SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 33-84778
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FREEDOM CHEMICAL COMPANY
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 51-0340498
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
Five Radnor Corporate Center, 100 Matsonford Road, Suite 170,
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Radnor, Pennsylvania 19087
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (610)964-9970
Mellon Center, Suite 3500, 1735 Market Street, Philadelphia, PA 19103
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(Former Address of Principal Executive Offices, if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of May 14, 1997, 156,056 shares of the registrant's Series A Common Stock and
no shares of the registrant's Series B Common Stock were outstanding.
<PAGE>
FREEDOM CHEMICAL COMPANY and SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
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Page
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PART I
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Item 1. Consolidated Balance Sheets at December 31, 1996 and March 31, 1997......................... 3
Consolidated Statements of Operations for the Three Months Ended March 31, 1996 & 1997...... 4
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1996 & 1997...... 5
Notes to Consolidated Financial Statements.................................................. 6-17
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 18-22
PART II
Item 2. Change in Securities........................................................................ 23
Item 5. Other Information........................................................................... 23
Item 6. Exhibits and Reports on Form 8-K............................................................ 23
</TABLE>
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................................. $ 3,554 $ 1,155
Accounts receivable, net of allowance for doubtful accounts
of $456 and $438, respectively...................................................... 44,249 47,227
Due from shareholders................................................................. 22 23
Refundable income taxes............................................................... 1,811 874
Inventories........................................................................... 53,019 55,186
Prepaid expenses and other current assets............................................. 5,251 5,958
Environmental indemnification......................................................... 492 192
Deferred income taxes................................................................. 7,237 7,460
--------- ---------
Total current assets.............................................................. 115,635 118,075
Property, Plant and Equipment:
Land.................................................................................. 3,872 3,819
Buildings and improvements............................................................ 14,600 14,534
Machinery and equipment............................................................... 101,356 101,342
Other................................................................................. 11,137 12,596
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130,965 132,291
Less accumulated depreciation........................................................... 28,754 31,432
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102,211 100,859
Other assets:
Intangible assets, net................................................................ 34,040 33,478
Environmental indemnification......................................................... 8 46
Deferred financing costs, net......................................................... 6,902 7,036
Investments in joint ventures......................................................... 541 1,074
Other................................................................................. 3,577 3,618
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Total assets...................................................................... $ 262,914 $ 264,186
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term debt.................................................. $ 1,067 $ 1,041
Short-term borrowings................................................................. 936 459
Notes payable......................................................................... 1,098 848
Accounts payable...................................................................... 20,996 22,362
Accrued expenses...................................................................... 7,889 7,160
Accrued interest...................................................................... 3,033 6,492
Accrued compensation.................................................................. 5,787 4,426
Accrued restructuring and other charges............................................... 4,627 3,701
Environmental......................................................................... 1,200 1,200
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Total current liabilities......................................................... 46,633 47,689
Long-term debt.......................................................................... 153,560 156,822
Environmental........................................................................... 14,550 13,705
Deferred income taxes................................................................... 12,259 12,472
Postretirement benefits................................................................. 4,416 4,494
Accrued restructuring and other charges................................................. 1,437 1,437
Other................................................................................... 3,346 2,150
Minority interest....................................................................... 3,390 3,462
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 $11,389
and $12,360, respectively............................................................. 32,711 33,682
Series C, cumulative, $1,000 par value, authorized 15,000 shares;
issued 9,137 shares, outstanding 8,916 shares, stated at liquidation value
of $1,054 per share plus accrued and unpaid dividends of $3,453 and
$3,832, respectively.................................................................. 13,083 13,462
Less: Treasury stock, at cost
(221 shares of Series C preferred)..................................................... (262) (262)
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45,532 46,882
Stockholders' deficit:
Common stock:
Series A, $.01 par value, authorized 200,000 shares; issued 156,001
shares respectively, outstanding 154,481 and 155,610 shares, respectively............. 2 2
Series B, $.01 par value, authorized 10,000 shares; none issued or outstanding........ -- --
Additional paid-in capital............................................................ 10,846 9,924
Accumulated deficit................................................................... (30,444) (30,903)
Cumulative translation adjustment..................................................... (397) (1,734)
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(19,993) (22,711)
Less: Stockholder notes receivable...................................................... (2,113) (2,113)
Treasury stock, at cost (391 shares of Series A common)............................... (46) (46)
Minimum pension liability............................................................. (57) (57)
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Total stockholders' deficit............................................................. (22,209) (24,927)
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Total liabilities and stockholders' deficit...................................... $ 262,914 $ 264,186
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
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1996 1997
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<S> <C> <C>
Net sales......................................... $ 77,129 $ 70,675
Cost of goods sold................................ 56,584 55,371
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Gross profit................................ 20,545 15,304
Selling, general and administrative expense....... 12,719 10,957
Noncash compensation expense ..................... 37 6
Research and development expense.................. 1,235 1,036
Restructuring and other charges .................. - 88
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Operating income .......................... 6,554 3,217
Interest and debt expense......................... 3,427 4,432
Other income...................................... - 326
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Income (loss) before minority interest
and income taxes ....................... 3,127 (889)
Minority interest................................. 59 65
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Income (loss) before income taxes ....... 3,068 (954)
Provision for income taxes........................ 1,095 52
Equity in income of joint ventures................ 118 547
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Net income (loss)....................... 2,091 (459)
Less: preferred dividends 1,215 1,350
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Net income (loss) applicable to common shares $ 876 $ (1,809)
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
4
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1996 1997
