SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission file number 33-84778
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FREEDOM CHEMICAL COMPANY
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 51-0340498
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
Five Radnor Corporate Center, 100 Matsonford Road, Suite 170,
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Radnor, Pennsylvania 19087
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (610)964-9970
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(Former Address of Principal Executive Offices, if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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As of November 13, 1997, 156,501 shares of the registrant's Series A Common
Stock and no shares of the registrant's Series B Common Stock were outstanding.
<PAGE>
FREEDOM CHEMICAL COMPANY and SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
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Page
PART I
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Item 1. Consolidated Balance Sheets at December 31, 1996 and September 30, 1997..................... 3
Consolidated Statements of Operations for the Three Months and Nine Months Ended
September 30, 1996 and 1997, respectively............................................... 4
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1996 and 1997, respectively............................................... 5
Notes to Consolidated Financial Statements.................................................. 6-20
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 21-26
PART II
Item 2. Change in Securities........................................................................ 27
Item 5. Other Information........................................................................... 27
Item 6. Exhibits and Reports on Form 8-K............................................................ 27
</TABLE>
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
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FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................... $ 3,554 $ 768
Accounts receivable, net of allowance for doubtful
accounts of $456 and $858, respectively......................... 44,249 45,283
Due from shareholders........................................... 22 68
Refundable income taxes......................................... 1,811 --
Inventories..................................................... 53,019 47,843
Prepaid expenses and other current assets....................... 5,251 4,489
Environmental indemnification................................... 492 192
Deferred income taxes........................................... 7,237 6,585
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Total current assets........................................ 115,635 105,228
Property plant and equipment:
Land............................................................ 3,872 3,680
Buildings and improvements...................................... 14,600 15,442
Machinery and equipment......................................... 101,356 110,723
Other........................................................... 11,137 6,440
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130,965 136,285
Less accumulated depreciation..................................... 28,754 37,011
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102,211 99,274
Intangible assets, net............................................ 34,040 32,695
Environmental indemnification..................................... 8 663
Deferred financing costs, net..................................... 6,902 6,605
Investments in joint ventures..................................... 541 2,280
Other............................................................. 3,577 3,731
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Total assets................................................ $ 262,914 $ 250,476
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LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term debt............................ $ 1,067 $ 8
Short-term borrowings........................................... 936 412
Notes payable................................................... 1,098 987
Accounts payable................................................ 20,996 21,923
Accrued expenses................................................ 7,889 7,966
Accrued interest................................................ 3,033 6,387
Accrued compensation............................................ 5,787 5,380
Accrued restructuring and other charges......................... 4,127 2,239
Environmental................................................... 1,700 2,812
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Total current liabilities................................... 46,633 48,114
Long-term debt.................................................... 153,560 150,797
Environmental..................................................... 15,987 12,279
Deferred income taxes............................................. 12,259 11,315
Postretirement benefits........................................... 4,416 4,632
Other............................................................. 3,346 1,969
Minority interest................................................. 3,390 3,445
Commitments and contingencies..................................... __ __
Mandatory redeemable preferred stock:
Series B, cumulative, $1,000 par value, authorized 40,000
shares; issued and outstanding 21,322 shares and 21,519,
respectively, stated at liquidation value of $1,000 per share plus
accrued and unpaid dividends of $11,389 and $14,429, respectively 32,711 35,948
Series C, cumulative, $1,000 par value, authorized 15,000 shares;
issued 9,137 shares, outstanding 8,916 shares, stated at
liquidation value of $1,054 per share plus accrued and unpaid
dividends of $3,453 and $4,640, respectively.................... 13,083 14,270
Less: Treasury stock, at cost (221 shares of Series C preferred) (262) (262)
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45,532 49,956
Stockholders' deficit:
Common stock
Series A, $.01 par value, authorized 200,000 shares; issued
154,872 and 156,892 shares respectively, outstanding 154,481
and 156,501 shares, respectively.............................. 2 2
Series B, $.01 par value, authorized 10,000 shares; none
issued or outstanding......................................... -- --
Additional paid-in capital...................................... 10,846 7,149
Accumulated deficit............................................. (30,444) (34,742)
Cumulative translation adjustment............................... (397) (2,224)
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(19,993) (29,815)
Less: Stockholder notes receivable................................ (2,113) (2,113)
Treasury stock, at cost (391 shares of Series A common)......... (46) (46)
Minimum pension liability....................................... (57) (57)
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Total stockholders' deficit....................................... (22,209) (32,031)
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Total liabilities and stockholders' deficit................ $ 262,914 $ 250,476
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</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
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1996 1997 1996 1997
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<S> <C> <C> <C> <C>
Net sales.................................................. $ 73,264 $ 71,327 $ 229,051 $ 217,619
Cost of goods sold (excluding inventory valuation charges). 57,137 56,395 173,619 168,684
Inventory valuation charges................................ 4,980 -- 4,980 3,155
--------- -------- -------- ---------
Gross profit......................................... 11,147 14,932 50,452 45,780
Selling, general and administrative expense................ 11,793 10,541 35,951 31,930
Non-cash compensation expense ............................. 84 158 159 190
Research and development expense........................... 1,085 1,045 3,584 3,317
Restructuring and other charges ........................... -- 112 -- 2,970
--------- -------- --------- ---------
Operating income (loss)............................. (1,815) 3,076 10,758 7,373
Interest and debt expense.................................. 3,550 3,982 10,339 12,876
Other income (loss)........................................ 281 (177) 507 298
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Income (loss) before minority
interest and income taxes....................... (5,084) (1,083) 926 (5,205)
Minority interest.......................................... 69 88 195 220
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Income (loss) before income taxes ................ (5,153) (1,171) 731 (5,425)
Provision (benefit) for income taxes....................... (508) 181 935 460
Equity in income of joint ventures......................... 72 459 527 1,587
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Net income (loss)................................ (4,573) (893) 323 (4,298)
Preferred dividends........................................ 481 1,468 2,949 4,229
--------- -------- --------- ---------
Net loss applicable to common shares.................. $ (5,054) $ (2,361) $ (2,626) $ (8,527)
========== ========= ========== ==========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
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1996 1997
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ....................................................... $ 323 $ (4,298)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................................ 10,136 10,771
Provision for doubtful accounts.......................................... 65 290
(Gain) loss on sale of fixed assets...................................... (60) 131
Minority interest........................................................ 195 203
Non-cash compensation expense............................................ 159 190
Equity increase of joint ventures........................................ (528) (1,588)
Deferred income taxes.................................................... 621 116
Inventory valuation charges.............................................. 4,980 3,155
Restructuring and other charges (excluding inventory
valuation charges), net of payments..................................... (2,649) (1,123)
Other changes that provided (used) cash: ................................
Accounts receivable.................................................. (7,940) (3,238)
Inventories.......................................................... (14,138) (69)
Prepaid expenses and other current assets............................ (2,620) 2,248
Accounts payable, accrued expenses and other liabilities............. 10,581 4,963
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Net cash (used in) provided by operating activities.......................... (875) 11,751
Cash flows from investing activities:
Capital expenditures.................................................. (7,883) (9,300)
Decrease in investments in joint ventures............................. 31 --
Proceeds from sale of capital equipment............................... 1,651 67
Payments for environmental liabilities................................ (1,988) (3,744)
Proceeds from environmental indemnification........................... 1,038 300
Other................................................................. 36 184
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Net cash used in investing activities........................................ (7,115) (12,493)
Cash flows from financing activities:
Issuance of common stock................................................. -- 223
Issuance of preferred stock.............................................. -- 196
Revolving borrowings under Credit Agreement.............................. 47,000 128,011
Revolving repayments under Credit Agreement............................. (41,499) (129,457)
Term loan repayments under Credit Agreement............................. (5,166) --
Short-term borrowings under European Facility............................ 8,329 --
Purchase of treasury stock............................................... (87) --
Payment of registration costs............................................ (114) (733)
Repayment of capital lease obligations................................... (91) (14)
Payments for financing costs............................................. (50) (55)
Dividends paid to minority interests..................................... (130) (129)
Other.................................................................... (40) (14)
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Net cash provided by (used in) financing activities.......................... 8,152 (1,972)
Effect of exchange rate changes on cash...................................... (68) (72)
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Net increase (decrease) in cash and cash equivalents......................... 94 (2,786)
Cash and cash equivalents, beginning of period............................... 1,450 3,554
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Cash and cash equivalents, end of period..................................... $ 1,544 $ 768
======== =========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)
1. Description of Business
Freedom Chemical Company, the Registrant ("FCC"; collectively with its
subsidiaries referred to as the "Company") was incorporated in Delaware on April
14, 1992 for the purpose of acquiring specialty chemical companies which
manufacture and market specialty chemical products for diverse applications. The
Company focuses globally on niche markets where it has strong market positions,
which have relatively few competitors and where there are significant barriers
to entry. In addition, the Company's products are often very important to the
performance of its customers' products, but typically represent a relatively
small percentage of their total costs. The Company has five core product lines:
(i) Food and Personal Care Ingredients; (ii) Pharmaceutical Intermediates and
Natural Additives; (iii) Specialty Organic Chemicals and Intermediates; (iv)
Organic Pigments and Dyes; and (v) Textile and Paper Chemicals.
