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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, 1997
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 (I.R.S. Employer Identification No.)
incorporation or organization)
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
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act: NONE
Indicate by check mark whether 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 20, 1998
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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
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PART I
Item 1. Business.......................................................... 1
Item 2. Properties........................................................ 11
Item 3. Legal Proceedings................................................. 11
Item 4. Submission of Matters to a Vote of Security Holders............... 13
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters........................................... 14
Item 6. Selected Financial Data........................................... 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 15
Item 8. Financial Statements and Supplementary Data....................... 20
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................... 20
PART III
Item 10. Directors and Executive Officers of the Registrant................ 21
Item 11. Executive Compensation............................................ 23
Item 12. Security Ownership of Certain Beneficial Owners and Management.... 25
Item 13. Certain Relationships and Related Transactions.................... 25
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K... 26
Signatures .............................................................. 27
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PART I
ITEM 1. Business
Trans-Resources, Inc., a privately-owned Delaware corporation ("TRI"),
operates through its independently managed and financed subsidiaries and is a
leading global developer, producer and marketer of specialty plant nutrients and
specialty industrial and agricultural chemicals. As used herein, the term "the
Company" means TRI, together with direct and indirect subsidiaries. The Company
is the world's largest producer and distributor of agricultural grade potassium
nitrate, which is a leading specialty plant nutrient. Potassium nitrate is
utilized in specialized agricultural applications for the growth of high-value
crops such as fruits, vegetables, flowers and tobacco. The Company is also: (i)
the largest global and sole U.S. producer of propanil, which is a leading rice
herbicide; (ii) the world's largest producer of technical grade potassium
nitrate, used in a variety of industrial applications; (iii) the sole supplier
to the U.S. Air Force of nitrogen tetroxide, an aerospace fuel additive; and
(iv) the only North American producer of 3,4 dichloroanaline ("DCA"), the
principal raw material in the production of propanil. The Company also produces
a variety of other chemical products used in agricultural, industrial and
pharmaceutical markets. In addition, the Company utilizes its production
capacity and manufacturing expertise to provide contract manufacturing services
for other chemical companies. The Company sells its products through an
established global sales, marketing and distribution network to customers in 95
countries and conducts its operations through three product groups: Specialty
Plant Nutrients, Industrial Chemicals and Organic Chemicals, which during 1997
contributed approximately 58.6%, 28.9% and 12.5%, respectively, of the Company's
total revenues. Of the Company's total revenues for the year ended December 31,
1997, approximately 34% 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
subsidiary, Vicksburg Chemical Company, a Delaware corporation ("Vicksburg");
and Na-Churs Plant Food Company ("Na-Churs"), a Delaware corporation (Na-Churs
was acquired in March 1995). TRI was incorporated in Delaware in 1971 under the
name Trans-Pacific Resources, Inc.
SIGNIFICANT DEVELOPMENTS
On August 16, 1996, Cedar's wholly-owned subsidiary, NMPC, Inc.,
(formerly New Mexico Potash Corporation), a New Mexico corporation ("NMPC"), and
EDP, Inc. (formerly Eddy Potash, Inc.), a Delaware corporation ("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 Item 3 "Legal Proceedings"). NMPC and EDP had conducted the
Company's potash mining and production operations. 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 Consolidated Statements of Operations. During the years
ended December 31, 1995 and 1996, the potash operations contributed
approximately $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 partially prepay debt secured in part 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.
During August 1997, Cedar and a subsidiary of Westrade, Inc., a
privately-held Cayman Islands corporation ("Westrade"), formed Riceco LLC, a
Delaware limited liability company ("Riceco"), to market propanil, combination
rice herbicides and other rice-related chemicals (other than fertilizers) on a
worldwide basis. Westrade's interest in Riceco is now held by a corporation (the
"Westrade Member") which is 50% owned by E.I. Du pont de Nemours and Company
("DuPont") and 50% by the private investment group which currently owns 50% of
Westrade. Westrade produces, markets and distributes various agricultural
chemicals. Under a long-term supply agreement, the Company will produce all of
the propanil required by Riceco. See "Riceco" below and Part II - Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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On November 9, 1997, Laser Industries Limited ("Laser"), a publicly
traded manufacturer of lasers for medical use in which the Company had an
ownership interest accounted for by the equity method, and ESC Medical Systems
Ltd. ("ESC"), signed a definitive agreement (the "Agreement") to combine the two
companies through an exchange of shares. The transaction closed on February 23,
1998. The Company's ability to sell the ESC shares it will receive pursuant to
the combination will be governed by securities law volume restrictions. As of
December 31, 1997, the Company carried its investment in the Laser shares at
approximately $9,100,000, which amount is included in the caption "other assets"
in the Consolidated Balance Sheet. Based on the quoted market value of the ESC
shares ($35.00 per share), as of February 20, 1998, the last day of trading
before the combination, the Company will recognize an after-tax gain of
approximately $22,400,000 which will be recorded during the first quarter of
1998. In addition to the ownership of the Laser shares described above, the
Company also owned a warrant (the "Laser Warrant") which enabled the Company to
purchase additional Laser shares. The Laser Warrant, which had a carrying value
of $750,000, was distributed as a dividend in February 1998.
On February 4, 1998, HCL completed the purchase of approximately 42% of
the equity of Lego Irrigation Ltd., an Israeli developer, manufacturer and
marketer of drip irrigation systems, for approximately $11,000,000. During 1996,
Lego had revenues of approximately $20,000,000. Under certain circumstances, HCL
could be required to increase its equity investment in Lego by an additional
$11,000,000.
See "Employees" below and Part II - Item 7 - "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for certain
information regarding a labor dispute at HCL commencing in October 1996 and
resulting in work stoppages and an HCL plant shut-down from December 3, 1996 to
March 10, 1997 (the "HCL Labor Dispute"), which significantly impacted the
Company's financial results during the fourth quarter of 1996 and the first two
quarters of 1997.
In March, 1998 the Company refinanced its 11 7/8% Senior Subordinated
Notes and issued $100,000,000 principal amount of 10 3/4% Senior Notes due 2008
(the "Senior Notes") and $135,000,000 principal amount of Senior Discount Notes
due 2008 to provide gross proceeds to the Company of approximately $75,400,000
(the "Senior Discount Notes"). See Note G of Notes to Consolidated Financial
Statements.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Report constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. All
statements other than statements of historical facts included in this Report are
forward-looking statements, including, but not limited to, statements concerning
future revenues (e.g., impact of the HCL Labor Dispute and inflation in Israel);
expenses (e.g., labor savings resulting from the new SCA, future environmental
costs and capital expenditures); and access to lending sources and Israeli
Government entitlement. 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 to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors ("Cautionary 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 Report.
Given these uncertainties, investors and prospective investors are
cautioned not to place undue reliance on such forward-looking statements. All
subsequent written and oral forward-looking statements attributable to the
Company or persons acting on behalf of the Company are expressly qualified in
their entirety by the Cautionary Factors.
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PRODUCTS
The Company develops, produces and distributes a range of specialty
chemicals products for a variety of agricultural and industrial end-uses. The
Company has grouped its operations into three general product categories that
reflect the different industries and end-use markets serviced by the Company.
These product groups are: Specialty Plant Nutrients, Industrial Chemicals and
Organic Chemicals.
Specialty Plant Nutrients. The Company's Specialty Plant Nutrients
consist of high-value nutrients designed for intensive agriculture, including
greenhouses, nurseries and orchards. The Company's flagship product is potassium
nitrate, which is marketed principally under the brand names K-Power
domestically and Multi-K internationally (collectively referred to as
"K-Power"). Potassium nitrate provides potassium and nitrogen, two of the three
essential plant nutrients, is water soluble and does not contain chlorine or
other environmentally harmful chemical residues that are generally found in
commodity fertilizers. The unique combination of these performance
characteristics allows potassium nitrate to command a price premium over other
potassic plant nutrients and fertilizers and has led to a compound annual growth
rate in tons shipped of approximately 6% for the industry over the past five
years. With current annual production capacity of approximately 630,000 tons,
the Company is the world's largest producer of potassium nitrate. The Company is
in the process of increasing its annual potassium nitrate capacity to
approximately 770,000 tons by year-end 1999. The Company believes that it
currently accounts for approximately 60% of the world's production of potassium
nitrate and 100% of North American production of potassium nitrate.
The Company's other Specialty Plant Nutrients include those designed for
highly specialized horticultural applications. These include: (i) Polyfeed, a
fully soluble and chlorine-free blend of varying combinations of plant nutrients
containing the three essential plant nutrients, nitrogen, phosphorus and
potassium; (ii) Magnisal, which acts as a magnesium supplement; (iii)
monoammonium phosphate, or Multi-MAP, a fully soluble source of nitrogen and
phosphorus; (iv) monopotassium phosphate, or Multi-MKP, a fully soluble,
chlorine-free source of potassium and phosphorus; and (v) Multicote, a polymer
coated specialty plant nutrient which provides for the controlled release of
nutrients over specific periods of time ranging from four to 12 months, which
optimizes plant feeding and minimizes labor requirements. The Company, through
Na-Churs, is also the largest U.S. producer and marketer of high purity liquid
fertilizers, which are sold under its Na-Churs brand name and are used both as a
starter nutrient in growing corn and in growing high-value crops such as fruits,
vegetables and flowers. Specialty Plant Nutrients revenues were approximately
$220,500,000 in 1997.
The following table sets forth the Company's principal Specialty Plant
Nutrients products, markets and applications:
Principal Products Primary Markets Applications
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Potassium Nitrate - Fruits and vegetables, flowers, - Fertigation, foliar sprays and
(K-Power) cotton and tobacco soil applications
Polyfeed - Horticulture - Fertigation and foliar sprays
Multi-MAP - Horticulture - Fertigation and foliar sprays
Multi-MKP - Horticulture - Fertigation and foliar sprays
Magnisal - Vegetables, citrus, tropical - Fertigation and foliar sprays
fruits and flowers
Multicote - Vegetables, turf, fruit trees and - Time release of nutrients
potted plants
Na-Churs Liquid Fertilizers - Corn, soybeans, wheat and - Furrow applied starter, foliar
high-value crops sprays and fertigation
Industrial Chemicals. The Company's Industrial Chemicals consist of a
variety of specialty and other chemicals with applications in multiple end-use
markets. The Company's Industrial Chemicals products are generally produced as
co-products in the Company's potassium nitrate manufacturing processes. These
products provide the Company with the ability to diversify its revenue base
while maintaining its leadership position in potassium nitrate and to allocate
its
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fixed costs over a broader base of revenues and products. The Company is the
world's largest manufacturer and marketer of technical grade potassium nitrate,
a high purity product used for many industrial applications, including the
production of television picture tubes, computer screens, other specialty
glasses, ceramics, food additives and explosives. The Company, through
Vicksburg, is also a manufacturer of potassium carbonate, marketed under the
brand name K-Carb. K-Carb is used in the production of television picture tubes,
computer screens, ceramics, detergents, in agricultural applications, and in the
production of other potassic chemicals. In addition, the Company is the sole
supplier to the U.S. Air Force of nitrogen tetroxide, an aerospace fuel
additive.
Additional Industrial Chemicals produced by the Company include
phosphoric acid, with approximately 66,000 tons of current annual production
capacity, used for metal treatment, industrial cleaning solutions, fermentation
and in the food and fertilizer industries; and a variety of phosphate products
including: sodium tripolyphosphate ("STPP"), an ingredient in detergents;
monoammonium phosphate ("MAP"), used in fire extinguishers and fire retardants;
monopotassium phosphate ("MKP"), used in the fermentation process; monosodium
phosphate ("MSP") and disodium phosphate ("DSP"), which are used by food
processing companies as emulsifiers for cheese processing and as a buffer in
foodstuffs; and sodium acid pyrophosphate ("SAPP"), used by food processing
companies in baking powders and potato processing. The Company also produces
chlorine sold to industrial and chemical manufacturing companies for water
purification and production of paper pulp and PVC pipe. Industrial Chemicals
revenues were approximately $109,000,000 in 1997.
