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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[Mark One]
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Transition Period From ________ To ________
Commission File Number 33-11634
TRANS-RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-2729497
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
9 West 57th Street, New York, New York 10019
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 888-3044
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 / /
At May 15, 1998, there were outstanding 3,000 shares of common stock, par value
of $.01 per share, all of which were owned by TPR Investment Associates, Inc., a
privately-held Delaware corporation.
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TRANS-RESOURCES, INC.
Form 10-Q Index
March 31, 1998
PART I
Page
Number
------
Item 1. - Financial Statements (Unaudited):
Consolidated Statements of Operations ......................... 3
Consolidated Balance Sheets ................................... 4
Consolidated Statement of Stockholder's Equity ................ 5
Consolidated Statements of Cash Flows ......................... 6
Notes to Unaudited Consolidated Financial Statements .......... 7
Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations ......................................... 9
PART II
Item 1. - Legal Proceedings ............................................. 18
Item 6. - Exhibits and Reports on Form 8-K .............................. 19
Signatures .............................................................. 20
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PART I. FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
TRANS-RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Month Period
Ended March 31,
1998 1997
--------- --------
(000's)
REVENUES ........................................... $ 104,962 $ 83,532
COSTS AND EXPENSES:
Cost of goods sold ............................. 84,976 68,132
General and administrative ..................... 11,750 9,466
--------- --------
OPERATING INCOME ................................... 8,236 5,934
Interest expense ............................... (8,220) (7,204)
Interest and other income - net ................ 23,820 926
--------- --------
INCOME (LOSS) BEFORE INCOME TAXES,
EXTRAORDINARY ITEM AND
CHANGE IN ACCOUNTING PRINCIPLE ................. 23,836 (344)
--------- --------
INCOME TAX PROVISION (BENEFIT):
Current ........................................ 524 396
Deferred ....................................... 112 (15)
--------- --------
636 381
--------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM AND CHANGE IN ACCOUNTING PRINCIPLE ........ 23,200 (725)
EXTRAORDINARY ITEM - Loss on repurchase of
debt (no income tax benefit) ................... (10,940) --
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE,
net of income tax benefit of $80,000 ........... (1,253) --
--------- --------
NET INCOME (LOSS) .................................. $ 11,007 $ (725)
========= ========
See notes to unaudited consolidated financial statements.
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TRANS-RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1998 1997
--------- ---------
(Unaudited)
(000's)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .............................. $ 25,192 $ 19,757
Accounts receivable .................................... 94,839 82,551
Inventories:
Finished goods ....................................... 47,403 46,764
Raw materials ........................................ 18,473 13,362
Other current assets ................................... 74,808 33,578
Prepaid expenses ....................................... 17,404 16,122
--------- ---------
Total Current Assets ................................. 278,119 212,134
PROPERTY, PLANT AND EQUIPMENT - NET ........................ 210,422 207,487
OTHER ASSETS ............................................... 53,711 42,395
--------- ---------
Total ................................................ $ 542,252 $ 462,016
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt ................... $ 16,185 $ 13,080
Short-term debt ........................................ 44,073 36,580
Accounts payable ....................................... 68,544 58,662
Accrued expenses and other current liabilities ......... 23,278 30,215
--------- ---------
Total Current Liabilities ............................ 152,080 138,537
--------- ---------
LONG-TERM DEBT - NET:
Senior indebtedness, notes payable and other obligations 331,342 154,726
Senior subordinated indebtedness - net ................. 4,882 114,288
--------- ---------
Long-Term Debt - net ................................. 336,224 269,014
--------- ---------
OTHER LIABILITIES .......................................... 31,245 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 ...................................... 5,554 6,203
Cumulative translation adjustment ...................... (62) (67)
Unrealized gains (losses) on marketable securities ..... 569 829
--------- ---------
Total Stockholder's Equity ........................... 22,703 23,607
--------- ---------
Total ................................................ $ 542,252 $ 462,016
========= =========
See notes to unaudited consolidated financial statements.