2. Accounting Policies
Principles of Consolidation
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The accompanying consolidated financial statements are unaudited and have
been prepared by management pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, these
consolidated financial statements contain all of the adjustments, consisting of
normal recurring adjustments, necessary to present fairly, in summarized form,
the financial position of the Company as of September 30,1997; the results of
its operations for the three and nine months ended September 30, 1996 and 1997,
respectively; and changes in its cash flows for the nine months ended September
30, 1996 and 1997, respectively. The results of operations for the three and
nine months periods ended September 30, 1997, respectively, are not necessarily
indicative of the results that may be expected for the year ending December 31,
1997. The financial information presented herein should be read in conjunction
with the consolidated financial statements included in the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996.
The consolidated financial statements include the accounts of FCC and its
subsidiaries which include: Freedom Textile Chemicals Co. and subsidiaries
("FTCC"), Hilton Davis Chemical Company ("HDCC"), Kalama Chemical, Inc. and
subsidiaries ("KCI"), Freedom Chemical Diamalt GmbH ("Diamalt") and subsidiaries
(collectively "FCD"), Freedom Europe B.V. ("BV") and Diamalt Inc. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Reclassifications
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Beginning in 1997, certain expenses related to evaluations of lower of cost
or market which were previously classified as cost of goods sold have been
reclassified to inventory valuation charges as a separate component of gross
profit. All financial information has been restated to conform to the current
presentation.
Certain other prior year amounts have been reclassified to conform to the
current year's presentation.
Forward Exchange Contracts
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The Company enters into forward exchange contracts primarily as hedges
relating to identifiable currency positions. These financial instruments are
designed to minimize exposure and reduce risk from exchange rate fluctuations in
the regular course of business. Gains and losses on forward exchange contracts
that hedge exposures on firm foreign currency commitments are deferred and
recognized as adjustments to the bases of those assets. Gains and losses on
forward exchange contracts which hedge foreign currency assets or liabilities
are recognized in income as incurred. Such amounts effectively offset gains and
losses on the foreign currency assets or liabilities that are hedged. The cash
flow from such contracts is classified in the same category as the transaction
hedged in the statements on consolidated cash flows.
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)
3. New Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 129, "Disclosure of
Information about Capital Structure" which becomes effective for financial
statements for periods ending after December 15, 1997. SFAS No. 129 established
certain required disclosures related to information about securities,
liquidation preference of preferred stock and redeemable stock. The Company
currently discloses the capital structure information required by SFAS 129.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" which becomes effective for financial statements for periods beginning
after December 15, 1997. SFAS No. 130 established standards for reporting and
display of comprehensive income and its components (revenues, expense, gains and
losses) in a full set of general-purpose financial statements. The statement
requires an enterprise to classify items of other comprehensive income by their
nature in a financial statement and display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of the statement of financial position. The
implementation of this standard is not expected to have a material effect on the
Company's financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" which becomes effective for financial
statements for periods beginning after December 15, 1997. SFAS No. 131
established standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also established standards
for related disclosures about products and services, geographical areas, and
major customers. The implementation of this standard is not expected to have a
material effect on the Company's financial statements.
4. Inventories
A summary of the major classifications of inventories is as follows:
December 31, September 30,
1996 1997
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Raw materials, work in process $ 27,265 $ 27,627
Finished goods 31,888 21,727
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59,153 49,354
Less: reserves ( 6,134) (1,511)
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$ 53,019 $ 47,843
========== =========
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)
5. Inventory Valuation Charges
During the nine months ended September 30, 1997, the Company recorded
inventory valuation charges of $3,155 related to write-downs of certain products
in its Pharmaceutical Intermediates and Natural Additives group. The write-downs
resulted from an evaluation of lower of cost or market due primarily to
industry-wide overproduction and declines in market values partially associated
with recent changes in government regulation governing prescription
reimbursement.
In March 1997, a charge of $679 was recorded based on an analysis of
conditions at that time. An anticipated improvement in market conditions during
the three months ended June 30, 1997 did not occur. Accordingly, management
reviewed the inventory balances at June 30, 1997 and recorded an additional
charge of $2,476.
In September, 1996, the Company recorded charges totaling $4,980 as a
result of inventory obsolescence principally in the Company's Organic Pigments
and Dyes product line.
6. Restructuring and Other Charges
In April 1997, the Company announced a plan to close its Vernon, France
facility. This closure was completed in June 1997. Manufacturing production and
certain manufacturing equipment were transferred to other locations as part of
the closure plan. The Company recorded restructuring and other charges of
$2,606. These charges include costs of $1,813 for severance to employees, $660
for the write-off of fixed assets and inventory, and $133 for other charges,
primarily for preparing the site for sale. The balance of this restructuring
liability as of September 30, 1997 was $887 and should be paid or settled during
the 1997 fiscal year.
As of September 30, 1997, the Company recorded charges totaling $444 as a
result of a marketing revitalization program the Company initiated primarily for
its Organic Pigments and Dyes product group. The Company expects to record
approximately $600 in 1997 for this program. These charges will be expensed as
incurred throughout the remainder of the year.
7. Environmental Contingencies
Contingencies exist for the Company and certain of its subsidiaries because
of legal and administrative proceedings arising out of the acquisition of
businesses and the normal course of business. Such contingencies include
environmental proceedings directly and indirectly against the Company or its
subsidiaries as well as matters internally identified by the Company. The
resolution of such matters often spans several years and frequently includes
regulatory oversight and/or adjudication. Additionally, many remediation
requirements are not fixed and are likely to be affected by future
technological, site and regulatory developments. Consequently, the ultimate
extent of liabilities with respect to such matters as well as the timing of cash
disbursements cannot be determined with certainty.
In connection with the purchase of a number of the Company's facilities,
contractual rights were obtained to indemnify the Company for certain types of
environmental pollution relating to those facilities. As more fully described
below, the Company consequently believes that a portion of the costs incurred in
connection with environmental liabilities existing prior to the Company's
ownership and remediation actions that may be required relating to the Company's
past and present properties will be the responsibility of other parties.
Accordingly, the Company believes that future liabilities over the amounts
accrued, relating to environmental conditions existing prior to the Company's
ownership and remediation actions, are not likely to have a material adverse
effect on the financial position of the Company, although the effect on results
of operations and cash flows could be material when these conditions are
resolved in a future period.
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)
7. Environmental Contingencies, continued
The Company has sent wastes from its operations to various third-party
waste disposal sites. From time to time the Company receives notices from
representatives of governmental agencies and private parties contending that the
Company is potentially liable for a portion of the investigation and remediation
costs and damages at formerly owned or operated sites and third-party sites,
some of which are discussed herein. The Company does not believe that its
liabilities in connection with such third-party sites, either individually or in
the aggregate, will have a material adverse effect on the Company's financial
position, results of operations or cash flows.
FTCC
In order to consolidate its textile operations, in 1995, the Company
transferred the textile assets of HDCC located in Cowpens, South Carolina,
acquired as a part of the HDCC acquisition, to FTCC. In 1994, the Company
reached a tentative agreement with the South Carolina Department of Health and
Environmental Control on an administrative consent agreement requiring the
former owner of the Cowpens facility prior to HDCC to take corrective measures
and conduct additional investigation, and the Company and the State of South
Carolina agreed on a work plan for assessment and remediation. As part of the
FTCC Asset Purchase Agreement, the former owner of the property prior to HDCC
agreed that the costs to be expended for the investigation and remediation of
the existing environmental conditions would be deducted from the final purchase
price payment due to them of $350.
At the time of the acquisition, the Company recorded a liability for $350
relating to the payment due to the former owners. In 1994, initial
investigations disclosed offsite groundwater contamination. The Company hired an
environmental consultant to manage this project and is developing an
investigative plan. While the Company believes that any remediation costs
incurred may be recovered from the prior owners, a $1,900 charge was recorded in
1995 for estimated remediation costs since any recoveries or reimbursements from
the prior owners are not currently determinable. As of September 30, 1997, FTCC
has accrued approximately $1,612 for this liability and believes the risk of
loss exposure is up to $6,500.
HDCC
In connection with the acquisition of HDCC, Sterling Winthrop, Inc.
("SWI"), a former owner of HDCC, entered into an Environmental Matters Agreement
("EMA") with HDCC, whereby SWI has taken responsibility for environmental
conditions that predate 1987, with certain exceptions, as well as for
remediation of the land at HDCC's Cincinnati facility pursuant to an October
1986 Consent Decree entered into between the State of Ohio and SWI and its
subsidiary.
Under the EMA, HDCC has agreed to share responsibility with SWI for certain
specific environmental conditions. Also, HDCC is responsible for environmental
conditions that postdate 1986. In addition, PMC, Inc. ("PMC"), another prior
owner of HDCC, has placed $1,000 of the purchase price paid by the Company in an
escrow account to indemnify the Company against breaches of representations and
warranties contained in the Stock Purchase Agreement between PMC and the
Company, including schedules thereto, to the extent such liabilities (including
certain claims not related to the environment) exceeded $200 in the aggregate
and subject to a total cap of $1,000 (excluding certain claims not related to
the environment). HDCC does not believe that it will be required to incur
significant liability in connection with such environmental conditions.
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)
7. Environmental Contingencies, continued
KCI
KCI owns three manufacturing facilities: Kalama, Washington; Garfield, New
Jersey; and Beaufort, South Carolina. Operations at these three sites, including
operations by subsidiaries formerly owned by KCI, have generated environmental
liabilities. The Stock Purchase Agreement between the Company and BC Sugar
whereby the Company acquired KCI (the "KCI Stock Purchase Agreement"), requires
BC Sugar to indemnify and reimburse the Company for certain environmental
liabilities, as discussed in more detail below.
