SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended June 30, 1997
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OR
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from _______________ to _______________
Commission file number 33-84778
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FREEDOM CHEMICAL COMPANY
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 51-0340498
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization Identification No.)
Five Radnor Corporate Center, 100 Matsonford Road, Suite 170,
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Radnor, Pennsylvania 19087
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (610)964-9970
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Mellon Center, Suite 3500, 1735 Market Street, Philadelphia, PA 19103
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(Former Address of Principal Executive Offices, if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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As of August 13, 1997, 156,056 shares of the registrant's Series A Common Stock
and no shares of the registrant's Series B Common Stock were outstanding.
<PAGE>
FREEDOM CHEMICAL COMPANY and SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
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Page
PART I
<S> <C> <C>
Item 1. Consolidated Balance Sheets at December 31, 1996 and June 30, 1997.......................... 3
Consolidated Statements of Operations for the Three Months and Six Months Ended
June 30, 1996 and 1997, respectively.................................................... 4
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1996 and 1997....... 5
Notes to Consolidated Financial Statements.................................................. 6-20
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 21-26
PART II
Item 2. Change in Securities........................................................................ 27
Item 5. Other Information........................................................................... 27
Item 6. Exhibits and Reports on Form 8-K............................................................ 27
</TABLE>
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
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FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997
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ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................... $ 3,554 $ 2,100
Accounts receivable, net of allowance for doubtful accounts
of $456 and $580, respectively................................ 44,249 47,828
Due from shareholders........................................... 22 23
Refundable income taxes......................................... 1,811 413
Inventories..................................................... 53,019 48,030
Prepaid expenses and other current assets....................... 5,251 7,131
Environmental indemnification................................... 492 192
Deferred income taxes........................................... 7,237 7,287
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Total current assets........................................ 115,635 113,004
Property, Plant and Equipment:
Land............................................................ 3,872 3,792
Buildings and improvements...................................... 14,600 15,424
Machinery and equipment......................................... 101,356 110,949
Other........................................................... 11,137 4,637
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130,965 134,802
Less accumulated depreciation..................................... 28,754 34,193
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102,211 100,609
Other assets:
Intangible assets, net.......................................... 34,040 32,867
Environmental indemnification................................... 8 68
Deferred financing costs, net................................... 6,902 6,843
Investments in joint ventures................................... 541 1,484
Other........................................................... 3,577 3,889
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Total assets................................................ $ 262,914 $ 258,764
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LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term debt............................ $ 1,067 $ 1,028
Short-term borrowings........................................... 936 477
Notes payable................................................... 1,098 1,738
Accounts payable................................................ 20,996 21,829
Accrued expenses................................................ 7,889 6,582
Accrued interest................................................ 3,033 3,120
Accrued compensation............................................ 5,787 5,378
Accrued restructuring and other charges......................... 4,627 4,308
Environmental................................................... 1,200 1,200
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Total current liabilities................................... 46,633 45,660
Long-term debt.................................................... 153,560 158,648
Environmental..................................................... 14,550 12,042
Deferred income taxes............................................. 12,259 12,410
Postretirement benefits........................................... 4,416 4,571
Accrued restructuring and other charges........................... 1,437 1,437
Other............................................................. 3,346 1,941
Minority interest................................................. 3,390 3,396
Commitments and contingencies..................................... __ __
Mandatory redeemable preferred stock:
Series B, cumulative, $1,000 par value, authorized 40,000 shares; issued and
outstanding 21,322 shares and 21,421, respectively, stated at liquidation
value of $1,000 per share plus accrued and unpaid dividends of $11,389
and $13,373, respectively....................................... 32,711 34,794
Series C, cumulative, $1,000 par value, authorized 15,000 shares; issued
9,137 shares, outstanding 8,916 shares, stated at liquidation value of
$1,054 per share plus accrued and unpaid dividends of $3,453 and$4,228,
respectively.................................................... 13,083 13,858
Less: Treasury stock, at cost (221 shares of Series C preferred) (262) (262)
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45,532 48,390
Stockholders' deficit:
Common stock:
Series A, $.01 par value, authorized 200,000 shares; issued 154,872 and 156,447
shares respectively, outstanding 154,481 and 156,056 shares, respectively 2 2
Series B, $.01 par value, authorized 10,000 shares; none issued or outstanding __ __
Additional paid-in capital...................................... 10,846 8,566
Accumulated deficit............................................. (30,444) (33,849)
Cumulative translation adjustment............................... (397) (2,234)
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(19,993) (27,515)
Less: Stockholder notes receivable................................ (2,113) (2,113)
Treasury stock, at cost (391 shares of Series A common)......... (46) (46)
Minimum pension liability....................................... (57) (57)
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Total stockholders' deficit....................................... (22,209) (29,731)
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Total liabilities and stockholders' deficit................ $ 262,914 $ 258,764
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</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months, Ended
June 30, June 30,
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1996 1997 1996 1997
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<S> <C> <C> <C> <C>
Net sales.................................................. $ 78,658 $ 75,617 $ 155,787 $146,292
Cost of goods sold (excluding Inventory valuation charge).. 59,898 57,597 116,482 112,289
Inventory valuation charge................................. - 2,476 - 3,155
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Gross profit......................................... 18,760 15,544 39,305 30,848
Selling, general and administrative expense................ 11,439 10,432 24,158 21,389
Non-cash compensation expense ............................. 38 26 75 32
Research and development expense........................... 1,264 1,236 2,499 2,272
Restructuring and other charges ........................... - 2,770 - 2,858
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Operating income ................................... 6,019 1,080 12,573 4,297
Interest and debt expense.................................. 3,362 4,462 6,789 8,894
Other income............................................... 226 149 226 475
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Income (loss) before minority interest
and income taxes.................................. 2,883 (3,233) 6,010 (4,122)
Minority interest.......................................... 67 67 126 132
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Income (loss) before income taxes ................ 2,816 (3,300) 5,884 (4,254)
Provision for income taxes................................. 348 227 1,443 279
Equity in income of joint ventures......................... 337 581 455 1,128
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Net income (loss)................................ 2,805 (2,946) 4,896 (3,405)
Less: preferred dividends................................. 1,253 1,411 2,468 2,761
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Net income (loss) applicable to common shares......... $ 1,552 $ (4,357) $ 2,428 $ (6,166)
======= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
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1996 1997
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ...................................... $ 4,896 $ (3,405)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization........................... 6,719 7,228
Provision for doubtful accounts......................... 144 19
(Gain) loss on sale of fixed assets..................... ( 87) 125
Minority interest....................................... 126 132
Non-cash compensation expense........................... 75 32
Equity decrease (increase) of joint ventures............ 367 (1,060)
Deferred income taxes................................... ( 455) 97
Inventory valuation charge.............................. _ 3,155
Restructuring and other charges, net of payments........ _ 313
Other changes that provided (used) cash:
Accounts receivable................................. ( 11,303) (5,067)
Inventories......................................... ( 8,040) 1,351
Prepaid expenses and other current assets........... ( 226) (2,313)
Accounts payable, accrued expenses
and other liabilities................................. 8,722 1,104
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Net cash provided by operating activities.................. 938 1,711
Cash flows from investing activities:
Capital expenditures................................. ( 3,986) (7,093)
Decrease in investments in joint ventures............ 41 24
Proceeds from sale of capital equipment.............. 1,659 8
Payments for environmental liabilities............... ( 1,355) (2,508)
Proceeds from environmental indemnification.......... 655 240
Other................................................ 24 78
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Net cash used in investing activities....................... ( 2,962) (9,251)
Cash flows from financing activities:
Issuance of common stock................................ -- 269
Revolving borrowings under Credit Agreement............. 31,000 93,335
Revolving repayments under Credit Agreement............ ( 29,500) (86,495)
Term loan repayments under Credit Agreement............ ( 3,547) --
Short-term borrowings under European Facility........... 4,890 --
Repayments of short-term borrowing
under European Facility................................ ( 3) --
Purchase of treasury stock.............................. ( 87) --
Payment of registration costs........................... -- (733)
Repayment of capital lease obligations.................. ( 71) (12)
Payments for financing costs............................ ( 33) (55)
Dividends paid to minority interests.................... ( 130) (129)
Other................................................... ( 26) --
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Net cash provided by financing activities.................. 2,493 6,180
Effect of exchange rate changes on cash..................... ( 66) (94)
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Net decrease in cash and cash equivalents................... 403 (1,454)
Cash and cash equivalents, beginning of period.............. 1,450 3,554
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Cash and cash equivalents, end of period.................... $ 1,853 $ 2,100
=========== ==========
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)
1. Description of Business
Freedom Chemical Company, the Registrant ("FCC"; collectively with its
subsidiaries referred to as the "Company") was incorporated in Delaware on April
14, 1992 for the purpose of acquiring specialty chemical companies which
manufacture and market specialty chemical products for diverse applications. The
Company focuses globally on niche markets where it has strong market positions,
which have relatively few competitors and where there are significant barriers
to entry. In addition, the Company's products are often very important to the
performance of its customers' products, but typically represent a relatively
small percentage of their total costs. The Company has five core product lines:
(i) Food and Personal Care Ingredients; (ii) Pharmaceutical Intermediates and
Natural Additives; (iii) Specialty Organic Chemicals and Intermediates; (iv)
Organic Pigments and Dyes; and (v) Textile and Paper Chemicals.
