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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number: 33-84778
FREEDOM CHEMICAL COMPANY
(Exact name of Registrant as specified in its charter)
DELAWARE 51-0340498
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
Mellon Center, Suite 3500
1735 Market Street
Philadelphia, PA 19103
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 979-3100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 NO X
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
State the aggregate market value of the voting stock held by
non-affiliates of the Registrant: No voting stock is held by non-affiliates of
the Registrant.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date: On March 27, 1997,
there were 154,481 shares of the Registrant's Series A Common Stock outstanding
and 0 shares of the Registrant's Series B Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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FREEDOM CHEMICAL COMPANY
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PART I
Item 1. Business.................................................................................... 1
Item 2. Properties.................................................................................. 17
Item 3. Legal Proceedings........................................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders......................................... 19
PART II
Item 5. Market for Registrant's Common Stock and
Related Stockholder Matters.............................................................. 20
Item 6. Selected Financial Data..................................................................... 21
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation................................................................. 23
Item 8. Financial Statements and Supplementary Data................................................. 33
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................................................... 34
PART III
Item 10. Directors and Executive Officers of the Registrant.......................................... 34
Item 11. Executive Compensation...................................................................... 37
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................. 44
Item 13. Certain Relationships and Related Transactions.............................................. 46
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................ 47
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PART I
Item 1. BUSINESS
Overview
Freedom Chemical Company (the "Company" or "Freedom") is a leading
global manufacturer and marketer of a broad range of specialty and fine chemical
products which are sold into several market segments for use in food and
beverage products, household and industrial products, cosmetics and personal
care products, pharmaceuticals, pet foods, textile and paper products and many
other diverse applications. The Company focuses on niche products where it has
strong market positions or a manufacturing advantage. The Company believes that
this focus, combined with improved operating efficiencies resulting from
recently completed restructuring and other measures, have enhanced the Company's
potential for future growth and profitability.
The Company estimates that approximately 55% of its 1996 domestic
net sales were derived from product lines for which it believes it is either the
largest or second largest U.S. producer. Typically, the Company's products are
important to the performance of its customers' products, but represent a
relatively small percentage of their total product costs. For example, although
food preservatives are essential to the quality of carbonated diet soft drinks
(such as Diet Coke), the Company's preservatives, potassium benzoate and sodium
benzoate, generally represent less than $.01 of the total cost of one 24-can
case. The Company has five core product lines:
o Food and Personal Care Ingredients. The Company manufactures
and markets food, drug and cosmetic colors, food preservatives
and flavors and fragrances to a broad array of customers,
including food and beverage, pet food, cosmetic, pharmaceutical
and household product manufacturers. The Company believes it is
the largest U.S. manufacturer of two of the world's most widely
used food preservatives and is the second largest U.S. producer
of food dyes. Food and Personal Care Ingredients accounted for
approximately $64.5 million, or 21.5%, of the Company's 1996
net sales.
o Pharmaceutical Intermediates and Natural Additives. The Company
manufactures and markets a number of pharmaceutical
intermediates and active ingredients for use in prescription
and over-the-counter pharmaceuticals, as well as natural
additives, including thickeners (which mimic the feel of fat),
gelling agents, bioproteins and amino acids, for use in foods,
pet foods, shampoos and cosmetics. The Company believes that it
is the largest producer of cysteine in the world.
Pharmaceutical Intermediates and Natural Additives accounted
for approximately $49.0 million, or 16.3%, of the Company's
1996 net sales.
o Specialty Organic Chemicals and Intermediates. The Company
manufactures and markets a number of specialty and fine organic
chemicals and chemical intermediates, including benzaldehyde,
benzoic acid, benzyl alcohol and phenol, that are used to
manufacture flavors and fragrances, adhesives, plasticizers,
alkyd and polyester resins, rubber chemicals and agricultural
intermediates. The Company is the sole U.S. producer of
benzaldehyde and believes that it is the largest U.S. producer
of benzoic acid. Specialty Organic Chemicals and Intermediates
accounted for approximately $62.5 million, or 20.8%, of the
Company's 1996 net sales.
o Organic Pigments and Dyes. The Company manufactures and markets
carbonless copy and technical dyes for use in industrial and
consumer products, and pigments for use in paints, coatings,
inks and plastics. The Company is a leading manufacturer of
blue carbonless copy dyes used in business forms, such as
credit card receipts, and of blue technical dyes used in a wide
range of household products, such as window cleaners. Organic
Pigments and Dyes accounted for approximately $55.3 million, or
18.4%, of the Company's 1996 net sales.
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o Textile and Paper Chemicals. The Company manufactures and
markets a wide range of specialty and fine chemicals that are
used in the textile and paper industries. The Company is one of
the two leading U.S. producers of glyoxal and glyoxal resins
which impart wrinkle resistance and shrinkage control to cotton
and cotton blend fabrics and are also used to enhance the
absorbency of paper. The Company also markets a complete line
of textile processing products. Textile and Paper Chemicals
accounted for approximately $68.8 million, or 23.0%, of the
Company's 1996 net sales.
The Company was formed in April 1992 by Joseph Littlejohn & Levy,
a private investment firm ("JLL"), and certain of the Company's present and past
executive officers. Freedom commenced operations in order to acquire the textile
chemical business (the "Freedom Textile Acquisition") of American Cyanamid
Company ("American Cyanamid"), a leading producer of glyoxal, which it renamed
Freedom Textile Chemicals Co. ("Freedom Textile"). Thereafter, as part of its
strategy to acquire specialty chemical companies with strong market positions,
complementary product lines and opportunities for operational improvement, the
Company acquired Hilton Davis Chemical Co. ("Hilton Davis"), a leading supplier
of food, drug and cosmetic colors, dyes and specialty and fine chemicals, in
September 1993 (the "Hilton Davis Acquisition"), and Kalama Chemical Inc.
("Kalama"), a leading supplier of food and beverage preservatives and certain
flavors and fragrances, in May 1994 (the "Kalama Acquisition"). In December
1994, the Company acquired substantially all the assets of Reilly-Whiteman Inc.
("Reilly-Whiteman"), a producer of textile and other industrial chemicals (the
"Reilly-Whiteman Acquisition"), and in January 1995, Freedom, through its wholly
owned subsidiary Freedom Chemical Diamalt, acquired certain assets of Diamalt
GmbH ("Diamalt"), a producer of pharmaceutical intermediates, natural additives
and food and pet food ingredients (the "Diamalt Acquisition").
Business Strategy
The Company's objective is to continue to enhance revenue growth
and profitability by leveraging its strong market positions in its core product
lines and by continuing to improve operating efficiencies. The Company plans to
achieve its objective by (i) increasing capacity of key product lines, (ii)
introducing new or technologically improved products, (iii) continuing to
improve operating efficiencies, (iv) broadening product offerings to primary
markets, (v) expanding its customer base, and (vi) enhancing growth through
selective acquisitions.
Products
The table below sets forth the Company's 1996 net sales by product
group, principal products, principal end markets and selected well-known
customers.
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Selected
Product Group (1996 Principal Products Principal Well-Known
Net Sales) End Markets Customers
========================= ==================================== ======================== ============================
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Food and Personal Food Colors Food and Beverage Coca-Cola
Care Ingredients Preservatives Drug and Cosmetic Mars
($64.5 Million) Flavor and Fragrance Chemicals Nestle
Drug and Cosmetic Colors PepsiCo
Procter & Gamble
Ralston Purina
========================= ==================================== ======================== ============================
Pharmaceutical Cysteine Pharmaceutical Boehringer
Intermediates and Cassia Cosmetic Brantford
Natural Additives Bioproteins Food IFF
($49.0 Million) Amino Acids Pet Food E. Merck
Thymidine Quest
Ratiopharm
========================= ==================================== ======================== ============================
Specialty Organic Benzaldehyde Food and Beverage BASF
Chemicals and Benzyl Alcohol Drug and Cosmetic Borden
Intermediates Benzoic Acid Rubber Ciba Geigy
($62.5 Million) Benzyl Amines Photographic Miles
Phenol Housing Milliken
Plasticizers Automotive
========================= ==================================== ======================== ============================
Organic Pigments Carbonless Copy Dyes Specialty Papers Appleton Papers
and Dyes Technical Dyes Household Products Mead Corporation
($55.3 Million) Pigments Paints and Pigments PPG
Paints and Coatings Pigments Photographic S.C. Johnson
Ink Pigments Sherwin-Williams
========================= ==================================== ======================== ============================
Textile and Paper Glyoxal Textiles C.H. Patrick
Chemicals Glyoxal Reactants and Resins Paper Cytec
($68.8 Million) Natural Chemicals Textile Printing Hoechst-Celanese
Textile Processing Products Oil Field Milliken
Mining
========================= ==================================== ======================== ============================
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Food and Personal Care Ingredients
Food Colors
Food colors, which are also known as FD&C ("Food, Drug, and
Cosmetic") colors, are used extensively in the U.S. and around the world in a
wide variety of food and beverage products, including dairy products, chewing
gum, cake icings, spice mixes, snack foods and soft drinks, as well as pet
foods. There are two types of food colors: (i) synthetic or artificial food
colors, which are man-made and certified by the FDA, and (ii) natural food
colors, which are derived from various natural sources and do not require FDA
certification. Synthetic food colors are preferable to natural food colors in
many applications because they are more consistent in quality and color than
natural colors, and are better able to withstand heat and other conditions
encountered during food production and preparation.
The Company's product line of food colors consists of synthetic
primary (red, yellow and blue) colors for food, beverages and pet foods. The
Company manufactures these colors in two forms: dyes, which are soluble, and
"lakes," which are insoluble (generally produced by combining dyes with a
metallic salt).
The Company's food color business has exhibited strong growth in
recent years as a result of modest growth in the overall market and the
Company's successful efforts to increase market share. The Company expects to
continue to grow this business in the future and plans to invest in capacity
expansions, new marketing initiatives and a greater emphasis on international
markets (which markets exceed the size of the U.S. market) to achieve this goal.
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In 1996, the Company expanded its capacity of yellow, red and blue
food color dyes. This expansion resulted in total capacity of food color dyes in
1996 of approximately 1 million pounds, a 6% increase over 1995.
Preservatives (Sodium Benzoate and Potassium Benzoate)
The Company believes it is the leading U.S. producer of sodium
benzoate and potassium benzoate, which are widely used food preservatives.
Benzoates are derivatives of benzoic acid, which the Company produces
internally. Most carbonated diet soft drinks contain either sodium or potassium
benzoate. Other preservative applications include food, pharmaceuticals and
toiletries. Benzoates can also be used as industrial preservatives and as a
corrosion inhibitor in anti-freeze for aluminum car engines. Potassium benzoate
is used as a substitute for sodium benzoate when a low sodium content is
desired.
The Company believes significant international growth for sodium
benzoate and potassium benzoate will occur in the future as diet soft drink
consumption increases in Mexico, Central and South America, Eastern Europe and
the Asia Pacific region.
Flavor and Fragrance Chemicals
The Company produces a range of flavors for foods and fragrance
chemicals that provide various aromas to perfumes, soaps, cosmetics and
household items. The Company's products include jasmine-like fragrances for use
in cosmetics, perfumes and soaps and cinnamon-like flavors and fragrances used
in confectioneries, gums, soaps and perfumes. The Company's flavor and fragrance
chemicals are derived from benzaldehyde, a specialty intermediate which the
Company produces internally. See "--Specialty Organic Chemicals and
Intermediates; Benzaldehyde." The Company is one of only two flavor and
fragrance manufacturers that produces its own benzaldehyde, the key ingredient
for this line of products. The Company believes that this backward integration
gives the Company a cost advantage over its non-integrated competitors.
The Company believes that there is significant growth potential
for flavor and fragrance chemicals and the Company intends to increase its
production of these products through a planned production capacity expansion at
its Kalama, Washington plant, which expansion is expected to be completed in
1997.
Drug and Cosmetic Colors
The Company manufactures drug and cosmetic ("D&C") colors which
are similar to food colors. Like food colors, D&C colors must be certified by
the FDA. Freedom manufactures dyes and lakes used in toiletries (shampoos, skin
creams and toothpaste), as well as cosmetics and pharmaceuticals.
The Company sells a full line of over 100 D&C colors to the
cosmetics industry, with its top ten products accounting for approximately
two-thirds of D&C sales. Colors produced by the Company include various reds,
yellows, oranges, greens, and violet. The Company expects to increase sales of
D&C colors, improve the profitability of its D&C color operations and reduce
overhead costs as a result of its transfer of production capabilities and
technology from its Newark plant to its Cincinnati plant.
Pharmaceutical Intermediates and Natural Additives
The Company's Pharmaceutical Intermediates and Natural Additives
group is comprised of a wide variety of products with diverse applications.
Products in this group are used in the pharmaceutical, cosmetics, food and pet
food industries and are derived from naturally occurring materials that are
refined and chemically converted in the Company's plants. Products in this group
include cysteine and its derivative products, active ingredients, thickeners
(which mimic the feel of fat), gelling agents, cassia, bioproteins and amino
acids.
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The Company believes that there is potential for significant
growth in the use of products in the Pharmaceutical Intermediates and Natural
Additives group as consumption of natural products increases. The Company
expects to grow this business in the future and plans to invest in capacity
expansions to increase production of cassia, cysteine and its derivatives and
amino acids.
Cysteine
The Company manufactures cysteine at its manufacturing facilities
in Raubling, Germany and Madras, India. Cysteine is used as a food additive and
flavor enhancer for meats and is also used in solution for feeding premature
infants. Cysteine derivatives are used as pharmaceuticals for bronchial therapy
and as antioxidants. Cysteine derivatives are also used in cosmetics. The
Company believes that it is the largest producer in the world of cysteine and
its derivatives.
Cassia
Cassia, an inexpensive alternative to locust bean gum and other
gelling agents, is used extensively in Europe as a gelling agent in canned pet
foods and as an additive in textile printing. The Company owns the patent rights
to the use of cassia in pet foods in the United States, Japan and many countries
in Western Europe. Such patent rights have expiration dates ranging from 2004 to
2006. The Company has developed a patented pet food additive made from cassia
and currently has sales contracts with several leading European pet food makers
for cassia to be used in pet foods.
Bioproteins
The Company produces bioproteins, which are used in shampoos,
cosmetics and other personal care products as well as in foods. The Company
manufactures two types of bioproteins: (i) hydrolyzed vegetable proteins (soy,
rice and wheat), and (ii) hydrolyzed animal proteins (collagen, keratin and
elastin).
Amino Acids
The Company manufactures amino acids, which have wide application
in foods and health foods as flavor enhancers and additives to prevent the
browning of fruit and vegetables, in baking, for gluten softening and in
pharmaceuticals for the treatment of bronchial, intestinal and other illnesses.
Amino acids are also used to formulate residue free digestible diets, also known
as "astronaut food."
Thymidine
The Company recently began manufacturing thymidine, an AZT
pharmaceutical intermediate utilized in producing drugs for AIDS therapy, and
entered into a contract to sell small quantities of this product to a major
pharmaceutical manufacturer.
Specialty Organic Chemicals and Intermediates
Benzaldehyde
The Company is the sole U.S. producer of benzaldehyde, a versatile
intermediate and ingredient of flavors and fragrances from which a steady supply
of new product applications is being developed by the Company and others. In
addition, benzaldehyde has been approved by the FDA as a synthetic flavoring
substance and is used to produce almond and cherry flavors. It is also used as a
fragrance for soap and toiletries. The industries that consume benzaldehyde and
its derivatives include chemical intermediates, fragrances, pharmaceuticals and
photographic chemicals. Examples of products that contain benzaldehyde or its
derivatives include: ampicillin, photographic developers, contact lens cleaners,
ink, perfumes, candy, vitamins and soap. In late 1995, the
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Company completed an expansion of its benzaldehyde production capacity by
approximately 40% at a cost of approximately $5.1 million.
Benzoic Acid
Benzoic acid is used as an intermediate in the manufacture of a
wide variety of products including other chemical intermediates, paints and
coatings, polyesters, plasticizers, dyestuffs, preservatives, drilling mud
additives and other applications. In addition to using benzoic acid as an
intermediate in the production of preservatives, plasticizers and phenol, the
Company sells benzoic acid to third parties. The Company believes that it is the
largest domestic producer of benzoic acid and increased its production of
benzoic acid through a 40% production capacity expansion at its Kalama,
Washington plant. Such expansion enabled the Company to increase its production
of benzaldehyde, which is co-produced with benzoic acid, in 1996.
Benzyl Alcohol
The Company believes that it is the leading domestic producer of
benzyl alcohol, which it produces from benzaldehyde. Benzyl alcohol is sold to
the food, personal care and other industries for a number of applications
including use in sweeteners, contact lens cleaners, lotions and ointments for
relief of insect bites, dispersing agents and activators, anti-static treating
compounds, photographic chemicals, and as a raw material in the manufacture of
various esters used in soaps, perfumes and flavorings.
Phenol
Unlike other chemicals manufactured by the Company, phenol,
produced from benzoic acid, is a commodity chemical. The primary consumers of
phenol are the housing, automotive and appliance industries. Phenol is used as a
raw material in the manufacture of (i) engineering plastics, (ii) resins for
wood adhesives, (iii) paper coatings, and (iv) medicinal consumer products such
as Campho-Phenique(Registered) and Chloroseptic (Registered) throat spray. The
Company's phenol production is consumed mostly by the wood products industry in
the Pacific Northwest region where the Company is the only producer of phenol.
Plasticizers
Freedom markets plasticizers under the brand name
K-FLEX(Registered) which are used extensively in polyvinyl acetate films.
K-FLEX(Registered) is also used as an ingredient in "white glue" packaging
adhesives such as Elmer's Glue, polyvinyl chloride plastic products and plastic
coatings on tools.
Organic Pigments and Dyes
Carbonless Copy Dyes
Carbonless copy dyes, also referred to as color formers, are
applied to paper for use in multi-part business forms such as credit card
receipts and computer printouts, among other applications. Carbonless forms have
been in existence since the 1950's and the Company has continually increased its
market share from "one time" carbon paper in business forms. The Company sells
color formers to specialty coated paper manufacturers which produce this grade
of paper for the business forms industry. The Company also markets a line of
thermally activated dyes for thermal paper used in telephone facsimile machines,
thermally produced labels and thermal labels used in supermarkets and other
retail applications.
The Company believes there are several factors that will account
for future volume growth in the color former area: (i) industry manufacturing
capacity has decreased within the past twelve months with the exit of two less
efficient manufacturers, which should enable remaining competitors to increase
market share, (ii) the Company expects the domestic carbonless and thermal
business forms market to grow with increased usage of thermally
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produced labels, and (iii) the Company anticipates the market for carbonless and
thermal paper to continue to grow in developing countries, especially in Mexico,
Central and South America and Asia.
Technical Dyes
Technical dyes are similar to food colors except that they are not
manufactured to the same strict purity standards and are not subject to FDA
certification. They are used in a wide range of industrial and consumer
products, including household products such as cleaning supplies and dishwasher
detergents, paper, writing instruments, turf and pond applications and cat
litter.
The Company's product line consists of a variety of water soluble
dyes including Acid Blue #9 and Tartrazine, a widely used yellow dye, as well as
a number of other specialty dyes. Acid Blue #9 is the Company's best-selling
technical dye and it is primarily used in toilet bowl cleaners and other
household products. Acid Blue #9 also absorbs ultraviolet light and is sold as a
water treatment chemical to prevent algae growth in ponds and water treatment
facilities. Tartrazine is used in photographic chemicals, detergents, other
household products such as window cleaners and detergents, and felt tip markers.
The Company believes that it is the world's leading manufacturer
of Acid Blue #9. The Company has significantly expanded its production capacity
for Acid Blue #9 through yield and process improvements. This expansion will
allow the Company to take advantage of the growth in demand for its pond and
turf applications.
Pigments
The Company markets pigments for three main product lines: (i)
paints and coatings, (ii) inks, and (iii) plastic dispersions.
Paints and Coatings Pigments. The Company manufactures and sells
pigments which are incorporated in paints and coatings used in the
architectural, industrial, automotive, and other paint and coating markets. The
Company's product line is broad, covering all coating types from water-based
paints to solvent-based paints. End products in which the Company's products are
used include house paint, automotive paint, wood stains, and paints for a
variety of industrial uses such as farm, road and railroad equipment, office
furniture, computers, containers and machine shop equipment.
Ink Pigments. The Company's product line consists of pigments
which are incorporated in ink used for printing newspapers, magazines and books.
The Company is a small participant in the ink colors market and intends to
increase its focus on higher margin specialty markets, such as high performance
inks for glossy publications.
Plastics Pigments. The Company competes in a small and highly
specialized portion of the plastic pigments market, where it manufactures finely
dispersed pigment suspensions for producers of colored plastic articles such as
amber medicine vials and tinted lenses.
Textile and Paper Chemicals
The Company manufactures and markets a broad line of chemicals for
use in the textile and paper industries. The textile product line consists of
fabric preparation chemicals used in most stages of textile processing including
weaving, knitting, preparation, dyeing, printing and finishing. Products sold by
the Company include glyoxal, glyoxal reactants and resins, textile pigments,
water repellents, flame retardants, softeners, dye assistants, lubricants and
antimigrants. The Company believes it has an advantage over many of its
competitors because of the proximity of its plants to most of the major textile
companies in the U.S., which allows the Company to respond more quickly and in a
more cost efficient manner than its competitors to customers' larger orders.
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Glyoxal
The Company is the leading domestic manufacturer of glyoxal, a
derivative of ethylene glycol. Glyoxal is used by the Company to produce its
line of glyoxal reactants, and is also sold directly to textile mills and
chemical companies which also produce reactants. The Company believes that its
patented continuous process to produce glyoxal makes it the lowest cost domestic
producer. The Company expects most of the growth in glyoxal sales to be for
non-textile applications such as the manufacture of oil field chemicals, xanthum
gums, agricultural chemicals and paper processing additives.
Glyoxal Reactants and Resins
Glyoxal reactants or permanent press resins are custom-made products sold
to textile mills to provide wrinkle resistance and shrinkage control for cotton
and cotton blend fabrics used in household furnishings and apparel. Success in
this product line requires the technical ability to develop cost-effective
reactants, custom designed to solve the problems of the textile mills.
Management believes that the Company's technical expertise and vertical
integration with glyoxal production provide it with a significant competitive
advantage. The Company also manufactures glyoxal-based resins for the paper
industry where they are used to enhance absorbency.
Natural Chemicals
Natural chemicals consist of products which are used in the
textile, paper and leather industries to thicken water. Products in this group
are made from agar-agar, starch, guar, cassia, alginates, enzymes and tamarind.
These natural raw materials are chemically modified and blended to produce
finished products. Textile printers require thickeners for achieving specific
levels of ink viscosity. These additives are also used for sizing in the paper
industry and also for leather treatment. The manufacturing process is customized
for each customer and consists of chemical treatment, milling, drying and
blending. The Company produces 40 different semifinished natural chemical
products which can then be combined with 100 different ingredients to meet
customer requirements.
Other Textile Processing Products
The Company produces a range of textile chemical processing
products including softeners, defoamers, lubricants, scours, dye bath additives
and other processing aids. The Company also markets complementary textile
chemicals on a commission basis, including melamine resins, antimigrants, dye
fixatives for the dyeing process and flame retardants. The Company supplies the
textile industry with a complete line of aqueous dispersions of organic pigments
and pigment fixatives for the printing of home furnishings and apparel. The
Company also manufactures water repellent chemicals used for non-woven fabrics.
Management believes that by offering a broad line of such textile processing
products to textile mills, the Company will be able to take advantage of growth
opportunities that may exist for these products.
Sales, Marketing and Distribution
Freedom sells specialty and fine chemicals to manufacturers who
incorporate the Company's products into their finished goods. Some of the
Company's well-known customers include Borden, The Coca-Cola Company, Cytec
Industries, The Mead Corporation, The Pepsi Cola Company, Procter and Gamble
Company, Ralston Purina, S.C. Johnson & Sons and Sherwin-Williams. The Company
has more than 5,500 customers. Sales to the top ten customers represented
approximately 16.3% of the Company's 1996 net sales and no single customer
represented more than 2.7% of the Company's 1996 net sales.
The Company's products are often critical to the performance of
its customers' products but typically represent a relatively small percentage of
the total product cost. Management believes that there are three key factors to
marketing its products successfully:
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o Quality. Many of the Company's specialty and fine chemical
products are used to ensure and enhance the performance of
their customers' end products and therefore consistency and
high quality are essential. The Company believes that its
reputation as a manufacturer of value-added, high-quality
specialty and fine chemicals provides it with a competitive
advantage when marketing its products to existing and
potential customers.
o Highly Trained and Technical Sales Force. Because of the
specialized nature of many of the niche markets the Company
serves, its direct sales force must have advanced technical
knowledge of the Company's products and the applications for
which they are used. As a result, many of the Company's
direct salespeople have a number of years of industry
experience and significant technical expertise related to
the products they sell.
o Superior Customer Service. Many of Freedom's research and
development specialists provide technical support services
directly to the customer enabling the Company to offer
formulating expertise and develop a better understanding of
customer's process technology. In addition to technical
support, the Company endeavors to meet the demands of its
many customers who operate "just-in-time" inventory systems
requiring prompt and reliable delivery of the Company's
specialty and fine chemical products. The Company's
strategically located manufacturing facilities as well as
its broad distribution network allow it to meet the
technical and logistical demands of its diverse customer
base.
The Company has recently expanded both its direct selling efforts
and its international distributor network. The Company anticipates growth in
many of its product groups as Mexico, Central and South America and Asia
continue to develop economically and consumption of food, beverage, household
and other products containing products manufactured by the Company increases.
The Company believes there are significant opportunities to enhance
international revenues by focusing on increasing the level of technical service,
providing more assistance in product development, and broadening the scope of
the Company's product line offered to its international customers. In addition,
the Company continues to seek opportunities to cross-market products to both its
domestic and international customers.
Raw Materials
The raw materials used in the Company's business consist chiefly
of a wide variety of organic intermediates and inorganic chemicals which are
purchased from manufacturers in the United States, Europe and Asia. In 1996, no
single raw material accounted for more than 11% of the Company's cost of goods
sold. Total raw materials cost was approximately $135.1 million or 45% of net
sales in 1996.
Many of the Company's products are produced from toluene whose
primary use is as an octane enhancer in gasoline. Consequently, the price of
toluene varies with the prices of competing gasoline additives and premium and
clear gasoline. Except in unusual circumstances (e.g., during the Persian Gulf
War), the price of toluene has been relatively stable over the past five years.
Total toluene costs in 1996 were approximately $24.6 million. Due to increased
demand for toluene in Asia, the Company's Asian toluene suppliers have indicated
that beginning in 1997, they will not be able to meet the Company's supply
requirements. Consequently, the Company has made arrangements to obtain toluene
from suppliers located in areas adjacent to the Gulf of Mexico.
The raw materials used for the Company's natural additives and
food ingredient products include guar, locust beans, cassia, alginates,
agar-agar and amino acids. The Company obtains these raw materials primarily
from suppliers in India and China, and believes that these raw materials are
generally available in sufficient quantities to meet its supply needs. The
primary raw materials used for the Company's pharmaceutical products are cystine
and cysteine, which are derived from human hair. Srinivasa, a joint venture in
which the Company has a 40% interest, sells cystine production to the Company,
supplying one third of the Company's needs. The Company also
9
<PAGE>
purchases cystine and cysteine from suppliers in China. The Company's raw
material strategy for products in its Pharmaceutical Intermediates and Natural
Additives group is to procure and process raw materials in countries such as
India, a country which is an important source of raw materials and where labor
costs are relatively low and the Company has long established relationships.
The Company believes that for most of its raw materials alternate
sources of supply are available to the Company at competitive prices.
Research and Development
Research, development and technical service efforts are conducted
by approximately 50 chemists and technicians at the various facilities of the
Company. Technical service is an important aspect of the Company's overall sales
effort. Many of the Company's products are sold on the basis of their ability to
solve a specific problem for a customer. In many cases, products are custom
designed or reformulated to solve a particular customer's operating problems or
product needs.
Technology is an important component of the Company's competitive
position, providing the Company with a low cost position and enabling the
Company to produce high quality products. Patents protect some of the Company's
technology, but a great deal of the Company's competitive advantage revolves
around know-how built up over many years of commercial operation, including 20
years of operating experience in carrying out the continuous catalytic oxidation
of ethylene glycol and toluene by the Company and its predecessors. The Company
does not believe its technical expertise can be easily duplicated. The Company
recently commercialized a process for thymidine, an AZT intermediate.
The Company possesses important ultra filtration technology for
the purification of food colors, dyes and pigments. The Company also possesses
what it believes to be unique "flushing" technology and know-how for the
production of flushed pigments. This technology enables the Company to produce
pigments of extremely fine particle size, which improves the pigments' quality.
Finally, the Company and its predecessors have over 20 years experience in the
production of carbonless copy dyes and a strong technological position in the
production of blue color formers.
The Company devotes its research and development resources to the
development of new products, the development of new processes, the improvement
of existing processes and products, and technical support for its customers.
Patents and Trademarks
The Company owns patents, tradenames and trademarks and uses
know-how, trade secrets, formulae and manufacturing techniques which assist in
maintaining the competitive positions of certain of its products, including food
colors, pigments, dyes, flavors and fragrances. Patents, formulae and know-how
are of particular importance in the manufacture of a number of the dyes and
flavor ingredients sold in the Company's specialty chemical business. The
Company believes that no single patent, trademark or other individual right is
of such importance, and, accordingly, the expiration or termination thereof
would not materially affect its business. The Company is also licensed to use
certain patents and technology owned by foreign companies to manufacture
products complementary to its own products, for which it pays royalties in
amounts not considered material.
Customers
The Company does not consider any segment of its business to be
dependent on a single customer or a few customers, the loss of any of which
would have an adverse effect on the Company's results. No single customer
accounted for more than 2.7% of the Company's 1996 net sales. For additional
information on the Company's customers, see "--Products" and "--Sales, Marketing
and Distribution."
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<PAGE>
Competition
The Company is engaged in a highly competitive industry and, with
respect to all of its major products, faces competition from a substantial
number of global and regional competitors. Some of the companies with which the
Company competes have greater financial, research and development, production
and other resources than the Company. The Company's competitive position is
based principally on customer service and support, product quality,
manufacturing technology, facility location and, to a lesser extent, price. See
"--Sales, Marketing and Distribution."
Employees
As of December 31, 1996, the Company had approximately 1,044
employees worldwide, of whom 47%were salaried employees and 53% were hourly
employees. Of these, 178 employees were in management and administration, 93 in
sales and marketing, 111 were chemists or technicians and 662 were in
production. Approximately 50% of the Company's domestic employees were covered
by collective bargaining agreements with three unions. These agreements expire
from June 1998 through March 1999. The Company considers its relations with both
its union and non-union employees to be good.
Environmental Matters
Chemical companies such as the Company are subject to extensive
environmental laws and regulations concerning, among other things, emissions to
the air, discharges to land, surface water and subsurface water, the generation,
handling, storage, transportation, treatment and disposal of waste and other
materials, and the remediation of environmental pollution relating to such
companies' (past and present) properties and operations ("Environmental Laws").
Costs and expenses under such Environmental Laws incidental to ongoing
operations are generally included within operating budgets. Potential costs and
expenses may also be incurred in connection with the repair or upgrade of
facilities to meet existing or new requirements under Environmental Laws. In
many instances, the ultimate costs under Environmental Laws and the time period
during which such costs are likely to be incurred are difficult to predict.
In connection with the purchase of a number of the Company's
facilities, the Company has obtained contractual rights to be indemnified for
certain types of environmental liability relating to the prior operations of
those facilities. In addition, pursuant to the federal Comprehensive
Environmental Response, Compensation and Liability Act of 1990, as amended
("CERCLA" or "Superfund"), the Company has a private cause of action against
other potentially responsible parties ("PRPs"), including prior owners or
operators. As described more fully below, the Company consequently believes that
the costs to be incurred in connection with most of the significant
environmental liabilities associated with conditions existing prior to the
Company's ownership of, and remediation actions that may be required relating
to, certain of the Company's past and present properties will be the
responsibility of other parties and, therefore, are not likely to have a
material adverse effect on the Company's financial position, although the effect
on results of operations and cash flows could be material when these conditions
are resolved in a future period. However, no assurance can be given that the
parties discussed below will have the financial resources to perform fully their
responsibilities under such agreements or that such other parties will not
challenge their liability under such agreements. In any such event, the Company
may be required to incur significant liabilities. As of December 31, 1996, the
Company had reserves of approximately $15.8 million for certain environmental
expenditures as discussed in more detail below. See notes 3 and 11 to the
Company's Consolidated Financial Statements included herein.
Under certain Environmental Laws, the Company may be liable for
the remediation of environmental pollution at certain on-site and off-site waste
management areas. Under CERCLA and similar state laws, the current and former
owner or operator of real property may be liable for the costs of removal or
remediation of certain hazardous or toxic materials on, under or emanating from
such property, regardless of whether the owner or operator knew of, or was
responsible for, the presence of such materials. In addition, CERCLA and similar
state
11
<PAGE>
laws impose liability for investigation, cleanup costs and natural resource
damages on persons who disposed of or arranged for the disposal of hazardous
substances at third-party sites. Under the federal Resource Conservation and
Recovery Act of 1976, as amended ("RCRA"), the holder of a permit to treat or
store hazardous waste can be required to remediate environmental pollution from
solid waste management areas at the permitted facility regardless of when the
contamination occurred. Under the New Jersey Industrial Site Recovery Act
("ISRA"), formerly known as the Environmental Cleanup Responsibility Act, the
owner of an industrial establishment can be required to remediate environmental
pollution at the time of a transfer or shutdown of the facility.
The Company has sent wastes from its operations to various
third-party waste disposal sites. From time to time the Company receives notices
from representatives of governmental agencies and private parties contending
that the Company is potentially liable for a portion of the investigation and
remediation costs and damages at formerly owned or operated sites and
third-party sites, some of which are discussed herein. Although there can be no
assurance, the Company does not believe that its liabilities in connection with
such third-party sites, either individually or in the aggregate, will have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
Hilton Davis. Extensive environmental studies of the Hilton Davis
facility in Cincinnati have been conducted by Sterling Winthrop, a former owner
of the facility, pursuant to a consent decree between Sterling Winthrop and the
State of Ohio. These studies have identified soil and ground water pollution at
a number of locations throughout the facility. Virtually all of this
contamination occurred prior to 1987. In connection with the Company's purchase
of Hilton Davis from PMC, Inc. ("PMC"), the Company entered into an
Environmental Matters Agreement (the "EMA"), dated September 9, 1993, with
Sterling Winthrop which, with certain exceptions, requires Sterling Winthrop to
take responsibility for environmental conditions that predate 1987. Claims for
indemnity for any such conditions not identified in the EMA must be made within
ten years and are subject to a maximum amount of $20 million. Under the EMA, the
Company has agreed to share responsibility with Sterling Winthrop for two
specific environmental conditions, provided, however, that the Company's
obligations shall not exceed $1.0 million. Currently, the Company has not
incurred any costs in connection with these matters. In addition, the EMA
requires the Company to be responsible for environmental conditions that
post-date 1986. In addition, pursuant to the Stock Purchase Agreement with PMC
(the "PMC Stock Purchase Agreement"), PMC made certain environmental
representations and warranties and indemnified Freedom for its breach thereof,
subject to a maximum amount of $1.0 million. In connection with its purchase of
Hilton Davis, the Company's environmental consultant conducted a Phase I
Assessment of the Cincinnati facility. This assessment did not disclose any
environmental conditions for which the Company is likely to be responsible which
would have a material adverse effect on the Company's financial position,
results of operations or cash flows.
