-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OabjTsz2YMvzZZYsW9SNI10hdr88cL8oQkhim5nFYmS3/ZpJV9HWJNqWwLPuXmwQ K4n0b+u/D9lCcdXWxNCTOA== 0000832815-98-000006.txt : 19981118 0000832815-98-000006.hdr.sgml : 19981118 ACCESSION NUMBER: 0000832815-98-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYBRON CHEMICALS INC CENTRAL INDEX KEY: 0000832815 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS CHEMICAL PRODUCTS [2890] IRS NUMBER: 510301280 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12263 FILM NUMBER: 98751249 BUSINESS ADDRESS: STREET 1: BIRMINGHAM RD STREET 2: PO BOX 66 CITY: BIRMINGHAM STATE: NJ ZIP: 08011 BUSINESS PHONE: 6098931100 MAIL ADDRESS: STREET 1: P O BOX 66 BIRMINGHAM ROAD CITY: BIRMINGHAM STATE: NJ ZIP: 08011 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 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 0-19983 SYBRON CHEMICALS INC. (Exact name of registrant as specified in its charter) DELAWARE 51-0301280 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Birmingham Rd., P.O. Box 66, Birmingham New Jersey 08011 (Address of principal executive offices) (zip code) Registrant's telephone number, including area code (609) 893-1100 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 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 . Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at September 30, 1998 Common stock, $.01 par value 5,713,095 SYBRON CHEMICALS INC. SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. This Form 10-Q Report contains information that is forward-looking, such as information relating to future capital expenditures and liquidity. Such forward-looking information involves important risks and uncertainties that could significantly affect expected results in the future from those expressed in any forward-looking statements made by, or on behalf of, the Company. These risks and uncertainties include, but are not limited to, uncertainties relating to economic conditions, fluctuations in exchange rates of various foreign currencies, and other risks associated with foreign operations, changes in governmental and regulatory policies including environmental regulations, the pricing of raw materials, the ability of the Company to make and successfully integrate corporate acquisitions, technological developments, the impact of Year 2000 issues on the Company and changes in the competitive environment in which the Company operates. INDEX Page No. Part I Financial information Item 1 - Financial Statements Consolidated Balance Sheet - September 30, 1998 and December 31, 1997 1 Consolidated Statement of Operations - nine months ended September 30, 1998 and 1997 2 Consolidated Statement of Operations - three months ended September 30, 1998 and 1997 3 Consolidated Statement of Cash Flows - nine months ended September 30, 1998 and 1997 4 Notes to Consolidated Financial Statements 5 - 9 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 10 - 17 Part II Other information Item 1 Legal Proceedings 17 Item 2 Changes in Securities 17 - 18 Item 5 Other 18 Item 6 Exhibits and Reports on Form 8-K 19 - 24 Signature 25 PART I - FINANCIAL INFORMATION SYBRON CHEMICALS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Unaudited in thousands except share and per share data) ASSETS Sept. 30, Dec. 31, 1998 1997 Current assets: Cash and cash equivalents $ 17,749 $ 26,592 Accounts receivable, net 48,541 37,367 Inventories, net 37,660 28,205 Prepaid and other current assets 3,443 3,019 Deferred income taxes 105 140 Total current assets 107,498 95,323 Property, plant and equipment, net 80,265 34,224 Intangible assets, net 80,417 20,086 Other assets 5,415 600 $273,595 $150,233 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable $ 1,280 $ 1,760 Current portion of long-term debt 7,407 2,429 Accounts payable 27,591 27,653 Accrued liabilities 16,906 16,087 Income taxes payable 1,313 3,951 Deferred income taxes 415 12 Total current liabilities 54,912 51,892 Long-term debt 138,771 27,390 Deferred income taxes 2,565 2,502 Postretirement benefits 3,859 3,919 Other liabilities 2,400 2,119 Total liabilities 202,507 87,822 Commitments and contingencies Shareholders' equity: Preferred stock, $.01 par value - 500,000 shares authorized; none issued Common stock - $.01 par value - 20,000,000 shares authorized; issued 5,934,050 and 5,908,260 shares 59 59 Additional paid-in capital 24,089 23,580 Retained earnings 59,069 51,989 Accumulated other comprehensive losses (7,710) (8,544) Treasury stock, at cost - 220,955 and 233,648 shares (4,419) (4,673) Total shareholders' equity 71,088 62,411 $273,595 $150,233 The accompanying notes are an integral part of the financial statements -1- SYBRON CHEMICALS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited in thousands except per share amounts) Nine months ended September 30, 1998 1997 Net sales $156,389 $138,429 Cost of sales 98,702 84,513 Selling 27,727 25,153 General and administrative 8,843 8,474 Research and development 3,124 2,764 138,396 120,904 Operating income 17,993 17,525 Other income(expense) Interest income 238 335 Interest expense (3,048) (1,391) Amortization of intangible assets (1,870) (1,060) Other - Net (783) (408) (5,463) (2,524) Income before income taxes and extraordinary item 12,530 15,001 Provision for income taxes 5,137 6,151 Income before extraordinary item 7,393 8,850 Extraordinary item - net of taxes 313 -- Net income $ 7,080 $ 8,850 Income per share before extraordinary item: Basic $ 1.30 $ 1.56 Diluted $ 1.26 $ 1.54 Loss per share extraordinary item: Basic $ (.06) $ .00 Diluted $ (.05) $ .00 Net income per share: Basic $ 1.24 $ 1.56 Diluted $ 1.21 $ 1.54 Weighted average shares outstanding: Basic 5,692,650 5,664,346 Diluted 5,872,036 5,757,798 -2- SYBRON CHEMICALS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited in thousands except per share amounts) Three months ended September 30, 1998 1997 Net sales $ 58,834 $ 46,297 Cost of sales 39,948 28,655 Selling 9,246 8,815 General and administrative 