufacturing technology in the areas of quaternization, alkylation and esterification (typical organic synthesis reactions used to make a variety of industrial chemical products). Products produced from these and other types of reactions are now sold for use as phase transfer agents, surfactants and intermediates for textile, cosmetic and various industrial applications. The Company’s distillation capabilities enable the products to be purified to the exact specifications demanded by these industries. Many of the chemicals produced and sold by this unit serve as raw materials for the formulations sold by the textile groups. Therefore, the organics product line represents both a vertical integration and a branching out into new markets. The demand for the Company’s technology in these areas has allowed its Wellford, South Carolina plant to utilize excess capacity and has enabled the Company to expand its capabilities and increase its overall margins. Clients for these services include some of the largest chemical companies in the U.S.
The Company’s Polymer Intermediates segment consists primarily of Ruco, which was acquired by the Company in 1998. Ruco is a leading polymer intermediates company which produces and sells polyester polyols, polyester powder coating resins, polyurethane latexes and specialty polymers used in the production of coatings, plastics and adhesives. The segment also includes the Company’s toner polymer business which manufactures chemicals for use as binders in reprographic toners. Ruco services customers in North America through a direct sales force, focusing on working closely with customers to design value-added applications and develop new products to meet customer needs.
Powder Coatings. Ruco’s powder coating resins are custom designed to provide specific performance characteristics and are used in the formulation of coating products. Ruco’s powder coating resins are used to produce a durable, high quality finish in multiple industries and end-use product applications. The major industrial markets that use powder coatings are the appliance, automotive and architectural and building markets. Ruco’s powder coating products are sold under brand names well known in the markets it serves.
Management believes Ruco’s powder coating business has strong growth potential. Powder coating resins are increasingly displacing liquid coating systems because they are more cost efficient and environmentally friendly. The driving force in the U.S. for the rapid growth of powder coatings is increasing pressure from federal, state, and local legislation to reduce volatile organic compounds. In Europe, growth in this market is driven by environmental regulations that are even more stringent than those in the U.S. The Company has minimal sales in the European market but believes it has significant growth opportunities available to it. Polyester powder coating systems are environmentally friendly and have excellent end-product characteristics, including resistance to corrosion, heat, impact, abrasion, fading from sunlight and extreme weather conditions on metallic substrates such as appliances and automobiles. In addition to performance characteristics, powder coatings also offer certain cost advantages. Because powder coatings are dry, up to 98% of powder overspray can be readily removed and reused. The waste that results from the application process is negligible, and can be disposed of easily and economically.
The powder coatings market in North America has grown at a compound annual rate of approximately 12% since 1986. The European market is significantly larger than the North American market, however, management believes that it will not grow as rapidly as the North American market since powder coating systems are already widely used in Europe. Compared to the general paint and coatings industry, which tends to track gross domestic product (GDP) growth, the powder coatings segment is a fragmented and rapidly growing niche market within the coatings industry.
The dominant application and substrate for powder coatings is on metals, which most readily conduct the static electric charge necessary for the adhesion of the coating to the metal and can withstand the high temperature curing processes. Technology exists and is being refined which will allow powder coatings to be more generally used on non-metal surfaces at lower cure temperatures. Improvement of the powder coating application technology is anticipated to result in enhanced growth prospects. Technological improvements will allow the use of powder coatings on non-metallic surfaces such as wood and plastic that could not otherwise withstand the higher cure temperatures used on metal substances.
Polyester Polyols. Ruco’s polyester polyol products are custom designed for use in the production of high solids coatings, thermoplastic urethanes and castable plastic parts used by the appliance, automotive and architectural industries with multiple end-use product applications. Ruco’s polyester polyol products are sold under brand names well known in the markets it serves.
The Company focuses on non-foam applications of polyester polyols, which typically command higher margins than foam applications. The Company intends to continue to strengthen its market position and product offerings through research and development and product introduction. Recent new products include polyester polyols for high solids adhesives and automotive cast urethanes, high molecular weight polyesters, weatherable polyesters (UV and water resistant), water dispersible polyester resins and polyesters for reactive hot melts.
Latex and Other Specialties. In addition to its powder coating resins and polyester polyol capabilities, Ruco produces polyurethane latexes and custom manufactures specialty resin and polyurethane products and toll manufactures products for major companies. Polyurethane latexes are predominantly used by Ruco’s customers for fiberglass reinforced plastic moldings.
The Company’s environmental products and services segment consists of ion exchange resins for use in home water softening and conditioning and industrial water treatment; biochemicals for use in improving the vigor of turf grasses and treating industrial and sanitary waste, contaminated soil and groundwater; and specialty polymers.
Ion Exchange Resins. Ion exchange resins are solid chemical compounds, generally in bead form, that are used primarily for the softening and demineralization of water and the removal of contaminants from water and other fluids. The ion exchange resin business is segmented in two distinct markets, industrial and household. Based on industry publications, the Company estimates the total U.S. market for ion exchange resins in 1999 to be in excess of $165 million. Management believes that its products and technical services have achieved a higher degree of technological and regulatory acceptance than those of its direct competitors. The Company’s ion exchange products are sold under the IONAC® tradename.
The industrial ion exchange water treatment market involves the demineralization of incoming water for high-pressure boilers and the purification of process water and other fluids. The use of untreated boiler water causes scaling of the heat exchangers which, in turn, leads to loss of efficiency or damage to costly turbine blades. Treatment of water with cation and anion exchange resins is required to reduce such risks. Electrical utilities are the largest industrial resin end users. Generally, demineralization by ion exchange resins has been declining as the usage of reverse osmosis membranes has increased. Also, resins are lasting longer before changeout. Other major industrial end users include large water users such as paper mills, refineries, and petrochemical plants and those industries requiring a high level of water purity, such as semi-conductor manufacturers and laboratories. A market exists in trailers containing ion exchange equipment that provide temporary on-site water treatment to various industries and utilities. The service deionization business, which provides on-site water treatment to a number of businesses, such as the electronics industry, also continues to grow. The Company’s industrial ion exchange resins are sold to approximately 150 customers.
A three-tiered channel of distribution exists in the U.S. industrial water treatment market. Resins for water treatment are sold directly to end-users by the resin manufacturer, to original equipment manufacturers (“OEMs”) for use in new equipment, and to both OEMs and distributors for resale to replace resins in existing equipment. The Company has developed close working relationships with major OEMs and selected distributors based on strong technical support and customer service. The ion exchange sales force, comprised of chemists and engineers, also maintains an active end user contact program through which members of the sales force act as advisors on matters related to the various needs for quality water. This key customer service aspect of the Company’s marketing strategy has enabled the Company to have its resins specified by numerous end users.
In addition to the industrial market, the Company provides cation exchange resins to the U.S. household water softening market. The Company believes that the market for household water treatment products is positioned for growth in the coming years, as the concern for water quality continues to grow. The Company’s main softening resins are sold directly to water softening equipment manufacturers such as Culligan International, a subsidiary of United States Filter Corporation, to whom the Company has been a major supplier for over 30 years.
The ion exchange business requires significant investment in production facilities as well as specialized expertise in product synthesis, applications and customer support. As a result, it is difficult for companies not presently manufacturing ion exchange resins to enter this market.
Biochemicals. The Company’s biochemical products are used in the operation of household and commercial septic systems; the reduction of fat and grease in places such as household drains, retention ponds and restaurant grease traps; the treatment of industrial and municipal wastewater; the elimination of hazardous contaminants in soil and ground water caused by spills and leaking underground storage tanks; and golf turf grasses. The Company expects these markets to experience growth due to the increasing emphasis on treating waste problems utilizing environmentally safe methods and minimizing the quantity of waste for disposal.
The biochemicals business supplies selectively adapted bacterial strains under the BI-CHEM® trade name. In the biodegradation process, bacterial strains, which are developed under laboratory conditions through a process of natural selection and adaptation, reduce or eliminate specific contaminants by breaking them down into harmless components such as carbon dioxide and water. The Company’s biochemical products are based on naturally occurring microorganisms already present in the environment. The Company’s primary expertise is in isolating, selecting, adapting and growing organisms so they will degrade specific hazardous or toxic organic compounds at a much faster rate than would otherwise occur with indigenous organisms under normal conditions.
For over twenty years, the Company has served the on-site waste treatment market (domestic and institutional septic systems). Over the past few years, the Company has expanded its presence in this market segment through the introduction of biological formulations for institutional and household utilization, such as bathroom and carpet deodorizers as well as fat and grease digesters for unclogging drains and pipes in bathrooms, kitchens and fast food restaurants. The Company supplies a biologically active formulation to The Clorox Company for use in Liquid Plumr®, their biological drain maintenance and septic products. This product, which eliminates deposit buildup in drain lines and prevents its recurrence, has demonstrated technical superiority since its introduction. The Company also supplies a biologically active formulation designed to enhance septic tank performance. This product is being marketed by Clorox with the Company’s formulation. The Company believes that its septic tank product is superior to other similar products currently sold in the market place and that the growth potential for septic treatment products is significant. Through the acquisition of certain operating assets, not including manufacturing facilities of Green Releaf Biotech, Inc. in February 1999, the Company has entered into the sale of microbial based plant growth enhancers for the golf turf industry. The use of traditional chemical products in that market today amounts to over $500 million in sales.
Specialty Polymers. This product line was developed to capitalize on the Company’s proprietary manufacturing technology in the areas of quaternization, alkylation and esterification (typical organic synthesis reactions used to make a variety of industrial chemical products). Products produced from these and other types of reactions are now sold for use as phase transfer agents, surfactants and intermediates for textile, cosmetic and various industrial applications. The Company’s distillation capabilities enable the products to be purified to the exact specifications demanded by these industries. Many of the chemicals produced and sold by this unit serve as raw materials for the formulations sold by the Textile Chemicals segment. The demand for the Company’s technology in these areas has allowed its Wellford, South Carolina plant to efficiently utilize capacity and has enabled the Company to expand its capabilities and increase its overall margins. Clients for these services include some of the largest chemical companies in the U.S.
At December 31, 1999, the Company had 913 employees worldwide, of whom 69% were salaried employees and 31% were hourly employees, with 112 employees in management and administration, 270 in sales and marketing, 74 in engineering and research, and 457 in production. The hourly employees at the Company’s Birmingham, New Jersey facility are covered by collective bargaining agreements with two unions that expire on April 12, 2002. The hourly and analytical employees at the Hicksville, New York facility are covered by collective bargaining agreements. These labor agreements will expire on June 28, 2002 and December 22, 2000, respectively. These labor contracts provided for small rate increases and implemented “Gain Sharing”, in which employees’ participate in cost reductions they create. Employees at the Ede, Holland facility are all members of national unions, which is customary in Holland. The Company considers its relations with its union and non-union employees to be satisfactory.
A significant portion of the Company’s operations are located outside the U.S., primarily in Western Europe. International operations and business expansion plans are subject to numerous additional risks, including the impact of foreign government regulations, currency fluctuations, political uncertainties and differences in business practices. There can be no assurance that foreign governments will not adopt regulations or take other actions that would have a direct or indirect adverse impact on the business or market opportunities of the Company in such countries. Furthermore, there can be no assurance that the political, cultural and economic climate outside the U.S. will be favorable to the Company’s operations and growth strategy.
In addition, the value of the Company’s investment in a subsidiary is partially a function of the currency exchange rate between the dollar and the applicable local currency. In addition, the Company is generally prohibited by the terms of its banking arrangements from executing hedge transactions to reduce its exposure to foreign currency exchange rate risks. Accordingly, the Company may experience economic loss and a negative impact on earnings with respect to its holdings solely as a result of foreign currency exchange rate fluctuations, which include foreign currency devaluations against the dollar. The countries in which the Company’s subsidiaries now conduct business generally do not restrict the repatriation or conversion of local or foreign currency; however, there can be no assurance this situation will continue.
For the fiscal years 1999, 1998, and 1997, approximately 34%, 40% and 46%, respectively, of the Company’s net sales were to customers outside the United States, predominantly in Western Europe, with most of the balance in Canada, Mexico and the Far East.
For the fiscal years 1999, 1998 and 1997, approximately 83%, 82% and 73%, respectively, of the Company’s identifiable assets were in North America. The remainder of the Company’s identifiable assets were predominantly in Western Europe although the Company does lease small production facilities in Taiwan and South Africa.
For the fiscal years 1999, 1998 and 1997, the Company derived approximately 45%, 45% and 45%, respectively, of its operating income from its North American operations. The balance of the Company’s operating income was principally derived from the Company’s European subsidiaries.
The Company purchases, both at spot prices and under contracts, various raw materials including caustic soda, sulfuric acid, styrene, surface active agents, adipic acid, terephthalic acid, neopentyl glycol and other glycols from a number of suppliers and does not rely on a sole source to any material extent. Management does not foresee any significant difficulty in obtaining necessary raw materials or supplies.
Each of the Company’s individual business groups has its own dedicated research and development activities. The Company’s research and development in textile chemicals has created several new products in recent years. Products developed include: environmentally friendly dye machine cleaners, EnviroShine for the interior and SurfcleanTM for the exterior; Ultralux, an innovative non-yellowing softener for unique fabric finishing; Astralplush® for the bulking of polypropylene and polyester fiber to impart a more luxurious hand; Astralprint® which greatly improves dye fastness on pigment printed fabrics; Tanaprint® used in high speed carpet printing machines; Tanacid® NA, an environmentally friendly replacement for acetic acid; Tanede Nova, an environmental friendly surfactant free detergent; Tanaterge® Rex, a mineral based post scouring agent for reactive dyes; and Plexene®, an environmental friendly biopolymer for Ca-dispersing.
Research and development efforts for the polymer intermediates business are focused on both improving existing products to meet new market requirements and partnering with selected companies to develop new products for new and/or existing applications. In recent years, new resins for color toners were developed along with polyester for high molecular weight adhesives. Also, several new products used to make toners for desktop laser printers were developed and introduced into the toner polymer product line.
The research effort in ion exchange products is dedicated toward improving existing products and processes as well as new product development. Development was concluded during 1998 in a process to effectively produce solvent free cation ion exchange resins which are currently in demand. The Company was the first company to receive National Sanitation Foundation (NSF) certification for these types of resins.
Research efforts in the biochemical business focus on new products in the consumer, agricultural, industrial wastewater and institutional markets. In the consumer segment, the Company developed new and improved formulations for the improvement of on-site septic systems, drain maintenance, odor control and carpet care.
Research and development expenditures for 1999, 1998 and 1997 were $5.5 million, $4.2 million and $3.7 million, respectively.
As set forth more fully below, the Company has numerous competitors, a number of which have substantially greater financial and other resources than the Company. There can be no assurance that the Company will not encounter increased competition in the future.
