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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, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 33-11634
TRANS-RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-2729497
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
9 West 57th Street, New York, NY 10019
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 888-3044
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 29, 1999
----- -----------------------------
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.................................................................................. 12
Item 3. Legal Proceedings........................................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders......................................... 14
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters..................................................................... 15
Item 6. Selected Financial Data..................................................................... 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................................... 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................. 24
Item 8. Financial Statements and Supplementary Data................................................. 24
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................................................... 24
PART III
Item 10. Directors and Executive Officers of the Registrant.......................................... 25
Item 11. Executive Compensation...................................................................... 28
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................. 30
Item 13. Certain Relationships and Related Transactions.............................................. 30
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.............................. 31
Signatures ............................................................................................ 32
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PART I
ITEM 1. Business
Trans-Resources, Inc., a privately-owned Delaware corporation ("TRI")
operating through its independently managed and financed subsidiaries, is a
leading global developer, producer and marketer of specialty chemical products.
As used herein, the term "the Company" means TRI, together with its 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 multinational
chemical companies. The Company sells its products through an established global
sales, marketing and distribution network to customers in approximately 95
countries. The Company groups its revenues into three general product
categories. These product groups are: Specialty Plant Nutrients, Industrial
Chemicals and Organic Chemicals, which during 1998 contributed approximately
57.3%, 29.4% and 13.3%, respectively, of the Company's total revenues. Of the
Company's total revenues for the year ended December 31, 1998, approximately 34%
and 40% 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");
Na-Churs Plant Food Company ("Na-Churs"), a Delaware corporation; and Plant
Products Co. Ltd. ("Plant Products"), an Ontario corporation. TRI was
incorporated in Delaware in 1971 under the name Trans-Pacific Resources, Inc.
During 1998, Company subsidiaries completed several small acquisitions.
Effective January 1, 1998, the Company acquired a Spanish company engaged in the
manufacturing and distribution of specialty plant nutrients; effective May 1,
1998, the Company acquired EMV Kft. ("EMV"), a Hungarian business engaged in the
manufacturing and marketing of organic chemicals; effective October 30, 1998,
the Company acquired Plant Products, headquartered in Ontario, Canada, which
manufactures and markets specialty plant nutrients for commercial horticulture,
specialty high value crops and retail markets; and effective December 18, 1998,
the Company acquired Alpine Plant Foods, Inc. (including its Canadian
subsidiary; together "Alpine"), which manufactures and distributes high purity
liquid fertilizers.
Each of these acquisitions have been accounted for using the purchase
method of accounting. The aggregate purchase price paid for these acquired
businesses was approximately $24.6 million and resulted in approximately $11
million in goodwill, with such goodwill generally being amortized over a 20 year
period. These acquisitions did not have a significant effect on the Company's
consolidated operations subsequent to their respective acquisition dates during
1998. The aggregate consolidated revenues (unaudited) for these companies for
the year ended December 31, 1998 (or their most recent fiscal year, as
applicable) amounted to approximately $58 million.
In addition, effective February 4, 1998, a subsidiary of HCL purchased
approximately a 42% equity interest in Lego Irrigation, Ltd. ("Lego"), an
Israeli developer, manufacturer and marketer of drip irrigation systems, for a
purchase price of approximately $11 million. On March 9, 1999, as contemplated
by the terms of the initial purchase of the Lego shares, the subsidiary of HCL
purchased, pursuant to an option, an additional 34% equity interest in Lego for
approximately $10 million.
For information regarding: (1) the conditional settlement of litigation
(the "Bogalusa Litigation") arising out of an October 23, 1995 chemical release
from a tank car at a Bogalusa, Louisiana plant of a customer of Vicksburg and
the resulting $36.2 million charge included in the accompanying December 31,
1998 Consolidated Statement of
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Operations, see Item 3 - "Legal Proceedings;" and (2) the Company's unrealized
1998 loss relating to its investment in the shares of ESC Medical Systems Ltd.
("ESC") included in the accompanying December 31, 1998 Consolidated Balance
Sheet, see Part II - Item 7 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations" - "Investment in Laser/ESC".
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 (as hereinafter defined)
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;
Year 2000 matters; outcomes of legal proceedings and statements identified or
qualified by words such as "likely," "will," "suggests," "may," "would,"
"could," "should," "expects," "anticipates," "estimates," "plans," "projects,"
"believes," or similar expressions (and variants of such words or expressions).
Such forward-looking statements involve known and unknown 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 government 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 and sustain
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 and
the conditional settlement of the Bogalusa Litigation, including, without
limitation, satisfaction by the parties of the terms and numerous conditions of
such conditional settlement (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 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.