3,217 3,229 Research and development 1,138 928 53,549 41,627 Operating income 5,285 4,670 Other income(expense) Interest income 127 134 Interest expense (2,210) (538) Amortization of intangible assets (835) (391) Other - Net (505) (284) (3,423) (1,079) Income before income taxes and extraordinary item 1,862 3,591 Provision for income taxes 744 1,472 Income before extraordinary item 1,118 2,119 Extraordinary item 313 -- Net income $ 805 $ 2,119 Income per share before extraordinary item: Basic $ .20 $ .37 Diluted $ .19 $ .36 Loss per share extraordinary item: Basic $ (.06) $ .00 Diluted $ (.05) $ .00 Net income per share: Basic $ .14 $ .37 Diluted $ .14 $ .36 Weighted average shares outstanding: Basic 5,710,599 5,670,257 Diluted 5,849,973 5,799,892 The accompanying notes are an integral part of the financial statements -3- SYBRON CHEMICALS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited in thousands) Nine months ended Sept. 30, 1998 1997 Cash flows from operating activities: Net income $ 7,080 $ 8,850 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary item 313 -- Depreciation and amortization 5,986 4,931 Provision for losses on accounts receivable 436 653 Changes in assets and liabilities: Accounts receivable (1,078) (5,470) Inventory 886 (1,996) Other current assets (54) (329) Accounts payable and accrued expenses (8,001) 5,800 Income taxes payable (2,677) 2,503 Other assets and liabilities - net 615 394 Net cash (used) provided by operating activities 3,506 15,336 Cash flows from investing activities: Capital expenditures (7,792) (5,726) Purchase of business assets (6,817) (13,774) Acquisition (net of cash acquired) (110,616) -- Net cash used by investing activities (125,225) (19,500) Cash flows from financing activities: Net (repayments) borrowings under revolving credit facilities (17,148) 14,320 Loan proceeds 145,000 -- Repayment of debt (12,643) (2,429) Direct costs of financing (2,710) -- Proceeds from exercise of stock options 351 29 Net cash (used) provided by financing activities 112,850 11,920 Effect of exchange rate changes on cash 26 (1,634) Net (decrease) increase in cash and cash equivalents (8,843) 6,122 Cash and cash equivalents at beginning of period 26,592 14,909 Cash and cash equivalents at end of period $17,749 $21,031 The accompanying notes are an integral part of the financial statements -4- SYBRON CHEMICALS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited in thousands) NOTE 1 - 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 only of normal recurring adjustments, necessary to present fairly, in summarized form, the financial position of the Company at September 30, 1998 and the results of its operations and changes in its cash flows for the nine months ended September 30, 1998 and 1997. The Company presumes that users of this Quarterly Report on Form 10-Q have read or have access to the audited financial statements for the year ended December 31, 1997 contained in the Company's Form 10-K which was filed with the Securities and Exchange Commission on March 31, 1998. Accordingly, footnote disclosures which would substantially duplicate the disclosures contained therein have been omitted. NOTE 2 - COMPREHENSIVE INCOME: The Company has adopted the Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income", which establishes standards for the reporting and display of comprehensive income and its components in general-purpose financial statements. The tables below set forth "comprehensive income" and each component's related tax effect for the three and nine months ended September 30: Statement of Comprehensive Income Three Months Ended September 30, 1998 1997 Net income $ 805 $ 2,119 Other comprehensive income, net of tax: Foreign currency translation adjustments 1,815 (410) Comprehensive income $ 2,620 $ 1,709 -5- Statement of Comprehensive Income Nine Months Ended September 30, 1998 1997 Net income $ 7,080 $ 8,850 Other comprehensive income, net of tax: Foreign currency translation adjustments 834 (3,916) Comprehensive income $ 7,914 $ 4,934 Related Tax Effects of Each Component of Other Comprehensive Income Three Months Ended September 30,
________________ 1998 ___________________ ________________ 1997 ___________________ Tax Net of Tax Net of Pre-Tax (Expense) Tax Pre-Tax (Expense) Tax Amount Benefit Amount Amount Benefit Amount Foreign currency translation adjustments 1,815 -- 1,815 (410) -- (410) Total Other comprehensive income 1,815 -- 1,815 (410) -- (410) Related Tax Effects of Each Component of Other Comprehensive Income Nine Months Ended September 30, ________________ 1998 __________________ _________________ 1997 __________________ Tax Net of Tax Net of Pre-Tax (Expense) Tax Pre-Tax (Expense) Tax Amount Benefit Amount Amount Benefit Amount Foreign currency translation adjustments 834 -- 834 (3,916) -- (3,916) Total Other comprehensive income 834 -- 834 (3,916) -- (3,916)
The following table illustrates the components of accumulated other comprehensive income and their associated changes for the nine month period ending September 30, 1998: -6- Accumulated Other Comprehensive Income Balances Nine Months Ending September 30, 1998 Current Beginning Period Ending Balance Change Balance Foreign currency translation adjustments (8,359) 834 (7,525) Minimum pension liability adjustment (185) -- (185) Accumulated other comprehensive loss (8,544) 834 (7,710) NOTE 3 - ACCOUNTING PRONOUNCEMENTS: In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS No. 131). This statement establishes standards for reporting information about operating segments in annual financial statements and requires the reporting of selected information about operating segments in interim financial reports issued to stockholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997, and in the initial year of application, comparative information for earlier years is to be restated. The Company will adopt this statement in the fourth quarter of 1998 and does not expect a significant impact on present segment reporting. In February 1998, the Financial Accounting Standards Board issued Statement No. 132, "Employers Disclosure About Pensions and Other Post-retirement Benefits, an amendment of FASB Statements No. 87, 88, and 106" (SFAS 132). This statement revises disclosures about pension and other post-retirement benefit plans. It does not change the measurement or recognition of those plans. The statement is effective for fiscal years beginning after December 15, 1997. The Company will adopt SFAS 132 in the fourth quarter of 1998. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" which establishes accounting and reporting standards for derivative instruments and hedging activities. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company is assessing the impact that the adoption of SFAS No. 133 will have on its consolidated financial statements. -7- NOTE 4 - INVENTORIES: Inventories are stated at the lower of cost or market. For U.S. operations, cost is determined using the last-in, first-out (LIFO) method. For foreign operations, cost is determined using the first-in, first-out (FIFO) method. The components of inventories are: Sept. 30, Dec. 31, 1998 1997 Finished goods $29,415 $21,317 Raw materials 10,306 7,864 39,721 29,181 Less reserves 2,061 976 $37,660 $28,205 NOTE 5 - ACQUISITIONS: On July 31, 1998, the Company acquired all of the outstanding capital stock of Ruco Polymer Corporation ("Ruco NY"), and all of the outstanding membership interests of Ruco Polymer Company of Georgia, LLC ("Ruco GA," and together with Ruco NY, "Ruco"), pursuant to the Capital Stock and Membership Interest Purchase Agreement. The aggregate purchase price for the acquisition was $110 million, including the repayment of bank debt owed by Ruco. The purchase price was financed by a $185 million senior secured credit facility obtained from Donaldson, Lufkin & Jenrette Securities Corporation, Morgan Guaranty Trust Company of New York Incorporated and Mellon Bank, N.A. The facility consists of a $145 million term facility and a $40 million revolving facility. Proceeds of the term facility were used to refinance the Company's outstanding indebtedness, to pay the cash consideration for the acquisition of Ruco and to pay certain related fees and expenses. The revolving facility will be available to fund the working capital requirements of the Company. Results of operations after the acquisition date are included in the 1998 Consolidated Statement of Operations. The following pro forma information has been prepared assuming that this acquisition had taken place at the beginning of the respective periods. The pro forma information includes adjustments for interest expense that would have been incurred to finance the purchase and the amortization of intangibles arising from the transaction, including non-compete agreement (estimated life 5 years), customer list (estimated life 10 years), and goodwill (estimated life 40 years). The pro forma information is presented for informational purposes only and may not be indicative of the results of operations as they would have been if the Company and the Ruco business had been a single entity during 1997 and 1998, nor is it necessarily indicative of the results of operations which may occur in the future. -8- NOTE 5 - ACQUISITIONS: (Continued) (Unaudited in thousands except per share amounts) Nine Months Ended September 30, 1998 1997 Net sales $204,011 $210,952 Operating income 23,952 25,536 Income before extraordinary item 6,704 8,091 Extraordinary item, net of taxes 313 -- Net income $ 6,391 $ 8,091 Income per share before extraordinary item: Basic $ 1.18 $ 1.43 Diluted $ 1.14 $ 1.41 Net income per share: Basic $ 1.12 $ 1.43 Diluted $ 1.09 $ 1.41 -9- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Nine Months Ended September 30, 1998 compared to Nine Months Ended September 30, 1997 and Three Months Ended September 30, 1998 compared to Three Months Ended September 30, 1997. The following tables set forth certain information about the Company's three business segments, Environmental Products and Services, Textile Chemical Specialties, and Polymer Intermediates. Nine Months Ended September 30, 1998 1997 -------------- --------------- % of % of Amount Sales Amount Sales ------ ----- ------ ----- (in thousands except percentages) Sales Environmental Products and Services $ 37,133 23.7% $ 41,967 30.3% Textile Chemical Specialties 105,353 67.4 96,462 69.7 Polymer Intermediates 13,903 8.9 -- -- ________ ________ Total 156,389 100.0 138,429 100.0 Cost of Sales Environmental Products and Services 24,385 65.7 28,630 68.2 Textile Chemical Specialties 62,723 59.5 55,883 57.9 Polymer Intermediates 11,594 83.4 -- -- Total 98,702 63.1 84,513 61.1 Gross Margin Environmental Products and Services 12,748 34.3 13,337 31.8 Textile Chemical Specialties 42,630 40.5 40,579 42.1 Polymer Intermediates 2,309 16.6 -- -- Total 57,687 36.9 53,916 38.9 Operating Expense Environmental Products and Services 8,538 23.0 9,307 22.2 Textile Chemical Specialties 30,459 28.9 27,084 28.1 Polymer Intermediates 697 5.0 -- -- Total 39,694 25.4 36,391 26.3 Operating Income Environmental Products and Services 4,210 11.3 4,030 9.6 Textile Chemical Specialties 12,171 11.6 13,495 14.0 Polymer Intermediates 1,612 11.6 -- -- Total 17,993 11.5 17,525 12.6 Other Expense, Net (5,463) (3.5) (2,524) (1.8) Income Before Income Taxes and extraordinary item 12,530 8.0 15,001 10.8 Provision for Income Taxes 5,137 3.3 6,151 4.4 Income before extraordinary item 7,393 4.7 8,850 6.4 Extraordinary item, net of tax 313 0.2 -- -- Net Income $ 7,080 4.5% $ 8,850 6.4% -10- Three Months Ended September 30, 1998 1997 % of % of Amount Sales Amount Sales (in thousands except percentages) Sales Environmental Products and Services $11,960 20.3% $13,524 29.2% Textile Chemical Specialties 32,971 56.1 32,773 70.8 Polymer Intermediates 13,903 23.6 -- -- Total 58,834 100.0 46,297 100.0 Cost of Sales Environmental Products and Services 7,952 66.5 9,167 67.8 Textile