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss)................................. $ 2,091 $ (459)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization..................... 3,341 3,668
Provision for doubtful accounts................... 75 14
(Gain)/loss on sale of fixed assets............... (52) 99
Minority interest................................. 59 65
Non-cash compensation expense..................... 37 6
Equity increase of joint ventures................. (118) (546)
Deferred income taxes............................. 327 (16)
Other changes that provided (used) cash:
Accounts receivable........................... (10,916) (4,018)
Inventories................................... (6,391) (4,042)
Prepaid expenses and other current assets 84 (638)
Accounts payable, accrued expenses and
other liabilities........................... 11,318 3,447
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Net cash used in operating activities (145) (2,420)
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Cash flows from financing activities:
Capital expenditures........................... (1,119) (3,748)
(Increase) decrease in investments
in joint ventures.............................. (7) --
Proceeds from sale of capital equipment........ 1,624 --
Payments for environmental liabilities......... (837) (845)
Proceeds from environmental indemnification.... 366 262
Other.......................................... 12 (29)
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Net cash provided by (used in) investing activities 39 (4,360)
Cash flows from financing activities:
Issuance of common stock.......................... -- 119
Revolving borrowings under Credit Agreement....... 14,750 37,531
Revolving repayments under Credit Agreement....... (13,764) (33,186)
Term loan repayments under Credit Agreement....... (2,422) --
Short-term borrowings under European Facility..... 10,040 111
Repayments of short-term borrowing under
European Facility................................ (8,725) (165)
Payment of registration costs..................... -- (366)
Repayment of capital lease obligations............ (66) (6)
Payments for financing costs...................... (17) (52)
Other............................................. (14) 8
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Net cash provided by (used in) financing activities... (218) 3,994
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Effect of exchange rate changes on cash............... (340) 387
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Net decrease in cash and
cash equivalents.................................. (664) (2,399)
Cash and cash equivalents, beginning of period........ 1,450 3,554
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Cash and cash equivalents, end of period.............. $ 786 $ 1,155
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
5
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)
1. Description of Business
Freedom Chemical Company, the Registrant ("FCC"; collectively with its
subsidiaries referred to as the "Company") was incorporated in Delaware on April
14, 1992 for the purpose of acquiring specialty chemical companies which
manufacture and market specialty chemical products for diverse applications. The
Company focuses globally on niche markets where it has strong market positions,
which have relatively few competitors and where there are significant barriers
to entry. In addition, the Company's products are often very important to the
performance of its customers products, but typically represent a relatively
small percentage of their total costs. The Company has five core product lines:
(i) Food and Personal Care Ingredients; (ii) Pharmaceutical Intermediates and
Natural Additives; (iii) Specialty Organic Chemicals and Intermediates; (iv)
Organic Pigments and Dyes; and (v) Textile and Paper Chemicals.
2. Accounting Policies
The accompanying consolidated financial statements are unaudited and have
been prepared by management pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, these
consolidated financial statements contain all of the adjustments, consisting of
normal recurring adjustments, necessary to present fairly, in summarized form,
the financial position of the Company as of March 31, 1997 and the results of
its operations and changes in its cash flows for the three months ended March
31, 1996 and 1997, respectively. The results of operations for the three month
period ended March 31, 1997 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1997. The financial information
presented herein should be read in conjunction with the consolidated financial
statements included in the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996.
The consolidated financial statements include the accounts of FCC and its
subsidiaries which include: Freedom Textile Chemicals Co. and subsidiaries
("FTCC"), Hilton Davis Chemical Company ("HDCC"), Kalama Chemical, Inc. and
subsidiaries ("KCI"), Freedom Chemical Diamalt GmbH ("Diamalt") and subsidiaries
(collectively "FCD"), Freedom Europe B.V. ("BV") and Diamalt Inc. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
3. Inventories
A summary of the major classifications of inventories is as follows:
March 31,
1997
----
Raw materials, work in process $25,252
Finished goods 31,744
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56,996
Less: reserves (1,810)
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$55,186
=======
6
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)
4. New Pronouncement
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 129, "Disclosure of
Information about Capital Structure" which becomes effective for financial
statements for periods ending after December 15, 1997. SFAS No. 129 established
certain required disclosures related to information about securities,
liquidation preference of preferred stock and redeemable stock. The Company
currently discloses the capital structure information required by SFAS 129.
5. Restructuring and Other Charges
In the first quarter of 1997, the Company recorded charges totaling $88,
which reduced operating income from $3.3 million to $3.2 million as a result of
a marketing revitalization program the Company initiated primarily for its
Organic Pigments and Dyes product group. The Company expects to record
approximately $0.6 million in 1997 for this program. These charges will be
recorded as incurred throughout the remainder of the year.
6. Subsequent Event
In April 1997, the Company committed and reached an agreement to close its
Vernon, France facility in June 1997. Manufacturing production and certain
manufacturing equipment will be transferred to other locations as part of the
closure plan. During the second quarter, the Company will record restructuring
and other charges of approximately $1.6 million for severance to employees, $0.3
million for the writedown of fixed assets, and $0.5 million for other charges,
primarily for preparing the site for sale.
7. Environmental Contingencies
Contingencies exist for the Company and certain of its subsidiaries because
of legal and administrative proceedings arising out of the acquisition of
businesses and the normal course of business. Such contingencies include
environmental proceedings directly and indirectly against the Company or its
subsidiaries as well as matters internally identified by the Company. The
resolution of such matters often spans several years and frequently includes
regulatory oversight and/or adjudication. Additionally, many remediation
requirements are not fixed and are likely to be affected by future
technological, site and regulatory developments. Consequently, the ultimate
extent of liabilities with respect to such matters as well as the timing of cash
disbursements cannot be determined with certainty.
In connection with the purchase of a number of the Company's facilities,
contractual rights were obtained to indemnify the Company for certain types of
environmental pollution relating to those facilities. As more fully described
below, the Company consequently believes that a portion of the costs incurred in
connection with environmental liabilities existing prior to the Company's
ownership and remediation actions that may be required relating to the Company's
past and present properties will be the responsibility of other parties.
Accordingly, the Company believes that future liabilities over the amounts
accrued, relating to environmental conditions existing prior to the Company's
ownership and remediation actions, are not likely to have a material adverse
effect on the financial position of the Company, although the effect on results
of operations and cash flows could be material when these conditions are
resolved in a future period.
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.
7
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)
FTCC
In order to consolidate its textile operations, in 1995, the Company
transferred the textile assets of HDCC located in Cowpens, South Carolina,
acquired as a part of the HDCC acquisition, to FTCC. In 1994, the Company
reached a tentative agreement with the South Carolina Department of Health and
Environmental Control on an administrative consent agreement requiring the
former owner of the Cowpens facility prior to HDCC to take corrective measures
and conduct additional investigation, and the Company and the State of South
Carolina agreed on a work plan for assessment and remediation. As part of the
FTCC Asset Purchase Agreement, the former owner of the property prior to HDCC
agreed that the costs to be expended for the investigation and remediation of
the existing environmental conditions would be deducted from the final purchase
price payment due to them of $350.
