<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 14, 1997
REGISTRATION NO. 33-84778
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
FREEDOM CHEMICAL COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 2819 51-0340498
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
MELLON CENTER, SUITE 3500
1735 MARKET STREET
PHILADELPHIA, PA 19103
(215) 979-3100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
SEE TABLE OF ADDITIONAL REGISTRANTS
------------------------
BRIAN F. MCNAMARA, VICE PRESIDENT,
GENERAL COUNSEL AND SECRETARY
FREEDOM CHEMICAL COMPANY
MELLON CENTER, SUITE 3500
1735 MARKET STREET
PHILADELPHIA, PA 19103
(215) 979-3100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
Copies to:
MARK C. SMITH, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
919 THIRD AVENUE
NEW YORK, NY 10022
(212) 735-3000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /x/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO THE SAID SECTION
8(A), MAY DETERMINE.
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<PAGE>
TABLE OF ADDITIONAL REGISTRANTS
<TABLE>
<CAPTION>
STATE OR OTHER PRIMARY STANDARD
JURISDICTION OF INDUSTRIAL I.R.S. EMPLOYER
INCORPORATION OR CLASSIFICATION IDENTIFICATION
NAME ORGANIZATION CODE NUMBER NUMBER
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<S> <C> <C> <C>
Hilton Davis Chemical Co. ............................................... Delaware 2819 95-4071292
2235 Langdon Farm Road
Cincinnati, Ohio 45327
(513) 841-4000
Kalama Chemical, Inc. .................................................. Washington 2819 91-0862423
1296 Third Street, N.W.
Kalama, Washington 98625
(360) 673-2550
Freedom Textile Chemicals Co. .......................................... Delaware 2819 56-1767462
8309 Wilkinson Boulevard
Charlotte, North Carolina 28214
(704) 393-0089
Freedom Chemical Diamalt GmbH ........................................... Germany 2819 N/A
Postfach 50 02 70
D-80972 Munchen
Germany
(011) (49) 898106208
Freedom Textile Chemical Company ........................................ Delaware 2819 56-1949391
(South Carolina), Inc.
5025 South Main Street
Cowpens, South Carolina 29330
(803) 463-4393
Kalama Specialty Chemicals, Inc. ....................................... Washington 2819 91-0971783
1296 Third Street, N.W.
Kalama, Washington 98625
(360) 673-2550
Kalama Foreign Sales Corporation ........................................ Guam 2819 98-0102014
1296 Third Street, N.W.
Kalama, Washington 98625
(360) 673-2550
FCC Acquisition Corp. .................................................. Delaware 2819 23-2791891
Mellon Center, Suite 3500
1735 Market Street
Philadelphia, Pennsylvania 19103
(215) 979-3100
</TABLE>
<PAGE>
PROSPECTUS
OFFER FOR ALL OUTSTANDING
10 5/8% SENIOR SUBORDINATED NOTES DUE 2006 IN EXCHANGE FOR
10 5/8% SENIOR SUBORDINATED NOTES DUE 2006, WHICH HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OF
[LOGO]
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON MARCH 17,
1997, UNLESS EXTENDED.
------------------------
Freedom Chemical Company ('Freedom' and, collectively with its subsidiaries,
the 'Company') hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and the accompanying Letter of Transmittal (which
together constitute the 'Exchange Offer'), to exchange an aggregate principal
amount of up to $125,000,000 of its 10 5/8% Senior Subordinated Notes due 2006
(the 'New Notes'), which have been registered under the Securities Act of 1933,
as amended (the 'Securities Act'), for a like principal amount of its issued and
outstanding 10 5/8% Senior Subordinated Notes due 2006 (the 'Old Notes' and,
together with the New Notes, the 'Notes') from the holders (the 'Holders')
thereof. The terms of the New Notes are identical in all material respects to
the Old Notes, except for certain transfer restrictions and registration rights
relating to the Old Notes and except for certain provisions providing for an
increase in the interest rate on the Old Notes under certain circumstances
relating to the timing of the Exchange Offer.
On October 17, 1996, Freedom issued $125,000,000 principal amount of Old
Notes. The Old Notes were issued pursuant to an offering exempt from
registration under the Securities Act and applicable state securities laws.
The Notes are redeemable at the option of Freedom, in whole or in part, at
any time on or after October 15, 2001 at the redemption prices set forth herein,
together with accrued and unpaid interest, if any, to the date of redemption. In
addition, on or prior to October 15, 1999, Freedom, at its option, may redeem in
the aggregate up to 35% of the original principal amount of the Notes at a
redemption price equal to 109.625% of the principal amount thereof, plus accrued
and unpaid interest, if any, to the date of redemption, with the net cash
proceeds of one or more Public Equity Offerings (as defined herein); provided,
however, that at least $81.25 million aggregate principal amount of Notes remain
outstanding immediately after giving effect to such redemption. Upon a Change of
Control (as defined herein), (i) Freedom will have the option to redeem the
Notes, in whole or in part, at a redemption price equal to the principal amount
thereof, together with accrued and unpaid interest to the date of redemption,
plus the Applicable Premium (as defined herein) and (ii) each holder of Notes
will have the right to require Freedom to purchase such holder's Notes at a
price equal to 101% of the principal amount thereof, together with accrued and
unpaid interest to the date of purchase.
The Notes are unsecured senior subordinated obligations of Freedom and are
subordinated in right of payment to all existing and future Senior Debt (as
defined herein) of Freedom, including indebtedness under the Amended and
Restated Credit Agreement (as defined herein) entered into by Freedom and its
wholly owned subsidiary Freedom Chemical Diamalt GmbH ('Freedom Chemical
Diamalt') concurrently with the sale of the Old Notes, and rank pari passu in
right of payment with all other existing and future senior subordinated
indebtedness of Freedom. The Old Notes are, and the New Notes will be fully and
unconditionally guaranteed (the 'Guarantees'), on a joint and several basis, as
to payment of principal, premium, if any, and interest, by all of Freedom's
domestic subsidiaries and Freedom Chemical Diamalt (collectively, the
'Guarantors'). The Guarantees are general unsecured obligations of the
Guarantors, subordinated in right of payment to all existing and future Senior
Debt of the Guarantors, including such Guarantors' guarantees of Freedom's
obligations under the Amended and Restated Credit Agreement. As of September 30,
1996, on a pro forma basis after giving effect to the issuance of the Notes, the
initial borrowings under the Amended and Restated Credit Agreement, the Cash
Equity Investment (as defined herein) and, in each case, the application of the
proceeds therefrom, the Company would have had approximately $21.5 million of
Senior Debt outstanding and approximately $149.2 million of indebtedness
outstanding.
For each Old Note accepted for exchange, the Holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. The New Notes will bear interest from the most recent date to which
interest has been paid on the Old Notes or, if no interest has been paid on the
Old Notes, from October 17, 1996. Old Notes accepted for exchange will cease to
accrue interest from and after the date of consummation of the Exchange Offer.
Holders of Old Notes whose Old Notes are accepted for exchange will not receive
any payment in respect of accrued interest on such Old Notes.
The New Notes are being offered hereunder in order to satisfy certain
obligations of Freedom contained in the Registration Rights Agreement (as
defined). Based on interpretations by the staff of the Securities and Exchange
Commission (the 'SEC'), as set forth in no-action letters issued to third
parties, Freedom believes that New Notes issued pursuant to the Exchange Offer
in exchange for Old Notes may be offered for resale, resold and otherwise
transferred by Holders thereof (other than any Holder which is an 'affiliate' of
Freedom within the meaning of Rule 405 under the Securities Act), without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such New Notes are acquired in the ordinary course
of such Holders' business and such Holders have no arrangement with any person
to participate in the distribution of such New Notes. However, the SEC has not
considered the Exchange Offer in the context of a no-action letter and there can
be no assurance that the staff of the SEC would make a similar determination
with respect to the Exchange Offer as in such other circumstances. Each Holder,
other than a broker-dealer, must acknowledge that it is not engaged in, and does
not intend to engage in, a distribution of such New Notes and has no arrangement
or understanding to participate in a distribution of New Notes. Each
broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an 'underwriter' within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of New Notes received in
exchange for Old Notes where such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities. Freedom has
agreed that, for a period of 180 days after the Expiration Date (as defined
herein), it will make this Prospectus available to any broker-dealer for use in
connection with any such resale. See 'Plan of Distribution.'
Freedom will not receive any proceeds from the Exchange Offer. Freedom will
pay all the expenses incident to the Exchange Offer. Tenders of Old Notes
pursuant to the Exchange Offer may be withdrawn at any time prior to the
Expiration Date. In the event Freedom terminates the Exchange Offer and does not
accept for exchange any Old Notes, Freedom will promptly return the Old Notes to
the Holders thereof. See 'The Exchange Offer.'
There is no existing trading market for the New Notes, and there can be no
assurance regarding the future development of a market for the New Notes, or the
ability of Holders of the New Notes to sell their New Notes or the price at
which such Holders may be able to sell their New Notes. Merrill Lynch & Co.,
Schroder Wertheim & Co. and Smith Barney Inc. (the 'Initial Purchasers') have
advised Freedom that they currently intend to make a market in the New Notes.
The Initial Purchasers are not obligated to do so, however, and any
market-making with respect to the New Notes may be discontinued at any time
without notice. Freedom does not intend to apply for listing or quotation of the
New Notes on any securities exchange or stock market.
SEE 'RISK FACTORS' BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS WHO TENDER THEIR OLD NOTES IN THE EXCHANGE
OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS FEBRUARY 14, 1997.
<PAGE>
AVAILABLE INFORMATION
Freedom has filed with the SEC a registration statement on Form S-1
(herein, together with all amendments and exhibits, referred to as the
'Registration Statement') under the Securities Act with respect to the New Notes
offered hereby. This Prospectus, which forms a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto, certain parts of which are
omitted in accordance with the rules and regulations of the SEC. For further
information with respect to Freedom and the New Notes offered hereby, reference
is made to the Registration Statement. Any statements made in this Prospectus
concerning the provisions of certain documents are not necessarily complete and,
in each instance, reference is made to the copy of such documents filed as an
exhibit to the Registration Statement otherwise filed with the SEC.
Upon the effectiveness of the Registration Statement, Freedom will become
subject to the informational requirements of the Securities Exchange Act of
1934, as amended (the 'Exchange Act'), and in accordance therewith, will file
reports and other information with the SEC. The Registration Statement, the
exhibits and schedules forming a part thereof and the reports and other
information filed by Freedom with the SEC in accordance with the Exchange Act
may be inspected, without charge, at the Public Reference Section of the SEC
located at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional
offices of the SEC located at Seven World Trade Center, 13th Floor, New York,
New York 10048 and at Citicorp Center, 500 West Madison Street, Chicago,
Illinois 60661. Copies of all or any portion of the material may be obtained
from the Public Reference Section of the SEC upon payment of the prescribed
fees. In addition, the SEC maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC. The address of such site is http://www.sec.gov.
In the event that Freedom is not required to be subject to the reporting
requirements of the Exchange Act in the future, Freedom will be required under
the Indenture (as defined), pursuant to which the Old Notes were, and the New
Notes will be, issued, to continue to file with the SEC, and to furnish Holders
of the New Notes with, the information, documents and other reports specified in
Sections 13 and 15(d) of the Exchange Act.
i
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. As used in this Prospectus, unless the context
requires otherwise, 'Freedom' refers to Freedom Chemical Company and 'Company'
refers to Freedom and its subsidiaries.
THE COMPANY
GENERAL
Freedom Chemical 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
focuses on niche products where it has strong market positions or a
manufacturing advantage. The Company believes that this focus, combined with
improved operating efficiencies resulting from recently completed restructuring
and other measures, have enhanced the Company's potential for future growth and
profitability. The Company's net sales and net income were $296.9 million and
$(17.0) million, respectively, for the year ended December 31, 1995, and $229.1
million and $0.3 million, respectively, for the nine months ended September 30,
1996. In addition, the Company's net cash provided by (used in) operating
activities, investing activities and financing activities for the year ended
December 31, 1995 were $(3.1) million, $(32.0) million and $33.7 million,
respectively, and $(0.9) million, $(7.1) million and $8.2 million, respectively,
for the nine months ended September 30, 1996. Approximately 41.6% of the
Company's 1995 net sales consisted of sales made outside the United States. The
Company's products are manufactured at four facilities located in the United
States, four facilities located in Europe and two facilities located in India.
The Company estimates that approximately 38.6% of its 1995 domestic net
sales were derived from product lines for which it believes it is either the
largest or second largest U.S. producer. Typically, the Company's products are
important to the performance of its customers' products, but represent a
relatively small percentage of their total product costs. For example, although
food preservatives are essential to the quality of carbonated diet soft drinks
(such as Diet Coke(Registered)), the Company's preservatives, potassium benzoate
and sodium benzoate, generally represent less than $.01 of the total cost of one
24-can case. The Company has five core product lines:
o Food and Personal Care Ingredients. The Company manufactures and markets
food, drug and cosmetic colors, food preservatives and flavors and fragrances
to a broad array of customers, including food and beverage, pet food,
cosmetic, pharmaceutical and household product manufacturers. The Company
believes it is the largest U.S. manufacturer of two of the world's most widely
used food preservatives and is the second largest U.S. producer of food dyes.
Food and Personal Care Ingredients accounted for approximately $61.3 million,
or 20.6%, of the Company's 1995 net sales.
o Pharmaceutical Intermediates and Natural Additives. The Company manufactures
and markets a number of pharmaceutical intermediates and active ingredients
for use in prescription and over-the-counter pharmaceuticals, as well as
natural additives, including thickeners (which mimic the feel of fat), gelling
agents, bioproteins and amino acids, for use in foods, pet foods, shampoos and
cosmetics. The Company believes that it is the largest producer of cysteine in
the world. Pharmaceutical Intermediates and Natural Additives accounted for
approximately $35.0 million, or 11.8%, of the Company's 1995 net sales.
o Specialty Organic Chemicals and Intermediates. The Company manufactures and
markets a number of specialty and fine organic chemicals and chemical
intermediates, including benzaldehyde, benzoic acid, benzyl alcohol and
phenol, that are used to manufacture flavors and fragrances, adhesives,
plasticizers, alkyd and polyester resins, rubber chemicals and agricultural
intermediates. The Company is the sole U.S. producer of benzaldehyde and
believes that it is the largest U.S. producer of benzoic acid. Specialty
Organic Chemicals and Intermediates accounted for approximately $56.0 million,
or 18.9%, of the Company's 1995 net sales.
o Organic Pigments and Dyes. The Company manufactures and markets carbonless
copy and technical dyes for use in industrial and consumer products, and
pigments for use in paints, coatings, inks and plastics. The Company is a
leading manufacturer of blue carbonless copy dyes used in business forms, such
as credit card receipts, and of blue technical dyes used in a wide range of
household products, such as window cleaners. Organic Pigments and Dyes
accounted for approximately $68.7 million, or 23.1%, of the Company's 1995 net
sales.
o Textile and Paper Chemicals. The Company manufactures and markets a wide
range of specialty and fine chemicals that are used in the textile and paper
industries. The Company is one of the two leading U.S.
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<PAGE>
producers of glyoxal and glyoxal resins which impart wrinkle resistance and
shrinkage control to cotton and cotton blend fabrics and are also used to
enhance the absorbency of paper. The Company also markets a complete line
of textile processing products. Textile and Paper Chemicals accounted for
approximately $75.9 million, or 25.6%, of the Company's 1995 net sales.
The Company was formed in April 1992 by Joseph Littlejohn & Levy, a private
investment firm ('JLL'), and certain of the Company's present and past executive
officers. Freedom commenced operations in order to acquire the textile chemical
business (the 'Freedom Textile Acquisition') of American Cyanamid Company
('American Cyanamid'), a leading producer of glyoxal, which it renamed Freedom
Textile Chemicals Co. ('Freedom Textile'). Thereafter, as part of its strategy
to acquire specialty chemical companies with strong market positions,
complementary product lines and opportunities for operational improvement, the
Company acquired Hilton Davis Chemical Co. ('Hilton Davis'), a leading supplier
of food, drug and cosmetic colors, dyes and specialty and fine chemicals, in
September 1993 (the 'Hilton Davis Acquisition'), and Kalama Chemical Inc.
('Kalama'), a leading supplier of food and beverage preservatives and certain
flavors and fragrances, in May 1994 (the 'Kalama Acquisition'). In December
1994, the Company acquired substantially all the assets of Reilly-Whiteman Inc.
('Reilly-Whiteman'), a producer of textile and other industrial chemicals (the
'Reilly-Whiteman Acquisition'), and in January 1995, Freedom, through its wholly
owned subsidiary Freedom Chemical Diamalt, acquired certain assets of Diamalt
GmbH ('Diamalt'), a producer of pharmaceutical intermediates, natural additives
and food and pet food ingredients (the 'Diamalt Acquisition').
BUSINESS STRATEGY
The Company's objective is to continue to enhance its revenue growth and
profitability by leveraging its strong market positions in its core product
lines and by continuing to improve operating efficiencies. The Company plans to
achieve its objective through the following key strategies:
o Increase Capacity of Key Product Lines. The Company intends to increase sales
by investing in capacity expansions for key product lines currently operating
at or near full capacity and has budgeted approximately $8 million to $10
million for each of the next two years for capacity expansions and process
improvements. In 1995, the Company completed the construction and start-up of
a plant in Madras, India to produce amino acids and cysteine and its
derivatives. In addition, it expanded benzaldehyde production capacity at its
plant in Kalama, Washington by 50% and implemented cassia production capacity
at its plant in Vadodara, India. The Company's current major capacity
expansion projects include (i) further plant expansion at Kalama, Washington,
which will expand the Company's production capacity for benzoic acid, phenol,
benzaldehyde and flavor and fragrance chemicals, (ii) expansion of cysteine
production capacity at its plant in Raubling, Germany and (iii) expansion of
cassia production capacity at its plant in Vadodara, India. See 'Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources.'
o Introduce New or Technologically Improved Products. The Company's research
and development efforts focus on the development of new and technologically
advanced products to respond to customer demands, changes in the marketplace,
technology and environmental regulations. For example, the Company is
currently working with its customers and capitalizing on existing technology
to develop new value-added products such as 'wash-away' textile dyes and
specialty pigments, environmentally friendly water-based paint pigments,
textile chemicals with reduced formaldehyde content and new coatings that meet
stricter environmental regulations for volatile organic compounds. The Company
also has an active pharmaceutical intermediates program and recently began
production and sale of thymidine, an AZT intermediate utilized in producing
drugs for AIDS therapy.
o Continue to Improve Operating Efficiencies. The initiatives taken by the
Company in connection with the restructuring and other measures have already
yielded significant cost savings and the Company intends to implement
additional cost-saving and productivity-enhancing programs in the future.
Currently, the Company is undertaking the following programs: raw material
sourcing from multiple vendors, yield improvement programs, the
discontinuation of unprofitable or low margin product lines, the reduction of
utility costs and the implementation of additional employee profit incentive
programs. The Company is analyzing additional opportunities to increase
operating efficiencies and profitability, including the possibility of further
consolidation of its manufacturing facilities, which are likely to result in
additional restructuring and other charges. See '--Restructuring and Other
Charges.'
o Broaden Product Offerings to Primary Markets. The Company seeks to broaden
its product lines through internal development and believes that offering a
complete product portfolio to a given customer will enable it
2
<PAGE>
to utilize more effectively its direct sales force, become a more complete
supplier to the industries it serves and increase its unit sales per
customer. Natural chemicals, including thickeners, enzymes and sizing
agents, are widely used in the European textile industry and the Company
intends to offer these products in the United States as additional
manufacturing capacity to produce these products becomes available. In
addition, the Company plans to capitalize on its position in food and pet
food ingredients by broadening its food colors, preservatives and flavor
product lines with natural additives such as amino acids, polysaccharides,
alginates and bioproteins, as well as with other products used by the
food and pet food industries.
o Expand Customer Base. The Company intends to expand and strengthen its
customer base by (i) focusing on relationships with key accounts, (ii)
creating incentives for its sales force to concentrate on fast-growing, high
margin areas within existing product segments, (iii) pursuing growth
opportunities in new markets outside the United States, including Mexico,
Central and South America and Asia, as such markets continue to develop
economically and the consumption of food, beverage, household and other
products containing the Company's products increases and (iv) cross-marketing
its products to existing customers who do not currently purchase such products
through, among other initiatives, an international sales force that will
market products from all of the Company's product groups.
o Enhance Growth through Selective Acquisitions. Freedom will continue to
selectively seek acquisitions with complementary product lines that offer the
opportunity to significantly improve profitability through integration with
the Company's existing businesses, although no specific acquisition is
currently contemplated. The Company considers the following characteristics in
its acquisitions: (i) strong market positions, (ii) unique product offerings,
(iii) low cost manufacturing capacity and (iv) technological or cost
advantages.
RESTRUCTURING AND OTHER CHARGES
In 1995, the Company recorded $14.4 million of restructuring and other
charges. The restructuring and other charges included (i) the consolidation of
certain of the Company's manufacturing facilities, (ii) the sale of the
Company's non-strategic transparent iron oxide coatings business, (iii) the
write-off of discontinued inventory and capitalized expenses and (iv) the
recognition of certain estimated environmental remediation costs. As a part of
these actions, the Company closed in April 1996 its Conshohocken, Pennsylvania
plant which manufactured products in the Organic Pigments and Dyes group and in
May 1996 its Newark, New Jersey plant which manufactured products in the Textile
and Paper Chemicals groups and relocated certain of those production
capabilities and technology to its other facilities. In addition, the Company
reduced personnel by approximately 135 employees in both administrative and
manufacturing positions.
In the fourth quarter of 1996, the Company recorded a charge of $6.0
million as a result of inventory obsolescence from plant closures of $0.9
million, inventory disposal costs of $0.6 million, severance for displaced
workers associated with plant closings and administrative personnel reductions
of $1.5 million and other charges of $0.7 million.
Additionally, during 1994, the Company idled its salicylic acid product
line. However, the Company continued to be a reseller of this product and
continued to pursue a long term position in this market. Since projected future
cash flows from this product line were sufficient to realize the Company's
investment from the time the assets were idled until the fourth quarter of 1996,
management did not believe that there was an impairment in the idle assets. In
the fourth quarter of 1996, the Company decided not to allocate its capital
resources to re-enter the salicylic acid business. Accordingly, the Company
recorded a charge of $2.3 million. The write-off will be included in
restructuring and other charges on the Company's statement of operations for
1996. Management estimates the costs to dismantle the line are approximately
equal to the salvage value of the line.
During the fourth quarter of 1996, the Company decided to shutdown its
Cowpens, South Carolina facility. During 1996, the Company incurred a loss from
operations of approximately $2.6 million from the Cowpens operations, including
a direct write-off of $1.5 million for inventory and related items in the fourth
quarter. The write-off was composed of $0.9 million of obsolete inventory from
unusable/unsaleable product as a result of product separation. The obsolete
inventory was identified during the October 31, 1996 planned physical inventory.
The write-off also included $0.6 million of disposal costs related to hazardous
products which required environmentally sound disposal procedures. Management is
currently negotiating with prospective buyers to sell the facility for its net
book value of approximately $2.7 million plus assumption of environmental
liabilities of $1.9 million. It is anticipated that the sale will be completed
during 1997.
Of the aforementioned $0.7 million of other charges, $0.5 million relates
to a municipality surcharge for water treatment and waste disposal at the
Company's Charlotte facility. The surcharge resulted from low plant
efficiency (due to the approach of a scheduled turn around and catalyst
change-out in January 1997) and high operating levels which caused waste to be
produced at above normal levels.
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<PAGE>
Of the $6.0 million charge recorded in the fourth quarter of 1996, $3.2
million is attributable to noncash items, primarily the idle equipment write-off
of $2.3 million and obsolete inventory of $0.9 million. Charges that will
require an outlay of cash total approximately $2.8 million. Of this amount $0.3
million was paid in the month of December. The remaining cash items totaling
approximately $2.5 million will be paid primarily over the first six months of
1997. Management believes this outlay of cash will be funded with cash flow from
operations and borrowings under the Amended and Restated Credit Agreement (as
defined herein) and will not materially adversely affect the Company's operating
cash flows or financial position.
The Company will continue to analyze additional opportunities to increase
operating efficiencies and profitability, which may result in additional
restructuring and other charges in the future. Additional matters have not
currently been identified. See 'Management's Discussion and Analysis of
Financial Condition and Results of Operations' and Note 17 to the Company's
Consolidated Financial Statements included herein.
THE TRANSACTIONS
The Company has undertaken the following transactions to provide it with
greater flexibility in the next several years with respect to its capital
expenditure and working capital requirements.
Concurrently with the consummation of the offering of Old Notes, Freedom
amended and restated its existing credit agreement (the 'Freedom Credit
Agreement' and, as amended and restated, the 'Amended and Restated Credit
Agreement'). The Amended and Restated Credit Agreement provides for a revolving
loan facility of up to $85 million and includes Freedom and Freedom Chemical
Diamalt as borrowers. The obligations of Freedom under the Amended and Restated
Credit Agreement are guaranteed by all of Freedom's domestic subsidiaries and
Freedom Chemical Diamalt and are secured by a first priority lien on
substantially all of the properties and assets of Freedom and its domestic
subsidiaries and certain properties and assets of Freedom Chemical Diamalt. The
obligations of Freedom Chemical Diamalt under the Amended and Restated Credit
Agreement are guaranteed by Freedom. See 'Description of Amended and Restated
Credit Agreement.' The Company initially borrowed $21.5 million under the
Amended and Restated Credit Agreement. As a condition to such initial borrowing,
all of the Company's outstanding indebtedness under the Freedom Credit Agreement
and under Freedom Chemical Diamalt's existing credit agreement (the 'Diamalt
Credit Agreement' and, together with the Freedom Credit Agreement, the 'Existing
Credit Agreements') was repaid in full and the Diamalt Credit Agreement was
terminated.
Joseph Littlejohn & Levy Fund, L.P. ('JLL Fund I') and Joseph Littlejohn &
Levy Fund II, L.P. ('JLL Fund II' and, together with JLL Fund I, the 'JLL
Funds'), Freedom's two largest stockholders, invested an aggregate of
approximately $9.94 million in Series A Common Stock (the 'Common Stock') of
Freedom (the 'JLL Cash Equity Investment' and, together with a $60,000 cash
equity investment made by an executive officer of Freedom, the 'Cash Equity
Investments') concurrently with the consummation of the offering of Old Notes.
In addition certain other stockholders of Freedom (principally current and
former management), using the proceeds of Company loans, invested an aggregate
of approximately $1.9 million in Common Stock (the 'Additional Equity
Investments' and, together with the Cash Equity Investments, the 'Equity
Investments') following consummation of the offering of Old Notes. See 'Certain
Transactions.' As of the date of this Prospectus, the JLL Funds beneficially
own, on a fully diluted basis, approximately 76.1% of Freedom's issued and
outstanding Common Stock, 93.5% of Freedom's issued and outstanding Series B
Redeemable Preferred Stock (the 'Series B Preferred Stock') and 90.5% of
Freedom's issued and outstanding Series C Redeemable Preferred Stock (the
'Series C Preferred Stock' and, together with the Series B Preferred Stock, the
'Preferred Stock').
In addition, concurrently with the consummation of the offering of Old
Notes, the Series B Preferred Stock and the Series C Preferred Stock of Freedom
were amended (the 'Preferred Stock Amendment') to extend the mandatory
redemption dates of such Preferred Stock to April 30, 2007 and May 31, 2007,
respectively. No consideration was paid to Freedom's Preferred Stockholders in
connection with the Preferred Stock Amendment.
The offering of Old Notes, the Equity Investments, the initial borrowing
under the Amended and Restated Credit Agreement and, in each case, the
application of the proceeds therefrom are collectively referred to herein as the
'Transactions.' See 'Use of Proceeds' which sets forth the impact of the
Transactions on the Company's financial position.
------------------
The Company's principal executive offices are located at 1735 Market
Street, Philadelphia, Pennsylvania, 19103, and its telephone number is (215)
979-3100.
4
<PAGE>
THE EXCHANGE OFFER
<TABLE>
<S> <C>
Securities Offered........................... Up to $125,000,000 principal amount of 10 5/8% Senior Subordinated
Notes due 2006, which have been registered under the Securities
Act. The terms of the New Notes and the Old Notes are identical in
all material respects, except for certain transfer restrictions
and registration rights relating to the Old Notes and except for
certain interest provisions relating to the Old Notes described
below under '--Summary Description of the New Notes.'
The Exchange Offer........................... The New Notes are being offered in exchange for a like principal
amount of Old Notes. The issuance of the New Notes is intended to
satisfy obligations of Freedom contained in the Registration
Rights Agreement, dated October 17, 1996, among Freedom, the
Guarantors and the Initial Purchasers (the 'Registration Rights
Agreement').
Expiration Date; Withdrawal Rights........... The Exchange Offer will expire at 5:00 p.m., New York City time,
on March 17, 1997, or such later date and time to which it is
extended. The tender of Old Notes pursuant to the Exchange Offer
may be withdrawn at any time prior to the Expiration Date. Any Old
Note not accepted for exchange for any reason will be returned
without expense to the tendering Holder thereof as promptly as
practicable after the expiration or termination of the Exchange
Offer. See 'The Exchange Offer--Terms of the Exchange Offer;
Period for Tendering Old Notes' and '-- Withdrawal Rights.'
Procedures for Tendering Old Notes........... Each Holder of Old Notes wishing to accept the Exchange Offer must
complete, sign and date the Letter of Transmittal, or a facsimile
thereof, in accordance with the instructions contained herein and
therein, and mail or otherwise deliver such Letter of Transmittal,
or such facsimile, together with either certificates for such Old
Notes or a Book-Entry Confirmation (as defined herein) of such Old
Notes into the Book-Entry Transfer Facility (as defined herein),
if such procedure is available, and any other required
documentation to the exchange agent (the 'Exchange Agent') at the
address set forth herein. By executing the Letter of Transmittal,
each Holder will represent to the Company, among other things,
that (i) the New Notes acquired pursuant to the Exchange Offer by
the Holder and any other person are being obtained in the ordinary
course of business of the person receiving such New Notes, (ii)
neither the Holder nor such other person is participating in,
intends to participate in or has an arrangement or understanding
with any person to participate in the distribution of such New
Notes and (iii) neither the Holder nor such other person is an
'affiliate,' as defined under Rule 405 of the Securities Act, of
the Company. Each broker-dealer that receives New Notes for its
own account in exchange for Old Notes, where such Old Notes were
acquired by such broker or dealer as a result of market-making
activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such
New Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker or dealer
will not be deemed to
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
admit that it is an 'underwriter' within the meaning of the
Securities Act. See 'The Exchange Offer--Procedures for Tendering
Old Notes' and 'Plan of Distribution.'
Special Procedures for
Beneficial Owners.......................... Any beneficial owner whose Old Notes are registered in the name of
a broker, dealer, commercial bank, trust company or other nominee
and who wishes to tender should contact such registered Holder
promptly and instruct such registered Holder to tender on such
beneficial owner's behalf. If such beneficial owner wishes to
tender on such owner's own behalf, such owner must, prior to
completing and executing the Letter of Transmittal and delivering
its Old Notes, either make appropriate arrangements to register
ownership of the Old Notes in such owner's name or obtain a
properly completed bond power from the registered Holder. The
transfer of registered ownership may take considerable time. See
'The Exchange Offer--Procedures for Tendering Old Notes.'
Guaranteed Delivery Procedures............... Holders of Old Notes who wish to tender their Old Notes and whose
Old Notes are not immediately available or who can not deliver
their Old Notes or any other documents required by the Letter of
Transmittal to the Exchange Agent must tender their Old Notes
according to the guaranteed delivery procedures set forth in 'The
Exchange Offer--Guaranteed Delivery Procedures.'
Federal Income Tax Consequences.............. The exchange pursuant to the Exchange Offer should not result in
gain or loss to the Holders or the Company for federal income tax
purposes. See 'Certain Federal Income Tax Consequences.'
Use of Proceeds.............................. There will be no proceeds to the Company from the Exchange Offer.
Exchange Agent............................... The Bank of New York is serving as Exchange Agent in connection
with the Exchange Offer. See 'The Exchange Offer--Exchange Agent.'
</TABLE>
CONSEQUENCES OF EXCHANGING OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. Freedom does not currently anticipate that it
will register Old Notes under the Securities Act. See 'Description of the
Notes--Registration Rights.' Based on interpretations by the staff of the SEC,
as set forth in no-action letters issued to third parties, Freedom believes that
New Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be
offered for resale, resold or otherwise transferred by Holders thereof (other
than any Holder which is an 'affiliate' of Freedom within the meaning of Rule
405 under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such Holders' business and such
Holders have no arrangement with any person to participate in the distribution
of such New Notes. However, the SEC has not considered the Exchange Offer in the
context of a no-action letter and there can be no assurance that the staff of
the SEC would make a similar determination with respect to the Exchange Offer as
in such other circumstances. Each Holder, other than a broker-dealer, must
acknowledge that it is not engaged in, and does not intend to engage in, a
distribution of New Notes and has no arrangement or understanding to participate
in a distribution of New Notes. Each broker-dealer
6
<PAGE>
that receives New Notes for its own account in exchange of Old Notes must
acknowledge that such Old Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities and that it will deliver
a Prospectus in connection with any resale of such New Notes. See 'Plan of
Distribution.' In addition, to comply with the securities laws of certain
jurisdictions, it may be necessary to qualify for sale or register thereunder
the New Notes prior to offering or selling such New Notes. Freedom has agreed,
pursuant to the Registration Rights Agreement, subject to certain limitations
specified therein, to register or qualify the New Notes for offer or sale under
the securities laws of such jurisdictions as any Holder reasonably requests in
writing. Unless a Holder so requests, Freedom does not intend to register or
qualify the sale of the New Notes in any such jurisdictions. See 'The Exchange
Offer--Consequences of Exchanging Old Notes.'
SUMMARY DESCRIPTION OF THE NEW NOTES
The terms of the New Notes and the Old Notes are identical in all material
respects, except for certain transfer restrictions and registration rights
relating to the Old Notes and except for certain provisions providing for an
increase in the interest rates on the Old Notes under certain circumstances
relating to timing of the Exchange Offer, which rights will terminate upon
consummation of the Exchange Offer. The New Notes will bear interest from the
most recent date to which interest has been paid on the Old Notes or, if no
interest has been paid on the Old Notes, from October 17, 1996. Accordingly,
registered Holders of New Notes on the relevant record date for the first
interest payment date following the consummation of the Exchange Offer will
receive interest accruing from the most recent date to which interest has been
paid or, if no interest has been paid, from October 17, 1996. Old Notes accepted
for exchange will cease to accrue interest from and after the date of
consummation of the Exchange Offer. Holders of Old Notes whose Old Notes are
accepted for exchange will not receive any payment in respect of interest on
such Old Notes otherwise payable on any interest payment date the record date
for which occurs on or after consummation of the Exchange Offer, which rights
will terminate upon consummation of the Exchange Offer.
<TABLE>
<S> <C>
Notes Offered................................ Up to $125,000,000 principal amount of the Company's 10 5/8%
Senior Subordinated Notes due 2006, which have been registered
under the Securities Act.
Maturity Date................................ October 15, 2006.
Interest Payment Dates....................... April 15 and October 15 of each year, commencing April 15, 1997.
Optional Redemption.......................... The Notes are redeemable at the option of Freedom, in whole or in
part, at any time on or after October 15, 2001 at the redemption
prices set forth herein, together with accrued and unpaid
interest, if any, to the date of redemption. In addition, on or
prior to October 15, 1999, Freedom, at its option, may redeem in
the aggregate up to 35% of the original principal amount of the
Notes at a redemption price equal to 109.625% of the principal
amount thereof, plus accrued and unpaid interest, if any, to the
date of redemption, with the net cash proceeds of one or more
Public Equity Offerings; provided, however, that at least $81.25
million aggregate principal amount of Notes remain outstanding
immediately after giving effect to such redemption.
Ranking...................................... The Notes are unsecured senior subordinated obligations of Freedom
and are subordinated in right of payment to all existing and
future Senior Debt of Freedom, including indebtedness under the
Amended and Restated Credit Agreement, and rank pari passu in
right of payment with all other existing and future senior
subordinated indebtedness of Freedom. As of September 30, 1996,
after giving pro forma effect to the Transactions, the Company
would have had approximately $21.5 million of Senior
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
Debt outstanding and approximately $149.2 million of indebtedness
outstanding.
Guarantees................................... The Notes are fully and unconditionally guaranteed, on a joint and
several basis, as to the payment of principal, premium, if any,
and interest by all of Freedom's domestic subsidiaries and Freedom
Chemical Diamalt (collectively, the 'Guarantors'). The Guarantees
are subordinated in right of payment to all existing and future
Senior Debt of the respective Guarantors, including such
Guarantors' guarantees of Freedom's obligations under the Amended
and Restated Credit Agreement. Freedom will cause any future
domestic Restricted Subsidiary of Freedom to guarantee, on a
senior subordinated basis, the due and punctual payment of all
amounts due under the Notes. See 'Description of the
Notes--Certain Covenants.'
Change of Control............................ Upon the occurrence of a Change of Control (as defined herein),
(i) Freedom will have the option to redeem the Notes, in whole or
in part, at a redemption price equal to the principal amount
thereof, together with accrued and unpaid interest to the date of
redemption, plus the Applicable Premium (as defined herein), and
(ii) subject to certain conditions, each holder of Notes will have
the right to require Freedom to purchase such holder's Notes at a
purchase price equal to 101% of the principal amount thereof,
together with accrued and unpaid interest, if any, to the date of
purchase.
Asset Sales.................................. In the event of certain asset sales, Freedom will be required to
offer to purchase the Notes at a purchase price equal to 100% of
their principal amount together with accrued and unpaid interest,
if any, to the date of purchase with the net proceeds of such
assets sales.
Covenants.................................... The indenture pursuant to which the Old Notes were, and the New
Notes will be, issued (the 'Indenture') contains certain covenants
that, among other things, limit the ability of Freedom and any
Restricted Subsidiary (as defined herein) to (i) incur additional
indebtedness, (ii) issue preferred stock in Restricted
Subsidiaries, (iii) pay dividends or make other distributions,
(iv) repurchase equity interests or subordinated indebtedness, (v)
create certain liens, (vi) enter into certain transactions with
affiliates, (vii) consummate certain asset sales, (viii) sell
equity interests in any Restricted Subsidiaries which guarantee
the Notes, and (ix) merge or consolidate with any person. See
'Description of the Notes--Certain Covenants.'
Exchange Offer; Registrations Rights......... Holders of New Notes (other than as set forth below) are not enti-
tled to any registration rights with respect to the New Notes.
Pursuant to the Registration Rights Agreement, Freedom agreed, for
the benefit of the Holders of Old Notes, to file an Exchange Offer
Registration Statement (as defined). The Registration Statement of
which this Prospectus is a part constitutes the Exchange Offer
Registration Statement. Under certain circumstances, certain
Holders of Notes (including Holders who may not participate in the
Exchange Offer or who may not freely resell New Notes received in
the Exchange Offer) may require Freedom to file, and
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
cause to become effective, a shelf registration statement under
the Securities Act, which would cover resales of Notes by such
Holders. See 'Description of the Notes--Exchange Offer; Registra-
tion Rights.'
Use of Proceeds.............................. The Company will not receive any proceeds from the Exchange Offer.
The proceeds from the offering of the Old Notes, together with the
initial borrowings under the Amended and Restated Credit Agreement
and the proceeds from the Cash Equity Investment, which were
approximately $156.5 million in the aggregate, were used to repay
in full indebtedness outstanding under the Existing Credit
Agreements and to pay fees and expenses related to the
Transactions. See 'Use of Proceeds.'
</TABLE>
RISK FACTORS
Holders of the Old Notes should consider carefully the information set
forth under the caption 'Risk Factors' and all other information set forth in
this Prospectus before making a decision to tender their Old Notes in the
Exchange Offer.
9
<PAGE>
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following table sets forth certain summary historical and pro forma
consolidated financial data for the periods indicated. The summary historical
consolidated financial data as of December 31, 1992 and 1993 and for the period
April 14, 1992 (inception) to December 31, 1992 (the '1992 Period') have been
derived from the Company's audited Consolidated Financial Statements not
included herein. The summary historical consolidated financial data as of
December 31, 1994 and 1995 and for the years ended December 31, 1993, 1994 and
1995 have been derived from the Company's audited Consolidated Financial
Statements and should be read in conjunction with such audited Consolidated
Financial Statements and the Notes thereto included herein. The summary
historical consolidated financial data as of September 30, 1996 and for the nine
months ended September 30, 1995 and 1996 have been derived from the Company's
unaudited Consolidated Financial Statements included herein, which, in the
opinion of management, include all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the Company's
financial position and results of operations for the unaudited periods.
Operating results for the nine months ended September 30, 1996 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1996. The summary unaudited pro forma consolidated financial data
for the year ended December 31, 1995 and as of and for the nine months ended
September 30, 1996 should be read in conjunction with the Company's Consolidated
Financial Statements and the Notes thereto and 'Unaudited Pro Forma Consolidated
Financial Information' included elsewhere herein.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
----------------------------------------- ------------------------------
1992 PRO FORMA PRO FORMA
PERIOD 1993 1994 1995 1995(A) 1995 1996 1996(A)
------- ------- -------- -------- --------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(B):
Net sales........................ $14,784 $54,831 $187,780 $296,888 $ 296,888 $229,340 $229,051 $ 229,051
Cost of goods sold............... 10,695 45,295 144,845 233,533 233,533 180,179 178,599 178,599
Gross profit(c).................. 4,089 9,536 42,935 63,355 63,355 49,161 50,452 50,452
Selling, general and
administrative expense......... 3,588 8,292 26,948 50,399 50,399 39,406 35,951 35,931
Research and development
expense........................ 173 735 2,331 4,950 4,950 3,914 3,584 3,584
Restructuring and other
charges(c)..................... -- -- -- 12,495 12,495 3,242 -- --
Operating income (loss).......... 328 509 12,741 (4,639) (4,639) 2,487 10,758 10,758
Interest and debt expense........ 531 1,556 6,682 13,805 15,557 10,334 10,339 11,689
Income (loss) before income
taxes, equity in income of
joint ventures, and
extraordinary loss............. (347) (1,261) 6,320 (20,873) (22,625) (10,289) 731 (619)
Net income (loss)................ (305) (970) 2,186 (16,990) (18,130) (7,892) 323 (562)
Less: preferred dividends........ 345 1,621 3,694 4,611 4,611 3,397 2,949 2,949
Net loss applicable to common
shares......................... (650) (2,591) (1,508) (21,601) (22,741) (11,289) (2,626) (3,511)
OTHER FINANCIAL DATA:
Net cash provided by (used in)
operating activities........... (750) 412 14,163 (3,130) -- (7,685) (875) --
Net cash used in investing
activities..................... (9,780) (30,628) (75,912) (32,015) -- (28,817) (7,115) --
Net cash provided by financing
activities..................... 12,038 29,497 63,371 33,717 -- 34,528 8,152 --
Depreciation and amortization.... 929 2,550 7,969 12,690 -- 9,872 9,555 --
Capital expenditures............. 435 953 7,210 15,514 -- 12,638 7,883 --
Gross margin(d).................. 27.7% 17.4% 22.9% 21.3% -- 21.4% 22.0% --
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------------
ACTUAL PRO FORMA(A)
-------- ------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital......................................................................... $ 31,851 $ 60,813
Total assets............................................................................ 254,279 259,735
Total long-term debt (net of current portion)........................................... 116,329 146,509
Mandatory redeemable preferred stock and minority interest.............................. 43,910 43,910
Stockholders' deficit................................................................... (22,875) (18,581)
</TABLE>
(Footnotes on next page)
10
<PAGE>
(Footnotes from previous page)
- ------------------
(a) The unaudited pro forma consolidated statements of operations for the year
ended December 31, 1995 and for the nine months ended September 30, 1996
give effect to the Transactions as if they had occurred at the beginning of
such periods. The unaudited pro forma balance sheet data as of September 30,
1996 give effect to the Transactions and certain restructuring and other
charges recorded by the Company in the fourth quarter of 1996 as if such
events had occurred on such date. See 'Unaudited Pro Forma Consolidated
Financial Information.'
(b) The results of operations of the Company reflect the results of operations
of: Freedom Textile effective from its acquisition in May 1992, Hilton Davis
effective from its acquisition in September 1993, Kalama effective from its
acquisition in May 1994, Reilly-Whiteman effective from its acquisition in
December 1994 and Diamalt effective from its acquisition in January 1995.
See Note 3 to the Company's Consolidated Financial Statements included
herein.
(c) In 1995, the Company recorded restructuring and other charges totaling $14.4
million. These charges reduced (i) gross profit from $65,287 to $63,355 and
operating income (loss) from $9,788 to $(4,639) for the year ended December
31, 1995 and (ii) gross profit from $51,093 to $49,161 and operating income
from $7,661 to $2,487 for the nine months ended September 30, 1995. See Note
17 to the Company's Consolidated Financial Statements included herein. In
the nine months ended September 30, 1996, the Company recorded charges
totaling $4,980. These charges reduced gross profit from $55,432 to $50,452
and were related to the write-off of inventory in its Organic Pigments and
Dyes product line.
(d) Gross margin is defined as gross profit as a percentage of net sales.
11
<PAGE>
RISK FACTORS
Holders of Old Notes should consider carefully all of the information set
forth in this Prospectus and, in particular, should evaluate the following risks
before tendering their Old Notes in the Exchange Offer, although the risk
factors set forth below (other than '--Consequences of Failure to Exchange and
Requirements for Transfer of New Notes') are generally applicable to the Old
Notes as well as the New Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE AND REQUIREMENTS FOR TRANSFER OF NEW NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. Freedom does not currently anticipate that it
will register Old Notes under the Securities Act. Based on interpretations by
the staff of the SEC, as set forth in no-action letters issued to third parties,
Freedom believes that New Notes issued pursuant to the Exchange Offer in
exchange for Old Notes may be offered for resale, resold or otherwise
transferred by Holders thereof (other than any such Holder which is an
'affiliate' of Freedom within the meaning of Rule 405 under the Securities Act)
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that such New Notes are acquired in the ordinary
course of such Holders' business and such Holders have no arrangement with any
person to participate in the distribution of such New Notes. However, the SEC
has not considered the Exchange Offer in the context of a no-action letter and
there can be no assurance that the staff of the SEC would make a similar
determination with respect to the Exchange Offer as in such other circumstances.
Each Holder, other than a broker-dealer, must acknowledge that it is not engaged
in, and does not intend to engage in, a distribution of New Notes and has no
arrangement or understanding to participate in a distribution of New Notes. If
any Holder is an affiliate of Freedom, is engaged in or intends to engage in or
has any arrangement or understanding with respect to the distribution of the New
Notes to be acquired pursuant to the Exchange Offer, such Holder (i) could not
rely on the applicable interpretations of the staff of the SEC and (ii) must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. Each broker-dealer
that receives New Notes for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an 'underwriter' within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of New Notes received in exchange for
Old Notes where such Old Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities. Freedom has agreed
that, for a period of 180 days after the Expiration Date, it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale. See 'Plan of Distribution.' However, to comply with the securities laws
of certain jurisdictions, if applicable, the New Notes may not be offered or
sold unless they have been registered or qualified for sale in such
jurisdictions or an exemption from registration or qualification is available
and is complied with. Freedom has agreed, pursuant to the Registration Rights
Agreement, subject to certain limitations specified therein, to register or
qualify the New Notes for offer or sale under the securities laws of such
jurisdictions as any Holder reasonably requests in writing. Unless Freedom is so
requested, Freedom does not currently intend to register or qualify the sale of
the New Notes in any such jurisdictions. See 'The Exchange Offer--Consequences
of Exchanging Old Notes.'
SUBSTANTIAL LEVERAGE AND ABILITY TO SERVICE DEBT
The Company is highly leveraged. As of September 30, 1996, on a pro forma
basis after giving effect to the Transactions, the Company would have had
outstanding approximately $149.2 million of indebtedness (including the Notes).
In addition, subject to the restrictions in the Amended and Restated Credit
Agreement and the Indenture, the Company may incur additional indebtedness from
time to time to finance acquisitions or capital expenditures or for other
purposes. See 'Description of the Notes' and 'Description of Amended and
Restated Credit Agreement.' The degree to which the Company is leveraged could
have important consequences to
12
<PAGE>
holders of the Notes, including the following: (i) a substantial portion of
Freedom's consolidated cash flow from operations must be dedicated to the
payment of the principal of and interest on its outstanding indebtedness and
will not be available for other purposes, (ii) the Company's ability to obtain
additional financing in the future for working capital needs, capital
expenditures, acquisitions and general corporate purposes may be materially
limited or impaired or such financing may not be on terms favorable to the
Company, (iii) the Company may be more highly leveraged than its competitors
which may place it at a competitive disadvantage, and (iv) the Company's
leverage may make it more vulnerable to a downturn in its business or the
economy in general.
The Company anticipates that its cash balance together with cash flow from
operations and borrowings available under the Amended and Restated Credit
Agreement will be sufficient to fund anticipated operating expenses, capital
expenditures and to service its debt requirements as they become due. There can
be no assurance, however, that the amounts available from such sources will be
sufficient for such purposes. No assurance can be given that additional sources
of funding will be available if required or, if available, will be on terms
satisfactory to the Company. If the Company is unable to service its
indebtedness it will be forced to adopt an alternative strategy that may include
actions such as reducing or delaying capital expenditures, selling assets,
restructuring or refinancing its indebtedness, or seeking additional equity
capital. There can be no assurance that any of these strategies could be
effected on satisfactory terms, if at all. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources.'
DEPENDENCE ON DISTRIBUTIONS FROM SUBSIDIARIES; ENFORCEABILITY OF GUARANTEES
Freedom is a holding company which derives all of its operating income from
its subsidiaries. Accordingly, Freedom will be dependent on dividends and other
distributions from its subsidiaries to generate the funds necessary to meet its
obligations, including the payment of principal and interest on the Notes. The
ability of Freedom's subsidiaries to pay such dividends will be subject to,
among other things, the terms of any debt instruments of Freedom's subsidiaries
then in effect and applicable law. The holders of the Notes will have no direct
claim against Freedom's subsidiaries other than the claim created by the
Guarantees, if any, which may themselves be subject to legal challenge in the
event of the bankruptcy or insolvency of a Guarantor. See '--Fraudulent Transfer
Considerations.' If such a challenge were upheld, the Guarantees would be
invalidated and unenforceable. To the extent that the Guarantees are held to be
unenforceable or have been released pursuant to the terms of the Indenture, the
rights of holders of the Notes to participate in any distribution of assets of
any Guarantor upon liquidation, bankruptcy or reorganization may, as is the case
with other unsecured creditors of Freedom, be subject to prior claims of
creditors of such Guarantor. The Indenture, among other things, limits the
incurrence of additional debt by Freedom's Restricted Subsidiaries. However,
these limitations are subject to a number of important qualifications. See
'Description of the Notes.'
RESTRICTIONS IMPOSED BY THE TERMS OF FREEDOM'S INDEBTEDNESS; CONSEQUENCES OF
FAILURE TO COMPLY
The terms and conditions of the Amended and Restated Credit Agreement and
the Indenture impose restrictions that affect, among other things, the ability
of Freedom and its Restricted Subsidiaries to incur debt (including other
subordinated debt), pay dividends or make distributions, make acquisitions,
create liens, sell assets, create restrictions on the payment of dividends and
other payments by its Restricted Subsidiaries and make certain investments. The
Amended and Restated Credit Agreement also requires Freedom to maintain
specified financial ratios and tests, including maximum leverage ratios and
minimum interest coverage ratios. Moreover, the indebtedness outstanding under
the Amended and Restated Credit Agreement is guaranteed by all of Freedom's
domestic subsidiaries (and by (i) Freedom in respect of indebtedness incurred by
Freedom Chemical Diamalt and (ii) Freedom Chemical Diamalt in respect of
indebtedness incurred by Freedom) and is secured by a first priority lien on
substantially all of the properties and assets of Freedom and its domestic
subsidiaries, now owned or acquired later, and certain properties and assets of
Freedom Chemical Diamalt, including a pledge of all of the shares of Freedom's
existing and future domestic subsidiaries and up to 65% of the shares of
Freedom's existing and future foreign subsidiaries that are owned by Freedom or
one of its domestic subsidiaries (collectively, the 'Collateral').
Freedom's ability to comply with the foregoing provisions can be affected
by events beyond its control. The breach of any of these covenants could result
in a default under one or more of the debt instruments of Freedom or its
subsidiaries. In the event of a default under any indebtedness of Freedom or its
subsidiaries, the holders of
13
<PAGE>
such indebtedness could elect to declare all amounts outstanding under their
respective debt instruments to be due and payable. Any such declaration under a
debt instrument of Freedom or its subsidiaries is likely to result in an event
of default under one or more of the other debt instruments of Freedom or its
subsidiaries. If indebtedness of Freedom or its subsidiaries was to be
accelerated, there could be no assurance that the assets of Freedom or Freedom's
subsidiaries, as the case may be, would be sufficient to repay in full
borrowings under all of such debt instruments, including the Notes. In the case
of the Amended and Restated Credit Agreement, if such indebtedness were not so
repaid, refinanced or restructured, the lenders could proceed to realize on the
Collateral. See 'Description of the Notes' and 'Description of Amended and
Restated Credit Agreement.'
SUBORDINATION OF NOTES AND GUARANTEES
The Notes are general unsecured obligations of Freedom and are subordinated
in right of payment to all existing and future Senior Debt of Freedom, including
Freedom's guarantee of Freedom Chemical Diamalt's obligations under the Amended
and Restated Credit Agreement. In addition, the Guarantees of the Notes by each
of the Guarantors are general unsecured obligations of each of such Guarantors
and are subordinated in right of payment to all existing and future Senior Debt
of each of such Guarantors, including such Guarantors' guarantees of Freedom's
obligations under the Amended and Restated Credit Agreement. Subject to certain
limitations, the Indenture permits Freedom and its Restricted Subsidiaries,
including the Guarantors, to incur additional Senior Debt. See 'Description of
the Notes--Certain Covenants--Limitation on Incurrence of Indebtedness.' As a
result of the subordination provisions contained in the Indenture, in the event
of a liquidation or insolvency, holders of Senior Debt and trade creditors of
Freedom and the Guarantors may recover more, ratably, than the holders of the
Notes. The holders of any indebtedness of Freedom's subsidiaries (other than the
Guarantors) will be entitled to payment of their indebtedness from the assets of
such subsidiaries prior to the holders of any general unsecured obligations of
Freedom, including the Notes. In addition, in the event of a payment default
under the Amended and Restated Credit Agreement, no payments may be made on
account of the principal, premium, if any, or interest on the Notes until such
default has been cured or waived. Under certain circumstances, no payments may
be made for a specified period with respect to the principal, premium, if any,
or interest on the Notes if a nonpayment default exists under the Amended and
Restated Credit Agreement.
INTERNATIONAL OPERATIONS, EXCHANGE RATE FLUCTUATIONS AND COUNTRY RISKS
The Company has significant assets located outside the United States and a
significant portion of the Company's sales and earnings are attributable to
operations conducted abroad and to export sales. The Company operates
manufacturing and other facilities in five countries and sells its products in
approximately 25 countries. For the nine months ended September 30, 1996,
approximately 22% of the Company's assets were located outside the United
States, predominantly in Western Europe, and approximately 44% of the Company's
net sales consisted of sales made to customers located outside the United
States, predominantly in Western Europe and the Far East. The United States
dollar value of the Company's international sales and earnings varies with
currency exchange rate fluctuations. Changes in currency exchange rates could in
the future adversely affect the Company's results of operations as well as the
Company's ability to meet interest and principal obligations on the Notes. In
addition, international manufacturing, sales and raw materials sourcing are
subject to other inherent risks, including labor unrest, political instability,
restrictions on transfers of funds, export duties and quotas, domestic and
international customs and tariffs, unexpected changes in regulatory
environments, difficulty in obtaining distribution and support, and potentially
adverse tax consequences. Although such risks have not had a material adverse
effect on the Company in the past, there can be no assurance that these factors
will not have a material adverse impact on the Company's ability to increase or
maintain its international sales or on its results of operations in the future.
COMPETITIVE INDUSTRY
The Company faces competition from a substantial number of global and
regional competitors, some of which have greater financial, research and
development, production and other resources than the Company. The Company's
competitive position is based principally on customer service and support,
breadth of product line, product quality, manufacturing technology, facility
location, and, to a lesser extent, the selling prices of its products. The
Company's competitors can be expected to continue to improve the design and
performance of
14
<PAGE>
their specialty chemical products and to introduce new products with competitive
price and performance characteristics. There can be no assurance that the
Company will have sufficient resources to maintain its current competitive
position or market share. See 'Business--Products' and '--Competition.'
ENVIRONMENTAL CONSIDERATIONS
Manufacturers of specialty and fine chemical products, including the
Company, are subject to a variety of U.S. and non-U.S. laws and regulations
relating to pollution and protection of the environment, including the storage,
handling, treatment, discharge and disposal of materials into the environment.
U.S. manufacturers of specialty and fine chemicals, including the Company, have
expended, and may be required to expend in the future, substantial funds for
compliance with such laws and regulations. Some risk of environmental liability
is inherent in the nature of the Company's business, and there is no assurance
that additional material environmental costs will not arise as a result of
compliance with existing and future legislation or other developments. The
Company does not currently anticipate any material adverse effect on its results
of operations, financial condition or competitive position as a result of
compliance with environmental requirements or as a result of the impact of
environmental considerations on the marketability of its products. However,
environmental laws and regulations are becoming increasingly more stringent. To
the extent that the cost of compliance increases and the Company cannot pass on
future increases to its customers, such increases may have an adverse impact on
the Company's profitability. As of September 30, 1996, the Company had reserves
of approximately $18.7 million for certain environmental expenditures. The
Company expects to have environmental expenditures of approximately $2.0 million
to $3.0 million annually in each of the next two years. See 'Management's
Discussion and Analysis of Financial Condition and Results of Operations' and
the Company's Consolidated Financial Statements included herein. The Company
believes that the costs incurred in connection with most of the significant
environmental liabilities relating to the Company's properties will be covered
by the indemnities described below. See 'Business--Environmental Matters.'
Pursuant to the terms of agreements entered into in connection with the
Company's acquisitions of Freedom Textile's Charlotte facility, Hilton Davis,
Kalama and certain assets of Reilly-Whiteman, the Company is indemnified against
certain environmental liabilities by American Cyanamid, Sterling Winthrop, Inc.
('Sterling Winthrop') (at the time of the Hilton Davis Acquisition a subsidiary
of Eastman Kodak Company ('Eastman Kodak')), BC Sugar Refinery Limited ('BC
Sugar') and Reilly-Whiteman (collectively, the 'Environmental Indemnitors'),
respectively. Subsequent to such acquisitions, American Cyanamid distributed to
its stockholders all of the capital stock of its chemicals unit, Cytec
Industries Inc. ('Cytec'), and Eastman Kodak sold the capital stock of Sterling
Winthrop to a third party. Although, to date, the Company has continued to be
reimbursed for environmental liabilities in respect of Freedom Textile and
Hilton Davis by Cytec and a subsidiary of Eastman Kodak, respectively, the
latter of such entities has not formally acknowledged to the Company its
assumption of indemnification obligations in connection with such environmental
liabilities. No assurance can be given that such subsidiary of Eastman Kodak
will continue to reimburse the Company in the future. Moreover, no assurance can
be given that the Environmental Indemnitors (or any successor that assumes the
obligations of any such Environmental Indemnitor) will have the financial
resources to perform their respective responsibilities fully or that the Company
will not be required to incur expenses for liabilities under environmental
requirements including those for remediation before such time as the
Environmental Indemnitors (or any such successor) pay any amounts for which they
are ultimately held responsible. In any such event, the Company may be required
to incur significant costs, which could have a material adverse effect on the
Company.
VOTING CONTROL BY PRINCIPAL STOCKHOLDER
As of the date of this Prospectus, the JLL Funds own, on a fully diluted
basis, an aggregate of approximately 76.1% of the outstanding shares of Common
Stock. The JLL Funds currently have sufficient voting power to elect the entire
Board of Directors of Freedom and, in general, to determine (without the consent
of Freedom's other stockholders) the outcome of any corporate transaction or
other matter submitted to the stockholders for approval, including mergers,
consolidations and the sale of all or substantially all of Freedom's assets, and
also the power to prevent or cause a change in control of the Company. In
addition, four of the nine current members of the Board of Directors are general
partners of or otherwise associated with JLL, the general partner of each of the
JLL Funds. Pursuant to a stockholders agreement (the 'Stockholders' Agreement')
among the JLL Funds
15
<PAGE>
and certain other stockholders of Freedom (principally current and former
management), the parties thereto agreed to vote their shares in favor of one
another's nominees to the Board of Directors. See 'Management-- Directors and
Executive Officers' and 'Principal Stockholders.'
RAW MATERIAL PRICE VOLATILITY
The principal raw materials used by the Company in the manufacture of its
products, including toluene, can be subject to significant cyclical price
fluctuations. No single raw material accounted for more than 7% of the Company's
1995 cost of goods sold. While the selling prices of the Company's products tend
to increase or decrease over time with the cost of raw materials, such changes
may not occur simultaneously or to the same degree. There can be no assurance
that the Company will be able to pass any increases in raw material costs
through to its customers in the form of price increases. Significant increases
in the price of raw materials, if not offset by product price increases, would
have an adverse impact upon the profitability of the Company. See 'Business--Raw
Materials.'
RELIANCE ON CONTINUED OPERATION AND SUFFICIENCY OF MANUFACTURING FACILITIES
The Company's revenues are dependent on the continued operation of its
various manufacturing facilities. Although presently all operating plants are
considered to be in good condition, the operation of manufacturing plants
involves many risks, including the breakdown, failure or substandard performance
of equipment, power outages, the improper installation or operation of
equipment, natural disasters and the need to comply with directives of
governmental agencies. Many of the Company's product lines are manufactured at a
single facility and production would not be transferable to another site. The
occurrence of material operational problems, including but not limited to the
above events, may adversely affect the profitability of the Company during the
period of such operational difficulties.
LABOR RELATIONS
As of November 30, 1996, approximately 50% of the Company's domestic
employees were covered by collective bargaining agreements which expire at
various times in each of the next several years. As of November 30, 1996,
approximately 5% of the Company's domestic employees were covered by agreements
which expire, or are subject to renegotiation, at various times during the next
20 months, including the agreement covering approximately 33 employees at the
Company's Charlotte, North Carolina facility which expires in June 1998. The
Company believes that it has satisfactory relations with its unions and,
therefore, anticipates reaching new agreements on satisfactory terms as the
existing agreements expire or shortly thereafter. There can be no assurance,
however, that new agreements will be reached without a work stoppage or strike
or will be reached on terms satisfactory to the Company. A prolonged work
stoppage or strike at any one of its manufacturing facilities could have a
material adverse effect on the Company's results of operations. See
'Business--Employees.'
FRAUDULENT TRANSFER CONSIDERATIONS
The obligations of any Guarantor under its Guarantee may be subject to
avoidance under state fraudulent transfer laws or federal bankruptcy law. If a
court were to find, in a lawsuit by an unpaid creditor of a Guarantor or a
representative of creditors, such as a trustee in bankruptcy, (a) that such
Guarantor incurred the indebtedness represented by its Guarantee with the intent
to hinder, delay or defraud present or future creditors, or received less than a
reasonably equivalent value or fair consideration for any such indebtedness and
(b) at the time of such incurrence (i) was insolvent, (ii) was rendered
insolvent by reason of such incurrence, (iii) was engaged or about to engage in
a business or transaction for which its remaining assets constituted
unreasonably small capital to carry on its business or (iv) intended to incur,
or believed or reasonably should have believed that it would incur debts beyond
its ability to pay as such debts matured, such court could avoid such
Guarantor's obligations under its Guarantee, subordinate such Guarantee to all
other indebtedness of such Guarantor or take other action detrimental to the
holders of the Notes. In such an event, there can be no assurance that any
payment on such Guarantee could ever be recovered by holders of the Notes. In
addition, any payments by any Guarantor pursuant to such Guarantor's Guarantee
could be voided and may be required to be returned to such Guarantor or to a
fund for the benefit of its creditors.
16
<PAGE>
The measures of insolvency for purposes of the foregoing considerations
will vary depending upon the law applied in any proceeding with respect to the
foregoing. Generally, however, a Guarantor would be considered insolvent if the
sum of its debts, including contingent liabilities, were greater than the fair
saleable value of all of its assets at a fair valuation or if the present fair
saleable value of its assets were less than the amount that would be required to
pay its probable liability on its existing debts, including contingent
liabilities, as they become absolute and mature. Although, the Company believes
that each of the Guarantors is solvent under the foregoing standards, there can
be no assurance as to what standard a court would apply in making such
determination or that a court would reach the same conclusion. See 'Description
of the Notes--The Guarantees.'
In rendering their opinions with respect to the validity of the New Notes
and the Guarantees, counsel for Freedom and the Guarantors will not express any
opinion as to the applicability of federal or state statutes relating to
fraudulent conveyances and obligations.
The obligations of Freedom Chemical Diamalt under its Guarantee are limited
under German law to the maximum amount that would not result in depletion of its
stated share capital.
REPURCHASE OF THE NOTES UPON A CHANGE OF CONTROL
Upon a Change of Control, Freedom will be required to offer to repurchase
the Notes then outstanding at a purchase price in cash equal to 101% of the
principal amount thereof, plus accrued and unpaid interest, if any, to the date
of repurchase. The Amended and Restated Credit Agreement prohibits Freedom from
purchasing any Notes pursuant to a Change of Control offer prior to repayment in
full of Freedom's indebtedness under the Amended and Restated Credit Agreement.
The failure of Freedom following a Change of Control to make or consummate
an offer to repurchase the Notes would constitute an Event of Default under the
Indenture. In such an event, the Trustee or the holders of at least 25% in
aggregate principal amount of the outstanding Notes may accelerate the maturity
of all of the Notes. A Change of Control includes any transaction which results
in any person (other than Permitted Holders (as defined in the Indenture))
beneficially owning or controlling more than 50% of the voting stock of Freedom.
See 'Description of the Notes--Change of Control.'
The occurrence of the events constituting a Change of Control with respect
to the Notes would result in an event of default under the Amended and Restated
Credit Agreement and would give the lenders thereunder the right to require
payments in full of the indebtedness thereunder. If a Change of Control were to
occur, there can be no assurance that Freedom would have adequate funds to first
satisfy its obligations under the Amended and Restated Credit Agreement or other
agreements relating to indebtedness, if accelerated, and then to repurchase the
Notes.
ABSENCE OF PUBLIC MARKET FOR THE NOTES
The New Notes are being offered to the Holders of the Old Notes. The Old
Notes were issued on October 17, 1996 to a small number of institutional
investors and are eligible for trading in the Private Offering, Resale and
Trading through Automated Linkages (PORTAL) Market, the National Association of
Securities Dealers' screenbased, automated market for trading of securities
eligible for resale under Rule 144A. To the extent that Old Notes are tendered
and accepted in the Exchange Offer, the trading market for the remaining
untendered Old Notes could be adversely affected. There is no existing trading
market for the New Notes, and there can be no assurance regarding the future
development of a market for the New Notes, or the ability of Holders of the New
Notes to sell their New Notes or the price at which such Holders may be able to
sell their New Notes. If such a market were to develop, the New Notes could
trade at prices that may be higher or lower than the initial offering price of
the Old Notes depending on many factors, including prevailing interest rates,
the Company's operating results and the market for similar securities. Although
the Initial Purchasers have informed Freedom that they currently intend to make
a market in the New Notes, they are not obligated to do so, and any such market
making may be discontinued at any time without notice. Accordingly, there can be
no assurance as to the development or liquidity of any market for the Notes.
Freedom does not intend to apply for listing of the New Notes on any securities
exchange or for quotation through the National Association of Securities Dealers
Automated Quotation System.
17
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the Exchange Offer. The
gross proceeds of the offering of Old Notes, together with initial borrowings
under the Amended and Restated Credit Agreement and the proceeds of the Equity
Investments, were used to repay in full indebtedness outstanding under the
Existing Credit Agreements and to pay fees and expenses related to the
Transactions, including, the discounts to the Initial Purchasers. The following
table sets forth the sources and uses of funds in connection with the
Transactions:
<TABLE>
<CAPTION>
AMOUNTS
---------------------
(DOLLARS IN MILLIONS)
<S> <C>
SOURCES OF FUNDS:
Borrowings under Amended and Restated Credit Agreement(a)(b)...................... $ 21.5
Proceeds from sale of Old Notes................................................... 125.0
Proceeds from Equity Investments(c)............................................... 10.0
-------
Total Sources.................................................................. $ 156.5
-------
-------
USES OF FUNDS:
Repayment of amounts outstanding under Freedom Credit Agreement(b)................ $ 125.4
Repayment of amounts outstanding under Diamalt Credit Agreement(d)................ 21.5
Fees and expenses(e).............................................................. 7.5
Working capital................................................................... 2.1
-------
Total Uses..................................................................... $ 156.5
-------
-------
</TABLE>
- ------------------
(a) Represents initial borrowings under the Amended and Restated Credit
Agreement, which provides for revolving loans of up to $85.0 million in the
aggregate.
(b) As of October 17, 1996, outstanding amounts under the Freedom Credit
Agreement included (i) $98.5 million under term loan facilities which
matured at various dates through 2002 and bore interest at a weighted
average rate of 8.9% per annum, (ii) $26.1 million under a revolving credit
facility, which matured on June 30, 2000 and bore interest at a weighted
average rate of 8.6% per annum and (iii) $0.8 million of accrued and unpaid
interest.
(c) Represents aggregate cash proceeds of $10.0 million received by Freedom in
connection with the Cash Equity Investments. Does not include the Additional
Equity Investments of approximately $1.9 million, which were financed almost
entirely with loans made by Freedom. See 'Certain Transactions.'
(d) As of October 17, 1996, the annual interest rate of borrowings under the
Diamalt Credit Agreement was 7.8%, and the maturity date of borrowings under
the Diamalt Credit Agreement was May 30, 1997.
(e) Represents estimated fees and expenses related to the Transactions,
including (i) discounts to the Initial Purchasers, (ii) lender fees and
(iii) legal, accounting and other professional fees and expenses.
18
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The Company has undertaken the Transactions to provide it with greater
flexibility in the next several years with respect to its capital expenditure
and working capital requirements. A detailed discussion of the Transactions is
set forth below.
On October 17, 1996, the Company issued $125 million principal amount of
Old Notes. The Old Notes were issued pursuant to an offering exempt from
registration under the Securities Act and applicable state securities laws.
Concurrently with the consummation of the offering of Old Notes, Freedom
amended and restated the Freedom Credit Agreement. The Amended and Restated
Credit Agreement provides for a revolving loan facility of up to $85 million and
includes Freedom and Freedom Chemical Diamalt as borrowers. The obligations of
Freedom under the Amended and Restated Credit Agreement are guaranteed by all of
Freedom's domestic subsidiaries and Freedom Chemical Diamalt and are secured by
a first priority lien on substantially all of the properties and assets of
Freedom and its domestic subsidiaries and certain properties and assets of
Freedom Chemical Diamalt. The obligations of Freedom Chemical Diamalt under the
Amended and Restated Credit Agreement are guaranteed by Freedom. See
'Description of Amended and Restated Credit Agreement.' The Company initially
borrowed $21.5 million under the Amended and Restated Credit Agreement. As a
condition to such initial borrowing, all of the Company's outstanding
indebtedness under the Freedom Credit Agreement and the Diamalt Credit Agreement
was repaid in full and the Diamalt Credit Agreement was terminated.
JLL Fund I and JLL Fund II, Freedom's two largest stockholders, invested an
aggregate of approximately $9.94 million in the Common Stock of Freedom, and an
executive officer of Freedom invested $60,000 in Common Stock concurrently with
the consummation of the offering of Old Notes. In addition, certain other
stockholders of Freedom (principally current and former management), using the
proceeds of Company loans, invested an aggregate of approximately $1.9 million
in Common Stock following consummation of the offering of Old Notes. See
'Certain Transactions.'