PRODUCTS
The Company develops, produces and markets a range of specialty chemical
products for a variety of agricultural and industrial end-uses. The Company has
grouped its revenues into three general product categories that reflect the
different product uses. 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 7% for the industry over the past five
years. With current annual production capacity of approximately 755,000 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 780,000 tons by the beginning of the year 2000. 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.
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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 the largest U.S. producer and marketer of high purity liquid
fertilizers, which are sold under Na-Churs Alpine Solutions brand names, and are
used as a starter nutrient in growing corn and soybeans, in foliar applications
and for fertigation in growing high-value crops such as fruits, vegetables and
flowers. The Company, through Plant Products, is the leading distributor of
various inputs to the horticulture industry in Canada including water soluble
fertilizers, agrochemicals and insects for biological control. Specialty Plant
Nutrients revenues were approximately $242.7 million in 1998.
The following table sets forth the Company's principal Specialty Plant
Nutrients products, markets and applications:
Principal Products Primary Markets Applications
- ------------------------------------- ------------------------------------ ---------------------------------
Potassium Nitrate - Fruits and vegetables, - Fertigation, foliar
(K-Power) flowers, cotton and tobacco sprays and soil applications
Polyfeed, Plant-Prod - Horticulture - Fertigation and foliar
sprays
Multi-MAP - Horticulture - Fertigation and foliar
sprays
Multi-MKP - Horticulture - Fertigation and foliar
sprays
Magnisal - Vegetables, citrus, - Fertigation and foliar
tropical fruits and flowers sprays
Multicote - Vegetables, turf, fruit - Time release nutrients
trees and potted plants
Na-Churs Alpine Solutions - Corn, soybeans, wheat and - Furrow applied
high-value crops starter, foliar 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 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 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 ingredient.
Additional Industrial Chemicals produced by the Company include
phosphoric acid, with approximately 90,000 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"), the active 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
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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 $124.7
million in 1998.
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, - Oxidation and source for
Nitrate metal, petrochemical and heat potassium
treatment industries
Potassium Nitrate USP Grade - Pharmaceutical and food - Ingredient in certain
industries toothpaste
Potassium Carbonate (K-Carb) - Glass, detergents and - Oxidation and cleansing
fertilizer industries
Phosphoric Acid - Industrial chemical - Metal treatment,
manufacturing, food and fertilizer industrial cleaning and
industries fermentation
Sodium Tripolyphosphate Food - Food processing companies - Meat and seafood
Grade processing
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 ingredient
Organic Chemicals. The Company's Organic Chemicals consist primarily of
a variety of herbicides and chemical intermediaries requiring expertise in
complex organic synthesis. The Company's Organic Chemicals products include
propanil, the world's leading rice herbicide, and diuron, a leading herbicide
used on a variety of crops as well as 3,4 -Dichloroanaline ("DCA"), the
principal raw material for the production of propanil and diuron. The Company is
the sole U.S. producer, and the largest integrated producer of propanil
worldwide, and is the sole producer of DCA and diuron in the U.S. Other Organic
Chemicals include Butoxone, a leading peanut and soybean herbicide; and
ethephon, a cotton, fruit and vegetable growth regulator. The Company
significantly increased its ability to supply a variety of crop protection
chemicals throughout the world as a result of the purchase of EMV. EMV's
products are molinate, diuron, acetochlor, EPTC, alachlor, fluometuron and a
number of smaller volume products used on a variety of crops. The Company also
produces and sells trishydroxyaminomethane ("THAM"), a proprietary buffering
agent used in pharmaceutical applications, including contact lens cleaning
solutions. In addition, the Company utilizes its manufacturing expertise and
capacity to serve as a contract manufacturer of organic chemicals for other
multinational chemical companies. The Company, through Riceco, LLC ("Riceco"),
markets propanil, combination rice herbicides and other rice-related products
(other than fertilizers) on a worldwide basis (see "Riceco" below). Organic
Chemicals revenues were approximately $56.2 million in 1998.