At the time of the acquisition, the Company recorded a liability for $350
relating to the payment due to the former owners. In 1994, initial
investigations disclosed offsite groundwater contamination. The Company hired an
environmental consultant to manage this project and is developing an
investigative plan. While the Company believes that any remediation costs
incurred may be recovered from the prior owners, a $1.9 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, 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 the Company against breaches of
representations and warranties contained in the Stock Purchase Agreement between
PMC and the Company, including schedules thereto, to the extent such liabilities
(including certain claims not related to the environment) exceeded $200 in the
aggregate and subject to a total cap of $1 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.
KCI
KCI owns three manufacturing facilities: Kalama, Washington, Garfield, New
Jersey, and Beaufort, South Carolina. Operations at these three sites, including
operations by subsidiaries formerly owned by KCI, have generated environmental
liabilities. The Stock Purchase Agreement between the Company and BC Sugar
whereby the Company acquired KCI (the "KCI Stock Purchase Agreement"), requires
BC Sugar to indemnify and reimburse the Company for certain environmental
liabilities, as discussed in more detail below.
The Company's Kalama, Washington facility is subject to an agreed order
between KCI and the Environvental Protection Agency ("EPA") requiring KCI to
remediate portions of the site and to limit potential offsite contamination,
pursuant to the Resource Conservation and Recovery Act ("RCRA"). The EPA has
approved 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 March 31, 1997, KCI has
accrued approximately $6,300 for this liability and believes the risk of
8
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)
loss exposure is up to $18,600. The associated indemnification as of March 31,
1997 is $200 to $7,000 based on the risk of loss exposure.
The Company's Garfield facility is subject to an administrative consent
order with the State of New Jersey requiring remediation of portions of the site
and potentially requiring remediation of areas offsite, pursuant to the New
Jersey Industrial Site Recovery Act ("ISRA"). The Garfield facility cleanup is
also subject to a Settlement Agreement (the "Tenneco Settlement Agreement"),
dated April 28, 1994, to terminate litigation between KCI and Tenneco Polymers,
Inc. ("Tenneco Polymers"), the successor in interest of the prior owner of the
site. The Tenneco Settlement Agreement requires Tenneco Polymers to conduct the
cleanup of the facility required by the State of New Jersey and to pay for 80
percent of the cleanup costs, with KCI responsible for the remaining 20 percent
of such costs. BC Sugar will remain responsible for certain of KCI's portion of
the cleanup costs pursuant to the KCI Stock Purchase Agreement as described
below. Tenneco Polymers is currently conducting additional site investigation
and discussing with the State of New Jersey the nature and scope of the required
remediation of the Garfield site. KCI has terminated manufacturing operations at
this facility.
As of March 31, 1997, 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 March 31, 1997 is $200 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 of consent between
KSCI and the EPA. The EPA and KSCI have reached agreement on a consent decree
under which KSCI is to perform the remediation strategy selected by the EPA.
Pilot equipment was installed and test work commenced in 1995. BC Sugar will
remain responsible for certain of KCI's portion of the cleanup costs pursuant to
the KCI Stock Purchase Agreement as described below. Manufacturing operations at
this facility have also ceased. As of March 31, 1997, KCI has accrued
approximately $3,900 for this liability and believes the risk of loss exposure
is up to $5,900. The associated indemnification as of March 31, 1997 is $400 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.
9
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)
The KCI Stock Purchase Agreement provides certain indemnifications and
related provisions which address these liabilities. Pursuant to the agreement,
BC Sugar remains responsible for the costs of investigation, negotiations with
government agencies, and installation of the capital expenditure component of
the cleanup required by the government at each of the three facilities currently
owned by KCI and its subsidiaries (i.e. Kalama, Garfield and Beaufort). BC Sugar
is also responsible for a total of 50 percent of the costs of operation and
maintenance arising from the capital expenditure component of cleanup at these
three sites until five years after the installation of the capital expenditure
component of each site.
In addition, BC Sugar is responsible for all costs incurred as a result of
KCI's liability at the offsite Superfund sites including the five at which KCI
is a cooperating PRP, sites at which an indemnitor other than BC Sugar has
agreed to accept responsibility and other identified sites at which KCI has
received claims but is currently denying liability, provided that the sites were
identified in the schedules to the Kalama Stock Purchase Agreement. BC Sugar's
liability for these sites continues until three years after the installation of
capital expenditures at all of the three currently owned facilities, but in any
event no later than May 26, 2004.
In the KCI Stock Purchase Agreement, BC Sugar also agreed to remain
responsible for certain liabilities arising from violations of environmental
laws occurring before May 26, 1994, at sites currently or formerly owned by KCI
to the extent such liabilities in the aggregate exceed $2,000 and claims are
made by the Company for such reimbursement before May 26, 1996. However, the KCI
Stock Purchase Agreement also includes certain warranties and representations by
BC Sugar that KCI was in compliance with environmental laws as of the closing
date (May 26, 1994), except as set forth in a schedule accompanying and
incorporated into the KCI Stock Purchase Agreement. BC Sugar further agreed to
indemnify the Company and KCI against liabilities arising out of the breach of
these representations and warranties to the extent each such liability exceeded
$50 individually and all such liabilities exceeded $600 in the aggregate, and
provided any such claim 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 1996,
the Company signed a consent agreement 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.
10
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)
8. Condensed Consolidating Financial Statements
The following condensed consolidating financial data illustrates the
composition of the consolidated financial statements. The Parent is FCC. The
U.S. Guarantor Subsidiaries include all domestic subsidiaries of FCC including
the following: FTCC and certain of its subsidiaries (Freedom Textile Chemical
Company (South Carolina), Inc. and FCC Acquisition Corp.), HDCC, KCI and its
subsidiaries (Kalama Specialty Chemicals, Inc. and Kalama Foreign Sales
Corporation) and Diamalt Inc. The German Guarantor Subsidiary is Diamalt,
excluding its subsidiaries. The Non-Guarantor Subsidiaries include the
following: A-Chem (U.K.) Limited (a subsidiary of FTCC), BV, Societe Francaise
Des Colloides, S.A. (a subsidiary of BV), Diamalt Pharmorganica Pvt. Limited (a
subsidiary of Diamalt), Diamalt Srl (a subsidiary of Diamalt), Indiamalt Private
Limited (a subsidiary of Diamalt). The U.S. and German Guarantor Subsidiaries
are wholly owned by the Parent.