At the time the Company and Sterling Winthrop entered into the
EMA, Sterling Winthrop was a wholly owned subsidiary of Eastman Kodak. In
November 1994, Eastman Kodak sold the capital stock of Sterling Winthrop to
SmithKline Beecham plc ("SmithKline Beecham"). SmithKline Beecham subsequently
sold the capital stock of Sterling Winthrop to Miles Inc., a subsidiary of Bayer
AG. Following these transactions, Sterling Winthrop advised the Company that
Eastman Kodak had retained Sterling Winthrop's liabilities in respect of Hilton
Davis and to address further correspondence in respect of the EMA to Eastman
Kodak. Subsequently, 360 North Pastoria Environmental Corporation, a subsidiary
of Eastman Kodak ("360 North"), notified the Company that (i) the Company should
send all future communications under the EMA to 360 North and (ii) Sterling's
responsibilities under the EMA would be managed by 360 North. Accordingly, since
the Sterling Winthrop sale the Company has been dealing with 360 North in
respect of matters arising under the EMA and 360 North has been performing
Sterling Winthrop's obligations under the EMA (including bearing the cost of the
performance of the work plan for closure of the surface impoundments at the
Cincinnati facility referred to below). Notwithstanding the foregoing, neither
Eastman Kodak nor 360 North has formally acknowledged to the Company its
assumption of Sterling Winthrop's obligations under the EMA nor has the Company
formally consented to any such assumption.
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<PAGE>
The State of Ohio has approved a work plan for closure of surface
impoundments formerly involved in wastewater treatment operations at the
Cincinnati facility. A former on-site landfill is also under investigation.
Under the EMA, Sterling Winthrop is wholly responsible for these matters and has
commenced performing the remediation of the surface impoundments. Consequently,
the Company believes that it will not be required to incur significant liability
in connection with such conditions.
On or about June 24, 1994, the United States Environmental
Protection Agency ("EPA") Region 5 filed an administrative complaint (Complaint
and Proposed Compliance Order, BEW 013-94) seeking approximately $1.6 million in
fines and penalties against Hilton Davis for alleged violations of EPA
regulations relating to industrial boilers. The particular unit which is the
subject of the complaint is out of service and has not operated since August 21,
1992. The Company and the EPA have agreed to settle this matter for a total
amount of $258,000, consisting of cash and a to-be-valued supplemental
environmental project. The Company has made a claim for indemnification against
PMC, the former owner of Hilton Davis, with respect to this matter; PMC has
indicated that it will contest the claim. There can be no assurances that such
claim will be successful.
In connection with the requirements of New Jersey's ISRA relating
to certain prior transfers of the Hilton Davis facility in Newark, New Jersey,
Sterling Winthrop, as a "former owner," investigated and completed certain
remedial actions relating to soil and ground water pollution at that facility.
Under the EMA, Sterling Winthrop is also required to comply with its previous
obligations under ISRA. Manufacturing operations at this facility ceased in May
1996. While the Company believes that it will not be required to incur
significant liability in connection with environmental conditions at this
facility, there can be no assurance that the State of New Jersey will not
conclude, in the future, that additional remediation is required, for which the
Company might be considered responsible.
On or about February 24, 1994, the State of New Jersey filed a
complaint in the Superior Court against Hilton Davis and thirty-two other
defendants (State of New Jersey v. Ace Service Corp., No. SOM L 247-94, Somerset
County) under the New Jersey Spill Control Act and other laws seeking recovery
of past and future costs incurred in response to alleged releases and threatened
releases of hazardous substances at a third-party warehouse. Sterling Winthrop
assumed the defense of this matter pursuant to the EMA and continues to defend
Hilton Davis. In the event of an adverse judgment, the Company expects to be
fully indemnified for all costs, including any remediation costs.
Freedom Textile. In connection with the Company's purchase of
Freedom Textile's Charlotte, North Carolina facility from American Cyanamid, the
Company entered into the Agreement for the Purchase and Sale of Assets, dated
February 28, 1992 (the "Freedom Textile Asset Purchase Agreement"), with
American Cyanamid, which requires American Cyanamid to take responsibility for
corrective actions with respect to certain environmental conditions. In January
1994, American Cyanamid distributed to its stockholders all of the capital stock
of its chemicals unit, Cytec. The Company believes that in connection with this
transaction Cytec assumed American Cyanamid's environmental indemnity
obligations to the Company under the Freedom Textile Asset Purchase Agreement.
Since the Cytec spin-off, the Company has been dealing with Cytec in respect of
matters arising under the Freedom Textile Asset Purchase Agreement and Cytec has
been performing American Cyanamid's obligations under the Agreement. The
Settlement Agreement, dated December 30, 1994, among Freedom Textile, Cytec and
American Cyanamid, which settled certain claims, including certain environmental
claims regarding the Charlotte facility, recited that Cytec is the successor to
American Cyanamid with regard to the Freedom Textile Asset Purchase Agreement.
The Company has notified American Cyanamid that it is cooperating with Cytec in
coordinating the fulfillment of American Cyanamid's obligations under the
Freedom Textile Asset Purchase Agreement as a matter of convenience to American
Cyanamid and has not waived its contractual rights to look to American Cyanamid
as the party liable for performance under the Freedom Textile Asset Purchase
Agreement.
In connection with the Charlotte facility's hazardous waste (i.e.,
RCRA) permits, the EPA and the State of North Carolina have required the
facility to conduct a RCRA facility investigation and to implement corrective
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<PAGE>
action as may be necessary at two on-site solid waste management units. Pursuant
to the Freedom Textile Asset Purchase Agreement, American Cyanimid is
responsible for any requirements which may be imposed by the EPA or the State of
North Carolina with respect to these two solid waste management units as well as
other pre-existing environmental conditions. Consequently, the Company believes
that it will not be required to incur significant liability in connection with
these units.
The Company acquired certain assets of Achem Corporation ("Achem")
in 1993 as part of the Hilton Davis Acquisition and in 1995 transferred such
assets to a subsidiary of Freedom Textile. Environmental investigations have
revealed soil and groundwater contamination at the Cowpens, South Carolina
facility. The groundwater contamination has migrated off-site. The Company has
reached agreement with the South Carolina Department of Health and Environmental
Control ("SCDHEC") on an administrative consent agreement which requires the
Company to conduct additional investigation and take corrective measures. The
Company has submitted a Remedial Investigation Work Plan to SCDHEC. SCDHEC has
recently advised the Company that such work plan will be accepted following
certain minor revisions. Certain former owners of Achem, which sold the facility
to Hilton Davis, have agreed to assume and pay all amounts due resulting from
the consent agreement or incurred in performance of Achem's obligations under
the consent agreement, and have further agreed that such costs may be deducted
from the final purchase price payment due to them of $350,000. Currently,
however, the Company believes that remediation costs are likely to exceed this
amount and, in any event, may exceed the financial resources of such owners.
Environmental investigations have also revealed soil and
groundwater pollution under the chemicals process building at the Cowpens site,
the source of which is unknown at this time. The contamination consists of a
solvent floating on groundwater. The Company has implemented an Initial Product
Abatement Plan ("IPAP") approved by SCDHEC and requested that the IPAP be
terminated with ongoing monitoring.
During March 1996, the Company instituted litigation
against PMC, all the former owners and operators of the Cowpens site and
IT Corporation in the U.S. District Court of South Carolina, Spartanburg
Division (Hilton Davis et al. v. PMC, Inc. et al., No. 7:96-795-20). The
action seeks recovery of all costs of investigation and remediation of soil
and groundwater contamination at that site. The claims against PMC are
based on the PMC Stock Purchase Agreement as well as on CERCLA. There can be
no assurance that the claims will be successful.
As of December 31, 1996, the Company had a reserve of
approximately $1.9 million for environmental expenditures associated with
remediation of the Cowpens facility. Although the Company believes that this
reserve is based on a reasonable estimate of potential costs of remediation,
there can be no assurance that such costs will not exceed this amount.
In connection with the sale of the former facility located in
Greenville, South Carolina, Freedom Textile has agreed to reimburse the buyer
for the costs of removing contaminated soil resulting from an underground
storage tank which was removed several years ago. The soil removal has not
occurred but due to the anticipated limited extent of contamination, the Company
does not believe that the cost of the soil removal will be significant.
Moreover, the Company has tendered a claim for indemnification to Sterling
Winthrop. Neither Sterling Winthrop nor Eastman Kodak has accepted
responsibility for this claim.
Reilly Whiteman. In connection with the Reilly-Whiteman
Acquisition, the Company and Reilly-Whiteman entered into the Asset Purchase
Agreement, dated November 8, 1994 (as amended, the "Reilly-Whiteman Asset
Purchase Agreement"). Pursuant to the Reilly-Whiteman Asset Purchase Agreement,
Reilly-Whiteman remains responsible for investigating and remediating certain
environmental matters at the Conshohocken facility which arose from
Reilly-Whiteman's operation of that facility prior to the acquisition. These
environmental matters include contamination from fuel oil leaking from an
underground storage tank and a tank farm at such facility. Pursuant to the
Reilly-Whiteman Asset Purchase Agreement, Reilly-Whiteman is currently
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<PAGE>
addressing all of these matters. Consequently, the Company does not believe that
these matters are likely to be material to the Company's financial position,
results of operations or cash flows. Manufacturing operations at the
Conshohocken facility ceased in April 1996.
Kalama. In connection with a RCRA investigation of the Kalama,
Washington facility by the EPA and the State of Washington, the EPA has required
the Company to conduct a RCRA facility investigation ("RFI") and to implement
corrective action as may be necessary on portions of the site. The EPA has
approved the Company's interim corrective measures ("ICM") work plan and RFI
report describing proposed interim remediation of the site. The Company is now
designing proposed interim corrective measures and studying data to prepare a
proposed final remediation plan. In connection with these submissions, the EPA
will require remediation of certain environmental conditions at the Kalama
facility. The Company believes that the interim corrective measures will provide
most, if not all, of the remediation required by the EPA.
In connection with the Company's purchase of Kalama from BC Sugar,
the Company entered into the Stock Purchase Agreement among Freedom, Chatterton
Petrochemical Corporation, a wholly owned subsidiary of BC Sugar ("Chatterton"),
and BC Sugar, dated as of May 11, 1994, and subsequently amended (the "Kalama
Stock Purchase Agreement"), which, with certain exceptions, requires BC Sugar
and Chatterton to indemnify and reimburse the Company for the RCRA corrective
actions at Kalama. Pursuant to the agreement, BC Sugar and Chatterton remain
responsible for the costs of investigation, negotiations with the EPA and the
State, and installation of the capital expenditure component of the cleanup
required by EPA or the State at the Kalama facility. BC Sugar and Chatterton are
also collectively responsible for a total of 50% of the costs of operation and
maintenance of the corrective action until five years after the installation of
the capital expenditure component at the site. All of the indemnifications and
other provisions in the Kalama Stock Purchase Agreement whereby BC Sugar and
Chatterton agreed to remain responsible for costs, including those provisions
described below, are subject to an aggregate limit of $44 million, including
certain costs which may be directly incurred or paid by BC Sugar and Chatterton.
As of December 31, 1996, approximately $5.5 million had been credited against
this limit.
In September 1995, an action was filed against Kalama by the U.S.
Department of Justice on behalf of the EPA, alleging violations of the Clean Air
Act at the Kalama facility which existed prior to the Company's purchase of it.
The Company has executed a consent decree settling the matter and expects
execution by the Department of Justice and the EPA in the near future. The
settlement contemplates the payment of a penalty as well as an additional
payment to fund supplemental environmental projects, both totaling approximately
$1.6 million. Under the Kalama Stock Purchase Agreement, BC Sugar and Chatterton
agreed to remain responsible for certain liabilities arising from violations of
environmental laws occurring before May 26, 1994 at sites owned by Kalama to the
extent such liabilities in the aggregate exceed certain thresholds and subject
to the $44 million aggregate limit. The Company has tendered a formal
indemnification claim to BC Sugar for the alleged air violations. Consequently,
the Company does not believe that this penalty is likely to be material to the
Company's financial position, results of operations or cash flows.
In connection with the requirements of New Jersey's ISRA relating
to certain prior transfers of the Kalama facility in Garfield, New Jersey, the
State and the Company have investigated contamination of the site and the
potential for migration of contamination offsite. Kalama terminated
manufacturing operations at the Garfield facility in May 1994. Under the Kalama
Stock Purchase Agreement, subject to the $44 million aggregate limit described
above, BC Sugar and Chatterton are responsible for the costs of investigation,
negotiations with the State, installation of the capital expenditure component
of the remedy and 50% of the costs of operation and maintenance of the remedy
until five years after its installation.
In connection with the settlement of certain litigation between
Kalama and Tenneco Polymers, Inc. ("Tenneco Polymers"), the successor in
interest of the prior owner of the Garfield site, Kalama entered into a
Settlement Agreement (the "Tenneco Settlement Agreement"), dated April 28, 1994,
with Tenneco Polymers. The Tenneco Settlement Agreement requires Tenneco
Polymers to conduct the cleanup of the Garfield facility required
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by the State of New Jersey and to pay for 80% of the cleanup costs and makes
Kalama responsible for the remaining 20% of such costs. Pursuant to the Kalama
Stock Purchase Agreement, BC Sugar and Chatterton have agreed to remain
responsible for Kalama's portion of the cleanup costs under the Tenneco
Settlement Agreement subject to the limitations on their liability described
above. In connection with the settlement of the litigation, Tenneco Corporation
has entered a guarantee dated May 2, 1994, for the benefit of Kalama, of Tenneco
Polymers' obligations under the Tenneco Settlement Agreement. Pursuant to the
Tenneco Settlement Agreement, Tenneco Polymers has assumed responsibility for
the Garfield site investigation and is currently negotiating the nature and
scope of the required remediation with the State of New Jersey.
Pursuant to the Kalama Stock Purchase Agreement, BC Sugar also
remains responsible for the vast majority of any necessary costs of remediation
of asbestos at the Garfield facility, which is currently estimated to cost
approximately $840,000. However, because the manufacturing operations at the
facility have ceased and because the facility is to be remediated under ISRA,
the Company has not yet determined the extent of asbestos remediation that is
legally required. The Company does not believe that this matter will materially
impact the Company's financial position, results of operations or cash flows.
Extensive environmental studies of the Kalama facility in
Beaufort, South Carolina have been conducted by Kalama's subsidiary Kalama
Specialty Chemicals, Inc. ("KSCI"), pursuant to an administrative order of
consent between KSCI and the EPA. The facility has been listed on the EPA's
National Priorities List pursuant to CERCLA. As a result of these studies, the
EPA has chosen a remedy which KSCI has agreed to perform pursuant to a consent
decree which has been lodged in U.S. District Court. Manufacturing operations at
this facility have ceased. Under the Kalama Stock Purchase Agreement, subject to
the $44 million aggregate limit described above, BC Sugar and Chatterton have
undertaken responsibility for the costs of investigation, negotiations with the
EPA, installation of the capital expenditure component of the remedy and 50% of
the costs of operation and maintenance of the remedy until five years after its
installation.
As of December 31, 1996, the Company had reserves of approximately
$15.8 million for environmental expenditures associated with remediation of the
Kalama, Garfield and Beaufort facilities, which expenditures the Company expects
to be made over the next 30 years.
Kalama has been named as a PRP pursuant to CERCLA at the Pasco
Sanitary Landfill site ("Pasco") in Washington State. At Pasco, Kalama has been
participating in voluntary site investigation and cleanup based on a share of
less than approximately two percent of the total site liability. While there can
be no assurance that Kalama's final share of total liability at Pasco will not
be greater than two percent, there are numerous solvent entities with extensive
resources which have also been named as PRPs at Pasco. Various contingencies
such as the incomplete status of investigation, the uncertainty of remediation
selection and effectiveness, the search for additional PRPs, the absence of
binding commitments allocating liability among PRPs, and the joint and several
nature of liability under CERCLA make it impossible to predict Kalama's total
liability at Pasco at this time.
Under the Kalama Stock Purchase Agreement, BC Sugar and Chatterton
remain responsible for the offsite CERCLA sites identified on schedules thereto,
including Pasco. Subject to the $44 million aggregate limit described above, BC
Sugar's and Chatterton's liability for these sites continues until three years
after the installation of capital expenditures component of remedies at all of
the Kalama, Washington, Garfield and Beaufort facilities, but in any event no
later than May 26, 2004.
Freedom Chemical Diamalt. Since 1961, the Company's facility in
Vernon, France has been discharging production wastewater without pretreatment
into the River Seine. According to an analysis completed by the Company in early
1996, such production wastewater includes concentrations of pollutants which are
not in compliance with legal limits or limits which are acceptable for discharge
to the municipal wastewater treatment plant. The Company plans to resolve this
matter by negotiating permission to discharge the wastewater to the municipal
wastewater treatment plant for a fee, constructing a wastewater treatment plant
for an estimated cost of
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$250,000 or by shifting production of certain raw materials to the facility
under construction in India. The Company believes, based upon the opinion of the
Company's independent environmental consultant, that the French environmental
authorities will refrain from penalizing the Company for these discharges while
a solution is sought. Although there can be no assurance that such negotiations
will be successful or that the environmental authorities will not penalize the
Company for such discharges into the river, the Company believes that, if
assessed, any such penalties are not likely to be material to the Company's
financial position or results of operations.
Item 2. PROPERTIES
The Company has ten manufacturing facilities which allow it to
carry out a broad array of chemical reactions. The chart below sets forth as of
December 31, 1996 the locations and sizes of the Company's manufacturing
facilities and products manufactured at each of its sites:
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<PAGE>
<TABLE>
<CAPTION>
Approximate
Location Owned or Square Products
Leased (a) Footage Manufactured
- ------------------------------- --------------------- ----------------------- ----------------------------------
<S> <C> <C> <C>
Kalama, Washington Owned 550,000 Food and Personal Care Products;
Specialty Organic Chemicals and
Intermediates
Charlotte, North Carolina Owned 500,000 Textile and Paper Chemicals
Cincinnati, Ohio Owned/Leased(b) 450,000 Food and Personal Care
Ingredients;
Organic Pigments and Dyes
Cowpens, South Carolina Owned(c) 40,000 Textile and Paper Chemicals
Raubling, Germany Owned/Leased(d) 354,000 Pharmaceutical Intermediates and
Natural Additives
Munich, Germany Leased(e) 162,000 Textile and Paper Chemicals;
Food and Personal Care
Ingredients
Vernon, France Owned 47,300 Textile and Paper Chemicals
Dewsbury, Owned 14,000 Organic Pigments and Dyes
United Kingdom
Vadodara, India Owned(f) 295,100 Pharmaceutical Intermediates and
Natural Additives
Madras, India Owned/Leased(g) 112,700 Pharmaceutical Intermediates and
Natural Additives
</TABLE>
- --------------
(a) For information concerning the Company's rental obligations, see note 12 to
the Company's Consolidated Financial Statements included herein.
(b) The land on which the plant is located is leased, with the lease expiring
in 2043.
(c) The plant is scheduled to be closed in May 1997.
(d) Approximately 15% of the land on which the plant is located is leased and
with the lease expiring in 2001.
(e) The land on which the plant is located is leased. The lease on part of the
land on which the plant is located is renewable at the Company's option
through 2009. The Company is currently renegotiating the lease on the other
part of the land on which a warehouse and research facility are located,
which lease expires in December 1996. To the extent such lease is not
renegotiated, the Company plans to relocate the warehouse and research
facility.
(f) The plant is owned by a joint venture in which Freedom Chemical Diamalt has
a 74% interest and Kamlakant Chottalal Exporters Private Limited, a company
registered under the Indian Companies Act, 1956, has a 26% interest. The
land on which the plant is located is owned.
(g) The land on which the plant is located is leased, with the lease expiring
in 2010.
18
<PAGE>
All of the Company's manufacturing facilities, except its
manufacturing facility in Kalama, Washington, are operating with excess
capacity. The Company's manufacturing facility in Kalama, Washington is
currently operating at a capacity level of approximately 90%.
The Company employs both continuous and batch process technologies
to produce its products. Glyoxal, benzoic acid, phenol and benzaldehyde are
produced using continuous processes. Batch processing is used to convert these
products into downstream specialty textile chemicals and food ingredients. Batch
processing technologies are also used in the production of most of the coloring
agents, specialty organics and paper coating products.
The Company is subject to extensive regulation by numerous
governmental authorities, including the FDA and corresponding state and foreign
agencies, and to various domestic and foreign safety standards. The Company's
regulatory compliance programs have been expanded to encompass compliance with
international standards known as ISO 9002 standards, which will become mandatory
in Europe in 1999. The FDA is in the process of adopting the ISO 9002 standards
as regulatory standards for the United States, and it is anticipated that these
standards will be phased in for U.S. manufacturers over a period of time. Three
of the Company's plants have achieved ISO 9002 certification and the Company
plans to implement the ISO 9002 standards in its other facilities. The Company
does not believe that adoption of the ISO 9002 standards by the FDA will have a
material effect on its financial condition or results of operations.
Item 3. LEGAL PROCEEDINGS
On March 28, 1994, a grand jury sitting in the Southern District
of Ohio issued a subpoena (the "Hilton Davis Subpoena") to Hilton Davis, seeking
the production of certain documents to determine whether there has been or may
have been a violation of the Sherman Act (15 U.S.C. Section 1). The Hilton Davis
Subpoena covers the period from January 1, 1988 through April 5, 1994 and seeks
production of documents relating to pigments (defined as raw materials used in
the production of offset and gravure printing ink). The investigation is being
conducted by the Antitrust Division of the Department of Justice. The Company
completed its response to the Hilton Davis Subpoena on July 8, 1994. Three
Hilton Davis employees have been subpoenaed and have testified before the grand
jury and three other employees of the Company were interviewed by the Department
of Justice in lieu of requiring their testimony before the grand jury. It is
premature to assess what action, if any, the grand jury may take. The Company
has been informed that it is not a target of the investigation.
The Company is subject to various legal proceedings and
administrative actions, all of which are of an ordinary or routine nature
incidental to the operations of the Company. Although it is impossible to
predict the outcome of any legal proceeding, in the opinion of the Company's
management, such proceedings and actions are not likely to have a material
adverse effect on the Company's financial position or results of operations. For
a description of certain environmental matters and related legal proceedings
involving the Company, see "Item 1. Business--Environmental Matters."
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
This item is not applicable.
19
<PAGE>
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
There is no established trading market for the Company's Series
A Common Stock (the "Common Stock") and Series B Common Stock.
Recent Sales of Unregistered Securities.
Since January 1, 1996 the Company has sold or issued the following
securities that were not registered under the Securities Act:
1. On October 17, 1996 the Company issued 56,635 shares of Common
Stock to Joseph Littlejohn & Levy Fund, L.P. for an aggregate purchase price of
$7,079,375.
2. On October 17, 1996 the Company issued 22,904.26 shares of
Common Stock to Joseph Littlejohn & Levy Fund II, L.P. for an aggregate purchase
price of $2,863,032.50.
3. On October 17, 1996 the Company issued 460.74 shares of Common
Stock to Robert A. Kirchner for an aggregate purchase price of $57,592.50.
4. On December 2, 1996, the Company issued 4,828.22 shares of
Common Stock to the Sorgenti Family Partnership, L.P. for an aggregate purchase
price of $603,527.50.
5. On December 2, 1996, the Company issued 8,643.64 shares of
Common Stock to Harold A. Sorgenti for an aggregate purchase price of
$1,080,455.
6. On December 2, 1996, the Company issued 217.27 shares of Common
Stock to James Trecek for an aggregate purchase price of $27,158.75.
7. On December 2, 1996, the Company issued 1,082.94 shares of
Common Stock to Donald W. McPhail for an aggregate purchase price of
$135,367.50.
8. On December 2, 1996, the Company issued 171.79 shares of Common
Stock to Dale E. Smith for an aggregate purchase price of $21,473.75.
9. On December 2, 1996, the Company issued 572.79 shares of Common
Stock to Robert G. Kitchen for an aggregate purchase price of $71,598.75.
The issuances of securities described above were made in reliance
on the exemption from registration provided by Section 4(2) of the Securities
Act for transactions not involving a public offering.
20
<PAGE>
Item 6. SELECTED FINANCIAL DATA
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical consolidated
financial data for the periods indicated. The selected historical consolidated
financial data as of December 31, 1992, 1993 and 1994 and for the 1992 Period
and the year ended December 31, 1993 have been derived from the Company's
audited Consolidated Financial Statements not included herein. The selected
historical consolidated financial data as of December 31, 1995 and 1996, and for
the years ended December 31, 1994, 1995 and 1996, have been derived from the
Company's audited Consolidated Financial Statements and should be read in
conjunction with such audited Consolidated Financial Statements and the notes
thereto included herein.
<TABLE>
<CAPTION>
For the years ended December 31,
------------------------------------------------------------
1992
Period 1993 1994 1995 1996
------ ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data(a):
Net sales......................... $14,784 $54,831 $187,780 $292,888 $300,168
Cost of goods sold................ 10,695 45,295 144,845 233,533 238,247
------- ------- ------- -------- --------
Gross profit(b)................... 4,089 9,536 42,935 63,355 61,921
Selling, general and administrative
expense......................... 3,588 8,292 26,948 50,399 47,372
Noncash compensation expense(c)... -- -- 915 150 197
Research and development expense.. 173 735 2,331 4,950 4,786
Restructuring and other charges(b) -- -- -- 12,495 3,974
------- ------- ------- -------- --------
Operating income (loss)........... 328 509 12,741 (4,639) 5,592
Registration costs................ -- -- -- 2,187 --
Other expense (income), net....... -- (37) (545) (5) (711)
Interest and debt expense......... 531 1,556 6,682 13,805 14,213
Minority interest................. 144 251 284 247 260
------- ------- ------- -------- --------
Income (loss) before income taxes,
equity in income of joint ventures
and extraordinary loss.......... (347) (1,261) 6,320 (20,873) (8,170)
Provision (benefit) for income taxes (42) (291) 2,858 (3,809) (2,305)
Equity in income of joint ventures -- -- -- 74 635
------- ------- ------- -------- --------
Income (loss) before extraordinary
loss............................. (305) (970) 3,462 (16,990) (5,230)
Extraordinary loss, (net)(d)...... -- -- 1,276 -- 2,001
------- ------- ------- -------- --------
Net income (loss)................. (305) (970) 2,186 (16,990) (7,231)
Less: preferred dividends......... 345 1,621 3,694 4,611 4,571
------- ------- ------- -------- --------
Loss applicable to common
shares........................... $(650) $(2,591) $(1,508) $(21,601) $(11,802)
======= ======= ======= ======== ========
Balance Sheet Data
(at period end):
Working capital................... $2,016 $23,964 $38,326 $37,455 $ 69,002
Total assets...................... 18,377 101,234 231,064 243,156 262,914
Total long-term debt
(net of current portion)......... 6,175 41,266 93,643 119,520 153,560
Mandatory redeemable preferred
stock and minority interest...... 7,517 26,267 39,707 41,035 45,532
Stockholders' equity (deficit).... 100 265 1,747 (18,743) (22,209)
</TABLE>
21
<PAGE>
- -----------------
(a) The results of operations of the Company reflect the results of
operations of: Freedom Textile effective from its acquisition in May
1992, Hilton Davis effective from its acquisition in September 1993,
Kalama effective from its acquisition in May 1994, Reilly-Whiteman
effective from its acquisition in December 1994 and Diamalt effective
from its acquisition in January 1995. See note 3 to the Company's
Consolidated Financial Statements included herein.
(b) In 1995, the Company recorded restructuring and other charges totaling
$14,427. These charges reduced gross profit from $65,287 to $63,355 and
operating income from $9,788 to $(4,639) for the year ended December
31, 1995. In 1996, the Company recorded restructuring and other charges
totaling $10,988. These charges reduced gross profit from $68,935 to
$61,921 and operating income from $16,580 to $5,592 for the year ended
December 31, 1996. See note 17 to the Company's Consolidated Financial
Statements included herein.
(c) The Company has recorded noncash compensation expense of $915, $150 and
$197 for the years ended December 31, 1994, 1995 and 1996, respectively
related to Common Stock options granted and vested during those periods
and Common Stock sold to executive officers of the Company in
connection with the Kalama Acquisition during June 1994.
(d) In 1994, the Company recorded an extraordinary loss in connection with
the write-off of deferred financing fees upon the consolidation of all
the Company's outstanding indebtedness under the Freedom Credit
Agreement. In 1996, the Company recorded an extraordinary loss in
connection with the write-off of deferred financing fees upon the
refinancing and consolidation of the Company's outstanding
indebtedness. See note 3 to the Company's Consolidated Financial
Statements included herein.
22
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The Company is a leading global manufacturer and marketer of a
broad range of specialty and fine chemical products which are sold into several
market segments for use in food and beverage products, household and industrial
products, cosmetics and personal care products, pharmaceuticals, pet foods,
textile and paper products and many other diverse applications. The Company
operates in one industry segment, with revenues derived from sales in five core
product groups: (i) Food and Personal Care Ingredients, (ii) Pharmaceutical
Intermediates and Natural Additives, (iii) Specialty Organic Chemicals and
Intermediates, (iv) Organic Pigments and Dyes and (v) Textile and Paper
Chemicals.
The revenue growth of each of the Company's product groups
generally fluctuates in response to the overall business trends of the
industries of each of its customers. During 1996, for example, the overall
performance of the Company's Textile and Paper Chemicals group declined as
compared to prior years as a result of lower textile production rates and the
impact of mill closings, both of which resulted from decreased demand for the
end products of textile mills. Such decline was partially offset by the strong
performance of the Company's Pharmaceutical Intermediates and Specialty Organic
Chemicals and Intermediates groups attributable to expanded production capacity
of benzoates and benzaldehyde.
The Company's sales increased significantly in each of 1994 and
1995 primarily as a result of two acquisitions: the Kalama Acquisition on May
26, 1994 and the Diamalt Acquisition on January 13, 1995, which was effective on
January 1, 1995. In 1996, sales increased to $300.1 million, an increase of 1%
from 1995 as a result of sales mix from Textile and Paper Chemicals and Organic
Pigments and Dyes into Pharmaceuticals Intermediates and Natural Additives.
The Company markets its products primarily in the United States
and Europe. In 1996, approximately 53.7% of the Company's net sales were made in
the United States, 31.8% were made in Europe and 14.5% were made in other parts
of the world. The Company's operating profit and assets reflect a similar
geographic distribution. Such distribution has changed since 1994 and 1995 when
the Company's net sales in the United States represented 78.7% and 58.4%
respectively, of net sales. This change in geographic distribution has occurred
primarily as a result of the Diamalt Acquisition, but also due to increased
sales of Specialty Organics and Intermediates in the Asia-Pacific region. The
Company believes that increased sales outside of the United States will enable
the Company to take advantage of future opportunities in the rapidly expanding
economies of certain parts of Europe and the Asia-Pacific region. See note 21 to
the Company's Consolidated Financial Statements included herein.
In 1995, the Company revised the net estimated costs for
environmental matters recorded in connection with the Kalama Acquisition, which
resulted principally from changes in facts and circumstances surrounding the
ultimate costs of environmental remediation. Costs for remediating the Kalama,
Washington facility, the Garfield, New Jersey facility and the Beaufort, South
Carolina facility were reduced by approximately $13.1 million, $4.1 million and
$1.7 million, respectively. These revisions were based on subsequent
negotiations and settlements with authorities, updates of studies prepared by
the Company's environmental consultants, engineers and/or contractors as of the
acquisition date and other factors which existed as of the acquisition date.
Additionally, the favorable settlement of a legal contingency existing as of the
acquisition date resulted in a reduction of the liabilities established by the
Company by approximately $1.5 million. The aggregate liabilities,
indemnification receivable and
23
<PAGE>
deferred tax asset originally recorded in 1994 by the Company were reduced by
approximately $19.3 million, $5.6 million and $5.1 million, respectively, which
resulted in a reduction of goodwill of approximately $8.6 million.
In December 1995, as a result of the continuing decline in
financial results during the year, a resultant strategic and operational review
and the application of the Company's objective measurement tests to evaluate the
recoverability of intangible assets, the Company recognized an impairment loss
of $7.0 million associated with the closure of the Conshohocken, Pennsylvania
plant acquired in the Reilly Whiteman Acquisition. The impairment loss consisted
of the write-off of all fixed assets, goodwill and other intangibles associated
with such acquisition. The underlying factors contributing to the decline in
financial results included a significant unforeseen decline in the retail market
for textiles (primarily sheet goods) in 1995. The Reilly-Whiteman acquisition
was completed in December 1994 to complement the Company's textile business by
providing a Philadelphia plant to supply the Northeastern U.S. textile market
while the Charlotte plant continued to supply the Southeastern U.S. textile
market. Due to depressed operating results for the Company's textile chemical
product line as a result of the decline in the retail market for textiles in
1995, the Company decided to consolidate manufacturing in the more efficient of
the two plants resulting in the closure of the Reilly-Whiteman facility.
Restructuring and Other Charges
In 1995, the Company recorded $14.4 million of restructuring and
other charges. The charges included (i) the consolidation of certain of the
Company's manufacturing facilities, (ii) the sale of the Company's non-strategic
transparent iron oxide coatings business, (iii) the write-off of discontinued
inventory and capitalized expenses and (iv) the recognition of certain estimated
environmental remediation costs. As a part of these actions, the Company closed
in April 1996 its Conshohocken, Pennsylvania plant which manufactured products
in the Organic Pigments and Dyes group and in May 1996 its Newark, New Jersey
plant which manufactured products in the Textile and Paper Chemicals group and
relocated certain of those production capabilities and technology to its other
facilities. In addition, the Company reduced personnel by approximately 135
employees in both administrative and manufacturing positions.
In 1996, the Company recorded restructuring and other charges
totaling $11.0 million. These charges, which reduced gross profit from $68.9
million to $61.9 million and operating income from $16.6 million to $5.6 million
were a result of inventory obsolescence principally in the Company's Organic
Pigments and Dyes product line of $5.0 million, obsolescent inventory disposal
costs of $1.5 million, impairment in idle assets of $2.3 million, severance for
displaced workers and administrative personnel reductions of $1.4 million and
other charges of $0.8 million.
During 1994, the Company idled its salicylic acid product line.
However, the Company continued to be a reseller of this product and continued to
pursue a long term position in this market. Since projected future cash flows
from this product line were sufficient to realize the Company's investment from
the time the assets were idled until the fourth quarter of 1996, management did
not believe that there was an impairment in the idle assets. In the fourth
quarter of 1996, the Company decided not to allocate its capital resources to
re-enter the salicylic acid business. Accordingly, the Company recorded a charge
of $2.3 million. Management estimates the costs to dismantle the line are
approximately equal to the salvage value of the line.
During the fourth quarter of 1996, the Company decided to shutdown
its Cowpens, South Carolina facility. During 1996, the Company incurred a loss
from operations of approximately $2.6 million from the Cowpens operations,
including a direct write-off of $1.5 million for inventory and related items in
the fourth quarter. The write-off was composed of $0.9 million of obsolete
inventory from unusable/unsaleable product as
24
<PAGE>
a result of product separation. The obsolete inventory was identified during the
October 31, 1996 planned physical inventory. The write-off also included $0.6
million of disposal costs related to hazardous products which required
environmentally sound disposal procedures. Approximately 30 manufacturing and
administrative positions will be eliminated in May 1997. Accordingly, the
Company recorded a charge of $0.4 million for severance and related benefits.
Management is currently negotiating with prospective buyers to sell the facility
for its net book value of approximately $2.7 million plus assumption of
environmental liabilities of $1.9 million. It is anticipated that a sale will be
completed during 1997.
In November 1996, approximately 20 employees were terminated at
the Company's Cincinnati, Ohio facility as part of the Company's effort to
reduce costs. Additionally, in 1996, the Company approved a plan to initiate the
process of centralizing administrative functions. Approximately 20
administrative positions are planned to be eliminated in 1997 from this
centralization. Accordingly, the Company recorded a charge of $1.0 million
associated with these actions.