In addition, concurrently with the consummation of the offering of Old
Notes, the Series B Preferred Stock and the Series C Preferred Stock of Freedom
were amended to extend the mandatory redemption dates of such Preferred Stock to
April 30, 2007 and May 31, 2007, respectively. No consideration was paid to
Freedom's Preferred Stockholders in connection with the Preferred Stock
Amendment.
The Unaudited Pro Forma Consolidated Statements of Operations for the
period ended December 31, 1995 and the nine months ended September 30, 1996 give
effect to the Transactions, which closed on October 17, 1996, as if they had
occurred at the beginning of such periods. The Unaudited Pro Forma Balance Sheet
as of September 30, 1996 gives effect to (i) the Transactions and (ii) certain
restructuring and other charges the Company recorded in the fourth quarter of
1996, as if such events had occurred on such date.
The pro forma adjustments are based upon available information and upon
certain interest rate assumptions that the Company believes are reasonable. The
unaudited Pro Forma Consolidated Financial Information should be read in
conjunction with the Company's Consolidated Financial Statements and notes
thereto included in this Prospectus. The unaudited Pro Forma Consolidated
Financial Information is not necessarily indicative of the Company's future
results of operations.
19
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA AS
ACTUAL DELETIONS(A) ADDITIONS(B) ADJUSTED
-------- ------------ ------------ --------
<S> <C> <C> <C> <C>
Net Sales.................................................. $296,888 -- -- $296,888
Cost of goods sold......................................... 233,533 -- -- 233,533
-------- ------------ ------------ --------
Gross Profit............................................. 63,355 -- -- 63,355
Selling, general and administrative........................ 50,399 -- -- 50,399
Noncash compensation expense............................... 150 -- -- 150
Research and development expense........................... 4,950 -- -- 4,950
Restructuring and other charges............................ 12,495 -- -- 12,495
-------- ------------ ------------ --------
Operating loss........................................... (4,639) -- -- (4,639)
Interest and debt expense.................................. 13,805 (13,707)(a) 15,459(b) 15,557
Registration costs......................................... 2,187 -- -- 2,187
Other income............................................... 5 -- -- 5
-------- ------------ ------------ --------
Net income (loss) before minority interest and income
taxes................................................. (20,626) 13,707 (15,459) (22,378)
Minority interest.......................................... 247 -- -- 247
-------- ------------ ------------ --------
Net loss before income taxes............................... (20,873) 13,707 (15,459) (22,625)
Provision (benefit) for income taxes....................... (3,809) 5,108(c) (5,720)(c) (4,421)
Equity in income of joint ventures......................... 74 -- -- 74
-------- ------------ ------------ --------
Net (loss)............................................... (16,990) 8,599 (9,739) (18,130)
Less preferred dividends................................... 4,611 -- -- 4,611
-------- ------------ ------------ --------
Net loss applicable to common shares..................... $(21,601) $ 8,599 $ (9,739) $(22,741)
-------- ------------ ------------ --------
-------- ------------ ------------ --------
</TABLE>
- ------------------
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(a) To delete historical interest and debt expense of $13,707, including
amortization of deferred financing costs of $822 in connection with the
Freedom Credit Agreement and the Diamalt Credit Agreement.
(b) To reflect interest and debt expense of $15,459 in connection with the
Transactions, which includes interest expense of $13,281 on $125,000 of Old
Notes at a fixed rate of 10.625% per annum, interest expense of $1,428 on
$21,500 of borrowings outstanding under the Amended and Restated Credit
Agreement based on the Company's actual interest rate as of February 13,
1997 of 6.64% per annum and amortization of deferred financing costs of
$750. The effect of a one percent increase in the interest rate on
borrowings outstanding under the Amended and Restated Credit Agreement for
the year ended December 31, 1995 would be additional interest expense of
$215 ($135, net of tax benefit). See page 19 for a description of the
Transactions.
(c) To reflect the income tax expense (benefit) associated with the historical
deletions and pro forma additions at a combined federal and state statutory
rate of 37% in connection with the Transactions. See page 19 for a
description of the Transactions.
20
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA AS
ACTUAL DELETIONS(A) ADDITIONS(B) ADJUSTED
-------- ------------ ------------ --------
<S> <C> <C> <C> <C>
Net Sales.................................................. $229,051 -- -- $229,051
Cost of goods sold......................................... 178,599 -- -- 178,599
-------- ------------ ------------ --------
Gross Profit............................................. 50,452 -- -- 50,452
Selling, general and administrative........................ 35,951 -- -- 35,951
Noncash compensation expense............................... 159 -- -- 159
Research and development expense........................... 3,584 -- -- 3,584
-------- ------------ ------------ --------
Operating income......................................... 10,758 -- -- 10,758
Interest and debt expense.................................. 10,339 $(10,245)(a) $ 11,595(b) 11,689
Other income............................................... 507 -- -- 507
-------- ------------ ------------ --------
Net income (loss) before minority interest and income
taxes................................................. 926 10,245 (11,595) (424)
Minority interest.......................................... 195 -- -- 195
-------- ------------ ------------ --------
Net income (loss) before income taxes...................... 731 10,245 (11,595) (619)
Provision (benefit) before income taxes.................... 935 3,825(c) (4,290)(c) 470
Equity in income of joint ventures......................... 527 -- -- 527
-------- ------------ ------------ --------
Net income (loss)........................................ 323 6,420 (7,305) (562)
Less preferred dividends................................... 2,949 -- -- 2,949
-------- ------------ ------------ --------
Net loss applicable to common shares..................... $ (2,626) $ 6,420 $ (7,305) $ (3,511)
-------- ------------ ------------ --------
-------- ------------ ------------ --------
</TABLE>
- ------------------
NOTES TO PRO FORMA UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
(a) To delete historical interest and debt expense of $10,245, including
amortization of deferred financing costs of $580, in connection with the
Freedom Credit Agreement and the Diamalt Credit Agreement.
(b) To reflect interest and debt expense of $11,595 in connection with the
Transactions, which includes interest expense of $9,961 on $125,000 of Old
Notes at a fixed rate of 10.625% per annum, interest expense of $1,071 on
$21,500 of borrowings outstanding under the Amended and Restated Credit
Agreement based on the Company's actual interest rate as of February 13,
1997 of 6.64% per annum and amortization of deferred financing costs of $563
in connection with the Transactions. The effect of a one percent increase in
the interest rate on borrowings outstanding under the Amended and Restated
Credit Agreement for the nine months ended September 30, 1996 would be
additional interest expense of $161 ($101, net of tax benefit). See page 19
for a description of the Transactions.
(c) To reflect the income tax expense (benefit) associated with the historical
deletions and pro forma additions at a combined federal and state statutory
rate of 37% in connection with the Transactions. See page 19 for a
description of the Transactions.
21
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THE TRANSACTIONS(A)
-------------------------------- 4TH QUARTER
THE CASH EQUITY 1996 RESTRUCTURING
ACTUAL NOTES INVESTMENT TOTAL AND OTHER CHARGES(B)
-------- -------- ----------- ------- --------------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................................... $ 1,544 $ (5,595) $10,027 $ 4,432 $ (274)
Accounts receivable, net.................................... 46,407 -- -- -- --
Refundable income taxes..................................... 344 -- -- -- --
Inventories................................................. 55,363 -- -- -- (942)
Prepaid expenses and other current assets................... 5,675 -- -- -- --
Environmental indemnification............................... 792 -- -- -- --
Deferred income taxes....................................... 1,449 -- -- -- --
-------- -------- ----------- ------- -------
Total current assets.......................................... 111,574 (5,595) 10,027 4,432 (1,216)
Property, plant and equipment:
Land........................................................ 3,918 -- -- -- --
Buildings and improvements.................................. 14,540 -- -- -- --
Machinery and equipment..................................... 101,623 -- -- -- --
Other....................................................... 8,290 -- -- -- --
-------- -------- ----------- ------- -------
128,371 -- -- -- --
Less accumulated depreciation................................. 26,700 -- -- -- 2,263
-------- -------- ----------- ------- -------
101,671 -- -- -- (2,263)
Other assets:
Intangible assets, net...................................... 33,374 -- -- -- --
Environmental indemnification............................... 24 -- -- -- --
Deferred financing costs, net............................... 2,997 7,500
(2,997) -- 4,503 --
Investments in joint ventures............................... 747 -- -- -- --
Other....................................................... 3,892 -- -- -- --
-------- -------- ----------- ------- -------
Total assets.................................................. $254,279 $ (1,092) $10,027 $ 8,935 $ (3,479)
-------- -------- ----------- ------- -------
-------- -------- ----------- ------- -------
Current liabilities:
Current maturities of long-term debt........................ 9,529 (8,444) -- (8,444) --
Short-term borrowing........................................ 19,624 (18,890) -- (18,890) --
Notes payable............................................... 1,570 -- -- -- --
Accounts payable............................................ 31,283 -- -- -- --
Accrued expenses............................................ 9,795 (941) -- (941) --
Accrued compensation........................................ 5,062 -- -- -- --
Accrued restructuring and other charges..................... 1,660 -- -- -- 2,529
Environmental............................................... 1,200 -- -- -- --
-------- -------- ----------- ------- -------
Total current liabilities..................................... 79,723 (28,275) -- (28,275) 2,529
Long-term debt................................................ 116,329 125,000
21,500
(116,320) -- 30,180 --
Environmental................................................. 15,379 -- -- -- --
Deferred income taxes......................................... 9,330 (1,049) -- (1,049) (2,223)
Post-retirement benefits...................................... 4,376 -- -- -- --
Accrued restructuring and other charges....................... 2,274 -- -- -- --
Other......................................................... 2,365 -- -- -- --
Minority interest............................................. 3,468 -- -- -- --
Commitments and contingencies -- -- -- -- --
Mandatory redeemable preferred stock:
Series B, cumulative, $1,000 par value, authorized 40,000
shares; issued and outstanding 21,322 shares, stated at
liquidation value of $1,000 per share plus accrued and
unpaid dividends of $10,425............................... 31,747 -- -- -- --
Series C, cumulative, $1,000 par value, authorized 15,000
shares; issued 9,137 shares, outstanding 6,914 shares
stated at liquidation value of $1,054 per share plus
accrued and unpaid dividends of $2,795.................... 12,425 -- -- -- --
Less: treasury stock, at cost (221 shares of Series C
preferred)................................................ (262) -- -- -- --
-------- -------- ----------- ------- -------
43,910 -- -- -- --
Stockholder's deficit:
Common stock:
Series A, $.01 par value, authorized 85,000 shares;
actual--issued 59,355 shares, outstanding 56,964 shares;
pro forma--issued 154,872 shares, outstanding 154,481
shares(c)................................................. 1 -- 1 1 --
Series B, $.01 par value, authorized 10,000 shares; none
issued or outstanding..................................... -- -- -- -- --
Additional paid-in capital.................................... -- -- 11,938 11,938 --
Accumulated deficit........................................... (22,361) (1,948) -- (1,948) (3,785)
Cumulative translation adjustment............................. (212) -- -- -- --
-------- -------- ----------- ------- -------
(22,572) (1,948) 11,939 9,991 (3,785)
Less: Stockholder notes receivable............................ (200) -- (1,912) (1,912) --
Treasury stock, at cost (391 shares of Series A common)..... (46) -- -- -- --
Minimum pension liability................................... (57) -- -- -- --
-------- -------- ----------- ------- -------
Total stockholders' equity (deficit).......................... (22,875) (1,948) 10,027 8,079 (3,785)
-------- -------- ----------- ------- -------
Total liabilities and stockholders' equity (deficit).......... $254,279 $ (1,092) $10,027 $ 8,935 $ (3,479)
-------- -------- ----------- ------- -------
-------- -------- ----------- ------- -------
<CAPTION>
PRO FORMA
---------
<S> <C>
Current assets:
Cash and cash equivalents................................... $ 5,702
Accounts receivable, net.................................... 46,407
Refundable income taxes..................................... 344
Inventories................................................. 54,421
Prepaid expenses and other current assets................... 5,675
Environmental indemnification............................... 792
Deferred income taxes....................................... 1,449
---------
Total current assets.......................................... 114,790
Property, plant and equipment:
Land........................................................ 3,918
Buildings and improvements.................................. 14,540
Machinery and equipment..................................... 101,623
Other....................................................... 8,290
---------
128,371
Less accumulated depreciation................................. 28,963
---------
99,408
Other assets:
Intangible assets, net...................................... 33,374
Environmental indemnification............................... 24
Deferred financing costs, net...............................
7,500
Investments in joint ventures............................... 747
Other....................................................... 3,892
---------
Total assets.................................................. $259,735
---------
---------
Current liabilities:
Current maturities of long-term debt........................ 1,085
Short-term borrowing........................................ 734
Notes payable............................................... 1,570
Accounts payable............................................ 31,283
Accrued expenses............................................ 8,854
Accrued compensation........................................ 5,062
Accrued restructuring and other charges..................... 4,189
Environmental............................................... 1,200
---------
Total current liabilities..................................... 53,977
Long-term debt................................................
146,509
Environmental................................................. 15,379
Deferred income taxes......................................... 6,058
Post-retirement benefits...................................... 4,376
Accrued restructuring and other charges....................... 2,274
Other......................................................... 2,365
Minority interest............................................. 3,468
Commitments and contingencies --
Mandatory redeemable preferred stock:
Series B, cumulative, $1,000 par value, authorized 40,000
shares; issued and outstanding 21,322 shares, stated at
liquidation value of $1,000 per share plus accrued and
unpaid dividends of $10,425............................... 31,747
Series C, cumulative, $1,000 par value, authorized 15,000
shares; issued 9,137 shares, outstanding 6,914 shares
stated at liquidation value of $1,054 per share plus
accrued and unpaid dividends of $2,795.................... 12,425
Less: treasury stock, at cost (221 shares of Series C
preferred)................................................ (262)
---------
43,910
Stockholder's deficit:
Common stock:
Series A, $.01 par value, authorized 85,000 shares;
actual--issued 59,355 shares, outstanding 56,964 shares;
pro forma--issued 154,872 shares, outstanding 154,481
shares(c)................................................. 2
Series B, $.01 par value, authorized 10,000 shares; none
issued or outstanding..................................... --
Additional paid-in capital.................................... 11,938
Accumulated deficit........................................... (28,094)
Cumulative translation adjustment............................. (212)
---------
(16,366)
Less: Stockholder notes receivable............................ (2,112)
Treasury stock, at cost (391 shares of Series A common)..... (46)
Minimum pension liability................................... (57)
---------
Total stockholders' equity (deficit).......................... (18,581)
---------
Total liabilities and stockholders' equity (deficit).......... $259,735
---------
---------
</TABLE>
22
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(a) To record the gross proceeds from the Transactions and the uses of such
proceeds.
<TABLE>
<S> <C>
Source of proceeds:
Proceeds from sale of Old Notes........................................................... $125,000
Borrowings under the Amended and Restated Credit Agreement................................ 21,500
Proceeds from Cash Equity Investments, net of $1,912 of Additional Equity Investments
financed with loans from the Company................................................... 10,027
--------
Total proceeds....................................................................... $156,527
Use of proceeds:
Repay amounts outstanding as of September 30 under Freedom Credit Agreement and Diamalt
Credit Agreement....................................................................... $144,595
Initial Purchasers' discount and transaction costs related to the Transactions............ 7,500
Working capital........................................................................... 4,432
--------
Total uses........................................................................... $156,527
Additionally, deferred financing fees of $2,997 related to the Freedom Credit Agreement, net
of an estimated tax benefit of $1,049, were written off in connection with the Transactions.
</TABLE>
(b) To record fourth quarter 1996 restructuring and other charges and a related
estimated tax benefit of $2,223:
<TABLE>
<S> <C>
Severance associated with personnel reductions.............................................. $ 1,442
Inventory obsolescence...................................................................... 942
Inventory disposal cost..................................................................... 612
Fixed asset write-off....................................................................... 2,263
Other, principally a waste disposal surcharge............................................... 749
--------
Total................................................................................ $ 6,008
</TABLE>
(c) As a result of Transactions, the pro forma change in Series A Common shares
issued and outstanding as of September 30, 1996 is as follows:
<TABLE>
<CAPTION>
ISSUED OUTSTANDING
------- -----------
<S> <C> <C>
Actual.......................................................................... 59,355 56,964
Cash Equity Investments......................................................... 80,000 80,000
Additional Equity Investments................................................... 15,517 15,517
------- ---------
Pro Forma....................................................................... 154,872 152,481
------- ---------
------- ---------
</TABLE>
See page 19 for a description of the Transactions.
23
<PAGE>
SELECTED HISTORICAL AND UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical and unaudited pro forma
consolidated financial data for the periods indicated. The selected historical
consolidated financial data as of December 31, 1992 and 1993 and for the 1992
Period have been derived from the Company's audited Consolidated Financial
Statements not included herein. The selected historical consolidated financial
data as of December 31, 1994 and 1995, and for the years ended December 31,
1993, 1994 and 1995, have been derived from the Company's audited Consolidated
Financial Statements and should be read in conjunction with such audited
Consolidated Financial Statements and the Notes thereto included herein. The
selected historical consolidated financial data as of September 30, 1996 and for
the nine months ended September 30, 1995 and 1996 have been derived from the
Company's unaudited Consolidated Financial Statements included herein. The
selected historical consolidated financial data as of September 30, 1995 has
been derived from the Company's unaudited Consolidated Financial Statements not
included herein. The unaudited Consolidated Financial Statements have been
prepared on the same basis as the audited Consolidated Financial Statements
included herein and, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the Company's financial position and results of operations for
the unaudited periods. Operating results for the nine months ended September 30,
1996 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1996. The summary unaudited pro forma consolidated
financial data for the year ended December 31, 1995 and as of and for the nine
months ended September 30, 1996 should be read in conjunction with the Company's
Consolidated Financial Statements and the Notes thereto and 'Unaudited Pro Forma
Consolidated Financial Information' included elsewhere herein.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------------------- ---------------------------------
1992 PRO FORMA PRO FORMA
PERIOD 1993 1994 1995 1995(A) 1995 1996 1996(A)
------- ------- -------- -------- --------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA(B):
Net sales.................... $14,784 $54,831 $187,780 $296,888 $296,888 $229,340 $229,051 $229,051
Cost of goods sold........... 10,695 45,295 144,845 233,533 233,533 180,179 178,599 178,599
------- ------- -------- -------- --------- -------- -------- ---------
Gross profit(c).............. 4,089 9,536 42,935 63,355 63,355 49,161 50,452 50,452
Selling, general and
administrative expense..... 3,588 8,292 26,948 50,399 50,399 39,406 35,951 35,951
Noncash compensation
expense(d)................. -- -- 915 150 150 130 159 159
Research and development
expense.................... 173 735 2,331 4,950 4,950 3,914 3,584 3,584
Restructuring and other
charges(c)................. -- -- -- 12,495 12,495 3,242 -- --
------- ------- -------- -------- --------- -------- -------- ---------
Operating income (loss)...... 328 509 12,741 (4,639) (4,639 ) 2,487 10,758 10,758
Registration costs........... -- -- -- 2,187 2,187 2,187 -- --
Other expense (income),
net........................ -- (37) (545) (5) (5 ) 68 (507) (507)
Interest and debt expense.... 531 1,556 6,682 13,805 15,557 10,334 10,339 11,689
Minority interest............ 144 251 284 247 247 187 195 195
------- ------- -------- -------- --------- -------- -------- ---------
Income (loss) before income
taxes, equity in income of
joint ventures and
extraordinary loss......... (347) (1,261) 6,320 (20,873) (22,625 ) (10,289) 731 (619)
Provision (benefit) for
income taxes............... (42) (291) 2,858 (3,809) (4,421 ) (2,361) 935 470
Equity in income of joint
ventures................... -- -- -- 74 74 36 527 527
------- ------- -------- -------- --------- -------- -------- ---------
Income (loss) before
extraordinary loss......... (305) (970) 3,462 (16,990) (18,130 ) (7,892) 323 (562)
Extraordinary loss, net(e)... -- -- 1,276 -- -- -- -- --
------- ------- -------- -------- --------- -------- -------- ---------
Net income (loss)............ (305) (970) 2,186 (16,990) (18,130 ) (7,892) 323 (562)
Less: preferred dividends.... 345 1,621 3,694 4,611 4,611 3,397 2,949 2,949
------- ------- -------- -------- --------- -------- -------- ---------
Net loss applicable to common
shares..................... $ (650) $(2,591) $ (1,508) $(21,601) $(22,741 ) $(11,289) $ (2,626) $ (3,511)
------- ------- -------- -------- --------- -------- -------- ---------
------- ------- -------- -------- --------- -------- -------- ---------
(Continued on next page)
</TABLE>
24
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Continued from previous page)
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------------------- ---------------------------------
1992 PRO FORMA PRO FORMA
PERIOD 1993 1994 1995 1995(A) 1995 1996 1996(A)
------- ------- -------- -------- --------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Net cash provided by (used
in) operating activities... (750) 412 14,163 (3,130) -- (7,685) (875) --
Net cash used in investing
activities................. (9,780) (30,628) (75,912) (32,015) -- (28,817) (7,115) --
Net cash provided by
financing activities....... 12,038 29,497 63,371 33,717 -- 34,528 8,152 --
Depreciation and
amortization............... 929 2,550 7,969 12,690 -- 9,872 9,555 --
Capital expenditures......... 435 953 7,210 15,514 -- 12,638 7,883 --
Gross margin(f).............. 27.7% 17.4% 22.9% 21.3% -- 21.4% 22.0% --
Ratio of earnings to fixed
charges(g)................. -- -- 1.9x -- -- -- 1.1x --
BALANCE SHEET DATA (AT PERIOD
END):
Working capital.............. $ 2,016 $23,964 $ 38,326 $ 37,455 -- $ 41,141 $ 31,851 $ 60,813
Total assets................. 18,377 101,234 231,064 243,156 -- 270,828 254,279 259,735
Total long-term debt (net of
current portion)........... 6,175 41,266 93,643 119,520 -- 120,454 116,329 146,509
Mandatory redeemable
preferred stock and
minority interest.......... 7,517 26,267 39,707 44,132 -- 40,009 43,910 43,910
Stockholders' equity
(deficit).................. 100 265 1,747 (18,743) -- 42,783 (22,875) (18,581)
</TABLE>
- ------------------
(a) The unaudited pro forma consolidated statements of operations for the year
ended December 31, 1995 and for the nine months ended September 30, 1996
give effect to the Transactions as if they had occurred at the beginning of
such periods. The unaudited pro forma balance sheet data as of September 30,
1996 gives effect to the Transactions and certain restructuring and other
charges recorded by the Company in the fourth quarter of 1996 as if such
events had occurred on such date. See 'Unaudited Pro Forma Consolidated
Financial Information.'
(b) The results of operations of the Company reflect the results of operations
of: Freedom Textile effective from its acquisition in May 1992, Hilton Davis
effective from its acquisition in September 1993, Kalama effective from its
acquisition in May 1994, Reilly-Whiteman effective from its acquisition in
December 1994 and Diamalt effective from its acquisition in January 1995.
See Note 3 to the Company's Consolidated Financial Statements included
herein.
(c) In 1995, the Company recorded restructuring and other charges totaling
$14,427. These charges reduced (i) gross profit from $65,287 to $63,355 and
operating income (loss) from $9,788 to $(4,639) for the year ended December
31, 1995 and (ii) gross profit from $51,093 to $49,161 and operating income
from $7,661 to $2,487 for the nine months ended September 30, 1995. See Note
17 to the Company's Consolidated Financial Statements included herein. In
the nine months ended September 30, 1996, the Company recorded charges
totaling $4,980. These charges reduced gross profit from $55,432 to $50,452
and were related to the write-off of inventory in its Organic Pigments and
Dyes product line.
(d) The Company has recorded noncash compensation expense of $915 and $150 for
the years ended December 31, 1994 and 1995, respectively, and $112 and $159
for the nine months ended September 30, 1995 and 1996, respectively, related
to Common Stock options granted and vested during those periods and Common
Stock sold to executive officers of the Company in connection with the
Kalama Acquisition during June 1994.
(e) The Company recorded an extraordinary loss in connection with the write-off
of deferred financing fees upon the consolidation of all the Company's
outstanding indebtedness under the Freedom Credit Agreement.
(f) Gross margin is defined as gross profit as a percentage of net sales.
(g) Ratio of earnings to fixed charges is calculated as the ratio of the sum of
income (loss) before taxes and fixed charges to fixed charges. Fixed charges
consist of interest and debt expense, minority interest, capitalized
interest and one-third of rental expense. The Company's earnings were
insufficient to cover fixed charges by $347, $1,261, $21,041, $22,793 for
the 1992 Period and for the years ended December 31, 1993, 1995 and Pro
Forma 1995, and $10,457 and $578 for the nine months ended September 30,
1995, and for the Pro Forma nine months ended September 30, 1996,
respectively.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with 'Selected
Consolidated Financial Data' and the Consolidated Financial Statements of the
Company and the notes thereto included in this Prospectus.
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.
The revenue growth of each of the Company's product groups generally
fluctuates in response to the overall business trends of the industries of each
of its customers. During the first nine months of 1996, for example, the overall
performance of the Company's Textile and Paper Chemicals group declined as
compared to prior periods as a result of lower textile production rates and the
impact of mill closings, both of which resulted from decreased demand for the
end products of textile mills. Such decline was partially offset by the strong
performance of the Company's Pharmaceutical Intermediates and Specialty Organic
Chemicals and Intermediates groups attributable to expanded production capacity
of benzoates and benzaldehyde.
The Company's sales have increased in each of the last three years
primarily as a result of three acquisitions: the Hilton Davis Acquisition on
September 9, 1993, the Kalama Acquisition on May 26, 1994 and the Diamalt
Acquisition on January 13, 1995, which was effective on January 1, 1995.
The Company markets its products primarily in the United States. In 1995,
approximately 58.4% of the Company's net sales were made in the United States,
28.3% were made in Europe and 13.3% were made in other parts of the world. The
Company's operating profit and assets reflect a similar geographic distribution.
Such distribution has changed since 1993 and 1994 when the Company's net sales
in the United States represented 82.9% and 78.7%, respectively, of net sales.
This change in geographic distribution has occurred primarily as a result of the
Diamalt Acquisition, but also due to increased sales of Specialty Organics and
Intermediates in the Asia-Pacific region. The Company believes that increased
sales outside of the United States will enable the Company to take advantage of
future opportunities in the rapidly expanding economies of certain parts of
Europe and the Asia-Pacific region. See Note 21 to the Company's Consolidated
Financial Statements included herein.
In 1995, the Company revised the net estimated costs for environmental
matters recorded in connection with the Kalama Acquisition, which resulted
principally from changes in facts and circumstances surrounding the ultimate
costs of environmental remediation. Costs for remediating the Kalama, Washington
facility, the Garfield, New Jersey facility and the Beaufort, South Carolina
facility were reduced by approximately $13.1 million, $4.1 million and $1.7
million, respectively. These revisions were based on subsequent negotiations and
settlements with authorities, updates of studies prepared by the Company's
environmental consultants, engineers and/or contractors as of the acquisition
date and other factors which existed as of the acquisition date. Additionally,
the favorable settlement of a legal contingency existing as of the acquisition
date resulted in a reduction of the liabilities established by the Company by
approximately $1.5 million. The aggregate liabilities, indemnification
receivable and deferred tax asset originally recorded by the Company were
reduced by approximately $19.3 million, $5.6 million and $5.1 million,
respectively, which resulted in a reduction of goodwill of approximately $8.6
million.
In December 1995, as a result of the continuing decline in financial
results during the year, a resultant strategic and operational review and the
application of the Company's objective measurement tests to evaluate the
recoverability of intangible assets, the Company recognized an impairment loss
of $7.0 million associated with the closure of the Conshohocken, Pennsylvania
plant acquired in the Reilly Whiteman Acquisition. The impairment loss consisted
of the write-off of all fixed assets, goodwill and other intangibles associated
with such acquisition. The underlying factors contributing to the decline in
financial results included a significant
26
<PAGE>
unforeseen decline in the retail market for textiles (primarily sheet goods) in
1995. The Reilly-Whiteman acquisition was completed in December 1994 to
complement the Company's textile business by providing a Philadelphia plant to
supply the Northeastern U.S. textile market while the Charlotte plant continued
to supply the Southeastern U.S. textile market. Due to depressed operating
results for the Company's textile chemical product line as a result of the
decline in the retail market for textiles in 1995, the Company decided to
consolidate manufacturing in the more efficient of the two plants resulting in
the closure of the Reilly-Whiteman facility.
RESTRUCTURING AND OTHER CHARGES
In 1995, the Company recorded $14.4 million of restructuring and other
charges. The charges included (i) the consolidation of certain of the Company's
manufacturing facilities, (ii) the sale of the Company's non-strategic
transparent iron oxide coatings business, (iii) the write-off of discontinued
inventory and capitalized expenses and (iv) the recognition of certain estimated
environmental remediation costs. As a part of these actions, the Company closed
in April 1996 its Conshohocken, Pennsylvania plant which manufactured products
in the Organic Pigments and Dyes group and in May 1996 its Newark, New Jersey
plant which manufactured products in the Textile and Paper Chemicals group and
relocated certain of those production capabilities and technology to its other
facilities. In addition, the Company reduced personnel by approximately 135
employees in both administrative and manufacturing positions.
In the fourth quarter of 1996, the Company recorded a charge of $6.0
million as a result of inventory obsolescence from plant closures of $0.9
million, inventory disposal costs of $0.6 million, severance for displaced
workers associated with plant closings and administrative personnel reductions
of $1.5 million and other charges of $0.7 million.
Additionally, during 1994, the Company idled its salicylic acid product
line. However, the Company continued to be a reseller of this product and
continued to pursue a long term position in this market. Since projected future
cash flows from this product line were sufficient to realize the Company's
investment from the time the assets were idled until the fourth quarter of 1996,
management did not believe that there was an impairment in the idle assets. In
the fourth quarter of 1996, the Company decided not to allocate its capital
resources to re-enter the salicylic acid business. Accordingly, the Company
recorded a charge of $2.3 million. The write-off will be included in
restructuring and other charges on the Company's statement of operations for
1996. Management estimates the costs to dismantle the line are approximately
equal to the salvage value of the line.
During the fourth quarter of 1996, the Company decided to shutdown its
Cowpens, South Carolina facility. During 1996, the Company incurred a loss from
operations of approximately $2.6 million from the Cowpens operations, including
a direct write-off of $1.5 million for inventory and related items in the fourth
quarter. The write-off was composed of $0.9 million of obsolete inventory from
unusable/unsaleable product as a result of product separation. The obsolete
inventory was identified during the October 31, 1996 planned physical inventory.
The write-off also included $0.6 million of disposal costs related to hazardous
products which required environmentally sound disposal procedures. Management is
currently negotiating with prospective buyers to sell the facility for its net
book value of approximately $2.7 million plus assumption of environmental
liabilities of $1.9 million. It is anticipated that the sale will be completed
during 1997.
Of the aforementioned $0.7 million of other charges, $0.5 million relates
to a municipality surcharge for water treatment and waste disposal at the
Company's Charlotte facility. The surcharge resulted from low plant efficiency
(due to the approach of a scheduled turn around and catalyst change-out in
January 1997) and high operating levels which caused waste to be produced at
above normal levels.
Of the $6.0 million recorded in the fourth quarter of 1996, $3.2 million is
attributable to noncash items, primarily the idle equipment write-off of $2.3
million and obsolete inventory of $0.9 million. Charges that will require an
outlay of cash total $2.8 million. Of this amount $0.3 million was paid in the
month of December. The remaining cash items totaling $2.5 million will be paid
primarily over the first six months of 1997. Management believes this outlay of
cash will be funded with cash flow from operations and borrowings under the
Amended and Restated Credit Agreement and will not materially adversely affect
the Company's operating cash flows or financial position.
The Company will continue to analyze additional opportunities to increase
operating efficiencies and profitability, which may result in additional
restructuring and other charges in the future. Additional matters have
27
<PAGE>
not currently been identified. See 'Business--Restructuring and Other Charges'
and Note 17 to the Company's Consolidated Financial Statements included herein.
RESULTS OF OPERATIONS
The following table sets forth certain data from the Selected Consolidated
Financial Data expressed as a percentage of net sales.
<TABLE>
<CAPTION>
FOR THE NINE
FOR THE YEARS ENDED MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------------- --------------
1993 1994 1995 1995 1996
------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
Net sales................................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold........................................ 82.6 77.1 78.7 78.6 78.0
Gross profit.............................................. 17.4 22.9 21.3 21.4 22.0
Selling, general and administrative expense............... 15.1 14.4 17.0 17.2 15.7
Research and development expense.......................... 1.3 1.2 1.7 1.7 1.6
Restructuring and other charges........................... -- -- 4.2 1.4 --
Operating income (loss)................................... 0.9 6.8 (1.6) 1.1 4.7
Interest and debt expense................................. 2.8 3.6 4.6 4.5 4.5
Net income (loss)......................................... (1.8) 1.2 (5.7) (3.4) 0.1
Less: preferred dividends................................. 2.9 2.0 1.6 1.5 1.3
Net loss applicable to common shares...................... (4.7) (0.8) (7.3) (4.9) (1.2)
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1995
Net Sales. Net sales declined $0.3 million to $229.1 million in the nine
months ended September 30, 1996 as compared to the same period in the prior
year. The decline in net sales was primarily due to a decrease in sales of
Organic Pigments and Dyes as a result of decreased demand for inks resulting
from the recent consolidation of the ink industry as well as a loss of
color-former export sales as a result of price pressure and off-shore
competition. The volume of Organic Pigments and Dyes sold declined 24% and the
average price of such products declined by 2% during the nine months ended
September 30, 1996, compared to the same period in the prior year. This decline
in net sales was partially offset by an increase in net sales of Specialty
Organic Chemicals and Intermediates and Pharmaceutical Intermediates
attributable to expanded production capacity for benzaldehyde. Specifically, the
volume of Specialty Organic Chemicals and Intermediates and Pharmaceutical
Intermediates sold increased 2% and 14%, respectively, and the average prices of
products in such product lines increased 8% and 17%, respectively, during the
nine months ended September 30, 1996 over the same period in the prior year.
Gross Profit. The Company's gross profit increased $1.3 million to $50.5
million in the nine months ended September 30, 1996 as compared to the same
period in the prior year. This increase in gross profit was primarily due to
increased sales volume of Specialty Organic Chemicals and Intermediates
attributable to expanded production capacity of benzoates and benzaldehyde
offset by a charge of approximately $5.0 million for the write-off of inventory
in the Company's Organic Pigments and Dyes product line due to declining
customer demand. The decreased customer product demand was principally due to
the acquisition of a customer by a competitor of the Company and product
consolidation by a customer. Management regularly performs analysis of inventory
to assess recoverability of its costs. Based upon these analyses, management
believes the remaining cost of Organic Pigments and Dyes inventory will be
recovered from future sales. As a result of this charge, gross profit for the
nine months ended September 30, 1996 was reduced by $5.0 million, or 2.2% of net
sales. In addition, significant factory cost reductions had a positive effect on
the Company's gross profit. This increase also results from $1.9 million of
restructuring and other charges which were included in the nine months ended
September 30, 1995. Excluding the impact of inventory write-offs, gross margins
increased from 21.4% for the nine months ended September 30, 1995 to 24.2% for
the same period of 1996 primarily as a result of a sales mix shift from lower
margin products to relatively higher margin products.
28
<PAGE>
The following table sets forth for each of the Company's five core product
lines a comparison of the average product price, volume of products sold, net
sales, gross profit and gross margin for the nine months ended September 30,
1995 and 1996 (dollars and pounds in millions, except average product price):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------------------------------------------------------------------------
SEPTEMBER 30, 1995 SEPTEMBER 30, 1996
-------------------------------------------- --------------------------------------------
PRODUCT AVERAGE VOLUME NET GROSS GROSS AVERAGE VOLUME NET GROSS GROSS
LINE PRICE (POUNDS) SALES PROFIT MARGIN PRICE (POUNDS) SALES PROFIT MARGIN
------- -------- ----- ------ ------ ------- -------- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Food and Personal Care
Ingredients...................... $ 1.20 41.06 $49.2 $ 15.3 31.20 % $1.11 44.53 $49.6 $ 14.2 28.55 %
Pharmaceutical Intermediates
and Natural Additives............ 3.32 8.77 29.1 6.4 22.03 3.90 9.99 39.0 10.3 26.40
Textile and Paper Chemicals........ 0.61 89.17 54.2 9.5 17.58 0.67 80.11 53.2 10.3 19.29
Specialty Organic Chemicals
and Intermediates................ 0.53 80.62 42.6 11.2 26.38 0.57 82.13 46.9 13.3 28.40
Organic Pigments and Dyes.......... 4.64 11.69 54.2 8.6 15.80 4.55 8.87 40.3 7.4 18.32
</TABLE>
- ------------------
* Data was not maintained at these levels for the years ended December 31, 1993
and 1994.
The Company recorded estimated costs of shutdown of $0.8 million and $1.1
million, for the nine months ended September 30, 1995 and 1996, respectively.
The increase is primarily due to rising costs associated with plant shutdowns.
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,
1996, $0.6 million was accrued related to such costs, which represented an
increase from December 31, 1995 of $0.4 million due primarily to a complete
plant shutdown in November 1995 at the Company's Kalama facility.
Selling, General and Administrative Expense. Selling, general, and
administrative expense decreased $3.5 million to $36.0 million in the nine
months ended September 30, 1996 as compared to the same period in 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 from 17.2% in the first nine months of 1995 to
15.7% for the same period of 1996.
Research and Development Expense. Research and development expense
decreased $0.3 million to $3.6 million in the nine months ended September 30,
1996 as compared to the same period in the prior year. As a percentage of sales,
research and development expense decreased from 1.7% in the first nine months of
1995 to 1.6% for the same period of 1996.
Operating Income. Operating income increased $8.3 million to $10.8 million
in the nine months ended September 30, 1996 as compared to the same period in
the prior year. Operating margins increased to 4.7% in the first nine months of
1996 from 1.1% for the same period of the prior year primarily due to expanded
production capacity of benzoates and benzaldehyde and improved manufacturing
efficiencies as well as cost reductions primarily as a result of restructuring
and other charges, offset by a charge of approximately $5.0 million for the
write-off of inventory. This increase also results from $5.2 million of charges
recorded in connection with the Restructuring Program which were included in the
nine months ended September 30, 1995. In April 1995, Diamalt formed a wholly
owned subsidiary, Diamalt Pharmorganica Pvt. Limited ('Diamalt Pharmorganica').
This subsidiary was in a start-up mode from April through September 1995 and for
the last three months of 1995 was operating at a 30% capacity level. In 1996,
Diamalt Pharmorganica operated at approximately 70% capacity and had operating
income of $0.7 million.
Interest and Debt Expense. Interest and debt expense was $10.3 million for
each of the nine months ended September 30, 1996 and 1995. The Company had net
borrowings of $8.7 million for the nine months ended September 30, 1996, as
compared to $37.2 million for the nine months ended September 30, 1995. The
weighted average interest rate and the ending interest rate of the Company's
borrowings were 8.8% and 8.9%, respectively, at September 30, 1996, as compared
to 9.2% and 9.0%, respectively, at September 30, 1995.
Net Income (Loss). Net income increased $8.2 million to $0.3 million in
the nine months ended September 30, 1996 as compared to the same period in the
prior year. The increase in the Company's net income resulted primarily from the
increased sales volume of Specialty Organic Chemicals and Intermediates
attributable to expanded production capacity of benzoates and benzaldehyde as
well as the reduction in overall costs, offset
29
<PAGE>
by a charge of approximately $5.0 million for the write-off of inventory. This
increase also results from the restructuring and other charges which were
included in the nine months ended September 30, 1995. Additionally, Diamalt
Pharmorganica had net income of $0.6 million, primarily attributable to its
operating capacity increase in 1996 to approximately 70% from 30% in 1995.
In addition, the Company's equity in income of joint ventures increased
$0.5 million for the nine months ended September 30, 1996 over the prior period
in 1995. The increase is primarily attributable to three joint ventures, Diamo
Handels GmbH ('Diamo'), Srinivasa Cystine Limited ('Srinivasa') and Lyomark
Pharma GmbH ('Lyomark'), which experienced increased sales volume and income in
1996. Two of the three joint ventures were formed in 1995 and required several
months to establish a presence in their respective markets. The Company's equity
in income in each of Diamo, Srinivasa and Lyomark in 1996 was $0.2 million, $0.4
million and $0.1 million, respectively. The increase in equity in income in
these joint ventures was partially offset by losses experienced by a fourth
joint venture, Hacker Malt Proteine GmbH and Co., of $0.2 million.
Preferred Dividends. The accretion of accrued and unpaid dividends on
Series B and Series C Preferred Stock decreased $0.4 million in the nine months
ended September 30, 1996 as compared to the same period in the prior year due
primarily to an adjustment in the accretion calculation.
Net Loss Applicable to Common Shares. Net loss applicable to common shares
decreased by $8.7 million to $2.6 million for the first nine months ended
September 30, 1996 as compared to the same period in the prior year. The
increase resulted from the items referred to above under 'Net Income' and
'Preferred Dividends.'
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Restructuring and Other Charges In 1995, the Company recorded
restructuring and other charges totalling $14.4 million. The items covered by
the charges included (i) plant closures aggregating $7.4 million, (ii) workforce
reductions aggregating $2.4 million, (iii) estimated environmental remediation
costs of $1.9 million and (iv) the write-off of discontinued inventory in the
Company's Organic Pigments and Dyes product line and capitalized expenses
totaling $2.7 million. Of the $14.4 million of charges, approximately $6.2
million represent charges which require cash expenditures. Additionally, the
Company sold a non-strategic product line. See 'Business--Restructuring and
Other Charges' and Note 17 to the Company's Consolidated Financial Statements
included herein.
Net Sales. Net sales increased $109.1 million to $296.9 million in the
year ended December 31, 1995 as compared to the prior year. The increase in net
sales resulted primarily from the inclusion in 1995 of the operations of Freedom
Chemical Diamalt and one full year of the operations of Kalama. The increase in
net sales was partially offset by a decline in sales of Textile and Paper
Chemicals attributable to decreased demand in the textile industry.
Gross Profit. The Company's gross profit increased $20.4 million to $63.4
million in the year ended December 31, 1995 as compared to the prior year. This
increase in gross profit was primarily due to the inclusion in 1995 of the
operations of Freedom Chemical Diamalt, offset by charges of $1.9 million
recorded in connection
with restructuring and other charges. The increased Organic Pigments and Dyes
reserves were due to the elimination of the sale of certain Organic Pigments and
Dyes products by the Company. Gross margins were 21.3% for 1995 compared to
22.9% in 1994. This decrease was primarily due to declining prices and higher
raw material costs affecting the Company's Textile and Paper Chemicals group.
The Company recorded estimated costs of shutdown of $0.6 million and $0.9
million, for the years ended December 31, 1995 and 1994, respectively. The
decrease in 1995 is due primarily from a reduction in shutdown costs based on
the results of the Kalama shutdown in November of 1995. 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 December 31, 1995,
$0.2 million was accrued related to such costs, which represented a
decrease from December 31, 1994 of $0.8 million due primarily to a complete
plant shutdown in the fourth quarter of 1995 at the Company's Charlotte
facility.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased $23.5 million to $50.4 million in the year
ended December 31, 1995 as compared to the prior year primarily due to the
inclusion in 1995 of the operations of each of Freedom Chemical Diamalt and
Kalama. In addition, the Company's Organic Pigments and Dyes group experienced
increased selling, general and administrative expense due to higher staffing
levels resulting from anticipated sales growth of that group, which did not
occur. As a
30
<PAGE>
percent of sales, selling, general and administrative expense increased to 17.0%
from 14.4% in 1994 principally due to the higher expense ratio of the
Pharmaceutical Intermediates and Natural Additives group due to high social
insurance costs in Europe and higher staffing levels of the Company (which were
subsequently reduced as part of restructuring and other charges).
Research and Development Expense. Research and development expense
increased $2.6 million to $5.0 million in the year ended December 31, 1995 as
compared to the prior year primarily due to the inclusion in 1995 of the
operations of each of Freedom Chemical Diamalt and Kalama.
Operating Income (Loss). Operating income declined $17.4 million to a loss
of $4.6 million in the year ended December 31, 1995 as compared to the prior
year primarily as a result of the restructuring and other charges, which
accounted for $14.4 million of the decline, with the remainder attributable to
lower sales volumes and reduced margins in the Organic Pigments and Dyes and
Textile and Paper Chemicals groups.
Interest and Debt Expense. Interest and debt expense increased $7.1
million to $13.8 million in the year ended December 31, 1995 as compared to the
prior year principally due to the indebtedness incurred to finance the Diamalt
Acquisition, the Reilly-Whiteman Acquisition and interest expense on
indebtedness in connection with the Kalama Acquisition. The Company had net
borrowings of $36.7 million for the year ended December 31, 1995, as compared to
$55.6 million for the year ended December 31, 1994. The weighted average
interest rate and the ending interest rate of the Company's borrowings were both
9.2% at December 31, 1995, as compared to 8.5% at December 31, 1994.
Net Income (Loss). Net loss was $17.0 million in the year ended December
31, 1995 as compared to net income of $2.2 million in the prior year. The loss
resulted primarily from the restructuring and other charges, higher staffing
levels in the Organic Pigments and Dyes group and declines in net sales and
gross profit in the Textile and Paper Chemicals group.
Preferred Dividends. The accretion of accrued and unpaid dividends on
Series B and Series C Preferred Stock increased $0.9 million to $4.6 million in
the year ended December 31, 1995 as compared to the prior year. The increase
resulted primarily from the inclusion in 1995 of a full year of accrued and
unpaid dividends on Series C Preferred Stock issued in 1994 in connection with
the Kalama Acquisition.
Net Loss Applicable to Common Shares. Net loss applicable to common shares
increased $20.1 million to $21.6 million in the year ended December 31, 1995 as
compared to the prior year. The increase resulted from the items referred to
above under 'Net Income (Loss)' and 'Preferred Dividends.'
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Net Sales. Net sales increased $132.9 million to $187.8 million in the
year ended December 31, 1994 as compared to the prior year. The increase in net
sales resulted from the inclusion in 1994 of one full year of the operations of
Hilton Davis and approximately 32 weeks of the operations of Kalama.
Gross Profit. The Company's gross profit increased $33.4 million to $42.9
million in the year ended December 31, 1994 as compared to the prior year,
primarily as a result of the inclusion in 1994 of one year of the operations of
Hilton Davis and 32 weeks of the operations of Kalama. Gross margins increased
from 17.4% in the year ended December 31, 1993 to 22.9% in 1994 principally as a
result of the inclusion of higher margin product lines from the Kalama and
Hilton Davis operations. The Company recorded estimated costs of shutdown of
$0.9 million and $0.2 million, for the years ended December 31, 1994 and 1993
respectively. The increase was primarily due to the inclusion in 1994 of
Kalama's shutdown costs and one full year of Hilton Davis' shutdown costs. 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 December 31,
1994, $0.8 million was accrued related to such costs, which represented an
increase from December 31, 1993 of $0.7 million due primarily to a complete
plant shutdown in 1994 at the Company's Charlotte facility.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased $18.7 million to $26.9 million in the year
ended December 31, 1994 as compared to the prior year primarily due to the
inclusion in 1994 of one year of the operations of Hilton Davis and 32 weeks of
the operations of Kalama. As a percent of sales, selling, general and
administrative expense declined from 15.1% in 1993 to 14.4% in 1994 principally
due to the lower expense ratios of the Company's Organic Pigments and Dyes
group.
31
<PAGE>
Research and Development Expense. Research and development expense
increased $1.6 million to $2.3 million in the year ended December 31, 1994 as
compared to the prior year primarily due to the inclusion in 1994 of one year of
the operations of Hilton Davis and 32 weeks of the operations of Kalama. As a
percent of sales, research and development expense decreased from 1.3% in 1993
to 1.2% in 1994.
Operating Income (Loss). Operating income increased $12.2 million to $12.7
million in the year ended December 31, 1994 as compared to the prior year.
Operating margins improved to 6.8% in the year ended December 31, 1994 from 0.9%
in the prior year primarily as a result of the Hilton Davis Acquisition and the
Kalama Acquisition.
Interest and Debt Expense. Interest and debt expense increased $5.1
million to $6.7 million in the year ended December 31, 1994 as compared to the
prior year principally due to the indebtedness incurred to finance the Hilton
Davis Acquisition and the Kalama Acquisition. The Company had net borrowings of
$55.6 million for the year ended December 31, 1994, as compared to $11.8 million
for the year ended December 31, 1993. The weighted average interest rate and the
ending interest rate of the Company's borrowings were both 8.5% at December 31,
1994, as compared to 8.3% at December 31, 1993.
Extraordinary Loss, Net. Extraordinary loss, net, reflects a nonrecurring
charge of $1.3 million, net of tax, associated with the write-off of deferred
financing costs upon the refinancing of all of the Company's outstanding
indebtedness in 1994.
Net Income (Loss). Net income for the year ended December 31, 1994 was
$2.2 million as compared to a loss of $1.0 million in 1993. The increase in the
Company's profitability resulted from the inclusion of the operations of each of
Kalama and Hilton Davis, partially offset by the nonrecurring write-off of
deferred financing fees.
Preferred Dividends. The accretion of accrued and unpaid dividends on
Series B and Series C Preferred Stock increased $2.1 million to $3.7 million in
the year ended December 31, 1994 as compared to the prior year. The increase
resulted from the inclusion in 1994 of a full year of accrued and unpaid
dividends on Series B Preferred Stock issued in 1993 in connection with the
Hilton Davis Acquisition.
Net Loss Applicable to Common Shares. Net loss applicable to common shares
decreased $1.1 million to $1.5 million in the year ended December 31, 1994 as
compared to the prior year. The decrease resulted from the items referred to
above under 'Net Income (Loss)' and 'Preferred Dividends.'
LIQUIDITY AND CAPITAL RESOURCES
Net Cash Used in Operating Activities. Net cash used in operating
activities for the nine months ended September 30, 1996 was $0.9 million, a
decrease of $6.8 million over the same period in the prior year. This decrease
was due primarily to an increase in net income of $8.2 million. Net cash used in
connection with the restructuring and other charges in the nine months ended
September 30, 1996 was $2.6 million. The Company anticipates that it will expend
approximately $0.3 million in connection with the restructuring and other
charges in the fourth quarter of 1996. Of the remaining accrual for the
restructuring and other charges, the Company anticipates that it will expend
approximately $4.8 million of cash in 1997. Net cash expended in connection with
the restructuring and other charges in the nine months ended September 30, 1995
was $0.5 million.
Net cash used by operating activities in the year ended December 31, 1995
was $3.1 million, a decrease of $17.3 million compared to the year ended
December 31, 1994. This decrease was primarily due to a decrease in net income.
Included in 1995 are net cash charges of $0.7 million related to restructuring
and other charges.
Net cash provided by operating activities in the year ended December 31,
1994 was $14.2 million, an increase of $13.8 million compared to the year ended
December 31, 1993. This increase was due primarily to the inclusion of the
operations of each of Kalama and Hilton Davis.
Net Cash Used in Investing Activities. Net cash used in investing
activities for the nine months ended September 30, 1996 was $7.1 million, a
decrease of $21.7 million over the same period in the prior year. Capital
expenditures in the first nine months of 1996 were $7.9 million compared to
$12.6 million in the first nine months of 1995. Capital expenditures in 1995
included $5.1 million related to an expansion program at the Company's Kalama
facility. The first nine months of 1996 also included proceeds of $1.1 million
generated from the sale of the Company's non-strategic transparent iron oxide
coatings business.
32
<PAGE>
Net cash used in investing activities for the year ended December 31, 1995
was $32.0 million, a decrease of $43.9 million compared to the year ended
December 31, 1994. Included in 1995 are a cash payment of $15.9 million in
connection with the Diamalt Acquisition and capital expenditures of $15.5
million, $5.1 million of which is related to an expansion of the Company's
Kalama facility. Included in 1994 are a cash payment of $68.3 million for the
acquisition of Kalama and capital expenditures of $7.2 million.
Net cash used in investing activities for the year ended December 31, 1994
was $75.9 million, an increase of $45.3 million compared to the year ended
December 31, 1993. Included in 1993 are a cash payment of $29.9 million for the
Hilton Davis Acquisition and capital expenditures of $1.0 million.
Net Cash Provided by Financing Activities. Net cash provided by financing
activities for the nine months ended September 30, 1996 was $8.1 million, a
decrease of $26.4 million over the same period in the prior year. This decrease
is due primarily to both the Diamalt Acquisition as well as increased levels of
capital expenditures in the first nine months of 1995.
Net cash provided by financing activities for the year ended December 31,
1995 was $33.7 million, a decrease of $29.7 million compared to the year ended
December 31, 1994. Included in 1995 is additional bank financing used both for
the Diamalt Acquisition as well as the expansion at the Company's Kalama
facility.
Net cash provided by financing activities in 1994 was $63.4 million, an
increase of $33.9 million compared to the year ended December 31, 1993. Included
in 1994 are proceeds of $9.7 million from the issuance by the Company of Series
B Preferred Stock, $2.3 million from the issuance by the Company of Common Stock
and $100.3 million from bank borrowings. These funds were used in 1994 primarily
in connection with the Kalama Acquisition and $44.6 million of long-term debt
refinancing. Included in 1993 are proceeds of $17.0 million from the issuance by
the Company of Series B Preferred Stock, $2.8 million from the issuance by the
Company of Common Stock and $62.9 million from bank borrowings. These funds were
used in 1993 primarily in connection with the financing of the Hilton Davis
Acquisition and the refinancing of $51.2 million of long-term debt.
Capital Expenditures. Capital expenditures for the nine months ended
September 30, 1996 were $7.9 million. Capital expenditures for the years ended
December 31, 1995, 1994 and 1993 were $15.5 million, $7.2 million and $1.0
million, respectively. The increase in capital expenditures over this period was
due primarily to the effects of the inclusion of the acquisitions of Kalama in
1994 and Diamalt in 1995. Capital expenditures in 1995 also included
approximately $5.1 million related to the expansion of benzaldehyde production
at the Company's Kalama facility. This expansion increased the Company's
benzaldehyde production by approximately 50%. Notwithstanding such expansion,
benzaldehyde production at the Company's Kalama facility is currently operating
at capacity.
The Company expects to have capital equipment investments of approximately
$14.0 million to $18.0 million annually for each of the next two years. Among
other projects, the Company plans to expand its production of benzoic acid and
benzaldehyde at its Kalama facility during 1997. Such expansion will increase
the Company's production capacity for benzoic acid by approximately 60% and its
production capacity for benzaldehyde by an additional 15%.
In addition to these capital expenditures, the Company estimates that its
expenditures in connection with environmental matters will be approximately $2.0
million to $3.0 million annually in each of the next two years. Freedom does not
believe that these estimated environmental expenditures will have a material
adverse effect on the Company's financial position. See 'Business--Environmental
Matters.'
Liquidity. As of September 30, 1996 the Company had $31.9 million of
working capital (current assets less current liabilities) and $0.7 million
available under the Freedom Credit Agreement.
Concurrently with the consummation of the offering of the Old Notes,
Freedom amended and restated the Freedom Credit Agreement to, among other
things, increase the amount of the revolving loan facility to $85 million and
include Freedom Chemical Diamalt as a co-borrower. Amounts outstanding under the
Amended and Restated Credit Agreement bear interest at Citicorp USA, Inc.'s
published prime rate plus 1.5% per annum or, at Freedom's option, LIBOR plus
2.5% per annum, with each such margin subject to adjustment based on the
Company's compliance with various debt ratios as specified in the Amended and
Restated Credit Agreement. See 'Description of Amended and Restated Credit
Agreement.'
The Amended and Restated Credit Agreement and the Indenture 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
33
<PAGE>
Freedom to maintain specified financial ratios and tests, including maximum
leverage ratios and minimum interest coverage ratios. The Company believes that
it was in compliance with such ratios and tests at December 31, 1996.
Concurrently with the consummation of the offering of the Old Notes, the
JLL Funds and an executive officer of Freedom invested an aggregate of
approximately $10.0 million in the Company in connection with the Cash Equity
Investments. In addition, following consummation of the offering of Old Notes,
certain other stockholders of Freedom (principally current and former
management) invested an aggregate of approximately $1.9 million in the Company
in connection with the Additional Equity Investments, almost all of which were
financed with loans made by Freedom. See 'Certain Transactions.'
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.
Following consummation of the Transactions, the Company had approximately $63.5
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.
EFFECT OF INFLATION; FOREIGN CURRENCY EXCHANGE RATES
Inflation generally affects the Company by increasing the cost of labor,
equipment and raw materials. The Company does not believe that inflation has had
any material effect on the Company's business over the last three years.
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 does not currently participate in hedging transactions related to
foreign currency.
IMPACT OF RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board ('FASB') issued
Statement of Financial Accounting Standards No. 121, 'Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of'
('SFAS No. 121'). SFAS No. 121, adopted by the Company in the first quarter of
1996, established criteria for recognizing, measuring and disclosing impairments
of long-lived assets, including intangibles and goodwill. The adoption of SFAS
No. 121 has not had a significant impact on the Company's results of operations
or financial position.
In October 1995, FASB issued Statement of Financial Accounting Standards
No. 123, 'Accounting for Stock-Based Compensation' ('SFAS No. 123'), which
became effective for transactions entered into in fiscal years beginning after
December 15, 1995. SFAS No. 123 encourages a fair value based method of
accounting for employee stock options or similar equity instruments, but allows
continued use of the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, 'Accounting for Stock Issued to
Employees' ('APB No. 25'). Companies electing to continue to use APB No. 25 must
make pro forma disclosures of net income as if the fair value based method of
accounting had been applied. The new accounting standard has not had an impact
on the Company's net income or financial position, as the Company has chosen to
continue to utilize the accounting guidance set forth in APB No. 25.
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THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), Freedom will accept for exchange Old Notes which are properly
tendered on or prior to the Expiration Date and not withdrawn as permitted
below. As used herein, the term 'Expiration Date' means 5:00 p.m., New York City
time, on March 17, 1997; provided, however, that if Freedom, in its sole
discretion, has extended the period of time for which the Exchange Offer is
open, the term 'Expiration Date' means the latest time and date to which the
Exchange Offer is extended.
As of the date of this Prospectus, $125 million aggregate principal amount
of the Old Notes is outstanding. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about February 14, 1997, to all Holders
of Old Notes known to Freedom. Freedom's obligation to accept Old Notes for
exchange pursuant to the Exchange Offer is subject to certain conditions as set
forth under '--Certain Conditions to the Exchange Offer' below.
Freedom expressly reserves the right, at any time or from time to time, to
extend the period of time during which the Exchange Offer is open, and thereby
delay acceptance for exchange of any Old Notes, by giving oral or written notice
of such extension to the Holders thereof as described below. During any such
extension, all Old Notes previously tendered will remain subject to the Exchange
Offer and may be accepted for exchange by Freedom. Any Old Notes not accepted
for exchange for any reason will be returned without expense to the tendering
Holder thereof as promptly as practicable after the expiration or termination of
the Exchange Offer.
Old Notes tendered in the Exchange Offer must be in denominations of
principal amount of $1,000 and any integral multiple thereof.
Freedom expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Old Notes not theretofore accepted for
exchange, upon the occurrence of any of the conditions of the Exchange Offer
specified below under '--Certain Conditions to the Exchange Offer.' Freedom will
give oral or written notice of any extension, amendment, non-acceptance or
termination to the Holders of the Old Notes as promptly as practicable, such
notice in the case of any extension to be issued by means of a press release or
other public announcement no later than 9:00 a.m., New York City time, on the
next business day after the previously scheduled Expiration Date.
PROCEDURES FOR TENDERING OLD NOTES
The tender to Freedom of Old Notes by a Holder thereof as set forth below
and the acceptance thereof by Freedom will constitute a binding agreement
between the tendering Holder and Freedom upon the terms and subject to the
conditions set forth in this Prospectus and in the accompanying Letter of
Transmittal. Except as set forth below, a Holder who wishes to tender Old Notes
for exchange pursuant to the Exchange Offer must transmit a properly completed
and duly executed Letter of Transmittal, including all other documents required
by such Letter of Transmittal, to The Bank of New York (the 'Exchange Agent') at
the address set forth below under 'Exchange Agent' on or prior to the Expiration
Date. In addition, either (i) certificates for such Old Notes must be received
by the Exchange Agent along with the Letter of Transmittal, or (ii) a timely
confirmation of a book-entry transfer (a 'Book-Entry Confirmation') of such Old
Notes, if such procedure is available, into the Exchange Agent's account at The
Depository Trust Company (the 'Book-Entry Transfer Facility') pursuant to the
procedure for book-entry transfer described below, must be received by the
Exchange Agent prior to the Expiration Date, or (iii) the Holder must comply
with the guaranteed delivery procedures described below. THE METHOD OF DELIVERY
OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE
ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED
THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED.
IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO
LETTERS OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO FREEDOM.
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Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered Holder promptly and instruct such
registered Holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's own behalf, such owner must,
prior to completing and executing the Letter of Transmittal and delivering such
owner's Old Notes, either make appropriate arrangements to register ownership of
the Old Notes in such owner's name or obtain a properly completed bond power
from the registered Holder. The transfer of registered ownership may take
considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant thereto are tendered (i) by a registered Holder of the Old Notes who
has not completed the box entitled 'Special Issuance Instructions' or 'Special
Delivery Instructions' on the Letter of Transmittal or (ii) for the account of
an Eligible Institution (as defined below). In the event that signatures on a
Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantees must be by a firm which is a
financial institution (including most banks, savings and loan associations and
brokerage houses) that is a participant in the Securities Transfer Agents
Medallion Program, the New York Stock Exchange Medallion Signature Program or
the Stock Exchanges Medallion Program (collectively, 'Eligible Institutions').
If Old Notes are registered in the name of a person other than a signer of the
Letter of Transmittal, the Old Notes surrendered for exchange must be endorsed
by, or be accompanied by a written instrument or instruments of transfer or
exchange, in satisfactory form as determined by Freedom in its sole discretion,
duly executed by the registered Holder with the signature thereon guaranteed by
an Eligible Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined by
Freedom in its sole discretion, which determination shall be final and binding.
Freedom reserves the absolute right to reject any and all tenders of any
particular Old Notes not properly tendered or to not accept any particular Old
Note which acceptance might, in the judgment of Freedom or its counsel, be
unlawful. Freedom also reserves the absolute right to waive any defects or
irregularities or conditions of the Exchange Offer as to any particular Old
Notes either before or after the Expiration Date (including the right to waive
the ineligibility of any Holder who seeks to tender Old Notes in the Exchange
Offer). The interpretation of the terms and conditions of the Exchange Offer as
to any particular Old Notes either before or after the Expiration Date
(including the Letter of Transmittal and the instructions thereto) by Freedom
shall be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Old Notes for exchange must be
cured within such reasonable period of time as Freedom shall determine. Neither
Freedom, the Exchange Agent nor any other person shall be under any duty to give
notification of any defect or irregularity with respect to any tender of Old
Notes for exchange, nor shall any of them incur any liability for failure to
give such notification.
If the Letter of Transmittal is signed by a person or persons other than
the registered Holder or Holders of Old Notes, such Old Notes must be endorsed
or accompanied by appropriate powers of attorney, in either case signed exactly
as the name or names of the registered Holder or Holders that appear on the Old
Notes.
If the Letter of Transmittal or any Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
Freedom, proper evidence satisfactory to Freedom of their authority to so act
must be submitted.
By tendering, each Holder will represent to Freedom that, among other
things, the New Notes acquired pursuant to the Exchange Offer are being obtained
in the ordinary course of business of the person receiving such New Notes,
whether or not such person is the Holder, and that neither the Holder nor such
other person has any arrangement or understanding with any person to participate
in the distribution of the New Notes. In the case of a Holder that is not a
broker-dealer, each such Holder, by tendering, will also represent to Freedom
that such Holder is not engaged in and does not intend to engage in, a
distribution of the New Notes. If any Holder or any such other person is an
'affiliate,' as defined under Rule 405 of the Securities Act, of Freedom, or is
engaged in or intends to engage in or has an arrangement or understanding with
any person to participate in a distribution of such New Notes to be acquired
pursuant to the Exchange Offer, such Holder or any such other person (i) could
not rely on the applicable interpretations of the staff of the SEC and (ii) must
comply with the registration and
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prospectus delivery requirements of the Securities Act in connection with any
resale transaction. Each broker-dealer that receives New Notes for its own
account in exchange for Old Notes, where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such New
Notes. See 'Plan of Distribution.' The Letter of Transmittal states that by so
acknowledging and by delivering such a prospectus, a broker-dealer will not be
deemed to admit that it is an 'underwriter' within the meaning of the Securities
Act.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
Freedom will accept, promptly after the Expiration Date, all Old Notes properly
tendered and will issue the New Notes promptly after acceptance of the Old
Notes. See '--Certain Conditions to the Exchange Offer' below. For purposes of
the Exchange Offer, Freedom shall be deemed to have accepted properly tendered
Old Notes for exchange when, as and if Freedom has given oral or written notice
thereof to the Exchange Agent, with written confirmation of any oral notice to
be given promptly thereafter.
For each Old Note accepted for exchange, the Holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. The New Notes will bear interest from the most recent date to which
interest has been paid on the Old Notes or, if no interest has been paid on the
Old Notes, from October 17, 1996. Accordingly, registered Holders of New Notes
on the relevant record date for the first interest payment date following the
consummation of the Exchange Offer will receive interest accruing from the most
recent date to which interest has been paid or, if no interest has been paid,
from October 17, 1996. Old Notes accepted for exchange will cease to accrue
interest from and after the date of consummation of the Exchange Offer. Holders
of Old Notes whose Old Notes are accepted for exchange will not receive any
payment in respect of accrued interest on such Old Notes otherwise payable on
any interest payment date the record date for which occurs on or after
consummation of the Exchange Offer.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely Book-Entry
Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal and all other required documents. If any tendered Old Notes are not
accepted for any reason set forth in the terms and conditions of the Exchange
Offer or if Old Notes are submitted for a greater principal amount than the
Holder desires to exchange, such unaccepted or non-exchanged Old Notes will be
returned without expense to the tendering Holder thereof (or, in the case of Old
Notes tendered by book-entry transfer into the Exchange Agent's account at the
Book-Entry Transfer Facility pursuant to the book-entry procedures described
below, such non-exchanged Old Notes will be credited to an account maintained
with such Book-Entry Transfer Facility) as promptly as practicable after the
expiration or termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal or facsimile thereof,
with any required signature guarantees and any other required documents, must,
in any case, be transmitted to and received by the Exchange Agent at the address
set forth below under '--Exchange Agent' on or prior to the Expiration Date or
the guaranteed delivery procedures described below must be complied with.
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GUARANTEED DELIVERY PROCEDURES
If a registered Holder of the Old Notes desires to tender such Old Notes
and the Old Notes are not immediately available, or time will not permit such
Holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is made
through an Eligible Institution, (ii) prior to the Expiration Date, the Exchange
Agent received from such Eligible Institution a properly completed and duly
executed Letter of Transmittal (or a facsimile thereof) and Notice of Guaranteed
Delivery, substantially in the form provided by Freedom (by facsimile
transmission, mail or hand delivery), setting forth the name and address of the
Holder of Old Notes and the amount of Old Notes tendered, stating that the
tender is being made thereby and guaranteeing that within three New York Stock
Exchange ('NYSE') trading days after the Expiration Date, the certificates for
all physically tendered Old Notes, in proper form for transfer, or a Book-Entry
Confirmation, as the case may be, and any other documents required by the Letter
of Transmittal will be deposited by the Eligible Institution with the Exchange
Agent, and (iii) the certificates for all physically tendered Old Notes, in
proper form for transfer, or a Book-Entry Confirmation, as the case may be, and
all other documents required by the Letter of Transmittal, are received by the
Exchange Agent within three NYSE trading days after the Expiration Date.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New
York City time, on the Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at the address or, in the case of Eligible
Institutions, at the facsimile number, set forth below under '--Exchange Agent'
prior to 5:00 p.m., New York City time, on the Expiration Date. Any such notice
of withdrawal must (i) specify the name of the person having tendered the Old
Notes to be withdrawn (the 'Depositor'), (ii) identify the Notes to be withdrawn
(including the certificate number or numbers and principal amount of such Old
Notes), (iii) contain a statement that such holder is withdrawing his election
to have such Old Notes exchanged, (iv) be signed by the holder in the same
manner as the original signature on the Letter of Transmittal by which such Old
Notes were tendered (including any required signature guarantees) or be
accompanied by documents of transfer to have the Trustee with respect to the Old
Notes register the transfer of such Old Notes in the name of the person
withdrawing the tender and (v) specify the name in which such Old Notes are
registered, if different from that of the Depositor. If Old Notes have been
tendered pursuant to the procedure for book-entry transfer described above, any
notice of withdrawal must specify the name and number of the account at the
Book-Entry Transfer Facility to be credited with the withdrawn Old Notes and
otherwise comply with the procedures of such facility. All questions as to the
validity, form and eligibility (including time of receipt) of such notices will
be determined by Freedom, whose determination shall be final and binding on all
parties. Any Old Notes so withdrawn will be deemed not to have been validly
tendered for exchange for purposes of the Exchange Offer and no New Notes will
be issued with respect thereto unless the Old Notes so withdrawn are validly
retendered. Any Old Notes that have been tendered for exchange but which are not
exchanged for any reason will be returned to the Holder thereof without cost to
such Holder (or, in the case of Old Notes tendered by book-entry transfer into
the Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the
book-entry transfer procedures described above, such Old Notes will be credited
to an account maintained with the Book-Entry Transfer Facility for the Old
Notes) as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Old Notes may be
retendered by following the procedures described under '-- Procedures for
Tendering Old Notes' above at any time on or prior to 5:00 p.m., New York City
time, on the Expiration Date.
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CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, Freedom shall
not be required to accept for exchange, or to issue New Notes in exchange for,
any Old Notes and may terminate or amend the Exchange Offer, if at any time
before the acceptance of such Old Notes for exchange or the exchange of the New
Notes for such Old Notes, any of the following events shall occur:
(a) there shall be threatened, instituted or pending any action or
proceeding before, or any injunction, order or decree shall have been
issued by, any court or governmental agency or other governmental
regulatory or administrative agency or commission, (i) seeking to restrain
or prohibit the making or consummation of the Exchange Offer or any other
transaction contemplated by the Exchange Offer, or assessing or seeking any
damages as a result thereof, or (ii) resulting in a material delay in the
ability of Freedom to accept for exchange or exchange some or all of the
Old Notes pursuant to the Exchange Offer; or any statute, rule, regulation,
order or injunction shall be sought, proposed, introduced, enacted,
promulgated or deemed applicable to the Exchange Offer or any of the
transactions contemplated by the Exchange Offer by any government or
governmental authority, domestic or foreign, or any action shall have been
taken, proposed or threatened, by any government, governmental authority,
agency or court, domestic or foreign, that in the sole judgment of Freedom
might directly or indirectly result in any of the consequences referred to
in clauses (i) or (ii) above or, in the sole judgment of Freedom, might
result in the holders of New Notes having obligations with respect to
resales and transfers of New Notes which are greater than those described
in the interpretation of the SEC referred to on the cover page of this
Prospectus, or would otherwise make it inadvisable to proceed with the
Exchange Offer; or
(b) there shall have occurred (i) any general suspension of or general
limitation on prices for, or trading in, securities on any national
securities exchange or in the over-the-counter market, (ii) any limitation
by a governmental agency or authority which may adversely affect the
ability of Freedom to complete the transactions contemplated by the
Exchange Offer, (iii) a declaration of a banking moratorium or any
suspension of payments in respect of banks in the United States or any
limitation by any governmental agency or authority which adversely affects
the extension of credit or (iv) a commencement of a war, armed hostilities
or other similar international calamity directly or indirectly involving
the United States, or, in the case of any of the foregoing existing at the
time of the commencement of the Exchange Offer, a material acceleration or
worsening thereof; or
(c) any change (or any development involving a prospective change)
shall have occurred or be threatened in the business, properties, assets,
liabilities, financial condition, operations, results of operations or
prospects of Freedom and its subsidiaries taken as a whole that, in the
sole judgment of Freedom, is or may be adverse to the Company, or Freedom
shall have become aware of facts that, in the sole judgment of Freedom,
have or may have adverse significance with respect to the value of the Old
Notes or the New Notes; which in the sole judgment of Freedom in any case,
and regardless of the circumstances (including any action by Freedom)
giving rise to any such condition, makes it inadvisable to proceed with the
Exchange Offer and/or with such acceptance for exchange or with such
exchange.
