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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 33-11634
TRANS-RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-2729497
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
9 West 57th Street, New York, NY 10019
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 888-3044
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Securities registered pursuant to Section 12 (b) of the Act: NONE
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Securities registered pursuant to Section 12 (g) of the Act: NONE
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Indicate by check mark whether 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 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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
State the aggregate market value of the voting stock held by
non-affiliates of registrant.
None held by non-affiliates
Indicate the number of shares outstanding of each of registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding at March 28, 1997
Common Stock, par value $.01 per share 3,000 shares
(Owned by TPR Investment Associates, Inc.)
Documents incorporated by reference.
None
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TABLE OF CONTENTS
Page
PART I
Item 1. Business.......................................................... 1
Item 2. Properties........................................................ 9
Item 3. Legal Proceedings................................................. 9
Item 4. Submission of Matters to a Vote of Security Holders............... 10
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters............................................. 11
Item 6. Selected Financial Data........................................... 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 12
Item 8. Financial Statements and Supplementary Data....................... 16
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................. 16
PART III
Item 10. Directors and Executive Officers of the Registrant................ 17
Item 11. Executive Compensation............................................ 18
Item 12. Security Ownership of Certain Beneficial Owners and Management.... 20
Item 13. Certain Relationships and Related Transactions.................... 21
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K... 21
Signatures .............................................................. 22
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PART I
ITEM 1. Business
Trans-Resources, Inc., a privately-owned Delaware corporation ("TRI"),
operates through its subsidiaries and it is a multinational manufacturer of
specialty plant nutrients, organic chemicals and industrial chemicals and
distributes its products in over 80 countries. As used herein, the term "the
Company" means TRI together with its direct and indirect subsidiaries. The
Company is the world's largest producer of potassium nitrate, which is marketed
principally under the brand names K-Power domestically and Multi-K
internationally (collectively referred to as K-Power). On August 16, 1996, the
Company sold its potash mining operations, as described below. During 1996,
specialty plant nutrients, organic chemicals, industrial chemicals and potash
contributed approximately 52%, 11%, 28% and 9%, respectively, of the Company's
total revenues. The following table sets forth the primary markets and
applications for each of the Company's current principal products:
Principal Products Primary Markets Applications
------------------ --------------- ------------
SPECIALTY PLANT NUTRIENTS
K-Power - Fresh fruits and vegetables, - Fertigation and foliar sprays
flowers, cotton and tobacco (fully soluble, readily absorbed,
Polyfeed Horticulture no harmful residues)
Multi-MAP Horticulture
Multi-MKP Horticulture
Magnisal Vegetables, citrus, tropical
fruits and flowers
Multicote - Vegetables, turf, fruit trees and - Time release of nutrients (to
potted plants optimize plant feeding and
minimize labor requirements)
ORGANIC CHEMICALS
Propanil - Rice - Broad spectrum weed control
Dichloroaniline - Organic chemical manufacturers - Intermediate propanil product
Butoxone - Peanuts - Weed control
Diuron - Food crops, alfalfa and cotton - Broad use herbicide
Ethephon - Cotton, fruit and vegetables - Plant growth regulator
Tham - Industrial and pharmaceutical - Buffering agent
companies
Custom Manufacturing - Various industrial companies - Various organic synthesis
INDUSTRIAL CHEMICALS
Technical Grade Potassium - Glass, ceramics, food, explosives, - Oxidization and ion exchange
Nitrate metal, petrochemical and heat
treatment industries
Potassium Carbonate - Glass, detergents and horticulture - Oxidization and cleansing
Phosphoric Acid - Industrial production, food and - Metal treatment, industrial
fertilizer industries cleaning and fermentation
Sodium Tripolyphosphate - Soaps and detergents - Cleansing ingredient
Monoammonium Phosphate - Chemical manufacturers - Fire extinguishing powders
Diammonium Phosphate Chemical manufacturers and fire retardant formulations
Monopotassium Phosphate - Food processing companies - Fermentation process
Sodium Acid Pyrophosphate - Food processing companies - Baking powders and potato
processing
Chlorine - Chemical companies - Water purification, production of
paper pulp and PVC pipe
Nitrogen Tetroxide - United States Government - Aerospace fuel additive
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Of the Company's total revenues for the year ended December 31, 1996,
approximately 35% and 39% were derived from sales in the United States and
Europe, respectively, with the remainder derived from sales in many other
countries.
TRI's direct and indirect wholly-owned subsidiaries include Haifa
Chemicals Limited ("HCL"), an Israeli corporation, and HCL's wholly-owned
subsidiary, Haifa Chemicals South, Ltd., an Israeli corporation ("HCSL"); Cedar
Chemical Corporation, a Delaware corporation ("Cedar"), and Cedar's wholly-owned
subsidiaries, Vicksburg Chemical Company, a Delaware corporation ("Vicksburg"),
and NMPC, Inc., a New Mexico corporation (("NMPC") formerly New Mexico Potash
Corporation); Na-Churs Plant Food Company ("Na-Churs"), a Delaware corporation
(Na-Churs was acquired in March, 1995); and EDP, Inc., a Delaware Corporation
(("EDP") formerly Eddy Potash, Inc.). TRI was incorporated in Delaware in 1971
under the name Trans-Pacific Resources, Inc.
On February 7, 1994, the smaller of HCL's two potassium nitrate
production units was damaged by a fire, causing a temporary reduction of the
Company's potassium nitrate production capacity. The impact of the loss of the
production unit, including the effect of business interruption, was
substantially covered by insurance. The insurance proceeds for the property
damage was for replacement value, which substantially exceeded the recorded
carrying value of the damaged assets. See Note D of Notes to Consolidated
Financial Statements for additional information. The Company completed the
replacement of the damaged production unit during 1995.
On August 16, 1996 NMPC and EDP sold substantially all of their assets
for an aggregate consideration of $56,154,000, including a payment for working
capital of $11,154,000 and the assumption of specified liabilities (but
excluding, among other things, certain antitrust litigation - see Part I - Item
3 "Legal Proceedings"). The sale of the Company's potash operations resulted in
a pre-tax gain, after considering certain costs relating thereto, of
$22,579,000. Such gain is included in "Interest and other income - net" in the
accompanying Consolidated Statements of Operations. NMPC and EDP had conducted
the Company's potash mining and production operations. During the years ended
December 31, 1994, 1995 and 1996, the potash operations contributed
approximately $57,000,000 (17%), $54,000,000 (14%) and $35,000,000 (9%),
respectively, to the Company's consolidated revenues, after eliminating
intercompany sales. Approximately 50% of the aggregate sales proceeds received
from the buyers were applied to prepay debt secured by the assets of NMPC or
EDP. In connection with the sale, Vicksburg entered into a five year potash
supply agreement, at prevailing market rates during the period (subject to
certain adjustments), with the buyer.
See "Personnel and Labor Relations" below and Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Results of Operations" for certain information regarding a labor dispute and
strike at HCL commencing in October, 1996 which significantly impacted the
Company's financial results.
SPECIALTY PLANT NUTRIENTS
The Company is a multinational manufacturer of a range of specialty
plant nutrients, which contributed approximately $216,000,000 to the Company's
revenues for the year ended December 31, 1996, of which K-Power contributed a
substantial portion. The Company is the world's largest producer of potassium
nitrate.
Products and Markets. K-Power, Polyfeed (a fully soluble plant nutrient
containing nitrogen, phosphate and potassium), Magnisal (magnesium nitrate),
Multi-MAP (monoammonium phosphate) and Multi-MKP (monopotassium phosphate) are
suitable for intensive high value crops such as fresh fruit and vegetables,
flowers, cotton and tobacco, since they are fully soluble, easily absorbed and
leave no harmful residues such as chloride, sodium or sulfate. Because of their
solubility, these products can be used with modern drip irrigation systems,
which are increasingly being employed to conserve water. The Company produces
several grades of agricultural potassium nitrate, including standard and
prilled.
Worldwide demand for potassium nitrate has been growing steadily since
potassium nitrate was introduced in the 1960's. The market for K-Power has
enjoyed steady volume growth because it increases plant yields, improves
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crop quality and shortens growing cycles. As a result, potassium nitrate
commands a price premium over other potassic plant nutrients such as potassium
sulfate and sulfate of potash magnesia, used in combination with ammonium
nitrate.
After a multi-year research and development effort, the Company
developed a technology for the coating of potassium nitrate and other specialty
plant nutrients which promotes the controlled release of nutrients over time.
These products increase nutrient uptake by plants while minimizing fertilizer
runoff into the soil, thus satisfying growing environmental concerns, and
reducing labor requirements. The Company markets these controlled release plant
nutrients products under the Multicote brand name.
Marketing and Sales. As part of the Company's market development and
sales efforts, resident agronomists are located in the United States, Italy,
France, the United Kingdom, Greece, Mexico, South Africa, China, Japan and the
Benelux countries. The steady growth in demand for the Company's specialty plant
nutrients has been supported by agronomic activities in many countries which
have demonstrated the benefits of using K-Power. Horticultural and agricultural
growers generally require substantial testing under their own specific climatic,
soil and growing conditions before they will adopt a new plant nutrient. The
Company has developed application expertise which has produced a growing number
of applications and users.
To market its specialty plant nutrients, the Company has established a
worldwide network of agents and distributors and uses storage facilities in
certain countries to provide prompt and responsive customer service. However,
depending on the conditions prevailing in the particular market, certain large
users are serviced directly and certain products are covered by product managers
who have worldwide responsibility for such products. In order to further improve
service to its customers in Western Europe, the Company has established
subsidiaries in the United Kingdom, Belgium, Spain and Italy. A French
subsidiary engaged in the fertilizer business and having its own sales and
distribution network also markets the Company's specialty plant nutrients. The
Company also has established a subsidiary in Mexico. For United States sales,
the Company utilizes its own sales force and also works in selected areas
through brokers.
In general, in the United States, the Company sells K-Power to blenders
who produce mixed fertilizers containing potassium nitrate, which is then sold
to growers. Internationally, the Company's distributors usually sell directly to
growers.
Manufacturing. The Company believes it accounts for approximately 65%
of the world's production of potassium nitrate and its current annual potassium
nitrate production capacity is approximately 550,000 metric tons. To meet the
anticipated continued growing demand of the market, in late 1994 the Company
expanded its production capacity by constructing a new facility (the "K3 Plant")
in Israel, with capacity to produce annually approximately 110,000 metric tons
of potassium nitrate and 15,000 metric tons of phosphoric acid. Capacity of the
K3 Plant may be expanded in subsequent years. Provided it complies with the
conditions specified in the applicable certificate of approval, HCL will
receive, with respect to taxable income derived from the K3 Plant, certain
benefits accorded under Israel's Investments Law. See "Facilities and Suppliers"
below.
Competition. The Company's only significant competitor in the
production and sale of potassium nitrate is Sociedad Quimica Y Minera De Chile,
S.A., a Chilean company. The principal methods of competition are product
quality, customer service, agronomic expertise and price.
ORGANIC CHEMICALS
The Company's organic chemicals business specializes in areas of
complex organic synthesis. Its sales were approximately $44,000,000 in 1996,
with sales of propanil, a leading rice herbicide, representing approximately 60%
thereof.
Products and Markets. The Company's organic chemicals products include
propanil (which Cedar markets principally under the Cedar label and the brand
names "Wham! EZ" and "Super Wham!"), dichloroanaline ("DCA", the
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principal raw material for the production of propanil), Butoxone (a peanut
herbicide), Diuron (a broad use herbicide used on food crops, alfalfa and
cotton) and Ethephon (a cotton, fruit and vegetable growth regulator). The
Company also produces and sells "THAM" (trishydroxyaminomethane), a proprietary
buffering agent used in industrial and pharmaceutical applications. The Company
has also developed several new propanil formulations which offer various
advantages in terms of ease of application and improved environmental impact in
an effort to expand the propanil market. The Company is currently the only
producer of DCA in North America.
Although the United States is currently the largest propanil market,
representing approximately 35% of the world market, the United States contains
only a small proportion of the world's rice acreage. Accordingly, the Company
believes there is significant potential for propanil growth internationally. The
Company has established an international market development program to introduce
propanil to additional markets around the world. The Company believes it is
positioned to benefit from growth in the international propanil market.
The Company also produces other organic chemicals as a contract
manufacturer for various chemical companies. Through this contract
manufacturing, the Company has developed certain techniques for the synthesis of
complex organic chemicals which has been beneficial to it in both its contract
manufacturing activities as well as its own developmental efforts for
proprietary products.
Marketing and Sales. The Company produces and sells propanil under its
own brand name and supplies propanil to other agrichemical companies under
long-term supply contracts. Sales by the Company of propanil and DCA under a
long-term supply contract with a major agrichemical company represented
approximately 20% of the Company's sales of organic chemicals in 1996.
The Company sells propanil and its other organic chemical products
through its own sales force, distributors, regional dealers, cooperatives and
international brokers.
Manufacturing. The Company is a low cost producer of propanil as a
result of its 1991 acquisition, relocation and upgrading of a DCA manufacturing
plant. The Company intends to continue to expand its organic chemicals business
by developing and/or distributing new products that draw upon its skills in
organic chemical synthesis and/or its sales organization.
Competition. In the United States market, the Company competes
primarily with two other propanil suppliers, while in international markets the
Company competes with several producers. Propanil competes with several other
rice herbicides, but is currently the most commonly used rice herbicide. Diuron,
Ethephon and THAM compete with other products supplied by several multi-national
companies. In contract manufacturing, the Company competes with various other
producers and the basis of competition is generally the quality and range of
production capabilities, service and price.
INDUSTRIAL CHEMICALS
The Company's industrial chemical products include technical grade
potassium nitrate, technical and food grade sodium tripolyphosphate ("STPP"),
technical and food grade phosphoric acid, technical grade monoammonium phosphate
and diammonium phosphate ("MAP" and "DAP"), technical and food grade
monopotassium phosphate ("MKP"), potassium carbonate, food grade sodium acid
pyrophosphate ("SAPP"), chlorine, nitrogen tetroxide and food grade salts.
Industrial chemicals contributed approximately $117,000,000 to the Company's
revenues for the year ended December 31, 1996.
Products and Markets. Technical grade potassium nitrate is used in the
glass industry for making fine tableware glass, TV tubes and crystal glass; in
the metal industry for heat treatment; in the ceramics industry for the glazing
process; for making explosives and for the production of heat transfer salts in
the petrochemical industry; and for solar energy systems.
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Phosphoric acid is used in metal treatment, industrial cleaning
solutions, fermentation processes and for carbonated drinks in the food
industry. STPP is used primarily in the manufacturing of detergents and
specialty cleaning compounds and in the textile and ceramic clay industry; MAP
and DAP are used for fire extinguishing powders and fire retardant functions;
MKP is used for the fermentation process; and SAPP is an ingredient in baking
powders and is used for potato processing. Chlorine is used in the pulp and
paper industry and as a swimming pool disinfectant. Nitrogen tetroxide is an
aerospace fuel additive. Food grade salts are used in food processing. Potassium
carbonate is used primarily in the glass industry.
Marketing and Sales. The Company sells its industrial chemicals through
its own sales force and brokers in the United States and internationally through
a worldwide network of agents and distributors. Nitrogen tetroxide is primarily
sold under a long-term contract to the United States Government. The Company
utilizes storage facilities in various countries.
Production. Many of these industrial products are co-products of the
Company's potassium nitrate manufacturing process. Given its production
flexibility, the Company can vary the relative proportion of the various
phosphate chemicals (STPP, MAP, MKP, DAP and SAPP) to optimize its product mix
in light of then prevailing market conditions.
Competition. Certain of the Company's industrial chemical products,
such as STPP and phosphoric acid, compete in large industrial chemical markets
in which the Company has a small position. Others, such as technical grade
potassium nitrate, MAP, MKP and nitrogen tetroxide have relatively significant
competitive positions in their respective niche markets. The nature of
competition for the various industrial chemicals sold by the Company varies by
product. However, in general, the principal methods of competition are product
quality, customer service and price.
FACILITIES AND SUPPLIERS
Vicksburg owns the property, plant and equipment located at its
Vicksburg, Mississippi site and Cedar owns the property, plant and equipment
located at its West Helena, Arkansas site. The Vicksburg plant consists of three
manufacturing plants situated on 600 contiguous acres. The West Helena plant is
located on a 60 acre site. The plants are encumbered by first mortgages and
security interests securing long-term bank indebtedness. Cedar's corporate
offices are located in leased premises in Memphis, Tennessee.