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The following table sets forth the Company's principal Organic Chemicals
products, markets and applications:
Principal Products Primary Markets Applications
- ---------------------------------------- --------------------------------------- -------------------------------
Propanil - Rice - Broad spectrum herbicide
3,4-Dichloroanaline - Propanil and diuron - Primary raw material
Butoxone - Peanuts and soybeans - Weed control
Diuron - Food crops, alfalfa and - Broad use herbicide
cotton
Ethephon - Cotton, fruits and vegetables - Plant growth regulator
EPTC - Corn and potatoes - Broad use herbicide
Fluometuron - Cotton - Herbicide
Acetochlor - Corn, orchards, coffee and - Broad use herbicide
soybeans
Alachlor - Corn, beans and soybeans - Broad use herbicide
Molinate - Rice - Residual herbicide
THAM - Pharmaceutical companies - Buffering agent
Contract Manufacturing - Numerous multinational - Various organic syntheses
companies
SALES AND MARKETING
The Company's sales and marketing network consists of a direct sales
force of approximately 165 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, Hungary, Mexico, South Africa, China, Japan,
Thailand, India, Canada 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, retail dealers,
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, 1998:
1996 1997 1998
----------------- ----------------- ----------------
Amount % Amount % Amount %
------ - ------ - ------ -
(Dollars in Millions)
Europe ................. $160 39% $148 39% $168 40%
United States .......... 145 35 128 34 145 34
Asia ................... 37 9 29 8 28 7
Canada and Latin America 24 6 22 6 33 8
Israel ................. 23 6 19 5 19 4
Australia .............. 6 1 6 2 8 2
Africa and other ....... 17 4 25 6 23 5
---- ---- ---- ---- ---- ----
Total .............. $412 100% $377 100% $424 100%
==== ==== ==== ==== ==== ====
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. 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 internationally. During
the year ended December 31, 1998, no customer accounted for more than 3% of
consolidated revenues and the Company's 10 largest customers accounted for less
than 15% of consolidated revenues.
RESEARCH AND DEVELOPMENT
For the years ended December 31, 1996, 1997 and 1998, the Company spent
approximately $2.7 million, $2.4 million and $2.7 million, respectively, on the
development and evaluation of process technologies, efficiencies and quality
control 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 1996 with the buyer
of the potash operations. Under such contract, the supplier has the right to
supply Vicksburg's remaining potash requirements if it can meet market prices
and specified quality standards. See Part II - Item 7 - "Management's Discussion
and Analysis of Financial Condition and Results of Operations" - "1996 Sale of
Potash Operations". The remainder of Vicksburg's potash requirements are
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.
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HCL (including HCSL) sources its potash exclusively from Dead Sea Works
Ltd. ("DSW") under two long-term contracts which expire on December 31, 1999 and
in 2005, and sources its phosphate rock solely from Rotem Amfert Negev Ltd.
("Rotem") according to the terms of a contract which expires in 2001. 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. The phosphate rock
contract provides for prices to be established quarterly, based on the average
price paid to Rotem by its non-affiliated customers during the preceding quarter
plus certain adjustments. 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 or Rotem could have an adverse impact on the Company's financial
performance. Ammonia is sourced from a U.S. supplier under a variable price two
year contract, renewable for additional two year periods and is available from a
number of alternative suppliers. Approximately 40% 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 and from Oil Refineries Ltd. ("ORL") according to the terms of a
contract which expired in 1998 and is currently being renegotiated. Such third
party also operates HCL's steam facility 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, 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. Other products follow a
similar route, i.e., synthesis and purification, followed by direct sales of
technical product or formulation into various packaged products or sale directly
into the market.
RICECO
During August, 1997, Cedar and a subsidiary of Westrade, Inc., a
privately-held Cayman Islands corporation ("Westrade"), formed 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. DuPont
de Nemours and Company ("DuPont") and 50% by the private investment group which
also owns 50% of Westrade. Westrade produces and markets various agricultural
chemicals.
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,
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but under specified conditions would be adjusted to 50% to each. Both members
contributed product registrations, labels and customer lists to Riceco and
subsequently each member provided an interim working capital loan of $1.25
million which was repaid in 1998. Under a long-term supply agreement, the
Company produces all of the propanil required by Riceco.
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, Plant-Prod, Multicote, Poni, K-Carb and Na-Churs Alpine
Solutions.
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 services and 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
The Company's principal operating assets are located in the United States
and Israel, the most significant of which are described below. In addition, the
Company has operating assets in Spain, France, Hungary and Canada.
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 in leased facilities.
HCL owns its machinery and equipment and leases the land for its Haifa,
Israel operations from 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.
8
11
EMPLOYEES
As of December 31, 1998, the Company employed approximately 1,500 people.
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 during 1997, primarily in the first
half of such year, the Company's operations were adversely impacted by 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"). See Part II - Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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.
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 through the early part of 1998, 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 has resulted 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. 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.
9
12
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 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,
the 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 the ADPCE believes may require remedial
action. In addition, the 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 $0.5 million and $1.0 million 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, 1998,
the Company has accrued an aggregate of $1.3 million 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. Cedar has agreed to settle its share of liability for such costs for
the sum of $10,000, payable upon entry of an Agreed Consent Decree.
HCL. As a result of the production of phosphoric acid, HCL generates acid
sludge and liquid acid effluents. In accordance with the Plan described below,
as of January 1, 1999 HCL is operating a new purifying plant, and disposes of
the neutralized sludge in a designated land site approved by the Ministry of
Environment (the "Ministry") for an initial experimental period of six months.