Textile Chemical Specialties. The Company's major competitors in the U.S. are American Emulsions Company, Apollo Chemical Company, Calloway, Ciba Specialty Chemicals, Henkel Corp., Hight Point Chemical Company, Piedmont Chemical Industries Inc. and Virkler Chemical Company. In Europe, some of the major chemical and dye manufacturing companies, such as BASF, Bayer A.G., Ciba Specialty Chemicals, Clariant Ltd., Henkel and ICI are major competitors of the Company, as are some larger specialty chemical manufacturers such as Bohme, CHT, Lamberti, Rudolf and Rotta.
Polymer Intermediates. The Company's major competitors in the U.S. are large, multi-national chemical companies and include CK-Witco, UCB Chemicals and DSM.
Environmental Products and Services. The Dow Chemical Co., Purolite Corporation and Rohm and Haas Co. are the Company's major competitors in this segment. A few other companies, such as InterBio, Semco Corporation and a variety of smaller companies, grow and sell bacterial strains but management believes that the Company's products have achieved a higher degree of technological and regulatory acceptance than its direct competitors' products.
The manufacture of the Company’s products, and in some cases their storage, transportation and disposal, involve a number of environmental considerations. These activities are subject to federal, state, local and foreign laws and regulations concerning, among other things, solid and hazardous waste disposal, air emissions, waste water discharge, toxic substances and occupational safety. The Company routinely incurs costs to comply with these laws and regulations and believes that it will continue to do so, although these costs are not expected to be material to the conduct of its business. Violations of any of these laws and regulations, uncontrolled releases of toxic or hazardous materials into the environment or third party or government actions relating to environmental matters could expose the Company to significant liability. The Company believes that it has all the necessary permits to operate its plants and that it is in substantial compliance with current regulatory requirements material to the conduct of its business.
In connection with the acquisition of the Sybron Chemical Group from Sybron Corporation in 1987, (a) the Company agreed to assume all liabilities relating to environmental matters arising as a result of the conduct of the business of the Sybron Chemical Group, and (b) Sybron Corporation agreed to make available to the Company insurance coverage of Sybron Corporation that was in force during the time that the Sybron Chemical Group was part of Sybron Corporation. The Company has not reduced its environmental liabilities or recorded any assets related to potential insurance recoveries from any policies previously in force.
The Company has identified certain soil and groundwater contamination at its Birmingham, New Jersey facility. The Company has conducted extensive sampling plans for both soil and groundwater and has proposed a remedial action work plan (the “Work Plan”) to the New Jersey Department of Environmental Protection (“DEP”) related to the cleanup of the Birmingham facility. The DEP has approved the soil-related portions of the Work Plan. The Company has completed essentially all of the soil-related cleanup. The ground water remedial activities at the Birmingham facility are continuing.
The Company has identified certain soil and groundwater contamination at its facility in Wellford, South Carolina. The Company submitted a proposed sampling and testing program to the South Carolina Department of Health and Environmental Control (“DHEC”) for its review. The DHEC has approved the Company’s proposed action for the next phase of the investigation and remediation of potential groundwater contamination. The remedial activities related to this program are in progress at this time.
In 1998, the Company completed various environmental studies which identified the extent of soil and groundwater contamination at its manufacturing facility in Ede, Holland and other adjacent facilities owned by third parties. Based on these studies, a plan of remediation was prepared by an environmental consulting firm and was approved by the authorities. The remedial activities associated with that plan are in progress and will continue for some time into the future.
The Company’s Hicksville, New York site, which the Company acquired in the acquisition of Ruco NY in 1998, is listed on the Superfund National Priorities List (“NPL”) and on the State of New York’s inactive hazardous waste site list. Pursuant to an asset purchase agreement dated as of February 28, 1982 (the “1982 Agreement”), Occidental Chemical Corporation (“Occidental”), the owner and operator of the Hicksville, NY site prior to Ruco, has indemnified Ruco and its successors for damages that may arise directly or indirectly from historic contamination at or emanating from the site as defined in the 1982 Agreement (“Historic Contamination”).
Occidental has assumed responsibility for addressing Historic Contamination at or emanating from the Hicksville site pursuant to the 1982 Agreement, and has been cooperating with the United States Environmental Protection Agency (“EPA”). Occidental has remediated certain PCB contaminated soils at the Hicksville site. In a record decision issued by EPA, remedial measures estimated to cost $13 million to fully implement, including treatment of onsite groundwater contamination and onsite soil flushing, were selected for the Hicksville site. Occidental proposed that groundwater contamination be addressed as part of a broader groundwater remediation effort involving other companies in the area. The EPA is considering Occidental’s proposal. At the request of the EPA, Occidental also has evaluated a treatment system for groundwater that has migrated from the Hicksville site. The present value estimated cost of the installation and operation of this system is $7.3 million. Implementation of both the onsite and offsite treatment systems may result in reduced costs due to efficiencies.
In connection with the Ruco acquisition in 1998, the Company purchased $10 million in environmental insurance coverage to address certain contingencies arising from known and unknown contamination at the Hicksville site.
Management believes, based on present information available to it, including the indemnification from Occidental, Occidental’s cooperation with the EPA, and the environmental insurance coverage purchased by the Company, that the Company does not face any material environmental liability with respect to the Hicksville site. However, there can be no assurance that the Company will not be subject to liability relating to remediation of the site or liability for losses suffered by adjacent property owners or other third parties.
The Company has not identified any sites which may require remediation but which have not been cited specifically by regulatory authorities for noncompliance with environmental rules and regulations.
Although there can be no assurance regarding the outcome of environmental proceedings, the Company believes that it has made adequate accruals to cover all cleanup and other related costs with respect to environmental problems of which it is aware. During 1999, the Company received an insurance recovery of prior years’ environmental expense which was reflected in income. The Company believes that the environmental matters described above, individually or in the aggregate, will not have a material adverse effect on the financial position, capital expenditures, cash flow, operating results or competitive position of the Company.
The Company’s products are sold under a variety of trademarks and trade names. The Company owns all of the trademarks and trade names that the Company believes to be material to the operation of its business, including the BICHEM®, IONAC®, AURALUXTM, TANATEX®, JERSEY STATETM, BLUE-J®, Rucote®, Rucothane® and Ocean Wash® trademarks. The Company believes such trademarks have widespread commercial recognition in their respective industries. The Company also owns various patents and considers selected patents related to its textile chemicals and biochemicals to be of commercial significance. The Company does not believe any single patent is material to the operations of its business as a whole.
The Company’s largest production facility in Birmingham, New Jersey, is located on 75 acres of a 500-acre site owned by the Company. This facility is located in a rural area approximately 23 miles from Philadelphia, Pennsylvania where the Company produces two major product lines: ion exchange resins and specialty polymers. This plant accounted for approximately 14%, 15% and 19% of 1999, 1998 and 1997 total sales, respectively. The Company presently has no plans to sell or to develop its undeveloped real estate in New Jersey.
At December 31, 1999, the Company occupied seven other U.S. sites: (i) a 22 acre site owned in Wellford, South Carolina producing textile chemicals and organics, which accounted for approximately 19%, 21% and 24% of 1999, 1998 and 1997 total sales, respectively; (ii) a 16 acre site owned in Hicksville, New York, acquired in July 1998, producing polyester polyols, powder resins, polyurethane latexes, and polyurethanes, which accounted for approximately 16% of 1999 total sales; (iii) a 30 acre site owned in Columbus, Georgia, acquired in July 1998, which produces powder resins, which accounted for approximately 16% of 1999 total sales; (iv) a two-acre owned facility in Salem, Virginia producing biochemicals; (v) a five-acre owned facility in Salem, Virginia used for packaging and warehousing biochemicals; (vi) a two-acre leased facility in Dalton, Georgia used for warehousing textile chemicals; and (vii) a nine-acre site owned in Norwich, Connecticut producing textile chemicals.
The Company also owns a six-acre production center in Ede, Holland producing textile chemicals. This plant accounted for approximately 20%, 25% and 30% of 1999, 1998 and 1997 total sales, respectively. The Company also leases a small production facility in Taiwan. In 1996 the Company completed construction of a new production facility in Ocoyoacac, Mexico on land owned by the Company. Except as noted below, the Company has ample manufacturing capacity for most of its product lines for its current level of business including anticipated growth for at least the next two years. The Company has entered into an agreement with Dow Chemical Co. (“Dow”) whereby Dow supplies the Company its requirements for anion exchange resins. The Company expects new capacity to be needed in the next few years for solid products in the Polymer Intermediates business.
In addition to offices maintained at its production facilities, the Company leases sales office space in (i) Buenos Aires, Argentina, (ii) Vienna, Austria, (iii) Burlington, Canada, (iv) Hong Kong, China, (v) Shanghai, China, (vi) Bogota, Colombia, (vii) Oldham, England, (viii) Le-Peck, France, (ix) Lyon, France, (x) Marq-En-Baroeul, France, (xi) Krefeld, Germany, (xii) Rovello Porro (Como), Italy, (xiii) Yokohama, Japan, (xiv) Seoul, South Korea, (xv) Guimaraes, Portugal, (xvi) Moscow, Russia, (xvii) Barcelona, Spain, (xviii) Istanbul, Turkey and (xix) Elmwood Park, New Jersey. The Company’s office and warehouse space is currently adequate for its needs. The leases are for total periods of one to five years at commercial rates. Management believes that suitable equivalent facilities could be obtained in each of the cities in which the Company maintains offices.
Periodically, the Company is advised that it may be named as a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) or similar state statutes with respect to the transport and disposal of hazardous wastes. At present, the Company is a party in a legal action in the United States regarding a site never occupied by the Company or its predecessors. This claim relates to the disposition of waste occurring prior to the Company’s acquisition of the Sybron Chemical Group. In connection with that acquisition, the Company agreed to assume all liabilities relating to environmental matters arising as a result of the prior conduct of the business of the Sybron Chemical Group. The Company has not identified any sites which may require remediation but which have not been cited specifically by regulatory authorities for noncompliance with environmental rules and regulations.
The Hicksville site is listed on the NPL and on the State of New York’s inactive hazardous waste site list. Pursuant to the 1982 Agreement, Occidental, the owner and operator of the Hicksville site prior to Ruco, has indemnified Ruco and its successors for damages that may arise directly or indirectly from Historic Contamination at the Hicksville site and has been cooperating with the EPA.
There are also pending against the Company several claims and lawsuits arising in the normal course of business. Such claims and lawsuits include a trademark dispute and allegations of patent infringement, injuries from the inhalation of hazardous chemicals and breach of contract. The Company believes it has adequate insurance to cover any such claims subject to a self-insurance retention of $1 million.
There are pending against Ruco several pre-acquisition claims and lawsuits arising in the normal course of business. The Company believes that Ruco has adequate insurance to cover any such claims. In addition, pursuant to the Purchase Agreement, the sellers agreed to indemnify the Company for liabilities that may arise out of certain of the pending lawsuits.
The Company has outstanding several claims and lawsuits arising in the normal course of business against various other parties.
The Company believes that the legal proceedings described above, individually or in the aggregate, will not have a material adverse effect on the financial position, cash flow or operating results of the Company.
Not applicable.
Since its inception the Company has not paid any dividends on its Common Stock (the “Common Stock”). Under the terms of the Credit Facility, as hereinafter defined, the Company is required to comply with certain debt covenants which require certain levels of cash flow and equity to be maintained. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Annual Report and Note 9 to the Consolidated Financial Statements also contained herein. The payment of any future dividends will be at the discretion of the Company’s Board of Directors and will depend upon, among other factors, the Company’s earnings, financial condition, cash flow and the covenants contained in the Credit Facility. The Company has no present intention to pay cash dividends on its Common Stock.
Based upon record ownership as of March 15, 2000, the approximate number of record holders of the Common Stock is 550. A significant number of shares of the Common Stock are held in street name by various institutions for the benefit of their clients.
The Common Stock began trading on The American Stock Exchange (“AMEX”) under the symbol “SYC” on October 10, 1996. Prior to October 10, 1996, the Common Stock traded on The Nasdaq National Market under the symbol “SYCM”. The following table sets forth the high and low sale prices of the Common Stock as reported by AMEX for each of the quarters indicated.
1999 High Low
First Quarter...................................... $14 13/16 $12
Second Quarter..................................... 20 1/2 13
Third Quarter...................................... 17 3/4 15 1/4
Fourth Quarter..................................... 15 1/4 11
1998 High Low
First Quarter...................................... $37 $33 1/8
Second Quarter..................................... 35 1/4 29 3/4
Third Quarter...................................... 32 15
Fourth Quarter..................................... 21 11 1/4
The following selected financial data has been derived from the Company’s annual financial statements and should be read in conjunction with the consolidated balance sheet at December 31, 1999 and 1998 and the related consolidated statements of income and of cash flows for the three years ended December 31, 1999 and notes thereto. See Item 8, Financial Statements and Supplementary Data, contained in this Annual Report.
Year Ended December 31,
-----------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands, except share and per share amounts)
Statement of Operations:
Net sales $269,123 $222,822 $188,814 $174,346 $167,807
Operating income (1) 17,783 21,337 21,851 16,306 13,481
Income before extraordinary item 2,991 10,640 8,514 6,329
8,738
Extraordinary item (2) -- (313) -- -- --
Net income 2,991 8,425 10,640 8,514 6,329
Income per share before extraordinary item
Basic $ .52 $ 1.53 $ 1.88 $ 1.51 $ 1.12
Diluted .52 1.49 1.84 1.50 1.12
Extraordinary item (2)
Basic -- $ (.06) -- -- --
Diluted -- (.05) -- -- --
Net income per share
Basic $ .52 $ 1.47 $ 1.88 $ 1.51 $ 1.12
Diluted .52 1.44 1.84 1.50 1.12
Weighted average shares outstanding
Basic 5,728,136 5,698,815 5,666,683 5,650,560 5,650,560
Diluted 5,759,429 5,849,946 5,793,770 5,669,893 5,650,560
December 31,
------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands)
Balance Sheet Data:
Cash and cash equivalents $ 14,697 $ 14,966 $ 26,592 $ 14,909 $11,284
Working capital 58,658 51,954 43,431 38,667 38,495
Total assets 257,131 270,284 150,233 117,064 111,329
Long-term debt 128,531 136,008 27,390 17,787 22,532
__________
(1) Includes a non-recurring pre-tax charge of $10,954 in the fourth quarter of 1999 to reflect the Company’s assessment that certain intangible assets related to the garment processing chemicals business have been permanently impaired as a result of long-term changes in the industry. The after-tax charge amounted to $6,688 or $1.16 per share.
(2) The extraordinary item represents the loss, net of taxes and other expenses, on the extinguishment of certain long-term debt prior to scheduled maturity.The following table sets forth certain information about the Company’s three business segments.