The foregoing conditions are for the sole benefit of Freedom and may be
asserted by Freedom regardless of the circumstances giving rise to any such
condition or may be waived by Freedom in whole or in part at any time and from
time to time in its sole discretion. The failure by Freedom at any time to
exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be asserted
at any time and from time to time.
In addition, Freedom will not accept for exchange any Old Notes tendered,
and no New Notes will be issued in exchange for any such Old Notes, if at such
time any stop order shall be threatened or in effect with respect to the
Registration Statement of which this Prospectus constitutes a part or the
qualification of the Indenture under the Trust Indenture Act of 1939.
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EXCHANGE AGENT
The Bank of New York has been appointed as the Exchange Agent for the
Exchange Offer. All executed Letters of Transmittal should be directed to the
Exchange Agent at the address set forth below. Questions and requests for
assistance, requests for additional copies of this Prospectus or of the Letter
of Transmittal and requests for Notices of Guaranteed Delivery should be
directed to the Exchange Agent addressed as follows:
The Bank of New York, Exchange Agent
By Mail or Hand Delivery:
The Bank of New York
Reorganization Section
101 Barclay Street - 7E
New York, New York 10286
Attention: Ms. Jodi Smith
By Facsimile Transmission:
(for Eligible Institutions only):
(212) 571-3080
Attention: Ms. Jodi Smith
Confirm by Telephone:
(212) 815-2791
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH
ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF SUCH LETTER OF TRANSMITTAL.
FEES AND EXPENSES
Freedom will not make any payment to brokers, dealers, or others soliciting
acceptances of the Exchange Offer. The estimated cash expenses to be incurred in
connection with the Exchange Offer will be paid by Freedom and are estimated in
the aggregate to be $300,000.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to
pay any transfer taxes in connection therewith, except that holders who instruct
Freedom to register New Notes in the name of, or request that Old Notes not
tendered or not accepted in the Exchange Offer be returned to, a person other
than the registered tendering holder will be responsible for the payment of any
applicable transfer tax thereon.
CONSEQUENCES OF EXCHANGING OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the provisions in
the Indenture regarding transfer and exchange of the Old Notes and the
restrictions on transfer of such Old Notes as set forth in the legend thereon as
a consequence of the issuance of the Old Notes pursuant to exemptions from, or
in transactions not subject to, the registration requirements of the Securities
Act and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. Freedom does not currently anticipate that it
will register Old Notes under the Securities Act. See 'Description of the
Notes--Registration Rights.' Based on interpretations by the staff of the SEC,
as set forth in no-action letters issued to third parties, Freedom believes that
New Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be
offered for resale, resold or otherwise transferred by Holders thereof (other
than any such Holder which is an 'affiliate' of Freedom within the meaning of
Rule 405 under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such Holders' business and such
Holders have no arrangement or understanding with
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any person to participate in the distribution of such New Notes. However, the
SEC has not considered the Exchange Offer in the context of a no-action letter
and there can be no assurance that the staff of the SEC would make a similar
determination with respect to the Exchange Offer as in such other circumstances.
Each Holder, other than a broker-dealer, must acknowledge that it is not engaged
in, and does not intend to engage in, a distribution of New Notes and has no
arrangement or understanding to participate in a distribution of New Notes. If
any Holder is an affiliate of Freedom, is engaged in or intends to engage in or
has any arrangement or understanding with respect to the distribution of the New
Notes to be acquired pursuant to the Exchange Offer, such Holder (i) could not
rely on the applicable interpretations of the staff of the SEC and (ii) must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. Each broker-dealer
that receives New Notes for its own account in exchange for Old Notes must
acknowledge that such Old Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities and that it will deliver
a prospectus in connection with any resale of such New Notes. See 'Plan of
Distribution.' In addition, to comply with the securities laws of certain
jurisdictions, if applicable, the New Notes may not be offered or sold unless
they have been registered or qualified for sale in such jurisdiction or an
exemption from registration or qualification is available and is complied with.
Freedom has agreed, pursuant to the Registration Rights Agreement, subject to
certain limitations specified therein, to register or qualify the New Notes for
offer or sale under the securities laws of such jurisdictions as any Holder
reasonably requests in writing. Unless Freedom is so requested, Freedom does not
intend to register or qualify the sale of the New Notes in any such
jurisdictions.
BUSINESS
OVERVIEW
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
focuses on niche products where it has strong market positions or a
manufacturing advantage. The Company believes that this focus, combined with
improved operating efficiencies resulting from recently completed restructuring
and other measures, have enhanced the Company's potential for future growth and
profitability. The Company's net sales and net income were $296.9 million and
$(17.0) million, respectively, for the year ended December 31, 1995, and $229.1
million and $0.3 million, respectively, for the nine months ended September 30,
1996. In addition, the Company's net cash provided by (used in) operating
activities, investing activities and financing activities for the year ended
December 31, 1995 was $(3.1) million, $(32.0) million and $33.7 million,
respectively, and $(0.9) million, $(7.1) million and $8.2 million, respectively,
for the nine months ended September 30, 1996. Approximately 41.6% of the
Company's 1995 net sales consisted of sales made outside the United States. The
Company's products are manufactured at four facilities located in the United
States, four facilities located in Europe and two facilities located in India.
The Company estimates that approximately 38.6% of its 1995 domestic net
sales were derived from product lines for which it believes it is either the
largest or second largest U.S. producer. Typically, the Company's products are
important to the performance of its customers' products, but represent a
relatively small percentage of their total product costs. For example, although
food preservatives are essential to the quality of carbonated diet soft drinks
(such as Diet Coke), the Company's preservatives, potassium benzoate and sodium
benzoate, generally represent less than $.01 of the total cost of one 24-can
case. The Company has five core product lines:
(i) Food and Personal Care Ingredients, such as food colors, drug and
cosmetic colors, food preservatives and flavors and fragrances,
(ii) Pharmaceutical Intermediates and Natural Additives, such as
cysteine and its derivatives, bioproteins, amino acids and thymidine,
(iii) Specialty Organic Chemicals and Intermediates, such as
benzaldehyde, benzoic acid, phenol and derivative products,
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(iv) Organic Pigments and Dyes, which are used in carbonless copy
paper, household products, paints, printing inks and plastics, and
(v) Textile and Paper Chemicals, such as permanent press and wrinkle
resistance resins, textile pigments, water repellents, flame retardants,
dye assistants, softeners, fiber lubricants and textile processing aids.
RESTRUCTURING AND OTHER CHARGES
In 1995, the Company recorded restructuring and other charges of $14.4
million related to the following: (a) plant closures aggregating $7.4 million,
(b) workforce reductions aggregating $2.4 million, (c) estimated environmental
remediation costs of $1.9 million and (d) the write-off of discontinued
inventory and capitalized expenses totalling $2.7 million. The restructuring and
other charges included (i) the consolidation of certain of the Company's
manufacturing facilities, (ii) the sale of the Company's non-strategic
transparent iron oxide coatings business, (iii) the write-off of discontinued
inventory and capitalized expenses and (iv) the recognition of certain estimated
environmental remediation costs. As a part of these actions, the Company closed
in April 1996 its Conshohocken, Pennsylvania plant which manufactured products
in the Organic Pigments and Dyes group and in May 1996 its Newark, New Jersey
plant which manufactured products in the Textile and Paper Chemicals group and
relocated certain of those production capabilities and technology to its other
facilities. In addition, the Company reduced personnel by approximately 135
employees in both administrative and manufacturing positions.
In the fourth quarter of 1996, the Company recorded a charge of $6.0
million as a result of inventory obsolescence from plant closures of $0.9
million, inventory disposal costs of $0.6 million, severance for displaced
workers associated with plant closings and administrative personnel reductions
of $1.5 million and other charges of $0.7 million.
Additionally, during 1994, the Company idled its salicylic acid product
line. However, the Company continued to be a reseller of this product and
continued to pursue a long term position in this market. Since projected future
cash flows from this product line were sufficient to realize the Company's
investment from the time the assets were idled until the fourth quarter of 1996,
management did not believe that there was an impairment in the idle assets. In
the fourth quarter of 1996, the Company decided not to allocate its capital
resources to re-enter the salicylic acid business. Accordingly, the Company
recorded a charge of $2.3 million. The write-off will be included in
restructuring and other charges on the Company's statement of operations for
1996. Management estimates the costs to dismantle the line are approximately
equal to the salvage value of the line.
During the fourth quarter of 1996, the Company decided to shutdown its
Cowpens, South Carolina facility. During 1996, the Company incurred a loss from
operations of approximately $2.6 million from the Cowpens operations, including
a direct write-off of $1.5 million for inventory and related items in the fourth
quarter. The write-off was composed of $0.9 million of obsolete inventory from
unusable/unsaleable product as a result of product separation. The obsolete
inventory was identified during the October 31, 1996 planned physical inventory.
The write-off also included $0.6 million of disposal costs related to hazardous
products which required environmentally sound disposal procedures. Management is
currently negotiating with prospective buyers to sell the facility for its net
book value of approximately $2.7 million plus assumption of environmental
liabilities of $1.9 million. It is anticipated that the sale will be completed
during 1997.
Of the aforementioned $0.7 million of other charges, $0.5 million relates
to a municipality surcharge for water treatment and waste disposal at the
Company's Charlotte facility. The surcharge resulted from low plant efficiency
(due to the approach of a scheduled turn around and catalyst change-out in
January 1997) and high operating levels which caused waste to be produced at
above normal levels.
Of the $6.0 million charge recorded in the fourth quarter of 1996, $3.2
million is attributable to noncash items, primarily the idle equipment write-off
of $2.3 million and obsolete inventory of $0.9 million. Charges that will
require an outlay of cash total approximately $2.8 million. Of this amount $0.3
million was paid in the month of December. The remaining cash items totaling
approximately $2.5 million will be paid primarily over the first six months of
1997. Management believes this outlay of cash will be funded with cash flow from
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<PAGE>
operations and borrowings under the Amended and Restated Credit Agreement and
will not materially adversely affect the Company's operating cash flows or
financial position.
BUSINESS STRATEGY
The Company's objective is to continue to enhance revenue growth and
profitability by leveraging its strong market positions in its core product
lines and by continuing to improve operating efficiencies. The Company plans to
achieve its objective through the following key strategies:
o Increase Capacity of Key Product Lines. The Company intends to increase
sales by investing in capacity expansions for key product lines currently
operating at or near full capacity and has budgeted approximately $8
million to $10 million for each of the next two years for capacity
expansions and process improvements. In 1995, the Company completed the
construction and start-up of a plant in Madras, India to produce amino
acids and cysteine and its derivatives. In addition, it expanded
benzaldehyde production capacity at its plant in Kalama, Washington by
50% and implemented cassia production capacity at its plant in Vadodara,
India. The Company's current major capacity expansion projects include
(i) further plant expansion at Kalama, Washington, which will expand the
Company's production capacity for benzoic acid, phenol, benzaldehyde and
flavor and fragrance chemicals, (ii) expansion of cysteine production
capacity at its plant in Raubling, Germany and (iii) expansion of cassia
production capacity at its plant in Vadodara, India. See 'Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources.'
o Introduce New or Technologically Improved Products. The Company's
research and development efforts focus on the development of new and
technologically advanced products to respond to customer demands, changes
in the marketplace, technology and environmental regulations. The Company
is currently working with its customers and capitalizing on existing
technology to develop new value-added products such as 'wash-away'
textile dyes and specialty pigments, environmentally friendly water-based
paint pigments, textile chemicals with reduced formaldehyde content and
new coatings that meet stricter environmental regulations for volatile
organic compounds. The Company also has an active pharmaceutical
intermediates program and recently began production and sale of
thymidine, an AZT intermediate utilized in producing drugs for AIDS
therapy.
o Continue to Improve Operating Efficiencies. The initiatives taken by the
Company in connection with the restructuring and other measures have
already yielded significant cost savings and the Company intends to
implement additional cost-saving and productivity-enhancing programs in
the future. Currently in 1996, the Company is undertaking the following
programs: raw material sourcing from multiple vendors, yield improvement
programs, the discontinuation of unprofitable or low margin product
lines, the reduction of utility costs and the implementation of
additional employee profit incentive programs. The Company is analyzing
additional opportunities to increase operating efficiencies and
profitability, including the possibility of further consolidation of its
manufacturing facilities, which are likely to result in additional
restructuring and other charges. See '--Restructuring and Other Charges.'
o Broaden Product Offerings to Primary Markets. The Company seeks to
broaden its product lines through internal development and believes that
offering a complete product portfolio to a given customer will enable it
to utilize more effectively its direct sales force, become a more
complete supplier to the industries it serves and increase its unit sales
per customer. Natural chemicals, including thickeners, enzymes and sizing
agents, are widely used in the European textile industry and the Company
intends to offer these products in the United States as additional
manufacturing capacity to produce these products becomes available. In
addition, the Company plans to capitalize on its position in food and pet
food ingredients by broadening its food colors, preservatives and flavors
product lines with natural additives such as amino acids,
polysaccharides, alginates and bioproteins, as well as with other
products used by the food and pet food industries.
o Expand Customer Base. The Company intends to expand and strengthen its
customer base by (i) focusing on relationships with key accounts, (ii)
creating incentives for its sales force to concentrate on fast growing,
high margin areas within existing product segments, (iii) pursuing growth
opportunities in new markets outside the United States, including Mexico,
Central and South America and Asia, as such
43
<PAGE>
markets continue to develop economically and the consumption of food,
beverage, household and other products containing the Company's products
increases and (iv) cross-marketing its products to existing customers who
do not currently purchase such products through, among other initiatives,
an international sales force that will market products from all of the
Company's product groups.
o Enhance Growth through Selective Acquisitions. Freedom will continue to
selectively seek acquisitions with complementary product lines that offer
the opportunity to significantly improve profitability through
integration with the Company's existing businesses, although no specific
acquisition is currently contemplated. The Company considers the
following characteristics in its acquisitions: (i) strong market
positions, (ii) unique product offerings, (iii) low cost manufacturing
capacity and (iv) technological or cost advantages.
PRODUCTS
The table below sets forth the Company's 1995 net sales by product group,
principal products, principal end markets and selected well-known customers.
<TABLE>
<CAPTION>
SELECTED
PRODUCT GROUP PRINCIPAL WELL-KNOWN
(1995 NET SALES) PRINCIPAL PRODUCTS END MARKETS CUSTOMERS
<S> <C> <C> <C>
Food and Personal Food Colors Food and Beverage Coca-Cola
Care Ingredients Preservatives Drug and Cosmetic Mars
($61.3 Million) Flavor and Fragrance Nestle
Chemicals PepsiCo
Drug and Cosmetic Colors Procter & Gamble
Ralston Purina
Pharmaceutical Cysteine Pharmaceutical Boehringer
Intermediates and Cassia Cosmetic Brantford
Natural Additives Bioproteins Food IFF
($35.0 Million) Amino Acids Pet Food E. Merck
Thymidine Quest
Ratiopharm
Specialty Organic Benzaldehyde Food and Beverage BASF
Chemicals and Benzyl Alcohol Drug and Cosmetic Borden
Intermediates Benzoic Acid Rubber Ciba Geigy
($56.0 Million) Benzyl Amines Photographic Miles
Phenol Housing Milliken
Plasticizers Automotive
Organic Pigments Carbonless Copy Dyes Specialty Papers Appleton Papers
and Dyes Technical Dyes Household Products Mead Corporation
($68.7 Million) Pigments Paints and PPG
Paints and Coatings Pigments Pigments S.C. Johnson
Ink Pigments Photographic Sherwin-Williams
Textile and Paper Glyoxal Textiles C.H. Patrick
Chemicals Glyoxal Reactants and Resins Paper Cytec
($75.9 Million) Natural Chemicals Textile Printing Hoechst-Celanese
Textile Processing Products Oil Field Milliken
Mining
</TABLE>
FOOD AND PERSONAL CARE INGREDIENTS
Food Colors
Food colors, which are also known as FD&C ('Food, Drug, and Cosmetic')
colors, are used extensively in the U.S. and around the world in a wide variety
of food and beverage products, including dairy products, chewing gum, cake
icings, spice mixes, snack foods and soft drinks, as well as pet foods. There
are two types of food colors: (i) synthetic or artificial food colors, which are
man-made and certified by the FDA, and (ii) natural food colors, which are
derived from various natural sources and do not require FDA certification.
Synthetic food colors are preferable to natural food colors in many applications
because they are more consistent in quality and color than natural colors, and
are better able to withstand heat and other conditions encountered during food
production and preparation.
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<PAGE>
The Company's product line of food colors consists of synthetic primary
(red, yellow and blue) colors for food, beverages and pet foods. The Company
manufactures these colors in two forms: dyes, which are soluble, and 'lakes,'
which are insoluble (generally produced by combining dyes with a metallic salt).
The Company's food color business has exhibited strong growth in recent
years as a result of modest growth in the overall market and the Company's
successful efforts to increase market share. The Company expects to continue to
grow this business in the future and plans to invest in capacity expansions, new
marketing initiatives and a greater emphasis on international markets (which
markets exceed the size of the U.S. market) to achieve this goal.
In 1995 and the first six months of 1996, the Company expanded its capacity
of yellow, red and blue food color dyes. This expansion resulted in total
capacity of food color dyes of approximately 6.5 million pounds, a 44% increase
over 1994.
Preservatives (Sodium Benzoate and Potassium Benzoate)
The Company believes it is the leading U.S. producer of sodium benzoate and
potassium benzoate, which are widely used food preservatives. Benzoates are
derivatives of benzoic acid, which the Company produces internally. Most
carbonated diet soft drinks contain either sodium or potassium benzoate. Other
preservative applications include food, pharmaceuticals and toiletries.
Benzoates can also be used as industrial preservatives and as a corrosion
inhibitor in anti-freeze for aluminum car engines. Potassium benzoate is used as
a substitute for sodium benzoate when a low sodium content is desired.
The Company believes significant international growth for sodium benzoate
and potassium benzoate will occur in the future as diet soft drink consumption
increases in Mexico, Central and South America, Eastern Europe and the Asia
Pacific region.
Flavor and Fragrance Chemicals
The Company produces a range of flavors for foods and fragrance chemicals
that provide various aromas to perfumes, soaps, cosmetics and household items.
The Company's products include jasmine-like fragrances for use in cosmetics,
perfumes and soaps and cinnamon-like flavors and fragrances used in
confectioneries, gums, soaps and perfumes. The Company's flavor and fragrance
chemicals are derived from benzaldehyde, a specialty intermediate which the
Company produces internally. See '--Specialty Organic Chemicals and
Intermediates; Benzaldehyde.' The Company is one of only two flavor and
fragrance manufacturers that produces its own benzaldehyde, the key ingredient
for this line of products. The Company believes that this backward integration
gives the Company a cost advantage over its non-integrated competitors.
The Company believes that there is significant growth potential for flavor
and fragrance chemicals and the Company intends to increase its production of
these products through a planned production capacity expansion at its Kalama,
Washington plant, which expansion is expected to be completed in 1997.
Drug and Cosmetic Colors
The Company manufactures drug and cosmetic ('D&C') colors which are similar
to food colors. Like food colors, D&C colors must be certified by the FDA.
Freedom manufactures dyes and lakes used in toiletries (shampoos, skin creams
and toothpaste), as well as cosmetics and pharmaceuticals.
The Company sells a full line of over 100 D&C colors to the cosmetics
industry, with its top ten products accounting for approximately two-thirds of
D&C sales. Colors produced by the Company include various reds, yellows,
oranges, greens, and violet. The Company expects to increase sales of D&C
colors, improve the profitability of its D&C color operations and reduce
overhead costs as a result of its transfer of production capabilities and
technology from its Newark plant to its Cincinnati plant.
45
<PAGE>
PHARMACEUTICAL INTERMEDIATES AND NATURAL ADDITIVES
The Company's Pharmaceutical Intermediates and Natural Additives group is
comprised of a wide variety of products with diverse applications. Products in
this group are used in the pharmaceutical, cosmetics, food and pet food
industries and are derived from naturally occurring materials that are refined
and chemically converted in the Company's plants. Products in this group include
cysteine and its derivative products, active ingredients, thickeners (which
mimic the feel of fat), gelling agents, cassia, bioproteins and amino acids.
The Company believes that there is potential for significant growth in the
use of products in the Pharmaceutical Intermediates and Natural Additives group
as consumption of natural products increases. The Company expects to grow this
business in the future and plans to invest in capacity expansions to increase
production of cassia, cysteine and its derivatives and amino acids.
Cysteine
The Company manufactures cysteine at its manufacturing facilities in
Raubling, Germany and Madras, India. Cysteine is used as a food additive and
flavor enhancer for meats and is also used in solution for feeding premature
infants. Cysteine derivatives are used as pharmaceuticals for bronchial therapy
and as antioxidants. Cysteine derivatives are also used in cosmetics. The
Company believes that it is the largest producer in the world of cysteine and
its derivatives.
Cassia
Cassia, an inexpensive alternative to locust bean gum and other gelling
agents, is used extensively in Europe as a gelling agent in canned pet foods and
as an additive in textile printing. The Company owns the patent rights to the
use of cassia in pet foods in the United States, Japan and many countries in
Western Europe. Such patent rights have expiration dates ranging from 2004 to
2006. The Company has developed a patented pet food additive made from cassia
and currently has sales contracts with several leading European pet food makers
for cassia to be used in pet foods.
Bioproteins
The Company produces bioproteins, which are used in shampoos, cosmetics and
other personal care products as well as in foods. The Company manufactures two
types of bioproteins: (i) hydrolyzed vegetable proteins (soy, rice and wheat),
and (ii) hydrolyzed animal proteins (collagen, keratin and elastin).
Amino Acids
The Company manufactures amino acids, which have wide application in foods
and health foods as flavor enhancers and additives to prevent the browning of
fruit and vegetables, in baking, for gluten softening and in pharmaceuticals for
the treatment of bronchial, intestinal and other illnesses. Amino acids are also
used to formulate residue free digestible diets, also known as 'astronaut food.'
Thymidine
The Company recently began manufacturing thymidine, an AZT pharmaceutical
intermediate utilized in producing drugs for AIDS therapy, and entered into a
contract to sell small quantities of this product to a major pharmaceutical
manufacturer.
SPECIALTY ORGANIC CHEMICALS AND INTERMEDIATES
Benzaldehyde
The Company is the sole U.S. producer of benzaldehyde, a versatile
intermediate and ingredient of flavors and fragrances from which a steady supply
of new product applications is being developed by the Company and others. In
addition, benzaldehyde has been approved by the FDA as a synthetic flavoring
substance and is used to produce almond and cherry flavors. It is also used as a
fragrance for soap and toiletries. The industries that consume benzaldehyde and
its derivatives include chemical intermediates, fragrances, pharmaceuticals and
46
<PAGE>
photographic chemicals. Examples of products that contain benzaldehyde or its
derivatives include: ampicillin, photographic developers, contact lens cleaners,
ink, perfumes, candy, vitamins and soap. In 1995, the Company expanded its
benzaldehyde production capacity by approximately 50% at a cost of approximately
$5 million.
Benzoic Acid
Benzoic acid is used as an intermediate in the manufacture of a wide
variety of products including other chemical intermediates, paints and coatings,
polyesters, plasticizers, dyestuffs, preservatives, drilling mud additives and
other applications. In addition to using benzoic acid as an intermediate in the
production of preservatives, plasticizers and phenol, the Company sells benzoic
acid to third parties. The Company believes that it is the largest domestic
producer of benzoic acid and plans to increase its production of benzoic acid
through a planned 40% production capacity expansion at its Kalama, Washington
plant, which expansion is expected to be completed in 1996. Such expansion will
enable the Company to increase its production of benzaldehyde, which is
co-produced with benzoic acid, in 1996.
Benzyl Alcohol
The Company believes that it is the leading domestic producer of benzyl
alcohol, which it produces from benzaldehyde. Benzyl alcohol is sold to the
food, personal care and other industries for a number of applications including
use in sweeteners, contact lens cleaners, lotions and ointments for relief of
insect bites, dispersing agents and activators, anti-static treating compounds,
photographic chemicals, and as a raw material in the manufacture of various
esters used in soaps, perfumes and flavorings.
Phenol
Unlike other chemicals manufactured by the Company, phenol, produced from
benzoic acid, is a commodity chemical. The primary consumers of phenol are the
housing, automotive and appliance industries. Phenol is used as a raw material
in the manufacture of (i) engineering plastics, (ii) resins for wood adhesives,
(iii) paper coatings, and (iv) medicinal consumer products such as
Campho-Phenique(Registered) and Chloroseptic(Registered) throat spray. The
Company's phenol production is consumed mostly by the wood products industry in
the Pacific Northwest region where the Company is the only producer of phenol.
Plasticizers
Freedom markets plasticizers under the brand name K-FLEX(Registered) which
are used extensively in polyvinyl acetate films. K-FLEX(Registered) is also used
as an ingredient in 'white glue' packaging adhesives such as Elmer's Glue,
polyvinyl chloride plastic products and plastic coatings on tools.
ORGANIC PIGMENTS AND DYES
Carbonless Copy Dyes
Carbonless copy dyes, also referred to as color formers, are applied to
paper for use in multi-part business forms such as credit card receipts and
computer printouts, among other applications. Carbonless forms have been in
existence since the 1950's and the Company has continually increased its market
share from 'one time' carbon paper in business forms. The Company sells color
formers to specialty coated paper manufacturers which produce this grade of
paper for the business forms industry. The Company also markets a line of
thermally activated dyes for thermal paper used in telephone facsimile machines,
thermally produced labels and thermal labels used in supermarkets and other
retail applications.
The Company believes there are several factors that will account for future
volume growth in the color former area: (i) industry manufacturing capacity has
decreased within the past twelve months with the exit of two less efficient
manufacturers, which should enable remaining competitors to increase market
share, (ii) the Company expects the domestic carbonless and thermal business
forms market to grow with increased usage of thermally produced labels, and
(iii) the Company anticipates the market for carbonless and thermal paper to
continue to grow in developing countries, especially in Mexico, Central and
South America and Asia.
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<PAGE>
Technical Dyes
Technical dyes are similar to food colors except that they are not
manufactured to the same strict purity standards and are not subject to FDA
certification. They are used in a wide range of industrial and consumer
products, including household products such as cleaning supplies and dishwasher
detergents, paper, writing instruments, turf and pond applications and cat
litter.
The Company's product line consists of a variety of water soluble dyes
including Acid Blue #9 and Tartrazine, a widely used yellow dye, as well as a
number of other specialty dyes. Acid Blue #9 is the Company's best-selling
technical dye and it is primarily used in toilet bowl cleaners and other
household products. Acid Blue #9 also absorbs ultraviolet light and is sold as a
water treatment chemical to prevent algae growth in ponds and water treatment
facilities. Tartrazine is used in photographic chemicals, detergents, other
household products such as window cleaners and detergents, and felt tip markers.
The Company believes that it is the world's leading manufacturer of Acid
Blue #9. The Company has significantly expanded its production capacity for Acid
Blue #9 through yield and process improvements. This expansion will allow the
Company to take advantage of the growth in demand for its pond and turf
applications.
Pigments
The Company markets pigments for three main product lines: (i) paints and
coatings, (ii) inks, and (iii) plastic dispersions.
Paints and Coatings Pigments. The Company manufactures and sells pigments
which are incorporated in paints and coatings used in the architectural,
industrial, automotive, and other paint and coating markets. The Company's
product line is broad, covering all coating types from water-based paints to
solvent-based paints. End products in which the Company's products are used
include house paint, automotive paint, wood stains, and paints for a variety of
industrial uses such as farm, road and railroad equipment, office furniture,
computers, containers and machine shop equipment.
Ink Pigments. The Company's product line consists of pigments which are
incorporated in ink used for printing newspapers, magazines and books. The
Company is a small participant in the ink colors market and intends to increase
its focus on higher margin specialty markets, such as high performance inks for
glossy publications.
Plastics Pigments. The Company competes in a small and highly specialized
portion of the plastic pigments market, where it manufactures finely dispersed
pigment suspensions for producers of colored plastic articles such as amber
medicine vials and tinted lenses.
TEXTILE AND PAPER CHEMICALS
The Company manufactures and markets a broad line of chemicals for use in
the textile and paper industries. The textile product line consists of fabric
preparation chemicals used in most stages of textile processing including
weaving, knitting, preparation, dyeing, printing and finishing. Products sold by
the Company include glyoxal, glyoxal reactants and resins, textile pigments,
water repellents, flame retardants, softeners, dye assistants, lubricants and
antimigrants. The Company believes it has an advantage over many of its
competitors because of the proximity of its plants to most of the major textile
companies in the U.S., which allows the Company to respond more quickly and in a
more cost efficient manner than its competitors to customers' larger orders.
Glyoxal
The Company is the leading domestic manufacturer of glyoxal, a derivative
of ethylene glycol. Glyoxal is used by the Company to produce its line of
glyoxal reactants, and is also sold directly to textile mills and chemical
companies which also produce reactants. The Company believes that its patented
continuous process to produce glyoxal makes it the lowest cost domestic
producer. The Company expects most of the growth in glyoxal sales to be for
non-textile applications such as the manufacture of oil field chemicals, xanthum
gums, agricultural chemicals and paper processing additives.
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<PAGE>
Glyoxal Reactants and Resins
Glyoxal reactants or permanent press resins are custom-made products sold
to textile mills to provide wrinkle resistance and shrinkage control for cotton
and cotton blend fabrics used in household furnishings and apparel. Success in
this product line requires the technical ability to develop cost-effective
reactants, custom designed to solve the problems of the textile mills.
Management believes that the Company's technical expertise and vertical
integration with glyoxal production provide it with a significant competitive
advantage. The Company also manufactures glyoxal-based resins for the paper
industry where they are used to enhance absorbency.
Natural Chemicals
Natural chemicals consist of products which are used in the textile, paper
and leather industries to thicken water. Products in this group are made from
agar-agar, starch, guar, cassia, alginates, enzymes and tamarind. These natural
raw materials are chemically modified and blended to produce finished products.
Textile printers require thickeners for achieving specific levels of ink
viscosity. These additives are also used for sizing in the paper industry and
also for leather treatment. The manufacturing process is customized for each
customer and consists of chemical treatment, milling, drying and blending. The
Company produces 40 different semifinished natural chemical products which can
then be combined with 100 different ingredients to meet customer requirements.
Other Textile Processing Products
The Company produces a range of textile chemical processing products
including softeners, defoamers, lubricants, scours, dye bath additives and other
processing aids. The Company also markets complementary textile chemicals on a
commission basis, including melamine resins, antimigrants, dye fixatives for the
dyeing process and flame retardants. The Company supplies the textile industry
with a complete line of aqueous dispersions of organic pigments and pigment
fixatives for the printing of home furnishings and apparel. The Company also
manufactures water repellent chemicals used for non-woven fabrics. Management
believes that by offering a broad line of such textile processing products to
textile mills, the Company will be able to take advantage of growth
opportunities that may exist for these products.
SALES, MARKETING AND DISTRIBUTION
Freedom sells specialty and fine chemicals to manufacturers who incorporate
the Company's products into their finished goods. Some of the Company's
well-known customers include Borden, The Coca-Cola Company, Cytec Industries,
The Mead Corporation, The Pepsi Cola Company, Procter and Gamble Company,
Ralston Purina, S.C. Johnson & Sons and Sherwin-Williams. The Company has more
than 5,500 customers. Sales to the top ten customers represented approximately
14.8% of the Company's 1995 net sales and no single customer represented more
than 3% of the Company's 1995 net sales.
The Company's products are often critical to the performance of its
customers' products but typically represent a relatively small percentage of the
total product cost. Management believes that there are three key factors to
marketing its products successfully:
o Quality. Many of the Company's specialty and fine chemical products are
used to ensure and enhance the performance of their customers' end
products and therefore consistency and high quality are essential. The
Company believes that its reputation as a manufacturer of value-added,
high-quality specialty and fine chemicals provides it with a competitive
advantage when marketing its products to existing and potential
customers.
o Highly Trained and Technical Sales Force. Because of the specialized
nature of many of the niche markets the Company serves, its direct sales
force must have advanced technical knowledge of the Company's products
and the applications for which they are used. As a result, many of the
Company's direct salespeople have a number of years of industry
experience and significant technical expertise related to the products
they sell.
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<PAGE>
o Superior Customer Service. Many of Freedom's research and development
specialists provide technical support services directly to the customer
enabling the Company to offer formulating expertise and develop a better
understanding of customer's process technology. In addition to technical
support, the Company endeavors to meet the demands of its many customers
who operate 'just-in-time' inventory systems requiring prompt and
reliable delivery of the Company's specialty and fine chemical products.
The Company's strategically located manufacturing facilities as well as
its broad distribution network allow it to meet the technical and
logistical demands of its diverse customer base.
The Company has recently expanded both its direct selling efforts and its
international distributor network. The Company anticipates growth in many of its
product groups as Mexico, Central and South America and Asia continue to develop
economically and consumption of food, beverage, household and other products
containing products manufactured by the Company increases. The Company believes
there are significant opportunities to enhance international revenues by
focusing on increasing the level of technical service, providing more assistance
in product development, and broadening the scope of the Company's product line
offered to its international customers. In addition, the Company continues to
seek opportunities to cross-market products to both its domestic and
international customers.
MANUFACTURING FACILITIES
The Company has ten manufacturing facilities which allow it to carry out a
broad array of chemical reactions. The chart below sets forth the locations and
sizes of the Company's manufacturing facilities and products manufactured at
each of its sites:
<TABLE>
<CAPTION>
OWNED OR APPROXIMATE PRODUCTS
LOCATION LEASED(A) SQUARE FOOTAGE MANUFACTURED
- ---------------------------------------- ---------------- -------------- --------------------------------
<S> <C> <C> <C>
Kalama, Washington...................... Owned 550,000 Food and Personal Care Products;
Specialty Organic Chemicals and
Intermediates
Charlotte, North Carolina............... Owned 500,000 Textile and Paper Chemicals
Cincinnati, Ohio........................ Owned/Leased(b) 450,000 Food and Personal Care
Ingredients; Organic Pigments
and Dyes
Cowpens, South Carolina................. Owned 40,000 Textile and Paper Chemicals
Raubling, Germany....................... Owned/Leased(c) 354,000 Pharmaceutical Intermediates and
Natural Additives
Munich, Germany......................... Leased(d) 162,000 Textile and Paper Chemicals;
Food and Personal Care
Ingredients
Vernon, France.......................... Owned 47,300 Textile and Paper Chemicals
Dewsbury, United Kingdom................ Owned 14,000 Organic Pigments and Dyes
Vadodara, India......................... Owned(e) 295,100 Pharmaceutical Intermediates and
Natural Additives
Madras, India........................... Owned/Leased(f) 112,700 Pharmaceutical Intermediates and
Natural Additives
</TABLE>
(Footnotes on next page)
50
<PAGE>
(Footnotes from previous page)
- ------------------
(a) For information concerning the Company's rental obligations, see Note 12 the
Company's Consolidated Financial Statements included herein.
(b) The land on which the plant is located is leased, with the lease expiring in
2043.
(c) Approximately 15% of the land on which the plant is located is leased and
with the lease expiring in 2001.
(d) The land on which the plant is located is leased. The lease on part of the
land on which the plant is located is renewable at the Company's option
through 2009. The Company is currently renegotiating the lease on the other
part of the land on which a warehouse and research facility are located,
which lease expires in December 1996. To the extent such lease is not
renegotiated, the Company plans to relocate the warehouse and research
facility.
(e) The plant is owned by a joint venture in which Freedom Chemical Diamalt has
a 74% interest and Kamlakant Chottalal Exporters Private Limited, a company
registered under the Indian Companies Act, 1956, has a 26% interest. The
land on which the plant is located is owned.
(f) The land on which the plant is located is leased, with the lease expiring in
2010.
All of the Company's manufacturing facilities, except its manufacturing
facility in Kalama, Washington, are operating with excess capacity. The
Company's manufacturing facility in Kalama, Washington is currently operating at
a capacity level of approximately 90%.
The Company employs both continuous and batch process technologies to
produce its products. Glyoxal, benzoic acid, phenol and benzaldehyde are
produced using continuous processes. Batch processing is used to convert these
products into downstream specialty textile chemicals and food ingredients. Batch
processing technologies are also used in the production of most of the coloring
agents, specialty organics and paper coating products.
The Company is subject to extensive regulation by numerous governmental
authorities, including the FDA and corresponding state and foreign agencies, and
to various domestic and foreign safety standards. The Company's regulatory
compliance programs have been expanded to encompass compliance with
international standards known as ISO 9002 standards, which will become mandatory
in Europe in 1999. The FDA is in the process of adopting the ISO 9002 standards
as regulatory standards for the United States, and it is anticipated that these
standards will be phased in for U.S. manufacturers over a period of time. Three
of the Company's plants have achieved ISO 9002 certification and the Company
plans to implement the ISO 9002 standards in its other facilities. The Company
does not believe that adoption of the ISO 9002 standards by the FDA will have a
material effect on its financial condition or results of operations.
RAW MATERIALS
The raw materials used in the Company's business consist chiefly of a wide
variety of organic intermediates and inorganic chemicals which are purchased
from manufacturers in the United States, Europe and Asia. In 1995, no single raw
material accounted for more than 7% of the Company's cost of goods sold. Total
raw materials cost was approximately $134 million or 45% of net sales in 1995.
Many of the Company's products are produced from toluene whose primary use
is as an octane enhancer in gasoline. Consequently, the price of toluene varies
with the prices of competing gasoline additives and premium and clear gasoline.
Except in unusual circumstances (e.g., during the Persian Gulf War), the price
of toluene has been relatively stable over the past five years. Total toluene
costs in 1995 were approximately $16.4 million. Due to increased demand for
toluene in Asia, the Company's Asian toluene suppliers have indicated that
beginning in 1997, they may not be able to meet the Company's supply
requirements. Consequently, the Company has made arrangements to obtain toluene
from suppliers located in areas adjacent to the Gulf of Mexico.
The raw materials used for the Company's natural additives and food
ingredient products include guar, locust beans, cassia, alginates, agar-agar and
amino acids. The Company obtains these raw materials primarily
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from suppliers in India and China, and believes that these raw materials are
generally available in sufficient quantities to meet its supply needs. The
primary raw materials used for the Company's pharmaceutical products are cystine
and cysteine, which are derived from human hair. Srinivasa, a joint venture in
which the Company has a 40% interest, sells cystine production to the Company,
supplying one third of the Company's needs. The Company also purchases cystine
and cysteine from suppliers in China. The Company's raw material strategy for
products in its Pharmaceutical Intermediates and Natural Additives group is to
procure and process raw materials in countries such as India, a country which is
an important source of raw materials and where labor costs are relatively low
and the Company has long established relationships.
The Company believes that for most of its raw materials alternate sources
of supply are available to the Company at competitive prices.
RESEARCH AND DEVELOPMENT
Research, development and technical service efforts are conducted by
approximately 50 chemists and technicians at the various facilities of the
Company. Technical service is an important aspect of the Company's overall sales
effort. Many of the Company's products are sold on the basis of their ability to
solve a specific problem for a customer. In many cases, products are custom
designed or reformulated to solve a particular customer's operating problems or
product needs.
Technology is an important component of the Company's competitive position,
providing the Company with a low cost position and enabling the Company to
produce high quality products. Patents protect some of the Company's technology,
but a great deal of the Company's competitive advantage revolves around know-how
built up over many years of commercial operation, including 20 years of
operating experience in carrying out the continuous catalytic oxidation of
ethylene glycol and toluene by the Company and its predecessors. The Company
does not believe its technical expertise can be easily duplicated. The Company
recently commercialized a process for thymidine, an AZT intermediate.
The Company possesses important ultra filtration technology for the
purification of food colors, dyes and pigments. The Company also possesses what
it believes to be unique 'flushing' technology and know-how for the production
of flushed pigments. This technology enables the Company to produce pigments of
extremely fine particle size, which improves the pigments' quality. Finally, the
Company and its predecessors have over 20 years experience in the production of
carbonless copy dyes and a strong technological position in the production of
blue color formers.
The Company devotes its research and development resources to the
development of new products, the development of new processes, the improvement
of existing processes and products, and technical support for its customers.
PATENTS AND TRADEMARKS
The Company owns patents, tradenames and trademarks and uses know-how,
trade secrets, formulae and manufacturing techniques which assist in maintaining
the competitive positions of certain of its products, including food colors,
pigments, dyes, flavors and fragrances. Patents, formulae and know-how are of
particular importance in the manufacture of a number of the dyes and flavor
ingredients sold in the Company's specialty chemical business. The Company
believes that no single patent, trademark or other individual right is of such
importance, and, accordingly, the expiration or termination thereof would not
materially affect its business. The Company is also licensed to use certain
patents and technology owned by foreign companies to manufacture products
complementary to its own products, for which it pays royalties in amounts not
considered material.
CUSTOMERS
The Company does not consider any segment of its business to be dependent
on a single customer or a few customers, the loss of any of which would have an
adverse effect on the Company's results. No single customer accounted for more
than 3% of the Company's 1995 net sales. A former international distributor for
the Company accounted for approximately 7.1% of the Company's 1995 net sales.
Following the Diamalt Acquisition, the Company began marketing its products
internationally through Freedom Chemical Diamalt's extensive sales force and
terminated its distribution agreement with such international distributor
effective January 1996. For additional information on the Company's customers,
see '--Products' and '--Sales, Marketing and Distribution.'
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COMPETITION
The Company is engaged in a highly competitive industry and, with respect
to all of its major products, faces competition from a substantial number of
global and regional competitors. Some of the companies with which the Company
competes have greater financial, research and development, production and other
resources than the Company. The Company's competitive position is based
principally on customer service and support, product quality, manufacturing
technology, facility location and, to a lesser extent, price. See '--Sales,
Marketing and Distribution.'
EMPLOYEES
As of September 30, 1996, the Company had approximately 1,044 employees
worldwide, of whom 47% were salaried employees and 53% were hourly employees. Of
these, 178 employees were in management and administration, 93 in sales and
marketing, 111 were chemists or technicians and 662 were in production.
Approximately 50% of the Company's domestic employees were covered by collective
bargaining agreements with three unions. These agreements expire from May 1997
through March 1999. The Company considers its relations with both its union and
non-union employees to be good.
ENVIRONMENTAL MATTERS
Chemical companies such as the Company are subject to extensive
environmental laws and regulations concerning, among other things, emissions to
the air, discharges to land, surface water and subsurface water, the generation,
handling, storage, transportation, treatment and disposal of waste and other
materials, and the remediation of environmental pollution relating to such
companies' (past and present) properties and operations ('Environmental Laws').
Costs and expenses under such Environmental Laws incidental to ongoing
operations are generally included within operating budgets. Potential costs and
expenses may also be incurred in connection with the repair or upgrade of
facilities to meet existing or new requirements under Environmental Laws. In
many instances, the ultimate costs under Environmental Laws and the time period
during which such costs are likely to be incurred are difficult to predict.
In connection with the purchase of a number of the Company's facilities,
the Company has obtained contractual rights to be indemnified for certain types
of environmental liability relating to the prior operations of those facilities.
In addition, pursuant to the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1990, as amended ('CERCLA' or 'Superfund'),
the Company has a private cause of action against other potentially responsible
parties ('PRPs'), including prior owners or operators. As described more fully
below, the Company consequently believes that the costs to be incurred in
connection with most of the significant environmental liabilities associated
with conditions existing prior to the Company's ownership of, and remediation
actions that may be required relating to, certain of the Company's past and
present properties will be the responsibility of other parties and, therefore,
are not likely to have a material adverse effect on the Company's financial
position, although the effect on results of operations could be material when
these conditions are resolved in a future period. However, no assurance can be
given that the parties discussed below will have the financial resources to
perform fully their responsibilities under such agreements or that such other
parties will not challenge their liability under such agreements. In any such
event, the Company may be required to incur significant liabilities. As of
September 30, 1996, the Company had reserves of approximately $18.7 million for
certain environmental expenditures as discussed in more detail below. See Notes
3 and 11 to the Company's Consolidated Financial Statements included herein.
Under certain Environmental Laws, the Company may be liable for the
remediation of environmental pollution at certain on-site and off-site waste
management areas. Under CERCLA and similar state laws, the current and former
owner or operator of real property may be liable for the costs of removal or
remediation of certain hazardous or toxic materials on, under or emanating from
such property, regardless of whether the owner or operator knew of, or was
responsible for, the presence of such materials. In addition, CERCLA and similar
state laws impose liability for investigation, cleanup costs and natural
resource damages on persons who disposed of or arranged for the disposal of
hazardous substances at third-party sites. Under the federal Resource
Conservation and Recovery Act of 1976, as amended ('RCRA'), the holder of a
permit to treat or store hazardous waste can be required to remediate
environmental pollution from solid waste management areas at the permitted
facility regardless of when the contamination occurred. Under the New Jersey
Industrial Site Recovery Act ('ISRA'), formerly known as the Environmental
Cleanup Responsibility Act, the owner of an industrial
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establishment can be required to remediate environmental pollution at the time
of a transfer or shutdown of the facility.
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. Although there can be no assurance, 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 or results of operations.
Hilton Davis. Extensive environmental studies of the Hilton Davis facility
in Cincinnati have been conducted by Sterling Winthrop, a former owner of the
facility, pursuant to a consent decree between Sterling Winthrop and the State
of Ohio. These studies have identified soil and ground water pollution at a
number of locations throughout the facility. Virtually all of this contamination
occurred prior to 1987. In connection with the Company's purchase of Hilton
Davis from PMC, Inc. ('PMC'), the Company entered into an Environmental Matters
Agreement (the 'EMA'), dated September 9, 1993, with Sterling Winthrop which,
with certain exceptions, requires Sterling Winthrop to take responsibility for
environmental conditions that predate 1987. Claims for indemnity for any such
conditions not identified in the EMA must be made within ten years and are
subject to a maximum amount of $20 million. Under the EMA, the Company has
agreed to share responsibility with Sterling Winthrop for two specific
environmental conditions, provided, however, that the Company's obligations
shall not exceed $1.0 million. Currently, the Company has not incurred any costs
in connection with these matters. In addition, the EMA requires the Company to
be responsible for environmental conditions that post-date 1986. In addition,
pursuant to the Stock Purchase Agreement with PMC (the 'PMC Stock Purchase
Agreement'), PMC made certain environmental representations and warranties and
indemnified Freedom for its breach thereof, subject to a maximum amount of $1.0
million. In connection with its purchase of Hilton Davis, the Company's
environmental consultant conducted a Phase I Assessment of the Cincinnati
facility. This assessment did not disclose any environmental conditions for
which the Company is likely to be responsible which would have a material
adverse effect on the Company's financial position or results of operations.
At the time the Company and Sterling Winthrop entered into the EMA,
Sterling Winthrop was a wholly owned subsidiary of Eastman Kodak. In November
1994, Eastman Kodak sold the capital stock of Sterling Winthrop to SmithKline
Beecham plc ('SmithKline Beecham'). SmithKline Beecham subsequently sold the
capital stock of Sterling Winthrop to Miles Inc., a subsidiary of Bayer AG.
Following these transactions, Sterling Winthrop advised the Company that Eastman
Kodak had retained Sterling Winthrop's liabilities in respect of Hilton Davis
and to address further correspondence in respect of the EMA to Eastman Kodak.
Subsequently, 360 North Pastoria Environmental Corporation, a subsidiary of
Eastman Kodak ('360 North'), notified the Company that (i) the Company should
send all future communications under the EMA to 360 North and (ii) Sterling's
responsibilities under the EMA would be managed by 360 North. Accordingly, since
the Sterling Winthrop sale the Company has been dealing with 360 North in
respect of matters arising under the EMA and 360 North has been performing
Sterling Winthrop's obligations under the EMA (including bearing the cost of the
performance of the work plan for closure of the surface impoundments at the
Cincinnati facility referred to below). Notwithstanding the foregoing, neither
Eastman Kodak nor 360 North has formally acknowledged to the Company its
assumption of Sterling Winthrop's obligations under the EMA nor has the Company
formally consented to any such assumption.
The State of Ohio has approved a work plan for closure of surface
impoundments formerly involved in wastewater treatment operations at the
Cincinnati facility. A former on-site landfill is also under investigation.
Under the EMA, Sterling Winthrop is wholly responsible for these matters and has
commenced performing the remediation of the surface impoundments. Consequently,
the Company believes that it will not be required to incur significant liability
in connection with such conditions.
On or about June 24, 1994, the United States Environmental Protection
Agency ('EPA') Region 5 filed an administrative complaint (Complaint and
Proposed Compliance Order, BEW 013-94) seeking approximately $1.6 million in
fines and penalties against Hilton Davis for alleged violations of EPA
regulations relating to industrial boilers. The particular unit which is the
subject of the complaint is out of service and has not operated since August 21,
1992. The Company expects the matter to be settled in the near future. The
Company has made
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a claim for indemnification against PMC, the former owner of Hilton Davis, with
respect to this matter; PMC has indicated that it will contest the claim. There
can be no assurances that such claim will be successful.
In connection with the requirements of New Jersey's ISRA relating to
certain prior transfers of the Hilton Davis facility in Newark, New Jersey,
Sterling Winthrop, as a 'former owner,' investigated and completed certain
remedial actions relating to soil and ground water pollution at that facility.
Under the EMA, Sterling Winthrop is also required to comply with its previous
obligations under ISRA. Manufacturing operations at this facility ceased in May
1996. While the Company believes that it will not be required to incur
significant liability in connection with environmental conditions at this
facility, there can be no assurance that the State of New Jersey will not
conclude, in the future, that additional remediation is required, for which the
Company might be considered responsible.
On or about February 24, 1994, the State of New Jersey filed a complaint in
the Superior Court against Hilton Davis and thirty-two other defendants (State
of New Jersey v. Ace Service Corp., No. SOM L 247-94, Somerset County) under the
New Jersey Spill Control Act and other laws seeking recovery of past and future
costs incurred in response to alleged releases and threatened releases of
hazardous substances at a third-party warehouse. Sterling Winthrop assumed the
defense of this matter pursuant to the EMA and continues to defend Hilton Davis.
In the event of an adverse judgment, the Company expects to be fully indemnified
for all costs, including any remediation costs.
Freedom Textile. In connection with the Company's purchase of Freedom
Textile's Charlotte, North Carolina facility from American Cyanamid, the Company
entered into the Agreement for the Purchase and Sale of Assets, dated February
28, 1992 (the 'Freedom Textile Asset Purchase Agreement'), with American
Cyanamid, which requires American Cyanamid to take responsibility for corrective
actions with respect to certain environmental conditions. In January 1994,
American Cyanamid distributed to its stockholders all of the capital stock of
its chemicals unit, Cytec. The Company believes that in connection with this
transaction Cytec assumed American Cyanamid's environmental indemnity
obligations to the Company under the Freedom Textile Asset Purchase Agreement.
Since the Cytec spin-off, the Company has been dealing with Cytec in respect of
matters arising under the Freedom Textile Asset Purchase Agreement and Cytec has
been performing American Cyanamid's obligations under the Agreement. The
Settlement Agreement, dated December 30, 1994, among Freedom Textile, Cytec and
American Cyanamid, which settled certain claims, including certain environmental
claims regarding the Charlotte facility, recited that Cytec is the successor to
American Cyanamid with regard to the Freedom Textile Asset Purchase Agreement.
The Company has notified American Cyanamid that it is cooperating with Cytec in
coordinating the fulfillment of American Cyanamid's obligations under the
Freedom Textile Asset Purchase Agreement as a matter of convenience to American
Cyanamid and has not waived its contractual rights to look to American Cyanamid
as the party liable for performance under the Freedom Textile Asset Purchase
Agreement.
In connection with the Charlotte facility's hazardous waste (i.e., RCRA)
permits, the EPA and the State of North Carolina have required the facility to
conduct a RCRA facility investigation and to implement corrective action as may
be necessary at two on-site solid waste management units. Pursuant to the
Freedom Textile Asset Purchase Agreement, American Cyanimid is responsible for
any requirements which may be imposed by the EPA or the State of North Carolina
with respect to these two solid waste management units as well as other pre-
existing environmental conditions. Consequently, the Company believes that it
will not be required to incur significant liability in connection with these
units.
The Company acquired certain assets of Achem Corporation ('Achem') in 1993
as part of the Hilton Davis Aquisition and in 1995 transferred such assets to a
subsidiary of Freedom Textile. Environmental investigations have revealed soil
and groundwater contamination at the Cowpens, South Carolina facility. The
groundwater contamination has migrated off-site. The Company has reached
agreement with the South Carolina Department of Health and Environmental Control
('SCDHEC') on an administrative consent agreement which requires the Company to
conduct additional investigation and take corrective measures. The Company has
submitted a Remedial Investigation Work Plan to SCDHEC. SCDHEC has recently
advised the Company that such work plan will be accepted following certain minor
revisions. Certain former owners of Achem, which sold the facility to Hilton
Davis, have agreed to assume and pay all amounts due resulting from the consent
agreement or incurred in performance of Achem's obligations under the consent
agreement, and have further agreed that such costs may be deducted from the
final purchase price payment due to them of $350,000. Currently, however, the
Company
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believes that remediation costs are likely to exceed this amount and, in any
event, may exceed the financial resources of such owners.
Environmental investigations have also revealed soil and groundwater
pollution under the chemicals process building at the Cowpens site, the source
of which is unknown at this time. The contamination consists of a solvent
floating on groundwater. The Company has implemented an Initial Product
Abatement Plan ('IPAP') approved by SCDHEC and requested that the IPAP be
terminated with ongoing monitoring.
During March 1996, the Company instituted litigation against PMC, all the
former owners and operators of the Cowpens site and IT Corporation in the U.S.
District Court of South Carolina, Spartanburg Division (Hilton Davis et al. v.
PMC, Inc. et al., No. 7:96-795-20). The action seeks recovery of all costs of
investigation and remediation of soil and groundwater contamination at that
site. The claims against PMC are based on the PMC Stock Purchase Agreement as
well as on CERCLA. There can be no assurance that the claims will be successful.
As of September 30, 1996, the Company had a reserve of approximately $1.9
million for environmental expenditures associated with remediation of the
Cowpens facility. Although the Company believes that this reserve is based on a
reasonable estimate of potential costs of remediation, there can be no assurance
that such costs will not exceed this amount.
In connection with the sale of the former facility located in Greenville,
South Carolina, Freedom Textile has agreed to reimburse the buyer for the costs
of removing contaminated soil resulting from an underground storage tank which
was removed several years ago. The soil removal has not occurred but due to the
anticipated limited extent of contamination, the Company does not believe that
the cost of the soil removal will be significant. Moreover, the Company has
tendered a claim for indemnification to Sterling Winthrop. Neither Sterling
Winthrop nor Eastman Kodak has accepted responsibility for this claim.
Reilly Whiteman. In connection with the Reilly-Whiteman Acquisition, the
Company and Reilly-Whiteman entered into the Asset Purchase Agreement, dated
November 8, 1994 (as amended, the 'Reilly-Whiteman Asset Purchase Agreement').
Pursuant to the Reilly-Whiteman Asset Purchase Agreement, Reilly-Whiteman
remains responsible for investigating and remediating certain environmental
matters at the Conshohocken facility which arose from Reilly-Whiteman's
operation of that facility prior to the acquisition. These environmental matters
include contamination from fuel oil leaking from an underground storage tank and
a tank farm at such facility. Pursuant to the Reilly-Whiteman Asset Purchase
Agreement, Reilly-Whiteman is currently addressing all of these matters.
Consequently, the Company does not believe that these matters are likely to be
material to the Company's financial position or results of operations.
Manufacturing operations at the Conshohocken facility ceased in April 1996.
Kalama. In connection with a RCRA investigation of the Kalama, Washington
facility by the EPA and the State of Washington, the EPA has required the
Company to conduct a RCRA facility investigation ('RFI') and to implement
corrective action as may be necessary on portions of the site. The EPA has
approved the Company's interim corrective measures ('ICM') work plan and RFI
report describing proposed interim remediation of the site. The Company is now
designing proposed interim corrective measures and studying data to prepare a
proposed final remediation plan. In connection with these submissions, the EPA
will require remediation of certain environmental conditions at the Kalama
facility. The Company believes that the interim corrective measures will provide
most, if not all, of the remediation required by the EPA.
In connection with the Company's purchase of Kalama from BC Sugar, the
Company entered into the Stock Purchase Agreement among Freedom, Chatterton
Petrochemical Corporation, a wholly owned subsidiary of BC Sugar ('Chatterton'),
and BC Sugar, dated as of May 11, 1994, and subsequently amended (the 'Kalama
Stock Purchase Agreement'), which, with certain exceptions, requires BC Sugar
and Chatterton to indemnify and reimburse the Company for the RCRA corrective
actions at Kalama. Pursuant to the agreement, BC Sugar and Chatterton remain
responsible for the costs of investigation, negotiations with the EPA and the
State, and installation of the capital expenditure component of the cleanup
required by EPA or the State at the Kalama facility. BC Sugar and Chatterton are
also collectively responsible for a total of 50% of the costs of operation and
maintenance of the corrective action until five years after the installation of
the capital expenditure component at the site. All of the indemnifications and
other provisions in the Kalama Stock Purchase Agreement whereby BC Sugar and
Chatterton agreed to remain responsible for costs, including those provisions
described below, are subject to an aggregate limit of $44 million, including
certain costs which may be directly incurred or paid by BC Sugar and Chatterton.
As of September 30, 1996, approximately $5.4 million had been credited against
this limit.
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In September 1995, an action was filed against Kalama by the U.S.
Department of Justice on behalf of the EPA, alleging violations of the Clean Air
Act at the Kalama facility which existed prior to the Company's purchase of it.
The Company has executed a consent decree settling the matter and expects
execution by the Department of Justice and the EPA in the near future. The
settlement contemplates the payment of a penalty as well as an additional
payment to fund supplemental environmental projects, both totaling approximately
$1.9 million. Under the Kalama Stock Purchase Agreement, BC Sugar and Chatterton
agreed to remain responsible for certain liabilities arising from violations of
environmental laws occurring before May 26, 1994 at sites owned by Kalama to the
extent such liabilities in the aggregate exceed certain thresholds and subject
to the $44 million aggregate limit. The Company has tendered a formal
indemnification claim to BC Sugar for the alleged air violations. Consequently,
the Company does not believe that this penalty is likely to be material to the
Company's financial position or results of operations.
In connection with the requirements of New Jersey's ISRA relating to
certain prior transfers of the Kalama facility in Garfield, New Jersey, the
State and the Company have investigated contamination of the site and the
potential for migration of contamination offsite. Kalama terminated
manufacturing operations at the Garfield facility in May 1994. Under the Kalama
Stock Purchase Agreement, subject to the $44 million aggregate limit described
above, BC Sugar and Chatterton are responsible for the costs of investigation,
negotiations with the State, installation of the capital expenditure component
of the remedy and 50% of the costs of operation and maintenance of the remedy
until five years after its installation.
In connection with the settlement of certain litigation between Kalama and
Tenneco Polymers, Inc. ('Tenneco Polymers'), the successor in interest of the
prior owner of the Garfield site, Kalama entered into a Settlement Agreement
(the 'Tenneco Settlement Agreement'), dated April 28, 1994, with Tenneco
Polymers. The Tenneco Settlement Agreement requires Tenneco Polymers to conduct
the cleanup of the Garfield facility required by the State of New Jersey and to
pay for 80% of the cleanup costs and makes Kalama responsible for the remaining
20% of such costs. Pursuant to the Kalama Stock Purchase Agreement, BC Sugar and
Chatterton have agreed to remain responsible for Kalama's portion of the cleanup
costs under the Tenneco Settlement Agreement subject to the limitations on their
liability described above. In connection with the settlement of the litigation,
Tenneco Corporation has entered a guarantee dated May 2, 1994, for the benefit
of Kalama, of Tenneco Polymers' obligations under the Tenneco Settlement
Agreement. Pursuant to the Tenneco Settlement Agreement, Tenneco Polymers has
assumed responsibility for the Garfield site investigation and is currently
negotiating the nature and scope of the required remediation with the State of
New Jersey.
Pursuant to the Kalama Stock Purchase Agreement, BC Sugar also remains
responsible for the vast majority of any necessary costs of remediation of
asbestos at the Garfield facility, which is currently estimated to cost
approximately $840,000. However, because the manufacturing operations at the
facility have ceased and because the facility is to be remediated under ISRA,
the Company has not yet determined the extent of asbestos remediation that is
legally required. The Company does not believe that this matter will materially
impact the Company's financial position or results of operations.
Extensive environmental studies of the Kalama facility in Beaufort, South
Carolina have been conducted by Kalama's subsidiary Kalama Specialty Chemicals,
Inc. ('KSCI'), pursuant to an administrative order of consent between KSCI and
the EPA. The facility has been listed on the EPA's National Priorities List
pursuant to CERCLA. As a result of these studies, the EPA has chosen a remedy
which KSCI has agreed to perform pursuant to a consent decree which has been
lodged in U.S. District Court. Manufacturing operations at this facility have
ceased. Under the Kalama Stock Purchase Agreement, subject to the $44 million
aggregate limit described above, BC Sugar and Chatterton have undertaken
responsibility for the costs of investigation, negotiations with the EPA,
installation of the capital expenditure component of the remedy and 50% of the
costs of operation and maintenance of the remedy until five years after its
installation.
As of September 30, 1996, the Company had reserves of approximately $16.6
million for environmental expenditures associated with remediation of the
Kalama, Garfield and Beaufort facilities, which expenditures the Company expects
to be made over the next 30 years.
Kalama has been named as a PRP pursuant to CERCLA at the Pasco Sanitary
Landfill site ('Pasco') in Washington State. At Pasco, Kalama has been
participating in voluntary site investigation and cleanup based on a share of
less than approximately two percent of the total site liability. While there can
be no assurance that Kalama's final share of total liability at Pasco will not
be greater than two percent, there are numerous solvent
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entities with extensive resources which have also been named as PRPs at Pasco.
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 Kalama's total liability at Pasco at this time.
Under the Kalama Stock Purchase Agreement, BC Sugar and Chatterton remain
responsible for the offsite CERCLA sites identified on schedules thereto,
including Pasco. Subject to the $44 million aggregate limit described above, BC
Sugar's and Chatterton's liability for these sites continues until three years
after the installation of capital expenditures component of remedies at all of
the Kalama, Washington, Garfield and Beaufort facilities, but in any event no
later than May 26, 2004.
Freedom Chemical Diamalt. Since 1961, the Company's facility in Vernon,
France has been discharging production wastewater without pretreatment into the
River Seine. According to an analysis completed by the Company in early 1996,
such production wastewater includes concentrations of pollutants which are not
in compliance with legal limits or limits which are acceptable for discharge to
the municipal wastewater treatment plant. The Company plans to resolve this
matter by negotiating permission to discharge the wastewater to the municipal
wastewater treatment plant for a fee, constructing a wastewater treatment plant
for an estimated cost of $250,000 or by shifting production of certain raw
materials to the facility under construction in India. The Company believes,
based upon the opinion of the Company's independent environmental consultant,
that the French environmental authorities will refrain from penalizing the
Company for these discharges while a solution is sought. Although there can be
no assurance that such negotiations will be succesful or that the environmental
authorities will not penalize the Company for such discharges into the river,
the Company believes that, if assessed, any such penalties are not likely to be
material to the Company's financial position or results of operations.
LITIGATION
On March 28, 1994, a grand jury sitting in the Southern District of Ohio
issued a subpoena (the 'Hilton Davis Subpoena') to Hilton Davis, seeking the
production of certain documents to determine whether there has been or may have
been a violation of the Sherman Act (15 U.S.C. Section 1). The Hilton Davis
Subpoena covers the period from January 1, 1988 through April 5, 1994 and seeks
production of documents relating to pigments (defined as raw materials used in
the production of offset and gravure printing ink). The investigation is being
conducted by the Antitrust Division of the Department of Justice. The Company
completed its response to the Hilton Davis Subpoena on July 8, 1994. Three
Hilton Davis employees have been subpoenaed and have testified before the grand
jury and three other employees of the Company were interviewed by the Department
of Justice in lieu of requiring their testimony before the grand jury. It is
premature to assess what action, if any, the grand jury may take. The Company
has been informed that it is not a target of the investigation.
The Company is subject to various legal proceedings and administrative
actions, all of which are of an ordinary or routine nature incidental to the
operations of the Company. Although it is impossible to predict the outcome of
any legal proceeding, in the opinion of the Company's management, such
proceedings and actions are not likely to have a material adverse effect on the
Company's financial position or results of operations. For a description of
certain environmental matters and related legal proceedings involving the
Company, see '--Environmental Matters.'
58
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the directors
and executive officers of Freedom.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------ --- ------------------------------------------------
<S> <C> <C>
Fred P. Rullo(1)................................ 56 Chairman of the Board of Directors, Chief
Executive Officer and President
Robert A. Kirchner.............................. 60 Senior Vice President; President, Kalama
Robert G. Kitchen............................... 43 Senior Vice President; President,
Hilton Davis
Brian F. McNamara............................... 48 Vice President, Secretary and General Counsel
Dennis M. Monahan............................... 49 Chief Financial Officer
Edward J. Rish.................................. 53 Executive Vice President, Freedom Textile
Dale E. Smith................................... 53 Vice President, Human Resources
Helmut E. Wolf.................................. 47 President, Freedom Chemical Diamalt
Alexander R. Castaldi........................... 46 Director
Timothy J. Clark................................ 32 Director
Peter A. Joseph(1).............................. 44 Director
Vincent P. Langone.............................. 54 Director
Paul S. Levy(1)................................. 48 Director
Angus C. Littlejohn, Jr......................... 46 Director
Harold A. Sorgenti(2)........................... 62 Director
</TABLE>
- ------------------
(1) Member of the Compensation Committee.
(2) Mr. Sorgenti resigned from his position as Executive Chairman and as
Chairman of the Board of Directors in July 1996, but remains a Director of
Freedom.
Set forth below is the background of each of Freedom's executive officers
and directors.
Fred P. Rullo has served as Chairman and Chief Executive Officer of Freedom
since July 1996 and as President and a Director of Freedom since April 1992. Mr.
Rullo spent 26 years with Atlantic Richfield Co. ('Atlantic Richfield') and ARCO
Chemical Company ('ARCO Chemical') where he was Vice President of Specialty
Chemicals. In addition, Mr. Rullo served as Executive Vice President of Lyondell
Petrochemical Company ('Lyondell') from 1985 to 1989 and President of ABB
Combustion Engineering Systems and Service Inc. ('ABB') from 1989 to 1991. Mr.
Rullo is also a director of Naxcor, Inc., a privately-held biogenetics company.
Robert A. Kirchner has served as Senior Vice President of Freedom since
1994 and as President of Kalama since 1981 and was a co-founder of Kalama in
1971. Prior to serving as President, Mr. Kirchner had been Plant Manager, Vice
President, Operations and Executive Vice President of Kalama. Prior to 1971, Mr.
Kirchner was with The Dow Chemical Company.
Robert G. Kitchen has served as Senior Vice President of Freedom and
President of Hilton Davis since January 1996. Prior to that he had served as
President of Freedom Textile since June 1992. He spent the previous 17 years
with Lyondell and Atlantic Richfield. His most recent position at Lyondell was
Vice President, Business Management and Marketing for Lyondell's entire
petrochemical product lines. Throughout his career, he held positions in
manufacturing, engineering, planning, product management and marketing.
Brian F. McNamara has served as Vice President, Secretary and General
Counsel of Freedom since October 1994. Prior to joining Freedom, Mr. McNamara
spent the previous 17 years with Combustion Engineering, Inc. (which was
acquired by Asea Brown Boveri, Inc. ('Asea Brown Boveri'), an affiliate of ABB,
in 1989) ('Combustion Engineering'), most recently as Vice President and General
Counsel of ABB's Systems Division.
Dennis M. Monahan has served as Chief Financial Officer of Freedom since
July 1996 and as Corporate Controller of Freedom from March 1995 to July 1996.
Prior to that time he had his own financial services
59
<PAGE>
consulting practice for three years, spent four years as Chief Financial Officer
of The Johnson Companies employee benefits division and spent a total of 18
years with Atlantic Richfield and ARCO Chemical in various financial and
accounting positions.
Edward J. Rish has served as Executive Vice President and General Manager
of Freedom Textile since July 1996. Mr. Rish joined the Company in February 1993
as Vice President Sales and Marketing. Prior to joining the Company he had over
25 years of experience in textile chemicals with Diamond Shamrock Inc., Jordan
Chemicals and PPG Industries Inc.
Dale E. Smith has served as Vice President Human Resources and
Administration of Freedom since October 1993. Prior to joining Freedom, Mr.
Smith was with Asea Brown Boveri for 11 years. His most recent position with
Combustion Engineering was Vice President, Human Resources. In his 27 years of
management experience he has held positions in administration, operations and
human resources.
Helmut E. Wolf has served as President of Freedom Chemical Diamalt since
January 1996. Mr. Wolf acted as General Manager, Research Department of Diamalt
from 1989 to 1995, and continued in such capacity after the Diamalt Acquisition.
Prior to 1989, he served in other managerial and technical capacities at
Diamalt.
Alexander R. Castaldi has served as a Director of Freedom since December
1996. Mr. Castaldi has also served as Executive Vice President and Chief
Financial Officer of Remington Products since November 1996. From July 1995 to
August 1996, he served as Vice President and Chief Financial Officer of Uniroyal
Chemicals Co. Prior to that time, he spent six years with Kendall International,
Inc. as Senior Vice President and Chief Financial Officer.
Timothy J. Clark has served as a Director of Freedom since June 1996. Mr.
Clark is a principal of JLL, which he joined in 1993. Prior to that time, Mr.
Clark was corporate planning manager of Edgcomb Metals Com-pany and a financial
analyst at the Blackstone Group. Mr. Clark is also a director of Hayes Wheels
International, Inc. ('Hayes Wheels').
Peter A. Joseph has served as a Director of Freedom since April 1992. Mr.
Joseph has been a partner of JLL from its inception in 1988. Mr. Joseph has
served as President of Lancer Industries, Inc. ('Lancer'), an industrial holding
company and the limited partner of JLL Associates since April 1992 and as
Secretary and director of Lancer since July 1989. Mr. Joseph is also a director
of OrNda HealthCorp ('OrNda'), Foodbrands America, Inc. ('Foodbrands'), Hayes
Wheels and Fairfield Manufacturing Company, Inc. ('Fairfield'). Mr. Joseph is
also Vice President and Secretary of Fairfield.
Vincent P. Langone has served as a Director of Freedom since December 1996.
Mr. Langone has served as the President and Chief Executive Officer of
Interbuild International Inc. since 1994. From 1988 to 1995, he served as Chief
Executive Officer of Formica Corporation. From 1989 to 1995, he also served as
Chairman of Formica Corporation. Mr. Langone is also a director of Summit Bank
and United Retail Group, Inc.
Paul S. Levy has served as a Director of Freedom since April 1992. Mr. Levy
has been a partner of JLL from its inception in 1988. Mr. Levy has served as
Chairman of the Board of Directors and Chief Executive Officer of Lancer since
July 1989. Mr. Levy is also a director of OrNda, Foodbrands, Hayes Wheels and
Fairfield. Mr. Levy is also Vice President and Assistant Secretary of Fairfield.
Angus C. Littlejohn, Jr. has served as a Director of Freedom since April
1992. Mr. Littlejohn is Chief Executive Officer of Littlejohn & Co., a company
he founded in August 1996. Mr. Littlejohn was a partner of JLL from its
inception in 1988 until his resignation in August 1996. Mr. Littlejohn served as
Vice Chairman of Lancer from April 1992 until July 1996 and as Chief Financial
Officer and a director of Lancer from July 1989 until July 1996. From July 1989
until April 1992 Mr. Littlejohn served as President of Lancer. Mr. Littlejohn is
also a director of OrNda and Foodbrands.