Of the aforementioned $0.8 million of other charges, $0.5 million
related to a municipality surcharge for water treatment and waste disposal at
the Company's Charlotte facility.
Of the $11.0 million charge recorded in 1996, $7.3 million is
attributable to noncash items, primarily the idle equipment write-off of $2.3
million and obsolete inventory of $5.0 million. Charges that will require an
outlay of cash total approximately $3.7 million. Of this amount, $0.3 million
was paid in the fourth quarter of 1996. The remaining cash items totaling
approximately $3.4 million will be paid primarily over the first six months of
1997. Management believes this outlay of cash will be funded with cash flow from
operations and borrowings under the Amended and Restated Credit Agreement and
will not materially affect the Company's operating cash flows or financial
position.
25
<PAGE>
Results of Operations
The following table sets forth certain data from the Selected
Historical Consolidated Financial Data expressed as a percentage of net sales.
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 77.1 78.7 79.4
Gross profit 22.9 21.3 20.6
Selling, general and administrative expense 14.4 17.0 15.8
Research and development expense 1.2 1.7 1.6
Restructuring and other charges -- 4.2 1.3
Operating income (loss) 6.8 (1.6) 1.9
Interest and debt expense 3.6 4.6 4.7
Net income (loss) 1.2 (5.7) (2.4)
Less: preferred dividends 2.0 1.6 1.5
Loss applicable to common shares (0.8) (7.3) (3.9)
</TABLE>
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Restructuring and other charges. In 1996, the Company recorded
restructuring and other charges totaling $11.0 million. These charges were a
result of inventory obsolescence principally in the Company's Organic Pigments
and Dyes product line of $5.0 million, obsolescence inventory disposal costs of
$1.5 million, impairment in idle assets of $2.3 million, severance for displaced
workers and administrative personnel reductions of $1.4 million, and other
charges of $0.8 million. See "--Restructuring and Other Charges" and note 17 to
the Company's Consolidated Financial Statements included herein.
Net Sales. Net sales increased $3.3 million to $300.1 million in
the year ended December 31, 1996 as compared to the prior year. This small
increase in net sales masked significant changes in the distribution of the
Company's product lines. Organic Pigments and Dyes declined by $13.4 million as
a result of decreased demand for inks resulting from the recent consolidation of
the ink industry as well as a loss of color-former export sales as a result of
price pressure and off-shore competition. Net sales of Textile and Paper
Chemicals declined by $7.1 million primarily due to the decline in the textile
market as well as the Company's withdrawal from unprofitable product lines.
These declines in net sales were offset by increases in sales of Food and
Personal Care Ingredients of $3.2 million, Specialty Organic Chemicals and
Intermediates of $6.5 million, and Pharmaceutical Intermediates of $14.0
million. These increases were attributable to expanded production capacity, as a
result of capital spending programs, as well as increasing prices and volumes
for Pharmaceutical Intermediates.
Gross Profit. The Company's gross profit decreased $1.4 million to
$61.9 million in the year ended December 31, 1996 as compared to the prior year.
This decrease in gross profit was primarily due to a charge of
26
<PAGE>
approximately $5.0 million for the write-off of inventory in the Company's
Organic Pigments and Dyes product line due to declining customer demand. The
decreased customer product demand was principally due to the consolidation of
the ink market and the resulting loss of several significant customers.
Management regularly performs analysis of inventory to assess recoverability of
its costs. Based upon these analyses, management believes the remaining cost of
Organic Pigments and Dyes inventory will be recovered from future sales. This
charge was partially offset with increased sales in more profitable product
lines, the impact of capacity expansion and the Company's ongoing program to
reduce manufacturing costs as evidenced by the closure of its Conshohocken,
Pennsylvania and Newark, New Jersey plants in 1996.
Excluding the 1995 and 1996 inventory writeoffs, gross profit and
gross margin increased $3.6 million and 1% to $68.9 million and 23%,
respectively, in the year ended December 31, 1996. This improvement results
primarily from increased sales in more profitable product lines.
The following table sets forth for each of the Company's five core
product lines a comparison of the average product price, volume of products
sold, net sales, gross profit and gross margin for the years ended December 31,
1995 and 1996 (dollars and pounds in millions, except average product price):
<TABLE>
<CAPTION>
Year Ended
----------------------------------------------------------------------------------------------------------
December 31, 1995 December 31, 1996
------------------------------------------------ -----------------------------------------------
Product Average Volume Net Gross Gross Average Volume Net Gross Gross
Line Price (pounds) Sales Profit Margin Price (pounds) Sales Profit Margin
----- ------- ----- ------ ------ ----- -------- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Food and
Personal
Care
Ingredients.... $1.21 50.9 $61.3 $17.7 28.9% $1.04 61.9 $64.5 $16.9 26.2%
Pharmaceutical
Intermediates
and Natural
Additives...... 24.08 1.5 35.0 9.8 28.0 29.42 1.7 49.0 13.7 28.0
Textile and
Paper
Chemicals.... .64 119.2 75.9 9.8 12.9 .64 108.2 68.8 10.1 14.7
Specialty
Organic
Chemicals
and
Intermediates.. .56 99.9 56.0 14.8 26.4 .56 110.7 62.5 20.1 32.2
Organic
Pigments
and Dyes..... 4.61 14.9 68.7 11.2 16.3 4.55 12.2 55.3 1.1 2.0
</TABLE>
- --------------
* Data was not maintained at these levels for the year ended December 31, 1994.
The Company recorded estimated costs of shutdown of $0.6 million
and $1.6 million for the years ended December 31, 1995 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 December 31,
1996, $0.9 million was accrued related to such costs, which represented an
increase from December 31, 1995 of $0.7 million due primarily to a complete
plant shutdown in November 1995 at the Company's Kalama facility.
Selling, General and Administrative Expense. Selling, general, and
administrative expense decreased $3.0 million to $47.3 million in the year ended
December 31, 1996 as compared to the prior year primarily due to personnel
reductions and plant closings as a result of restructuring and other charges. As
a percentage of sales,
27
<PAGE>
selling, general, and administrative expense decreased from 17.0% in the year
ended December 31, 1995 to 15.8% for 1996.
Research and Development Expense. Research and development expense
decreased $0.2 million to $4.8 million in the year ended December 31, 1996 as
compared to the prior year. As a percentage of sales, research and development
expense decreased from 1.7% in the December 31, 1995 to 1.6% for the year ended
December 31, 1996.
Operating Income. Operating income increased $10.2 million to $5.6
million in the year ended December 31, 1996 as compared to the prior year.
Excluding the decrease of $3.4 million in restructuring and other charges
recorded in 1996 compared to 1995, operating income increased $6.8 million
primarily due to increased sales in more profitable product lines, expanded
production capacity of benzoates and benzaldehyde,improved manufacturing
efficiencies and cost reductions primarily as a result of restructuring and
other charges. Additionally, in April 1995, Diamalt formed a wholly owned
subsidiary, Diamalt Pharmorganica Pvt. Limited ("Diamalt Pharmorganica"). This
subsidiary was in a start-up mode from April through December 1995 and was
operating at a 30% capacity level. In 1996, Diamalt Pharmorganica operated at
near normal capacity and had operating income of $1.0 million.
Interest and Debt Expense. Interest and debt expense was $14.2
million and $13.8 million, respectively, for the years ended December 31, 1996
and 1995. The Company had net borrowings of $15.2 million for the year ended
December 31, 1996, as compared to $36.7 million for the year ended December 31,
1995. The weighted average interest rate of the Company's borrowings was 9.2% at
December 31, 1996, as compared to 9.2% at December 31, 1995.
Loss. The loss decreased $9.8 million to $7.2 million in the year
ended December 31, 1996 as compared to the prior year. The increase in the
Company's net income resulted primarily from the increased sales volume of
Specialty Organic Chemicals and Intermediates attributable to expanded
production capacity of benzoates and benzaldehyde as well as the reduction in
overall costs, offset by a charge of approximately $5.0 million for the
write-off of inventory. Additionally, Diamalt Pharmorganica had net income of
$0.9 million, primarily attributable to its operating capacity increase in 1996
to near normal from 30% in 1995.
In addition, the Company's equity in income of joint ventures
increased $0.7 million for the year ended December 31, 1996 over the prior year.
The increase is primarily attributable to three joint ventures, Diamo Handels
GmbH ("Diamo"), Srinivasa Cystine Limited ("Srinivasa") and Lyomark Pharma GmbH
("Lyomark"), which experienced increased sales volume and income in 1996. Two of
the three joint ventures were formed in 1995 and required several months to
establish a presence in their respective markets. The Company's equity in income
in each of Diamo, Srinivasa and Lyomark in 1996 was $0.3 million, $0.4 million
and $0.2 million, respectively. The increase in equity in income in these joint
ventures was partially offset by losses experienced by a fourth joint venture,
Hacker Malt Proteine GmbH and Co., of $0.2 million.
Loss Applicable to Common Shares. The loss applicable to common
shares decreased by $9.8 million to $11.8 million for the year ended December
31, 1996 as compared to the prior year. The increase resulted from the items
referred to above.
28
<PAGE>
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Restructuring and Other Charges. In 1995, the Company recorded
restructuring and other charges totalling $14.4 million. The items covered by
the charges included (i) plant closures aggregating $7.4 million, (ii) workforce
reductions aggregating $2.4 million, (iii) estimated environmental remediation
costs of $1.9 million and (iv) the write-off of discontinued inventory in the
Company's Organic Pigments and Dyes product line and capitalized expenses
totaling $2.7 million. Of the $14.4 million of charges, approximately $6.2
million represent charges which require cash expenditures. Additionally, the
Company sold a non-strategic product line. See A--Restructuring and Other
Charges" and note 17 to the Company's Consolidated Financial Statements included
herein.
Net Sales. Net sales increased $109.1 million to $296.9 million in
the year ended December 31, 1995 as compared to the prior year. The increase in
net sales resulted primarily from the inclusion in 1995 of the operations of
Freedom Chemical Diamalt and one full year of the operations of Kalama. The
increase in net sales was partially offset by a decline in sales of Textile and
Paper Chemicals attributable to decreased demand in the textile industry.
Gross Profit. The Company's gross profit increased $20.4 million
to $63.4 million in the year ended December 31, 1995 as compared to the prior
year. This increase in gross profit was primarily due to the inclusion in 1995
of the operations of Freedom Chemical Diamalt, offset by charges of $1.9 million
recorded in connection with restructuring and other charges. The increased
Organic Pigments and Dyes reserves were due to the elimination of the sale of
certain Organic Pigments and Dyes products by the Company. Gross margins were
21.3% for 1995 compared to 22.9% in 1994. This decrease was primarily due to
declining prices and higher raw material costs affecting the Company's Textile
and Paper Chemicals group. The Company recorded estimated costs of shutdown of
$0.6 million and $0.9 million, for the years ended December 31, 1995 and 1994,
respectively. The decrease in 1995 is due primarily from a reduction in shutdown
costs based on the results of the Kalama shutdown in November of 1995. The costs
of shutdown are accrued on a pro rata basis over the period between shutdowns.
Plant shutdowns are typically scheduled on a semi-annual, nine month and annual
basis at the Company's various plants for the performance of maintenance and
inspection of various pieces of equipment. As of December 31, 1995, $0.2 million
was accrued related to such costs, which represented a decrease from December
31, 1994 of $0.8 million due primarily to a complete plant shutdown in the
fourth quarter of 1995 at the Company's Charlotte facility.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased $23.5 million to $50.4 million in the year
ended December 31, 1995 as compared to the prior year primarily due to the
inclusion in 1995 of the operations of each of Freedom Chemical Diamalt and
Kalama. In addition, the Company's Organic Pigments and Dyes group experienced
increased selling, general and administrative expense due to higher staffing
levels resulting from anticipated sales growth of that group, which did not
occur. As a percent of sales, selling, general and administrative expense
increased to 17.0% from 14.4% in 1994 principally due to the higher expense
ratio of the Pharmaceutical Intermediates and Natural Additives group due to
high social insurance costs in Europe and higher staffing levels of the Company
(which were subsequently reduced as part of restructuring and other charges).
Research and Development Expense. Research and development expense
increased $2.6 million to $5.0 million in the year ended December 31, 1995 as
compared to the prior year primarily due to the inclusion in 1995 of the
operations of each of Freedom Chemical Diamalt and Kalama.
Operating Income (Loss). Operating income declined $17.4 million
to a loss of $4.6 million in the year ended December 31, 1995 as compared to the
prior year primarily as a result of the restructuring and other charges,
29
<PAGE>
which accounted for $14.4 million of the decline, with the remainder
attributable to lower sales volumes and reduced margins in the Organic Pigments
and Dyes and Textile and Paper Chemicals groups.
Interest and Debt Expense. Interest and debt expense increased
$7.1 million to $13.8 million in the year ended December 31, 1995 as compared to
the prior year principally due to the indebtedness incurred to finance the
Diamalt Acquisition, the Reilly-Whiteman Acquisition and interest expense on
indebtedness in connection with the Kalama Acquisition. The Company had net
borrowings of $36.7 million for the year ended December 31, 1995, as compared to
$55.6 million for the year ended December 31, 1994. The weighted average
interest rate and the ending interest rate of the Company's borrowings were both
9.2% at December 31, 1995, as compared to 8.5% at December 31, 1994.
Loss. The loss was $17.0 million in the year ended December 31,
1995 as compared to net income of $2.2 million in the prior year. The loss
resulted primarily from the restructuring and other charges, higher staffing
levels in the Organic Pigments and Dyes group and declines in net sales and
gross profit in the Textile and Paper Chemicals group.
Preferred Dividends. The accretion of accrued and unpaid dividends
on Series B and Series C Preferred Stock increased $0.9 million to $4.6 million
in the year ended December 31, 1995 as compared to the prior year. The increase
resulted primarily from the inclusion in 1995 of a full year of accrued and
unpaid dividends on Series C Preferred Stock issued in 1994 in connection with
the Kalama Acquisition.
Loss Applicable to Common Shares. The loss applicable to common
shares increased $20.1 million to $21.6 million in the year ended December 31,
1995 as compared to the prior year. The increase resulted from the items
referred to above under "Net Income (Loss)" and "Preferred Dividends."
Liquidity and Capital Resources
Net Cash Used in Operating Activities. Net cash used in operating
activities for the year ended December 31, 1996 was $6.9 million, an increase of
$3.8 million over the prior year. This increase was due primarily to increases
in accounts receivable and inventories attributable to increased sales offset by
a decrease in net loss of $9.8 million. Net cash to be expended in connection
with the restructuring and other charges incurred during the year ended December
31, 1996 is $3.7 million. Net cash expended in connection with the restructuring
and other charges during 1996 was $3.7 million. Of the remaining accrual for the
restructuring and other charges at December 31, 1996, the Company anticipates
that it will expend approximately $4.6 million of cash in 1997.
Net cash used by operating activities in the year ended December
31, 1995 was $3.1 million, a decrease of $17.3 million compared to the year
ended December 31, 1994. This decrease was primarily due to a decrease in net
income. Included in 1995 are net cash charges of $0.7 million related to
restructuring and other charges.
Net Cash Used in Investing Activities. Net cash used in investing
activities for the year ended December 31, 1996 was $13.5 million, a decrease of
$18.5 million over the prior year. Capital expenditures in the year ended
December 31, 1996 were $13.0 million compared to $15.5 million in the prior
year. Capital expenditures in 1995 included $5.1 million related to an expansion
program at the Company's Kalama facility. The year ended December 31, 1996 also
included proceeds of $1.1 million generated from the sale of the Company's
non-strategic transparent iron oxide coatings business.
30
<PAGE>
Net cash used in investing activities for the year ended December
31, 1995 was $32.0 million, a decrease of $43.9 million compared to the year
ended December 31, 1994. Included in 1995 are a cash payment of $15.9 million in
connection with the Diamalt Acquisition and capital expenditures of $15.5
million, $5.1 million of which is related to an expansion of the Company's
Kalama facility. Included in 1994 are a cash payment of $68.3 million for the
acquisition of Kalama and capital expenditures of $7.2 million.
Net Cash Provided by Financing Activities. Net cash provided by
financing activities for the year ended December 31, 1996 was $22.5 million, a
decrease of $11.2 million over the prior year. In 1996, the Company received
cash proceeds from the sale of its 10-5/8% Senior Subordinated Notes due 2006
(the "Notes") of approximately $121.3 million. Additionally, the Company
received cash proceeds of $10.0 million from the issuance of Common Stock. These
proceeds, in conjunction with additional revolving borrowings, were used to
repay approximately $146.9 million of outstanding borrowings under the Freedom
and Diamalt credit agreements. This decrease is due primarily to both the
Diamalt Acquisition as well as increased levels of capital expenditures in 1995.
Net cash provided by financing activities for the year ended
December 31, 1995 was $33.7 million, a decrease of $29.7 million compared to the
year ended December 31, 1994. Included in 1995 is additional bank financing used
both for the Diamalt Acquisition as well as the expansion at the Company's
Kalama facility. Included in 1994 are proceeds of $9.7 million from the issuance
by the Company of Series B Preferred Stock, $2.3 million from the issuance by
the Company of Common Stock and $100.3 million from bank borrowings. These funds
were used in 1994 primarily in connection with the Kalama Acquisition and $44.6
million of long-term debt refinancing.
Capital Expenditures. Capital expenditures for the years ended
December 31, 1996, 1995 and 1994 were $13.0 million, $15.5 million and $7.2
million, respectively. The increase in capital expenditures between 1994 and
1996 was due primarily to the effects of the inclusion of the acquisitions of
Kalama in 1994 and Diamalt in 1995. Capital expenditures in 1995 also included
approximately $5.1 million related to the expansion of benzaldehyde production
at the Company's Kalama facility. This expansion increased the Company's
benzaldehyde production by approximately 50%. In 1996, the Company installed a
second toluene storage facility at its Kalama plant for a cost of approximately
$1.0 million and began an expansion of its production of benzoic acid at an
estimated cost of $3.0 million.
The Company expects to have capital equipment investments of
approximately $14.0 million to $18.0 million annually for each of 1997 and 1998.
Among other projects, the Company plans an additional expansion of its
production of benzoic acid and benzaldehyde at its Kalama facility during 1997.
Such expansion will increase the Company's production capacity for benzoic acid
by approximately 60% and its production capacity for benzaldehyde by an
additional 15%. In addition, in 1997 the Company plans to expand its food color
capacity, its NAC production and glyoxal output for an aggregate estimated cost
of $1.2 million.
In addition to these capital expenditures, the Company estimates
that its expenditures in connection with environmental matters will be
approximately $2.0 million to $3.0 million annually in each of 1997 and 1998.
Freedom does not believe that these estimated environmental expenditures will
have a material adverse effect on the Company's financial position. See "Item
1. Business--Environmental Matters."
Liquidity. On October 17, 1996, Freedom 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 Freedom's
domestic subsidiaries and Freedom Chemical Diamalt GmbH ("Freedom Chemical
Diamalt").
31
<PAGE>
Concurrently with the consummation of the offering of the Notes,
Freedom amended and restated its existing credit agreement (the "Freedom Credit
Agreement" and, 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 Freedom Chemical Diamalt as a co-borrower.
Amounts outstanding under the Amended and Restated Credit Agreement bear
interest at Citicorp USA, Inc.'s published prime rate plus 1.5% per annum or, at
Freedom's option, LIBOR plus 2.5% per annum, with each such margin subject to
adjustment based on the Company's compliance with various debt ratios as
specified in the Amended and Restated Credit Agreement. The obligations of
Freedom under the Amended and Restated Credit Agreement are guaranteed by all of
Freedom's domestic subsidiaries and Freedom Chemical Diamalt and are secured by
a first priority lien on substantially all of the properties and assets of
Freedom and its domestic subsidiaries and certain properties and assets of
Freedom Chemical Diamalt. The obligations of Freedom Chemical Diamalt under the
Amended and Restated Credit Agreement are guaranteed by Freedom.
The Amended and Restated Credit Agreement and the Indenture
contain certain financial covenants that restrict, among other things, the
incurrence of additional indebtedness, the sale of assets, and certain
investments, acquisitions and distributions by the Company. The Amended and
Restated Credit Agreement also requires Freedom 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
December 31, 1996.
Concurrently with the consummation of the offering of the Notes,
Joseph Littlejohn & Levy Fund, L.P. ("JLL Fund I") and Joseph Littlejohn & Levy
Fund II, L.P. ("JLL Fund II" and, together with JLL Fund I, the "JLL Funds"),
Freedom's two largest stockholders, and an executive officer of Freedom invested
an aggregate of approximately $10.0 million in Common Stock of the Company. In
addition, following consummation of the offering of the Notes, certain other
stockholders of Freedom (principally current and former management) invested an
aggregate of approximately $1.9 million in Common Stock, almost all of which
were financed with loans made by Freedom. The proceeds from the offering of the
Notes, the cash equity investments and initial borrowings under the Amended and
Restated Credit Agreement were used to repay outstanding indebtedness under the
Freedom Credit Agreement and the credit agreement with Freedom Chemical Diamalt.
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 December 31, 1996 the Company had $69.0 million of working
capital (current assets less current liabilities) and $56.4 million available
under the Amended and Restated Credit Agreement.
Although the Company expects that cash flows from operations and
available borrowings under the Amended and Restated Credit Agreement will
provide sufficient working capital to operate the Company's business, to make
expected capital expenditures and to meet the Company's foreseeable liquidity
requirements, there can be no assurance that sufficient sources of funds will be
available.
Effect of Inflation; Foreign Currency Exchange Rates
Inflation generally affects the Company by increasing the cost of
labor, equipment and raw materials. The Company does not believe that inflation
has had any material effect on the Company's business over the last three years.
32
<PAGE>
The Company's substantial foreign operations expose it to the risk
of exchange rate fluctuations. If foreign currency denominated revenues are
greater than costs, the translation of foreign currency denominated costs and
revenues into U.S. dollars will improve profitability when the foreign currency
strengthens against the U.S. dollar and will reduce profitability when the
foreign currency weakens. In addition, the remeasurement of foreign currency
denominated assets and liabilities into U.S. dollars gives rise to foreign
exchange gains or losses which are included in the determination of net income.
The Company does not currently participate in hedging transactions related to
foreign currency.
Impact of Recently Adopted Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS No. 121"), which is effective for years beginning after December 15,
1995. SFAS No. 121 established criteria for recognizing, measuring and
disclosing impairments of long-lived assets, including intangibles and goodwill.
The adoption of SFAS No. 121 effective January 1, 1996 did not have an impact on
the Company's results of operations or financial position. In the fourth quarter
of 1996, the Company recorded a charge of $2.3 million in its consolidated
results of operations.
In October 1995, FASB issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123"), which became effective for transactions entered into in fiscal years
beginning after December 15, 1995. SFAS No. 123 encourages a fair value based
method of accounting for employee stock options or similar equity instruments,
but allows continued use of the intrinsic value based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB No. 25"). Companies electing to continue to use APB
No. 25 must make pro forma disclosures of net income as if the fair value based
method of accounting had been applied. The Company has elected to follow the
provisions of APB No. 25.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a
"safe harbor" for certain forward-looking statements. The forward-looking
statements contained in this Form 10-K are subject to certain risks and
uncertainties. Actual results could differ materially from current expectations.
Among the factors that could affect the Company's actual results and could cause
results to differ from those contained in the forward-looking statements
contained herein is the Company's ability to implement its business strategy
successfully, which will be dependent on business, financial and other factors
beyond the Company's control. There can be no assurance that the Company will be
successful in implementing its business strategy. Other factors could also cause
actual results to vary materially from the future results covered in such
forward-looking statements.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements, notes to
Consolidated Financial Statements and Financial Statement Schedule and the
reports of Coopers and Lybrand L.L.P., independent certified accountants, with
respect thereto, referred to in the Index to Consolidated Financial Statements
of the Company contained in Item 14(a), appear on pages F-1 through F-45 of this
Form 10-K and are incorporated herein by reference thereto.
33
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers
The following table sets forth certain information regarding the
directors and executive officers of the Company as of December 31, 1996.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Fred P. Rullo(1)............................ 56 Chairman of the Board of Directors, Chief
Executive Officer and President
Robert A. Kirchner.......................... 60 Senior Vice President; President, Kalama
Robert G. Kitchen........................... 43 Executive Vice President; President,
Hilton Davis
Brian F. McNamara........................... 48 Vice President, Secretary and General Counsel
Dennis M. Monahan........................... 49 Chief Financial Officer
Edward J. Rish.............................. 53 Executive Vice President, Freedom Textile
Dale E. Smith............................... 53 Vice President, Human Resources
Helmut E. Wolf.............................. 47 President, Freedom Chemical Diamalt
Alexander R. Castaldi....................... 46 Director
Timothy J. Clark............................ 32 Director
Peter A. Joseph(1).......................... 44 Director
Vincent P. Langone.......................... 54 Director
Paul S. Levy(1)............................. 49 Director
Angus C. Littlejohn, Jr..................... 46 Director
Harold A. Sorgenti(2)....................... 62 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee.
(2) Mr. Sorgenti resigned from his position as Executive Chairman
and as Chairman of the Board of Directors in July 1996, but remains
a Director of Freedom.
34
<PAGE>
Set forth below is the background of each of Freedom's executive
officers and directors.
Fred P. Rullo has served as Chairman and Chief Executive Officer
of Freedom since July 1996 and as President and a Director of Freedom since
April 1992. Mr. Rullo spent 26 years with Atlantic Richfield Co. ("Atlantic
Richfield") and ARCO Chemical Company ("ARCO Chemical") where he was Vice
President of Specialty Chemicals. In addition, Mr. Rullo served as Executive
Vice President of Lyondell Petrochemical Company ("Lyondell") from 1985 to 1989
and President of ABB Combustion Engineering Systems and Service Inc. ("ABB")
from 1989 to 1991. Mr. Rullo is also a director of Naxcor, Inc., a
privately-held biogenetics company.
Robert A. Kirchner has served as Senior Vice President of Freedom
since 1994 and as President of Kalama since 1981 and was a co-founder of Kalama
in 1971. Prior to serving as President, Mr. Kirchner had been Plant Manager,
Vice President, Operations and Executive Vice President of Kalama. Prior to
1971, Mr. Kirchner was with The Dow Chemical Company.
Robert G. Kitchen has served as Executive Vice President of
Freedom and President of Hilton Davis since January 1996. Prior to that he had
served as President of Freedom Textile since June 1992. He spent the previous 17
years with Lyondell and Atlantic Richfield. His most recent position at Lyondell
was Vice President, Business Management and Marketing for Lyondell's entire
petrochemical product lines. Throughout his career, he held positions in
manufacturing, engineering, planning, product management and marketing.
Brian F. McNamara has served as Vice President, Secretary and
General Counsel of Freedom since October 1994. Prior to joining Freedom, Mr.
McNamara spent the previous 17 years with Combustion Engineering, Inc. (which
was acquired by Asea Brown Boveri, Inc. ("Asea Brown Boveri"), an affiliate of
ABB, in 1989) ("Combustion Engineering"), most recently as Vice President and
General Counsel of ABB's Systems Division.
Dennis M. Monahan has served as Chief Financial Officer of Freedom
since July 1996 and as Corporate Controller of Freedom from March 1995 to July
1996. Prior to that time he had his own financial services consulting practice
for three years, spent four years as Chief Financial Officer of The Johnson
Companies employee benefits division and spent a total of 18 years with Atlantic
Richfield and ARCO Chemical in various financial and accounting positions.
Edward J. Rish has served as Executive Vice President and General
Manager of Freedom Textile since July 1996. Mr. Rish joined the Company in
February 1993 as Vice President Sales and Marketing. Prior to joining the
Company he had over 25 years of experience in textile chemicals with Diamond
Shamrock Inc., Jordan Chemicals and PPG Industries Inc.
Dale E. Smith has served as Vice President Human Resources and
Administration of Freedom since October 1993. Prior to joining Freedom, Mr.
Smith was with Asea Brown Boveri for 11 years. His most recent position with
Combustion Engineering was Vice President, Human Resources. In his 27 years of
management experience he has held positions in administration, operations and
human resources.
Helmut E. Wolf has served as President of Freedom Chemical Diamalt
since January 1996. Mr. Wolf acted as General Manager, Research Department of
Diamalt from 1989 to 1995, and continued in such capacity after the Diamalt
Acquisition. Prior to 1989, he served in other managerial and technical
capacities at Diamalt.
35
<PAGE>
Alexander R. Castaldi has served as a Director of Freedom since
December 1996. Mr. Castaldi has also served as Executive Vice President and
Chief Financial Officer of Remington Products since November 1996. From July
1995 to August 1996, he served as Vice President and Chief Financial Officer of
Uniroyal Chemicals Co. Prior to that time, he spent six years with Kendall
International, Inc. as Senior Vice President and Chief Financial Officer.
Timothy J. Clark has served as a Director of Freedom since June
1996. Mr. Clark is a principal of JLL, which he joined in 1993. Prior to that
time, Mr. Clark was corporate planning manager of Edgcomb Metals Company and a
financial analyst at the Blackstone Group. Mr. Clark is also a director of Hayes
Wheels International, Inc. ("Hayes Wheels").
Peter A. Joseph has served as a Director of Freedom since April
1992. Mr. Joseph has been a partner of JLL from its inception in 1988. Mr.
Joseph has served as President of Lancer Industries, Inc. ("Lancer"), an
industrial holding company and the limited partner of JLL Associates since April
1992 and as Secretary and director of Lancer since July 1989. Mr. Joseph is also
a director of Tenet Healthcare Corporation ("Tenet"), Foodbrands America, Inc.
("Foodbrands"), Hayes Wheels, Peregrine, Inc. ("Peregrine") and Fairfield
Manufacturing Company, Inc. ("Fairfield"). Mr. Joseph is also Vice President and
Secretary of Fairfield.
Vincent P. Langone has served as a Director of Freedom since
December 1996. Mr. Langone has served as the President and Chief Executive
Officer of Interbuild International Inc. since 1996. From 1988 to 1995, he
served as Chief Executive Officer of Formica Corporation. From 1989 to 1995, he
also served as Chairman of Formica Corporation. Mr. Langone is also a director
of Summit Bank, United Retail Group, Inc. and Brand Scaffolding
Services.
Paul S. Levy has served as a Director of Freedom since April 1992.
Mr. Levy has been a partner of JLL from its inception in 1988. Mr. Levy has
served as Chairman of the Board of Directors and Chief Executive Officer of
Lancer since July 1989. Mr. Levy is also a director of Tenet, Foodbrands, Hayes
Wheels, Peregrine and Fairfield. Mr. Levy is also Vice President and Assistant
Secretary of Fairfield.
Angus C. Littlejohn, Jr. has served as a Director of Freedom since
April 1992. Mr. Littlejohn is Chief Executive Officer of Littlejohn & Co., a
company he founded in August 1996. Mr. Littlejohn was a partner of JLL from its
inception in 1988 until his resignation in August 1996. Mr. Littlejohn served as
Vice Chairman of Lancer from April 1992 until July 1996 and as Chief Financial
Officer and a director of Lancer from July 1989 until July 1996. From July 1989
until April 1992 Mr. Littlejohn served as President of Lancer. Mr. Littlejohn is
also a director of Foodbrands.
Harold A. Sorgenti has served as a Director of Freedom since April
1992 and had served as Executive Chairman and Chairman of the Board of Freedom
from April 1992 until July 1996. Mr. Sorgenti spent 32 years with Atlantic
Richfield and ARCO Chemical. From 1979 to 1991 he was President of ARCO Chemical
and was Chief Executive Officer of ARCO Chemical from 1987 to 1991. Mr. Sorgenti
serves on the boards of Provident Mutual Life Insurance Company and Crown Cork
and Seal, Inc. Mr. Sorgenti is a former chairman of the Chemical Manufacturers
Association.
None of the officers or directors has any family relationship with
any other officer or director. The Board of Directors currently consists of
eight members, three of whom (Messrs. Clark, Joseph and Levy) are designees of
the JLL Funds.
36
<PAGE>
Freedom, each of the JLL Funds, Messrs. Sorgenti and Rullo, RULCO,
Inc., a corporation wholly owned by Mr. Rullo ("Rulco"), Freedom Investment
Corp., a corporation wholly owned by Mr. Sorgenti ("FIC"), and certain other
stockholders of Freedom have entered into the Stockholders' Agreement, pursuant
to which, among other things, the parties agreed that Messrs. Sorgenti and
Rullo, Rulco, FIC and the other stockholders will vote their shares in favor of
JLL's nominees to the Board of Directors and JLL will vote its shares in favor
of the nomination to the Board of Directors of Messrs. Sorgenti and Rullo.
Election of Directors and Committees
Directors are elected at the annual meeting of stockholders and
hold office until their successors have been duly elected and qualified or until
their death, resignation or removal.
The Board of Directors has established a compensation committee
(the "Compensation Committee"), which reviews and approves the compensation of
the officers and directors of the Company and makes recommendations to the Board
of Directors with respect to standards for setting compensation levels. The
Compensation Committee also administers Freedom's stock option and other
employee benefit plans. See "Item 11. Executive Compensation --Management Equity
Plan" and "--Compensation Interlocks and Insider Participation."
Item 11. EXECUTIVE COMPENSATION
The following table sets forth in summary form all compensation
for all services rendered in all capacities to the Company for the years ended
December 31, 1996, 1995 and 1994 of the Chief Executive Officer of Freedom and
the other four most highly compensated executive officers of the Company
(collectively with the Chief Executive Officer, the "Named Executive Officers"):
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
---------------------
Long Term
Compensation
Awards
------------------
Securities All Other
Salary Bonus Underlying Options Compensation(6)
Name and Principal Position Year $ $ (#) $
--------------------------- ---- --------- -------- ------------------ -----------------
<S> <C> <C> <C> <C> <C>
Fred P. Rullo (1)................. 1996 $400,000 $150,000 8,683(3) $4,788
Chairman, Chief Executive 1995 400,000 --- --- 3,038
Officer and President(2) 1994 353,462 400,000 752(3) 3,814
Harold A. Sorgenti (1)............ 1996 $200,000 $ --- --- $244,163(7)
Former Executive Chairman 1995 400,000 --- --- 4,618
and Chairman of the 1994 260,385 400,000 1,129(3) 1,404
Board(2)
Robert G. Kitchen................. 1996 $210,000 $80,000 100(4) $4,759
President, Freedom Textile 1995 193,071 --- 225(4) 5,134
1994 175,769 120,000 175(4) 3,555
Robert A. Kirchner................ 1996 $227,796 $92,000 --- $8,312
President, Kalama 1995 227,796 77,380 --- 6,903
1994 227,796(5) 84,704 400(4) 6,903
Helmut E. Wolf.................... 1996 $174,050 $50,000 190(4) $11,229
President, Freedom 1995 172,200(8) --- 110(4) 10,464(8)
Chemical Diamalt 1994 --- --- --- ---
</TABLE>
37
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Brian F. McNamara 1996 $148,068 $53,511 100(4) $3,771
Vice President, Secretary 1995 144,982 --- 200(4) 1,855
and General Counsel 1994 34,959 40,000 150(4) 29
</TABLE>
- ------------
(1) The amounts listed for Messrs. Sorgenti and Rullo under the salary column
for 1996 and 1995 were paid directly to Messrs. Sorgenti and Rullo pursuant
to their respective employment agreements. During the fiscal year ended
December 31, 1994, Freedom paid $350,000 to The Freedom Group Partnership,
a Pennsylvania limited partnership ("The Freedom Group"), for its
management of the Company pursuant to an agreement, dated May 26, 1994,
between The Freedom Group and the Company (the "1994 Management
Agreement"), which amount was paid to Messrs. Sorgenti and Rullo and is
included as compensation in the table above under the salary column. FIC
and Rulco are the limited and general partners of The Freedom Group.