The major raw materials required by Vicksburg for production of
potassium nitrate are potash supplied primarily by the entity which acquired the
assets of NMPC in August 1996 (see Note A of Notes to Consolidated Financial
Statements) and nitric acid which is produced at the Vicksburg plant. Ammonia,
the principal raw material required for production of nitric acid, is supplied
by a third party in close proximity to the Vicksburg facility. The major raw
material for the production of propanil is DCA. The principal raw material for
the production of DCA is provided to the Company under a supply contract. Such
raw material is available from multiple sources.
HCL owns its machinery and equipment and leases its land and buildings
from Oil Refineries Ltd. ("ORL"), a corporation which is majority-owned by the
Israeli Government. The leases expire at various dates, principally in 19 years.
Substantially all of the assets of HCL are subject to security interests in
favor of the State of Israel or banks. HCL also has a contract with ORL for
steam and processed water which expires on June 30, 1997, with HCL having an
option to extend such contract for an additional year, and a lease from ORL of a
pipeline which transports ammonia from the port in Haifa to HCL's plant. HCSL
leases its land from the Israeli Government under a 49 year lease which
commenced in 1994, with the payments for such lease paid in advance and included
in the K3 Plant construction costs.
HCL obtains its major raw materials, potash and phosphate rock, in
Israel. HCL purchases potash solely from Dead Sea Works, Ltd. ("DSW") in
accordance with a supply contract expiring December 31, 1999. The contract
provides for prices to be established quarterly, based on the weighted average
of the FOB Israeli port prices paid to DSW by its overseas customers during the
preceding quarter plus certain adjustments thereto. HCL currently is purchasing
phosphate rock on a "spot" basis from Rotem Amfert Negev ("Rotem"). DSW and
Rotem are companies that are
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majority-owned by the Israeli Government and the sole suppliers in Israel of
potash and phosphate rock, respectively. While HCL views its current
relationships with both of its principal suppliers to be good, the loss of
supply from either of these sources could have an adverse effect on the Company.
Ammonia, which is used to produce nitric acid (which in turn is used to
produce potassium nitrate), is manufactured in Israel as well as imported. The
ammonia used by HCL is currently imported from a producer under supply
agreements expiring on December 31, 1998. HCL owns ammonia terminal facilities
located on leased property in the port of Haifa which have the capacity to store
an amount of ammonia sufficient to meet HCL's requirements.
Management believes that its facilities are in good operating condition
and adequate for its current needs. See Item 7 - "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Capital
Expenditures".
RESEARCH AND DEVELOPMENT
The Company has developed and patented certain manufacturing processes
and has submitted other applications for patents for additional processes. As of
December 31, 1996, the Company employed approximately 70 research and
development scientists, engineers and technicians, who are involved in the
development and evaluation of process technologies, efficiencies and quality
control. For the years ended December 31, 1994, 1995 and 1996, the Company spent
approximately $3,978,000, $3,158,000 and $2,693,000, respectively, on these
efforts, which have been charged to current operations.
PERSONNEL AND LABOR RELATIONS
As of December 31, 1996 the Company employed approximately 1,000
people. Approximately 250 employees have advanced technical and academic
qualifications. Except for certain employees at HCL, none of the Company's
employees are represented by any collective bargaining unit.
Technicians and engineers of HCL are members of the Union of
Technicians and Engineers, which operates throughout Israel. The other employees
of HCL are members of the "Histadrut", the dominant labor union in Israel. The
terms of employment of all employees are governed by a Specific Collective
Agreement ("SCA") negotiated by HCL with the Histadrut and the representatives
of the employees. In 1994, an agreement was signed with the technicians and
engineers for the three year period ending December 31, 1996. In 1995, an SCA
was signed with the Histadrut and the representatives of the employees for the
two year period ending December 31, 1996.
In September, 1996, in accordance with its rights pursuant to the
above-mentioned agreements, HCL announced the cancellation of such agreements
effective with their expiration dates. HCL also announced its intent to
negotiate a new SCA with basic changes for the period commencing after December
31, 1996.
As a result of the announced cancellation of the labor agreements,
during October, 1996 HCL suffered several work stoppages and other job actions
which adversely affected plant productivity, which was followed by a complete
work stoppage and plant shut-down from October 29 to November 14, 1996. Based on
a decision of a regional labor court, HCL's plant was then ordered to be
re-opened temporarily. The court also ordered HCL and representatives of the
workers to continue to negotiate a settlement of the labor dispute.
Notwithstanding the court's ruling, HCL suffered numerous job actions by its
workers which again led to very low productivity. On December 3, 1996 the
workers declared a strike and the plant was shut-down. The plant remained closed
until March 10, 1997 when a new SCA was signed for the three year period ending
December 31, 1999.
See Item 7 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations Results of Operations".
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Prior to 1996, HCL's last major labor dispute took place in July 1991
and related to negotiations of the SCA for 1990 and 1991. As a result of this
dispute, HCL's employees went on strike for approximately four weeks during the
third quarter of 1991. Prior to that, the last major labor dispute took place in
1983, which resulted in a strike of approximately two weeks.
See Note O of Notes to Consolidated Financial Statements.
ENVIRONMENTAL MATTERS
Cedar and Vicksburg
Vicksburg's plant located in Vicksburg, Mississippi and Cedar's West
Helena, Arkansas plant discharge process waste water and storm water pursuant to
permits issued in accordance with the Federal Clean Water Act and related state
statutes. Air emissions at each plant are regulated by permits issued pursuant
to the Federal Clean Air Act and related state statutes. While the plants have
generated solid waste regulated by the Federal Resource Conservation and
Recovery Act of 1976, as amended by the Hazardous and Solid Waste Amendments of
1984 ("RCRA") and related state statutes, the Company believes that such waste
is currently handled and disposed of in a manner which does not require the
Company to have permits under RCRA or any related state statute.
The Environmental Protection Agency's (the "EPA") Regional Office in
Atlanta notified Cedar in 1989 that unspecified corrective action will be
required to protect against the release of contaminants allegedly present at the
Vicksburg plant as a result of previous pesticide manufacturing operations. As a
result of the notice, Cedar reached agreement with the EPA and the Department of
Justice on the terms of a Consent Decree which was filed in the United States
District Court at Jackson, Mississippi in January 1992. Pursuant to the Consent
Decree, Cedar submitted a report of current conditions which was approved by the
EPA in October 1996. A facility investigation work plan for the Vicksburg plant
was submitted immediately thereafter. Following approval of the facility
investigation work plan, Vicksburg intends to undertake a site investigation and
corrective measures study, followed by implementation of appropriate corrective
action. Compliance with the Consent Decree is expected to occur over a five to
six year period following approval of the facility investigation work plan.
Cedar's West Helena plant utilizes a surface impoundment for biological
treatment of non-hazardous waste streams which was the subject of an enforcement
proceeding initiated by the Arkansas Department of Pollution Control and Ecology
(the "ADPCE") in 1986. The proceeding resulted in a Consent Administrative Order
which required Cedar to carry out various studies, ultimately leading to the
implementation of a groundwater monitoring system. Based in part on the results
of groundwater monitoring and in part on the discovery of a drum burial area on
the West Helena plant site, the ADPCE requested Cedar to initiate an expanded
plant-wide investigation pursuant to a Consent Administrative Order. The Order
was entered in the third quarter of 1991. Implementation of corrective measures
is expected to occur over a three year period following completion and approval
of the facility investigation. A proposed final facility investigation report
was submitted to the ADPCE in June 1996.
Cedar removed the buried drums from the West Helena site in accordance
with a work plan incorporated in the Consent Administrative Order and, shortly
thereafter, filed a suit against a former operator of the plant site for
contribution for the costs incurred. In October 1994, Cedar reached a settlement
pursuant to which it recovered $1,580,000 of its previously incurred drum
removal and investigative costs. The settlement also provides for binding
arbitration among Cedar and two former operators at the plant site to apportion
future investigative and remedial costs required under the Order. Cedar
recovered an additional $286,000 of investigation costs in 1995.
The Company believes that the future costs required to complete the
site investigation and corrective measures studies at Vicksburg and any
supplemental plant-wide investigation (if required) and the corrective measures
studies at West Helena will be between $500,000 and $1,000,000 and will be
expended over two to three years. Interim corrective measures may also be
implemented at one or both of these locations during this same period. As of
December 31, 1995 and 1996, the Company has accrued an aggregate of $1,250,000
for these matters. Until these investigations
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are completed, it is not possible to definitively determine the costs of any
final corrective actions which will be required. Any such corrective action
costs will be expended over a period of years. There can be no assurance that
such costs will not be material.
HCL
As a result of the production of phosphoric acid, HCL generates acid
sludge and liquid acid effluents. In accordance with a permit issued by the
Israeli Agency for Environmental Preservation of the Ministry of Interior (the
"Agency") pursuant to the Law for the Prevention of Sea Pollution (Disposing of
Wastes) of 1983 and 1984, HCL is now disposing of the acid sludge in a
designated site in the Mediterranean Sea, situated 20 nautical miles from the
Israeli coast. The permit allows for the disposal of a quantity which is
sufficient to satisfy HCL's needs. The permit expired on March 31, 1996 and the
Company has obtained from the Agency the consent to extend the term of the
permit for an additional period of 18 months.
HCL currently disposes of its liquid acid effluents to the Haifa Bay
through a local river (the "River"). During July 1996 the Ministry of
Environment (the "Ministry") approved a proposed comprehensive land solution
plan for the handling and disposal of the sludge and effluents produced by HCL's
plant (the "Plan"). The Plan was based on the joint work of HCL and
representatives of the Ministry. In general, the Plan consisted of two
objectives: (i) decreasing the quantities and concentrations of the effluents,
and (ii) a permanent land solution for the sludge currently being disposed of in
the Mediterranean Sea, by filtering and purifying same in a special purifying
plant to be built by HCL, and the disposal thereof at a land site to be approved
by the Ministry.
The overall time schedule for the complete execution of the Plan is 4.5
years, with up to a 1.5 year grace period available under certain conditions,
with estimated capital expenditures of up to $15 million. HCL has informed the
Ministry that it expects the Ministry's assistance in obtaining Governmental
financial support for the implementation of the Plan.
Upon approval of the Plan, the Ministry withdrew its objection to
granting HCL a temporary permit for disposing of liquid acid effluents into the
Haifa Bay, which was accordingly granted on July 24, 1996. In addition, HCL was
also granted on August 28, 1996 a temporary permit pursuant to the Water Law,
1959 to dispose of the effluents into the River as a passageway to the sea
(together with the Haifa Bay permit, the "Permits"). Both Permits are effective
until July 31, 1997. The Permits also set forth restrictions on quantities and
concentrations, inspection, reporting duties and certain other conditions.
In November, 1996 HCL signed a settlement agreement (the "Agreement")
for resolution of a private criminal complaint which was submitted against HCL
and its directors on December 21, 1994 by Man, Nature and Law, an Israeli
fellowship for the protection of the environment (the "Society") and six fishing
companies (collectively, the "Petitioners") before the Magistrate's Court of
Haifa. On November 26, 1996 the court approved the Agreement, and the
Petitioners withdrew the complaint.
While the Agreement is consistent with the Plan, it is more specific
regarding prescribed time schedules, effluents concentrations and the
maintenance of such concentrations. It also establishes a Supervising Committee
to review and supervise HCL's progress in complying with the Agreement and
enforcement penalty provisions. In addition, HCL has undertaken to compensate
the Petitioners and reimburse the Society for certain legal expenses. The
Society agreed that after implementation of the Agreement it would not make any
further demands on HCL and/or any judicial or administrative body regarding the
alleged contamination of river or sea water, unless the terms of the Agreement
are not fulfilled.
Appropriate provisions have been made in the consolidated financial
statements with respect to the above matters. See Notes A and O of Notes to
Consolidated Financial Statements.
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ITEM 2. Properties.
Reference is made to "Facilities and Suppliers" in Item 1 above,
"Business," for information concerning the Company's properties. See also Note D
of Notes to Consolidated Financial Statements for additional information.
ITEM 3. Legal Proceedings.
1. Beginning in April 1993 a number of class of action lawsuits were
filed in several United States District Courts against the major Canadian and
United States potash producers, including EDP and NMPC. The purported class
actions were filed on behalf of all direct United States purchasers of potash
from any of the named defendants or their respective affiliates, at any time
during the period from April 1987 to the present, and alleged that the
defendants conspired to fix, raise, maintain and stabilize the prices of potash
in the United States purchased by the plaintiffs and the other members of the
class in violation of the United States antitrust laws. The complaints sought
unspecified treble damages, attorneys' fees and injunctive relief against the
defendants. Pursuant to an order of the Judicial Panel for Multidistrict
Litigation, all of the Federal District Court actions were consolidated for
pretrial purposes in the United States District Court for Minnesota and
captioned In Re Potash Antitrust Litigation. Several additional and/or amended
complaints were filed in the Minnesota Federal District Courts making
substantially the same allegations as the earlier complaints. These complaints
have been superseded by or deemed included in the Third Amended and Consolidated
Class Action Complaint, to which NMPC and EDP served and filed answers denying
all the material allegations thereof on or about July 22, 1994. On or about
January 12, 1995 the Court granted plaintiffs' motion to certify the plaintiff
class. On or about December 21, 1995, the defendants filed motions for summary
judgement. On September 13, 1996 Magistrate Judge Erickson issued a Report and
Recommendation recommending that U.S. District Court Judge Kyle grant the
motions filed by NMPC, EDP and the other defendants for summary judgment as to
all of the plaintiffs' claims. Plaintiffs filed objections to the Report and
Recommendation under Rule 72 F.R.Civ.P. On January 2, 1997, after written briefs
were submitted by plaintiffs and defendants and after oral argument before Judge
Kyle on December 19, 1996, Judge Kyle issued an order accepting and adopting
Magistrate Judge Erickson's Report and Recommendation and ordering that the
motions filed by NMPC, EDP and the other defendants for summary judgment as to
all of the plaintiffs' claims be granted. Plaintiffs, by Notice of Appeal dated
January 31, 1997, appealed Judge Kyle's order to the U.S. Court of Appeals for
the Eighth Circuit.
On or about May 27, 1993 a purported class action captioned Angela
Coleman v. New Mexico Potash Corp., et al. was filed against the major Canadian
and United States potash producers, including EDP and NMPC, and unnamed
co-conspirators in the Superior Court of the State of California for the County
of Los Angeles. The Coleman action was commenced by Angela Coleman on behalf of
a class consisting of all California indirect purchasers of potash, and alleges
that the defendants conspired to fix, raise, maintain and stabilize the prices
of potash indirectly purchased by the members of the class in violation of
specified California antitrust and unfair competition statutes. The complaint in
Coleman seeks unspecified treble damages, attorneys' fees and injunctive relief
against the defendants. In addition, on or about March 29, 1994, a purported
class action captioned Neve Bros. et al. v. Potash Corporation of Saskatchewan,
et. al., was commenced in the Superior Court of the State of California for the
City and County of San Francisco against the major Canadian and United States
potash producers and unnamed co-conspirators. EDP, NMPC, NMPC's parent, Cedar,
Cedar's parent, Nine West Corporation, and the Company are among the named
defendants in the Neve action. The Neve action, also brought on behalf of a
class of indirect purchasers of potash in California, makes substantially the
same allegations as made in the Coleman action and seeks substantially the same
legal and equitable remedies and relief. Nine West Corporation and the Company
have been dismissed from the Neve action, in each case for lack of personal
jurisdiction. Cedar, EDP and NMPC have served and filed answers in the Neve
action, and EDP and NMPC have served and filed answers in the Coleman action, in
each case denying all material allegations of the respective complaint. The
Coleman action has been consolidated with the Neve action in the Superior Court
of the State of California for the City and County of San Francisco.
On or about August 2, 1994, a purported class action on behalf of
indirect purchasers of potash outside of California, David B. Gaebler v. New
Mexico Potash Corporation, et al., was commenced against the major Canadian and
United States potash producers, including EDP and NMPC, in the Circuit Court of
Cook County, Illinois, under the
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Illinois consumer fraud statute. The Gaebler action makes substantially the same
allegations made in the Neve and Coleman actions and seeks unspecified
compensatory and punitive damages and an award of attorneys' fees and costs. On
or about June 22, 1995, the Court dismissed the Gaebler action and on or about
July 14, 1995 the Court denied the Gaebler motion to amend the complaint. The
Gaebler plaintiffs have appealed the dismissal to the Appellate Court of
Illinois, First Judicial District, Second Division. On November 27, 1996, the
Appellate Court affirmed the Circuit Court's dismissal of the action. The
plaintiffs' Petition for a Rehearing by the Appellate Court was denied by the
Court pursuant to an order entered January 15, 1997. It is possible that the
Gaebler plaintiffs will seek to appeal to the Illinois Supreme Court.