Harold A. Sorgenti has served as a Director of Freedom since April 1992 and
had served as Executive Chairman and Chairman of the Board of Freedom from April
1992 until July 1996. Mr. Sorgenti spent 32 years with Atlantic Richfield and
ARCO Chemical. From 1979 to 1991 he was President of ARCO Chemical and was Chief
Executive Officer of ARCO Chemical from 1987 to 1991. Mr. Sorgenti serves on the
boards of Provident Mutual Life Insurance Company and Crown Cork and Seal, Inc.
Mr. Sorgenti is a former chairman of the Chemical Manufacturers Association.
None of the officers or directors has any family relationship with any
other officer or director. The Board of Directors currently consists of eight
members, three of whom (Messrs. Clark, Joseph and Levy) are designees of the JLL
Funds.
60
<PAGE>
Freedom, each of the JLL Funds, Messrs. Sorgenti and Rullo, RULCO, Inc., a
corporation wholly owned by Mr. Rullo ('Rulco'), Freedom Investment Corp., a
corporation wholly owned by Mr. Sorgenti ('FIC'), and certain other stockholders
of Freedom have entered into the Stockholders' Agreement, pursuant to which,
among other things, the parties agreed that Messrs. Sorgenti and Rullo, Rulco,
FIC and the other stockholders will vote their shares in favor of JLL's nominees
to the Board of Directors and JLL will vote its shares in favor of the
nomination to the Board of Directors of Messrs. Sorgenti and Rullo.
ELECTION OF DIRECTORS AND COMMITTEES
Directors are elected at the annual meeting of stockholders and hold office
until their successors have been duly elected and qualified or until their
death, resignation or removal.
The Board of Directors has established a compensation committee (the
'Compensation Committee'), which reviews and approves the compensation of the
officers and directors of the Company and makes recommendations to the Board of
Directors with respect to standards for setting compensation levels. The
Compensation Committee also administers Freedom's stock option and other
employee benefit plans. See '--Management Equity Plan' and '--Compensation
Interlocks and Insider Participation.'
EXECUTIVE COMPENSATION
The following table sets forth in summary form all compensation for all
services rendered in all capacities to the Company for the years ended December
31, 1996, 1995 and 1994 of the Chief Executive Officer of Freedom and the other
four most highly compensated executive officers of the Company (collectively
with the Chief Executive Officer, the 'Named Executive Officers'):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
--------------------- UNDERLYING ALL OTHER
SALARY BONUS OPTIONS COMPENSATION(6)
NAME & PRINCIPAL POSITION YEAR $ $ (#) $
- ----------------------------------------------- ---- -------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Fred P. Rullo (1) ............................. 1996 $400,000 $150,000 8,683(3) $ 4,788
Chairman, Chief Executive Officer 1995 400,000 -- -- 3,038
and President(2) 1994 353,462 400,000 752(3) 3,814
Harold A. Sorgenti (1) ........................ 1996 $200,000 $ -- -- $ 244,163(7)
Former Executive Chairman and 1995 400,000 -- -- 4,618
Chairman of the Board(2) 1994 260,385 400,000 1,129(3) 1,404
Robert G. Kitchen ............................. 1996 $210,000 $ 90,000 100(4) $ 4,759
President, Freedom Textile 1995 193,071 -- 225(4) 5,134
1994 175,769 120,000 175(4) 3,555
Robert A. Kirchner ............................ 1996 $227,796 $ 22,780 -- $ 8,312
President, Kalama 1995 227,796 77,380 -- 6,903
1994 227,796(5) 84,704 400(4) 6,903
Helmut E. Wolf ................................ 1996 $174,050 $ 50,000 190(4) $ 11,229
President, Freedom Chemical Diamalt 1995 172,200(8) -- 110(4) 10,464(8)
1994 -- -- -- --
Brian F. McNamara ............................. 1996 $148,068 $ 53,511 100(4) $ 3,771
Vice President, Secretary 1995 144,982 -- 200(4) 1,855
and General Counsel 1994 34,959 40,000 150(4) 29
</TABLE>
- ------------------
(1) The amounts listed for Messrs. Sorgenti and Rullo under the salary column
for 1996 and 1995 were paid directly to Messrs. Sorgenti and Rullo pursuant
to their respective employment agreements. During the fiscal year ended
December 31, 1994, Freedom paid $350,000 to The Freedom Group Partnership, a
Pennsylvania limited partnership ('The Freedom Group'), for its management
of the Company pursuant to an agreement, dated May 26, 1994, between The
Freedom Group and the Company (the '1994 Management Agreement'),
(Footnotes continued on next page)
61
<PAGE>
(Footnotes continued from previous page)
which amount was paid to Messrs. Sorgenti and Rullo and is included as
compensation in the table above under the salary column. FIC and Rulco are
the limited and general partners of The Freedom Group.
(2) Mr. Sorgenti was Executive Chairman and Chairman of the Board of Directors
until July 2, 1996 (the 'Sorgenti Resignation Date'), at which time he
resigned from these positions. Mr. Rullo assumed Mr. Sorgenti's position as
Executive Chairman and Chairman of the Board of Directors in July 1996.
(3) In connection with the Freedom Textile Acquisition, on May 4, 1992, pursuant
to an option agreement between The Freedom Group and Freedom (the 'Textile
Option Agreement'), Freedom granted The Freedom Group an option to purchase
1,837 shares of Common Stock at an exercise price of $100.00 per share. In
connection with the Hilton Davis Acquisition, on September 9, 1993, pursuant
to an option agreement between The Freedom Group and Freedom (the 'Hilton
Davis Option Agreement'), Freedom granted The Freedom Group an option to
purchase 7,500 shares of Common Stock at an exercise price of $100.00 per
share. In connection with the Kalama Acquisition, on May 26, 1994, pursuant
to an option agreement between The Freedom Group and Freedom (the 'Kalama
Option Agreement'), Freedom granted The Freedom Group an option to purchase
1,981 shares of Common Stock at an exercise price of $105.40 per share.
Effective December 7, 1994, Freedom and The Freedom Group amended and
restated each of these option agreements (collectively, the 'Amended and
Restated Option Agreements'). Pursuant to the Amended and Restated Option
Agreements, Freedom granted to The Freedom Group options to purchase an
aggregate of 11,318 shares of Common Stock, of which options to purchase
9,337 shares are exercisable at an exercise price of $100.00 per share and
options to purchase 1,981 shares are exercisable at an exercise price of
$105.40 per share. Pursuant to the Amended and Restated Option Agreements,
of the options to purchase 11,318 shares, options to purchase 6,790 shares
were deemed to be attributable to Mr. Sorgenti and options to purchase 4,528
shares were deemed to be attributable to Mr. Rullo. The exercise price of
options granted to Messrs. Sorgenti and Rullo in 1992, 1993 and 1994, in
each case, corresponds to the subscription price paid by investors for
Common Stock issued by Freedom to finance the acquisition in connection with
which such options were granted. Pursuant to an agreement with Freedom, in
January 1994 The Freedom Group exercised options to purchase 5,322 of the
shares attributable to Mr. Sorgenti and transferred such shares to FIC and
FIC transferred such shares to affiliates of Mr. Sorgenti. Pursuant to an
assignment agreement dated April 14, 1995 (the 'McPhail Assignment'), the
Freedom Group assigned to Donald W. McPhail, one of its limited partners and
a former Vice President of Freedom, a 5% interest in certain partnership
property, including options to purchase 567 shares of Common Stock (of the
options to purchase 11,318 shares originally granted). Also on April 14,
1995, pursuant to separate assignment agreements (together with the McPhail
Assignment, the 'Assignments'), the Freedom Group assigned to FIC and Rulco
a 57% and a 38% interest, respectively, in certain partnership property,
including options to purchase, respectively, 1,129 shares of Common Stock
and 4,300 shares of Common Stock (in each case, of the options to purchase
11,318 shares originally granted). On July 2, 1996, Mr. Sorgenti resigned
from his position as Executive Chairman of Freedom and, pursuant to the
Amended and Restated Option Agreements (after giving effect to the
Assignments), 100% of the options held by FIC are currently exercisable.
Pursuant to the Amended and Restated Option Agreements (after giving effect
to the Assignments), as of May 4, 1996, 80% (or 3,440) of the options held
by Rulco are currently exercisable and the remaining 20% will vest on May 4,
1997. In the fourth quarter of 1996, Freedom granted Mr. Rullo an option to
purchase shares of Common Stock at an exercise price of $125 per share,
which purchase may be financed with a loan made by Freedom. The option
vested fully on the date of grant and is exercisable for a period of five
years. The exercise price of the option is based on the subscription price
paid by investors in connection with the Equity Investments. See 'Certain
Transactions.'
(4) Pursuant to the Management Equity Plan, in 1996 and 1995 Freedom granted
Messrs. Kitchen, Wolf and McNamara options to purchase shares of Series B
common stock of Freedom (the 'Series B Common Stock') at an exercise price
of $255 per share and in 1994 Freedom granted Messrs. Kitchen, Kirchner and
McNamara options to purchase shares of Series B Common Stock at an exercise
price of $100 per share. The options become exercisable on December 31,
1998, subject to the Company attaining certain performance goals, and
otherwise become fully exercisable on December 31, 2004, except in the case
of the options granted to Mr. Kitchen in 1994, which options become fully
exercisable on December 31, 2003. The exercise price of the options granted
to Messrs. Kitchen, Wolf and McNamara in 1995 was based on the assumed value
of the underlying Series B Common Stock immediately prior to the
consummation of the Company's proposed initial public offering (which was
subsequently abandoned) and the exercise price of the options
(Footnotes continued on next page)
62
<PAGE>
(Footnotes continued from previous page)
granted to Messrs. Kitchen, Kirchner and McNamara in 1994 was based on the
most recent subscription price paid by investors for Common Stock prior to
the grant of such options.
(5) The amount listed represents total salary for 1994; however, Freedom
acquired Kalama in May 1994.
(6) The amounts listed represent the Company's contributions to the Company's
401(k) plan and group life insurance for such individuals, and in the case
of Mr. Wolf, the Company's statutory contribution to social insurance in
Germany.
(7) Includes amounts associated with severance.
(8) Amounts paid in Deutschemarks (DM) and converted to U.S. dollars based on
the average exchange rate of 1.4883 DM to one U.S. dollar. (The average
exchange rate was calculated as the sum of the average monthly purchase and
selling rates of the U.S. dollar determined at the end of each month during
1995 divided by 12).
Options Grants in Last Fiscal Year. The following table sets forth
information with respect to the total number of options to purchase Common Stock
and Series B Common Stock granted to the Named Executive Officers in 1996.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE OF
INDIVIDUAL OPTION GRANTS ASSUMED ANNUAL
------------------------------------------------------ RATES OF STOCK
NUMBER OF PERCENT PRICE
SECURITIES OF TOTAL APPRECIATION
UNDERLYING OPTIONS FOR OPTION
OPTIONS GRANTED TO EXERCISE OR TERM(1)($)
GRANTED EMPLOYEES BASE PRICE EXPIRATION ---------------
NAME (#) IN 1996 ($/SH) DATE 5%
- ---------------------------------------- ---------- ----------- ----------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Fred P. Rullo........................... 8,683(2) 90.6% 125 12/31/01 682,571
Robert G. Kitchen....................... 100(3) 1.0% 255 1/31/05 0
Helmut E. Wolf.......................... 190(3) 2.0% 255 1/31/05 0
Brian F. McNamara....................... 100(3) 1.0% 255 1/31/05 0
<CAPTION>
NAME 10%
- ---------------------------------------- ---------------
<S> <C>
Fred P. Rullo........................... 1,729,826
Robert G. Kitchen....................... 6,922
Helmut E. Wolf.......................... 13,151
Brian F. McNamara....................... 6,922
</TABLE>
- ------------------
(1) Assumes a fair market value per share of Common Stock of $125.00 as of the
date of grant.
(2) Represents options to purchase shares of Common Stock which are currently
exercisable.
(3) Represents options to purchase shares of Series B Common Stock granted
pursuant to the Management Equity Plan. The options become exercisable on
December 31, 1998, subject to the Company attaining certain performance
goals, and otherwise become fully exercisable on December 31, 2004, provided
that the Named Executive Officer continues to be employed by the Company on
such date.
Aggregated Option Exercises and Holdings and December 31, 1996 Option
Values. The following table sets forth information with respect to the
aggregate number of unexercised options to purchase Common Stock and Series B
Common Stock granted in all years to the Named Executive Officers and held by
them as of December 31, 1996, and the value of unexercised in-the-money options
(i.e., options that had a positive spread between the exercise price and the
fair market value of Common Stock or Series B Common Stock, as the case may be)
as of December 31, 1996:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
DECEMBER 31, 1996 AT DECEMBER 31, 1996
(#) ($)
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE(5)
- ----------------------------------------- ------------------------------- --------------------
<S> <C> <C>
Fred P. Rullo............................ 12,123/860(1)(2) 90,560/22,640
Harold A. Sorgenti....................... 1,129/--(1)(3) 22,128/--
Robert G. Kitchen........................ 0/500(4) 0/0
Robert A. Kirchner....................... 0/400(4) 0/0
Helmut E. Wolf........................... 0/300(4) 0/0
Brian F. McNamara........................ 0/450(4) 0/0
</TABLE>
(Footnotes on next page)
63
<PAGE>
(Footnotes from previous page)
- ------------------
(1) Other than the option to purchase 8,683 shares of Common Stock granted to
Mr. Rullo in the fourth quarter of 1996, the options to purchase Common
Stock listed in the table were granted to The Freedom Group pursuant to the
Amended and Restated Option Agreements and subsequently transferred to its
general partners, FIC and Rulco, pursuant to the Assignments. Messrs.
Sorgenti and Rullo are the respective sole shareholders of FIC and Rulco.
(2) Mr. Rullo's unexercisable options will become exercisable on May 4, 1997.
(3) On July 2, 1996, Mr. Sorgenti resigned from his position as Executive
Chairman of Freedom. Pursuant to the Amended and Restated Option Agreements,
100% of Mr. Sorgenti's options are exercisable for a period of one year
following his resignation.
(4) Represents options to purchase shares of Series B Common Stock granted
pursuant to the Management Equity Plan. The options become exercisable on
December 31, 1998, subject to the Company attaining certain performance
goals, and otherwise become fully exercisable on December 31, 2004 (except
in the case of the 175 options granted to Mr. Kitchen in 1994, which become
fully exercisable on December 31, 2003), provided that the Named Executive
Officer continues to be employed by the Company on such date.
(5) Assumes a fair market value per share of Common Stock of $125.00 at December
31, 1996.
PENSION PLAN TABLE
The following table shows the combined maximum annual pension benefits
payable under the Freedom Textile Chemicals Co. Retirement Plan (the 'Pension
Plan') and the Freedom Group Supplemental Executive Retirement Plan (the 'SERP')
in the specified compensation and years-of-service classifications in effect for
employees of Freedom and Freedom Textile. The benefits are computed as single
life annuity amounts.
<TABLE>
<CAPTION>
YEARS OF SERVICE
AVERAGE ANNUAL --------------------------------------------------------------
COMPENSATION 5 10 15 20 25 30
- ------------------------------------------------ ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
$ 50,000........................................ $ 2,783 $ 5,567 $ 8,350 $11,133 $13,917 $16,700
75,000........................................ 4,721 9,442 14,162 18,883 23,604 28,325
100,000........................................ 6,658 13,317 19,975 26,633 33,292 39,950
125,000........................................ 8,596 17,192 25,787 34,383 42,979 51,575
150,000........................................ 10,533 21,067 31,600 42,133 52,667 63,200
175,000........................................ 12,471 24,942 37,412 49,883 63,354 74,825
200,000........................................ 14,408 28,817 43,225 57,633 72,042 86,450
225,000........................................ 16,346 32,692 49,037 65,383 81,729 98,075
250,000........................................ 18,283 36,567 54,850 73,133 91,417 109,700
275,000........................................ 20,221 40,442 60,662 80,883 101,104 121,325
300,000........................................ 22,158 44,317 66,475 88,633 110,792 132,950
325,000........................................ 24,096 48,192 72,287 96,383 120,479 144,575
350,000........................................ 26,033 52,067 78,100 104,133 130,167 156,200
375,000........................................ 27,971 55,942 83,912 111,883 139,854 167,825
400,000........................................ 29,908 59,817 89,725 119,633 149,542 179,450
425,000........................................ 31,846 63,692 95,537 127,383 159,229 191,075
450,000........................................ 33,783 67,567 101,350 135,133 168,917 202,700
475,000........................................ 35,721 71,442 107,162 142,883 178,604 214,325
500,000........................................ 37,658 75,317 112,975 150,633 188,292 225,950
</TABLE>
The Pension Plan is a non-contributory plan which provides a lifetime
income upon an employee's retirement at or after having attained age 65 and
having completed at least 5 years of service, or upon an earlier date if various
stated conditions are satisfied. Benefits under the Pension Plan are determined
by a formula related to an employee's age, service and final average
compensation at termination. The covered compensation (35 year average of the
Social Security wage base) used to develop the table above is $43,668 (the
amount for a person born in 1940). The SERP is an unfunded obligation which
provides benefits to participants (including the Named Executive Officers) which
would otherwise be restricted under the Pension Plan by virtue of the
limitations imposed on qualified plans by Sections 415 and 401(a)(4) of the
Internal Revenue Code (the 'Code').
An employee's final average compensation is determined based upon the
highest 60 consecutive months of service during the last 120 consecutive months.
Final average compensation includes base salary and bonuses.
64
<PAGE>
At December 31, 1996, the credited years of service and the average annual
earnings under the Pension Plan and the SERP of the Named Executive Officers
were as follows:
<TABLE>
<CAPTION>
AVERAGE ANNUAL CREDITED YEARS
COMPENSATION OF SERVICE
-------------- --------------
<S> <C> <C>
Fred P. Rullo............................................... $487,506 4.8
Harold A. Sorgenti.......................................... 392,870 5.0
Robert G. Kitchen........................................... 243,352 4.6
*Robert Kirchner............................................. -- --
*Helmut E. Wolf.............................................. -- --
Brian F. McNamara........................................... 187,342 2.3
</TABLE>
- ------------------
* Not a participant in the Pension Plan
MANAGEMENT EQUITY PLAN
On June 30, 1994, the Board adopted and the stockholders approved the 1994
Management Equity Plan (the 'Management Equity Plan') which provides for grants
of options to purchase shares of Common Stock and Series B Common Stock to
executive officers, other key employees and consultants of the Company. The
Management Equity Plan also provides for the grant of stock appreciation rights
('SARs') in tandem with an option award. The purpose of the Management Equity
Plan is to afford an incentive to such participants to increase their efforts on
behalf of the Company and to promote the success of the Company's business.
Each option grant is evidenced by an agreement between the grantee and
Freedom (an 'Option Agreement'). An Option Agreement provides the number of
shares of Common Stock or Series B Common Stock, as appropriate, covered by the
award, the option price and the exercise period (which will be ten years and one
month unless otherwise provided in the option agreement). In addition, the
Compensation Committee may establish appropriate performance goals which, if
attained, will accelerate the exercisability and vesting of the option award.
The performance goals are based on the Company attaining a pre-established level
of annual and cumulative earnings before interest, taxes, depreciation and
amortization. If such performance goals are not attained, the option becomes
exercisable based on its original exercise schedule (rather than on an
accelerated exercise schedule).
Freedom has authorized and reserved 4,185 shares of Common Stock and 4,185
shares of Series B Common Stock for awards under the Management Equity Plan.
Such shares are subject to adjustment in the event of certain transactions which
affect the capitalization of the Company. In the event of such a transaction,
the number of shares of Common Stock available for awards, the number of such
shares covered by outstanding awards and the option price or SAR price may be
equitably adjusted by the Compensation Committee, in order to reflect such event
and preserve the value of outstanding awards.
The Management Equity Plan provides that in the event of a Change of
Control of Freedom (as such term is defined in the Management Equity Plan)
following an initial public offering all awards which are outstanding at such
time shall become immediately exercisable and otherwise nonforfeitable. The
Board, at any time, may amend or terminate the plan, provided, that an amendment
which requires stockholder approval in order for the Management Equity Plan to
continue to comply with Rule 16b-3 shall not be effective unless approved by the
requisite vote of the stockholders of Freedom. In addition, no amendment or
termination may adversely affect any award previously granted without the
written consent of the participant.
As of January 1, 1997, 3,525 options to purchase shares of Series B Common
Stock were outstanding under the Management Equity Plan. Such options vest over
five years provided that the Company achieves certain annual and cumulative
performance goals.
No awards may be granted under the Management Equity Plan after June 30,
2004.
EMPLOYMENT CONTRACTS WITH NAMED EXECUTIVE OFFICERS
Freedom is party to an employment agreement with Mr. Kitchen (the 'Kitchen
Employment Agreement') providing for his employment with Freedom until June 30,
1997 at an annual base salary of not less than $210,000, plus performance-based
bonuses. If Mr. Kitchen's employment is terminated by Freedom other than for
Cause (as defined in the Kitchen Employment Agreement), the Kitchen Employment
Agreement provides that he will receive his base salary in effect at the time of
termination and benefits for a period of 18 months following such termination,
plus a prorated portion of the incentive bonus for such year.
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<PAGE>
Freedom Chemical Diamalt is a party to an employment agreement with Mr.
Wolf (the 'Wolf Employment Agreement') providing for his employment with Freedom
Chemical Diamalt at an annual salarly of DM273,000 (subject to adjustment
annually), plus a performance-based bonus. The Wolf Employment Agreement
continues until Mr. Wolf reaches 65 years of age, subject to prior termination
by either party as set forth therein.
See 'Certain Transactions' for a description of the 1994 Employment
Agreements with Messrs. Rullo and Sorgenti.
COMPENSATION OF DIRECTORS
Independent outside directors receive compensation of $20,000 per annum for
serving on the Board. Directors who are not full-time employees of the Company
are reimbursed for traveling costs and other out-of-pocket expenses incurred in
attending meetings. Directors who serve on the Compensation Committee receive no
additional compensation.
COMPENSATION INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors has a Compensation Committee consisting of Messrs.
Rullo, Joseph and Levy. Except for Mr. Rullo, Freedom's Chairman of the Board,
Chief Executive Officer and President, no officer or employee of the Company has
participated in deliberations of the Board of Directors concerning executive
officer compensation. Mr. Rullo has entered into certain agreements with Freedom
which are discussed under 'Certain Transactions.'
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PRINCIPAL STOCKHOLDERS
The following table sets forth, as of February 10, 1997, after giving
effect to the Equity Investments, certain information regarding the beneficial
ownership of Common Stock by (i) each of Freedom's directors, (ii) each person
believed by Freedom to own beneficially more than 5% of its outstanding Common
Stock, (iii) each of the Named Executive Officers and (iv) all executive
officers and directors of Freedom as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY % OF COMMON
NAMED EXECUTIVE OFFICERS, DIRECTORS AND 5% STOCKHOLDERS OWNED(1) STOCK(2)(3)
- -------------------------------------------------------------------- ---------------- -----------
<S> <C> <C>
Joseph Littlejohn and Levy Fund, L.P................................ 91,825(4)(5) 59.44
Joseph Littlejohn and Levy Fund II, L.P............................. 37,136(4)(5) 24.04
Harold A. Sorgenti.................................................. 21,842(6) 14.04
Fred P. Rullo....................................................... 13,217(7) 8.10
Peter A. Joseph..................................................... 128,961(5) 83.50
Paul S. Levy........................................................ 128,961(5) 83.50
Alexander R. Castaldi............................................... -- --
Timothy J. Clark.................................................... -- --
Angus C. Littlejohn, Jr............................................. -- --
Vincent P. Langone.................................................. -- --
Robert A. Kirchner.................................................. 745(8) *
Robert G. Kitchen................................................... 929(9) *
Brian F. McNamara................................................... --(10) *
Helmut E. Wolf...................................................... --(11) --
All directors and executive officers as a group (14 persons)........ 165,972(12) 98.95
</TABLE>
- ------------------
* Less than 1%.
(1) Unless otherwise indicated, each beneficial owner has both sole voting and
sole investment power with respect to the shares beneficially owned by him.
The number of shares shown as beneficially owned includes all options held
by such person, entity or group which are exercisable within 60 days.
(2) The percentages of beneficial ownership as to each person, entity or group
assume that all options held by such person, entity or group which are
exercisable within 60 days, but not those held by others shown in the
table, have been exercised.
(3) Percentages are calculated based on 154,481 shares of Common Stock
outstanding as of February 10, 1997.
(4) All of such shares are owned by the JLL Fund I and the JLL Fund II, as
indicated. Messrs. Joseph and Levy are officers and directors of Lancer, a
limited partner of JLL Associates and the owner of 100% of the capital
stock of JLL Inc. which, pursuant to contract, manages the JLL Fund I.
Messrs. Joseph and Levy are each general partners of JLL Associates and JLL
Associates II, which is the general partner of the JLL Fund I and JLL Fund
II, respectively. Messrs. Joseph and Levy disclaim beneficial ownership of
all such shares. By virtue of the Stockholders' Agreement, Messrs. Sorgenti
and Rullo, FIC and Rulco may be deemed to have a beneficial ownership
interest in such shares. Messrs. Sorgenti and Rullo, FIC and Rulco have
disclaimed beneficial ownership of such shares.
(5) Messrs. Joseph and Levy may be deemed to beneficially own the shares held
by the JLL Funds. See Note 4 above.
(6) Includes 6,469 shares held by Mr. Sorgenti directly, 549 shares held by The
Harold A. Sorgenti 1994 Five Year Grantor Retained Annuity Trust, 5,867
shares held by FIC, 7,828 shares held by the Sorgenti Family Partnership,
L.P., a Delaware limited partnership ('SFP'), and 1,129 shares subject to
currently exercisable options held by FIC. Mr. Sorgenti disclaims
beneficial ownership of the 7,828 shares held by SFP. By virtue of the
Stockholders' Agreement, JLL Fund I and JLL Fund II may be deemed to have a
beneficial ownership interest in such shares. JLL Fund I and JLL Fund II
have disclaimed beneficial ownership of such shares.
(7) Includes 367 shares held by Mr. Rullo directly, 727 shares held in the name
of Rulco, 8,683 shares of Common Stock subject to currently exercisable
options held by Mr. Rullo; and 3,440 shares subject to currently
exercisable options held by Rulco. Does not include options to purchase 860
shares of Common Stock subject to options held by Rulco that currently are
not exercisable. By virtue of the Stockholders' Agreement, JLL Fund I and
JLL Fund II may be deemed to have a beneficial ownership interest in such
shares. JLL Fund I and JLL Fund II have disclaimed beneficial ownership of
such shares. See 'Certain Transactions.'
(8) Does not include 400 shares of Series B Common Stock subject to options
held by Mr. Kirchner that are not currently exercisable.
(9) Does not include 500 shares of Series B Common Stock subject to options
held by Mr. Kitchen that are not currently exercisable.
(Footnotes continued on next page)
67
<PAGE>
(Footnotes continued from previous page)
(10) Does not include 450 shares of Series B Common Stock subject to options
held by Mr. McNamara that are not currently exercisable.
(11) Does not include 300 shares of Series B Common Stock subject to options
held by Dr. Wolf that are not currently exercisable.
(12) Does not include 2,250 shares of Series B Common Stock subject to options
held by such executive officers and directors that currently are not
exercisable.
CERTAIN TRANSACTIONS
Set forth below is a summary of certain agreements and arrangements entered
into by the Company and related parties.
On September 9, 1993, Freedom loaned Rulco $200,000 to enable it to
purchase 300 shares of Common Stock and 170 shares of the Series B Preferred
Stock (collectively, the 'Pledged Stock'). Fred P. Rullo, Chairman of the Board
of Directors, Chief Executive Officer and President of Freedom, is the sole
shareholder of Rulco. All unpaid principal and interest is due and payable in
full on December 31, 2000. The loan bears interest at a rate per annum equal to
the highest rate payable by Freedom under the Freedom Credit Agreement.
Repayment of the loan is guaranteed by Mr. Rullo and is collateralized by the
Pledged Stock.
Effective December 7, 1994, JLL and The Freedom Group (Messrs. Sorgenti,
Rullo and McPhail) entered into an agreement, (the '1994 Conditional Bonus
Agreement') which terminated an agreement in principle the parties had entered
into in 1992 and amended and restated the conditional bonus provided for in such
agreement in principle. The 1994 Conditional Bonus Agreement provides that JLL
will pay a bonus (a 'Conditional Bonus') to The Freedom Group out of the cash
proceeds realized by JLL in connection with the disposition of all or a portion
of its investments in Freedom, which cash proceeds are in excess of certain
thresholds. On April 14, 1995, pursuant to the Assignments, The Freedom Group
assigned to FIC, Rulco and Donald W. McPhail, respectively, 57%, 38% and 5%
interests in its rights under the 1994 Conditional Bonus Agreement, including
its interest in the Conditional Bonus. Under GAAP as currently in effect, if JLL
were to pay a Conditional Bonus to such assignees, the payment of such bonus may
be treated as a contribution to the capital of Freedom by JLL and Freedom may
have to recognize compensation expense with respect to such bonus payment. If
Freedom were required under GAAP to record a payment by JLL in this manner,
Freedom would have to record a non-cash charge to Freedom's earnings in the
quarter such bonus is earned.
Effective December 7, 1994, Freedom entered into employment agreements with
each of Mr. Rullo (the 'Rullo Employment Agreement') and Mr. Sorgenti (the
'Sorgenti Employment Agreement' and, together with the Rullo Employment
Agreement, the '1994 Employment Agreements'). The terms of the Rullo Employment
Agreement and the Sorgenti Employment Agreement are substantially similar.
Pursuant to the Rullo Employment Agreement, Mr. Rullo served as President of
Freedom, and pursuant to the Sorgenti Employment Agreement, prior to his
resignation, Mr. Sorgenti served as the Executive Chairman of Freedom. The Rullo
Employment Agreement will be automatically extended for additional one year
terms unless either Freedom or Mr. Rullo elects not to extend the term. Under
the 1994 Employment Agreements, each of Mr. Sorgenti and Rullo were entitled to
an annual base salary of not less than $400,000, and subject to Freedom's
meeting certain performance criteria established by the Board of Directors or
the Compensation Committee, an annual bonus of up to 150% of the base salary.
On July 2, 1996, Mr. Sorgenti resigned from his position as Executive
Chairman of Freedom. Pursuant to the Sorgenti Employment Agreement, as a result
of Mr. Sorgenti's resignation, Freedom will pay to Mr. Sorgenti a severance
benefit in an aggregate amount of $962,558 in substantially equal monthly
installments over a period of two years. In addition, pursuant to the Amended
and Restated Option Agreements, 100% of the Sorgenti Shares (as such term is
defined in the Amended and Restated Option Agreements) became vested and
immediately exercisable; provided that The Freedom Group will have until July 2,
1997 to exercise such options and thereafter such options will expire. Also
pursuant to the Sorgenti Employment Agreement, Freedom will maintain health
benefits for Mr. Sorgenti until 18 months after the Sorgenti Resignation Date.
Upon termination of Mr. Rullo's employment with Freedom, (i) by Freedom
other than for Cause (as defined in the Rullo Employment Agreement), or (ii) by
Mr. Rullo for Good Reason (as defined in the Rullo Employment Agreement),
Freedom will pay to Mr. Rullo, in substantially equal monthly installments over
a period of two years an amount equal to the product of two multiplied by the
amount of the average of the annual compensation actually paid to Mr. Rullo with
respect to the three years immediately preceding the year in which such
termination of employment occurs. In addition, Freedom will continue to maintain
health benefits for Mr. Rullo, until the later of the end of the initial term of
the Rullo Employment Agreement and 18 months after the date of such termination.
The Rullo Employment Agreement also contains certain confidentiality,
noncompetition and non-disclosure provisions.
JLL does not receive any fees from Freedom. Freedom reimburses JLL for its
out-of-pocket expenses.
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<PAGE>
The JLL Funds and Mr. Kirchner made Cash Equity Investments in the Company
in an aggregate of $10 million (approximately $9.94 million and $60,000,
respectively) concurrently with the consummation of the offering of Old Notes.
Following consummation of the offering of Old Notes, Messrs. Sorgenti and
Kitchen as well as certain other stockholders of Freedom invested an aggregate
of approximately $1.9 million in the Company in connection with the Additional
Equity Investments, almost all of which were financed with loans made by
Freedom. Each loan bears interest at a rate of 10 5/8% per annum, matures on
December 31, 2001 and is secured by a pledge of the Common Stock purchased with
the proceeds of such loan. In the fourth quarter of 1996, Mr. Rullo was granted
an option to purchase 8,683 shares of Common Stock at an exercise price of $125
per share, which purchase may be financed with a loan made by Freedom. The
option vested fully on the date of grant and is exercisable for a period of five
years.
DESCRIPTION OF AMENDED AND RESTATED CREDIT AGREEMENT
The Amended and Restated Credit Agreement provides for a revolving loan
facility of up to $85 million, which includes a $25 million letter of credit
sub-facility and a $5 million swing loan sub-facility. Up to $50 million of the
total facility is available for borrowings in German Deutschmarks, British
pounds sterling or French francs. Amounts outstanding under the Amended and
Restated Credit Agreement bear interest at Citicorp's published prime rate plus
1.5% per annum or, at Freedom's option, LIBOR plus 2.5% per annum, with each
such margin subject to adjustment based on the Company's compliance with various
debt ratios as specified in the Amended and Restated Credit Agreement (which
margins range from 0.5% to 1.5% for the prime-based rate, and 1.5% to 2.5% for
the LIBOR-based rate). Freedom is obligated to pay a fee equal to 0.5% of the
unused credit facilities and to pay standard letter of credit fees to issuing
banks. Borrowings under the Amended and Restated Credit Agreement are available
until, and will be repayable no later than, October 17, 2001.
The indebtedness outstanding under the Amended and Restated Credit
Agreement is guaranteed by all of Freedom's domestic subsidiaries (and by (i)
Freedom in respect of indebtedness incurred by Freedom Chemical Diamalt and (ii)
Freedom Chemical Diamalt in respect of indebtedness incurred by Freedom) and
secured by a first priority lien on substantially all of the properties and
assets, including present and future inventory, cash deposits, equipment,
accounts receivable and real property, of Freedom and its domestic subsidiaries
and certain of the properties and assets of Freedom Chemical Diamalt, in each
case now owned or acquired later, including a pledge of all of the shares of
Freedom's respective existing and future domestic subsidiaries and up to 65% of
the shares of Freedom's existing and future foreign subsidiaries which are owned
by Freedom or one of its domestic subsidiaries.
The Amended and Restated Credit Agreement contains various covenants which
restrict Freedom and its subsidiaries with respect to, among other things,
incurring other indebtedness, entering into merger or consolidation
transactions, disposing of their assets (other than in the ordinary course of
business), acquiring assets (with permitted exceptions), making certain
restricted payments, repaying the Notes, creating any liens on Freedom's assets,
making investments, creating guarantee obligations, and entering into sale and
leaseback transactions and transactions with affiliates. The Amended and
Restated Credit Agreement also requires that Freedom comply with various
financial covenants, including a leverage ratio, a minimum fixed charge coverage
ratio, a maximum capital expenditure test and a minimum interest coverage ratio.
The Company believes that it was in compliance with such covenants and tests as
of December 31, 1996. The Amended and Restated Credit Agreement also contains
events of default similar to those contained in the Freedom Credit Agreement,
including default upon the nonpayment of principal, interest, fees or other
amounts, the occurrence of a change of control, a cross default with respect to
other obligations of Freedom and its subsidiaries, failure to comply with
certain covenants, conditions or provisions under the Amended and Restated
Credit Agreement, the existence of certain unstayed or undischarged judgments,
the invalidity or unenforceability of the relevant security documents, the
making of materially false or misleading representations or warranties,
commencement of reorganization, bankruptcy, insolvency or similar proceedings or
the occurrence of certain ERISA events. Upon the occurrence and during the
continuance of an event of default under the Amended and Restated Credit
Agreement, the agent may declare all obligations thereunder to be immediately
due and payable.
69
<PAGE>
DESCRIPTION OF THE NOTES
GENERAL
The New Notes offered hereby will be issued under an Indenture (the
'Indenture'), dated as of October 15, 1996, by and among the Company, the
Guarantors and The Bank of New York, as trustee (the 'Trustee'). The following
is a summary of the material provisions of the Indenture. This summary does not
purport to be complete and is subject to the detailed provisions of, and is
qualified in its entirety by reference to, the Trust Indenture Act of 1939, as
amended (the 'Trust Indenture Act'), the Notes and the Indenture, including the
definitions of certain terms contained therein and including those terms made
part of the Indenture by reference to the Trust Indenture Act. A copy of the
Indenture is filed as an exhibit to the Registration Statement of which this
Prospectus forms a part. The definitions of certain terms used in the following
summary are set forth below under '--Certain Definitions.' Reference is made to
the Indenture for the full definition of all such terms, as well as any other
capitalized terms used herein for which no definition is provided.
MATURITY AND INTEREST
The New Notes will be unsecured senior subordinated obligations of the
Company limited in aggregate principal amount to $125,000,000. The New Notes
will mature on October 15, 2006. Interest on the New Notes will accrue at the
rate of 10 5/8% per annum and will be payable semi-annually in arrears on April
15 and October 15 in each year, commencing on April 15, 1997, to holders of
record on the immediately preceding April 1 and October 1, respectively.
Interest on the New Notes will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from October 17, 1996
(the 'Issue Date'). Old Notes accepted for exchange will cease to accrue
interest from and after the date of consummation of the Exchange Offer. Holders
of Old Notes whose Old Notes are accepted for exchange will not receive any
payment in respect of interest on such Old Notes otherwise payable on any
interest payment date the record date for which occurs on or after the
consummation of the Exchange Offer. Interest will be computed on the basis of a
360-day year comprised of twelve 30-day months.
The Trustee will authenticate and deliver from time to time New Notes for
original issue only in exchange for a like principal amount of Old Notes.
Principal of, premium, if any, and interest on the New Notes will be
payable at the office or agency of the Company maintained for such purpose in
The City of New York or, at the option of the Company, payment of interest may
be made by check mailed to the holders of the New Notes at their respective
addresses as set forth in the register of holders of New Notes. Until otherwise
designated by the Company, the Company's office or agency in The City of New
York will be the office of the Trustee maintained for such purpose. The New
Notes will be issued in fully registered form, without coupons, and in
denominations of $1,000 and integral multiples thereof. No service charge will
be made for any transfer, exchange or redemption of New Notes, except in certain
circumstances for any tax or other governmental charge that may be imposed in
connection therewith.
For each Old Note accepted for exchange, the Holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Notes.
All Old Notes and New Notes will be treated as a single class of securities
under the Indenture.
THE GUARANTEES
The Notes are guaranteed on a senior subordinated basis by each of the
Guarantors. Each of the Guarantors (subject to the third sentence of the next
paragraph with respect to Freedom Chemical Diamalt) has fully and
unconditionally guaranteed (each, a 'Guarantee') on a joint and several basis
all of the Company's obligations under the Notes and the Indenture, including
its obligations to pay principal, premium, if any, and interest with respect to
the Notes. The Guarantees are subordinated to all existing and future Senior
Debt of the respective Guarantors, including such Guarantor's guarantees of the
Company's obligations under the Amended and Restated Credit Agreement. Except as
provided in '--Certain Covenants' below, the Company is not restricted from
selling or otherwise disposing of any of the Guarantors.
Pursuant to the Guarantees, if the Company defaults in payment of any
amount owing in respect of any Notes, each Guarantor is obligated to duly and
punctually pay the same. Pursuant to the terms of the Indenture, each of the
Guarantors has agreed that its obligations under its Guarantee are
unconditional, irrespective of the validity, regularity or enforceability of the
Notes or the Indenture, the absence of any action to enforce the same or any
other circumstance which might otherwise constitute a legal or equitable
discharge or defense of a Guarantor. Notwithstanding the foregoing, in the event
that the articles of incorporation of Freedom Chemical
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<PAGE>
Diamalt are amended with the result that Freedom Chemical Diamalt becomes
classified as a controlled foreign corporation under U.S. federal tax law, at
the option of the Company, upon written notice to the Trustee, the Guarantee of
Freedom Chemical Diamalt may be amended to eliminate the guarantee of Freedom
Chemical Diamalt in the form existing on the Issue Date and to provide instead
for the full and unconditional guarantee by Freedom Chemical Diamalt of the
obligations of the other Guarantors under their respective Guarantees. In
addition, notwithstanding the foregoing, each Guarantor's liability under its
Guarantee is limited to the maximum amount that would not result in such
Guarantor's Guarantee constituting a fraudulent conveyance or fraudulent
transfer under applicable law and, in the case of Freedom Chemical Diamalt, the
liability of such Guarantor is limited at any time to the maximum amount that
would not result in a depletion of such Guarantor's stated share capital.
If no Default exists or would exist under the Indenture, concurrently with
any sale or disposition (by merger or otherwise) of any Guarantor (other than a
transaction subject to the provisions described under '--Merger, Consolidation
and Sale of Assets') by the Company or a Restricted Subsidiary to any person or
entity that is not a Subsidiary of the Company which transaction is in
compliance with the terms of the Indenture, such Guarantor will automatically
and unconditionally be released from all obligations under its Guarantee.
SUBORDINATION
The payment of the principal of, premium, if any, and interest on, the
Notes is subordinated, as set forth in the Indenture, in right of payment to the
prior payment in full, in cash, of all existing and future Senior Debt
(including the indebtedness under the Amended and Restated Credit Agreement).
The Notes are senior subordinated indebtedness of the Company ranking pari passu
with all other existing and future senior subordinated indebtedness of the
Company.
Upon any payment or distribution of cash, securities or other property of
the Company to creditors upon any liquidation, dissolution or winding up of the
Company, or in a bankruptcy, reorganization, insolvency, receivership or similar
proceeding relating to the Company or its property or securities, the holders of
any Senior Debt of the Company will be entitled to receive payment in full, in
cash, of all Obligations due in respect of such Senior Debt (including interest
after the commencement of any such proceeding at the rate specified in the
agreements governing such Senior Debt) before the holders of the Notes will be
entitled to receive any payment or distribution with respect to the Notes.
The Company also may not make any payment upon or in respect of the Notes
if (i) a default in the payment of the principal of, premium, if any, or
interest on any Designated Senior Debt occurs and is continuing, whether at
maturity or on a date fixed for prepayment or by declaration of acceleration or
otherwise, or (ii) the Trustee has received written notice ('Payment Blockage
Notice') from the representative of any holders of Designated Senior Debt that a
nonpayment default has occurred and is continuing with respect to such
Designated Senior Debt that permits such holders to accelerate the maturity of
such Designated Senior Debt. Payments on the Notes shall resume (and all past
due amounts on the Notes, with interest thereon as specified in the Indenture,
shall be paid) (i) in the case of a payment default in respect of any Designated
Senior Debt, on the date on which such default is cured or waived or otherwise
ceases to exist; and (ii) in the case of a nonpayment default in respect of any
Designated Senior Debt, on the earlier of (a) the date on which such nonpayment
default is cured or waived, or (b) 179 days after the date on which the Payment
Blockage Notice with respect to such default was received by the Trustee, in
each case, unless the maturity of any Designated Senior Debt has been
accelerated and the Company has defaulted with respect to the payment of such
Designated Senior Debt, or (c) the date on which such Payment Blockage Period
(as defined below) shall have been terminated by written notice to the Company
or the Trustee from the representative of the holders of Designated Senior Debt
initiating such Payment Blockage Period. During any consecutive 365-day period,
the aggregate number of days in which payments due on the Notes may not be made
as a result of nonpayment defaults on Designated Senior Debt (a 'Payment
Blockage Period') shall not exceed 179 days, and there shall be a period of at
least 186 consecutive days in each consecutive 365-day period when such payments
are not prohibited. No event or circumstance that creates a default under any
Designated Senior Debt that (i) gives rise to the commencement of a Payment
Blockage Period or (ii) exists at the commencement of or during any Payment
Blockage Period shall be made the basis for the commencement of any subsequent
Payment Blockage Period unless such default has been cured or waived for a
period of not less than 90 consecutive days following the commencement of the
initial Payment Blockage Period.
As a result of the subordination provisions described above, in the event
of liquidation or insolvency, holders of Notes may recover less ratably than
creditors holding Senior Debt of the Company. In such
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<PAGE>
circumstances, funds which would otherwise be payable to the holders of the
Notes will be paid to the holders of the Senior Debt to the extent necessary to
pay the Senior Debt in full in cash, and the Company may be unable to meet its
obligations fully with respect to the Notes.
If the Company fails to make any payment on the Notes when due or within
any applicable grace period, whether or not on account of the payment blockage
provisions referred to above, such failure would constitute an Event of Default
under the Indenture and would enable the holders of the Notes to accelerate the
maturity thereof. See '--Events of Default.'
As of September 30, 1996, on a pro forma basis after giving effect to the
offering of the Old Notes, initial borrowings under the Amended and Restated
Credit Agreement and the Cash Equity Investment and the application of the
proceeds therefrom, there would have been outstanding approximately $21.5
million of Senior Debt of the Company, including Indebtedness under the Amended
and Restated Credit Agreement.
REDEMPTION
Mandatory Redemption. The Notes are not subject to any mandatory sinking
fund redemption prior to maturity.
Optional Redemption. The Notes are redeemable at the option of the
Company, in whole or in part, at any time on or after October 15, 2001 at the
redemption prices (expressed as percentages of the principal amount of the
Notes) set forth below plus in each case accrued and unpaid interest, if any, to
the date of redemption, if redeemed during the twelve-month period beginning on
October 15, of the years indicated below.
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- -------------------------------------------------------------- ----------
<S> <C>
2001.......................................................... 105.312%
2002.......................................................... 103.541%
2003.......................................................... 101.771%
2004 and thereafter........................................... 100.000%
</TABLE>
In addition, at any time on or prior to October 15, 1999, the Company may,
at its option, redeem up to 35% of the aggregate principal amount of Notes
originally issued with the net cash proceeds of one or more Public Equity
Offerings (as defined below), at 109.625% of the aggregate principal amount
thereof plus accrued and unpaid interest, if any, to the date of redemption;
provided, however, that not less than $81.25 million principal amount of the
Notes is outstanding immediately after giving effect to such redemption (other
than any Notes owned by the Company or any of its Affiliates) and such
redemption is effected within 60 days of such issuance or investment.
As used in the preceding paragraph, a 'Public Equity Offering' means an
underwritten public offering of Capital Stock (other than Disqualified Stock) of
the Company pursuant to an effective registration statement filed under the
Securities Act which public equity offering results in gross proceeds to the
Company of not less than $35.0 million.
In addition, at any time on or prior to October 15, 2001, upon the
occurrence of a Change of Control, the Company may, at its option, redeem all
but not less than all of the Notes, at a redemption price equal to 100% of the
principal amount thereof plus the Applicable Premium plus accrued and unpaid
interest, if any, to the date of redemption. Notice of redemption of the Notes
pursuant to this paragraph shall be mailed to holders of the Notes not more than
60 days and not less than 30 days following the occurrence of a Change of
Control.
Selection and Notice. If less than all of the Notes are to be redeemed at
any time, selection of the Notes to be redeemed will be made by the Company in
compliance with the requirements of the principal national securities exchange,
if any, on which the Notes are listed or, if the Notes are not listed on a
securities exchange, on a pro rata basis or by lot or any other method as the
Trustee shall deem fair and appropriate; provided, that Notes redeemed in part
shall only be redeemed in integral multiples of $1,000; provided, further, that
any such redemption pursuant to the provisions relating to a Public Equity
Offering shall be made on a pro rata basis or on as nearly a pro rata basis as
practicable (subject to the procedures of The Depository Trust Company or any
other Depository). Notices of any optional or mandatory redemption shall be
mailed by first class mail at least 30 but not more than 60 days before the
redemption date to each holder of Notes to be redeemed at such holder's
registered address. If any Note is to be redeemed in part only, the notice of
redemption that relates to such Note shall state the portion of the principal
amount thereof to be redeemed, and the Trustee shall authenticate and mail to
the holder of the original Note a new Note in principal amount equal to the
unredeemed portion of the original Note promptly after the original Note has
been canceled. On and after the redemption date, interest will cease to accrue
on Notes or portions thereof called for redemption.
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CHANGE OF CONTROL
In the event of a Change of Control, each holder of Notes will have the
right, unless the Company has given a notice of redemption, subject to the terms
and conditions of the Indenture, to require the Company to offer to purchase all
or any portion (equal to $1,000 or an integral multiple thereof) of such
holder's Notes at a purchase price in cash equal to 101% of the aggregate
principal amount thereof plus accrued and unpaid interest, if any, to the date
of purchase, in accordance with the terms set forth below (a 'Change of Control
Offer').
The Amended and Restated Credit Agreement prohibits the Company from
purchasing any Notes pursuant to a Change of Control Offer prior to repayment in
full of the indebtedness under the Amended and Restated Credit Agreement. Any
additional credit agreements or other agreements relating to unsubordinated
indebtedness to which the Company becomes a party may contain similar
restrictions and provisions. Moreover, the Amended and Restated Credit Agreement
contains a 'change of control' provision that is similar to the provision in the
Indenture relating to a Change of Control, and the occurrence of such a 'change
of control' would constitute a default under the Amended and Restated Credit
Agreement. The Company's obligations under the Amended and Restated Credit
Agreement represent obligations senior in right of payment to the Notes and the
Amended and Restated Credit Agreement will not permit the purchase of the Notes
absent consent of the lenders thereunder in the event of a Change of Control
(although the failure by the Company to comply with its obligations in the event
of a Change of Control would constitute a Default under the Notes).
If the Company is unable to obtain the requisite consents and/or repay all
indebtedness which prohibits the repurchase of the Notes upon the occurrence of
a Change of Control, the Company would remain prohibited by such indebtedness
from purchasing any Notes and, as a result, the Company could not commence a
Change of Control Offer to purchase the Notes within 30 days of the occurrence
of the Change of Control, which would constitute an Event of Default under the
Indenture. The Company's failure to commence such a Change of Control Offer
would also constitute an event of default under the Amended and Restated Credit
Agreement which would permit the lenders thereunder to accelerate all of the
Company's indebtedness under the Amended and Restated Credit Agreement. If a
Change of Control were to occur, there can be no assurance that the Company
would have sufficient assets to first satisfy its obligations under the Amended
and Restated Credit Agreement or other agreements relating to indebtedness, if
accelerated, and then to purchase all of the Notes that might be delivered by
holders seeking to accept a Change of Control Offer. See 'Risk
Factors--Repurchase of the Notes Upon a Change of Control.'
On or before the 30th day following the occurrence of any Change of
Control, the Company shall mail to each holder of Notes at such holder's
registered address a notice stating: (i) that a Change of Control has occurred
and that such holder has the right to require the Company to purchase all or a
portion (equal to $1,000 or an integral multiple thereof) of such holder's Notes
at a purchase price in cash equal to 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest, if any, to the date of purchase (the
'Change of Control Purchase Date'), which shall be a business day, specified in
such notice, that is not earlier than 30 days or later than 60 days from the
date such notice is mailed, (ii) the amount of accrued and unpaid interest, if
any, as of the Change of Control Purchase Date, (iii) that any Note not tendered
will continue to accrue interest, (iv) that, unless the Company defaults in the
payment of the purchase price for the Notes payable pursuant to the Change of
Control Offer, any Notes accepted for payment pursuant to the Change of Control
Offer shall cease to accrue interest after the Change of Control Purchase Date,
(v) the procedures, consistent with the Indenture, to be followed by a holder of
Notes in order to accept a Change of Control Offer or to withdraw such
acceptance, and (vi) such other information as may be required by the Indenture
and applicable laws and regulations.
On the Change of Control Purchase Date, the Company will (i) accept for
payment all Notes or portions thereof tendered pursuant to the Change of Control
Offer, (ii) deposit with the Paying Agent the aggregate purchase price of all
Notes or portions thereof accepted for payment and any accrued interest on such
Notes as of the Change of Control Purchase Date, and (iii) deliver or cause to
be delivered to the Trustee all Notes tendered pursuant to the Change of Control
Offer. The Paying Agent shall promptly mail to each holder of Notes or portions
thereof accepted for payment an amount equal to the purchase price for such
Notes plus accrued and unpaid interest, if any, thereon, and the Trustee shall
promptly authenticate and mail to each holder of Notes accepted for payment in
part a new Note equal in principal amount to any unpurchased portion of the
Notes, and any Note not accepted for payment in whole or in part shall be
promptly returned to the holder of such Note. On and after a Change of Control
Purchase Date, interest will cease to accrue on the Notes or portions thereof
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accepted for payment, unless the Company defaults in the payment of the purchase
price therefor. The Company will announce the results of the Change of Control
Offer to holders of the Notes on or as soon as practicable after the Change of
Control Purchase Date.
As used in the definition of Change of Control, the phrase 'all or
substantially all' of the Capital Stock or assets of the Company and its
Restricted Subsidiaries will likely be interpreted under applicable state law
and will be dependent upon particular facts and circumstances. As a result,
there may be a degree of uncertainty in ascertaining whether a sale or
disposition of 'all or substantially all' of the Capital Stock or assets of the
Company and its Restricted Subsidiaries has occurred, in which case a holder's
ability to obtain the benefit of a Change of Control Offer may be impaired.
The Company will comply with the applicable tender offer rules, including
the requirements of Section 14(e) and Rule 14e-1 under the Exchange Act, and all
other applicable securities laws and regulations in connection with any Change
of Control Offer and will be deemed not to be in violation of any of the
covenants under the Indenture to the extent such compliance is in conflict with
such covenants.
CERTAIN COVENANTS
Limitation on Incurrence of Indebtedness. The Indenture provides that the
Company will not, and will not permit any Restricted Subsidiary to, create,
incur, assume or directly or indirectly guarantee or in any other manner become
directly or indirectly liable for ('incur') any Indebtedness (including Acquired
Debt), except that the Company and any Guarantor may incur Indebtedness if, at
the time of, and immediately after giving pro forma effect to, such incurrence
of Indebtedness, the Consolidated Cash Flow Coverage Ratio of the Company for
the most recently ended four fiscal quarters for which financial statements are
available would be at least 2.0 to 1.0 until October 15, 1999 and 2.25 to 1.0
thereafter.
The foregoing limitations will not apply to the incurrence of any of the
following (collectively, 'Permitted Indebtedness'), each of which shall be given
independent effect:
(i) Indebtedness of the Company and the Guarantors arising under the
Amended and Restated Credit Agreement not to exceed in outstanding
principal amount the greater of (a) $90.0 million at any time outstanding
or (b) the sum of (x) 80% of the consolidated book value of the net
accounts receivable of the Person Incurring such Indebtedness and its
Restricted Subsidiaries and (y) 50% of the consolidated book value of the
inventory of the Person Incurring such Indebtedness and its Restricted
Subsidiaries, in each case determined in accordance with GAAP;
(ii) Indebtedness of the Company and the Guarantors represented by the
Notes and the Guarantees;
(iii) Indebtedness of the Company and the Guarantors represented by
the Exchange Notes;
(iv) Indebtedness of the Company or any Restricted Subsidiaries which
is outstanding on the Issue Date ('Existing Indebtedness');
(v) Indebtedness owed by any Restricted Subsidiary to the Company or
to another Restricted Subsidiary, or owed by the Company to any Restricted
Subsidiary; provided, however, that any such Indebtedness shall be at all
times held by a Person which is either the Company or a Restricted
Subsidiary of the Company (provided that such Indebtedness may be pledged
or otherwise assigned to the holders of Senior Bank Debt); provided,
further, however, that upon either (a) the transfer or other disposition of
any such Indebtedness to a Person other than the Company or another
Restricted Subsidiary or (b) the sale, lease, transfer or other disposition
of shares of Capital Stock (including by consolidation or merger) of any
such Restricted Subsidiary to a Person other than the Company or another
Restricted Subsidiary, the incurrence of such Indebtedness shall be deemed
to be an incurrence that is not permitted by this clause (v);
(vi) Indebtedness of the Company or any Restricted Subsidiary arising
with respect to Interest Rate Agreement Obligations and Currency Agreement
Obligations incurred for the purpose of fixing or hedging interest rate
risk or currency risk with respect to any fixed or floating rate
Indebtedness that is permitted by the terms of the Indenture to be
outstanding or any receivable or liability the payment of which is
determined by reference to a foreign currency; provided in no event shall
any Restricted Subsidiary incur Indebtedness under any Interest Rate
Agreement Obligations or any Currency Agreement Obligations under this
clause (vi) relating to Indebtedness or obligations of the Company;
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(vii) Indebtedness represented by performance, completion, guarantee,
surety and similar bonds provided by the Company or any Restricted
Subsidiary in the ordinary course of business consistent with past
practice;
(viii) Any Indebtedness incurred in connection with or given in
exchange for the renewal, extension, substitution, refunding, defeasance,
refinancing or replacement (a 'refinancing') of any Existing Indebtedness
or any Indebtedness described in clauses (ii) and (iii) above or any
Indebtedness issued after the Issue Date and not incurred in violation of
the Indenture ('Refinancing Indebtedness'); provided, however, that (a) the
principal amount of such Refinancing Indebtedness shall not exceed the
principal amount (or accrued amount, if less) of the Indebtedness so
refinanced (plus the premiums paid in connection therewith and the
reasonable expenses incurred in connection therewith); (b) with respect to
Refinancing Indebtedness of any Indebtedness other than Senior Debt, if the
Weighted Average Life to Maturity of the Indebtedness being refinanced is
equal to or greater than the Weighted Average Life to Maturity of the Notes
the Refinancing Indebtedness shall have a Weighted Average Life to Maturity
equal to or greater than the Weighted Average Life to Maturity of the
Notes; (c) with respect to Refinancing Indebtedness other than Senior Debt
incurred by the Company, such Refinancing Indebtedness shall rank no more
senior than, and shall be at least as subordinated in right of payment to
the Notes as, the Indebtedness being refinanced; and (d) the obligor on
such Refinancing Indebtedness shall be the obligor on the Indebtedness
being refinanced or the Company;
(ix) Indebtedness of the Company or any Restricted Subsidiary (a)
representing Capitalized Lease Obligations and (b) in respect of Purchase
Money Obligations for property acquired in the ordinary course of business,
which taken together do not exceed $10.0 million in aggregate amount at any
time outstanding;
(x) Indebtedness of Foreign Subsidiaries of the Company not to exceed
a principal amount outstanding at any time of $20.0 million in the
aggregate for all Foreign Subsidiaries, to be used for working capital,
capital expenditures, joint ventures, acquisitions and other general
corporate purposes; and
(xi) Indebtedness (including Acquired Debt) of the Company or any
Restricted Subsidiary in addition to that described in clauses (i) through
(x) above, and any renewals, extensions, substitutions, refinancings or
replacements of such Indebtedness, so long as the aggregate principal
amount of all such Indebtedness incurred pursuant to this clause (xi) does
not exceed $10.0 million at any one time outstanding.
For purposes of determining any particular amount of Indebtedness under
this 'Limitation on Incurrence of Indebtedness' covenant, Guarantees, Liens or
obligations with respect to letters of credit supporting Indebtedness otherwise
included in the determination of such particular amount shall not be included.
For purposes of determining compliance with this 'Limitation on Indebtedness'
covenant, in the event that an item of Indebtedness meets the criteria of more
than one of the types of Indebtedness described in the definition of Permitted
Indebtedness or is entitled to be Incurred pursuant to the first paragraph of
this 'Limitation on Incurrence of Indebtedness' covenant, the Company, in its
sole discretion, shall classify such item of Indebtedness and only be required
to include the amount and type of such Indebtedness in one of such clauses or
pursuant to the first paragraph hereof.
Indebtedness of any Person which is outstanding at the time such Person
becomes a Restricted Subsidiary or is merged with or into or consolidated with
the Company or a Restricted Subsidiary shall be deemed to have been incurred at
the time such Person becomes a Restricted Subsidiary or is merged with or into
or consolidated with the Company or a Restricted Subsidiary, and Indebtedness
which is assumed at the time of the acquisition of any asset shall be deemed to
have been incurred at the time of such acquisition.
Limitation on Restricted Payments. The Indenture provides that the Company
will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, make any Restricted Payment, unless at the time of and immediately
after giving effect to the proposed Restricted Payment (with the value of any
such Restricted Payment, if other than cash, to be determined reasonably and in
good faith by the Board of Directors of the Company), (i) no Default or Event of
Default shall have occurred and be continuing or would occur as a consequence
thereof, (ii) the Company could incur at least $1.00 of additional Indebtedness
pursuant to the first paragraph under '--Limitation on Incurrence of
Indebtedness' and (iii) the aggregate amount of all Restricted Payments made
after the Issue Date shall not exceed the sum of (a) an amount equal to 50% of
the Company's aggregate cumulative Consolidated Net Income accrued on a
cumulative basis during the period (treated as one
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accounting period) beginning on October 1, 1996 and ending on the last day of
the fiscal quarter of the Company immediately preceding the date of such
proposed Restricted Payment (or, if such aggregate cumulative Consolidated Net
Income for such period shall be a deficit, minus 100% of such deficit), plus (b)
the aggregate amount of all net cash proceeds (other than proceeds from the Cash
Equity Investment) received since the Issue Date by the Company from (x) the
issuance and sale (other than to a Restricted Subsidiary) of Capital Stock
(other than Disqualified Stock), (y) the issuance to a Person who is not a
Subsidiary of the Company of any options, warrants or other rights to acquire
Capital Stock of the Company (in each case, exclusive of any Disqualified Stock
or any options, warrants or other rights that are redeemable at the option of
the holder, or are required to be redeemed, prior to the Stated Maturity of the
Notes) and (z) the issuance and sale by the Company after the Issue Date of
Disqualified Stock or debt securities that have been converted into or exchanged
for Capital Stock of the Company (other than Disqualified Stock), in each case
to the extent that such proceeds are not used to redeem, repurchase, retire or
otherwise acquire Capital Stock or any Indebtedness of the Company or make any
Restricted Investment, pursuant to clauses (ii) or (iv) of the next paragraph,
plus (c) the amount of the net reduction in Investments by the Company in
Unrestricted Subsidiaries resulting from (x) the payment of dividends or the
repayment in cash of the principal of loans or the cash return on any
Investment, in each case to the extent received by the Company or any Restricted
Subsidiary of the Company from Unrestricted Subsidiaries, (y) the release or
extinguishment of any guarantee of Indebtedness of any Unrestricted Subsidiary,
and (z) the redesignation of Unrestricted Subsidiaries as Restricted
Subsidiaries of the Company (valued as provided in the definition of
'Investment'), such aggregate amount of the net reduction in Investments not to
exceed in the case of any Unrestricted Subsidiaries the amount of Restricted
Investments previously made by the Company or any Restricted Subsidiary of the
Company in such Unrestricted Subsidiary, which amount was included in the
calculation of the amount of Restricted Payments, plus (d) to the extent that
any Restricted Investment that was made after the Issue Date is sold for cash or
otherwise liquidated or repaid for cash, the amount of cash proceeds received
with respect to such Restricted Investment, net of taxes and the cost of
disposition, not to exceed the amount of Restricted Investments made after the
Issue Date. For purposes of this covenant, the aggregate amount of Restricted
Investments made by the Company and its Restricted Subsidiaries after the date
of the Indenture shall equal the aggregate gross amount of such Restricted
Investments, less reductions in connection with the write-down of any portion of
such Restricted Investments to the extent deducted from the Consolidated Net
Income of the Company.
The foregoing provisions do not prohibit, so long as there is no Default or
Event of Default continuing, the following actions (collectively, 'Permitted
Payments'):
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such declaration date such payment would have
been permitted under the Indenture and such payment shall be deemed to have
been paid on such date of declaration for purposes of clause (iii) of the
preceding paragraph;
(ii) the redemption, repurchase, retirement or other acquisition of
any Capital Stock or any Indebtedness of the Company that is subordinated
in right of payment to the Notes in exchange for, or out of the proceeds
of, the substantially concurrent sale (other than to a Restricted
Subsidiary) of Capital Stock of the Company (other than any Disqualified
Stock);
(iii) any purchase or defeasance of Subordinated Indebtedness to the
extent required upon a Change of Control or Asset Sale (as defined therein)
by the Indenture or other agreement or instrument pursuant to which such
Subordinated Indebtedness was issued, but only if the Company (x) in the
case of a Change of Control, has complied with its obligations under the
provisions described under the covenant entitled 'Change of Control' or (y)
in the case of an Asset Sale has applied the Net Cash Proceeds from such
Asset Sale in accordance with the provisions under the covenant entitled
'Limitation on Asset Sales;'
(iv) any Restricted Investment made with the proceeds of the
substantially concurrent sale of Capital Stock (other than Disqualified
Stock);
(v) Restricted Investments in an amount such that the sum of the
aggregate amount of Restricted Investments made pursuant to this clause (v)
after the Issue Date and outstanding (net of any returns in cash thereof or
cash received in liquidation or on disposition thereof) made pursuant to
this clause (v) does not exceed at any time $15.0 million;
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(vi) the repurchase of Capital Stock of the Company (including
options, warrants or other rights to acquire such Capital Stock) from
departing or deceased directors, officers or employees of the Company or
its Subsidiaries pursuant to the terms of an employee benefit plan or
employee agreement; provided that an aggregate amount of all such
repurchases shall not exceed $1.5 million in any fiscal year, provided that
the Company may carry forward up to $1.0 million of the unused portion in
any fiscal year to the next fiscal year, and provided, further, that such
payments shall not exceed $2.5 million per annum in any subsequent fiscal
year;
(vii) the payment of cash dividends required to be made on the Series
A Redeemable Preferred Stock outstanding as of the Issue Date and the
repurchase or redemption of such stock at a price not to exceed 100% of
liquidation value plus accrued dividends; and
(viii) Restricted Payments (other than a dividend or other
distribution declared on any Capital Stock of the Company or a payment to
purchase, redeem or otherwise acquire or retire for value any Capital Stock
of the Company) not to exceed $2.5 million in the aggregate.
For purposes of clause (iii) of the first paragraph of this covenant,
Permitted Payments made pursuant to clauses (i), (v), (vi) and (vii) (only with
respect to cash dividends paid with respect to Series A Redeemable Preferred
Stock) of the immediately preceding paragraph shall be included (with respect to
clause (i), as of the date of declaration) as Restricted Payments made since the
Issue Date.
Limitation on Asset Sales. The Indenture provides that the Company will
not, and will not permit any Restricted Subsidiary to, make any Asset Sale
unless (i) the Company or such Restricted Subsidiary, as the case may be,
receives consideration at the time of such Asset Sale at least equal to the fair
market value of the assets or other property sold or disposed of in the Asset
Sale and (ii) at least 75% of such consideration consists of either cash or Cash
Equivalents; provided, however, that, at the option of the Company, clause (ii)
shall not be applicable to Asset Sales (or portions of Asset Sales) that, in the
aggregate from the Issue Date, do not involve assets representing less than 5%
of the Consolidated Total Assets of the Company as of the last fiscal quarter
prior to the execution of the agreement for such Asset Sale. For purposes of
this covenant (x) 'cash' shall include the amount of any Indebtedness (other
than any Indebtedness that is by its terms subordinated to the Notes) of the
Company or such Restricted Subsidiary as shown on the Company's or such
Restricted Subsidiary's most recent balance sheet or in the notes thereto that
is assumed by the transferee of any such assets or other property in such Asset
Sale or is no longer the liability of the Company or any Restricted Subsidiary
(and excluding any liabilities that are incurred in connection with or in
anticipation of such Asset Sale), but only to the extent that such assumption is
effected on a basis under which there is no further recourse to the Company or
any of the Restricted Subsidiaries with respect to such liabilities, and (y) any
securities, notes or other obligations received by the Company or any such
Restricted Subsidiary in connection with such Asset Sale that are converted by
the Company or such Restricted Subsidiary into cash within 60 days of receipt
shall be deemed to be cash for purposes of this provision.
Within 365 days after any Asset Sale, the Company may elect to apply the
Net Proceeds from such Asset Sale to (a) permanently reduce any Senior Debt of
the Company and/or (b) make an investment in, or acquire assets and properties
that will be used in the business of the Company and the Restricted Subsidiaries
existing on the Issue Date or in businesses reasonably related thereto. Pending
the final application of any such Net Proceeds, the Company may temporarily
reduce Indebtedness or temporarily invest such Net Proceeds in cash or Cash
Equivalents. Any Net Proceeds from an Asset Sale not applied or invested as
provided in the first sentence of this paragraph within 365 days of such Asset
Sale will be deemed to constitute 'Excess Proceeds.'
Each date that the aggregate amount of Excess Proceeds in respect of which
an Asset Sale Offer has not been made exceeds $10.0 million shall be deemed an
'Asset Sale Offer Trigger Date.' As soon as practicable, but in no event later
than 20 business days after each Asset Sale Offer Trigger Date, the Company
shall commence an offer (an 'Asset Sale Offer') to purchase the maximum
principal amount of Notes and other Indebtedness of the Company that ranks pari
passu in right of payment with the Notes (to the extent required by the
instrument governing such other Indebtedness) that may be purchased out of the
Excess Proceeds. Any Notes and other Indebtedness to be purchased pursuant to an
Asset Sale Offer shall be purchased pro rata based on the aggregate principal
amount of Notes and all such other Indebtedness outstanding, and all Notes shall
be purchased at an offer price in cash in an amount equal to 100% of the
principal amount thereof, plus accrued and unpaid interest, if any, to the date
of purchase. To the extent that any Excess Proceeds remain after completion of
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an Asset Sale Offer, the Company may use the remaining amount for general
corporate purposes otherwise permitted by the Indenture. Upon the consummation
of any Asset Sale Offer, the amount of Excess Proceeds shall be deemed to be
reset to zero.
Notice of an Asset Sale Offer shall be mailed by the Company not later than
the 20th business day after the related Asset Sale Offer Trigger Date to each
holder of Notes at such holder's registered address, stating: (i) that an Asset
Sale Offer Trigger Date has occurred and that the Company is offering to
purchase the maximum principal amount of Notes that may be purchased out of the
Excess Proceeds (to the extent provided in the immediately preceding paragraph),
at an offer price in cash in an amount equal to 100% of the principal amount
thereof, plus accrued and unpaid interest, if any, to the date of the purchase
(the 'Asset Sale Offer Purchase Date'), which shall be a business day, specified
in such notice, that is not earlier than 30 days or later than 60 days from the
date such notice is mailed, (ii) the amount of accrued and unpaid interest, if
any, as of the Asset Sale Offer Purchase Date, (iii) that any Note not tendered
will continue to accrue interest, (iv) that, unless the Company defaults in the
payment of the purchase price for the Notes payable pursuant to the Asset Sale
Offer, any Notes accepted for payment pursuant to the Asset Sale Offer shall
cease to accrue interest after the Asset Sale Offer Purchase Date, (v) the
procedures, consistent with the Indenture, to be followed by a holder of Notes
in order to accept an Asset Sale Offer or to withdraw such acceptance, and (vi)
such other information as may be required by the Indenture and applicable laws
and regulations.
On the Asset Sale Offer Purchase Date, the Company will (i) accept for
payment the maximum principal amount of Notes or portions thereof tendered
pursuant to the Asset Sale Offer that can be purchased out of Excess Proceeds
from such Asset Sale that are to be applied to an Asset Sale Offer (to the
extent provided in the second preceding paragraph), (ii) deposit with the Paying
Agent an amount in cash equal to the aggregate purchase price of all Notes or
portions thereof accepted for payment and any accrued and unpaid interest, if
any, on such Notes as of the Asset Sale Offer Purchase Date, and (iii) deliver
or cause to be delivered to the Trustee all Notes tendered pursuant to the Asset
Sale Offer. If less than all Notes tendered pursuant to the Asset Sale Offer are
accepted for payment by the Company for any reason consistent with the
Indenture, selection of the Notes to be purchased by the Company shall be in
compliance with the requirements of the principal national securities exchange,
if any, on which the Notes are listed or, if the Notes are not so listed, on a
pro rata basis or by lot; provided, however, that Notes accepted for payment in
part shall only be purchased in integral multiples of $1,000. The Paying Agent
shall promptly mail to each holder of Notes or portions thereof accepted for
payment an amount in cash equal to the purchase price for such Notes plus
accrued and unpaid interest, if any, thereon, and the Trustee shall promptly
authenticate and mail to such holder of Notes accepted for payment in part a new
Note equal in principal amount to any unpurchased portion of the Notes, and any
Note not accepted for payment in whole or in part shall be promptly returned to
the holder of such Note. On and after an Asset Sale Offer Purchase Date,
interest will cease to accrue on the Notes or portions thereof accepted for
payment, unless the Company defaults in the payment of the purchase price
therefor. The Company will announce the results of the Asset Sale Offer to
holders of the Notes on or as soon as practicable after the Asset Sale Offer
Purchase Date.