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TRANS-RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
Three Month Period Ended March 31, 1998
(Unaudited)
Additional Cumulative Unrealized
Preferred Common Paid-In Retained Translation Gains (Losses) Comprehensive
Stock Stock Capital Earnings Adjustment on Securities Total Income
----- ------ ------ -------- ---------- ------------- ----- ------
(000's)
BALANCE,
January 1, 1998 ... $7,960 $ $8,682 $ 6,203 $ (67) $ 829 $ 23,607
Net income ............. 11,007 11,007 $ 11,007
Dividends paid:
Common stock,
including non-cash
dividend of $750,000 (11,443) (11,443)
Preferred stock ...... (213) (213)
Net change during
period ............ 5 (260) (255) (255)
------ ------ ------ -------- -------- ----- -------- --------
BALANCE,
March 31, 1998 .... $7,960 $ $8,682 $ 5,554 $ (62) $ 569 $ 22,703 $ 10,752
====== ====== ====== ======== ======== ===== ======== ========
See notes to unaudited consolidated financial statements.
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TRANS-RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Month Period
Ended March 31,
-------------------------
1998 1997
--------- --------
(000's)
OPERATING ACTIVITIES AND WORKING CAPITAL
MANAGEMENT:
Operations:
Net income (loss) ................................................. $ 11,007 $ (725)
Items not requiring (providing) cash:
Depreciation and amortization ................................... 5,903 4,859
Gain on Laser/ESC share exchange ................................ (22,946) --
Extraordinary item - loss on repurchase of debt ................. 10,940 --
Cumulative effect of change in accounting
principle .................................................... 1,253 --
Deferred taxes and other - net .................................. 366 (210)
--------- --------
Total ........................................................ 6,523 3,924
Working capital management:
Accounts receivable and other current assets .................... (22,535) (17,868)
Inventories ..................................................... (5,750) 9,532
Prepaid expenses ................................................ (1,282) (5,893)
Accounts payable ................................................ 9,882 12,490
Accrued expenses and other current liabilities .................. (7,312) (5,667)
--------- --------
Cash provided (used) by operations and working
capital management ........................................ (20,474) (3,482)
--------- --------
INVESTMENT ACTIVITIES:
Additions to property, plant and equipment ........................ (8,229) (3,857)
Purchases of marketable securities and other short-term investments (4,285) (4,898)
Sales of marketable securities and other short-term investments ... 5,346 3,456
Other - net ....................................................... (18,804) (1,264)
--------- --------
Cash provided (used) by investment activities ................ (25,972) (6,563)
--------- --------
FINANCING ACTIVITIES:
Increase (decrease) in short-term debt ............................ 7,493 (1,775)
Increase in long-term debt ........................................ 190,697 6,500
Repurchases, payments and current maturities of long-term debt .... (135,403) (3,697)
Dividends to stockholder .......................................... (10,906) (2,395)
--------- --------
Cash provided (used) by financing activities ................. 51,881 (1,367)
--------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...................... 5,435 (11,412)
CASH AND CASH EQUIVALENTS:
Beginning of period ............................................... 19,757 29,112
--------- --------
End of period ..................................................... $ 25,192 $ 17,700
========= ========
See notes to unaudited consolidated financial statements.
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TRANS-RESOURCES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation and Other Matters
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); Na-Churs Plant Food Company; and Haifa Chemicals
Ltd. ("HCL") and HCL's wholly-owned subsidiary, Haifa Chemicals South, Ltd. TRI
is a wholly-owned subsidiary of TPR Investment Associates, Inc. As used herein,
the term "the Company" means TRI together with its direct and indirect
subsidiaries. Certain prior period amounts have been reclassified to conform to
the manner of presentation in the current period.
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.
See Item 2 below - "Management's Discussion and Analysis of Financial
Condition and Results of Operations" ("MD&A") for certain information regarding
(i) a labor dispute at HCL (the "HCL Labor Dispute") and (ii) the Company's
investment in Laser Industries Limited. Also see "MD&A - Refinancing" for
information regarding the Company's March 1998 refinancing of its 11 7/8% Senior
Subordinated Notes and Item 1 of Part II for information regarding certain legal
proceedings.