The following table sets forth the Company's principal Industrial
Chemicals products, markets and applications:
Principal Products Primary Markets Applications
- ------------------------------------ --------------------------------------------- -------------------------------------
Technical Grade Potassium - Glass, ceramics, explosives, - Oxidization and ion exchange
Nitrate metal, petrochemical and heat
treatment industries
Potassium Nitrate USP Grade - Pharmaceutical industry - Ingredient in certain toothpaste
Potassium Carbonate (K -Carb) - Glass, detergents and fertilizer - Oxidization and cleansing
industry
Phosphoric Acid - Industrial production, food and - Metal treatment, industrial
fertilizer industries cleaning and fermentation
Sodium Tripolyphosphate Food - Food processing companies - Meat and seafood processing
Grade
Sodium Tripolyphosphate - Soap and detergent industry - Cleansing ingredient
Monoammonium Phosphate - Chemical manufacturers - Fire retardant formulations
Monopotassium Phosphate - Food processing companies - Fermentation process
Monosodium Phosphate - Food processing companies - Emulsifiers and buffers
Disodium Phosphate - Food processing companies - Emulsifiers and buffers
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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Organic Chemicals. The Company's Organic Chemicals consist primarily of
a variety of herbicides and other products requiring expertise in complex
organic synthesis. The Company's Organic Chemicals products include propanil,
the world's leading rice herbicide, and DCA, the principal raw material for the
production of propanil. The Company is the sole U.S. producer, and the only
fully integrated producer worldwide, of propanil, and is the sole producer of
DCA in North America. Other Organic Chemicals include Butoxone, a leading peanut
and soybean herbicide; diuron, a broad use herbicide used on various crops,
including alfalfa and cotton; and ethephon, a cotton, fruit and vegetable growth
regulator. The Company also produces and sells trishydroxyaminomethane ("THAM"),
a proprietary buffering agent used in pharmaceutical applications, including
contact lens solutions. In addition, the Company utilizes its manufacturing
expertise and capacity and serves as a contract manufacturer of organic
chemicals for chemical companies. The Company recently formed Riceco with a
strategic partner to market propanil, combination rice herbicides and other
rice-related chemicals (other than fertilizers) on a worldwide basis. Organic
Chemicals revenues were approximately $47,000,000 in 1997.
The following table sets forth the Company's principal Organic
Chemicals products, markets and applications:
Principal Products Primary Markets Applications
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Propanil - Rice - Broad spectrum weed control
Dichloroanaline - Organic chemicals - Primary propanil raw material
manufacturers
Butoxone - Peanuts and soybeans - Weed control
Diuron - Food crops, alfalfa and cotton - Broad use herbicide
Ethephon - Cotton, fruit and vegetables - Plant growth regulator
THAM - Pharmaceutical companies - Buffering agent
Contract Manufacturing - Various industrial companies - Various organic syntheses
SALES AND MARKETING
The Company's sales and marketing network consists of a direct sales
force of approximately 115 professionals as well as over 150 independent agents,
distributors and brokers who market and distribute the Company's products in
particular markets in which the Company does not have a significant direct sales
and marketing presence. The Company's sales efforts are complemented by its
product development and technical support staff, who work with customers to
demonstrate the performance of the Company's existing products under specific
climatic, soil and growing conditions and to develop new products and markets
based on customer needs. At present, the Company maintains resident development
and technical support staff in the United States, Israel, Italy, Spain, France,
the United Kingdom, Greece, Mexico, South Africa, China, Japan and the Benelux
countries.
The Industrial Chemicals produced by the Company are generally marketed
through the Company's marketing network and through the Company's subsidiaries
throughout the world. Nitrogen tetroxide is primarily sold under a long-term
contract to the U.S. Air Force. Contract manufacturing business is generally
secured on the basis of reputation for quality, efficiency and speed of
execution and promotional activity, such as participation in trade shows.
In order to provide prompt and responsive service the Company uses
warehouse and distribution facilities which are strategically located throughout
the Company's global network. The Company maintains inventories of its products
internationally to facilitate prompt deliveries to customers.
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CUSTOMERS AND MARKETS
The Company's customers include blenders, distributors, professional
growers, agrichemical companies, governmental agencies, and multinational
manufacturers in many geographic markets throughout the world. The following
chart sets forth the breakdown of the Company's sales by geographic market for
the three year period ended December 31, 1997:
1995 1996 1997
--------------- ---------------- ---------------
(Dollars in Millions)
Amount % Amount % Amount %
Europe ................. $146 38% $160 39% $148 39%
United States .......... 136 35 145 35 128 34
Asia ................... 34 9 37 9 29 8
Canada and Latin America 22 6 24 6 22 6
Israel ................. 21 5 23 6 19 5
Australia .............. 6 2 6 1 6 2
Africa and other ....... 21 5 17 4 25 6
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Total .............. $386 100% $412 100% $377 100%
==== === ==== === ==== ===
The Company's customers are diversified across each of the Company's
product groups. Specialty Plant Nutrients are generally sold through the
Company's network of representative offices and through its sales, technical
support and distribution affiliates who in turn generally sell to blenders,
growers or other end-users. In addition, the Company sells Specialty Plant
Nutrients directly to certain large blenders and end-users. The Company sells
its Industrial Chemicals principally through its own worldwide network of
representative offices and through its sales, support and distribution
affiliates to various industrial consumers. The Company's Organic Chemicals
Group sells its products through distributors, co-operatives, regional dealers,
international brokers and multinationals, as well as to Riceco. In addition, the
Company sells its Organic Chemicals directly to some customers domestically and
through a joint venture partner internationally. During the year ended December
31, 1997, no customer accounted for more than 4% of consolidated revenues and
the 10 largest customers accounted for less than 18% of consolidated revenues.
RESEARCH AND DEVELOPMENT
As of December 31, 1997, the Company employed approximately 54 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, 1995, 1996 and 1997, the Company spent
approximately $3,158,000, $2,693,000 and $2,421,000, respectively, on these
efforts, which have been charged to current operations. The Company's extensive
agronomic data base, which consists of the results of thousands of experiments
under a wide range of soil and climatic conditions, enhances the Company's
ability to develop and introduce new products, as 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 also utilizes cooperative agronomic research and development
partnerships with universities to further develop new products and applications.
RAW MATERIALS
The Company's raw materials consist primarily of ammonia, potash and
phosphate rock. Other raw materials include orthodichlorobenzene, propionic acid
and various other chemicals. In the United States, all of the Company's raw
materials are readily available from multiple suppliers. A minimum of
approximately 50% of Vicksburg's potash requirements are required to be
purchased pursuant to a five year contract entered into in connection with the
Company's 1996 sale of its potash operations with the buyer of the potash
operations. This supplier has the right to supply Vicksburg's remaining potash
requirements if it can meet market prices and specified quality standards. The
contract is renewable for additional one year periods if mutually agreed. The
remainder of Vicksburg's potash requirements are
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available from multiple suppliers. Ammonia is generally purchased from a
supplier under a renewable contract expiring in August 1999 at negotiated prices
and is also available from multiple sources.
HCL (including HCSL) sources its potash exclusively from Dead Sea Works
Ltd. ("DSW") under two long-term contracts which expire in 1999 and 2005, and
sources its phosphate rock solely from Rotem Amfert Negev Ltd. ("Rotem")
according to the terms of a variable price contract which expired in 1996 and
which is currently being renegotiated. The potash contracts provide 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. DSW and Rotem are both subsidiaries of a large
Israeli chemical company. While the Company believes that alternative sources of
supply for raw materials supplied by Rotem and DSW are available, the loss of
supply from DSW and Rotem could have an adverse impact on the Company's
financial performance. Ammonia is sourced from a European supplier under a one
year contract renewable at negotiated prices and is available from a number of
alternative suppliers. Approximately 85% of HCL's energy requirements and
approximately 50% of its steam requirements at its Haifa facility are provided
by a co-generation plant owned and operated by a third party under a three year
contract expiring in 2001 and renewable for an additional two years. The
remainder of HCL's steam requirements in Haifa are supplied by HCL's own steam
facility. Such third party also operates this steam facility for HCL under a
contract having a similar term and at prices generally below those available
from alternative steam sources other than the co-generation plant.
The Company has historically experienced fluctuations in the price of
ammonia. The Company has not generally passed on ammonia price changes to its
customers as price changes have generally been temporary.
MANUFACTURING
The production of Specialty Plant Nutrients, Organic Chemicals and
Industrial Chemicals are each integrated multi-stage processes which in some
cases involve chemical synthesis, formulation and mixing. Following these
processes, the product is packaged based upon customer requirements.
The Company utilizes two unique synthetic manufacturing processes in
producing Specialty Plant Nutrients and Industrial Chemicals. HCL utilizes a
"solvent extraction" process in Israel and Vicksburg utilizes a "direct
reaction" process in the United States. The solvent extraction process is based
on reacting potassium chloride with nitric acid in the presence of an aqueous
recycled brine and an organic solvent, producing potassium nitrate and
hydrochloric acid as co-products. The hydrochloric acid is used on-site to
acidulate phosphate rock and produce phosphoric acid, which in turn is used to
manufacture a variety of phosphate products. The direct reaction process is
based on the reaction of potassium chloride and nitric acid, which produces
potassium nitrate and chlorine and nitrogen tetroxide as co-products. In the
production of the Company's Organic Chemicals and contract manufacturing
products, major processes and chemistries include the complex synthesis of
organic chemicals to produce agrichemicals and pharmaceutical chemicals.
Propanil is produced at Cedar's West Helena, Arkansas facility by reacting DCA
with propionic acid and propionic anhydride to produce propanil technical, the
active ingredient in all propanil products. Propanil technical is formulated
into emulsifiable concentrate and then sold. Cedar also sells propanil
technical in molten form and flake form.
RICECO
During August 1997, Cedar and Westrade formed Riceco to market propanil,
combination rice herbicides and other rice-related chemicals (other than
fertilizers) on a worldwide basis. The Company and the Westrade Member each have
a 50% equity interest in Riceco and each exercises equal voting rights. Riceco's
profits and losses are currently allocated 60% to the Company and 40% to the
Westrade Member, but under specified conditions would be adjusted to 50% to
each. At closing, both members contributed product registrations, labels and
customer lists to Riceco and subsequently each member provided an interim
working capital loan of $1,250,000 to be repaid in 1998 in accordance with
covenants contained in a Riceco loan agreement. Under a long-term supply
agreement, the Company will produce all of the propanil required by Riceco.
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INTELLECTUAL PROPERTY
The Company seeks to protect the confidentiality of its manufacturing
processes by maintaining these processes as trade secrets, and accordingly, has
generally not sought patent protection. In addition, the Company has
differentiated its products in the marketplace by pursuing a branded strategy.
As a result, the Company has developed several brand names, such as K-Power,
Magnisal, Polyfeed, Multicote, Poni, K-Carb and Na-Churs.
COMPETITION
In Specialty Plant Nutrients, the Company primarily competes with
Sociedad Quimica y Minera de Chile, S.A., a Chilean corporation, and to a lesser
extent with other producers. Competition among producers of agricultural grade
potassium nitrate is primarily driven by customer preferences for quality,
reliability, custom specifications and price.
In Industrial Chemicals, the Company competes with a wide variety of
large and small specialty and commodity chemical companies. The primary
competitive factors in the industrial chemicals market are product quality,
technical specifications and price.
In Organic Chemicals, the Company primarily competes with a wide variety
of large and small specialty and commodity chemical companies. Competitive
factors in the production of organic chemicals primarily consist of
manufacturing expertise in specific complex chemical processes, vertical
integration, flexible manufacturing facilities and price.
FACILITIES
Vicksburg owns the property, plant and equipment located at its
Vicksburg, Mississippi facility and Cedar owns the property, plant and equipment
located at its West Helena, Arkansas facility. The Vicksburg plant consists of
three manufacturing plants situated on 600 contiguous acres. The West Helena
facility is ISO 9002 certified and is located on a 60 acre site. The plants are
encumbered by first mortgages and security interests securing long-term bank
indebtedness. The Company's corporate office in New York City and administrative
office in Memphis, Tennessee are both in leased facilities.