The Company will comply with the applicable tender offer rules, including
the requirements of Section 14(e) and Rule 14e-1 under the Exchange Act, and all
other applicable securities laws and regulations in connection with any Asset
Sale Offer and will be deemed not to be in violation of any of the covenants
under the Indenture to the extent such compliance is in conflict with such
covenants.
Limitation on Liens. The Indenture provides that the Company will not, and
will not permit any Restricted Subsidiary to, directly or indirectly, create,
incur, assume or suffer to exist any Lien securing Indebtedness that is pari
passu with or subordinated in right of payment to the Notes (other than
Permitted Liens) on any asset now owned or hereafter acquired, or any income or
profits therefrom, or assign or convey any right to receive income therefrom to
secure any such Indebtedness, unless the Notes are equally and ratably secured
thereby.
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Indenture provides that the Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any consensual encumbrance or
restriction on the ability of any Restricted Subsidiary to (i) pay dividends or
make any other distributions to the Company or any other Restricted Subsidiary
on its Capital Stock or with respect to any other interest or participation in,
or measured by, its profits, or pay any Indebtedness owed to the Company or any
other Restricted Subsidiary, (ii) make loans or advances to the Company or any
other Restricted Subsidiary or (iii) transfer any of its properties or assets to
the
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Company or any other Restricted Subsidiary, except for such encumbrances or
restrictions existing under or by reason of (a) the Amended and Restated Credit
Agreement or any other Indebtedness as in effect on the Issue Date, and any
amendments, restatements, renewals, replacements or refinancings thereof;
provided, however, that such amendments, restatements, renewals, replacements or
refinancings are no more restrictive with respect to such dividend and other
payment restrictions than those contained in the Amended and Restated Credit
Agreement or such other Indebtedness (or, if more restrictive, than those
contained in the Indenture) immediately prior to any such amendment,
restatement, renewal, replacement or refinancing, (b) applicable law, (c) any
instrument governing Indebtedness or Capital Stock of an Acquired Person
acquired by the Company or any of its Restricted Subsidiaries as in effect at
the time of such acquisition (except to the extent such Indebtedness was
incurred in connection with or in contemplation of such acquisition); provided,
however, that such restriction is not applicable to any Person, or the
properties or assets of any Person, other than the Acquired Person, (d) by
reason of customary non-assignment provisions in leases entered into the
ordinary course of business and consistent with past practices, (e) Purchase
Money Indebtedness for property acquired in the ordinary course of business that
only impose restrictions on the property so acquired, (f) an agreement for the
sale or disposition of the Capital Stock or assets of such Restricted
Subsidiary; provided, however, that such restriction is only applicable to such
Restricted Subsidiary or assets, as applicable, and such sale or disposition
otherwise is permitted under '--Limitation on Asset Sales' above, (g)
Refinancing Indebtedness permitted under the Indenture; provided, however, that
the restrictions contained in the agreements governing such Refinancing
Indebtedness are no more restrictive in the aggregate than those contained in
the agreements governing the Indebtedness being refinanced immediately prior to
such refinancing, (h) the Indenture, the Notes and the Guarantees, (i) arising
or agreed to in the ordinary course of business, not relating to any
Indebtedness, and that do not individually or in the aggregate, detract from the
value of property or assets of the Company or any Restricted Subsidiary in any
manner material to the Company or any Restricted Subsidiary, or (j) any
instrument governing Indebtedness of a Foreign Subsidiary which is permitted by
the terms of the Indenture.
Nothing contained in this 'Limitation on Dividends and Other Payment
Restrictions Affecting Restricted Subsidiaries' covenant shall prevent the
Company or any Restricted Subsidiary from (1) creating, incurring, assuming or
suffering to exist any Liens otherwise permitted in the 'Limitation on Liens'
covenant or (2) restricting the sale or other disposition of property or assets
of the Company or any of its Restricted Subsidiaries that secure Indebtedness of
the Company or any of its Restricted Subsidiaries.
Limitation on Transactions with Affiliates. The Company will not, and will
not permit any Restricted Subsidiary to, directly or indirectly, enter into any
transaction or series of related transactions (including, without limitation,
the sale, purchase, exchange or lease of assets, property or services) with any
Affiliate of the Company (other than the Company or a Restricted Subsidiary)
unless (1) such transaction or series of transactions is on terms that are no
less favorable to the Company or such Restricted Subsidiary, as the case may be,
than would be available in a comparable transaction in arm's-length dealings
with an unrelated third party, and (2) the Company delivers to the Trustee (a)
with respect to any transaction or series of transactions involving aggregate
payments in excess of $1.0 million, an Officers' Certificate certifying that
such transaction or series of related transactions complies with clause (1)
above and (b) with respect to any transaction or series of transactions
involving aggregate payments in excess of $5.0 million, an Officer's Certificate
certifying that such transaction or series of related transactions has been
approved by a majority of the members of the Board of Directors of the Company
and evidenced by a resolution of the Board of Directors set forth in an
Officer's Certificate, and (c) with respect to any transaction or series of
transactions involving aggregate payments in excess of $10.0 million, an opinion
as to the fairness to the Company from a financial point of view issued by an
investment banking firm, accounting firm or appraisal firm of national standing.
Notwithstanding the foregoing, this covenant will not apply to (i) employment
agreements or compensation or employee benefit arrangements with any officer,
director or employee of the Company entered into in the ordinary course of
business (including customary benefits thereunder and including reimbursement or
advancement of out of pocket expenses, loans to officers, directors and
employees in the ordinary course of business and director's and officer's
liability insurance), (ii) any transaction entered into by or among the Company
or one of its Restricted Subsidiaries with one or more Restricted Subsidiaries
of the Company, (iii) any Restricted Payment not prohibited by the 'Limitation
on Restricted Payments' covenant, (iv) transactions permitted by, and complying
with, the provisions described under '--Merger, Consolidation and Sale of
Assets,' (v) any sale or issuance of Capital Stock (other than
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Disqualified Stock) of the Company and (vi) the grant or performance of
registration rights with respect to securities of the Company.
Limitation on Incurrence of Senior Subordinated Indebtedness. The Company
will not, directly or indirectly, incur, create, issue, assume, guarantee or
otherwise become liable for any Indebtedness that is subordinated or junior in
right of payment to any Senior Debt of the Company and senior in any respect in
right of payment to the Notes. For purposes of this provision, no Indebtedness
shall be deemed to be subordinated in right of payment to any other Indebtedness
by reason of the fact that such other Indebtedness is secured by any Lien or is
subject to a Guarantee.
Limitation on Designation of Unrestricted Subsidiaries. The Indenture
provides that the Company will not designate any Subsidiary of the Company
(other than a newly created Subsidiary in which no Investment has previously
been made) as an 'Unrestricted Subsidiary' under the Indenture (a 'Designation')
unless:
(a) no Default shall have occurred and be continuning at the time of
or after giving effect to such Designation;
(b) immediately after giving effect to such Designation the Company
would be able to incur $1.00 of Indebtedness (other than Permitted
Indebtedness) under the covenant described above under the caption
'--Limitation on Incurrence of Indebtedness;' and
(c) the Company would not be prohibited under the Indenture from
making an Investment at the time of Designation in an amount (the
'Designation Amount') equal to the Fair Market Value of such Restricted
Subsidiary on such date.
In the event of any such Designation, the Company shall be deemed to have
made an Investment constituting a Restricted Payment pursuant to the covenant
described above under the caption '--Limitation on Restricted Payments' for all
purposes of the Indenture in the Designation Amount. The Indenture will further
provide that neither the Company nor any Restricted Subsidiary shall at any time
(x) provide credit support for, or a guarantee of, any Indebtedness of any
Unrestricted Subsidiary (including any undertaking, agreement or instrument
evidencing such Indebtedness); provided that the Company and its Restricted
Subsidiaries may pledge Capital Stock or Indebtedness of any Unrestricted
Subsidiary on a nonrecourse basis such that the pledgee has no claim whatsoever
against the Company other than to obtain such pledged property or (y) be
directly or indirectly liable for any Indebtedness of any Unrestricted
Subsidiary, except to the extent permitted under the covenant described above
under the caption '--Limitation on Restricted Payments.'
The Indenture further provides that the Company will not revoke any
Designation of a Subsidiary as an Unrestricted Subsidiary (a 'Revocation'),
unless:
(a) no Default shall have occurred and be continuing at the time of
and after giving effect to such Revocation; and
(b) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation shall be deemed to have
been incurred at such time and shall have been permitted to be incurred for
all purposes of the Indenture.
All Designations and Revocations must be evidenced by Board Resolutions
delivered to the Trustee certifying compliance with the foregoing provisions.
Provision of Financial Statements. The Indenture provides that, whether or
not the Company is then subject to Section 13(a) or 15(d) of the Exchange Act,
the Company will file (unless such filing is not permitted under the Exchange
Act) with the Commission, so long as Notes are outstanding, the annual reports,
quarterly reports and other periodic reports which the Company would have been
required to file with the Commission pursuant to such Section 13(a) or 15(d) if
the Company were so subject, and such documents shall be filed with the
Commission on or prior to the respective dates (the 'Required Filing Dates') by
which the Company would have been required so to file such documents if the
Company were so subject. The Company will also in any event (i) within 15 days
of each Required Filing Date, (a) transmit by mail to all holders of Notes, as
their names and addresses appear in the Note register, without cost to such
holders and (b) file with the Trustee copies of the annual reports, quarterly
reports and other periodic reports which the Company would have been required to
file with the Commission pursuant to Section 13(a) or 15(d) of the Exchange Act
if the Company were subject to such Sections and (ii) if filing such documents
by the Company with the Commission is prohibited under the
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Exchange Act, promptly upon written request and payment of the reasonable cost
of duplication and delivery, supply copies of such documents to any prospective
holder at the Company's cost.
Future Guarantors. The Indenture provides that the Company and each
Guarantor shall cause each Restricted Subsidiary of the Company (other than any
Foreign Subsidiary) which, after the date of the Indenture (if not then a
Guarantor), becomes a Restricted Subsidiary to execute and deliver an indenture
supplemental to the Indenture and thereby become a Guarantor which shall be
bound by the Guarantee of the Notes in the form set forth in the Indenture
(without such future Guarantor being required to execute and deliver the
Guarantee endorsed on the Notes).
Additional Covenants. The Indenture also contains covenants with respect
to the following matters: (i) payment of principal, premium and interest; (ii)
maintenance of an office or agency in The City of New York; (iii) maintenance of
corporate existence; (iv) payment of taxes and other claims; (v) maintenance of
properties; and (vi) maintenance of insurance.
MERGER, CONSOLIDATION AND SALE OF ASSETS
The Indenture provides that the Company shall not, in any single
transaction or series of related transactions, consolidate or merge with or into
(whether or not the Company is the Surviving Person), or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of its properties
or assets in one or more related transactions (other than a consolidation or
merger with or into a Wholly Owned Restricted Subsidiary; provided that, in
connection with any such merger or consolidation, no consideration (other than
Common Stock in the Surviving Person or the Company) shall be issued or
distributed to the shareholders of the Company) to, another Person, and the
Company will not permit any Restricted Subsidiary to enter into any such
transaction or series of related transactions if such transaction or series of
related transactions, in the aggregate, would result in a sale, assignment,
transfer, lease, conveyance or other disposition of all or substantially all of
the properties and assets of the Company and the Restricted Subsidiaries, taken
as a whole, to another Person, unless (i) the Surviving Person is a corporation
organized or existing under the laws of the United States, any state thereof or
the District of Columbia; (ii) the Surviving Person (if other than the Company)
assumes all the obligations of the Company under the Notes (and the Guarantees
of the Company's Restricted Subsidiaries shall be confirmed as applying to such
Surviving Person's obligations), and the Indenture pursuant to a supplemental
indenture in a form reasonably satisfactory to the Trustee; (iii) at the time of
and immediately after such transaction, no Default or Event of Default shall
have occurred and be continuing; and (iv) the Surviving Person will and after
giving pro forma effect to such transaction, the Surviving Person would be
permitted to incur at least $1.00 of additional Indebtedness pursuant to the
first paragraph of the covenant described under '--Certain Covenants--Limitation
on Incurrence of Indebtedness.'
In the event of any transaction (other than a lease) described in and
complying with the conditions listed in the immediately preceding paragraph in
which the Company is not the Surviving Person, the Surviving Person is to assume
all the obligations of the Company under the Notes, the Indenture and, if then
in effect, the Registration Rights Agreement pursuant to a supplemental
indenture or other written agreement, as the case may be, such Surviving Person
shall succeed to, and be substituted for, and may exercise every right and power
of, the Company and the Company would be discharged from its obligations under
the Indenture, the Notes and the Registration Rights Agreement.
EVENTS OF DEFAULT
The Indenture provides that each of the following constitutes an Event of
Default:
(i) a default for 30 days in the payment when due of interest on any
Note (whether or not prohibited by the subordination provisions of the
Indenture);
(ii) a default in the payment when due of principal on any Note
(whether or not prohibited by the subordination provisions of the
Indenture), whether upon maturity, acceleration, optional or mandatory
redemption, required repurchase or otherwise;
(iii) the failure by the Company to comply with its obligations under
'Merger, Consolidation and Sale of Assets' above;
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(iv) failure to perform or comply with any covenant, agreement or
warranty in the Indenture (other than the defaults specified in clauses
(i), (ii) or (iii) above) which failure continues for 60 days after written
notice thereof has been given to the Company by the Trustee or to the
Company and the Trustee by the holders of at least 25% in aggregate
principal amount of the then outstanding Notes;
(v) the occurrence of one or more defaults under any agreements,
indentures or instruments under which the Company or any Significant
Subsidiary then has outstanding Indebtedness in excess of $5.0 million in
the aggregate and, if not already matured at its final maturity in
accordance with its terms, such Indebtedness shall have been accelerated
and such Indebtedness shall not have been repaid or such acceleration
rescinded within 30 days of such acceleration or final maturity;
(vi) one or more judgments, orders or decrees for the payment of money
in excess of $5.0 million, either individually or in the aggregate shall be
entered against the Company or any Significant Subsidiary or any of their
respective properties and which judgments, orders or decrees are not paid,
discharged, bonded or stayed or stayed pending appeal for a period of 60
days after their entry;
(vii) certain events of bankruptcy, dissolution, insolvency,
reorganization, administration or similar proceedings of the Company or any
Significant Subsidiary; or
(viii) any Guarantee of a Significant Subsidiary ceases to be in full
force and effect (other than as expressly provided for under the Indenture)
or is declared null and void, or any Guarantor which is a Significant
Subsidiary denies that it has any further liability under any Guarantee, or
gives notice to such effect (other than by reason of the termination of the
Indenture or the release of any such Guarantee in accordance with the
Indenture).
If any Event of Default (other than as specified in clause (vii) of the
preceding paragraph with respect to the Company) occurs and is continuing, the
Trustee or the holders of at least 25% in aggregate principal amount of the then
outstanding Notes may, and the Trustee at the request of such holders shall,
declare all the Notes to be due and payable immediately by notice in writing to
the Company, and to the Company and the Trustee if by the holders, specifying
the respective Event of Default and that such notice is a 'notice of
acceleration,' and the Notes shall become immediately due and payable.
Notwithstanding the foregoing, in the case of an Event of Default arising from
the events specified in clause (vii) of the preceding paragraph with respect to
the Company, the principal of, premium, if any, and any accrued interest on all
outstanding Notes shall ipso facto become immediately due and payable without
further action or notice. Holders of the Notes may not enforce the Indenture or
the Notes except as provided in the Indenture.
The holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except (i) a continuing Default or Event of Default in the payment
of the principal of, or premium, if any, or interest on, the Notes (which may
only be waived with the consent of each holder of Notes affected), or (ii) in
respect of a covenant or provision which under the Indenture cannot be modified
or amended without the consent of the holder of each Note outstanding. Holders
of a majority in principal amount of the then outstanding Notes may direct the
Trustee in its exercise of any trust or power subject to certain limitations,
including that such direction not conflict with any rule of law or the Indenture
or expose the Trustee to liability, and provided that the Trustee is entitled to
receive indemnification in connection with any such direction. The Trustee may
withhold from holders of the Notes notice of any continuing Default or Event of
Default (except a Default or Event of Default relating to the payment of
principal, premium or interest) if it determines that withholding notice is in
their interest.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required, upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
The Indenture provides that no recourse for the payment of the principal
of, premium, if any, or interest on any of the Notes or for any claim based
thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant or agreement of the Company or any of the Guarantors in the
Indenture, or in any of the Notes or the Guarantees or because of the creation
of any Indebtedness represented thereby, shall be had against any incorporator,
stockholder, officer, director, employee or controlling person of the Company or
any of the
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Guarantors or any successor Person thereof. Each Holder, by accepting the Notes,
waives and releases all such liability.
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, elect to have the
obligations of the Company discharged with respect to the outstanding Notes and
to have terminated the obligations of the Guarantors with respect to the
Guarantees ('defeasance'). Such defeasance means that the Company shall be
deemed to have paid and discharged the entire indebtedness represented by the
outstanding Notes and the Company and each of the Guarantors and to have
satisfied all other obligations under the Notes and the Indenture except for (i)
the rights of holders of the outstanding Notes to receive, solely from the trust
fund described below, payments in respect of the principal of, premium, if any,
and interest on such Notes when such payments are due, (ii) the Company's
obligations with respect to the Notes concerning issuing temporary Notes,
registration of Notes, mutilated, destroyed, lost or stolen Notes, and the
maintenance of an office or agency for payment and money for security payments
held in trust, (iii) the rights, powers, trusts, duties and immunities of the
Trustee under the Indenture, and (iv) the defeasance provisions of the
Indenture. In addition, the Company may, at its option and at any time, elect to
have the respective obligations of the Company and the Guarantors released with
respect to certain covenants that are described in the Indenture ('covenant
defeasance') and any omission to comply with such obligations shall not
constitute a Default or an Event of Default with respect to the Notes. In the
event that a covenant defeasance occurs, certain events (not including
non-payment, bankruptcy and insolvency events) described under '--Events of
Default' will no longer constitute Events of Default with respect to the Notes.
In order to exercise either defeasance or covenant defeasance, (i) the
Company shall irrevocably deposit with the Trustee, as trust funds in trust, for
the benefit of the holders of the Notes, cash in United States dollars, U.S.
Government Obligations (as defined in the Indenture), or a combination thereof,
in such amounts as will be sufficient, in the report of a nationally recognized
firm of independent public accountants or a nationally recognized investment
banking firm, to pay and discharge the principal of, premium, if any, and
interest on the outstanding Notes to redemption or maturity; (ii) the Company
shall have delivered to the Trustee an opinion of counsel in the United States
to the effect that the holders of the outstanding Notes will not recognize
income, gain or loss for Federal income tax purposes as a result of such
defeasance or covenant defeasance, as the case may be, and will be subject to
Federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such defeasance or covenant defeasance, as the
case may be, had not occurred (in the case of defeasance, such opinion must
refer to and be based upon a ruling of the Internal Revenue Service or a change
in applicable Federal income tax laws); (iii) no Default or Event of Default
shall have occurred and be continuing on the date of such deposit or insofar as
clause (vi) under the first paragraph under '--Events of Default' is concerned,
at any time during the period ending on the 91st day after the date of deposit;
(iv) such defeasance or covenant defeasance shall not result in a breach or
violation of, or constitute a Default under, the Indenture or any other material
agreement or instrument to which the Company is a party or by which it is bound;
and (v) the Company shall have delivered to the Trustee an Officers' Certificate
and an opinion of counsel, each stating that all conditions precedent under the
Indenture to either defeasance or covenant defeasance, as the case may be, have
been complied with and that no violations under agreements governing any other
outstanding Indebtedness would result therefrom.
SATISFACTION AND DISCHARGE
The Indenture will cease to be of further effect (except as to surviving
rights of registration of transfer or exchange of the Notes, as expressly
provided for in the Indenture) as to all outstanding Notes when (i) either (a)
all the Notes theretofore authenticated and delivered (except lost, stolen or
destroyed Notes which have been replaced or paid) have been delivered to the
Trustee for cancellation or (b) all Notes not theretofore delivered to the
Trustee for cancellation have become due and payable and the Company has
irrevocably deposited or caused to be deposited with the Trustee an amount in
United States dollars sufficient to pay and discharge the entire indebtedness on
the Notes not theretofore delivered to the Trustee for cancellation, for the
principal of, premium, if any, and interest to the date of deposit; (ii) the
Company has paid or caused to be paid all other sums payable under the Indenture
by the Company; and (iii) the Company has delivered to the Trustee an Officers'
Certificate and an opinion of counsel each stating that all conditions precedent
under the Indenture relating to the satisfaction and discharge of the Indenture
have been complied with.
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RELEASE OF GUARANTEE
So long as no Event of Default shall have occurred and be continuing upon
the sale or disposition (whether by merger, stock purchase, asset sale or
otherwise) of a Guarantor (or all or substantially all of the assets of any such
Guarantor or 50% or more of the Capital Stock of any such Guarantor) to an
entity which is not a Subsidiary of the Company, which transaction is otherwise
in compliance with the Indenture, such Guarantor shall be deemed released from
all its obligations under its guarantee of the Notes; provided, however, that
any such termination shall occur only to the extent that all obligations of such
Guarantor under all its guarantees of, and under all of its pledges of assets or
other security interests which secure, any Indebtedness of the Company shall
also terminate upon such release, sale or transfer. Upon the release of any
Guarantor from its Guarantee pursuant to the provisions of the Indenture, each
other Guarantor not so released shall remain liable for the full amount of
principal of, and interest on, the Notes as and to the extent provided in the
Indenture.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two paragraphs, the Indenture or the Notes
may be amended or supplemented with the written consent of the holders of at
least a majority in aggregate principal amount of the then outstanding Notes
(including consents obtained in connection with a tender offer or exchange offer
for the Notes), and any existing Default or Event of Default or compliance with
any provision of the Indenture or the Notes may be waived with the consent of
the holders of a majority in principal amount of the then outstanding Notes
(including consents obtained in connection with a tender offer or exchange offer
for Notes).
Without the consent of each holder affected, an amendment or waiver shall
not: (i) reduce the principal amount of the Notes whose holders must consent to
an amendment, supplement or waiver, (ii) reduce the principal of or change the
fixed maturity of any Note, or alter the provisions with respect to the
redemption of the Notes in a manner adverse to the holders of the Notes, (iii)
reduce the rate of or change the time for payment of interest on any Notes, (iv)
waive a Default or Event of Default in the payment of principal of, premium, if
any, or interest on the Notes (except that holders of at least a majority in
aggregate principal amount of the then outstanding Notes may (a) rescind an
acceleration of the Notes that resulted from a non-payment default, and (b)
waive the payment default that resulted from such acceleration), (v) make any
Note payable in money other than that stated in the Notes, (vi) make any change
in the provisions of the Indenture relating to waivers of past Defaults or the
rights of holders of Notes to receive payments of principal of, or premium, if
any, or interest on, the Notes, (vii) waive a redemption payment with respect to
any Note, or (viii) modify or change any of the provisions of the Indenture
relating to the subordination of the Notes in a manner adverse to the holders of
the Notes.
Notwithstanding the foregoing, without the consent of any holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
(i) to cure any ambiguity, defect or inconsistency, (ii) to provide for
uncertificated Notes in addition to or in place of certificated Notes, (iii) to
provide for the assumption of the Company's obligations to holders of the Notes
in the event of any Disposition involving the Company in which the Company is
not the Surviving Person, (iv) to make any change that would provide any
additional rights or benefits to the holders of the Notes or that does not
adversely affect the rights of any such holder, (v) to comply with the
requirements of the Securities and Exchange Commission in order to effect or
maintain the qualification of the Indenture under the Trust Indenture Act, (vi)
to provide for additional Guarantors of the Notes, (vii) to evidence the release
of any Guarantor as described under '--Release of Guarantee,' (viii) to evidence
and provide for the acceptance of appointment by a successor trustee under the
Indenture with respect to the Notes, or (ix) to eliminate the Guarantee of
Freedom Chemical Diamalt in the form existing on the Issue Date and provide for
the full and unconditional Guarantee by Freedom Chemical Diamalt upon the
occurrence of certain events.
TRANSFER AND EXCHANGE
The registered holder of a Note will be treated as the owner of it for all
purposes. A holder may transfer or exchange Notes in accordance with the
Indenture. The Registrar and the Trustee may require a holder among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a holder to pay any taxes and fees required by law or
permitted by the Indenture. Neither the Company nor the Registrar shall be
required to issue, register the transfer of or exchange any Note (i) during a
period beginning at the opening of business on the day that the Trustee receives
notice of any redemption from the Company and ending
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at the close of business on the day the notice of redemption is sent to holders,
(ii) selected for redemption, in whole or in part, except the unredeemed portion
of any Note being redeemed in part may be transferred or exchanged, and (iii)
during a Change of Control Offer or an Asset Sale Offer if such Note is tendered
pursuant to such Change of Control Offer or Asset Sale Offer and not withdrawn.
THE TRUSTEE
The Bank of New York is the Trustee under the Indenture and has been
appointed by the Company as Registrar and Paying Agent with regard to the Notes.
The Indenture (including the provisions of the Trust Indenture Act
incorporated by reference therein) contains limitations on the rights of the
Trustee thereunder, should it become a creditor of the Company, to obtain
payment of claims in certain cases or to realize on certain property received by
it in respect of any such claims, as security or otherwise. The Trustee is
permitted to engage in other transactions; provided, however, if it acquires any
conflicting interest (as defined in the Trust Indenture Act) it must eliminate
such conflict or resign.
The Bank of New York was a lender under the Freedom Credit Agreement and is
a lender under the Amended and Restated Credit Agreement.
GOVERNING LAW
The Indenture is, and the New Notes and the Guarantees will be, governed by
the laws of the State of New York, without regard to the principles of conflicts
of law.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for the definition of all other terms used in the
Indenture.
'Acquired Debt' means, with respect to any specified Person, Indebtedness
of any other Person (the 'Acquired Person') existing at the time the Acquired
Person merges with or into, or becomes a Subsidiary of, such specified Person,
including Indebtedness incurred in connection with, or in contemplation of, the
Acquired Person merging with or into, or becoming a Subsidiary of, such
specified Person, provided that Indebtedness of such Person which is redeemed,
defeased, retired or otherwise repaid at the time of or immediately upon
consummation of the transactions by which such Person becomes a Restricted
Subsidiary or such Asset Acquisition shall not be Acquired Debt.
'Affiliate' means, with respect to any specified Person, any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person. For purposes of this definition,
'control' (including, with correlative meanings, the terms 'controlling,'
'controlled by' and 'under common control with') of any Person means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise.
'Amended and Restated Credit Agreement' means the Company's Amended and
Restated Credit Agreement, dated as of October 11, 1996 among the Company,
Freedom Chemical Diamalt, as co-borrower, Citicorp USA, Inc. as agent, the
financial institutions party thereto in their capacities as lenders and issuing
banks thereunder, together with the related documents thereto (including without
limitation, any guarantee agreements and security documents), in each case as
such agreements may be amended, modified, restated, supplemented, renewed,
refunded, replaced or refinanced from time to time, including (i) any related
notes, letters of credit, guarantees, collateral documents, instruments and
agreements executed in connection therewith, and in each case as amended,
modified, restated, supplemented, renewed, refunded, replaced or refinanced from
time to time, and (ii) any notes, guarantees, collateral documents, instruments
and agreements executed in connection with any such amendment, modification,
restatement, supplement, renewal, refunding, replacement or refinancing.
'Applicable Premium' means, with respect to a Note, the greater of (i) 1.0%
of the then outstanding principal amount of such Note or (ii) the excess of (A)
the present value of the required interest and principal payments due on such
Note, computed using a discount rate equal to the Treasury Rate plus 75 basis
points, over (B) the then outstanding principal amount of such Note; provided
that in no event will the Applicable Premium exceed the amount of the applicable
redemption price upon an optional redemption less 100%, at any time on or after
October 15, 2001.
'Asset Sale' means (i) any sale, lease, conveyance or other disposition by
the Company or any Restricted Subsidiary (other than to the Company or a
Restricted Subsidiary and other than directors' qualifying shares) of
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any assets (including by way of a sale-and-leaseback) other than in the ordinary
course of business (provided that (x) the sale, lease, conveyance or other
disposition of all or substantially all of the assets of the Company shall not
be an 'Asset Sale' but instead shall be governed by the provisions of the
Indenture described under 'Merger, Consolidation and Sale of Assets' and (y)
Investments made in compliance with the Restricted Payments covenant shall not
be deemed to be Asset Sales), or (ii) the issuance or sale of Capital Stock
(other than Disqualified Stock) of any Restricted Subsidiary, in the case of
each of (i) and (ii), whether in a single transaction or a series of related
transactions, to any Person (other than to the Company or a Restricted
Subsidiary and other than directors' qualifying shares) for Net Proceeds in
excess of $1,000,000; provided, however, the following transactions shall not be
deemed Asset Sales:
(i) the Company and the Restricted Subsidiaries may (x) convey, sell,
lease, transfer, assign or otherwise dispose of assets pursuant to and in
accordance with the limitation on mergers, sales or consolidations
provisions in the Indenture and (y) make Restricted Payments permitted by
the Restricted Payment covenant in the Indenture;
(ii) the Company and the Restricted Subsidiaries may create or assume
Liens (or permit any foreclosure thereon) securing Indebtedness to the
extent that such Lien does not violate the '--Limitation on Liens' covenant
above; and
(iii) the Company and the Restricted Subsidiaries may consummate any
sale or series of related sales of assets or properties of the Company and
the Restricted Subsidiaries having an aggregate Fair Market Value of less
than $2,500,000 in any fiscal year.
'Capital Lease Obligation' of any Person means, at the time any
determination thereof is to be made, the amount of the liability in respect of a
capital lease for property leased by such Person that would at such time be
required to be capitalized on the balance sheet of such Person in accordance
with GAAP.
'Capital Stock' of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) corporate stock or other equity
participations, including partnership interests, whether general or limited, of
such Person, including any Preferred Stock.
'Cash Equivalents' means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof; (ii)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Rating Services or Moody's Investors
Service, Inc.; (iii) commercial paper maturing no more than one year from the
date of creation thereof and, at the time of acquisition, having a rating of at
least A-1 from Standard & Poor's Rating Services or at least P-1 from Moody's
Investors Service, Inc.; (iv) certificates of deposit or bankers' acceptances
(or, with respect to foreign banks, similar instruments) maturing within one
year from the date of acquisition thereof issued by any bank organized under the
laws of the United States of America or any state thereof or the District of
Columbia or any member of the European Economic Community any U.S. branch of a
foreign bank having at the date of acquisition thereof combined capital and
surplus of not less than $200 million; (v) repurchase obligations with a term of
not more than seven days for underlying securities of the types described in
clause (i) above entered into with any bank meeting the qualifications specified
in clause (iv) above; and (vi) investments in money market funds which invest
substantially all their assets in securities of the types described in clauses
(i) through (v) above.
'Cash Flow' means, with respect to any period, the (i) Consolidated Net
Income of the Company and its Restricted Subsidiaries for such period, plus (ii)
provision for taxes based on income or profits, to the extent such provision for
taxes was included in computing such Consolidated Net Income, and any provision
for taxes utilized in computing the net losses under clause (i) hereof, plus
(iii) Consolidated Interest Expense of the Company and its Restricted
Subsidiaries for such period, plus (iv) depreciation, amortization (including
deferred financing costs and expenses) and all other non-cash charges or
expenses (including minority interests), to the extent such depreciation,
amortization and other non-cash charges or expenses (including minority
interests) were deducted in computing such Consolidated Net Income (including
amortization of goodwill and other intangibles).
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'Change of Control' means the occurrence of any of the following events:
(i) any 'person' or 'group' (as such terms are used in Sections 13(d) and 14(d)
of the Exchange Act), other than Permitted Holders, is or becomes (including by
merger, consolidation or otherwise) the 'beneficial owner' (as defined in Rules
13d-3 and 13d-5 under the Exchange Act, except that a Person shall be deemed to
have beneficial ownership of all shares that such Person has the right to
acquire, whether such right is exercisable immediately or only after the passage
of time), directly or indirectly, of 50% or more of the voting power of the
total outstanding Voting Stock of the Company; (ii) during any period of two
consecutive years, individuals who at the beginning of such period constituted
the Board of Directors of the Company (together with any new directors whose
election to such Board of Directors, or whose nomination for election by the
stockholders of the Company, was approved by a vote of 66 2/3% of the directors
then still in office who were either directors at the beginning of such period
or whose election or nomination for election was previously so approved) cease
for any reason to constitute a majority of such Board of Directors of the
Company then in office; or (iii) the sale or other disposition (including by
merger, consolidation or otherwise) of all or substantially all of the Capital
Stock or assets (where the transferee of such assets has assumed the obigation
of the Company under the Notes pursuant to the covenant described under 'Merger,
Consolidation and Sale of Assets') of the Company and its Restricted
Subsidiaries to any Person or Group (as defined in Rule 13d-5 of the Exchange
Act) excluding transfers or conveyances to or among the Company's Restricted
Subsidiaries and other than to the Permitted Holders as an entirety or
substantially as an entirety in one transaction or a series of related
transactions.
'Company' means Freedom Chemical Company, a Delaware corporation, unless
and until a successor replaces it in accordance with the Indenture and
thereafter means such successor.
'Consolidated Cash Flow Coverage Ratio' means, with respect to any date of
determination, the ratio of (i) the aggregate amount of Cash Flow for the period
of the most recent four consecutive fiscal quarters for which financial
statements are available, to (ii) Consolidated Interest Expense for such four
fiscal quarters of the Company, determined on a pro forma basis after giving pro
forma effect to (i) the incurrence of such Indebtedness and (if applicable) the
application of the net proceeds therefrom, including to refinance other
Indebtedness, as if such Indebtedness was incurred, and the application of such
proceeds occurred, at the beginning of such four-quarter period; (ii) the
incurrence, repayment or retirement of any other Indebtedness by the Company and
its Restricted Subsidiaries since the first day of such four-quarter period as
if such Indebtedness was incurred, repaid or retired at the beginning of such
four-quarter period; (iii) in the case of Acquired Debt, the related acquisition
as if such acquisition had occurred at the beginning of such four-quarter
period; and (iv) any acquisition or disposition by the Company and its
Restricted Subsidiaries of any company or any business or any assets out of the
ordinary course of business (without regard to clause (iii) of the definition of
Consolidated Net Income), or any related repayment of Indebtedness, in each case
since the first day of such four-quarter period, assuming such acquisition,
disposition or related repayment had been consummated on the first day of such
four-quarter period.
'Consolidated Interest Expense' means, with respect to any period, the sum
of (i) the interest expense of the Company and its Restricted Subsidiaries for
such period, determined on a consolidated basis in accordance with GAAP
consistently applied (except as provided herein), including, without limitation,
(a) amortization of debt discount, (b) the net cash payments, if any, under
interest rate contracts, (c) the interest portion of any deferred payment
obligation, (d) accrued interest, and (e) all commissions, discounts and other
fees and charges owed with respect to letters of credit, bankers' acceptance
financing or similar facilities, plus (ii) the interest component of the Capital
Lease Obligations paid, accrued and/or scheduled to be paid or accrued by the
Company during such period, of the Company and its Restricted Subsidiaries, plus
(iii) all cash dividends paid during such period by the Company and its
Restricted Subsidiaries with respect to any Disqualified Stock (other than by
Restricted Subsidiaries of such Person to such Person or such Person's
Restricted Subsidiaries and other than any dividend paid in Capital Stock (other
than Disqualified Stock)), in each case as determined on a consolidated basis in
accordance with GAAP consistently applied; provided, that Consolidated Interest
Expense shall exclude the amortization of fees related to the issuance of the
Notes and fees (other than letters of credit) related to any bank indebtedness
of the Company or any Restricted Subsidiary, including Senior Bank Debt.
'Consolidated Net Income' means, with respect to any period, the net income
(or loss) of the Company and its Restricted Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP consistently applied,
adjusted to the extent included in calculating such net income (or loss), by
excluding, without duplication, (i) extraordinary gains and losses, (ii) the
portion of net income (or loss) of the Company
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and its Restricted Subsidiaries allocable to interests in unconsolidated Persons
or Unrestricted Subsidiaries, except to the extent of the amount of dividends or
distributions actually paid to the Company or its Restricted Subsidiaries by
such other Person during such period, (iii) net income (or loss) of any Person
combined with the Company or any of its Restricted Subsidiaries on a 'pooling of
interests' basis attributable to any period prior to the date of combination,
(iv) net gain or loss in respect of sale, transfer or disposition of assets
(including, without limitation, pursuant to sale and leaseback transactions)
other than in the ordinary course of business, (v) the net income of any
Restricted Subsidiary to the extent that the declaration of dividends or similar
distributions by that Restricted Subsidiary of that income to the Company is not
at the time permitted, directly or indirectly, by operation of the terms of its
charter or any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to that Restricted Subsidiary or its
stockholders (other than pursuant to the Notes or the Indenture), (vi)
Refinancing Expenses (including any write-off of deferred financing costs
related to the Existing Credit Agreements) to the extent recognized as an
expense prior to December 31, 1996, (vii) the non-recurring cumulative effect of
a change in accounting principles, (viii) non-recurring gains and non-recurring,
non-cash losses and costs, (ix) any non-cash compensation expense in connection
with the exercise of, grant to or repurchase from officers, directors, and
employees of stock, stock options or stock equivalents, or (x) any non-cash
charge or expense arising by reason of the application of APB no. 16.
'Consolidated Total Assets' means, as of any date, the total assets of the
Company and its Restricted Subsidiaries, all as set forth on the most recently
available consolidated balance sheet of the Company and its Restricted
Subsidiaries prepared in conformity with GAAP.
'Currency Agreement Obligations' means the obligations of any person under
a foreign exchange contract, currency swap agreement or other similar agreement
or arrangement to protect such person against fluctuations in currency values.
'Default' means any event that is, or after the giving of notice or passage
of time or both would be, an Event of Default.
'Designated Senior Debt' means (i) the Senior Bank Debt, and (ii) any other
Senior Debt of the Company permitted to be incurred under the Indenture the
principal amount of which is $5 million or more at the time of the designation
of such Senior Debt as 'Designated Senior Debt' by the Company in a written
instrument delivered to the Trustee.
'Disposition' means, with respect to any Person, any merger, consolidation
or other business combination involving such Person (whether or not such Person
is the Surviving Person) or the sale, assignment, transfer, lease, conveyance or
other disposition of all or substantially all of such Person's assets.
'Disqualified Stock' means (i) any Preferred Stock of any Restricted
Subsidiary and (ii) any Capital Stock that, by its terms (or by the terms of any
security into which it is convertible or for which it is exchangeable), or upon
the happening of any event, matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or is redeemable at the option of the
holder thereof (other than upon the occurrence of an 'asset sale' or a change of
control of the Company in circumstances where the holders of the Notes would
have similar rights), in whole or in part on or prior to the stated maturity of
the Notes.
'Dollars' and '$' means lawful money of the United States of America.
'Exchange Act' means the Securities Exchange Act of 1934, as amended.
'Fair Market Value' means, with respect to any asset or property, the sale
value that would be obtained in an arm's-length transaction between an informed
and willing seller under no compulsion to sell and an informed and willing buyer
under no compulsion to buy.
'Foreign Subsidiary' means a Subsidiary of a Person not organized under the
laws of the United States or any political subdivision thereof and the
operations of which are located substantially outside the United States.
'GAAP' means generally accepted accounting principles in the United States
set forth in the Statements of Financial Accounting Standards and the
Interpretations, Accounting Principles Board Opinions and AICPA Accounting
Research Bulletins which are applicable as of the Issue Date and consistently
applied.
'Guarantee' means a guarantee (other than by endorsement of negotiable
instruments for collection or deposit in the ordinary course of business),
direct or indirect, in any manner (including, without limitation, letters of
credit and reimbursement agreements in respect thereof), of all or any part of
any Indebtedness.
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'Guarantor' means (i) each of Freedom Textile Chemicals Co., Hilton Davis
Chemical Co., Kalama Chemical, Inc., Kalama Specialty Chemical, Inc., Freedom
Chemical Diamalt GmbH, Kalama Foreign Sales Corporation, Freedom Textile
Chemical Company (South Carolina) Inc., FCC Acquisition Corp., (ii) each of the
Company's Restricted Subsidiaries who become Restricted Subsidiaries after the
Issue Date and which are organized in the United States and (iii) any other
Restricted Subsidiary of the Company that the Company designates as a Guarantor
in a written instrument delivered to the Trustee.
'Indebtedness' means, with respect to any Person, without duplication, and
whether or not contingent, (i) all indebtedness of such Person for borrowed
money or which is evidenced by a note, bond, debenture or similar instrument,
(ii) all obligations of such Person to pay the deferred or unpaid purchase price
of property or services, which purchase price is due more than six months after
the date of placing such property in service or taking delivery and title
thereto or the completion of such service (other than obligations related to
premiums payable in connection with insurance obtained in the ordinary course of
business), (iii) all Capital Lease Obligations of such Person, (iv) all
obligations of such Person in respect of letters of credit or bankers'
acceptances issued or created for the account of such Person, (v) to the extent
not otherwise included in this definition, all net obligations of such Person
under Interest Rate Agreement Obligations or Currency Agreement Obligations of
such Person, (vi) all liabilities of others of the kind described in the
preceding clause (i), (ii) or (iii) secured by any Lien on any property owned by
such Person even though such Person has not assumed or become liable for the
payment of such liabilities; provided, however, the amount of such Indebtedness
for purposes of this definition shall be limited to the lesser of the amount of
Indebtedness secured by such Lien or the value of the property subject to such
Lien, (vii) all Disqualified Stock issued by such Person and all Preferred Stock
issued by a Subsidiary of such Person, and (viii) to the extent not otherwise
included, any guarantee by such Person of any other Person's indebtedness or
other obligations described in clauses (i) through (vii) above. 'Indebtedness'
of the Company and the Restricted Subsidiaries shall not include (i) current
trade payables incurred in the ordinary course of business and payable in
accordance with customary practices and (ii) non-interest bearing installment
obligations and accrued liabilities incurred in the ordinary course of business
which are not more than 90 days past due (or, if overdue for more than 90 days,
are being contested in good faith). The principal amount outstanding of any
Indebtedness issued with original issue discount is the accreted value of such
Indebtedness and Indebtedness shall not include any liability for federal,
state, local or other taxes.
'Interest Rate Agreement Obligations' means, with respect to any Person,
the Obligations of such Person under (i) interest rate swap agreements, interest
rate cap agreements and interest rate collar agreements, and (ii) other
agreements or arrangements designed to protect such Person against fluctuations
in interest rates.
'Investment' in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee or
similar arrangement but excluding advances to customers and employees in the
ordinary course of business) to, capital contribution (by means of any transfer
of cash or other property to others or any payment for property or services for
the account or use of others) to, or any purchase or acquisition of Capital
Stock, bonds, notes, debentures or other similar instruments issued by, such
Person and shall include the designation of a Restricted Subsidiary as an
Unrestricted Subsidiary. For purposes of the definition of 'Unrestricted
Subsidiary' and the 'Limitation on Restricted Payments' covenant described
above, (i) 'Investment' shall include the Fair Market Value of the assets (net
of liabilities) of any Restricted Subsidiary of the Company at the time that
such Restricted Subsidiary of the Company is designated an Unrestricted
Subsidiary and shall exclude the Fair Market Value of the assets (net of
liabilities) of any Unrestricted Subsidiary at the time that such Unrestricted
Subsidiary is designated a Restricted Subsidiary of the Company and (ii) any
property transferred to or from an Unrestricted Subsidiary shall be valued at
its Fair Market Value at the time of such transfer, in each case as determined
by the Board of Directors in good faith.
'Issue Date' means October 17, 1996, the date on which the Old Notes were
originally issued under the Indenture.
'Lien' means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in any asset and any filing of, or agreement to give, any financing
statement under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
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'Net Proceeds' means, with respect to any Asset Sale by any Person, the
aggregate cash or Cash Equivalent proceeds received by such Person and/or its
Affiliates in respect of such Asset Sale, which amount is equal to the excess,
if any, of (i) the cash or Cash Equivalent received by such Person and/or its
Affiliates (including any cash payments received by way of deferred payment
pursuant to, or monetization of, a note or installment receivable or otherwise,
but only as and when received) in connection with such Asset Sale, over (ii) the
sum of (a) the amount of any Indebtedness that is secured by such asset and
which is required to be repaid by such Person in connection with such Asset
Sale, plus (b) all fees, commissions and other expenses incurred (including,
without limitation, the fees and expenses of legal counsel and investment
banking, underwriting and brokerage fees and expenses) by such Person in
connection with such Asset Sale, plus (c) provision for taxes, including income
taxes, attributable to the Asset Sale or attributable to required prepayments or
repayments of Indebtedness with the proceeds of such Asset Sale, plus (d)
appropriate amounts to be provided by the Company or any Restricted Subsidiary
of the Company as a reserve against any liabilities associated with such Asset
Sale, including, without limitation, pension and other post-employment benefit
liabilities, liabilities related to environmental matters and liabilities under
any indemnification obligations associated with such Asset Sale, plus (e) if
such Person is a Restricted Subsidiary, any dividends or distributions payable
to holders of minority interests in such Restricted Subsidiary from the proceeds
of such Asset Sale.
'Obligations' means any principal, interest, penalties, fees,
indemnifications, reimbursement obligations, damages and other liabilities
payable under the documentation governing any Indebtedness.
'Permitted Holders' means (i) collectively or individually Joseph
Littlejohn & Levy Fund, L.P., Joseph Littlejohn & Levy Fund L.P. II, The Freedom
Group Partnership; or (ii) any Affiliate of any of the Persons described in
clause (i) and with respect to Joseph Littlejohn & Levy Fund, L.P. and Joseph
Littlejohn & Levy Fund II, L.P., any partnership or corporation which is managed
or controlled by JLL Associates, L.P. or any Affiliate thereof. For purposes of
this definition, 'control,' as used with respect to any Person, shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through
ownership of voting securities or by contract or otherwise.
'Permitted Investments' means (i) any Investment in the Company or any
Restricted Subsidiary; (ii) any Investment in Cash Equivalents; (iii) any
Investment in a Person (an 'Acquired Person') if, as a result of such
Investment, (a) the Acquired Person becomes a Restricted Subsidiary of the
Company, or (b) the Acquired Person either (1) is merged, consolidated or
amalgamated with or into the Company or one of its Restricted Subsidiaries and
the Company or such Restricted Subsidiary is the Surviving Person, or (2)
transfers or conveys substantially all of its assets to, or is liquidated into,
the Company or one of its Restricted Subsidiaries; (iv) Investments in accounts
and notes receivable acquired in the ordinary course of business; (v) any
securities received in connection with an Asset Sale that complies with the
covenant described under 'Limitations on Asset Sales'; (vi) interest rate and
currency agreement obligations permitted pursuant to the second paragraph of the
covenant described under 'Incurrence of Indebtedness' above; (vii) investments
in or acquisitions of Capital Stock or similar interests in Persons (other than
Affiliates of the Company) received in the bankruptcy or reorganization of or by
such Person or any exchange of such investment with the issuer thereof or taken
in settlement of or other resolution of claims or disputes, and, in each case,
extensions, modifications and renewals thereof; (viii) loans or advances to
officers, directors and employees made in the ordinary course of business, not
to exceed $1.0 million in the aggregate; (ix) Investments for which the sole
consideration provided is the Capital Stock of the Company (other than
Disqualified Stock); (x) Investments in evidences of Indebtedness, securities or
other property received by the Company or any Restricted Subsidiary from another
Person in connection with any bankruptcy proceeding or by reason of a
composition or readjustment of debt or a reorganization of such Person or as a
result of foreclosure, perfection or enforcement of any Lien in exchange for
evidences of Indebtedness, securities or other property of such Person held by
the Company or any Restricted Subsidiary, or for other liabilities or
obligations of such other Person to the Company or any Restricted Subsidiary
that were created in accordance with the terms of the Indenture; (xi) any
Investments existing in an Acquired Person at the time of the acquisition of
such Acquired Person, provided that such Investment is not incurred in
connection with, or in contemplation of such acquisition; (xii) loans or
advances to stockholders of the Company solely for the purchase of Capital Stock
of the Company by such stockholders, not to exceed $4.0 million in the
aggregate; and (xiii) any other Investments that do not exceed $1.0 million in
amount in the aggregate at any one time outstanding.
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'Permitted Liens' means (i) Liens on assets or property of the Company that
secure Senior Debt of the Company and Liens on assets or property of a
Restricted Subsidiary that secure Senior Debt of such Restricted Subsidiary;
(ii) Liens securing Indebtedness of a Person existing at the time that such
Person is merged into or consolidated with the Company or a Restricted
Subsidiary; provided, however, that such Liens were in existence prior to the
contemplation of such merger or consolidation and do not extend to any assets
other than those of such Person; (iii) Liens on property acquired by the Company
or a Restricted Subsidiary; provided, however, that such Liens were in existence
prior to the contemplation of such acquisition and do not extend to any other
property; (iv) Liens in respect of Interest Rate Obligations and Currency
Agreement Obligations permitted under the Indenture; (v) Liens in favor of the
Company or any Restricted Subsidiary; (vi) Liens incurred, or pledges and
deposits in connection with the performance of tenders, bids, leases, workers'
compensation, bankers' acceptances, unemployment insurance and other social
security benefits, and leases, surety and appeal bonds, government contracts and
other obligations of like nature incurred by the Company or any Restricted
Subsidiary in the ordinary course of business; (vii) Liens imposed by law,
including, without limitation, mechanics', carriers', warehousemen's,
material-men's, suppliers' and vendors' Liens, incurred by the Company or any
Restricted Subsidiary in the ordinary course of business; (viii) Liens for ad
valorem, income or property taxes or assessments and similar charges which
either are not delinquent or are being contested in good faith by appropriate
proceedings for which the Company has set aside on its books reserves to the
extent required by GAAP; (ix) Liens existing on the Issue Date; (x) Liens
securing the Notes or Guarantees; (xi) Liens securing or arising from Purchase
Money Obligations permitted to be incurred under clause (ix) of the definition
of Permitted Indebtedness, provided such Liens relate to the property (and
monetary proceeds thereof) which was acquired or constructed with such Purchase
Money Obligations and the Capital Stock of any Person formed to acquire such
property and that does not own any other material property; (xii) easements,
rights-of-way, municipal and zoning ordinances and similar charges,
encumbrances, title defects or other irregularities that do not materially
interfere with the ordinary course of business of the Company or any of its
Restricted Subsidiaries; (xiii) leases or subleases granted to others that do
not materially interfere with the ordinary course of business of the Company and
its Restricted Subsidiaries, taken as a whole; (xiv) Liens arising from the
rendering of a final judgment or order against the Company or any Restricted
Subsidiary of the Company that does not give rise to an Event of Default; (xv)
Liens securing reimbursement obligations with respect to letters of credit that
encumber documents and other property relating to such letters of credit and the
products and proceeds thereof; (xvi) Liens in favor of customs and revenue
authorities arising as a matter of law to secure payment of customs duties in
connection with the importation of goods; (xvii) Liens encumbering customary
initial deposits and margin deposits, and other Liens that are either within the
general parameters customary in the industry and incurred in the ordinary course
of business, in each case, securing Indebtedness under Interest Rate Agreement
Obligations and Currency Agreement Obligations and forward contracts, options,
future contracts, futures, options or similar agreements or arrangements
designed to protect the Company or any of its Restricted Subsidiaries from
fluctuations in the price of commodities; and (xviii) Liens on or sales of
receivables in the ordinary course of business (including in connection with the
establishment of an accounts receivable facility).
'Person' means any individual, corporation, partnership, joint venture,
association, joint-stock company, limited liability company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
'Preferred Stock' as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends or distributions, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
Person, over Capital Stock of any other class of such Person.
'Purchase Money Obligation' means any Indebtedness secured by a Lien on
assets related to the business of the Company or the Restricted Subsidiaries,
and any additions and accessions thereto, which are purchased or constructed by
the Company or any Restricted Subsidiary at any time after the Issue Date;
provided that (i) any security agreement or conditional sales or other title
retention contract pursuant to which the Lien on such assets is created
(collectively a 'Security Agreement') shall be entered into within 180 days
after the purchase or substantial completion of the construction of such assets
and shall at all times be confined solely to the assets so purchased or
acquired, any additions and accessions thereto and any proceeds therefrom, (ii)
at no time shall the aggregate principal amount of the outstanding Indebtedness
secured thereby be increased, except in connection with the purchase of
additions and accessions thereto and except in respect of fees and other
obligations in
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respect of such Indebtedness and (iii) (A) the aggregate outstanding principal
amount of Indebtedness secured thereby (determined on a per asset basis in the
case of any additions and accessions) shall not at the time such Security
Agreement is entered into exceed 100% of the purchase price to the Company or
any Restricted Subsidiary of the assets subject thereto or (B) the Indebtedness
secured thereby shall be with recourse solely to the assets so purchased or
acquired, any additions and accessions thereto and any proceeds therefrom.
'Refinancing Expenses' means (i) legal, accounting, printing, engraving,
registration, blue sky and other fees and expenses incurred by the Company which
are directly attributable to the Offering, the amendment and restatement of the
Freedom Credit Agreement, the initial borrowings under the Amended and Restated
Credit Agreement and the repayment of amounts outstanding under the Existing
Credit Agreements, the Cash Equity Investment and the Additional Equity
Investments and the Exchange Offer, and (ii) fees, discounts and commissions
paid to the Initial Purchasers in connection with the Offering or to any agent
or lender under the Amended and Restated Credit Agreement.
'Restricted Investment' means an Investment other than a Permitted
Investment.
'Restricted Payment' means (i) any dividend or other distribution declared
or paid on any Capital Stock of the Company (other than dividends or
distributions payable solely in Capital Stock (other than Disqualified Stock) of
the Company or dividends or distributions payable to the Company or any
Restricted Subsidiary); (ii) any payment to purchase, redeem or otherwise
acquire or retire for value any Capital Stock of the Company; (iii) any
voluntary or optional payment to purchase, redeem, defease or otherwise acquire
or retire for value any Indebtedness that is subordinated in right of payment to
the Notes other than a purchase, redemption, defeasance or other acquisition or
retirement for value that is paid for with the proceeds of Refinancing
Indebtedness that is permitted under the covenant described under '--Certain
Covenants--Limitation on Incurrence of Indebtedness'; or (iv) any Restricted
Investment.
'Restricted Subsidiary' means each direct or indirect Subsidiary of the
Company other than an Unrestricted Subsidiary.
'Senior Bank Debt' means (i) the Indebtedness outstanding or arising under
the Amended and Restated Credit Agreement, (ii) all obligations incurred by or
owing to the holders of such Indebtedness outstanding or arising under the
Amended and Restated Credit Agreement (including, but not limited to, all fees
and expenses of counsel and all other charges, fees and expenses), and (iii) all
interest rate agreement obligations arising in connection thereafter with any
party to the Amended and Restated Credit Agreement.
'Senior Debt' means with respect to the Company, the principal of and
interest (including post-petition interest) on, and all other amounts owing in
respect of, (i) Senior Bank Debt, (ii) any other Indebtedness incurred by the
Company (including, but not limited to, reasonable fees and expenses of counsel
and all other charges, fees and expenses incurred in connection with such
Indebtedness), unless the instrument creating or evidencing such Indebtedness or
pursuant to which such Indebtedness is outstanding expressly provides that such
Indebtedness is on a parity with or subordinated in right of payment to the
Notes. Notwithstanding the foregoing, Senior Debt shall not include (i) any
Indebtedness for federal, state, local or other taxes, (ii) any Indebtedness
among or between the Company, any Restricted Subsidiary and/or their Affiliates
which is not pledged or otherwise assigned to the agent for the holders of
Senior Bank Debt, (iii) any Indebtedness incurred for the purchase of goods or
materials, or for services obtained, in the ordinary course of business or any
obligations in respect of any such Indebtedness, (iv) any Indebtedness that is
incurred in violation of the Indenture, (v) Indebtedness evidenced by the Notes
or (vi) Indebtedness of a person that is expressly subordinate or junior in
right of payment to any other Indebtedness of such Person.
'Series A Redeemable Preferred Stock' means the 2,800 shares of Freedom
Textile's $1,000 par value Series A Preferred Stock, as the terms of such
Preferred Stock were in effect on the Issue Date.
'Significant Subsidiary' means any Subsidiary that would be a 'significant
subsidiary' as defined in Article 1, Rule 1-02 of Regulation S-X promulgated
pursuant to the Securities Act, as such Regulation S-X is in effect on the Issue
Date.
'Subordinated Indebtedness' means Indebtedness of the Company subordinated
in right of payment to the Notes.
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'Subsidiary' of a Person means (i) any corporation more than 50% of the
outstanding voting power of the Voting Stock of which is owned or controlled,
directly or indirectly, by such Person or by one or more other Subsidiaries of
such Person, or by such Person and one or more other Subsidiaries thereof, or
(ii) any limited partnership of which such Person or any Subsidiary of such
Person is a general partner, or (iii) any other Person (other than a corporation
or limited partnership) in which such Person, or one or more other Subsidiaries
of such Person, or such Person and one or more other Subsidiaries thereof,
directly or indirectly, has more than 50% of the outstanding partnership or
similar interests or has the power, by contract or otherwise, to direct or cause
the direction of the policies, management and affairs thereof.
'Surviving Person' means, with respect to any Person involved in or that
makes any Disposition, the Person formed by or surviving such Disposition or the
Person to which such Disposition is made.
'Treasury Rate' means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H.15(519) which
has become publicly available at least two business days prior to the date fixed
for prepayment (or, if such Statistical Release is no longer published, any
publicly available source of similar market data)) most nearly equal to the then
remaining term to October 15, 2001; provided, however, that if the then
remaining term to October 15, 2001 is not equal to the constant maturity of a
United States Treasury Security for which a weekly average yield is given, the
Treasury Rate shall be obtained by linear interpolation (calculated to the
nearest one-twelfth of a year) from the weekly average yields of United States
Treasury securities for which such yields are given, except that if the then
remaining term to October 15, 2001 is less than one year, the weekly average
yield on actually traded United States Treasury securities adjusted to a
constant maturity of one year shall be used.
'Unrestricted Subsidiary' means Indiamalt and any other Subsidiary of the
Company (other than a Guarantor) designated as such pursuant to and in
compliance with the covenant described under '--Limitation on Designations of
Unrestricted Subsidiaries.' Any such designation may be revoked by a Board
Resolution of the Company delivered to the Trustee, subject to the provisions of
such covenant.
'Voting Stock' of a Person means Capital Stock of such Person of the class
or classes pursuant to which the holders thereof have the general voting power
under ordinary circumstances to elect at least a majority of the board of
directors, managers or trustees of such Person (irrespective of whether or not
at the time stock of any other class or classes shall have or might have voting
power by reason of the happening of any contingency).
'Weighted Average Life to Maturity' means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required scheduled payment
of principal, including payment at final maturity, in respect thereof, with (b)
the number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (ii) the then outstanding
aggregate principal amount of such Indebtedness.
'Wholly Owned Restricted Subsidiary' means any Restricted Subsidiary with
respect to which all of the outstanding voting securities (other than directors'
qualifying shares) of which are owned, directly or indirectly, by the Company or
a Surviving Person of any Disposition involving the Company, as the case may be.
BOOK-ENTRY; DELIVERY AND FORM
The certificates representing the New Notes will be issued in fully
registered form, without coupons. Except as described below, the New Notes will
be deposited with, or on behalf of, The Depository Trust Company, New York, New
York (the 'Depository'), and registered in the name of Cede & Co. ('Cede') as
the Depository's nominee in the form of a global Note (the 'Global Note') or
will remain in the custody of the Trustee pursuant to the FAST Balance
Certificate Agreement between the Depository and the Trustee.
The Depository has advised the Company as follows: The Depository is a
limited-purpose trust company and organized under the laws of the State of New
York, a member of the Federal Reserve System, a 'clearing corporation' within
the meaning of the New York Uniform Commercial Code, and 'a clearing agency'
registered pursuant to the provisions of Section 17A of the Exchange Act. The
Depository was created to hold securities of institutions that have accounts
with the Depository ('participants') and to facilitate the clearance and
settlement of securities transactions among its participants in such securities
through electronic book-entry changes in accounts of the participants, thereby
eliminating the need for physical movement of securities
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certificates. The Depository's participants include securities brokers and
dealers (which may include the Initial Purchasers), banks, trust companies,
clearing corporations and certain other organizations. Access to the
Depository's book-entry system is also available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly. The Depository
agrees with and represents to its participants that it will administer its
book-entry system in accordance with its rules and by-laws and requirements of
law.
The Depository will credit, on its book-entry registration and transfer
system, the respective principal amounts of the New Notes represented by such
Global Note to the accounts of participants. Ownership of beneficial interests
in the Global Note will be limited to participants or persons that may hold
interests through participants. Ownership of beneficial interests in the Global
Note will be shown on, and the transfer of those ownership interests will be
effected only through, records maintained by the Depository (with respect to
participants' interest) and such participants (with respect to the owners of
beneficial interests in the Global Note other than participants). The laws of
some jurisdictions may require that certain purchasers of securities take
physical delivery of such securities in definitive form. Such limits and laws
may impair the ability to transfer or pledge beneficial interests in the Global
Note.
So long as the Depository, or its nominee, is the registered holder and
owner of the Global Note, the Depository or such nominee, as the case may be,
will be considered the sole owner and holder of the related New Notes for all
purposes of such New Notes. Owners of beneficial interests in the Global Note
will not be entitled to have the New Notes represented by such Global Note
registered in their names, will not receive or be entitled to receive physical
delivery of certificated Notes in definitive form and will not be considered to
be the owners or holders of any New Notes under the Global Note. Accordingly,
each person owning a beneficial interest in the Global Note must rely on the
procedures of the Depository and, if such person is not a participant, on the
procedures of the participant through which such person owns its interests, to
exercise any right of a holder of New Notes under the Global Note. The Company
understands that under existing industry practice, in the event an owner of a
beneficial interest in the Global Note desires to take any action that the
Depository, as the holder of the Global Note, is entitled to take, the
Depository would authorize the participants to take such action, and that the
participants would authorize beneficial owners owning through such participants
to take such action or would otherwise act upon the instructions of beneficial
owners owning through them.
Payment of principal of and interest on New Notes represented by the Global
Note registered in the name of and held by the Depository or its nominee will be
made to the Depository or its nominee, as the case may be, as the registered
owner and holder of the Global Note.
The Company expects that the Depository or its nominee, upon receipt of any
payment of principal or interest in respect of the Global Note, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global Note as
shown on the records of the Depository or its nominee. The Company also expects
that payments by participants to owners of beneficial interests in such Global
Notes through such participants will be governed by standing instructions and
customary practices, and will be the responsibility of such participants. The
Company will not have any responsibility or liability for any aspect of the
records relating to, or payments made on account of, beneficial ownership
interests in the Global Notes for any Note or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests or for
other aspect of the relationship between the Depository and its participants or
the relationship between such participants and the owners of beneficial
interests in the Global Notes owning through such participants.
Unless and until they are exchanged in whole or in part for certificated
New Notes in definitive form, the Global Note may not be transferred except as a
whole by the Depository to a nominee of such Depository or by a nominee of such
Depository to such Depository or another nominee of such Depository.
Beneficial owners of New Notes registered in the name of the Depository or
its nominee will be entitled to be issued, upon request, New Notes in definitive
certificated form.
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CERTIFICATED NOTES
The New Notes represented by the Global Note are exchangeable for
certificated New Notes in definitive form of like tenor as such New Notes in
denominations of U.S.$1,000 and integral multiples thereof if (i) the Depository
notifies the Company that it is unwilling or unable to continue as Depository
for the Global Note or if at any time the Depository ceases to be a clearing
agency registered under the Exchange Act, (ii) the Company in its discretion at
any time determines not to have all of the New Notes represented by the Global
Note or (iii) a default entitling the holders of the Notes to accelerate the
maturity thereof has occurred and is continuing. Any New Note that is
exchangeable pursuant to the preceding sentence is exchangeable for certificated
Notes issuable in authorized denominations and registered in such names as the
Depository shall direct.
Although the Depository has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Note among participants of the
Depository, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. Neither the
Trustee nor Freedom will have any responsibility for the performance by the
Depository or its respective participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
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EXCHANGE OFFER; REGISTRATION RIGHTS
In connection with the initial issuance and sale of the Old Notes, the
Initial Purchasers and their assignees became entitled to the benefits of the
Registration Rights Agreement. Pursuant to the Registration Rights Agreement
with the Initial Purchasers, for the benefit of the holders of the Old Notes,
the Company is obligated, at its expense, (i) to file the Registration Statement
of which this Prospectus forms a part with the SEC with respect to a registered
offer to exchange the Old Notes for the New Notes, which will have terms
substantially identical in all material respect to those of the Old Notes
(except that the New Notes will not contain terms with respect to transfer
restrictions) on or before December 16, 1996 and (ii) to use its best efforts to
cause the Registration Statement to be declared effective under the Securities
Act by February 14, 1997. Upon the effectiveness of the Registration Statement,
the Company will offer the New Notes in exchange for surrender of the Old Notes.
The Company will keep the Exchange Offer open for 30 days (or longer if required
by applicable law) after the date notice of the Exchange Offer is mailed to the
Holders of the Old Notes. For each Old Note surrendered to the Company pursuant
to the Exchange Offer, the Holder of such Old Note will receive a New Note
having a principal amount equal to that of the surrendered Old Note. Interest on
each New Note will accrue from the last interest payment date on which interest
was paid on the Old Note surrendered in exchange thereof or, if no interest has
been paid on such Old Note, from October 17, 1996. Under existing
interpretations of the SEC staff, the New Notes would in general be freely
transferable by holders other than affiliates of the Company after the Exchange
Offer without further registration under the Securities Act if the holder of the
New Notes represents that it is acquiring the New Notes in the ordinary course
of its business, that it has no arrangement or understanding with any person to
participate in the distribution of New Notes and that it is not an affiliate (as
such term is defined in Rule 405 under the Securities Act) of the Company, as
such terms are interpreted by the SEC; provided that broker-dealers
('Participating Broker-Dealers') receiving New Notes in the Exchange Offer will
have a prospectus delivery requirement with respect to resales of such New
Notes. The SEC has taken the position that Participating Broker-Dealers may
fulfill their prospectus delivery requirements with respect to New Notes (other
than a resale of an unsold allotment from the original sale of the Old Notes)
with this Prospectus contained in the Registration Statement. Under the
Registration Rights Agreement, the Company is required to allow Participating
Broker-Dealers who receive New Notes in exchange for Old Notes (where such Old
Notes were acquired as a result of market-making or other trading activities)
and other persons, if any, with similar prospectus delivery requirements to use
this Prospectus in connection with the resale of such New Notes.
Each holder of Old Notes (other than certain specified holders) who wishes
to exchange such Old Notes for New Notes in the Exchange Offer will be required
to make certain representations, including representations that any New Notes to
be received by it will be acquired in the ordinary course of its business and
that at the time of the commencement of the Exchange Offer it has no arrangement
with any person to participate in the distribution (within the meaning of the
Securities Act) of the New Notes.
Freedom has agreed to pay all expenses incident to the Exchange Offer and
will indemnify the Holders against certain liabilities, including liabilities
under the Securities Act.
In the event that (i) applicable interpretations of the staff of the
Commission do not permit Freedom to effect such an Exchange Offer, (ii) for any
other reason the Exchange Offer is not consummated within 150 days of the Issue
Date, (iii) a holder of the Old Notes is not permitted to participate in the
Exchange Offer or does not receive freely tradeable New Notes pursuant to the
Exchange Offer or (iv) under certain circumstances, the Initial Purchasers of
the Old Notes or the holders of a majority in aggregate principal amount of Old
Notes so request (any of (i) through (iv) being an 'Event' and the date thereof,
the 'Event Date'), Freedom will, at its cost, (a) as promptly as practicable
and, in any event, within 30 days after such Event Date (which shall be no
earlier than 60 days after the Issue Date), file a shelf registration statement
(the 'Shelf Registration Statement') covering resales of the Notes, (b) use its
best efforts to cause the Shelf Registration Statement to be declared effective
under the Securities Act and (c) use its best efforts to keep effective the
Shelf Registration Statement for a period of three years after the Issue Date or
such shorter period when all Notes have been sold thereunder. Freedom will, in
the event a Shelf Registration Statement is declared effective, provide to each
holder of the Notes copies of the prospectus which is a part of the Shelf
Registration Statement, notify each such holder when the Shelf Registration
Statement has become effective and take certain other actions as are required to
permit unrestricted resales of the Notes. A holder of Notes that sells such
Notes pursuant to the Shelf Registration Statement generally will be required to
be named as a selling security holder in the related prospectus and to deliver a
prospectus to purchasers, will be subject to certain of the civil liability
provisions under the Securities Act in connection with such sales and will be
bound by the provisions of the Registration Rights Agreement that are applicable
to such a holder (including certain indemnification obligations).
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If on or prior to 60 days following the Issue Date, an Exchange Offer
Registration Statement has not been filed with the Commission, additional
interest will accrue on the Old Notes from and including the 61st day following
the Issue Date until, but excluding, the date such registration statement is
filed. In addition, if on or prior to 120 days following the Issue Date, such
Exchange Offer Registration Statement is not declared effective, additional
interest will accrue on the Old Notes from and including the 121st day following
the Issue Date until, but excluding, the date such registration statement is
declared effective. Further, if on or prior to 150 days following the Issue Date
the Exchange Offer is not consummated, additional interest will accrue on the
Old Notes from and including the 151st day following the Issue Date until, but
excluding, the consummation of the Exchange Offer. If an Event shall have
occurred, and if by 180 days after the Issue Date a Shelf Registration is not
declared effective, additional interest will accrue on the Old Notes not
exchanged as a result of such law or interpretation from and including the 181st
day after the Issue Date, until the effective date of the Shelf Registration
Statement. In each case, additional interest will be payable semi-annually in
arrears, with the first semiannual payment due on the first interest payment
date in respect of the Old Notes following the date from which additional
interest begins to accrue, and will accrue, under each circumstance set forth
above at a rate per annum equal to an additional one-half of one percent (0.50%)
of the principal amount of the Old Notes upon the occurrence of each such
circumstance, which rate will increase by one-quarter of one percent (0.25%) for
each 90-day period that such additional interest continues to accrue under any
such circumstance, with an aggregate maximum increase in the interest rate per
annum equal to one percent (1.0%).
If applicable, in the event that the Shelf Registration Statement ceases to
be effective prior to the third anniversary of the Issue Date for a period in
excess of 45 days, whether or not consecutive, in any given year, then, the
interest rate borne by the Notes shall increase by an additional one-half of one
percent (0.50%) per annum on the 46th day in the applicable year such Shelf
Registration Statement ceases to be effective. Such interest rate will increase
by an additional one-quarter of one percent (0.25%) per annum for each
additional 90 days that such Shelf Registration Statement is not effective,
subject to the same aggregate maximum increase in the interest rate per annum of
one percent (1.0%) referred to above. Upon the filing of the Exchange Offer
Registration Statement, the effectiveness of the Exchange Offer Registration
Statement, or the consummation of the Exchange Offer, as the case may be, the
interest rate borne by the Notes will be reduced by the full amount of any such
increase to the extent that such increase related to the failure of any such
event to have occurred. Upon the effectiveness of a Shelf Registration
Statement, the interest rate borne by the Notes shall be reduced to the original
interest rate of the Notes unless and until increased as described above.