Year Ended December 31,
---- ----- ------------
1999 1998 1997
---- ---- ----
%of %of % of
Amount Sales Amount Sales Amount Sales
------ ----- ------ ----- ------ -----
(dollar amounts in thousands)
Sales:
Textile Chemical Specialties $132,118 49.1% $139,581 62.7% $133,452 70.7%
Polymer Intermediates 86,567 32.2 34,162 15.3 --
Environmental Products and Services 50,438 18.7 49,079 22.0 55,362 29.3
Total $269,123 100.0% $222,822 100.0% $188,814 100.0%
Cost of
Sales: $76,574 58.0% $83,149 59.6% $77,556 58.1%
Textile Chemical Specialties
Polymer Intermediates 68,012 78.6 28,352 83.0 --
Environmental Products and 32,939 65.3 32,397 66.0 37,624 68.0
Services
Total $177,525 66.0% $143,898 64.6% $115,180 61.0%
Gross Margin:
Textile Chemical Specialties $55,544 42.0% $56,432 40.4% $55,896 41.9%
Polymer Intermediates 18,555 21.4 5,810 17.0 --
Environmental Products and Services 17,499 34.7 16,682 34.0 17,738 32.0
$91,598 34.0% $78,924 35.4% $73,634 39.0%
Total
Operating Expense:
Textile Chemical Specialties * $54,982 41.6% $43,359 31.1% $39,199 29.4%
Polymer Intermediates 7,140 8.2 2,293 6.7 --
Environmental Products and Services 11,693 23.2 11,935 24.3 12,584 22.7
Total $73,815 27.4% $57,587 25.8% $51,783 27.4%
Operating
Income: $ 562 0.4% $13,073 9.3% $16,697 12.5%
Textile Chemical Specialties *
Polymer Intermediates 11,415 13.2 3,517 10.3 --
Environmental Products and Services 5,806 11.5 4,747 9.7 5,154 9.3
Total $17,783 6.6% $21,337 9.6% $21,851 11.6%
*Includes a non-recurring pre-tax charge of $10,954 in the fourth quarter of 1999 to reflect the Company’s assessment that certain intangible assets related to the garment processing chemicals business have been permanently impaired as a result of long-term changes in the industry.
Sales in 1999 increased by $46.3 million from 1998, principally as a result of the inclusion of Ruco for the full year. Ruco Polymer Corporation and Ruco Polymer Company of Georgia LLC (“Ruco”), were acquired on July 31, 1998. Partially offsetting this increase was a reduction in North American sales of textile and garment processing products. Operating income, before a non-recurring write-down of $11.0 million, was $28.7 million, an increase of $7.4 million or 34.7% over 1998. The increase in operating profit is primarily the result of the inclusion for the full year of Ruco. The $11.0 million impairment charge reflects the Company’s assessment that certain intangible assets related to the garment processing chemicals business have been permanently impaired as a result of long-term changes in the industry. After the non-recurring write-down, operating profit decreased 16.7% to $17.8 million. The Company’s earnings per share, before the non-recurring write-down was $1.68 compared to $1.49, before the extraordinary item of $.05 per share in 1998, an increase of 12.8%. After the non-recurring write-down of assets in 1999, earnings per share decreased to $.52 per fully diluted share.
The Textile Chemical Specialties segment sales of $132.1 million for 1999 decreased by 5.3% from 1998. This decrease resulted primarily from the continued softness in the North American textile and garment markets and from a 6.2% reduction in the Dutch Guilder exchange rate compared to the U.S. dollar. Garment product sales in North America declined by $6.0 million or 33.4% primarily as a result of the rapid movement to low cost Latin American and Asian garment manufacturers, intense price competition and the impact of style changes from light colored denim to dark colors, which requires less of the Company’s enzyme products. Partially offsetting these declines were increased textile and garment chemical sales in Latin America and Asia. The Company has increased its focus on these expanding markets. Sales in Latin America increased by $1.0 million or 12.5%. Sales in Asia increased $1.8 million or 46.1% from 1998. U.S. based organic chemicals sales increased $3.5 million or 52.1% from 1998 due mainly to significant increases in toll manufacturing business.
The Polymer Intermediates segment sales of $86.6 million were $52.4 million higher than 1998. The increase reflects the seven extra months of Ruco sales, toner polymer volumes, which were not included in 1998, and annualized volume growth of 3.5% in 1999.
The Environmental Product and Services segment sales of $50.4 million were 2.8% higher than 1998. The increased sales reflect the acquisition of the Green Releaf product line for golf course turf treatment in the Biochemical business, increased aziridine and ion exchange product sales, offset by the elimination of toner polymer sales which were included in this segment in 1998. Ion exchange physical volumes increased by 11.4% reflecting somewhat improved industrial ion exchange market conditions in the U.S. and Far East.
The overall gross margin for 1999 was 34.0% versus 35.4% for 1998. The reduction was related to the increased sales in the Polymer Intermediates segment, which has a lower gross margin, with lower operating expenses, than the other segments. The gross margin in each of the three segments increased from 1998.
Gross margin for the Textile Chemical Specialties segment of 42.0% increased 1.6 percentage points from 40.4% in 1998. Margins in Europe were relatively smooth from the prior year. Decreased selling prices and unfavorable product mix were offset by favorable raw material prices. In North America, gross margin was also flat mainly as a result of reduced raw material costs, an increase in the sales and margin of organic chemicals, lower sales of garment processing chemicals, which have a lower margin, which were offset by slightly lower selling prices. Gross margin in Latin America increased by 7.5 percentage points mainly as a result of higher textile chemical product margins in Mexico. Margins in Asia were constant. Gross margin for organics products increased 8.0 percentage points on increased volumes of toll processing business.
Gross margin for the Polymer Intermediate segment of 21.4% increased 4.4 percentage points from 17.0% in 1998. The increase in margin is the result of reduced raw material costs, plant efficiencies and the addition of the higher margin toner polymer business, all of which offset sharp reductions in selling prices in this segment.
Gross margin for the Environmental Products and Services segment of 34.7% increased .7 percentage points from 1998. The increase is attributed to the inclusion in 1999 of the Green Releaf product line which has a higher gross margin than the other products in this segment. Gross margin from ion exchange product sales decreased by 1.0 percentage point as declining sales prices more than offset raw material savings. The gross margin percentage for specialty products declined with the inclusion of new aziridine product sales. These products are purchased in finished form and resold.
Operating expenses, excluding the non-recurring write-down of the garment assets, as a percent of sales decreased 2.4 percentage points in 1999. Operating expenses in 1999 of $73.8 million were impacted by the $11.0 million write-down of the garment processing intangible assets and by the receipt of an environmental insurance settlement of $2.1 million. Excluding these one-time items, operating expense of $64.9 million was 24.1% of sales, a decrease of 1.7 percentage points from 1998. The decrease is primarily attributable to the inclusion for the full year of lower operating expenses of Ruco. Operating expenses in the Textile Chemical Specialties segment, excluding the write-down of the garment assets were 33.3% of sales versus 31.1% in 1998. The increase is primarily related to increased selling and administrative costs in Latin America and Asia, as those operations have expanded consistent with the Company’s regional growth plans. Partially offsetting this increase is reduced selling costs in North America in recognition of this shrinking market. The Company is continuing to refocus its resources in recognition of the changing worldwide textile and garment markets. After adjusting for the one-time insurance settlement, operating expenses in the Environmental Products and Services segment were 1.9 percentage points higher than in 1998. Additional selling expenses related to Green Releaf direct sales force were responsible for the increase.
Other expense was $12.3 million for 1999 versus $6.5 million in 1998. The increase was primarily related to the increase in interest expense of $5.1 million associated with the acquisitions of Ruco and Ocean Wash in 1998. Additionally, there was a favorable foreign currency adjustment in 1998 not repeated in 1999 as the Korean Won strengthened against the U.S. dollar.
The Company’s provision for income taxes was computed using applicable prevailing income tax rates. The Company’s effective tax rate of 45.2% was 4.2% above 1998‘s effective rate principally as a result of the tax treatment of the garment product write-down.
1998 Compared to 1997The Textile Chemical Specialties segment sales for 1998 increased 4.6% over 1997. This increase resulted primarily from the Ocean Wash and Ivax acquisitions, which more than offset the continued soft conditions in the North American textile market where the Company had reduced sales of $5.2 million, and the unfavorable impact of a style change in the garment sector, from light colored denim to dark colors, which requires less of the Company’s enzyme products that create the stone-washed effect. Europe’s textile chemical sales for the year improved 1.5% in U.S. dollars, mostly due to increased sales in distributor countries. The Europe physical volume improvement of 2.3% was offset by the 1.6% negative effect of the continued stronger U.S. dollar versus the Dutch guilder for 1998. U.S. based organic chemicals sales volume decreased by approximately 4% due to expiring toll manufacturing contracts which were not renewed or replaced.
The newly formed Polymer Intermediates segment had sales of $34.1 million for the five months it was part of the Company, which was approximately 10% above Ruco’s results for the comparable pre-acquisition period in 1997. That increase was mainly a result of physical volume growth as prices declined by slightly more than 2%.
Sales in the Environmental Product and Services segment for 1998 decreased 11.3% due, in part, to the sale of the reverse osmosis membranes business in December 1997. The ongoing operations in this segment showed a decline of 6.1% versus 1997. This segment was negatively impacted in 1998 by the continued weak ion exchange industrial and household markets conditions in both the U.S. and Far East, with volume dropping 12.3%. Those decreases were partially offset by improvements in the toner, specialty polymer and biochemical product lines.
The overall gross margin for 1998 was 35.4% versus 39.0% for 1997. In the Textile Chemical Specialties segment, 1998 margin of 40.4% was 1.5 percentage points below the prior year level of 41.9%. Margins for North America/Asia were 2.3 percentage points below 1997, primarily due to the impact of the additional sales of the Ocean Wash products which carry overall lower margins, an approximate 2% drop in average U.S. selling prices, somewhat offset by lower raw material and fixed manufacturing costs. Margins in Europe remained steady from year to year. Organic margins were affected by the reduced volume without a corresponding decrease in fixed manufacturing costs.
Gross margin for the Polymer Intermediate segment, at 17.0%, is much lower than margins for the Company’s other segments, and was comparable to Ruco’s pre-acquisition performance. The lower gross profit margin is more than offset by lower operating expenses, producing very favorable operating income as discussed below.
The gross margin in the Environmental Products and Services segment for 1998 increased to 34.0% versus 32.0% for 1997. Overall, the period was positively impacted by the results of several strategic action plans which were set in motion in 1997, including (i) the entry into a ten-year supply agreement pursuant to which Dow Chemical Company (“Dow”) will provide the Company with substantially all of the Company’s anion exchange resin requirements; (ii) the switch from purchasing a major raw material in the polymer product line to manufacturing in-house; and (iii) the aforementioned divestiture of the reverse osmosis membrane business which carried substantially lower margins. In addition, in 1998, the biochemical product line showed improved margins due to increased volume and a favorable product/customer mix in France.
Operating expenses as a percent of sales decreased 1.6 percentage points to 25.8% in 1998, due to the lower operating cost of the Polymer Intermediates business offsetting increased operating costs (as a percentage of sales) over 1997 in the Company’s other segments. While sales volumes increased overall in the Textile Chemical Specialties segment, operating expenses grew at a higher rate and, as a percentage of sales, increased primarily due to the added costs for the Ocean Wash and Ivax acquisitions, higher legal expenses in the U.S. and increased administration and computer related costs in Europe. The lower sales volume caused the Environmental Products and Services segment expenses as a percent of sales to increase over the same period in 1997 despite a reduction of actual expenses.
The Company’s provision for income taxes was computed using applicable prevailing income tax rates. The Company’s effective tax rate of 41.0% for 1998 was essentially equivalent to 1997‘s rate of 41.1%.
Other expense was $6.5 million for 1998 versus $3.8 million in 1997. The increase was primarily due to the increase in interest expense of $ 4.1 million associated with the acquisition of Ruco and the refinancing of the Company’s debt. This was offset by a favorable currency adjustment difference between the two years of $1.1 million. This currency impact primarily resulted from the Korean won strengthening against the U.S. dollar, reversing part of the loss experienced in 1997. Also in 1997 the Company recorded expenses of $1.3 million related to the terminated merger transaction.
The manufacture of the Company’s products, and in some cases their storage, transportation and disposal, involve a number of environmental considerations. See Item 1 - Environmental Matters and Note 14 - Commitments and Contingencies, to the Company’s Consolidated Financial Statements contained in this Annual Report.
During 1999, 1998 and 1997 the Company spent approximately $523,000, $66,000 and $122,000, respectively, to identify and remediate certain soil contamination at its facility in Ede, Holland which existed at the time the Company acquired this facility from Sybron
Corporation. Approximately $523,000, $60,000 and $75,000 of the costs incurred in 1999, 1998 and 1997, respectively, were charged against amounts previously reserved.The cost of remediating contamination at the Company’s existing facilities is not expected to have a material adverse effect on the Company’s annual operating results, cash flow or financial condition. At December 31, 1999, the Company had reserves of approximately $1,455,000 to offset future environmental assessment and remediation costs.
Cash and cash equivalents of $14.7 million as of December 31, 1999 were $.3 million below the December 31, 1998 balance of $15.0 million. Cash generated from operations in 1999 was utilized to pay down long-term debt that is associated with the 1998 acquisitions of Ocean Wash and Ruco.
Operating activities generated net cash of $19.0 million in 1999 versus $4.8 million in 1998. The increase in cash generation resulted from increased net income, excluding the non-cash write-down of $11.0 million, the increase in non-cash amortization expense related to the 1998 acquisitions and to working capital changes. Accounts receivable balances increased by $6.7 million in 1999 reflecting the overall higher sales in the last quarter of 1999 and the relatively higher sales from Asia and Latin America which have longer payment terms. Accounts payable and accrued liabilities were relatively flat in 1999 versus the substantial reduction in payables in 1998 from the repayment of a foreign tax refund paid in error, pension funding, and payments of terminated merger agreement costs.
Net cash generated by operating activities in 1998 totaled $4.8 million versus $25.6 million in 1997. This was primarily the result of a substantial reduction in accounts payable and accrued expenses resulting from the return to the taxing authorities of an erroneous tax refund in the Netherlands, executive bonus payouts for 1997, annual pension funding and payments for the previously discussed terminated merger agreement. In addition, unusually high inventory and capital equipment purchases during the latter part of 1997 were paid for in 1998.
Net cash used by investing activities totaled $7.2 million in 1999 as compared with $128.5 million for 1998, mainly reflects the acquisitions of Ruco and Ocean Wash in 1998. The 1999 capital expenditures were primarily for replacing and maintaining existing Company assets. The 1998 capital expenditures included the purchase of land adjacent to the Ede, Holland manufacturing site.
Net cash used by investing activities totaled $128.5 million for 1998 as compared with $22.3 million for the comparable 1997 period. The year-to-year increase was primarily the result of the Ruco and Ocean Wash acquisitions, coupled with the purchase of the property adjacent to the manufacturing site in Ede, Holland.