The Company's Kalama, Washington facility is subject to an agreed order
between KCI and the Environmental Protection Agency ("EPA") requiring KCI to
remediate portions of the site and to limit potential offsite contamination,
pursuant to the Resource Conservation and Recovery Act ("RCRA"). The EPA has
approved one of Kalama's interim corrective measures work plans and initial RCRA
facility investigation report describing proposed remediation of the site.
Capital equipment has been installed in part of the facility and remediation is
ongoing. The Company believes that the interim corrective measures will provide
most if not all of the remediation required by the EPA. As of September 30,
1997, KCI has accrued approximately $5,700 for this liability and believes the
risk of loss exposure is up to $18,000. The associated indemnification as of
September 30, 1997 is $435 to $7,200 based on the risk of loss exposure.
The Company's Garfield facility is subject to an administrative consent
order with the State of New Jersey requiring remediation of portions of the site
and potentially requiring remediation of areas offsite, pursuant to the New
Jersey Industrial Site Recovery Act ("ISRA"). The Garfield facility cleanup is
also subject to a Settlement Agreement (the "Tenneco Settlement Agreement"),
dated April 28, 1994, to terminate litigation between KCI and Tenneco Polymers,
Inc. ("Tenneco Polymers"), the successor in interest of the prior owner of the
site. The Tenneco Settlement Agreement requires Tenneco Polymers to conduct the
cleanup of the facility required by the State of New Jersey and to pay for 80
percent of the cleanup costs, with KCI responsible for the remaining 20 percent
of such costs. BC Sugar will remain responsible for certain of KCI's portion of
the cleanup costs pursuant to the KCI Stock Purchase Agreement as described
below. Tenneco Polymers is currently conducting additional site investigation
and discussing with the State of New Jersey the nature and scope of the required
remediation of the Garfield site. KCI has terminated manufacturing operations at
this facility.
As of September 30, 1997, KCI has accrued approximately $500 for this
liability and believes the risk of loss exposure is up to $900. The associated
indemnification as of September 30, 1997 is $200 to $360 based on the risk of
loss exposure.
The Company's Beaufort facility has been listed on the EPA's National
Priorities List pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"). KCI's subsidiary, Kalama Specialty
Chemicals, Inc. ("KSCI"), has conducted environmental studies of the site to
identify the extent of contamination and to evaluate the feasibility of
remediation alternatives, pursuant to an administrative order of consent between
KSCI and the EPA. The EPA and KSCI have reached agreement on a consent decree
under which KSCI is to perform the remediation strategy selected by the EPA.
Pilot equipment was installed and test work commenced in 1995. BC Sugar will
remain responsible for certain of KCI's portion of the cleanup costs pursuant to
the KCI Stock Purchase Agreement as described below. Manufacturing operations at
this facility have also ceased. As of September 30, 1997, KCI has accrued
approximately $3,300 for this liability and believes the risk of loss exposure
is up to $5,300. The associated indemnification as of September 30, 1997 is $100
to $600 based on the risk of loss exposure.
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)
7. Environmental Contingencies, continued
KCI and its subsidiaries have also been named as potentially responsible
parties ("PRPs") pursuant to CERCLA or similar state laws at five sites not
owned by KCI at which it is alleged that hazardous substances generated by KCI
or its subsidiaries were disposed. These sites are being remediated or studied
for remediation. KCI is cooperating with the relevant governmental agency and
other PRPs in the investigation and cleanup at each of these sites. Various
contingencies such as the incomplete status of investigation, the uncertainty of
remediation selection and effectiveness, the search for additional PRPs, the
absence of binding commitments allocating liability among PRPs and the joint and
several nature of liability under CERCLA make it impossible to predict at this
time KCI's total liability at these sites. KCI or one of its subsidiaries has
also been named as a PRP at sites under which an indemnitor (other than BC
Sugar) has agreed to undertake the defense and liability. Finally, claims of
liability have been received at other sites for which KCI has denied
responsibility. However, BC Sugar is responsible for certain liabilities
incurred at these Superfund sites pursuant to the KCI Stock Purchase Agreement,
as discussed in more detail below.
The KCI Stock Purchase Agreement provides certain indemnifications and
related provisions, which address these liabilities. Pursuant to the agreement,
BC Sugar remains responsible for the costs of investigation, negotiations with
government agencies, and installation of the capital expenditure component of
the cleanup required by the government at each of the three facilities currently
owned by KCI and its subsidiaries (i.e. Kalama, Garfield and Beaufort). BC Sugar
is also responsible for a total of 50 percent of the costs of operation and
maintenance arising from the capital expenditure component of cleanup at these
three sites until five years after the installation of the capital expenditure
component of each site.
In addition, BC Sugar is responsible for all costs incurred as a result of
KCI's liability at the offsite Superfund sites including the five at which KCI
is a cooperating PRP, sites at which an indemnitor other than BC Sugar has
agreed to accept responsibility and other identified sites at which KCI has
received claims but is currently denying liability, provided that the sites were
identified in the schedules to the Kalama Stock Purchase Agreement. BC Sugar's
liability for these sites continues until three years after the installation of
capital expenditures at all of the three currently owned facilities, but in any
event no later than May 26, 2004.
In the KCI Stock Purchase Agreement, BC Sugar also agreed to remain
responsible for certain liabilities arising from violations of environmental
laws occurring before May 26, 1994, at sites currently or formerly owned by KCI
to the extent such liabilities in the aggregate exceed $2,000 and claims are
made by the Company for such reimbursement before May 26, 1996. However, the KCI
Stock Purchase Agreement also includes certain warranties and representations by
BC Sugar that KCI was in compliance with environmental laws as of the closing
date (May 26, 1994), except as set forth in a schedule accompanying and
incorporated into the KCI Stock Purchase Agreement. BC Sugar further agreed to
indemnify the Company and KCI against liabilities arising out of the breach of
these representations and warranties to the extent each such liability exceeded
$50 individually and all such liabilities exceeded $600 in the aggregate, and
provided any such claim was made by the Company or KCI before May 26, 1996. All
of the indemnifications and other provisions whereby BC Sugar agreed to remain
responsible for costs in the KCI Stock Purchase Agreement, including those
described above, are subject to an aggregate limit of $44,000 and including
certain costs which may be directly incurred or paid by BC Sugar. The KCI Stock
Purchase Agreement required BC Sugar to establish a trust fund to provide
reimbursement for expenditures for environmental liabilities by KCI and the
Company for which BC Sugar is liable under the agreement.
As a result of the KCI Stock Purchase Agreement and the Tenneco Settlement
Agreement, the Company does not believe that additional liabilities, if any, to
be incurred by KCI under environmental laws would be material to the Company's
financial position, results of operations or cash flows.
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)
7. Environmental Contingencies, continued
In May 1991, the EPA issued a compliance order to KCI alleging nine
violations of the Clean Air Act, dating back to 1984, at the Kalama facility. In
July 1994, KCI was informally notified by the EPA that these violations (and
possibly other alleged violations of the Clean Air Act) had been referred to the
Department of Justice for possible initiation of an enforcement action. In 1996,
the Company signed a consent agreement with the Department of Justice, which
contemplated the payment of a penalty as well as an additional payment to fund
supplemental environmental projects. These amounts were included in the
liabilities established by the Company in connection with the acquisition of
KCI. The consent decree was finalized in early 1997 and all required payments
have been made totaling approximately $1,700. The Company has made a claim to BC
Sugar for indemnification in this matter.
8. Condensed Consolidating Financial Statements
The following condensed consolidating financial data illustrates the
composition of the consolidated financial statements. The Parent is FCC. The
U.S. Guarantor Subsidiaries include all domestic subsidiaries of FCC including
the following: FTCC and certain of its subsidiaries (Freedom Textile Chemical
Company (South Carolina), Inc. and FCC Acquisition Corp.), HDCC, KCI and its
subsidiaries (Kalama Specialty Chemicals, Inc. and Kalama Foreign Sales
Corporation) and Diamalt Inc. The German Guarantor Subsidiary is Diamalt,
excluding its subsidiaries. The Non-Guarantor Subsidiaries include the
following: A-Chem (U.K.) Limited (a subsidiary of FTCC), BV, Societe Francaise
Des Colloides, S.A. (a subsidiary of BV), Diamalt Pharmorganica Pvt. Limited (a
subsidiary of Diamalt), Diamalt Srl (a subsidiary of Diamalt), Indiamalt Private
Limited (a subsidiary of Diamalt). The U.S. and German Guarantor Subsidiaries
are wholly owned by the Parent.
Investments in subsidiaries are accounted for by the Parent, the U.S.
Guarantor Subsidiaries and the German Guarantor Subsidiary on an unconsolidated
basis using the equity method for purposes of the consolidating presentation.
Earnings of subsidiaries are therefore reflected in the Parent's, U.S. Guarantor
Subsidiaries' and German Guarantor Subsidiary's investment accounts and
earnings. Income tax expense (benefit) is allocated among the consolidating
entities based upon taxable income (loss) by jurisdiction within each group.