Interest on each New Note will accrue from October 17, 1996 or from the
most recent interest payment date to which interest was paid on the Old Note
surrendered in exchange therefor or on the New Note, as the case may be. The New
Notes will bear interest at 10 5/8% per annum, except that, if any interest
accrues on the New Notes in respect of any period prior to their issuance, such
interest will accrue at the rate or rates borne by the Notes from time to time
during such period.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of the form of which is filed as an exhibit to the
Registration Statement of which this Prospectus forms a part.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain United States federal income tax
consequences associated with the exchange of Old Notes for New Notes and the
ownership and disposition of the New Notes by holders who acquired the New Notes
pursuant to the Exchange Offer. The summary is based upon current laws,
regulations, rulings and judicial decisions, all of which are subject to change.
The discussion below does not address all aspects of United States federal
income taxation that may be relevant to particular holders in the context of
their specific investment circumstances or certain types of holders subject to
special treatment under such laws (for example, financial institutions, banks,
tax-exempt organizations and insurance companies). In addition, the discussion
does not address any aspect of state, local or foreign taxation and assumes that
a holder of the New Notes (i) will hold them as 'capital assets' (generally,
property held for investment) within the meaning of Section 1221 of the Code and
(ii) will not own, directly or indirectly, 10% or more of the total combined
voting power of all classes of stock of Freedom entitled to vote.
For purposes of the discussion, a 'United States holder' is an individual
who is a citizen or resident of the United States, a corporation, partnership or
other entity created under the laws of the United States or any
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political subdivision thereof, or an estate or trust that is subject to United
States federal income taxation without regard to the source of income and a
'Non-United States holder' is any holder who is not a United States holder.
PROSPECTIVE PURCHASERS OF THE NEW NOTES ARE URGED TO CONSULT THEIR TAX
ADVISORS CONCERNING THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF
ACQUIRING, OWNING AND DISPOSING OF THE NEW NOTES AS WELL AS THE APPLICATION OF
STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
EXCHANGE OFFER
The exchange of Old Notes for New Notes pursuant to the Exchange Offer
should not be treated as an exchange or other taxable event for U.S. federal
income tax purposes because under Treasury regulations, the New Notes should not
be considered to differ materially in kind or extent from the Old Notes. Rather,
the New Notes received by a holder should be treated as a continuation of the
Old Notes in the hands of such holder. As a result, there should be no U.S.
federal income tax consequences to holders who exchange Old Notes for New Notes
pursuant to the Exchange Offer and any such holder should have the same tax
basis and holding period in the New Notes as it had in the Old Notes immediately
before the exchange.
UNITED STATES HOLDERS
Interest payable on the New Notes will be includible in the income of a
United States holder in accordance with such holder's regular method of
accounting. If a New Note is redeemed, sold or otherwise disposed of, a United
States holder generally will recognize gain or loss equal to the difference
between the amount realized on the sale or other disposition of such New Note
(to the extent such amount does not represent accrued but unpaid interest) and
such holder's tax basis in the New Note. Subject to the market discount rules
discussed below, such gain or loss will be capital gain or loss, assuming that
the holder has held the New Note as a capital asset, and will be long-term if
the holder has held the New Note for more than one year at the time of
disposition.
Under the market discount rules of the Code, a holder (other than a holder
who made the election described below) who purchased an Old Note with 'market
discount' (generally defined as the amount by which the stated redemption price
at maturity exceeds the holder's purchase price) will be required to treat any
gain recognized on the redemption, sale or other disposition of the New Note
received in the exchange as ordinary income to the extent of the market discount
that accrued during the holding period of such New Note (which would include the
holding period of the Old Note). A holder who has elected under applicable Code
provisions to include market discount in income annually as such discount
accrues will not, however, be required to treat any gain recognized as ordinary
income under these rules. Holders should consult their tax advisors as to the
portion of any gain that would be taxable as ordinary income under these
provisions.
NON-UNITED STATES HOLDERS
An investment in the New Notes by a Non-United States holder generally will
not give rise to any United States federal income tax consequences if the
interest received or any gain recognized on the sale, redemption or other
disposition of the New Notes by such holder is not treated as effectively
connected with the conduct by such holder of a trade or business in the United
States, and in the case of gains derived by an individual, such individual is
not present in the United States for 183 days or more and certain other
requirements are met. Under current Treasury regulations, in order to avoid
back-up withholding of 31% on payments of interest (i) a Non-United States
holder of the New Notes generally must certify to the issuer or its agent, under
penalties of perjury, that it is not a United States person and complete and
provide the payor with a U.S. Treasury Form W-8 (or a suitable substitute form),
which includes its name and address, or (ii) a securities clearing organization,
bank or other financial organization that holds customers' securities in the
ordinary course of business (a 'financial institution') and holds the New Note,
must certify under penalties of perjury that such a Form W-8 (or suitable
substitute form) has been received from the beneficial owner of the New Notes by
it or by a financial institution between it and the beneficial owner, and must
furnish the payor with a copy thereof.
On April 22, 1996, the Internal Revenue Service proposed regulations (the
'Proposed Regulations') which, if enacted in their current form, could affect
the procedures to be followed by a Non-United States holder in establishing such
holder's status as a Non-United States holder for purposes of the backup
withholding rules discussed above. The Proposed Regulations, if adopted in their
current form, generally would be effective for payments made after December 31,
1997. Prospective investors should consult their tax advisors concerning the
potential adoption of the Proposed Regulations and the potential effect of such
regulations on an investment in the New Notes.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. Freedom has agreed that, for a period of 180 days after the
Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale. In
addition, until May 15, 1997 (90 days from the date of this Prospectus), all
dealers effecting transactions in the New Notes may be required to deliver a
prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such New Notes. Any broker-dealer that
resells New Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such New Notes may be deemed to be an 'underwriter' within the meaning of the
Securities Act and any profit on any such resale of New Notes and any commission
or concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that, by
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an 'underwriter' within the
meaning of the Securities Act.
For a period of 180 days after the Expiration Date Freedom will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in the Letter
of Transmittal. Freedom has agreed to pay all expenses incident to the Exchange
Offer (including the expenses of one counsel for the holders of the Notes) other
than commissions or concessions of any brokers or dealers and will indemnify the
Holders of the Notes (including any broker-dealers) against certain liabilities,
including liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters as to the validity of the New Notes and the
Guarantees offered hereby will be passed upon for the Company by Skadden, Arps,
Slate, Meagher & Flom LLP, New York, New York. Certain legal matters relating to
the issuance of the Guarantees offered hereby will be passed upon for the
Guarantors as to matters of Washington law by Bogle & Gates P.L.L.C., Seattle,
Washington, as to matters of German law by Boesebeck Droste, Frankfurt, The
Federal Republic of Germany, and as to matters of Guam law by Carlsmith Ball
Wichman Case & Ichiki ('Carlsmith'), Agana, Guam. William C. Williams, a partner
at Carlsmith, is a director of Kalama Foreign Sales Corporation, a wholly-owned
subsidiary of Freedom.
EXPERTS
The consolidated balance sheets of the Company as of December 31, 1994 and
1995, and the consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1995, included in this Prospectus have been included herein in reliance on
the report of Coopers and Lybrand L.L.P., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
The consolidated balance sheets of Kalama and subsidiaries as of September
30, 1993, and May 26, 1994, and the consolidated statements of operations,
changes in stockholder's equity and cash flows for the year ended September 30,
1993, and the period October 1, 1993 to May 26, 1994, included in this
Prospectus have been included herein in reliance on the report, which includes
explanatory paragraphs regarding Kalama's change in its method of accounting for
income taxes and involvement in various environmental matters, of KPMG Peat
Marwick LLP, independent certified public accountants, given on the authority of
that firm as experts in accounting and auditing.
99
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES (THE 'COMPANY')
Report of Coopers & Lybrand L.L.P., Independent Accountants................................................ F-2
Financial Statements:
Consolidated Balance Sheets as of December 31, 1994 and 1995 and September 30, 1996 (unaudited)............ F-3
Consolidated Statements of Operations for the years ended December 31, 1993, 1994 and 1995
and the nine months ended September 30, 1995 and 1996 (unaudited)........................................ F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years ended
December 31, 1993, 1994 and 1995......................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995
and the nine months ended September 30, 1995 and 1996 (unaudited)........................................ F-6
Notes to Consolidated Financial Statements................................................................. F-7
KALAMA CHEMICAL, INC. AND SUBSIDIARIES
Report of KPMG Peat Marwick LLP, Independent Accountants................................................... F-46
Financial Statements:
Consolidated Balance Sheets as of September 30, 1993 and May 26, 1994...................................... F-47
Consolidated Statements of Stockholder's Equity for the year ended September 30, 1993 and for the period
October 1, 1993 to May 26, 1994.......................................................................... F-48
Consolidated Statements of Cash Flows for the year ended September 30, 1993 and for the period October 1,
1993 to May 26, 1994..................................................................................... F-49
Consolidated Statements of Operations for the year ended September 30, 1993 and for the period October 1,
1993 to May 26, 1994..................................................................................... F-50
Notes to Consolidated Financial Statements................................................................. F-51
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Freedom Chemical Company
Philadelphia, Pennsylvania
We have audited the accompanying consolidated balance sheets of Freedom Chemical
Company and Subsidiaries as of December 31, 1994 and 1995 and the related
consolidated statements of operations, changes in stockholders' equity (deficit)
and cash flows for each of the three years in the period ended December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Freedom Chemical
Company and Subsidiaries as of December 31, 1994 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
600 Lee Road
Wayne, Pennsylvania
March 26, 1996 except as to Note 22(a)
for which the date is
October 17, 1996
F-2
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, SEPTEMBER
--------------------- 30,
1994 1995 1996
-------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 2,411 $ 1,450 $ 1,544
Accounts receivable, net of allowance for doubtful
accounts of $287, $260 and $342, respectively....... 28,724 39,050 46,407
Refundable income taxes............................... -- 2,742 344
Inventories........................................... 39,382 46,848 55,363
Prepaid expenses and other current assets............. 3,647 4,812 5,675
Environmental indemnification......................... 4,346 780 792
Deferred income taxes................................. 3,240 2,107 1,449
-------- -------- ------------
Total current assets................................ 81,750 97,789 111,574
Property, Plant and Equipment:
Land.................................................. 3,072 3,658 3,918
Buildings and improvements............................ 11,617 14,357 14,540
Machinery and equipment............................... 75,148 97,679 101,623
Other................................................. 4,373 4,506 8,290
-------- -------- ------------
94,210 120,200 128,371
Less accumulated depreciation.......................... 8,854 18,734 26,700
-------- -------- ------------
85,356 101,466 101,671
Other assets:
Intangible assets, net................................ 48,866 34,928 33,374
Environmental indemnification......................... 5,763 1,074 24
Deferred financing costs, net......................... 2,929 3,641 2,997
Investments in joint ventures......................... -- 511 747
Other................................................. 6,400 3,747 3,892
-------- -------- ------------
Total assets........................................ $231,064 $243,156 $254,279
-------- -------- ------------
-------- -------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt.................. $ 7,112 $ 6,142 $ 9,529
Short-term borrowings................................. -- 12,238 19,624
Notes payable......................................... 165 753 1,570
Accounts payable...................................... 18,220 22,928 31,283
Accounts payable--shareholders........................ 273 -- --
Accrued expenses...................................... 8,883 8,985 9,795
Accrued compensation.................................. 4,425 4,618 5,062
Accrued restructuring and other charges............... -- 3,470 1,660
Environmental......................................... 4,346 1,200 1,200
-------- -------- ------------
Total current liabilities.............................. 43,424 60,334 79,723
Long-term debt......................................... 93,643 119,520 116,329
Environmental.......................................... 37,427 18,066 15,379
Deferred income taxes.................................. 9,740 11,058 9,330
Postretirement benefits................................ 3,951 4,211 4,376
Accrued restructuring and other charges................ -- 2,429 2,274
Other.................................................. 1,425 2,151 2,365
Minority interest...................................... 3,095 3,095 3,468
Commitments and contingencies.......................... -- -- --
Mandatory redeemable preferred stock:
Series B, cumulative, $1,000 par value, authorized
40,000 shares; issued and outstanding 21,322 shares,
stated at liquidation value of $1,000 per share plus
accrued and unpaid dividends of $4,891, $8,192 and
$10,425, respectively............................... 26,213 29,514 31,747
Series C, cumulative, $1,000 par value, authorized
15,000 shares; issued 9,137 shares, outstanding
9,137, 8,976 and 8,916 shares, respectively, stated
at liquidation value of $1,054 per share plus
accrued and unpaid dividends of $769, $2,079 and
$2,795, respectively................................ 10,399 11,709 12,425
Less: Treasury stock, at cost (0, 161 and 221 shares
of Series C preferred, respectively)................ -- (188) (262)
-------- -------- ------------
36,612 41,035 43,910
Stockholders' equity (deficit):
Common stock:
Series A, $.01 par value, authorized 85,000 shares;
issued 59,355 shares, outstanding 59,355, 59,070 and
58,964 shares, respectively......................... 1 1 1
Series B, $.01 par value, authorized 10,000 shares;
none issued or outstanding.......................... -- -- --
Additional paid-in capital............................. 1,866 -- --
Accumulated deficit.................................... -- (19,735) (22,361)
Cumulative translation adjustment...................... 80 1,281 (212)
-------- -------- ------------
1,947 (18,453) (22,572)
Less: Stockholder note receivable...................... (200) (200) (200)
Treasury stock, at cost (0, 285 and 391 shares of
Series A common, respectively)...................... -- (33) (46)
Minimum pension liability............................. -- (57) (57)
-------- -------- ------------
Total stockholders' equity (deficit)................... 1,747 (18,743) (22,875)
-------- -------- ------------
Total liabilities and stockholders' equity
(deficit)......................................... $231,064 $243,156 $254,279
-------- -------- ------------
-------- -------- ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............................................. $54,831 $187,780 $296,888 $229,340 $229,051
Cost of goods sold.................................... 45,295 144,845 233,533 180,179 178,599
------- -------- -------- -------- --------
Gross profit..................................... 9,536 42,935 63,355 49,161 50,452
Selling, general and administrative expense........... 8,292 26,948 50,399 39,406 35,951
Noncash compensation expense (note 18)................ -- 915 150 112 159
Research and development expense...................... 735 2,331 4,950 3,914 3,584
Restructuring and other charges (note 17)............. -- -- 12,495 3,242 --
------- -------- -------- -------- --------
Operating income (loss).......................... 509 12,741 (4,639) 2,487 10,758
Interest and debt expense, net of capitalized interest
of $168 and $111 for the year ended December 31,
1995 and the six months ended June 30, 1995,
respectively........................................ 1,556 6,682 13,805 10,334 10,339
Registration costs (note 17).......................... -- -- 2,187 2,187 --
Other income.......................................... 37 545 5 (68) 507
------- -------- -------- -------- --------
Income (loss) before minority interest, income
taxes and extraordinary item................... (1,010) 6,604 (20,626) (10,102) 926
Minority interest..................................... 251 284 247 187 195
------- -------- -------- -------- --------
Income (loss) before income taxes and
extraordinary item............................. (1,261) 6,320 (20,873) (10,289) 731
Provision (benefit) for income taxes.................. (291) 2,858 (3,809) (2,361) 935
Equity in income of joint ventures.................... -- -- 74 36 527
------- -------- -------- -------- --------
Net income (loss) before extraordinary item...... (970) 3,462 (16,990) (7,892) 323
Extraordinary loss, net of applicable income tax
benefit of $725..................................... -- (1,276) -- -- --
------- -------- -------- -------- --------
Net income (loss)................................ (970) 2,186 (16,990) (7,892) 323
Less: preferred dividends............................. 1,621 3,694 4,611 3,397 2,949
------- -------- -------- -------- --------
Net loss applicable to common shares............. $(2,591) $ (1,508) $(21,601) $(11,289) $ (2,626)
------- -------- -------- -------- --------
------- -------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A
COMMON STOCK ADDITIONAL CUMULATIVE STOCKHOLDER MINIMUM
----------------- PAID-IN ACCUMULATED TRANSLATION NOTE TREASURY PENSION
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT RECEIVABLE STOCK LIABILITY TOTAL
------- ------- ---------- ----------- ---------- ----------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1992.......... 7,500 $ 1 $ 404 $ (305) $ -- $ -- $ -- $ -- $ 100
1993:
Issuance of common
stock............. 30,000 -- 3,000 -- -- -- -- -- 3,000
Issuance of
stockholder note
receivable........ -- -- -- -- -- (200) -- -- (200)
Foreign currency
translation....... -- -- -- -- (44) -- -- -- (44)
Accrued and unpaid
preferred
dividends for the
year ended
December 31,
1993.............. -- -- (1,621) -- -- -- -- -- (1,621)
Loss................ -- -- -- (970) -- -- -- -- (970)
------- ------- ---------- ----------- ---------- ----------- -------- ------- --------
Balance at December
31, 1993.......... 37,500 1 1,783 (1,275) (44) (200) -- -- 265
1994:
Issuance of common
stock............. 21,855 -- 2,866 -- -- -- -- -- 2,866
Foreign currency
translation....... -- -- -- -- 124 -- -- -- 124
Accrued and unpaid
preferred
dividends for the
year ended
December 31,
1994.............. -- -- (2,783) (911) -- -- -- -- (3,694)
Net income.......... -- -- -- 2,186 -- -- -- -- 2,186
------- ------- ---------- ----------- ---------- ----------- -------- ------- --------
Balance at December
31, 1994.......... 59,355 1 1,866 -- 80 (200) -- -- 1,747
1995:
Foreign currency
translation....... -- -- -- -- 1,201 -- -- -- 1,201
Treasury shares
purchased (285
Series A common
shares)........... -- -- -- -- -- -- (33) -- (33)
Accrued and unpaid
preferred
dividends for the
year ended
December 31,
1995.............. -- -- (1,866) (2,745) -- -- -- -- (4,611)
Minimum pension
liability......... -- -- -- -- -- -- -- (57) (57)
Loss................ -- -- -- (16,990) -- (16,990)
------- ------- ---------- ----------- ---------- ----------- -------- ------- --------
Balance at December
31, 1995.......... 59,355 $ 1 $ -- $ (19,735) $ 1,281 $ (200) $ (33) $ (57) $(18,743)
------- ------- ---------- ----------- ---------- ----------- -------- ------- --------
------- ------- ---------- ----------- ---------- ----------- -------- ------- --------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------- ------------------
1993 1994 1995 1995 1996
--------- --------- --------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)................ $ (970) $ 2,186 $(16,990) $(7,892) $ 323
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization.... 2,735 8,559 13,512 10,460 10,136
Provision for doubtful
accounts....................... 112 142 36 77 65
Gain on sale of fixed assets..... (6) -- (188) (73) (60)
Minority interest................ 251 284 247 187 195
Non-cash compensation expense.... -- 915 150 112 159
Extraordinary loss............... -- 2,001 -- -- --
Restructuring and other charges,
net of payments................ -- -- 13,759 5,174 4,980
Registration costs............... -- -- 2,187 2,187 --
Equity increase of joint
ventures....................... -- -- (74) (35) (528)
Deferred income taxes............ (428) 258 (3,294) 353 621
Other changes that provided
(used) cash:
Accounts receivable............ 150 (2,035) (8,308) (11,081) (7,940)
Inventories.................... 1,824 (438) (1,787) (2,189) (14,138)
Prepaid expenses and other
current assets............... 1,058 (658) 1,385 1,622 (2,620)
Accounts payable, accrued
expenses and other
liabilities.................. (4,314) 2,949 (3,765) (6,587) 7,932
--------- --------- --------- ------- -------
Net cash (used in) operating
activities..................... 412 14,163 (3,130) (7,685) (875)
--------- --------- --------- ------- -------
Cash flows from investing
activities:
Payments for acquisitions, net of
cash acquired.................. (29,890) (68,286) (15,874) (15,874) --
Capital expenditures............. (953) (7,210) (15,514) (12,638) (7,883)
Purchase of subsidiary stock from
minority stockholders.......... -- (142) -- -- --
(Increase) decrease in
investments in joint
ventures....................... -- -- (133) (626) 31
Proceeds from sale of capital
equipment...................... 50 185 762 636 1,651
Payments for environmental
liabilities.................... -- (2,543) (3,943) (2,686) (1,988)
Proceeds from environmental
indemnification................ -- 2,292 2,645 2,379 1,038
Other............................ 165 (208) 42 (8) 36
--------- --------- --------- ------- -------
Net cash used in investing
activities..................... (30,628) (75,912) (32,015) (28,817) (7,115)
--------- --------- --------- ------- -------
Cash flows from financing
activities:
Issuance of common stock......... 2,800 2,273 -- -- --
Issuance of preferred stock...... 17,000 9,745 -- -- --
Revolving borrowings under Credit
Agreement...................... -- 36,250 86,830 72,250 47,000
Revolving repayments under Credit
Agreement...................... -- (28,500) (73,830) (61,250) (41,499)
Term loan borrowings under Credit
Agreement...................... -- 95,500 18,200 18,200 --
Term loan repayments under Credit
Agreement...................... -- (3,000) (7,000) (5,250) (5,166)
Short term borrowings under
European Facility.............. -- -- 16,516 17,176 8,329
Repayments of short term
borrowing under European
Facility....................... -- -- (3,986) (3,974) --
Borrowing of refinanced long-term
debt........................... 62,931 -- -- -- --
Repayment of refinanced long-term
debt........................... (25,771) (44,630) -- -- --
Repayment of assumed long-term
debt........................... (25,401) -- -- -- --
Purchase of treasury stock....... -- -- (221) (221) (87)
Payment of registration costs.... -- -- (1,004) (1,004) (114)
Repayment of capital lease
obligations.................... -- (134) (65) (58) (91)
Payments for financing costs..... (1,861) (3,250) (1,391) (1,021) (50)
Dividends paid to minority
interests...................... (122) (129) (247) (247) (130)
Other............................ (79) (754) (85) (73) (40)
--------- --------- --------- ------- -------
Net cash provided by financing
activities....................... 29,497 63,371 33,717 34,528 8,152
--------- --------- --------- ------- -------
Effect of exchange rate changes on
cash............................. -- -- 467 604 (68)
--------- --------- --------- ------- -------
Net increase (decrease) in cash and
cash equivalents................. (719) 1,622 (961) (1,370) 94
Cash and cash equivalents,
beginning of period.............. 1,508 789 2,411 2,411 1,450
--------- --------- --------- ------- -------
Cash and cash equivalents, end of
period........................... $ 789 $ 2,411 $ 1,450 $ 1,041 $ 1,544
--------- --------- --------- ------- -------
--------- --------- --------- ------- -------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
1. DESCRIPTION OF BUSINESS
Freedom Chemical Company ('FCC' or '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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and include the accounts of Freedom
Chemical Company and its Subsidiaries (collectively, referred to as 'the
Company'). The Subsidiaries include: Freedom Textile Chemicals Company and
Subsidiaries ('FTCC'), Hilton Davis Chemical Company ('HDCC'), Kalama Chemical,
Inc. and Subsidiaries ('KCI'), Freedom Chemical Diamalt GmbH and Subsidiaries
('FCD') and Societe Francaise Des Colloides ('SFC') (note 3). All significant
intercompany accounts and transactions have been eliminated in consolidation.
Predecessor
HDCC is deemed to be the registrant's predecessor for financial reporting
purposes based upon its significance at the time it was acquired in 1993. See
note 3 for information regarding the accounting for this acquisition.
Revenue Recognition
Revenue is recognized when title transfers, which is concurrent with
shipment. Net sales are comprised of the total sales billed during the period
less the sales value of goods returned, trade discounts and customer allowances.
Cash and Cash Equivalents
All investments purchased with maturities of three months or less when
purchased are considered cash equivalents.
Inventory
Inventories are stated at the lower of cost or market. Cost is determined
by the last-in, first-out ('LIFO') method for approximately 70 percent and 42
percent of total inventories at December 31, 1994 and 1995, respectively. The
cost of the remaining inventories are valued using the first-in, first-out
('FIFO') method. Obsolete or unsaleable inventory is reflected at its estimated
net realizable value. Inventory costs include materials, direct labor and
manufacturing overhead.
Property, Plant and Equipment
Property, plant and equipment are recorded at their assigned values as
determined through the allocation of the respective acquisition purchase prices.
Additions are carried at cost and include expenditures for major renewals and
betterments. Maintenance, repairs and minor renewals are expensed as incurred.
Maintenance and repairs expense for the years ended December 31, 1993, 1994 and
1995 was $1,937, $7,409 and $8,704,
F-7
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
respectively. Upon retirement or other disposition, the cost and related
accumulated depreciation are removed from the accounts and any gain or loss is
included in the results of operations. For financial reporting purposes,
depreciation is computed using the straight-line method over the estimated
useful lives of the related assets as follows: buildings and improvements--15 to
31.5 years; machinery and equipment--4 to 13 years; other-- 5 years.
Depreciation expense during the years ended December 31, 1993, 1994 and 1995 was
$1,895, $6,367 and $10,255, respectively.
Maintenance/Inspection Shutdown Costs
Plant shutdowns are typically scheduled on a semi-annual, nine-month and
annual basis at the Company's various individual plants for the performance of
maintenance and inspection of various pieces of equipment. Estimated costs
related to these shutdowns, which include, among others, supplies, repair parts
and outside contract labor, are accrued on a pro rata basis over the period
between shutdowns. As of December 31, 1994 and 1995, accrued costs for plant
shutdowns, classified as current liabilities, totaled $985 and $187,
respectively.
Intangible Assets
Intangible assets consists of amounts relating to goodwill, patents and
other intangibles, including a sales agreement, trademark licenses,
organizational costs and covenants not to compete arising from acquisitions.
These amounts are being amortized on a straight-line basis over their remaining
useful lives as follows: goodwill--20 to 40 years; patents--6 to 10 years; and
other--1 to 8 years.
At each balance sheet date, management evaluates the recoverability of
intangible assets using certain financial indicators, such as historical and
future ability to generate income from operations. The Company's policy is to
record an impairment loss against the net unamortized cost of the intangible
asset in the period when it is determined that the carrying amount of the asset
may not be recoverable. This determination is based on an evaluation of such
factors as the occurrence of a significant event, a significant change in the
environment in which the business operates or if the expected future net cash
flows (undiscounted and without interest) would become less than the carrying
amount of the asset.
Deferred Financing Costs
Financing costs relating to bank borrowings are deferred and amortized over
the term of the debt agreements. In May 1994, the Company refinanced and
consolidated all existing Company debt through an amended and restated credit
agreement (the 'Credit Agreement'). In connection with the refinancing, the
Company incurred a before-tax extraordinary loss of $2,001, relating primarily
to the write-off of deferred financing fees on the old debt and prepayment
penalties. The after-tax loss was $1,276.
Amortization of deferred financing costs during the years ended December
31, 1993, 1994 and 1995 was $186, $590 and $822, respectively, and is classified
as interest expense in the consolidated statements of operations.
Investments in Joint Ventures
The Company's investments in affiliated companies which are not majority
owned or controlled are accounted for using the equity method. Investments
carried at equity and the percentage interest owned consist of Lyomark Pharma
GmbH (33.4%), Srinivasa Cystine Limited (40%), Prince Chemicals Co. Ltd. (50%),
Hackermalt Protein Verwaltungs GmbH (50%) and Diamo Handels GmbH (50%).
F-8
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
Income Taxes
Income tax expense is based on reported results of operations before
extraordinary items and income taxes. Deferred income taxes reflect the impact
of temporary differences between the amount of assets and liabilities recognized
for financial reporting purposes and such amounts recognized for tax purposes.
Deferred tax balances are adjusted to reflect tax rates, based on current tax
laws, that will be in effect in the years in which the temporary differences are
expected to reverse. Valuation allowances are established when necessary to
reduce deferred tax assets to amounts more likely than not to be realized.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Foreign Currency Translation
Balance sheet accounts for foreign operations are translated at the
exchange rate as of the balance sheet date, and income statement items are
translated at the weighted average exchange rate for the period. The resulting
translation adjustments are included as a separate component of stockholders'
equity. Transaction gains and losses included in the consolidated statements of
operations were not significant for the years ended December 31, 1993 and 1994.
Transaction losses of $581 were included in the consolidated statement of
operations for the year ended December 31, 1995.
Environmental Liabilities and Recoveries
Environmental contingencies assumed in connection with business
acquisitions are recorded as liabilities in connection with the purchase.
Expenditures for ongoing compliance with environmental regulations that relate
to current operations are expensed or capitalized as appropriate. Expenditures
related to improving the condition of property compared with the condition of
that property when constructed or acquired are capitalized. The Company also
capitalizes expenditures that prevent future environmental contamination and
expenditures incurred in preparing a property for sale. Other expenditures are
expensed as incurred. Liabilities are recorded when environmental assessments
indicate that remedial efforts are probable and the costs can be reasonably
estimated. Estimates of the liability are based upon currently available facts,
existing technology, and presently enacted laws and regulations taking into
consideration the likely effects of inflation and other societal and economic
factors. All available evidence is considered including prior experience in
remediation of contaminated sites, other companies' clean-up experience and data
released by the Environmental Protection Agency (EPA) or other organizations.
These liabilities are included in the consolidated balance sheet at their
undiscounted amounts. Recoveries, which are evaluated separately from related
liabilities, are recorded as assets when their receipt is deemed probable.
Additional information regarding environmental recoveries and liabilities is
included in note 11.
Concentration of Credit Risk
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of its trade receivables. The Company sells a
majority of its products to a wide range of industrial plant and service
facilities. Trade receivables balances consist of a wide range of customers
located in the United States and internationally with the primary concentration
in North America. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. The Company maintains
reserves for potential credit losses and historically such losses have been
within management's expectations.
F-9
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, trade receivables, trade payables and long-term debt. The book
value of cash and cash equivalents, trade receivables, and trade payables is
considered to be representative of their fair value because of their short
maturities. The carrying amount of long-term debt outstanding at December 31,
1994 and 1995 approximated fair value as the interest rates were variable and
set to market. Management believes that determining a fair value for the
Company's mandatory redeemable preferred stock is impractical due to the
closely-held nature of these securities. Additional information regarding these
securities is included in note 14.
Significant Customers
Sales to a customer, which acts as an international distributor for the
Company, amounted to approximately $5.8 million or 10.6 percent, $19.9 million
or 10.6 percent, and $21.2 million or 7.1 percent, of net sales for the years
ended December 31, 1993, 1994 and 1995, respectively. At December 31, 1994 and
1995, respectively, approximately $2.3 million or 7.9 percent, and $1.2 million
or 3.0 percent of net accounts receivable, was due from this customer.
In 1995, the Company notified the international distributor that, effective
January 1996, the distributor agreement would be cancelled. As part of revamping
the structure of international sales, the Company will be utilizing the
resources of the FCD sales force to call on these customers. The Company does
not expect any negative impact on future international sales from this change.
New Pronouncements
In March 1995, the Financial Accounting Standards Board ('FASB') issued
Statement of Financial Accounting Standard No. 121, 'Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of'
('SFAS No. 121'), which is effective for years beginning after December 15,
1995. SFAS No. 121 established criteria for recognizing, measuring and
disclosing impairments of long-lived assets, including intangibles and goodwill.
The Company plans to adopt SFAS No. 121 in 1996 and is currently evaluating the
impact on its consolidated financial position and results of operations.
In October 1995, FASB issued Statement of Financial Accounting Standards
No. 123, 'Accounting for Stock-Based Compensation' ('SFAS No. 123'). SFAS No.
123 is required to be adopted for fiscal years beginning after December 15,
1995. SFAS No. 123 encourages a fair value based method of accounting for
employee stock options or similar equity instruments, but allows continued use
of the intrinsic value based method of accounting prescribed by Accounting
Principles Board Opinion No. 25, 'Accounting for Stock Issued to Employees'
('APB No. 25'). Companies electing to continue to use APB No. 25 must make
proforma disclosures of net income as if the fair value based method of
accounting had been applied. The Company is evaluating the provisions of SFAS
No. 123, but has not yet determined whether it will continue to follow the
provisions of APB No. 25 or change to the fair value method of SFAS No. 123.
3. BUSINESS ACQUISITIONS
The acquisitions described below have been accounted for under the purchase
method. The results of these acquisitions have been included in the results of
operations from the applicable acquisition dates. The purchase price of each
acquisition was allocated to assets and liabilities based on their estimated
fair values as of the date of acquisition. However, for the 1993 and 1995
acquisitions, the values assigned to all noncurrent assets were reduced
proportionately by the excess of the estimated fair value of the identifiable
net assets acquired over the purchase price. In connection with the 1994
acquisitions, the excess of the purchase price over identifiable net assets
acquired, net of adjustments, is being amortized on a straight-line basis over
the period, which
F-10
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
approximates the estimated period of benefit. Deferred taxes were established
for differences between the assigned financial statement and tax bases of assets
and liabilities.
1993 Acquisition
In September 1993, the Company acquired all of the issued and outstanding
common stock of HDCC. This acquisition was financed by cash payments of $29,890.
In connection with the acquisition, liabilities of $11,187, principally deferred
taxes, benefit plan obligations and transaction costs, were established based on
adjustments required under generally accepted accounting principles related to
purchase business combinations. In addition, $44,199 of liabilities, principally
long-term debt, deferred taxes and other liabilities in the normal course of
operations, were assumed. The cash portion was financed with bank debt and
proceeds from the issuance of FCC Series B preferred stock and FCC common stock.
The cash payment for the acquisition is summarized as follows: $43,603 of
current assets plus $41,673 of noncurrent assets acquired less liabilities of
$55,386 equals the cash payment of $29,890.
1994 Acquisitions
In May 1994, the Company acquired all of the issued and outstanding shares
of common stock of KCI from BC Sugar Refinery Limited ('BC Sugar') and
Chatterton Petrochemical Corporation (collectively referred to as 'BC Sugar').
This acquisition was financed by net cash payments of $60,315. In connection
with the acquisition, liabilities of $13,718, principally for environmental
matters, deferred taxes, benefit plan obligations, and transaction costs, were
established based on adjustments required under generally accepted accounting
principles related to purchase business combinations. In addition, $82,111 of
liabilities, principally for environmental matters, deferred taxes, benefit plan
obligations and other liabilities in the normal course of operations, were
assumed. The cash portion was financed with bank debt and proceeds from the
issuance of FCC Series C preferred stock and FCC common stock. The cash payment
for the acquisition is summarized as follows: $27,739 of current assets plus
$87,007 of noncurrent assets acquired plus goodwill of $41,398 less liabilities
of $95,829 equals the cash payment of $60,315. The goodwill is being amortized
on a straight-line basis over 40 years, which approximates the estimated period
of benefit.
In connection with the acquisition of KCI, the liabilities referred to
above included $44,400 for estimated expenditures related to costs for
assessment, investigation, negotiations, legal representation, cleanup and
remediation, and fines and penalties for the environmental matters described in
note 11. Of this amount, $41,400 represents liabilities assumed from BC Sugar.
The remaining $3,000 represents liabilities established as a result of
contractual obligations arising from the KCI Stock Purchase Agreement which
require the Company to oversee the disposition of KCI's environmental matters.
An indemnification receivable of $12,700 from BC Sugar was recorded in
accordance with the KCI Stock Purchase Agreement. A deferred tax benefit of
$15,600 was also recorded. A trust fund was established to fund the
indemnification receivable from BC Sugar. In 1995, the Company revised its
estimates related to the aforementioned costs associated with environmental
matters based on negotiations and settlements with authorities, updates of
studies prepared by environmental consultants, engineers and contractors as of
the acquisition date and changes in other factors which existed as of the
acquisition date. As a result, the liability, indemnification receivable, and
deferred tax asset originally recorded were reduced by $19,263, $5,610 and
$5,055, respectively. This resulted in a reduction of goodwill of $8,598. The
reduction in the liability was primarily attributable to matters at the Kalama,
Washington facility ($13,100), the Garfield, New Jersey facility ($4,148) and
the Beaufort, South Carolina facility ($1,720). At December 31, 1995, the
remaining liability, indemnification receivable and deferred tax asset for the
aforementioned matters are $18,567, $1,854 and $7,002, respectively.
Additionally, in December 1994, the Company acquired certain assets of
Reilly-Whiteman, Inc. ('Reilly-Whiteman') through FCC Acquisition Corp.
('FCAC'), a subsidiary of FTCC. This acquisition was financed by net cash
payments of $7,971. The goodwill was amortized on a straight-line basis over 20
years, which
F-11
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
approximated the estimated period of benefit at the time of acquisition. In
connection with the acquisition, liabilities of $305, principally for
transaction costs, were established and $519 of liabilities, principally for
liabilities in the normal course of operations, were assumed. The cash portion
was financed with bank debt. The net cash payment for the acquisition is
summarized as follows: $1,814 of current assets plus $3,220 of noncurrent assets
acquired plus goodwill of $3,761, less liabilities of $824 equals the cash
payment of $7,971. In December 1995, the Company recognized an impairment loss
of $4,029 on all goodwill and other intangibles associated with this acquisition
(note 17).
1995 Acquisition
In January 1995, the Company purchased certain assets and liabilities of
Diamalt GmbH and subsidiaries, headquartered in Munich, Germany, through its
subsidiary, FCD. The acquisition was financed by cash payments of $15,874 which
were financed with bank debt. The Company borrowed $23.5 million, $5.3 million
under the Revolving Credit Facility and $18.2 million as additional Term B debt.
In connection with the acquisition, liabilities of $700, principally for
transaction costs, were established and $7,853 of liabilities, principally for
liabilities in the normal course of operations and long-term debt, were assumed.
The net cash payment for the acquisition is summarized as follows: $10,470 of
current assets plus $13,957 of non-current assets ($25,770 of non-current assets
acquired less negative goodwill of $11,813) less liabilities of $8,553 equals
the cash payment of $15,874.
The following unaudited pro forma summary information combines the
consolidated results of operations of the Company, KCI and FCAC as if the
acquisitions had occurred on January 1, 1994. Results of operations for FCD were
not significant for 1994 and, accordingly, are not included in the 1994 pro
forma summary below.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1994
------------------
<S> <C>
Net sales............................................. $228,740
Operating income...................................... 20,889
Net income............................................ 6,565
</TABLE>
The pro forma results presented above do not necessarily represent results
which would have occurred if the respective acquisitions had taken place at the
beginning of each period, nor are they indicative of the results of future
combined operations. Pro forma information for 1995 is not presented since the
results of operations for FCD are included in the consolidated statement of
operations of the Company.
4. INVENTORIES
A summary of inventories and related reserves as of December 31, 1994 and
1995 is as follows:
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Raw materials and intermediates......................................... $18,014 $27,388
Finished goods.......................................................... 21,426 19,628
------- -------
39,440 47,016
Less: reserves.......................................................... (58) (168)
------- -------
$39,382 $46,848
------- -------
------- -------
</TABLE>
It is estimated that inventories would have been $2,350 lower than reported
at December 31, 1994 and $828 lower than reported at December 31, 1995, if
quantities valued on the LIFO basis were instead valued on the FIFO basis. The
difference at December 31, 1995 will be charged to operations in future periods,
if and when inventory quantities are reduced below the base year level. The
Company believes that a write-down of the carrying amount of inventories to
current or replacement cost is not appropriate, as no loss is expected to be
realized upon their final sale.
F-12
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
5. INTANGIBLES
A summary of intangible assets and related accumulated amortization as of
December 31, 1994 and 1995 is as follows:
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Goodwill................................................................ $45,159 $32,800
Patents................................................................. 2,090 2,558
Covenants not to compete................................................ 3,401 3,401
Other................................................................... 830 926
------- -------
51,480 39,685
Less: accumulated amortization.......................................... 2,614 4,757
------- -------
$48,866 $34,928
------- -------
------- -------
</TABLE>
Amortization expense for intangible assets was $654, $1,602 and $2,435, for
the years ended December 31, 1993, 1994 and 1995, respectively.
6. SHORT-TERM BORROWINGS
In 1995, FCD negotiated a European Revolving Facility aggregating $18.2
million. The European Revolving Facility has multiple maturities, with $11.2
million maturing in June 1996, and is collateralized by a $15.0 million letter
of credit under the Domestic Revolving Credit facility (note 7) and FCD accounts
receivable. The Company intends to renew the European Revolving Facility in June
1996 and reissue the $15.0 million letter of credit. Additionally, in 1996, FCD
negotiated an increase in the European Revolving Facility of $2.3 million, also
collateralized by FCD accounts receivables.
Borrowings of European revolving loans may be in the form of Base Rate
loans or European Currency loans. Under the European Revolving Facility, FCD had
$1.7 million and $10.5 million outstanding as Base Rate and European Currency
loans, respectively, at December 31, 1995. The rates in effect on both Base Rate
and European Currency loans were between 7.75 and 9.5 percent at December 31,
1995.
FCD also pays a commission on all outstanding letters of credit of 0.75
percent per annum of the face amount of each letter of credit issued. At
December 31, 1995, letters of credit outstanding totaled $0.8 million under the
European Revolving Facility.
7. LONG-TERM DEBT
Long-term debt at December 31, 1994 and 1995 is summarized as follows:
<TABLE>
<CAPTION>
1994 1995
------- --------
<S> <C> <C>
The Credit Agreement:
Term A loan............................................................ $34,500 $ 27,500
Term B loan............................................................ 50,000 68,200
Acquisition Term loan.................................................. 8,000 8,000
Domestic Revolving loans............................................... 7,750 20,750
FCD construction loan.................................................. -- 1,093
Capital lease obligations.............................................. 505 119
------- --------
100,755 125,662
Less: current maturities............................................... 7,112 6,142
------- --------
$93,643 $119,520
------- --------
------- --------
</TABLE>
F-13
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
During 1994, the Company refinanced and consolidated all existing company
debt through an amended and restated credit agreement (the 'Credit Agreement'),
dated May 26, 1994. The Credit Agreement, as amended, consists of term loans,
revolving credit and letter of credit facilities aggregating approximately $146
million. As of December 31, 1995, the Credit Agreement was comprised of a Term A
loan for $27.5 million, a Term B loan for $68.2 million, an Acquisition Term
loan for $8.0 million, and a revolving credit facility (the 'Domestic Revolving
Credit Facility') for up to $42.5 million. These facilities are collateralized
by a pledge of the stock of FCC's subsidiaries, intercompany debt and
substantially all of the real and personal property of the subsidiaries.
Borrowings under the Credit Agreement were used to refinance indebtedness, to
pay certain fees and expenses related to such refinancing, purchase 100 percent
of the stock of KCI, acquire certain assets of Reilly-Whiteman and certain
assets of Diamalt GmbH (note 3).
During 1995, the Company negotiated amendments to the Credit Agreement for
the acquisition of FCD and to modify certain financial covenant requirements. In
connection with these amendments, the Company incurred financing costs of
$1,391.
The Company's ability to borrow under the Domestic Revolving Credit
Facility is based on the sum of stated percentages of its eligible accounts
receivable and inventory. Up to $25 million of this facility is available for
standby and documentary letters of credit. The Domestic Revolving Credit
Facility commitment is subject to a mandatory reduction in the amount of $5
million on both May 26, 1999 and May 26, 2000.
The Term A loan is payable in 22 consecutive quarterly installments,
ranging from $1,125 to $2,813, which commenced September 30, 1994, with a final
payment due on December 31, 1999. The Term B loan is payable in 12 consecutive
quarterly installments, ranging from $5,115 to $6,820, commencing September 30,
1999, with a final payment due on June 30, 2002. The Acquisition Term loan is
payable in 14 consecutive quarterly installments, ranging from $325 to $725
commencing September 30, 1996, with a final payment on December 31, 1999.
The Domestic Revolving Credit Facility has a final maturity on June 30,
2000. Borrowings of Domestic Revolving loans may be in the form of Base Rate
loans or Eurodollar Rate loans and must be in a principal amount of at least
$250 and $1,000, respectively. Under the Domestic Revolving Credit Facility, FCC
had $3.75 million and $4.00 million outstanding as Base Rate loans and
Eurodollar Rate loans, respectively, at December 31, 1994, and $3.75 million and
$17 million as Base Rate loans and Eurodollar Rate loans, respectively, at
December 31, 1995.
Loans under the Credit Agreement have a conversion option whereby FCC may
convert their borrowings to Base Rate loans or Eurodollar Rate loans
periodically. Therefore, interest is calculated at either the Base Rate plus
1.25 or 1.50 percent per annum, depending on certain performance levels, or the
Eurodollar Rate plus 2.75 or 3.00 percent per annum, depending on certain
performance levels, for Term A loans, Acquisition Term loans and Domestic
Revolving loans. Interest on the Term B loan is calculated at either the Base
Rate plus 2.00 or 2.25 percent per annum, depending on certain performance
levels, or the Eurodollar Rate plus 3.25 or 3.50 percent per annum, depending on
certain performance levels. The Term A and Term B loans outstanding at December
31, 1994 and 1995 were Eurodollar Rate loans. The Base Rate is the higher of the
lender's Base Rate or an Alternate Base Rate as calculated per the agreement.
The Eurodollar Rate is equal to the average LIBOR for the respective Eurodollar
interest period. Interest on Base Rate loans is payable on a quarterly basis and
on Eurodollar Rate loans at the earlier of the maturity of the Eurodollar Loan
or quarterly. The rates in effect at December 31, 1994 and 1995 were 8.75 and
8.875 percent, respectively, on the Term A loan, 9.25 and 9.375 percent,
respectively, on the Term B loan, 9.13 and 8.8125 percent , respectively, on the
Acquisition Term loan, 8.88 and 10.25 percent, respectively, on the Base Rate
Revolving loan and 9.75 and 8.75 percent, respectively, on the Eurodollar Rate
Domestic Revolving loan.
FCC must pay to the lenders a quarterly commitment fee equal to 0.50
percent of the unused portion of the Domestic Revolving Credit and Acquisition
Term Loan Facilities. The Company also pays a commission on all
F-14
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
outstanding letters of credit of 2.50 or 2.75 percent per annum of the face
amount of each letter of credit, depending on certain performance levels, as
well as an initial fee equal to 0.25 percent per annum of the face amount of
each letter of credit issued. At December 31, 1995, letters of credit
outstanding under the Domestic Revolving Credit Facility totaled $15.5 million,
of which $15.0 million is used to support short term borrowings under the
European Revolving Facility. At December 31, 1994, there were no letters of
credit outstanding.
The Credit Agreement contains certain negative covenants which restrict the
Company from, among other things, incurring additional indebtedness, entering
into merger or consolidation transactions, disposing of all or substantially all
of its assets, making certain restricted payments, creating liens on the
Company's assets, creating guarantee obligations, creating material lease
obligations and exceeding limitations on capital expenditures. The Credit
Agreement also limits the Company's ability to pay dividends or make
distributions on its Common Stock. In addition, the Company must maintain
certain financial ratios including a fixed charge coverage ratio and a times
interest earned ratio, as well as certain other covenants, including the
maintenance of minimum net worth.
As part of the FCD acquisition, the Company assumed $1.1 million of long
term debt principally for plant expansion. This debt is collateralized by real
and personal property with payments due of $0.6 million in 1996 and $0.5 million
in 1997. Interest on the debt is principally calculated at the Eurodollar Rate
plus 3.00 percent per annum.
Capital lease obligations, principally collateralized by certain property,
plant, and equipment are due through 1999, with interest rates ranging from 8.0
percent to 12.5 percent. Total future minimum lease payments under capital lease
obligations at December 31, 1994 and 1995 are $614 and $119, respectively.
Aggregate maturities of long-term debt as of December 31, 1995 for the next
five years and thereafter are as follows:
<TABLE>
<CAPTION>
<S> <C>
1996.......................................................... $ 6,142
1997.......................................................... 9,670
1998.......................................................... 14,100
1999.......................................................... 17,712
2000.......................................................... 41,210
Thereafter.................................................... 36,828
--------
Total......................................................... $125,662
--------
--------
</TABLE>
F-15
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
8. INCOME TAXES
The provision (benefit) for income taxes for the years ended December 31,
1993, 1994 and 1995 consists of the following:
<TABLE>
<CAPTION>
1993 1994 1995
----- ------ -------
<S> <C> <C> <C>
Currently payable (receivable):
Federal.................................................................. $ 99 $2,223 $ (871)
State.................................................................... 38 377 192
Foreign.................................................................. -- -- 164
----- ------ -------
137 2,600 (515)
----- ------ -------
Deferred:
Federal.................................................................. (520) 224 (3,149)
State.................................................................... 92 34 (84)
Foreign.................................................................. -- -- (61)
----- ------ -------
(428) 258 (3,294)
----- ------ -------
Provision (benefit) for income taxes on income before
extraordinary item....................................................... (291) 2,858 (3,809)
Tax benefit from extraordinary item........................................ -- 725 --
----- ------ -------
Provision (benefit) for income taxes....................................... $(291) $2,133 $(3,809)
----- ------ -------
----- ------ -------
</TABLE>
Deferred tax (assets) liabilities are comprised of the following:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Allowance for doubtful accounts........................................ $ (161) $ (240) $ (215)
Nondeductible accruals................................................. (1,353) (1,593) (1,397)
Domestic net operating loss carryforwards.............................. (501) -- (1,778)
Foreign net operating loss carryforwards............................... -- -- (4,173)
Postretirement liability............................................... (61) (1,427) (1,482)
Alternative minimum tax credits........................................ (203) -- (633)
Other.................................................................. (543) (123) (346)
Deferred financing costs............................................... -- (660) --
Restructuring reserves................................................. -- -- (3,710)
Environmental accrual.................................................. -- (14,620) (7,002)
------- ------- -------
Gross deferred tax assets............................................ (2,822) (18,663) (20,736)
------- ------- -------
Fixed assets and intangibles........................................... 10,146 20,701 19,368
Inventory.............................................................. 1,154 315 512
Foreign temporary differences primarily in fixed assets
and inventory........................................................ -- -- 1,663
Other.................................................................. 167 -- 418
------- ------- -------
Gross deferred tax liabilities....................................... 11,467 21,016 21,961
------- ------- -------
Valuation allowance.................................................... -- 4,147 7,726
------- ------- -------
Net deferred tax (assets) liabilities................................ $ 8,645 $ 6,500 $ 8,951
------- ------- -------
------- ------- -------
</TABLE>
F-16
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
A reconciliation of the U.S. Federal income tax (benefit) rate to the
effective tax (benefit) rate is as follows:
<TABLE>
<CAPTION>
1993 1994 1995
----- ---- -----
<S> <C> <C> <C>
U.S. federal income tax rate.................................................. (34.0)% 34.0% (34.0)%
State income taxes, net of federal income tax benefit......................... 6.8 5.8 .6
Benefit of losses in the foreign jurisdictions................................ -- -- (12.1)
Increase in domestic valuation allowance...................................... -- -- 13.5
Valuation allowance attributable to foreign jurisdictions..................... -- -- 12.1
Noncash compensation expense.................................................. -- 7.2 .2
Nondeductible goodwill amortization........................................... -- 4.8 1.8
Foreign sales corporation..................................................... -- (3.5) (1.5)
Preferred stock dividend...................................................... 6.7 2.2 .4
Other nondeductible items..................................................... (2.6) (1.1) .7
----- ---- -----
Effective income tax (benefit) rate........................................... (23.1)% 49.4% (18.3)%
----- ---- -----
----- ---- -----
</TABLE>
At December 31, 1995, for Federal tax purposes, the Company has an
available tax net operating loss carryforward of approximately $5,229 expiring
in 2010. The Company also has alternative minimum tax credit carryforwards of
approximately $633 which have no expiration date. At December 31, 1995, a
foreign tax net operating loss carryforward of approximately $4,173 was
available with no expiration date.
At December 31, 1995, the Company maintains a valuation allowance based on
management's evaluation of the future realization of certain of the Federal and
foreign tax net operating loss carryforwards and the tax benefits of certain
temporary differences. Of the total valuation allowance, approximately $2,400
maintained in connection with tax benefits resulting from the acquisition of KCI
(see note 3) would reduce goodwill upon realization.
9. PENSION AND SAVINGS PLANS
The Company's domestic subsidiaries maintain certain noncontributory
defined benefit pension plans. The plans cover certain hourly and salaried
employees and provide benefits based on the participants' years of service. The
funding policies are consistent with statutory requirements and tax
considerations.
Net periodic pension cost includes the following components for the years
ended December 31, 1993, 1994 and 1995:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Service cost.......................................................... $185 $289 $432
Interest cost on projected benefit obligation......................... 30 98 127
Return on plan assets................................................. (28) (16) (370)
Plan deferrals and amortization....................................... (4) (18) 243
---- ---- ----
$183 $353 $432
---- ---- ----
---- ---- ----
</TABLE>
F-17
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
Contributions are made to trusts maintained by independent trustees. The
following table presents a reconciliation of the funded status of the plans to
the accrued pension liability, which is included in accrued compensation at
December 31, 1994 and 1995:
<TABLE>
<CAPTION>
1994 1995
------ ------
<S> <C> <C>
Plan assets at fair value.................................................. $1,230 $1,883
Actuarial present value of benefit obligations:
Accumulated benefit obligation (vested, 1994--$1,432;
1995--$2,010)......................................................... 1,489 2,133
Effect of increase in compensation....................................... 155 249
------ ------
Projected benefit obligation............................................. 1,644 2,382
------ ------
Projected benefit obligation in excess of plan assets.................... 414 500
Prior service costs...................................................... 19 17
Adjustment to recognize minimum liability................................ 87 10
Unrecognized loss........................................................ (206) (180)
------ ------
Accrued pension liability................................................ $ 314 $ 347
------ ------
------ ------
</TABLE>
Significant assumptions used in determining the pension obligation and the
related pension expense include weighted-average assumed discount rates of 7.25
percent to 8 percent at December 31, 1994 and 7 percent to 7.25 percent at
December 31, 1995. The expected long-term rates of return on plan assets were 8
percent to 10 percent at both December 31, 1994 and 1995. In addition, the
projected rate of compensation increase is 5 percent.
The Company's subsidiaries also maintain certain defined contribution
benefit plans. The plans cover salaried and certain hourly employees who meet
the eligibility requirements, and require the subsidiaries to match certain
employee contributions. Expenses relating to these plans were $49 for the year
ended December 31, 1993, $680 for the year ended December 31, 1994 and $1,025
for the year ended December 31, 1995.
The Company maintains a Supplemental Executive Retirement Plan to provide
supplemental retirement benefits to certain executives. At December 31, 1995,
the accrued liability for this plan was $348. In addition, the Company recorded
a minimum pension liability of $57 as a reduction of stockholders' equity.
10. POSTRETIREMENT BENEFITS
FTCC maintains plans to provide certain health care and life insurance
benefits to eligible retired employees. The plans are unfunded. FTCC immediately
recognized the accumulated postretirement benefit obligation measured as of the
acquisition date and as such included a liability of $120 in the purchase price
allocation.
In connection with the acquisition of KCI, the Company recorded a liability
of $3,563 for postretirement benefit obligations assumed from BC Sugar. However,
BC Sugar indemnified KCI for postretirement benefit obligations totaling $2,374
with respect to each participant who was retired or eligible to retire as of the
acquisition closing date. Accordingly, the Company recorded an indemnification
receivable of $1,543 and a deferred tax benefit of $831.
F-18
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
The following table sets forth the accumulated postretirement benefit
obligation, which is included in postretirement benefits at December 31, 1994
and 1995:
<TABLE>
<CAPTION>
1994 1995
------ ------
<S> <C> <C>
Retirees................................................................... $2,448 $2,094
Active plan participants................................................... 1,503 1,399
------ ------
3,951 3,493
Unrecognized net gain...................................................... -- 718
------ ------
$3,951 $4,211
------ ------
------ ------
</TABLE>
The postretirement benefit costs for the years ended December 31, 1993,
1994 and 1995 include the following components:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Service cost.......................................................... $ 13 $ 80 $252
Interest cost......................................................... 11 152 253
---- ---- ----
$ 24 $232 $505
---- ---- ----
---- ---- ----
</TABLE>
The weighted-average assumed discount rate used to measure the accumulated
postretirement benefit obligation was 7 percent at December 31, 1994 and 1995.
At December 31, 1995, the health care cost rate was 5 percent. A one percentage
point increase in the assumed health care cost trend rate for each future year
would increase postretirement benefit costs for the year ended December 31, 1995
by $51. The effect on the accumulated postretirement benefit obligation as of
December 31, 1995 would be an increase of $422.
11. 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 described more fully
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 could be material when these conditions are resolved in a future
period.
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
F-19
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
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 or results of operations.
FTCC
In connection with the Company's purchase of FTCC's Charlotte, North
Carolina facility from American Cyanamid ('AC'), the Company entered into the
Agreement for the Purchase and Sale of Assets, dated February 28, 1992 (the
'Freedom Textile Asset Purchase Agreement'), with AC, which requires AC to take
responsibility for corrective actions with respect to certain environmental
conditions. In January 1994, AC distributed to its stockholders all of the
capital stock of its chemicals unit, Cytec. The Company believes that in
connection with this transaction, Cytec assumed AC's environmental indemnity
obligations to the Company under the Freedom textile Asset Purchase Agreement.
Since the Cytec spin-off, the Company has been dealing with Cytec in respect of
matters arising under the Freedom Textile Asset Purchase Agreement and Cytec has
been performing AC's obligations under the Agreement. The Settlement Agreement,
dated December 30, 1994, among the Company, Cytec and AC, which settled certain
claims, including certain environmental claims regarding the Charlotte facility,
recited that Cytec is the successor to AC with regard to the Freedom Textile
Asset Purchase Agreement. The Company has notified AC that it is cooperating
with Cytec in coordinating fulfillment of AC's obligations under the Freedom
Textile Asset Purchase Agreement as a matter of convenience to AC and has not
waived its contractual rights to look to AC as the party liable for performance
under the Freedom Textile Asset Purchase Agreement. Notwithstanding the
foregoing, Cytec has never formally acknowledged to the Company its assumption
of AC's obligations under the Freedom Textile Asset Purchase Agreement nor has
the Company formally consented to any such assumption.
In 1993, FTCC completed a Resource Conservation and Recovery Act ('RCRA')
investigation at its Charlotte, North Carolina facility required by the EPA and
the State of North Carolina. Currently pending investigation and negotiations
with these agencies may require the remediation of certain environmental
conditions at this facility. The Company currently does not have sufficient
information on which to base an estimate of potential costs associated with this
remediation. However, the prior owner of FTCC's Charlotte facility agreed to
indemnify FTCC for costs associated with remediation of these environmental
conditions. In addition, they have agreed to indemnify FTCC in part for certain
anticipated changes in environmental regulations which may affect the facility.
Accordingly, the Company does not believe that any liabilities incurred by FTCC
in relation to such environmental conditions or such anticipated changes at its
Charlotte facility are likely to have a material adverse effect on the Company's
financial position or results of operations.
In order to consolidate its textile operations, in 1995, the Company
transferred the textile assets of HDCC located in Cowpens, South Carolina,
acquired as 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 acquisition, the Company
recorded a liability for $350 relating to the remediation of 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 $1.9
million charge was recorded in 1995 for estimated remediation costs since any
recoveries or reimbursements from the prior owners are not currently
determinable. FTCC believes the risk of loss exposure is up to $6.5 million.
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
HDCC
In connection with the acquisition of HDCC, Sterling Winthrop, Inc.
('SWI'), a former owner of HDCC, SWI 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 million of the purchase price paid by the Company
in an escrow account to indemnify HDCC 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 million (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.
At the time the Company and SWI entered into the EMA, SWI was a wholly
owned subsidiary of Eastman Kodak ('EK'). In November 1994, EK sold the capital
stock of SWI to SmithKline Beecham plc ('SmithKline Beecham'). SmithKline
Beecham subsequently sold the capital stock of SWI to Miles Inc., a subsidiary
of Bayer AG. Following these transactions, SWI advised the Company that EK had
retained SWI's liabilities in respect of HDCC and to address further
correspondence in respect of the EMA to EK. Subsequently, 360 North Pastoria
Environmental Corporation, a subsidiary of EK ('360 North'), notified the
Company that (i) the Company should send all future communications under the EMA
to 360 North and (ii) SWI's responsibilities under the EMA would be managed by
360 North. Accordingly, since the SWI sale the Company has been dealing with 360
North in respect of matters arising under the EMA and 360 North has been
performing SWI's obligations under the EMA. Notwithstanding the foregoing,
neither EK nor 360 North has formally acknowledged to the Company its assumption
of SWI's obligations under the EMA nor has the Company formally consented to any
such assumption.
Additionally, under the EMA, SWI is required to comply with its previous
obligations pursuant to a January 1989 Administrative Consent Order entered into
between the New Jersey Department of Environmental Protection and Energy
('NJDEPE') and SWI relating to remediation of the land at the HDCC Newark, New
Jersey facility. While HDCC does not believe that it will be required to incur
significant liability in connection with environmental conditions at the Newark
facility, there can be no assurance that the State of New Jersey will not
conclude, in the future, that additional remediation is required, for which HDCC
may be considered responsible. The EMA also requires SWI to remediate
environmental matters, if any, at the Greenville, South Carolina facility
arising before December 31, 1986, subject to certain conditions set forth in the
EMA.
In June 1994, the EPA filed an administrative complaint against HDCC for
alleged violations of EPA regulations relating to industrial boilers at the
Cincinnati facility. The particular unit that is the subject of the complaint,
boiler number five, is out of service and has not operated since August 1992. In
1995, the Company made a monetary offer to the EPA to settle this claim and
continues to negotiate with the EPA. If the EPA does not accept the Company's
settlement offer, litigation is likely to ensue in which the Company intends to
assert all meritorious defenses available. The Company believes the outcome of
such litigation would not be material to the Company's financial position or
results of operations. The Company has made a claim for indemnification against
PMC with respect to this matter; PMC has indicated that it will contest the
claim. The Company believes that its current accrual of $170 in connection with
this matter is reasonable and any additional amounts that it may be liable for
will be de minimus. The Company has not recorded any indemnification receivable
from PMC in light of PMC's stated intent to contest the Company's claim.
In connection with the acquisition of HDCC, the Company employed
environmental consultants to examine all HDCC sites and assess the related
environmental matters at these sites. Based on this examination, all known
F-21
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
environmental liabilities, including fines and penalties, that are the
responsibility of HDCC have been accrued for by HDCC as of the acquisition date.
KCI
KCI owns three manufacturing facilities: Kalama, Washington, Garfield, New
Jersey, and Beaufort, South Carolina. Operations at these three sites, as well
as operations by subsidiaries formerly owned by KCI, have generated
environmental liabilities. The Stock Purchase Agreement between FCC and BC Sugar
(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 EPA requiring KCI to remediate portions of the site and to
limit potential offsite contamination, pursuant to RCRA. The EPA has approved
Kalama's interim corrective measures work plan and 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 December 31, 1995, KCI has accrued
approximately $9,700 for this liability and believes the risk of loss exposure
is up to $22,000. The associated indemnification as of December 31, 1995 is
$2,900. The indemnification, based on the risk of loss exposure, is up to
$9,300.
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 December 31, 1995, KCI has accrued approximately $1,000 for
this liability and believes the risk of loss exposure is up to $1,400. The
associated indemnification as of December 31, 1995 is $500. The indemnification,
based on the risk of loss exposure, is up to $700.
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 on 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 December 31, 1995, KCI has accrued
approximately $5,000 for this liability and believes the risk of loss exposure
is up to $7,100. The associated indemnification as of December 31, 1995 is
$1,300. The indemnification, based on the risk of loss exposure, is up to
$1,800.
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
F-22
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
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 (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 is 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 any additional liabilities incurred
by KCI under environmental laws will be material to the Company's financial
position or results of operations.
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 1995,
the Company reached a tentative understanding with the Department of Justice
which contemplates the payment of a penalty as well as an additional payment to
fund supplemental environmental projects, both totaling approximately $1,600.
The Company has made a claim to BC Sugar for indemnification in this matter,
which is included in the liabilities established by the Company in connection
with the acquisition of KCI.
F-23
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
FCAC
In December 1994, the Company acquired certain assets of Reilly-Whiteman
through its subsidiary, FCAC and entered into a lease of the Reilly-Whiteman
facility at Conshohocken, Pennsylvania. Reilly-Whiteman incurred certain
environmental liabilities prior to December 1994, including alleged violations
of environmental regulations, some of which may have continued after that date.
However, pursuant to the Asset Purchase Agreement entered in connection with the
acquisition, the prior owner, the Reilly Corporation, has the responsibility for
claims or liabilities arising from operations prior to that date. Accordingly,
the Company does not believe that any known liabilities arising from the
Conshohocken facility are likely to have a material adverse effect on the
Company's financial position or results of operations.
12. COMMITMENTS AND CONTINGENCIES
The Company has entered into various operating lease agreements for the use
of certain real estate, buildings, office space, equipment and vehicles. A
number of these agreements provide for renewal options which, if exercised,
would extend the terms of the leases for varying periods of time. Rental expense
relating to operating leases for the years ended December 31, 1993, 1994 and
1995 was $318, $970 and $2,383, respectively.
Future minimum lease payments for all noncancellable operating leases with
initial or remaining terms in excess of one year as of December 31, 1995 are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING OPERATING LEASES
- ------------------------------------------------------------------ ----------------
<S> <C>
1996.............................................................. $ 2,890
1997.............................................................. 2,380
1998.............................................................. 2,080
1999.............................................................. 1,776
2000.............................................................. 1,680
----------------
Total minimum lease payments................................. $ 10,806
----------------
----------------
</TABLE>
In accordance with a management agreement between the Company and a
partnership controlled by two officers, a management fee paid to the partnership
and certain of the Company's corporate expenses paid by the aforementioned
partnership amounting to $1,076 in 1993 have been included in the related
results of operations. During 1994, the management agreement was amended and all
corporate expenses are now paid by the Company.
During 1994, the Company entered into employment agreements with the two
officers whereby each would continue to serve the Company in their present
capacity through May 1997. Under the employment agreements, the two officers are
each entitled to an annual base salary and, subject to the Company's meeting
certain performance criteria established by the Board of Directors or the
Compensation Committee, an annual bonus based on a percentage of the annual base
salary. In the event that these agreements are terminated by the Company without
cause, the two officers shall be entitled to severance benefits equal to two
times the officers' average final compensation, payable over two years.
The two officers also have a conditional bonus agreement with the majority
shareholder which entitles them to receive a cash bonus from the majority
shareholder if certain returns on the majority shareholder's investment are
realized. If such bonus is paid by the shareholder, the Company will treat it in
accordance with generally accepted accounting principles.
F-24
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
13. MINORITY INTEREST
In connection with its acquisition, FTCC issued 2,800 shares of its $1,000
par value Series A Preferred Stock to its former owner. The Series A Preferred
Stock is entitled to receive an 8.5 percent cumulative cash dividend paid
semiannually. The shares are subject to redemption, in whole or in part, at
$1,000 per share plus all unpaid dividends accrued thereon, at the option of the
Board of Directors of FTCC, or upon the earlier of an occurrence of an event of
mandatory redemption or May 4, 2002. The Company has $3,073 included in Minority
Interest on the consolidated balance sheets at December 31, 1994 and 1995
relating to the Series A Preferred Stock of FTCC. The Company has $238, $277 and
$247 reflected in Minority Interest on the consolidated statements of
operations, relating to the dividends paid or accrued by FTCC on their Series A
Preferred Stock, for the years ended December 31, 1993, 1994 and 1995,
respectively.
In addition, FTCC issued 114.75 shares of its $1,000 par value Series B
Preferred Stock to two executives of FTCC in connection with the acquisition.
The holders of this stock are entitled to receive a 10 percent cumulative cash
dividend payable quarterly. The Series B shares are subject to redemption, in
whole or in part, at $1,000 per share plus all unpaid dividends accrued thereon,
at the discretion of the Board of Directors of FTCC. On June 30, 1994, these
shares were exchanged one-for-one for shares of FCC's Series B Preferred Stock
(note 14). In consideration, FCC became the owner of the FTCC shares previously
held by the executives, making FCC the holder of 100 percent of FTCC's Series B
Preferred Stock. Therefore, at December 31, 1994 and 1995, there is $22 included
in Minority Interest on the consolidated balance sheet relating to the accrued
and unpaid dividends earned by the former owners of the stock prior to the date
of the exchange. The par value of the shares was eliminated in consolidation. In
addition, the Company has $13, $7 and $0 reflected in Minority Interest on the
consolidated statements of operations, relating to the Series B Preferred Stock
dividends paid or accrued by FTCC, for the years ended December 31, 1993, 1994
and 1995, respectively.
14. MANDATORY REDEEMABLE PREFERRED STOCK
Series B Preferred Stock
The holders of nonvoting Series B Preferred Stock are entitled to receive
an 11 7/8 percent cumulative cash dividend payable quarterly on the last day of
the month succeeding the end of a calendar quarter (the dividend payment date).
In the event of liquidation of the Company, the holders shall be entitled to
receive all of the par value plus any accrued and unpaid dividends.
Series B Preferred Stock, at the discretion of the Board of Directors of
the Company, shall be subject to redemption, in whole or in part, at $1,000 per
share plus all unpaid dividends accrued thereon (liquidation preference). Series
B Preferred Stock shall be subject to a mandatory redemption, at the liquidation
preference, on April 30, 2002.
For any quarterly dividend period in which dividends are not paid in cash
on the respective dividend payment date, such accrued and unpaid dividends shall
be added to the liquidation preference at the beginning of the subsequent
quarterly dividend period. The Company has paid no cash dividends. There were
$4,891 and $8,192 of accrued and unpaid dividends on the Series B Preferred
Stock at December 31, 1994 and 1995, respectively.
Series C Preferred Stock
The holders of nonvoting Series C Preferred Stock, par value $1,000, are
entitled to receive an 11 7/8 percent cumulative cash dividend payable quarterly
on the last day of the month succeeding the end of a calendar quarter (the
dividend payment date). In the event of liquidation of the Company, the holders
shall be entitled to receive $1,054 per share plus any accrued and unpaid
dividends (the liquidation preference). Series C stock shall be subject to
redemption, in whole or in part, at the liquidation preference, at the
discretion of the Board of Directors of the Company or under mandatory
redemption on May 31, 2004.
F-25
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
For any quarterly dividend period in which dividends are not paid in cash
on the respective dividend payment date, such accrued and unpaid dividends shall
be added to the liquidation preference at the beginning of the subsequent
quarterly dividend period. The Company has paid no cash dividends. There were
$769 and $2,079 of accrued and unpaid dividends relating to the Series C
Preferred Stock at December 31, 1994 and 1995, respectively.
In 1995, the Company purchased 161 shares of Series C Preferred Stock at an
aggregate cost of $188. These shares are classified as treasury stock at
December 31, 1995.
15. COMMON STOCK
In September 1994, the Company reclassified the par value of its Series A
Common Stock from $100 to $.01. All references to the Series A Common Stock in
the financial statements have been restated to reflect the reclassification as
of the Company's date of inception. In addition, the Company authorized the
issuance of 10,000 shares of a new Series B Common Stock. The holders of Common
Stock shall not be entitled to receive cash dividends, nor shall shares of
Common Stock be purchased, redeemed, or otherwise acquired by the Company until
the Series B Preferred Stock and the Series C Preferred Stock has been redeemed
in full.
In 1995, the Company purchased 285 shares of Series A Common Stock at an
aggregate cost of $33. These shares are classified as treasury stock at December
31, 1995.
16. EQUITY PARTICIPATION PLAN AND STOCK OPTIONS
Pursuant to the May 1992, September 1993 and May 1994 Stock Option
Agreements, collectively amended December 7, 1994, the Company granted
nonqualified stock options to acquire an aggregate of 1,837, 7,500 and 1,981
shares, respectively, of Series A Common Stock to two officers of the Company.
The options are exercisable at the fair market value of the shares on the date
of grant and are 60 percent vested as of December 31, 1995. The remaining
options will become vested at a rate of 20 percent each May 4 through 1997 or
immediately upon the occurrence of certain other events as set forth in the
stock option agreements. In January 1994, a stockholder exercised his option to
purchase 5,322 shares of Series A Common Stock. Approximately 27 percent of the
shares purchased represent restricted shares, which can be repurchased by the
Company, upon the occurrence of certain events, until the stockholder becomes
fully vested in these shares in accordance with the terms set forth in the Stock
Option Agreements.