Management has no knowledge of any conspiracy of the type alleged in
these complaints.
In June 1996, the grand jury authorized by the U.S. Department of
Justice Antitrust Division to investigate possible violations of the antitrust
laws in connection with the allegations made in the civil actions described
above closed its investigation without bringing any action.
2. On October 24, 1995, several suits were filed in both the State
Court in Bogalusa, Louisiana and in the United States District Court for the
Eastern District of Louisiana, each purporting to be class actions arising out
of an October 23, 1995 explosion of a tank car at a plant of a Vicksburg
customer located in Bogalusa, Louisiana. The tank car contained nitrogen
tetroxide which had been produced and sold by Vicksburg. Subsequently, at least
146 suits were filed in the State Court for the 22nd Judicial District,
Washington Parish, Louisiana. All of the cases have been consolidated in this
State Court and the consolidated suit certified as a class action. Vicksburg and
Cedar are included among the defendants in the class action. In addition, two
later suits, one on behalf of the City of Bogalusa, have been filed in the same
court naming, among the defendants, Vicksburg, Cedar and the Company. Also, 10
separate suits naming an aggregate of more than 8,000 plaintiffs have been filed
in the Circuit Court of Hinds County, Mississippi naming, among the defendants,
Vicksburg, Cedar and the Company. Among other defendants included in the
consolidated Louisiana class action and in the Mississippi suits are Gaylord
Chemical Company and its parent corporation, Gaylord Container Corporation;
Union Tank Car Company; Illinois Central Railroad and Kansas City Southern
Railroad. The plaintiffs in all of these suits seek unspecified damages arising
out of the alleged exposure to toxic fumes which were allegedly released as a
result of the explosion and the City of Bogalusa also seeks reimbursement of
expenses allegedly resulting from the explosion. The suits have been tendered to
the Company's liability insurance carriers for defense and indemnification.
Vicksburg and Cedar have commenced an action in the 22nd Judicial District
Court, Washington Parish, Louisiana against their principal insurance carriers
(whose insurance policies also include the Company as an additional named
insured) seeking a declaratory judgement that Cedar and Vicksburg are entitled
to defense costs and indemnification with respect to these claims.
There are several other legal proceedings pending against the Company
and certain of its subsidiaries arising in the ordinary course of its business
which management does not consider material.
Management of the Company believes, based upon its assessment of the
actions and claims outstanding against the Company and certain of its
subsidiaries, and after discussion with counsel, that the eventual disposition
of the matters described or referred to above should not have a material adverse
effect on the financial position, future operations or liquidity of the Company.
However, management of the Company cannot predict with certainty the outcome of
the potash and Louisiana matters described above.
For information relating to certain environmental proceedings affecting
the Company, see "Environmental Matters" in Item 1 above, "Business."
ITEM 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the
quarter ended December 31, 1996.
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PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
All of the Company's equity securities are owned by TPR Investment
Associates, Inc. ("TPR"). See Item 12 - "Security Ownership of Certain
Beneficial Owners and Management." In addition, see Note G of Notes to
Consolidated Financial Statements for information regarding certain restrictions
on the Company's payment of dividends. During 1994, 1995 and 1996 the Company
paid or declared dividends on its Common Stock in the amounts of $4,466,000,
$856,000 and $5,208,000, respectively.
ITEM 6. Selected Financial Data.
The following table presents selected consolidated financial data of
the Company for the five year period ended December 31, 1996. This data has been
derived from the consolidated financial statements of the Company and should be
read in conjunction with the notes thereto.
Year Ended December 31,
-------------------------------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
(in thousands)
Results of Operations:
Revenues .............................. $ 345,356 $ 326,315 $ 334,107 $ 385,564 $ 412,305
Operating costs and expenses:
Cost of goods sold .................. 266,770 255,563 265,795 323,126 343,930
General and administrative .......... 36,270 38,375 37,780 43,193 46,419
--------- --------- --------- --------- ---------
Operating income ...................... 42,316 32,377 30,532 19,245 21,956
Interest expense ...................... (27,542) (27,405) (28,369) (34,498) (32,195)
Interest and other income - net (1) ... 8,476 6,014 15,056 9,128 25,448
--------- --------- --------- --------- ---------
Income (loss) before income taxes,
extraordinary item and change
in accounting principle ............. 23,250 10,986 17,219 (6,125) 15,209
Income tax provision .................. 11,231 7,920 14,669 733 4,016
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item
and change in accounting principle .. 12,019 3,066 2,550 (6,858) 11,193
Extraordinary item - net .............. -- (8,830) -- (103) (553)
Cumulative effect on prior years of
change in accounting for income taxes 1,130 -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss) ..................... $ 13,149 $ (5,764) $ 2,550 $ (6,961) $ 10,640
========= ========= ========= ========= =========
Dividends:
Preferred stock ....................... $ -- $ -- $ -- $ 851 $ 851
Common stock .......................... 13,136 7,508 4,466 856 5,208
(1) Includes (a) gains of $18,100,000 and $1,700,000 in the years ended
December 31, 1994 and 1995, respectively, representing the excess of
insurance proceeds over the carrying value of certain HCL property
destroyed in a fire, (b) security gains (losses) of $2,865,000,
$2,261,000, ($1,178,000), ($413,000) and $341,000 in the years ended
December 31, 1992, 1993, 1994, 1995 and 1996, respectively, (c) foreign
currency gains (losses) of $4,000,000, $850,000, ($3,800,000),
$5,400,000 and ($1,600,000) in the years ended December 31, 1992, 1993,
1994, 1995 and 1996, respectively and (d) a gain of $22,579,000
relating to the Company's sale of its potash operations in 1996. See
Item 7 - "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Notes A and K of Notes to Consolidated
Financial Statements.
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December 31,
-------------------------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
(in thousands)
Financial Position:
Cash and cash equivalents ........ $ 54,745 $ 25,742 $ 15,571 $ 32,872 $ 29,112
Working capital .................. 107,850 103,776 66,294 82,011 94,435
Total assets ..................... 341,055 365,865 550,954 467,102 426,631
Short-term debt, including current
maturities of long-term debt ... 42,666 47,282 157,986(a) 46,848 32,829
Long-term debt, excluding current
maturities and subordinated debt 71,318 61,328 102,059 174,506 152,539
Senior subordinated debt - net ... 103,689 140,133 140,385 114,074 114,175
Junior subordinated debt - net ... 15,089 15,495 7,981 -- --
Stockholder's equity ............. 28,882 15,794 20,550 20,675 26,254
(a) Was collateralized, in part, by $100,000,000 of certificates of
deposit, which were included in "other current assets" in the December
31, 1994 Consolidated Balance Sheet. See Note G of Notes to
Consolidated Financial Statements.
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
RESULTS OF OPERATIONS
The following table sets forth as a percentage of revenues and the
percentage change of those items as compared to the prior period, certain items
appearing in the Consolidated Financial Statements
Percentage of Revenues Year-to-Year Changes
------------------------------- ------------------
1995 1996
Year Ended December 31, vs. vs.
1994 1995 1996 1994 1995
----- ----- ----- ----- -----
Revenues .............................. 100.0% 100.0% 100.0% 15.4% 6.9%
Operating costs and expenses:
Cost of goods sold ............... 79.5 83.8 83.4 21.6 6.4
General and administrative ....... 11.3 11.2 11.3 14.3 7.5
----- ----- ----- ----- -----
Operating income ...................... 9.2 5.0 5.3 (37.0) 14.1
Interest expense ................. (8.5) (8.9) (7.8) 21.6 (6.7)
Interest and other income - net .. 4.5 2.3 6.2 (39.4) 178.8
----- ----- ----- ----- -----
Income (loss) before income taxes and
extraordinary item ............... 5.2 (1.6) 3.7 (135.6) 348.3
Income tax provision .................. 4.4 .2 1.0 (95.0) 447.9
----- ----- ----- ----- -----
Income (loss) before extraordinary item .8 (1.8) 2.7 (368.9) 263.2
Extraordinary item - net .............. -- -- (.1) -- 436.9
----- ----- ----- ----- -----
Net income (loss) ..................... .8% (1.8)% 2.6% (373.0)% 252.9%
===== ===== ===== ===== =====
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements herein constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include, but are not limited to, statements
concerning future revenues (e.g., impact of HCL work stoppage and strike on
first quarter of 1997, and inflation in Israel); expenses (e.g., labor savings
resulting from the new SCA, future environmental cost and capital expenditures);
and access to lending sources and Israeli Government entitlements. Such
forward-looking statements involve unknown and uncertain risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of the Company
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to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: political stability, inflation and currency rates
in those foreign countries (including, without limitation, Israel) in which the
Company generates a significant portion of its production, sales and earnings;
current or future environmental developments or regulations which would require
the Company to make substantial expenditures, and changes in, or the failure of
the Company to comply with, such government regulations; the potentially
hazardous nature of certain of the Company's products; the ability to achieve
anticipated labor cost reductions at HCL; the Company's ability to continue to
service and refinance its debt; new plant start-up costs; competition; changes
in business strategy or expansion plans; raw material costs and availability;
the final outcome of the legal proceedings to which the Company is a party (see
Item 3- "Legal Proceedings"); and other factors referenced in this Form 10-K.
Given these uncertainties, investors and prospective investors are
cautioned not to place undue reliance on such forward-looking statements.
1996 Compared with 1995
Revenues increased by 6.9% to $412,305,000 in 1996 from $385,564,000 in
1995, an increase of $26,741,000, resulting from increased sales of specialty
plant nutrients and industrial chemicals ($45,900,000), partially offset by
decreased sales of organic chemicals ($800,000) and potash ($18,400,000).
Effective August 16, 1996, the Company sold its potash operations - see Note A
of Notes to Consolidated Financial Statements.
Cost of goods sold as a percentage of revenues decreased to 83.4% in
1996 compared with 83.8% in 1995. Gross profit was $68,375,000 in 1996 compared
with $62,438,000 (16.6% of revenues in 1996 compared with 16.2% of revenues in
1995) an increase of $5,937,000. The primary factors resulting in the increased
1996 gross profit were (i) more favorable currency rates, (ii) higher quantities
of potassium nitrate sold and (iii) the inclusion of the results of Na-Churs for
the full year in 1996 as compared with only nine months in 1995. These increases
were partially offset by lower potash and organic chemicals margins in 1996 and
the adverse effect of the labor dispute and strike at HCL commencing in October,
1996. See Item 1 - Business - "Personnel and Labor Relations" above.
As a result of the job actions, work stoppages and the related strike,
the fourth quarter of 1996 was significantly impacted by a reduction in sales
volume, lower gross margins due to reduced productivity, resulting in the
under-absorption of fixed overhead, coupled with inventory shortages requiring
purchases from third parties and increased general and administrative expenses
arising from higher security and other costs. This adverse impact was partially
offset by lower labor costs.
The negative impact experienced during the fourth quarter of 1996, as
described above, continued into the first quarter of 1997. While the cost
savings as a result of the changes in the terms of the new SCA over the labor
costs it would otherwise have incurred during the next few years have not yet
been quantified, management believes that the savings will substantially exceed
the costs incurred during the period of labor disruption. Such savings will
commence during the second quarter of 1997.
General and administrative expense increased to $46,419,000 in 1996
from $43,193,000 in 1995 (11.3% and 11.2% of revenues in 1996 and 1995,
respectively). During 1995 the Company recorded a $750,000 reimbursement of
certain general and administrative expenses incurred in prior years on behalf of
an entity in which the Company has an investment.
As a result of the matters described above, the Company's operating
income increased by $2,711,000 to $21,956,000 in 1996 as compared with
$19,245,000 in 1995.
Interest expense decreased by $2,303,000 ($32,195,000 in 1996 compared
with $34,498,000 in 1995), primarily as a result of reduced interest expense
resulting from the repurchase and maturity of the Company's outstanding Senior
Subordinated Reset Notes, partially offset by increased interest on the
long-term debt that financed
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16
the construction of the Company's K3 Plant in Israel. Interest and other income
- - net increased in 1996 by $16,320,000 principally as the result of (i) the 1996
period including a gain relating to the sale of the Company's potash operations
($22,579,000) and increased equity in the earnings of an entity in which the
Company has an investment ($2,600,000) partially offset by (ii) the net change
in adjustments relating to the marking-to-market of forward exchange contracts
which do not qualify as hedges ($7,000,000) and (iii) the 1995 period including
a $1,700,000 gain relating to the February, 1994 fire at HCL. See Note K of
Notes to Consolidated Financial Statements.
As a result of the above factors, income before income taxes and
extraordinary item increased by $21,334,000 in 1996. The Company's provisions
for income taxes are impacted by the mix between domestic and foreign earnings
and vary from the U.S. Federal statutory rate principally due to the impact of
foreign operations and certain losses for which there is no current tax benefit.
In addition, during 1995 HCL recorded a tax benefit for a $1,100,000 tax refund
related to prior years. See Note J of Notes to Consolidated Financial Statements
for information regarding effective tax rates.
In 1995 and 1996 the Company acquired $3,250,000 and $19,122,000,
respectively, of the principal amount of its Senior Subordinated Reset Notes,
which resulted in losses of $103,000 and $553,000, respectively. Such losses
(which have no current tax benefit) are classified as extraordinary items in the
accompanying Consolidated Statements of Operations. See Note G of Notes to
Consolidated Financial Statements.
1995 Compared with 1994
Revenues increased by 15.4% to $385,564,000 in 1995 from $334,107,000
in 1994, an increase of $51,457,000, resulting from increased sales of specialty
plant nutrients and industrial chemicals ($49,300,000) (including $12,900,000
relating to the acquisition of Na-Churs) and organic chemicals ($5,900,000),
which were partially offset by lower potash sales ($3,700,000).
Cost of goods sold as a percentage of revenues increased during the
period (83.8% in 1995 compared with 79.5% in 1994), primarily due to (i) certain
raw material and utility cost increases, which were partially offset by
increases in the selling prices of the Company's products, and, to a lesser
extent, (ii) the customary costs associated with the initial run-in periods of
the Company's newly-constructed manufacturing facilities and (iii) a 1994 refund
of $1,800,000 received from a utility supplier related to prior years. In
addition, effective July 1, 1994 and January 1, 1995, the Company revised the
estimate of depreciable lives of its property, plant and equipment at HCL and
EDP, respectively, to more closely approximate the economic lives of those
assets. The effect of these changes in estimate was to decrease depreciation
expense (and cost of sales) in 1994 and 1995 by approximately $1,800,000 and
$2,800,000, respectively. As a result of the foregoing, gross profit was
$62,438,000 in 1995 compared with $68,312,000 in 1994 (16.2% of revenues in 1995
compared with 20.5% of revenues in 1994), a decrease of $5,874,000. General and
administrative expense increased to $43,193,000 in 1995 (including approximately
$2,800,000 relating to Na-Churs) from $37,780,000 in 1994, but declined slightly
as a percentage of revenues (11.2% of revenues in 1995 compared with 11.3% of
revenues in 1994). Pursuant to an agreement during 1995, the Company recorded a
$750,000 reimbursement of certain general and administrative expenses incurred
in prior years on behalf of an entity in which the Company has an investment.
As a result of the matters described above, the Company's operating
income decreased by $11,287,000 to $19,245,000 in 1995 as compared with
$30,532,000 in 1994.
Interest expense increased by $6,129,000 ($34,498,000 in 1995 compared
with $28,369,000 in 1994) primarily as a result of interest on the long-term
debt that financed the construction of the K3 Plant. Interest and other income -
net decreased in 1995 by $5,928,000, principally as the result of the 1994
period including a gain of approximately $18,100,000 relating to the February
1994 fire at HCL as compared to a $1,700,000 gain in the 1995 period relating to
such fire, with the remainder of the decrease in the 1995 period being partially
offset primarily by (i) the net adjustments relating to the marking-to-market of
forward exchange contracts which do not qualify as hedges and (ii) interest
income related to a prior year's tax refund.