HCL owns its machinery and equipment and leases the land for its Haifa,
Israel operations from Oil Refineries Ltd. ("ORL"), a corporation which is
majority-owned by the Israeli Government. The leases expire at various dates,
primarily in the years 2015 and 2016. HCSL owns the machinery and equipment and
leases the land for its Mishor Rotem, Israel operations from the Israeli Land
Administration Authority under a 49 year lease which commenced in 1994. All of
such lease payments for the Mishor Rotem land have already been paid and were
included in the construction costs for this facility. HCL also owns ammonia
terminal facilities located on leased property in the port in Haifa and leases
from ORL a pipeline which transports ammonia from the port in Haifa to HCL's
plant. Substantially all of these assets are subject to security interests in
favor of the State of Israel or banks.
Management believes that its facilities are in good operating condition
and adequate for its current needs.
EMPLOYEES
As of December 31, 1997 the Company employed approximately 840 people.
Approximately 220 employees have advanced technical and academic qualifications.
Except for certain employees at the Company's Israeli operations, none of the
Company's employees are represented by any collective bargaining unit.
During the fourth quarter of 1996 and the first two quarters of 1997, the
Company's operations were adversely impacted by the HCL Labor Dispute.
Most HCL employees are members of the "Histadrut," the Israeli national
labor federation, and are represented by collective bargaining units. Terms of
employment of most HCL employees are currently governed predominantly
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by a Specific Collective Agreement ("SCA") negotiated by HCL with the Histadrut,
the respective unions representing the employees and representatives of the
employees.
In 1994, HCL signed an agreement with the unions and representatives of
the technicians and engineers for the three year period ended December 31, 1996.
In 1995, an SCA was signed with the unions and representatives of the other
employees for the two year period ended December 31, 1996. In September 1996,
the Company announced the cancellation of such agreements effective upon their
expiration dates and its intention to negotiate a new SCA with basic changes
aimed at reducing labor costs and enhancing operating flexibility for the period
following December 31, 1996.
As a result of the announced cancellation of the labor agreements, HCL
suffered several work stoppages and other job actions which adversely affected
productivity during October and November 1996, including a period of temporary
plant shut-down. On December 3, 1996 the plant was shutdown until March 10, 1997
when a new SCA providing for certain wage freezes and reductions in benefits was
signed for the three year period ending December 31, 1999. Subsequent to March
10, 1997, the HCL plant re-opened and gradually began production. By the end of
May 1997 and subsequent thereto, the HCL plant was generally operating at
approximately full capacity; however, there have been several periods of
operations at less than full capacity due to the need for increased maintenance
for certain equipment resulting from the lengthy period of shut-down.
Management believes that the new SCA will result in cost savings for the
Company compared to the costs it would otherwise have incurred during the next
few years had HCL merely renewed the terms of the prior SCAs and continued the
pattern of increased costs included in recent SCAs. Further, management believes
that the aggregate amount of such cost savings over the next few years will
substantially exceed the incremental costs experienced during the HCL Labor
Dispute. Such savings commenced during the second quarter of 1997.
Following the settlement of the HCL Labor Dispute, HCL achieved the
following objectives: (i) a reduction in absenteeism from about 7% per annum to
about 2% per annum; (ii) greater ability to freely transfer employees between
departments and production units; (iii) increased flexibility regarding the
ability to promote employees and incentivize them based on performance measures
and evaluations developed and implemented by management; (iv) greater ability to
dismiss employees on the basis of poor performance (which has already been
utilized); (v) on-going and more effective communication between management and
employees; and (vi) increased freedom to use sub-contractors. In addition,
following the settlement of the HCL Labor Dispute, HCL restructured its
workforce with the result being a net 100 person reduction (or 18%) in the
number of its employees, and an approximate 16% reduction in the average cost
per employee. Under the new labor agreement, such reductions in headcount and in
average cost per employee resulted in estimated annual cost savings of
$9,000,000. See Part II - Item 7--"Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Special Note Regarding
Forward Looking Statements" above.
A third party provides operating and management services for HCSL's
Mishor Rotem, Israel facility as a subcontractor, and is reimbursed for costs
based on an approved budget plus a variable incentive fee designed to increase
efficiency, volumes produced and quality of production.
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.
The Federal Environmental Protection Agency ("EPA") notified the Company
in 1989 that unspecified corrective action will be required under the Federal
Resource Conservation and Recovery Act of 1976, as amended, 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, an
agreement was reached 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, a facility
investigation work plan was submitted to the EPA. Following
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its approval, 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 the EPA's 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 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 entered in 1991 (the "Order"). In December 1997,
ADPCE accepted the final facility investigation report and requested Cedar to
initiate a corrective measures study to address eight separate locations on
Cedar's West Helena plant site which ADPCE believes may require remedial action.
In addition, ADPCE requested a plan for interim measures to address groundwater
contamination on and adjacent to the West Helena plant. Cedar removed the buried
drums from the West Helena site in accordance with a work plan incorporated in
the 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 a substantial portion 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.
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, 1997, the
Company has accrued an aggregate of $1,250,000 for these matters. Until these
investigations are completed, it is not possible to 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.
In December 1997, the EPA requested 34 companies, including Cedar, to
provide information about their dealings with the previous owners and operators
of a drum reclamation and recycling site known as the W&R Drum Superfund Site in
Memphis, Tennessee. Cedar could have potential liability to share costs of
remediating this site, which is on the National Priorities List under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended.
HCL. As a result of the production of phosphoric acid, HCL generates acid
sludge and liquid acid effluents. In accordance with a permit issued pursuant to
the Law for the Prevention of Sea Pollution (Disposing of Wastes) of 1983, 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 is effective until September 30, 1998, after which disposal of acid
sludge to the sea should cease in accordance with the Plan described below.
HCL currently disposes of its liquid acid effluents to the Haifa Bay
through a local river in accordance with a permit issued pursuant to the Law for
the Prevention of Sea Pollution from Land Sources of 1988, effective until
September 30, 1998. Both above-mentioned permits set forth restrictions on
quantities and concentrations, inspection, reporting duties and certain other
conditions.
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
consists 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 it in a
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
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execution of the Plan is four and one-half years, with up to an additional one
and one-half year grace period available under certain conditions, with
estimated capital expenditures of up to $15,000,000 which commenced in 1997.
In November 1996 HCL signed a settlement agreement (the "Agreement") for
resolution of a private criminal complaint, alleging violation of specified
Israeli environmental laws as a result of HCL's dumping of chemical waste into a
local river without adequate permits, 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, concentrations of effluents 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
prescribes enforcement penalty provisions. In addition, HCL compensated the
Petitioners and reimbursed the Society for certain legal expenses and agreed to
contribute to an educational and monitoring fund to be established under the
Agreement. The Society agreed that after implementation of the plans pursuant to
the Agreement, it would not make any further demands on HCL or to any judicial
or administrative body regarding the alleged contamination of water or the sea
unless the Agreement is breached.
HCSL disposes of liquid effluents in plastic lined evaporation ponds in
accordance with a business license issued under the Business Licenses Act of
1968. Based on recent results of groundwater monitoring in the area, the
Ministry notified HCSL of its intention to seek an alternate solution to be
implemented in the future, including the imposition of a requirement to decrease
the concentrations of acid effluents. HCSL believes that the solution used by it
heretofore in coordination with the authorities provides adequate protection to
avoid groundwater contamination. HCSL notified the Ministry of its objection to
the imposition of new purifying requirements.
On March 3, 1998, a criminal proceeding was initiated against HCL and its
Managing Director in the Magistrate's Court of Haifa for alleged 1995 nitrous
oxide air emissions beyond prescribed levels. During 1995, HCL adopted
additional technical and administrative measures to monitor such emissions and
believed that it had resolved this matter with the Ministry in 1995. The Company
believes that even if this proceeding were adversely decided, the penalty would
be a fine which would not have a material adverse effect on it operations or
financial conditions.
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.
ITEM 2. Properties
Reference is made to "Facilities" 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
Beginning in April 1993 a number of class 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
11
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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, before which oral argument on the appeal occurred on November 17, 1997.
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 corporation, Nine West Corporation ("Nine West"), 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 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. By stipulation, this consolidated action has been stayed pending the
outcome of the appeal to the Court of Appeals for the Eighth Circuit in the
federal action discussed above.
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.
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, approximately 146 suits
were filed in the State Court for the 22nd Judicial District, Washington Parish,
Louisiana. The cases have been consolidated in this State Court and the
consolidated suit certified as a class action. The class is estimated to contain
approximately 8,000 claimants. Vicksburg, Cedar and the Company 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
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explosion. The Company has filed motions and/or exceptions in the Mississippi
and Louisiana actions denying personal jurisdiction, which motions/exceptions
remain pending. The Mississippi court has established a trial date for an
initial group of plaintiffs to be determined for September 1998. The Louisiana
court has established a plan culminating in a trial in October 1998. 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, 1997.
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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 Part III 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 1995, 1996 and 1997, the Company
paid or declared dividends on its Common Stock in the amounts of $856,000,
$5,208,000 and $3,736,000, 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, 1997. 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,
-----------------------------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
(in thousands)
Results of Operations:
Revenues .............................. $ 326,315 $ 334,107 $ 385,564 $ 412,305 $ 376,531
Operating costs and expenses:
Cost of goods sold .................. 255,563 265,795 323,126 343,930 305,588
General and administrative .......... 38,375 37,780 43,193 46,419 42,622
--------- --------- --------- --------- ---------
Operating income ...................... 32,377 30,532 19,245 21,956 28,321
Interest expense ...................... (27,405) (28,369) (34,498) (32,195) (29,475)
Interest and other income - net (1) ... 6,014 15,056 9,128 25,448 5,550
--------- --------- --------- --------- ---------
Income (loss) before income taxes,
and extraordinary item .............. 10,986 17,219 (6,125) 15,209 4,396
Income tax provision .................. 7,920 14,669 733 4,016 2,952
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item 3,066 2,550 (6,858) 11,193 1,444
Extraordinary item - net .............. (8,830) -- (103) (553) --
--------- --------- --------- --------- ---------
Net income (loss) ..................... $ (5,764) $ 2,550 $ (6,961) $ 10,640 $ 1,444
========= ========= ========= ========= =========
Dividends:
Preferred stock ....................... $ -- $ -- $ 851 $ 851 $ 850
Common stock .......................... 7,508 4,466 856 5,208 3,736
(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 $2,261,000,
($1,178,000), ($413,000), $341,000 and $2,713,000 for the years ended
December 31, 1993, 1994, 1995, 1996 and 1997, respectively, (c) foreign
currency gains (losses) of $850,000, ($3,800,000), $5,400,000,
($1,600,000) and $0 for the years ended December 31, 1993, 1994, 1995,
1996 and 1997, respectively, and (d) a gain of $22,579,000 in the year
ended December 31, 1996 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,
-----------------------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(in thousands)
Financial Position:
Cash and cash equivalents ........ $ 25,742 $ 15,571 $ 32,872 $ 29,112 $ 19,757
Working capital .................. 103,776 66,294 82,011 86,986 73,597
Total assets ..................... 365,865 550,954 467,102 426,631 462,016
Short-term debt, including current
maturities of long-term debt ... 47,282 157,986(a) 46,848 32,829 49,660
Long-term debt, excluding current
maturities and subordinated debt 61,328 102,059 174,506 152,539 154,726
Senior subordinated debt - net ... 140,133 140,385 114,074 114,175 114,288
Junior subordinated debt - net ... 15,495 7,981 -- -- --
Stockholder's equity ............. 15,794 20,550 20,675 26,254 23,607
(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.
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 Revenue
-----------------------------------
Year Ended December 31,
-----------------------------------
1995 1996 1997
----- ----- -----
Revenues:
Specialty Plant Nutrients ........ 49.1% 52.5% 58.6%
Industrial Chemicals ............. 25.4 28.4 28.9
Organic Chemicals ................ 11.6 10.6 12.5
Potash ........................... 13.9 8.5 --
----- ----- -----
Total revenues ................... 100.0% 100.0% 100.0%
Operating costs and expenses:
Cost of goods sold ............... 83.8 83.4 81.2
General and administrative ....... 11.2 11.3 11.3
----- ----- -----
Operating income ...................... 5.0 5.3 7.5
Interest expense ................. (8.9) (7.8) (7.8)
Interest and other income - net .. 2.3 6.2 1.5
----- ----- -----
Income (loss) before income taxes and
extraordinary item ............... (1.6) 3.7 1.2
Income tax provision .................. 0.2 1.0 0.8
----- ----- -----
Income (loss) before extraordinary item (1.8) 2.7 0.4
Extraordinary item - net .............. -- (0.1) --
----- ----- -----
Net income (loss) ..................... (1.8)% 2.6% 0.4%
===== ===== =====
1997 Compared with 1996
Revenues decreased by 8.7% to $376,531,000 in 1997 from $412,305,000 in
1996, a decrease of $35,774,000. The decrease resulted from a $35,300,000
reduction in sales associated with the Company's sale of its potash operations
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and a $3,900,000 decrease in sales of Specialty Plant Nutrients and Industrial
Chemicals primarily as a result of the HCL Labor Dispute and less favorable
currency exchange rates in 1997. These decreases in sales were partially offset
by higher sales of Organic Chemicals of $3,400,000. See Part I - Item 1 -
"Business" - "Significant Developments" and "Employees" above.