(2) Mr. Sorgenti was Executive Chairman and Chairman of the Board of Directors
until July 2, 1996 (the "Sorgenti Resignation Date"), at which time he
resigned from these positions. Mr. Rullo assumed Mr. Sorgenti's position as
Executive Chairman and Chairman of the Board of Directors in July 1996.
(3) In connection with the Freedom Textile Acquisition, on May 4, 1992,
pursuant to an option agreement between The Freedom Group and Freedom (the
"Textile Option Agreement"), Freedom granted The Freedom Group an option to
purchase 1,837 shares of Common Stock at an exercise price of $100.00 per
share. In connection with the Hilton Davis Acquisition, on September 9,
1993, pursuant to an option agreement between The Freedom Group and Freedom
(the "Hilton Davis Option Agreement"), Freedom granted The Freedom Group an
option to purchase 7,500 shares of Common Stock at an exercise price of
$100.00 per share. In connection with the Kalama Acquisition, on May 26,
1994, pursuant to an option agreement between The Freedom Group and Freedom
(the "Kalama Option Agreement"), Freedom granted The Freedom Group an
option to purchase 1,981 shares of Common Stock at an exercise price of
$105.40 per share. Effective December 7, 1994, Freedom and The Freedom
Group amended and restated each of these option agreements (collectively,
the "Amended and Restated Option Agreements"). Pursuant to the Amended and
Restated Option Agreements, Freedom granted to The Freedom Group options to
purchase an aggregate of 11,318 shares of Common Stock, of which options to
purchase 9,337 shares are exercisable at an exercise price of $100.00 per
share and options to purchase 1,981 shares are exercisable at an exercise
price of $105.40 per share. Pursuant to the Amended and Restated Option
Agreements, of the options to purchase 11,318 shares, options to purchase
6,790 shares were deemed to be attributable to Mr. Sorgenti and options to
purchase 4,528 shares were deemed to be attributable to Mr. Rullo. The
exercise price of options granted to Messrs. Sorgenti and Rullo in 1992,
1993 and 1994, in each case, corresponds to the subscription price paid by
investors for Common Stock issued by Freedom to finance the acquisition in
connection with which such options were granted. Pursuant to an agreement
with Freedom, in January 1994 The Freedom Group exercised options to
purchase 5,322 of the shares attributable to Mr. Sorgenti and transferred
such shares to FIC and FIC transferred such shares to affiliates of Mr.
Sorgenti. Pursuant to an assignment agreement dated April 14, 1995 (the
"McPhail Assignment"), the Freedom Group assigned to Donald W. McPhail, one
of its limited partners and a former Vice President of Freedom, a 5%
interest in certain partnership property, including options to purchase 567
shares of Common Stock (of the options to purchase 11,318 shares originally
granted). Also on April 14, 1995, pursuant to separate assignment
agreements (together with the McPhail Assignment, the "Assignments"), the
Freedom Group assigned to FIC and Rulco a 57% and a 38% interest,
respectively, in certain partnership property,
38
<PAGE>
including options to purchase, respectively, 1,129 shares of Common Stock
and 4,300 shares of Common Stock (in each case, of the options to purchase
11,318 shares originally granted). On July 2, 1996, Mr. Sorgenti resigned
from his position as Executive Chairman of Freedom and, pursuant to the
Amended and Restated Option Agreements (after giving effect to the
Assignments), 100% of the options held by FIC are currently exercisable.
Pursuant to the Amended and Restated Option Agreements (after giving effect
to the Assignments), as of May 4, 1996, 80% (or 3,440) of the options held
by Rulco are currently exercisable and the remaining 20% will vest on May
4, 1997. In the fourth quarter of 1996, Freedom granted Mr. Rullo an option
to purchase shares of Common Stock at an exercise price of $125 per share,
which purchase may be financed with a loan made by Freedom. The option
vested fully on the date of grant and is exercisable for a period of five
years. The exercise price of the option is based on the subscription price
paid by investors in connection with the Equity Investments. See "Item 13.
Certain Relationships and Related Transactions."
(4) Pursuant to the Management Equity Plan, in 1996 and 1995 Freedom granted
Messrs. Kitchen, Wolf and McNamara options to purchase shares of Series B
common stock of Freedom (the "Series B Common Stock") at an exercise price
of $255 per share and in 1994 Freedom granted Messrs. Kitchen, Kirchner and
McNamara options to purchase shares of Series B Common Stock at an exercise
price of $100 per share. The options become exercisable on December 31,
1998, subject to the Company attaining certain performance goals, and
otherwise become fully exercisable on December 31, 2004, except in the case
of the options granted to Mr. Kitchen in 1994, which options become fully
exercisable on December 31, 2003. The exercise price of the options granted
to Messrs. Kitchen, Wolf and McNamara in 1995 was based on the assumed
value of the underlying Series B Common Stock immediately prior to the
consummation of the Company's proposed initial public offering (which was
subsequently abandoned) and the exercise price of the options granted to
Messrs. Kitchen, Kirchner and McNamara in 1994 was based on the most recent
subscription price paid by investors for Common Stock prior to the grant of
such options.
(5) The amount listed represents total salary for 1994; however, Freedom
acquired Kalama in May 1994.
(6) The amounts listed represent the Company's contributions to the Company's
401(k) plan and group life insurance for such individuals, and in the case
of Mr. Wolf, the Company's statutory contribution to social insurance in
Germany.
(7) Includes amounts associated with severance.
(8) Amounts paid in Deutschemarks (DM) and converted to U.S. dollars based on
the average exchange rate of 1.4883 DM to one U.S. dollar. (The average
exchange rate was calculated as the sum of the average monthly purchase and
selling rates of the U.S. dollar determined at the end of each month during
1995 divided by 12).
39
<PAGE>
Options Grants in Last Fiscal Year. The following table sets forth
information with respect to the total number of options to purchase Common Stock
and Series B Common Stock granted to the Named Executive Officers in 1996.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable
Value of Assumed
Annual Rates of Stock
Price Appreciation for
Individual Option Grants Option Term(1)($)
-----------------------------------------------------------------------------------------
Name Number of Percent
- ---- Securities of Total
Underlying Options Exercise
Options Granted to or
Granted Employees Base Price Expiration
(#) in 1996 ($/sh) Date 5% 10%
---------- ----------- ----------- ---------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Fred P. Rullo........... 8,683(2) 90.6% 125 12/31/01 682,571 1,729,826
Robert G. Kitchen....... 100(3) 1.0% 255 1/31/05 0 6,922
Helmut E. Wolf.......... 190(3) 2.0% 255 1/31/05 0 13,151
Brian F. McNamara....... 100(3) 1.0% 255 1/31/05 0 6,922
</TABLE>
- -----------------
(1) Assumes a fair market value per share of Common Stock of $125.00 as of the
date of grant.
(2) Represents options to purchase shares of Common Stock which are currently
exercisable.
(3) Represents options to purchase shares of Series B Common Stock granted
pursuant to the Management Equity Plan. The options become exercisable on
December 31, 1998, subject to the Company attaining certain performance
goals, and otherwise become fully exercisable on December 31, 2004,
provided that the Named Executive Officer continues to be employed by the
Company on such date.
Aggregated Option Exercises and Holdings and December 31, 1996
Option Values. The following table sets forth information with respect to the
aggregate number of unexercised options to purchase Common Stock and Series B
Common Stock granted in all years to the Named Executive Officers and held by
them as of December 31, 1996, and the value of unexercised in-the-money options
(i.e., options that had a positive spread between the exercise price and the
fair market value of Common Stock or Series B Common Stock, as the case may be)
as of December 31, 1996:
40
<PAGE>
Aggregated Option Exercises in Last Fiscal Year
<TABLE>
<CAPTION>
Name Number of Securities Underlying Value of Unexercised
- ---- Unexercised Options at in-the-Money
December 31, 1996 Options at December 31, 1996
(#) ($)
Exercisable/Unexercisable Exercisable/Unexercisable(5)
--------------------------------- -----------------------------
<S> <C> <C>
Fred P. Rullo....................... 12,123/860(1)(2) 90,560/22,640
Harold A. Sorgenti.................. 1,129/--(1)(3) 22,128/--
Robert G. Kitchen................... 0/500(4) 0/0
Robert A. Kirchner.................. 0/400(4) 0/0
Helmut E. Wolf...................... 0/300(4) 0/0
Brian F. McNamara................... 0/450(4) 0/0
</TABLE>
- --------------
(1) Other than the option to purchase 8,683 shares of Common Stock granted to
Mr. Rullo in the fourth quarter of 1996, the options to purchase Common
Stock listed in the table were granted to The Freedom Group pursuant to the
Amended and Restated Option Agreements and subsequently transferred to its
general partners, FIC and Rulco, pursuant to the Assignments. Messrs.
Sorgenti and Rullo are the respective sole shareholders of FIC and Rulco.
(2) Mr. Rullo's unexercisable options will become exercisable on May 4, 1997.
(3) On July 2, 1996, Mr. Sorgenti resigned from his position as Executive
Chairman of Freedom. Pursuant to the Amended and Restated Option
Agreements, 100% of Mr. Sorgenti's options are exercisable for a period of
one year following his resignation.
(4) Represents options to purchase shares of Series B Common Stock granted
pursuant to the Management Equity Plan. The options become exercisable on
December 31, 1998, subject to the Company attaining certain performance
goals, and otherwise become fully exercisable on December 31, 2004 (except
in the case of the 175 options granted to Mr. Kitchen in 1994, which become
fully exercisable on December 31, 2003), provided that the Named Executive
Officer continues to be employed by the Company on such date.
(5) Assumes a fair market value per share of Common Stock of $125.00 at
December 31, 1996.
Pension Plan Table
The following table shows the combined maximum annual pension
benefits payable under the Freedom Textile Chemicals Co. Retirement Plan (the
"Pension Plan") and the Freedom Group Supplemental Executive Retirement Plan
(the "SERP") in the specified compensation and years-of-service classifications
in effect for employees of Freedom and Freedom Textile. The benefits are
computed as single life annuity amounts.
41
<PAGE>
<TABLE>
<CAPTION>
Years of Service
Average Annual ------------------------------------------------------------------------------------
Compensation 5 10 15 20 25 30
------------ - -- -- -- -- --
<S> <C> <C> <C> <C> <C> <C>
$ 50,000.................. $2,783 $5,567 $8,350 $11,133 $13,917 $16,700
75,000.................. 4,721 9,442 14,162 18,883 23,604 28,325
100,000.................. 6,658 13,317 19,975 26,633 33,292 39,950
125,000.................. 8,596 17,192 25,787 34,383 42,979 51,575
150,000.................. 10,533 21,067 31,600 42,133 52,667 63,200
175,000.................. 12,471 24,942 37,412 49,883 63,354 74,825
200,000.................. 14,408 28,817 43,225 57,633 72,042 86,450
225,000.................. 16,346 32,692 49,037 65,383 81,729 98,075
250,000.................. 18,283 36,567 54,850 73,133 91,417 109,700
275,000.................. 20,221 40,442 60,662 80,883 101,104 121,325
300,000.................. 22,158 44,317 66,475 88,633 110,792 132,950
325,000.................. 24,096 48,192 72,287 96,383 120,479 144,575
350,000.................. 26,033 52,067 78,100 104,133 130,167 156,200
375,000.................. 27,971 55,942 83,912 111,883 139,854 167,825
400,000.................. 29,908 59,817 89,725 119,633 149,542 179,450
425,000.................. 31,846 63,692 95,537 127,383 159,229 191,075
450,000.................. 33,783 67,567 101,350 135,133 168,917 202,700
475,000.................. 35,721 71,442 107,162 142,883 178,604 214,325
500,000.................. 37,658 75,317 112,975 150,633 188,292 225,950
</TABLE>
The Pension Plan is a non-contributory plan which provides a
lifetime income upon an employee's retirement at or after having attained age 65
and having completed at least 5 years of service, or upon an earlier date if
various stated conditions are satisfied. Benefits under the Pension Plan are
determined by a formula related to an employee's age, service and final average
compensation at termination. The covered compensation (35 year average of the
Social Security wage base) used to develop the table above is $43,668 (the
amount for a person born in 1940). The SERP is an unfunded obligation which
provides benefits to participants (including the Named Executive Officers) which
would otherwise be restricted under the Pension Plan by virtue of the
limitations imposed on qualified plans by Sections 415 and 401(a)(4) of the
Internal Revenue Code (the "Code").
An employee's final average compensation is determined based upon
the highest 60 consecutive months of service during the last 120 consecutive
months. Final average compensation includes base salary and bonuses.
At December 31, 1996, the credited years of service and the
average annual earnings under the Pension Plan and the SERP of the Named
Executive Officers were as follows:
<TABLE>
<CAPTION>
Average Annual Credited Years
Compensation of Service
<S> <C> <C>
Fred P. Rullo.......................................... $487,506 4.8
Harold A. Sorgenti..................................... 392,870 5.0
Robert G. Kitchen...................................... 243,352 4.6
*Robert Kirchner....................................... --- ---
*Helmut E. Wolf........................................ --- ---
Brian F. McNamara...................................... 187,342 2.3
</TABLE>
- ---------------
* Not a participant in the Pension Plan
Management Equity Plan
On June 30, 1994, the Board adopted and the stockholders approved
the 1994 Management Equity Plan (the "Management Equity Plan") which provides
for grants of options to purchase shares of Common Stock and Series B Common
Stock to executive officers, other key employees and consultants of the Company.
The Management Equity Plan also provides for the grant of stock appreciation
rights ("SARs") in tandem with an option award. The purpose of the Management
Equity Plan is to afford an incentive to such participants to increase their
efforts on behalf of the Company and to promote the success of the Company's
business.
42
<PAGE>
Each option grant is evidenced by an agreement between the grantee
and Freedom (an "Option Agreement"). An Option Agreement provides the number of
shares of Common Stock or Series B Common Stock, as appropriate, covered by the
award, the option price and the exercise period (which will be ten years and one
month unless otherwise provided in the option agreement). In addition, the
Compensation Committee may establish appropriate performance goals which, if
attained, will accelerate the exercisability and vesting of the option award.
The performance goals are based on the Company attaining a pre-established level
of annual and cumulative earnings before interest, taxes, depreciation and
amortization. If such performance goals are not attained, the option becomes
exercisable based on its original exercise schedule (rather than on an
accelerated exercise schedule).
Freedom has authorized and reserved 4,185 shares of Common Stock
and 4,185 shares of Series B Common Stock for awards under the Management Equity
Plan. Such shares are subject to adjustment in the event of certain transactions
which affect the capitalization of the Company. In the event of such a
transaction, the number of shares of Common Stock available for awards, the
number of such shares covered by outstanding awards and the option price or SAR
price may be equitably adjusted by the Compensation Committee, in order to
reflect such event and preserve the value of outstanding awards.
The Management Equity Plan provides that in the event of a Change
of Control of Freedom (as such term is defined in the Management Equity Plan)
following an initial public offering all awards which are outstanding at such
time shall become immediately exercisable and otherwise nonforfeitable. The
Board, at any time, may amend or terminate the plan, provided, that an amendment
which requires stockholder approval in order for the Management Equity Plan to
continue to comply with Rule 16b-3 shall not be effective unless approved by the
requisite vote of the stockholders of Freedom. In addition, no amendment or
termination may adversely affect any award previously granted without the
written consent of the participant.
As of March 1, 1997, 3,525 options to purchase shares of Series B
Common Stock were outstanding under the Management Equity Plan. Such options
vest over five years provided that the Company achieves certain annual and
cumulative performance goals.
No awards may be granted under the Management Equity Plan after
June 30, 2004.
Employment Contracts with Named Executive Officers
Freedom is party to an employment agreement with Mr. Kitchen (the
"Kitchen Employment Agreement") providing for his employment with Freedom until
June 30, 1997 at an annual base salary of not less than $210,000, plus
performance-based bonuses. If Mr. Kitchen's employment is terminated by Freedom
other than for Cause (as defined in the Kitchen Employment Agreement), the
Kitchen Employment Agreement provides that he will receive his base salary in
effect at the time of termination and benefits for a period of 18 months
following such termination, plus a prorated portion of the incentive bonus for
such year.
Freedom Chemical Diamalt is a party to an employment agreement
with Mr. Wolf (the "Wolf Employment Agreement") providing for his employment
with Freedom Chemical Diamalt at an annual salary of DM273,000 (subject to
adjustment annually), plus a performance-based bonus. The Wolf Employment
Agreement continues until Mr. Wolf reaches 65 years of age, subject to prior
termination by either party as set forth therein.
See "Item 13. Certain Relationships and Related Transactions" for
a description of the 1994 Employment Agreements with Messrs. Rullo and Sorgenti.
43
<PAGE>
Compensation of Directors
Independent outside directors receive compensation of $20,000 per
annum for serving on the Board. Directors who are not full-time employees of the
Company are reimbursed for traveling costs and other out-of-pocket expenses
incurred in attending meetings. Directors who serve on the Compensation
Committee receive no additional compensation.
Compensation Interlocks and Insider Participation
The Board of Directors has a Compensation Committee consisting of
Messrs. Rullo, Joseph and Levy. Except for Mr. Rullo, Freedom's Chairman of the
Board, Chief Executive Officer and President, no officer or employee of the
Company has participated in deliberations of the Board of Directors concerning
executive officer compensation. Mr. Rullo has entered into certain agreements
with Freedom which are discussed under "Item 13. Certain Relationships and
Related Transactions."
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 1, 1997, certain
information regarding the beneficial ownership of Common Stock by (i) each of
Freedom's directors, (ii) each person believed by Freedom to own beneficially
more than 5% of its outstanding Common Stock, (iii) each of the Named Executive
Officers and (iv) all executive officers and directors of Freedom as a group.
<TABLE>
<CAPTION>
Number of Shares
Beneficially % of Common
Named Executive Officers, Directors and 5% Stockholders Owned(1) Stock (2)(3)
- ------------------------------------------------------- ---------------- -----------
<S> <C> <C>
Joseph Littlejohn and Levy Fund, L.P.................................. 91,825(4)(5) 59.44
Joseph Littlejohn and Levy Fund II, L.P............................... 37,136(4)(5) 24.04
Harold A. Sorgenti.................................................... 21,842(6) 14.04
Fred P. Rullo......................................................... 13,217(7) 8.10
Peter A. Joseph....................................................... 128,961(5) 83.50
Paul S. Levy.......................................................... 128,961(5) 83.50
Alexander R. Castaldi................................................. -- --
Timothy J. Clark...................................................... -- --
Angus C. Littlejohn, Jr............................................... -- --
Vincent P. Langone.................................................... -- --
Robert A. Kirchner.................................................... 745(8) *
Robert G. Kitchen..................................................... 929(9) *
Brian F. McNamara..................................................... --(10) *
Helmut E. Wolf........................................................ --(11) --
All directors and executive officers as a group (14 persons).......... 165,972(12) 98.95
</TABLE>
- -------------------------
* Less than 1%.
(1) Unless otherwise indicated, each beneficial owner has both sole voting
and sole investment power with respect to the shares beneficially owned
by him. The number of shares shown as beneficially owned includes all
options held by such person, entity or group which are exercisable
within 60 days.
44
<PAGE>
(2) The percentages of beneficial ownership as to each person, entity or group
assume that all options held by such person, entity or group which are
exercisable within 60 days, but not those held by others shown in the
table, have been exercised.
(3) Percentages are calculated based on 154,481 shares of Common Stock
outstanding as of March 1, 1997.
(4) All of such shares are owned by the JLL Fund I and the JLL Fund II, as
indicated. Messrs. Joseph and Levy are officers and directors of Lancer, a
limited partner of JLL Associates and the owner of 100% of the capital
stock of JLL Inc. which, pursuant to contract, manages the JLL Fund I.
Messrs. Joseph and Levy are each general partners of JLL Associates and JLL
Associates II, which is the general partner of the JLL Fund I and JLL Fund
II, respectively. Messrs. Joseph and Levy disclaim beneficial ownership of
all such shares. By virtue of the Stockholders' Agreement, Messrs. Sorgenti
and Rullo, FIC and Rulco may be deemed to have a beneficial ownership
interest in such shares. Messrs. Sorgenti and Rullo, FIC and Rulco have
disclaimed beneficial ownership of such shares.
(5) Messrs. Joseph and Levy may be deemed to beneficially own the shares held
by the JLL Funds. See Note 4 above.
(6) Includes 6,469 shares held by Mr. Sorgenti directly, 549 shares held by The
Harold A. Sorgenti 1994 Five Year Grantor Retained Annuity Trust, 5,867
shares held by FIC, 7,828 shares held by the Sorgenti Family Partnership,
L.P., a Delaware limited partnership ("SFP"), and 1,129 shares subject to
currently exercisable options held by FIC. Mr. Sorgenti disclaims
beneficial ownership of the 7,828 shares held by SFP. By virtue of the
Stockholders' Agreement, JLL Fund I and JLL Fund II may be deemed to have a
beneficial ownership interest in such shares. JLL Fund I and JLL Fund II
have disclaimed beneficial ownership of such shares.
(7) Includes 367 shares held by Mr. Rullo directly, 727 shares held in the name
of Rulco, 8,683 shares of Common Stock subject to currently exercisable
options held by Mr. Rullo; and 3,440 shares subject to currently
exercisable options held by Rulco. Does not include options to purchase 860
shares of Common Stock subject to options held by Rulco that currently are
not exercisable. By virtue of the Stockholders' Agreement, JLL Fund I and
JLL Fund II may be deemed to have a beneficial ownership interest in such
shares. JLL Fund I and JLL Fund II have disclaimed beneficial ownership of
such shares. See "Item 13. Certain Relationships and Related Transactions."
(8) Does not include 400 shares of Series B Common Stock subject to options
held by Mr. Kirchner that are not currently exercisable.
(9) Does not include 500 shares of Series B Common Stock subject to options
held by Mr. Kitchen that are not currently exercisable.
(10) Does not include 450 shares of Series B Common Stock subject to options
held by Mr. McNamara that are not currently exercisable.
(11) Does not include 300 shares of Series B Common Stock subject to options
held by Dr. Wolf that are not currently exercisable.
45
<PAGE>
(12) Does not include 2,250 shares of Series B Common Stock subject to options
held by such executive officers and directors that currently are not
exercisable.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Set forth below is a summary of certain agreements and
arrangements entered into by the Company and related parties.
On September 9, 1993, Freedom loaned Rulco $200,000 to enable it
to purchase 300 shares of Common Stock and 170 shares of the Series B Preferred
Stock (collectively, the "Pledged Stock"). Fred P. Rullo, Chairman of the Board
of Directors, Chief Executive Officer and President of Freedom, is the sole
shareholder of Rulco. All unpaid principal and interest is due and payable in
full on December 31, 2000. The loan bears interest at a rate per annum equal to
the highest rate payable by Freedom under the Freedom Credit Agreement.
Repayment of the loan is guaranteed by Mr. Rullo and is collateralized by the
Pledged Stock.
Effective December 7, 1994, JLL and The Freedom Group (Messrs.
Sorgenti, Rullo and McPhail) entered into an agreement, (the "1994 Conditional
Bonus Agreement") which terminated an agreement in principle the parties had
entered into in 1992 and amended and restated the conditional bonus provided for
in such agreement in principle. The 1994 Conditional Bonus Agreement provides
that JLL will pay a bonus (a "Conditional Bonus") to The Freedom Group out of
the cash proceeds realized by JLL in connection with the disposition of all or a
portion of its investments in Freedom, which cash proceeds are in excess of
certain thresholds. On April 14, 1995, pursuant to the Assignments, The Freedom
Group assigned to FIC, Rulco and Donald W. McPhail, respectively, 57%, 38% and
5% interests in its rights under the 1994 Conditional Bonus Agreement, including
its interest in the Conditional Bonus. Under GAAP as currently in effect, if JLL
were to pay a Conditional Bonus to such assignees, the payment of such bonus may
be treated as a contribution to the capital of Freedom by JLL and Freedom may
have to recognize compensation expense with respect to such bonus payment. If
Freedom were required under GAAP to record a payment by JLL in this manner,
Freedom would have to record a non-cash charge to Freedom's earnings in the
quarter such bonus is earned.
Effective December 7, 1994, Freedom entered into employment
agreements with each of Mr. Rullo (the "Rullo Employment Agreement") and Mr.
Sorgenti (the "Sorgenti Employment Agreement" and, together with the Rullo
Employment Agreement, the "1994 Employment Agreements"). The terms of the Rullo
Employment Agreement and the Sorgenti Employment Agreement are substantially
similar. Pursuant to the Rullo Employment Agreement, Mr. Rullo served as
President of Freedom, and pursuant to the Sorgenti Employment Agreement, prior
to his resignation, Mr. Sorgenti served as the Executive Chairman of Freedom.
The Rullo Employment Agreement will be automatically extended for additional one
year terms unless either Freedom or Mr. Rullo elects not to extend the term. On
February 10, 1997 the Rullo Employment Agreement was extended to December 31,
1997. All other terms of the 1994 Rullo Employment Agreement remain unchanged.
Under the 1994 Employment Agreements, each of Mr. Sorgenti and Rullo were
entitled to an annual base salary of not less than $400,000, and subject to
Freedom's meeting certain performance criteria established by the Board of
Directors or the Compensation Committee, an annual bonus of up to 150% of the
base salary.
On July 2, 1996, Mr. Sorgenti resigned from his position as
Executive Chairman of Freedom. Pursuant to the Sorgenti Employment Agreement, as
a result of Mr. Sorgenti's resignation, Freedom will pay to Mr. Sorgenti a
severance benefit in an aggregate amount of $962,558 in substantially equal
monthly installments over a period of two years. In addition, pursuant to the
Amended and Restated Option Agreements, 100% of the Sorgenti Shares
46
<PAGE>
(as such term is defined in the Amended and Restated Option Agreements) became
vested and immediately exercisable; provided that The Freedom Group will have
until July 2, 1997 to exercise such options and thereafter such options will
expire. Also pursuant to the Sorgenti Employment Agreement, Freedom will
maintain health benefits for Mr. Sorgenti until 18 months after the Sorgenti
Resignation Date.
Upon termination of Mr. Rullo's employment with Freedom, (i) by
Freedom other than for Cause (as defined in the Rullo Employment Agreement), or
(ii) by Mr. Rullo for Good Reason (as defined in the Rullo Employment
Agreement), Freedom will pay to Mr. Rullo, in substantially equal monthly
installments over a period of two years an amount equal to the product of two
multiplied by the amount of the average of the annual compensation actually paid
to Mr. Rullo with respect to the three years immediately preceding the year in
which such termination of employment occurs. In addition, Freedom will continue
to maintain health benefits for Mr. Rullo, until the later of the end of the
initial term of the Rullo Employment Agreement and 18 months after the date of
such termination. The Rullo Employment Agreement also contains certain
confidentiality, noncompetition and non-disclosure provisions.
JLL does not receive any fees from Freedom. Freedom reimburses JLL
for its out-of-pocket expenses.
The JLL Funds and Mr. Kirchner made cash equity investments in the
Company in an aggregate of $10 million (approximately $9.94 million and $60,000,
respectively) concurrently with the consummation of the offering of Notes.
Following consummation of the offering of Notes, Messrs. Sorgenti and Kitchen as
well as certain other stockholders of Freedom invested an aggregate of
approximately $1.9 million in the Company, almost all of which were financed
with loans made by Freedom. Each loan bears interest at a rate of 10 5/8% per
annum, matures on December 31, 2001 and is secured by a pledge of the Common
Stock purchased with the proceeds of such loan. In the fourth quarter of 1996,
Mr. Rullo was granted an option to purchase 8,683 shares of Common Stock at an
exercise price of $125 per share, which purchase may be financed with a loan
made by Freedom. The option vested fully on the date of grant and is exercisable
for a period of five years.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this Report:
1. Consolidated Financial Statements and Schedules appear on page
F-1 herein.
2. Exhibits (except as otherwise designated below, all exhibits
have been previously filed).
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).
47
<PAGE>
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).
4.1 Indenture dated as of October 15, 1996, among Freedom
Chemical Company, the Guarantors named therein and The Bank
of New York, as trustee, relating to the 10 5/8% Senior
Subordinated Notes due 2006 of Freedom Chemical Company and
exhibits thereto, including Form of 10 5/8% Senior
Subordinated Note due 2006 of Freedom Chemical Company
(filed as Exhibit 4.1 to the Company's Registration
Statement on Form S-1 (33-84778) and incorporated herein by
reference).
10.1 Registration Rights Agreement, dated October 17, 1996 among
Freedom Chemical Company, the Guarantors named therein and
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Schroder
Wertheim & Co. Incorporated and Smith Barney Inc. (filed as
Exhibit 10.1 to the Company's Registration Statement on Form
S-1 (33-84778) and incorporated herein by reference).
10.2 Amended and Restated Credit Agreement, dated as of October
17, 1996 among Freedom Chemical Company, Freedom Chemical
Diamalt GmbH, the institutions from time to time party
thereto as lenders, the institutions from time to time party
thereto as issuing bank and Citicorp USA, Inc., as Agent
(filed as Exhibit 10.2 to the Company's Registration
Statement on Form S-1 (33-84778) and incorporated herein by
reference).
10.3 Share Pledge Agreement, dated January 16, 1995, by and among
Freedom Chemical Company, Hilton Davis Chemical Co. and
Citicorp USA, Inc. (filed as Exhibit 10.3 to the Company's
Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
10.4 Amendment to Share Pledge Agreement, dated January 17, 1995,
by and among Freedom Chemical Company, Hilton Davis Chemical
Co. and Citicorp USA, Inc. (filed as Exhibit 10.4 to the
Company's Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
10.5 Security Assignment Agreement, dated January 16, 1995,
between Freedom Chemical Company and Citicorp USA, Inc.
(filed as Exhibit 10.5 to the Company's Registration
Statement on Form S-1 (33-84778) and incorporated herein by
reference).
10.6 Stock Purchase Agreement, dated as of May 11, 1994, among BC
Sugar Refinery Limited, Chatterton Petrochemical Corporation
and Freedom Chemical Company (filed as Exhibit 10.6 to the
Company's Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
10.7 Amendment No. 1 to Stock Purchase Agreement, dated as of May
26, 1994, among BC Sugar Refinery Limited, Chatterton
Petrochemical Corporation and Freedom Chemical Company
(filed as Exhibit 10.7 to the Company's Registration
Statement on Form S-1 (33-84778) and incorporated herein by
reference).
48
<PAGE>
10.8 Settlement Agreement, dated as of April 28, 1994, between
Tenneco Polymers, Inc. and Kalama Chemical, Inc. (filed as
Exhibit 10.8 to the Company's Registration Statement on Form
S-1 (33-84778) and incorporated herein by reference).
10.9 Stock Purchase Agreement, dated as of May 21, 1993, between
PMC, Inc. and Freedom Chemical Acquisition Corporation
(filed as Exhibit 10.9 to the Company's Registration
Statement on Form S-1 (33-84778) and incorporated herein by
reference).
10.10 Amendment No. 1 to Stock Purchase Agreement, dated as of
September 9, 1993, between PMC, Inc. and Freedom Chemical
Company (filed as Exhibit 10.10 to the Company's
Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
10.11 Definitive Agreement, dated as of August 13, 1993, between
Sterling Winthrop Inc. and Freedom Chemical Acquisition
Corporation (filed as Exhibit 10.11 to the Company's
Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
10.12 Ground Lease, dated September 9, 1993, between The SDI
Divestiture Corp. and Hilton Davis Chemical Co. (filed as
Exhibit 10.12 to the Company's Registration Statement on
Form S-1 (33-84778) and incorporated herein by reference).
10.13 Amendment to Ground Lease Provisions, dated September 9,
1993 (filed as Exhibit 10.13 to the Company's Registration
Statement on Form S-1 (33-84778) and incorporated herein by
reference).
10.14 Escrow Agreement, dated September 9, 1993, by and among PMC,
Inc., Freedom Chemical Acquisition Corporation and
CoreStates Bank, N.A. (filed as Exhibit 10.14 to the
Company's Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
10.15 Environmental Matters Agreement, dated September 9, 1993,
among Freedom Chemical Acquisition Corporation, Hilton Davis
Chemical Co. and Sterling Winthrop, Inc. (filed as Exhibit
10.15 to the Company's Registration Statement on Form S-1
(33-84778) and incorporated herein by reference).
10.16 Agreement for the Purchase and Sale of Assets, dated
February 28, 1992, between Freedom Textile Chemicals Co. and
American Cyanamid Company (filed as Exhibit 10.16 to the
Company's Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
10.17 Employment Agreement, dated November 15, 1994, by and
between Freedom Chemical Company and Fred P. Rullo (filed as
Exhibit 10.18 to the Company's Registration Statement on
Form S-1 (33-84778) and incorporated herein by reference).
10.18 Employment Agreement, dated November 15, 1994, by and
between Freedom Chemical Company and Harold A. Sorgenti
(filed as Exhibit 10.19 to the Company's Registration
Statement on Form S-1 (33-84778) and incorporated herein by
reference).
49
<PAGE>
10.19 Employment Agreement, dated June 1, 1991, between Kalama
Chemical, Inc. and Robert A. Kirchner (filed as Exhibit
10.20 to the Company's Registration Statement on Form S-1
(33-84778) and incorporated herein by reference).
10.20 Employment Agreement, dated January 17, 1996, between
Freedom Textile Chemicals Co. and Robert G. Kitchen (filed
as Exhibit 10.21 to the Company's Registration Statement on
Form S-1 (33-84778) and incorporated herein by reference).
10.21 Letter Agreement, dated January 9, 1997, between Freedom
Chemical Company and Robert G. Kitchen (filed as Exhibit
10.21(a) to the Company's Registration Statement on Form S-1
(33-84778) and incorporated herein by reference).
10.22 Employment Agreement between Freedom Chemical Diamalt GmbH
and Helmut Wolf (filed as Exhibit 10.22 to the Company's
Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
10.23 Letter Agreement, dated May 8, 1992, between The Freedom
Group and Robert Kitchen (filed as Exhibit 10.23 to the
Company's Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
10.24 Employment Agreement, dated March 13, 1992, between Freedom
Textile Chemicals Co. and James B. Trecek (filed as Exhibit
10.24 to the Company's Registration Statement on Form S-1
(33-84778) and incorporated herein by reference).
10.25 Agreement, dated December 7, 1994, by and among Freedom
Chemical Company, the Freedom Group Partnership, Joseph
Littlejohn & Levy Fund, L.P., Joseph Littlejohn & Levy Fund
II, L.P., Harold A. Sorgenti and Fred P. Rullo (filed as
Exhibit 10.25 to the Company's Registration Statement on
Form S-1 (33-84778) and incorporated herein by reference).
10.26 Stockholders' Agreement, dated as of May 4, 1992, among
Freedom Chemical Company, Joseph Littlejohn & Levy Fund,
L.P., Harold A. Sorgenti and Fred P. Rullo (filed as Exhibit
10.26 to the Company's Registration Statement on Form S-1
(33-84778) and incorporated herein by reference).
10.27 Amendment to Stockholders' Agreement, dated as of September
9, 1993, by and among Freedom Chemical Company, Joseph
Littlejohn & Levy Fund, L.P., Freedom Investment Corp.,
Harold A. Sorgenti, Fred P. Rullo and RULCO, Inc. (filed as
Exhibit 10.27 to the Company's Registration Statement on
Form S-1 (33-84778) and incorporated herein by reference).