The principal elimination entries eliminate investments in subsidiaries and
intercompany balances and transactions. Separate financial statements of the
U.S. Guarantor Subsidiaries, the German Guarantor Subsidiary, and the
Non-Guarantor Subsidiaries are not presented because management has determined
that such financial statements would not be material to investors.
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Condensed Consolidating Balance Sheet
As of December 31, 1996
------------------------------------------------------------------------------
U.S. German Non
Guarantor Guarantor Guarantor Elim-
Parent Subsidiaries Subsidiary Subsidiaries inations Consolidated
--------- --------- -------- -------- -------- --------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents............... $88 $344 $2,218 $992 $(88) $3,554
Accounts receivable, net................ -- 29,933 11,458 2,858 -- 44,249
Due from affiliates..................... 6,294 -- -- 1,566 (7,860) --
Due from shareholder.................... 17 5 -- -- -- 22
Refundable income taxes................. 1,811 -- 10 -- (10) 1,811
Inventories............................. -- 33,522 17,481 2,069 (53) 53,019
Prepaid expenses and
other current assets................. 63 2,164 2,858 410 (244) 5,251
Environmental indemnification........... -- 492 -- -- -- 492
Deferred income taxes................... 609 6,492 -- 136 -- 7,237
-------- -------- ------- ------- -------- --------
Total current assets.............. 8,882 72,952 34,025 8,031 (8,255) 115,635
Property, plant and equipment:
Land.................................... -- 2,610 438 824 -- 3,872
Buildings and improvements.............. -- 13,001 704 895 -- 14,600
Machinery and equipment................. -- 88,186 9,047 4,123 -- 101,356
Other................................... 376 8,805 733 1,223 -- 11,137
-------- -------- ----- ------ ------ ------
376 112,602 10,922 7,065 -- 130,965
Less accumulated depreciation.......... 142 25,680 1,544 1,388 -- 28,754
-------- -------- ----- ------ ------ ------
234 86,922 9,378 5,677 -- 102,211
Intangible assets, net...................... 335 33,063 267 59 316 34,040
Environmental indemnification............... -- 8 -- -- -- 8
Deferred financing costs, net............... -- 5,946 948 8 -- 6,902
Investments in joint ventures............... -- -- 541 -- -- 541
Deferred income taxes....................... 3,204 -- -- -- (3,204) --
Other....................................... 148 3,163 220 46 -- 3,577
Notes receivable, subsidiaries.............. 127,943 6,578 539 -- (135,060) --
Investment in subsidiaries.................. 25,405 2,752 3,329 -- (31,486) --
-------- -------- ------- ------- -------- --------
Total assets...................... $166,151 $211,384 $49,247 $13,821 $(177,689) $262,914
======== ======== ======= ======= ========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt.... $-- $26 $-- $1,041 $-- $1,067
Short-term borrowings................... -- -- 458 478 -- 936
Notes payable........................... 2 773 -- 323 -- 1,098
Accounts payable........................ 186 15,654 4,072 1,169 (85) 20,996
Due to affiliates....................... -- 479 7,161 220 (7,860) --
Accrued expenses........................ 428 6,686 730 298 (253) 7,889
Accrued interest........................ 2,897 -- 104 32 -- 3,033
Accrued compensation.................... 345 4,184 750 508 -- 5,787
Accrued restructuring and other charges. 953 2,516 557 101 -- 4,127
Environmental........................... -- 1,700 -- -- -- 1,700
-------- -------- ------ ------- -------- --------
Total current liabilities......... 4,811 32,018 13,832 4,170 (8,198) 46,633
Long-term debt.............................. 134,500 -- 18,591 469 -- 153,560
Environmental............................... -- 15,987 -- -- -- 15,987
Deferred income taxes....................... -- 15,416 -- 47 (3,204) 12,259
Postretirement benefits..................... -- 4,416 -- -- -- 4,416
Notes payable............................... -- 119,676 13,425 1,959 (135,060) --
Other....................................... 2,456 173 456 261 -- 3,346
Minority interest........................... -- -- -- 290 3,100 3,390
Commitments and contingencies............... -- -- -- -- -- --
Mandatory redeemable preferred stock:....... 45,794 3,079 -- -- (3,079) 45,794
Less: Treasury stock................... (262) -- -- -- -- (262)
-------- -------- ------- ------- -------- --------
45,532 3,079 -- -- (3,079) 45,532
Stockholders' equity (deficit):
Common stock................................ 2 1,200 1,291 2,333 (4,824) 2
Preferred stock............................. -- 3,839 -- -- (3,839) --
Additional paid-in capital.................. 10,846 33,928 8,241 2,761 (44,930) 10,846
Retained earnings (accumulated deficit)..... (29,980) (18,148) (6,097) 1,648 22,133 (30,444)
Cumulative translation adjustment........... -- -- (492) (117) 212 (397)
Less: Stockholder note receivable........... (1,913) (200) -- -- -- (2,113)
Treasury stock, at cost................ (46) -- -- -- -- (46)
Minimum pension liability.............. (57) -- -- -- -- (57)
-------- -------- ------- ------- -------- --------
Total stockholders' equity
(deficit)........................ (21,148) 20,619 2,943 6,625 (31,248) (22,209)
-------- -------- ------- ------- -------- --------
Total liabilities and
stockholders' equity (deficit).. $166,151 $211,384 $49,247 $13,821 $(177,689) $262,914
======== ======== ======= ======= ========= ========
</TABLE>
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Condensed Consolidating Balance Sheet
As of September 30, 1997
------------------------------------------------------------------------------
U.S. German Non
Guarantor Guarantor Guarantor Elimin-
Parent Subsidiaries Subsidiary Subsidiaries ations Consolidated
--------- ---------- ---------- ---------- -------- ----------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents ................ $ 424 $ 73 $ (224) $ 722 $ (227) $ 768
Accounts receivable, net ................. -- 31,574 11,376 2,326 7 45,283
Due from affiliates ...................... 6,393 (38) 722 411 (7,488) --
Due from shareholder ..................... 68 -- -- -- -- 68
Refundable income taxes .................. -- -- -- -- -- --
Inventories .............................. -- 34,145 12,856 964 (122) 47,843
Prepaid expenses and
other current assets ................... 380 2,225 1,660 224 -- 4,489
Environmental indemnification ............ -- 192 -- -- -- 192
Deferred income taxes .................... 609 5,939 -- 37 -- 6,585
--------- --------- --------- --------- --------- ---------
Total current assets ............... 7,874 74,110 26,390 4,684 (7,830) 105,228
Property, plant and equipment:
Land ..................................... -- 2,514 384 782 -- 3,680
Buildings and improvements ............... -- 13,209 616 1,617 -- 15,442
Machinery and equipment .................. -- 97,499 7,898 5,326 -- 110,723
Other .................................... 660 4,632 994 154 -- 6,440
--------- --------- --------- --------- --------- ---------
660 117,854 9,892 7,879 -- 136,285
Less accumulated depreciation ........... 231 33,164 1,886 1,730 -- 37,011
--------- --------- --------- --------- --------- ---------
429 84,690 8,006 6,149 -- 99,274
Intangible assets, net ....................... 266 31,739 352 338 -- 32,695
Environmental indemnification ................ -- 663 -- -- -- 663
Deferred financing costs, net ................ 428 5,418 754 5 -- 6,605
Investments in joint ventures ................ -- -- 2,280 -- -- 2,280
Deferred income taxes ........................ 3,617 -- -- -- (3,617) --
Other ........................................ 159 3,534 -- 38 -- 3,731
Notes receivable, subsidiaries ............... 130,207 6,578 1,006 -- (137,791) --
Investment in subsidiaries ................... 14,121 569 3,128 -- (17,818) --
--------- --------- --------- --------- --------- ---------
Total assets ....................... $ 157,101 $ 207,301 $ 41,916 $ 11,214 $(167,056) $ 250,476
========= ========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt ..... $ -- $ 2 $ -- $ 6 $ -- $ 8
Short-term borrowings .................... -- -- -- 412 -- 412
Notes payable ............................ 2 958 -- 27 -- 987
Accounts payable ......................... 109 18,818 2,261 962 (227) 21,923
Due to affiliates ........................ -- 404 6,478 606 (7,488) --
Accrued expenses ......................... 842 5,677 1,227 220 -- 7,966
Accrued interest ......................... 6,222 -- 132 33 -- 6,387
Accrued compensation ..................... 47 3,900 1,070 363 -- 5,380
Accrued restructuring and other charges .. 959 393 -- 887 -- 2,239
Environmental ............................ -- 2,812 -- -- -- 2,812
--------- --------- --------- --------- --------- ---------
Total current liabilities .......... 8,181 32,964 11,168 3,516 (7,715) 48,114
Long-term debt ............................... 129,750 -- 19,786 1,261 -- 150,797
Environmental ................................ -- 12,279 -- -- -- 12,279
Deferred income taxes ........................ -- 14,863 -- 69 (3,617) 11,315
Postretirement benefits ...................... -- 4,632 -- -- -- 4,632
Accrued restructuring and other charges ...... -- -- -- -- -- --
Notes payable ................................ -- 121,732 13,425 2,634 (137,791) --
Other ........................................ 1,068 221 552 128 -- 1,969
Minority interest ............................ -- -- -- 269 3,176 3,445
Commitments and contingencies ................ -- -- -- -- -- --
Mandatory redeemable preferred stock: ........ 50,218 3,149 -- -- (3,149) 50,218
Less: Treasury stock .................... (262) -- -- -- -- (262)
--------- --------- --------- --------- --------- ---------
49,956 3,149 -- -- (3,149) 49,956
Stockholders' equity (deficit):