Effective January 1, 1998, the Company changed its method of accounting
for start-up costs incurred relating to the start-up of newly constructed
manufacturing facilities to conform with AICPA Statement of Position No. 98-5
("SOP 98-5"), "Reporting on the Costs of Start-Up Activities", which requires
that such costs be currently charged to operations. SOP 98-5 encourages
companies that previously deferred such costs to write-off the unamortized
amounts thereof. As of January 1, 1998, the Company has reported the cumulative
effect of the change in the method of accounting for start-up costs in the
Consolidated Statement of Operations for the three month period ended March 31,
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1998. The effect of adopting SOP 98-5 in 1998 was the write-off of unamortized
start-up costs of $1,333,000 and a reduction in net income for the cumulative
effect of the change in accounting principle of $1,253,000 (net of income
taxes).
In the opinion of management, the unaudited consolidated financial
statements for the three month periods ended March 31, 1998 and 1997,
respectively, include all adjustments, which comprise only normal recurring
accruals, necessary for a fair presentation of the results for such periods. The
results of operations for the three month period ended March 31, 1998 are not
necessarily indicative of results that may be expected for any other interim
period or the full fiscal year. It is suggested that these unaudited
consolidated financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1997 (the "Form 10-K") which has been filed
with the Securities and Exchange Commission.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of revenues, certain items
appearing in the unaudited consolidated financial statements of the Company.
Percentage
of Revenues
---------------------
Three Month
Period Ended
March 31,
---------------------
1998 1997
------ ------
Revenues:
Specialty Plant Nutrients ........................... 59.4% 55.3%
Industrial Chemicals ................................ 25.1 29.7
Organic Chemicals ................................... 15.5 15.0
----- -----
Total Revenues ...................................... 100.0% 100.0%
Costs and expenses:
Cost of goods sold .................................. 81.0 81.6
General and administrative .......................... 11.2 11.3
----- -----
Operating income ........................................ 7.8 7.1
Interest expense .................................... (7.8) (8.6)
Interest and other income - net ..................... 22.7 1.1
----- -----
Income (loss) before income taxes, extraordinary
item and change in accounting principle ............. 22.7 (.4)
Income tax provision .................................... .6 .5
----- -----
Income (loss) before extraordinary item and
change in accounting principle ...................... 22.1 (.9)
Extraordinary item ...................................... (10.4) --
Cumulative effect of change in accounting principle - net (1.2) --
----- -----
Net income (loss) ....................................... 10.5% (.9)%
===== =====
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements herein (and in the Form 10-K) 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 herein (and in the Form 10-K) are forward-looking
statements, including, but are 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 HCL's new Specific Collective
Agreement ("SCA"), future environmental costs and capital expenditures); access
to lending sources and Israeli Government entitlements; and outcomes of legal
proceedings. Such forward-looking statements involve unknown and uncertain
risks, uncertainties and other factors which may cause the
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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 (including the
terms of any settlements thereof) to which the Company is a party (see Item 3 -
"Legal Proceedings" in the Form 10-K and Item 1 - "Legal Proceedings" of Part II
of this Form 10-Q); and other factors referenced in this Form 10-Q (or in the
Company's Form 10-K).
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.
HCL LABOR DISPUTE
During the fourth quarter of 1996 and during 1997, primarily in the first
half of such year, 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 by an 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.
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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 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 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, due to the need for
increased maintenance for certain equipment resulting from the lengthy period of
shut-down, there have been several periods of operations at less than full
capacity and production efficiencies were also adversely impacted.
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 years subsequent to the
settlement of the HCL Labor Dispute will substantially exceed the incremental
costs experienced during the HCL Labor Dispute.
Following the settlement of the HCL Labor Dispute, HCL achieved the
following objectives: (i) a reduction in absenteeism; (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; (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 an approximate 18% reduction in the number of
its employees, and a 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 compared to the
estimated costs the Company would otherwise have incurred. See "Special Note
Regarding Forward Looking Statements" above.
INVESTMENT IN LASER INDUSTRIES LIMITED
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 received pursuant to the
combination is 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
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caption "Other assets" in the accompanying December 31, 1997 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 recognized a pre-tax gain of approximately $22,900,000 during the
first quarter of 1998, which gain is included in the caption "Interest and other
income-net" in the accompanying Consolidated Statement of Operations for the
three month period ended March 31, 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.