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17
As a result of the above factors, income before income taxes and
extraordinary item decreased by $23,344,000 in 1995. The Company's provisions
for income taxes are impacted by the mix between domestic and foreign earnings
and vary from the U.S. Federal statutory rate principally due to the impact of
foreign operations and certain losses for which there is no current tax benefit.
In addition, during the 1995 period HCL recorded a tax benefit for a $1,100,000
tax refund related to prior years. See Note J of Notes to Consolidated Financial
Statements for information regarding effective tax rates.
CAPITAL RESOURCES AND LIQUIDITY
The Company's consolidated working capital at December 31, 1996 and
1995 was $94,435,000 and $82,011,000, respectively.
Operations for the years ended December 31, 1996 and 1995, after adding
back non-cash items, provided cash of approximately $11,100,000 and $16,100,000,
respectively. During such periods other changes in working capital used cash of
approximately $7,700,000 and $14,300,000, respectively, resulting in net cash
being provided from operating activities and working capital management of
approximately $3,400,000 and $1,800,000, respectively.
Investment activities during the years ended December 31, 1996 and 1995
provided cash of approximately $35,300,000 and $84,800,000, respectively,
including additions to property in 1996 and 1995 of approximately $13,600,000
and $35,700,000, respectively, purchases of marketable securities and short-term
investments of approximately $9,400,000 and $4,400,000, respectively, and sales
of marketable securities and other short-term investments of approximately
$2,000,000 and $132,300,000, respectively. No major property additions occurred
in 1996. The 1995 property additions principally relate to (i) the construction
of the K3 Plant, (ii) the replacement of the HCL production unit damaged in the
fire in February, 1994 and (iii) the construction of a new potassium carbonate
manufacturing facility. The 1995 sales of marketable securities and short-term
investments relate principally to the purchase in 1994, and the liquidation in
1995, of the pledged certificates of deposit ("CD's") relating to the Loan
Agreement described below. During 1996 the Company sold its potash operations
and realized gross proceeds of approximately $56,200,000. Approximately 50% of
such gross proceeds were applied to prepay certain senior indebtedness related
to the Company's potash operations.
Financing activities during the years ended December 31, 1996 and 1995
used cash of approximately $42,500,000 and $69,300,000, respectively (the 1995
amount principally relating to the prepayment of certain long-term debt which is
described below).
On June 30, 1994, the Company entered into the Loan Agreement with a
bank and borrowed $40,000,000 (repayable quarterly over a four year period) and
utilized a portion of the proceeds to prepay approximately $19,000,000 then owed
to such bank. Pursuant to the Loan Agreement, the Company also borrowed an
additional $100,000,000, repayable in January, 1996. Under certain specified
circumstances prior to such date, the Company could have converted such loan
into a term loan maturing five years from the date of conversion. The Company
pledged CD's with a principal amount of $100,000,000 as collateral for such loan
(such CD's were included in "other current assets" in the December 31, 1994
Consolidated Balance Sheet). In addition, the Company pledged 79% of the capital
stock of HCL to secure its obligations under the Loan Agreement. On January 5,
1995, the Company liquidated the pledged CD's and prepaid the $100,000,000 loan.
See Note G of Notes to Consolidated Financial Statements.
As of December 31, 1996, the Company had outstanding long-term debt
(excluding current maturities) of $266,714,000. The Company's primary source of
liquidity is cash flow generated from operations and the unused credit lines
described in Note E of Notes to Consolidated Financial Statements.
Approximately 90% of HCL's sales are made outside of Israel in various
currencies, of which approximately 40% are in U.S. dollars, with the remainder
principally in Western European currencies. In order to mitigate the impact of
currency fluctuations against the U.S. dollar, the Company has a policy of
hedging a significant portion of its foreign sales denominated in Western
European currencies by entering into forward exchange contracts. A portion of
these
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contracts qualify as hedges pursuant to Statement of Financial Accounting
Standards No. 52 and, accordingly, unrealized gains and losses arising therefrom
are deferred and accounted for in the subsequent year as part of sales.
Unrealized gains and losses for the remainder of the forward exchange contracts
are recognized in income currently. If the Company had not followed such a
policy of entering into forward exchange contracts in order to hedge its foreign
sales, and instead recognized income based on the then prevailing foreign
currency rates, the Company's income before income taxes for the years ended
December 31, 1996 and 1995 would have increased (decreased) by approximately
($5,300,000) and $11,200,000, respectively.
The principal purpose of the Company's hedging program (which is for
other than trading purposes) is to mitigate the impact of fluctuations against
the U.S. dollar, as well as to protect against significant adverse changes in
exchange rates. Accordingly, the gains and losses recognized relating to the
hedging program in any particular period and the impact on revenues had the
Company not had such a program are not necessarily indicative of its
effectiveness.
CAPITAL EXPENDITURES
During 1996 the Company invested approximately $13,600,000 in capital
expenditures. The Company currently anticipates that capital expenditures for
the year ending December 31, 1997 will aggregate approximately $13,000,000. The
Company's capital expenditures will be used primarily for increasing certain
production capacity and efficiency, product diversification and for ecological
matters. The Company expects to be able to finance its capital expenditures from
internally generated funds, borrowings from traditional lending sources and,
where applicable, Israeli Government grants and entitlements. See Note D of
Notes to Consolidated Financial Statements.
INFLATION
Inasmuch as only approximately $62,000,000 of HCL's annual operating
costs are denominated in New Israeli Shekels ("NIS"), HCL is exposed to
inflation in Israel to a limited extent. The combination of price increases
coupled with devaluation of the NIS have in the past generally enabled HCL to
avoid a material adverse impact from inflation in Israel. However, HCL's
earnings could increase or decrease to the extent that the rate of future NIS
devaluation differs from the rate of Israeli inflation. For the years ended
December 31, 1996 and 1995, the inflation rate of the NIS as compared to the
U.S. Dollar exceeded the devaluation rate in Israel by 6.9% and 4.2%,
respectively.
ENVIRONMENTAL MATTERS
See Item 1 - "Business - Environmental Matters" above and Note O of
Notes to Consolidated Financial Statements for information regarding
environmental matters relating to the Company's various facilities.
ITEM 8. Financial Statements and Supplementary Data.
See Index to Consolidated Financial Statements and Schedules on page
F-1.
ITEM 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure.
None.
16
19
PART III
ITEM 10. Directors and Executive Officers of the Registrant.
The directors and executive officers of the Company are as follows:
NAME AGE POSITION
- ---- --- --------
Arie Genger...................... 51 Chairman of the Board and Chief Executive Officer
Thomas G. Hardy.................. 51 President and Chief Operating Officer; Director
Lester W. Youner................. 51 Vice President, Treasurer and Chief Financial Officer and Secretary
John J. Lewandowski.............. 41 Vice President - Corporate Development
Martin A. Coleman................ 66 Director
Sash A. Spencer.................. 65 Director
FINANCIAL ADVISORY COMMITTEE
- ----------------------------
Lawrence M. Small
Thomas G. Hardy
Sash A. Spencer
Directors hold office until the next annual meeting of stockholders or
until their successors are elected and qualified. There are no arrangements or
understandings between any director or executive officer of the Company and any
other person pursuant to which such person was elected as a director or
executive officer. The executive officers serve at the discretion of the Board
of Directors.
There are no family relationships among any directors or executive
officers of the Company.
The following are descriptions of the directors and executive officers
of the Company and the members of the Financial Advisory Committee. The
Financial Advisory Committee advises the Board of Directors regarding financial
matters and, when the Committee deems appropriate, make recommendations to the
Board of Directors.
Arie Genger has been a director and Chairman of the Board of Directors
and Chief Executive Officer of the Company since 1986, the sole member of the
Executive Committee since June 1988, and was President of the Company from 1986
to December 1993.
Thomas G. Hardy has been President and Chief Operating Officer of the
Company since December 1993, was Executive Vice President of the Company from
June 1987 to December 1993 and has been a director and member of the Financial
Advisory Committee since October 1992. He has been a director of Laser
Industries Limited ("Laser") (a manufacturer and distributor of surgical lasers
and other medical technology in which the Company has an ownership interest)
since January 1990.
17
20
Lester W. Youner has been Vice President, Treasurer and Chief Financial
Officer of the Company since October 1987 and has been Secretary since December
31, 1996. From June 1979 until October 1987 he was a Partner of Deloitte &
Touche LLP, a public accounting firm. He has been a director of Laser since
November 1996.
John J. Lewandowski has been Vice President - Corporate Development of
the Company since September 1996. From September 1995 until August 1996 he
served as the President of the Company's Potash Group. From January 1995 (when
he accepted a position with the Company) until September 1995 he served as the
Company's Director of Business Development. From 1991 through 1994 he served in
a variety of consulting and business advisory roles for several chemical
producers in the United States and Eastern Europe. From 1983 to 1990 he was
employed by Arcadian Corporation, in positions of increasing responsibility, his
last position being Director - Nitrogen Products.
Martin A. Coleman has been a director since March 1993. Since January
1991 he has been a private investor. Prior to that he was a member of the law
firm of Rubin Baum Levin Constant & Friedman, general counsel to the Company,
for more than five years.
Sash A. Spencer has been a director since October 1992 and a member of
the Financial Advisory Committee since March 1993. He has been an investor and
Chairman of Holding Capital Management Corp., a private investment firm, for
more than five years and is on the board of directors of several private
companies.
Lawrence M. Small, 55, has been Chairman of the Financial Advisory
Committee of the Board of Directors since October 1992. Mr. Small is President
and Chief Operating Officer of Fannie Mae, the country's largest investor in
home mortgages and issuer of mortgage-backed securities, headquartered in
Washington, DC, which he joined in September 1991. Prior to that, he was Vice
Chairman and Chairman of the Executive Committee of the Boards of Directors of
Citicorp and Citibank, N.A., where he was employed for 27 years. He serves as a
director of Fannie Mae, The Chubb Corporation (an insurance company) and
Marriott International, Inc. (a lodging and food service management company).
ITEM 11. Executive Compensation
The following table sets forth the aggregate compensation paid or
accrued by the Company for the past three fiscal years to its Chief Executive
Officer and to other executive officers whose annual compensation exceeded
$100,000 for the year ended December 31, 1996:
SUMMARY COMPENSATION TABLE
Annual Compensation (1) All Other
Name and Principal Position Year Salary (2) Bonus Compensation (3)
- --------------------------- ---- ---------- ----- ----------------
Arie Genger................................ 1996 $750,000 $750,000 $511,000
Chairman of the Board 1995 675,000 - 510,000
and Chief Executive Officer 1994 750,000 - 509,000
Thomas G. Hardy............................ 1996 400,000 175,000 1,405,000
President and Chief Operating Officer 1995 360,000 130,000 5,000
and Director 1994 400,000 - 1,406,000
Lester W. Youner........................... 1996 251,000 100,000 5,000
Vice President, Treasurer and 1995 241,000 65,000 5,000
Chief Financial Officer and Secretary 1994 241,000 55,000 6,000
John J. Lewandowski........................ 1996 120,000 105,000 4,000
Vice President - Corporate Development
18
21
(1) During the period covered by the table, the Company did not make any
restricted stock awards and did not have in effect any stock option or
stock appreciation rights plan. See "Compensation Agreements" for Mr.
Hardy's bonus arrangement.
(2) Amounts shown for 1994 include in the case of Messrs. Genger, Hardy and
Youner $500,000, $275,000 and $20,000, respectively, of 1994 salary
which was prepaid in 1993.
(3) For 1996, consists of: (i) in the case of Mr. Genger, $250,000 for an
annual premium on ordinary life insurance, $250,000 for related income
tax gross-up, $4,000 for the Company's matching contribution to a
profit sharing thrift plan, and $7,000 for the premium on term life
insurance; (ii) in the case of Messrs. Hardy, Youner and Lewandowski,
$4,000 each for the Company's matching contribution to a profit sharing
thrift plan; and (iii) $1,000 each for Messrs. Hardy and Youner for the
premium on term life insurance. In the case of Mr. Hardy, also includes
$1,400,000 deposited in trust for Mr. Hardy. See "Compensation
Agreements".
For 1995, consists of: (i) in the case of Mr. Genger, $250,000 for an
annual premium on ordinary life insurance, $250,000 for related income
tax gross-up, $4,000 for the Company's matching contribution to a
profit sharing thrift plan, and $6,000 for the premium on term life
insurance; (ii) in the case of Messrs. Hardy and Youner, $4,000 each
for the Company's matching contribution to a profit sharing thrift
plan; and (iii) $1,000 each for Messrs. Hardy and Youner for the
premium on term life insurance.
For 1994, consists of: (i) in the case of Mr. Genger, $250,000 for an
annual premium on ordinary life insurance, $250,000 for related income
tax gross-up, $4,000 for the Company's matching contribution to a
profit sharing thrift plan, and $5,000 for the premium on term life
insurance; (ii) in the case of Messrs. Hardy and Youner, $4,000 each
for the Company's matching contribution to a profit sharing thrift
plan; and (iii) $2,000 each for Messrs. Hardy and Youner for the
premium on term life insurance. In the case of Mr. Hardy, also includes
$1,400,000 deposited in trust for Mr. Hardy. See "Compensation
Agreements".
COMPENSATION AGREEMENTS
Pursuant to an Agreement entered into in March 1994 (the "New
Agreement"), which modified and superseded a 1988 bonus arrangement under which
no payments had been made, the Company was required to irrevocably deposit in
trust for the benefit of Mr. Hardy an aggregate of $2,800,000, of which
$1,400,000 was deposited upon execution of the New Agreement, and the remaining
$1,400,000 was deposited in March, 1996. The deposited funds are held under a
Trust Agreement (the "Trust Agreement"), which provides that the assets held
thereunder are subject to the claims of the Company's general creditors in the
event of insolvency of the Company. The Trust Agreement provides that the assets
are payable in a lump sum to Mr. Hardy or his beneficiaries upon the earlier of
December 1, 2001 or the termination of his employment with the Company.
An employment agreement between the Company and Mr. Hardy, effective as
of June 1, 1993, having a primary term of seven years, renewable for 10
additional years unless either party gives at least 12 months' prior written
notice of termination, provides for an annual salary of $400,000, subject to
negotiated annual increases commencing in the year 2000. With certain
restrictions, Mr. Hardy will be entitled to receive a bonus (the "Bonus") based
on a percentage of the fair market value (the "Value") of the Company's equity
at December 31st of the year Mr. Hardy's employment terminates, he turns 65 or
certain acceleration events, including a change of control of the Company,
occur. If the Company and Mr. Hardy cannot agree on the Value, each may propose
an amount. If only one makes a proposal, that would constitute the Value. If
each makes a proposal, an investment banker would choose between them. The
Bonus, generally payable in installments, would be equal to the excess over
$2,800,000 (the aggregate amount Mr. Hardy received under the New Agreement) of
specified percentages of different ranges of Value. Mr. Hardy is not entitled to
the Bonus if he voluntarily terminates his employment during the primary term
(other than by death or disability) or if Mr. Hardy's employment is terminated
for cause (as defined).
19
22
Pursuant to a salary continuation agreement between the Company and
Lester W. Youner, the Company is obligated to pay Mr. Youner a retirement
allowance ("Allowance") of $100,000 per year for life commencing at age 65. In
the event of Mr. Youner's death after the commencement of the payment of the
Allowance, Mr. Youner's designated beneficiary is to receive the Allowance until
10 annual payments shall have been made to Mr. Youner and his beneficiary. Mr.
Youner became 25% vested in the Allowance on December 31, 1996 and shall
continue to vest at the rate of 5% per year thereafter provided that he remains
in the employ of the Company. Notwithstanding the foregoing, the Allowance will
become 100% vested on the earlier of Mr. Youner's 65th birthday or the
occurrence of an acceleration event, including a change of control of the
Company. Mr. Youner forfeits the Allowance if his employment is terminated for
cause (as defined) or, if within two years after the voluntary termination of
his employment, Mr. Youner engages directly or indirectly in any activity
competitive with the Company or any of its subsidiaries. The agreement further
provides that in the event of Mr. Youner's death prior to his 65th birthday
while in the active employ of the Company, his designated beneficiary is to
receive an annual death benefit of $100,000 for 10 years. Mr. Youner's death
benefit is currently 100% vested.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors does not have a Compensation Committee.
Executive officer compensation matters were determined by the Board of
Directors, whose four members currently include Mr. Genger, Chairman of the
Board and Chief Executive Officer of the Company, and Mr. Hardy, President and
Chief Operating Officer of the Company. No director has a relationship that
would constitute an interlocking relationship with executive officers or
directors of another entity.