10.28 Amendment No. 2 to Stockholders' Agreement, dated as of June
30, 1994, by and among Freedom Chemical Company, Joseph
Littlejohn & Levy Fund, L.P., Joseph Littlejohn & Levy Fund
II, L.P., Freedom Investment Corp., Harold A. Sorgenti, Fred
P. Rullo and RULCO, Inc. (filed as Exhibit 10.28 to the
Company's Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
50
<PAGE>
10.29 Stockholders' Agreement, dated as of June 30, 1993, by and
among Freedom Chemical Company, Joseph Littlejohn & Levy
Fund, L.P., Donald W. McPhail and Stamford-Atlanta Capital
Corporation (filed as Exhibit 10.29 to the Company's
Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
10.30 Amendment to Stockholders' Agreement, dated as of June 30,
1994, by and among Freedom Chemical Company, Joseph
Littlejohn & Levy Fund, L.P., Joseph Littlejohn and Levy
Fund II, L.P., Donald W. McPhail and Stamford-Atlanta
Capital Corporation (filed as Exhibit 10.30 to the Company's
Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
10.31 Stockholders' Agreement, dated as of June 30, 1994, by and
among Freedom Chemical Company, Joseph Littlejohn & Levy
Fund, L.P., Joseph Littlejohn & Levy Fund II, L.P., and the
individual shareholders whose names are set forth on the
signature page thereto (filed as Exhibit 10.31 to the
Company's Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
10.32 Stockholders' Agreement, dated as of June 30, 1994, by and
among Freedom Chemical Company, Joseph Littlejohn & Levy
Fund, L.P., Joseph Littlejohn & Levy Fund II, L.P., and
Richard E. Gilleland (filed as Exhibit 10.32 to the
Company's Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
10.33 Freedom Chemical Company 1994 Management Equity Plan (filed
as Exhibit 10.33 to the Company's Registration Statement on
Form S-1 (33-84778) and incorporated herein by reference).
10.34 Form of Stock Option Agreement (filed as Exhibit 10.34 to
the Company's Registration Statement on Form S-1 (33-84778)
and incorporated herein by reference).
10.35 Amended and Restated Stock Option Agreement, dated as of
November 15, 1994, between Freedom Chemical Company and The
Freedom Group Partnership (filed as Exhibit 10.35 to the
Company's Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
10.36 Amended and Restated Stock Option Agreement, dated as of
November 15, 1994, between Freedom Chemical Company and The
Freedom Group Partnership (filed as Exhibit 10.36 to the
Company's Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
10.37 Amended and Restated Stock Option Agreement, dated as of
November 15, 1994, between Freedom Chemical Company and The
Freedom Group Partnership (filed as Exhibit 10.37 to the
Company's Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
10.38 Letter, dated January 18, 1994, from The Freedom Group to
Freedom Chemical Company (filed as Exhibit 10.38 to the
Company's Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
51
<PAGE>
10.39 Letter, dated January 24, 1994, from Freedom Investment
Corp. to Joseph Littlejohn & Levy Fund, L.P.; Letter, dated
January 24, 1994, from Harold A. Sorgenti and Ann R.
Sorgenti to Joseph Littlejohn & Levy Fund, L.P.; Letter,
dated January 24, 1994, from Sorgenti Family Partnership,
L.P. to Joseph Littlejohn & Levy Fund, L.P. (filed as
Exhibit 10.39 to the Company's Registration Statement on
Form S-1 (33-84778) and incorporated herein by reference).
10.40 Subscription Agreement, dated as of October 17, 1996 between
Freedom Chemical Company and Joseph Littlejohn & Levy Fund,
L.P. (filed as Exhibit 10.40 to the Company's Registration
Statement on Form S-1 (33-84778) and incorporated herein by
reference).
10.41 Subscription Agreement, dated as of October 17, 1996 between
Freedom Chemical Company and Joseph Littlejohn & Levy Fund
II, L.P. (filed as Exhibit 10.41 to the Company's
Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
10.42 Assignment Agreement, dated as of May 26, 1994, between
Kalama Chemical, Inc. and United States Trust Company (filed
as Exhibit 10.42 to the Company's Registration Statement on
Form S-1 (33-84778) and incorporated herein by reference).
10.43 Trust Agreement, dated May 26, 1994, among Chatterton
Petrochemical Corporation, Freedom Chemical Company, Kalama
Chemical, Inc. and United States Trust Company of New York
(filed as Exhibit 10.43 to the Company's Registration
Statement on Form S-1 (33-84778) and incorporated herein by
reference).
10.44 Stock Option Agreement, dated December 18, 1996, between
Freedom Chemical Company and Fred P. Rullo.
10.45 Amendment No. 1 to Employment Agreement, dated February 10,
1997, between Freedom Chemical Company and Fred P. Rullo.
21.1 Subsidiaries of Freedom Chemical Company (filed as Exhibit
21.1 to the Company's Registration Statement on Form S-1
(33-84778) and incorporated herein by reference).
24.1 Powers of Attorney of directors and officers of the Company
authorizing Fred P. Rullo and Brian F. McNamara to sign any
amendments to this Report on their behalf (set forth on
signature pages of this Report).
27. Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during
the last quarter of 1996.
52
<PAGE>
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, thereunto duly authorized, in the city of Philadelphia, state
of Pennsylvania, on March 28, 1997.
FREEDOM CHEMICAL COMPANY
(Registrant)
/s/ BRIAN F. MC NAMARA
---------------------------------------
Brian F. McNamara
Vice President, Secretary and General Counsel
We, the undersigned officers and directors of Freedom Chemical Company,
hereby severally constitute and appoint Fred P. Rullo and Brian F. McNamara, and
each of them singly, our true and lawful attorneys, with full power to them, and
each of them singly, to sign for us and in our names in the capacities indicated
below, this Report and any and all amendments to this Report, including any
exhibits or other documents filed in connection therewith, and generally to do
all such things in our names and on our behalf in our capacities as officers and
directors to enable Freedom Chemical Company to comply with the provisions of
the Securities Exchange Act of 1934, and all requirements of the Securities and
Exchange Commission, hereby ratifying and confirming our signatures as they may
be signed by our said attorneys or any of them, to this Report and any and all
amendments thereto.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/s/ FRED P. RULLO Chairman, Chief Executive Officer and March 28, 1997
- ------------------------------------ President (Principal Executive Officer
Fred P. Rullo and Director
/s/ DENNIS M. MONAHAN Chief Financial Officer (Principal Financial March 28, 1997
- ------------------------------------ Officer and Principal Accounting Officer)
Dennis M. Monahan
Director
- ------------------------------------
Alexander R. Castaldi
/s/ TIMOTHY J. CLARK Director March 28, 1997
- ------------------------------------
Timothy J. Clark
/s/ PETER A. JOSEPH Director March 28, 1997
- ------------------------------------
Peter A. Joseph
/s/ VINCENT P. LANGONE Director March 28, 1997
- ------------------------------------
Vincent P. Langone
Director
- ------------------------------------
Paul S. Levy
Director
- ------------------------------------
Angus C. Littlejohn
/s/ HAROLD A. SORGENTI Director March 28, 1997
- ------------------------------------
Harold A. Sorgenti
</TABLE>
53
<PAGE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.
None.
54
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES (THE "COMPANY")
Report of Coopers & Lybrand L.L.P., Independent Accountants..................................... F-2
Financial Statements:
Consolidated Balance Sheets as of December 31, 1995 and 1996.................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and 1996...... F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years ended
December 31, 1994, 1995 and 1996............................................................ F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996...... F-6
Notes to Consolidated Financial Statements...................................................... F-7
Financial Statement Schedule for the years ended December 31, 1994, 1995 and 1996:
Report of Coopers & Lybrand L.L.P., Independent Accounts....................................... F-44
Schedule II - Valuation and Qualifying Accounts................................................. F-45
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Freedom Chemical Company
Philadelphia, Pennsylvania
We have audited the accompanying consolidated balance sheets of Freedom Chemical
Company and Subsidiaries as of December 31, 1995 and 1996 and the related
consolidated statements of operations, changes in stockholders' equity (deficit)
and cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Freedom Chemical
Company and Subsidiaries as of December 31, 1995 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ Coopers & Lybrand L.L.P.
600 Lee Road
Wayne, Pennsylvania
March 26, 1997
F-2
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
As of December 31,
--------------------
1995 1996
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,450 $ 3,554
Accounts receivable, net of allowance for doubtful accounts
of $260 and $456, respectively.......................... 39,050 44,249
Due from shareholders..................................... -- 22
Refundable income taxes................................... 2,742 1,811
Inventories............................................... 46,848 53,019
Prepaid expenses and other current assets................. 4,812 5,251
Environmental indemnification............................. 780 492
Deferred income taxes..................................... 2,107 7,237
-------- --------
Total current assets.................................. 97,789 115,635
Property, Plant and Equipment:
Land...................................................... 3,658 3,872
Buildings and improvements................................ 14,357 14,600
Machinery and equipment................................... 97,679 101,356
Other..................................................... 4,506 11,137
-------- --------
120,200 130,965
Less accumulated depreciation............................... 18,734 28,754
-------- --------
101,466 102,211
Other assets:
Intangible assets, net.................................... 34,928 34,040
Environmental indemnification............................. 1,074 8
Deferred financing costs, net............................. 3,641 6,902
Investments in joint ventures............................. 511 541
Other..................................................... 3,747 3,577
--------- --------
Total assets.......................................... $ 243,156 $ 262,914
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term debt...................... $ 6,142 $ 1,067
Short-term borrowings..................................... 12,238 936
Notes payable............................................. 753 1,098
Accounts payable.......................................... 22,928 20,996
Accrued expenses.......................................... 8,985 10,922
Accrued compensation...................................... 4,618 5,787
Accrued restructuring and other charges................... 3,470 4,627
Environmental............................................. 1,200 1,200
------------ ------------
Total current liabilities............................. 60,334 46,633
Long-term debt.............................................. 119,520 153,560
Environmental............................................... 18,066 14,550
Deferred income taxes....................................... 11,058 12,259
Postretirement benefits..................................... 4,211 4,416
Accrued restructuring and other charges..................... 2,429 1,437
Other....................................................... 2,151 3,346
Minority interest........................................... 3,095 3,390
Commitments and contingencies............................... -- --
Mandatory redeemable preferred stock:
Series B, cumulative, $1,000 par value, authorized 40,000
shares; issued and outstanding 21,322 shares, stated
at liquidation value of $1,000 per share
plus accrued and unpaid dividends of $8,192
and $11,389, respectively................................. 29,514 32,711
Series C, cumulative, $1,000 par value, authorized 15,000
shares; issued 9,137 shares, outstanding 9,137, 8,976
and 8,916 shares, respectively, stated at liquidation
value of $1,054 per share plus accrued and unpaid
dividends of $2,079 and $3,453, respectively............. 11,709 13,083
Less: Treasury stock, at cost
(161 and 221 shares of Series C preferred, respectively)... (188) (262)
--------- -------
41,035 45,532
Stockholders' deficit:
Common stock:
Series A, $.01 par value, authorized 200,000 shares;
issued 59,355 and 154,872 shares respectively,
outstanding 59,070 and 154,481 shares, respectively....... 1 2
Series B, $.01 par value, authorized 10,000 shares;
none issued or outstanding................................ -- --
Additional paid-in capital................................ -- 10,846
Accumulated deficit....................................... (19,735) (30,444)
Cumulative translation adjustment......................... 1,281 (397)
---------- -------
(18,453) (19,993)
Less: Stockholder notes receivable.......................... (200) (2,113)
Treasury stock, at cost (285 and 391 shares of
Series A common, respectively)............................ (33) (46)
Minimum pension liability................................. (57) (57)
----------- ---------
Total stockholders' deficit................................. (18,743) (22,209)
----------- ---------
Total liabilities and stockholders' deficit............... $ 243,156 $ 262,914
========== =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-3
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Net sales......................................... $ 187,780 $ 296,888 $ 300,168
Cost of goods sold................................ 144,845 233,533 238,247
---------- ---------- ----------
Gross profit...................................... 42,935 63,355 61,921
Selling, general and administrative expense....... 26,948 50,399 47,372
Noncash compensation expense (note 18)............ 915 150 197
Research and development expense.................. 2,331 4,950 4,786
Restructuring and other charges (note 17)......... -- 12,495 3,974
--------- --------- ---------
Operating income (loss)........................... 12,741 (4,639) 5,592
Interest and debt expense, net of capitalized
interest of $168 and $193 for the years
ended December 31, 1995 and 1996.............. 6,682 13,805 14,213
Registration costs (note 17)...................... -- 2,187 --
Other income...................................... 545 5 711
--------- --------- ---------
Income (loss) before minority
interest, income taxes and
extraordinary item.................. 6,604 (20,626) (7,910)
Minority interest................................. 284 247 260
--------- --------- ---------
Income (loss) before income taxes
and extraordinary item.............. 6,320 (20,873) ( 8,170)
Provision (benefit) for income taxes.............. 2,858 (3,809) (2,305)
Equity in income of joint ventures................ -- 74 635
--------- --------- ---------
Net income (loss) before
extraordinary item.................. 3,462 (16,990) (5,230)
Extraordinary loss, net of applicable
income tax benefit of $725 and $1,140 for the
years ended December 31, 1994 and 1996,
respectively (note 2) ........................ (1,276) -- (2,001)
-------- -------- --------
Net income (loss)....................... 2,186 (16,990) (7,231)
Less: preferred dividends......................... 3,694 4,611 4,571
-------- -------- --------
Net loss applicable to..................
common shares....................... $ (1,508) $ (21,601) $ (11,802)
======== ========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-4
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(Dollars in thousands)
<TABLE>
<CAPTION>
Series A
Common Stock Additional Cumulative Stockholder Minimum
________________ Paid-in Accumulated Translation Note Treasury Pension
Shares Amount Capital Deficit Adjustment Receivable Stock Liability Total
------ ------ ------- ----------- ----------- ---------- ------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1993......... 37,500 $ 1 $ 1,783 $(1,275) $ (44) $ (200) $ -- $ -- $ 265
1994:
Issuance of common
stock............ 21,855 -- 2,866 -- -- -- -- -- 2,866
Foreign currency
translation...... -- -- -- -- 124 -- -- -- 124
Accrued and unpaid
preferred dividends
for the
year ended
December 31,
1994............. -- -- (2,783) (911) -- -- -- -- (3,694)
Net income.......... -- -- -- 2,186 -- -- -- -- 2,186
------- --- ------ ------ ------ ------- -- --- ------
Balance at December
31, 1994......... 59,355 1 1,866 -- 80 (200) -- -- 1,747
1995:
Foreign currency
translation...... -- -- -- -- 1,201 -- -- -- 1,201
Treasury shares
purchased (285
Series A common
shares).......... -- -- -- -- -- -- (33) -- (33)
Accrued and unpaid
preferred
dividends for the
year ended
December 31,
1995............. -- -- (1,866) (2,745) -- -- -- -- (4,611)
Minimum pension
liability........ -- -- -- -- -- -- -- (57) (57)
Loss................. -- -- -- (16,990) -- -- -- -- (16,990)
-------- --- ------ ------- ----- -------- --- --- --------
Balance at December
31, 1995......... 59,355 1 -- (19,735) 1,281 (200) (33) (57) (18,743)
1996:
Issuance of common
stock ........... 95,517 1 11,939 -- -- -- -- -- 11,940
Issuance of stockholder
notes receivable. -- -- -- -- -- (1,913) -- -- (1,913)
Foreign currency
translation...... -- -- -- -- (1,678) -- -- -- (1,678)
Treasury shares
purchased (106
Series A common
shares).......... -- -- -- -- -- -- (13) -- (13)
Accrued and unpaid
preferred
dividends for the
year ended
December 31,
1996............. -- -- (1,093) (3,478) -- -- -- -- (4,571)
Loss................. -- -- -- (7,231) -- -- -- -- (7,231)
------- --- ------ ------- ------ ------- ---- --- -------
Balance at December
31, 1996........ 154,872 $ 2 $10,846 $(30,444) $ (397) $ (2,113) $ (46) $ (57) ($22,209)
======= === ====== ======= ====== ======= === ==== ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)..................... $ 2,186 $(16,990) $( 7,231)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization......... 8,559 13,512 13,793
Provision for doubtful accounts....... 142 36 397
Gain on sale of fixed assets.......... -- (188) (60)
Minority interest..................... 284 247 260
Non-cash compensation expense......... 915 150 197
Extraordinary loss.................... 2,001 -- 3,141
Restructuring and other charges,
net of payments...................... -- 13,759 10,404
Registration costs.................... -- 2,187 --
Equity increase of joint ventures.... -- (74) (636)
Deferred income taxes................ 258 (3,294) (2,537)
Other changes that provided
(used) cash:
Accounts receivable............... (2,035) (8,308) (6,297)
Inventories....................... (438) (1,787) (12,195)
Prepaid expenses and other
current assets.................... (658) (1,385) (3,157)
Accounts payable, accrued
expenses and other
liabilities................... 2,949 (3,765) (3,016)
--------- --------- ---------
Net cash provided by (used in) operating
activities........................ 14,163 (3,130) (6,937)
--------- --------- ---------
Payments for acquisitions, net of
cash acquired................. (68,286) (15,874) --
Capital expenditures............... (7,210) (15,514) (12,337)
Acquisition of intangibles......... -- -- (1,084)
Purchase of subsidiary stock from
minority stockholders.......... (142) -- --
(Increase) decrease in investments
in joint ventures.............. -- (133) 367
Proceeds from sale of capital equipment 185 762 1,640
Payment for environmental liabilities (2,543) (3,943) (2,817)
Proceeds from environmental indemnification 2,292 2,645 1,354
Other.............................. (208) 42 48
--------- --------- ---------
Net cash used in investing
activities...................... (75,912) (32,015) (12,829)
Cash flows from financing activities:
Issuance of common stock.............. 2,273 -- 10,027
Issuance of preferred stock........... 9,745 -- --
Revolving borrowings under Credit Agreement 36,250 86,830 76,750
Revolving repayments under Credit Agreement (28,500) (73,830) (61,999)
Term loan borrowings under Credit Agreement 95,500 18,200 --
Term loan repayments under Credit Agreement (3,000) (7,000) (129,700)
Short term borrowings under European Facility -- 16,516 97,697
Repayments of short term borrowings under
European Facility.................. -- (3,986) (88,789)
Issuance of senior subordinated notes -- -- 121,250
Repayment of refinanced long-term debt (44,630) -- --
Purchase of treasury stock............ -- (221) (87)
Payment of registration costs......... -- (1,004) (815)
Repayment of capital lease obligations (134) (65) (132)
Payments for financing costs.......... (3,250) (1,391) (1,354)
Dividends paid to minority interests.. (129) (247) (260)
Other................................. (754) (85) (52)
--------- --------- ---------
Net cash provided by financing activities. 63,371 33,717 22,536
--------- --------- ---------
Net effect of exchange rate changes on
cash -- 467 11
--------- -------- ---------
Net increase (decrease) in cash and
cash equivalents...................... 1,622 (961) 2,104
Cash and cash equivalents, beginning of period 789 2,411 1,450
---------- -------- ---------
Cash and cash equivalents, end of period.. $ 2,411 $ 1,450 $ 3,554
========== ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-6
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except share data)
1. Description of Business
Freedom Chemical Company ("FCC"; 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. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and include the accounts of FCC and its
subsidiaries which include: Freedom Textile Chemicals Company and Subsidiaries
("FTCC"), Hilton Davis Chemical Company ("HDCC"), Kalama Chemical, Inc. and
Subsidiaries ("KCI"), Freedom Chemical Diamalt GmbH and Subsidiaries ("FCD"),
Freedom Europe B.V. ("BV") and Diamalt, Inc. (see note 3). All significant
intercompany accounts and transactions have been eliminated in consolidation.
Revenue Recognition
Revenue is recognized when title transfers, which is concurrent with
shipment. Net sales are comprised of the total sales billed during the period
less the sales value of goods returned, trade discounts and customer allowances.
Cash and Cash Equivalents
All investments purchased with maturities of three months or less when
purchased are considered cash equivalents.
Inventory
Inventories are stated at the lower of cost or market. Cost is determined
by the last-in, first-out ("LIFO") method for approximately 42 percent and 33
percent of total inventories at December 31, 1995 and 1996, respectively. The
cost of the remaining inventories are valued using the first-in, first-out
("FIFO") method. Obsolete or unsaleable inventory is reflected at its estimated
net realizable value. Inventory costs include materials, direct labor and
manufacturing overhead.
F-7
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except share data)
Property, Plant and Equipment
Property, plant and equipment are recorded at their assigned values as
determined through the allocation of the respective acquisition purchase prices.
Additions are carried at cost and include expenditures for major renewals and
betterments. Maintenance, repairs and minor renewals are expensed as incurred.
Maintenance and repairs expense for the years ended December 31, 1994, 1995 and
1996 was $6,666, $11,631 and $10,756 respectively. Interest costs are
capitalized as part of the cost of major asset construction projects. Upon
retirement or other disposition, the cost and related accumulated depreciation
are removed from the accounts and any gain or loss is included in the results of
operations. For financial reporting purposes, depreciation is computed using the
straight-line method over the estimated useful lives of the related assets as
follows: buildings and improvements--15 to 31.5 years; machinery and
equipment--4 to 13 years; other--5 years. Depreciation expense during the
years ended December 31, 1994, 1995 and 1996 was $6,367, $10,255 and $10,978
respectively.
Maintenance/Inspection Shutdown Costs
Plant shutdowns are typically scheduled on a semi-annual, nine-month and
annual basis at the Company's various individual plants for the performance of
maintenance and inspection of various pieces of equipment. Estimated costs
related to these shutdowns, which include, among others, supplies, repair parts
and outside contract labor, are accrued on a pro rata basis over the period
between shutdowns. As of December 31, 1995 and 1996, accrued costs for plant
shutdowns, classified as current liabilities, totaled $186 and $919,
respectively.
Intangible Assets
Intangible assets consist of amounts relating to goodwill, patents and
other intangibles, including a sales agreement, trademark licenses,
organizational costs and covenants not to compete arising from acquisitions.
These amounts are being amortized on a straight-line basis over their remaining
useful lives as follows: goodwill--20 to 40 years; patents--6 to 10 years;
and other--1 to 8 years.
At each balance sheet date, management evaluates the recoverability of
intangible assets using certain financial indicators, such as historical and
future ability to generate income from operations. The Company's policy is to
record an impairment loss against the net unamortized cost of the intangible
asset in the period when it is determined that the carrying amount of the asset
may not be recoverable. This determination is based on an evaluation of such
factors as the occurrence of a significant event, a significant change in the
environment in which the business operates or if the expected future net cash
flows (undiscounted and without interest) would become less than the carrying
amount of the asset.
Deferred Financing Costs/Extraordinary Losses
Financing costs relating to bank borrowings are deferred and amortized over
the term of the debt agreements. In October 1996, the Company refinanced and
consolidated most existing Company debt through an amended and restated credit
agreement (the "Amended and Restated Credit Agreement") and the sale of $125,000
of 10 5/8% Senior Subordinated Notes due 2006 ("the Notes"). In connection with
the refinancing, the Company incurred a before-tax extraordinary loss of $3,141,
relating to the write-off of deferred financing fees on the old debt. The
after-tax loss was $2,001.
In May 1994, the Company refinanced and consolidated all existing Company
debt. In connection with the refinancing, the Company incurred a before-tax
extraordinary loss of $2,001, relating to the write-off of deferred financing
fees on the old debt and prepayment penalties. The after-tax loss was $1,276.
Amortization of deferred financing costs during the years ended December
31, 1994, 1995 and 1996 was $590, $822 and $791, respectively, and is classified
as interest expense in the consolidated statements of operations.
F-8
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except share data)
Investments in Joint Ventures
The Company's investments in affiliated companies which are not majority
owned or controlled are accounted for using the equity method. Investments
carried at equity and the percentage interest owned consist of Lyomark Pharma
GmbH (33.4%), Srinivasa Cystine Limited (40%), Prince Chemicals Co. Ltd. (50%),
Hackermalt Protein Verwaltungs GmbH (50%) and Diamo Handels GmbH (50%).
Income Taxes
Income tax expense is based on reported results of operations before
extraordinary items and income taxes. Deferred income taxes reflect the impact
of temporary differences between the amount of assets and liabilities recognized
for financial reporting purposes and such amounts recognized for tax purposes.
Deferred tax balances are adjusted to reflect tax rates, based on current tax
laws, that will be in effect in the years in which the temporary differences are
expected to reverse. Valuation allowances are established when necessary to
reduce deferred tax assets to amounts more likely than not to be realized.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
estimates relate to environmental liabilities and recoveries and the useful
lives and recoverability of intangible assets.
Foreign Currency Translation
Balance sheet accounts for foreign operations are translated at the
exchange rate as of the balance sheet date, and income statement items are
translated at the weighted average exchange rate for the period. The resulting
translation adjustments are included as a separate component of stockholders'
equity. Transaction gains and losses included in the consolidated statements of
operations were not significant for the year ended December 31, 1994.
Transaction losses of $581 and gains of $429 were included in the consolidated
statement of operations for the years ended December 31, 1995, and December 31,
1996, respectively.
Environmental Liabilities and Recoveries
Environmental contingencies assumed in connection with business
acquisitions are recorded as liabilities in connection with the purchase.
Expenditures for ongoing compliance with environmental regulations that relate
to current operations are expensed or capitalized as appropriate. Expenditures
related to improving the condition of property compared with the condition of
that property when constructed or acquired are capitalized. The Company also
capitalizes expenditures that prevent future environmental contamination and
expenditures incurred in preparing a property for sale. Other expenditures are
expensed as incurred. Liabilities are recorded when environmental assessments
indicate that remedial efforts are probable and the costs can be reasonably
estimated. Estimates of the liability are based upon currently available facts,
existing technology, and presently enacted laws and regulations taking into
consideration the likely effects of inflation and other societal and economic
factors. All available evidence is considered including prior experience in
remediation of contaminated sites, other companies' clean-up experience and data
released by the Environmental Protection Agency (EPA) or other organizations.
These liabilities are included in the consolidated balance sheet at their
undiscounted amounts. Recoveries, which are evaluated separately from related
liabilities, are recorded as assets when their receipt is deemed probable.
Additional information regarding environmental recoveries and liabilities is
included in note 11.
F-9
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except share data)
Concentration of Credit Risk
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of its trade receivables. The Company sells a
majority of its products to a wide range of industrial plant and service
facilities. Trade receivables balances consist of a wide range of customers
located in the United States and internationally with the primary concentration
in North America, Europe and Asia. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral. The
Company maintains reserves for potential credit losses and historically such
losses have been within management's expectations.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, trade receivables, trade payables, the Notes and certain other
long-term debt. The book value of cash and cash equivalents, trade receivables,
and trade payables is considered to be representative of their fair value
because of their short maturities. The fair value of the Company's Notes
approximates $131.3 million as of December 31, 1996. This amount is
approximately $6.3 million higher than the carrying amount reported on the
balance sheet at December 31, 1996. Fair value is estimated based on the quoted
market price for the same or similar instruments. The carrying amount of certain
other long-term debt outstanding at December 31, 1995 and 1996 approximated fair
value as the interest rates were variable and set to market. Management believes
that determining a fair value for the Company's mandatory redeemable preferred
stock is impractical due to the closely-held nature of these securities.
Additional information regarding these securities is included in note 14.
Significant Customers
Sales to a customer, which acted as an international distributor for the
Company, amounted to approximately $19.9 million or 10.6 percent, and $21.2
million or 7.1 percent, of net sales for the years ended December 31, 1994 and
1995, respectively. At December 31, 1995, approximately $1.2 million or 3.0
percent of net accounts receivable, was due from this customer.
In 1996, the Company canceled its distribution agreement with their
international distributor. As part of revamping the structure of international
sales, the Company is utilizing the resources of the FCD sales force to call on
these customers.
New Pronouncements
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS No. 121"), which is effective for years beginning after December 15,
1995. SFAS No. 121 established criteria for recognizing, measuring and
disclosing impairments of long-lived assets, including intangibles and goodwill.
The adoption of SFAS No. 121 effective January 1, 1996 did not have any impact
on the Company's results of operations or financial position. In the fourth
quarter of 1996, the Company recorded a charge of $2.3 million in its
consolidated results of operations for the impairment of idle assets (see
note 17).
In October 1995, FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). SFAS No.
123 is required to be adopted for fiscal years beginning after December 15,
1995. SFAS No. 123 encourages a fair value based method of accounting for
employee stock options or similar equity instruments, but allows continued use
of the intrinsic value based method of accounting prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB No. 25"). Companies electing to continue to use APB No. 25 must make
proforma disclosures of net income as if the fair value based method of
accounting had been applied. The Company has elected to continue to follow the
provisions of APB No. 25 (see note 16).
F-10
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except share data)
3. Business Acquisitions
The acquisitions described below have been accounted for under the purchase
method. The results of these acquisitions have been included in the results of
operations from the applicable acquisition dates. The purchase price of each
acquisition was allocated to assets and liabilities based on their estimated
fair values as of the date of acquisition. However, for the 1995 acquisition,
the values assigned to all noncurrent assets were reduced proportionately by the
excess of the estimated fair value of the identifiable net assets acquired over
the purchase price. In connection with the 1994 acquisitions, the excess of the
purchase price over identifiable net assets acquired, net of adjustments, is
being amortized on a straight-line basis over the period, which approximates the
estimated period of benefit. Deferred taxes were established for differences
between the assigned financial statement and tax bases of assets and
liabilities.
1994 Acquisitions
In May 1994, the Company acquired all of the issued and outstanding shares
of common stock of KCI from BC Sugar Refinery Limited ("BC Sugar") and
Chatterton Petrochemical Corporation (collectively referred to as "BC Sugar").
This acquisition was financed by net cash payments of $60,315. In connection
with the acquisition, liabilities of $13,718, principally for environmental
matters, deferred taxes, benefit plan obligations, and transaction costs, were
established based on adjustments required under generally accepted accounting
principles related to purchase business combinations. In addition, $82,111 of
liabilities, principally for environmental matters, deferred taxes, benefit plan
obligations and other liabilities in the normal course of operations, were
assumed. The cash portion was financed with bank debt and proceeds from the
issuance of FCC Series C preferred stock and FCC common stock. The cash payment
for the acquisition is summarized as follows: $27,739 of current assets plus
$87,007 of noncurrent assets acquired plus goodwill of $41,398 less liabilities
of $95,829 equals the cash payment of $60,315. The goodwill is being amortized
on a straight-line basis over 40 years, which approximates the estimated period
of benefit.
In connection with the acquisition of KCI, the liabilities referred to
above included $44,400 for estimated expenditures related to costs for
assessment, investigation, negotiations, legal representation, cleanup and
remediation, and fines and penalties for the environmental matters described in
note 11. Of this amount, $41,400 represents liabilities assumed from BC Sugar.
The remaining $3,000 represents liabilities established as a result of
contractual obligations arising from the KCI Stock Purchase Agreement which
require the Company to oversee the disposition of KCI's environmental matters.
An indemnification receivable of $12,700 from BC Sugar was recorded in
accordance with the KCI Stock Purchase Agreement. A deferred tax benefit of
$15,600 was also recorded. A trust fund was established to fund the
indemnification receivable from BC Sugar. In 1995, the Company revised its
estimates related to the aforementioned costs associated with environmental
matters based on negotiations and settlements with authorities, updates of
studies prepared by environmental consultants, engineers and contractors as of
the acquisition date and changes in other factors which existed as of the
acquisition date. As a result, the liability, indemnification receivable, and
deferred tax asset originally recorded were reduced by $19,263, $5,610 and
$5,055, respectively. This resulted in a reduction of goodwill of $8,598. The
reduction in the liability was primarily attributable to matters at the Kalama,
Washington facility ($13,100), the Garfield, New Jersey facility ($4,148) and
the Beaufort, South Carolina facility ($1,720). At December 31, 1996, the
remaining liability, indemnification receivable and deferred tax asset for the
aforementioned matters are $15,750, $500 and $6,249, respectively.
Additionally, in December 1994, the Company acquired certain assets of
Reilly-Whiteman, Inc. ("Reilly-Whiteman") through FCC Acquisition Corp.
("FCAC"), a subsidiary of FTCC. This acquisition was financed by net cash
payments of $7,971. The goodwill was amortized on a straight-line basis over 20
years, which approximated the estimated period of benefit at the time of
acquisition. In connection with the acquisition, liabilities of $305,
principally for transaction costs, were established and $519 of liabilities,
principally for liabilities in the normal course of operations, were assumed.
The cash portion was financed with bank debt. The net cash payment for the
acquisition is summarized as follows: $1,814 of current assets plus $3,220 of
noncurrent assets acquired plus goodwill of $3,761, less liabilities of $824
equals the cash payment of $7,971. In December 1995, the Company recognized an
impairment loss of $4,029 on all goodwill and other intangibles associated with
this acquisition (see note 17).
F-11
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except share data)
1995 Acquisition
In January 1995, the Company purchased certain assets and liabilities of
Diamalt GmbH and subsidiaries, headquartered in Munich, Germany, through its
subsidiary, FCD. The acquisition was financed by cash payments of $15,874 which
were financed with bank debt. The Company borrowed $23,500, $5,300 under the
Revolving Credit Facility and $18,200 as additional Term B debt. In connection
with the acquisition, liabilities of $700, principally for transaction costs,
were established and $7,853 of liabilities, principally for liabilities in the
normal course of operations and long-term debt, were assumed. The net cash
payment for the acquisition is summarized as follows: $10,470 of current assets
plus $13,957 of non-current assets ($25,770 of non-current assets acquired less
negative goodwill of $11,813) less liabilities of $8,553 equals the cash payment
of $15,874.
F-12
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except share data)
4. Inventories
A summary of inventories and related reserves as of December 31, 1995 and
1996 is as follows:
1995 1996
------- -------
Raw materials and intermediates............... $ 27,388 $ 27,265
Finished goods................................ 19,628 31,888
------- --------
47,016 59,153
Less: reserves............................... (168) (6,134)
--------- --------
$ 46,848 $ 53,019
======== ========
5. Intangibles
A summary of intangible assets and related accumulated amortization
as of December 31, 1995 and 1996 is as follows:
1995 1996
------- -------
Goodwill.................................... $32,800 $32,800
Patents..................................... 2,558 2,651
Covenants not to compete.................... 3,401 3,401
Other....................................... 926 1,975
------- -------
39,685 40,827
Less: accumulated amortization.............. 4,757 6,787
------- -------
$34,928 $34,040
======= =======
Amortization expense for intangible assets was $1,602, $2,435 and
$2,024, for the years ended December 31, 1994, 1995 and 1996, respectively.
6. Short-Term Borrowings
In 1995, FCD negotiated a European Revolving Facility aggregating $18.2
million. The European Revolving Facility had multiple maturities and was
collateralized by a $15.0 million letter of credit under the Domestic Revolving
Credit facility (see note 7) and FCD accounts receivable. Additionally, in 1996,
FCD negotiated an increase in the European Revolving Facility of $2.3 million,
also collateralized by FCD accounts receivables.
Borrowings of European revolving loans were in the form of Base Rate
loans or European Currency loans. Under the European Revolving Facility, FCD had
$1.7 million and $10.5 million outstanding as Base Rate and European Currency
loans, respectively, at December 31, 1995. The rates in effect on both Base Rate
and European Currency loans were between 7.75 and 9.5 percent at December 31,
1995.
On October 17, 1996, the European Revolving Facility was terminated in
connection with refinancing of the Company's debt (see note 7).
F-13
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except share data)
7. Long-Term Debt
Long-term debt at December 31, 1995 and 1996 is summarized as follows:
1995 1996
-------- ------
Term A loan.................................. $ 27,500 $ --
Term B loan.................................. 68,200 --
Acquisition Term loan........................ 8,000 --
Senior Subordinated Notes.................... -- 125,000
U.S. Dollar Revolving loans.................. 20,750 9,500
FCD Revolving loans.......................... -- 18,591
FCD construction loan........................ 1,000 1,469
Other........................................ 212 67
------- -------
125,662 154,627
Less: current maturities..................... 6,142 1,067
-------- --------
$119,520 $153,560
======== ========
1995
----
As of December 31, 1995, the Credit Agreement was comprised of a Term A
loan for $27.5 million, a Term B loan for $68.2 million, an Acquisition Term
loan for $8.0 million, and a revolving credit facility (the "Domestic Revolving
Credit Facility") for up to $42.5 million. These facilities were collateralized
by a pledge of the stock of FCC's subsidiaries, intercompany debt and
substantially all of the real and personal property of the subsidiaries.