RESULTS OF OPERATIONS
Three month period ended March 31, 1998 compared with the three month
period ended March 31, 1997:
Revenues increased by 25.7% to $104,962,000 in 1998 from $83,532,000 in
1997, an increase of $21,430,000. The increase resulted from increased sales of
Specialty Plant Nutrients and Industrial Chemicals of approximately $17,600,000
principally as a result of the HCL strike in the 1997 period and an increase in
sales of Organic Chemicals of approximately $3,800,000. See "HCL Labor Dispute"
above for information regarding a labor dispute at HCL in 1997.
Cost of goods sold as a percentage of revenues decreased to 81.0% in 1998
compared with 81.6% in 1997. Gross profit was $19,986,000 in 1998, or 19.0% of
revenues, compared with $15,400,000 or 18.4% of revenues in 1997, an increase of
$4,586,000. The primary factors resulting in the increased gross profit in 1998
were (i) increased quantities sold as compared to the 1997 period resulting from
the adverse effect of the HCL Labor Dispute (net of HCL's claim for
reimbursement from an Israeli industrial association for partial contribution
towards the costs suffered during the period of the labor disruption) and (ii)
lower raw material and energy costs and certain selling price increases. These
increases were partially offset by less favorable currency exchange rates in the
1998 period and by certain increased costs relating to production interruptions
and inefficiencies at HCL in the 1998 period resulting from (i) certain
unscheduled maintenance to equipment required due to the lengthy period of
shut-down during the HCL Labor Dispute and (ii) the impact of power
interruptions associated with the installation of a new electrical co-generation
facility at HCL's plant. General and administrative expense did not materially
differ as a percentage of revenues during the periods ($11,750,000 in 1998, or
11.2% of revenues, compared with $9,466,000 in 1997, or 11.3% of revenues).
As a result of the matters described above, the Company's operating income
increased by $2,302,000 to $8,236,000 in 1998 as compared with $5,934,000 in
1997.
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Interest expense increased by $1,016,000 to $8,220,000 in 1998 compared
with $7,204,000 in 1997 primarily as a result of (i) the issuance by the Company
of the 10 3/4% Senior Notes and 12% Senior Discount Notes, partially offset by
the Company's repurchase of most of its 11 7/8% Senior Subordinated Notes on
March 16, 1998 (see "Refinancing" below) and (ii) certain increased borrowings
relating to working capital purposes, including the Company's February 1998
purchase of approximately 42% of the equity of Lego Irrigation, Ltd. ("Lego"),
an Israeli developer, manufacturer and marketer of drip irrigation systems.
Interest and other income - net increased in 1998 by $22,894,000, principally as
the result of the gain related to the Laser/ESC combination described above (see
"Investment in Laser Industries Limited").
As a result of the above factors, income before income taxes,
extraordinary item and cumulative effect of change in accounting principle
increased by $24,180,000 in 1998. 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 items which are not taxable.
In the 1998 period the Company acquired $110,090,000 principal amount of
its 11 7/8% Senior Subordinated Notes, which resulted in a loss of $10,940,000
(see "Refinancing" below). Such loss (which has no tax benefit) is classified as
an extraordinary item in the accompanying Consolidated Statement of Operations.
No such debt was acquired in the 1997 period.
In the 1998 period the Company changed its method of accounting for
start-up costs incurred relating to the start-up of newly constructed
manufacturing facilities to conform with SOP 98-5. This change in accounting
method resulted in a net charge of $1,253,000.
CAPITAL RESOURCES AND LIQUIDITY
The Company's consolidated working capital at March 31, 1998 and December
31, 1997 was $126,039,000 and $73,597,000, respectively.
Operations for the three month periods ended March 31, 1998 and 1997,
after adding back non-cash items, provided cash of approximately $6,500,000 and
$3,900,000, respectively. During such periods other changes in working capital
used cash of approximately $27,000,000 and $7,400,000, respectively, resulting
in cash being used by operating activities and working capital management of
approximately $20,500,000 and $3,500,000, respectively.
Investment activities during the three month periods ended March 31, 1998
and 1997 used cash of approximately $26,000,000 and $6,600,000, respectively.