Investments in subsidiaries are accounted for by the Parent, the U.S.
Guarantor Subsidiaries and the German Guarantor Subsidiary on an unconsolidated
basis using the equity method for purposes of the consolidating presentation.
Earnings of subsidiaries are therefore reflected in the Parent's, U.S. Guarantor
Subsidiaries' and German Guarantor Subsidiary's investment accounts and
earnings. Income tax expense (benefit) is allocated among the consolidating
entities based upon taxable income (loss) by jurisdiction within each group.
The principal elimination entries eliminate investments in subsidiaries and
intercompany balances and transactions. Separate financial statements of the
U.S. Guarantor Subsidiaries, the German Guarantor Subsidiary, and the
Non-Guarantor Subsidiaries are not presented because management has determined
that such financial statements would not be material to investors.
11
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Condensed Consolidating Balance Sheet
As of December 31, 1996
------------------------------------------------------------------------------
U.S. German Non
Guarantor Guarantor Guarantor
Parent Subsidiaries Subsidiary Subsidiaries Eliminations Consolidated
------ ------------ ---------- ------------ ------------ ------------
<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.................. 428 6,686 730 298 (253) 7,889
Accrued interest.................. 2,897 -- 104 32 -- 3,033
Accrued compensation.............. 345 4,184 750 508 -- 5,787
Accrued restructuring and other
charges....................... 953 3,016 557 101 -- 4,627
Environmental..................... -- 1,200 -- -- -- 1,200
-------- -------- ------- ------- -------- --------
Total current liabilities............. 4,811 32,018 13,832 4,170 (8,198) 46,633
Long-term debt........................ 134,500 -- 18,591 469 -- 153,560
Environmental......................... -- 14,550 -- -- -- 14,550
Deferred income taxes................. -- 15,416 -- 47 (3,204) 12,259
Postretirement benefits............... -- 4,416 -- -- -- 4,416
Accrued restructuring and other
charges........................... -- 1,437 -- -- -- 1,437
Notes payable......................... -- 119,676 13,425 1,959 (135,060) --
Other................................. 2,456 173 456 261 -- 3,346
Minority interest..................... -- -- -- 290 3,100 3,390
Commitments and contingencies......... -- -- -- -- -- --
Mandatory redeemable preferred
stock:............................ 45,794 3,079 -- -- (3,079) 45,794
Less: Treasury stock.................. (262) -- -- -- -- (262)
-------- -------- ------- ------- -------- --------
45,532 3,079 -- -- (3,079) 45,532
Stockholders' equity (deficit):
Common stock: .................... 2 1,200 1,291 2,333 (4,824) 2
Preferred stock....................... -- 3,839 -- -- (3,839) --
Additional paid-in capital............ 10,846 33,928 8,241 2,761 (44,930) 10,846
Retained earnings (accumulated
deficit).......................... (29,980) (18,148) (6,097) 1,648 22,133 (30,444)
Cumulative translation
adjustment........................ -- -- (492) (117) 212 (397)
Less: Stockholder note
receivable........................ (1,913) (200) -- -- -- (2,113)
Treasury stock, at cost........... (46) -- -- -- -- (46)
Minimum pension liability......... (57) -- -- -- -- (57)
-------- -------- ------- ------- -------- --------
Total stockholders' equity
(deficit)......................... (21,148) 20,619 2,943 6,625 (31,248) (22,209)
-------- -------- ------- ------- -------- --------
Total liabilities and
stockholders' equity
(deficit).................... $166,151 $211,384 $49,247 $13,821 $(177,689) $262,914
======== ======== ======= ======= ========= ========
</TABLE>
12
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Condensed Consolidating Balance Sheet
As of December 31, 1997
------------------------------------------------------------------------------
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......... $136 $10 $155 $990 $(136) $1,155
Accounts receivable, net.......... -- 34,202 9,898 3,127 -- 47,227
Due from affiliates............... 6,345 -- 285 1,967 (8,597) --
Due from shareholder.............. 23 -- -- -- -- 23
Refundable income taxes........... 1,107 -- -- -- (233) 874
Inventories....................... -- 34,576 18,602 2,069 (61) 55,186
Prepaid expenses and other
current assets................ 27 1,482 3,733 550 166 5,958
Environmental indemnification..... -- 192 -- -- -- 192
Deferred income taxes............. 609 6,712 -- 139 -- 7,460
-------- -------- ------- ------- -------- --------
Total current assets.......... 8,247 77,174 32,673 8,842 (8,861) 118,075
Property, Plant and Equipment:
Land.............................. -- 2,610 405 804 -- 3,819
Buildings and improvements........ -- 13,009 649 876 -- 14,534
Machinery and equipment........... -- 88,455 8,233 4,654 -- 101,342
Other............................. 407 10,312 838 1,039 -- 12,596
-------- -------- ------- ------- -------- --------
407 114,386 10,125 7,353 -- 132,291
Less accumulated depreciation......... 158 28,158 1,600 1,516 -- 31,432
-------- -------- ------- ------- -------- --------
249 86,228 8,525 5,857 -- 100,859
Other assets:
Intangible assets, net............ 311 32,614 211 103 239 33,478
Environmental indemnification..... -- 46 -- -- -- 46
Deferred financing costs, net..... 380 5,771 878 7 -- 7,036
Investments in joint ventures..... -- -- 1,074 -- -- 1,074
Deferred income taxes............. 3,204 -- -- -- (3,204) --
Other............................. 157 3,215 203 43 -- 3,618
Notes receivable, subsidiaries........ 133,858 6,578 996 -- (141,432) --
Investment in subsidiaries............ 23,392 2,375 3,696 -- (29,463) --
-------- -------- ------- ------- -------- --------
Total assets.................. $169,798 $214,001 $48,256 $14,852 $(182,721) $264,186
======== ======== ======= ======= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term
debt.......................... $-- $14 $-- $1,027 $-- $1,041
Short-term borrowings............. -- -- -- 459 -- 459
Notes payable..................... -- 469 -- 379 -- 848
Accounts payable.................. 394 17,957 2,611 1,536 (136) 22,362
Due to affiliates................. -- 347 7,885 365 (8,597) --
Accrued expenses.................. 809 5,433 695 289 (235) 7,160
Accrued interest.................. 6,331 -- 147 14 -- 6,492
Accrued compensation.............. 112 2,945 880 489 -- 4,426
Accrued restructuring and other
charges....................... 745 2,425 462 69 -- 3,701
Environmental..................... -- 1,200 -- -- -- 1,200