2. Accounting Policies
Principles of Consolidation
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The accompanying consolidated financial statements are unaudited and have
been prepared by management pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, these
consolidated financial statements contain all of the adjustments, consisting of
normal recurring adjustments, necessary to present fairly, in summarized form,
the financial position of the Company as of June 30,1997; the results of its
operations for the three and six months ended June 30, 1996 and 1997,
respectively; and changes in its cash flows for the six months ended June 30,
1996 and 1997, respectively. The results of operations for the three and six
months periods ended June 30, 1997, respectively, are not necessarily indicative
of the results that may be expected for the year ending December 31, 1997. The
financial information presented herein should be read in conjunction with the
consolidated financial statements included in the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1996.
The consolidated financial statements include the accounts of FCC and its
subsidiaries which include: Freedom Textile Chemicals Co. and subsidiaries
("FTCC"), Hilton Davis Chemical Company ("HDCC"), Kalama Chemical, Inc. and
subsidiaries ("KCI"), Freedom Chemical Diamalt GmbH ("Diamalt") and subsidiaries
(collectively "FCD"), Freedom Europe B.V. ("BV") and Diamalt Inc. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Forward Exchange Contracts
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The Company enters into forward exchange contracts primarily as hedges
relating to identifiable currency positions. These financial instruments are
designed to minimize exposure and reduce risk from exchange rate fluctuations in
the regular course of business. Gains and losses on forward exchange contracts
that hedge exposures on firm foreign currency commitments are deferred and
recognized as adjustments to the bases of those assets. Gains and losses on
forward exchange contracts which hedge foreign currency assets or liabilities
are recognized in income as incurred. Such amounts effectively offset gains and
losses on the foreign currency assets or liabilities that are hedged. The cash
flow from such contracts is classified in the same category as the transaction
hedged in the statements on consolidated cash flows.
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)
3. Inventories
A summary of the major classifications of inventories is as follows:
December 31, June 30,
1996 1997
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Raw materials, work in process $ 27,265 $ 26,313
Finished goods 31,888 25,922
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59,153 52,235
Less: reserves ( 6,134) (4,205)
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$ 53,019 $ 48,030
========== =========
4. Inventory Valuation Charge
During the six months ended June 30, 1997, the Company recorded inventory
valuation charges of $3,155 related to write-downs of certain products in its
Pharmaceutical Intermediates and Natural Additives group. The write-downs
resulted from an evaluation of lower of cost or market due primarily to
industry-wide overproduction and declines in market values partially associated
with recent changes in government regulation governing prescription
reimbursement.
In March 1997, a charge of $679 was recorded based on an analysis of
conditions at that time. An anticipated improvement in market conditions during
the three months ended June 30, 1997 did not occur. Accordingly, management
reviewed the inventory balances at June 30, 1997 and recorded an additional
charge of $2,476. This charge was classified as an inventory valuation charge
and the charges at March 31, 1997, which were included in cost of goods sold,
have been reclassified for comparative purposes with the June 30, 1997
presentation.
5. New Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 129, "Disclosure of
Information about Capital Structure" which becomes effective for financial
statements for periods ending after December 15, 1997. SFAS No. 129 established
certain required disclosures related to information about securities,
liquidation preference of preferred stock and redeemable stock. The Company
currently discloses the capital structure information required by SFAS 129.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" which becomes effective for financial statements for periods beginning
after December 15, 1997. SFAS No. 130 established standards for reporting and
display of comprehensive income and its components (revenues, expense, gains and
losses) in a full set of general-purpose financial statements. The statement
requires an enterprise to classify items of other comprehensive income by their
nature in a financial statement and display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of the statement of financial position. The
implementation of this standard is not expected to have a material effect on the
Company's financial statements.
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)
5. New Pronouncements, continued
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" which becomes effective for financial
statements for periods beginning after December 15, 1997. SFAS No. 131
established standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also established standards
for related disclosures about products and services, geographical areas, and
major customers. The implementation of this standard is not expected to have a
material effect on the Company's financial statements.
6. Restructuring and Other Charges
In April 1997, the Company announced a plan to close its Vernon, France
facility. This closure was completed in June 1997. Manufacturing production and
certain manufacturing equipment were transferred to other locations as part of
the closure plan. The Company recorded restructuring and other charges of
$2,606. These charges include costs of $1,813 for severance to employees, $660
for the write-off of fixed assets and inventory, and $133 for other charges,
primarily for preparing the site for sale. The balance of this restructuring
liability as of June 30, 1997 was $2,229 and should be paid or settled during
the 1997 fiscal year.
As of June 30, 1997, the Company recorded charges totaling $332 as a result
of a marketing revitalization program the Company initiated primarily for its
Organic Pigments and Dyes product group. The Company expects to record
approximately $600 in 1997 for this program. These charges will be recorded as
incurred throughout the remainder of the year.
7. Environmental Contingencies
Contingencies exist for the Company and certain of its subsidiaries because
of legal and administrative proceedings arising out of the acquisition of
businesses and the normal course of business. Such contingencies include
environmental proceedings directly and indirectly against the Company or its
subsidiaries as well as matters internally identified by the Company. The
resolution of such matters often spans several years and frequently includes
regulatory oversight and/or adjudication. Additionally, many remediation
requirements are not fixed and are likely to be affected by future
technological, site and regulatory developments. Consequently, the ultimate
extent of liabilities with respect to such matters as well as the timing of cash
disbursements cannot be determined with certainty.
In connection with the purchase of a number of the Company's facilities,
contractual rights were obtained to indemnify the Company for certain types of
environmental pollution relating to those facilities. As more fully described
below, the Company consequently believes that a portion of the costs incurred in
connection with environmental liabilities existing prior to the Company's
ownership and remediation actions that may be required relating to the Company's
past and present properties will be the responsibility of other parties.
Accordingly, the Company believes that future liabilities over the amounts
accrued, relating to environmental conditions existing prior to the Company's
ownership and remediation actions, are not likely to have a material adverse
effect on the financial position of the Company, although the effect on results
of operations and cash flows could be material when these conditions are
resolved in a future period.
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)
7. Environmental Contingencies, continued
The Company has sent wastes from its operations to various third-party
waste disposal sites. From time to time the Company receives notices from
representatives of governmental agencies and private parties contending that the
Company is potentially liable for a portion of the investigation and remediation
costs and damages at formerly owned or operated sites and third-party sites,
some of which are discussed herein. The Company does not believe that its
liabilities in connection with such third-party sites, either individually or in
the aggregate, will have a material adverse effect on the Company's financial
position, results of operations or cash flows.
FTCC
In order to consolidate its textile operations, in 1995, the Company
transferred the textile assets of HDCC located in Cowpens, South Carolina,
acquired as a part of the HDCC acquisition, to FTCC. In 1994, the Company
reached a tentative agreement with the South Carolina Department of Health and
Environmental Control on an administrative consent agreement requiring the
former owner of the Cowpens facility prior to HDCC to take corrective measures
and conduct additional investigation, and the Company and the State of South
Carolina agreed on a work plan for assessment and remediation. As part of the
FTCC Asset Purchase Agreement, the former owner of the property prior to HDCC
agreed that the costs to be expended for the investigation and remediation of
the existing environmental conditions would be deducted from the final purchase
price payment due to them of $350.
At the time of the acquisition, the Company recorded a liability for $350
relating to the payment due to the former owners. In 1994, initial
investigations disclosed offsite groundwater contamination. The Company hired an
environmental consultant to manage this project and is developing an
investigative plan. While the Company believes that any remediation costs
incurred may be recovered from the prior owners, a $1,900 charge was recorded in
1995 for estimated remediation costs since any recoveries or reimbursements from
the prior owners are not currently determinable. FTCC believes the risk of loss
exposure is up to $6,500.
HDCC
In connection with the acquisition of HDCC, Sterling Winthrop, Inc.
("SWI"), a former owner of HDCC, entered into an Environmental Matters Agreement
("EMA") with HDCC, whereby SWI has taken responsibility for environmental
conditions that predate 1987, with certain exceptions, as well as for
remediation of the land at HDCC's Cincinnati facility pursuant to an October
1986 Consent Decree entered into between the State of Ohio and SWI and its
subsidiary.
Under the EMA, HDCC has agreed to share responsibility with SWI for certain
specific environmental conditions. Also, HDCC is responsible for environmental
conditions that postdate 1986. In addition, PMC, Inc. ("PMC"), another prior
owner of HDCC, has placed $1,000 of the purchase price paid by the Company in an
escrow account to indemnify the Company against breaches of representations and
warranties contained in the Stock Purchase Agreement between PMC and the
Company, including schedules thereto, to the extent such liabilities (including
certain claims not related to the environment) exceeded $200 in the aggregate
and subject to a total cap of $1,000 (excluding certain claims not related to
the environment). HDCC does not believe that it will be required to incur
significant liability in connection with such environmental conditions.
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)
7. Environmental Contingencies, continued
KCI
KCI owns three manufacturing facilities: Kalama, Washington, Garfield, New
Jersey, and Beaufort, South Carolina. Operations at these three sites, including
operations by subsidiaries formerly owned by KCI, have generated environmental
liabilities. The Stock Purchase Agreement between the Company and BC Sugar
whereby the Company acquired KCI (the "KCI Stock Purchase Agreement"), requires
BC Sugar to indemnify and reimburse the Company for certain environmental
liabilities, as discussed in more detail below.