Borrowings under the Credit Agreement were used to refinance indebtedness, to
pay certain fees and expenses related to such refinancing, purchase 100 percent
of the stock of KCI, acquire certain assets of Reilly-Whiteman and certain
assets of Diamalt GmbH (note 3).
During 1995, the Company negotiated amendments to the Credit Agreement for
the acquisition of FCD and to modify certain financial covenant requirements. In
connection with these amendments, the Company incurred financing costs of
$1,391.
F-14
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except share data)
Under the Domestic Revolving Credit Facility, FCC had $3.75 million and $17
million as Base Rate loans and Eurodollar Rate loans, respectively, at December
31, 1995.
The rates in effect at December 31, 1995 were 8.875 percent on the Term A
loan, 9.375 percent on the Term B loan, 8.8125 percent on the Acquisition Term
loan, 10.25 percent, on the Base Rate Revolving loan and 8.75 percent on the
Eurodollar Rate Domestic Revolving loan.
At December 31, 1995, letters of credit outstanding under the Domestic
Revolving Credit Facility totaled $15.5 million, of which $15.0 million was used
to support short term borrowings under the European Revolving Facility
As part of the FCD acquisition, the Company assumed $1.1 million of long
term debt principally for plant expansion. This debt is collateralized by real
and personal property. Interest on the debt is principally calculated at the
Eurodollar Rate plus 3.00 percent per annum.
1996
----
On October 17, 1996, the Company completed an offering (the "Offering") of
Notes, pursuant to Rule 144A of the Securities Act of 1933, as amended.
Subsequent to the closing of the Offering, the Company filed a registration
statement to register notes having substantially identical terms as the Notes
and to make an offer to exchange such registered notes for the outstanding
Notes. The net proceeds of the Offering were used to repay a combination of term
and revolving loans under the Company's current Domestic Revolving Credit
Facility and the European Revolving Facility.
The Notes are not subject to any mandatory sinking fund redemption
prior to maturity. The Notes are redeemable at the option of the Company,
in whole or in part, at any time on or after October 15, 2001 at the
redemption prices (expressed as percentages of the principal amount of the
Notes) set forth below plus in each case accrued and unpaid interest, if any,
to the date of redemption, if redeemed during the twelve-month period
beginning on October 15, of the years indicated below.
Year Percentage
---- ----------
2001............................................. 105.312%
2002............................................. 103.541%
2003............................................. 101.771%
2004............................................. 100.000%
In addition, at any time on or prior to October 15, 1999, the Company may,
at its option, redeem up to 35 percent of the aggregate principal amount of
Notes originally issued with the net cash proceeds of one or more public equity
offerings at 109.625 percent of the aggregate principal amount thereof plus
accrued and unpaid interest, if any, to the date of redemption; provided,
however, that not less than $81.25 million principal amount of the Notes is
outstanding immediately after giving effect to such redemption (other than any
notes owned by the Company or any of its Affiliates) and such redemption is
effected within 60 days of such issuance or investment.
In addition, at any time on or prior to October 15, 2001, upon the
occurrence of a change of control, the Company may, at its option, redeem all
but not less than all of the Notes, at a redemption price equal to 100 percent
of the principal amount thereof plus the applicable premium plus accrued and
unpaid interest, if any, to the date of redemption. In the event of a change of
control, each holder of Notes will have the right, unless the Company has given
a notice of redemption, to require the Company to offer to purchase all or any
portion of such holder's Notes at a purchase price in cash equal to 101 percent
of the aggregate principal amount thereof plus accrued and unpaid interest.
Concurrently with the consummation of the Offering, the Company amended and
restated the Credit Agreement. The Amended and Restated Credit Agreement
provides for a revolving loan facility of up to $85 million, which includes a
$50.0 million multi-currency sub-limit, and includes Freedom Chemical Diamalt
GmbH ("Diamalt") as a co-borrower. The obligations of the Company under the
Amended and Restated Credit Agreement and the Notes are guaranteed fully and
unconditionally, on a joint and several basis, by substantially all of the
Company's domestic subsidiaries ("U.S. Guarantor Subsidiaries") and Diamalt
("German Guarantor Subsidiary").
F-15
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except share data)
The Amended and Restated Credit Agreement is also collateralized by a first
priority lien on substantially all of the properties and assets of the Company
and certain properties and assets of Diamalt. The obligations of Diamalt under
the Amended and Restated Credit Agreement are guaranteed by the Company.
The Amended and Restated Credit Agreement has a final maturity of
October, 2001. Borrowings of revolving loans may be in the form of Base Rate
loans or Eurodollar Rate loans and must be in a principal amount of at least
$250 and $1,000 respectively. Under the Amended and Restated Credit Agreement,
FCC and Diamalt had revolving loans of $9.5 and $19.1 million outstanding at
December 31, 1996, respectively.
Loans under the Amended and Restated Credit Agreement have a conversion
option whereby FCC and Diamalt may convert their borrowings to Base Rate loans
or Eurodollar rate loans periodically. Therefore, interest is calculated at
either Base Rate plus 0.50, 1.00, 1.25 or 1.50 percent per annum, depending on
certain performance levels, or the Eurodollar Rate plus 1.50, 2.00, 2.25 or 2.50
percent per annum, depending on certain performance levels. The Eurodollar rate
is equal to the average LIBOR for the respective Eurodollar interest period. The
weighted average rates in effect at December 31, 1996 were 9.75 percent for FCC
and 6.0 percent for Diamalt.
FCC and Diamalt must pay a quarterly commitment fee equal to 0.50
percent of the unused portion of the Amended and Restated Credit Agreement. At
December 31,1996, letters of credit outstanding under the Amended and Restated
Credit Agreement totaled $20.1 million.
The Notes and Amended and Restated Credit Agreement both contain
certain negative covenants which may restrict the Company, depending on certain
ratios, from, among other things, incurring additional indebtedness, entering
into merger or consolidation transactions, disposing of all or substantially all
of its assets, making certain restricted payments, creating liens on the
Company's assets, creating guarantee obligations, creating material lease
obligations and exceeding limitations on capital expenditures. The Amended and
Restated Credit Agreement also requires the Company to maintain certain
financial ratios including a fixed charge coverage ratio and a times interest
earned ratio, as well as certain other covenants.
The rate in effect for the FCD construction loans at December 31, 1996
is principally calculated at the Eurodollar Rate plus 2 percent per annum. In
1996, FCD incurred additional long-term debt of approximately $0.5 million in
connection with a majority owned joint venture in India. This debt is
collateralized by all of the real and personal property of the joint venture.
Capital lease obligations, principally collateralized by certain property,
plant, and equipment are due through 1999, with interest rates ranging from 8.0
percent to 12.5 percent. Total future minimum lease payments under capital lease
obligations at December 31, 1995 and 1996 are $119 and $26, respectively.
F-16
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except share data)
Aggregate maturities of long-term debt as of December 31, 1996 for the
next five years and thereafter are as follows:
1997.............................. $ 1,067
1998.............................. --
1999.............................. --
2000.............................. --
2001.............................. 28,560
Thereafter........................ 125,000
--------
Total............................. $154,627
========
F-17
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Dollars in thousands except share data)
8. Income Taxes
The provision (benefit) for income taxes for the years ended December
31, 1994, 1995 and 1996 consists of the following:
1994 1995 1996
------ ------ ------
Currently payable (receivable):
Federal........................... $ 2,223 $ (871) $ --
State............................ 377 192 33
Foreign........................... -- 164 199
------- ------ ------
2,600 (515) 232
------- ------ ------
Deferred:
Federal........................... 224 (3,149) (2,453)
State............................. 34 (84) (25)
Foreign........................... -- (61) (59)
------- ------ ------
258 (3,294) (2,537)
------- ------ ------
Provision (benefit) for income
taxes on income before
extraordinary item............. 2,858 (3,809) (2,305)
Tax benefit from extraordinary item... (725) -- (1,140)
------- ------ ------
Provision (benefit) for
income taxes...................... $ 2,133 $ (3,809) $(3,445)
======= ======= =======
Deferred tax (assets) liabilities
are comprised of the follows:
1994 1995 1996
------ ------ ------
Allowance for doubtful accounts....... $ (240) $ (215) $ (195)
Nondeductible accruals................ (1,593) (1,397) (2,001)
Domestic net operating loss
carryforwards..................... -- (1,778) (3,711)
Foreign net operating
loss carryforwards............... -- (4,173) (4,847)
Postretirement liability............. (1,427) (1,482) (1,554)
Alternative minimum tax credits...... -- (633) (1,063)
Inventory............................ -- -- (691)
Other................................ (123) (346) (478)
Deferred financing costs............. (660) -- --
Restructuring reserves............... -- (3,710) (3,606)
Environmental accrual................ (14,620) (7,002) (6,249)
-------- ------- -------
Gross deferred tax assets........ (18,663) (20,736) (24,395)
------- ------- -------
Fixed assets and intangibles......... 20,701 19,368 19,522
Inventory............................ 315 512 --
Foreign temporary differences
primarily in fixed assets
and inventory.................. -- 1,663 2,195
Other............................... -- 418 --
------- ------- -------
Gross deferred tax liabilities.. 21,016 21,961 21,717
------- ------- -------
Valuation allowance................. 4,147 7,726 7,700
------- ------- -------
Net deferred tax (assets)
liabilities..................... $ 6,500 $ 8,951 $ 5,022
========= ========= ========
F-18
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Dollars in thousands except share data)
A reconciliation of the U.S. Federal income tax (benefit) rate to the
effective tax (benefit) rate is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
U.S. federal income tax rate.................................. 34.0% (34.0)% (34.0)%
State income taxes, net of federal income tax benefit......... 3.9 .6 .3
Increase in domestic valuation allowance...................... -- 13.5 --
Benefit of losses in the foreign jurisdictions................ -- (12.1) (1.7)
Valuation allowance attributable to foreign jurisdictions..... -- 12.1 1.7
Noncash compensation expense.................................. 4.9 .2 .8
Nondeductible goodwill amortization........................... 3.3 1.8 3.4
Foreign sales corporation..................................... (2.4) (1.5) (6.9)
Preferred stock dividend...................................... 1.5 .4 1.1
Other nondeductible items..................................... -- .7 7.1
---- ---- ----
Effective income tax (benefit) rate........................... 45.2% (18.3)% (28.2)%
==== ==== ====
</TABLE>
At December 31, 1996, for Federal tax purposes, the Company has available
tax net operating loss carryforwards of approximately $10,602 expiring through
2011. The Company also has alternative minimum tax credit carryforwards of
approximately $1,063 which have no expiration date. At December 31, 1996,
foreign tax net operating loss carryforwards of approximately $9,694 were
available with no expiration date.
At December 31, 1996, the Company maintains a valuation allowance based on
management's evaluation of the future realization of certain of the Federal and
foreign tax net operating loss carryforwards and the tax benefits of certain
temporary differences. Of the total valuation allowance, approximately $2,400
maintained in connection with tax benefits resulting from the acquisition of KCI
(see note 3) would reduce goodwill upon realization.
9. Pension and Savings Plans
The Company's domestic subsidiaries maintain certain noncontributory
defined benefit pension plans. The plans cover certain hourly and salaried
employees and provide benefits based on the participants' years of service. The
funding policies are consistent with statutory requirements and tax
considerations.
Net periodic pension cost includes the following components for the years
ended December 31, 1994, 1995 and 1996:
1994 1995 1996
------ ------ ------
Service cost.............................. $ 289 $ 432 $ 452
Interest cost on projected benefit
obligation.............................. 98 127 163
Return on plan assets..................... (16) (370) (306)
Plan deferrals and amortization........... (18) 243 34
----- ----- -----
$ 353 $ 432 $ 343
===== ===== =====
F-19
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Dollars in thousands except share data)
Contributions are made to trusts maintained by independent trustees. The
following table presents a reconciliation of the funded status of the plans to
the accrued pension liability, which is included in accrued compensation at
December 31, 1995 and 1996:
1995 1996
------ ------
Plan assets at fair value.......................... $ 1,883 $ 2,781
Actuarial present value of benefit obligations:
Accumulated benefit obligation
(vested, 1995--$2,010; 1996--$2,284)........... 2,133 2,484
Effect of increase in compensation............. 249 401
------ ------
Projected benefit obligation................... 2,382 2,885
------ ------
Projected benefit obligation
in excess of plan assets.................... 500 103
Prior service costs........................... 17 16
Adjustment to recognize minimum liability..... 10 --
Unrecognized loss............................. (180) (1)
------ ------
Accrued pension liability..................... $ 347 $ 118
====== ======
Significant assumptions used in determining the pension obligation and the
related pension expense include weighted-average assumed discount rates of 7
percent to 7.25 percent at December 31, 1995 and 1996. The expected long-term
rates of return on plan assets were 8 percent to 10 percent at both December 31,
1995 and 1996. In addition, the projected rate of compensation increase is 5
percent.
The Company's subsidiaries also maintain certain defined contribution
benefit plans. The plans cover salaried and certain hourly employees who meet
the eligibility requirements, and require the subsidiaries to match certain
employee contributions. Expenses relating to these plans were $680, $1,025 and
$1,003 for the years ended December 31, 1994, 1995 and 1996, respectively.
The Company maintains a Supplemental Executive Retirement Plan to provide
supplemental retirement benefits to certain executives. At December 31, 1995 and
1996, the accrued liability for this plan was $348 and $388, respectively. In
addition, the Company recorded a minimum pension liability of $57 as a reduction
of stockholders' equity in 1995.
10. Postretirement Benefits
FTCC maintains plans to provide certain health care and life insurance
benefits to eligible retired employees. The plans are unfunded. FTCC immediately
recognized the accumulated postretirement benefit obligation measured as of the
acquisition date and as such included a liability of $120 in the purchase price
allocation.
In connection with the acquisition of KCI, the Company recorded a liability
of $3,563 for postretirement benefit obligations assumed from BC Sugar. However,
BC Sugar indemnified KCI for postretirement benefit obligations totaling $2,374
with respect to participants who were retired or eligible to retire as of the
acquisition closing date. Accordingly, the Company recorded an indemnification
receivable of $1,543 and a deferred tax benefit of $831.
F-20
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Dollars in thousands except share data)
The following table sets forth the accumulated postretirement benefit
obligation, which is included in postretirement benefits at December 31, 1995
and 1996:
1995 1996
----- ----
Retirees....................... $2,094 $2,157
Active plan participants....... 1,399 1,589
------ ------
3,493 3,746
Unrecognized net gain............ 718 671
------ ------
$4,211 $4,417
====== ======
The postretirement benefit costs for the years ended December 31, 1994,
1995 and 1996 include the following components:
1994 1995 1996
---- ---- ----
Service cost.......... $ 80 $252 $ 180
Interest cost......... 152 253 188
---- ---- -----
$232 $505 $ 368
==== ==== =====
The weighted-average assumed discount rate used to measure the accumulated
postretirement benefit obligation was 7 percent at December 31, 1995 and 1996.
At December 31, 1996, the health care cost rate was 5 percent. A one percentage
point increase in the assumed health care cost trend rate for each future year
would increase postretirement benefit costs for the year ended December 31, 1996
by $51. The effect on the accumulated postretirement benefit obligation as of
December 31, 1996 would be an increase of $422.
11. Environmental Contingencies
Contingencies exist for the Company and certain of its subsidiaries because
of legal and administrative proceedings arising out of the acquisition of
businesses and the normal course of business. Such contingencies include
environmental proceedings directly and indirectly against the Company or its
subsidiaries as well as matters internally identified by the Company. The
resolution of such matters often spans several years and frequently includes
regulatory oversight and/or adjudication. Additionally, many remediation
requirements are not fixed and are likely to be affected by future
technological, site and regulatory developments. Consequently, the ultimate
extent of liabilities with respect to such matters as well as the timing of cash
disbursements cannot be determined with certainty.
In connection with the purchase of a number of the Company's facilities,
contractual rights were obtained to indemnify the Company for certain types of
environmental pollution relating to those facilities. As described more fully
below, the Company consequently believes that a portion of the costs incurred in
connection with environmental liabilities existing prior to the Company's
ownership and remediation actions that may be required relating to the Company's
past and present properties will be the responsibility of other parties.
Accordingly, the Company believes that future liabilities over the amounts
accrued, relating to environmental conditions existing prior to the Company's
ownership and remediation actions, are not likely to have a material adverse
effect on the financial position of the Company, although the effect on results
of operations and cash flows could be material when these conditions are
resolved in a future period.
F-21
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Dollars in thousands except share data)
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 connection with the Company's purchase of FTCC's Charlotte, North
Carolina facility from American Cyanamid ("AC"), the Company entered into the
Agreement for the Purchase and Sale of Assets, dated February 28, 1992 (the
"Freedom Textile Asset Purchase Agreement"), with AC, which requires AC to take
responsibility for corrective actions with respect to certain environmental
conditions. In January 1994, AC distributed to its stockholders all of the
capital stock of its chemicals unit, Cytec. The Company believes that in
connection with this transaction, Cytec assumed AC's environmental indemnity
obligations to the Company under the Freedom textile Asset Purchase Agreement.
Since the Cytec spin-off, the Company has been dealing with Cytec in respect of
matters arising under the Freedom Textile Asset Purchase Agreement and Cytec has
been performing AC's obligations under the Agreement. The Settlement Agreement,
dated December 30, 1994, among the Company, Cytec and AC, which settled certain
claims, including certain environmental claims regarding the Charlotte facility,
recited that Cytec is the successor to AC with regard to the Freedom Textile
Asset Purchase Agreement. The Company has notified AC that it is cooperating
with Cytec in coordinating fulfillment of AC's obligations under the Freedom
Textile Asset Purchase Agreement as a matter of convenience to AC and has not
waived its contractual rights to look to AC as the party liable for performance
under the Freedom Textile Asset Purchase Agreement. Notwithstanding the
foregoing, Cytec has never formally acknowledged to the Company its assumption
of AC's obligations under the Freedom Textile Asset Purchase Agreement nor has
the Company formally consented to any such assumption.
In 1993, FTCC completed a Resource Conservation and Recovery Act ("RCRA")
investigation at its Charlotte, North Carolina facility required by the EPA and
the State of North Carolina. Currently pending investigation and negotiations
with these agencies may require the remediation of certain environmental
conditions at this facility. The Company currently does not have sufficient
information on which to base an estimate of potential costs associated with this
remediation. However, the prior owner of FTCC's Charlotte facility agreed to
indemnify FTCC for costs associated with remediation of these environmental
conditions. In addition, they have agreed to indemnify FTCC in part for certain
anticipated changes in environmental regulations which may affect the facility.
Accordingly, the Company does not believe that any liabilities incurred by FTCC
in relation to such environmental conditions or such anticipated changes at its
Charlotte facility are likely to have a material adverse effect on the Company's
financial position, results of operations or cash flows.
In order to consolidate its textile operations, in 1995, the Company
transferred the textile assets of HDCC located in Cowpens, South Carolina,
acquired as part of the HDCC acquisition, to FTCC. In 1994, the Company reached
a tentative agreement with the South Carolina Department of Health and
Environmental Control on an administrative consent agreement requiring the
former owner of the Cowpens facility prior to HDCC to take corrective measures
and conduct additional investigation, and the Company and the State of South
Carolina agreed on a work plan for assessment and remediation. As part of the
FTCC Asset Purchase Agreement, the former owner of the property prior to HDCC
agreed that the costs to be expended for the investigation and remediation of
the existing environmental conditions would
F-22
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Dollars in thousands except share data)
be deducted from the final purchase price payment due to them of $350. At the
time of acquisition, the Company recorded a liability for $350 relating to the
remediation of the payment due to the former owners. In 1994, initial
investigations disclosed offsite groundwater contamination. The Company hired an
environmental consultant to manage this project and is developing an
investigative plan. While the Company believes that any remediation costs
incurred may be recovered from the prior owners, a $1.9 million charge was
recorded in 1995 for estimated remediation costs since any recoveries or
reimbursements from the prior owners are not currently determinable. FTCC
believes the risk of loss exposure is up to $6.5 million.
HDCC
In connection with the acquisition of HDCC, Sterling Winthrop, Inc.
("SWI"), a former owner of HDCC, SWI entered into an Environmental Matters
Agreement ("EMA") with HDCC, whereby SWI has taken responsibility for
environmental conditions that predate 1987, with certain exceptions, as well as
for remediation of the land at HDCC's Cincinnati facility pursuant to an October
1986 Consent Decree entered into between the State of Ohio and SWI and its
subsidiary.
Under the EMA, HDCC has agreed to share responsibility with SWI for certain
specific environmental conditions. Also, HDCC is responsible for environmental
conditions that postdate 1986. In addition, PMC, Inc. ("PMC"), another prior
owner of HDCC, has placed $1 million of the purchase price paid by the Company
in an escrow account to indemnify HDCC against breaches of representations and
warranties contained in the Stock Purchase Agreement between PMC and the
Company, including schedules thereto, to the extent such liabilities (including
certain claims not related to the environment) exceeded $200 in the aggregate
and subject to a total cap of $1 million (excluding certain claims not related
to the environment). HDCC does not believe that it will be required to incur
significant liability in connection with such environmental conditions.
At the time the Company and SWI entered into the EMA, SWI was a wholly
owned subsidiary of Eastman Kodak ("EK"). In November 1994, EK sold the capital
stock of SWI to SmithKline Beecham plc ("SmithKline Beecham"). SmithKline
Beecham subsequently sold the capital stock of SWI to Miles Inc., a subsidiary
of Bayer AG. Following these transactions, SWI advised the Company that EK had
retained SWI's liabilities in respect of HDCC and to address further
correspondence in respect of the EMA to EK. Subsequently, 360 North Pastoria
Environmental Corporation, a subsidiary of EK ("360 North"), notified the
Company that (i) the Company should send all future communications under the EMA
to 360 North and (ii) SWI's responsibilities under the EMA would be managed by
360 North. Accordingly, since the SWI sale the Company has been dealing with 360
North in respect of matters arising under the EMA and 360 North has been
performing SWI's obligations under the EMA. Notwithstanding the foregoing,
neither EK nor 360 North has formally acknowledged to the Company its assumption
of SWI's obligations under the EMA nor has the Company formally consented to any
such assumption.
Additionally, under the EMA, SWI is required to comply with its previous
obligations pursuant to a January 1989 Administrative Consent Order entered into
between the New Jersey Department of Environmental Protection and Energy
("NJDEPE") and SWI relating to remediation of the land at the HDCC Newark, New
Jersey facility. While HDCC does not believe that it will be required to incur
significant liability in connection with environmental conditions at the Newark
facility, there can be no assurance that the State of New Jersey will not
conclude, in the future, that additional remediation is required, for which HDCC
may be considered responsible. The EMA also requires SWI to remediate
environmental matters, if any, at the Greenville, South Carolina facility
arising before December 31, 1986, subject to certain conditions set forth in the
EMA.
F-23
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Dollars in thousands except share data)
In June 1994, the EPA filed an administrative complaint against HDCC for
alleged violations of EPA regulations relating to industrial boilers at the
Cincinnati facility. The particular unit that is the subject of the complaint,
boiler number five, is out of service and has not operated since August 1992.
The Company and the EPA have agreed to settle this matter. The Company has made
a claim for indemnification against PMC with respect to this matter; PMC has
indicated that it will contest the claim. Management believes the accrual
related to this matter will be sufficient to comply with the provisions of the
tentative settlement. The Company has not recorded any indemnification
receivable from PMC in light of PMC's stated intent to contest the Company's
claim.
In connection with the acquisition of HDCC, the Company employed
environmental consultants to examine all HDCC sites and assess the related
environmental matters at these sites. Based on this examination, all known
environmental liabilities, including fines and penalties, that are the
responsibility of HDCC have been accrued for by HDCC as of the acquisition date.
KCI
KCI owns three manufacturing facilities: Kalama, Washington, Garfield, New
Jersey, and Beaufort, South Carolina. Operations at these three sites, as well
as operations by subsidiaries formerly owned by KCI, have generated
environmental liabilities. The Stock Purchase Agreement between FCC and BC Sugar
(the "KCI Stock Purchase Agreement"), requires BC Sugar to indemnify and
reimburse the Company for certain environmental liabilities, as discussed in
more detail below.
The Company's Kalama, Washington facility is subject to an agreed order
between KCI and the EPA requiring KCI to remediate portions of the site and to
limit potential offsite contamination, pursuant to RCRA. The EPA has approved
Kalama's interim corrective measures work plan and RCRA facility investigation
report describing proposed remediation of the site. Capital equipment has been
installed in part of the facility and remediation is ongoing. The Company
believes that the interim corrective measures will provide most if not all of
the remediation required by the EPA. As of December 31, 1996, KCI has accrued
approximately $6,400 for this liability and believes the risk of loss exposure
is up to $18,800. The associated indemnification as of December 31, 1996 is $420
to $7,200 based on the risk of loss exposure.
The Company's Garfield facility is subject to an administrative consent
order with the State of New Jersey requiring remediation of portions of the site
and potentially requiring remediation of areas offsite, pursuant to the New
Jersey Industrial Site Recovery Act ("ISRA"). The Garfield facility cleanup is
also subject to a Settlement Agreement (the "Tenneco Settlement Agreement"),
dated April 28, 1994, to terminate litigation between KCI and Tenneco Polymers,
Inc. ("Tenneco Polymers"), the successor in interest of the prior owner of the
site. The Tenneco Settlement Agreement requires Tenneco Polymers to conduct the
cleanup of the facility required by the State of New Jersey and to pay for 80
percent of the cleanup costs, with KCI responsible for the remaining 20 percent
of such costs. BC Sugar will remain responsible for certain of KCI's portion of
the cleanup costs pursuant to the KCI Stock Purchase Agreement as described
below. Tenneco Polymers is currently conducting additional site investigation
and discussing with the State of New Jersey the nature and scope of the required
remediation of the Garfield site. KCI has terminated manufacturing operations at
this facility.
F-24
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIRIES
Notes to Consolidated Financial Statements--(Continued)
(Dollars in thousands except share data)
As of December 31, 1996, KCI has accrued approximately $700 for this
liability and believes the risk of loss exposure is up to $1,100. The associated
indemnification as of December 31, 1996 is $300 to $500 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 on consent between
KSCI and the EPA. The EPA and KSCI have reached agreement on a consent decree
under which KSCI is to perform the remediation strategy selected by the EPA.
Pilot equipment was installed and test work commenced in 1995. BC Sugar will
remain responsible for certain of KCI's portion of the cleanup costs pursuant to
the KCI Stock Purchase Agreement as described below. Manufacturing operations at
this facility have also ceased. As of December 31, 1996, KCI has accrued
approximately $4,000 for this liability and believes the risk of loss exposure
is up to $6,100. The associated indemnification as of December 31, 1996 is $600
to $1,100 based on the risk of loss exposure.
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 (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
F-25
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Dollars in thousands except share data)
to the extent such liabilities in the aggregate exceed $2,000 and claims are
made by the Company for such reimbursement before May 26, 1996. However, the KCI
Stock Purchase Agreement also includes certain warranties and representations by
BC Sugar that KCI was in compliance with environmental laws as of the closing
date (May 26, 1994), except as set forth in a schedule accompanying and
incorporated into the KCI Stock Purchase Agreement. BC Sugar further agreed to
indemnify the Company and KCI against liabilities arising out of the breach of
these representations and warranties to the extent each such liability exceeded
$50 individually and all such liabilities exceeded $600 in the aggregate, and
provided any such claim is made by the Company or KCI before May 26, 1996. All
of the indemnifications and other provisions whereby BC Sugar agreed to remain
responsible for costs in the KCI Stock Purchase Agreement, including those
described above, are subject to an aggregate limit of $44,000 and including
certain costs which may be directly incurred or paid by BC Sugar. The KCI Stock
Purchase Agreement required BC Sugar to establish a trust fund to provide
reimbursement for expenditures for environmental liabilities by KCI and the
Company for which BC Sugar is liable under the agreement.
As a result of the KCI Stock Purchase Agreement and the Tenneco Settlement
Agreement, the Company does not believe that 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.
In May 1991, the EPA issued a compliance order to KCI alleging nine
violations of the Clean Air Act, dating back to 1984, at the Kalama facility. In
July 1994, KCI was informally notified by the EPA that these violations (and
possibly other alleged violations of the Clean Air Act) had been referred to the
Department of Justice for possible initiation of an enforcement action. In 1995,
the Company reached a tentative understanding with the Department of Justice
which contemplates the payment of a penalty as well as an additional payment to
fund supplemental environmental projects, both totaling approximately $1,600,
which is included in the liabilities established by the Company in connection
with the acquisition of KCI. The Company has made a claim to BC Sugar for
indemnification in this matter.
FCAC
In December 1994, the Company acquired certain assets of Reilly-Whiteman
through its indirect subsidiary, FCAC and entered into a lease of the
Reilly-Whiteman facility at Conshohocken, Pennsylvania. Reilly-Whiteman incurred
certain environmental liabilities prior to December 1994, including alleged
violations of environmental regulations, some of which may have continued after
that date. However, pursuant to the Asset Purchase Agreement entered in
connection with the acquisition, the prior owner, the Reilly Corporation, has
the responsibility for claims or liabilities arising from operations prior to
that date. Accordingly, the Company does not believe that any known liabilities
arising from the Conshohocken facility are likely to have a material adverse
effect on the Company's financial position, results of operations or cash flows.
Other
Since 1961, the Company's facility in Vernon, France has been discharging
production wastewater without pretreatment into the River Seine. According to an
analysis completed by the Company in early 1996, such production wastewater
includes concentrations of pollutants which are not in compliance with legal
limits or limits which are acceptable for discharge to the municipal wastewater
treatment plant. The Company plans to resolve this matter by negotiating
permission to discharge the wastewater to the municipal wastewater treatment
plant for a fee, constructing a wastewater treatment plant for an estimated cost
of $250 or shifting production of certain raw materials to a facility under
construction in India. The Company believes, based upon the opinion of the
Company's independent environmental consultant, that the French environmental
authorities will refrain from penalizing the Company for these discharges while
a solution is sought. The Company believes that, if assessed, any such penalties
are not likely to be material to the Company's financial position or results of
operations.
F-26
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Dollars in thousands except share data)
12. Commitments and Contingencies
The Company has entered into various operating lease agreements for the use
of certain real estate, buildings, office space, equipment and vehicles. A
number of these agreements provide for renewal options which, if exercised,
would extend the terms of the leases for varying periods of time. Rental expense
relating to operating leases for the years ended December 31, 1994, 1995 and
1996 was $970, $2,383 and $3,048, respectively.
Future minimum lease payments for all noncancellable operating leases with
initial or remaining terms in excess of one year as of December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
Year Ending Operating Leases
- --------- ----------------
<S> <C>
1997............................................................................ $ 2,820
1998............................................................................ 2,486
1999............................................................................ 1,910
2000............................................................................ 442
2001............................................................................ 153
-------
Total minimum lease payments.......................................... $ 7,811
=======
</TABLE>
During 1994, the Company entered into employment agreements with two
executives, Chairman of the Board of Directors and President, whereby each would
continue to serve the Company in their present capacity through May 1997. Under
the employment agreements, the two officers are each entitled to an annual base
salary and, subject to the Company's meeting certain performance criteria
established by the Board of Directors or the Compensation Committee, an annual
bonus based on a percentage of the annual base salary. In the event that these
agreements are terminated by the Company without cause, the two officers shall
be entitled to severance benefits equal to two times the officers' average final
compensation, payable over two years.
The two officers also have a conditional bonus agreement with the majority
shareholder which entitles them to receive a cash bonus from the majority
shareholder if certain returns on the majority shareholder's investment are
realized. If such bonus is paid by the shareholder, the Company will treat it in
accordance with generally accepted accounting principles.
Effective July 2, 1996, the Chairman of the Board of Directors resigned
from his position at the Company. This former executive will continue to serve
as a Director of the Company and remains a stockholder. Pursuant to an
employment agreement, the Company will provide the former executive with a cash
benefit to be paid in substantially equal monthly installments over two years
beginning July 1996. Also, pursuant to certain stock option agreements, all
options attributable to the former executive became 100% vested and exercisable.
In addition, with regard to certain options exercised by the former executive in
1994 which were restricted and provided the Company with a right to call such
shares, the call rights have been terminated. Accordingly the Company recorded a
charge of approximately $1,000 in July 1996 resulting from the former
executive's resignation.
As a result of the former executive's resignation, the President was also
named the new Chairman of the Board of Directors. In February 1997, his
employment contract was extended through 1997.
13. Minority Interest
In connection with its acquisition, FTCC issued 2,800 shares of its $1,000
par value Series A Preferred Stock to its former owner. The Series A Preferred
Stock is entitled to receive an 8.5 percent cumulative cash dividend paid
semiannually. The shares are subject to redemption, in whole or in part, at
$1,000 per share plus all unpaid dividends accrued thereon, at the option of the
Board of Directors of FTCC, or upon the earlier of an occurrence of an event of
mandatory redemption or May 4, 2002. The Company has $3,073 and $3,078 included
in Minority Interest on the consolidated balance sheets at December 31, 1995 and
1996, respectively, relating to the Series A
F-27
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Dollars in thousands except share data)
Preferred Stock of FTCC. The Company has $277, $247 and $260, respectively,
reflected in Minority Interest on the consolidated statements of operations,
relating to the dividends paid or accrued by FTCC on their Series A Preferred
Stock, for the years ended December 31, 1994, 1995 and 1996, respectively.
In addition, FTCC issued 114.75 shares of its $1,000 par value Series B
Preferred Stock to two executives of FTCC in connection with the acquisition.
The holders of this stock are entitled to receive a 10 percent cumulative cash
dividend payable quarterly. The Series B shares are subject to redemption, in
whole or in part, at $1,000 per share plus all unpaid dividends accrued thereon,
at the discretion of the Board of Directors of FTCC. On June 30, 1994, these
shares were exchanged one-for-one for shares of FCC's Series B Preferred Stock
(see note 14). In consideration, FCC became the owner of the FTCC shares
previously held by the executives, making FCC the holder of 100 percent of
FTCC's Series B Preferred Stock. Therefore, at December 31, 1995 and 1996, there
is $22 included in Minority Interest on the consolidated balance sheet relating
to the accrued and unpaid dividends earned by the former owners of the stock
prior to the date of the exchange. The par value of the shares was eliminated in
consolidation. In addition, the Company has $7 reflected in Minority Interest on
the consolidated statements of operations, relating to the Series B Preferred
Stock dividends paid or accrued by FTCC, for the year ended December 31, 1994.
14. Mandatory Redeemable Preferred Stock
Series B Preferred Stock
The holders of nonvoting Series B Preferred Stock are entitled to receive
an 11 7/8 percent cumulative cash dividend payable quarterly on the last day of
the month succeeding the end of a calendar quarter (the dividend payment date).
In the event of liquidation of the Company, the holders shall be entitled to
receive all of the par value plus any accrued and unpaid dividends.
Series B Preferred Stock, at the discretion of the Board of Directors of
the Company, shall be subject to redemption, in whole or in part, at $1,000 per
share plus all unpaid dividends accrued thereon (liquidation preference). On
October 17, 1996, the date for mandatory redemption of the Series B Preferred
Stock at its liquidation preference was extended to April 2007.
For any quarterly dividend period in which dividends are not paid in cash
on the respective dividend payment date, such accrued and unpaid dividends shall
be added to the liquidation preference at the beginning of the subsequent
quarterly dividend period. The Company has paid no cash dividends. There were
$8,192 and $11,389 of accrued and unpaid dividends on the Series B Preferred
Stock at December 31, 1995 and 1996, respectively.