-------- -------- ------- ------- -------- --------
Total current liabilities............. 8,391 30,790 12,680 4,627 (8,799) 47,689
Long-term debt........................ 136,000 -- 20,388 434 -- 156,822
Environmental......................... -- 13,705 -- -- -- 13,705
Deferred income taxes................. -- 15,636 -- 40 (3,204) 12,472
Postretirement benefits............... -- 4,494 -- -- -- 4,494
Accrued restructuring and other
charges........................... -- 1,437 -- -- -- 1,437
Notes payable......................... -- 125,465 13,425 2,542 (141,432) --
Other................................. 1,316 125 474 235 -- 2,150
Minority interest..................... -- -- -- 295 3,167 3,462
Commitments and contingencies......... -- -- -- -- -- --
Mandatory redeemable preferred
stock:............................ 47,144 3,145 -- -- (3,145) 47,144
Less: Treasury stock.................. (262) -- -- -- -- (262)
-------- -------- ------- ------- -------- --------
46,882 3,145 -- -- (3,145) 46,882
Stockholders' equity (deficit):
Common stock: .................... 2 1,200 1,291 2,333 (4,824) 2
Preferred stock....................... -- 3,938 -- -- (3,938) --
Additional paid-in capital............ 9,924 33,928 8,241 2,761 (44,930) 9,924
Retained earnings (accumulated
deficit).......................... (30,701) (19,662) (6,763) 1,983 24,240 (30,903)
Cumulative translation
adjustment........................ -- -- (1,480) (398) 144 (1,734)
Less: Stockholder note
receivable........................ (1,913) (200) -- -- -- (2,113)
Treasury stock, at cost........... (46) -- -- -- -- (46)
Minimum pension liability......... (57) -- -- -- -- (57)
-------- -------- ------- ------- -------- --------
Total stockholders' equity (deficit).. (22,791) 19,204 1,289 6,679 (29,308) (24,927)
-------- -------- ------- ------- -------- --------
Total liabilities and
stockholders' equity
(deficit).................. $169,798 $214,001 $48,256 $14,852 $(182,721) $264,186
======== ======== ======= ======= ========= ========
</TABLE>
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Operations
For the Three Months Ended March 31, 1996
------------------------------------------------------------------------------
U.S. German Non
Guarantor Guarantor Guarantor
Parent Subsidiaries Subsidiary Subsidiaries Eliminations Consolidated
------ ------------ ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales.................................... $ -- $56,269 $18,415 $3,632 $(1,187) $77,129
Cost of goods sold........................... -- 41,415 13,665 2,635 (1,131) 56,584
------ ------- ------- ------ ------- -------
Gross profit............................. -- 14,854 4,750 997 (56) 20,545
Selling, general and administrative expense.. 927 8,080 3,189 706 (183) 12,719
Noncash compensation expense................. 37 -- -- -- -- 37
Research and development expense............. -- 872 313 50 -- 1,235
------ ------- ------- ------ ------- -------
Operating income (loss).................. (964) 5,902 1,248 241 127 6,554
Interest and debt expense (income)........... 166 2,625 569 67 -- 3,427
Other income (expense)....................... 1,171 (991) 102 (36) (246) --
Equity in income (loss) of subsidiary........ 2,187 591 189 -- (2,967) --
------ ------- ------- ------ ------- -------
Income (loss) before minority interest
and income taxes................. 2,228 2,877 970 138 (3,086) 3,127
Minority interest............................ -- -- -- -- 59 59
------ ------- ------- ------ ------- -------
Income (loss) before income taxes........ 2,228 2,877 970 138 (3,145) 3,068
Provision (benefit) for income taxes......... 20 1,138 1 (3) (61) 1,095
Equity in income of joint ventures......... -- -- 118 -- -- 118
------ ------- ------- ------ ------- -------
Net income (loss)........................ 2,208 1,739 1,087 141 (3,084) 2,091
Less: preferred dividends.................... 1,215 637 -- -- (637) 1,215
------ ------- ------- ------ ------- -------
Net income (loss) applicable to
common shares...................... $ 993 $ 1,102 $ 1,087 $ 141 $(2,447) $876
====== ======= ======= ====== ======= =======
</TABLE>
14
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Operations
For the Three Months Ended March 31, 1997
------------------------------------------------------------------------------
U.S. German Non
Guarantor Guarantor Guarantor
Parent Subsidiaries Subsidiary Subsidiaries Eliminations Consolidated
------ ------------ ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales.................................. $ -- $55,873 $12,698 $4,578 $(2,474) $70,675
Cost of goods sold......................... -- 43,560 10,987 3,150 (2,326) 55,371
------- ------- ------- ------ ------- -------
Gross profit........................... -- 12,313 1,711 1,428 (148) 15,304
Selling, general and administrative expense 907 6,871 2,624 686 (131) 10,957
Noncash compensation expense............... 6 -- -- -- -- 6
Research and development expense........... -- 738 256 42 -- 1,036
Restructuring and other charges............ -- 88 -- -- -- 88
------- ------- ------- ------ ------- -------
Operating income (loss)................ (913) 4,616 (1,169) 700 (17) 3,217
Interest and debt expense (income)......... (225) 3,707 904 46 -- 4,432
Other income (expense)..................... 2,439 (2,327) 618 (183) (221) 326
Equity in income (loss) of subsidiary...... (1,929) (292) 242 -- 1,979 --
------- ------- ------- ------ ------- -------
Income (loss) before minority interest
and income taxes................. (178) (1,710) (1,213) 471 1,741 (889)
Minority interest.......................... -- -- -- -- 65 65
------- ------- ------- ------ ------- -------
Income (loss) before income taxes...... (178) (1,710) (1,213) 471 1,676 (954)
Provision (benefit) for income taxes....... 549 (445) 1 50 (103) 52
Equity in income of joint ventures......... -- -- 547 -- -- 547
------- ------- ------- ------ ------- -------
Net income (loss)...................... (727) (1,265) (667) 421 1,779 (459)
Less: preferred dividends.................. 1,351 164 -- -- (164) 1,351
------- ------- ------- ------ ------- -------
Net income (loss) applicable to common
shares........................... $(2,078) $(1,429) $ (667) $ 421 $1,943 $(1,810)
======= ======= ====== ====== ====== =======
</TABLE>
15
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 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) investing
activities................................... $ 1,489 $ 278 $(1,230) $ (938) $ 256 $ (145)
-------- ------ ------- ------ ------ -------