The Company's Kalama, Washington facility is subject to an agreed order
between KCI and the Environmental Protection Agency ("EPA") requiring KCI to
remediate portions of the site and to limit potential offsite contamination,
pursuant to the Resource Conservation and Recovery Act ("RCRA"). The EPA has
approved one of Kalama's interim corrective measures work plans and initial RCRA
facility investigation report describing proposed remediation of the site.
Capital equipment has been installed in part of the facility and remediation is
ongoing. The Company believes that the interim corrective measures will provide
most if not all of the remediation required by the EPA. As of June 30, 1997, KCI
has accrued approximately $5,900 for this liability and believes the risk of
loss exposure is up to $18,200. The associated indemnification as of June 30,
1997 is $600 to $7,300 based on the risk of loss exposure.
The Company's Garfield facility is subject to an administrative consent
order with the State of New Jersey requiring remediation of portions of the site
and potentially requiring remediation of areas offsite, pursuant to the New
Jersey Industrial Site Recovery Act ("ISRA"). The Garfield facility cleanup is
also subject to a Settlement Agreement (the "Tenneco Settlement Agreement"),
dated April 28, 1994, to terminate litigation between KCI and Tenneco Polymers,
Inc. ("Tenneco Polymers"), the successor in interest of the prior owner of the
site. The Tenneco Settlement Agreement requires Tenneco Polymers to conduct the
cleanup of the facility required by the State of New Jersey and to pay for 80
percent of the cleanup costs, with KCI responsible for the remaining 20 percent
of such costs. BC Sugar will remain responsible for certain of KCI's portion of
the cleanup costs pursuant to the KCI Stock Purchase Agreement as described
below. Tenneco Polymers is currently conducting additional site investigation
and discussing with the State of New Jersey the nature and scope of the required
remediation of the Garfield site. KCI has terminated manufacturing operations at
this facility.
As of June 30, 1997, KCI has accrued approximately $500 for this liability
and believes the risk of loss exposure is up to $900. The associated
indemnification as of June 30, 1997 is $200 to $400 based on the risk of loss
exposure.
The Company's Beaufort facility has been listed on the EPA's National
Priorities List pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"). KCI's subsidiary, Kalama Specialty
Chemicals, Inc. ("KSCI"), has conducted environmental studies of the site to
identify the extent of contamination and to evaluate the feasibility of
remediation alternatives, pursuant to an administrative order of consent between
KSCI and the EPA. The EPA and KSCI have reached agreement on a consent decree
under which KSCI is to perform the remediation strategy selected by the EPA.
Pilot equipment was installed and test work commenced in 1995. BC Sugar will
remain responsible for certain of KCI's portion of the cleanup costs pursuant to
the KCI Stock Purchase Agreement as described below. Manufacturing operations at
this facility have also ceased. As of June 30, 1997, KCI has accrued
approximately $3,800 for this liability and believes the risk of loss exposure
is up to $5,800. The associated indemnification as of June 30, 1997 is $400 to
$900 based on the risk of loss exposure.
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)
7. Environmental Contingencies, continued
KCI and its subsidiaries have also been named as potentially responsible
parties ("PRPs") pursuant to CERCLA or similar state laws at five sites not
owned by KCI at which it is alleged that hazardous substances generated by KCI
or its subsidiaries were disposed. These sites are being remediated or studied
for remediation. KCI is cooperating with the relevant governmental agency and
other PRPs in the investigation and cleanup at each of these sites. Various
contingencies such as the incomplete status of investigation, the uncertainty of
remediation selection and effectiveness, the search for additional PRPs, the
absence of binding commitments allocating liability among PRPs and the joint and
several nature of liability under CERCLA make it impossible to predict at this
time KCI's total liability at these sites. KCI or one of its subsidiaries has
also been named as a PRP at sites under which an indemnitor (other than BC
Sugar) has agreed to undertake the defense and liability. Finally, claims of
liability have been received at other sites for which KCI has denied
responsibility. However, BC Sugar is responsible for certain liabilities
incurred at these Superfund sites pursuant to the KCI Stock Purchase Agreement,
as discussed in more detail below.
The KCI Stock Purchase Agreement provides certain indemnifications and
related provisions, which address these liabilities. Pursuant to the agreement,
BC Sugar remains responsible for the costs of investigation, negotiations with
government agencies, and installation of the capital expenditure component of
the cleanup required by the government at each of the three facilities currently
owned by KCI and its subsidiaries (i.e. Kalama, Garfield and Beaufort). BC Sugar
is also responsible for a total of 50 percent of the costs of operation and
maintenance arising from the capital expenditure component of cleanup at these
three sites until five years after the installation of the capital expenditure
component of each site.
In addition, BC Sugar is responsible for all costs incurred as a result of
KCI's liability at the offsite Superfund sites including the five at which KCI
is a cooperating PRP, sites at which an indemnitor other than BC Sugar has
agreed to accept responsibility and other identified sites at which KCI has
received claims but is currently denying liability, provided that the sites were
identified in the schedules to the Kalama Stock Purchase Agreement. BC Sugar's
liability for these sites continues until three years after the installation of
capital expenditures at all of the three currently owned facilities, but in any
event no later than May 26, 2004.
In the KCI Stock Purchase Agreement, BC Sugar also agreed to remain
responsible for certain liabilities arising from violations of environmental
laws occurring before May 26, 1994, at sites currently or formerly owned by KCI
to the extent such liabilities in the aggregate exceed $2,000 and claims are
made by the Company for such reimbursement before May 26, 1996. However, the KCI
Stock Purchase Agreement also includes certain warranties and representations by
BC Sugar that KCI was in compliance with environmental laws as of the closing
date (May 26, 1994), except as set forth in a schedule accompanying and
incorporated into the KCI Stock Purchase Agreement. BC Sugar further agreed to
indemnify the Company and KCI against liabilities arising out of the breach of
these representations and warranties to the extent each such liability exceeded
$50 individually and all such liabilities exceeded $600 in the aggregate, and
provided any such claim was made by the Company or KCI before May 26, 1996. All
of the indemnifications and other provisions whereby BC Sugar agreed to remain
responsible for costs in the KCI Stock Purchase Agreement, including those
described above, are subject to an aggregate limit of $44,000 and including
certain costs which may be directly incurred or paid by BC Sugar. The KCI Stock
Purchase Agreement required BC Sugar to establish a trust fund to provide
reimbursement for expenditures for environmental liabilities by KCI and the
Company for which BC Sugar is liable under the agreement.
As a result of the KCI Stock Purchase Agreement and the Tenneco Settlement
Agreement, the Company does not believe that additional liabilities, if any, to
be incurred by KCI under environmental laws would be material to the Company's
financial position, results of operations or cash flows.
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)
7. Environmental Contingencies, continued
In May 1991, the EPA issued a compliance order to KCI alleging nine
violations of the Clean Air Act, dating back to 1984, at the Kalama facility. In
July 1994, KCI was informally notified by the EPA that these violations (and
possibly other alleged violations of the Clean Air Act) had been referred to the
Department of Justice for possible initiation of an enforcement action. In 1996,
the Company signed a consent agreement with the Department of Justice, which
contemplated the payment of a penalty as well as an additional payment to fund
supplemental environmental projects. These amounts were included in the
liabilities established by the Company in connection with the acquisition of
KCI. The consent decree was finalized in early 1997 and all required payments
have been made totaling approximately $1,700. The Company has made a claim to BC
Sugar for indemnification in this matter.
8. Condensed Consolidating Financial Statements
The following condensed consolidating financial data illustrates the
composition of the consolidated financial statements. The Parent is FCC. The
U.S. Guarantor Subsidiaries include all domestic subsidiaries of FCC including
the following: FTCC and certain of its subsidiaries (Freedom Textile Chemical
Company (South Carolina), Inc. and FCC Acquisition Corp.), HDCC, KCI and its
subsidiaries (Kalama Specialty Chemicals, Inc. and Kalama Foreign Sales
Corporation) and Diamalt Inc. The German Guarantor Subsidiary is Diamalt,
excluding its subsidiaries. The Non-Guarantor Subsidiaries include the
following: A-Chem (U.K.) Limited (a subsidiary of FTCC), BV, Societe Francaise
Des Colloides, S.A. (a subsidiary of BV), Diamalt Pharmorganica Pvt. Limited (a
subsidiary of Diamalt), Diamalt Srl (a subsidiary of Diamalt), Indiamalt Private
Limited (a subsidiary of Diamalt). The U.S. and German Guarantor Subsidiaries
are wholly owned by the Parent.
Investments in subsidiaries are accounted for by the Parent, the U.S.
Guarantor Subsidiaries and the German Guarantor Subsidiary on an unconsolidated
basis using the equity method for purposes of the consolidating presentation.
Earnings of subsidiaries are therefore reflected in the Parent's, U.S. Guarantor
Subsidiaries' and German Guarantor Subsidiary's investment accounts and
earnings. Income tax expense (benefit) is allocated among the consolidating
entities based upon taxable income (loss) by jurisdiction within each group.