Chemical Specialties 20,402 61.9 19,488 59.5 Polymer Intermediates 11,594 83.4 -- -- Total 39,948 67.9 28,655 61.9 Gross Margin Environmental Products and Services 4,008 33.5 4,357 32.2 Textile Chemical Specialties 12,569 38.1 13,285 40.5 Polymer Intermediates 2,309 16.6 -- -- Total 18,886 32.1 17,642 38.1 Operating Expense Environmental Products and Services 2,838 23.7 3,395 25.1 Textile Chemical Specialties 10,066 30.5 9,577 29.2 Polymer Intermediates 697 5.0 -- -- Total 13,601 23.1 12,972 28.0 Operating Income Environmental Products and Services 1,170 9.8 962 7.1 Textile Chemical Specialties 2,503 7.6 3,708 11.3 Polymer Intermediates 1,612 11.6 -- -- Total 5,285 9.0 4,670 10.1 Other Expense, Net (3,423) (5.8) (1,079) (2.3) Income Before Income Taxes and extraordinary item 1,862 3.2 3,591 7.8 Provision for Income Taxes 744 1.3 1,472 3.2 Income before extraordinary item 1,118 1.9 2,119 4.6 Extraordinary item 313 0.5 -- -- Net Income $ 805 1.4% $ 2,119 4.6% -11- Operations Sales for the nine months and quarter ending September 30, 1998 were $156.4 million and $58.8 million, respectively; an improvement of 13.0% and 27.1%, compared with the same periods in 1997. Both the nine months and quarter included two months of operations of Ruco Polymer Corporation and Ruco Polymer Company of Georgia LLC (together "Ruco"), which were acquired by the Company on July 31, 1998. The Textile Chemical Specialties segment sales increased 9.2% for the nine months and 0.6% for the third quarter, compared with the same periods last year, as a direct result of the acquisitions of the garment processing chemicals businesses of Ocean Wash Inc. and Ocean Wash de Mexico S.A. de C.V. in April 1998 and Ivax Industries, Inc. in July, 1997. Nine months sales in the Environmental Products and Services segment dropped 11.5% as compared with the similar period in 1997, while quarterly sales decreased 11.6%. Almost half of the decline in both periods was due to the sale of the Company's reverse osmosis membrane business in December 1997. In the Textile Chemical Specialties segment, combined North America/Asia textile chemical sales for the nine months and third quarter improved 14.6% and 1.3%, respectively, compared with the same periods in 1997 as a direct result of the aforementioned Ocean Wash and Ivax acquisitions. These improvements more than offset the continued soft conditions in the North America textile marketplace, the unfavorable impact on sales of the Company's stonewash denim products from a style change in the garment sector from light to dark colored denim, and reduced activity in the organics toll manufacturing business. Europe Division textile chemical sales for the nine months, expressed in U.S. dollars, improved 2.0%, while the third quarter was flat. For the first nine months of this year, physical volume improved 5.3% as a result of strong sales in the Middle East and several Western European countries, while physical volumes slipped 1.0% in the quarter. During the nine-month period, the U.S. dollar remained stronger versus the Dutch guilder resulting in a negative currency effect of 4.4% on Europe's nine-month sales as compared to the prior year; however, the recent strengthening of the guilder had a minor favorable impact on the quarter. Sales in the Environmental Product and Services segment, after the effect of the sale of the reverse osmosis membranes business, declined 6.3% and 6.0% versus the nine months and third quarter of 1997. Both periods were negatively impacted by the continued soft conditions in the ion exchange markets in the U.S. and Far East. Reduced requirements from two major toner polymer customers also contributed to the quarters' downturn. Sales for Biochemicals were flat in both periods. Sales in the new Polymer Intermediates segment, formed from the above-mentioned Ruco acquisitions, were $13.9 million for both periods. -12- The overall gross margin for the nine months and third quarter ending September 30, 1998 were 36.9% and 32.1%, respectively, versus last year's similar period margins of 38.9% and 38.1%. The decrease in margins was heavily influenced by the acquisition of the new Polymer Intermediates segment, which realizes substantially lower margins. In the Textile Chemical Specialties segment, both the nine months margin of 40.5% and the quarter's 38.1% were under their respective prior year levels of 42.1% and 40.5%, respectively. Margins for both periods in North America/Asia were lower than the similar 1997 periods due to the impact of the lower margin sales from Ocean Wash, one-time termination costs relating to staff reductions, reduced average U.S. selling prices, and increased freight costs, partially offset by lower material costs and manufacturing efficiencies. Margins also fell in the organics product line primarily as a result of reduced sales of higher margin toll manufactured products. Margins in Europe for the first nine months of 1998 equaled margins for the same period last year due to the continued favorable impact of a weak guilder compared to certain other European currencies, and a small selling price increase which offset higher raw material costs and an unfavorable product mix. For the quarter, margins improved in Europe primarily due to favorable manufacturing variances, lower raw material costs and slightly lower employee incentives. The gross margin in the Environmental Products and Services segment for the nine months and quarter ending September 30, 1998 increased to 34.3% and 33.5%, respectively, versus the 31.8% and 32.2% experienced in the same periods in 1997. Both periods continue to be positively impacted by the results of several strategic action plans implemented in 1997 including: the alliance with Dow Chemical for the manufacture of anion exchange resins; the switch from purchasing a major raw material to manufacturing in- house; and the aforementioned divestiture of the reverse osmosis membrane business, which carried substantially lower margins. Also affecting