Cost of goods sold as a percentage of revenues decreased to 81.2% in 1997
compared with 83.4% in 1996. Gross profit was $70,943,000 in 1997, or 18.8% of
revenues, compared with $68,375,000 in 1996, or 16.6% of revenues. The primary
factors resulting in the increased gross profit were related to higher Organic
Chemicals margins in the 1997 period, lower raw material and energy costs and
increased selling prices for the Company's Specialty Plant Nutrients and
Industrial Chemicals, with such increases partially offset by less favorable
currency exchange rates in the 1997 period of $15,000,000.
Both 1997 and 1996 were adversely affected by the HCL Labor Dispute. The
adverse effect of the HCL Labor Dispute related to: (i) a reduction in sales
volume; (ii) the increased cost of production resulting from reduced
manufacturing during the period which affected the fixed charge component of
cost of sales; and (iii) lower gross margins due to inventory shortages which
required purchases from third parties at substantially increased costs compared
to the Company's costs. These adverse impacts were partially offset by lower
labor costs during the HCL Labor Dispute and the net proceeds received from the
Israeli manufacturers association under HCL's claim for damages, amounting to
$3,100,000 and $2,000,000 in the years ended December 31, 1997 and 1996,
respectively, applied for partial contribution towards the costs suffered during
the period of the labor disruption.
General and administrative expense decreased by $3,797,000 to $42,622,000
in 1997, from $46,419,000 in 1996, but remained the same as a percentage of
revenues at 11.3%. Most of the decreased expense related to the Company's potash
operations, which were sold in 1996. In addition, during the 1997 period,
certain HCL general and administrative expenses declined as a result of lower
wages.
As a result of the matters described above, the Company's operating
income increased by $6,365,000 to $28,321,000 in 1997 as compared with
$21,956,000 in 1996. As a percentage of revenues operating income increased to
7.5% in 1997 from 5.3% in 1996.
Interest expense decreased by $2,720,000 to $29,475,000 in 1997 compared
with $32,195,000 in 1996 primarily as a result of: (i) the maturity of the
Company's Senior Subordinated Reset Notes in September 1996 and (ii) the
prepayment of senior bank debt with a portion of the proceeds from the sale of
the Company's potash operations. Interest and other income - net decreased in
1997 by $19,898,000, principally as the result of the gain on the sale of the
Company's potash operations of $22,579,000 in the 1996 period, partially offset
by increased realized gains on sales of marketable securities in the 1997
period.
As a result of the above factors, income before income taxes and
extraordinary item decreased by $10,813,000 in 1997. 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 the 1996 period the Company acquired $19,122,000 principal amount of
its Senior Subordinated Reset Notes, which resulted in a loss of $553,000. Such
loss (which has no current tax benefit) is classified as an extraordinary item
in the accompanying Consolidated Statements of Operations. No such debt was
acquired in the 1997 period.
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. This increase resulted from increased sales of
Specialty Plant Nutrients and Industrial Chemicals of $45,900,000, partially
offset by decreased sales of Organic Chemicals of $800,000 and Potash of
$18,400,000. Effective August 16, 1996, the Company sold its potash operations -
see Note A of Notes to Consolidated Financial Statements.
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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, or 16.6% of
revenues, compared with $62,438,000, or 16.2% of revenues, 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, (iii) the inclusion of the results of Na-Churs for the full year
in 1996 as compared with only nine months in 1995 and (iv) lower ammonia prices
in 1996. 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 Part I - Item 1 - "Business" -
"Significant Developments" and "Employees" above.
As a result of the HCL Labor Dispute, the fourth quarter of 1996 was
significantly impacted by: (i) a reduction in sales volume; (ii) increased cost
of production resulting from reduced manufacturing which affected the fixed
charge component of cost of sales; (iii) the cost of raw materials destroyed in
the production process during work stoppages and job actions; (iv) lower gross
margins due to inventory shortages requiring purchases from third parties at
substantially increased costs compared to the Company's cost of production; and
(v) increased general and administrative expenses arising from higher security
and other costs. This adverse impact was partially offset by lower labor costs
during the HCL Labor Dispute and the net proceeds received from the Israeli
manufacturers association under HCL's claim for damages, applied for partial
contribution towards the costs suffered during the period of labor disruption.
General and administrative expense increased to $46,419,000 in 1996, or
11.3% of revenues, from $43,193,000 in 1995, or 11.2% of revenues, primarily as
a result of (i) the inclusion of the results of Na-Churs for the full year in
1996 and (ii) the inclusion in 1995 of 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 to $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 the construction of HCSL's Plant in Mishor Rotem,
Israel. Interest and other income - net increased in 1996 by $16,320,000
principally as the result of (i) the 1996 period including a $22,579,000 gain
relating to the sale of the Company's potash operations and an increase in
equity in the earnings of Laser of $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 of $7,000,000 and (iii) the inclusion
in 1995 of 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 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.
CAPITAL RESOURCES AND LIQUIDITY
The Company's consolidated working capital at December 31, 1997 and
1996 was $73,597,000 and $86,986,000, respectively.
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Operations for the years ended December 31, 1997, 1996 and 1995, after
adding back non-cash items, provided cash of approximately $22,800,000,
$11,100,000 and $16,100,000, respectively. During such years, other changes in
working capital used cash of approximately $13,100,000, $7,700,000 and
$14,300,000, respectively, resulting in net cash being provided from operating
activities and working capital management of approximately $9,700,000,
$3,400,000 and $1,800,000, respectively.
Investment activities during the years ended December 31, 1997, 1996
and 1995 provided (used) cash of approximately ($33,500,000), $35,300,000 and
$84,800,000, respectively. These amounts include: (i) additions to property in
1997, 1996 and 1995 of $26,900,000, $13,600,000 and $35,700,000, respectively;
(ii) purchases of marketable securities and other short-term investments in
1997, 1996 and 1995 of $7,700,000, $9,400,000 and $4,400,000, respectively;
(iii) sales of marketable securities and other short-term investments in 1997,
1996 and 1995 of $8,000,000, $2,000,000 and $132,300,000, respectively,
including a 1995 liquidation of certificates of deposit securing a bank loan,
and (iv) other items providing (using) cash in 1997, 1996 and 1995 of
($6,900,000), $56,400,000 and ($7,400,000), respectively, including, in 1996,
the gross proceeds relating to the Company's sale of its potash operations. The
property additions in 1995 include the completion of two major capital projects:
(i) replacement of the Company's potassium nitrate production facility in Haifa,
Israel damaged in a fire in 1994; and (ii) construction of the Company's new
operating facility in Mishor Rotem, Israel.
Financing activities during the years ended December 31, 1997, 1996
and 1995 provided (used) cash of approximately $14,400,000, ($42,500,000) and
($69,300,000), respectively. These amounts include: (i) a $100,000,000 loan
borrowed from a bank in 1994 and prepaid in 1995; (ii) borrowings to finance the
Company's construction of its Mishor Rotem facility in 1995; (iii) the Company's
acquisition of its Senior Subordinated Reset Notes in 1995 and 1996; and (iv)
the prepayment of certain bank debt in 1996 with a portion of the proceeds from
the sale of the Company's potash operations.
As of December 31, 1997, the Company had outstanding long-term debt
(excluding current maturities) of $269,014,000. The Company's primary sources of
liquidity are cash flow generated from operations and the unused credit lines
described in Note E of Notes to Consolidated Financial Statements. See also Note
G of Notes to Consolidated Financial Statements for information relating to the
Company's refinancing (the "Refinancing") of its 11 7/8% Senior Subordinated
Notes.
FORWARD-LOOKING LIQUIDITY AND CAPITAL RESOURCES
Upon consummation of the Refinancing, interest payments on the Senior
Notes and interest and principal repayments under other indebtedness will
represent significant obligations of the Company and its subsidiaries. For a
description of the amortization required on the Company's other indebtedness see
Note G of Notes to Consolidated Financial Statements. In 1997, the Company spent
approximately $26,900,000 on capital projects, of which: (i) approximately
$10,800,000 relates to the Company's initial capital expenditures pursuant to
its plan to increase capacity for potassium nitrate, food grade phosphates and
the construction of a plant to manufacture MAP and MKP; and (ii) $3,800,000
relates to the Company's construction of a co-generation facility. In addition,
the Company plans to complete its plan to increase capacity for potassium
nitrate and food grade phosphates and the construction of the MAP and MKP plant
by spending approximately $63,000,000 during 1998 and 1999. Ongoing maintenance
capital expenditures are expected to be approximately $13,000,000 per year.
The Company's primary sources of liquidity will be cash flows from
operations and borrowings under the credit facilities of the Company and its
subsidiaries. As of December 31, 1997, the Company and its subsidiaries had
approximately $72,000,000 of borrowing availability, consisting of $37,000,000
of borrowing availability of the Company and $35,000,000 of total availability
at the Company's subsidiaries. HCL intends to enter into a new $80,000,000
credit facility which will be used primarily to finance its planned capacity
expansion at its Mishor Rotem facility. Dividends and other distributions from
the Company's subsidiaries are, in part, a source of cash flow available to the
Company. The Company believes that, based on current and anticipated financial
performance, cash flow from operations, borrowings under the Company's credit
facilities and dividends and other distributions available from the Company's
subsidiaries will be adequate to meet anticipated requirements for capital
expenditures, working capital and
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scheduled interest payments. However, the Company's capital requirements may
change, particularly if the Company would complete any material acquisitions.
The ability of the Company to satisfy its capital requirements and to repay or
refinance its indebtedness will be dependent upon the future financial
performance of the Company, which in turn will be subject to general economic
conditions and to financial, business and other factors, including factors
beyond the Company's control.
FOREIGN CURRENCIES
The Company has no significant foreign currency denominated revenues
except at HCL. Approximately $135,000,000 of HCL's total sales for the year
ending December 31, 1998 will be made outside of Israel in currencies other than
the U.S. dollar (principally Western European currencies). Accordingly, to the
extent that the U.S. dollar weakens or strengthens versus the applicable
corresponding foreign currency, HCL's results are favorably or unfavorably
affected. 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,
applicable 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, 1997, 1996
and 1995 would have increased (decreased) by approximately ($7,000,000),
($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.
INFLATION
Inasmuch as only approximately $59,000,000 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,
1997, 1996 and 1995, the inflation rate of the NIS as compared to the U.S.
Dollar was greater (less) than the devaluation rate in Israel by (1.8%), 6.9%
and 4.2%, respectively.
ENVIRONMENTAL MATTERS
See Part I - 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.
OTHER MATTERS
The Company is evaluating the potential impact of the situation commonly
referred to as the "Year 2000 problem". The Year 2000 problem, which is common
to most corporations, concerns the inability of information systems, primarily
computer software programs, to properly recognize and process date sensitive
information related to the year 2000. Preliminary assessment indicates that
solutions will involve a mix of purchasing new systems and modifying existing
systems and confirming vendor compliance. The Company is currently evaluating
the expected costs to be incurred in connection with the Year 2000 problem, but
expects that such costs will not be significant.
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In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS 131"), and SFAS No. 130,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 131 establishes standards
for reporting financial and descriptive information for reportable segments on
the same basis that is used internally for evaluating segment performance and
the allocation of resources to segments. The Company is evaluating the effect,
if any, of SFAS 131, on its operating segment reporting disclosure. SFAS 130
establishes standards for presenting certain items that are excluded from net
income and reported as components of stockholders' equity, such as foreign
currency translation. These statements are effective for fiscal years beginning
after December 15, 1997. The adoption of these statements will not have a
material effect on the Company's results of operations or financial position.