Cash flow from investing activities:
Capital expenditures......................... (70) (637) (313) (99) -- (1,119)
Increase in investments in joint ventures -- -- (7) -- -- (7)
Proceeds from sale of capital equipment...... -- 1,572 52 -- -- 1,624
Payments for environmental liabilities....... -- (837) -- -- -- (837)
Proceeds from environmental indemnification -- 366 -- -- -- 366
Other........................................ -- 12 -- -- -- 12
-------- ------ ------- ------ ------ -------
Net cash provided by (used in)
investing activities......................... (70) 476 (268) (99) -- 39
-------- ------- ------- ------ ------ -------
Cash flows from financing activities:
Revolving borrowings under Credit Agreement.. 14,750 -- -- -- -- 14,750
Revolving repayments under Credit Agreement.. (13,764) -- -- -- -- (13,764)
Term loan repayments under Credit Agreement.. (2,422) -- -- -- -- (2,422)
Short-term loan borrowings under European
Facility................................. -- -- 709 606 -- 1,315
Repayment of capital lease obligations....... -- (54) -- (12) -- (66)
Payments for financing costs................. -- -- -- (17) -- (17)
Other........................................ -- (14) -- -- -- (14)
Subsidiary loans............................. 57 (686) 616 13 -- --
-------- ------ ------- ------ ------ -------
Net cash provided by (used in)
financing activities......................... (1,379) (754) 1,325 590 -- (218)
Effect of exchange rate changes on cash.......... -- -- (17) (28) (296) (341)
-------- ------ ------- ------ ------ -------
Net increase (decrease) in cash and cash
equivalents.................................. 40 -- (190) (475) (40) (664)
Cash and cash equivalents,
beginning of period.......................... 248 -- 429 1,021 (248) 1,450
-------- ------ ------- ------ ------ -------
Cash and cash equivalents, end of
period....................................... $ 288 $ -- $ 239 $ 546 $ (288) $ 786
======== ====== ======= ====== ====== =======
</TABLE>
16
<PAGE>
FREEDOM CHEMICAL COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 1997
--------------------------------------------------------------------------
U.S. German Non
Guarantor Guarantor Guarantor
Parent Subsidiaries Subsidiary Subsidiaries Eliminations Consolidated
------ ------------ ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities............... $ 4,731 $(2,227) $(4,154) $ (56) $ (714) $ 2,420)
------- ------- ------- ------ ------ -------
Cash flows from investing activities:
Capital expenditures............... (21) (3,319) (44) (364) -- (3,748)
Payments for environmental liabilities -- (845) -- -- -- (845)
Proceeds from environmental
indemnification............... -- 262 -- -- -- 262
Other.............................. -- 12 -- (41) -- (29)
------- ------- ------- ------ ------ -------
Net cash flows used in investing
activities......................... (21) (3,890) (44) (405) (4,360)
------- ------- ------- ------ ------ -------
Cash flows from financing activities:
Issuance of common stock........... 119 -- -- -- -- 119
Revolving borrowings under Credit
Agreement...................... 12,000 -- 25,531 -- -- 37,531
Revolving repayments under Credit
Agreement...................... (10,500) -- (22,686) -- -- (33,186)
Short-term borrowings under
European Facility............. -- -- -- 111 -- 111
Repayments of short-term
borrowing under European Facility -- -- -- (165) -- (165)
Payment of registration costs...... (366) -- -- -- -- (366)
Repayment of capital lease obligations -- (6) -- -- -- (6)
Payments for financing costs....... -- -- (52) -- -- (52)
Other............................. -- -- -- 8 -- 8
Subsidiary loans................... (5,915) 5,789 (457) 583 -- --
------- ------- ------- ------ ------ -------
Net cash provided by (used in)
financing activities............... (4,662) 5,783 2,336 537 -- 3,994
------- ------- ------- ------ ------ -------
Effect of exchange rate changes on cash -- -- (201) (78) 666 387
------- ------- ------- ------ ------ -------
Net increase (decrease) in cash and
cash equivalents................... 48 (334) (2,063) (2) (48) (2,399)
Cash and cash equivalents,
beginning of period................ 88 344 2,218 992 (88) 3,554
------- ------- ------- ------ ------ -------
Cash and cash equivalents, end of
period............................. $ 136 $ 10 $ 155 $ 990 $ (136) $ 1,155
======= ======= ======= ====== ====== =======
</TABLE>
17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following should be read in conjunction with Item 1 of this report.
General
The Company is a leading global manufacturer and marketer of a broad range
of specialty and fine chemical products which are sold into several market
segments for use in food and beverage products, household and industrial
products, cosmetics and personal care products, pharmaceuticals, pet foods,
textile and paper products and many other diverse applications. The Company
operates in one industry segment, with revenues derived from sales in five core
product groups: (i) Food and Personal Care Ingredients, (ii) Pharmaceutical
Intermediates and Natural Additives, (iii) Specialty Organic Chemicals and
Intermediates, (iv) Organic Pigments and Dyes and (v) Textile and Paper
Chemicals.
Restructuring and Other Charges
In the first quarter 1997, the Company recorded charges totaling $88 which
reduced operating income from $3.3 million to $3.2 million as a result of a
marketing revitalization program the Company initiated primarily for its Organic
Pigments and Dyes product group. The Company expects to record approximately
$0.6 million in 1997 for this program. These charges will be recorded as
incurred throughout the remainder of the year.
In April 1997, the Company committed and reached an agreement to close its
Vernon, France facility in June 1997. Manufacturing production and certain
manufacturing equipment will be transferred to other locations as part of the
closure plan. During the second quarter, the Company will record restructuring
and other charges of approximately $1.6 million for severance to employees, $0.3
million for the writedown of fixed assets, and $0.5 million for other charges,
primarily for preparing the site for sale. The closing of this facility is
consistent with the Company's strategic plan of improving its cost structure by
having fewer manufacturing plants producing greater volume products. The Company
estimated that the annual savings as a result of this plant closure will be
approximately $2.2 million most of which will begin in 1998.