COMPENSATION OF DIRECTORS
Officers of the Company who serve as directors do not receive any
compensation for serving as directors. Martin A. Coleman and Sash A. Spencer
each receive $15,000 annually for serving as directors.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information as of March 28,
1997, as to the beneficial ownership of the Common Stock of the Company, which
is the only outstanding class of voting security of the Company:
SHARES PERCENT
BENEFICIALLY OF
NAME AND ADDRESS OWNED CLASS
---------------- ----- -----
Common Stock, $.01 par value (1):
TPR (2)
9 West 57th Street
New York, NY 10019.......................... 3,000 100%
All executive officers and directors as a group
(six persons)(2)............................ 3,000 100%
- ---------------------
(1) All of the shares of the Common Stock of the Company are pledged to
secure an outstanding TPR note of $7,000,000 issued to a former
indirect stockholder and director of the Company.
(2) Mr. Genger and members of his family own all of the capital stock of
TPR.
20
23
ITEM 13. Certain Relationships and Related Transactions.
The Company is, for Federal income tax purposes, a member of a
consolidated tax group of which TPR is the common parent. The Company, TPR, EDP,
Cedar and certain other subsidiaries are parties to a tax sharing agreement,
dated as of December 30, 1991, under which, among other things, the Company and
such other parties have each agreed to pay TPR amounts equal to the amounts of
Federal income taxes that each such party would be required to pay if it filed a
Federal income tax return on a separate return basis (or in the case of Cedar, a
consolidated Federal income tax return for itself and its eligible
subsidiaries), computed without regard to net operating loss carrybacks and
carryforwards. However, TPR may, at its discretion, allow tax benefits for such
losses. See Note A of Notes to Consolidated Financial Statements.
See Notes G and L of Notes to Consolidated Financial Statements for a
description of a 1994 transaction pursuant to which TPR acquired the Company's
outstanding $9,000,000, 9 1/2% junior subordinated debentures due 2005 (the
"9.5% Debentures") and became the obligor on an outstanding 8 3/4%, $4,000,000
note due 2005 payable to the Company. Upon TPR's acquisition of the 9.5%
Debentures, TPR exchanged the 9.5% Debentures for a new preferred stock of the
Company described in said Note L. In addition, during 1995 TPR assumed the
Company's obligation for $9,000,000 principal amount of outstanding 9.5%
Debentures due in 1998 and Company's liability thereon was extinguished.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) (1)-(2) See Index to Consolidated Financial Statements and
Schedules on Page F-1.
(3) See Index to Exhibits on Page E-1.
(b) No reports on Form 8-K were filed during the last quarter of
the year ended December 31, 1996.
21
24
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15 (d) 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.
Trans-Resources, Inc.
(Registrant)
By /s/ Lester W. Youner
--------------------
Lester W. Youner
Vice President, Treasurer
and Chief Financial Officer
Dated: March 28, 1997
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED:
PRINCIPAL EXECUTIVE OFFICER:
ARIE GENGER
Chairman of the Board and Chief Executive Officer
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:
LESTER W. YOUNER
Vice President, Treasurer and Chief Financial Officer
By /s/ Lester W. Youner
--------------------
Lester W. Youner
For Himself and As Attorney-In-Fact
Directors:
Arie Genger Dated: March 28, 1997
Thomas G. Hardy
Martin A. Coleman
Sash A. Spencer
POWERS OF ATTORNEY AUTHORIZING LESTER W. YOUNER TO SIGN THIS REPORT AND
ANY AMENDMENTS HERETO ON BEHALF OF THE PRINCIPAL EXECUTIVE OFFICER AND THE
DIRECTORS ARE BEING FILED WITH THE SECURITIES AND EXCHANGE COMMISSION WITH THIS
REPORT.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT:
No annual report or proxy materials have been sent to the Company's
security holders. This Annual Report on Form 10-K will be furnished to the
holders of the Company's 11 7/8% Notes.
22
25
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
FINANCIAL STATEMENTS Page
Independent Auditors' Report.......................................... F-2
Report of Independent Accountants..................................... F-3
Consolidated Balance Sheets, December 31, 1995 and 1996............... F-4
Consolidated Statements of Operations,
for the Years Ended December 31, 1994, 1995 and 1996.............. F-5
Consolidated Statements of Stockholder's Equity,
for the Years Ended December 31, 1994, 1995 and 1996.............. F-6
Consolidated Statements of Cash Flows,
for the Years Ended December 31, 1994, 1995 and 1996.............. F-7
Notes to Consolidated Financial Statements............................ F-8
SCHEDULE
Schedule I - Condensed Financial Information of Registrant,
for the Years Ended December 31, 1994, 1995 and 1996.............. S-1
F - 1
26
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of Trans-Resources, Inc.
New York, New York
We have audited the accompanying consolidated financial statements and financial
statement schedule of Trans-Resources, Inc. (a wholly-owned subsidiary of TPR
Investment Associates, Inc.) and Subsidiaries listed in the foregoing Index.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We did not audit the consolidated financial statements of Cedar
Chemical Corporation, a wholly-owned subsidiary, which statements reflect total
assets constituting 20 percent and 26 percent of consolidated total assets as of
December 31, 1996 and 1995, respectively, and total revenues constituting 33
percent, 34 percent and 38 percent of consolidated total revenues for the years
ended December 31, 1996, 1995 and 1994, respectively. Such financial statements
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Cedar Chemical
Corporation, is based solely on the report of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based upon our audits and the report of other auditors, such
consolidated financial statements present fairly, in all material respects, the
financial position of Trans-Resources, Inc. and Subsidiaries as of December 31,
1996 and 1995, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. Also, in our opinion, based on our
audits and (as to the amounts included for Cedar Chemical Corporation) the
report of other auditors, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Deloitte & Touche LLP
March 21, 1997
New York, New York
F - 2
27
Report of Independent Accountants
To the Board of Directors and Shareholder
of Cedar Chemical Corporation:
In our opinion, the consolidated balance sheets and the related consolidated
statements of income and retained earnings and of cash flows (not presented
separately herein) present fairly, in all material respects, the financial
position of Cedar Chemical Corporation (a wholly-owned subsidiary of
Trans-Resources, Inc.) and its subsidiaries ("Cedar") at December 31, 1996 and
1995, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of Cedar's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Memphis, Tennessee
February 7, 1997
F - 3
28
TRANS-RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------
1995 1996
--------- ---------
(in thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................... $ 32,872 $ 29,112
Accounts receivable ..................................... 75,630 71,551
Inventories ............................................. 66,474 53,094
Other current assets .................................... 19,364 30,226
Prepaid expenses ........................................ 19,316 14,635
--------- ---------
Total Current Assets ................................ 213,656 198,618
PROPERTY, PLANT AND EQUIPMENT - net .......................... 220,191 198,887
OTHER ASSETS ................................................. 33,255 29,126
--------- ---------
Total ............................................... $ 467,102 $ 426,631
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt ................... $ 40,703 $ 17,481
Short-term debt ........................................ 6,145 15,348
Accounts payable ....................................... 51,383 38,033
Accrued expenses and other current liabilities ......... 33,414 33,321
--------- ---------
Total Current Liabilities .......................... 131,645 104,183
--------- ---------
LONG-TERM DEBT - net:
Senior indebtedness, notes payable and other obligations 174,506 152,539
Senior subordinated debt - net ......................... 114,074 114,175
--------- ---------
Long-Term Debt - net ............................... 288,580 266,714
--------- ---------
OTHER LIABILITIES ........................................... 26,202 29,480
--------- ---------
STOCKHOLDER'S EQUITY:
Preferred stock, $1.00 par value, 100,000 shares
authorized, issued and outstanding ................. 7,960 7,960
Common stock, $.01 par value, 3,000 shares
authorized, issued and outstanding ................. -- --
Additional paid-in capital ............................. 8,682 8,682
Retained earnings ...................................... 4,764 9,345
Cumulative translation adjustment ...................... (594) (367)
Unrealized gain (loss) on marketable securities ........ (137) 634
--------- ---------
Total Stockholder's Equity ......................... 20,675 26,254
--------- ---------
Total ......................................... $ 467,102 $ 426,631
========= =========
See notes to consolidated financial statements.
F - 4
29
TRANS-RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1994, 1995 and 1996
1994 1995 1996
--------- --------- ---------
(in thousands)
REVENUES .............................. $ 334,107 $ 385,564 $ 412,305
OPERATING COSTS AND EXPENSES:
Cost of goods sold ................. 265,795 323,126 343,930
General and administrative ......... 37,780 43,193 46,419
--------- --------- ---------
OPERATING INCOME ...................... 30,532 19,245 21,956
Interest expense ................... (28,369) (34,498) (32,195)
Interest and other income - net .... 15,056 9,128 25,448
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM ................. 17,219 (6,125) 15,209
INCOME TAX PROVISION .................. 14,669 733 4,016
--------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM ............................... 2,550 (6,858) 11,193
EXTRAORDINARY ITEM - Loss on repurchase
of debt (no income tax benefit) .... -- (103) (553)
--------- --------- ---------
NET INCOME (LOSS) ..................... $ 2,550 $ (6,961) $ 10,640
========= ========= =========
See notes to consolidated financial statements.
F - 5
30
TRANS-RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
For the Years Ended December 31, 1994, 1995 and 1996
ADDITIONAL CUMULATIVE UNREALIZED
PREFERRED COMMON PAID-IN RETAINED TRANSLATION GAIN (LOSS)
STOCK STOCK CAPITAL EARNINGS ADJUSTMENT ON SECURITIES TOTAL
-------- -------- -------- -------- -------- -------- --------
(in thousands)
BALANCE, JANUARY 1, 1994 ................ $ -- $ -- $ 500 $ 15,348 $ (54) $ -- $ 15,794
Net income ........................... 2,550 2,550
Dividends - common stock, including
non-cash dividend of $4,241,000 ... (4,466) (4,466)
Issuance of preferred stock upon
conversion of 9 1/2% junior
subordinated debentures ........... 7,960 7,960
Net change during year ............... 5 (306) (987) (1,288)
-------- -------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1994 .............. 7,960 -- 505 13,432 (360) (987) 20,550
Net loss ............................. (6,961) (6,961)
Dividends:
Common stock ...................... (856) (856)
Preferred stock ................... (851) (851)
Capital contribution by parent company
upon assumption of 9 1/2% junior
subordinated debentures ........... 8,177 8,177
Net change during year ............... (234) 850 616
-------- -------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1995 .............. 7,960 -- 8,682 4,764 (594) (137) 20,675
Net income ........................... 10,640 10,640
Dividends:
Common stock ...................... (5,208) (5,208)
Preferred stock ................... (851) (851)
Net change during year ............... 227 771 998
-------- -------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1996 .............. $ 7,960 $ -- $ 8,682 $ 9,345 $ (367) $ 634 $ 26,254
======== ======== ======== ======== ======== ======== ========
See notes to consolidated financial statements.
F - 6
31
TRANS-RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1994, 1995 and 1996
1994 1995 1996
--------- --------- ---------
(in thousands)
OPERATING ACTIVITIES AND WORKING CAPITAL
MANAGEMENT:
Operations:
Net income (loss) .................................. $ 2,550 $ (6,961) $ 10,640
Items not requiring (providing) cash:
Depreciation and amortization .................. 20,859 22,409 22,689
Increase (decrease) in other liabilities ....... 509 (37) 236
Deferred taxes and other - net, including gain
on sale of potash operations in 1996 ...... 2,986 688 (22,488)
--------- --------- ---------
Total ..................................... 26,904 16,099 11,077
Working capital management:
Accounts receivable and other current assets ... (26,105) 15,585 (3,912)
Inventories .................................... 9,616 (11,274) 5,603
Prepaid expenses ............................... (1,367) (443) 469
Accounts payable ............................... 22,153 (7,753) (11,239)
Accrued expenses and other current liabilities.. 8,658 (10,381) 1,360
--------- --------- ---------
Cash provided by operations and
working capital management ................ 39,859 1,833 3,358
--------- --------- ---------
INVESTMENT ACTIVITIES:
Additions to property, plant and equipment ........... (93,314) (35,661) (13,570)
Sales of marketable securities and short-term
investments, including in 1995 liquidation
of CD's securing a bank loan (see Note G) .......... 33,543 132,260 1,965
Purchases of marketable securities and short-
term investments, including in 1994 purchase
of CD's securing a bank loan (see Note G) ...... (134,790) (4,371) (9,432)
Other - net, including proceeds from sale of
potash operations in 1996 .......................... (6,403) (7,441) 56,376
--------- --------- ---------
Cash provided by (used in) investment activities... (200,964) 84,787 35,339
--------- --------- ---------
FINANCING ACTIVITIES:
Increase in long-term debt ........................... 183,330 101,616 44,168
Repurchases, payments and current maturities of
long-term debt ..................................... (43,211) (141,452) (89,769)
Increase (decrease) in short-term debt ............... 11,040 (27,776) 9,203
Dividends to stockholders ............................ (225) (1,707) (6,059)
--------- --------- ---------
Cash provided by (used in) financing activities 150,934 (69,319) (42,457)
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ..................................... (10,171) 17,301 (3,760)
CASH AND CASH EQUIVALENTS:
Beginning of year .................................... 25,742 15,571 32,872
--------- --------- ---------
End of year .......................................... $ 15,571 $ 32,872 $ 29,112
========= ========= =========
See notes to consolidated financial statements.
F - 7
32
TRANS-RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The consolidated financial statements of Trans-Resources, Inc. ("TRI"),
include TRI and its direct and indirect wholly-owned subsidiaries, after
elimination of intercompany accounts and transactions. TRI's principal
subsidiaries are Cedar Chemical Corporation ("Cedar"), and Cedar's two
wholly-owned subsidiaries, NMPC, Inc. (name changed from New Mexico Potash
Corporation upon completion of the sale of its potash operations in August,
1996; "NMPC"); and Vicksburg Chemical Company ("Vicksburg"); EDP, Inc. (name
changed from Eddy Potash, Inc. upon completion of the sale of its potash
operations in August, 1996; "EDP"); Na-Churs Plant Food Company ("Na-Churs");
and Haifa Chemicals Ltd. ("HCL") and HCL's wholly-owned subsidiary, Haifa
Chemicals South, Ltd. ("HCSL"). TRI is a wholly-owned subsidiary of TPR
Investment Associates, Inc. ("TPR"). As used herein, the term "the Company"
means TRI together with its direct and indirect subsidiaries.
Effective March 31, 1995 the Company acquired the assets of Na-Churs, a
company headquartered in Ohio and engaged in the specialty plant nutrient
business. The acquisition was accounted for as a purchase. Such acquisition did
not have a significant effect on the Company's results of operations.
On August 16, 1996 NMPC and EDP sold substantially all of their assets
for an aggregate consideration of $56,154,000, including a payment for working
capital of $11,154,000, and the assumption of specified liabilities (but
excluding, among other things, certain antitrust litigation - see Part I - Item
3 "Legal Proceedings"). The sale of the Company's potash operations resulted in
a pre-tax gain, after considering certain costs relating thereto, of
$22,579,000. Such gain is included in "Interest and other income - net" in the
accompanying Consolidated Statements of Operations.
NMPC and EDP had conducted the Company's potash mining and production
operations. During the years ended December 31, 1994, 1995 and 1996, the potash
operations contributed approximately $57,000,000 (17%), $54,000,000 (14%) and
$35,000,000 (9%), respectively, to the Company's consolidated revenues, after
eliminating intercompany sales.
Approximately 50% of the aggregate sales proceeds were applied to
prepay debt secured by the assets of NMPC or EDP. In connection with the sale,
Vicksburg entered into a five year potash supply agreement, at prevailing market
rates during the period (subject to certain adjustments), with the buyer.
Substantially all of the companies' revenues, operating profits and
identifiable assets are related to the chemical industry. The Company is a
multinational manufacturer of specialty plant nutrients, organic chemicals and
industrial chemicals and distributes its products internationally.
F - 8
33
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and liabilities
and disclosure of contingencies at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Management believes that the
estimates used are reasonable.