The principal elimination entries eliminate investments in subsidiaries and
intercompany balances and transactions. Separate financial statements of the
U.S. Guarantor Subsidiaries, the German Guarantor Subsidiary, and the
Non-Guarantor Subsidiaries are not presented because management has determined
that such financial statements would not be material to investors.
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Condensed Consolidating Balance Sheet
As of December 31, 1996
----------------------------------------------------------------------
U.S. German Non
Guarantor Guarantor Guarantor
Parent Subsidiaries Subsidiary Subsidiaries Eliminations Consolidated
------ ------------- ---------- ------------ ------------ ------------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents......... $88 $344 $2,218 $992 $(88) $3,554
Accounts receivable, net.......... -- 29,933 11,458 2,858 -- 44,249
Due from affiliates............... 6,294 -- -- 1,566 (7,860) --
Due from shareholder.............. 17 5 -- -- -- 22
Refundable income taxes........... 1,811 -- 10 -- (10) 1,811
Inventories....................... -- 33,522 17,481 2,069 (53) 53,019
Prepaid expenses
and other current assets.......... 63 2,164 2,858 410 (244) 5,251
Environmental indemnification..... -- 492 -- -- -- 492
Deferred income taxes............. 609 6,492 -- 136 -- 7,237
-------- -------- ------- ------- -------- --------
Total current assets.......... 8,882 72,952 34,025 8,031 (8,255) 115,635
Property, Plant and Equipment:
Land.............................. -- 2,610 438 824 -- 3,872
Buildings and improvements........ -- 13,001 704 895 -- 14,600
Machinery and equipment........... -- 88,186 9,047 4,123 -- 101,356
Other............................. 376 8,805 733 1,223 -- 11,137
-------- -------- ------- ------- -------- --------
376 112,602 10,922 7,065 -- 130,965
Less accumulated depreciation......... 142 25,680 1,544 1,388 -- 28,754
-------- -------- ------- ------- -------- --------
234 86,922 9,378 5,677 -- 102,211
Other assets:
Intangible assets, net............ 335 33,063 267 59 316 34,040
Environmental indemnification..... -- 8 -- -- -- 8
Deferred financing costs, net..... -- 5,946 948 8 -- 6,902
Investments in joint ventures..... -- -- 541 -- -- 541
Deferred income taxes............. 3,204 -- -- -- (3,204) --
Other............................. 148 3,163 220 46 -- 3,577
Notes receivable, subsidiaries........ 127,943 6,578 539 -- (135,060) --
Investment in subsidiaries............ 25,405 2,752 3,329 -- (31,486) --
-------- -------- ------- ------- -------- --------
Total assets.................. $166,151 $211,384 $49,247 $13,821 $(177,689) $262,914
======== ======== ======= ======= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of
long-term debt.................... $-- $26 $-- $1,041 $-- $1,067
Short-term borrowings............. -- -- 458 478 -- 936
Notes payable..................... 2 773 -- 323 -- 1,098
Accounts payable.................. 186 15,654 4,072 1,169 (85) 20,996
Due to affiliates................. -- 479 7,161 220 (7,860) --
Accrued expenses.................. 428 6,686 730 298 (253) 7,889
Accrued interest.................. 2,897 -- 104 32 -- 3,033
Accrued compensation.............. 345 4,184 750 508 -- 5,787
Accrued restructuring and
other charges..................... 953 3,016 557 101 -- 4,627
Environmental..................... -- 1,200 -- -- -- 1,200
-------- -------- ------- ------- -------- --------
Total current liabilities............. 4,811 32,018 13,832 4,170 (8,198) 46,633
Long-term debt........................ 134,500 -- 18,591 469 -- 153,560
Environmental......................... -- 14,550 -- -- -- 14,550
Deferred income taxes................. -- 15,416 -- 47 (3,204) 12,259
Postretirement benefits............... -- 4,416 -- -- -- 4,416
Accrued restructuring
and other charges..................... -- 1,437 -- -- -- 1,437
Notes payable......................... -- 119,676 13,425 1,959 (135,060) --
Other................................. 2,456 173 456 261 -- 3,346
Minority interest..................... -- -- -- 290 3,100 3,390
Commitments and contingencies......... -- -- -- -- -- --
Mandatory redeemable preferred stock.. 45,794 3,079 -- -- (3,079) 45,794
Less: Treasury stock............. (262) -- -- -- -- (262)
-------- -------- ------- ------- -------- --------
45,532 3,079 -- -- (3,079) 45,532
Stockholders' equity (deficit):
Common stock.......................... 2 1,200 1,291 2,333 (4,824) 2
Preferred stock....................... -- 3,839 -- -- (3,839) --
Additional paid-in capital............ 10,846 33,928 8,241 2,761 (44,930) 10,846
Retained earnings
(accumulated deficit)................. (29,980) (18,148) (6,097) 1,648 22,133 (30,444)
Cumulative translation adjustment..... -- -- (492) (117) 212 (397)
Less: Stockholder note receivable..... (1,913) (200) -- -- -- (2,113)
Treasury stock, at cost...... (46) -- -- -- -- (46)
Minimum pension liability.... (57) -- -- -- -- (57)
-------- -------- ------- ------- -------- --------
Total stockholders' equity (deficit).. (21,148) 20,619 2,943 6,625 (31,248) (22,209)
-------- -------- ------- ------- -------- --------
Total liabilities and
stockholders' equity (deficit) $166,151 $211,384 $49,247 $13,821 $(177,689) $262,914
======== ======== ======= ======= ========= ========
</TABLE>
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Condensed Consolidating Balance Sheet
As of June 30, 1997
----------------------------------------------------------------------
U.S. German Non
Guarantor Guarantor Guarantor
Parent Subsidiaries Subsidiary Subsidiaries Eliminations Consolidated
------ ------------- ---------- ------------ ------------ ------------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents......... $16 $(6) $731 $1,360 $(1) $2,100
Accounts receivable, net.......... -- 34,283 10,072 3,462 11 47,828
Due from affiliates............... 6,449 (59) 419 1,464 (8,273) --
Due from shareholder.............. 23 -- -- -- -- 23
Refundable income taxes........... 413 -- -- -- -- 413
Inventories....................... -- 32,918 14,528 716 (132) 48,030
Prepaid expenses and
other current assets.............. 489 3,034 2,554 1,056 (2) 7,131
Environmental indemnification..... -- 192 -- -- -- 192
Deferred income taxes............. 609 6,617 -- 61 -- 7,287
-------- -------- ------- ------- -------- --------
Total current assets.......... 7,999 76,979 28,304 8,119 (8,397) 113,004
Property, Plant and Equipment:
Land.............................. -- 2,610 391 791 -- 3,792
Buildings and improvements........ -- 13,192 627 1,605 -- 15,424
Machinery and equipment........... -- 97,237 7,950 5,762 -- 110,949
Other............................. 529 2,689 971 448 -- 4,637
-------- -------- ------- ------- -------- --------
529 115,728 9,939 8,606 -- 134,802
Less accumulated depreciation......... 192 30,661 1,727 1,613 -- 34,193
-------- -------- ------- ------- --------- -------
337 85,067 8,212 6,993 -- 100,609
Other assets:
Intangible assets, net............ 289 32,175 155 1 247 32,867
Environmental indemnification..... -- 68 -- -- -- 68
Deferred financing costs, net..... 439 5,595 803 6 -- 6,843
Investments in joint ventures..... -- -- 1,484 -- -- 1,484
Deferred income taxes............. 3,204 -- -- -- (3,204) --
Other............................. 159 3,492 196 42 -- 3,889
Notes receivable, subsidiaries........ 134,037 6,578 980 -- (141,595) --
Investment in subsidiaries............ 16,884 866 3,532 -- (21,282) --
-------- -------- ------- ------- ---------- --------
Total assets.................. $163,348 $210,820 $43,666 $15,161 $(174,231) $258,764
======== ======== ======= ======= ========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt $-- $8 $-- $1,020 $-- $1,028
Short-term borrowings............. -- -- -- 477 -- 477
Notes payable..................... 4 1,448 -- 286 -- 1,738
Accounts payable.................. 453 17,436 2,863 1,079 (2) 21,829
Due to affiliates................. -- 478 7,003 792 (8,273) --
Accrued expenses.................. 836 4,754 631 358 3 6,582
Accrued interest.................. 2,957 -- 107 56 -- 3,120
Accrued compensation.............. 25 3,557 1,066 730 -- 5,378
Accrued restructuring
and other charges................. 1,144 935 46 2,183 -- 4,308
Environmental..................... -- 1,200 -- -- -- 1,200
-------- -------- ------- ------- -------- --------
Total current liabilities............. 5,419 29,816 11,716 6,981 (8,272) 45,660
Long-term debt........................ 137,000 -- 20,364 1,284 -- 158,648
Environmental......................... -- 12,042 -- -- -- 12,042
Deferred income taxes................. -- 15,541 -- 73 (3,204) 12,410
Postretirement benefits............... -- 4,571 -- -- -- 4,571
Accrued restructuring
and other charges................. -- 1,437 -- -- -- 1,437
Notes payable......................... -- 125,599 13,425 2,571 (141,595) --
Other................................. 1,089 228 510 114 -- 1,941
Minority interest..................... -- -- -- 291 3,105 3,396
Commitments and contingencies......... -- -- -- -- -- --
Mandatory redeemable preferred stock:. 48,652 3,082 -- -- (3,082) 48,652
Less: Treasury stock.................. (262) -- -- -- -- (262)
-------- -------- ------- ------- -------- --------
48,390 3,082 -- -- (3,082) 48,390
Stockholders' equity (deficit):
Common stock ......................... 2 1,200 1,291 2,333 (4,824) 2
Preferred stock....................... -- 4,041 -- -- (4,041) --
Additional paid-in capital............ 8,566 33,927 8,241 2,761 (44,929) 8,566
Retained earnings (accumulated deficit) (35,102) (20,464) (9,958) (758) 32,433 (33,849)
Cumulative translation adjustment.... -- -- (1,923) (489) 178 (2,234)
Less: Stockholder note receivable.... (1,913) (200) -- -- -- (2,113)
Treasury stock, at cost...... (46) -- -- -- -- (46)
Minimum pension liability.... (57) -- -- -- -- (57)
-------- -------- ------- ------- -------- --------