These amounts include: (i) additions to property in 1998 and 1997 of
approximately $8,200,000 and $3,900,000, respectively; (ii) purchases of
marketable securities and other short-term investments of approximately
$4,300,000 and $4,900,000, respectively; (iii) sales of marketable securities
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and other short-term investments of approximately $5,300,000 and $3,500,000,
respectively; and (iv) other items using cash of $18,800,000 (including the
purchase of the Company's interest in Lego) and $1,300,000, respectively. The
property additions in the 1998 period relate primarily to the Company's
expansion of its potassium nitrate and food grade phosphates capacity in the
United States and Israel and the construction of a plant in the United States to
produce monoammonium phosphate ("MAP") and monopotassium phosphate ("MKP").
Financing activities during the three month periods ended March 31, 1998
and 1997 provided (used) cash of approximately $51,900,000 and ($1,400,000),
respectively. The 1998 amount relates primarily to the Refinancing described
below.
As of March 31, 1998, the Company had outstanding long-term debt
(excluding current maturities) of $336,224,000. The Company's primary sources of
liquidity are cash flows generated from operations and its unused credit lines.
REFINANCING
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 at maturity 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 and consent solicitation) approximately
$110,000,000 principal amount of the Company's 11 7/8% Senior Subordinated Notes
(the "Refinancing"), and, combined with the write-off of certain unamortized
issuance costs associated with the 11 7/8% Senior Subordinated Notes, resulted
in an extraordinary charge for the early extinguishment of debt of approximately
$10,900,000 which is classified as an extraordinary item in the accompanying
Consolidated Statement of Operations.
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
accretes and compounds semi-annually but is not 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 and general
corporate purposes, including the repayment of debt and possible future
acquisitions and capital expenditures. During March 1998 the Company repaid
$13,900,000 of borrowings under a
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Loan Agreement with a bank and reduced the amounts outstanding under certain
short-term loans. See Note G of Notes to Consolidated Financial Statements
included in the Company's Form 10-K.
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 included in the Company's
Form 10-K. During the year ended 1997, the Company spent approximately
$10,800,000 relating 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. 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 an
aggregate of approximately $63,000,000 during 1998 and 1999. During the three
month period ended March 31, 1998 the Company incurred capital expenditures of
approximately $8,200,000, including approximately $5,400,000 relating to these
projects. Ongoing maintenance capital expenditures are expected to be
approximately $13,000,000 per year.
The Company's primary sources of liquidity are cash flows from operations
and borrowings under the credit facilities of the Company and its subsidiaries.
As of March 31, 1998, the Company and its subsidiaries had approximately
$73,000,000 of borrowing availability, consisting of $40,000,000 of borrowing
availability of the Company and $33,000,000 of total availability at the
Company's subsidiaries. HCL intends to enter into a new $85,000,000 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 scheduled interest payments. However, the
Company's capital requirements may change, particularly if the Company completes
any material acquisitions. In addition, as described below, the Company has
commenced settlement negotiations in connection with the Bogalusa litigation.
See Item 1 of Part II - "Legal Proceedings" below. 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. See "Special Note
Regarding Forward Looking Statements" above.
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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
ended December 31, 1998 are estimated to be made outside of Israel in currencies
other than the U.S. dollar (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 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 three month periods ended March 31, 1998 and 1997, would
have decreased by approximately $1,200,000 and $3,500,000, 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.
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 and 1996 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%) and 6.9%,
respectively.
ENVIRONMENTAL MATTERS
See Item 1 - "Business - Environmental Matters" and Note O of Notes to
Consolidated Financial Statements included in the Company's Form 10-K for
information regarding environmental matters relating to the Company's various
facilities.
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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.
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"). 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 reporting disclosures. This
statement is effective for fiscal years beginning after December 15, 1997.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously disclosed in the Form 10-K, 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
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 included 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. The Company has commenced settlement discussions with
representatives of the Louisiana and Mississippi plaintiffs. There can be no
assurance that a settlement will be achieved, or, if a settlement is achieved,
that the amount of such settlement would not be material.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter for which this report
is filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRANS-RESOURCES, INC.
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(Registrant)
Date: May 15, 1998 Lester W. Youner
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Vice President, Treasurer and
Chief Financial Officer
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TRANS-RESOURCES, INC.
INDEX TO EXHIBITS
Exhibit Description Page No.
- ------- ----------- --------
27 Financial Data Schedule. 22
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