Financing activities used $11.0 million in net cash during 1999 versus providing $111.6 million in 1998. The change was primarily due to the credit facility the Company entered into in connection with the acquisition of Ruco on July 31, 1998 and repayment of $9.3 million in maturities of that facility in 1999. The credit facility entered into in 1998 consists of a $40 million Revolving Credit Facility and a $145 million six-year term loan facility. As of December 31, 1999, the revolving credit facility was undrawn and the balance on the original $145 million term loan is $134.1 million. The current portion of this loan as of December 31, 1999 is $7.2 million.
Borrowings under the Credit Facility bear interest at a rate per annum equal to LIBOR plus a leveraged margin of 2.25%. The Company’s obligations under the Credit Facility are guaranteed by each of the Company’s present and future domestic subsidiaries. The Credit Facility and the guarantees thereof are secured by substantially all the assets of the Company and the Loan Guarantors and a pledge of all the capital stock of the Company’s domestic subsidiaries and 65% of the voting capital stock of the Company’s foreign subsidiaries.
In March 2000 the company amended (as more fully described in footnote 9) the credit facility to reduce current maturates in the next six years. The interest rate, restrictive covenants and certain other provisions were also amended.
During 2000, the Company believes its capital expenditures will be approximately $10 million. Approximately 41% of these expenditures will be for replacing and maintaining existing Company facilities and 59% will be for business expansion opportunities. Management believes cash flow from operations and available credit will be sufficient to finance operations, planned capital expenditures and debt service requirements for the foreseeable future.
The Company has 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 currencies. The Company’s Mexican and Colombian subsidiaries’ functional currency is considered to be the U.S. dollar because both countries have experienced high inflation and conduct a significant portion of their business in the U. S. dollar. The Company has a large manufacturing facility in Ede, Holland where chemicals are manufactured and sold either directly to customers or to various subsidiaries, which are principally in Europe. Overall, the Company recognized a negligible exchange gain in 1999, an exchange gain of $0.3 million in 1998, and an exchange loss of $0.8 million in 1997.
United States - Average selling prices in the U.S. decreased by approximately 2% during 1999. Raw material costs, for several of the company’s significant products, also declined during the year as the impacts of an aggressive internal program started in late 1998 were realized and lower crude oil prices, along with excess supply earlier in the year, resulted in an average reduction in petrochemical prices, which is now reversing.
Europe - Average selling prices in the Europe division’s textile chemical product line decreased by 6% during 1999. The majority of this decline is the result of the stronger dollar in relationship to the Dutch guilder. In the Textile Chemical Specialties segment, the Company is focusing on increasing market penetration in developing markets in Latin America, Asia, Eastern Europe and Northern Africa. In North America, as the textile and garment processing markets continue to decline, the Company is actively reducing fixed costs consistent with the market declines and selectively pursuing partnering arrangements. The Company plans to continue new product development including more environmentally friendly alternatives to existing products.
The Polymer Intermediates segment is expected to continue to experience rapid growth in the solid and liquid polymers applications, further penetration into the toner and laser printer markets, and continuing expansion of it’s product offerings to existing and new customers. The Company also plans to explore opportunities to enter international markets.
Growth opportunities in the Environmental Products and Services segment include: opportunities for aziridine based products; expansion of the biochemical waste treatment and consumer/institutional business in the U.S. and Europe; and expansion of Green Releaf golf turf treatment products.
In addition, the Company continues to actively pursue niche acquisitions that, together with synergies gained with the existing businesses, would provide both top and bottom line growth and accretive earnings per share.
The Consolidated Financial Statements and supplementary data as set forth in Item 14(a)(1) and (2).
The executive officers and directors of the Company, their ages and their positions are set forth below:
Name Age Position
Richard M. Klein....................... 62 President, Chief Executive
Officer and Director
Stephen R. Adler....................... 50 Vice President, Human Resources
Doug Brown............................. 46 President, Ruco Polymer
Intermediates
Peter de Bruijn........................ 51 Executive Vice President, Textile
Chemicals and Managing Director,
Europe
Steven F. Ladin........................ 53 Vice President, Finance
and Chief Financial Officer
Robert M. Parlman...................... 50 President, Textile Chemicals
John H. Schroeder...................... 49 Executive Vice President
Environmental Products and
Services and Director
Kirk P. Pond........................... 55 Director
Fred P. Rullo, Jr...................... 59 Director
Paul C. Schorr, IV..................... 32 Director
Dr. Klein has been a director of the Company and its President and Chief Executive Officer since its inception in 1987. Since 1969 and until July 1987, Dr. Klein served in various managerial positions with the Sybron Chemical Group, becoming its senior executive officer in 1978. He holds a Ph.D. in Chemistry from the University of Illinois. Dr. Klein currently serves as Chairman of the Board of Governors of the Synthetic Organic Chemicals Manufacturers Association (SOCMA), and is a director of Mannington Mills, Inc. He currently serves through appointment by Governor Christine Todd Whitman on the Board of the Commerce and Economic Growth Commission of New Jersey and as a member of the Prosperity New Jersey Commission and the New Jersey Economic Development Site Task Force. His term as director will expire in 2001.
Mr. Adler has been the Vice President, Human Resources for the Company and the Sybron Chemical Group since 1984.
Mr. Brown joined the Company in December 1999 as President, Ruco Polymer Intermediates. Prior to joining the Company, he was Vice President for the Structural Composites and Electronic Materials Business segment in Ciba Specialty Chemical's Polymer Division. Mr. Brown was employed with Ciba Specialty Chemicals from 1987 to December 1999. Prior to employment with Ciba Specialty Chemicals, Mr. Brown held positions with Montedison USA, C.H. Kline and Co. and the International Nickel Corp.
Mr. de Bruijn has served in various managerial positions within the Company and the Sybron Chemical Group since January 1972. In January 1995, he was promoted to Managing Director Europe Division with managerial responsibility for the Company’s textile chemical business in Europe and in 1998 he was appointed Executive Vice President, Textile Chemicals.
Mr. Ladin joined the Company in August 1998 as Vice President, Finance and Chief Financial Officer. He also holds the positions of Treasurer and Corporate Secretary. Prior to joining the Company, he was Controller of The DuPont Merck Pharmaceutical Company, which he joined on it's creation in 1991 after 14 years with E.I. DuPont Company, Inc., a leading international chemical company.
Dr. Parlman joined the Company in December 1998 as President, Textile Chemicals. Prior to joining the Company, he served as Vice President, General Manager for a Zeeland Chemicals Inc. subsidiary, and Vice President-Business Development of Cambrex Corporation. Prior to that, he was Vice President, Tretolite Division, Petrolite Corporation, with international responsibility for their oil field specialty chemicals business.
Mr. Schroeder has served in various managerial positions within the Company since 1983 and has been a director of the Company since 1992. He was promoted to Executive Vice President Environmental Products and Services in March 1996 with responsibility for all business activities for the Company’s Environmental Products and Services segment. His term as director will expire in 2002.
Mr. Pond has been a director of the Company since May 1998 and has been Chairman, President and CEO of Fairchild Semiconductor Corporation of Portland, Maine and a member of the office of the President of National since 1994. He also served in various management positions for the combined National and Fairchild Logic businesses since 1984. Mr. Pond currently serves as Chairman of Fairchild’s Board of Directors. He is a nominee for director at the 2000 Annual Meeting of Shareholders.
Mr. Rullo has been a director of the Company since February 1999. He is currently Vice Chairman of Naxcor Biotech. He also was Chairman, President and CEO of Freedom Chemical Company. Prior to that he was President of ABB Combustion Systems and Services, Executive Vice President and Director of Lyondell Petrochemical Company, Senior Vice President of Arco Chemical Company and was a director of Rexene Corporation. Mr. Rullo is currently Chairman and CEO of Penn Specialty Chemicals, Inc. and is currently director of Pro Mach, Inc., Naxcor, Pecora Corporation and Carolina Best Friend Pet Care, LLC. He is a nominee for director at the 2000 Annual Meeting of Shareholders.
Mr. Schorr has been a director of the Company since February 1997 and has been a Vice President of Citicorp Venture Capital Ltd. since 1996. Prior to joining Citicorp in 1996, Mr. Schorr was a consultant with McKinsey and Company, Inc. Mr. Schorr currently serves as a director of KEMET Corporation and Fairchild Semiconductor. His term as director will expire in 2001.
Each member of the Board of Directors who is not an employee of the Company is automatically granted options to acquire 4,000 shares of common stock on the first business day of each year at the current market price. In addition, during 1999 directors of the Company who were not employees or affiliates of Citicorp Investments Inc. were paid a standard fee of (a) $750 for each meeting of the Board of Directors that such director attends, and (b) $500 for each meeting of a committee of the Board of Directors that such Director attends. Such Directors are also entitled to reimbursement of reasonable travel expenses incurred while attending meetings of the Board of Directors or any of its committees.
The following table summarizes certain information for each of the last three fiscal years concerning the cash compensation paid by the Company, as well as certain other compensation paid to or accrued for 1999, 1998 and 1997, to the Company’s Chief Executive Officer and to each of the Company’s other four most highly compensated executive officers:
Annual Compensation Long Term Compensation
---------------------------------------- ----------------------
Awards
------
All
Other Other
Name and Annual Restricted Securities LTIP Compen-
Principal Salary Bonus Compensa- Stock Underlying Pay- sation
Position Year ($) ($) tion($) Award(s)($) Options outs($) ($)(4)
-------- ---- --- --- -------- ----------- ------- ------- ------
Richard M. Klein 1999 291,900 133,107(1) -- -- 32,320
President and Chief 1998 286,039 96,391(2) -- -- -- -- -- -- 45,154
Executive Officer 1997 272,500 339,736(3) -- -- -- 36,416
--
Anthony F. Forgione 1999 202,462 64,777(1) -- -- -- 17,252
President, Polymer 1998 80,769 7,580(2) -- -- -- -- 17,198
Intermediates 1997 Not employed by the Company -- -- -- -- --
--
Robert M. Parlman 1999 200,000 45,378(1) -- -- -- -- 14,335
President, Textile Chemicals 1998 16,667 -- -- -- -- -- 713
1997 Not employed by the Company -- -- -- -- --
Steven F. Ladin 1999 177,190 56,169(1) -- -- -- -- 56,498
Vice President, Finance and 1998 76,282 7,051(2) -- -- -- -- 9,156
Chief Financial Officer 1997 Not employed by the Company -- -- -- -- --
John H. Schroeder 1999 175,350 63,616(1) -- -- -- 18,608
Executive Vice 1998 175,449 41,877(2) -- -- -- -- 21,727
President, Environmental 1997 166,055 141,256(3) -- -- -- -- 18,968
Products and Services --
__________
| (1) Consists of bonuses earned during 1999 and paid in 2000 pursuant to the Company's Executive Bonus Plan (the "Bonus Plan"). These bonuses were paid in the form of Common Stock and cash in the following amounts: Richard M. Klein 7,046 shares of Common Stock and $27,417 cash, Anthony F. Forgione 3,443 shares of Common Stock and $13,132 cash, Robert M. Parlman 3,025 shares of Common Stock and $3 cash, Steven F. Ladin 3,098 shares of Common Stock and $9,699 cash and John H. Schroeder 3,059 shares of Common Stock and $17,731 cash. The closing price of the Common Stock on the date the Bonus Plan shares were issued was $15.00. For a description of the determination of the number of shares issued see: "Report of the Audit and Compensation Committee on Executive Compensation". |
| (2) Consists of bonuses earned during 1998 and paid in 1999 pursuant to the Company's Executive Bonus Plan (the "Bonus Plan"). These bonuses were paid in the form of Common Stock and cash in the following amounts: Richard M. Klein 7,711 shares of Common Stock and $3 cash, John H. Schroeder 3,350 shares of Common Stock and $2 cash, Steven F. Ladin 564 shares of Common Stock and $1cash and Anthony F. Forgione 0 shares of Common Stock and $7,580 cash. The closing price of the Common Stock on the date the Bonus Plan shares were issued was $12.50. For a description of the determination of the number of shares issued see: "Report of the Audit and Compensation Committee on Executive Compensation". |
| (3) Consists of bonuses earned during 1997 and paid in 1998 pursuant to the Company's Executive Bonus Plan (the "Bonus Plan"). These bonuses were paid in the form of |
| Common Stock and cash in the following amounts: Richard M. Klein 6,856 shares of Common Stock and $108,346 cash and John H. Schroeder 2,639 shares of Common Stock and $52,190 cash. The closing price of the Common Stock on the date the Bonus Plan shares were issued was $33.75. For a description of the determination of the number of shares issued see: “Report of the Audit and Compensation Committee on Executive Compensation”. |
| (4) Includes (with respect to amounts applicable to 1999) contributions by the Company to the named executives' pension and 401(k) plans ("PLANS"), as well as car allowances ("AUTO"), life insurance premiums ("LIFE"), supplemental executive retirement plan contributions "SERP"), relocation reimbursement ("MOVING") and income tax preparation ("TAX") paid by the Company for the benefit of the named executives: Richard M. Klein $13,365 (PLANS), $2,506 (AUTO), $16,449 SERP), $905 (TAX); John H. Schroeder $9,760 (PLANS), $5,879 (AUTO), $290 (LIFE), $2,679 (SERP); Anthony F. Forgione $7,200 (PLANS), $7,800 (AUTO), $2,252 (SERP); Steven F. Ladin $6,761 (PLANS), $7,336 (AUTO), $1,772 (SERP), $469 (LIFE), $40,160 (MOVING); and Robert M. Parlman $6,400 (PLANS), $5,045 (AUTO), $290 (LIFE), $2,600 (SERP). |
No stock options were granted to the Chief Executive Officer and the four most highly compensated other executive officers of the Company during 1999. The Company did not grant any stock appreciation rights (“SARs”) during 1999.
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options
Acquired on Value Options at FY-End(#) at Fiscal Year-End
Name Exercise (#) Realized Exercisable Unexercisable Exercisable Unexercisable
---- ------------ -------- ----------- ----------- -------------
Richard M. Klein 0 0 19,800 10,200 -- --
Robert M. Parlman 0 0 5,000 20,000 -- --
Steven F. Ladin 0 0 5,000 20,000 -- --
John H. Schroeder 0 0 18,000 9,000 -- --
None of the Company's executive officers are eligible participants in defined benefit or actuarial plans sponsored by the Company. However, Peter de Bruijn, a resident of the Netherlands, participates in a national pension plan sponsored by the Dutch government.
Dr. Klein (President and Chief Executive Officer) is employed pursuant to an employment agreement dated June 2, 1995 with the Company (the “Agreement”). The Agreement provides for an initial term of employment, which expired on December 31, 1996, and for successive one year renewal periods subject to termination as provided therein. The Agreement calls for compensation, benefits and stock options to be paid to Dr. Klein as determined by the Audit and Compensation Committee of the Company’s Board of Directors.