the ion exchange product line in both periods was an approximately 5% average price reduction in the third quarter and one-time termination costs associated with selective staff reductions, only partially offset by lower production costs. Margins in the biochemical product line for both the nine months and quarter were lower than the respective periods in 1997 primarily due to unfavorable production variances in the U.S. which were somewhat offset by a favorable product/customer mix in France. Margins in the new Polymer Intermediates segment were 16.6%. Operating expenses as a percent of sales decreased in both the nine-month and third quarter periods to 25.4% and 23.1%, respectively, as compared with the 26.3% and 28.0% experienced in the similar periods in 1997. This improvement was primarily due to the new Polymer Intermediates segment, which has lower operating -13- expenses. In addition, the Environmental Products and Services segment expenses as a percent of sales for the quarter were lower as compared to the third quarter of 1997, in which the Company recorded increased provisions for doubtful accounts and legal and environmental expenses. While sales volumes increased overall in the Textile Chemical Specialties segment, operating expenses grew at a faster pace, in both periods, primarily due to the added costs for the Ocean Wash acquisition and computer upgrading expenses in Europe, somewhat offset, in the nine month period, by the favorable currency impact in Europe on fixed costs. Income Taxes and Other Items The Company's provision for income taxes is computed using applicable prevailing income tax rates. The Company's effective tax rate of 41.0% for the nine months was equal to the same period in 1997 while the third quarter 1998 rate of 40.0% was slightly under last year's equivalent rates of 41.0%. Other income (expense) before an extraordinary item was ($5.5) million and ($3.4) million for the year-to-date and third quarter, respectively, versus ($2.5) million and ($1.1) million experienced in last year's comparable periods. The increase for both periods was primarily due to the amortization costs relating to the three acquisitions and higher interest costs resulting from the Ruco acquisition financing. The extraordinary cost of $0.3 million, after taxes, reflects the cost of early debt retirement that was refinanced with debt incurred for the acquisition of the Ruco companies. Liquidity and Capital Resources Cash and cash equivalents were $17.8 million as of September 30, and $26.6 million at December 31, 1997. Operating activities generated net cash of $3.5 million for the first nine months of 1998 as compared to $15.3 million for the same period in 1997. This was primarily the result of a substantial reduction in accounts payable and accrued expenses in 1998 due to: the return to the taxing authorities of an erroneous tax refund in the Netherlands; executive bonus payouts; annual pension funding; and payments for the terminated going private transaction. In addition, unusually high inventory and capital equipment purchased during the latter part of 1997 were paid for in 1998. Net cash used by investing activities totaled $125.2 million for the first nine months of 1998 as compared with $19.5 million for the comparable 1997 period. The year-to-year increase was -14- primarily the result of the aforementioned purchase of the Ruco and Ocean Wash businesses, coupled with the purchase of property adjacent to the manufacturing site in Ede, Holland which could be used for future expansion. Financing activities provided $112.9 million in net cash through September 1998 which were primarily used for the funding of the Ocean Wash and Ruco acquisitions. The $11.9 million provided in the comparable 1997 period was primarily used for the Ivax acquisition. On July 31, 1998 the Company purchased for $110 million in cash all of the capital stock of Ruco Polymer Corporation and all of the equity interests in Ruco Polymer Company of Georgia LLC. This acquisition was pursued as part of the Company's strategic initiative to develop a "third leg" business to complement its existing Textile Chemical Specialties and Environmental Products and Services segments. Ruco produces and markets polymers for powder and high-solids coatings applications. Also on July 31, 1998, the Company obtained from Donaldson, Lufkin & Jenrette Securities Corporation, J.P. Morgan Securities Inc., and Mellon Bank N.A. a $185 million Senior Secured Credit Facility. The Senior Secured Credit Facility consists of a $40 million Revolving Credit Facility, which replaced a CoreStates Bank revolver, and a $145 million six-year Term Loan Facility. The Term Loan was used to finance the $110 million acquisition of Ruco, refinance existing debt, and pay certain fees and expenses. At September 30, 1998, the Revolving Credit Facility was undrawn. The Company may elect to refinance or restructure a portion of the $145 million Term Loan Facility with proceeds from an offering of senior subordinated notes or by some other means, if market conditions are favorable. The Company believes that its capital expenditures for existing operations for 1998 will approximate 1997 levels, adjusted for acquisitions, and can be funded from operations. The Company further believes that it will be able to meet both short-term and long-term financial obligations in the foreseeable future from its anticipated operating income and present credit facilities. Foreign Exchange The Company has foreign subsidiaries in Europe, Asia, Africa and the Americas and, for all subsidiaries, except the Company's Mexican and Colombian subsidiaries, the Company has determined the functional currencies are the subsidiaries' local currency. The functional currency of the Mexican and Colombian subsidiaries are considered to be the U.S. dollar because of those countries' designation as highly inflationary economies. The Company has a large manufacturing facility in Ede, Holland where chemicals are -15- manufactured and sold either directly to customers or to various subsidiaries, which are principally in Europe. Intercompany balances arise between the Dutch operation and various subsidiaries. Overall, the Company recognized an exchange gain of $0.1 million in the first nine months of 1998 versus $0.1 million exchange loss in the similar period in 1997. Year 2000 Readiness Disclosure Many currently installed computer systems are not capable of distinguishing 21st century dates from 20th century dates. As a result, in less than fifteen months, computer systems and/or software used by many companies in a wide variety of applications will experience operating difficulties unless they are modified or upgraded to adequately process information involving, related to or dependent upon the century change. Significant uncertainty exists concerning the scope and magnitude of problems associated with the century change. The Company recognizes the need to ensure its operations will not be adversely impacted by Year 2000 software failures and has established a project team to address Year 2000 risks. The project team has coordinated the identification of and will coordinate the implementation of changes to computer hardware and software applications that will attempt to ensure availability and integrity of the Company's information systems and the reliability of its operational systems and manufacturing processes. The Company is also assessing the potential overall impact of the impending century change on its business, results of operations and financial position. The Company has reviewed its information and operational systems and manufacturing processes in order to identify those products, services or systems that are not Year 2000 compliant. As a result of this review, the Company has determined that it will be required to modify or replace certain information and operational systems so they will be Year 2000 compliant. These modifications and replacements are being and will continue to be, made in conjunction with the Company's overall systems initiatives. The total cost of these Year 2000 compliance activities, estimated at less than $500,000, has not been, and is not anticipated to be, material to the Company's financial position or its results of operations. The Company expects to complete its Year 2000 project during 1999. Based on available information, the Company does not believe any material exposure to significant business interruption exists as a result of Year 2000 compliance issues. Accordingly, the Company has not adopted any formal contingency plan in the event its year 2000 project is not completed in a timely manner. These costs and the timing in which the Company plans to complete its Year 2000 modification and testing processes are based on management's best estimates. However, there can be no assurance -16- that the Company will timely identify and remediate all significant Year 2000 problems, that remedial efforts will not involve significant time and expense, or that such problems will not have a material adverse effect on the Company's business, results of operations or financial position. The Company also faces risk to the extent that suppliers of products, services and systems not purchased by the Company and others with whom the Company transacts business on a worldwide basis do not comply with Year 2000 requirements. The Company has initiated formal communications with significant suppliers and customers to determine the extent to which the Company is vulnerable to these third parties failure to remediate their own Year 2000 issues. In the event any such third parties cannot provide the company with products, services, or systems that meet the Year 2000 requirements on a timely basis, or in the event Year 2000 issues prevent such third parties from timely delivery of products or services required by the Company, the Company's results of operations could be materially adversely affected. To the extent Year 2000 issues cause significant delays in, or cancellation of, decisions to purchase the Company's products or services, the Company's business, results of operations and financial position would be materially adversely affected. PART II - OTHER INFORMATION Item 1. Legal Proceedings There have been no material developments in connection with any pending legal proceedings as reported in the Registrant's Form 10-K Annual Report which was filed with the Securities and Exchange Commission on March 31, 1998. Item 2. Changes in Securities On August 7, 1998, the Company's Board of Directors adopted a Stockholder Rights Plan (the "Plan"). The Plan was adopted in an effort to protect stockholders and their equity investment from potential acquirers who would use coercive or unfair tactics to gain control of the Company. The Plan would not preclude any fair acquisition proposal. Under the Plan, which is similar to those adopted by many other companies, Rights will be distributed as a dividend at the rate of one Right for each share of Common Stock of the Company held by shareholders of record as of the close of business on August 27, 1998. Each Right entitles the registered holder to purchase from the Company one unit representing one ten-thousandth of a share of Series A Junior Participating Preferred Stock, par value $0.01 per share, at a Purchase Price of $150.00 per unit, subject to adjustment ("Purchase Price"). -17- The Rights will separate from the Common Stock and will be distributed upon the earlier of (i) ten days following a public announcement that a person or group of affiliated or associated persons, excluding certain exempt persons, has acquired, or obtained the right to acquire, beneficial ownership of 20% or more of the outstanding shares of Common Stock; or (ii) ten business days (or such later date as may be determined by the Board of Directors) following the commencement of a tender offer or exchange offer that would result in a person or group beneficially owning 20% or more of such