Common stock ................................. 2 1,200 1,291 2,333 (4,824) 2
Preferred stock .............................. -- 4,147 -- -- (4,147) --
Additional paid-in capital ................... 7,149 33,927 8,241 2,761 (44,929) 7,149
Retained earnings (accumulated deficit) ...... (36,965) (21,613) (10,649) (1,177) 35,662 (34,742)
Cumulative translation adjustment ............ (24) -- (1,898) (580) 278 (2,224)
Less: Stockholder note receivable ............ (1,913) (200) -- -- -- (2,113)
Treasury stock, at cost ................. (46) -- -- -- -- (46)
Minimum pension liability ............... (57) -- -- -- -- (57)
--------- --------- --------- --------- --------- ---------
Total stockholders'
equity (deficit) .................. (31,854) 17,461 (3,015) 3,337 (17,960) (32,031)
--------- --------- --------- --------- --------- ---------
Total liabilities and
stockholders' equity (deficit) .... $ 157,101 $ 207,301 $ 41,916 $ 11,214 $(167,056) $ 250,476
========= ========= ========= ========= ========= =========
</TABLE>
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Operations
For the Three Months Ended September 30, 1996
------------------------------------------------------------------------------
U.S. German Non
Guarantor Guarantor Guarantor Elimin-
Parent Subsidiaries Subsidiary Subsidiary ations Consolidated
--------- ---------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net sales........................................ $ -- $ 52,474 $ 18,313 $ 3,731 $ (1,254) $ 73,264
Cost of goods sold (excluding
inventory valuation charges)................... -- 42,897 15,415 2,398 (924) 57,137
Inventory valuation charges...................... -- 4,980 -- -- -- 4,980
--------- --------- ---------- -------- --------- ---------
Gross profit................................. -- 7,246 2,898 1,333 (330) 11,147
Selling, general and administrative expense...... 1,700 6,587 3,012 607 (113) 11,793
Non-cash compensation expense.................... 84 -- -- -- -- 84
Research and development expense................. -- 777 267 41 -- 1,085
--------- --------- ---------- -------- --------- ---------
Operating income (loss)...................... (1,784) (118) (381) 685 (217) (1,815)
Interest and debt expense (income)............... (146) 2,899 726 72 (1) 3,550
Other income (loss).............................. 2,854 (2,467) 125 (40) (191) 281
Equity in income (loss) of subsidiary............ (4,033) (556) 420 -- 4,169 --
--------- --------- ---------- -------- --------- ---------
Income (loss) before minority
interest and income taxes............... (2,817) (6,040) (562) 573 3,762 (5,084)
Minority interest................................ -- -- -- -- 69 69
--------- --------- ---------- -------- --------- ---------
Income (loss) before income taxes............ (2,817) (6,040) (562) 573 3,693 (5,153)
Provision (benefit) for income taxes............. 1,488 (2,199) 2 409 (208) (508)
Equity in income of joint ventures............... -- -- 72 -- -- 72
--------- --------- ---------- -------- --------- ---------
Net income (loss)............................ (4,305) (3,841) (492) 164 3,901 (4,573)
Preferred dividends.............................. 481 (637) -- -- 637 481
--------- --------- ---------- -------- --------- ---------
Net income (loss) applicable
to common shares.......................... $ (4,786) $ (3,204) $ (492) $ 164 $ 3,264 $ (5,054)
========= ========= ========== ======== ========= =========
</TABLE>
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Operations
For the Three Months Ended September 30, 1997
------------------------------------------------------------------------------
U.S. German Non
Guarantor Guarantor Guarantor Elimin-
Parent Subsidiaries Subsidiary Subsidiaries ations Consolidated
---------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Net sales........................................ $ -- $ 56,238 $ 14,940 $ 2,593 $(2,444) $ 71,327
Cost of goods sold (excluding
inventory valuation charges).................... -- 43,818 12,846 2,173 (2,442) 56,395
Inventory valuation charges...................... -- -- -- -- -- --
---------- --------- --------- --------- --------- --------
Gross profit................................. -- 12,420 2,094 420 (2) 14,932
Selling, general and administrative expense...... 1,007 6,691 2,576 353 (86) 10,541
Non-cash compensation expense.................... 158 -- -- -- -- 158
Research and development expense................. -- 821 210 14 -- 1,045
Restructuring and other charges.................. -- 112 -- -- -- 112
---------- --------- --------- --------- --------- --------
Operating income (loss)...................... (1,165) 4,796 (692) 53 84 3,076
Interest and debt expense ....................... (15) 3,359 568 70 -- 3,982
Other income (loss).............................. 2,329 (2,187) 218 (345) (192) (177)
Equity in income (loss) of subsidiary............ (2,022) (297) (47) -- 2,366 --
---------- --------- --------- --------- --------- --------
Income (loss) before minority
interest and income taxes.................. (843) (1,047) (1,089) (362) 2,258 (1,083)
Minority interest................................ -- -- -- 17 71 88
---------- --------- --------- --------- --------- --------
Income (loss) before income taxes............ (843) (1,047) (1,089) (379) 2,187 (1,171)
Provision (benefit) for income taxes............. 1,020 (73) 14 40 (820) 181
Equity in income of joint ventures............... -- -- 412 -- 47 459
---------- --------- --------- --------- --------- --------
Net income (loss)............................ (1,863) (974) (691) (419) 3,054 (893)
Preferred dividends.............................. 1,468 175 -- -- (175) 1,468
---------- --------- --------- --------- --------- --------
Net income (loss) applicable
to common shares.......................... $ (3,331) $ (1,149) $ (691) $ (419) $ 3,229 $(2,361)
========== ========= ========= ========= ========= ========
</TABLE>
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Operations
For the Nine Months Ended September 30, 1996
------------------------------------------------------------------------------
U.S. German Non
Guarantor Guarantor Guarantor Elimin-
Parent Subsidiaries Subsidiary Subsidiary ations Consolidated
----- ------- --------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Net sales ................................. $ -- $ 164,912 $ 57,247 $ 11,113 $ (4,221) $ 229,051
Cost of goods sold (excluding
inventory valuation charges) ............. -- 124,813 45,000 7,641 (3,835) 173,619
Inventory valuation charges ............... -- 4,980 -- -- -- 4,980
---------- ---------- --------- --------- --------- ----------
Gross profit .......................... -- 35,119 12,247 3,472 (386) 50,452
Selling, general and administrative expense 3,500 21,526 9,332 1,962 (369) 35,951
Noncash compensation expense .............. 159 -- -- -- -- 159
Research and development expense .......... -- 2,542 901 141 -- 3,584
---------- ---------- --------- --------- --------- ----------
Operating income (loss) ............... (3,659) 11,051 2,014 1,369 (17) 10,758
Interest and debt expense ................. (96) 8,318 1,897 220 -- 10,339
Other income (loss) ....................... 8,884 (8,078) 533 (241) (591) 507
Equity in income (loss) of subsidiary ..... (2,388) 648 630 -- 1,110 --
---------- ---------- --------- --------- --------- ----------
Income (loss) before minority
interest and income taxes ........... 2,933 (4,697) 1,280 908 502 926
Minority interest ......................... -- -- -- -- 195 195
---------- ---------- --------- --------- --------- ----------
Income (loss) before income taxes ..... 2,933 (4,697) 1,280 908 307 731
---------- ---------- --------- --------- --------- ----------
Provision (benefit) for income taxes ...... 2,015 (1,374) 4 498 (208) 935
Equity in income of joint ventures ........ -- -- 527 -- -- 527
---------- ---------- --------- --------- --------- ----------
Net income (loss) ..................... 918 (3,323) 1,803 410 515 323
Preferred dividends ....................... 2,949 -- -- -- -- 2,949
---------- ---------- --------- --------- --------- ----------
Net income (loss) applicable
to common shares .................... $ (2,031) $ (3,323) $ 1,803 $ 410 $ 515 $ (2,626)
========== ========== ========= ========= ========= ==========
</TABLE>
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Operations
For the Nine Months Ended September 30, 1997
------------------------------------------------------------------------------
U.S. German Non
Guarantor Guarantor Guarantor Elimin-
Parent Subsidiaries Subsidiary Subsidiaries ations Consolidated
------ -------- ------- --------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net sales ....................................... $ -- $ 171,663 $ 42,513 $ 11,363 $ (7,920) $ 217,619
Cost of goods sold (excluding
inventory valuation charges) ................... -- 131,475 36,603 8,839 (8,233) 168,684
Inventory valuation charges ..................... -- -- 3,155 -- -- 3,155
--------- --------- --------- --------- --------- ---------
Gross profit ................................ -- 40,188 2,755 2,524 313 45,780
Selling, general and administrative expense ..... 2,630 20,688 7,351 1,649 (388) 31,930
Non-cash compensation expense ................... 190 -- -- -- -- 190
Research and development expense ................ -- 2,519 705 93 -- 3,317
Restructuring and other charges ................. -- 444 -- 2,526 -- 2,970
--------- --------- --------- --------- --------- ---------
Operating income (loss) ..................... (2,820) 16,537 (5,301) (1,744) 701 7,373
Interest and debt expense (income) .............. (155) 10,381 2,476 174 -- 12,876
Other income (loss) ............................. 7,356 (6,869) 1,105 (619) (675) 298
Equity in income (loss) of subsidiary ........... (10,449) (2,097) 594 -- 11,952 --