Operating Data
The Company's revenues by region for the years ended December 31, 1994,
1995 and 1996 are set forth below:
1994 1995 1996
---- ---- ----
(in millions)
Western Hemisphere:
United States ................. $122 $136 $145
Other ......................... 23 22 24
Europe ............................ 117 146 160
Asia and Australia ................ 41 40 43
Israel ............................ 18 21 23
Africa and other .................. 13 21 17
---- ---- ----
Total ......................... $334 $386 $412
==== ==== ====
As of December 31, 1995 and 1996, the Company's assets were located in
the United States (40% and 36%, respectively) and abroad (principally Israel)
(60% and 64%, respectively). The Company has no single customer accounting for
more than 10% of its revenues.
HCL leases land and buildings from Oil Refineries Ltd. ("ORL"), a
corporation which is majority-owned by the Israeli Government. The leases expire
at various dates, principally in 19 years. HCL also has a contract with ORL for
steam and processed water which expires on June 30, 1997, with HCL having an
option to extend such contract for an additional year, and a lease from ORL of a
pipeline which transports ammonia from the port in Haifa to HCL's plant. HCSL
leases its land from the Israeli government under a 49 year lease which
commenced in 1994.
HCL obtains its major raw materials, potash and phosphate rock, in
Israel. Potash is purchased solely from Dead Sea Works, Ltd. ("DSW") in
accordance with a supply contract expiring December 31, 1999. HCL is currently
purchasing phosphate rock on a "spot" basis from Rotem Amfert Negev ("Rotem").
DSW and Rotem are companies that are majority-owned by the Israeli Government
and are the sole suppliers in Israel of potash and phosphate rock, respectively.
While management believes its current relationships with both of its principal
suppliers to be good, the loss of supply from either of these sources could have
an adverse effect on the Company.
Functional Currency and Transaction Gains and Losses
Approximately 90% of HCL's sales are made outside of Israel in various
currencies, of which approximately 40% are in U.S. dollars, with the remainder
principally in Western European currencies. In order to mitigate the impact of
currency fluctuations against the U.S. dollar, the Company has a policy of
hedging a significant portion of its foreign sales denominated in Western
European currencies by entering into forward exchange contracts. A portion of
these contracts qualify as hedges pursuant to Statement of Financial Accounting
Standards No. 52 and, accordingly, unrealized gains and losses arising therefrom
are deferred and accounted for in the subsequent year as part of sales.
Unrealized gains and losses for the remainder of the forward exchange contracts
are recognized in operations currently. At December 31, 1995 and 1996, there
were outstanding contracts to purchase $148 million and $53 million,
respectively, in various European currencies, principally Deutsche Marks and
Italian Lira. In addition, at December 31, 1995 and 1996 there were outstanding
contracts to purchase 95 million and 26 million Deutsche Marks,
F - 9
34
respectively, and to sell a corresponding amount of Italian Lira and Spanish
Pesetas. Gains of approximately $900,000 were deferred at December 31, 1995 for
foreign exchange contracts which qualify as hedges; no such gains or losses were
deferred at December 31, 1996.
If the Company had not followed such a policy of entering into forward
exchange contracts in order to hedge its foreign sales, and instead recognized
income based on the then prevailing foreign currency rates, the Company's
operating income for the years ended December 31, 1994, 1995 and 1996 would have
increased (decreased) by $7,400,000, $16,600,000 and ($6,900,000), respectively,
and income before taxes would have increased (decreased) by approximately
$11,200,000, $11,200,000, and ($5,300,000), respectively.
The principal purpose of the Company's hedging program (which is for
other than trading purposes) is to mitigate the impact of fluctuations against
the U.S. dollar, as well as to protect against significant adverse changes in
exchange rates. Accordingly, the gains and losses recognized relating to the
hedging program in any particular period and the impact on revenues had the
Company not had such a program are not necessarily indicative of its
effectiveness.
Raw materials purchased in Israel are mainly quoted at prices linked to
the U.S. dollar. The U.S. dollar is the functional currency and accordingly the
financial statements of HCL are prepared, and the books and records of HCL
(except for a subsidiary described below) are maintained, in U.S. dollars.
The assets, liabilities and operations of one of HCL's foreign
subsidiaries are measured using the currency of the primary economic environment
in which the subsidiary operates. Assets and liabilities are translated at the
exchange rate as of the balance sheet date. Revenues, expenses, gains and losses
are translated at the weighted average exchange rate for the period. Translation
adjustments, resulting from the process of translating such subsidiary's
financial statements from its currency into U.S. dollars, are recorded as a
separate component of stockholder's equity.
Inventories
Inventories are carried at the lower of cost or market. Cost is
determined on the first-in, first-out method.
Property, Plant and Equipment
Property, plant and equipment are carried at cost, less accumulated
depreciation and amortization. Depreciation is recorded under the straight-line
method at generally the following annual rates:
Buildings............................................ 3 - 10%
Machinery, plant and equipment....................... 5 - 33%
Office furniture and equipment....................... 6 - 20%
Expenditures for maintenance and repairs are charged to expense as
incurred. Investment grants from the Israeli Government are initially recorded
as a reduction of the capitalized asset and are recognized in income over the
estimated useful life of the respective asset. HCL recorded investment grants
for the years ended December 31, 1994, 1995 and 1996 amounting to $22,708,000,
$995,000, and $248,000, respectively.
Effective January 1, 1995, the Company revised the estimate of
depreciable lives of its property, plant and equipment at EDP to more closely
approximate the economic lives of those assets. The effect of this change in
estimate was to decrease depreciation expense in 1995 by approximately
$2,800,000.
F - 10
35
Investments In Marketable Securities and Other Short-Term Investments
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", the Company
classifies its equity and fixed maturity securities as available-for-sale and
reports such securities at fair value, with unrealized gains and losses recorded
as a separate component of stockholder's equity.
Income Taxes
The Company is included in the consolidated Federal income tax return
of TPR. Under the tax allocation agreement with TPR, the annual current Federal
income tax liability for the Company and each of its domestic subsidiaries
reporting profits is determined as if such entity had filed a separate Federal
income tax return; no tax benefits are given for companies reporting losses.
However, TPR may, at its discretion, allow tax benefits for such losses.
For purposes of the consolidated financial statements, taxes on income
have been computed as if the Company and its domestic subsidiaries filed its own
consolidated Federal income tax return without regard to the tax allocation
agreement. Payments to TPR, if any, representing the excess of amounts
determined under the tax allocation agreement over amounts determined for the
purposes of consolidated financial statements are charged to retained earnings.
During the three years in the period ended December 31, 1996, TPR did not
require payment of amounts different from that which was computed as if the
Company and its consolidated subsidiaries filed its own consolidated income tax
returns.
The Company accounts for income taxes under the asset and liability
method. Deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates that are
expected to be in effect when the differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities are
expected to reverse. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
Environmental Costs
Environmental expenditures that relate to current operations are
expensed or capitalized as appropriate. Expenditures that relate to an existing
condition caused by past operations (including fines levied under environmental
laws, reclamation costs and litigation costs), and which do not contribute to
current or future revenue generation ("environmental clean-up costs"), are
expensed. Such environmental clean-up costs do not encompass ongoing operating
costs relating to compliance with environmental laws, including disposal of
waste. Liabilities are recorded when environmental assessments and/or remedial
efforts are probable, the cost can be reasonably estimated and the Company's
responsibility is established. Generally, the timing of these accruals coincides
with the earlier of completion of a feasibility study or the Company's
commitment to a formal plan of action. Accruals relating to costs to be
incurred, if any, at the end of the useful life of equipment, facilities or
other assets are made over the useful life of the respective assets.
During 1994, 1995 and 1996 the Company incurred environmental clean-up
costs of approximately $600,000, $300,000 and $300,000, respectively. In
addition, at both December 31, 1995 and 1996, the Company has accrued
approximately $1,600,000 related to the estimated costs to be incurred for
various environmental liabilities.
In October, 1996 the AICPA Accounting Standards Executive Committee
issued Statement of Position 96-1, "Environmental Remediation Liabilities",
which requires adoption in 1997. The adoption of this pronouncement will not
have a material effect on the Company's consolidated financial condition or
results of operations.
F - 11
36
Research and Development Costs
Research and development costs are charged to expense as incurred and
amounted to $3,978,000, $3,158,000 and $2,693,000 for the years ended December
31, 1994, 1995 and 1996, respectively.
Risk Management Derivatives
Amounts receivable or payable under interest rate swap agreements are
recognized as interest expense.
Impairment of Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed
Of". In accordance with SFAS 121, management evaluates the recoverability of its
long-lived assets whenever events or changes in circumstances indicate that a
recorded asset might not be recoverable by taking into consideration such
factors as recent operating results, projected undiscounted cash flows and plans
for future operations. At December 31, 1996 there were no impairments of the
Company's assets.
Cash and Cash Equivalents
Investments with original maturities of three months or less are
classified as cash equivalents by the Company.
Concentration of Credit Risk
The Company believes no significant concentration of credit risk exists
with respect to investments and accounts receivable. The Company places its cash
investments with high quality financial institutions, and the Company's
receivables are diversified across a diverse customer base and geographical
regions.
Reclassifications
Certain prior year amounts have been reclassified to conform to the
manner of presentation in the current year.
B. OTHER CURRENT ASSETS
Other current assets consist of the following at December 31, 1995 and
1996:
1995 1996
------- -------
(in thousands)
Marketable securities (carried at market) ........ $ 2,393 $ 8,557
Miscellaneous receivables, other securities,
deferred income taxes, etc .................. 16,971 21,669
------- -------
Total .................................. $19,364 $30,226
======= =======
F - 12
37
The Company classifies all of its marketable securities (including U.S.
Government obligations) as available-for-sale securities as of December 31, 1995
and 1996:
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
------ ------ ------ ------
(in thousands)
December 31, 1995
Foreign Government obligations ..... $ 877 $ 21 $ -- $ 898
Other debt securities .............. 393 9 -- 402
------ ------ ------ ------
Total debt securities ......... 1,270 30 -- 1,300
------ ------ ------ ------
Common stocks and mutual funds
investing primarily therein ...... 872 25 129 768
Preferred stocks ................... 388 -- 63 325
------ ------ ------ ------
Total equity securities ....... 1,260 25 192 1,093
------ ------ ------ ------
Total ......................... $2,530 $ 55 $ 192 $2,393
====== ====== ====== ======
December 31, 1996
Foreign Government obligations ..... $1,005 $ -- $ 10 $ 995
Other debt securities .............. 432 41 -- 473
------ ------ ------ ------
Total debt securities ......... 1,437 41 10 1,468
------ ------ ------ ------
Common stocks and mutual funds
investing primarily therein ...... 6,099 505 -- 6,604
Preferred stocks ................... 387 98 -- 485
------ ------ ------ ------
Total equity securities ....... 6,486 603 -- 7,089
------ ------ ------ ------
Total ......................... $7,923 $ 644 $ 10 $8,557
====== ====== ====== ======
The cost and estimated fair value of debt securities at December 31,
1996, by contractual maturity, are as follows:
Estimated
Cost Fair Value
------ ------
(in thousands)
Due in one year or less ...................... $ 648 $ 650
Due after one year through three years ....... 496 506
Due after three years ........................ 293 312
------ ------
Total .................................. $1,437 $1,468
====== ======
During 1995, the gross realized gains on sales of securities totaled
approximately $555,000 and the gross realized losses totaled approximately
$968,000; during 1996 such gross realized gains totaled approximately $411,000
and gross realized losses totaled approximately $70,000 (see Note K).
F - 13
38
C. INVENTORIES
Inventories consist of the following at December 31, 1995 and 1996:
1995 1996
------- -------
(in thousands)
Raw materials ........................ $20,444 $19,476
Finished goods ....................... 46,030 33,618
------- -------
Total ............................ $66,474 $53,094
======= =======
D. PROPERTY, PLANT AND EQUIPMENT - NET
Property, plant and equipment at December 31, 1995 and 1996 consists of
the following:
1995 1996
-------- --------
(in thousands)
Land ............................................... $ 4,328 $ 4,272
Buildings .......................................... 28,413 22,178
Machinery, plant and equipment ..................... 304,228 260,876
Office furniture, equipment and water rights ....... 10,955 8,731
Construction-in-progress ........................... 8,823 13,927
-------- --------
Total, at cost ................................. 356,747 309,984
Less accumulated depreciation and amortization ..... 136,556 111,097
-------- --------
Property, plant and equipment - net ............ $220,191 $198,887
======== ========
During 1993 the Company commenced construction of the K3 Plant, a new
facility in Israel, with initial capacity to produce approximately 110,000
metric tons of potassium nitrate annually. The Company substantially completed
the construction of the K3 Plant in the fourth quarter of 1994. Capital
expenditures incurred in connection with the K3 Plant aggregated approximately
$67,000,000 (net of aggregate Israeli Government grants of approximately
$35,000,000). Product sales from the K3 Plant commenced in 1995. The capacity of
the K3 plant may be expanded in subsequent years.
The Company capitalized interest costs aggregating $3,360,000 and
$953,000 during the years ended December 31, 1994 and 1995, respectively, with
respect to several construction projects. No interest was capitalized during
1996. Certain property, plant and equipment has been pledged as collateral for
long-term debt - see Note G.
On February 7, 1994, the smaller of HCL's two potassium nitrate
production units was damaged by a fire, causing a temporary reduction of the
Company's potassium nitrate production capacity. The Company completed the
replacement of the damaged unit during 1995. The impact of the loss of the
facility, including the effect of business interruption, was substantially
covered by insurance. The insurance proceeds relating to the property damage was
for replacement value, which was greater than the recorded carrying value of the
damaged assets. Accordingly, during the years ended December 31, 1994 and 1995,
HCL has recorded pre-tax gains of approximately $18,100,000 and $1,700,000,
respectively. Such pre-tax gains are included in the caption "interest and other
income-net" in the accompanying Consolidated Statements of Operations - see Note
K.
E. SHORT-TERM DEBT AND UNUSED CREDIT LINES
The weighted average interest rates for short-term debt outstanding at
December 31, 1995 and 1996 were 6.5% and 5.9%, respectively.
F - 14
39
As of December 31, 1996, the Company and its subsidiaries have unused
revolving loan commitments and other credit lines from banks aggregating
approximately $81,000,000.
F. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following
at December 31, 1995 and 1996:
1995 1996
------- -------
(in thousands)
Compensation and payroll taxes ............... $10,159 $ 9,241
Interest ..................................... 11,020 10,229
Income taxes ................................. 1,518 840
Other ........................................ 10,717 13,011
------- -------
Total .................................. $33,414 $33,321
======= =======
G. LONG-TERM DEBT - NET
Long-term debt consists of the following at December 31, 1995 and 1996:
Payable
Description Interest Rate* Through 1995 1996
----------- -------------- ------- ---- ----
(in thousands)
TRI:
Bank loans (1) .................................... Various 1998 $ 27,500 $-
Senior subordinated reset notes, net of
unamortized debt discount of $150,000
at December 31, 1995 (effective interest
rate of 15.4%) (2) .............................. 14.5% 1996 23,350 --
11.875% Senior subordinated notes, net of
unamortized debt discount of $926,000 and
$825,000 (effective interest rate of 12.1%) (3) . 11.875% 2002 114,074 114,175
Subsidiaries:
Bank loans and other financing .................... Various 2020 164,359 170,020
-------- --------
Total ........................................... 329,283 284,195
Less current portion ............................ 40,703 17,481
-------- --------
Long-term debt .................................. $288,580 $266,714
======== ========
- ----------
* As prevailing on respective balance sheet dates. Such rates (other than
the subordinated debt) generally "float" according to changes in the Prime or
LIBOR rates. At December 31, 1996 such rates were approximately 8.25% and 5.5%,
respectively.
1. On June 30, 1994, the Company entered into a Loan Agreement with a bank
and borrowed $40,000,000 (repayable quarterly over a four year period) and
utilized a portion of the proceeds to prepay approximately $19,000,000 then owed
to such bank. Pursuant to the Loan Agreement, the Company also borrowed an
additional $100,000,000, repayable in January, 1996. Under certain specified
circumstances prior to such date, the Company could have converted such loan
into a term loan maturing five years from the date of conversion. At December
31, 1994 the Company pledged certificates of deposit ("CD's") with a principal
amount of $100,000,000 as collateral for such loan. The Company pledged 79% of
the capital stock of HCL to secure its obligations under the Loan Agreement. On
January 5, 1995, the Company liquidated the pledged CD's and prepaid, in full,
the $100,000,000
F - 15
40
loan. On January 2, 1996 the Company prepaid the then remaining outstanding
principal balance ($27,500,000) relating to this loan.