Total stockholders' equity (deficit).. (28,550) 18,504 (2,349) 3,847 (21,183) (29,731)
-------- -------- ------- ------- -------- --------
Total liabilities and
stockholders' equity (deficit) $163,348 $210,820 $43,666 $15,161 $(174,231) $258,764
======== ======== ======= ======= ========= ========
</TABLE>
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Operations
For the Three Months Ended June 30, 1996
----------------------------------------------------------------------
U.S. German Non
Guarantor Guarantor Guarantor
Parent Subsidiaries Subsidiary Subsidiaries Eliminations Consolidated
------ ------------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales........................................ $ -- $56,169 $20,519 $ 3,750 $(1,780) $78,658
Cost of goods sold (excluding
Inventory valuation charge).................. -- 43,150 15,920 2,608 (1,780) 59,898
Inventory valuation charge....................... -- -- -- -- -- --
------- ------ ------- ------- ------ -------
Gross profit................................. -- 13,019 4,599 1,142 -- 18,760
Selling, general and administrative expense...... 873 6,859 3,131 649 (73) 11,439
Non-cash compensation expense.................... 38 -- -- -- -- 38
Research and development expense................. -- 893 321 50 -- 1,264
------- ------ ------- ------- ------ -------
Operating income (loss)...................... (911) 5,267 1,147 443 73 6,019
Interest and debt expense (income)............... (116) 2,794 602 81 1 3,362
Other income (expense)........................... 4,859 (4,620) 306 (165) (154) 226
Equity in income (loss) of subsidiary............ (542) 613 21 -- (92) --
------- ------- ------- ------- ------ -------
Income (loss) before minority interest
and income taxes............................ 3,522 (1,534) 872 197 (174) 2,883
Minority interest................................ -- -- -- -- 67 67
------- ------- ------- ------- ------ -------
Income (loss) before income taxes............ 3,522 (1,534) 872 197 (241) 2,816
Provision (benefit) for income taxes............. 507 (313) 1 92 61 348
Equity in income of joint ventures............... -- -- 337 -- -- 337
------- ------- ------- ------- ------ -------
Net income (loss)............................ 3,015 (1,221) 1,208 105 (302) 2,805
Less: preferred dividends........................ 1,253 -- -- -- -- 1,253
------- ------- ------- ------- ------ -------
Net income (loss) applicable to common shares $ 1,762 $(1,221) $ 1,208 $ 105 $ (302) $ 1,552
======= ======= ======= ======= ======= =======
</TABLE>
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Operations
For the Three Months Ended June 30, 1997
----------------------------------------------------------------------
U.S. German Non
Guarantor Guarantor Guarantor
Parent Subsidiaries Subsidiary Subsidiaries Eliminations Consolidated
------ ------------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales ........................................ $ -- $ 59,552 $ 14,875 $ 4,192 $ (3,002) $ 75,617
Cost of goods sold (excluding
Inventory valuation charge) .................. -- 44,097 13,449 3,516 (3,465) 57,597
Inventory valuation charge ....................... -- -- 2,476 -- -- 2,476
-------- -------- -------- -------- -------- --------
Gross profit ................................. -- 15,455 (1,050) 676 463 15,544
Selling, general and administrative expense ...... 716 7,126 2,151 610 (171) 10,432
Non-cash compensation expense .................... 26 -- -- -- -- 26
Research and development expense ................. -- 960 239 37 -- 1,236
Restructuring and other charges .................. -- 244 -- 2,526 -- 2,770
-------- -------- -------- -------- -------- --------
Operating income (loss) ...................... (742) 7,125 (3,440) (2,497) 634 1,080
Interest and debt expense ........................ 85 3,315 1,004 58 -- 4,462
Other income (expense) ........................... 2,588 (2,355) 269 (91) (262) 149
Equity in income (loss) of subsidiary ............ (6,498) (1,508) 399 -- 7,607 --
-------- -------- -------- -------- -------- --------
Income (loss) before minority
interest and income taxes ................. (4,737) (53) (3,776) (2,646) 7,979 (3,233)
Minority interest ................................ -- -- -- -- 67 67
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes ............ (4,737) (53) (3,776) (2,646) 7,912 (3,300)
Provision (benefit) for income taxes ............. (256) 579 (1) 95 (190) 227
Equity in income of joint ventures ............... -- -- 581 -- -- 581
-------- -------- -------- -------- -------- --------
Net income (loss) ............................ (4,481) (632) (3,194) (2,741) 8,102 (2,946)
Less: preferred dividends ........................ 1,411 169 -- -- (169) 1,411
-------- -------- -------- -------- -------- --------
Net income (loss) applicable to common shares $ (5,892) $ (801) $ (3,194) $ (2,741) $ 8,271 $ (4,357)
======== ======== ======== ======== ======== ========
</TABLE>
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Operations
For the Six Months Ended June 30, 1996
----------------------------------------------------------------------
U.S. German Non
Guarantor Guarantor Guarantor
Parent Subsidiaries Subsidiary Subsidiaries Eliminations Consolidated
------ ------------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales ...................................... $ -- $ 112,438 $ 38,934 $ 7,382 $ (2,967) $ 155,787
Cost of goods sold ............................. -- 84,565 29,585 5,243 (2,911) 116,482
Inventory valuation charge ..................... -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Gross profit ............................... -- 27,873 9,349 2,139 (56) 39,305
Selling, general and administrative expense .... 1,800 14,939 6,320 1,355 (256) 24,158
Noncash compensation expense ................... 75 -- -- -- -- 75
Research and development expense ............... -- 1,765 634 100 -- 2,499
--------- --------- --------- --------- --------- ---------
Operating income (loss) .................... (1,875) 11,169 2,395 684 200 12,573
Interest and debt expense ...................... 50 5,419 1,171 148 1 6,789
Other income (expense) ......................... 6,030 (5,611) 408 (201) (400) 226
Equity in income (loss) of subsidiary .......... 1,645 1,204 210 -- (3,059) --
--------- --------- --------- --------- --------- ---------
Income (loss) before minority
interest and income taxes ................ 5,750 1,343 1,842 335 (3,260) 6,010
Minority interest .............................. -- -- -- -- 126 126
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes .......... 5,750 1,343 1,842 335 (3,386) 5,884
Provision (benefit) for income taxes ........... 527 825 2 89 -- 1,443
Equity in income of joint ventures ............. -- -- 455 -- -- 455
--------- --------- --------- --------- --------- ---------
Net income (loss) .......................... 5,223 518 2,295 246 (3,386) 4,896
Less: preferred dividends ...................... 2,468 637 -- -- (637) 2,468
--------- --------- --------- --------- --------- ---------
Net income (loss) applicable to common shares $ 2,755 $ (119) $ 2,295 $ 246 $ (2,749) $ 2,428
========= ========= ========= ========= ========= =========
</TABLE>
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Operations
For the Six Months Ended June 30, 1997
----------------------------------------------------------------------
U.S. German Non
Guarantor Guarantor Guarantor
Parent Subsidiaries Subsidiary Subsidiaries Eliminations Consolidated
------ ------------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales ....................................... $ -- $ 115,425 $ 27,573 $ 8,770 $ (5,476) $ 146,292
Cost of goods sold (excluding
Inventory valuation charge) ............... -- 87,657 23,757 6,666 (5,791) 112,289
Inventory valuation charge ...................... -- -- 3,155 -- -- 3,155
--------- --------- --------- --------- --------- ---------
Gross profit ................................ -- 27,768 661 2,104 315 30,848
Selling, general and administrative expense ..... 1,623 13,997 4,775 1,296 (302) 21,389
Non-cash compensation expense ................... 32 -- -- -- -- 32
Research and development expense ................ -- 1,698 495 79 -- 2,272
Restructuring and other charges ................. -- 332 -- 2,526 -- 2,858
--------- --------- --------- --------- --------- ---------
Operating income (loss) ..................... (1,655) 11,741 (4,609) (1,797) 617 4,297
Interest and debt expense (income) .............. (140) 7,022 1,908 104 -- 8,894
Other income (expense) .......................... 5,027 (4,682) 887 (274) (483) 475
Equity in income (loss) of subsidiary ........... (8,427) (1,800) 641 -- 9,586 --
--------- --------- --------- --------- --------- ---------
Income (loss) before minority
interest and income taxes ................. (4,915) (1,763) (4,989) (2,175) 9,720 (4,122)
Minority interest ............................... -- -- -- -- 132 132
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes ........... (4,915) (1,763) (4,989) (2,175) 9,588 (4,254)
Provision (benefit) for income taxes ............ 293 134 -- 145 (293) 279
Equity in income of joint ventures .............. -- -- 1,128 -- -- 1,128
--------- --------- --------- --------- --------- ---------
Net income (loss) ........................... (5,208) (1,897) (3,861) (2,320) 9,881 (3,405)
Less: preferred dividends ....................... 2,761 333 -- -- (333) 2,761
--------- --------- --------- --------- --------- ---------
Net income (loss) applicable to common shares $ (7,969) $ (2,230) $ (3,861) $ (2,320) $ 10,214 $ (6,166)
========= ========= ========= ========= ========= =========
</TABLE>
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 1996
----------------------------------------------------------------------
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 . $ (1,369) $ 2,540 $ (1,127) $ 967 $ (73) $ 938
-------- -------- -------- -------- -------- --------