In June 1994, the Company adopted an Equity Participation Plan (the 'Plan')
which provides for the award of nonqualified stock options and stock
appreciation rights ('SARs') to certain executive officers, key employees and
consultants of the Company and its subsidiaries. The Plan permits the Company to
grant, to any holder of an option, a SAR relating to all or some of the Series B
Common Stock shares covered by such options. The options vest ratably over 10
years, subject to acceleration to five years if certain performance goals are
met. The vesting period for the SARs coincides with the related options.
For options granted prior to May 1994, no compensation expense was
recognized, as the exercise price was equal to the estimated fair market value
on the date of grant. Noncash compensation expense of $218 was recorded for the
options granted and vested in May 1994 (note 18). Additionally, compensation
expense of $735 will be recognized over the vesting period of the options issued
in June 1994 and the remainder of the May 1994 options. At December 31, 1995,
5,996 and 3,165 shares of Series A and Series B Common Stock, respectively,
remained reserved for issuance in connection with the Stock Option Agreements at
December 31, 1995 and 1994, respectively. No SARs have been awarded.
F-26
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
The following is a summary of option transactions and exercise prices:
<TABLE>
<CAPTION>
SERIES A SERIES B PRICE
COMMON SHARES COMMON SHARES SHARE
------------- ------------- ---------
<S> <C> <C> <C>
Outstanding at December 31, 1992.......................... 1,837 -- $100.00
Granted................................................... 7,500 -- 100.00
------------- ------
Outstanding at December 31, 1993.......................... 9,337 --
Granted................................................... 1,981 -- 105.40
Granted................................................... -- 2,565 100.00
Exercised................................................. (5,322) -- 100.00
------------- ------
Outstanding at December 31, 1994.......................... 5,996 2,565
Granted................................................... -- 1,360 255.00
Forfeited................................................. -- (760) 100.00
------------- ------
Outstanding at December 31, 1995.......................... 5,996 3,165
------------- ------
------------- ------
Exercisable at December 31, 1995.......................... 3,598 497
------------- ------
------------- ------
</TABLE>
17. RESTRUCTURING AND OTHER CHARGES
In 1995, the Company recorded restructuring and other charges totaling
$14.4 million. These charges, which reduced gross profit from $65,287 to $63,355
and operating income (loss) from $9,788 to $(4,639), are aimed at reducing the
Company's overall cost structure, including both manufacturing and
administrative costs, through the closure of two manufacturing facilities and
personnel reductions in both administrative and manufacturing positions. In
addition, included in the charges are provisions related to unsaleable
inventory, estimated environmental remediation costs and an impairment loss on
intangibles.
These actions affect approximately 135 of the Company's employees in
manufacturing and headquarters locations throughout the United States and
Europe. Charges related to personnel reductions, including severance and related
benefits total $3.0 million. As of December 31, 1995, 30 employees have been
terminated and $0.3 million of termination benefits have been paid. The
remainder of the employees included in the cost reduction initiatives are
generally located at manufacturing facilities and will work through the plant
closing transition periods ending in 1996. At that time, the remaining cash
payments to employees of $2.7 million will be made.
Of the remaining $11.4 million of restructuring and other charges, $3.2
million represent charges that require an outlay of cash, including primarily
lease and other contract terminations totalling $1.3 million associated with the
FCAC plant closure and environmental remediation costs estimated at $1.9
million. Of this amount, $0.1 million has been paid through December 31, 1995
with $1.0 million to be paid in 1996 and $2.1 million to be paid in years after
1996, principally for environmental remediation.
Noncash charges of $8.2 million include increases in inventory reserves at
HDCC and FTCC of $1.9 million in connection with the write-off of inventory in
the Company's Organic Pigments and Dyes product line ($0.6 million in the second
quarter and $1.3 million in the third quarter), writedowns of fixed assets
associated with plant closures at HDCC and FCAC of $2.2 million and an
impairment loss of $4.0 million on all goodwill and other intangibles associated
with the FCAC acquisition. The Organic Pigments and Dyes write-offs were due to
the elimination of the sale of certain Organic Pigments and Dyes products by the
Company. The continued decline in the financial results of the operating
elements of the Company's FCAC business acquired in 1994, the resultant
strategic and operational review and the application of the Company's objective
measurement tests resulted in an evaluation of intangible assets for possible
impairment. The underlying factors contributing to the decline in financial
results included a significant unforeseen decline in the retail market for
textiles (primarily
F-27
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
sheet goods) in 1995. The Reilly-Whiteman acquisition was completed in December
1994 to complement the Company's textile business by providing a Philadelphia
plant to supply the Northeastern U.S. textile market while the Charlotte plant
continued to supply the Southeastern U.S. textile market. Due to depressed
operating results for the Company's textile chemical product line as a result of
the decline in the retail market for textiles in 1995, the Company decided to
consolidate manufacturing in the more efficient of the two plants resulting in
the closure of the Reilly-Whiteman facility.
Additionally, in 1995, the Company recorded a charge of $2,187 for
registration costs associated with an aborted public offering.
18. COMPENSATION EXPENSE
The Company has recorded noncash compensation expense of $915 and $150 for
the years ended December 31, 1994 and 1995 related to common stock options
granted (note 16) and to a nonrecurring charge for common stock sold to
executive officers by the Company during June 1994 in connection with the
acquisition of KCI.
19. RELATED PARTY TRANSACTIONS
Included in loans to stockholders is a note receivable from a shareholder
in the principal amount of $200. Interest is earned quarterly at the highest
annual rate paid by the Company on its outstanding debt during such year. All
unpaid principal and interest due on the note is payable in full on December 31,
1999. The note is collateralized by 300 shares of common stock and 170 shares of
Series B Preferred Stock of the Company held by the stockholder.
20. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information for the years ended
December 31, 1993, 1994 and 1995 is as follows:
<TABLE>
<CAPTION>
1993 1994 1995
------ ------ -------
<S> <C> <C> <C>
Cash paid for:
Interest (net of capitalized interest).......................... $1,286 $5,549 $12,748
------ ------ -------
------ ------ -------
Income taxes.................................................... $ 195 $2,741 $ 755
------ ------ -------
------ ------ -------
Non-cash investing and financing activities:
Issuance of note receivable to stockholder.................... $ 200 $ -- $ --
------ ------ -------
------ ------ -------
Accrued and unpaid dividends on Series B preferred
stock...................................................... $1,621 $2,925 $ 3,301
------ ------ -------
------ ------ -------
Accrued and unpaid dividends on Series C preferred
stock...................................................... $ -- $ 769 $ 1,310
------ ------ -------
------ ------ -------
Accrued and unpaid dividends for minority interest of
subsidiary................................................. $ 128 $ 277 $ 247
------ ------ -------
------ ------ -------
Capital expenditures included in accounts payable and accrued
expenses................................................... $ 216 $1,060 $ 330
------ ------ -------
------ ------ -------
</TABLE>
F-28
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
21. GEOGRAPHIC INFORMATION
The Company operates in one business segment, specialty chemicals. Prior to
1996, HDCC's export sales were primarily via a distribution agreement with a
subsidiary of the former owner of HDCC. The geographic distribution of the
Company's net sales, operating profit (loss) and total assets is indicated by
the table below:
<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Net sales (by origin):
United States (by destination)
Domestic............................................... $ 45,528 $147,861 $174,083
Canada................................................. 1,455 7,928 11,179
South and Latin America................................ 651 4,312 6,702
Europe................................................. 4,106 11,160 15,052
Asia-Pacific........................................... 2,531 14,103 20,904
Africa................................................. -- 66 207
-------- -------- --------
Sub-total........................................... $ 54,271 $185,430 $228,127
Europe................................................... 660 2,350 69,089
Asia-Pacific............................................. -- -- 684
Elimination of intercompany sales........................ -- -- (1,012)
-------- -------- --------
Total............................................... $ 54,931 $187,780 $296,888
-------- -------- --------
-------- -------- --------
Operating profit (loss):
United States.......................................... $ 437 $ 12,568 $ (3,372)
Europe................................................. 72 173 (1,235)
Asia-Pacific........................................... -- -- (39)
Eliminations........................................... -- -- 7
-------- -------- --------
Total............................................... $ 509 $ 12,741 $ (4,639)
-------- -------- --------
-------- -------- --------
Total assets:
United States.......................................... $ 99,782 $229,865 $222,414
Europe................................................. 1,452 1,199 46,197
Asia-Pacific........................................... -- -- 5,185
Eliminations........................................... -- -- (30,640)
-------- -------- --------
Total............................................... $101,234 $231,064 $243,156
-------- -------- --------
-------- -------- --------
</TABLE>
F-29
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
22. DEBT FINANCING AND CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
a) Debt Refinancing
On October 17, 1996, the Company completed an offering (the 'Offering') of
$125 million of senior subordinated notes due 2006 (the 'Notes'), pursuant to
Rule 144A of the Securities Act of 1933, as amended. Subsequent to the closing
of the Offering, the Company filed a registration statement to register notes
having substantially identical terms as the Notes and to make an offer to
exchange such registered notes for the outstanding Notes. The net proceeds of
the Offering were used to repay a combination of term and revolving loans under
the Company's current Domestic Revolving Credit Facility and the European
Revolving Facility.
Concurrently with the consummation of the Offering, the Company amended and
restated its existing credit agreement ('Amended and Restated Credit
Agreement'). The Amended and Restated Credit Agreement provides for a revolving
loan facility of up to $85 million and includes Freedom Chemical Diamalt GmbH
('Diamalt') as a co-borrower. The obligations of the Company under the Amended
and Restated Credit Agreement and the Notes are guaranteed fully and
unconditionally, on a joint and several basis, by all of the Company's domestic
subsidiaries ('U.S. Guarantor Subsidiaries') and Diamalt ('German Guarantor
Subsidiary'). The Amended and Restated Credit Agreement is also collateralized
by a first priority lien on substantially all of the properties and assets of
the Company and certain properties and assets of Diamalt. The obligations of
Diamalt under the Amended and Restated Agreement are guaranteed by the Company.
Prior to the consummation of the Offering, three of the Company's
stockholders, including the Company's majority stockholder, invested an
aggregate of $10 million of new cash equity in the Company (the 'Cash Equity
Investment'). Following consummation of the Offering, certain other stockholders
of the Company invested an aggregate of approximately $1.9 million in the
Company, almost all of which was financed with loans made by the Company (the
'Additional Equity Investments').
Additionally, concurrent with the consummation of the Offering, the Series
B Preferred Stock and the Series C Preferred Stock of the Company was amended
(the 'Preferred Stock Amendment') to extend the mandatory redemption dates of
such Preferred Stock to April 2007 and May 2007, respectively.
b) Condensed Consolidating Financial Statements
The following condensed consolidating financial data illustrates the
composition of the consolidated financial statements. The Parent Company is FCC.
The U.S. Guarantor Subsidiaries include the following: FTCC and certain of its
subsidiaries (FTCC (South Carolina) and FCAC), HDCC, KCI and its subsidiaries
(Kalama Specialty Chemicals, Inc. and Kalama Foreign Sales Corporation). 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), Freedom Europe, B.V., a subsidiary of FCC ('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) and
Indiamalt Private Limited (a subsidiary of Diamalt). The U.S. and German
Guarantor Subsidiaries are wholly owned by the Company.
Investments in subsidiaries are accounted for by the Company, 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 Company'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. Prior to
1994, income tax expense (benefit) was allocated on a separate taxpayer basis.
The Condensed Consolidating Statement of Operations for the year ended December
31, 1993 has been restated to reflect the new method of allocation. The effect
of this change was immaterial to the consolidating entities.
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.
F-30
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1994
------------------------------------------------------------------------------------
U.S. GERMAN NON
GUARANTOR GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARY SUBSIDIARY ELIMINATIONS CONSOLIDATED
-------- ------------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents... $ 714 $ 1,457 -- $ 240 -- $ 2,411
Accounts receivable, net.... -- 28,184 -- 540 -- 28,724
Due from affiliates......... -- 722 -- -- $ (722) --
Inventories................. -- 38,996 -- 386 -- 39,382
Prepaid expenses and other
current assets............ 99 3,532 -- 16 -- 3,647
Environmental
indemnification........... -- 4,346 -- -- -- 4,346
Deferred income taxes....... -- 3,240 -- -- -- 3,240
-------- ------------ ---------- ---------- ------------ ------------
Total current assets...... 813 80,477 -- 1,182 (722) 81,750
Property, plant and equipment:
Land........................ -- 2,825 -- 247 -- 3,072
Buildings and
improvements.............. -- 11,421 -- 196 -- 11,617
Machinery and equipment..... -- 74,833 -- 315 -- 75,148
Other....................... 155 4,124 -- 94 -- 4,373
-------- ------------ ---------- ---------- ------------ ------------
155 93,203 -- 852 -- 94,210
Less accumulated
depreciation................ 31 8,702 -- 121 -- 8,854
-------- ------------ ---------- ---------- ------------ ------------
124 84,501 -- 731 -- 85,356
Other assets:
Intangible assets, net...... 15 48,851 -- -- -- 48,866
Environmental
indemnification........... -- 5,763 -- -- -- 5,763
Deferred financing costs,
net....................... -- 2,929 -- -- -- 2,929
Other....................... 2,333 4,067 -- -- -- 6,400
Notes receivable,
subsidiaries.............. 101,930 -- -- -- (101,930) --
Investment in
subsidiaries.............. 36,783 555 -- -- (37,338) --
-------- ------------ ---------- ---------- ------------ ------------
Total assets.............. $141,998 $227,143 -- $ 1,913 $ (139,990) $231,064
-------- ------------ ---------- ---------- ------------ ------------
-------- ------------ ---------- ---------- ------------ ------------
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current maturities of
long-term debt............ $ 7,000 $ 112 -- -- -- $ 7,112
Notes payable............... -- 165 -- -- -- 165
Accounts payable............ 171 17,756 -- $ 293 -- 18,220
Accounts
payable--shareholders..... 273 -- -- -- -- 273
Due from affiliates......... -- -- -- 722 $ (722) --
Accrued expenses............ 892 7,755 -- 236 -- 8,883
Accrued compensation........ 974 3,451 -- -- -- 4,425
Environmental............... -- 4,346 -- -- -- 4,346
-------- ------------ ---------- ---------- ------------ ------------
Total current liabilities..... 9,310 33,585 -- 1,251 (722) 43,424
Long-term debt................ 93,250 393 -- -- -- 93,643
Environmental................. -- 37,427 -- -- -- 37,427
Deferred income taxes......... -- 9,739 -- 1 -- 9,740
Postretirement benefits....... -- 3,951 -- -- -- 3,951
Other......................... 308 1,115 -- 2 -- 1,425
Notes payable, parent......... -- 101,906 -- 24 (101,930) --
Minority interest............. -- -- -- -- 3,095 3,095
Commitments and
contingencies............... -- -- -- -- -- --
Mandatory redeemable preferred
stock:
Series B, cumulative, $1,000
par value, authorized
40,000 shares; issued and
outstanding 21,322 shares,
stated at liquidation
value of $1,000 per share
plus accrued and unpaid
dividends of $4,891....... 26,213 -- -- -- -- 26,213
Series C, cumulative, $1,000
par value, authorized
15,000 shares; issued and
outstanding 9,137 shares
stated at liquidation
value of $1,054 per share
plus accrued and unpaid
dividends of $769......... 10,399 -- -- -- -- 10,399
Stockholders' equity
(deficit):
Common stock:
Series A, $.01 par value,
authorized 85,000 shares;
issued and outstanding
59,355 shares,............ 1 568 -- -- (568) 1
Series B, $.01 par value,
authorized 10,000 shares;
none issued or
outstanding............... -- -- -- -- -- --
Preferred stock............... -- 6,197 -- -- (6,197) --
Additional paid-in capital.... 1,866 29,890 -- -- (29,890) 1,866
Retained earnings (accumulated
deficit).................... 651 2,572 -- 555 (3,778) --
Cumulative translation
adjustment.................. -- -- -- 80 -- 80
Less: stockholder note
receivable.................. -- (200) -- -- -- (200)
-------- ------------ ---------- ---------- ------------ ------------
Total stockholders' equity
(deficit)................... 2,518 39,027 -- 635 (40,433) 1,747
-------- ------------ ---------- ---------- ------------ ------------
Total liabilities and
stockholders' equity
(deficit)............... $141,998 $227,143 -- $ 1,913 $ (139,990) $231,064
-------- ------------ ---------- ---------- ------------ ------------
-------- ------------ ---------- ---------- ------------ ------------
</TABLE>
F-31
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING BALANCE SHEET--(CONTINUED)
AS OF DECEMBER 31, 1995
----------------------------------------------------------------------------
U.S. GERMAN NON
GUARANTOR GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........ $ 248 -- $ 429 $ 1,021 $ (248) $ 1,450
Accounts receivable, net......... -- $ 26,971 9,591 2,488 -- 39,050
Due from affiliates.............. -- 405 926 -- (1,331) --
Refundable income taxes.......... 2,742 -- -- -- -- 2,742
Inventories...................... -- 32,267 12,541 2,090 (50) 46,848
Prepaid expenses and other
current assets................. 49 4,023 317 423 -- 4,812
Environmental indemnification.... -- 780 -- -- -- 780
Deferred income taxes............ 266 1,706 -- 135 -- 2,107
-------- ------------ ---------- ------------ ------------ ------------
Total current assets........... 3,305 66,152 23,804 6,157 (1,629) 97,789
Property, Plant and Equipment:
Land............................. -- 2,610 470 578 -- 3,658
Buildings and improvements....... -- 12,831 627 899 -- 14,357
Machinery and equipment.......... -- 84,702 9,044 3,933 -- 97,679
Other............................ 182 3,757 489 78 -- 4,506
-------- ------------ ---------- ------------ ------------ ------------
182 103,900 10,630 5,488 -- 120,200
Less accumulated depreciation...... 68 17,125 793 748 -- 18,734
-------- ------------ ---------- ------------ ------------ ------------
114 86,775 9,837 4,740 -- 101,466
Other assets:
Intangible assets, net........... 434 34,178 313 3 -- 34,928
Environmental indemnification.... -- 1,074 -- -- -- 1,074
Deferred financing costs, net.... 329 2,370 936 6 -- 3,641
Investments in joint ventures.... -- -- 511 -- -- 511
Deferred income taxes............ 1,954 -- -- -- (1,954) --
Other............................ 29 3,038 221 459 -- 3,747
Notes receivable, subsidiaries..... 118,579 8,029 530 -- (127,138) --
Investment in subsidiaries......... 25,732 2,032 1,253 -- (29,017) --
-------- ------------ ---------- ------------ ------------ ------------
Total assets................... $150,476 $203,648 $ 37,405 $ 11,365 $ (159,738) $243,156
-------- ------------ ---------- ------------ ------------ ------------
-------- ------------ ---------- ------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term
debt........................... $ 5,500 $ 24 -- $ 618 -- $ 6,142
Short-term borrowings............ -- -- $ 11,880 358 -- 12,238
Notes payable.................... 8 410 -- 335 -- 753
Accounts payable................. 142 18,621 3,237 1,176 $ (248) 22,928
Due to affiliates................ -- 199 876 256 (1,331) --
Accrued expenses................. 2,105 5,190 1,376 318 (4) 8,985
Accrued compensation............. 92 3,672 335 519 -- 4,618
Accrued restructuring and other
charges........................ 350 1,755 1,365 -- -- 3,470
Environmental.................... -- 1,200 -- -- -- 1,200
-------- ------------ ---------- ------------ ------------ ------------
Total current liabilities.......... 8,197 31,071 19,069 3,580 (1,583) 60,334
Long-term debt..................... 118,950 26 -- 544 -- 119,520
Environmental...................... -- 17,367 699 -- -- 18,066
Deferred income taxes.............. -- 12,458 -- 104 (1,504) 11,058
Postretirement benefits............ -- 4,211 -- -- -- 4,211
Accrued restructuring and other
charges.......................... -- 2,429 -- -- -- 2,429
Notes payable...................... -- 108,763 16,386 1,989 (127,138) --
Other.............................. 962 671 243 275 -- 2,151
Minority interest.................. -- -- -- -- 3,095 3,095
Commitments and contingencies...... -- -- -- -- -- --
Mandatory redeemable preferred
stock:
Series B, cumulative, $1,000 par
value, authorized 40,000
shares; issued and outstanding
21,322 shares, stated at
liquidation value of $1,000 per
share plus accrued and unpaid
dividends of $8,192............ 29,514 -- -- -- -- 29,514
Series C, cumulative, $1,000 par
value, authorized 15,000
shares; issued 9,137 shares,
outstanding 8,976, stated at
liquidation value of $1,054 per
share plus accrued and unpaid
dividends of $2,079............ 11,709 -- -- -- -- 11,709
Less: Treasury stock, at cost (161
shares of Series C preferred).... (188) -- -- -- -- (188)
-------- ------------ ---------- ------------ ------------ ------------
41,035 -- -- -- -- 41,035
Stockholders' equity (deficit):
Common stock:
Series A, $.01 par value,
authorized 85,000 shares;
issued 59,355 shares,
outstanding 59,070 shares...... 1 567 1,291 1,476 (3,334) 1
Series B, $.01 par value,
authorized 10,000 shares; none
issued or outstanding
Preferred stock.................... -- 6,535 -- -- (6,535) --
Additional paid-in capital......... -- 29,890 3,786 2,799 (36,475) --
Retained earnings (accumulated
deficit)......................... (14,400) (10,140) (5,263) 511 9,557 (19,735)
Cumulative translation
adjustment....................... -- -- 1,194 87 -- 1,281
Less: Stockholder note
receivable....................... -- (200) -- -- -- (200)
Treasury stock, at cost (285
shares of Series A common)..... (33) -- -- -- -- (33)
Minimum pension liability........ (57) -- -- -- -- (57)
-------- ------------ ---------- ------------ ------------ ------------
Total stockholders' equity
(deficit)........................ (14,489) 26,652 1,008 4,873 (36,787) (18,743)
-------- ------------ ---------- ------------ ------------ ------------
Total liabilities and
stockholders' equity
(deficit).................... $154,655 $203,648 $ 37,405 $ 11,365 $ (163,917) $243,156
-------- ------------ ---------- ------------ ------------ ------------
-------- ------------ ---------- ------------ ------------ ------------
</TABLE>
F-32
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993
----------------------------------------------------------------------------
U.S. GERMAN NON
GUARANTOR GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARY SUBSIDIARY ELIMINATIONS CONSOLIDATED
------- ------------ --------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales...................................... -- $ 54,084 -- $ 747 -- $ 54,831
Cost of goods sold............................. -- 44,866 -- 429 -- 45,295
------- ------------ --------- --------- ------ ------------
Gross profit................................. -- 9,218 -- 318 -- 9,536
Selling, general and administrative expense.... $ 1,269 6,787 -- 236 -- 8,292
Research and development expense............... -- 735 -- -- -- 735
------- ------------ --------- --------- ------ ------------
Operating income (loss)...................... (1,269) 1,696 -- 82 -- 509
Interest and debt expense (income)............. (23) 1,579 -- -- -- 1,556
Other income (expense)......................... 575 (284) -- 4 $ (258) 37
Equity in income (loss) of subsidiary.......... (40) 86 -- -- (46) --
------- ------------ --------- --------- ------ ------------
Income (loss) before minority interest and
income taxes.............................. (711) (81) -- 86 (304) (1,010)
Minority interest.............................. -- -- -- -- 251 251
------- ------------ --------- --------- ------ ------------
Income (loss) before income taxes............ (711) (81) -- 86 (555) (1,261)
Provision (benefit) for income taxes........... (162) (41) -- -- (88) (291)
------- ------------ --------- --------- ------ ------------
Net income (loss)............................ (549) (40) -- 86 (467) (970)
Less: preferred dividends...................... 1,621 -- -- -- -- 1,621
------- ------------ --------- --------- ------ ------------
Net income (loss) applicable to common
shares.................................... $(2,170) $ (40) -- $ 86 $ (467) $ (2,591)
------- ------------ --------- --------- ------ ------------
------- ------------ --------- --------- ------ ------------
</TABLE>
F-33
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
-----------------------------------------------------------------------------------
U.S. GERMAN NON
GUARANTOR GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARY SUBSIDIARY ELIMINATIONS CONSOLIDATED
------- ------------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales............................. -- $185,429 -- $2,351 -- $187,780
Cost of goods sold.................... -- 143,384 -- 1,461 -- 144,845
------- ------------ ---------- ---------- ------------ ------------
Gross profit........................ -- 42,045 -- 890 -- 42,935
Selling, general and administrative
expense............................. $ 3,418 22,837 -- 693 -- 26,948
Noncash compensation expense (note
18)................................. 915 -- -- -- -- 915
Research and development
expense............................. -- 2,331 -- -- -- 2,331
------- ------------ ---------- ---------- ------------ ------------
Operating income (loss)............. (4,333) 16,877 -- 197 -- 12,741
Interest and debt expense
(income)............................ (333) 7,015 -- -- -- 6,682
Other income (expense)................ 2,183 (1,323) -- (22) $ (293) 545
Equity in income (loss) of
subsidiary.......................... 4,131 175 -- -- (4,306) --
------- ------------ ---------- ---------- ------------ ------------
Income (loss) before minority
interest, income taxes and
extraordinary item............... 2,314 8,714 -- 175 (4,599) 6,604
Minority interest..................... -- -- -- -- 284 284
------- ------------ ---------- ---------- ------------ ------------
Income (loss) before income taxes
and extraordinary item........... 2,314 8,714 -- 175 (4,883) 6,320
Provision (benefit) for income
taxes............................... (349) 3,307 -- -- (100) 2,858
------- ------------ ---------- ---------- ------------ ------------
Net income (loss) before
extraordinary item............... 2,663 5,407 -- 175 (4,783) 3,462
Extraordinary loss, net of applicable
income tax.......................... -- 1,276 -- -- -- 1,276
------- ------------ ---------- ---------- ------------ ------------
Net income (loss)................... 2,663 4,131 -- 175 (4,783) 2,186
Less: preferred dividends............. 3,694 -- -- -- -- 3,694
------- ------------ ---------- ---------- ------------ ------------
Net income (loss) applicable to
common shares.................... $(1,031) $ 4,131 -- $ 175 $ (4,783) $ (1,508)
------- ------------ ---------- ---------- ------------ ------------
------- ------------ ---------- ---------- ------------ ------------
</TABLE>
F-34
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
----------------------------------------------------------------------------
U.S. GERMAN NON
GUARANTOR GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales...................................... -- $ 228,127 $ 58,272 $ 14,442 $ (3,953) $296,888
Cost of goods sold............................. -- 180,313 46,781 10,266 (3,827) 233,533
-------- ------------ ---------- ------------ ------------ ------------
Gross profit................................. -- 47,814 11,491 4,176 (126) 63,355
Selling, general and administrative expense.... $ 4,726 31,803 11,201 2,745 (76) 50,399
Noncash compensation expense (note 18)......... 150 -- -- -- -- 150
Research and development expense............... -- 3,374 1,405 171 -- 4,950
Restructuring and other charges (note 17)...... 350 10,780 1,365 -- -- 12,495
-------- ------------ ---------- ------------ ------------ ------------
Operating income (loss)...................... (5,226) 1,857 (2,480) 1,260 (50) (4,639)
Interest and debt expense (income)............. 746 10,639 2,075 345 -- 13,805
Registration costs (note 17)................... 2,187 -- -- -- -- 2,187
Other income (expense)......................... 5,441 (3,781) (458) (856) (341) 5
Equity in income (loss) of subsidiary.......... (14,786) (2,321) (324) -- 17,431 --
-------- ------------ ---------- ------------ ------------ ------------
Income (loss) before minority interest and
income taxes.............................. (17,504) (14,884) (5,337) 59 17,040 (20,626)
Minority interest.............................. -- -- -- -- 247 247
-------- ------------ ---------- ------------ ------------ ------------
Income (loss) before income taxes............ (17,504) (14,884) (5,337) 59 16,793 (20,873)
Provision (benefit) for income taxes........... (1,019) (2,760) -- 103 (133) (3,809)
Equity in income of joint ventures............. -- -- 74 -- -- 74
-------- ------------ ---------- ------------ ------------ ------------
Net income (loss)............................ (16,485) (12,124) (5,263) (44) 16,926 (16,990)
Less: preferred dividends...................... 4,611 -- -- -- -- 4,611
-------- ------------ ---------- ------------ ------------ ------------
Net income (loss) applicable to common
shares.................................... $(21,096) $ (12,124) $ (5,263) $ (44) $ 16,926 $(21,601)
-------- ------------ ---------- ------------ ------------ ------------
-------- ------------ ---------- ------------ ------------ ------------
</TABLE>
F-35
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1993
--------------------------------------------------------------------------
U.S. GERMAN NON
GUARANTOR GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARY SUBSIDIARY ELIMINATIONS CONSOLIDATED
-------- ------------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities..................................... $ (1,181) $ 1,516 -- $ 77 -- $ 412
-------- ------------ ---------- ----- ------------ ------------
Cash flows from investing activities:
Payments for acquisitions, net of cash
acquired.................................... -- (29,890) -- -- -- (29,890)
Investment in subsidiary....................... (19,800) -- -- -- $ 19,800 --
Capital expenditures........................... (8) (920) -- (25) -- (953)
Proceeds from sale of capital equipment........ -- 50 -- -- -- 50
Other.......................................... 165 -- -- -- 165
-------- ------------ ---------- ----- ------------ ------------
Net cash used in investing activities.......... $(19,808) $(30,595) -- $(25) $ 19,800 $(30,628)
-------- ------------ ---------- ----- ------------ ------------
Cash flows from financing activities:
Issuance of common stock....................... 2,800 19,800 -- -- (19,800) 2,800
Issuance of preferred stock.................... 17,000 -- -- -- -- 17,000
Borrowing of refinanced long-term debt......... -- 62,931 -- -- -- 62,931
Repayment of refinanced long-term debt......... -- (25,771) -- -- -- (25,771)
Repayment of assumed long-term debt............ -- (25,401) -- -- -- (25,401)
Payments for financing costs................... -- (1,861) -- -- -- (1,861)
Dividends paid to minority interests........... -- (122) -- -- -- (122)
Other.......................................... -- (79) -- -- -- (79)
-------- ------------ ---------- ----- ------------ ------------
Net cash provided by financing activities........ 19,800 29,497 -- -- (19,800) 29,497
-------- ------------ ---------- ----- ------------ ------------
Net increase (decrease) in cash and cash
equivalents.................................... (1,189) 418 -- 52 -- (719)
Cash and cash equivalents, beginning of period... 1,389 119 -- -- -- 1,508
-------- ------------ ---------- ----- ------------ ------------
Cash and cash equivalents, end of period......... $ 200 $ 537 -- $ 52 $ -- $ 789
-------- ------------ ---------- ----- ------------ ------------
-------- ------------ ---------- ----- ------------ ------------
</TABLE>
F-36
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1994
----------------------------------------------------------------------------------------
U.S. GERMAN NON
GUARANTOR GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARY SUBSIDIARY ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by investing
activities....................... $ 844 $ 12,942 -- $377 -- $ 14,163
-------- ------------ ------------ ----- ------------ ------------
Cash flow from investing
activities:
Payments for acquisitions, net of
cash acquired.................. -- (68,286) -- -- -- (68,286)
Investment in subsidiaries....... (10,001) -- -- -- $ 10,001 --
Capital expenditures............. (23) (6,988) -- (199) -- (7,210)
Purchase of subsidiary stock from
minority stockholder............. (142) -- -- -- -- (142)
Proceeds from sale of capital
equipment...................... -- 185 -- -- -- 185
Payments for environmental
liabilities.................... -- (2,543) -- -- -- (2,543)
Proceeds from environmental
indemnification................ -- 2,292 -- -- -- 2,292
Other............................ (254) 46 -- -- -- (208)
-------- ------------ ------------ ----- ------------ ------------
Net cash provided by used in
investing activities............. (10,420) (75,294) -- (199) 10,001 (75,912)
-------- ------------ ------------ ----- ------------ ------------
Cash flows from financing
activities:
Issuance of common stock......... 2,273 10,001 -- -- (10,001) 2,273
Issuance of preferred stock...... 9,745 -- -- -- -- 9,745
Revolving borrowings under Credit
Agreement...................... 36,250 -- -- -- -- 36,250
Revolving repayments under Credit
Agreement...................... (28,500) -- -- -- -- (28,500)
Term loan borrowings under Credit
Agreement...................... 95,500 -- -- -- -- 95,500
Term loan repayments under Credit
Agreement...................... (3,000) -- -- -- -- (3,000)
Repayment of refinanced long-term
debt........................... -- (44,630) -- -- -- (44,630)
Repayment of capital lease
obligations.................... -- (134) -- -- -- (134)
Payments for financing costs..... (21) (3,229) -- -- -- (3,250)
Dividends paid to minority
interests...................... -- (129) -- -- -- (129)
Other............................ (735) (19) -- -- -- (754)
Subsidiary loans................. (101,418) 101,408 -- 10 -- --
-------- ------------ ------------ ----- ------------ ------------
Net cash provided by (used in)
financing activities............. 10,094 63,268 -- 10 (10,001) 63,371
-------- ------------ ------------ ----- ------------ ------------
Net increase in cash and cash
equivalents...................... 518 916 -- 188 -- 1,622
Cash and cash equivalents,
beginning of period.............. 200 537 -- 52 -- 789
-------- ------------ ------------ ----- ------------ ------------
Cash and cash equivalents, end of
period........................... $ 718 $ 1,453 -- $240 -- $ 2,411
-------- ------------ ------------ ----- ------------ ------------
-------- ------------ ------------ ----- ------------ ------------
</TABLE>
F-37
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
---------------------------------------------------------------------------------
U.S. GERMAN NON
GUARANTOR GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities............. $ (2,331) $ 18,594 $(17,742) $ (1,403) $ (248) $ (3,130)
-------- ------------ ---------- ------------ ------------ ------------
Cash flows from investing
activities:
Payments for acquisitions, net of
cash acquired.................. -- -- (13,493) (2,381) -- (15,874)
Investments in subsidiaries...... (3,982) (3,797) -- (1,573) 9,352 --
Capital expenditures............. (113) (13,980) (834) (587) -- (15,514)
(Increase) decrease in
investments in joint
ventures....................... -- -- (133) -- -- (133)
Proceeds from sale of capital
equipment...................... -- 576 186 -- -- 762
Payments for environmental
liabilities.................... -- (3,943) -- -- -- (3,943)
Proceeds from environmental
indemnification................ -- 2,645 -- -- -- 2,645
Other............................ -- 42 -- -- -- 42
-------- ------------ ---------- ------------ ------------ ------------
Net cash flows used in investing
activities....................... (4,095) (18,457) (14,274) (4,541) 9,352 (32,015)
-------- ------------ ---------- ------------ ------------ ------------
Cash flows from financing
activities:
Issuance of common stock......... -- -- 5,077 4,275 (9,352) --
Revolving borrowings under Credit
Agreement...................... 86,830 -- -- -- -- 86,830
Revolving repayments under Credit
Agreement...................... (73,830) -- -- -- -- (73,830)
Term loan borrowings under Credit
Agreement...................... 18,200 -- -- -- -- 18,200
Term loan repayments under Credit
Agreement...................... (7,000) -- -- -- -- (7,000)
Short-term borrowings under
European Facility.............. -- -- 15,974 542 -- 16,516
Repayments of short-term
borrowing under European
Facility....................... -- -- (3,986) -- -- (3,986)
Purchase of treasury stock....... (221) -- -- -- -- (221)
Payment of registration costs.... (1,004) -- -- -- -- (1,004)
Repayment of capital lease
obligations.................... -- (65) -- -- -- (65)
Payments for financing costs..... (370) (21) (1,000) -- -- (1,391)
Dividends paid to minority
interests...................... -- (247) -- -- -- (247)
Other............................ -- (85) -- -- -- (85)
Subsidiary loans................. (16,649) (1,172) 15,856 1,965 -- --
-------- ------------ ---------- ------------ ------------ ------------
Net cash provided by financing
activities....................... 5,956 (1,590) 31,921 6,782 (9,352) 33,717
-------- ------------ ---------- ------------ ------------ ------------
Effect of exchange rate changes on
cash............................. -- -- 524 (57) -- 467
-------- ------------ ---------- ------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents................. (470) (1,453) 429 781 (248) (961)
Cash and cash equivalents,
beginning of period.............. 718 1,453 -- 240 -- 2,411
-------- ------------ ---------- ------------ ------------ ------------
Cash and cash equivalents, end of
period........................... $ 248 $ -- $ 429 $ 1,021 $ (248) $ 1,450
-------- ------------ ---------- ------------ ------------ ------------
-------- ------------ ---------- ------------ ------------ ------------
</TABLE>
F-38
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING BALANCE SHEET--(CONTINUED)
AS OF SEPTEMBER 30, 1996 (UNAUDITED)
---------------------------------------------------------------------------------
U.S. GERMAN NON
GUARANTOR GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........ $ 252 $ 536 $ 490 $ 519 $ (253) $ 1,544
Accounts receivable, net......... -- 31,480 11,935 2,992 -- 46,407
Due from affiliates.............. -- 250 386 767 (1,403) --
Refundable income taxes.......... 344 -- -- -- -- 344
Inventories...................... -- 35,191 18,335 2,212 (375) 55,363
Prepaid expenses and other
current assets................. 84 2,144 2,973 474 -- 5,675
Environmental indemnification.... -- 792 -- -- -- 792
Deferred income taxes............ 266 1,048 -- 135 -- 1,449
-------- ------------ ------------ ------- ------------ ------------
Total current assets........... 946 71,441 34,119 7,099 (2,031) 111,574
Property, plant and equipment:
Land............................. -- 2,610 444 864 -- 3,918
Buildings and improvements....... -- 13,023 586 931 -- 14,540
Machinery and equipment.......... -- 89,038 8,555 4,030 -- 101,623
Other............................ 296 5,817 1,210 960 7 8,290
-------- ------------ ------------ ------- ------------ ------------
296 110,488 10,795 6,785 7 128,371
Less accumulated depreciation...... 118 24,050 1,326 1,206 -- 26,700
-------- ------------ ------------ ------- ------------ ------------
178 86,438 9,469 5,579 7 101,671
Other assets:
Intangible assets, net........... 360 32,829 183 2 -- 33,374
Environmental indemnification.... -- 24 -- -- -- 24
Deferred financing costs, net.... 288 1,933 773 3 -- 2,997
Investments in joint ventures.... -- -- 747 -- -- 747
Other............................ 537 3,092 216 47 -- 3,892
Deferred income taxes............ 971 -- -- -- (971) --
Notes receivable, subsidiaries... 121,449 6,951 545 -- (128,945) --
Investments in subsidiaries...... 28,105 2,595 1,859 -- (32,559) --
-------- ------------ ------------ ------- ------------ ------------
Total assets................... $152,834 $205,303 $ 47,911 $12,730 $ (170,786) $254,279
-------- ------------ ------------ ------- ------------ ------------
-------- ------------ ------------ ------- ------------ ------------
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term
debt........................... $ 8,444 22 -- $ 1,063 -- $ 9,529
Short-term borrowings............ -- -- $ 18,890 734 -- 19,624
Notes payable.................... 4 $ 1,269 -- 297 -- 1,570
Accounts payable................. 150 25,769 4,509 1,108 $ (253) 31,283
Due to affiliates................ -- 134 767 502 (1,403) --
Accrued expenses................. 1,703 6,561 1,229 279 23 9,795
Accrued compensation............. 932 2,275 1,329 526 -- 5,062
Accrued restructuring and other
charges........................ 277 614 769 -- -- 1,660
Environmental.................... -- 1,200 -- -- -- 1,200
-------- ------------ ------------ ------- ------------ ------------
Total current liabilities.......... 11,510 37,844 27,493 4,509 (1,633) 79,723
Long-term debt..................... 116,320 3 -- 6 -- 116,329
Environmental...................... -- 15,379 -- -- -- 15,379
Deferred income taxes.............. -- 10,202 -- 19 (891) 9,330
Postretirement benefits............ -- 4,376 -- -- -- 4,376
Accrued restructuring and other
charges.......................... 234 2,040 -- -- -- 2,274
Notes payable, parent.............. -- 112,130 14,185 2,600 (128,915) --
Other.............................. 1,572 124 403 266 -- 2,365
Minority interest.................. -- -- -- 304 3,164 3,468
Commitments and contingencies...... -- -- -- -- -- --
Mandatory redeemable preferred
stock:
Series B, cumulative, $1,000 par
value, authorized 40,000
shares; issued and outstanding
21,322 shares, stated at
liquidation value of $1,000 per
share plus accrued and unpaid
dividends of $10,425........... 31,747 -- -- -- -- 31,747
Series C, cumulative, $1,000 par
value, authorized 15,000
shares; issued 9,137 shares,
outstanding 9,137, 8,976 and
8,916 shares, respectively,
stated at liquidation value of
$1,054 per share plus accrued
and unpaid dividends of
$2,795......................... 12,425 -- -- -- -- 12,425
Less: Treasury stock, at cost
(221 shares of Series C
preferred)..................... (262) -- -- -- -- (262)
-------- ------------ ------------ ------- ------------ ------------
43,910 -- -- -- -- 43,910
Stockholders' equity (deficit):
Common stock:
Series A, $.01 par value,
authorized 85,000 shares;
issued 59,355 shares,
outstanding 58,964 shares...... 1 567 1,291 1,476 (3,334) 1
Series B, $.01 par value,
authorized 10,000 shares; none
issued or outstanding.......... -- -- -- -- -- --
Preferred stock.................... -- 6,884 -- -- (6,884) --
Additional paid-in capital......... -- 29,890 8,235 2,767 (40,892) --
Retained earnings (accumulated
deficit)......................... (20,610) (13,936) (3,461) 921 14,725 (22,361)
Cumulative translation
adjustment....................... -- -- (235) (138) 161 (212)
Less: Stockholder note
receivable....................... -- (200) -- -- -- (200)
Treasury stock, at cost (391
shares of Series A common)..... (46) -- -- -- -- (46)
Minimum pension liability........ (57) -- -- -- -- (57)
-------- ------------ ------------ ------- ------------ ------------
Total stockholders' equity
(deficit)........................ (20,712) 23,205 5,830 5,026 (36,224) (22,875)
-------- ------------ ------------ ------- ------------ ------------
Total liabilities and stockholders'
equity (deficit)................. $152,834 $205,303 $ 47,911 $12,730 $ (170,786) $254,279
-------- ------------ ------------ ------- ------------ ------------
-------- ------------ ------------ ------- ------------ ------------
</TABLE>
F-39
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED)
----------------------------------------------------------------------------------------
U.S. GERMAN NON
GUARANTOR GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales......................... -- $176,906 $ 44,094 $ 10,985 $ (2,645) $229,340
Cost of goods sold................ -- 140,192 34,876 7,666 (2,555) 180,179
-------- ------------ ------------ ------------ ------------ ------------
Gross profit.................... -- 36,714 9,218 3,319 (90) 49,161
Selling, general and
administrative expense.......... $ 3,336 24,862 8,970 2,286 (48) 39,406
Noncash compensation expense (note
18)............................. 112 -- -- -- -- 112
Research and development
expense......................... -- 2,673 1,124 117 -- 3,914
Restructuring and other charges
(note 17)....................... -- 3,242 -- -- -- 3,242
-------- ------------ ------------ ------------ ------------ ------------
Operating income (loss)......... (3,448) 5,937 (876) 916 (42) 2,487
Interest and debt expense
(income)........................ 461 8,139 1,470 264 -- 10,334
Registration costs (note 17)...... 2,187 -- -- -- -- 2,187
Other income (expense)............ 3,645 (2,930) (339) (192) (252) (68)
Equity in income (loss) of
subsidiary...................... (6,010) (1,274) (320) -- 7,604 --
-------- ------------ ------------ ------------ ------------ ------------
Income (loss) before minority
interest and income taxes.... (8,461) (6,406) (3,005) 460 7,310 (10,102)
Minority interest................. -- -- -- -- 187 187
-------- ------------ ------------ ------------ ------------ ------------
Income (loss) before income
taxes........................ (8,461) (6,406) (3,005) 460 7,123 (10,289)
Provision (benefit) for income
taxes........................... (950) (1,575) -- 264 (100) (2,361)
Equity in income of joint
ventures........................ -- -- 36 -- -- 36
-------- ------------ ------------ ------------ ------------ ------------
Net income (loss)............... (7,511) (4,831) (2,969) 196 7,223 (7,892)
Less: preferred dividends......... 3,397 -- -- -- -- 3,397
-------- ------------ ------------ ------------ ------------ ------------
Net income (loss) applicable to
common shares................ $(10,908) $ (4,831) $ (2,969) $ 196 $ 7,223 $(11,289)
-------- ------------ ------------ ------------ ------------ ------------
-------- ------------ ------------ ------------ ------------ ------------
</TABLE>
F-40
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
--------------------------------------------------------------------------------------
U.S. GERMAN NON
GUARANTOR GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales.................................. -- $164,912 $57,247 $ 11,113 $ (4,221) $229,051
Cost of goods sold......................... -- 129,793 45,000 7,641 (3,835) 178,599
------- ------------ ----------- ------------ ------------ ------------
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 (note 18)..... 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 (income)......... (96) 8,318 1,897 220 -- 10,339
Other income (expense)..................... 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
Less: preferred dividends.................. 2,949 -- -- -- -- 2,949
------- ------------ ----------- ------------ ------------ ------------
Net income (loss) applicable to common
shares................................. $(2,031) $ (3,323) $ 1,803 $ 410 $ 515 $ (2,626)
------- ------------ ----------- ------------ ------------ ------------
------- ------------ ----------- ------------ ------------ ------------
</TABLE>
F-41
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED)
---------------------------------------------------------------------------------
U.S. GERMAN NEW
GUARANTOR GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities................................ $ (283) $ 11,982 $(18,212) $ (930) $ (242) $ (7,685)
-------- ------------ ---------- ------------ ------------ ------------
Cash flow from investing activities:
Payments for acquisitions, net of cash
acquired................................ -- -- (13,493) (2,381) -- (15,874)
Investment in subsidiaries................ (3,982) (3,797) -- (1,573) 9,352 --
Capital expenditures...................... (108) (11,556) (541) (433) -- (12,638)
(Increase) decrease in investment in joint
ventures................................ -- -- (626) -- -- (626)
Proceeds from sale of capital equipment... -- 566 70 -- -- 636
Payments for environmental liabilities.... -- (2,686) -- -- -- (2,686)
Proceeds from environmental
indemnification......................... -- 2,379 -- -- -- 2,379
Other..................................... -- 35 -- (43) -- (8)
-------- ------------ ---------- ------------ ------------ ------------
Net cash used in investing activities....... $ (4,090) $(15,059) $(14,590) $ (4,430) $ 9,352 $(28,817)
-------- ------------ ---------- ------------ ------------ ------------
Issuance of common stock.................. -- -- 5,077 4,275 (9,352) --
Revolving borrowings under Credit
Agreement............................... 72,250 -- -- -- -- 72,250
Revolving repayments under Credit
Agreement............................... (61,250) -- -- -- -- (61,250)
Term loan borrowings under Credit
Agreement............................... 18,200 -- -- -- -- 18,200
Term loan repayments under Credit
Agreement............................... (5,250) -- -- -- -- (5,250)
Short term borrowings under European
Facility................................ -- -- 16,135 1,041 -- 17,176
Repayments of short term borrowing under
European Facility....................... -- -- (3,974) -- -- (3,974)
Purchase of treasury stock................ (221) -- -- -- -- (221)
Payment of registration costs............. (1,004) -- -- -- -- (1,004)
Repayment of capital lease obligations.... -- (58) -- -- -- (58)
Payments for financing costs.............. -- (21) (1,000) -- -- (1,021)
Dividends paid to minority interests...... -- (247) -- -- -- (247)
Other..................................... -- (73) -- -- -- (73)
Loans from parent......................... (18,828) 2,023 16,027 778 -- --
-------- ------------ ---------- ------------ ------------ ------------
Net cash provided by financing activities... 3,897 1,624 32,265 6,094 (9,352) 34,528
-------- ------------ ---------- ------------ ------------ ------------
Effect of exchange rate changes on cash..... -- -- 623 (19) -- 604
-------- ------------ ---------- ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents............................... (476) (1,453) 86 715 (242) (1,370)
Cash and cash equivalents, beginning
of period................................. 718 1,453 -- 240 -- 2,411
-------- ------------ ---------- ------------ ------------ ------------
Cash and cash equivalents, end of period.... $ 242 $ -- $ 86 $ 955 $ (242) $ 1,041
-------- ------------ ---------- ------------ ------------ ------------
</TABLE>
F-42
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
---------------------------------------------------------------------------------
U.S. GERMAN NON
GUARANTOR GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARY SUBSIDIARIES ELIMINATIONS 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:
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 borrowings under European
Facility................................ -- -- 7,906 423 -- 8,329
Purchase 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)
Loans from parent......................... (2,870) 4,445 (2,216) 611 30 --
-------- ------------ ---------- ------------ ------------ ------------
Net cash provided by financing activities... (2,736) 4,219 5,690 949 -- 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>
F-43
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
23. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
The accompanying consolidated balance sheet as of September 30, 1996 and
the related consolidated statements of operations and cash flows for the nine
month periods ended September 30, 1995 and 1996 have been prepared in accordance
with generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal and recurring adjustments) considered necessary for a fair
presentation have been included. The results of operations for the nine month
period ended September 30, 1996 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1996.
Inventories
A summary of the major classifications of inventories is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
-------------
<S> <C>
Raw materials, work in process and intermediates........... $30,376
Finished goods............................................. 30,482
Less: Reserves............................................. 5,495
-------------
$55,363
-------------
-------------
</TABLE>
It is estimated that inventories would have been $1,135 lower than reported
at September 30, 1996, if quantities valued on the LIFO basis were instead
valued on the FIFO basis. During September, due to declining customer demand,
the Company recorded charges of $4,980 in connection with the write-off of
inventory in its Organic Pigments and Dyes product line. The decreased customer
product demand was principally due to the acquisition of a customer by a
competitor of the Company and product consolidation by a customer. Management
regularly performs analysis of inventory to assess recoverability of its costs.
Based upon these analyses, management believes the remaining cost of Organic
Pigments and Dyes inventory will be recovered from future sales.
Resignation of Executive Chairman
Effective July 2, 1996, the Executive Chairman and Chairman of the Board of
Directors resigned from his positions at the Company. This former executive will
continue to serve as a Director of the Company and remains a stockholder.
Pursuant to an employment agreement, the Company will provide the former
executive with a cash benefit to be paid in substantially equal monthly
installments over two years beginning July 1996. Also, pursuant to certain stock
option agreements, all options attributable to the former executive became 100%
vested and exercisable. In addition, with regard to certain options exercised by
the former executive in 1994 which were restricted and provided the Company with
a right to call such shares, the call rights have been terminated. Accordingly,
the Company recorded a charge of approximately $1,000 in July 1996 resulting
from the former executive's resignation.
New Pronouncements
In March 1995, FASB issued SFAS No. 121, 'Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.' SFAS No. 121,
adopted by the Company in the first quarter of 1996, established criteria for
recognizing, measuring and disclosing impairments of long-lived assets,
including intangibles and goodwill. The adoption of SFAS No. 121 has not had a
significant impact on the Company's results of operations or financial position.
In October 1995, FASB issued SFAS No. 123, 'Accounting for Stock-Based
Compensation,' which became effective for transactions entered into in fiscal
years beginning after December 15, 1995. SFAS No. 123 encourages a fair value
based method of accounting for employee stock options or similar equity
instruments, but allows continued use of the intrinsic value based method of
accounting prescribed by APB No. 25, 'Accounting
F-44
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
for Stock Issued to Employees.' Companies electing to continue to use APB No. 25
must make pro forma disclosures of net income as if the fair value based method
of accounting had been applied. The new accounting standard has not had an
impact on the Company's net income or financial position, as the Company has
chosen to continue to utilize the accounting guidance set forth in APB No. 25.
Environmental
Since 1961, the Company's facility in Vernon, France has been discharging
production wastewater without pretreatment into the River Seine. According to an
analysis completed by the Company in early 1996, such production wastewater
includes concentrations of pollutants which are not in compliance with legal
limits or limits which are acceptable for discharge to the municipal wastewater
treatment plant. The Company plans to resolve this matter by negotiating
permission to discharge the wastewater to the municipal wastewater treatment
plant for a fee; constructing a wastewater treatment plant for an estimated cost
of $250; or by shifting production of certain raw materials to the facility
under construction in India. The Company believes, based upon the opinion of the
Company's independent environmental consultant, that the French environmental
authorities will refrain from penalizing the Company for these discharges while
a solution is sought. The Company believes that, if assessed, any such penalties
are not likely to be material to the Company's financial position or results of
operations.
Other Events
In the fourth quarter of 1996, the Company recorded a charge of $6.0
million as a result of inventory obsolescence from plant closures of $0.9
million, inventory disposal costs of $0.6 million, severance for displaced
workers associated with plant closings and administrative personnel reductions
of $1.5 million and other charges of $0.7 million.
Additionally, during 1994, the Company idled its salicylic acid product
line. However, the Company continued to be a reseller of this product and
continued to pursue a long term position in this market. Since projected future
cash flows from this product line were sufficient to realize the Company's
investment from the time the assets were idled until the fourth quarter of 1996,
management did not believe that there was an impairment in the idle assets. In
the fourth quarter of 1996, the Company decided not to allocate its capital
resources to re-enter the salicylic acid business. Accordingly, the Company
recorded a charge of $2.3 million. The write-off will be included in
restructuring and other charges on the Company's statement of operations for
1996. Management estimates the costs to dismantle the line are approximately
equal to the salvage value of the line.
During the fourth quarter of 1996, the Company decided to shutdown its
Cowpens, South Carolina facility. During 1996, the Company incurred a loss from
operations of approximately $2.6 million from the Cowpens operations, including
a direct write-off of $1.5 million for inventory and related items in the fourth
quarter. The write-off was composed of $0.9 million of obsolete inventory from
unusable/unsaleable product as a result of product separation. The obsolete
inventory was identified during the October 31, 1996 planned physical inventory.
The write-off also included $0.6 million of disposal costs related to hazardous
products which required environmentally sound disposal procedures. Management is
currently negotiating with prospective buyers to sell the facility for its net
book value of approximately $2.7 million plus assumption of environmental
liabilities of $1.9 million. It is anticipated that the sale will be completed
during 1997.
Of the aforementioned $0.7 million of other charges, $0.5 million relates
to a municipality surcharge for water treatment and waste disposal at the
Company's Charlotte facility. The surcharge resulted from low plant efficiency
(due to the approach of a scheduled turn around and catalyst change-out in
January 1997) and high operating levels which caused waste to be produced at
above normal levels.
Of the $6.0 million charge recorded in the fourth quarter of 1996, $3.2
million is attributable to noncash items, primarily the idle equipment write-off
of $2.3 million and obsolete inventory of $0.9 million. Charges that will
require an outlay of cash total approximately $2.8 million. Of this amount $0.3
million was paid in the month of December. The remaining cash items totaling
approximately $2.5 million will be paid primarily over the first six months of
1997. Management believes this outlay of cash will be funded with cash flow from
operations and borrowings under the Amended and Restated Credit Agreement and
will not materially adversely affect the Company's operating cash flows or
financial position.
F-45
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Kalama Chemical, Inc.:
We have audited the accompanying consolidated balance sheets of Kalama Chemical,
Inc. and subsidiaries as of May 26, 1994 and September 30, 1993, and the related
consolidated statements of operations, stockholder's equity, and cash flows for
the period October 1, 1993 to May 26, 1994 and the year ended September 30,
1993. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Kalama Chemical,
Inc. and subsidiaries as of May 26, 1994 and September 30, 1993, and the results
of their operations and their cash flows for the period October 1, 1993 to May
26, 1994 and the year ended September 30, 1993 in conformity with generally
accepted accounting principles.
As discussed in note 9 to the consolidated financial statements, the Company is
involved in various environmental matters. The ultimate outcome of certain
contingencies cannot presently be determined. Accordingly, the provision for the
total liability that may result has not been recognized in the accompanying
consolidated financial statements.
As discussed in note 1(i) to the consolidated financial statements, the Company
changed its method of accounting for income taxes effective October 1, 1993.
KPMG PEAT MARWICK LLP
August 22, 1994
F-46
<PAGE>
KALAMA CHEMICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MAY 26, SEPTEMBER 30,
ASSETS 1994 1993
------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................................... $ 3,837 $ 817
Marketable securities............................................................... 518 94
Accounts receivable:
Trade, less allowance for doubtful accounts of $253 in 1994 and $241 in 1993...... 11,810 11,371
B. C. Sugar affiliate............................................................. 1,281 --
Kalama International.............................................................. -- 454
Other............................................................................. 197 203
Inventories......................................................................... 8,205 9,556
Accrued environmental recoveries.................................................... 9,422 --
Deferred income taxes............................................................... 2,001 632
Prepaid expenses and other current assets........................................... 643 281
------- -------------
Total current assets............................................................ 37,914 23,408
------- -------------
Property, plant and equipment, at cost:
Land................................................................................ 1,473 1,473
Buildings and improvements.......................................................... 2,286 2,953
Equipment........................................................................... 27,566 28,643
------- -------------
31,325 33,069
Less accumulated depreciation....................................................... 11,544 11,868
------- -------------
19,781 21,201
------- -------------
Construction in progress............................................................ 1,664 3,973
Net property, plant and equipment............................................... 21,445 25,174
------- -------------
Other assets:
Accrued environmental recoveries.................................................... 18,923 34,975
Deferred income taxes............................................................... 4,021 --
Other............................................................................... 761 777
------- -------------
Total other assets.............................................................. 23,705 35,752
------- -------------
$83,064 $84,334
------- -------------
------- -------------
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C> <C>
Current liabilities:
Short-term borrowings............................................................... $ -- $ 950
Current installments of long-term debt.............................................. -- 1,910
Accounts payable.................................................................... 5,076 5,019
Accrued payroll and employee benefits............................................... 918 1,121
Accrued environmental liabilities................................................... 4,663 594
Other accrued liabilities........................................................... 2,863 1,332
Income taxes payable................................................................ 3,202 742
------- -------------
Total current liabilities....................................................... 16,722 11,668
------- -------------
Deferred income taxes................................................................. -- 4,258
Accrued environmental liabilities..................................................... 43,434 35,975
Stockholder's equity:
Common stock, no par value. Authorized 8,000,000 shares; issued and outstanding
1,769,352 shares at stated value of $100.......................................... 100 100
Additional paid-in capital.......................................................... 30,954 30,954
Retained earnings (deficit)......................................................... (8,146) 1,379
------- -------------
Total stockholder's equity...................................................... 22,908 32,433
------- -------------
Commitments, contingencies and subsequent events...................................... $83,064 $84,334
------- -------------
------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-47
<PAGE>
KALAMA CHEMICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TOTAL
------------------- PAID-IN EARNINGS STOCKHOLDER'S
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
--------- ------ ---------- -------- -------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1992......................... 1,769,352 $100 $ 30,054 $(4,105) $26,949
Net earnings for the year ended September 30, 1993.... -- -- -- 5,484 5,484
--------- ------ ---------- -------- -------
Balance at September 30, 1993......................... 1,769,352 100 30,054 1,379 32,433
Net loss for the period from October 1, 1993
to May 26, 1994..................................... -- -- -- (9,177) (9,177)
Dividend of Kalama Trading, Inc. to a B.C. Sugar
affiliate........................................... -- -- -- (348) (348)
--------- ------ ---------- -------- -------
Balance at May 26, 1994............................... 1,769,352 $100 $ 30,054 $(8,146) $22,908
--------- ------ ---------- -------- -------
--------- ------ ---------- -------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
F-48
<PAGE>
KALAMA CHEMICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1, 1993 YEAR ENDED
TO MAY 26, SEPTEMBER 30,
1994 1993
--------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss)............................................................. $(9,177) $ 5,484
Adjustment to reconcile net earnings (loss) to net cash provided by operating
activities:
Depreciation and amortization................................................. 2,350 3,374
Equity in income of joint ventures............................................ (50) (5)
Deferred income taxes......................................................... (9,815) 120
Loss on Garfield, New Jersey, plant shutdown.................................. 1,864 --
Changes in certain assets and liabilities:
Decrease (increase) in accounts receivable.................................. (1,310) (2,731)
Decrease in inventories..................................................... 1,074 1,416
Decrease (increase) in prepaid expenses and other current assets............ (362) 119
Increase (decrease) in accounts payable..................................... 57 (522)
Increase (decrease) in accrued liabilities.................................. (134) 971
Increase in income taxes payable............................................ 2,460 742
Increase (decrease) in accrued environmental liabilities, net of accrued
environmental recoveries................................................... 18,158 (1,882)
--------------- -------------
Net cash provided by operating activities................................ $ 5,115 $ 7,086
--------------- -------------
Cash flows from investing activities:
Additions to property, plant and equipment...................................... (887) (5,677)
Proceeds from Garfield, New Jersey manufacturing facility asset sale less
payments of facility closing costs............................................ 1,995 --
Joint ventures distribution..................................................... 50 635
Increase of marketable securities............................................... (424) (94)
Other........................................................................... 31 126
--------------- -------------
Net cash provided by (used in) investing activities......................... 765 (5,010)
--------------- -------------
Cash flows from financing activities:
Repayments of short-term borrowings............................................. (950) (915)
Repayment of long-term debt..................................................... (1,910) (855)
--------------- -------------
Net cash used in financing activities....................................... (2,860) (1,770)
--------------- -------------
Net increase (decrease) in cash and cash equivalents........................ 3,020 306
Cash and cash equivalents at beginning of period.................................. 817 511
--------------- -------------
Cash and cash equivalents at end of period........................................ $ 3,837 $ 817
--------------- -------------
Supplemental disclosures of cash flow information--cash paid during the period
for:
Interest........................................................................ $ 48 $ 376
Income taxes, net of refunds received........................................... 1,940 1,450
--------------- -------------
Supplemental schedule of noncash financing activity--dividend of Kalama Trading,
Inc. to a B.C. Sugar affiliate.................................................. $ 348 $ --
--------------- -------------
--------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-49
<PAGE>
KALAMA CHEMICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED
OCTOBER 1, 1993 SEPTEMBER 30,
TO MAY 26, 1994 1993
--------------- -------------
<S> <C> <C>
Net sales...................................................................... $51,565 $75,821
Cost of sales.................................................................. 40,715 60,278
--------------- -------------
Gross profit.............................................................. 10,850 15,543
--------------- -------------
Operating expenses:
Selling and administrative................................................... 3,207 4,589
Environmental, net........................................................... 20,494 2,775
Loss on Garfield, New Jersey, plant shutdown................................. 1,864 --
--------------- -------------
Total operating expenses.................................................. 25,565 7,364
--------------- -------------
Earnings (loss) from operations........................................... (14,715) 8,179
Interest expense............................................................... (17) (384)
Other income, net.............................................................. 307 369
--------------- -------------
Earnings (loss) before income tax expense (benefit)....................... (14,425) 8,164
Income tax expense (benefit)................................................... (5,248) 2,680
--------------- -------------
Net earnings (loss)....................................................... $(9,177) $ 5,484
--------------- -------------
--------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-50
<PAGE>
KALAMA CHEMICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Change of Ownership
A stock purchase agreement dated as of May 11, 1994 and effective May 26,
1994 transferred ownership of the common stock of Kalama Chemical, Inc. (Kalama
or Company) from B.C. Sugar Refinery Limited (B.C. Sugar) and Chatterton
Petrochemical Corporation (collectively referred to as B.C. Sugar or the Parent)
to Freedom Chemical Company (Freedom). Kalama's common stock was pledged as
security by B.C. Sugar pursuant to B.C. Sugar's agreements with certain lenders.
(b) Basis of Presentation
The consolidated financial statements for the year ended September 30, 1993
include the accounts of the Company and its wholly-owned subsidiaries, Kalama
Trading, Inc. (Trading) and Kalama Foreign Sales Corporation (KFS Corporation).
Effective May 26, 1994, the Company transferred its interest in Trading to
a company ultimately owned by B.C. Sugar, at net book value. Trading carried its
50% interest in two trading company joint ventures; Kalama International (a
partnership) and Pelican Trading Company, Limited; at cost, plus equity in
undistributed net earnings. The Company's equity in net earnings of the trading
companies was $50 for the period ended May 26, 1994 and, $5 for the year ended
September 30, 1993.
As a result of the transfer, the consolidated financial statements as of
May 26, 1994 do not include the financial position of Trading. A summary of
financial information for the trading companies, accounted for by the equity
method, is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1993
-------------
<S> <C>
Total assets................................................................... $ 8,707
Total liabilities.............................................................. $ 8,734
</TABLE>
All significant intercompany transactions and accounts have been eliminated
in consolidation.
(c) Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less at the date of purchase to be cash equivalents.
(d) Marketable Securities
Marketable securities are held for sale and are carried at the lower of
cost or market value. The cost of the marketable securities approximates market
value at May 26, 1994 and September 30, 1993.
(e) Inventories
Inventories are stated at the lower of cost (average cost for finished
goods and first-in, first-out for raw materials and supplies) or market.
Inventories consist of the following:
<TABLE>
<CAPTION>
MAY 26, SEPTEMBER 30,
1994 1993
------- -------------
<S> <C> <C>
Raw materials, principally toluene............................................. $3,430 $ 3,616
Manufactured finished goods.................................................... 2,958 4,479
Supplies....................................................................... 1,817 1,461
------- -------------
$8,205 $ 9,556
------- -------------
------- -------------
</TABLE>
F-51
<PAGE>
KALAMA CHEMICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
(f) Property, Plant and Equipment
Depreciation is provided on the straight-line method. Estimated useful
lives are as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
IN YEARS
------------
<S> <C>
Buildings and improvements............................................. 15-20
Equipment.............................................................. 2-15
</TABLE>
Normal maintenance and repairs are charged to operations as incurred;
additions, renewals or betterments are capitalized. Construction in progress
includes capital additions which are not yet in service.
(g) Maintenance/Inspection Shutdown Costs
The Company schedules periodic plant shutdowns for the performance of
nonroutine maintenance and inspection of various pieces of equipment. Estimated
costs related to these shutdowns are accrued over the period between shutdowns.
(h) Environmental Liabilities and Recoveries
Expenditures for ongoing compliance with environmental regulations that
relate to current operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations, and
which do not contribute to current or future revenue generation, are expensed.
Liabilities are recorded when environmental assessments indicate that remedial
efforts are probable and the costs can be reasonably estimated. Estimates of the
liability are based upon currently available facts, existing technology, and
presently enacted laws and regulations taking into consideration the likely
effects of inflation and other societal and economic factors. All available
evidence is considered including prior experience in remediation of contaminated
sites, other companies' clean-up experience, and data released by the
Environmental Protection Agency (EPA) or other organizations. These liabilities
are included in the consolidated balance sheets at their undiscounted amounts
unless otherwise noted. Recoveries are evaluated separately from the liability
and are recorded separately from the associated liability in the consolidated
balance sheets. Additional information regarding environmental liabilities is
included in note 9.
(i) Income Taxes
Through September 30, 1993, income taxes were computed using the asset and
liability method under Statement of Financial Accounting Standards No. 96
(Statement 96). Under the asset and liability method of Statement 96, deferred
tax assets and liabilities were recognized for all events that had been
recognized in the consolidated balance sheets. Under Statement 96, the future
tax consequences of recovering assets or settling liabilities at their financial
statement carrying amounts were considered in calculating deferred taxes.
Generally, Statement 96 prohibited consideration of any other future events in
calculating deferred taxes.
Effective October 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 (Statement 109), Accounting for Income Taxes, which
also requires an asset and liability approach to financial accounting and
reporting for income taxes. Deferred income tax assets and liabilities are
computed for differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in net deferred tax assets and
liabilities. There was no current or cumulative effect of this change in
accounting for income taxes.
F-52
<PAGE>
KALAMA CHEMICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
(j) Revenue Recognition
Revenue is generally recognized upon shipment of products to customers.
(2) SHORT-TERM BORROWINGS AND NOTE PAYABLE TO BANK
During the period ended May 26, 1994, the Company repaid all borrowings
under a short-term secured line of credit with a bank and terminated the credit
facility. Outstanding borrowings under this line of credit were $950 at
September 30, 1993.
In October 1993, the Company repaid a note payable to a bank. The unpaid
balance was $1,910 at September 30, 1993.
(3) OFF-BALANCE SHEET RISK, CONCENTRATIONS OF CREDIT RISK AND FAIR VALUE OF
FINANCIAL INSTRUMENTS
(a) Off-Balance Sheet Risk
The Company enters into forward exchange contracts, generally with terms of
90 days or less, as a hedge against some of its foreign currency receivables.
The Company does not engage in speculation, nor does the Company hedge
nontransaction-related balance sheet exposure. Offsetting gains or losses on
these contracts are recognized concurrently with the exchange gains and losses
stemming from the associated receivables. As of May 26, 1994 and September 30,
1993, the Company had approximately $1,140 and $1,170, respectively, of foreign
exchange contracts outstanding, which are mainly denominated in Japanese and
European currencies.
(b) Concentrations of Credit Risk
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of its trade accounts receivable. Trade accounts
receivable balances consist of a wide range of customers located in the United
States and internationally with concentration in North America.
(c) Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, trade accounts receivable, trade accounts payable, short-term
borrowings, long-term debt and foreign currency forward contracts. The book
value of cash and cash equivalents, trade accounts receivable and trade accounts
payable are considered to be representative of their fair values because of
their short maturities. Based on the period-end rates and maturity dates, the
carrying value of foreign currency forward contracts approximated fair value at
May 26, 1994 and September 30, 1993. The carrying amount of short-term
borrowings and long-term debt outstanding at September 30, 1993 approximated
fair value as the interest rates were variable and set to market.
(4) SALE OF CUSTOMER LIST, EQUIPMENT, TRADEMARKS AND TECHNICAL DATA
In December 1993, the Company sold the customer list and certain equipment,
trademarks and technical data (asset sale) of its Garfield, New Jersey chemical
manufacturing facility. The asset sale resulted in the closure of the Garfield,
New Jersey facility in May 1994. The net tangible assets remaining at May 26,
1994 consist of land, building and supplies inventory totaling $78 which were
not held for sale or disposition as of May 26, 1994. Included in other accrued
liabilities at May 26, 1994 is $1,316 representing unpaid employee severance and
related employee benefit costs, consultants' fees and other costs associated
with the asset sale and plant closure.
Proceeds from the sale of assets of approximately $2,750 less related costs
and expenses of approximately $4,614 are included in operating expenses.
Pursuant to the asset sale agreement, the Company manufactured and supplied
chemical products to NIPA Laboratories, Inc. from December 1993 until May 1994
resulting in revenues of $5,300.
F-53
<PAGE>
KALAMA CHEMICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
Net sales and cost of sales for the Garfield, New Jersey, manufacturing
facility are included in operations and are as follows:
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1, YEAR ENDED
1993 TO SEPTEMBER 30,
MAY 26, 1994 1993
------------ -------------
<S> <C> <C>
Net sales............................................................... $9,470 $14,487
Cost of sales........................................................... 9,724 13,903
</TABLE>
(5) INCOME TAXES
As discussed in note 1(i), the Company adopted Statement No. 109 effective
October 1, 1993. There was no cumulative effect on the consolidated financial
statements, accordingly, no adjustment has been made for prior tax amounts.