outstanding shares of Common Stock. Following either of the above events, each holder of a Right, except the person or group triggering such event, will thereafter have the right to receive, upon exercise, Common Stock (or, in certain circumstances, cash, property or other securities of the Company) having a value equal to two times the Purchase Price. The description and terms of the Plan are set forth more fully in the Rights Agreement dated as of August 7, 1998, between the Company and BankBoston, N.A., as Rights Agent, which is attached as an exhibit to the Company's Registration Statement on Form 8-A, filed on August 13, 1998 with the Securities and Exchange Commission, and incorporated herein by reference. Item 5. Other Acquisition On July 31, 1998, the Company acquired all of the outstanding capital stock of Ruco Polymer Corporation ("Ruco NY"), and all of the outstanding membership interests of Ruco Polymer Company of Georgia, LLC ("Ruco GA," and together with Ruco NY, "Ruco") pursuant to the Capital Stock and Membership Interest Purchase Agreement, dated July 30, 1998, effective July 31, 1998, by and among the Company, Louis T. Camilleri, Anthony F. Forgione, Joseph Mitola and Joseph A. Ruffing, a copy of which has been filed previously by the Company and is incorporated herein by reference. Messrs. Camilleri, Forgione, Mitola and Ruffing hereinafter are referred to as the "Sellers." Ruco is a leading North American polymer intermediates company that produces polyester polyols, polyester powder coating resins, polyurethane latexes and specialty polymers which are intermediate chemical products used in the formulation and production of coatings and plastics. The aggregate purchase price for the acquisition, determined through arms-length negotiations between the parties, was $110 million, including the repayment of bank debt owed by Ruco. The purchase price is subject to certain post-closing adjustments. The acquisition was pursued as part of the Company's strategic initiative to develop a "third leg" business to complement its existing Textile Chemical Specialties and Environmental Products and Services segments. The Company intends to continue the business of Ruco and the use of Ruco's facilities, equipment and physical property obtained through the acquisition. -18- In connection with the acquisition of Ruco, each of the Sellers entered into five-year non-compete agreements with the Company. In addition, the Company entered into an agreement with Anthony F. Forgione, the President and Chief Executive Officer of Ruco prior to the acquisition, pursuant to which Mr. Forgione will serve as President of Ruco. The employment agreement anticipates a minimum term of two years and will continue in full force and effect until terminated by either party. Financing On July 31, 1998, the Company obtained from Donaldson, Lufkin & Jenrette Securities Corporation, Morgan Guaranty Trust Company of New York Incorporated and Mellon Bank, N.A. a $185 million senior secured credit facility. The facility consists of a $145 million term facility and a $40 million revolving facility. Proceeds of the term facility were used to refinance the Company's outstanding indebtedness, to pay the cash consideration for the acquisition of Ruco and to pay certain related fees and expenses. The revolving facility will be available to fund the working capital requirements of the Company. Item 6. Exhibits and Reports on Form 8-K On October 13, 1998, the Company filed a Form 8-K report containing financial information relating to the July 31, 1998 acquisition of all of the outstanding capital stock of Ruco Polymer Corporation and all of the outstanding membership interests of Ruco Polymer Company of Georgia, LLC. Exhibit Description 2.1 Capital Stock and Membership Interest Purchase Agreement, effective as of July 31, 1998, by and among Sybron Chemicals Inc., Louis T. Camilleri, Anthony F. Forgione, Joseph Mitola, and Joseph A. Ruffing, with exhibits: A. Non-Competition Agreement, effective as of July 31, 1998, by and among Sybron Chemicals Inc., Ruco NY, Ruco GA and Anthony Forgione (substantially similar agreements with Messrs. Mitola, Camilleri and Mitola not included). B. Employment Agreement by and among Ruco Polymer Corp., Ruco Polymer Company of Georgia, LLC, Sybron Chemicals Inc. and Anthony F. Forgione, dated as of July 31, 1998, with exhibits (attached as Exhibit 10.1). C. Form Opinion of Jacobson, Mermelstein & Squire, dated as of July 31, 1998. -19- D. Amendment to Employment Agreement of Michael J. McCann and Waiver of Certain Rights Thereunder, dated as of July 31, 1998. 4 Rights Agreement, dated as of August 7, 1998, by and between Sybron Chemicals Inc. and the Rights Agent, with exhibits (incorporated herein by reference to Exhibit 1 to the Registration Statement on Form 8-A, filed on August 14, 1998 with the Securities and Exchange Commission). 10.1 Employment Agreement by and among Ruco Polymer Corp., Ruco Polymer Company of Georgia LLC, Sybron Chemicals Inc. and Anthony F. Forgione, dated as of July 31, 1998, with material exhibits: C. Bonus Incentive Plan for Mr. Forgione. 10.2 Credit Agreement, dated as of July 31, 1998, by and among Sybron Chemicals Inc., DLJ Capital Funding, Inc., Morgan Guaranty Trust Company of New York and Mellon Bank, N.A. 10.3 Promissory Notes, dated as of July 31, 1998, by Sybron Chemicals Inc. in favor of DLJ Capital Funding, Inc., Morgan Guaranty Trust Company of New York and Mellon Bank, N.A. 10.4 Security Agreement, dated as of July 31, 1998, among Sybron Chemicals Inc. and Mellon Bank, N.A. 10.5 Trademark Security Agreement, dated as of July 31, 1998, among Sybron Chemicals Inc., the Subsidiary Guarantors to the Credit Agreement, and Mellon Bank, N.A. re: Sybron Chemicals Inc.'s trademarks and licenses. 10.6 Trademark Security Agreement, dated as of July 31, 1998, among Sybron Chemicals Inc., the Subsidiary Guarantors to the Credit Agreement, and Mellon Bank, N.A. re: Ruco NY's trademarks and licenses. 