Cash flow from investing activities:
Capital expenditures ........................... (83) (3,144) (551) (208) -- (3,986)
Increase in investments in joint ventures ...... -- -- (14) 51 4 41
Proceeds from sale of capital equipment ........ -- 1,572 191 -- (104) 1,659
Payments for environmental liabilities ......... -- (1,355) -- -- -- (1,355)
Proceeds from environmental indemnification .... -- 655 -- -- -- 655
Other .......................................... -- 24 -- -- -- 24
-------- -------- -------- -------- -------- --------
Net cash provided by (used in) investing activities (83) (2,248) (374) (157) (100) (2,962)
-------- -------- -------- -------- -------- --------
Cash flows from financing activities:
Revolving borrowings under Credit Agreement .... 31,000 -- -- -- -- 31,000
Revolving repayments under Credit Agreement .... (29,500) -- -- -- -- (29,500)
Term loan repayments under Credit Agreement .... (3,547) -- -- -- -- (3,547)
Short-term loan borrowings under European
Facility ................................... -- -- 4,331 559 -- 4,890
Short-term loan repayments under European
Facility ................................... -- -- -- (3) -- (3)
Payment of treasury stock ...................... (87) -- -- -- -- (87)
Dividends paid to minority interests ........... -- (130) -- -- -- (130)
Repayment of capital lease obligations ......... -- (47) -- (24) -- (71)
Payments for financing costs ................... -- -- -- (33) -- (33)
Other .......................................... -- (26) -- -- -- (26)
Subsidiary loans ............................... 3,622 (89) (2,969) (564) -- --
-------- -------- -------- -------- -------- --------
Net cash provided by (used in) financing activities 1,488 (292) 1,362 (65) -- 2,493
Effect of exchange rate changes on cash ............ -- -- (28) (175) 137 (66)
-------- -------- -------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents 36 -- (167) 570 (36) 403
Cash and cash equivalents, beginning of period .... 248 -- 428 1,022 (248) 1,450
-------- -------- -------- -------- -------- --------
Cash and cash equivalents, end of period .......... $ 284 $ -- $ 261 $ 1,592 $ (284) $ 1,853
======== ======== ======== ======== ======== ========
</TABLE>
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 1997
----------------------------------------------------------------------
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 $ 4,127 $ 1,011 $ (4,156) $ 806 $ (77) $ 1,711
-------- -------- -------- -------- -------- --------
Cash flow from investing activities:
Capital expenditures ........................... (141) (4,899) (390) (1,663) -- (7,093)
Increase in investments in joint ventures ...... -- -- 24 -- -- 24
Proceeds from sale of capital equipment ........ -- -- -- 8 -- 8
Payments for environmental liabilities ......... -- (2,508) -- -- -- (2,508)
Proceeds from environmental indemnification .... -- 240 -- -- -- 240
Other .......................................... -- 24 54 -- -- 78
-------- -------- -------- -------- -------- --------
Net cash used in investing activities .............. (141) (7,143) (312) (1,655) -- (9,251)
-------- -------- -------- -------- -------- --------
Cash flows from financing activities:
Issuance of common stock ...................... 269 -- -- -- -- 269
Revolving borrowings under Credit Agreement .... 41,000 -- 51,312 1,023 -- 93,335
Revolving repayments under Credit Agreement .... (38,500) -- (47,724) (271) -- (86,495)
Payment of registration costs .................. (733) -- -- -- -- (733)
Repayment of capital lease obligations ......... -- (12) -- -- -- (12)
Payments for financing costs ................... -- -- (55) -- -- (55)
Dividends paid to minority interests ........... -- (129) -- -- -- (129)
Subsidiary loans ............................... (6,094) 5,923 (441) 612 -- --
-------- -------- -------- -------- -------- --------
Net cash provided by (used in) financing activities (4,058) 5,782 3,092 1,364 -- 6,180
-------- -------- -------- -------- -------- --------
Effect of exchange rate changes on cash ............ -- -- (112) (148) 166 (94)
-------- -------- -------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents (72) (350) (1,488) 367 89 (1,454)
Cash and cash equivalents, beginning of period ..... 88 344 2,218 992 (88) 3,554
-------- -------- -------- -------- -------- --------
Cash and cash equivalents, end of period ........... $ 16 $ (6) $ 730 $ 1,359 $ 1 $ 2,100
======== ======== ======== ======== ======== ========
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following should be read in conjunction with Item 1 of this report.
General
The Company is a leading global manufacturer and marketer of a broad range
of specialty and fine chemical products which are sold into several market
segments for use in food and beverage products, household and industrial
products, cosmetics and personal care products, pharmaceuticals, pet foods,
textile and paper products and many other diverse applications. The Company
operates in one industry segment, with revenues derived from sales in five core
product groups: (i) Food and Personal Care Ingredients, (ii) Pharmaceutical
Intermediates and Natural Additives, (iii) Specialty Organic Chemicals and
Intermediates, (iv) Organic Pigments and Dyes and (v) Textile and Paper
Chemicals.
Restructuring and Other Charges
In April 1997, the Company announced a plan to close its Vernon, France
facility. This closure was completed in June 1997. Manufacturing production and
certain manufacturing equipment were transferred to other locations as part of
the closure. The Company recorded restructuring and other charges of $2.6
million. These charges include costs of $1.8 million for severance to employees,
$0.7 million for the write-off of fixed assets and inventory, and $0.1 million
for other charges, primarily for preparing the site for sale. The closing of
this facility is consistent with the Company's strategic plan of improving its
cost structure by having fewer manufacturing plants producing greater volume
products. The Company estimates that the annual savings as a result of this
plant closure will be approximately $2.2 million most of which will begin in
1998.
During the six months ended June 30, 1997, the Company recorded inventory
valuation charges of $3.2 million related to write-downs of certain products in
its Pharmaceutical Intermediates and Natural Additives group. The write-downs
resulted from an evaluation of lower of cost or market due primarily to
industry-wide overproduction and declines in market values partially associated
with recent changes in government regulation governing prescription
reimbursement. In March 1997, a charge of $0.7 million was recorded based on an
analysis of conditions at that date. An anticipated improvement in market
conditions during the three months ended June 30, 1997 did not occur.
Accordingly, management reviewed the inventory balances at June 30, 1997 and
recorded an additional charge of $2.5 million. This charge was classified as an
inventory valuation charge and the charge at March 31, 1997, which was included
in cost of goods sold, have been reclassified for comparative purposes with the
June 30, 1997 presentation. After recording this adjustment, management expects
that product line profitability will return to historical levels for the
Pharmaceutical Intermediates and Natural Additives product line.
During the six months ended June 30, 1997, the Company recorded charges
totaling $0.3 million which reduced operating income as a result of a marketing
revitalization program the Company initiated primarily for its Organic Pigments
and Dyes product group. The Company expects to record approximately $0.6 million
in 1997 for this program. These charges will be recorded as incurred throughout
the remainder of the year.
Results of Operations
The following table sets forth certain data from the Consolidated Financial
Statements (Unaudited) expressed as a percentage of Net sales.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold (excluding Inventory valuation charge) 76.1 76.2 74.8 76.8
Inventory valuation charge -- 3.3 -- 2.2
Gross profit 23.9 20.6 25.2 21.1
Selling, general and administrative expense 14.5 13.8 15.5 14.6
Research and development expense 1.6 1.6 1.6 1.6
Restructuring and other charges -- 3.7 -- 2.0
Operating income 7.7 1.4 8.1 2.9
Interest and debt expense 4.3 5.9 4.4 6.1
Net income (loss) 3.6 (3.9) 3.1 (2.3)
Less: preferred dividends 1.6 1.9 1.6 1.9
Net income (loss) applicable to common shares 2.0 (5.8) 1.6 (4.2)
</TABLE>
Three Months Ended June 30, 1997 Compared to Three Months Ended June 30, 1996
Net Sales. Net sales declined $3.1 million to $75.6 million in the quarter
ended June 30, 1997 compared to the quarter ended June 30, 1996. Sales of
Pharmaceuticals declined $3.1 million because of (i) industry-wide overstocking
due to producer and customer expectations of comparable business strengths in
1997 versus 1996, and (ii) changes in German social legislation regarding the
reimbursement for certain cough medicines in which one of the Company's main
products is used. It is expected that this development will not result in a
permanent loss of business. Textile and Paper Chemicals revenues declined by
$2.7 million compared to the same period in the prior year, primarily as a
result of discontinuation of unprofitable product lines. Organic Pigments and
Dyes increased by $2.1 million as a result of increased sales in Graphics Arts,
Coatings, and Color Formers. Specialty Organics and Chemical Intermediates'
revenues improved by $1.1 million compared to the same period in 1996. This
improvement is a result primarily of plant expansions. This increase is
primarily volume related as this product line experienced some overall price
level deterioration and also shows some negative impact (at the sale level only)
as a result of foreign exchange.