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.
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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 52 Chairman of the Board and Chief Executive Officer
Thomas G. Hardy 52 President and Chief Operating Officer; Director
Gabriel Politzer 48 Senior Vice President
Lester W. Youner 52 Vice President, Treasurer and Chief Financial Officer and Secretary
John J. Lewandowski 42 Vice President--Corporate Development
Michael P. Oravec 46 Vice President--Corporate Taxation
Martin A. Coleman 67 Director
Sash A. Spencer 66 Director
In addition, the following are key employees of the Company's
subsidiaries:
NAME AGE POSITIONS
---- --- ---------
Amiad Cohen 60 Managing Director of HCL; President of HCL, effective April 1, 1998
Esther Eldan 43 General Manager of HCL's Specialty Fertilizer Division; Managing
Director of HCL, effective April 1, 1998
J. Randal Tomblin 55 Senior Vice President of Cedar and President of the Organic
Chemicals Division
Yale L. Schalk 42 President of Vicksburg
The Financial Advisory Committee advises the Board of Directors regarding
financial matters and, when the Committee deems appropriate, makes
recommendations to the Board of Directors. The members of the Financial Advisory
Committee are Mr. Lawrence M. Small and Messrs. Hardy and Spencer.
The following are descriptions of the directors, executive officers and
key employees of the Company.
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 was a director of Laser from January
1990 until February
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1998 and has been a director of ESC since February 1998 (see Part I - Item 1 -
"Business" - "Significant Developments").
Gabriel Politzer has been a Senior Vice President of the Company since
January 1, 1998, with responsibilities for the Company's worldwide Specialty
Plant Nutrients products. He was Executive Vice President of Vicksburg from
September 1993 to January 1998. From January 1989 through September 1993, he was
Vice President of Sales and Marketing at HCL. From 1983 to 1989 he was Chief
Financial Officer of Negev Phosphates (a major subsidiary of Israel Chemicals
Ltd.).
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 was a director of Laser from November
1996 to February 1998.
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.
Michael P. Oravec has been Vice President-Corporate Taxation since
January 1997. From December 1994 (when he accepted a position with the Company)
until December 1996 he served as the Company's Director of Taxes. From 1980 to
1994 he was employed by The Mennen Company, in positions of increasing
responsibility, his last position being Director of Taxes.
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.
Amiad Cohen has been the Managing Director of HCL since 1988. Mr. Cohen
has over thirty years of experience in the chemical industry. Effective April 1,
1998, Mr. Cohen will become the President of HCL.
Esther Eldan has been general manager of HCL's Specialty Fertilizer
Division since its inception in January 1996. Previously, she was the Chief
Financial Officer of HCL for more than five years. Ms. Eldan joined HCL in 1981.
Effective April 1, 1998, Ms. Eldan will become the Managing Director of HCL.
J. Randal Tomblin has been Senior Vice President of Cedar and President
of its Organics Division since 1989. He was Vice President of NMPC from 1985 to
1986, President and Chief Executive Officer of Vertac Chemical Corporation from
1986 to 1987 and was in private business for a period between 1987 and 1989.
Prior to joining NMPC, he served for 20 years with Hoechst Celanese Corporation,
most recently as a Director of Manufacturing with Hoechst Celanese Chemical
Company, and Director of Strategic Planning and Director of New Business
Development with Hoechst Celanese Fibers Division.
Yale L. Schalk joined the Company in December of 1997 as President of
Vicksburg after over 20 years of experience with Shell Oil Company and DuPont,
where he held a variety of positions in sales, marketing and business
management. Most recently from 1994 to 1997, he was U.S. Marketing Manager,
interim Director of U.S. Business and North American Business Unit Leader of
DuPont's Agricultural Products Division.
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Lawrence M. Small, 56, 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 and Marriott International, Inc.
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, executive officers
or key employees of the 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 during the 1997 fiscal year whose annual
compensation exceeded $100,000 for the year ended December 31, 1997:
ANNUAL COMPENSATION (a)
------------------------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(b)
- ---------------------------------------- -------------------------------------------------------
Arie Genger ............................ 1997 $750,000 $400,000 $ 797,000
Chairman of the Board and Chief ..... 1996 750,000 750,000 682,000
Executive Officer ................... 1995 675,000 -- 510,000
Thomas G. Hardy ........................ 1997 425,000 150,000 5,000
President and Chief Operating Officer 1996 400,000 175,000 1,405,000
and Director ........................ 1995 360,000 130,000 5,000
Lester W. Youner ....................... 1997 263,000 75,000 5,000
Vice President, Treasurer and Chief . 1996 251,000 100,000 5,000
Financial Officer and Secretary ..... 1995 241,000 65,000 5,000
John J. Lewandowski .................... 1997 125,000 35,000 4,000
Vice President--Corporate Development 1996 120,000 105,000 4,000
Michael P. Oravec ...................... 1997 118,000 18,000 5,000
Vice President--Corporate Taxation
- ------------------
(a) 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.
(b) Includes the cost to the Company of split-dollar life insurance policies on
the life of Mr. Genger. The Company paid premiums on these policies of $286,000
in 1997. The Company is entitled to a refund of the cumulative annual premiums
paid by it to the insurers pursuant to the split-dollar life insurance
arrangements before any benefits are paid by the insurers to the owner or
beneficiaries of the policies. Additionally, for 1997, includes: (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, Lewandowski and
Oravec, $4,000 each for the Company's matching contribution to a profit sharing
thrift plan; and (iii) $1,000 each for Messrs. Hardy, Youner and Oravec for the
premium on term life and disability insurance.
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Includes the cost to the Company of split-dollar life insurance policies
on the life of Mr. Genger. The Company paid premiums on these policies of
$171,000 in 1996. The Company is entitled to a refund of the cumulative annual
premiums paid by it to the insurers pursuant to the split-dollar life insurance
arrangements before any benefits are paid by the insurers to the owner or
beneficiaries of the policies. Additionally, for 1996, includes: (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.
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).
Pursuant to a salary continuation agreement between the Company and
Lester W. Youner, the Company is obligated to pay Mr. Youner a retirement
allowance (the "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 30% vested in the Allowance on December 31, 1997 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
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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.
The Company is also a party to certain split-dollar insurance agreements
on the life of Mr. Genger as described above.
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 20, 1998,
as to the beneficial ownership of the Common Stock of the Company, which is the
only outstanding class of voting security of the Company:
NAME AND ADDRESS SHARES OWNED PERCENT OF CLASS
- ---------------- ------------ ----------------
Common Stock, $.01 par value(a):
TPR(b)
9 West 57th Street
New York, NY 10019 ........................ 3,000 100%
All executive officers and directors
as a group (eight persons)(b) ............. 3,000 100%
- -----------------
(a) 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. See Item 13--"Certain Relationships and Related
Transactions" regarding TPR's ownership of shares of a non-voting preferred
stock of the Company.
(b) Mr. Genger and members of his family own all of the capital stock of TPR.
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, Na-Churs 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
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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, 9.5% junior subordinated debentures due 2005 (the "9.5%
Debentures") and became the obligor on an outstanding 8.75%, $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. TPR pledged the above-mentioned
Company preferred stock to secure TPR's $9,000,000 obligation.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1)-(2) See Index to Consolidated Financial Statements and Schedule 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, 1997.
26
29
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 Lester W. Youner
---------------------
Lester W. Youner
Vice President, Treasurer
and Chief Financial Officer
Dated: March 20, 1998
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 Lester W. Youner
Lester W. Youner
For Himself and As Attorney-In-Fact
Directors:
Arie Genger Dated: March 20, 1998
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.
27
30
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
FINANCIAL STATEMENTS Page
- -------------------- ----
Independent Auditors' Report...................................... F-2
Report of Independent Accountants................................. F-3
Consolidated Balance Sheets, December 31, 1996 and 1997........... F-4
Consolidated Statements of Operations,
for the Years Ended December 31, 1995, 1996 and 1997.......... F-5
Consolidated Statements of Stockholder's Equity,
for the Years Ended December 31, 1995, 1996 and 1997.......... F-6
Consolidated Statements of Cash Flows,
for the Years Ended December 31, 1995, 1996 and 1997.......... F-7
Notes to Consolidated Financial Statements........................ F-8
SCHEDULE
- --------
Schedule I - Condensed Financial Information of Registrant,
for the Years Ended December 31, 1995, 1996 and 1997.......... S-1
F - 1
31
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 22 percent and 20 percent of consolidated total assets as of
December 31, 1997 and 1996, respectively, and total revenues constituting 31
percent, 33 percent and 34 percent of consolidated total revenues for the years
ended December 31, 1997, 1996 and 1995, 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,
1997 and 1996, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997, 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
February 25, 1998 (except as to Note G, the date of which is March 16, 1998)
New York, New York
F - 2
32
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, 1997 and
1996, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, 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
January 30, 1998
F - 3
33
TRANS-RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
1996 1997
--------- ---------
(in thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................ $ 29,112 $ 19,757
Accounts receivable .................................................. 71,551 82,551
Inventories .......................................................... 51,207 60,126
Other current assets ................................................. 24,664 33,578
Prepaid expenses ..................................................... 14,635 16,122
--------- ---------
Total Current Assets ............................................. 191,169 212,134
PROPERTY, PLANT AND EQUIPMENT - net ....................................... 200,774 207,487
OTHER ASSETS .............................................................. 34,688 42,395
--------- ---------
Total ............................................................ $ 426,631 $ 462,016
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt ................................. $ 17,481 $ 13,080
Short-term debt ...................................................... 15,348 36,580
Accounts payable ..................................................... 38,033 58,662
Accrued expenses and other current liabilities ....................... 33,321 30,215
--------- ---------
Total Current Liabilities ........................................ 104,183 138,537
--------- ---------
LONG-TERM DEBT - net:
Senior indebtedness, notes payable and other obligations ............. 152,539 154,726
Senior subordinated debt - net ....................................... 114,175 114,288
--------- ---------
Long-Term Debt - net ............................................. 266,714 269,014
--------- ---------
OTHER LIABILITIES ......................................................... 29,480 30,858
--------- ---------
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 .................................................... 9,345 6,203
Cumulative translation adjustment .................................... (367) (67)
Unrealized gain on marketable securities ............................. 634 829
--------- ---------
Total Stockholder's Equity ....................................... 26,254 23,607
--------- ---------
Total ....................................................... $ 426,631 $ 462,016
========= =========
See notes to consolidated financial statements.
F - 4
34
TRANS-RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1995, 1996 and 1997
1995 1996 1997
--------- --------- ---------
(in thousands)
REVENUES .............................. $ 385,564 $ 412,305 $ 376,531
OPERATING COSTS AND EXPENSES:
Cost of goods sold ................. 323,126 343,930 305,588
General and administrative ......... 43,193 46,419 42,622
--------- --------- ---------
OPERATING INCOME ...................... 19,245 21,956 28,321
Interest expense ................... (34,498) (32,195) (29,475)
Interest and other income - net .... 9,128 25,448 5,550
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM ................. (6,125) 15,209 4,396
INCOME TAX PROVISION .................. 733 4,016 2,952
--------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (6,858) 11,193 1,444
EXTRAORDINARY ITEM - Loss on repurchase
of debt (no income tax benefit) .... (103) (553) --
--------- --------- ---------
NET INCOME (LOSS) ..................... $ (6,961) $ 10,640 $ 1,444
========= ========= =========
See notes to consolidated financial statements.
F - 5
35
TRANS-RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
For the Years Ended December 31, 1995, 1996 and 1997
ADDITIONAL CUMULATIVE UNREALIZED
PREFERRED COMMON PAID-IN RETAINED TRANSLATION GAIN (LOSS)
STOCK STOCK CAPITAL EARNINGS ADJUSTMENT ON SECURITIES TOTAL
------ ----- ------ ------- --------- ------ -------
(in thousands)
BALANCE, JANUARY 1, 1995.................. $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
Net income............................. 1,444 1,444
Dividends:
Common stock........................ (3,736) (3,736)
Preferred stock..................... (850) (850)
Net change during year................. 300 195 495
------ ----- ------ ------- --------- ------ -------
BALANCE, DECEMBER 31, 1997................ $7,960 $ - $8,682 $ 6,203 $ (67) $ 829 $23,607
====== ===== ====== ======= ========= ====== =======
See notes to consolidated financial statements.