18
<PAGE>
Results of Operations
The following table sets forth certain data from the Consolidated Financial
Statements (Unaudited) expressed as a percentage of net sales.
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
------------------------------------
1996 1997
---- ----
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of goods sold 73.4 78.3
Gross profit 26.6 21.7
Selling, general and administrative expense 16.5 15.5
Research and development expense 1.6 1.5
Restructuring and other charges -- 0.1
Operating income 8.5 4.5
Interest and debt expense 4.4 6.3
Net income (loss) 2.7 (0.6)
Less: preferred dividends 1.6 1.9
Net income (loss) applicable to common shares 1.1 (2.5)
</TABLE>
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996
Net Sales. Net sales declined $6.5 million to $70.7 million in the quarter
ended March 31, 1997 compared to quarter ended March 31, 1996, due primarily to
an $8.5 million decline in the sales of Pharmaceuticals caused by a change in
German social legislation regarding the reimbursement for certain cough
medicines in which one of the Company's main products is used. It is expected
that this development will not result in a permanent loss of business. Food and
Personal Care revenues improved by $1.4 million compared to the same period in
1996 primarily due to increases in sales of natural additives and export sales
of preservatives. Textile and Paper Chemicals revenues improved by $1.6 million
compared to the same period in the prior year. Organic Pigments and Dyes
declined by $0.9 million compared to the first quarter of 1996 as 1996 sales
reflected the results of a product line which has since been discontinued.
Specialty Organics and Chemical Intermediates' revenues for the quarter were
comparable to the first quarter of 1996.
Gross Profit. Gross profit for the three months ended March 31, 1997
declined $5.2 million to $15.3 million compared to the three months ended March
31, 1996. Such decline resulted primarily from the following: (i) $3.1 million
was due to lower sales of Pharmaceuticals; (ii) $1.7 million resulted from
higher toluene and energy costs impacting Specialty Organics and Intermediates,
which costs are expected to moderate for the remainder of 1997; (iii) $0.4
million was attributable to the discontinued product line in the Organic
Pigments and Dyes area; and (iv) $0.5 million resulted from higher export sales
which carry lower average prices compared to the first quarter of 1996.
19
<PAGE>
The following table displays a comparison for each of the Company's five
core product lines of pounds of product sold, average prices, net sales, gross
profit dollars, and gross profit percentage for the quarters March 31, 1996 and
1997, respectively. (All values are in millions except for average price.)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1996 March 31, 1997
-------------------------------------------- -------------------------------------------
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...... 1.15 13.9 15.9 5.9 36.9% 1.05 16.5 17.3 4.7 27%
Pharmaceutical
Intermediates
And Natural
Additives............. 23.1 0.7 15.3 4.0 26.0% 13.6 0.5 6.8 1.3 20%
Textile and Paper
Chemicals............ .63 24.9 15.7 3.0 19.0% .64 27.0 17.4 3.2 18.2%
Specialty Organic
Chemicals and
Intermediates......... .56 27.2 15.3 3.9 25.4% .54 28.2 15.2 3.7 24.3%
Organic Pigments and
Dyes.................. 4.89 3.0 14.8 3.8 26.0% 4.43 3.2 14.0 2.4 17%
</TABLE>
The Company recorded estimated costs of shutdown of $0.4 million and $0.5
million for the three months ended March 31, 1996 and 1997, 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 March 31, 1997,
$1.2 million was accrued related to such costs, which represented an increase
from December 31, 1996 of $0.3 million due primarily to the timing of the
various plant shutdowns scheduled in 1997.
Selling, General and Administrative Expense. Selling, general, and
administrative expense decreased $1.8 million to $11.0 million in the three
months ended March 31, 1997 as compared to the same period of the prior year
primarily due to personnel reductions and plant closings as a result of
restructuring and other charges. As a percentage of sales, selling, general, and
administrative expense decreased from 16.5% in the three months ended March 31,
1996 to 15.5% for the same period in 1997.
Research and Development Expense. Research and development expense
decreased $0.2 million to $1.0 million in the three months ended March 31, 1997
as compared to the same period of the prior year. As a percentage of sales,
research and development expense decreased from 1.6% in the three months ended
March 31, 1996 to 1.5% for the same period in 1997.
Operating Income. Operating Income declined $3.3 million to $3.2 million in
the quarter ended March 31, 1997 compared to the same quarter of 1996 primarily
as a result of the Net Sales and Gross Profit impacts discussed above.
Offsetting these impacts were the reduced selling, general and administrative
expenses.
Interest and Debt Expense. Interest and debt expense was $4.4 million and
$3.4 million for the three months ended March 31, 1997 and 1996, respectively.
The Company had net borrowings of $4.3 million for the three months March 31,
1997, as compared to net repayments $0.1 million for the three months ended
March 31, 1996. The weighted average interest rate of the Company's borrowings
was 10.0% at March 31, 1997, as compared to 8.8% at March 31, 1996. The increase
in the weighted average interest rate is attributable to the issuance of the 10
5/8% Senior Subordinated Notes due 2006 (the "Notes") that were issued in
October 1996.
20
<PAGE>
Net Income (Loss). Net income decreased $2.6 million to a loss of $0.5
million in the three months ended March 31, 1997 as compared to the same period
of the prior year. The loss resulted primarily from items discussed above.
Additionally, Diamalt Pharmorganica had an increase in net income of $0.2
million to $0.4 million for the three months ended March 31, 1997 as compared to
the same period of the prior year, primarily attributable to its operating
capacity increase from start-up mode.
In addition, the Company's equity in income of joint ventures increased
$0.4 million for the three months ended March 31, 1997 as compared to the same
period of the prior year. The increase is primarily attributable to the increase
in the equity in income of Srinivasa Cystine Limited which increased $0.5
million.
Net Income (Loss) Applicable to Common Shares. The net income applicable to
common shares decreased by $2.6 million to a loss of $1.8 million for the three
months ended March 31, 1997 as compared to the same period of the prior year.
The decrease resulted from the items referred to above.
Liquidity and Capital Resources
Net Cash Used in Operating Activities. Net cash used in operating
activities for the three months ended March 31, 1997 was $2.4 million, an
increase of $2.3 million over the same period of the prior year. This increase
was due primarily to increases in accounts receivable from increased
international sales from domestic operations, increased inventories attributable
to customer demand and a decrease in net income of $2.6 million.