Gross Profit. Gross profit, excluding the inventory valuation charge of
$2.5 million, declined $0.8 million for the three months ended June 30, 1997 to
$18.0 million compared to $18.8 million for the three months ended June 30,
1996. This decline resulted primarily from the following: (i) $2.1 million was
due to lower sales of Pharmaceuticals; (ii) $1.8 million resulted from price
level deterioration and higher toluene and energy costs impacting Specialty
Organics and Intermediates, which costs are expected to moderate for the
remainder of 1997. These negative impacts were offset by the following
improvements: (i) $1.5 million in Organic Pigments and Dyes as a result of the
increased sales and improving margins in the Graphic Arts and Coatings product
lines; (ii) $0.6 million in Textile and Paper Chemicals as a result of improved
product line profitability due to the discontinuation of unprofitable product
lines; and (iii) $1.0 million in Food and Personal Care primarily as a result of
improvements in our Preservatives and Food Color product lines.
The following table displays a comparison for each of the Company's five
core product lines of pounds of product sold, average prices, net sales, gross
profit dollars, and gross profit percentage for the quarters ending June 30,
1997 and 1996, respectively. (All values are in millions except for average
price.)
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
June 30, 1997 June 30, 1996
------------------------------------------- ------------------------------------------
Volume Average Net Gross Gross Volume Average Net Gross Gross
Line (pounds) Price Sales Profit Margin (pounds) Price Sales Profit Margin
-------- ----- ----- ------ ------ -------- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Specialty Organics
& Intermediates 32.86 $0.50 $16.29 $3.37 20.67% 27.48 $0.55 $15.12 $5.13 33.93%
Food & Personal
Care Ingredients 1.85 $1.01 $18.73 $6.30 33.62% 19.23 $1.00 $19.27 $5.32 27.60%
Pharmaceutical
Intermediates 0.72 $11.92 $8.55 $0.21 2.42% 0.65 $17.79 $11.65 $2.27 19.47%
Textile & Paper
Chemicals 22.27 $0.76 $16.97 $4.78 28.18% 26.12 $0.75 $19.68 $4.21 21.37%
Organic Pigments
& Dyes 3.51 $4.29 $15.08 $3.36 22.34% 0.27 $4.79 $12.94 $1.83 14.21%
Company Total 77.89 $0.97 $75.62 $18.02 23.83% 76.18 $1.03 $78.66 $18.76 23.85%
</TABLE>
The Company recorded estimated costs of shutdown of $0.4 million and $0.3
million for the three months ended June 30, 1997 and 1996, respectively. The
costs of shutdown are accrued on a pro rata basis over the period between
shutdowns. Plant shutdowns are typically scheduled on a semi-annual; nine-month
and annual basis at the Company's various plants for the performance of
maintenance and inspection of various pieces of equipment. As of June 30, 1997,
$0.6 million was accrued related to such costs, which represented a decrease
from December 31, 1996 of $0.3 million due primarily to shutdowns at the
Company's Hilton Davis and Kalama facilities in June and the timing of various
other plant shutdowns scheduled in 1997.
Selling, General and Administrative Expense. Selling, general, and
administrative expense decreased $1.0 million to $10.4 million in the three
months ended June 30, 1997 compared to the same period of the prior year
primarily due to personnel reductions and plant closings as a result of
restructuring and other charges. As a percentage of sales, selling, general, and
administrative expense decreased from 14.5% in the three months ended June 30,
1996 to 13.8% for the same period in 1997.
Research and Development Expense. Research and development expense stayed
constant at $1.2 million compared to the same period of the prior year. As a
percentage of sales, research and development also was constant at 1.6% in the
three months ended June 30, 1996 compared to the same period in 1997.
Operating Income. Operating income declined $4.9 million to $1.1 million in
the quarter ended June 30, 1997 compared to the same quarter of 1996. Excluding
the impact of the inventory adjustment and the restructuring costs, Operating
income for the quarter ended June 30, 1997 was $6.3 million compared to $6.0 in
the same quarter of 1996. This improvement is primarily a result of the gross
profit and selling, general and administrative expense impacts discussed above.
Interest and Debt Expense. Interest and debt expense was $4.5 million and
$3.4 million for the three months ended June 30, 1997 and 1996, respectively.
The weighted average interest rate of the Company's borrowings was 9.8% at June
30, 1997, as compared to 8.9% at June 30, 1996. The increase in the weighted
average interest rate is attributable to the issuance of the 10 5/8% Senior
Subordinated Notes due 2006 (the "Notes") that were issued in October 1996.
Net Income (Loss). Net income decreased $5.8 million to a loss of $2.9
million in the three months ended June 30, 1997 as compared to the same period
of the prior year. The loss resulted primarily from items discussed above.
In addition, the Company's equity in income of joint ventures increased
$0.3 million for the three months ended June 30, 1997 as compared to the same
period of the prior year. The increase is primarily attributable to the increase
in the equity in income of Srinivasa Cystine Limited which increased $0.4
million.
Net Income (Loss) Applicable to Common Shares. The net income applicable to
common shares decreased by $5.9 million to a loss of $4.4 million for the three
months ended June 30, 1997 as compared to the same period of the prior year. The
decrease resulted from the items referred to above.
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Net Sales. Net sales declined $9.5 million to $146.3 million in the six
months June 30, 1997 compared to the same period in 1996. Sales of
Pharmaceuticals declined $11.6 million because of (i) industry-wide overstocking
due to producer and customer expectations of comparable business strengths in
1997 versus 1996, and (ii) a change in German social legislation regarding the
reimbursement for certain cough medicines in which one of the Company's main
products is used. It is expected that this development will not result in a
permanent loss of business. Textile and Paper Chemicals revenues declined by
$1.1 million compared to the same period in the prior year, primarily as a
result of discontinuation of unprofitable product lines. Organic Pigments and
Dyes increased by $1.3 million, while 1996 results show $0.8 million of a
discontinued product line. Specialty Organics and Chemical Intermediates'
revenues improved by $1.1 million compared to the same period in 1996. This
improvement is a result primarily of plant expansions. This increase is
primarily volume related as this product line experienced some overall price
level deterioration and also shows some negative impact (at the sale level only)
as a result of foreign exchange.
Gross Profit. Gross profit, excluding the inventory valuation charge of
$3.2 million, declined $5.3 million for six months ended June 30, 1997 to $34.0
million compared to $39.3 million for the six three months ended June 30, 1996.
This decline resulted primarily from the following: (i) $4.6 million was due to
lower sales of Pharmaceuticals; (ii) $1.9 million resulted from lower overall
prices, higher toluene and energy costs impacting Specialty Organics and
Intermediates, which costs are expected to moderate for the remainder of 1997.
These negative impacts were offset by the following improvements (i) $0.1
million in Organic Pigments and Dyes as a result of the increased sales as well
as improving margins in the Graphic Arts and Coatings product lines while 1996
results show $0.4 million from a discontinued product line; (ii) $0.7 million in
Textile and Paper Chemicals as a result of improved product line profitability
as a result of the discontinuation of unprofitable product lines; and (iii) $0.3
million in Food and Personal Care primarily as a result of improvements in our
Preservatives and Food Color product lines.
The following table displays a comparison for each of the Company's five
core product lines of pounds of product sold, average prices, net sales, gross
profit dollars, and gross profit percentage for the six months ended June 30,
1997 and 1996, respectively. (All values are in millions except for average
price.)
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1997 June 30, 1996
------------------------------------------- ------------------------------------------
Volume Average Net Gross Gross Volume Average Net Gross Gross
Line (pounds) Price Sales Profit Margin (pounds) Price Sales Profit Margin
-------- ----- ----- ------ ------ -------- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Specialty Organics
& Intermediates 61.03 $0.52 $31.47 $7.06 22.44% 54.67 $0.56 $30.37 $9.00 29.64%
Food & Personal
Care Ingredients 34.99 $1.03 $36.06 $10.98 30.44% 33.21 $1.06 $35.22 $10.67 30.28%
Pharmaceutical
Intermediates 1..25 $12.25 $15.37 $2.23 14.50% 1..32 $20.48 $26.98 $6.79 25.16%
Textile & Paper
Chemicals 49.27 $0.70 $34.35 $7.93 23.11% 50.98 $0.69 $35.43 $7.18 20.27%
Organic Pigments
& Dyes 6.66 $4.36 $29.04 $5.80 19.97% 5.74 $4.84 $27.79 $5.67 20.40%
Company 153.20 $0.96 $146.29 $34.00 23.24% 145.83 $1.07 $155.79 $39.31 25.23%
</TABLE>
The Company recorded estimated costs of shutdown of $0.8 million and $0.4
million for the three months ended June 30, 1997 and 1996, respectively. The
costs of shutdown are accrued on a pro rata basis over the period between
shutdowns. Plant shutdowns are typically scheduled on a semi-annual, nine-month
and annual basis at the Company's various plants for the performance of
maintenance and inspection of various pieces of equipment. As of June 30, 1997,
$0.6 million was accrued related to such costs, which represented an increase
from December 31, 1996 of $0.3 million due primarily to shutdowns at the
Company's Hilton Davis and Kalama facilities in June and the timing of various
other plant shutdowns scheduled in 1997.