--------- --------- --------- --------- --------- ---------
Income (loss) before minority
interest and income taxes ................. (5,758) (2,810) (6,078) (2,537) 11,978 (5,205)
Minority interest ............................... -- -- -- 17 203 220
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes ........... (5,758) (2,810) (6,078) (2,554) 11,775 (5,425)
Provision (benefit) for income taxes ............ 1,313 61 14 185 (1,113) 460
Equity in income of joint ventures .............. -- -- 1,540 -- 47 1,587
--------- --------- --------- --------- --------- ---------
Net income (loss) ........................... (7,071) (2,871) (4,552) (2,739) 12,935 (4,298)
Preferred dividends ............................. 4,229 508 -- -- (508) 4,229
--------- --------- --------- --------- --------- ---------
Net income (loss) applicable to common shares $ (11,300) $ (3,379) $ (4,552) $ (2,739) $ 13,443 $ (8,527)
========= ========= ========= ========= ========= =========
</TABLE>
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 1996
---------------------------------------------------------------------------
U.S. German Non
Guarantor Guarantor Guarantor Elimin-
Parent Subsidiaries Subsidiary Subsidiary ations Consolidated
-------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities .................... $ 2,853 $ 1,521 $ (4,910) $ (304) $ (35) $ (875)
-------- -------- -------- -------- -------- --------
Cash flows from investing activities:
Capital expenditures ...................... (113) (5,856) (890) (1,024) -- (7,883)
(Increase) decrease in
investments in joint ventures ........... -- -- (20) 51 -- 31
Proceeds from sale of capital equipment ... -- 1,572 79 -- -- 1,651
Payments for environmental liabilities .... -- (1,988) -- -- -- (1,988)
Proceeds from environmental indemnification -- 1,038 -- -- -- 1,038
Other ..................................... -- 30 -- 6 -- 36
Net cash used in investing activities ......... (113) (5,204) (831) (967) -- (7,115)
-------- -------- -------- -------- -------- --------
Cash flows from financing activities:
Issuance of common stock .................. -- -- -- -- -- --
Issuance of preferred stock ............... -- -- -- -- -- --
Revolving borrowings under Credit Agreement 47,000 -- -- -- -- 47,000
Revolving repayments under Credit Agreement (41,499) -- -- -- -- (41,499)
Term loan repayments under Credit Agreement (5,166) -- -- -- -- (5,166)
Short-term loan borrowings
under European Facility ................. -- -- 7,906 423 -- 8,329
Payment of treasury stock ................. (87) -- -- -- -- (87)
Payment of registration costs ............. (114) -- -- -- -- (114)
Repayment of capital lease obligations .... -- (56) -- (35) -- (91)
Payments for financing costs .............. -- -- -- (50) -- (50)
Dividends paid to minority interests ...... -- (130) -- -- -- (130)
Other ..................................... -- (40) -- -- -- (40)
Subsidiary loans .......................... (2,870) 4,445 (2,216) 611 30 --
-------- -------- -------- -------- -------- --------
Net cash provided by (used in)
financing activities .................... (2,736) 4,219 5,690 949 30 8,152
Effect of exchange rate changes on cash ....... -- -- 112 (180) -- (68)
-------- -------- -------- -------- -------- --------
Net increase (decrease) in cash
and cash equivalents .................... 4 536 61 (502) (5) 94
-------- -------- -------- -------- -------- --------
Cash and cash equivalents, beginning of period 248 -- 429 1,021 (248) 1,450
-------- -------- -------- -------- -------- --------
Cash and cash equivalents, end of period ..... $ 252 $ 536 $ 490 $ 519 $ (253) $ 1,544
======== ======== ======== ======== ======== ========
</TABLE>
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 1997
------------------------------------------------------------------------------
U.S. German Non
Guarantor Guarantor Guarantor Elimin-
Parent Subsidiaries Subsidiary Subsidiary ations Consolidated
-------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities ......................... $ 7,709 $ 7,900 $ (4,140) $ 980 $ (698) $ 11,751
--------- --------- --------- --------- --------- ---------
Cash flows from investing activities:
Capital expenditures ...................... (295) (6,679) (524) (1,802) -- (9,300)
Increase in investments in subsidiaries ... -- -- (581) -- 581 --
Proceeds from sale of capital equipment ... -- -- -- 67 -- 67
Payments for environmental liabilities .... -- (3,744) -- -- -- (3,744)
Proceeds from environmental
indemnification ......................... -- 300 -- -- -- 300
Other ..................................... -- 36 148 -- -- 184
Net cash used in investing activities ......... (295) (10,087) (957) (1,735) -- (12,493)
--------- --------- --------- --------- --------- ---------
Cash flows from financing activities:
Issuance of common stock .................. 223 -- -- 8 (8) 223
Issuance of preferred stock ............... 196 -- -- -- -- 196
Revolving borrowings under Credit Agreement 55,000 -- 71,452 1,559 -- 128,011
Revolving repayments under Credit Agreement (59,500) -- (68,143) (1,814) -- (129,457)
Term loan repayments under Credit Agreement -- -- -- -- -- --
Short-term loan borrowings
under European Facility ................. -- -- -- -- -- --
Payment of treasury stock ................. -- -- -- -- -- --
Payment of registration costs ............. (733) -- -- -- -- (733)
Repayment of capital lease obligations .... -- (14) -- -- -- (14)
Payments for financing costs .............. -- -- (55) -- -- (55)
Dividends paid to minority interests ...... -- (129) -- -- -- (129)
Other ..................................... -- 2 -- (16) -- (14)
Subsidiary loans .......................... (2,264) 2,056 (467) 675 -- --
--------- --------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities ................... (7,078) 1,915 2,787 412 (8) (1,972)
Effect of exchange rate changes on cash ....... -- 1 (132) (89) 148 (72)
--------- --------- --------- --------- --------- ---------
Net increase (decrease) in cash
and cash equivalents .................... 336 (271) (2,442) (432) 23 (2,786)
Cash and cash equivalents, beginning of period 88 344 2,218 992 (88) 3,554
--------- --------- --------- --------- --------- ---------
Cash and cash equivalents, end of period ...... $ 424 $ 73 $ (224) $ 560 $ (65) $ 768
========= ========= ========= ========= ========= =========
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of
- ------- ---------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
The following should be read in conjunction with Item 1 of this report.
General
The Company is a leading global manufacturer and marketer of a broad range
of specialty and fine chemical products which are sold into several market
segments for use in food and beverage products, household and industrial
products, cosmetics and personal care products, pharmaceuticals, pet foods,
textile and paper products and many other diverse applications. The Company
operates in one industry segment, with revenues derived from sales in five core
product groups: (i) Food and Personal Care Ingredients; (ii) Pharmaceutical
Intermediates and Natural Additives; (iii) Specialty Organic Chemicals and
Intermediates; (iv) Organic Pigments and Dyes; and (v) Textile and Paper
Chemicals.
Inventory Valuation Charges
During the nine months ended September 30, 1997, the Company recorded
inventory valuation charges of $3.2 million related to write-downs of certain
products in its Pharmaceutical Intermediates and Natural Additives group. The
write-downs resulted from an evaluation of lower of cost or market due primarily
to industry-wide overproduction and declines in market values partially
associated with recent changes in government regulation governing prescription
reimbursement. In March 1997, a charge of $0.7 million was recorded based on an
analysis of conditions at that date. An anticipated improvement in market
conditions during the three months ended June 30, 1997 did not occur.
Accordingly, management reviewed the inventory balances at June 30, 1997 and
recorded an additional charge of $2.5 million. After recording this adjustment,
management expects that profitability will return to historical levels for the
Pharmaceutical Intermediates and Natural Additives product line.
In September, 1996, the Company recorded charges totaling $5.0 million as a
result of inventory obsolescence principally in the Company's Organic Pigments
and Dyes product line.
Restructuring and Other Charges
In April 1997, the Company announced a plan to close its Vernon, France
facility. This closure was completed in June 1997. Manufacturing production and
certain manufacturing equipment were transferred to other locations as part of
the closure. The Company recorded restructuring and other charges of $2.6
million. These charges include costs of $1.8 million for severance to employees,
$0.7 million for the write-off of fixed assets and inventory, and $0.1 million
for other charges, primarily for preparing the site for sale. The closing of
this facility is consistent with the Company's strategic plan of improving its
cost structure by having fewer manufacturing plants producing greater volume
products. The Company estimates that the annual savings as a result of this
plant closure will be approximately $2.2 million most of which will begin in
1998.
During the nine months ended September 30, 1997, the Company recorded
charges totaling $0.4 million which reduced operating income as a result of a
marketing revitalization program the Company initiated primarily for its Organic
Pigments and Dyes product group. The Company expects to record approximately
$0.6 million in 1997 for this program. These charges will be expensed as
incurred throughout the remainder of the year.