2. The Senior Subordinated Reset Notes (the "Reset Notes") bore interest
at 14.5% and matured on September 1, 1996. During 1995 and 1996, the Company
acquired $3,250,000 and $19,122,000, respectively, principal amount of the Reset
Notes prior to maturity. In connection with such acquisitions of the Reset
Notes, the Company has recorded extraordinary losses of $103,000 and $553,000,
respectively. Such losses had no current tax benefit.
3. The 11 7/8% Notes mature on July 1, 2002 and are redeemable at the
option of the Company at any time after July 1, 1998 at stipulated redemption
prices. There are no mandatory sinking fund requirements.
- ------------------
On November 28, 1986, the Company issued junior subordinated debentures
(the "9.5% Debentures") in the aggregate principal amount of $9,000,000, with
interest payable quarterly. The 9.5% Debentures were initially recorded at
$6,700,000, the estimated value on the date of issue, and were scheduled to
mature in 1998.
During 1991, the Company's then outstanding redeemable preferred stock
was converted into another $9,000,000 principal amount of the Company's 9.5%
Debentures. Subsequently, during 1991, the then holder of this $9,000,000
principal amount of 9.5% Debentures agreed to extend the maturity date of such
principal amount by seven years to the year 2005. The carrying value of the 9.5%
Debentures issued upon conversion of the redeemable preferred stock was
equivalent to the previous carrying value of the preferred stock. During 1994,
as a result of the settlement of certain litigation with a former indirect
stockholder and director of the Company, TPR acquired the 9.5% Debentures then
held by the wife of such stockholder. Upon TPR's acquisition of such 9.5%
Debentures, TPR exchanged these 9.5% Debentures for a new Company preferred
stock - see Note L. Also as part of the settlement of such litigation, TPR
assumed a $4,000,000 obligation that was previously owed to the Company by the
wife of the former indirect stockholder and director. Such obligation, which is
included in "other assets" in the accompanying Consolidated Balance Sheets,
bears interest at the rate of 8.75% per year and is due in the year 2005.
During 1995, TPR assumed the Company's obligation for the remaining
outstanding 9.5% Debentures and the Company's liability thereon was
extinguished. The Company recorded such assumed obligation as an $8,177,000
capital contribution by TPR, the amount equivalent to the then net carrying
value of the 9.5% Debentures.
Certain of the Company's and its subsidiaries' loan agreements and its
Indenture require the Company and/or the respective subsidiary to, among other
things, maintain various financial ratios including minimum net worth, ratios of
debt to net worth, interest and fixed charge coverage tests and current ratios.
In addition, there are certain limitations on the Company's ability make certain
Restricted Payments and Restricted Investments (each as defined), etc. The
Company is also required to offer to purchase a portion of the 11 7/8% Notes if
it fails to maintain minimum amounts of Junior Subordinated Capital (as
defined). In the event of a Change in Control (as defined), the Company is
required to offer to purchase all the 11 7/8% Notes as well as to repay certain
bank loans. Certain of the respective instruments also limit the payment of
dividends, capital expenditures and the incurring of additional debt and liens.
F - 16
41
As of December 31, 1996, the Company and its subsidiaries are in
compliance with the covenants of each of the respective loan agreements and its
Indenture.
The aggregate maturities of long-term debt at December 31, 1996 are set
forth below.
Years Ending
December 31, (in thousands)
- ------------ --------------
1997 ................................................ $ 17,481
1998 ................................................ 13,129
1999 ................................................ 10,917
2000 ................................................ 8,105
2001 ................................................ 11,259
Thereafter .......................................... 223,304
--------
Total ........................................... $284,195
========
Substantially all of the assets of HCL and HCSL are subject to security
interests in favor of the State of Israel and/or banks. In addition,
substantially all of the assets of the Company's United States subsidiaries are
subject to security interests in favor of banks pursuant to loan agreements. The
capital stock of HCL and Cedar have also been pledged to the banks pursuant to
these agreements. The Company's common stock is pledged to secure the repayment
obligations of TPR under a note issued by it to a former indirect shareholder of
the Company.
Interest paid, net of capitalized interest, totaled $24,089,000,
$33,445,000 and $31,672,000 for the years ended December 31, 1994, 1995 and
1996, respectively.
H. OTHER LIABILITIES
Under Israeli law and labor agreements, HCL is required to make
severance and pension payments to dismissed employees and to employees leaving
employment in certain other circumstances. These liabilities are covered by
regular deposits to various severance pay funds and by payment of premiums to an
insurance company for officers and non-factory personnel under approved plans.
"Other liabilities" in the Consolidated Balance Sheets as of December 31, 1995
and 1996 include accruals of $2,528,000 and $2,731,000, respectively, for the
estimated unfunded liability of complete severance of all HCL employees. Costs
incurred were approximately $2,648,000, $2,060,000 and $2,629,000 for the years
ended December 31, 1994, 1995 and 1996, respectively.
No information is available regarding the actuarial present value of
HCL's pension plans and the plans' net assets available for benefits, as these
plans are multi-employer, external and independent of HCL.
Cedar has a defined benefit pension plan which covers all of the
full-time employees of Cedar and Vicksburg. Funding of the plan is made through
payment to various funds managed by a third party and is in accordance with the
funding requirements of the Employee Retirement Income Security Act of 1974
("ERISA").
F - 17
42
Cedar's net pension cost for the years ended December 31, 1994, 1995
and 1996 included the following benefit and cost components:
1994 1995 1996
------- ------- -------
(in thousands)
Service cost ......................................... $ 657 $ 603 $ 796
Interest cost ........................................ 756 844 1,014
Amortization of unrecognized prior service cost ...... 109 109 109
Actual return on plan assets ......................... (751) (793) (904)
Amortization of unrecognized net transition obligation 58 59 59
------- ------- -------
Net pension cost ................................. $ 829 $ 822 $ 1,074
======= ======= =======
The funded status and the amounts recognized in the Company's December
31, 1995 and 1996 Consolidated Balance Sheets for Cedar's benefit plan is as
follows:
1995 1996
-------- --------
(in thousands)
Plan assets at market value ........................... $ 10,059 $ 12,157
Actuarial present value of projected benefit obligation 12,910 15,140
-------- --------
Funding status ........................................ (2,851) (2,983)
Unrecognized net transition obligation ................ 351 293
Unrecognized prior service cost ....................... 952 843
Unrecognized net loss ................................. 1,065 1,754
-------- --------
Prepaid (accrued) pension cost ........................ $ (483) $ (93)
======== ========
At December 31, 1995 and 1996 the actuarial present value of Cedar's
vested benefit obligation was $9,493,000 and $10,666,000 and the accumulated
benefit obligation was $9,949,000 and $11,304,000, respectively.
Actuarial assumptions used at December 31, 1995 and 1996 were as
follows:
1995 1996
---- ----
Discount rate - projected benefit obligation ............... 7.5% 7.5%
Rate of increase in compensation levels .................... 5.0% 5.0%
Expected long-term rate of return on assets ................ 9.0% 9.0%
The unrecognized net transition obligation is being amortized on a
straight-line basis over fifteen years beginning January 1, 1987.
Certain of the Company's United States subsidiaries have profit sharing
thrift plans designed to conform to Internal Revenue Code Section 401(k) and to
the requirements of ERISA. The plans, which cover all full-time employees (and
one of which includes Company headquarters employees), allow participants to
contribute as much as 15% of their annual compensation, up to a maximum
permitted by law, through salary reductions. The companies' contributions to the
plans are based on a percentage of the participant's contributions, and the
companies may make additional contributions to the plans at the discretion of
their respective Boards of Directors. The contribution expense relating to the
profit sharing thrift plans totaled $538,000, $559,000 and $505,000 for the
years ended December 31, 1994, 1995 and 1996, respectively.
F - 18
43
I. COMMITMENTS
Operating Leases
The Company and its subsidiaries are obligated under non-cancelable
operating leases covering principally land, office facilities and equipment. At
December 31, 1996, minimum annual rental commitments under these leases are:
Years Ending
December 31, (in thousands)
- ------------
1997 ................................................. $ 2,931
1998 ................................................. 2,775
1999 ................................................. 2,167
2000 ................................................. 1,542
2001 ................................................. 1,086
Thereafter ........................................... 9,404
-------
Total ............................................ $19,905
=======
Rent expense for 1994, 1995 and 1996 was $3,485,000, $5,308,000 and
$4,683,000, respectively, covering land, office facilities and equipment.
Purchase Commitment
HCL has an agreement for the purchase of potash which expires in 1999.
The terms of the agreement require HCL to purchase a minimum quantity at the
weighted average of the FOB Israeli port prices received by the seller for the
immediately preceding quarter plus certain adjustments thereto. Based upon
current prices and at current capacity, the annual commitment is approximately
$26,000,000. There are currently no purchase commitments in excess of market
prices.
J. INCOME TAXES
The Company's income tax provision for the years ended December 31,
1994, 1995 and 1996 consist of the following:
1994 1995 1996
------- ------- -------
(in thousands)
Current expense (benefit):
Federal .............................. $ 2,193 $ -- $ --
Foreign .............................. 4,872 (364) 3,146
State ................................ 432 392 (121)
------- ------- -------
Total current .................. 7,497 28 3,025
------- ------- -------
Deferred expense:
Foreign .............................. 7,135 507 385
State ................................ 37 198 606
------- ------- -------
Total deferred ................. 7,172 705 991
------- ------- -------
Total .......................... $14,669 $ 733 $ 4,016
======= ======= =======
F - 19
44
The provision for income taxes for the years ended December 31, 1994,
1995 and 1996 amounted to $14,669,000, $733,000 and $4,016,000, respectively,
representing effective income tax rates of 85.2%, 12.0% and 26.4%, respectively.
These amounts differ from the amounts of $6,027,000, ($2,144,000) and
$5,323,000, respectively, computed by applying the statutory Federal income tax
rates to income (loss) before income taxes and extraordinary item. The reasons
for such variances from statutory rates were as follows:
1994 1995 1996
---- ---- ----
Statutory Federal rates ................................ 35.0% (35.0)% 35.0%
Increase (decrease) in income tax rate resulting from:
Israeli operations - net impact of Israeli statutory
rate, effects of "inflation allowances",
withholding taxes, etc ........................ (6.1) (53.5) 0.5
Net losses without current tax benefit,
Alternative Minimum Tax ("AMT") and other ..... 56.1 96.1 13.4
Utilization of capital loss carryforwards .......... -- -- (22.6)
Additional depletion expense ....................... (1.6) (1.9) (2.0)
State and local income taxes - net ................. 1.8 6.3 2.1
---- ---- ----
Effective income tax rates ............................. 85.2% 12.0% 26.4%
==== ==== ====
At December 31, 1995 and 1996, deferred tax assets (liabilities)
consisted of the following:
1995 1996
-------- --------
(in thousands)
Depreciation and property and equipment basis differences $(23,360) $(29,981)
Nondeductible reserves .................................. 4,429 5,695
Net operating loss carryforwards ........................ 10,665 20,244
Capital loss and capital loss carryforwards ............. 4,112 --
Foreign tax credit carryovers ........................... 2,507 4,753
AMT credit carryovers ................................... 6,313 5,401
Investment tax credit carryovers ........................ 200 200
Other ................................................... 879 1,320
-------- --------
Deferred taxes - net, exclusive of valuation allowance .. 5,745 7,632
Valuation allowance ..................................... (25,506) (28,384)
-------- --------
Deferred taxes - net .................................... $(19,761) $(20,752)
======== ========
At December 31, 1995, deferred tax assets of $1,227,000 are classified
as "other current assets" and deferred tax liabilities of $20,988,000 are
classified as "other liabilities". At December 31, 1996, deferred tax assets of
$2,563,000 are classified as "other current assets" and deferred tax liabilities
of $23,315,000 are classified as "other liabilities".
F - 20
45
At December 31, 1996, the Company had various tax loss and credit
carryovers which expire as follows:
U.S. Federal
-------------------------------------------
Investment Net Alternative State Net Foreign Net
Foreign Tax Operating Minimum Operating Operating
Expiration Tax Credit Credit Loss Tax Credit Loss Loss
- ---------- ------- ------- ------- ------- ------- -------
(in thousands)
1998 .... $ 4,680
2000 .... 41
2001 .... 32 $ 200
2010 .... $22,208 $13,700
2011 .... 18,318 11,800
Unlimited $ 5,401 $14,600
------- ------- ------- ------- ------- -------
Total ... $ 4,753 $ 200 $40,526 $ 5,401 $25,500 $14,600
======= ======= ======= ======= ======= =======
Income taxes paid totaled approximately $7,300,000, $3,700,000 and
$3,100,000, respectively, during the years ended December 31, 1994, 1995 and
1996. These amounts are exclusive of a prior year tax refund received by HCL in
1995 of approximately $4,000,000.
K. INTEREST AND OTHER INCOME - NET
Interest and other income - net for the years ended December 31, 1994,
1995 and 1996 consists of the following:
1994 1995 1996
-------- -------- --------
(in thousands)
Interest and dividend income .............................. $ 2,442 $ 2,459 $ 1,408
Security gains (losses) - net ............................. (1,178) (413) 341
Gain on involuntary conversion (see Note D) ............... 18,100 1,700 --
Gain on sale of potash operations (see Note A) ............ -- -- 22,579
Other, including gains (losses) of $(3,800,000), $5,400,000
and ($1,600,000) in 1994, 1995 and 1996, respectively,
relating to foreign currencies (see Note A) .......... (4,308) 5,382 1,120
-------- -------- --------
Total ................................................ $ 15,056 $ 9,128 $ 25,448
======== ======== ========
L. PREFERRED STOCK
As discussed in Note G, preferred stock was issued to TPR in December,
1994. The dividend on the preferred stock is cumulative at the rate of $8.50 per
share per annum. The preferred shares are non-voting and were recorded at
$7,960,000, TRI's carrying value of the 9.5% Debentures held by TPR on the date
of conversion. The preferred shares are redeemable, at the option of the
Company, at any time, at a redemption price of $79.60 per share, plus an amount
equal to cumulative dividends, accrued and unpaid thereon up to the date of
redemption.
F - 21
46
M. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In connection with a credit agreement, Cedar has entered into several
three-year interest rate swap agreements with a bank to effectively convert a
portion of its floating rate debt to fixed, thereby managing its credit risk. An
interest rate swap generally involves the exchange of fixed for floating rate
interest payment streams on specified notional principal amounts for an
agreed-upon period of time, without the exchange of the underlying principal
amounts. Notional amounts often are used to express the volume of these
transactions, but the amounts potentially subject to credit risk are much
smaller. Cedar's credit risk involves the possible default of the counterparty
(the bank). No collateral requirements are imposed.
Cedar entered into the following interest rate swap agreements which
are used to manage its interest-rate risk. Cedar receives variable rate payments
and pays fixed rate payments. The following is a summary of the contracts
outstanding (in thousands of dollars) at December 31, 1996:
Variable
Nominal Fixed Rate Rate Maturity
Amount Paid Received Date
------- ---------- -------- --------
$10,000 6.17% 5.94% 10/98
10,000 6.04% 5.94% 10/98
7,500 5.99% 5.94% 10/98
5,000 5.27% 5.50% 2/99
The variable rate received is tied to the three-month LIBOR rate. The
quarterly repricing dates for each of these agreements are as of month-end,
beginning January, 1996.
N. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107, "Disclosures About Fair Value of
Financial Instruments". The estimated fair value amounts have been determined by
the Company, using available market information and appropriate valuation
methodologies. However, considerable judgment is necessarily required in
interpreting market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts
that the Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a material
effect on the estimated fair value amounts.
December 31, 1995 December 31, 1996
----------------------- -----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------- --------- --------- ---------
(in thousands)
Assets:
Marketable securities (included within
"other current assets") ............. $ 2,393 $ 2,393 $ 8,557 $ 8,557
Investments in certain securities
(included within "other assets" and
accounted for by the equity method).. 3,607 12,355 8,290 13,454
Liabilities:
Long-term debt .......................... 329,283 320,832 284,195 285,020
Off-balance sheet financial instruments:
Foreign currency contracts .............. 1,600 2,500 659 659
Risk management derivatives ............. -- (109) -- (44)
F - 22
47
Cash and Cash Equivalents, Accounts Receivable, Short-Term Debt and
Accounts Payable - The carrying amounts of these items are a reasonable estimate
of their fair value.
Investments in Securities - The fair value of these securities is
estimated based on quoted market prices.