The Agreement also provides that, in the event of a Change in Control (as defined in the Agreement), Dr. Klein shall be entitled to a severance payment equal to three times his annual base salary as then in effect, plus three times the average incentive compensation awarded to Dr. Klein during the preceding calendar years, plus one-half of Dr. Klein’s base salary as then in effect in lieu of further benefits and perquisites being provided by the Company to Dr. Klein. In addition, Dr. Klein has the right to surrender to the Company for cancellation all or any part of his options to purchase Common Stock of the Company in exchange for an amount equal to the difference between the option prices for the shares surrendered and the higher of (a) the fair market value to the shares (determined to be the mean between the highest and lowest price for the shares traded on the American Stock Exchange on the last trading day preceding the day of surrender), or (b) the highest price per share offered to the Company’s shareholders in any tender or exchange offer which led to the Change in Control.
The Agreement subjects Dr. Klein to confidentiality obligations and certain restrictions on competing with and soliciting customers of the Company for a period of one year following termination of the Agreement.
Mr. Forgione (President, Ruco Polymer Intermediates) is employed pursuant to an employment agreement dated July 30, 1998 (the “Agreement”). The Agreement may be terminated by either party at any time and for any reason by written notice to the other party no less than six months prior to the effective date of termination. Mr. Forgione retired on December 31, 1999.
Dr. Parlman (President, Textile Chemicals) is employed pursuant to an employment agreement dated November 4, 1998 (the “Agreement”). The Agreement provides that, in the event there shall be a Change in Control (as defined in the Agreement), and Dr. Parlman’s employment terminates Without Cause (as defined in the Agreement) any time prior to December 31, 2000, he shall be entitled to a lump sum payment equal to twice his annual base salary then in effect, payable no later than 30 days after his employment with the Company so terminates.
Mr. Ladin (Vice President, Finance and Chief Financial Officer) is employed pursuant to an employment agreement dated July 15, 1998 (the “Agreement”). The Agreement provides that, in the event there shall be a Change in Control (as defined in the Agreement), and Mr. Ladin’s employment terminates Without Cause (as defined in the Agreement) any time prior to December 31, 2000, he shall be entitled to a lump sum payment equal to twice his annual base salary then in effect, payable no later than 30 days after his employment with the Company so terminates.
Mr. Schroeder (Executive Vice President, Environmental Products and Services) is employed pursuant to an employment agreement which was amended and restated in July 1995. The amended agreement provides that, upon the occurrence of certain events (each a “Termination Event”), Mr. Schroeder shall be entitled to be employed by the Company for a period of two years after the Termination Event with remuneration, benefits and responsibilities comparable to those earned prior to the Termination Event, or, at the Company’s option, he shall be entitled to receive, for a period of two years after the Termination Event, payments equal to the base salary plus bonus earned by him prior to the Termination Event.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Amount Percent of
Beneficially Outstanding
Name and Address of Beneficial Owner Owned Shares*
------------------------------------ ----- -------
399 Venture Partners, Inc................................... 2,025,000(1) 35.31
Citibank, N.A.
Citicorp
399 Park Avenue
New York, NY 10043
Mario Joseph Gabelli........................................ 1,139,100(2) 19.86
Gabelli Associates Fund
Gabelli Performance Partnership
One Corporate Center
Rye, NY 10580-1434
Richard M. Klein............................................ 504,869(3) 8.80
P.O. Box 66
Birmingham, NJ 08011
Mentor Partners, L.P........................................ 332,400(4) 5.80
499 Park Avenue
New York, NY 10022
*Based on outstanding shares as of March 15, 2000 as reported on the Company's 10-K.
| (1) Based on a Schedule 13G/A, filed with the Securities and Exchange Commission (the “Commission”) as of February 14, 2000, which states that the address of each of 399 Venture Partners, Inc. (“399 Venture”), Citibank, N.A. (“Citibank”) and Citicorp is 399 Park Avenue, New York, New York 10043; that 399 Venture is the record and beneficial owner of 2,025,000 shares of Common Stock and has sole ownership of and voting and dispositive powers over such shares; that 399 Venture is a wholly owned subsidiary of Citibank; |
| that Citibank is a wholly owned subsidiary of Citicorp; and that Citibank and Citicorp own no shares of Common Stock directly. |
| (2) Based on a Schedule 13D/A, filed with the Commission as of April 21, 1999 by Gamco Investors, Inc. (“GAMCO”), Gabelli Funds, LLC. (“GFL”), Gabelli Associates Fund (“Gabelli Associates”), Gabelli International Limited (“GIL”), Gabelli Performance Partnership L.P. (“GPP”), Gabelli Advisers, Inc. (“Gabelli Advisers”), Gabelli Foundation, Inc. (“Foundation”),Gabelli Funds, Inc. (“GFI”), Gabelli Asset Management, Inc. (“GAMI”), Marc J. Gabelli and Mario J. Gabelli, which states that each of the following entities or individuals has sole voting and dispositive power over the number of shares of the Company’s Common Stock listed next to its or his name: GAMCO -- 793,100 shares (13.83% of Common Stock outstanding), GFL -- 263,000 shares (4.59% of Common Stock outstanding), Gabelli Associates -- 0 shares (0.0% of Common Stock outstanding), GIL -- 42,000 shares (0.73% of Common Stock outstanding), GPP -- 33,400 shares (0.58% of Common Stock outstanding), Gabelli Advisers -- 5,600 shares (0.1% of Common Stock outstanding), Foundation -- 2,000 shares (.03% of Common Stock outstanding), GFI -- 0 shares (0.0% of Common Stock outstanding), Marc J. Gabelli -- 0 shares (0.0% of Common Stock outstanding), GAMI - 0 shares (0.0% of Common Stock outstanding), Mario J. Gabelli -- 0 shares (0.0% of Common Stock outstanding); that the address of GFI, GAMI, GAMCO, Gabelli Advisers and Gabelli Associates is One Corporate Center, Rye, New York, 10580-1434, the address of Foundation is 165 West Liberty Street, Reno, Nevada 89501, the address of GPP is 401 Theodore Fremd Ave., Rye, New York 10580, and the address of GIL is c/o MeesPicrson (Cayman) Limited, British American Centre, Dr. Roy’s Drive -- Phase 3, George Town, Grand Cayman, British West Indies; that the reporting persons do not admit that they constitute a group; that Mario J. Gabelli is deemed to have beneficial ownership of the shares owned beneficially by each of the reporting persons other than Marc J. Gabelli; and that GFI and GAMI are deemed to have beneficial ownership of the shares beneficially owned by each of the reporting persons other than Mario J. Gabelli, Marc J. Gabelli and the Foundation. |
| (3) Shares issuable pursuant to options exercisable within 60 days of April 1, 2000 are deemed to be beneficially owned; accordingly, the amount beneficially owned by Richard M. Klein includes 22,500 shares of Common Stock underlying options held by him. |
| (4) Based on a Schedule 13F, filed with the Commission as of February 1, 1999, by Mentor Partners, L.P. ("Mentor") which states that the address of Mentor is 500 Park Avenue, New York, New York 10022 and that Mentor owns beneficially and has sole voting power and sole dispositive power over 332,400 shares of Common Stock. |
The following table sets forth certain information regarding the Common Stock beneficially owned by the Company's Chief Executive Officer, by each director and nominee for director of
the Company, by each of the Company’s three other most highly compensated executive officers and by all directors and executive officers of the Company as a group, at the close of business on March 15, 2000. Each of the persons named in the table below as beneficially owning the shares set forth therein has sole voting power and sole investment power with respect to such shares, unless otherwise indicated.
Amount Percent of
Beneficially Outstanding
Owned(1) Shares(1)
-------- ---------
Name of Beneficial Owner
------------------------
Richard M. Klein......................................... 504,869 8.8
Kirk P. Pond............................................. 4,400 *
Fred P. Rullo, Jr........................................ 4,400 *
Paul C. Schorr, IV....................................... 9,440 *
John H. Schroeder........................................ 84,802 1.5
Anthony F. Forgione...................................... 3,443 *
Steven F. Ladin.......................................... 10,662 *
Robert M. Parlman........................................ 8,764 *
All directors and executive officers as
a group (11 persons)................................... 676,160 11.8
------------------
*Represents less than 1% of the Company's outstanding shares of Common Stock.
(1)......Shares issuable pursuant to options exercisable within 60 days of April 1, 2000 are deemed to be beneficially owned;
accordingly, the amount beneficially owned includes the following number of shares of Common Stock underlying options held by
the following individuals: Richard M. Klein 22,500 shares, Kirk. P. Pond 4,400 shares, Fred P. Rullo 2,000 shares, Paul C.
Schorr, IV 9,440, John H. Schroeder 20,700 shares, Steven F. Ladin 5,000 shares, and Robert M. Parlman 5,000 shares; and all
directors and executive officers as a group 97,215 shares.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
(a) (1) Financial Statements
Page
Report of Independent Accountants...................... F-2
Consolidated Balance Sheets as of December 31, 1999
and 1998.............................................. F-3
Consolidated Statements of Income for the years
ended December 31, 1999, 1998 and 1997................ F-4
Consolidated Statement of Stockholders' Equity for the
years ended December 31, 1999, 1998 and 1997.......... F-5
Consolidated Statement of Cash Flows for the years
ended December 31, 1999, 1998 and 1997................ F-6
Notes to Consolidated Financial Statements.............. F-7
(2) Financial Statement Schedules
The following financial statement schedule for the
years ended December 31, 1999, 1998 and 1997 is filed
as part of this report and should be read in conjunction
with the consolidated financial statements.
Page
Schedule VIII - Valuation and Qualifying Accounts
and Reserves........................................ S-1
Schedules other than that listed above are omitted because
they are not applicable or because the required information
is given in the consolidated financial statements and notes
thereto.
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. (6)
3.1 Form of Restated Certificate of Incorporation of
Sybron Chemicals Inc. (1)
3.2 Bylaws of Sybron Chemicals Inc. (1)
3.3 Certificate of Ownership and Merger Merging Sybron
Chemicals, Inc. into Sybron Chemical
Industries Inc. (2)
3.4 Agreement and Plan of Merger dated January 28,
1993 between Sybron Chemicals Inc. and Sybron
Chemical Industries Inc. (2)
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). (7)
10 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 Ruffing not included). (6)
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. (6)
10.2 Bonus Incentive Plan for Mr. Forgione. (6)
10.3 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. (6)
10.4* Savings and Thrift Plan, as amended (1)
10.5* 1992 Stock Option Plan (1)
10.6* Share Participation Plan (1)
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. (6)
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. (6)
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. (6)
10.10* Executive Bonus Plan (2)
10.11* Employment Agreement, dated April 19, 1996, with
Albert L. Eilender. (4)
10.12 Asset Purchase Agreement by and among Ivax
Corporation, Ivax Industries Inc., Ivax
Industries Canada, Inc., Ivax Industries U.K.,
Ltd. and Sybron Chemicals Inc. dated
July 29, 1997. (5)
10.13 Subordination Agreement, dated as of July 31, 1998
by Sybron Chemical Industries Nederland B.V. (6)
10.14 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. (6)
10.15 Security Agreement, dated as of July 31, 1998,
among Sybron Chemicals Inc. and Mellon Bank,
N.A. (6)
(3) Exhibits and Exhibit Index (Continued)
Exhibit No. Description
10.16 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. (6)
10.17 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.(6)
10.18 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. (6)
10.19 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. (6)
10.20* Employment Agreement, dated November 4, 1998, with
Robert M. Parlman.(8)
10.21* Employment Agreement, dated October 4, 1999, with
Douglas S. Brown.(8)
10.22* Employment Agreement, dated July 15, 1998, with
Steven F. Ladin.(8)
10.23* Supplement to Employment Agreement, dated February
13, 1998, with Stephen R. Adler.(8)
21 Subsidiaries of the Registrant (8)
23 Consent of PricewaterhouseCoopers LLP dated May
1, 2000 (9)
24 Powers of attorney of directors of the
Registrant.(9)
27 Financial Data Schedule (8)
____________________
(1) Previously filed as an Exhibit to the Registrant's Registration
Statement on Form S-1 (File No. 33-46091) and incorporated
herein by reference.
(2) Previously filed as an Exhibit to the Registrant’s 1992 Form 10-K and incorporated herein by reference.
(3) Previously filed as an Exhibit to the Registrant’s 1994 Form 10-K and incorporated herein by reference.
(4) Previously filed as an Exhibit to the Registrant’s 1996 Form 10-K and incorporated herein by reference.
(5) Previously filed as an Exhibit to Registrant’s Form 8-K filed October 13, 1997 and incorporated herein by reference.
(6) 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.
(7) Previously filed as an Exhibit to the Company’s Registration Statement on Form 8-A, filed on August 14, 1998.
(8) Previously filed as an Exhibit to the Registrant's 1999 Form 10-K, filed March 30, 2000 and incorporated herein by reference.
(9) Filed electronically herewith.
* Denotes management contract required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
(b) Reports on Form 8-KPursuant to the requirements of Section 13 or 15(d) 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, on May 1, 2000.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on May 1, 2000 by the following persons on behalf of the Registrant and in the capacities indicated.
Signature Title
/s/ RICHARD M. KLEIN Chairman of the Board, President,
RICHARD M. KLEIN and Chief Executive Officer
/s/ STEVEN F. LADIN Vice President, Finance, Chief
STEVEN F. LADIN Financial Officer, Secretary and Treasurer
/s/ * Director
KIRK P. POND
/s/ * Director
PAUL C. SCHORR, IV
/s/ * Director
JOHN H. SCHROEDER
/s/ * Director
FRED P. RULLO, JR.
* By: /s/ RICHARD M. KLEIN
RICHARD M. KLEIN, Attorney-in-fact
Index to Consolidated Financial Statements
Sybron Chemicals Inc.