10.7 Trademark Security Agreement, dated as of July 31, 1998, among Sybron Chemicals Inc., the Subsidiary Guarantors to the Credit Agreement, and Mellon Bank, N.A. re: Ruco GA's trademarks and licenses. 10.8 Patent Security Agreement, dated as of July 31, 1998, among Sybron Chemicals Inc., the Subsidiary Guarantors to the Credit Agreement, and Mellon Bank, N.A. re: Sybron Chemicals Inc.'s patents and licenses. -20- 10.9 Patent Security Agreement, dated as of July 31, 1998, among Sybron Chemicals Inc., the Subsidiary Guarantors to the Credit Agreement, and Mellon Bank, N.A. re: Ruco NY's patents and licenses. 10.10 Patent Security Agreement, dated as of July 31, 1998, among Sybron Chemicals Inc., the Subsidiary Guarantors to the Credit Agreement, and Mellon Bank, N.A. re: Ruco GA's patents and licenses. 10.11 Subsidiary Guaranty Agreement, dated as of July 31, 1998, by and among Sybron Chemical Holdings Inc., Ruco NY, Ruco GA and DLJ Capital Funding, Inc., Morgan Guaranty Trust Co. of New York and Mellon Bank, N.A. 10.12 Subordination Agreement, dated as of July 31, 1998 by Sybron Chemie Nederland B.V. 10.13 Subordination Agreement, dated as of July 31, 1998 by Sybron Chemical Industries Nederland B.V. 20.1 Press Release dated July 31, 1998 Re: The Company's Purchase of Ruco. 20.2 Press Release dated August 7, 1998 Re: The Company's Adoption of Stockholder Rights Plan. 27 Financial Data Schedule -21- EXHIBIT INDEX Exhibit Method of Filing 2.1 Capital Stock and Membership Interest * Purchase Agreement, effective as of July 31, 1998, by and among Sybron Chemicals Inc., Louis T. Camilleri, Anthony F. Forgione, Joseph Mitola, and Joseph A. Ruffing, with exhibits: A. Non-Competition Agreement, effec- tive as of July 31, 1998, by and among Sybron Chemicals Inc., Ruco NY, Ruco GA and Anthony Forgione (substantially similar agreements with Messrs. Mitola, Camilleri and Mitola not included). B. Employment Agreement by and among Ruco Polymer Corp., Ruco Polymer Company of Georgia, LLC, Sybron Chemicals Inc. and Anthony F. Forgione, dated as of July 31, 1998, with exhibits (attached as Exhibit 10.1). C. Form Opinion of Jacobson, Mermelstein & Squire, dated as of July 31, 1998. D. Amendment to Employment Agreement of Michael J. McCann and Waiver of Certain Rights Thereunder, dated as of July 31, 1998. 4 Rights Agreement, dated as of August 7, (2) 1998, by and between Sybron Chemicals Inc. and the Rights Agent, with exhibits (incorporated herein by reference to Exhibit 1 to the Registration Statement on Form 8-A, filed on August 14, 1998 with the Securities and Exchange Commission). 10.1 Employment Agreement by and among Ruco * Polymer Corp., Ruco Polymer Company of Georgia LLC, Sybron Chemicals Inc. and Anthony F. Forgione, dated as of July 31, 1998, with material exhibits: C. Bonus Incentive Plan for Mr. Forgione. -22- 10.2 Credit Agreement, dated as of July 31, * 1998, by and among Sybron Chemicals Inc., DLJ Capital Funding, Inc., Morgan Guaranty Trust Company of New York and Mellon Bank, N.A. 10.3 Promissory Notes, dated as of July 31, * 1998, by Sybron Chemicals Inc. in favor of DLJ Capital Funding, Inc., Morgan Guaranty Trust Company of New York and Mellon Bank, N.A. 10.4 Security Agreement, dated as of July 31, * 1998, among Sybron Chemicals Inc. and Mellon Bank, N.A. 10.5 Trademark Security Agreement, dated as * of July 31, 1998, among Sybron Chemicals Inc., the Subsidiary Guarantors to the Credit Agreement, and Mellon Bank, N.A. re: Sybron Chemicals Inc.'s trademarks and licenses. 10.6 Trademark Security Agreement, dated as of * July 31, 1998, among Sybron Chemicals Inc., the Subsidiary Guarantors to the Credit Agreement, and Mellon Bank, N.A. re: Ruco NY's trademarks and licenses. 10.7 Trademark Security Agreement, dated as of * July 31, 1998, among Sybron Chemicals Inc., the Subsidiary Guarantors to the Credit Agreement, and Mellon Bank, N.A. re: Ruco GA's trademarks and licenses. 10.8 Patent Security Agreement, dated as of * July 31, 1998, among Sybron Chemicals Inc., the Subsidiary Guarantors to the Credit Agreement, and Mellon Bank, N.A. re: Sybron Chemicals Inc.'s patents and licenses. 10.9 Patent Security Agreement, dated as of * July 31, 1998, among Sybron Chemicals Inc., the Subsidiary Guarantors to the Credit Agreement, and Mellon Bank, N.A. re: Ruco NY's patents and licenses. 10.10 Patent Security Agreement, dated as of * July 31, 1998, among Sybron Chemicals Inc., the Subsidiary Guarantors to the Credit Agreement, and Mellon Bank, N.A. re: Ruco GA's patents and licenses. -23- 10.11 Subsidiary Guaranty Agreement, dated as * of July 31, 1998, by and among Sybron Chemical Holdings Inc., Ruco NY, Ruco GA and DLJ Capital Funding, Inc., Morgan Guaranty Trust Co. of New York and Mellon Bank, N.A. 10.12 Subordination Agreement, dated as of * July 31, 1998 by Sybron Chemie Nederland B.V. 10.13 Subordination Agreement, dated as of * July 31, 1998 by Sybron Chemical Industries Nederland B.V. 20.1 Press Release dated July 31, 1998 * Re: The Company's Purchase of Ruco. 20.2 Press Release dated August 7, 1998 * Re: The Company's Adoption of Stockholder Rights Plan. 27 Financial Data Schedule (1) * Previously filed as an Exhibit to the Registrant's Quarterly report on Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference. (1) Filed electronically herewith. (2) Previously filed as an Exhibit to the Company's Registration Statement on Form 8-A, filed on August 14, 1998. -24- SIGNATURE 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. SYBRON CHEMICALS INC. /s/ Steven F. Ladin Steven F. Ladin Vice President, Finance and Chief Financial Officer Date: November 16, 1998 -25- EX-27 2
5 9-MOS DEC-31-1998 SEP-30-1998 17,749,000 0 48,541,000 0 37,660,000 107,498,000 80,265,000 0 273,595,000 54,912,000 0 0 0 59,000 71,029,000 273,595,000 156,389,000 156,389,000 98,702,000 138,396,000 2,415,000 0 3,048,000 12,530,000 5,137,000 7,393,000 0 313,000 0 7,080,000 1.24 1.21
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