Long-Term Debt - Interest rates that are currently available to the
Company for issuance of debt with similar terms and remaining maturities are
used on a discounted cash flow basis to estimate fair value for debt issues for
which no market quotes are available.
Foreign Currency Contracts - The fair value of foreign currency
purchase contracts is estimated by obtaining quotes from brokers. The
contractual amount of these contracts totals approximately $214,000,000 and
$70,000,000 as of December 31, 1995 and 1996, respectively.
Risk Management Derivatives - The fair value generally reflects the
estimated amounts that the Company would receive or pay to terminate the
contracts at the reporting date.
The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 1995 and 1996. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date, and current
estimates of fair value may differ significantly from the amounts presented
herein.
O. CONTINGENT LIABILITIES AND OTHER MATTERS
For a description of certain pending legal proceedings, see Item 3 -
"Legal Proceedings", which is an integral part of these financial statements.
The Company is vigorously defending against the allegations described therein.
Management of the Company believes, based upon its assessment of the
actions and claims outstanding against the Company and certain of its
subsidiaries, and after discussion with counsel, that the eventual disposition
of the matters referred to above should not have a material adverse effect on
the financial position, future operations or liquidity of the Company. However,
management of the Company cannot predict with certainty the outcome of the
potash and Louisiana matters described in Item 3.
The production of fertilizers and chemicals involves the use, handling
and processing of materials that may be considered hazardous within the meaning
of applicable environmental or health and safety laws. Accordingly, the
Company's operations are subject to extensive Federal, state and local
regulatory requirements in the United States and regulatory requirements in
Israel relating to environmental matters. Operating permits are required for the
operation of the Company's facilities, and these permits are subject to
revocation, modification and renewal. Government authorities have the power to
enforce compliance with these regulations and permits, and violators are subject
to civil and criminal penalties, including civil fines, injunctions or both. The
Company has entered into consent decrees and administrative orders with certain
governmental authorities which are expected to result in unspecified corrective
actions - see "Environmental Matters" in Item 1 - "Business". There can be no
assurance that the costs of such corrective actions will not be material.
The Company has accrued for the estimated costs of facility
investigations, corrective measures studies and known remedial measures relating
to environmental clean-up costs. However, the Company has been unable to
ascertain the range of reasonably possible costs that may be incurred for
environmental clean-up costs pending completion of investigations and studies.
Based on currently available information, Management believes that the
Company's expenditures for environmental capital investment and remediation
necessary to comply with present regulations governing environmental protection
and other expenditures for the resolution of environmental actions will not have
a material
F - 23
48
adverse effect on the Company's liquidity and capital resources, competitive
position or financial statements. However, Management cannot assess the possible
effect of compliance with future requirements.
Technicians and engineers of HCL are members of the Union of
Technicians and Engineers, which operates throughout Israel. The other employees
of HCL are members of the "Histadrut", the dominant labor union in Israel. The
terms of employment of all employees are governed by a Specific Collective
Agreement ("SCA") negotiated by HCL with the Histadrut and the representatives
of the employees. In 1994, an agreement was signed with the technicians and
engineers for the three year period ending December 31, 1996. In 1995, an SCA
was signed with the Histadrut and the representatives of the employees for the
two year period ending December 31, 1996.
In September, 1996, in accordance with its rights pursuant to the
above-mentioned agreements, HCL announced the cancellation of such agreements
effective with their expiration dates. HCL also announced its intent to
negotiate a new SCA with basic changes for the period commencing after December
31, 1996.
As a result of the announced cancellation of the labor agreements,
during October, 1996 HCL suffered several work stoppages and other job actions
which adversely affected plant productivity, which was followed by a complete
work stoppage and plant shut-down from October 29 to November 14, 1996. Based on
a decision of a regional labor court, HCL's plant was then ordered to be
re-opened temporarily. The court also ordered HCL and representatives of the
workers to continue to negotiate a settlement of the labor dispute.
Notwithstanding the court's ruling, HCL suffered numerous job actions by its
workers which again led to very low productivity. On December 3, 1996 the
workers declared a strike and the plant was shut-down. The plant remained closed
until March 10, 1997 when a new SCA was signed for the three year period ending
December 31, 1999.
Prior to 1996, HCL's last major labor dispute took place in July 1991
and related to negotiations of the SCA for 1990 and 1991. As a result of this
dispute, HCL's employees went on strike for approximately four weeks during the
third quarter of 1991. Prior to that, the last major labor dispute took place in
1983, which resulted in a strike of approximately two weeks.
F - 24
49
CONDENSED FINANCIAL INFORMATION OF REGISTRANT SCHEDULE I
TRANS-RESOURCES, INC.
BALANCE SHEETS
December 31,
------------------------
1995 1996
--------- ---------
(in thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .............................. $ 17,760 $ 20,261
Receivables and other assets ........................... 1,012 8,925
Prepaid expenses ....................................... 291 466
--------- ---------
Total Current Assets ............................... 19,063 29,652
INVESTMENTS IN SUBSIDIARIES .............................. 152,731 91,363
DUE FROM SUBSIDIARIES - net .............................. 6,359 5,699
OTHER ASSETS ............................................. 18,614 26,650
--------- ---------
Total .............................................. $ 196,767 $ 153,364
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt ................... $ 23,350 $ --
Accrued expenses and other current liabilities ......... 9,565 9,899
--------- ---------
Total Current Liabilities .......................... 32,915 9,899
--------- ---------
LONG-TERM DEBT - net:
Senior indebtedness, notes payable and other
obligations........................................... 27,500 --
Senior subordinated debt - net ......................... 114,074 114,175
--------- ---------
Long-Term Debt - net (Note) ........................ 141,574 114,175
--------- ---------
OTHER LIABILITIES ........................................ 1,603 3,036
--------- ---------
STOCKHOLDER'S EQUITY:
Preferred stock, $1.00 par value, 100,000 shares
authorized, issued and outstanding ................. 7,960 7,960
Common stock, $.01 par value, 3,000 shares authorized,
issued and outstanding ............................. -- --
Additional paid-in capital ............................. 8,682 8,682
Retained earnings ...................................... 4,764 9,345
Cumulative translation adjustment ...................... (594) (367)
Unrealized gains (losses) on marketable securities ..... (137) 634
--------- ---------
Total Stockholder's Equity ......................... 20,675 26,254
--------- ---------
Total ......................................... $ 196,767 $ 153,364
========= =========
Note- The aggregate maturities of long-term debt during the next five years
is approximately as follows: 1997 - $0; 1998 - $0; 1999 - $0; and 2000
- $0; and 2001 - $0. Also see Note G of Notes to Consolidated Financial
Statements.
S - 1
50
CONDENSED FINANCIAL INFORMATION OF REGISTRANT SCHEDULE I
(continued)
TRANS-RESOURCES, INC.
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1994, 1995 and 1996
1994 1995 1996
-------- -------- --------
(in thousands)
REVENUES - EQUITY IN NET
EARNING OF SUBSIDIARIES:
Dividends received from subsidiaries . $ 17,005 $ 8,609 $ 76,556
Undistributed (dividends in excess of)
earnings of subsidiaries .......... 11,764 7,021 (55,685)
-------- -------- --------
Total ................................ 28,769 15,630 20,871
COSTS AND EXPENSES ..................... (3,674) (4,148) (4,559)
INTEREST EXPENSE ....................... (23,243) (22,250) (15,568)
INTEREST AND OTHER INCOME - Net ........ 1,392 1,868 2,024
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM ................... 3,244 (8,900) 2,768
INCOME TAX BENEFIT (PROVISION) ......... (694) 2,042 8,425
-------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 2,550 (6,858) 11,193
EXTRAORDINARY ITEM - Loss on repurchase
of debt (no income tax benefit) ...... -- (103) (553)
-------- -------- --------
NET INCOME (LOSS) ...................... $ 2,550 $ (6,961) $ 10,640
======== ======== ========
S - 2
51
CONDENSED FINANCIAL INFORMATION OF REGISTRANT SCHEDULE I
(concluded)
TRANS-RESOURCES, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1994, 1995 and 1996
1994 1995 1996
--------- --------- --------
(in thousands)
OPERATING ACTIVITIES AND WORKING
CAPITAL MANAGEMENT:
Operations:
Net income (loss) .............................. $ 2,550 $ (6,961) $ 10,640
Items not requiring (providing) cash:
Unremitted earnings of subsidiaries .......... (11,764) (7,021) 55,685
Depreciation and amortization ................ 1,226 1,147 478
Increase in other liabilities ................ 29 31 33
Deferred taxes and other - net ............... 242 (1,064) (4,314)
--------- --------- --------
Total .......................................... (7,717) (13,868) 62,522
Working capital management:
Receivables and other current assets ......... (3,064) 6,115 (546)
Prepaid expenses ............................. 851 (251) (175)
Accrued expenses and other current liabilities 2,778 (4,118) (1,066)
--------- --------- --------
Cash provided by (used in) operations and
working capital management ................... (7,152) (12,122) 60,735
--------- --------- --------
INVESTMENT ACTIVITIES:
Additions to property, plant and equipment ....... (70) (3) (21)
Sales of marketable securities and short-term
investments, including in 1995 liquidation
of CD's securing a bank loan (see Note G) ...... 33,543 132,436 1,987
Purchases of marketable securities and short-
term investments, including in 1994 purchase
of CD's securing a bank loan (see Note G) ...... (133,396) (4,371) (9,354)
Other - net ...................................... (3,464) 7,207 6,213
--------- --------- --------
Cash provided by (used in) investment activities . (103,387) 135,269 (1,175)
--------- --------- --------
FINANCING ACTIVITIES:
Increase in long-term debt ....................... 139,574 -- --
Repurchases, payments and current maturities of
long-term debt ................................ (29,040) (113,250) (51,000)
Dividends to stockholders ........................ (225) (1,707) (6,059)
--------- --------- --------
Cash provided by (used in) financing activities .. 110,309 (114,957) (57,059)
--------- --------- --------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ................................. (230) 8,190 2,501
CASH AND CASH EQUIVALENTS:
Beginning of year ................................ 9,800 9,570 17,760
--------- --------- --------
End of year ...................................... $ 9,570 $ 17,760 $ 20,261
========= ========= ========
Interest paid ...................................... $ 19,913 $ 23,289 $ 16,446
========= ========= ========
Income taxes paid .................................. $ 1,113 $ 3,255 $ 2,268
========= ========= ========
S - 3
52
TRANS-RESOURCES, INC.
INDEX TO EXHIBITS
Exhibit Description Page No.
- ------- ----------- --------
2.1 Asset Purchase Agreement dated as of May 21, 1996, by and
among Mississippi Chemical Corporation, Mississippi
Acquisition I, Inc., Mississippi Acquisition II, Inc.,
New Mexico Potash Corporation and Eddy Potash, Inc.,
filed as Exhibit 2.1 to the Company's Current Report on
Form 8-K for August 16, 1996 (the "Form 8-K"), which is
incorporated herein by reference. The Company hereby
agrees to furnish supplementally to the Securities and
Exchange Commission upon request a copy of any omitted
schedule or exhibit, all of which are listed at the end
of the Table of Contents to the Asset Purchase Agreement. *
2.2 Amendment to Asset Purchase Agreement, dated August 16,
1996, filed as Exhibit 2.2 to the Form 8-K, which is
incorporated herein by reference. The Company hereby
agrees to furnish supplementally to the Securities and
Exchange Commission upon request a copy of any omitted
exhibit, all of which are referenced on the first page of
the Amendment. *
3.1 Certificate of Incorporation of the Company, as amended
(in restated form), filed as Exhibit 3.1 to the Company's
Annual Report on Form 10-K for the year ended December
31, 1994 (the "1994 Form 10-K"), which is incorporated
herein by reference. *
3.2 By-laws of the Company, filed as Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1991 (the "1991 Form 10-K"), which is
incorporated herein by reference. *
4.1 Indenture, dated as of March 30, 1993 between the Company
and First Alabama Bank, as Trustee, relating to the 11
7/8% Senior Subordinated Notes due 2002, filed as Exhibit
4.1 to the Registration Statement of the Company on Form
S-1, filed on April 16, 1993, as amended, Registration
No. 33-61158, which is incorporated herein by reference. *
10.1 Potash Sales Agreement between Haifa Chemicals Ltd. and
Dead Sea Works Limited, dated January 1, 1980
(termination date extended to December 31, 1999),
concerning the supply of potash, filed as Exhibit 10.2 to
the Registration Statement of the Company on Form S-1,
filed on January 30, 1987, as amended, Registration No.
33-11634 (the "1987 Form S-1"), which is incorporated
herein by reference. *
10.2 Manufacturing Processes Agreement between Haifa Chemicals
Ltd. and Oil Refineries Ltd., dated December 28, 1981,
concerning the supply of steam and water, filed as
Exhibit 10.6 to the 1987 Form S-1, which is incorporated
herein by reference. *
E - 1
53
Exhibit Description Page No.
- ------- ----------- --------
10.3 Agreement of Use of Ammonia Pipeline between Haifa
Chemicals Ltd. and Oil Refineries Ltd., dated August 7,
1977, as amended, concerning the use of an ammonia
pipeline, filed as Exhibit 10.8 to the 1987 Form S-1,
which is incorporated herein by reference. *
10.4 Lease between Haifa Chemicals Ltd. and Oil Refineries
Ltd., dated December 20, 1968, concerning real property,
filed as Exhibit 10.9 to the 1987 Form S-1, which is
incorporated herein by reference. *
10.5 Lease between Haifa Chemicals Ltd. and Oil Refineries
Ltd., dated March 31, 1974, concerning real property,
filed as Exhibit 10.10 to the 1987 Form S-1, which is
incorporated herein by reference. *
10.6 Lease between Haifa Chemicals Ltd. and Oil Refineries
Ltd., dated April 5, 1978, concerning real property,
filed as Exhibit 10.11 to the 1987 Form S-1, which is
incorporated herein by reference. *
10.7 Lease between Haifa Chemical Ltd. and Oil Refineries
Ltd., dated June 25, 1978, concerning real property,
filed as Exhibit 10.12 to the 1987 Form S-1, which is
incorporated herein by reference. *
10.8 Lease between Haifa Chemicals Ltd. and Oil Refineries
Ltd., dated September 25, 1986, concerning real property,
filed as Exhibit 10.13 to the 1987 Form S-1, which is
incorporated herein by reference. *
10.9 Agreement between the Company and Thomas G. Hardy, dated
March 22, 1994, concerning incentive bonus compensation,
including, as Exhibit A thereto, the related Trust
Agreement, filed as Exhibit 10.10 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1993,
which is incorporated herein by reference. (1) *
10.10 Employment Agreement between the Company and Thomas G.
Hardy, dated as of June 1, 1993, filed as Exhibit 10.11
to the 1994 Form 10-K, which is incorporated herein by
reference. (1) *
10.11 Salary Continuation Agreement between the Company and
Lester W. Youner, dated as of August 24, 1994, filed as
Exhibit 10.12 to the 1994 Form 10-K, which is
incorporated herein by reference. (1) *
10.12 Credit Agreement, dated as of November 3, 1995, among
Cedar Chemical Corporation, the Lenders listed on the
signature pages thereof and The Chase Manhattan Bank
(National Association), as Administrative Agent (exhibits
and schedules omitted), filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1995, which is incorporated
herein by reference. *
10.13 Loan Agreement, dated as of December 29, 1995, between
the Company and Bank Hapoalim (certain exhibits and
schedules omitted). *
E - 2
54
Exhibit Description Page No.
- ------- ----------- --------
10.14 Tax Sharing Agreement, dated as of December 30, 1991,
among TPR Investment Associates, Inc., the Company, EDP,
Inc., Nine West Corporation, TR Media Corporation and
Cedar Chemical Corporation, filed as Exhibit 10.23 to the
1991 Form 10-K, which is incorporated herein by
reference. *
10.15 Split Dollar Insurance Agreement, entered into as of
August 26, 1988, between the Company and Arie Genger,
filed as Exhibit 10.27 to the Registration Statement of
the Company on Form S-1, filed on October 20, 1992, as
amended, Registration No. 33-53486, which is incorporated
herein by reference. (1) *
21 Subsidiaries of the Company. E - 4
24 Power of Attorney authorizing Lester W. Youner to sign
this report and any amendments hereto on behalf of the
principal executive officer and the directors. E - 5
27 Financial Data Schedule. E - 6
- --------
* Incorporated by reference
(1) Management contract or compensatory plan or arrangement
E - 3