<PAGE>
Results of Operations
The following table sets forth certain data from the Consolidated Financial
Statements (Unaudited) expressed as a percentage of net sales.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold (excluding inventory valuation charges) 78.0 79.1 75.8 77.5
Inventory valuation charges 6.8 -- 2.2 1.4
Gross profit 15.2 20.9 22.0 21.0
Selling, general and administrative expense 16.1 14.8 15.7 14.7
Research and development expense 1.5 1.5 1.6 1.5
Restructuring and other charges -- 0.2 -- 1.4
Operating income (loss) (2.4) 4.3 4.7 3.4
Interest and debt expense 4.8 5.6 4.5 5.9
Net (loss) income (6.2) (1.3) 0.1 (2.0)
Preferred dividends 0.7 2.1 1.3 1.9
Net loss applicable to common shares (6.9) (3.3) (1.1) (3.9)
</TABLE>
Three Months Ended September 30, 1997
Compared to Three Months Ended September 30, 1996
Net Sales. Net sales declined $1.9 million to $71.3 million in the quarter
ended September 30, 1997 compared to the quarter ended September 30, 1996.
Pharmaceuticals revenues declined $3.7 million because of (i) industry-wide
overstocking due to producer and customer expectations of comparable business
strengths in 1997 versus 1996, and (ii) changes in German social legislation
regarding the reimbursement for certain medications in which one of the
Company's main products is used. It is expected that this development will not
result in a permanent loss of business. Textile and Paper Chemicals revenues
decreased $2.9 million, primarily as a result of the discontinuation of
unprofitable product lines. Organic Pigment and Dye revenues declined $0.5
million as a result of effects of increased European competition on Color Former
sales, offset partially by increased sales in Inks. Specialty Organics and
Intermediates revenues increased $4.8 million, primarily due to capacity
expansion.
Gross Profit. Gross profit, excluding inventory charges of $5.0 million in
1996, decreased $1.2 million for the three months ended September 30, 1997 to
$14.9 million compared to $16.1 million for the three months ended September 30,
1996. This decrease resulted primarily from the following: (i) $1.5 million was
due to lower Pharmaceutical sales and $2.4 million in Textile and Paper
Chemicals due to unfavorable yield variances. These negative impacts were
offset, in part, by the following improvements: (i) $1.8 million in Specialty
Organics and Chemical Intermediates due to increased sales and $1.1 million in
Food and Personal Care Ingredients due to a favorable change in product mix and
plant cost structure.
The following table displays a comparison for each of the Company's five
core product lines of pounds of product sold, average prices, net sales, gross
profit dollars (excluding inventory valuation charges), and gross profit
percentage for the quarters ending September 30, 1997 and 1996, respectively.
(All values are in millions except for average price.)
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
September 30, 1997 September 30, 1996
----------------------------------------------- ------------------------------------------------
Volume Average Net Gross Gross Volume Average Net Gross Gross
Line (pounds) Price Sales Profit Margin (pounds) Price Sales Profit Margin
-------- ----- ----- ------ ------ -------- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Specialty Organics
and Intermediates 33.69 $0.50 $16.96 $4.76 28.10% 23.78 $0.51 $12.13 $2.96 24.37%
Food and Personal
Care Ingredients 15.98 $1.17 $18.62 $6.17 33.14% 17.30 $1.06 $18.27 $5.04 27.60%
Pharmaceutical
Intermediates 0.50 $16.79 $8.43 $0.56 6.64% 0.53 $23.04 $12.12 $2.01 16.56%
Textile and Paper
Chemicals 27.88 $0.51 $14.10 $1.90 13.51% 29.65 $0.57 $17.03 $4.28 25.14%
Organic Pigments
and Dyes 3.10 $4.27 $13.22 $1.53 11.58% 2.78 $4.93 $13.71 $1.83 13.39%
Company Total 81.15 $0.88 $71.33 $14.93 20.93% 74.03 $0.99 $73.26 $16.12 22.01%
</TABLE>
The Company recorded estimated costs of shutdown of $0.7 million and $0.4
million for the three months ended September 30, 1997 and 1996, respectively.
The costs of shutdown are accrued on a pro rata basis over the period between
shutdowns. Plant shutdowns are typically scheduled on a semi-annual; nine-month
and annual basis at the Company's various plants for the performance of
maintenance and inspection of various pieces of equipment. As of September 30,
1997, $0.7 million was accrued related to such costs, which represented a
decrease from December 31, 1996 of $0.2 million due primarily to shutdowns at
the Company's Hilton Davis and Kalama facilities in June and Freedom Textile in
July and the timing of various other plant shutdowns scheduled in 1997.
Selling, General and Administrative Expense. Selling, general, and
administrative expense decreased $1.3 million to $10.5 million in the three
months ended September 30, 1997 compared to the same period of the prior year
primarily due to personnel reductions and plant closings as a result of
restructuring and other charges. As a percentage of sales, selling, general, and
administrative expense decreased to 14.8% in the three months ended September
30, 1997 from 16.1% for the same period in 1996.
Research and Development Expense. Research and development expense remained
constant at $1.1 million compared to the same period of the prior year. As a
percentage of sales, research and development also was constant at 1.5% in the
three months ended September 30, 1997 compared to the same period in 1996.
Operating Income. Operating income, excluding restructuring charges of $0.1
million in 1997 and inventory charges of $5.0 million in 1996, remained constant
at $3.2 million for the quarter ended September 30, 1997 compared to the same
quarter of 1996.
Interest and Debt Expense. Interest and debt expense increased $0.4 million to
$4.0 million for the three months ended September 30, 1997 compared to the same
period of the prior year. The weighted average interest rate of the Company's
borrowings was 9.9% at September 30, 1997, as compared to 8.9% at September 30,
1996. The increase in the weighted average interest rate is attributable to the
issuance of the 10 5/8% Senior Subordinated Notes due 2006 (the "Notes") that
were issued in October 1996.
Net Income (Loss). Net loss decreased $3.7 million to a loss of $0.9
million in the three months ended September 30, 1997 as compared to the same
period of the prior year. The decreases resulted primarily from items discussed
above.
Net Income (Loss) Applicable to Common Shares. The net loss applicable to
common shares decreased by $2.7 million to a loss of $2.4 million for the three
months ended September 30, 1997 as compared to the same period of the prior
year. The decrease resulted from the items referred to above.
Nine months Ended September 30, 1997
Compared to Nine months Ended September 30, 1996
Net Sales. Net sales declined $11.4 million to $217.6 million in the nine
months ended September 30, 1997 compared to the same period in 1996.
Pharmaceuticals revenues declined $15.3 million because of (i) industry-wide
overstocking due to producer and customer expectations of comparable business
strengths in 1997 versus 1996, and (ii) changes in German social legislation
regarding the reimbursement for certain medications in which one of the
Company's main products is used. It is expected that this development will not
result in a permanent loss of business. Textile and Paper Chemicals revenues
decreased $4.0 million, primarily as a result of the discontinuation of
unprofitable product lines. These declines were offset by the following: (i)
Organic Pigment and Dye revenues increased $0.8 million as a result of strong
sales in the Inks product line, (ii) Specialty Organics and Intermediates
revenues increased $5.9 million, primarily due to capacity expansion, and (iii)
Food and Personal Care Ingredients revenues increased $1.2 million as a result
of strong sales in Preservatives, Colors and Cosmetics.
Gross Profit. Gross profit, excluding the inventory valuation charges of
$3.2 million and $5.0 million in 1997 and 1996, respectively, declined $6.5
million for nine months ended September 30, 1997 to $48.9 million compared to
$55.4 million for the nine months ended September 30, 1996. This decline
resulted primarily from the following: (i) $6.0 million was due to lower
Pharmaceutical sales, (ii) $1.6 million in Textile and Paper Chemicals due to
unfavorable yield variances, which was offset by the favorable effects of the
discontinuation of unprofitable product lines and (iii) $0.1 million in
Specialty Organics and Intermediates due primarily to lower overall prices,
higher toluene and energy costs, offset by higher sales volumes. These negative
impacts were offset by improvements of $1.4 million in Food and Personal Care
Ingredients due primarily to increased sales in Preservatives, Colors and
Cosmetics.
The following table displays a comparison for each of the Company's five
core product lines of pounds of product sold, average prices, net sales, gross
profit dollars (excluding inventory valuation charges), and gross profit
percentage for the nine months ended September 30, 1997 and 1996, respectively.
(All values are in millions except for average price.)
<TABLE>
<CAPTION>
Nine months Ended
September 30, 1997 September 30, 1996
------------------------------------------------ ----------------------------------------------
Volume Average Net Gross Gross Volume Average Net Gross Gross
Line (pounds) Price Sales Profit Margin (pounds) Price Sales Profit Margin
-------- ----- ----- ------ ------ -------- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Specialty Organics
and Intermediates 94.72 $0.51 $48.43 $11.83 24.42% 78.45 $0.54 $42.51 $11.96 28.13%
Food and Personal
Care Ingredients 50.97 $1.07 $54.68 $17.15 31.36% 50.43 $1.06 $53.49 $15.71 29.37%
Pharmaceutical
Intermediates 1.45 $16.44 $23.80 $2.79 11.72% 1.84 $21.21 $39.10 $8.80 22.49%
Textile and Paper
Chemicals 77.15 $0.63 $48.45 $9.84 20.31% 80.62 $0.65 $52.46 $11.46 21.85%
Organic Pigments
and Dyes 9.76 $4.33 $42.26 $7.33 17.35% 8.52 $4.87 $41.49 $7.50 18.09%
Company Total 234.05 $0.93 $217.62 $48.94 22.49% 219.86 $1.04 $229.05 55.43 24.20%
</TABLE>
The Company recorded estimated costs of shutdown of $1.6 million and $1.1
million for the nine months ended September 30, 1997 and 1996, respectively. The
costs of shutdown are accrued on a pro rata basis over the period between
shutdowns. Plant shutdowns are typically scheduled on a semi-annual, nine-month
and annual basis at the Company's various plants for the performance of
maintenance and inspection of various pieces of equipment. As of September 30,
1997, $0.7 million was accrued related to such costs, which represented a
decrease from December 31, 1996 of $0.2 million due primarily to shutdowns at
the Company's Hilton Davis and Kalama facilities in June and Freedom Textile in
July and the timing of various other plant shutdowns scheduled in 1997.