Selling, General and Administrative Expense. Selling, general, and
administrative expense decreased $2.8 million to $21.4 million in the six months
ended June 30, 1997 compared to the same period of the prior year primarily due
to personnel reductions and plant closings as a result of restructuring and
other charges. As a percentage of sales, selling, general, and administrative
expense decreased from 15.5% in the six months ended June 30, 1996 to 14.6% for
the same period in 1997.
Research and Development Expense. Research and development expense declined
$0.2 million to $2.3 million compared to the same period of the prior year. As a
percentage of sales, research and development remained at 1.6% for the six
months ended June 30, 1997 compared to the same period in 1996.
Operating Income. Operating income declined $8.3 million to $4.3 million
for the six months ended June 30, 1997 compared to the same period of 1996.
Excluding the impact of the inventory adjustment and the restructuring costs,
Operating Income for the six months ended June 30, 1997 was $10.3 million
compared to $12.6 million for the same period 1996. This performance is a result
of the decline in gross profit as a result of the Pharmaceutical Sales decline
and the increased cost of toluene and energy offset by improvements in other
product lines and the decline in selling, general and administrative expense.
Interest and Debt Expense. Interest and debt expense was $8.9 million and
$6.8 million for the six months ended June 30, 1997 and 1996, respectively. The
Company had net borrowings of $6.8 million for the six months ended June 30,
1997, as compared to net borrowings of $2.8 million for the six months ended
June 30, 1996. The weighted average interest rate of the Company's borrowings
was 9.8% at June 30, 1997, as compared to 8.9% at June 30, 1996. The increase in
the weighted average interest rate is attributable to the issuance of the 10
5/8% Senior Subordinated Notes due 2006 (the "Notes") that were issued in
October 1996.
Net Income (Loss). Net income decreased $8.3 million to a loss of $3.4
million in the six months ended June 30, 1997 as compared to the same period of
the prior year. The loss resulted primarily from items discussed above.
In addition, the Company's equity in income of joint ventures increased
$0.7 million for the six months ended June 30, 1997 as compared to the same
period of the prior year. The increase is primarily attributable to the increase
in the equity in income of Srinivasa Cystine Limited which increased $0.8
million.
Net Income (Loss) Applicable to Common Shares. The net income applicable to
common shares decreased by $8.6 million to a loss of $6.2 million for the six
months ended June 30, 1997 as compared to the same period of the prior year. The
decrease resulted from the items referred to above.
Liquidity and Capital Resources
Net Cash Provided By Operating Activities. Net cash provided by operating
activities for the six months ended June 30, 1997 was $1.7 million, an increase
of $0.8 million over the same period of the prior year. This increase was due
primarily to increases in accounts receivable from increased international sales
from domestic operations, increased inventories attributable to customer demand,
and a decrease in net income of $8.3 million.
Net Cash Used in Investing Activities. Net cash used in investing
activities for the six months ended June 30, 1997 was $9.3 million, an increase
of $6.3 million over the same period of the prior year. Capital expenditures in
the six months ended June 30, 1997 were $7.1 million compared to $4.0 million in
the same period of the prior year. This increase in capital expenditures in 1997
included $2.5 million related to the expansion program at the Company's Kalama
facility.
Net Cash Provided by Financing Activities. Net cash provided by financing
activities for the six months ended June 30, 1997 was $6.2 million, an increase
of $3.7 million over the same period of the prior year and includes cash
proceeds of $0.3 million from the issuance of common stock. This increase is due
primarily to both lower operating results and increased levels of capital
expenditures in 1997.
Liquidity. On October 17, 1996, the Company issued the Notes. The Notes are
fully and unconditionally guaranteed, on a joint and several basis, as to
payment of principal, premium, if any, and interest, by all of the Company's
domestic subsidiaries and Diamalt.
Concurrently with the consummation of the offering of the Notes, the
Company amended and restated its existing credit agreement (as amended and
restated, the "Amended and Restated Credit Agreement") to, among other things,
increase the amount of the revolving loan facility to $85 million and include
Diamalt as a co-borrower. The Amended and Restated Credit Agreement and the
Indenture related to the Notes contain certain financial covenants that
restrict, among other things, the incurrence of additional indebtedness, the
sale of assets, and certain investments, acquisitions and distributions by the
Company. The Amended and Restated Credit Agreement also requires the Company to
maintain specified financial ratios and tests, including maximum leverage ratios
and minimum interest coverage ratios. The Company was in compliance with such
ratios and tests at June 30, 1997.
The Company expects that its ongoing cash requirements will consist
primarily of interest payments on its outstanding indebtedness, including the
Notes and any borrowings under the Amended and Restated Credit Agreement. As of
June 30, 1997 the Company had $67.3 million of working capital (current assets
less current liabilities) and $52.1 million available under the Amended and
Restated Credit Agreement.
Although the Company expects that cash flows from operations and available
borrowings under the Amended and Restated Credit Agreement will provide
sufficient working capital to operate the Company's business, to make expected
capital expenditures and to meet the Company's foreseeable liquidity
requirements, there can be no assurance that sufficient sources of funds will be
available.
Foreign Currency Exchange Rates
The Company's substantial foreign operations expose it to the risk of
exchange rate fluctuations. If foreign currency denominated revenues are greater
than costs, the translation of foreign currency denominated costs and revenues
into U.S. dollars will improve profitability when the foreign currency
strengthens against the U.S. dollar and will reduce profitability when the
foreign currency weakens. In addition, the remeasurement of foreign currency
denominated assets and liabilities into U.S. dollars gives rise to foreign
exchange gains or losses, which are included in the determination of net income.
The Company's foreign currency exposures are managed on a consolidated
basis, which allows certain exposures to be offset naturally. However, forward
contracts are entered into periodically to hedge specific foreign currency
exposures. Under this strategy, gains or losses on hedging transactions are
offset by gains or losses on the underlying exposures being hedged.
<PAGE>
PART II - OTHER INFORMATION
Item 2. Changes in Securities
Recent Sales of Unregistered Securities
In April 1997, the Company issued 445.75 shares of its Series A Common Stock and
98.292 shares of its Series B Redeemable Preferred Stock to Vincent P. Langone
for an aggregate purchase price of $150,000.
The issuance of these securities was made in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended,
for transactions not involving a public offering.
Item 5. Other Information
On March 18, 1997, the Company consummated a fully-subscribed registered
exchange offer for the Notes (the "Exchange Offer") to satisfy certain of the
Company's obligations under a registration rights agreement relating to the
Notes. The form and terms of the Notes issued under the Exchange Offer are
substantially identical in all material respects to the form and terms of the
Notes issued on October 17, 1996.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit
No. Description of Exhibit
3.1 Restated Certificate of Incorporation of Freedom Chemical Company and
Certificate of Designation for Preferred Stock (filed as Exhibit 3.1
to the Company's Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
3.2 By-laws of Freedom Chemical Company (filed as Exhibit 3.2 to the
Company's Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
27 Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter for which this report is
filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FREEDOM CHEMICAL COMPANY
(Registrant)
By: /s/ BRIAN F. MCNAMARA
Brian F. McNamara
Vice President, Secretary
and General Counsel
Date: August 14, 1997 By: /s/ DENNIS M. MONAHAN
---------------------
Dennis M. Monahan
Vice President, Finance
and Control
<PAGE>
FREEDOM CHEMICAL COMPANY
Form 10-Q Report for the Three Months Ended
June 30, 1997
INDEX TO EXHIBITS
Exhibit
No. Description of Exhibit
3.1 Restated Certificate of Incorporation of Freedom Chemical Company and
Certificate of Designation for Preferred Stock (filed as Exhibit 3.1 to
the Company's Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
3.2 By-laws of Freedom Chemical Company (filed as Exhibit 3.2 to the
Company's Registration Statement on Form S-1(33-84778) and
incorporated herein by reference).
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from balance
sheets and income statements of Freedom Chemical Company and Subsidiaries
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000931075
<NAME> FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
<MULTIPLIER> 1,000
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 2,100
<SECURITIES> 0
<RECEIVABLES> 47,828
<ALLOWANCES> 580
<INVENTORY> 48,030
<CURRENT-ASSETS> 113,004
<PP&E> 100,609
<DEPRECIATION> 34,193
<TOTAL-ASSETS> 258,764
<CURRENT-LIABILITIES> 45,660
<BONDS> 125,000
48,390
0
<COMMON> 2
<OTHER-SE> (29,733)
<TOTAL-LIABILITY-AND-EQUITY> 258,764
<SALES> 75,617
<TOTAL-REVENUES> 75,617
<CGS> 57,597
<TOTAL-COSTS> 60,073
<OTHER-EXPENSES> (149)
<LOSS-PROVISION> 5
<INTEREST-EXPENSE> 4,462
<INCOME-PRETAX> (3,300)
<INCOME-TAX> 227
<INCOME-CONTINUING> (2,946)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,946)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