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1, YEAR ENDED
1993 TO SEPTEMBER 30,
MAY 26, 1994 1993
------------ -----------------
<S> <C> <C>
Current income taxes:
Federal taxes.................................................... $ 4,270 $ 2,421
State and local taxes............................................ 130 139
------------ -------
4,400 2,560
Deferred income taxes............................................... (9,648) 120
------------ -------
$ (5,248) $ 2,680
------------ -------
------------ -------
</TABLE>
Income tax expense (benefit) differs from the amount computed by applying
the statutory Federal income tax rate to pretax earnings (loss) as a result of
the following:
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1 YEAR ENDED
1993 TO SEPTEMBER 30,
MAY 26, 1994 1993
------------ -------------
<S> <C> <C>
Taxes computed at the statutory Federal income tax rate................... $ (4,905) $ 2,776
State and local taxes, net of Federal tax benefit......................... 86 92
Tax benefit from foreign sales corporation................................ (153) (181)
Other, net................................................................ (276) (7)
------------ -------------
$ (5,248) $ 2,680
------------ -------------
------------ -------------
</TABLE>
F-54
<PAGE>
KALAMA CHEMICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
MAY 26, 1994 1993
------------ -------------
<S> <C> <C>
Deferred tax assets:
Garfield plant closure costs............................................ $ 447 $ --
Maintenance/inspection shutdown costs................................... 259 229
Employee compensation and benefits...................................... 277 318
Environmental liabilities, net.......................................... 9,069 353
Other................................................................... 103 85
------------ -------------
Total gross deferred tax assets................................. 10,155 985
------------ -------------
Deferred tax liabilities:
Depreciation of plant and equipment..................................... 4,133 4,611
Other................................................................... -- --
------------ -------------
Total gross deferred tax liabilities............................ 4,133 4,611
------------ -------------
Net deferred tax assets (liabilities)........................... $6,022 $(3,626)
------------ -------------
------------ -------------
</TABLE>
No valuation allowance has been established for the deferred tax assets at
October 1, 1993 and May 26, 1994. For the Company to realize its gross deferred
tax assets, it must achieve future pretax earnings. Although the Company
believes such pretax earnings will be achieved, a lack of such earnings could
result in an increased provision for income taxes.
(6) INVESTMENT
The Company has an investment of $500 in common stock of Primex, Ltd.
(Primex), a captive insurance company which was formed for the purpose of
providing certain comprehensive general and product liability coverage for its
members. In past years, the Company has participated in insurance programs
provided by Primex. However in 1993 the Company obtained insurance from other
sources. It is currently the Company's intent to hold its investment in Primex
for the foreseeable future, although all members have the right to redeem their
shares at any time. If the Company were to redeem its shares, the redemption
amount would be approximately $500. The Primex common stock held by the Company
is subject to a lien in favor of Primex. All Primex shares held by the Company
are subject to a right of first refusal agreement in favor of Primex.
(7) TRANSACTION WITH RELATED PARTIES
As discussed in note 1(b), effective May 26, 1994, the Company transferred
its interest in Trading to a company ultimately owned by B.C. Sugar for
Trading's net book value. Concurrently, the Company transferred its interest in
an advance made by Trading to Kalama International to the B.C. Sugar affiliate
for the amount of the advance. The Company has recorded accounts receivable of
$1,281 at May 26, 1994 to reflect amounts due from the B.C. Sugar affiliate
resulting from the transfer of the advance.
As discussed in note 10(b), the Company transferred all obligations and
liabilities arising out of its defined benefit retirement plan for hourly
employees of the Company's Garfield, New Jersey manufacturing facility, which
closed in May 1994, to a company ultimately owned by B.C. Sugar.
During 1993, Kalama paid $2,487 to B.C. Sugar for supplies and equipment.
F-55
<PAGE>
KALAMA CHEMICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
(8) COMMITMENTS
(a) Leases
At May 26, 1994, the Company is obligated under noncancelable operating
leases for office space, rolling stock and office equipment which provide for
payment of taxes, insurance and maintenance in addition to periodic rental.
Future minimum lease payments are as follows:
<TABLE>
<S> <C>
Year ending May 26:
1995............................................................... $319
1996............................................................... 248
1997............................................................... 114
1998............................................................... 68
1999............................................................... 20
---------
Total minimum lease payments.................................. $769
---------
---------
</TABLE>
The Company receives, as a partial offset to lease payments due for rolling
stock, a mileage credit from railroads based on loaded distances traveled.
Depending on the annual usage of the rolling stock, the Company's minimum lease
payments may be significantly reduced.
Rent expense was approximately $372 and $470 for the period ended May 26,
1994 and the year ended September 30, 1993, respectively.
(b) Employment Agreements
The Company has employment agreements with certain executive officers which
expire on December 31, 1996. The employment agreements provide for discretionary
bonuses to be determined by the Board of Directors or senior officers. The
employment agreements also provide for a salary and for severance benefits to
these officers upon termination of employment.
(9) ENVIRONMENTAL MATTERS
In January 1988, a wholly-owned subsidiary of the Company entered into an
Administrative Consent Order with the EPA in which the subsidiary undertook to
conduct a remedial investigation and feasibility study for environmental
contamination at the subsidiary's former manufacturing facility and adjoining
property in Beaufort, South Carolina. The EPA issued its Record of Decision
(ROD) in September 1993 setting forth the cleanup plan required for this site.
The plan calls for a 30-year remediation program with a present value cost,
discounted at 5%, of approximately $3,500. Implementation of the plan is
expected to begin in September 1994. The ROD also requires additional
investigation which could lead to other cleanup requirements beyond those
included in the $3,500 cost estimate.
In December 1988, the Company entered into an Administrative Consent Order
with the New Jersey Department of Environmental Protection and Energy (NJDEPE)
with respect to investigation and cleanup of contamination at its Garfield, New
Jersey manufacturing facility. Under the order, the Company must investigate and
propose a cleanup plan acceptable to the NJDEPE. During 1993, investigation was
completed at the site and a remediation plan was conditionally approved by
NJDEPE in March 1994. Remediation is projected over a 30-year period at an
estimated undiscounted cost of approximately $26,600. Depending upon the results
of continuing investigation, there is presently a reasonable possibility that
additional remediation costs of approximately $3,000 may be incurred in
connection with this site. The Company has brought suit against the prior owner
of the facility, Tenneco Polymers, Inc. (Tenneco), to ensure their participation
in the costs associated with investigation and remediation at the site. The
court granted summary judgment to the Company, that
F-56
<PAGE>
KALAMA CHEMICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
Tenneco, pursuant to the terms of the acquisition agreement, must indemnify the
Company from liability resulting from Tenneco's period of operation.
In May 1994, the Company settled its litigation claims against Tenneco. The
settlement requires Tenneco to conduct the Garfield site cleanup, pay 80% of the
future cleanup costs and to defend against and hold the Company harmless from
future liability resulting from environmental contamination in the soil and
ground water at the Garfield site, including any third-party claims from
adjoining property. The Company remains responsible for 20% of future cleanup
costs.
In April 1991, the Company entered into an Agreed Order with the EPA which
requires the investigation and remediation of contamination associated with a
number of accidental releases at its Kalama, Washington plant as well as
potential contamination in specified process areas resulting from plant
operations. The initial investigatory work is nearing completion and a work plan
for specific interim correction measures has been negotiated with the EPA, the
implementation of which will cost approximately $1,000. The final remedial
alternatives for the site will be considered after approval of the final
investigative report which is expected to be submitted to the EPA in September
1994. The remediation method selected could require as much as 30 years to
complete. Preliminary undiscounted cost estimates to cleanup the site range from
approximately $15,300 to $30,200. This cost estimate does not include possible
cleanup costs associated with the on-site wetlands where contamination may be
present at levels which are unacceptable to the EPA. The Company anticipates
additional testing and analysis of the wetlands site to begin after August 1994.
It is not possible at this time to estimate the costs to cleanup the wetlands,
but the costs could be significant.
In October 1991, the Company was named as one of many potentially
responsible parties by the Washington Department of Ecology (DOE) at the Pasco
Landfill Superfund site near Pasco, Washington. The Company is participating
with other companies alleged to have generated waste that was received at the
Pasco site. The parties named by the DOE are alleged to be jointly and severally
liable for costs associated with the investigation and cleanup of the site. The
final draft of the Phase I Remedial Investigation report was submitted to the
DOE in January 1994 and indicates that both soil and ground water contamination
were detected during the investigation. It is not possible at this time to
estimate the costs to cleanup this site, but the costs could be significant. The
total cost estimate will be materially affected by decisions which will be made
by the DOE following the results of additional investigation which is expected
to begin in 1995.
The Company is named as one of many potentially responsible parties at
various Superfund sites where investigation and cleanup of environmental
contamination is being required by the EPA or state counterpart. The parties
named by the EPA are alleged to be jointly and severally liable for costs
associated with the investigation and cleanup of the sites. It is not possible
at this time to estimate the costs of investigation and cleanup at many of the
Superfund sites, but the costs could be significant.
In May 1991, the EPA issued a compliance order alleging nine violations of
the Clean Air Act dating back to 1984. In July 1994, the Company was informally
notified by the EPA that these violations had been referred to the Department of
Justice for possible initiation of an enforcement action and that fines and
penalties recommended by the EPA exceeded $1,000. The Company has not received
any other notice that the EPA or Department of Justice has initiated any
enforcement action against the Company for these alleged violations. No amount
has been recorded by the Company as it is not possible at this time to determine
the costs of the potential fines, penalties and enforcement action, if any.
The Company completed settlements with eight of its insurers prior to
September 30, 1993, and believes that the likelihood of recovery against the
remaining carriers is very strong. Accrued environmental recoveries represent
the total estimated recoveries from insurers or other third parties based upon
currently available information with regard to actions brought by the Company
for damages and declaratory relief for costs incurred and to be incurred.
Accrued environmental liabilities represent the total estimated costs inclusive
of estimated
F-57
<PAGE>
KALAMA CHEMICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
costs of cleanup, additional investigative studies, EPA oversight, site
preparation and associated legal costs based upon currently available
information. Accrued environmental recoveries consist of the following:
<TABLE>
<CAPTION>
MAY 26, SEPTEMBER 30,
1994 1993
------- -------------
<S> <C> <C>
Beaufort, South Carolina...................................................... $ 4,082 $ 5,800
Garfield, New Jersey.......................................................... 20,256 26,850
Kalama, Washington............................................................ 3,865 2,325
Various Superfund sites....................................................... 142 --
------- -------------
28,345 34,975
Less current portion.......................................................... 9,422 --
------- -------------
Noncurrent accrued environmental recoveries.............................. $18,923 $34,975
------- -------------
------- -------------
</TABLE>
Accrued environmental liabilities consist of the following:
<TABLE>
<CAPTION>
MAY 26, SEPTEMBER 30,
1994 1993
------- -------------
<S> <C> <C>
Beaufort, South Carolina...................................................... $ 4,082 $ 5,800
Garfield, New Jersey.......................................................... 27,027 26,878
Kalama, Washington............................................................ 15,774 3,459
Pasco, Washington............................................................. 175 --
Various Superfund sites....................................................... 195 --
Various legal costs........................................................... 844 432
------- -------------
48,097 36,569
Less current portion.......................................................... 4,663 594
------- -------------
Noncurrent accrued environmental liabilities............................. $43,434 $35,975
------- -------------
------- -------------
</TABLE>
At May 26, 1994, the expected payments for each of the five succeeding
years and the aggregate amount thereafter for the Beaufort site are as follows:
<TABLE>
<S> <C>
Year ending May 26:
1995.................................................................. $ 1,873
1996.................................................................. 501
1997.................................................................. 134
1998.................................................................. 134
1999.................................................................. 120
Thereafter............................................................ 2,922
-------
Expected aggregate undiscounted payments......................... 5,684
Less amount representing interest.......................................... 1,602
-------
Present value of expected aggregate payments included in accrued
environmental liabilities...................................... $ 4,082
-------
-------
</TABLE>
F-58
<PAGE>
KALAMA CHEMICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
Environmental expenses, net included in the consolidated statements of
operations are comprised of the following:
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1, YEAR ENDED
1993 TO SEPTEMBER 30,
MAY 26, 1994 1993
------------ -------------
<S> <C> <C>
Environmental expense..................................................... $ 30,990 $36,305
Environmental recoveries.................................................. 10,496 33,530
------------ -------------
Total........................................................... $ 20,494 $ 2,775
------------ -------------
------------ -------------
</TABLE>
(10) EMPLOYEE BENEFITS
(a) Defined Contribution Plan
The Company has a defined contribution pension plan covering all eligible
union and nonunion employees. The Company contributes up to 4% of the gross
wages of eligible participants. The Company also has a section 401(k) tax
deferred savings plan covering all eligible salaried and Kalama plant hourly
employees. The Company contributes fifty cents for each dollar contributed by a
participant, with a maximum contribution of 3% of a participant's earnings.
Total expense of the plans was approximately $429 and $616 for the period
ended May 26, 1994 and the year ended September 30, 1993, respectively.
(b) Defined Benefit Plan
Effective May 25, 1994, the Company transferred all the obligations and
liabilities arising out of its defined benefit retirement plan (Plan) for
eligible hourly employees of the Company's Garfield, New Jersey manufacturing
facility, which closed in May 1994, to a company ultimately owned by B.C. Sugar.
Per the transfer agreement, the transfer of obligations and liabilities arising
from the Plan is for the events occurring before and after May 25, 1994.
The Plan provided pension benefits based upon a participant's length of
service. The Company's funding policy was to contribute annually an amount equal
to the minimum contribution required by the law and no more than the amount
deductible for Federal income tax purposes.
Net periodic pension cost is comprised of the following:
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1, YEAR ENDED
1993 TO SEPTEMBER 30,
MAY 26, 1994 1993
------------ ------------------
<S> <C> <C>
Service cost for the benefits earned during the period................ $ 31 $ 47
Interest cost on the projected benefit obligation..................... 108 166
Actual return on plan assets.......................................... (80) (376)
Net amortization and deferral......................................... (55) 202
------ -------
Total....................................................... $ 4 $ 39
------ -------
------ -------
</TABLE>
F-59
<PAGE>
KALAMA CHEMICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
The funded status of the Plan is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1993
------------------
<S> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation............................................... $2,502
-------
Accumulated benefit obligation.......................................... $2,598
-------
Projected benefit obligation.............................................. 2,598
Plan assets at fair value................................................. 2,878
-------
Plan assets in excess of the projected benefit obligation....... (280)
Unrecognized net gain..................................................... 416
Unrecognized obligation................................................... (99)
-------
Accrued pension cost included in accrued payroll and employee
benefits in the consolidated financial statements............. $ 37
-------
-------
</TABLE>
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation and the expected long-term
rate of return on assets was 6.5%. No rate of increase in compensation levels
was assumed in accounting for the Plan.
Plan assets consist primarily of annuities purchased under group contracts
and funds holding fixed income and equity investments.
(11) POSTRETIREMENT EMPLOYEE BENEFITS OTHER THAN PENSIONS
The Company provides certain health care insurance benefits for retired
employees. The Company's employees may become eligible for these benefits
depending on their age and length of service. These benefits are provided
through insurance companies whose premiums are based on benefits paid during the
year. The Company recognizes the cost of providing those benefits by expensing
the annual insurance premiums.
Total expense of providing these benefits was $30 and $41 for the period
ended May 26, 1994 and the year ended September 30, 1993, respectively.
In December 1990, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 106 (Statement 106), Employers' Accounting
for Postretirement Benefits Other Than Pensions. The Statement requires
employers to accrue the cost of postretirement benefits during the employees'
working careers. The provisions of the statement are effective for the Company
for the fiscal year beginning after December 15, 1994, although earlier
implementation is permitted. The Company plans to implement Statement 106
effective October 1, 1995. The Company may adopt the new standard prospectively
or via a cumulative catch-up adjustment. The Statement allows two alternatives
in accounting for the unrecognized, unfunded accumulated postretirement benefit
obligation (APBO). The unfunded APBO can be recognized immediately or it can be
amortized over 20 years. The Company has not yet decided which of these two
methods will be adopted.
The Company engaged an actuarial consultant that has estimated that the
APBO is $3,563 at May 26, 1994 based on the Plan terms currently in place. This
estimate is subject to change based on a number of factors, including changes in
the assumed health care cost trend and other assumptions used in determining the
APBO.
F-60
<PAGE>
KALAMA CHEMICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
(12) OTHER INCOME, NET
Other income, net is comprised of the following:
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1, YEAR ENDED
1993 TO SEPTEMBER 30,
MAY 26, 1994 1993
------------ -----------------
<S> <C> <C>
Insurance settlement.................................................. $ -- $ 289
Equity in income of joint ventures.................................... 50 5
Interest and dividends................................................ 55 48
Other, net............................................................ 202 27
------ ------
Total....................................................... $307 $ 369
------ ------
------ ------
</TABLE>
(13) GEOGRAPHIC SEGMENT INFORMATION
The Company operates in one industry segment: manufacturing and marketing
chemical products. The Company's products are marketed mainly in the United
States, Asia, Canada and Mexico. Export sales by geographic area are as follows:
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1, YEAR ENDED
1993 TO SEPTEMBER 30,
MAY 26, 1994 1993
------------ -----------------
<S> <C> <C>
Canada and Mexico..................................................... $ 5,748 $ 7,501
Asia, excluding Japan................................................. 3,186 3,482
Japan................................................................. 2,558 3,338
Other................................................................. 2,433 3,632
------------ -----------------
$ 13,925 $17,953
------------ -----------------
------------ -----------------
</TABLE>
(14) SUBSEQUENT EVENTS
(a) Change of Ownership
As discussed in note 1(a), B.C. Sugar transferred all of the common stock
of the Company to Freedom effective May 26, 1994, in accordance with the May 11,
1994 stock purchase agreement (Agreement). Under terms of the Agreement, B.C.
Sugar has indemnified Freedom in relation to certain environmental and other
matters.
(b) Income Tax Examination
Subsequent to May 26, 1994, the Internal Revenue Service (IRS) completed
its examination of the Company for fiscal years ended September 30, 1989 through
1993. The Company has received notification that approximately $400 of
environmental costs deducted during these periods will be disallowed by the IRS,
however, these amounts will be deductible over future periods not expected to
exceed seven years.
F-61
<PAGE>
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, ANY GUARANTOR OR ANY INITIAL PURCHASER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information........................... i
Summary......................................... 1
Risk Factors.................................... 12
Use of Proceeds................................. 18
Unaudited Pro Forma Consolidated Financial
Information................................... 19
Selected Historical and Unaudited Pro Forma
Consolidated Financial Data................... 24
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 26
The Exchange Offer.............................. 35
Business........................................ 41
Management...................................... 59
Principal Stockholders.......................... 67
Certain Transactions............................ 68
Description of Amended and Restated Credit
Agreement..................................... 69
Description of the Notes........................ 70
Exchange Offer; Registration Rights............. 96
Certain United States Federal Income Tax
Considerations................................ 97
Plan of Distribution............................ 99
Legal Matters................................... 99
Experts......................................... 99
Index to Financial Statements................... F-1
</TABLE>
UNTIL MAY 15, 1997 (90 DAYS FOLLOWING THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE NEW NOTES WHETHER OR NOT PARTICIPATING IN
THIS EXCHANGE OFFER MAY BE REQUIRED TO DELIVER A PROSPECTUS.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
$125,000,000
[LOGO]
FREEDOM CHEMICAL COMPANY]
10 5/8% SENIOR SUBORDINATED
NOTES DUE 2006
---------------------------------------
PROSPECTUS
---------------------------------------
FEBRUARY 14, 1997
------------------------------------------------------
------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All of the amounts shown are estimated
except the SEC registration fee.
<TABLE>
<S> <C>
SEC registration fee....................................................... $ 37,878.79
Printing and engraving expenses............................................ 250,000.00
Legal fees and expenses.................................................... 200,000.00
Accounting fees and expenses............................................... 200,000.00
Miscellaneous.............................................................. 12,121.21
------------
Total................................................................. $ 700,000.00
------------
------------
</TABLE>
---------------------------
* to be filed by amendment
The Company will bear all of such expenses.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
I. Freedom Chemical Company, Hilton Davis Chemical Co., Freedom Textile
Chemicals Co., Freedom Textile Chemical Company (South Carolina), Inc. and
FCC Acquisition Corp.
Section 145 of the Delaware General Corporation Law ('DGCL') provides
generally and in pertinent part that a Delaware corporation may indemnify its
directors and officers against expenses, judgments, fines, and settlements
actually and reasonably incurred by them in connection with any civil suit or
action, except actions by or in the right of the corporation, or any
administrative or investigative proceeding if, in connection with the matters in
issue, they acted in good faith and in a manner they reasonably believed to be
in, or not opposed to, the best interests of the corporation, and in connection
with any criminal suit or proceeding, if in connection with the matters in
issue, they had no reasonable cause to believe their conduct was unlawful.
Section 145 further provides that, in connection with the defense or settlement
of any action by or in the right of the corporation, a Delaware corporation may
indemnify its directors and officers against expenses actually and reasonably
incurred by them if, in connection with the matters in issue, they acted in good
faith, in a manner they reasonably believed to be in, or not opposed to, the
best interest of the corporation, and without negligence or misconduct in the
performance of their duties to the corporation. Section 145 further permits a
Delaware corporation to grant its directors and officers additional rights of
indemnification through by-law provisions and otherwise.
The Sixth Article of the Restated Certificate of Incorporation of Freedom
Chemical Company ('Freedom') and Article VII of the By-laws of Freedom provide
that Freedom shall indemnify its directors and officers to the fullest extent
permitted by Delaware law.
Article VI of the By-laws of Hilton Davis Chemical Co. ('Hilton Davis')
provides that Hilton Davis shall indemnify its directors and officers to the
fullest extent permitted by Delaware law.
The Sixth Article of the Certificate of Incorporation of Freedom Textile
Chemicals Co. ('Freedom Textile') and Article VII of the By-laws of the Freedom
Textile provide that Freedom Textile shall indemnify its directors and officers
to the fullest extent permitted by Delaware law.
The Sixth Article of the Certificate of Incorporation of Freedom Textile
Chemical Company (South Carolina), Inc. ('Freedom Textile South Carolina') and
Article VIII of the By-laws of Freedom Textile South Carolina provide that
Freedom Textile South Carolina shall indemnify its directors and officers to the
fullest extent permitted by Delaware law.
II-1
<PAGE>
The Sixth Article of the Certificate of Incorporation of FCC Acquisition
Corp. ('FCCAC') and Article VIII of the By-laws of FCCAC provide that FCCAC
shall indemnify its directors and officers to the fullest extent permitted by
Delaware law.
Section 102(b)(7) of the Delaware law provides that a certificate of
incorporation may contain a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director provided that such provision
shall not eliminate or limit the liability of a director (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware law (relating
to liability for unauthorized acquisitions or redemptions of, or dividends on,
capital stock) or (iv) for any transaction from which the director derived an
improper personal benefit. The Sixth Article of each of (i) Freedom's Restated
Certificate of Incorporation, (ii) Freedom Textile's Certificate of
Incorporation and (iii) FCCAC's Certificate of Incorporation contains the
following provision:
'A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of
the director's duty of loyalty to the Corporation or its stockholders, (ii)
for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
DGCL, (iv) for any transaction from which the director derived an improper
personal benefit. If the DGCL is hereafter amended to authorize the further
elimination or limitation of the liability of directors, then the liability
of the directors of the Corporation, in addition to the limitation on
personal liability provided herein, shall be limited to the fullest extent
permitted by the amended DGCL. Any appeal or modification of this paragraph
by the stockholders of the Corporation shall be prospective only, and shall
not adversely affect any limitation on the personal liability of a director
of the Corporation existing at the time of such repeal or modification.'
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling Freedom, Hilton
Davis, Freedom Textile, Freedom Textile South Carolina and FCCAC, respectively,
pursuant to the foregoing provisions, each of Freedom, Hilton Davis, Freedom
Textile, Freedom Textile South Carolina and FCCAC has been informed that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
The foregoing summaries are necessarily subject to the complete text of the
statutes, Freedom's Restated Certificate of Incorporation, the Certificates of
Incorporation of each of Hilton Davis, Freedom Textile, Freedom Textile South
Carolina and FCCAC, respectively, and the By-laws of each of Freedom, Hilton
Davis, Freedom Textile, Freedom Textile South Carolina and FCCAC, respectively,
and the agreements referred to above and are qualified in their entirety by
reference thereto.
II. Kalama Chemical, Inc. and Kalama Specialty Chemicals, Inc.
Section 23B.08.500 through 23B.08.600 of the Washington Business
Corporation Act authorize a court to award, or a corporation's board of
directors to grant, indemnification to directors and officers on terms
sufficiently broad to permit indemnification under certain circumstances for
liabilities arising under the Securities Act. Article IX of the By-laws of
Kalama Chemical, Inc. ('Kalama Chemical') provides that Kalama Chemical shall
indemnify its directors, officers, employees and agents to the fullest extent
permitted by applicable law. Article IX of the By-laws of Kalama Specialty
Chemicals, Inc. ('Kalama Specialty Chemicals') has the effect of indemnifying
its directors, officers, employees and agents to the fullest extent permitted by
applicable law.
Section 23B.08.320 of the Washington Business Corporation Act authorizes a
corporation to limit a director's personal liability to the corporation or its
shareholders for monetary damages for conduct as a director, except in certain
circumstances involving intentional misconduct, a knowing violation of law,
self-dealing or illegal corporate loans or distributions, or any transaction
from which the director personally received a benefit in money, property or
services to which the director is legally entitled. Article VIII to the Articles
of Incorporation of Kalama Chemical and Article XIV to the Articles of
Incorporation of Kalama Specialty Chemicals contain provisions implementing, to
the fullest extent permitted by Washington law, such limitations on a director's
liability to the corporation and its shareholders.
II-2
<PAGE>
The foregoing summaries are necessarily subject to the complete text of the
statutes, the Articles of Incorporation of each of Kalama Chemical and Kalama
Specialty Chemicals, respectively, and the By-laws of each of Kalama Chemical
and Kalama Specialty Chemicals, respectively, and the agreements referred to
above and are qualified in their entirety by reference thereto.
III. Freedom Chemical Diamalt GmbH
The laws of Germany make no provision for indemnification of officers and
directors.
IV. Kalama Foreign Sales Corporation
Section 2117(b) of the Guam Code Annotated provides that a director of a
foreign sales corporation may be indemnified if such director acted in good
faith and reasonably believed (i) in the case of conduct in a official capacity
with the corporation, that such conduct was in the corporation's best interest
and (ii) in all cases, such conduct was at least not opposed to the
corporation's best interests, and (iii) in the case of any criminal proceeding,
such director had no reasonable cause to believe such director's conduct was
unlawful.
Article X of Kalama Foreign Sales Corporation's ('Kalama Foreign Sales')
Articles of Incorporation provides that no director or officer shall be held
liable to the corporation for any loss or damage suffered by it on account of
any action or omission by such director or officer if such director or officer
acted in good faith and in a manner such director or officer reasonably believed
to be in or not opposed to the best interests of the corporation, unless with
respect to an action or suit by or in the right of the corporation to procure a
judgment in its favor such director or officer shall have been adjudged to be
liable for negligence or misconduct in the performance of his or her duty to the
corporation.
The foregoing summaries are necessarily subject to the complete text of the
statutes, Kalama Foreign Sales' Articles of Incorporation, its By-laws and the
agreements referred to above and are qualified in their entirety by reference
thereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since November 1, 1993 Freedom has sold or issued the following securities
that were not registered under the Securities Act:
1. On January 18, 1994 Freedom issued 5,322 shares of Series A Common Stock
to Freedom Investment Corp., pursuant to the exercise of options held by The
Freedom Group, for an aggregate purchase price of $532,200.
2. On May 26, 1994 Freedom issued 14,231.5 shares of Series A Common Stock
and 8,064.52 shares of Series C Preferred Stock to Joseph Littlejohn & Levy Fund
II, L.P. for an aggregate purchase price of $10,000,000.
3. On June 30, 1994 Freedom issued 426.94 shares of Series A Common Stock
and 241.94 shares of Series C Preferred Stock to Freedom Investment Corp. for an
aggregate purchase price of $300,000.
4. On June 30, 1994 Freedom issued 426.94 shares of Series A Common Stock
and 241.94 shares of Series C Preferred Stock to RULCO, INC. for an aggregate
purchase price of $300,000.
5. On June 30, 1994 Freedom issued 31.98 shares of Series A Common Stock
and 18.12 shares of Series C Preferred Stock to Donald W. McPhail for an
aggregate purchase price of $22,470.
6. On June 30, 1994 Freedom issued 284.63 shares of Series A Common Stock
and 161.29 shares of Series C Preferred Stock to Robert A. Kirchner for an
aggregate purchase price of $200,000.
7. On June 30, 1994 Freedom issued 284.63 shares of Series A Common Stock
and 161.29 shares of Series C Preferred Stock to Nicholas E. Lynam for an
aggregate purchase price of $200,000.
8. On June 30, 1994 Freedom issued 81.9 shares of Series A Common Stock and
46.41 shares of Series C Preferred Stock to Robert G. Kitchen for an aggregate
purchase price of $57,500.
II-3
<PAGE>
9. On June 30, 1994 Freedom issued 106.74 shares of Series A Common Stock
and 60.48 shares of Series C Preferred Stock to Leslie E. Schenk for an
aggregate purchase price of $75,000.
10. On June 30, 1994 Freedom issued 106.74 shares of Series A Common Stock
and 60.48 shares of Series C Preferred Stock to Dale E. Smith for an aggregate
purchase price of $75,000.
11. On June 30, 1994 Freedom issued 142.31 shares of Series A Common Stock
and 80.65 shares of Series C Preferred Stock to Richard E. Gilleland for an
aggregate purchase price of $100,000.
12. On June 30, 1994 Freedom issued 135 shares of Series A Common Stock and
76.5 shares of Series B Preferred Stock to Robert G. Kitchen in connection with
a share-for-share exchange of 135 shares of common stock and 76.5 shares of
Series B Preferred Stock of Freedom Textile Chemicals Co. held by Robert G.
Kitchen. The consideration for such issuance was $90,000 worth of shares of
Freedom Textile Chemicals Co.
13. On June 30, 1994 Freedom issued 67.5 shares of Series A Common Stock
and 38.25 shares of Series B Preferred Stock to James C. Trecek in connection
with a share-for-share exchange of 67.5 shares of common stock and 38.25 shares
of Series B Preferred Stock of Freedom Textile Chemicals Co. held by James C.
Trecek. The consideration for such issuance was $45,000 worth of shares of
Freedom Textile Chemicals Co.
14. On June 30, 1994 Freedom issued 70.5 shares of Series A Common Stock to
Robert G. Kitchen in consideration of the cancellation of Robert G. Kitchen's
entitlement to certain equity securities of Freedom Textile Chemical Co.
15. On June 30, 1994 Freedom issued 67.5 shares of Series A Common Stock to
James C. Trecek in consideration of the cancellation of James C. Trecek's
entitlement to certain equity securities of Freedom Textile Chemical Co.
16. On October 17, 1996, Freedom sold $125,000,000 aggregate principal
amount of Freedom's 10 5/8% Senior Subordinated Notes due 2006 (the 'Old Notes')
to Merrill Lynch, Pierce, Fenner & Smith Incorporated, Schroder Wertheim & Co.
Incorporated and Smith Barney Inc., which Old Notes were guaranteed on a senior
subordinated basis by each of the Guarantors. In accordance with the agreement
pursuant to which the Initial Purchasers purchased the Old Notes, such Initial
Purchasers agreed to offer and sell the Old Notes only to qualified
institutional buyers in reliance on Rule 144A under the Securities Act, and to a
limited number of institutional 'accredited investors' (as defined in Rule
501(a)(1), (2), (3) or (7) under the Securities Act).
17. On October 17, 1996 Freedom issued 56,635 shares of Series A Common
Stock to Joseph Littlejohn & Levy Fund, L.P. for an aggregate purchase price of
$7,079,375.
18. On October 17, 1996 Freedom issued 22,904.26 shares of Series A Common
Stock to Joseph Littlejohn & Levy Fund II, L.P. for an aggregate purchase price
of $2,863,032.50.
19. On October 17, 1996 Freedom issued 460.74 shares of Series A Common
Stock to Robert A. Kirchner for an aggregate purchase price of $57,592.50.
20. On December 2, 1996, Freedom issued 4,828.22 shares of Series A Common
Stock to the Sorgenti Family Partnership, L.P. for an aggregate purchase price
of $603,527.50.
21. On December 2, 1996, Freedom issued 8,643.64 shares of Series A Common
Stock to Harold A. Sorgenti for an aggregate purchase price of $1,080,455.00.
22. On December 2, 1996, Freedom issued 217.27 shares of Series A Common
Stock to James Trecek for an aggregate purchase price of $27,158.75.
23. On December 2, 1996, Freedom issued 1,082.94 shares of Series A Common
Stock to Donald W. McPhail for an aggregate purchase price of $135,367.50.
24. On December 2, 1996, Freedom issued 171.79 shares of Series A Common
Stock to Dale E. Smith for an aggregate purchase price of $21,473.75.
25. On December 2, 1996, Freedom issued 572.79 shares of Series A Common
Stock to Robert G. Kitchen for an aggregate purchase price of $71,598.75.
II-4
<PAGE>
The issuances of securities described above were made in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act for
transactions not involving a public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- --------------------------------------------------------------------------------------------------
<S> <C>
3.1 Restated Certificate of Incorporation of Freedom Chemical Company and Certificate of Designation
for Preferred Stock.*
3.2 By-laws of Freedom Chemical Company.*
3.3 Certificate of Incorporation of Hilton Davis Chemical Co.*
3.4 By-laws of Hilton Davis Chemical Co.*
3.5 Articles of Incorporation of Kalama Chemical, Inc.*
3.6 By-laws of Kalama Chemical, Inc.*
3.7 Certificate of Incorporation of Freedom Textile Chemicals Co.*
3.8 By-laws of Freedom Textile Chemicals Co.*
3.9 Articles of Association of Freedom Chemical Diamalt GmbH.*
3.10 Certificate of Incorporation of Freedom Textile Chemical Company (South Carolina), Inc.*
3.11 By-laws of Freedom Textile Chemical Company (South Carolina), Inc.*
3.12 Articles of Incorporation of Kalama Specialty Chemicals, Inc.*
3.13 By-laws of Kalama Specialty Chemicals, Inc.*
3.14 Articles of Incorporation of Kalama Foreign Sales Corporation.*
3.15 By-laws of Kalama Foreign Sales Corporation.*
3.16 Certificate of Incorporation of FCC Acquisition Corp.*
3.17 By-laws of FCC Acquisition Corp.*
4.1 Indenture dated as of October 15, 1996, among Freedom Chemical Company, the Guarantors named
therein and The Bank of New York, as trustee, relating to the 10 5/8% Senior Subordinated Notes
due 2006 of Freedom Chemical Company and exhibits thereto, including Form of 10 5/8% Senior
Subordinated Note due 2006 of Freedom Chemical Company.*
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP regarding legality of securities being
registered.*
5.2 Opinion of Bogle & Gates regarding legality of securities being registered.*
5.3 Opinion of Boesebeck Droste regarding legality of securities being registered.*
5.4 Opinion of Carlsmith Ball Wichman Case & Ichiki regarding legality of securities being
registered.*
10.1 Registration Rights Agreement, dated October 17, 1996 among Freedom Chemical Company, the
Guarantors named therein and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Schroder Wertheim
& Co. Incorporated and Smith Barney Inc.*
10.2 Amended and Restated Credit Agreement, dated as of October 17, 1996 among Freedom Chemical
Company, Freedom Chemical Diamalt GmbH, the institutions from time to time party thereto as
lenders, the institutions from time to time party thereto as issuing bank and Citicorp USA, Inc.,
as Agent.*
10.3 Share Pledge Agreement, dated January 16, 1995, by and among Freedom Chemical Company, Hilton
Davis Chemical Co. and Citicorp USA, Inc.*
10.4 Amendment to Share Pledge Agreement, dated January 17, 1995, by and among Freedom Chemical
Company, Hilton Davis Chemical Co. and Citicorp USA, Inc.*
10.5 Security Assignment Agreement, dated January 16, 1995, between Freedom Chemical Company and
Citicorp USA, Inc.*
10.6 Stock Purchase Agreement, dated as of May 11, 1994, among BC Sugar Refinery Limited, Chatterton
Petrochemical Corporation and Freedom Chemical Company.*
10.7 Amendment No. 1 to Stock Purchase Agreement, dated as of May 26, 1994, among BC Sugar Refinery
Limited, Chatterton Petrochemical Corporation and Freedom Chemical Company.*
10.8 Settlement Agreement dated as of April 28, 1994 between Tenneco Polymers, Inc. and Kalama
Chemical, Inc.*
10.9 Stock Purchase Agreement, dated as of May 21, 1993, between PMC, Inc. and Freedom Chemical
Acquisition Corporation.*
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- --------------------------------------------------------------------------------------------------
<S> <C>
10.10 Amendment No. 1 to Stock Purchase Agreement, dated as of September 9, 1993, between PMC, Inc. and
Freedom Chemical Company.*
10.11 Definitive Agreement, dated as of August 13, 1993, between Sterling Winthrop Inc. and Freedom
Chemical Acquisition Corporation.*
10.12 Ground Lease, dated September 9, 1993, between The SDI Divestiture Corp. and Hilton Davis Chemical
Co.*
10.13 Amendment to Ground Lease Provisions, dated September 9, 1993.*
10.14 Escrow Agreement, dated September 9, 1993, by and among PMC, Inc., Freedom Chemical Acquisition
Corporation and CoreStates Bank, N.A.*
10.15 Environmental Matters Agreement, dated September 9, 1993, among Freedom Chemical Acquisition
Corporation, Hilton Davis Chemical Co. and Sterling Winthrop, Inc.*
10.16 Agreement for the Purchase and Sale of Assets, dated February 28, 1992, between Freedom Textile
Chemicals Co. and American Cyanamid Company.*
10.17 [Intentionally Omitted]
10.18 Employment Agreement, dated November 15, 1994, by and between Freedom Chemical Company and Fred P.
Rullo.*
10.19 Employment Agreement, dated November 15, 1994, by and between Freedom Chemical Company and Harold
A. Sorgenti.*
10.20 Employment Agreement, dated June 1, 1991, between Kalama Chemical, Inc. and Robert A. Kirchner.*
10.21 Employment Agreement, dated January 17, 1996, between Freedom Textile Chemicals Co. and Robert G.
Kitchen.*
10.21(a) Letter Agreement, dated January 9, 1997, between Freedom Chemical Company and Robert G. Kitchen.*
10.22 Employment Agreement between Freedom Chemical Diamalt GmbH and Helmut Wolf.*
10.23 Letter Agreement, dated May 8, 1992, between The Freedom Group and Robert Kitchen.*
10.24 Employment Agreement, dated March 13, 1992, between Freedom Textile Chemicals Co. and James B.
Trecek.*
10.25 Agreement, dated December 7, 1994, by and among Freedom Chemical Company, the Freedom Group
Partnership, Joseph Littlejohn & Levy Fund, L.P., Joseph Littlejohn & Levy Fund II, L.P., Harold
A. Sorgenti and Fred P. Rullo.*
10.26 Stockholders' Agreement, dated as of May 4, 1992, among Freedom Chemical Company, Joseph
Littlejohn & Levy Fund, L.P., Harold A. Sorgenti and Fred P. Rullo.*
10.27 Amendment to Stockholders' Agreement, dated as of September 9, 1993, by and among Freedom Chemical
Company, Joseph Littlejohn & Levy Fund, L.P., Freedom Investment Corp., Harold A. Sorgenti, Fred
P. Rullo and RULCO, Inc.*
10.28 Amendment No. 2 to Stockholders' Agreement, dated as of June 30, 1994, by and among Freedom
Chemical Company, Joseph Littlejohn & Levy Fund, L.P., Joseph Littlejohn & Levy Fund II, L.P.,
Freedom Investment Corp., Harold A. Sorgenti, Fred P. Rullo and RULCO, Inc.*
10.29 Stockholders' Agreement, dated as of June 30, 1993, by and among Freedom Chemical Company, Joseph
Littlejohn & Levy Fund, L.P., Donald W. McPhail and Stamford-Atlanta Capital Corporation.*
10.30 Amendment to Stockholders' Agreement, dated as of June 30, 1994, by and among Freedom Chemical
Company, Joseph Littlejohn & Levy Fund, L.P., Joseph Littlejohn and Levy Fund II, L.P., Donald W.
McPhail and Stamford-Atlanta Capital Corporation.*
10.31 Stockholders' Agreement, dated as of June 30, 1994, by and among Freedom Chemical Company, Joseph
Littlejohn & Levy Fund, L.P., Joseph Littlejohn & Levy Fund II, L.P., and the individual
shareholders whose names are set forth on the signature page thereto.*
10.32 Stockholders' Agreement, dated as of June 30, 1994, by and among Freedom Chemical Company, Joseph
Littlejohn & Levy Fund, L.P., Joseph Littlejohn & Levy Fund II, L.P., and Richard E. Gilleland.*
10.33 Freedom Chemical Company 1994 Management Equity Plan.*
10.34 Form of Stock Option Agreement.*
10.35 Amended and Restated Stock Option Agreement, dated as of November 15, 1994, between Freedom
Chemical Company and The Freedom Group Partnership.*
10.36 Amended and Restated Stock Option Agreement, dated as of November 15, 1994, between Freedom
Chemical Company and The Freedom Group Partnership.*
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- --------------------------------------------------------------------------------------------------
<S> <C>
10.37 Amended and Restated Stock Option Agreement, dated as of November 15, 1994, between Freedom
Chemical Company and The Freedom Group Partnership.*
10.38 Letter, dated January 18, 1994, from The Freedom Group to Freedom Chemical Company.*
10.39 Letter, dated January 24, 1994, from Freedom Investment Corp. to Joseph Littlejohn & Levy Fund,
L.P.; Letter, dated January 24, 1994, from Harold A. Sorgenti and Ann R. Sorgenti to Joseph
Littlejohn & Levy Fund, L.P.; Letter, dated January 24, 1994, from Sorgenti Family Partnership,
L.P. to Joseph Littlejohn & Levy Fund, L.P.*
10.40 Subscription Agreement, dated as of October 17, 1996 between Freedom Chemical Company and Joseph
Littlejohn & Levy Fund, L.P.*
10.41 Subscription Agreement, dated as of October 17, 1996 between Freedom Chemical Company and Joseph
Littlejohn & Levy Fund II, L.P.*
10.42 Assignment Agreement, dated as of May 26, 1994, between Kalama Chemical, Inc. and United States
Trust Company.*
10.43 Trust Agreement, dated May 26, 1994, among Chatterton Petrochemical Corporation, Freedom Chemical
Company, Kalama Chemical, Inc. and United States Trust Company of New York.*
12.1 Statement re: Computation of ratio of earnings to fixed charges for Freedom Chemical Company and
Subsidiaries.**
21.1 Subsidiaries of Freedom Chemical Company.**
21.2 Subsidiaries of Hilton Davis Chemical Co.*
21.3 Subsidiaries of Kalama Chemical, Inc.*
21.4 Subsidiaries of Freedom Textile Chemicals Co.*
21.5 Subsidiaries of Freedom Chemical Diamalt GmbH.**
21.6 Subsidiaries of Freedom Textile Chemical (South Carolina), Inc.*
21.7 Subsidiaries of Kalama Specialty Chemicals, Inc.*
21.8 Subsidiaries of Kalama Foreign Sales Corporation.*
21.9 Subsidiaries of FCC Acquisition Corp.*
23.1 Consent of Coopers & Lybrand L.L.P., independent accountants.**
23.2 Consent of KPMG Peat Marwick LLP, independent certified public accountants.**
23.3 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in their opinion filed as Exhibit
5.1 to this Registration Statement).*
23.4 Consent of Bogle & Gates (included in their opinion filed as Exhibit 5.2 to this Registration
Statement).*
23.5 Consent of Boesebeck Droste (included in their opinion filed as Exhibit 5.3 to this Registration
Statement).*
23.6 Consent of Carlsmith Ball Wichman Case & Ichiki (included in their opinion filed as Exhibit 5.4 to
this Registration Statement).*
24.1 Powers of Attorney of certain directors and officers of the Company authorizing Fred P. Rullo and
Brian F. McNamara to sign the Registration Statement and amendments thereto on their behalf (set
forth on signature pages of Registration Statement).*
24.2 Powers of Attorney of Alexander R. Castaldi authorizing Fred P. Rullo and Brian F. McNamara to
sign the Registration Statement and amendments thereto on his behalf.*
24.3 Powers of Attorney of Vincent P. Langone authorizing Fred P. Rullo and Brian F. McNamara to sign
the Registration Statement and amendments thereto on his behalf.*
25.1 Statement of Eligibility under the Trust Indenture Act of 1939 of The Bank of New York on Form
T-1.*
27.1 Financial Data Schedule.*
99.1 Form of Letter of Transmittal.*
99.2 Form of Notice of Guaranteed Delivery.*
99.3 Form of Letter to Clients.*
99.4 Form of Letter to Brokers, Dealers, Trust Companies and Other Nominees.*
</TABLE>
- ------------------
* Filed previously
** Filed herewith
II-7
<PAGE>
(b) Financial Statement Schedules
The following financial statement schedule is filed herewith:
<TABLE>
<CAPTION>
SCHEDULE PAGE
- ----------------------------------------------------------------------------------------------------------- ----
<S> <C>
Freedom Chemical Company and Subsidiaries (the 'Company')
Report of Independent Accountants.......................................................................... S-1
Financial Statement Schedule for the years ended December 31, 1993, 1994 and 1995:
Schedule II--Valuation and Qualifying Accounts........................................................ S-2
</TABLE>
All other supplemental schedules are omitted because of the absence of
conditions under which they are required or because the information is shown in
the financial statements or notes thereto or in other supplemental schedules.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrants hereby undertake:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement (i) to
include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933; (ii) to reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20% change in the maximum aggregate offering
price set forth in the 'Calculation of Registration Fee' table in the
effective Registration Statement; and (iii) to include any material
information with respect to the plan for distribution not previously
disclosed in the Registration Statement or any material change to such
information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrants pursuant to the foregoing provisions, or otherwise, the
Registrants have been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrants of expenses
incurred or paid by a director, officer or controlling person of the Registrants
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrants will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of
Philadelphia, state of Pennsylvania, on February 14, 1997.
FREEDOM CHEMICAL COMPANY
(Registrant)
/s/ BRIAN F. MCNAMARA
--------------------------------------
Brian F. McNamara
Vice President, Secretary and General
Counsel
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- ------------------------------------------ --------------------------------------------- ------------------
<S> <C> <C>
* Chairman, Chief Executive Officer and
- ------------------------------------------ President (Principal Executive Officer)
Fred P. Rullo
* Chief Financial Officer (Principal Financial
- ------------------------------------------ Officer and Principal Accounting Officer)
Dennis M. Monahan
* Director
- ------------------------------------------
Alexander R. Castaldi
* Director
- ------------------------------------------
Timothy J. Clark
* Director
- ------------------------------------------
Peter A. Joseph
* Director
- ------------------------------------------
Vincent P. Langone
* Director
- ------------------------------------------
Paul S. Levy
* Director
- ------------------------------------------
Angus C. Littlejohn
* Director
- ------------------------------------------
Harold A. Sorgenti
*By: /s/ BRIAN F. MCNAMARA Attorney-in-Fact February 14, 1997
--------------------------------------
Brian F. McNamara
</TABLE>
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Cincinnati,
state of Ohio, on February 14, 1997.
HILTON DAVIS CHEMICAL CO.
(Registrant)
/s/ BRIAN F. MCNAMARA
--------------------------------------
Brian F. McNamara
Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- ------------------------------------------ --------------------------------------------- -----------------
<S> <C> <C>
* President, Chief Executive Officer and
- ------------------------------------------ Director (Principal Executive Officer)
Robert G. Kitchen
* Chief Financial Officer (Principal Financial
- ------------------------------------------ Officer and Principal Accounting Officer)
Gary Sommer
* Chairman of the Board of Directors
- ------------------------------------------
Fred P. Rullo
*By: /s/ BRIAN F. MCNAMARA Attorney-in-Fact February 14, 1997
--------------------------------------
Brian F. McNamara
</TABLE>
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Kalama,
state of Washington, on February 14, 1997.
KALAMA CHEMICAL, INC.
(Registrant)
/s/ ROBERT A. KIRCHNER
--------------------------------------
Robert A. Kirchner
President
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- ------------------------------------------ --------------------------------------------- ------------------
<S> <C> <C>
/s/ ROBERT A. KIRCHNER President and Director (Principal Executive February 14, 1997
- ------------------------------------------ Officer)
Robert A. Kirchner
* Controller (Principal Financial Officer and
- ------------------------------------------ Principal Accounting Officer)
John W. Hagen
* Director
- ------------------------------------------
Fred P. Rullo
* Director
- ------------------------------------------
Mark A. Fleischauer
*By: /s/ BRIAN F. MCNAMARA Attorney-in-Fact February 14, 1997
--------------------------------------
Brian F. McNamara
</TABLE>
II-11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of
Philadelphia, state of Pennsylvania, on February 14, 1997.
FREEDOM TEXTILE CHEMICALS CO.
(Registrant)
/s/ BRIAN F. MCNAMARA
--------------------------------------
Brian F. McNamara
Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- ------------------------------------------ --------------------------------------------- ------------------
<S> <C> <C>
* President, Chief Executive Officer and
- ------------------------------------------ Director (Principal Executive Officer,
Fred P. Rullo Principal Financial Officer and Principal
Accounting Officer)
/s/ BRIAN F. MCNAMARA Director February 14, 1997
- ------------------------------------------
Brian F. McNamara
*By: /s/ BRIAN F. MCNAMARA Attorney-in-Fact February 14, 1997
- ------------------------------------------
Brian F. McNamara
</TABLE>
II-12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Munich,
Federal Republic of Germany, on February 14, 1997.
FREEDOM CHEMICAL DIAMALT GMBH
(Registrant)
/s/ S. KURT HOLDERER
--------------------------------------
S. Kurt Holderer
Executive Vice President
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- --------------------------------------------- --------------------------------------------- -----------------
<S> <C> <C>
* Managing Director (Principal Executive
- --------------------------------------------- Officer)
Helmut Wolf
/s/ S. KURT HOLDERER Executive Vice President (Principal Financial
- --------------------------------------------- Officer and Principal Accounting Officer)
S. Kurt Holderer February 14, 1997
*By: /s/ BRIAN F. MCNAMARA Attorney-in-Fact
---------------------------------
Brian F. McNamara February 14, 1997
</TABLE>
II-13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of
Philadelphia, state of Pennsylvania, on February 14, 1997.
FREEDOM TEXTILE CHEMICAL COMPANY
(SOUTH CAROLINA), INC.
(Registrant)
/s/ BRIAN F. MCNAMARA
--------------------------------------
Brian F. McNamara
Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- ------------------------------------------ --------------------------------------------- ------------------
<S> <C> <C>
* Chief Executive Officer and Director
- ------------------------------------------ (Principal Executive Officer, Principal
Fred P. Rullo Financial Officer and Principal Accounting
Officer)
/s/ BRIAN F. MCNAMARA Director February 14, 1997
- ------------------------------------------
Brian F. McNamara
*By: /s/ BRIAN F. MCNAMARA Attorney-in-Fact February 14, 1997
---------------------------------
Brian F. McNamara
</TABLE>
II-14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Kalama,
state of Washington, on February 14, 1997.
KALAMA SPECIALTY CHEMICALS, INC.
(Registrant)
/s/ ROBERT A. KIRCHNER
--------------------------------------
Robert A. Kirchner
President
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- ------------------------------------------ ------------------------------------------------ ------------------
<S> <C> <C>
/s/ ROBERT A. KIRCHNER President and Director (Principal Executive February 14, 1997
- ------------------------------------------ Officer)
Robert A. Kirchner
* Controller (Principal Financial Officer and
- ------------------------------------------ Principal Accounting Officer)
John W. Hagen
* Director
- ------------------------------------------
Thomas J. Lobue
* Director
- ------------------------------------------
John P. Fairman
*By: /s/ BRIAN F. MCNAMARA Attorney-in-Fact February 14, 1997
---------------------------------
Brian F. McNamara
</TABLE>
II-15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Kalama,
state of Washington, on February 14, 1997.
KALAMA FOREIGN SALES CORPORATION
(Registrant)
/S/ ROBERT A. KIRCHNER
--------------------------------------
Robert A. Kirchner
President
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- --------------------------------------------- --------------------------------------------- -----------------
<S> <C> <C>
/s/ ROBERT A. KIRCHNER President and Director February 14, 1997
- -------------------------------------------- (Principal Executive Officer)
Robert A. Kirchner
* Controller and Director
- -------------------------------------------- (Principal Financial Officer and Principal
John W. Hagen Accounting Officer)
* Director
- --------------------------------------------
William C. Williams
*By: /s/ BRIAN F. MCNAMARA Attorney-in-Fact February 14, 1997
----------------------------------------
Brian F. McNamara
</TABLE>
II-16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of
Philadelphia, state of Pennsylvania, on February 14, 1997.
FCC ACQUISITION CORP.
(Registrant)
/s/ BRIAN F. MCNAMARA
--------------------------------------
Brian F. McNamara
Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- ----------------------------------------- ---------------------------------------------- -----------------
<S> <C> <C>
* President, Chief Executive Officer and
- ---------------------------------------- Director (Principal Executive Officer,
Fred P. Rullo Principal Financial Officer and Principal
Accounting Officer)
/s/ BRIAN F. MCNAMARA Director February 14, 1997
- ----------------------------------------
Brian F. McNamara
By: /s/ BRIAN F. MCNAMARA Attorney-in-Fact February 14, 1997
-------------------------------
Brian F. McNamara
</TABLE>
II-17
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
In connection with our audits of the consolidated financial statements of
Freedom Chemical Company and Subsidiaries as of December 31, 1994 and 1995, and
for each of the three years in the period ended December 31, 1995, which
financial statements are included in the Prospectus, we have also audited the
financial statement schedule listed in Item 16 herein.
In our opinion, this financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Wayne, Pennsylvania
March 26, 1996
S-1
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED ADDITIONS BALANCE AT
BEGINNING TO COSTS CHARGED TO END
OF PERIOD AND EXPENSES OTHER ACCOUNTS DEDUCTIONS OF PERIOD
---------- ------------ -------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
For the year ended December 31, 1993................. $ 35 $ 112 -- $ 2 $ 145
---------- ------------ ------- ---------- ----------
---------- ------------ ------- ---------- ----------
For the year ended December 31, 1994................. $ 145 $ 142 -- -- $ 287
---------- ------------ ------- ---------- ----------
---------- ------------ ------- ---------- ----------
For the year ended December 31, 1995................. $ 287 $ 36 -- $ 63 $ 260
---------- ------------ ------- ---------- ----------
---------- ------------ ------- ---------- ----------
INVENTORY RESERVES:
For the year ended December 31, 1993................. -- -- -- -- --
---------- ------------ ------- ---------- ----------
---------- ------------ ------- ---------- ----------
For the year ended December 31, 1994................. -- $ 58 -- -- $ 58
---------- ------------ ------- ---------- ----------
---------- ------------ ------- ---------- ----------
For the year ended December 31, 1995................. $ 58 $1,964 -- $1,854 $ 168
---------- ------------ ------- ---------- ----------
---------- ------------ ------- ---------- ----------
VALUATION ALLOWANCE FOR DEFERRED TAXES:
For the year ended December 31, 1993................. -- -- -- -- --
---------- ------------ ------- ---------- ----------
---------- ------------ ------- ---------- ----------
For the year ended December 31, 1994................. -- $ 147 $4,000 -- $4,147
---------- ------------ ------- ---------- ----------
---------- ------------ ------- ---------- ----------
For the year ended December 31, 1995................. $4,147 $5,326 -- $1,747 $7,726
---------- ------------ ------- ---------- ----------
---------- ------------ ------- ---------- ----------
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. DESCRIPTION OF EXHIBIT NUMBER
- ------- ----------------------------------------------------------------------------------------------- ------
<S> <C> <C>
3.1 Restated Certificate of Incorporation of Freedom Chemical Company and Certificate of
Designation for Preferred Stock.*
3.2 By-laws of Freedom Chemical Company.*
3.3 Certificate of Incorporation of Hilton Davis Chemical Co.*
3.4 By-laws of Hilton Davis Chemical Co.*
3.5 Articles of Incorporation of Kalama Chemical, Inc.*
3.6 By-laws of Kalama Chemical, Inc.*
3.7 Certificate of Incorporation of Freedom Textile Chemicals Co.*
3.8 By-laws of Freedom Textile Chemicals Co.*
3.9 Articles of Association of Freedom Chemical Diamalt GmbH.*
3.10 Certificate of Incorporation of Freedom Textile Chemical Company (South Carolina), Inc.*
3.11 By-laws of Freedom Textile Chemical Company (South Carolina), Inc.*
3.12 Articles of Incorporation of Kalama Specialty Chemicals, Inc.*
3.13 By-laws of Kalama Specialty Chemicals, Inc.*
3.14 Articles of Incorporation of Kalama Foreign Sales Corporation.*
3.15 By-laws of Kalama Foreign Sales Corporation.*
3.16 Certificate of Incorporation of FCC Acquisition Corp.*
3.17 By-laws of FCC Acquisition Corp.*
4.1 Indenture dated as of October 15, 1996, among Freedom Chemical Company, the Guarantors named
therein and The Bank of New York, as trustee, relating to the 10 5/8% Senior Subordinated Notes
due 2006 of Freedom Chemical Company and exhibits thereto, including Form of 10 5/8% Senior
Subordinated Note due 2006 of Freedom Chemical Company.*
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP regarding legality of securities being
registered.*
5.2 Opinion of Bogle & Gates regarding legality of securities being registered.*
5.3 Opinion of Boesebeck Droste regarding legality of securities being registered.*
5.4 Opinion of Carlsmith Ball Wichman Case & Ichiki regarding legality of securities being
registered.*
10.1 Registration Rights Agreement, dated October 17, 1996 among Freedom Chemical Company, the
Guarantors named therein and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Schroder
Wertheim & Co. Incorporated and Smith Barney Inc.*
10.2 Amended and Restated Credit Agreement, dated as of October 17, 1996 among Freedom Chemical
Company, Freedom Chemical Diamalt GmbH, the institutions from time to time party thereto as
lenders, the institutions from time to time party thereto as issuing bank and Citicorp USA,
Inc., as Agent.*
10.3 Share Pledge Agreement, dated January 16, 1995, by and among Freedom Chemical Company, Hilton
Davis Chemical Co. and Citicorp USA, Inc.*
10.4 Amendment to Share Pledge Agreement, dated January 17, 1995, by and among Freedom Chemical
Company, Hilton Davis Chemical Co. and Citicorp USA, Inc.*
10.5 Security Assignment Agreement, dated January 16, 1995, between Freedom Chemical Company and
Citicorp USA, Inc.*
10.6 Stock Purchase Agreement, dated as of May 11, 1994, among BC Sugar Refinery Limited, Chatterton
Petrochemical Corporation and Freedom Chemical Company.*
10.7 Amendment No. 1 to Stock Purchase Agreement, dated as of May 26, 1994, among BC Sugar Refinery
Limited, Chatterton Petrochemical Corporation and Freedom Chemical Company.*
10.8 Settlement Agreement dated as of April 28, 1994 between Tenneco Polymers, Inc. and Kalama
Chemical, Inc.*
10.9 Stock Purchase Agreement, dated as of May 21, 1993, between PMC, Inc. and Freedom Chemical
Acquisition Corporation.*
10.10 Amendment No. 1 to Stock Purchase Agreement, dated as of September 9, 1993, between PMC, Inc.
and Freedom Chemical Company.*
10.11 Definitive Agreement, dated as of August 13, 1993, between Sterling Winthrop Inc. and Freedom
Chemical Acquisition Corporation.*
10.12 Ground Lease, dated September 9, 1993, between The SDI Divestiture Corp. and Hilton Davis
Chemical Co.*
10.13 Amendment to Ground Lease Provisions, dated September 9, 1993.*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. DESCRIPTION OF EXHIBIT NUMBER
- ------- ----------------------------------------------------------------------------------------------- ------
<S> <C> <C>
10.14 Escrow Agreement, dated September 9, 1993, by and among PMC, Inc., Freedom Chemical Acquisition
Corporation and CoreStates Bank, N.A.*
10.15 Environmental Matters Agreement, dated September 9, 1993, among Freedom Chemical Acquisition
Corporation, Hilton Davis Chemical Co. and Sterling Winthrop, Inc.*
10.16 Agreement for the Purchase and Sale of Assets, dated February 28, 1992, between Freedom Textile
Chemicals Co. and American Cyanamid Company.*
10.17 [Intentionally Omitted]
10.18 Employment Agreement, dated November 15, 1994, by and between Freedom Chemical Company and Fred
P. Rullo.*
10.19 Employment Agreement, dated November 15, 1994, by and between Freedom Chemical Company and
Harold A. Sorgenti.*
10.20 Employment Agreement, dated June 1, 1991, between Kalama Chemical, Inc. and Robert A.
Kirchner.*
10.21 Employment Agreement, dated January 17, 1996, between Freedom Textile Chemicals Co. and Robert
G. Kitchen.*
10.21(a) Letter Agreement, dated January 9, 1997, between Freedom Chemical Company and Robert G.
Kitchen.*
10.22 Employment Agreement between Freedom Chemical Diamalt GmbH and Helmut Wolf.*
10.23 Letter Agreement, dated May 8, 1992, between The Freedom Group and Robert Kitchen.*
10.24 Employment Agreement, dated March 13, 1992, between Freedom Textile Chemicals Co. and James B.
Trecek.*
10.25 Agreement, dated December 7, 1994, by and among Freedom Chemical Company, the Freedom Group
Partnership, Joseph Littlejohn & Levy Fund, L.P., Joseph Littlejohn & Levy Fund II, L.P.,
Harold A. Sorgenti and Fred P. Rullo.*
10.26 Stockholders' Agreement, dated as of May 4, 1992, among Freedom Chemical Company, Joseph
Littlejohn & Levy Fund, L.P., Harold A. Sorgenti and Fred P. Rullo.*
10.27 Amendment to Stockholders' Agreement, dated as of September 9, 1993, by and among Freedom
Chemical Company, Joseph Littlejohn & Levy Fund, L.P., Freedom Investment Corp., Harold A.
Sorgenti, Fred P. Rullo and RULCO, Inc.*
10.28 Amendment No. 2 to Stockholders' Agreement, dated as of June 30, 1994, by and among Freedom
Chemical Company, Joseph Littlejohn & Levy Fund, L.P., Joseph Littlejohn & Levy Fund II, L.P.,
Freedom Investment Corp., Harold A. Sorgenti, Fred P. Rullo and RULCO, Inc.*
10.29 Stockholders' Agreement, dated as of June 30, 1993, by and among Freedom Chemical Company,
Joseph Littlejohn & Levy Fund, L.P., Donald W. McPhail and Stamford-Atlanta Capital
Corporation.*
10.30 Amendment to Stockholders' Agreement, dated as of June 30, 1994, by and among Freedom Chemical
Company, Joseph Littlejohn & Levy Fund, L.P., Joseph Littlejohn and Levy Fund II, L.P., Donald
W. McPhail and Stamford-Atlanta Capital Corporation.*
10.31 Stockholders' Agreement, dated as of June 30, 1994, by and among Freedom Chemical Company,
Joseph Littlejohn & Levy Fund, L.P., Joseph Littlejohn & Levy Fund II, L.P., and the individual
shareholders whose names are set forth on the signature page thereto.*
10.32 Stockholders' Agreement, dated as of June 30, 1994, by and among Freedom Chemical Company,
Joseph Littlejohn & Levy Fund, L.P., Joseph Littlejohn & Levy Fund II, L.P., and Richard E.
Gilleland.*
10.33 Freedom Chemical Company 1994 Management Equity Plan.*
10.34 Form of Stock Option Agreement.*
10.35 Amended and Restated Stock Option Agreement, dated as of November 15, 1994, between Freedom
Chemical Company and The Freedom Group Partnership.*
10.36 Amended and Restated Stock Option Agreement, dated as of November 15, 1994, between Freedom
Chemical Company and The Freedom Group Partnership.*
10.37 Amended and Restated Stock Option Agreement, dated as of November 15, 1994, between Freedom
Chemical Company and The Freedom Group Partnership.*
10.38 Letter, dated January 18, 1994, from The Freedom Group to Freedom Chemical Company.*
10.39 Letter, dated January 24, 1994, from Freedom Investment Corp. to Joseph Littlejohn & Levy Fund,
L.P.; Letter, dated January 24, 1994, from Harold A. Sorgenti and Ann R. Sorgenti to Joseph
Littlejohn & Levy Fund, L.P.; Letter, dated January 24, 1994, from Sorgenti Family Partnership,
L.P. to Joseph Littlejohn & Levy Fund, L.P.*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. DESCRIPTION OF EXHIBIT NUMBER
- ------- ----------------------------------------------------------------------------------------------- ------
<S> <C> <C>
10.40 Subscription Agreement, dated as of October 17, 1996 between Freedom Chemical Company and
Joseph Littlejohn & Levy Fund, L.P.*
10.41 Subscription Agreement, dated as of October 17, 1996 between Freedom Chemical Company and
Joseph Littlejohn & Levy Fund II, L.P.*
10.42 Assignment Agreement, dated as of May 26, 1994, between Kalama Chemical, Inc. and United States
Trust Company.*
10.43 Trust Agreement, dated May 26, 1994, among Chatterton Petrochemical Corporation, Freedom
Chemical Company, Kalama Chemical, Inc. and United States Trust Company of New York.*
12.1 Statement re: Computation of ratio of earnings to fixed charges for Freedom Chemical Company
and Subsidiaries.**
21.1 Subsidiaries of Freedom Chemical Company.**
21.2 Subsidiaries of Hilton Davis Chemical Co.*
21.3 Subsidiaries of Kalama Chemical, Inc.*
21.4 Subsidiaries of Freedom Textile Chemicals Co.*
21.5 Subsidiaries of Freedom Chemical Diamalt GmbH.**
21.6 Subsidiaries of Freedom Textile Chemical (South Carolina), Inc.*
21.7 Subsidiaries of Kalama Specialty Chemicals, Inc.*
21.8 Subsidiaries of Kalama Foreign Sales Corporation.*
21.9 Subsidiaries of FCC Acquisition Corp.*
23.1 Consent of Coopers & Lybrand L.L.P., independent accountants.**
23.2 Consent of KPMG Peat Marwick LLP, independent certified public accountants.**
23.3 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in their opinion filed as Exhibit
5.1 to this Registration Statement).*
23.4 Consent of Bogle & Gates (included in their opinion filed as Exhibit 5.2 to this Registration
Statement).*
23.5 Consent of Boesebeck Droste (included in their opinion filed as Exhibit 5.3 to this
Registration Statement).*
23.6 Consent of Carlsmith Ball Wichman Case & Ichiki (included in their opinion filed as Exhibit 5.4
to this Registration Statement).*
24.1 Powers of Attorney of certain directors and officers of the Company authorizing Fred P. Rullo
and Brian F. McNamara to sign the Registration Statement and amendments thereto on their behalf
(set forth on signature pages of Registration Statement).*
24.2 Powers of Attorney of Alexander R. Castaldi authorizing Fred P. Rullo and Brian F. McNamara to
sign the Registration Statement and amendments thereto on his behalf.*
24.3 Powers of Attorney of Vincent P. Langone authorizing Fred P. Rullo and Brian F. McNamara to
sign the Registration Statement and amendments thereto on his behalf.*
25.1 Statement of Eligibility under the Trust Indenture Act of 1939 of The Bank of New York on Form
T-1.*
27.1 Financial Data Schedule.*
99.1 Form of Letter of Transmittal.*
99.2 Form of Notice of Guaranteed Delivery.*
99.3 Form of Letter to Clients.*
99.4 Form of Letter to Brokers, Dealers, Trust Companies and Other Nominees.*
</TABLE>
- ------------------
* Filed previously
** Filed herewith
<PAGE>
EXHIBIT 12.1
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS, EXCEPT RATIO)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- --------------------------------
PRO FORMA PRO FORMA
1992 1993 1994 1995 1995 1995 1996 1996
----- ------- ------- -------- --------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income (loss) before
taxes................. $(347) $(1,261) $ 6,320 $(20,873) $(22,625) $(10,289) $ 731 $ (619)
----- ------- ------- -------- --------- -------- ------- ---------
Interest and debt
expense............... 531 1,556 6,682 13,805 15,557 10,334 10,339 11,689
Minority interest....... 144 251 284 247 247 187 195 195
Capitalized interest.... -- -- -- 168 168 168 -- --
One third of rental
expense............... 52 106 323 794 794 677 742 742
----- ------- ------- -------- --------- -------- ------- ---------
Total fixed charges..... 727 1,913 7,289 15,014 16,766 11,366 11,276 12,626
----- ------- ------- -------- --------- -------- ------- ---------
Distributions from joint
ventures.............. -- -- -- -- -- -- 41 41
Capitalized interest.... -- -- -- (168) (168) (168) -- --
----- ------- ------- -------- --------- -------- ------- ---------
Sub-total............. $ 380 $ 652 $13,609 $ (6,027) $ (6,027) $ 909 $12,048 $12,048
----- ------- ------- -------- --------- -------- ------- ---------
Ratio of earnings to
fixed charges......... 0.5 0.3 1.9 (0.4) (0.3) 0.1 1.1 0.9
----- ------- ------- -------- --------- -------- ------- ---------
----- ------- ------- -------- --------- -------- ------- ---------
Surplus (deficiency) of
earnings.............. $(347) $(1,261) $ 6,320 $(21,041) $(22,793) $(10,457) $ 772 $ (578)
----- ------- ------- -------- --------- -------- ------- ---------
----- ------- ------- -------- --------- -------- ------- ---------
Rental expense.......... $ 156 $ 318 $ 970 $ 2,383 $ 2,383 $ 2,031 $ 2,226 $ 2,226
----- ------- ------- -------- --------- -------- ------- ---------
----- ------- ------- -------- --------- -------- ------- ---------
</TABLE>
<PAGE>
Exhibit 21.1
Jurisdiction
Subsidiaries of Freedom Chemical Company of Incorporation
- ---------------------------------------- ----------------
Hilton Davis Chemical Co. Delaware
Freedom Chemical Diamalt GmbH Germany
Diamalt Pharmorganica PM Limited India
Diamalt S.r.l. Italy
Indiamalt Private Limited India
Freedom Textile Chemicals Co. Delaware
A-Chem (U.K.) Limited England
FCC Acquisition Corp. Delaware
Freedom Textile Chemical Company (South Delaware
Carolina), Inc.
Kalama Chemical, Inc. Washington
Kalama Foreign Sales Corporation Guam
Kalama Specialty Chemicals, Inc. Washington
Freedom Europe B.V. Netherlands
Societe Francaise des Colloides S.A. France
<PAGE>
Exhibit 21.5
Jurisdiction
Subsidiaries of Freedom Chemical Diamalt GmbH of Incorporation
- --------------------------------------------- ----------------
Diamalt Pharmorganica PM Limited India
Diamalt S.r.l. Italy
Indiamalt Private Limited India
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 (File
No. 33-84778) of our report dated March 26, 1996, except as to Note 22(a) for
which the date is October 17, 1996, on our audits of the financial statements
and financial statement schedule of Freedom Chemical Company and Subsidiaries.
We also consent to the reference to our firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Wayne, Pennsylvania
February 13, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
The Board of Directors
Freedom Chemical Company:
We consent to the inclusion of our report dated August
22, 1994, with respect to the consolidated balance sheets
of Kalama Chemical, Inc. and subsidiaries as of May 26,
1994 and September 30, 1993, and the related consolidated
statements of operations, stockholder's equity, and cash
flows for the period from October 1, 1993 to May 26,
1994, and the year ended September 30, 1993, which report
appears in Amendment No. 3 to the Registration Statement
on Form S-1 of Freedom Chemical Company and to the refer-
ence to our firm under the heading "Experts" in the
Registration Statement.
Our report dated August 22, 1994 contains an explanatory
paragraph that states that the Company is involved in
various environmental matters. The ultimate outcome of
certain contingencies cannot presently be determined.
Accordingly, the provision for the total liability that
may result has not been recognized in the consolidated
financial statements.
Our report dated August 22, 1994 also refers to a change
in the method of accounting for income taxes, effective
October 1, 1993.
KPMG Peat Marwick LLP
Seattle, Washington
February 13, 1997