Series C Preferred Stock
The holders of nonvoting Series C Preferred Stock, par value $1,000, are
entitled to receive an 11 7/8 percent cumulative cash dividend payable quarterly
on the last day of the month succeeding the end of a calendar quarter (the
dividend payment date). In the event of liquidation of the Company, the holders
shall be entitled to receive all of the par value plus any accrued and unpaid
dividends.
Series C Preferred Stock, at the discretion of the Board of Directors of
the Company, shall be subject to redemption, in whole or in part, at $1,054 per
share plus all unpaid dividends accrued theron (liquidation preference) On
December 31, 1995, the Series C Preferred Stock was subject to a mandatory
redemption, at the liquidation preference, on May 31, 2004. On October 17, 1996
the redemption date of the Series C Preferred Stock was extended to May 2007.
F-28
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Dollars in thousands except share data)
For any quarterly dividend period in which dividends are not paid in cash
on the respective dividend payment date, such accrued and unpaid dividends shall
be added to the liquidation preference at the beginning of the subsequent
quarterly dividend period. The Company has paid no cash dividends. There were
$2,079 and $3,453 of accrued and unpaid dividends relating to the Series C
Preferred Stock at December 31, 1995 and 1996, respectively.
In 1995 and 1996, the Company purchased 161 and 60 shares, respectively, of
Series C Preferred Stock at an aggregate cost of $188 and $74, respectively.
These shares are classified as treasury stock at December 31, 1995 and 1996.
15. Common Stock
The holders of Common Stock shall not be entitled to receive cash
dividends, nor shall shares of Common Stock be purchased, redeemed, or otherwise
acquired by the Company until the Series B Preferred Stock and the Series C
Preferred Stock have been redeemed in full.
In October 1996, the Board of Directors of the Company increased the
authorized shares of Series A Common Stock from 85,000 shares to 200,000 shares.
On October 17, 1996, the Company's majority shareholder and another shareholder
purchased $9.9 million and $0.1 million, respectively, of Series A Common Stock.
The sale price per share approximated fair value based upon an independent
valuation of the Company's common stock. On December 2, 1996, the Company's
other stockholders, using proceeds from Company loans (see note 19), invested an
aggregate of approximately $1.9 million in Series A Common Stock in an amount
sufficient to maintain their existing ownership percentages.
In 1995 and 1996, the Company purchased 285 and 106 shares, respectively,
of Series A Common Stock at an aggregate cost of $33 and $13, respectively.
These shares are classified as treasury stock at December 31, 1995 and 1996.
16. Equity Participation Plan and Stock Options
Pursuant to stock option agreements entered into during 1992 through 1996,
the Company has granted nonqualified stock options to acquire an aggregate of
20,001 shares of Series A Common Stock to the former Chairman of the Board and
the current Chairman of the Board of the Company (see note 12). This amount
includes 8,683 stock options granted to the current Chairman of the Board in
December 1996 in order to maintain his existing ownership percentage (see notes
15 and 19). In January 1994, the former Chairman of the Board exercised his
option to purchase 5,322 shares of Series A Common Stock. These shares purchased
represented restricted shares, which became fully vested when he resigned as set
forth in the stock option agreements. Of the remaining 14,679 options still
outstanding as of December 31, 1996, 13,819 are vested. The remaining 860
options vest on May 4, 1997 or immediately upon the occurrence of certain other
events as set forth in the stock option agreements. At December 31, 1996, 14,679
shares of Series A common stock remained reserved for issuance in connection
with the stock option agreements.
In June 1994, the Company adopted an Equity Participation Plan (the "Plan")
which provides for the award of nonqualified stock options and stock
appreciation rights ("SARs") to certain executive officers, key employees and
consultants of the Company and its subsidiaries. The Plan permits the Company to
grant, to any holder of an option, a SAR relating to all or some of the Series B
Common Stock shares covered by such options. The options vest ratably over 10
years, subject to acceleration to five years if certain performance goals are
met. The vesting period for the SARs coincides with the related options. At
December 31 1996, 3,525 shares of Series B common stock remained reserved for
issuance in connection with the stock option agreements. No SARs have been
awarded.
F-29
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Dollars in thousands except share data)
Noncash compensation expense of $218 was recorded in 1994 for options
granted and vested in May 1994 (see note 18). Additionally, compensation expense
of $735 will be recognized over the vesting period of options granted in June
1994 and the remainder of the May 1994 options, of which $436 has been
recognized as of December 31, 1996. No compensation expense was recognized for
any other options, as the exercise price was equal to the estimated fair market
value on the date of grant.
The Company applies APB No. 25 and related interpretations in accounting
for its plans. The stock option exercise price is equal to the fair value of the
stock on the date of grant. Accordingly, no compensation expense has been
recognized. Had compensation expense for the plans been determined based on the
fair value at the grant dates for awards under those plans consistent with SFAS
No. 123, the Company's net income would have been reduced to the pro forma
amounts indicated below:
Net loss Pro forma
as reported net loss
1995 $(16,990) $(16,992)
1996 $(7,237) $(7,508)
F-30
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Dollars in thousands except share data)
The following is a summary of option transactions and exercise prices:
<TABLE>
<CAPTION>
Series A Series B Weighted Average
Common Shares Common Shares Price per Share
------------- ------------- ---------------
<S> <C> <C> <C>
Outstanding at January 1, 1994.............. 9,337 -- $100.00
Granted..................................... 1,981 -- 105.40
Granted..................................... -- 2,565 100.00
Exercised................................... (5,322) -- 100.00
------- -------
Outstanding at December 31, 1994............ 5,996 2,565
Granted..................................... -- 1,360 255.00
Forfeited................................... -- (760) 100.00
------- -------
Outstanding at December 31, 1995............ 5,996 3,165
Granted..................................... 8,683 -- 125.00
Granted..................................... -- 900 255.00
Forfeited................................... -- (540) 180.37
------ ------
Outstanding at December 31, 1996............ 14,679 3,525
======= ======
Exercisable at December 31, 1996............ 13,819 --
======= ======
At December 31, 1996:
Weighted average option price per share.. $115.51 $187.06
Range of exercise prices................. $100-125 $100-255
Weighted average remaining contractual
life of options (1)...................... 5 years 9 years
Weighted average grant date fair value per share
for grants in:
1995..................................... $ -- $ 29.57
1996..................................... $ 29.87 $ 131.84
The fair value of each option grant is estimated on
the date of grant using the Black-Scholes option-
pricing model with the following assumptions:
Expected dividend yield..................... 0.0% 0.0%
Expected stock price volatility............. 0.001% 0.001%
Risk-free interest rate..................... 6.06% 6.79%
Expected life of options.................... 5 years 10 years
</TABLE>
(1) 4,867 of the 14,679 outstanding Series A options do not have a fixed
expiration date.
F-31
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Dollars in thousands except share data)
17. Restructuring and Other Charges
1995
In 1995, the Company recorded restructuring and other charges totaling
$14.4 million. These charges, which reduced gross profit from $65,287 to $63,355
and operating income (loss) from $9,788 to $(4,639), are aimed at reducing the
Company's overall cost structure, including both manufacturing and
administrative costs, through the closure of two manufacturing facilities and
personnel reductions in both administrative and manufacturing positions. In
addition, included in the charges are provisions related to unsaleable
inventory, estimated environmental remediation costs and an impairment loss on
intangibles.
These actions affect approximately 135 of the Company's employees in
manufacturing and headquarters locations throughout the United States and
Europe. Charges related to personnel reductions, including severance and related
benefits total $3.0 million. As of December 31, 1995, 30 employees have been
terminated and $0.3 million of termination benefits have been paid. The
remainder of the employees included in the cost reduction initiatives are
generally located at manufacturing facilities and will work through the plant
closing transition periods ending in 1996. At that time, the remaining cash
payments to employees of $2.7 million will be made.
Of the remaining $11.4 million of restructuring and other charges, $3.2
million represent charges that require an outlay of cash, including primarily
lease and other contract terminations totalling $1.3 million associated with the
FCAC plant closure and environmental remediation costs estimated at $1.9
million. Of this amount, $0.1 million has been paid through December 31, 1995
with $1.0 million to be paid in 1996 and $2.1 million to be paid in years after
1996, principally for environmental remediation.
Noncash charges of $8.2 million include increases in inventory reserves at
HDCC and FTCC of $1.9 million in connection with the write-off of inventory in
the Company's Organic Pigments and Dyes product line ($0.6 million in the second
quarter and $1.3 million in the third quarter), writedowns of fixed assets
associated with plant closures at HDCC and FCAC of $2.2 million and an
impairment loss of $4.0 million on all goodwill and other intangibles associated
with the FCAC acquisition. The Organic Pigments and Dyes write-offs were due to
the elimination of the sale of certain Organic Pigments and Dyes products by the
Company. The continued decline in the financial results of the operating
elements of the Company's FCAC business acquired in 1994, the resultant
strategic and operational review and the application of the Company's objective
measurement tests resulted in an evaluation of intangible assets for possible
impairment. The underlying factors contributing to the decline in financial
results included a significant unforeseen decline in the retail market for
textiles (primarily sheet goods) in 1995. The Reilly-Whiteman acquisition was
completed in December 1994 to complement the Company's textile business by
providing a Philadelphia plant to supply the Northeastern U.S. textile market
while the Charlotte plant continued to supply the Southeastern U.S. textile
market. Due to depressed operating results for the Company's textile chemical
product line as a result of the decline in the retail market for textiles in
1995, the Company decided to consolidate manufacturing in the more efficient of
the two plants resulting in the closure of the Reilly-Whiteman facility.
Additionally, in 1995, the Company recorded a charge of $2,187 for
registration costs associated with an aborted public offering.
1996
In 1996, the Company recorded restructuring and other charges totaling
$11.0 million. These charges, which reduced gross profit from $68,935 to $61,921
and operating income from $16,580 to $5,592, were a result of inventory
obsolescence principally in the Company's Organic Pigments and Dyes product line
of $5.0 million, disposal costs for obsolete inventory of $1.5 million,
impairment in idle assets of $2.3 million, severance for displaced workers and
administrative personnel reductions of $1.4 million, and other charges of $0.8
million.
During 1994, the Company idled its salicylic acid product line. However,
the Company continued to be a reseller of this product and continued to pursue a
long term position in this market. Since projected future cash flows from this
product line were sufficient to realize the Company's investment from the time
the assets were idled until the fourth quarter of 1996, management did not
believe that there was an impairment in the idle assets. In the
F-32
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Dollars in thousands except share data)
fourth quarter of 1996, the Company decided not to allocate its capital
resources to re-enter the salicylic acid business. Accordingly, the Company
recorded a charge of $2.3 million. Management estimates the costs to dismantle
the line approximate the salvage value of the line.
During the fourth quarter of 1996, the Company decided to shutdown its
Cowpens, South Carolina facility. During 1996, the Company incurred a loss from
operations of approximately $2.6 million from the Cowpens operations, including
a direct write-off of $1.5 million for inventory and related items in the fourth
quarter. The write-off was composed of $0.9 million of obsolete inventory from
unusable/unsaleable product as a result of product separation. The obsolete
inventory was identified during the October 31, 1996 planned physical inventory.
The write-off also included $0.6 million of disposal costs related to
hazardous products which required environmentally sound disposal procedures.
Approximately 30 manufacturing and administrative positions will be eliminated
in May, 1997. Accordingly, the Company recorded a charge of $0.4 million for
severance and related benefits. Management is currently negotiating with
prospective buyers to sell the facility for its net book value of approximately
$2.7 million plus assumption of environmental liabilities of $1.9 million. It is
anticipated that a sale will be completed during 1997.
In November 1996, approximately 20 employees were terminated at the HDCC
location as part of the Company's effort to reduce costs. Additionally, in 1996
the Company approved a plan to initiate the process of centralizing
administrative functions. Approximately 20 administrative positions are planned
to be eliminated in 1997 from this centralization. Accordingly, the Company
recorded a charge of $1.0 million associated with these actions.
Of the aforementioned $0.8 million of other charges, $0.5 million relates
to a municipality surcharge for water treatment and waste disposal at the
Company's Charlotte facility.
Of the $11.0 million charge recorded in 1996, $7.3 million is attributable
to noncash items, primarily the idle equipment write-off of $2.3 million and
obsolete inventory charge of $5.0 million. Charges that will require an outlay
of cash total approximately $3.7 million. Of this amount, $0.3 million was paid
in the fourth quarter of 1996. The remaining cash items totaling approximately
$3.4 million will be paid primarily over the first six months of 1997.
Management believes this outlay of cash will be funded with cash flow from
operations and borrowings under the Amended and Restated Credit Agreement and
will not materially adversely affect the Company's operating cash flows or
financial position.
18. Compensation Expense
The Company has recorded noncash compensation expense of $915, $150 and
$197 for the years ended December 31, 1994, 1995 and 1996 related to common
stock options granted (see note 16) and to a non recurring charge for common
stock in connection with the acquisition of KCI in 1994.
19. Related Party Transactions
On December 2, 1996, several former and current employee shareholders of
the Company were granted loans of $1,913 million to purchase additional Series A
Common Stock in an amount sufficient to maintain their existing ownership
percentages. Interest is earned monthly at 10 5/8 percent, the same as the
Senior Notes, and payable quarterly to the Company. Principal amortization
payments are due annually beginning December 31, 1997 and ending December 31,
2001.
Also included in loans to stockholders is a note receivable from a
shareholder in the principal amount of $200. Interest is earned quarterly at the
highest annual rate paid by the Company on its outstanding debt during such
year. All unpaid principal and interest due on the note is payable in full on
December 31, 2000. The note is collateralized by 300 shares of common stock and
170 shares of Series B Preferred Stock of the Company held by the stockholder.
F-33
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Dollars in thousands except share data)
20. Supplemental Cash Flow Information
Supplemental disclosure of cash flow information for the years ended
December 31, 1993, 1994 and 1995 is as follows:
<TABLE>
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Cash paid for:
Interest (net of capitalized interest)............................. $ 5,549 $12,916 $13,456
====== ====== =======
Income taxes....................................................... $ 2,741 $ 755 $ 670
====== ====== =======
Non-cash investing and financing activities:
Issuance of note receivable to stockholders.................... $ -- $ -- $ 1,913
====== ====== =======
Accrued and unpaid dividends on Series B preferred
stock.................................................... $ 2,925 $ 3,301 $ 3,197
====== ====== =======
Accrued and unpaid dividends on Series C preferred
stock.................................................... $ 769 $ 1,310 $ 1,374
====== ====== =======
Accrued and unpaid dividends for minority interest of
subsidiary............................................... $ 277 $ 247 $ 260
====== ====== =======
Capital expenditures included in accounts payable and accrued
expenses................................................. $ 1,060 $ 330 $ 1,863
====== ====== =======
Underwriter's discount on the Notes............................ $ -- $ -- $ 3,750
====== ====== =======
</TABLE>
F-34
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Dollars in thousands except share data)
21. Geographic Information
The Company operates in one business segment, specialty chemicals. Prior to
1996, HDCC's export sales were primarily via a distribution agreement with a
subsidiary of the former owner of HDCC. The geographic distribution of the
Company's net sales, operating profit (loss) and total assets is indicated by
the table below:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Net Sales (by origin):
United States (by destination)
Domestic...................................... $ 147,861 $ 174,083 $ 161,327
Canada........................................ 7,928 11,179 11,111
South and Latin America....................... 4,312 6,702 6,836
Europe........................................ 11,160 15,052 14,958
Asia-Pacific.................................. 14,103 20,904 22,922
Africa...................................... 66 207 266
-------- -------- --------
Sub-total............................... $ 185,430 $ 228,127 $ 217,420
Europe............................................ 2,350 69,089 83,130
Asia-Pacific...................................... -- 684 2,280
Elimination of intercompany sales................. -- (1,012) (2,662)
-------- -------- --------
Total................................... $ 187,780 $ 296,888 $ 300,168
======== ======== ========
Operating profit (loss):
United States................................. $ 12,568 $ (3,372) $ 3,149
Europe........................................ 173 (1,235) 1,328
Asia-Pacific.................................. -- (39) 1,036
Eliminations.................................. -- 7 79
-------- -------- --------
Total................................... $ 12,741 $ (4,639) $ 5,592
======== ======== ========
Total assets:
United States................................. $ 229,865 $ 222,414 $ 238,328
Europe........................................ 1,199 46,197 52,100
Asia-Pacific.................................. -- 5,185 5,644
Eliminations.................................. -- (30,640) (33,158)
-------- -------- --------
Total................................... $ 231,064 $ 243,156 $ 262,914
======== ======== ========
</TABLE>
22. 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 (FTCC (South Carolina) and
FCAC), 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.
F-35
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Dollars in thousands except share data)
Condensed Consolidating Balance Sheet--(Continued)
As of December 31, 1995
<TABLE>
<CAPTION>
U.S. German Non
Guarantor Guarantor Guarantor
Parent Subsidiaries Subsidiary Subsidiaries Eliminations Consolidated
______ ____________ _________ ____________ ____________ ____________
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......... $ 248 $ -- $ 429 $1,021 $ (248) $ 1,450
Accounts receivable, net.......... -- 26,971 9,591 2,488 -- 39,050
Due from affiliates............... -- 405 926 -- (1,331) --
Refundable income taxes........... 2,742 -- -- -- -- 2,742
Inventories....................... -- 32,267 12,541 2,090 (50) 46,848
Prepaid expenses and other current
assets........................ 49 4,023 317 423 -- 4,812
Environmental indemnification..... -- 780 -- -- -- 780
Deferred income taxes............. 266 1,706 -- 135 -- 2,107
-------- -------- ------- ------- -------- --------
Total current assets.......... 3,305 66,152 23,804 6,157 (1,629) 97,789
Property, Plant and Equipment:
Land.............................. -- 2,610 470 578 -- 3,658
Buildings and improvements........ -- 12,831 627 899 -- 14,357
Machinery and equipment........... -- 84,702 9,044 3,933 -- 97,679
Other............................. 182 3,757 489 78 -- 4,506
-------- -------- ------- ------- -------- --------
182 103,900 10,630 5,488 -- 120,200
Less accumulated depreciation......... 68 17,125 793 748 -- 18,734
-------- -------- ------- ------- -------- --------
114 86,775 9,837 4,740 -- 101,466
Other assets:
Intangible assets, net............ 434 34,178 313 3 -- 34,928
Environmental indemnification..... -- 1,074 -- -- -- 1,074
Deferred financing costs, net..... 329 2,370 936 6 -- 3,641
Investments in joint ventures..... -- -- 511 -- -- 511
Deferred income taxes............. 1,954 -- -- -- (1,954) --
Other............................. 29 3,038 221 459 -- 3,747
Notes receivable, subsidiaries........ 118,579 8,029 530 -- (127,138) --
Investment in subsidiaries............ 25,732 2,032 1,253 -- (29,017) --
-------- -------- ------- ------- -------- --------
Total assets.................. $150,476 $203,648 $ 37,405 $11,365 $(159,738 $243,156
======== ======== ======= ======= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Current maturities of long-term
debt.......................... $ 5,500 $ 24 $ -- $ 618 $ -- $ 6,142
Short-term borrowings............. -- -- 11,880 358 -- 12,238
Notes payable..................... 8 410 -- 335 -- 753
Accounts payable.................. 142 18,621 3,237 1,176 (248) 22,928
Due to affiliates................. -- 199 876 256 (1,331) --
Accrued expenses.................. 2,105 5,190 1,376 318 (4) 8,985
Accrued compensation.............. 92 3,672 335 519 -- 4,618
Accrued restructuring and other
charges....................... 350 1,755 1,365 -- -- 3,470
Environmental..................... -- 1,200 -- -- -- 1,200
-------- -------- ------- ------- -------- --------
Total current liabilities............. 8,197 31,071 19,069 3,580 (1,583) 60,334
Long-term debt........................ 118,950 26 -- 544 -- 119,520
Environmental......................... -- 17,367 699 -- -- 18,066
Deferred income taxes................. -- 12,458 -- 104 (1,504) 11,058
Postretirement benefits............... -- 4,211 -- -- -- 4,211
Accrued restructuring and other
charges........................... -- 2,429 -- -- -- 2,429
Notes payable......................... -- 108,763 16,386 1,989 (127,138) --
Other................................. 962 671 243 275 -- 2,151
Minority interest..................... -- -- -- -- 3,095 3,095
Commitments and contingencies......... -- -- -- -- -- --
Mandatory redeemable preferred
stock:............................ 41,223 3,073 -- -- (3,073) 41,223
Less: Treasury stock, at cost......... (188) -- -- -- -- (188)
-------- -------- ------- ------- -------- --------
41,035 3,073 -- -- 3,073 41,035
Stockholders' equity (deficit):
Common stock: .................... 1 567 1,291 1,476 (3,334) 1
Preferred stock....................... -- 3,462 -- -- (3,462) --
Additional paid-in capital............ -- 29,890 3,786 2,799 (36,475) --
Retained earnings (accumulated
deficit).......................... (14,400) (10,140) (5,263) 511 9,557 (19,735)
Cumulative translation
adjustment........................ -- -- 1,194 87 -- 1,281
Less: Stockholder note
receivable........................ -- (200) -- -- -- (200)
Treasury stock.................... (33) -- -- -- -- (33)
Minimum pension liability......... (57) -- -- -- -- (57)
-------- -------- ------- ------- -------- --------
Total stockholders' equity
(deficit)......................... (14,489) 23,579 1,008 4,873 (33,714) (18,743)
-------- -------- ------- ------- -------- --------
Total liabilities and
stockholders' equity
(deficit)................. $154,655 $203,648 $ 37,405 $11,365 $(163,917) $243,156
======== ======== ======== ======= ========= ========
F-36
</TABLE>
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Dollars in thousands except share data)
Condensed Consolidating Balance Sheet--(Continued)
As of December 31, 1996
<TABLE>
<CAPTION>
U.S. German Non
Guarantor Guarantor Guarantor
Parent Subsidiaries Subsidiary Subsidiaries Eliminations Consolidated
______ ____________ __________ ____________ ____________ ____________
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......... $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.................. 3,325 6,686 834 330 (253) 10,922
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>
F-37
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Dollars in thousands except share data)
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Operations
For the Year Ended December 31, 1994
---------------------------------------------------------------------
U.S. German Non
Guarantor Guarantor Guarantor
Parent Subsidiaries Subsidiary Subsidiary Eliminations Consolidated
------ ------------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales.................................... $ -- $ 185,429 $ -- $ 2,351 $ -- $ 187,780
Cost of goods sold........................... -- 143,384 -- 1,461 -- 144,845
------ ----------- ---------- ---------- ------------ ------------
Gross profit............................. -- 42,045 -- 890 -- 42,935
Selling, general and administrative
expense.................................. 3,418 22,837 -- 693 -- 26,948
Noncash compensation expense (note
18)...................................... 915 -- -- -- -- 915
Research and development
expense.................................. -- 2,331 -- -- -- 2,331
------ ------- ----- ----- ----- -------
Operating income (loss).................. (4,333) 16,877 -- 197 -- 12,741
Interest and debt expense
(income)................................. (333) 7,015 -- -- -- 6,682
Other income (expense)....................... 2,183 (1,323) -- (22) (293) 545
Equity in income (loss) of
subsidiary............................... 4,131 175 -- -- (4,306) --
------ ------- ----- ----- ----- -------
Income (loss) before minority
interest, income taxes and
extraordinary item................. 2,314 8,714 -- 175 (4,599) 6,604
Minority interest............................ -- -- -- -- 284 284
------ ------- ----- ----- ----- -------
Income (loss) before income taxes
and extraordinary item............. 2,314 8,714 -- 175 (4,883) 6,320
Provision (benefit) for income
taxes.................................... (349) 3,307 -- -- (100) 2,858
Net income (loss) before
extraordinary item................. 2,663 5,407 -- 175 (4,783) 3,462
Extraordinary loss, net of applicable
income tax............................... -- 1,276 -- -- -- 1,276
------ ------- ----- ----- ----- -------
Net income (loss)........................ 2,663 4,131 -- 175 (4,783) 2,186
Less: preferred dividends.................... 3,694 577 -- -- (577) 3,694
------- ------- ----- ----- -------- -------
Net income (loss) applicable to
common shares...................... $(1,031) $ 3,554 $ -- $ 175 $(4,206) $(1,508)
======== ======= ===== ===== ======== ========
</TABLE>
F-38
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Dollars in thousands except share data)
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Operations
For the Year Ended December 31, 1995
-------------------------------------------------------------------------
U.S. German Non
Guarantor Guarantor Guarantor
Parent Subsidiaries Subsidiary Subsidiaries Eliminations Consolidated
------ ------------ ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales.................................. $ -- $ 228,127 $ 58,272 $ 14,442 $ (3,953) $ 296,888
Cost of goods sold......................... -- 180,313 46,781 10,266 (3,827) 233,533
------- -------- ------- ------- ------- --------
Gross profit........................... -- 47,814 11,491 4,176 (126) 63,355
Selling, general and administrative expense 4,726 31,803 11,201 2,745 (76) 50,399
Noncash compensation expense (note 18)..... 150 -- -- -- -- 150
Research and development expense........... -- 3,374 1,405 171 -- 4,950
Restructuring and other charges (note 17).. 350 10,780 1,365 -- -- 12,495
------- -------- ------- ------- ------- --------
Operating income (loss)................ (5,226) 1,857 (2,480) 1,260 (50) (4,639)
Interest and debt expense (income)......... 746 10,639 2,075 345 -- 13,805
Registration costs (note 17)............... 2,187 -- -- -- -- 2,187
Other income (expense)..................... 5,441 (3,781) (458) (856) (341) 5
Equity in income (loss) of subsidiary...... (14,786) (2,321) (324) -- 17,431 --
------- -------- ------- ------- ------- --------
Income (loss) before minority interest
and income taxes................ (17,504) (14,884) (5,337) 59 17,040 (20,626)
Minority interest.......................... -- -- -- -- 247 247
------- -------- ------- ------- ------- --------
Income (loss) before income taxes...... (17,504) (14,884) (5,337) 59 16,793 (20,873)
Provision (benefit) for income taxes....... (1,019) (2,760) -- 103 (133) (3,809)
Equity in income of joint ventures......... -- -- 74 -- -- 74
------- -------- ------- ------- ------- --------
Net income (loss)...................... (16,485) (12,124) (5,263) (44) 16,926 (16,990)
Less: preferred dividends.................. 4,611 607 -- -- (607) 4,611
------- -------- ------- ------- ------- --------
Net income (loss) applicable to common
shares........................... $ (21,096) $ (12,731) $ (5,263) $ (44) $17,533 $ (21,601)
======= ======== ======= ======= ======= ========
</TABLE>
F-39
<PAGE>
Notes to Consolidated Financial Statements--(Continued)
(Dollars in thousands except share data)
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Operations
For the Year Ended December 31, 1996
---------------------------------------------------------------------------
U.S. German Non
Guarantor Guarantor Guarantor
Parent Subsidiaries Subsidiary Subsidiaries Eliminations Consolidated
------ ------------ ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales.................................. $ -- $217,503 $73,461 $15,510 $(6,306) $300,168
Cost of goods sold......................... -- 173,659 59,667 10,763 (5,842) 238,247
------- -------- ------- ------- ------- --------
Gross profit........................... -- 43,844 13,794 4,747 (464) 61,921
Selling, general and administrative expense 4,544 28,607 12,065 2,714 (558) 47,372
Noncash compensation expense (note 18)..... 197 -- -- -- -- 197
Research and development expense........... -- 3,387 1,205 194 -- 4,786
Restructuring and other charges (note 17).. 611 3,363 -- -- -- 3,974
------- -------- ------- ------- ------- --------
Operating income (loss)................ (5,352) 8,487 524 1,839 94 5,592
Interest and debt expense (income)......... (376) 11,627 2,678 284 -- 14,213
Other income (expense)..................... 5,658 (4,676) 865 (283) (853) 711
Equity in income (loss) of subsidiary...... (7,884) (154) 577 -- 7,461 --
------- -------- ------- ------- ------- --------
Income (loss) before minority interest
and income taxes................ (7,202) (7,970) (712) 1,272 6,702 (7,910)
Minority interest expense.................. -- -- -- -- 260 260
------- -------- ------- ------- ------- --------
Income (loss) before income taxes...... (7,202) (7,970) (712) 1,272 6,442 (8,170)
Provision (benefit) for income taxes....... 69 (2,178) 10 140 (346) (2,305)
Equity in income of joint ventures......... -- -- 649 -- (14) 635
------- -------- ------- ------- ------- --------
Net income (loss) before
extraordinary item.............. (7,271) (5,792) (73) 1,132 6,774 (5,230)
Extraordinary loss, net of applicable
income tax.............................. 334 (1,574 (761) -- -- (2,001)
Net income (loss)....................... (6,937) (7,366) (834) 1,132 6,774 (7,231)
Less: preferred dividends.................. 4,571 637 -- -- (637) 4,571
------- -------- ------- ------- ------- --------
Net income (loss) applicable to common
shares........................... $(11,508) $(8,003) $(834) $1,132 $7,411 $(11,802)
======== ======= ====== ====== ======= ========
</TABLE>
F-40
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Dollars in thousands except share data)
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 1994
-------------------------------------------------------------------------
U.S. German Non
Guarantor Guarantor Guarantor
Parent Subsidiaries Subsidiary Subsidiary Eliminations Consolidated
------ ------------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by investing
activities............................... $ 844 $ 12,942 $ -- $ 377 $ -- $ 14,163
-------- --------- ---------- --------- ------------ ---------
Cash flow from investing activities:
Payments for acquisitions, net of
cash acquired........................ -- (68,286) -- -- -- (68,286)
Investment in subsidiaries............... (10,001) -- -- -- 10,001 --
Capital expenditures..................... (23) (6,988) -- (199) -- (7,210)
Purchase of subsidiary stock from
minority stockholder..................... (142) -- -- -- -- (142)
Proceeds from sale of capital
equipment............................ -- 185 -- -- -- 185
Payments for environmental
liabilities.......................... -- (2,543) -- -- -- (2,543)
Proceeds from environmental
indemnification...................... -- 2,292 -- -- -- 2,292
Other.................................... (254) 46 -- -- -- (208)
-------- -------- -------- ------- -------- --------
Net cash provided by used in
investing activities..................... (10,420) (75,294) -- (199) 10,001 (75,912)
-------- -------- -------- ------- -------- --------
Cash flows from financing activities:
Issuance of common stock................. 2,273 10,001 -- -- (10,001) 2,273
Issuance of preferred stock.............. 9,745 -- -- -- -- 9,745
Revolving borrowings under Credit
Agreement............................ 36,250 -- -- -- -- 36,250
Revolving repayments under Credit
Agreement............................ (28,500) -- -- -- -- (28,500)
Term loan borrowings under Credit
Agreement............................ 95,500 -- -- -- -- 95,500
Term loan repayments under Credit
Agreement............................ (3,000) -- -- -- -- (3,000)
Repayment of refinanced long-term
debt................................. -- (44,630) -- -- -- (44,630)
Repayment of capital lease
obligations.......................... -- (134) -- -- -- (134)
Payments for financing costs............. (21) (3,229) -- -- -- (3,250)
Dividends paid to minority
interests............................ -- (129) -- -- -- (129)
Other.................................... (735) (19) -- -- -- (754)
Subsidiary loans......................... (101,418) 101,408 -- 10 -- --
-------- -------- -------- ------- -------- --------
Net cash provided by (used in)
financing activities..................... 10,094 63,268 -- 10 (10,001) 63,371
Net increase in cash and cash
equivalents.............................. 518 916 -- 188 -- 1,622
Cash and cash equivalents,
beginning of period...................... 200 537 -- 52 -- 789
-------- -------- -------- ------- -------- --------
Cash and cash equivalents, end of
period................................... $ 718 $ 1,453 $ -- $ 240 $ -- $ 2,411
======== ======== ======== ======= ======== ========
</TABLE>
F-41
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
(Dollars in thousands except share data)
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Cash Flows
Year Ended December 31, 1995
-------------------------------------------------------------------------
U.S. German Non
Guarantor Guarantor Guarantor
Parent Subsidiaries Subsidiary Subsidiaries Eliminations Consolidated
------ ------------ ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities............... $ (2,331) $ 18,594 $(17,742) $ (1,403) $ (248) $ (3,130)
------- -------- --------- -------- ------ --------
Cash flows from investing activities:
Payments for acquisitions, net of
cash acquired.................. -- -- (13,493) (2,381) -- (15,874)
Investments in subsidiaries........ (3,982) (3,797) -- (1,573) 9,352 --
Capital expenditures............... (113) (13,980) (834) (587) -- (15,514)
(Increase) decrease in
investments in joint
ventures....................... -- -- (133) -- -- (133)
Proceeds from sale of capital
equipment...................... -- 576 186 -- -- 762
Payments for environmental
liabilities.................... -- (3,943) -- -- -- (3,943)
Proceeds from environmental
indemnification................ -- 2,645 -- -- -- 2,645
Other.............................. -- 42 -- -- -- 42
------- ------- ------- ------ ------ -------
Net cash flows used in investing
activities......................... (4,095) (18,457) (14,274) (4,541) 9,352 (32,015)
------- ------- ------- ------ ------ -------
Cash flows from financing activities:
Issuance of common stock........... -- -- 5,077 4,275 (9,352) --
Revolving borrowings under Credit
Agreement...................... 86,830 -- -- -- -- 86,830
Revolving repayments under Credit
Agreement...................... (73,830) -- -- -- -- (73,830)
Term loan borrowings under Credit
Agreement...................... 18,200 -- -- -- -- 18,200
Term loan repayments under Credit
Agreement...................... (7,000) -- -- -- -- (7,000)
Short-term borrowings under
European Facility.............. -- -- 15,974 542 -- 16,516
Repayments of short-term
borrowing under European
Facility....................... -- -- (3,986) -- -- (3,986)
Purchase of treasury stock......... (221) -- -- -- -- (221)
Payment of registration costs...... (1,004) -- -- -- -- (1,004)
Repayment of capital lease
obligations.................... -- (65) -- -- -- (65)
Payments for financing costs....... (370) (21) (1,000) -- -- (1,391)
Dividends paid to minority interests -- (247) -- -- -- (247)
Other.............................. -- (85) -- -- -- (85)
Subsidiary loans................... (16,649) (1,172) 15,856 1,965 -- --
------- ------- ------- ------ ------ -------
Net cash provided by financing
activities........................ 5,956 (1,590) 31,921 6,782 (9,352) 33,717
------- ------- ------- ------ ------ -------
Effect of exchange rate changes
on cash.......................... -- -- 524 (57) -- 467
------- ------- ------- ------ ------ -------
Net increase (decrease) in cash and
cash equivalents................... (470) (1,453) 429 781 (248) (961)
Cash and cash equivalents,
beginning of period................ 718 1,453 -- 240 -- 2,411
------- ------- ------- ------ ------ -------
Cash and cash equivalents, end of
period............................. $ 248 $ -- $ 429 $1,021 $ (248) $ 1,450
======= ======= ======= ====== ====== =======
</TABLE>
F-42
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
(Dollars in thousands except share data)
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Cash Flows
Year Ended December 31, 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............................. $(4,675) $(925) $(1,561) $72 $152 $(6,937)
------- ------ ------- -------- ---- -------
Cash flows from investing activities:
Capital expenditures................... (193) (10,198) (1,101) (1,522) -- (13,014)
Acquisition of intangibles............. -- (677) (407) -- -- (1,084)
(Increase) decrease in investments in
joint ventures..................... -- -- 287 (12) 92 367
Increase in investment in subsidiaries. -- -- (857) -- 857 --
Proceeds from sale of capital equipment -- 1,572 68 -- -- 1,640
Payments for environmental liabilities. -- (2,817) -- -- -- (2,817)
Proceeds from environmental
indemnification.................... -- 1,354 -- -- -- 1,354
Other.................................. -- 48 -- -- -- 48
------- ------- ------ ------ ---- -------
Net cash used in investing activities...... (193) (10,718) (2,010) (1,534) 949 (13,506)
------- ------- ------ ------ ---- -------
Cash flows from financing activities:
Issuance of common stock............... 10,027 -- -- 857 (857) 10,027
Issuance of senior subordinated debt... 121,250 -- -- -- -- 121,250
Revolving borrowings under Credit
Agreement............................ 76,750 -- -- -- -- 76,750
Revolving repayments under Credit
Agreement............................ (61,999) -- -- -- -- (61,999)
Term loan repayments under Credit
Agreement............................ (129,700) -- -- -- -- (129,700)
Short term borrowings under European
Facility............................. -- -- 97,074 623 -- 97,697
Short term repayments under European
Facility............................. -- -- (88,763) (26) -- (88,789)
Purchase of treasury stock............. (87) -- -- -- -- (87)
Payment of registration costs.......... (815) -- -- -- -- (815)
Repayment of capital lease obligations. -- (65) -- (67) -- (132)
Payments for financing costs........... (1,354) -- -- -- -- (1,354)
Dividends paid to minority interests... -- (260) -- -- -- (260)
Other.................................. -- (52) -- -- -- (52)
Subsidiary loans....................... (9,364) 12,364 (2,970) (30) -- --
------- ------ ------ ------ ---- -------
Net cash provided by financing activities.. 4,708 11,987 5,341 1,357 (857) 22,536
------- ------ ------ ------ ---- -------
Effect of exchange rate changes on cash.... -- -- 19 76 (84) 11
------- ------ ------ ------ ---- -------
Net increase (decrease) in cash and cash
equivalents............................ (160) 344 1,789 (29) 160 2,104
Cash and cash equivalents, beginning of
period................................. 248 -- 429 1,021 (248) 1,450
------- ------ ------ ------ ---- -------
Cash and cash equivalents, end of period... $88 $344 $2,218 $992 $(88) $3,554
======= ====== ====== ====== ==== =======
</TABLE>
F-43
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
In connection with our audits of the consolidated financial statements of
Freedom Chemical Company and Subsidiaries as of December 31, 1995 and 1996, and
for each of the three years in the period ended December 31, 1996, which
financial statements are included in Form 10-K, we have also audited the
financial statement schedule listed in Item 8 herein.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
/s/ Coopers & Lybrand L.L.P.