Page
Report of Independent Accountants.......................... F-2
Consolidated Balance Sheets as of December 31, 1999
and 1998.................................................. F-3
Consolidated Statements of Income for the years
ended December 31, 1999, 1998 and 1997.................... F-4
Consolidated Statement of Stockholders' Equity for the
years ended December 31, 1999, 1998 and 1997.............. F-5
Consolidated Statement of Cash Flows for the years
ended December 31, 1999, 1998 and 1997.................... F-6
Notes to Consolidated Financial Statements.................. F-7
In our opinion, the accompanying consolidated balance sheets and related consolidated statements of income, of stockholders’ equity and of cash flows present fairly, in all material respects, the financial position of Sybron Chemicals Inc. and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
December 31,
1999 1998
Current assets:
Cash and cash equivalents .......................... $ 14,697 $ 14,966
Accounts receivable, net ........................... 50,316 46,089
Inventories, net ................................... 37,205 36,466
Prepaid and other current assets ................... 3,962 3,515
Prepaid income taxes ............................... 182 1,938
Deferred income taxes .............................. 922 237
--- ---
Total current assets ............................. 107,284 103,211
Property, plant and equipment, net ................... 74,459 80,175
Intangible assets, net ............................... 68,454 81,967
Deferred income taxes ................................ 915 12
Other assets ......................................... 6,019 4,919
----- -----
$ 257,131 $ 270,284
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable ...................................... $ 2,093
Current portion of long-term debt .................. $ 8,501 9,285
Accounts payable ................................... 24,489 23,642
Accrued liabilities ................................ 14,835 15,190
Income taxes payable ............................... 131 598
Deferred income taxes .............................. 670 449
--- ---
Total current liabilities ........................ 48,626 51,257
Long-term debt ....................................... 127,706 136,008
Deferred income taxes ................................ 1,429 3,904
Post-retirement benefits ............................. 3,584 3,739
Other liabilities .................................... 3,203 2,728
----- -----
Total liabilities ................................ 184,548 197,636
------- -------
Commitments and contingencies (See Note 13)
Stockholders' equity:
Preferred stock, $.01 par value, 500,000
shares authorized; none issued
Common stock - $.01 par value, 20,000,000
shares authorized; issued 5,941,165
and 5,938,050 shares ............................. 59 59
Additional paid-in capital ......................... 24,214 24,151
Retained earnings .................................. 63,405 60,414
Accumulated other comprehensive losses ............. (10,943) (7,610)
Less treasury stock, at cost - 207,611
and 218,299 shares ................................. (4,152) (4,366)
------- ------ ------
Total stockholders' equity ....................... 72,583 72,648
------ ------
$ 257,131 $ 270,284
========= =========
The accompanying notes are an integral part of the financial statements.
Year ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
Net sales $269,123 $222,822 $188,814
Cost of sales 177,525 143,898 115,180
Selling 39,894 38,050 35,148
General and administrative 13,464 12,534 11,340
Research and development 5,509 4,209 3,710
Amortization of intangible assets 3,994 2,794 1,585
Goodwill impairment charge 10,954
251,340 201,485 166,963
Operating income 17,783 21,337 21,851
Other income (expense):
Interest income 588 387 497
Interest expense (11,177) (6,058) (1,968)
Terminated merger costs (161) (1,270)
Other, net (1,737) (694) (1,048)
(12,326) (6,526) (3,789)
Income before income taxes and
extraordinary item 5,457 14,811 18,062
Provision for income taxes 2,466 6,073 7,422
Income before extraordinary item 2,991 8,738 10,640
Extraordinary item - net of income taxes (313)
Net income $ 2,991 $ 8,425 $ 10,640
Income per share before extraordinary item:
Basic $ .52 $ 1.53 $ 1.88
Diluted .52 1.49 1.84
Loss per share extraordinary item:
Basic (.06)
Diluted (.05)
Net income per share:
Basic $ .52 $ 1.47 $ 1.88
Diluted $ .52 $ 1.44 $ 1.84
The accompanying notes are an integral part of the financial statements.
Accumulated
Additional other com- Total
Common stock paid-in prehensive Retained Treasury Stock Stockholders'
Shares Amount Capital losses earnings Shares Amount Equity
------ ------ ------- ------ -------- ------ ------ ------
Balances at December 31, 1996 ...... 5,905 $ 59 $ 23,530 $ (3,761) $ 41,349 254 $ (5,089) $ 56,088
Net income ......................... 10,640 10,640
Translation adjustment ............. (4,850) (4,850)
Minimum pension liability adjustment 67 67
Exercise of stock options .......... 3 47 47
Shares issued under Savings and
Incentive Plans .................... _____ ____ ______ ______ (20) 416 419
3
Balances at December 31, 1997 ...... 5,908 59 23,580 (8,544) 51,989 234 (4,673) 62,411
Net income ......................... 8,425 8,425
Translation adjustment ............. 1,106 1,106
Minimum pension liability adjustment (172) (172)
Exercise of stock options .......... 30 429 429
Shares issued under Savings and
Incentive Plans .................. 142 (16) 307 449
Balances at December 31, 1998 ...... 5,938 59 24,151 (7,610) 60,414 218 (4,366) 72,648
Net income ......................... 2,991 2,991
Translation adjustment ............. (3,690) (3,690)
Minimum pension liability adjustment 357 357
Exercise of stock options including 3 115 115
tax ................................ benefit
Shares issued under Savings and
Incentive Plans .................. (10) 214 162
(52)
Balances at December 31, 1999 ...... 5,941 $ 59 $ 24,214 $(10,943) $ 63,405 208 $ (4,152) $ 72,583
The accompanying notes are an integral part of the financial statements.
Year ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net income .................................... $ 2,991 $ 8,425 $ 10,640
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ................. 13,320 9,028 6,524
Goodwill impairment charge .................... 10,954
Provision for losses on accounts receivable ... 1,250 726 709
Gain on sale of assets......................... (136)
Provision (benefit) for deferred taxes ........ (2,452) 1,215 (818)
Extraordinary item ............................ 313
Change in assets and liabilities:
Accounts receivable ........................... (6,668) 1,533 (6,119)
Inventories ................................... (1,780) 2,116 (6,074)
Other current assets .......................... 584 (328) (312)
Accounts payable and accrued expenses ......... 194 (13,039) 15,874
Income taxes payable .......................... 158 (4,381) 3,602
Other assets and liabilities, net ............. 466 (842) 1,676
Net cash provided by operating activities ..... 19,017 4,766 25,566
Cash flows from investing activities:
Capital expenditures .......................... (5,283) (10,689) (9,365)
Business acquisitions, net of cash acquired ... (1,704) (117,849) (14,476)
Sale of business assets ....................... 1,500
Other, net .................................... (200)
Net cash used by investing activities ......... (7,187) (128,538) (22,341)
Cash flows from financing activities:
Repayment of debt ............................. (9,293) (14,455) (2,429)
Net (repayments) borrowings under revolving
credit facilities ............................ (1,909) (16,155) 13,335
Loan proceeds, net ............................ 208 141,811
Proceeds from the exercise of stock options ... 31 429 47
Net cash provided (used) by financing activities (10,963) 111,630 10,953
Effect of exchange rate changes on cash ........ (1,136) 516 (2,495)
Net (decrease) increase in cash and cash
equivalents ................................. (269) (11,626) 11,683
Cash and cash equivalents at beginning of year . 14,966 26,592 14,909
Cash and cash equivalents at end of year ....... $ 14,697 $ 14,966 $ 26,592
See Consolidated Statement of Shareholders' Equity for non-cash transactions
involving treasury shares issued in 1999, 1998 and 1997 under savings and
incentive plans.
The accompanying notes are an integral part of the financial statements.
NOTE 1 - THE COMPANY:
The Company is an international “specialty” chemical company which serves three main markets: textile chemical specialties products, polymer intermediates and environmental products and services (primarily related to water and waste treatment). As used herein, unless otherwise indicated, the “Company” refers to Sybron Chemicals Inc. and its subsidiaries.
NOTE 2 - BASIS OF PRESENTATION AND ACCOUNTING POLICIES:
Basis of Presentation:
The financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and activity have been eliminated.
Accounting Policies:
Use of Estimates -The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents -Cash and cash equivalents include funds invested in liquid short-term investments with a maturity of three months or less. For such investments the carrying amount approximates fair value. At December 31, 1999 and 1998 these investments amounted to $5,775 and $4,257, respectively.
Inventories -Inventories are stated at the lower of cost or market. For U.S. operations, except the Ruco subsidiary, cost is determined using the last-in, first-out (LIFO) method. For all other operations, cost is determined using the first-in, first-out (FIFO) method.
NOTE 2 - BASIS OF PRESENTATION AND ACCOUNTING POLICIES (Continued):
Property, Plant and Equipment -Property, plant and equipment is stated at cost less accumulated depreciation. Depreciation is provided over the estimated useful lives of depreciable assets (generally 10-40 years for buildings and 3-20 years for machinery and equipment) using the straight-line method.
Intangible and Other Assets -Intangible assets (net of accumulated amortization - 1999, $12,469; 1998, $9,157) include the unamortized fair values of trademarks, license agreements, patents, non-compete agreements and goodwill. Intangible assets are amortized on a straight-line basis over estimated useful lives of 5 to 40 years. The Company continually evaluates the reasonableness of its amortization for intangibles. If it becomes probable that expected future undiscounted cash flows associated with intangible assets are less than their carrying value, the assets will be written down to their fair value. Costs associated with the issuance of long-term debt are amortized on a straight-line basis over the term of the debt.
Impairment of Long-Lived Assets -The Company reviews long-lived assets and certain identifiable intangibles for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Environmental Liabilities and Expenditures -Accrued liabilities and other liabilities include accruals for environmental matters which are established and reflected as operating expenses when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Accrued liabilities are exclusive of claims against third parties and are not discounted.
In general, costs related to environmental remediation are charged to expense. Environmental remediation costs are capitalized if the costs increase the value of the property as compared to the state of the property when acquired, or mitigate or prevent contamination from future operations.
NOTE 2 - BASIS OF PRESENTATION AND ACCOUNTING POLICIES (Continued):
Revenue Recognition and Related Disclosures -The Company recognizes revenue upon shipment of products. Receivables resulting from these sales approximate fair value. The Company monitors the credit worthiness of its customers. Concentrations of credit risk associated with these trade receivables are considered minimal due to the Company’s diverse customer base. The allowance for doubtful accounts at December 31, 1999 and 1998 was $3,579 and $2,785, respectively.
Interest Expense -Interest expense incurred during the construction of facilities and equipment is capitalized as part of the cost of those assets. Total interest paid by the Company was $11,178 in 1999, $6,414 in 1998 and $1,651 in 1997. Interest capitalized was $12 in 1999, $154 in 1998 and $33 in 1997.
Retirement Benefits -Pension expense for the Company’s domestic and significant international defined benefit pension plans is determined in accordance with Statement of Financial Accounting Standards No. 87 (FAS 87), “Employers’ Accounting for Pensions”. FAS 132, “Employers’ Disclosures about Pensions and Other Post-retirement Benefits” was adopted by the Company in 1998. See Note 11 for further description.
In addition to providing pension benefits, the Company provides certain health care and life insurance benefits for a portion of its retired employees which are funded as costs are incurred. Liability for these benefits are recognized in accordance with FAS 106, “Employers’ Accounting for Post-retirement Benefits Other than Pensions.”
Stock-Based Compensation -Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”, encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method described in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations.
NOTE 2 - BASIS OF PRESENTATION AND ACCOUNTING POLICIES (Continued):
Income Taxes -The Company accounts for certain income and expense items differently for financial reporting and income tax purposes. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for operating loss and tax credit carry-forwards.
Foreign Currency Translation -The financial statements and transactions for the majority of the Company’s foreign subsidiaries are maintained in their local currencies which are considered to be their functional currencies. The Company’s Mexican and Colombian subsidiaries functional currencies are considered to be the U.S. dollar because these countries have been designated as highly inflationary economies and conduct a significant portion of their business in the U.S. dollar. All of these transactions are translated into U.S. dollars in accordance with Statement of Financial Accounting Standards No. 52.
Assets and liabilities of foreign subsidiaries are translated into U.S. dollars using current exchange rates and the resulting translation adjustments are recorded to the cumulative translation adjustment component of stockholders’ equity, except the Company’s Mexican and Colombian subsidiaries which operate in highly inflationary economies. (Certain assets of these subsidiaries are translated at historical exchange rates and all translation adjustments are reflected in the Consolidated Statements of Income). Revenues and expenses of foreign subsidiaries are translated at weighted average rates of exchange for the respective periods. Foreign exchange gains (losses) for 1999, 1998 and 1997 were approximately $15, $303 and ($787), respectively.
NOTE 2 - BASIS OF PRESENTATION AND ACCOUNTING POLICIES (Continued):
Earnings Per Share -Statement of Financial Accounting Standards No. 128, “Earnings Per Share,” requires two presentations of earnings per share - “basic” and “diluted”. Basic earnings per share is computed by dividing income available to common stockholders (the numerator) by the weighted-average number of common shares (the denominator) for the period. The computation of diluted earnings per share is similar to basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued.
The numerator in calculating both basic and diluted earnings per share for each year is reported net income. The denominator is based on the following weighted-average number of common shares:
1999 1998 1997
---- ---- ----
Basic 5,728,136 5,698,815 5,666,683
Diluted 5,759,429 5,849,946 5,793,770
The difference between basic and diluted weighted-average common shares results from the assumption that dilutive stock options outstanding were exercised.
The following stock options are not included in the diluted earnings per share calculation since in each case the exercise price is greater than the average market price for the year:
1999 1998 1997
---- ---- ----
Stock options 453,073 144,402 9,318
NOTE 3 - 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 twelve months ended December 31:
NOTE 3 - COMPREHENSIVE INCOME (Continued):
1999 1998 1997
---- ---- ----
Net Income $2,991 $8,425 $10,640
Other comprehensive income, net of tax:
Foreign currency translation adjustments (3,690) 1,106 (4,850)
Minimum pension liability adjustment 357 (172) 67
Other comprehensive income (3,333) 934 (4,783)
Comprehensive income (loss) $(342) $9,359 $5,857
___________1999 ___________ _____________1998___________ ___________1997____________
Tax Net of Tax Net of Tax Net of
Pre-Tax (Expense) Tax Pre-Tax (Expense) Tax Pre-Tax (Expense) Tax
Amount Benefit Amount Amount Benefit Amount Amount Benefit Amount
------ ------- ------ ------ ------- ------ ------ ------- ------
Foreign currency translation $(3,690) $(3,690) $ 1,106 $ 1,106 $(4,850) $(4,850)
adjustments
Minimum pension liability .. 586 $ (229) 357 (292) $ 120 (172) 117 $(50) 67
adjustment
Total comprehensive income . $(3,104) $ (229) $(3,333) $ 814 $ 120 $ 934 $(4,733) $(50) (4,783)
(loss)
The following table illustrates the components of accumulated other comprehensive income and their associated changes for the year ending December 31.
_____________1999 _____________ _____________1998______________
Current Current
Beginning Period Ending Beginning Period Ending
Balance Change Balance Balance Change Balance
------- ------ ------- ------- ------ -------
Foreign currency translation adjustments $(7,253) $(3,690) ($10,943) $(8,359) $ 1,106 $(7,253)
Minimum pension liability adjustment ... (357) 357 0 (185) (172) (357)
Accumulated comprehensive (loss) income $(7,610) $(3,333) $(10,943) $(8,544) $ 934 $(7,610)
NOTE 4 - GOODWILL IMPAIRMENT CHARGE
The goodwill impairment charge recorded in the fourth quarter of 1999 reflects the Company’s assessment that certain intangible assets related to the garment processing chemicals business have been permanently impaired as a result of long-term changes in the industry.
The Company considers significant and long-term changes in industry conditions in the United States to be its primary indicators of potential impairment. An impairment was recognized when the future undiscounted cash flows of the garment processing chemicals business was estimated to be insufficient to recover the carrying value of related intangibles. Estimates of fair value were determined by discounting estimated future cash flows. Considerable management judgement is necessary to estimate discounted future cash flows.
The non-cash charge was $10,954 pre-tax and $6,688 after tax. The effect on net income was $1.16 per share.