F - 6
36
TRANS-RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1995, 1996 and 1997
1995 1996 1997
--------- -------- --------
(in thousands)
OPERATING ACTIVITIES AND WORKING CAPITAL
MANAGEMENT:
Operations:
Net income (loss) .................................. $ (6,961) $ 10,640 $ 1,444
Items not requiring (providing) cash:
Depreciation and amortization .................. 22,409 22,689 22,099
Increase (decrease) in other liabilities ....... (37) 236 (1,043)
Deferred taxes and other - net, including gain
on sale of potash operations in 1996 ...... 688 (22,488) 281
--------- -------- --------
Total ..................................... 16,099 11,077 22,781
Working capital management:
Accounts receivable and other current assets ... 15,585 (3,912) (20,153)
Inventories .................................... (11,274) 5,603 (8,919)
Prepaid expenses ............................... (443) 469 (1,487)
Accounts payable ............................... (7,753) (11,239) 20,629
Accrued expenses and other current liabilities . (10,381) 1,360 (3,106)
--------- -------- --------
Cash provided by operations and
working capital management ................ 1,833 3,358 9,745
--------- -------- --------
INVESTMENT ACTIVITIES:
Additions to property, plant and equipment ........... (35,661) (13,570) (26,862)
Sales of marketable securities and short-term
investments, including in 1995 liquidation
of CD's securing a bank loan ....................... 132,260 1,965 7,982
Purchases of marketable securities and short-
term investments ................................... (4,371) (9,432) (7,743)
Other - net, including proceeds from sale of
potash operations in 1996 .......................... (7,441) 56,376 (6,909)
--------- -------- --------
Cash provided by (used in) investment activities 84,787 35,339 (33,532)
--------- -------- --------
FINANCING ACTIVITIES:
Increase in long-term debt ........................... 101,616 44,168 12,000
Repurchases, payments and current maturities of
long-term debt ..................................... (141,452) (89,769) (14,214)
Increase (decrease) in short-term debt ............... (27,776) 9,203 21,232
Dividends to stockholders ............................ (1,707) (6,059) (4,586)
--------- -------- --------
Cash provided by (used in) financing activities (69,319) (42,457) 14,432
--------- -------- --------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ..................................... 17,301 (3,760) (9,355)
CASH AND CASH EQUIVALENTS:
Beginning of year .................................... 15,571 32,872 29,112
--------- -------- --------
End of year .......................................... $ 32,872 $ 29,112 $ 19,757
========= ======== ========
See notes to consolidated financial statements.
F - 7
37
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.
On August 16, 1996 NMPC and EDP sold their potash producing 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 (see Note K).
During the years ended December 31, 1995 and 1996, the potash
operations contributed approximately $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
global developer, producer and marketer of specialty plant nutrients and
specialty industrial and agricultural chemicals and distributes its products
internationally.
F - 8
38
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, 1995,
1996 and 1997 are set forth below:
1995 1996 1997
---- ---- ----
(in millions)
Europe .................................... $146 $160 $148
United States ............................. 136 145 128
Asia ...................................... 34 37 29
Canada and Latin America .................. 22 24 22
Israel .................................... 21 23 19
Australia ................................. 6 6 6
Africa and other .......................... 21 17 25
---- ---- ----
Total ................................. $386 $412 $377
==== ==== ====
As of December 31, 1996 and 1997, the Company's assets were located in
the United States (36% and 37%, respectively) and abroad (principally Israel)
(64% and 63%, 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 the years 2015 and 2016. HCL also has 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 two supply contracts which expire in 1999 and 2005. HCL
currently sources phosphate rock from Rotem Amfert Negev Ltd. ("Rotem")
according to the terms of a variable price contract which expired in 1996, which
is currently being renegotiated. DSW and Rotem are subsidiaries of Israel
Chemicals Ltd., a large Israeli chemical company, and are the sole suppliers in
Israel of potash and phosphate rock, respectively. While management views its
current relationships with both of its principal suppliers to be good, the loss
of supply from either of these sources could have a material 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. Accordingly, to the extent the U.S.
dollar weakens or strengthens versus the applicable corresponding currency,
HCL's results are favorably or unfavorably affected. 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, 1996 and 1997,
there were outstanding
F - 9
39
contracts to purchase $53 million and $27 million, respectively, in various
European currencies, principally Deutsche Marks and Italian Lira in 1996 and
British Pounds and Spanish Pesetas in 1997. In addition, at December 31, 1996
there were outstanding contracts to purchase 26 million Deutsche Marks and to
sell a corresponding aggregate amount of Italian Lira and Spanish Pesetas. No
gains or losses were deferred at December 31, 1996 and 1997 for foreign exchange
contracts which qualify as hedges.
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, 1995, 1996 and 1997 would have
increased (decreased) by $16,600,000, ($6,900,000) and ($7,000,000),
respectively, and income before income taxes would have increased (decreased) by
approximately $11,200,000, ($5,300,000) and ($7,000,000), respectively.
The Company determines when to enter into hedging transactions based on
its ongoing review of the currency markets. 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 - 8%
Machinery, plant and equipment............... 5 - 25%
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, 1995, 1996 and 1997 amounting to $995,000,
$248,000 and $1,646,000, respectively.
F - 10
40
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" ("SFAS 115"),
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, 1997, 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 1995, 1996 and 1997 the Company incurred environmental clean-up
costs of approximately $300,000, $300,000 and $400,000, respectively. In
addition, at both December 31, 1996 and 1997, 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 required adoption in 1997. The adoption of this pronouncement did not have
a material effect on the Company's consolidated financial condition or results
of operations.
F - 11
41
Research and Development Costs
Research and development costs are charged to expense as incurred and
amounted to $3,158,000, $2,693,000 and $2,421,000 for the years ended December
31, 1995, 1996 and 1997, respectively.
Risk Management Derivatives
Amounts receivable or payable under interest rate swap agreements are
recognized as interest expense.
Long-Lived Assets
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 and 1997 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.
Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131"), and SFAS No. 130,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 131 establishes standards
for reporting financial and descriptive information for reportable segments on
the same basis that is used internally for evaluating segment performance and
the allocation of resources to segments. The Company is evaluating the effect,
if any, of SFAS 131, on its operating segment reporting disclosure. SFAS 130
establishes standards for presenting certain items that are excluded from net
income and reported as components of stockholders' equity, such as foreign
currency translation. These statements are effective for fiscal years beginning
after December 15, 1997. The adoption of these statements will not have a
material effect on the Company's results of operations or financial position.
Reclassifications
Certain prior year amounts have been reclassified to conform to the
manner of presentation in the current year.
F - 12
42
B. OTHER CURRENT ASSETS AND INVESTMENT IN LASER INDUSTRIES LIMITED
Other Current Assets
Other current assets consist of the following at December 31, 1996 and
1997:
1996 1997
------- -------
(in thousands)
Marketable securities (carried at market) .. $ 8,557 $ 6,523
Miscellaneous receivables, other securities,
deferred income taxes, etc ............ 16,107 27,055
------- -------
Total ............................ $24,664 $33,578
======= =======
The Company classifies all of its marketable securities (including U.S.
Government obligations) as available-for-sale securities as of December
31, 1996 and 1997:
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
------ ---------- ---------- ---------
(in thousands)
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
====== ====== ==== ======
December 31, 1997
Foreign Government obligations $ 866 $ -- $ 17 $ 849
Other debt securities ........ 492 29 -- 521
------ ------ ---- ------
Total debt securities ... 1,358 29 17 1,370
------ ------ ---- ------
Common stocks and mutual funds
investing primarily therein 4,383 1,009 239 5,153
Preferred stocks ............. -- -- -- --
------ ------ ---- ------
Total equity securities . 4,383 1,009 239 5,153
------ ------ ---- ------
Total ................... $5,741 $1,038 $256 $6,523
====== ====== ==== ======
F - 13
43
The cost and estimated fair value of debt securities at December 31,
1997, by contractual maturity, are as follows:
Estimated
Cost Fair Value
------ ------
(in thousands)
Due in one year or less .............. $ 408 $ 407
Due after one year through three years 592 576
Due after three years ................ 358 387
------ ------
Total .......................... $1,358 $1,370
====== ======
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, the gross realized gains on sales of securities totaled
approximately $411,000 and the gross realized losses totaled approximately
$70,000; during 1997 the gross realized gains on sales of securities totaled
approximately $3,052,000 and the gross realized losses totaled approximately
$339,000 (see Note K).
Investment in Laser Industries Limited ("Laser")
On November 9, 1997, Laser, a publicly traded manufacturer of lasers
for medical use in which the Company had an ownership interest accounted for by
the equity method, and ESC Medical Systems Ltd. ("ESC"), signed a definitive
agreement (the "Agreement") to combine the two companies through an exchange of
shares. The transaction closed on February 23, 1998. The Company's ability to
sell the ESC shares it will receive pursuant to the combination will be governed
by securities law volume restrictions.
As of December 31, 1997, the Company carried its investment in the
Laser shares at approximately $9,100,000, which amount is included in the
caption "other assets" in the accompanying Consolidated Balance Sheet. Based on
the quoted market value of the ESC shares ($35.00 per share) as of February 20,
1998, the last day of trading before the combination, the Company will recognize
an after-tax gain of approximately $22,400,000 which will be recorded during the
first quarter of 1998.
In addition to the ownership of the Laser shares described above, the
Company also owned a warrant (the "Laser Warrant") which enabled the Company to
purchase additional Laser shares. The Laser Warrant, which had a carrying value
of $750,000, was distributed to TPR as a dividend in February 1998 prior to
Laser's combination with ESC.
During the years ended December 31, 1995, 1996 and 1997, the Company
recorded equity in Laser's earnings (losses), inclusive of goodwill
amortization, of ($478,000), $2,280,000 and $1,558,000, respectively. Such
amounts are included in "Interest and other income-net" in the accompanying
Consolidated Statements of Operations (see Note K).
ESC develops, manufactures and markets medical devices utilizing both
state-of-the-art lasers and proprietary intense pulsed light source technology
for non-invasive treatment of varicose veins and other benign vascular lesions,
as well as for hair removal, skin cancer, skin rejuvenation and other clinical
applications. ESC shares are traded in the United States on the NASDAQ National
Market System. The Company's investment in ESC will be accounted for pursuant to
SFAS 115.
F - 14
44
C. INVENTORIES
Inventories consist of the following at December 31, 1996 and 1997:
1996 1997
------- -------
(in thousands)
Raw materials .................... $17,589 $13,362
Finished goods ................... 33,618 46,764
------- -------
Total ........................ $51,207 $60,126
======= =======
D. PROPERTY, PLANT AND EQUIPMENT - NET
Property, plant and equipment at December 31, 1996 and 1997 consists of
the following:
1996 1997
-------- --------
(in thousands)
Land ......................................... $ 4,272 $ 4,272
Buildings .................................... 22,178 22,416
Machinery, plant and equipment ............... 262,763 279,734
Office furniture, equipment and water rights . 8,731 9,714
Construction-in-progress ..................... 13,927 20,339
-------- --------
Total, at cost ........................... 311,871 336,475
Less accumulated depreciation and amortization 111,097 128,988
-------- --------
Property, plant and equipment - net ...... $200,774 $207,487
======== ========
The Company capitalized interest costs aggregating $953,000, $0 and
$35,000 during the years ended December 31, 1995, 1996 and 1997, respectively,
with respect to several construction projects. 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 year ended December 31, 1995 HCL
recorded a pre-tax gain of approximately $1,700,000, (which amount was the
residual adjustment over and above the initial gain recorded in 1994). Such
pre-tax gain is 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, 1996 and 1997 were 5.9% and 6.4%, respectively.
As of December 31, 1997, the Company and its subsidiaries have unused
revolving loan commitments and other credit lines from banks aggregating
approximately $72,000,000.