Selling, General and Administrative Expense. Selling, general, and
administrative expense decreased $4.0 million to $31.9 million in the nine
months ended September 30, 1997 compared to the same period of the prior year
primarily due to personnel reductions and plant closings as a result of
restructuring and other charges. As a percentage of sales, selling, general, and
administrative expense decreased to 14.7% in the nine months ended September 30,
1997 from 15.7% for the same period in 1996.
Research and Development Expense. Research and development expense declined
$0.3 million to $3.3 million compared to the same period of the prior year. As a
percentage of sales, research and development declined to 1.5% in the nine
months ended September 30, 1997 from 1.6% for the same period in 1996.
Operating Income. Operating income, excluding inventory valuation and
restructuring charges of $6.1 million and $5.0 million in 1997 and 1996,
respectively, declined $2.2 million to $13.5 million for the nine months ended
September 30, 1997 compared to the same period of 1996. The decrease resulted
primarily from items discussed above.
Interest and Debt Expense. Interest and debt expense increased $2.5 million
to $12.9 million for the nine months ended September 30, 1997 compared to the
same period of the prior year. The weighted average interest rate of the
Company's borrowings was 9.9% at September 30, 1997, as compared to 8.9% at
September 30, 1996. The increase in the weighted average interest rate is
attributable to the issuance of the 10 5/8% Senior Subordinated Notes due 2006
(the "Notes") that were issued in October 1996.
Net Income (Loss). Net income decreased $4.6 million to a loss of $4.3
million in the nine months ended September 30, 1997 as compared to the same
period of the prior year. The loss resulted primarily from items discussed
above.
In addition, the Company's equity in income of joint ventures increased
$1.1 million for the nine months ended September 30, 1997 as compared to the
same period of the prior year. The increase is primarily attributable to the
increase in the equity in income of Srinivasa Cystine Limited which increased
$1.1 million.
Net Income (Loss) Applicable to Common Shares. The net loss applicable to
common shares increased by $5.9 million to a loss of $8.5 million for the nine
months ended September 30, 1997 as compared to the same period of the prior
year. The decrease resulted from the items referred to above.
Liquidity and Capital Resources
Net Cash Provided By Operating Activities. Net cash provided by operating
activities for the nine months ended September 30, 1997 was $11.8 million, which
represented a change of $12.6 million from the $0.9 million net cash used in
operating activities in the same period of the prior year. This change was due
primarily to a decrease in inventory.
Net Cash Used in Investing Activities. Net cash used in investing
activities for the nine months ended September 30, 1997 was $12.5 million, an
increase of $5.4 million compared to the same period of the prior year. Capital
expenditures in the nine months ended September 30, 1997 were $9.3 million
compared to $7.9 million in the same period of the prior year. This increase in
capital expenditures in 1997 included $2.5 million related to the expansion
program at the Company's Kalama facility.
Net Cash Used in Financing Activities. Net cash used in financing
activities for the nine months ended September 30, 1997 was $2.0 million, a
change of $10.1 million from the net cash provided by financing activities of
$8.1 million over the same period of the prior year. This change includes net
repayments of $1.4 million compared to net borrowings of $8.7 million for the
same period in the prior year and cash proceeds of $0.4 million from the
issuance of common and preferred stock.
Liquidity. On October 17, 1996, the Company issued the Notes. The Notes are
fully and unconditionally guaranteed, on a joint and several basis, as to
payment of principal, premium, if any, and interest, by all of the Company's
domestic subsidiaries and Diamalt.
Concurrently with the consummation of the offering of the Notes, the
Company amended and restated its existing credit agreement (as amended and
restated, the "Amended and Restated Credit Agreement") to, among other things,
increase the amount of the revolving loan facility to $85 million and include
Diamalt as a co-borrower. The Amended and Restated Credit Agreement and the
Indenture related to the Notes contain certain financial covenants that
restrict, among other things, the incurrence of additional indebtedness, the
sale of assets, and certain investments, acquisitions and distributions by the
Company. The Amended and Restated Credit Agreement also requires the Company to
maintain specified financial ratios and tests, including maximum leverage ratios
and minimum interest coverage ratios. The Company was in compliance with such
ratios and tests at September 30, 1997.
The Company expects that its ongoing cash requirements will consist
primarily of interest payments on its outstanding indebtedness, including the
Notes and any borrowings under the Amended and Restated Credit Agreement. As of
September 30, 1997 the Company had $57.1 million of working capital (current
assets less current liabilities) and $59.1 million available under the Amended
and Restated Credit Agreement.
Although the Company expects that cash flows from operations and available
borrowings under the Amended and Restated Credit Agreement will provide
sufficient working capital to operate the Company's business, to make expected
capital expenditures and to meet the Company's foreseeable liquidity
requirements, there can be no assurance that sufficient sources of funds will be
available.
Foreign Currency Exchange Rates
The Company's substantial foreign operations expose it to the risk of
exchange rate fluctuations. If foreign currency denominated revenues are greater
than costs, the translation of foreign currency denominated costs and revenues
into U.S. dollars will improve profitability when the foreign currency
strengthens against the U.S. dollar and will reduce profitability when the
foreign currency weakens. In addition, the remeasurement of foreign currency
denominated assets and liabilities into U.S. dollars gives rise to foreign
exchange gains or losses, which are included in the determination of net income.
The Company's foreign currency exposures are managed on a consolidated
basis, which allows certain exposures to be offset naturally. However, forward
contracts are entered into periodically to hedge specific foreign currency
exposures. Under this strategy, gains or losses on hedging transactions are
offset by gains or losses on the underlying exposures being hedged.
<PAGE>
PART II - OTHER INFORMATION
Item 2. Changes in Securities
Recent Sales of Unregistered Securities
In September 1997, the Company issued 445.75 shares of its Series A Common Stock
and 98.292 shares of its Series B Redeemable Preferred Stock to Alexander R.
Castaldi for an aggregate purchase price of $150,000.
In April 1997, the Company issued 445.75 shares of its Series A Common Stock and
98.292 shares of its Series B Redeemable Preferred Stock to Vincent P. Langone
for an aggregate purchase price of $150,000.
The issuance of these securities was made in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended,
for transactions not involving a public offering.
Item 5. Other Information
On March 18, 1997, the Company consummated a fully-subscribed registered
exchange offer for the Notes (the "Exchange Offer") to satisfy certain of the
Company's obligations under a registration rights agreement relating to the
Notes. The form and terms of the Notes issued under the Exchange Offer are
substantially identical in all material respects to the form and terms of the
Notes issued on October 17, 1996.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit
No. Description of Exhibit
3.1 Restated Certificate of Incorporation of Freedom Chemical Company and
Certificate of Designation for Preferred Stock (filed as Exhibit 3.1
to the Company's Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
3.2 By-laws of Freedom Chemical Company (filed as Exhibit 3.2 to the
Company's Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
27 Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter for which this report is
filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FREEDOM CHEMICAL COMPANY
(Registrant)
By: /s/ BRIAN F. MCNAMARA
---------------------
Brian F. McNamara
Vice President, Secretary
and General Counsel
Date: November 13, 1997 By: /s/ DENNIS M. MONAHAN
---------------------
Dennis M. Monahan
Vice President, Finance
and Control
<PAGE>
FREEDOM CHEMICAL COMPANY
Form 10-Q Report for the Nine Months Ended
September 30, 1997
INDEX TO EXHIBITS
Exhibit
No. Description of Exhibit
3.1 Restated Certificate of Incorporation of Freedom Chemical Company and
Certificate of Designation for Preferred Stock (filed as Exhibit 3.1 to
the Company's Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
3.2 By-laws of Freedom Chemical Company (filed as Exhibit 3.2 to the
Company's Registration Statement on Form S-1 (33-84778)and
incorporated herein by reference).
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from balance
sheets and income statements of Freedom Chemical Company and Subsidiaries and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000931075
<NAME> FREEDOM CHEMICAL COMPANY AND SUBSIDARIES
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-1-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 768
<SECURITIES> 0
<RECEIVABLES> 45,283
<ALLOWANCES> 858
<INVENTORY> 47,843
<CURRENT-ASSETS> 105,228
<PP&E> 99,274
<DEPRECIATION> 37,011
<TOTAL-ASSETS> 250,476
<CURRENT-LIABILITIES> 48,114
<BONDS> 125,000
49,956
0
<COMMON> 2
<OTHER-SE> (32,033)
<TOTAL-LIABILITY-AND-EQUITY> 250,476
<SALES> 71,327
<TOTAL-REVENUES> 71,327
<CGS> 56,395
<TOTAL-COSTS> 56,395
<OTHER-EXPENSES> (177)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,982
<INCOME-PRETAX> (712)
<INCOME-TAX> 181
<INCOME-CONTINUING> (893)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (893)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