NOTE 5 - ACQUISITIONS AND MERGERS:
On February 1, 1999, the Company acquired certain operating assets, not including manufacturing facilities, of Green Releaf Bio Tech. Inc. (“Green Releaf”) for $1,500. The Green Releaf acquisition did not have a material effect on 1999 results.
On July 31, 1998, the Company acquired all of the outstanding capital stock of Ruco Polymer Corporation and all of the outstanding membership interests of Ruco Polymer Company of Georgia, LLC (collectively “Ruco”). The aggregate purchase price for the acquisition was $110,000, including the repayment of bank debt owed by Ruco.
In April 1998, the Company acquired certain operating assets, not including manufacturing facilities, of the garment processing specialty chemicals businesses of Ocean Wash Inc. and Ocean Wash de Mexico de C.V., (collectively “Ocean Wash”), for $6,750. The acquired garment processing chemicals businesses have been merged into the Company’s corresponding business sector.
Between October 1997 and February 11, 1998, the Company entertained a buyout proposal received from an investor group consisting of certain major shareholders, primarily Citicorp Venture Capital Ltd. and certain members of the Company’s management. The Company signed a merger agreement on December 11, 1997, which was terminated on February 11, 1998. The Company recognized expense of $1,270 associated with the terminated merger agreement in the fourth quarter of 1997 and $161 in the first quarter of 1998.
NOTE 5 - ACQUISITIONS AND MERGERS (Continued):
On July 29, 1997, the Company acquired certain operating assets, not including manufacturing facilities, of the textile and garment processing businesses of Ivax Industries, Inc., Ivax Industries Canada, Inc. and Ivax Industries U.K. Ltd., (collectively "Ivax"), for $14,476. The acquired garment processing chemicals businesses have been merged into the Company's corresponding business sector.
All the above described acquisitions have been accounted for as purchases and, accordingly, the operating results of the acquired businesses have been included in the Company’s consolidated financial statements since the date of acquisition.
The Ocean Wash acquisition did not have a material effect on 1998 operating results. The following unaudited pro forma consolidated results of operations for the years ended December 31, 1998 and 1997 assume the Ruco and Ivax acquisitions occurred on January 1, 1997:
1998 1997
---- ----
Net sales $270,444 $280,613
Net income before extraordinary item $ 6,745 $ 7,095
Net income per diluted share before extraordinary item $ 1.15 $ 1.22
NOTE 6 - INVENTORIES:
The components of inventories are:
December 31,
1999 1998
---- ----
Finished goods $29,373 $28,871
Raw materials 9,502 9,632
38,875 38,503
Less reserves 1,670 2,037
$37,205 $36,466
LIFO inventories comprise approximately 42% and 49% of total inventories at December 31, 1999 and 1998, respectively. If the FIFO method of accounting for inventories had been used by the Company, inventories would have been less than reported by $45 and $25 at December 31, 1999 and 1998, respectively.
NOTE 7 - PROPERTY, PLANT AND EQUIPMENT:
The components of property, plant and equipment are:
December 31,
------------
1999 1998
---- ----
Land $ 7,383 $ 7,324
Buildings 29,834 30,293
Machinery and equipment 89,121 86,647
Construction in progress 616 1,489
126,954 125,753
Accumulated depreciation (52,495) (45,578)
$74,459 $80,175
Depreciation expense for the years ended December 31, 1999, 1998 and 1997 was $9,326 $6,234 and $4,939, respectively. Maintenance and repairs expense for the same periods amounted to $2,662, $2,672 and $2,342, respectively.
NOTE 8 - ACCRUED LIABILITIES:
The components of accrued liabilities are:
December 31,
------------
1999 1998
---- ----
Accrued compensation $ 6,794 $ 6,542
Accrued selling and marketing expenses 3,396 2,304
Accrued professional fees 615 1,152
Accrued environmental liabilities 1,455 1,312
Other accrued liabilities 2,575 3,880
$14,835 $15,190
NOTE 9 - LONG-TERM DEBT:
The components of long-term debt are:
December 31,
------------
1999 1998
---- ----
Notes payable - Tranche A Facility $ 41,625 $44,438
Notes payable - Tranche B Facility 92,500 98,750
Other debt 2,082 2,105
136,207 145,293
Less current portion 8,501 9,285
$127,706 $136,008
On March 28, 2000 the Company amended it’s Credit Facility creating a Term Facility of $130,000 and a Revolving Facility of $25,000, which is undrawn. The Credit Facility will now expire on March 31, 2007. The Term Facility is composed of a $20,000 Tranche A, with quarterly maturities through March 31, 2005, and a $110,000 Tranche B that substantially matures in quarterly installments from June 30, 2006 through March 31, 2007.
Borrowings under Tranche A and B continue to bear interest at a rate per annum equal to a margin, at the Company’s option, over a base rate or adjusted LIBOR plus 2.50% and 3.25%, respectively at March 29, 2000, which for Tranche A is adjusted, based on the leverage ratio.
The amended Revolving Facility has $25,000, available to fund working capital requirements and general corporate purposes of the Company.
In 1998, concurrent with the closing of the Ruco acquisition, the Company entered into a Credit Facility consisting of a Term Facility in an aggregate principal amount of $145,000 and a Revolving Facility in an aggregate principal amount of $40,000, which was undrawn at December 31, 1999. The Term Facility is composed of a $45,000 Tranche A facility and a $100,000 Tranche B facility. That Credit Facility was replaced on March 29, 2000 as described above.
The repayment of the 8.17% notes on July 31, 1998, resulted in an extraordinary loss of $313, net of taxes of $200.
NOTE 9 - LONG-TERM DEBT (Continued):
Annual Repayments:The aggregate annual repayments of debt outstanding at December 31, 1999 are as follows:
2000 $ 8,501
2001 5,478
2002 5,853
2003 5,853
2004 4,872
Thereafter 105,650
$136,207
Debt Covenants:
The Credit Facility imposes upon the Company certain conditions and restrictions, such as financial tests relating to interest coverage, fixed charge coverage, leverage ratio and minimum tangible net worth, limitations on the ability of the Company to incur debt, pay dividends or take certain other corporate actions, and limitations on capital expenditures, investments and acquisitions. Additionally, the amended Credit Facility requires earlier prepayments under specified circumstances. The Company believes it was in compliance with these covenants and restrictions at December 31, 1999.
NOTE 10 - INCOME TAXES:
Provisions for income taxes are:
Year ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
Currently payable:
Federal $ (118) $ 174 $ 1,973
State 46 233
Foreign 4,990 4,687 6,034
----- ----- -----
4,918 4,861 8,240
Deferred taxes:
Federal (1,571) 518 (654)
State (228) 116 (96)
Foreign (653) 578 (68)
---- --- ---
Income taxes before extraordinary item $2,466 $6,073 $7,422
====== ====== ======
NOTE 10 - INCOME TAXES (Continued):
Provisions for income taxes differ from the amount computed by applying the statutory federal rate due to the following:
Year ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
Income tax computed at U.S.
Federal statutory tax rates $1,857 $5,037 $6,141
State income taxes, net of
federal income tax benefit 11 99 233
Foreign subsidiaries taxed at
higher rates 528 683 1,063
Other items, net 70 254 (15)
-- --- ---
$2,466 $6,073 $7,422
====== ====== ======
Income taxes paid were $4,637 in 1999, $9,271 in 1998 and $4,379 in 1997.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1999 and 1998 are presented below.
December 31,
------------
1999 1998
---- ----
Deferred tax assets:
Intangibles $ 2,549
Accrued expenses 1,871 $ 1,700
Post-retirement benefits 1,456 1,518
Tax credit carryover 1,039
Other 639 815
--- ---
Total deferred tax assets 7,554 4,033
----- -----
Deferred tax liabilities:
Depreciation (4,218) (3,285)
Inventory (1,769) (1,376)
Property (1,473) (1,521)
Intangibles (1,255)
Other (356) (700)
---- ----
Total deferred tax liabilities (7,816) (8,137)
------ ------
Net deferred tax liability $ (262) $(4,104)
======== =======
NOTE 10 - INCOME TAXES (Continued):
The components of income before income taxes and extraordinary item are:
Year ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
United States (before extraordinary item) $ (5,289) $ 554 $ 3,632
Foreign 10,746 14,257 14,430
------ ------ ------
$ 5,457 $14,811 $18,062
======= ======= =======
Retained earnings of foreign subsidiaries totaling approximately $48,500 at December 31, 1999 are considered to be reinvested indefinitely in these businesses. Accordingly, no provision for income taxes has been made for the repatriation of these earnings. Provision for income taxes have been made for approximately $17,000 of retained earnings of foreign subsidiaries which are not considered to be indefinitely invested.
NOTE 11 - PENSION AND POST-RETIREMENT BENEFITS:
Pension Benefits:The Company maintains savings and investment plans for certain U.S. employees. In accordance with the plans, the Company contributes a fixed percentage of an employee’s annual earnings based upon the employee’s age and length of service with the Company. Under the voluntary portion of the plans, participants contribute a certain percentage of their compensation each pay period. The Company matches 35% of this voluntary contribution up to 6% of total compensation. Total expenses relating to this plan were $1,230, $1,196 and $823 for the years ended December 31, 1999, 1998 and 1997, respectively.
The Company has defined benefit pension plans covering substantially all U.S. hourly and foreign employees. Plans covering U.S. hourly employees provide benefits based on years of service, compensation and applicable contractual agreements. Plans covering foreign employees are generally based on various formulas, the principal factors of which are years of service and compensation.
The Company’s funding policy is to make the minimum annual contribution required by applicable regulations.
NOTE 11 - PENSION AND POST-RETIREMENT BENEFITS (Continued):
In addition to providing pension benefits, the Company provides certain health care and life insurance benefits for a portion of its retired employees which are funded as costs are incurred. These benefits are provided through various insurance companies whose premiums are based on the claims paid during the period. In addition, current retirees contribute varying percentages of equivalent premiums toward the cost of their health care coverage. Retiree contributions are automatically indexed to keep up with health care inflation.
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. As required, the Company adopted the disclosures prescribed by this statement below.
Domestic plan activity and status as of and for the years ended December 31 were as follows:
Post-retirement
Pension Benefits Benefits
---------------- --------
1999 1998 1999 1998
---- ---- ---- ----
Change in benefit obligation:
Benefit obligation at beginning of year $ 7,068 $ 4,662 $ 2,159 $ 1,949
Service cost ........................ 261 167 1 1
Interest cost ....................... 462 374 140 135
Actuarial loss (gain) ............... (536) 362 682 231
Acquisitions ........................ 1,881
Benefits paid ....................... (331) (378) (168) (157)
---- ---- ---- ----
Benefit obligation at end of year ... $ 6,924 $ 7,068 $ 2,814 $ 2,159
------- ------- ------- -------
NOTE 11 - PENSION AND POST-RETIREMENT BENEFITS (Continued):
Change in plan assets:
Pension Benefits Post-retirement Benefits
---------------- ------------------------
1999 1998 1999 1998
---- ---- ---- ----
Fair value of plan assets at beginning
of year $6,304 $4,456
Actual return on plan assets 716 329
Acquisitions 1,481
Employer contributions 207 419
Benefits paid (331) (378)
Adjustments (3)
----- -----
Fair value of plan assets at end of year 6,896 6,304
----- -----
Funded status (28) (764) $(2,814) $(2,159)
Unrecognized net actuarial loss (gain) (223) 659 278 (418)
Unrecognized prior service cost 496 344 (1,198) (1,300)
Unrecognized net obligation (asset) (102) (100)
---- ----
Net amount recognized $ 143 $ 139 $(3,734) $(3,877)
====== ====== ======= =======
Amounts recognized in the statement
of financial position consist of:
Pension Benefits Post-retirement Benefits
---------------- ------------------------
1999 1998 1999 1998
---- ---- ---- ----
Prepaid benefit cost $ 617 $ 540
Accrued benefit liability (474) (1,337) $(3,734) $(3,877)
Intangible asset 350
Deferred tax asset 229
Accumulated other comprehensive losses 357
---- ----- ------- -------
Net amount recognized $ 143 $ 139 $(3,734) $(3,877)
====== ===== ======= =======
Weighted average assumptions:
Discount rate 7.75% 6.50% 7.75% 6.75%
Expected return on plan assets 9.00% 9.00% N/A N/A
Rate of compensation increase 4.00% 4.00% N/A N/A
NOTE 11 - PENSION AND POST-RETIREMENT BENEFITS (Continued):
Components of net periodic benefit costs
for the years ended December 31,
are as follows:
Pension Benefits Post-retirement Benefits
---------------- ------------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
Service cost $261 $167 $126 $ 1 $ 1 $ 1
Interest cost 462 374 317 140 135 175
Expected return on plan assets (580) (419) (360)
Amortization of prior service cost 47 33 33 (102) (102) (102)
Amortization of initial unrecognized obligation 2 21 21
Amortization of unrecognized net loss (gain) 11 2 (14) (38)
----- ----- ----- ----- ------ ----
Net periodic benefit cost $ 203 $ 178 $ 137 $ 25 $ (4) 74
The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $2,167, $1,960 and $1,924, respectively, as of December 31, 1999 and $6,960, $6,728 and $6,067, respectively, as of December 31, 1998.
Assumed health care cost trend rates have a significant effect on the amounts reported for the post-retirement plan. The Company assumed an average inflation rate for health care costs ranging from 8.0% currently to 5.5% in 2006 and thereafter. A one-percentage point change in assumed health care cost trend rates would have the following effects:
1-Percentage 1-Percentage
Point Increase Point Decrease
-------------- --------------
Effect on total of service and interest
cost components: $ 12 $ (10)
Effect on post-retirement obligation: $151 $(134)
The following table summarizes the status of the Company’s significant foreign defined benefit pension plans:
NOTE 11 - PENSION AND POST-RETIREMENT BENEFITS (Continued):
December 31,
------------
1999 1998
---- ----
Change in benefit obligation:
Benefit obligation at beginning of year $8,760 $7,449
Service cost 468 397
Interest cost 464 449
Actuarial loss (gain) 571 (83)
Benefits paid (121) (124)
Effect of exchange rates (1,282) 672
------ ---
Benefit obligation at end of year $8,860 $8,760
------ ------
Change in plan assets:
Fair value of plan assets at beginning of year $8,019 $6,370
Actual return on plan assets 431 419
Employer contributions 729 663
Benefits paid (121) (124)
Adjustments 165 140
Effect of exchange rates (1,188) 551
------ ---
Fair value of plan assets at end of year $8,035 $8,019
------ ------
1999 1998
---- ----
Funded status $(825) $(741)
Unrecognized net actuarial loss (gain) 956 725
Unrecognized net obligation (asset) 224 325
--- ---
Net amount recognized $ 355 $ 309
===== =======
NOTE 11 - PENSION AND POST-RETIREMENT BENEFITS (Continued):
Amounts recognized in the statement of
financial position consist of:
1999 1998
---- ----
Prepaid benefit cost $355 $ 309
Accrued benefit liability
Intangible asset
Deferred tax asset
Accumulated other comprehensive losses _____ _____
Net amount recognized $ 355 $ 309
===== =====
Weighted average assumptions:
Discount rate 5.50% 6.00%
Expected return on plan assets 5.50% 6.00%
Rate of compensation increase 3.50% 3.50%
Components of net periodic benefit costs
for the years ended December 31, are
as follows:
1999 1998 1997
---- ---- ----
Service cost $468 $397 $395
Interest cost 464 449 414
Expected return on plan assets (431) (419) (362)
Amortization of initial unrecognized
obligation 58 61 62
Amortization of unrecognized net loss (gain 23 3 25
-- - --
Net periodic benefit cost $582 $491 $534
==== ==== ====
NOTE 12 - OTHER EMPLOYEE BENEFITS:
Stock Options-Effective May 1, 1992, the Company adopted the 1992 Stock Option Plan (the “Option Plan”). The aggregate maximum number of shares of Common Stock available for awards under the Plan is 521,952. Options granted under the Option Plan may be either incentive stock options or non-qualified stock options. The exercise price of each option equals the market price of the Company’s stock on the date of the grant and an options maximum term is 10 years. Options generally vest in 20% increments beginning with the first anniversary of the grant.