F - 15
45
F. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following
at December 31, 1996 and 1997:
1996 1997
------- -------
(in thousands)
Compensation and payroll taxes $ 9,241 $ 7,104
Interest 10,229 10,455
Income taxes 840 607
Other 13,011 12,049
------- -------
Total $33,321 $30,215
======= =======
G. LONG-TERM DEBT - NET
Long-term debt consists of the following at December 31, 1996 and 1997:
Payable
Description Interest Rate* Through 1996 1997
----------- -------------- ------- ---- ----
(in thousands)
TRI:
Bank loans (1)..................................... Various 2004 $ - $ 3,000
$115,000,000 principal amount of 11.875%
Senior subordinated notes, net of unamortized
debt discount of $825,000 and $712,000
(effective interest rate of 12.1%) (2) 11.875% 2002 114,175 114,288
Subsidiaries:
Bank loans and other financing..................... Various 2020 170,020 164,806
-------- --------
Total............................................ 284,195 282,094
Less current portion............................. 17,481 13,080
-------- --------
Long-term debt - net............................. $266,714 $269,014
======== ========
* 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, 1997 such rates were approximately 8.25% and 5.80%,
respectively.
1. As of December 29, 1995, the Company entered into a Loan Agreement with
a bank for borrowings upon the Company's request prior to December 29, 1998 in
the aggregate principal amount not to exceed $40,000,000. The loan matures on
December 29, 2004. The Company pledged all of the capital stock of HCL to secure
its obligations under the Loan Agreement.
2. The 11 7/8% senior subordinated notes (the "11 7/8% Notes") mature 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 March 11, 1998, the Company commenced the sale in a private
placement of $100,000,000 principal amount of 10 3/4% Senior Notes due 2008 (the
"Senior Notes") and $135,000,000 principal amount of 12% Senior Discount Notes
due 2008 to provide gross proceeds to the Company of approximately $75,400,000
(the "Senior Discount Notes"). The sale of the Senior Notes and the Senior
Discount Notes closed on March 16, 1998. A substantial portion (approximately
$118,000,000) of the net proceeds from the sale was used to purchase (pursuant
to a tender offer) approximately $110,000,000 principal amount of the 11 7/8%
Notes (the "Refinancing"), resulting in an extraordinary charge for the early
extinguishment of debt of approximately $10,900,000 (no tax effect) which will
be recorded in the first quarter of 1998.
F - 16
46
The Senior Notes and the Senior Discount Notes are unsecured
obligations of the Company and are pari passu in right of payment with all
existing and future unsecured and unsubordinated indebtedness of the Company and
senior in right to payment of all subordinated indebtedness of the Company.
Interest on the Senior Notes is payable semi-annually. Interest on the Senior
Discount Notes will accrue and compound semi-annually but will not be payable
until 2003, after which interest will be payable semi-annually.
The Company intends to use the balance of the proceeds from the sale of
the Senior Notes and Senior Discount Notes for working capital, general
corporate purposes, and the repayment of $13,900,000 of borrowings (of which
$10,900,000 was borrowed subsequent to December 31, 1997, of which $9,000,000
was dividended to TPR) under the Loan Agreement discussed above.
- ------------------
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
Indentures 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. In the
event of a Change in Control (as defined), the Company is required to offer to
purchase all the Senior Notes and Senior Discount 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 by both the Company and its subsidiaries. As of December 31, 1997, the
Company and its subsidiaries are in compliance with the covenants of each of the
respective loan agreements and the Indenture then in effect.
F - 17
47
The aggregate maturities of long-term debt at December 31, 1997 (after
giving effect to the Refinancing of the 11 7/8% Notes) are set forth below.
Years Ending
December 31, (in thousands)
------------
1998................................ $ 13,080
1999................................ 15,433
2000................................ 13,685
2001................................ 13,840
2002................................ 38,081
Thereafter.......................... 187,975
--------
Total........................... $282,094
========
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.
During 1995 and 1996, the Company acquired $3,250,000 and $19,122,000,
respectively, principal amount of its senior subordinated reset notes (the
"Reset Notes") prior to their scheduled maturity of September 1, 1996. 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.
Interest paid, net of capitalized interest, totaled $33,445,000,
$31,672,000 and $28,193,000 for the years ended December 31, 1995, 1996 and
1997, 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, 1996
and 1997 include accruals of $2,731,000 and $1,653,000, respectively, for the
estimated unfunded liability of complete severance of all HCL employees. Costs
incurred were approximately $2,060,000, $2,629,000 and $1,912,000 for the years
ended December 31, 1995, 1996 and 1997, 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 - 18
48
Cedar's net pension cost for the years ended December 31, 1995, 1996
and 1997 included the following benefit and cost components:
1995 1996 1997
----- ------- -------
(in thousands)
Service cost $ 603 $ 796 $ 819
Interest cost 844 1,014 1,133
Amortization of unrecognized prior service cost 109 109 109
Actual return on plan assets (793) (904) (1,091)
Amortization of unrecognized net transition obligation 59 59 59
----- ------- -------
Net pension cost $ 822 $ 1,074 $ 1,029
===== ======= =======
The funded status and the amounts recognized in the Company's December
31, 1996 and 1997 Consolidated Balance Sheets for Cedar's benefit plan was as
follows:
1996 1997
-------- --------
(in thousands)
Plan assets at market value ........................... $ 12,157 $ 14,239
Actuarial present value of projected benefit obligation 15,140 18,215
-------- --------
Funding status ........................................ (2,983) (3,976)
Unrecognized net transition obligation ................ 293 234
Unrecognized prior service cost ....................... 843 734
Unrecognized net loss ................................. 1,754 2,418
-------- --------
Prepaid (accrued) pension cost ........................ $ (93) $ (590)
======== ========
At December 31, 1996 and 1997 the actuarial present value of Cedar's
vested benefit obligation was $10,666,000 and $12,865,000 and the accumulated
benefit obligation was $11,304,000 and $13,614,000, respectively.
Actuarial assumptions used at December 31, 1996 and 1997 were
as follows:
1996 1997
------ ------
Discount rate - projected benefit obligation ........ 7.5% 7.0%
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 $559,000, $505,000 and $202,000 for the
years ended December 31, 1995, 1996 and 1997, respectively.
F - 19
49
I. OPERATING LEASES
The Company and its subsidiaries are obligated under non-cancelable
operating leases covering principally land, office facilities and equipment. At
December 31, 1997, minimum annual rental commitments under these leases are:
Years Ending
December 31, (in thousands)
------------
1998.................................. $3,664
1999.................................. 2,544
2000.................................. 1,589
2001.................................. 1,099
2002.................................. 1,041
Thereafter............................ 8,360
-------
Total............................. $18,297
=======
Rent expense for 1995, 1996 and 1997 was $5,308,000, $4,683,000 and
$4,489,000, respectively, covering land, office facilities and equipment.
J. INCOME TAXES
The Company's income tax provision for the years ended December 31,
1995, 1996 and 1997 consist of the following:
1995 1996 1997
----- ------- ------
(in thousands)
Current expense (benefit):
Federal .............. $ -- $ -- $ --
Foreign .............. (364) 3,146 652
State ................ 392 (121) 570
----- ------- ------
Total current .. 28 3,025 1,222
----- ------- ------
Deferred expense:
Foreign .............. 507 385 1,647
State ................ 198 606 83
----- ------- ------
Total deferred . 705 991 1,730
----- ------- ------
Total .......... $ 733 $ 4,016 $2,952
===== ======= ======
F - 20
50
The provision for income taxes for the years ended December 31, 1995,
1996 and 1997 amounted to $773,000, $4,016,000 and $2,952,000, respectively,
representing effective income tax rates of 12.0%, 26.4% and 67.2%, respectively.
These amounts differ from the amounts of ($2,144,000), $5,323,000 and
$1,539,000, 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:
1995 1996 1997
---- ---- ----
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 ........................ (53.5) 0.5 (33.9)
Net losses without current tax benefit
and other ..................................... 96.1 13.4 56.5
Utilization of capital loss carryforwards .......... -- (22.6) --
Additional depletion expense ....................... (1.9) (2.0) --
State and local income taxes - net ................. 6.3 2.1 9.6
---- ---- ----
Effective income tax rates ............................. 12.0% 26.4% 67.2%
==== ==== ====
At December 31, 1996 and 1997, deferred tax assets (liabilities)
consisted of the following:
1996 1997
-------- --------
(in thousands)
Depreciation and property and equipment basis differences $(29,981) $(33,534)
Nondeductible reserves .................................. 5,695 4,582
Net operating loss carryforwards ........................ 20,244 28,744
Foreign tax credit carryovers ........................... 4,753 5,427
Alternative minimum tax credit carryovers ............... 5,401 5,401
Investment tax credit carryovers ........................ 200 200
Other ................................................... 1,320 392
-------- --------
Deferred taxes - net, exclusive of valuation allowance .. 7,632 11,212
Valuation allowance ..................................... (28,384) (33,694)
-------- --------
Deferred taxes - net .................................... $(20,752) $(22,482)
======== ========
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". At December 31, 1997, deferred tax assets of
$3,325,000 are classified as "other current assets" and deferred tax liabilities
of $25,807,000 are classified as "other liabilities".
F - 21
51
At December 31, 1997, 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......... $2,053
1999......... 3,265
2000......... 41
2001......... 32 $200
2002......... 36
2010......... $22,208 $15,600
2011......... 17,442 11,200
2012......... 9,313 9,600
Unlimited.... $5,401 $38,013
------ ---- ------- ------ ------- -------
Total........ $5,427 $200 $48,963 $5,401 $36,400 $38,013
====== ==== ======= ====== ======= =======
Income taxes paid, including prepaid amounts, totaled approximately
$3,700,000, $3,100,000 and $3,800,000, respectively, during the years ended
December 31, 1995, 1996 and 1997. These amounts are exclusive of a prior year
tax refund received by HCL in 1995 of approximately $4,000,000.
No taxes on income have been provided on approximately $47,000,000 of
undistributed earnings of foreign subsidiaries as of December 31, 1997, since
management believes these amounts to be permanently invested.
K. INTEREST AND OTHER INCOME - NET
Interest and other income - net for the years ended December 31, 1995,
1996 and 1997 consists of the following:
1995 1996 1997
---- ---- ----
(in thousands)
Interest and dividend income .......................... $ 2,459 $ 1,408 $1,131
Security gains (losses) - net (see Note B) ............ (413) 341 2,713
Gain on involuntary conversion (see Note D) ........... 1,700 -- --
Gain on sale of potash operations (see Note A) ........ -- 22,579 --
Equity on earnings (losses) of Laser - net (see Note B) (478) 2,280 1,558
Other, including gains (losses) of $5,400,000 and
($1,600,000) in 1995 and 1996, respectively,
relating to foreign currencies (see Note A) ....... 5,860 (1,160) 148
------- -------- ------
Total ............................................. $ 9,128 $ 25,448 $5,550
======= ======== ======
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 - 22
52
M. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In connection with a credit agreement, Cedar has entered into five
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 counter party
(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, 1997:
Variable
Nominal Fixed Rate Rate Maturity
Amount Paid Received Date
------ ---- -------- ----
$10,000 6.17% 5.78% 10/98
10,000 6.04% 5.78% 10/98
7,500 5.99% 5.78% 10/98
5,000 5.27% 5.81% 2/99
15,000 6.70% 5.81% 10/01
The variable rate received is tied to the three-month LIBOR rate.
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, 1996 December 31, 1997
--------------------------- ----------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
(in thousands)
Assets:
Marketable securities (included within
"other current assets") ........... $ 8,557 $ 8,557 $ 6,523 $ 6,523
Investments in certain securities
(included within "other assets" and
accounted for by the equity method) 8,290 13,454 9,848 38,824
Liabilities:
Long-term debt ........................ 284,195 285,020 282,094 288,556
Off-balance sheet financial instruments:
Foreign currency contracts ............ 659 659 503 503
Risk management derivatives ........... -- (44) -- (317)
F - 23
53
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 $70,000,000 and
$27,000,000 as of December 31, 1996 and 1997, 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, 1996 and 1997. 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 Part I -
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 Part I - Item 3 - "Legal Proceedings".
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 Part I - Item 1 - "Business" - "Environmental Matters". 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 - 24
54
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.
During the fourth quarter of 1996 and the first two quarters of 1997,
the Company's operations were adversely impacted by a labor dispute at HCL (the
"Haifa Labor Dispute") - see Part I - Item 1 - "Business" - "Employees".