600 Lee Road
Wayne, Pennsylvania
March 26, 1997
F-44
<PAGE>
Freedom Chemical Company and Subsidiaries
Schedule II -- Valuation and Qualifying Accounts for the years ended
December 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>
Balance at Additions Additions
beginning charged to costs charged to Balance at end
of period and expenses other accounts Deductions of period
--------- ------------ -------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
- -------------------------------
For the year ended December 31, 1994........ $ 145 $ 142 $ -- $ -- $ 287
--------- ------------ ------------- --------- ---------
For the year ended December 31, 1995........ $ 287 $ 36 $ -- $ 63 $ 260
--------- ------------ ------------- --------- ---------
For the year ended December 31, 1996........ $ 260 $ 397 $ -- $ 201 $ 456
--------- ------------ ------------- --------- ---------
Inventory reserves:
- ------------------
For the year ended December 31, 1994........ $ -- $ 58 $ -- $ -- $ 58
--------- ------------ ------------- -------- ---------
For the year ended December 31, 1995........ $ 58 $ 1,964 $ -- $ 1,854 $ 168
--------- ------------ ------------- -------- ---------
For the year ended December 31, 1996........ $ 168 $ 6,662 $ -- $ 696 $ 6,134
--------- ------------ ------------- -------- ---------
Valuation allowance for deferred taxes:
- --------------------------------------
For the year ended December 31, 1994......... $ -- $ 147 $ 4,000 $ -- $ 4,147
--------- ------------ ------------- -------- --------
For the year ended December 31, 1995......... $ 4,147 $ 5,326 $ -- $ 1,747 $ 7,726
--------- ------------ ------------- -------- --------
For the year ended December 31, 1996......... $ 7,726 $ -- $ -- $ 26 $ 7,700
--------- ------------ ------------- -------- --------
</TABLE>
F-45
<PAGE>
EXHIBIT INDEX
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).
4.1 Indenture dated as of October 15, 1996, among Freedom
Chemical Company, the Guarantors named therein and The Bank
of New York, as trustee, relating to the 10 5/8% Senior
Subordinated Notes due 2006 of Freedom Chemical Company and
exhibits thereto, including Form of 10 5/8% Senior
Subordinated Note due 2006 of Freedom Chemical Company
(filed as Exhibit 4.1 to the Company's Registration
Statement on Form S-1 (33-84778) and incorporated herein by
reference).
10.1 Registration Rights Agreement, dated October 17, 1996 among
Freedom Chemical Company, the Guarantors named therein and
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Schroder
Wertheim & Co. Incorporated and Smith Barney Inc. (filed as
Exhibit 10.1 to the Company's Registration Statement on Form
S-1 (33-84778) and incorporated herein by reference).
10.2 Amended and Restated Credit Agreement, dated as of October
17, 1996 among Freedom Chemical Company, Freedom Chemical
Diamalt GmbH, the institutions from time to time party
thereto as lenders, the institutions from time to time party
thereto as issuing bank and Citicorp USA, Inc., as Agent
(filed as Exhibit 10.2 to the Company's Registration
Statement on Form S-1 (33-84778) and incorporated herein by
reference).
10.3 Share Pledge Agreement, dated January 16, 1995, by and among
Freedom Chemical Company, Hilton Davis Chemical Co. and
Citicorp USA, Inc. (filed as Exhibit 10.3 to the Company's
Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
10.4 Amendment to Share Pledge Agreement, dated January 17, 1995,
by and among Freedom Chemical Company, Hilton Davis Chemical
Co. and Citicorp USA, Inc. (filed as Exhibit 10.4 to the
Company's Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
10.5 Security Assignment Agreement, dated January 16, 1995,
between Freedom Chemical Company and Citicorp USA, Inc.
(filed as Exhibit 10.5 to the Company's Registration
Statement on Form S-1 (33-84778) and incorporated herein by
reference).
10.6 Stock Purchase Agreement, dated as of May 11, 1994, among BC
Sugar Refinery Limited, Chatterton Petrochemical Corporation
and Freedom Chemical Company (filed as Exhibit 10.6 to the
Company's Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
<PAGE>
Exhibit
No. Description of Exhibit
- ------- ----------------------
10.7 Amendment No. 1 to Stock Purchase Agreement, dated as of May
26, 1994, among BC Sugar Refinery Limited, Chatterton
Petrochemical Corporation and Freedom Chemical Company
(filed as Exhibit 10.7 to the Company's Registration
Statement on Form S-1 (33-84778) and incorporated herein by
reference).
10.8 Settlement Agreement, dated as of April 28, 1994, between
Tenneco Polymers, Inc. and Kalama Chemical, Inc. (filed as
Exhibit 10.8 to the Company's Registration Statement on Form
S-1 (33-84778) and incorporated herein by reference).
10.9 Stock Purchase Agreement, dated as of May 21, 1993, between
PMC, Inc. and Freedom Chemical Acquisition Corporation
(filed as Exhibit 10.9 to the Company's Registration
Statement on Form S-1 (33-84778) and incorporated herein by
reference).
10.10 Amendment No. 1 to Stock Purchase Agreement, dated as of
September 9, 1993, between PMC, Inc. and Freedom Chemical
Company (filed as Exhibit 10.10 to the Company's
Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
10.11 Definitive Agreement, dated as of August 13, 1993, between
Sterling Winthrop Inc. and Freedom Chemical Acquisition
Corporation (filed as Exhibit 10.11 to the Company's
Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
10.12 Ground Lease, dated September 9, 1993, between The SDI
Divestiture Corp. and Hilton Davis Chemical Co. (filed as
Exhibit 10.12 to the Company's Registration Statement on
Form S-1 (33-84778) and incorporated herein by reference).
10.13 Amendment to Ground Lease Provisions, dated September 9,
1993 (filed as Exhibit 10.13 to the Company's Registration
Statement on Form S-1 (33-84778) and incorporated herein by
reference).
10.14 Escrow Agreement, dated September 9, 1993, by and among PMC,
Inc., Freedom Chemical Acquisition Corporation and
CoreStates Bank, N.A. (filed as Exhibit 10.14 to the
Company's Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
10.15 Environmental Matters Agreement, dated September 9, 1993,
among Freedom Chemical Acquisition Corporation, Hilton Davis
Chemical Co. and Sterling Winthrop, Inc. (filed as Exhibit
10.15 to the Company's Registration Statement on Form S-1
(33-84778) and incorporated herein by reference).
10.16 Agreement for the Purchase and Sale of Assets, dated
February 28, 1992, between Freedom Textile Chemicals Co. and
American Cyanamid Company (filed as Exhibit 10.16 to the
Company's Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
10.17 Employment Agreement, dated November 15, 1994, by and
between Freedom Chemical Company and Fred P. Rullo (filed as
Exhibit 10.18 to the Company's Registration Statement on
Form S-1 (33-84778) and incorporated herein by reference).
<PAGE>
Exhibit
No. Description of Exhibit
- ------- ----------------------
10.18 Employment Agreement, dated November 15, 1994, by and
between Freedom Chemical Company and Harold A. Sorgenti
(filed as Exhibit 10.19 to the Company's Registration
Statement on Form S-1 (33-84778) and incorporated herein by
reference).
10.19 Employment Agreement, dated June 1, 1991, between Kalama
Chemical, Inc. and Robert A. Kirchner (filed as Exhibit
10.20 to the Company's Registration Statement on Form S-1
(33-84778) and incorporated herein by reference).
10.20 Employment Agreement, dated January 17, 1996, between
Freedom Textile Chemicals Co. and Robert G. Kitchen (filed
as Exhibit 10.21 to the Company's Registration Statement on
Form S-1 (33-84778) and incorporated herein by reference).
10.21 Letter Agreement, dated January 9, 1997, between Freedom
Chemical Company and Robert G. Kitchen (filed as Exhibit
10.21(a) to the Company's Registration Statement on Form S-1
(33-84778) and incorporated herein by reference).
10.22 Employment Agreement between Freedom Chemical Diamalt GmbH
and Helmut Wolf (filed as Exhibit 10.22 to the Company's
Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
10.23 Letter Agreement, dated May 8, 1992, between The Freedom
Group and Robert Kitchen (filed as Exhibit 10.23 to the
Company's Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
10.24 Employment Agreement, dated March 13, 1992, between Freedom
Textile Chemicals Co. and James B. Trecek (filed as Exhibit
10.24 to the Company's Registration Statement on Form S-1
(33-84778) and incorporated herein by reference).
10.25 Agreement, dated December 7, 1994, by and among Freedom
Chemical Company, the Freedom Group Partnership, Joseph
Littlejohn & Levy Fund, L.P., Joseph Littlejohn & Levy Fund
II, L.P., Harold A. Sorgenti and Fred P. Rullo (filed as
Exhibit 10.25 to the Company's Registration Statement on
Form S-1 (33-84778) and incorporated herein by reference).
10.26 Stockholders' Agreement, dated as of May 4, 1992, among
Freedom Chemical Company, Joseph Littlejohn & Levy Fund,
L.P., Harold A. Sorgenti and Fred P. Rullo (filed as Exhibit
10.26 to the Company's Registration Statement on Form S-1
(33-84778) and incorporated herein by reference).
10.27 Amendment to Stockholders' Agreement, dated as of September
9, 1993, by and among Freedom Chemical Company, Joseph
Littlejohn & Levy Fund, L.P., Freedom Investment Corp.,
Harold A. Sorgenti, Fred P. Rullo and RULCO, Inc. (filed as
Exhibit 10.27 to the Company's Registration Statement on
Form S-1 (33-84778) and incorporated herein by reference).
10.28 Amendment No. 2 to Stockholders' Agreement, dated as of June
30, 1994, by and among Freedom Chemical Company, Joseph
Littlejohn & Levy Fund, L.P., Joseph Littlejohn & Levy Fund
II, L.P., Freedom Investment Corp., Harold A. Sorgenti, Fred
P. Rullo and RULCO, Inc. (filed as Exhibit 10.28 to the
Company's Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
<PAGE>
Exhibit
No. Description of Exhibit
- ------- ----------------------
10.29 Stockholders' Agreement, dated as of June 30, 1993, by and
among Freedom Chemical Company, Joseph Littlejohn & Levy
Fund, L.P., Donald W. McPhail and Stamford-Atlanta Capital
Corporation (filed as Exhibit 10.29 to the Company's
Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
10.30 Amendment to Stockholders' Agreement, dated as of June 30,
1994, by and among Freedom Chemical Company, Joseph
Littlejohn & Levy Fund, L.P., Joseph Littlejohn and Levy
Fund II, L.P., Donald W. McPhail and Stamford-Atlanta
Capital Corporation (filed as Exhibit 10.30 to the Company's
Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
10.31 Stockholders' Agreement, dated as of June 30, 1994, by and
among Freedom Chemical Company, Joseph Littlejohn & Levy
Fund, L.P., Joseph Littlejohn & Levy Fund II, L.P., and the
individual shareholders whose names are set forth on the
signature page thereto (filed as Exhibit 10.31 to the
Company's Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
10.32 Stockholders' Agreement, dated as of June 30, 1994, by and
among Freedom Chemical Company, Joseph Littlejohn & Levy
Fund, L.P., Joseph Littlejohn & Levy Fund II, L.P., and
Richard E. Gilleland (filed as Exhibit 10.32 to the
Company's Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
10.33 Freedom Chemical Company 1994 Management Equity Plan (filed
as Exhibit 10.33 to the Company's Registration Statement on
Form S-1 (33-84778) and incorporated herein by reference).
10.34 Form of Stock Option Agreement (filed as Exhibit 10.34 to
the Company's Registration Statement on Form S-1 (33-84778)
and incorporated herein by reference).
10.35 Amended and Restated Stock Option Agreement, dated as of
November 15, 1994, between Freedom Chemical Company and The
Freedom Group Partnership (filed as Exhibit 10.35 to the
Company's Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
10.36 Amended and Restated Stock Option Agreement, dated as of
November 15, 1994, between Freedom Chemical Company and The
Freedom Group Partnership (filed as Exhibit 10.36 to the
Company's Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
10.37 Amended and Restated Stock Option Agreement, dated as of
November 15, 1994, between Freedom Chemical Company and The
Freedom Group Partnership (filed as Exhibit 10.37 to the
Company's Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
10.38 Letter, dated January 18, 1994, from The Freedom Group to
Freedom Chemical Company (filed as Exhibit 10.38 to the
Company's Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
<PAGE>
Exhibit
No. Description of Exhibit
- ------- ----------------------
10.39 Letter, dated January 24, 1994, from Freedom Investment
Corp. to Joseph Littlejohn & Levy Fund, L.P.; Letter, dated
January 24, 1994, from Harold A. Sorgenti and Ann R.
Sorgenti to Joseph Littlejohn & Levy Fund, L.P.; Letter,
dated January 24, 1994, from Sorgenti Family Partnership,
L.P. to Joseph Littlejohn & Levy Fund, L.P. (filed as
Exhibit 10.39 to the Company's Registration Statement on
Form S-1 (33-84778) and incorporated herein by reference).
10.40 Subscription Agreement, dated as of October 17, 1996 between
Freedom Chemical Company and Joseph Littlejohn & Levy Fund,
L.P. (filed as Exhibit 10.40 to the Company's Registration
Statement on Form S-1 (33-84778) and incorporated herein by
reference).
10.41 Subscription Agreement, dated as of October 17, 1996 between
Freedom Chemical Company and Joseph Littlejohn & Levy Fund
II, L.P. (filed as Exhibit 10.41 to the Company's
Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
10.42 Assignment Agreement, dated as of May 26, 1994, between
Kalama Chemical, Inc. and United States Trust Company (filed
as Exhibit 10.42 to the Company's Registration Statement on
Form S-1 (33-84778) and incorporated herein by reference).
10.43 Trust Agreement, dated May 26, 1994, among Chatterton
Petrochemical Corporation, Freedom Chemical Company, Kalama
Chemical, Inc. and United States Trust Company of New York
(filed as Exhibit 10.43 to the Company's Registration
Statement on Form S-1 (33-84778) and incorporated herein by
reference).
10.44 Stock Option Agreement, dated December 18, 1996, between
Freedom Chemical Company and Fred P. Rullo.
10.45 Amendment No. 1 to Employment Agreement, dated February 10,
1997, between Freedom Chemical Company and Fred P. Rullo.
21.1 Subsidiaries of Freedom Chemical Company (filed as Exhibit
21.1 to the Company's Registration Statement on Form S-1
(33-84778) and incorporated herein by reference).
24.1 Powers of Attorney of directors and officers of the Company
authorizing Fred P. Rullo and Brian F. McNamara to sign any
amendments to this Report on their behalf (set forth on
signature pages of this Report).
27 Financial Data Schedule.
<PAGE>
STOCK OPTION AGREEMENT
AGREEMENT made on December 18, 1996, by and between FREEDOM
CHEMICAL COMPANY, a Delaware corporation (the "Company") and FRED P. RULLO (the
"Executive").
WHEREAS, on October 17, 1996, the Company issued $125,000,000
aggregate principal amount of its 10 5/8% Senior Subordinated Notes due 2006
(the
"Offering");
WHEREAS, in connection with the Offering, Joseph Littlejohn &
Levy Fund, L.P. and Joseph Littlejohn & Levy Fund II, L.P., the Company's two
largest stockholders, made a cash equity investment in the Company;
WHEREAS, certain other stockholders of the Company have been
offered the opportunity to make additional equity investments in the Company in
an amount sufficient to maintain their existing ownership percentages of the
Company's Series A Common Stock, par value $.01 per share (the "Common Stock");
WHEREAS, the Company and the Executive are entering into an
amendment to the employment agreement dated as of November 15, 1994 (such
agreement, as so amended, together with any agreement replacing or amending such
agreement being herein referred to as the "Rullo Employment Agreement");
NOW, THEREFORE, the parties hereby agree as follows:
1. Definitions. Capitalized terms not otherwise defined
herein shall have the meaning set forth in the Rullo Employment Agreement.
2. Grant of Option. The Executive is hereby granted a
non-qualified stock option (the "Option") to purchase an aggregate of 8,683.20
shares (the "Option Shares") of Common Stock, pursuant to the terms of this
Agreement.
3. Option Price. The exercise price of the Option shall
be $125.00 per share of Common Stock issuable thereunder (the "Option Price").
<PAGE>
4. Exercisability. The Option is immediately
exercisable with respect to one hundred percent (100%) of the Option Shares
covered hereby.
5. Period of Option. The Option shall expire with respect to
one hundred percent (100%) of the Option Shares at 5:00 p.m., New York City
time, on the earlier to occur of (i) December 31, 2001 and (ii) the thirtieth
day following termination of the Executive's employment with the Company for any
reason; this Option may be exercised, in whole or in part (other than with
respect to any fractional share), at any time prior to such expiration.
6. Promissory Note. At the written request of the Executive
made at the time the Executive irrevocably exercises the Option, the Company
will lend to the Executive an amount equal to the aggregate Option Price (a
"Loan"). The Loan shall be made pursuant to and on the terms and conditions set
forth in the Form of Promissory Note attached as Exhibit A hereto.
7. Exercise of Option.
(a) The Option shall be exercised in the
following manner: the Executive, or the person or persons having the right to
exercise the Option on behalf of the Executive, shall deliver to the Company
written notice specifying the number of shares of Common Stock which it elects
to purchase and, if the Executive elects to cause the Company to lend to the
Executive the Option Price, a notice to that effect. The Executive (or such
other person) must include with such notice either (i) full payment of the
exercise price for the Common Stock being purchased pursuant to such notice (in
the form of cash or certified or cashier's check) or (ii) an executed Promissory
Note in the amount of the aggregate Option Price and having the other terms and
conditions set forth in Exhibit A hereto.
(b) The Company may, if in its reasonable
judgment determines it to be required under any applicable law, require that the
Executive pay to the Company, at the time of exercise of any portion of the
Option, any such additional amount as the Company deems necessary to satisfy its
liability to withhold federal, state or local income tax or any other taxes
incurred by reasons of the
2
<PAGE>
exercise or the transfer of shares of Common Stock thereupon.
(c) If any law, regulation or interpretation
requires the Company to take any action regarding the Common Stock, before the
Company issues certificates for the Common Stock being purchased, the Company
may delay delivering the certificates for the Common Stock for the period
necessary to take such action. The certificate or certificates representing the
Common Stock acquired pursuant to the Option may bear a legend restricting the
transfer of such Common Stock, and the Company may impose stop transfer
instructions to implement such restrictions, if applicable.
(d) The Executive will not be deemed to be a
holder of any shares pursuant to exercise of the Option until the date of the
issuance of a stock certificate to him for such shares of Common Stock and until
the shares of Common Stock are paid in full in cash, by certified cashier's
check or by delivery of the Promissory Note, as provided in Section 7(a).
(e) The Executive agrees the Option Shares will
be subject to the terms and conditions of the Stockholders' Agreement dated as
of May 4, 1992, as amended by Amendment No. 1 and Amendment No. 2 thereto, to
which the Executive is a party (the "Stockholders' Agreement").
(f) The Executive agrees that the issuance of
the Option by the Company fully satisfies all obligations the Company may have
to the Executive pursuant to the Company's letter to the Executive dated October
1, 1996 and the Executive's response to such letter dated October 22, 1996.
8. Representations and Covenants
(a) The Company represents and warrants and
covenants that (i) this Agreement has been authorized by all necessary corporate
action of the Company and is a valid and binding agreement of the Company
enforceable against it in accordance with its terms and (ii) the Company shall
at all times during the term of this Agreement reserve and keep available such
number of shares of
3
<PAGE>
Common Stock as will be sufficient to satisfy the obligations of the Company
under this Agreement.
(b) The Executive represents and warrants that
he is not a party to any agreement or instrument which would prevent him from
entering into or performing its duties in any way under this Agreement.
(c) The Executive understands that the Option
Shares have not been registered under the Securities Act and that it cannot
offer for sale, sell or transfer such Option Shares unless such offer, sale or
transfer has been registered under the Securities Act or unless an exemption
from such registration is available.
9. Transferability. The Option may be transferred to a
Permitted Transferee, provided that such Permitted Transferee agrees to be bound
by all the terms and conditions of any stockholders agreement then in effect
among the Company the Executive. For purposes of this Agreement, a "Permitted
Transferee" shall be (i) RULCO, Inc.; (ii) a spouse of the Executive; (iii) the
children or step-children of the Executive or their lineal descendants; (iv) any
trust the beneficiary of which is the spouse, children, step-children of the
Executive or their lineal descendants and which is controlled by the Executive;
or (v) any affiliate of any of the foregoing. For purposes of clause (iv) above,
a trust shall be deemed to be controlled by the Executive if the Executive has
the power to direct the disposition of the assets transferred to such trust.
10. Adjustments. In the event of any increase, reduction,
change or exchange of Option Shares for a different number or kind of shares or
other securities of the Company by reasons of a reclassification,
recapitalization, merger, consolidation, stock dividend or other similar event,
the Board of Directors of the Company shall, in the exercise of its good faith
judgment, conclusively determine the number and class of Option Shares subject
hereto and the exercise price thereof to the extent it determines such
adjustment to be appropriate to prevent any unfair change in the Executive's
rights hereunder.
11. Entire Agreement. This Agreement, the Stockholders'
Agreement and the Rullo Employment Agree-
4
<PAGE>
ment contain all the understandings between the parties hereto pertaining to
the matters referred to herein, and supersede all undertakings and agreements,
whether oral or in writing, previously entered into by them with respect
thereto, including, without limitation, the Company's letter to the Executive
dated October 1, 1996 and the Executive's letter to the Company dated October
22, 1996. The Executive represents that, in executing this Agreement, it does
not rely and has not relied upon any representation or statement not set forth
herein made by the Company with regard to the subject matter or effect of this
Agreement or otherwise.
12. Amendment or Modification, Waiver. No provision of this
Agreement may be amended or waived unless such amendment or waiver is agreed to
in writing, signed by the Executive and by a duly authorized officer of the
Company. No waiver by any party hereto of any breach by another party hereto of
any condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of a similar or dissimilar condition or provision at
the same time, any prior time or any subsequent time.
13. Notices. Any notice to be given hereunder shall be in
writing and shall be deemed given when delivered personally, sent by courier or
telecopy or registered or certified mail, postage prepaid, return receipt
requested, addressed to the party concerned at the address indicated below or to
such other address as such party may subsequently give notice of hereunder in
writing:
To the Executive at:
Fred P. Rullo
907 Sorrel Lane
Bryn Mawr, PA 19010
To the Company at:
Freedom Chemical Company
Mellon Center
1735 Market Street
Philadelphia, Pennsylvania 19103
Attention: General Counsel
Telecopy: (215) 979-3733
5
<PAGE>
With a copy to:
Joseph Littlejohn & Levy
450 Lexington Avenue
New York, New York 10017
Attention: Peter A. Joseph
Telecopy: (212) 286-8626
Any notice delivered personally or by courier under this
Section 13 shall be deemed given on the date delivered and any notice sent by
telecopy or registered or certified mail, postage prepaid, return receipt
requested, shall be deemed given on the date telecopied or mailed.
14. Severability. If any provision of this Agreement or the
application of any such provision to any party or circumstances shall be
determined by any court of competent jurisdiction to be invalid and
unenforceable to any extent, the remainder of this Agreement or the application
of such provision to such person or circumstances other than those to which it
is so determined to be invalid and unenforceable, shall not be affected thereby,
and each provision hereof shall be validated and shall be enforced to the
fullest extent permitted by law.
15. Survivorship. The respective rights and obligations
of the parties hereunder shall survive any termination of this Agreement to the
extent necessary to the intended preservation of such rights and obligations.
16. Governing Law. This Agreement will be governed by
and construed in accordance with the laws of the State of New York, without
regard to its conflicts of laws principles.
17. Headings. All descriptive headings of sections and
paragraphs in this Agreement are intended solely for convenience, and no
provision of this Agreement is to be construed by reference to the heading
of any section or paragraph.
18. Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
FREEDOM CHEMICAL COMPANY
By: /s/ Brian McNamara
----------------------------
Name: Brian McNamara
Title: Vice President
/s/ Fred P. Rullo
----------------------------
Fred P. Rullo
7
<PAGE>
Exhibit A
FORM OF PROMISSORY NOTE
$________* New York, New York
[DATE]**
FOR VALUE RECEIVED, the undersigned, Fred P. Rullo ("Maker"),
hereby promises to pay to the order of Freedom Chemical Company, a Delaware
corporation ("Freedom"), the principal sum of [AMOUNT] ($ )*, in five equal
annual installments of [AMOUNT] ($ )*** each (each, a "Principal
Installment"), commencing on [DATE], with the final Principal Installment due
and payable on [DATE]****, and to pay interest in respect of the unpaid
principal amount of this Note at a rate of 10 5/8% per annum, computed on the
basis of a 360-day year consisting of twelve 30-day months, quarterly on the
last day of each March, June, September and December, commencing on [DATE]*****
until this Note shall be paid in full. Interest on this Note shall accrue from
and including the date hereof, to but excluding the date of any repayment
thereof. Each such installment of principal and interest shall be paid in lawful
money of the United States of America in immediately available funds without
deduction for or on account of any present or future taxes, duties or other
charges levied or imposed on this Note or the proceeds or holder hereof by the
government of the United States of America or any political subdivision or
taxing authority thereof.
- --------
* aggregate Option Price
** date of issuance of Promissory Note
*** one-fifth of aggregate Option Price
**** fifth anniversary of date of issuance of Promissory Note
***** last day of March, June, September or December next succeeding date
of issuance of Promissory Note
8
<PAGE>
1. Events of Default. The occurrence of any of the following
events shall constitute a default under this Note (each an "Event of Default"):
(a) the failure by Maker to pay all or any part of the
interest on the Note when and as the same becomes due and payable and the
continuance of such failure for ten days;
(b) the failure by Maker to pay all or any part of the
principal amount of the Note when and as the same becomes due and payable;
(c) the entry by a court having jurisdiction in the premises
of (i) a decree or order for relief in respect of Maker in an involuntary case
or proceeding under any applicable federal or state bankruptcy, insolvency,
reorganization or other similar law, and the continuance of any such decree or
order for relief or any such other decree or order unstayed and in effect for a
period of 60 consecutive days; or (ii) a decree or order adjudging Maker
bankrupt or insolvent, or approving as properly filed a petition seeking
reorganization, arrangement, adjustment or composition of or in respect of Maker
under any applicable federal or state law, or appointing a custodian, receiver,
liquidator, assignee, trustee, sequestrator or other similar official of Maker
or of any substantial part of their respective property, or ordering the winding
up or liquidation of affairs, and the continuance of any such decree or order
for relief or any such other decree or order unstayed and in effect for a period
of 60 consecutive days; or
(d) the commencement by Maker of a voluntary case or
proceeding under any applicable federal or state bankruptcy, insolvency,
reorganization or other similar law or of any other case or proceeding to be
adjudicated bankrupt or insolvent, or the consent to the entry of a decree or
order for relief in respect of Maker in an involuntary case or proceeding under
any applicable federal or state bankruptcy, insolvency, reorganization or other
similar law or to the commencement of any bankruptcy or insolvency case or
proceeding against Maker, or the filing of a petition or answer or consent
seeking reorganization or relief under any applicable federal or state law, or
the consent to the filing of such petition
9
<PAGE>
or to the appointment of or taking possession by a custodian, receiver,
liquidator, assignee, trustee, sequestrator or other similar official of Maker
or of any substantial part of its property, or the making of an assignment for
the benefit of creditors, or the admission in writing of inability to pay debts
generally as they become due, or the taking of corporate action by Maker in
furtherance of any such action.
2. Acceleration Upon Event of Default. Upon the occurrence of
any Event of Default, the holder may, at its option, declare the remaining
principal amount of this Note to be immediately due and payable upon written
notice to Maker.
3. Prepayment Right. Maker shall have the right to prepay this Note, in
whole or in part, at any time or from time to time without penalty or premium,
any such prepayment to be applied to the remaining Principal Installments in the
order of their maturities or as otherwise directed by Maker.
4. Set-off. The holder of this Note may, at any time, to the full
extent permitted by law, after any installment of principal or interest on this
Note shall become due, whether at maturity, by acceleration or otherwise,
set-off any amounts payable by Freedom or any of its subsidiaries to Maker,
including but not limited to amounts payable under any employment, severance or
similar agreement between Maker and Freedom or any of its subsidiaries, against
such due and unpaid installment of principal and/or interest.
5. Waiver. No failure by the holder to exercise, or delay by the holder
in exercising, any right or remedy hereunder shall operate as a waiver thereof
or of any other right or remedy and no single or partial exercise of any right
or remedy shall preclude any other or further exercise thereof or of any other
right or remedy. Acceptance by the holder of any payment after the maturity of
this Note has been accelerated shall not constitute a waiver of such
acceleration.
6. Assignment. Upon written notice to Maker, the holder may
freely assign to one or more assignees all or a portion of its interests, rights
and obligations under
10
<PAGE>
this Note, subject to the right of set-off under Section 4 above.
7. Meaning of Holder. As used herein, "holder" shall mean
Freedom or any endorsee of this Note, in accordance with the provisions of
Section 6, who is in possession of it and "Freedom" shall include any successors
thereto.
8. Security. To secure the prompt and complete payment and performance
when due (whether at stated maturity, by acceleration or otherwise) of Maker's
obligations under this Note, Maker hereby pledges, assigns, grants a security
interest in, transfers and delivers unto the holder all of Maker's right, title
and interest in and to the shares (the "Pledged Shares") of Series A Common
Stock, par value $.01 per share, of Freedom described in Schedule I hereto******
and the certificates representing such Pledged Shares, and all dividends, cash
and other property from time to time received or receivable in respect of or in
exchange for any or all of the Pledged Shares; and, with respect to all of such
Pledged Shares, the holder shall have all the rights and remedies of a secured
party under the Uniform Commercial Code and under any other applicable law, as
the same may be from time to time by in effect in the State of New York. So long
as no Event of Default has occurred and is continuing under this Note, Maker
shall be entitled to receive any dividends or distributions (other than
liquidating distributions) on the Pledged Shares and exercise all voting rights
with respect thereto.
9. Governing Law. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK.
- --------------------
****** Schedule I to describe shares to be issued pursuant to exercise of the
Option (see p. 14).
11
<PAGE>
IN WITNESS WHEREOF, Maker has caused this Note to be duly
executed by the undersigned.
Fred P. Rullo,
as Maker
By:________________________________
Name:
Notice Address: ________________________
------------------------
Fax: ________________________
Tel: ________________________
12
<PAGE>
Schedule I*
PLEDGED SHARES
Certificate No. Number of Shares Represented
C-A-___*
- --------
* Schedule I to describe shares to be issued pursuant to exercise of the Option.
13
<PAGE>
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
AMENDMENT NO. 1 TO THE EMPLOYMENT AGREEMENT, dated as of
February 10, 1997 (this "Amendment No. 1"), by and between Freedom Chemical
Company, a Delaware corporation (the "Company") and Fred P. Rullo (the
"Executive").
WHEREAS, the Company and the Executive have entered into an
Employment Agreement dated as of November 15, 1994, by and between the Company
and the Executive (the "1994 Employment Agreement"); and
WHEREAS, the Company and the Executive desire to amend and
modify the 1994 Agreement as set forth herein.
NOW, THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Executive hereby agree that the 1994 Employment Agreement shall be, and hereby
is, amended and modified as follows:
1. Section 2 of the 1994 Employment Agreement is hereby
amended and replaced in its entirety to read as follows:
"2. Term.
(a) Subject to Section 14 hereof, the term of this
Agreement (the "Term") is hereby extended to December 31, 1997.
(b) Commencing on December 31, 1997 and each
anniversary of such date thereafter, the Term shall automatically be extended
for one additional year unless, not later than sixty (60) days prior to such
date or any such anniversary, as the case may be, either party hereto shall have
notified the other party hereto in writing that such extension shall not take
effect."
2. Except as amended and modified by this Amendment
No. 1, all other terms of the 1994 Employment Agreement shall remain unchanged.
3. This Amendment No. 1 may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, this Amendment No. 1 has been duly
executed and delivered by a duly authorized officer of the Company and by the
Executive as of the date first above written.
FREEDOM CHEMICAL COMPANY
By: /s/ Brian McNamara
-----------------------------
Name: Brian McNamara
-----------------------------
Title: Vice President & General Counsel
---------------------------------
/s/ Fred P. Rullo
-------------------------------------
Fred P. Rullo
2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated balance sheet and income statement of Freedom Chemical Company and
Subsidiaries for the year ended, and as of, December 31, 1996, and is qualified
in its entirety by reference to such financial statement[s].<F1>
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,554
<SECURITIES> 0
<RECEIVABLES> 44,877
<ALLOWANCES> 628
<INVENTORY> 53,019
<CURRENT-ASSETS> 115,635
<PP&E> 130,965
<DEPRECIATION> 28,754
<TOTAL-ASSETS> 262,914
<CURRENT-LIABILITIES> 46,633
<BONDS> 125,000
45,532
0
<COMMON> 2
<OTHER-SE> (19,995)
<TOTAL-LIABILITY-AND-EQUITY> 262,914
<SALES> 300,168
<TOTAL-REVENUES> 300,168
<CGS> 238,247
<TOTAL-COSTS> 238,247
<OTHER-EXPENSES> (711)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,213
<INCOME-PRETAX> (8,170)
<INCOME-TAX> (2,305)
<INCOME-CONTINUING> (5,230)
<DISCONTINUED> 0
<EXTRAORDINARY> (2,001)
<CHANGES> 0
<NET-INCOME> (11,802)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