The Company applies APB Opinion 25 and related Interpretations in accounting for its Option Plan. Accordingly, no compensation cost has been recognized for options granted under its Option Plan. Had compensation cost for the Company’s Option Plan been determined based on the fair value at the grant dates for awards under the Option Plan consistent with the method of FASB Statement 123, the Company’s net income and earnings per share (basic and diluted) would have been reduced by the pro forma amounts of: 1999 net income, $462, and earnings per share, $.08; 1998 net income, $370, and earnings per share, $.06; 1997 net income, $334, and earnings per share, $.06. This determination of fair value was based on using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1999, 1998, and 1997: dividend yield of 0%, expected lives of 5 years, expected volatility of 41%, 42% and 40%, respectively, and a risk free interest rate of 6.4%, 4.6% and 5.7%, respectively.
NOTE 12 - OTHER EMPLOYEE BENEFITS (Continued):
Stock Options- (Continued)A summary of the status of the Option Plan at December 31, 1999, 1998 and 1997 and changes during the years ending on those dates is as follows:
Weighted
Average
Number Price Exercise
of shares Per Share Price
--------- --------- -----
Options outstanding at December 31, 1996... 331,905 $10.75-$25.50 $13.34
Granted.................................. 49,250 $16.00-$22.50 $19.43
Exercised................................ (3,260) $10.75-$18.75 $14.35
Cancelled and available for reissue...... (27,730) $10.75-$18.75 $13.87
Options outstanding at December 31, 1997... 350,165 $10.75-$25.50 $14.33
Granted.................................. 221,195 $14.875-$33.50 $19.78
Exercised................................ (29,790) $10.75-$19.50 $14.39
Cancelled and available for reissue...... (79,335) $12.50-$33.50 $25.68
Options outstanding at December 31, 1998... 462,235 $10.75-$33.50 $15.12
Granted.................................. 51,000 $13.55-$20.00 $13.89
Exercised................................ (4,998) $10.75-$12.75 $11.05
Cancelled and available for reissue...... (31,783) $10.75-$33.50 $17.12
Options outstanding at December 31, 1999... 476,454 $10.75-$33.50 $14.90
Options exercisable at December 31, 1999... 207,879 $10.75-$33.50 $14.95
Options available for grant at
December 31, 1999........................ 45,498
Weighted average remaining life (years) at December 31, 1999 7
The following table summarizes information about the stock options outstanding
at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices 12/31/99 Life Price 12/31/99 Price
------ -------- ---- ----- -------- -----
$10.75 to $12.50 88,564 6 $11.91 48,014 $11.92
$12.625 to $13.50 144,680 7 $13.14 80,220 $13.16
$13.625 to $15.00 110,650 9 $14.65 16,530 $14.96
$15.50 to $18.75 109,795 7 $17.37 53,720 $18.01
$20.00 to $33.50 22,765 8 $27.01 9,395 $28.25
$10.75 to $33.50 476,454 7 $14.90 207,879 $14.95
NOTE 12 - OTHER EMPLOYEE BENEFITS (Continued):
Share Participation Plan-The Company has a Share Participation Plan (the “Share Plan”) as a means of rewarding certain employees of the Company for their effort in contributing to an increase in the value of the Company as well as to provide an incentive to continue employment in the Company. The Share Plan covers all full-time employees of the Company, with the exception of executive officers and certain other senior employees of the Company, who have completed at least one full year of service.
The Share Plan entitles employees holding shares to receive a pro rata portion of a cash award pool to be established in the event the Company sells a substantial portion of its assets, undergoes a substantial change in beneficial ownership of its equity securities, merges or is consolidated into an unaffiliated third party. The cash award paid is a sum equal to 2% of the net amount of cash and fair market value of any publicly traded securities paid in consideration of a triggering event, less $2.6 million. In the event that an employee receives payment for their shares under the Share Plan, a proportionate percentage of their stock options, if any, in the Option Plan will be subject to cancellation.
NOTE 13 - OPERATING LEASES:
The Company leases certain manufacturing, warehouse and office facilities, and equipment. Future minimum lease payments required as of December 31, 1999 under operating leases that have initial non-cancelable lease terms exceeding one year are as follows:
Year
----
2000 $2,342
2001 1,646
2002 847
2003 277
2004 164
Thereafter 532
---
$5,808
======
Rent expense was approximately $3,113 for 1999, $2,914 for 1998 and $2,941 for 1997.
NOTE 14 - COMMITMENTS AND CONTINGENCIES:
The Company is subject to a variety of environmental and pollution control regulations in the jurisdictions in which it operates. These laws and regulations require the Company to make significant expenditures for remediation, capital improvements and operating environmental protection equipment. Future developments and changes in environmental regulations may require the Company to make additional unforeseen environmental expenditures. The Company’s major competitors are confronted by substantially similar environmental risks and regulations.
The Company has identified certain soil and groundwater contamination at its Birmingham, New Jersey facility. The Company has conducted extensive sampling plans for both soil and ground-water and has proposed a remedial action work plan (the “Work Plan”) to the New Jersey Department of Environmental Protection (the “DEP”) related to the clean-up of the Birmingham facility. DEP has approved the soil related portions of the Work Plan. The Company has completed essentially all of the soil related cleanup. The ground water remedial activities at the Birmingham facility are continuing.
The Company has identified certain soil and groundwater contamination at its Wellford, South Carolina facility. The Company submitted a remedial action plan to the South Carolina Department of Health and Environmental Control (DHEC) for its review. DHEC has approved the Company’s proposed action for remediation of potential groundwater contamination, and these activities are in progress at this time.
The Company completed in 1998 various environmental reports to identify the extent of soil and groundwater contamination at its manufacturing facility in Ede, Holland and other facilities owned by third parties which are adjacent thereto. Based on these studies, a plan of remediation was prepared by an environmental consulting firm and was approved by the authorities. The remedial activities associated with that plan are in progress and will continue for sometime into the future.
The Company’s Hicksville, New York facility is located on a superfund site as designated by the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (“CERCLA”). The Company has received full indemnification from its prior owners and any costs incurred to date have been funded under this indemnification agreement. In the opinion of management, future costs to the Company will be minimal and not material to the Company’s financial position or results of operation. In addition, in connection with the Ruco acquisition, the Company purchased environmental insurance coverage to address contingencies at the Hicksville site.
In addition to sites occupied by the Company, the Company has on occasion been advised that it may be named as a potentially responsible party under CERCLA or similar state statutes with respect to the transport and disposal of hazardous wastes. At present, the Company is a party in a
NOTE 14 - COMMITMENTS AND CONTINGENCIES (Continued):
legal action in the United States regarding the clean-up of hazardous waste or chemicals at a site never occupied by the Company or its predecessors.
The Company has not identified any sites which may require remediation but which have not been cited specifically by regulatory authorities for non-compliance with environmental rules and regulations.
Although it is difficult to quantify the potential impact of compliance with or liability under environmental protection laws, the Company believes that it has made adequate accruals for all clean-up and other related costs with respect to environmental problems of which it is aware. At December 31, 1999 and 1998, the Company has accrued approximately $1,455 and $1,312, respectively, to offset future environmental assessment and remediation costs. The Company has not reduced its environmental liabilities or recorded any assets related to potential insurance recoveries.
There are also pending against the Company several claims and lawsuits arising in the normal course of its business. Such claims and lawsuits include allegations of patent infringement and injuries related to the inhalation of hazardous chemicals.
The Company believes it has adequate insurance to cover any such claims subject to a self-insurance retention of $1,000. Similarly, the Company has several outstanding claims and lawsuits arising in the normal course of business against various other parties.
The Company believes that adequate provision has been made for the environmental and legal proceedings described above, and that such proceedings will not have a material adverse effect on the financial position, cash flow or operating results of the Company.
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS:
The fair value of a financial instrument represents the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation.
The carrying amounts of the Company’s long-term debt and the current portion of long-term debt approximate fair value because the interest rates are based on short-term market rates.
NOTE 16 - BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION:
In 1998 the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS No. 131). SFAS No. 131 utilizes the management approach as the source for reportable segment disclosure. The statement also requires disclosures about products and services, geographic areas and major customers. The required disclosures under this statement are set forth below.
The Company operates in the following three business segments - textile chemical specialty products, polymer intermediates and environmental products and services. These segments are categorized based on the Company’s management and reporting structure and the type of products and services provided. These products and services are the basis for segment presentation. The polymer intermediates segment was established in 1998 primarily due to the Ruco acquisition.
The Company’s textile chemical products are used in the largest segment of the textile chemical specialties industry, wet processing, and are designed to improve the wet processing of fabrics and garments as well as enhance the aesthetic and physical characteristics of such fabrics and garments.
The polymer intermediates segment 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 environmental products include ion exchange resins for use in home water softening/ conditioning and industrial water treatment; biochemicals for treating industrial, municipal and sanitary waste, and contaminated soil and groundwater.
The Company’s business segments offer different products and services which require different technologies and marketing strategies and are as such managed as separate strategic business units.
The accounting policies of the segments are essentially the same as those described in the summary of accounting policies. Sales and transfers between geographic areas are generally priced to recover cost plus an appropriate markup for profit. Operating income is revenue less related costs and direct and allocated operating expenses, excluding interest and other income (expense), net.
No single customer accounts for more than 5% of consolidated revenue in the periods presented.
NOTE 16 - BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION (Continued):
The following schedule presents information about the Company’s operations by business segment (in thousands):
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
Textile Polymer Environmental Textile Polymer Environmental Textile Polymer Environmental
Chemical Inter- Products and Chemical Inter- Products and Chemical Inter- Products and
Specialties mediates Services Total Specialties mediates Services Total Specialties mediates Services Total
----------- -------- -------- ----- ----------- -------- -------- ----- ----------- -------- -------- -----
Revenues from external $132,118 $86,567 $50,438 $269,123 $139,581 $34,162 $49,079 $222,822 $133,452 -- $55,362 $188,814
customers
Inter-segment revenues 35 158 193 23 -- 271 294 7 -- 406 413
Depreciation and ....... 6,192 5,237 1,891 13,320 5,201 2,116 1,711 9,028 4,238 -- 2,286 6,524
amortization
Segment operating income 562 11,415 5,806 17,783 13,073 3,517 4,747 21,337 16,697 -- 5,154 21,851
Identifiable assets .... 100,238 121,830 35,063 257,131 113,418 121,817 35,049 270,284 118,299 -- 31,934 150,233
Capital expenditures ... 2,773 1,305 1,205 5,283 7,788 1,158 1,743 10,689 6,990 -- 2,375 9,365
Acquisitions ........... 132 -- 1,572 1,704 6,938 110,838 73 117,849 14,476 -- -- 14,476
NOTE 16 - BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION (Continued):
The following schedule presents information about the Company’s operations by geographic location (in thousands). Sales to external customers are attributed to countries based on the location of customer and not the country of origin:
Year ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
Sales to external customers:
United States $178,852 $133,138 $101,960
Foreign 90,271 89,684 86,854
------ ------ ------
Total sales to external customers $269,123 $222,822 $188,814
======== ======== ========
Long-lived assets:
United States $134,256 $148,591 $ 39,882
Foreign 15,591 18,469 15,016
------ ------ ------
Total long-lived assets $149,847 $167,060 $ 54,898
======== ======== ========
NOTE 17 - QUARTERLY FINANCIAL DATA (Unaudited):
The following is a summary of quarterly financial results for the years ended December 31, 1999 and 1998 (amounts in thousands except
per share data):
1999 1998
---- ----
Three Months Ended Three Months Ended
------------------ ------------------
March 31 June 30 Sept. 30 Dec. 31* March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------- -------- ------- -------- -------
Net sales .................... $ 68,685 $ 64,974 $ 66,079 $ 69,385 $ 48,572 $ 48,983 $ 58,834 $ 66,433
Gross profit ................. 23,558 22,900 21,756 23,384 19,779 19,022 18,886 21,237
Operating income (loss) ...... 9,412 6,489 5,995 (4,113) 6,343 5,330 4,450 5,214
Income (loss) before ......... 3,410 2,222 1,749 (4,390) 3,764 2,511 1,118 1,345
extraordinary item
Income (loss) per share before
extraordinary item:
Basic ...................... .60 .39 .31 (.77) .66 .20 .24
Diluted .................... .59 .38 .30 (.77) .64 .43 .19 .23
Net Income (loss) ............ 3,410 2,222 1,749 (4,390) 3,764 2,511 805 1,345
Net income (loss) per share:
Basic ...................... .60 .39 .31 (.77) .66 .14 .24
Diluted .................... .59 .38 .30 (.77) .64 .43 .14 .23
*Includes a non-recurring pre-tax charge of $10,954 in the fourth quarter of 1999 to reflect the Company’s assessment that certain intangible assets related to the garment processing chemicals business have been permanently impaired as a result of long-term changes in the industry. The after-tax charge amounted to $6,688 or $1.16 per share.
beginning of costs and Other Balance at
period expenses accounts(1) Deductions end of period
------ -------- ----------- ---------- -------------
Allowance for Doubtful Accounts
For the year ended:
December 31, 1999 $2,785 $1,250 $ (59) $(397) $3,579
December 31, 1998 2,058 726 404 (403) 2,785
December 31, 1997 1,820 709 (174) (297) 2,058
Inventory Reserves
For the year ended:
December 31, 1999 2,036 696 (8) (1,054) 1,670
December 31, 1998 976 908 1,232 (1,080) 2,036
December 31, 1997 873 1,300 (7) (1,190) 976
(1)Foreign exchange adjustments, acquisitions, and other reclassifications
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