Most employees at HCL's manufacturing facility (the "Haifa Facility")
are members of the "Histradrut," the Israeli national labor federation, and are
represented by collective bargaining units. Terms of employment of most
employees at the Haifa Facility are currently governed predominantly by a
Specific Collective Agreement ("SCA") negotiated by the Company with the
Histadrut, the respective unions representing the employees and representatives
of the employees.
In 1994, an agreement was signed with the unions and the
representatives of the technicians and engineers at the Haifa Facility for the
three year period ended December 31, 1996. In 1995, an SCA was signed with the
unions and representatives of the other employees for the two year period ended
December 31, 1996. In September 1996, the Company announced the cancellation of
such agreements effective upon their expiration dates and its intention to
negotiate a new SCA with basic changes aimed at reducing labor costs and
enhancing operating flexibility for the period following December 31, 1996.
As a result of the announced cancellation of the labor agreements, the
Company suffered several work stoppages and other job actions which adversely
affected productivity at the Haifa Facility during October and November 1996,
including a period of temporary plant shut-down. On December 3, 1996 the plant
was shut down until March 10, 1997 when a new SCA providing for certain wage
freezes and reductions in benefits was signed for the three year period ending
December 31, 1999. Subsequent to March 10, 1997, the Haifa Facility re-opened
and gradually began production. By the end of May 1997 and subsequent thereto,
the Haifa Facility was generally operating at approximately full capacity;
however, there have been several periods of operations at less than full
capacity due to the need for increased maintenance for certain equipment
resulting from the lengthy period of shut-down.
The Company's financial results subsequent to the commencement of the
Haifa Labor Dispute have been adversely affected (particularly in the fourth
quarter of 1996 and the first quarter of 1997) as a result of several factors,
including: (i) the increased cost of production resulting from reduced
manufacturing during the periods which affected the fixed charge component of
cost of sales; (ii) the cost of raw materials destroyed in the production
process during work stoppages and job actions; (iii) lower gross margins due to
inventory shortages which required purchases from third parties at substantially
increased costs compared to the Company's costs; and (iv) increased general and
administrative expenses arising from higher security and other costs. These
adverse impacts were partially offset by lower labor costs during the Haifa
Labor Dispute.
Management believes that the new SCA will result in substantial cost
savings for the Company compared to the costs it would otherwise have incurred
during the next few years had the Company merely renewed the terms of the prior
SCAs and continued the pattern of increased costs included in recent SCAs.
Further, management believes that the aggregate amount of such cost savings over
the next few years will substantially exceed the incremental costs experienced
during the period of the Haifa Labor Dispute. Such savings commenced during the
second quarter of 1997.
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 - 25
55
CONDENSED FINANCIAL INFORMATION OF REGISTRANT SCHEDULE I
TRANS-RESOURCES, INC.
BALANCE SHEETS
December 31,
--------------------------
1996 1997
--------- ---------
ASSETS (in thousands)
CURRENT ASSETS:
Cash and cash equivalents ................................. $ 20,261 $ 12,924
Receivables and other assets .............................. 8,925 8,854
Prepaid expenses .......................................... 466 2,741
--------- ---------
Total Current Assets .................................. 29,652 24,519
INVESTMENTS IN SUBSIDIARIES ................................. 91,363 93,363
DUE FROM SUBSIDIARIES - net ................................. 5,699 4,894
OTHER ASSETS ................................................ 26,650 28,393
--------- ---------
Total ................................................. $ 153,364 $ 151,169
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES -
Accrued expenses and other current liabilities ......... $ 9,899 $ 7,203
--------- ---------
LONG-TERM DEBT - net:
Senior indebtedness, notes payable and other obligations -- 3,000
Senior subordinated debt - net ......................... 114,175 114,288
--------- ---------
Long-Term Debt - net (Note) ........................ 114,175 117,288
--------- ---------
OTHER LIABILITIES ........................................ 3,036 3,071
--------- ---------
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 ...................................... 9,345 6,203
Cumulative translation adjustment ...................... (367) (67)
Unrealized gain on marketable securities ............... 634 829
--------- ---------
Total Stockholder's Equity ......................... 26,254 23,607
--------- ---------
Total ......................................... $ 153,364 $ 151,169
========= =========
- ---------------------
Note - The aggregate maturities of long-term debt during the next
five years, after giving effect to the Refinancing of the 11 7/8% Notes
referred to in Note G of Notes to Consolidated Financial Statements is
approximately as follows: 1998-$0; 1999-$0; 2000-$1,000,000;
2001-$1,000,000 and 2002 - $1,000,000.
S - 1
56
CONDENSED FINANCIAL INFORMATION OF REGISTRANT SCHEDULE I
(continued)
TRANS-RESOURCES, INC.
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1995, 1996 and 1997
1995 1996 1997
---- ---- ----
(in thousands)
REVENUES - EQUITY IN NET
EARNING OF SUBSIDIARIES:
Dividends received from subsidiaries . $ 8,609 $ 76,556 $ 13,400
Undistributed (dividends in excess of)
earnings of subsidiaries .......... 7,021 (55,685) 1,693
-------- -------- --------
Total ................................ 15,630 20,871 15,093
COSTS AND EXPENSES ..................... (4,148) (4,559) (6,142)
INTEREST EXPENSE ....................... (22,250) (15,568) (14,324)
INTEREST AND OTHER INCOME - Net ........ 1,868 2,024 3,666
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM ................... (8,900) 2,768 (1,707)
INCOME TAX BENEFIT ..................... 2,042 8,425 3,151
-------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (6,858) 11,193 1,444
EXTRAORDINARY ITEM - Loss on repurchase
of debt (no income tax benefit) ...... (103) (553) --
-------- -------- --------
NET INCOME (LOSS) ...................... $ (6,961) $ 10,640 $ 1,444
======== ======== ========
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57
CONDENSED FINANCIAL INFORMATION OF REGISTRANT SCHEDULE I
(concluded)
TRANS-RESOURCES, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1995, 1996 and 1997
1995 1996 1997
---- ---- ----
(in thousands)
OPERATING ACTIVITIES AND WORKING
CAPITAL MANAGEMENT:
Operations:
Net income (loss) .............................. $ (6,961) $ 10,640 $ 1,444
Items not requiring (providing) cash:
Unremitted earnings of subsidiaries .......... (7,021) 55,685 (1,693)
Depreciation and amortization ................ 1,147 478 1,363
Increase in other liabilities ................ 31 33 35
Deferred taxes and other - net ............... (1,064) (4,314) (1,148)
--------- -------- --------
Total .......................................... (13,868) 62,522 1
Working capital management:
Receivables and other current assets ......... 6,115 (546) (312)
Prepaid expenses ............................. (251) (175) (2,275)
Accrued expenses and other current liabilities (4,118) (1,066) (2,696)
--------- -------- --------
Cash provided by (used in) operations and
working capital management ................ (12,122) 60,735 (5,282)
--------- -------- --------
INVESTMENT ACTIVITIES:
Additions to property, plant and equipment ....... (3) (21) (29)
Sales of marketable securities and short-term
investments, including in 1995 liquidation
of CD's securing a bank loan ................... 132,436 1,987 8,035
Purchases of marketable securities and short-
term investments ............................... (4,371) (9,354) (7,652)
Other - net ...................................... 7,207 6,213 (823)
--------- -------- --------
Cash provided by (used in) investment activities . 135,269 (1,175) (469)
--------- -------- --------
FINANCING ACTIVITIES:
Increase in long-term debt ....................... -- -- 3,000
Repurchases, payments and current maturities of
long-term debt ................................ (113,250) (51,000) --
Dividends to stockholders ........................ (1,707) (6,059) (4,586)
--------- -------- --------
Cash provided by (used in) financing activities .. (114,957) (57,059) (1,586)
--------- -------- --------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ................................. 8,190 2,501 (7,337)
CASH AND CASH EQUIVALENTS:
Beginning of year ................................ 9,570 17,760 20,261
--------- -------- --------
End of year ...................................... $ 17,760 $ 20,261 $ 12,924
========= ======== ========
Interest paid ...................................... $ 23,289 $ 16,446 $ 13,666
========= ======== ========
Income taxes paid .................................. $ 3,255 $ 2,268 $ 3,339
========= ======== ========
S - 3
58
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 Regions Bank
(formerly First Alabama Bank), as Trustee ("Regions Bank"), relating to the
11 7/8% Senior Subordinated Notes due 2002 (the "11 7/8% Notes"), 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. *
4.2 Form of 11 7/8% Senior Subordinated Notes due 2002, Series A and Series B
(contained in Exhibit 4.1 as Exhibit A and B thereto, respectively) *
4.3 First Supplemental Indenture, dated as of February 27, 1998, between the
Company and Regions Bank, relating to the 11 7/8% Notes. E-5
4.4 Indenture, dated as of March 16, 1998, between the Company and State Street
Bank and Trust Company ("State Street"), as Trustee, relating to the 10 3/4%
Senior Notes due 2008 (the "10 3/4% Notes"). E-6
E - 1
59
Exhibit Description Page No.
------- ----------- --------
4.5 Form of 10 3/4% Senior Notes due 2008, Series A and Series B (contained in
Exhibit 4.4 as Exhibit A and B thereto, respectively).
4.6 Indenture, dated as of March 16, 1998, between the Company and State Street,
as Trustee, relating to the 12% Senior Discount Notes due 2008 (the "12%
Notes"). E-7
4.7 Form of 12% Senior Discount Notes due 2008, Series A and Series B (contained
in Exhibit 4.6 as Exhibit A and B thereto, respectively).
4.8 Exchange and Registration Rights Agreement, dated March 16, 1998, among the
Company, Chase Securities Inc. ("CSI") and Donaldson Lufkin & Jenrette
Securities Corporation ("DLJ"), relating to the 10 3/4% Notes. E-8
4.9 Exchange and Registration Rights Agreement, dated March 16, 1998, among the
Company, CSI and DLJ, relating to the 12% Notes. E-9
4.10 Credit Agreement, dated as of November 3, 1995 and Amended and Restated as of
July 31, 1997 (the "Cedar Credit Agreement"), among Cedar Chemical
Corporation, the Lenders listed on the signature pages thereof and the Chase
Manhattan Bank, as Administrative Agent (exhibits and schedules omitted),
filed as Exhibit 10.16 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1997, which is incorporated herein by
reference. *
4.11 Amendment No. 1, dated as of February 26, 1998, to the Cedar Credit
Agreement. E-10
Certain instruments which define the rights of holders of long-term debt of
the Company and its consolidated subsidiaries have not been filed as Exhibits
to this Report since the total amount of securities authorized under any such
instrument does not exceed 10% of the total assets of the Company and its
subsidiaries on a consolidated basis, as of December 31, 1997. For a
description of such indebtedness see Note G of Notes to Consolidated
Financial Statements. The Company agrees to furnish copies of such
instruments to the Securities and Exchange Commission upon its request.
10.1 Potash Sales Agreement between Haifa Chemicals Ltd. and Dead Sea Works
Limited, dated as of January 1, 1990 concerning the supply of potash. E-11
10.2 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 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. *
10.3 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. *
E - 2
60
Exhibit Description Page No.
------- ----------- --------
10.4 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. *
10.5 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. *
10.6 Lease between Haifa Chemicals 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. *
10.7 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. *
10.8 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) *
10.9 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) *
10.10 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) *
10.11 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. *
10.12 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) *
10.13 Split Dollar Agreement and Collateral Assignment, made as of December 31,
1996, between the Company and the trustees of the Arie Genger 1995 Life
Insurance Trust. (1) E-12
E - 3
61
Exhibit Description Page No.
------- ----------- --------
10.14 Lease contract between Haifa Chemicals South, Ltd. and Israel Land
Administration Authority, dated as of March 6, 1995, concerning real property. E-13
10.15 Potash Sales Agreement between Haifa Chemicals South, Ltd. and Dead Sea
Works Limited, dated April 24, 1995, concerning the supply of potash. E-14
21 Subsidiaries of the Company. E-15
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-16
27 Financial Data Schedule. E-17
- -------------------
* Incorporated by reference
(1) Management contract or compensatory plan or arrangement
E - 4