Net Cash Used in Investing Activities. Net cash used in investing
activities for the three months ended March 31, 1997 was $4.4 million, an
increase of $4.4 million over the same period of the prior year. Capital
expenditures in the three months ended March 31, 1997 were $3.7 million compared
to $1.1 million in the same period of the prior year. This increase in capital
expenditures in 1997 included $1.9 million related to an expansion program at
the Company's Kalama facility.
Net Cash Provided by Financing Activities. Net cash provided by financing
activities for the three months ended March 31, 1997 was $4.0 million, an
increase of $4.2 million over the same period of the prior year. The Company
also received cash proceeds of $0.1 million from the issuance of common stock.
This increase is due primarily to both lower operating results as well as
increased levels of capital expenditures in 1997.
Liquidity. On October 17, 1996, the Company issued the Notes. The Notes are
fully and unconditionally guaranteed, on a joint and several basis, as to
payment of principal, premium, if any, and interest, by all of the Company's
domestic subsidiaries and Diamalt.
Concurrently with the consummation of the offering of the Notes, the
Company amended and restated its existing credit agreement (as amended and
restated, the "Amended and Restated Credit Agreement") to, among other things,
increase the amount of the revolving loan facility to $85 million and include
Diamalt as a co-borrower. 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 the Company'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 the Company under the Amended and Restated Credit Agreement are
guaranteed by all of the Company's domestic subsidiaries and Diamalt and are
collateralized by a first priority lien on substantially all of the properties
and assets of the company and its domestic subsidiaries 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 and the Indenture related to the
Notes contain certain financial covenants that restrict, among other things, the
incurrence of additional indebtedness, the sale of assets, and certain
investments, acquisitions and distributions by the Company. The Amended and
Restated Credit Agreement also requires the Company to maintain specified
financial ratios and tests, including maximum leverage ratios and minimum
interest coverage ratios. The Company was in compliance with such ratios and
tests at March 31, 1997.
21
<PAGE>
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
March 31, 1997 the Company had $70.4 million of working capital (current assets
less current liabilities) and $53.7 million available under the Amended and
Restated Credit Agreement.
Although the Company expects that cash flows from operations and available
borrowings under the Amended and Restated Credit Agreement will provide
sufficient working capital to operate the Company's business, to make expected
capital expenditures and to meet the Company's foreseeable liquidity
requirements, there can be no assurance that sufficient sources of funds will be
available.
Foreign Currency Exchange Rates
The Company's substantial foreign operations expose it to the risk of
exchange rate fluctuations. If foreign currency denominated revenues are greater
than costs, the translation of foreign currency denominated costs and revenues
into U.S. dollars will improve profitability when the foreign currency
strengthens against the U.S. dollar and will reduce profitability when the
foreign currency weakens. In addition, the remeasurement of foreign currency
denominated assets and liabilities into U.S. dollars gives rise to foreign
exchange gains or losses which are included in the determination of net income.
The Company's foreign currency exposures are managed on a consolidated
basis, which allows certain exposures to be offset naturally. However, forward
contracts are entered into periodically to hedge specific foreign currency
exposures. Under this strategy, gains or losses on hedging transactions are
offset by gains or losses on the underlying exposures being hedged.
22
<PAGE>
PART II - OTHER INFORMATION
Item 2. Changes in Securities
Recent Sales of Unregistered Securities
In April 1997, the Company issued 445.75 shares of its Series A Common Stock and
98.292 shares of its Series B Redeemable Preferred Stock to Vincent P. Langone
for an aggregate purchase price of $150,000.
The issuance of these securities was made in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended,
for transactions not involving a public offering.
Item 5. Other Information
On March 18, 1997, the Company consummated a fully-subscribed registered
exchange offer for the Notes (the "Exchange Offer") to satisfy certain of the
Company's obligations under a registration rights agreement relating to the
Notes. The form and terms of the Notes issued under the Exchange Offer are
substantially identical in all material respects to the form and terms of the
Notes issued on October 17, 1996.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit
No. Description of Exhibit
3.1 Restated Certificate of Incorporation of Freedom Chemical Company and
Certificate of Designation for Preferred Stock (filed as Exhibit 3.1
to the Company's Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
3.2 By-laws of Freedom Chemical Company (filed as Exhibit 3.2 to the
Company's Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
27 Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter for which this report is
filed.
23
<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 hereunto duly authorized.
FREEDOM CHEMICAL COMPANY
(Registrant)
By: /s/ BRIAN F. MCNAMARA
----------------------------------------
Brian F. McNamara
Vice President, Secretary
and General Counsel
Date: May 14, 1997 By: /s/ DENNIS M. MONAHAN
----------------------------------------
Dennis M. Monahan
Chief Financial Officer
<PAGE>
FREEDOM CHEMICAL COMPANY
Form 10-Q Report for the Three Months Ended
March 31, 1997
INDEX TO EXHIBITS
Exhibit
No. Description of Exhibit
3.1 Restated Certificate of Incorporation of Freedom Chemical Company and
Certificate of Designation for Preferred Stock (filed as Exhibit 3.1 to
the Company's Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
3.2 By-laws of Freedom Chemical Company (filed as Exhibit 3.2 to the
Company's Registration Statement on Form S-1 (33-84778) and
incorporated herein by reference).
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from balance
sheets and income statements of Freedom Chemical Company and Subsidiaries and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S.$
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 1,115
<SECURITIES> 0
<RECEIVABLES> 47,836
<ALLOWANCES> 609
<INVENTORY> 55,186
<CURRENT-ASSETS> 118,075
<PP&E> 132,291
<DEPRECIATION> 31,432
<TOTAL-ASSETS> 264,186
<CURRENT-LIABILITIES> 47,689
<BONDS> 125,000
46,882
0
<COMMON> 2
<OTHER-SE> (22,713)
<TOTAL-LIABILITY-AND-EQUITY> 264,186
<SALES> 70,675
<TOTAL-REVENUES> 70,675
<CGS> 55,371
<TOTAL-COSTS> 55,371
<OTHER-EXPENSES> (326)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,432
<INCOME-PRETAX> (954)
<INCOME-TAX> 52
<INCOME-CONTINUING> (459)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,809)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