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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, which was effective
until September 30, 1998. The Ministry has approved a two-year extension for
this permit.
Both of the foregoing governmental actions contain restrictions on
quantities and concentrations, inspection, reporting duties and certain other
conditions.
During July, 1996 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 previously disposed of in the
Mediterranean Sea, by filtering and purifying it in a purifying plant, and the
disposal thereof at a land site to be approved by the Ministry. The overall time
schedule for the complete execution of the Plan is 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 $15.0 million 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. The complaint 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 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 new regulations for evaporation ponds and the Ministry's
requirements, HCSL has submitted an updated strategic plan for the treatment of
wastes, which was approved by the Ministry in December, 1998. In general, the
plan is based on (i) segregation of streams, (ii) recovery of products and water
and (iii) disposal of treated liquid waste to the Dead Sea. The overall time
schedule for the complete execution of the plan is through 2002. In accordance
with the strategic plan, the Ministry has recently approved the issuance to HCSL
of a three-year permit pursuant to the Law for Prevention of Sea Pollution
(Disposing of Wastes) of 1983 for the disposal of liquid waste to the Dead Sea.
The approval sets forth restrictions on concentrations, provides for inspection,
and includes reporting duties and certain other conditions.
On March 3, 1998, a criminal proceeding was initiated against HCL and its
then 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
defendants have pleaded not guilty. A hearing for submission of evidence is
scheduled for May, 1999. 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 its operations or financial condition.
Appropriate provisions have been made in the consolidated financial
statements with respect to the above matters. See Notes A and O of Notes to
Consolidated Financial Statements.
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ITEM 2. Properties
Reference is made to "Facilities" 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 Eddy Potash, Inc. ("EDP"), a direct
subsidiary of the Company whose name was changed to EDP, Inc. upon completion of
the sale of its potash business in August, 1996, and New Mexico Potash
Corporation ("NMPC"), an indirect subsidiary of the Company whose name was
changed to NMPC, Inc. upon completion of the sale of its potash business in
August, 1996, and "unnamed co-conspirators." The purported class actions were
filed on behalf of all direct United States purchasers of potash from any of the
named defendants or their respective affiliates, at any time during the period
from April, 1987 to the present, and alleged that the defendants conspired to
fix, raise, maintain and stabilize the prices of potash in the United States
purchased by the plaintiffs and the other members of the class in violation of
the United States antitrust laws. The complaints sought unspecified treble
damages, attorneys' fees and injunctive relief against the defendants. Pursuant
to an order of the Judicial Panel for Multidistrict Litigation, all of the
Federal District Court actions were consolidated for pretrial purposes in the
United States District Court for Minnesota and captioned In Re Potash Antitrust
Litigation. Several additional and/or amended complaints were filed in the
Minnesota Federal District Courts making substantially the same allegations as
the earlier complaints. These complaints have been superseded by or deemed
included in the Third Amended and Consolidated Class Action Complaint, to which
NMPC and EDP served and filed answers denying all the material allegations
thereof on or about July 22, 1994. On or about January 12, 1995 the Court
granted plaintiffs' motion to certify the plaintiff class. On or about December
21, 1995, the defendants filed motions for summary judgement. On September 13,
1996 Magistrate Judge Erickson issued a Report and Recommendation recommending
that U.S. District Court Judge Kyle grant the motions filed by NMPC, EDP and the
other defendants for summary judgment as to all of the plaintiffs' claims.
Plaintiffs filed objections to the Report and Recommendation under Rule 72
F.R.Civ.P. On January 2, 1997, after written briefs were submitted by plaintiffs
and defendants and after oral argument before Judge Kyle on December 19, 1996,
Judge Kyle issued an order accepting and adopting Magistrate Judge Erickson's
Report and Recommendation and ordering that the motions filed by NMPC, EDP and
the other defendants for summary judgment as to all of the plaintiffs' claims be
granted. Plaintiffs, by Notice of Appeal dated January 31, 1997, appealed Judge
Kyle's order to the U.S. Court of Appeals for the Eighth Circuit, 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.
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Management has no knowledge of any conspiracy of the type alleged in
these complaints.
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 chemical release from a tank car at a Bogalusa, Louisiana plant
of a Vicksburg customer. 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 "Louisiana Court"). The cases have been consolidated in the
Louisiana Court and certified as a class action (the "Louisiana Class Action").
The class is estimated to contain more than 8,000 claimants (the "Class").
Vicksburg, Cedar and the Company are included among the defendants in the
Louisiana Class Action. In addition, two later suits, one on behalf of the City
of Bogalusa, have been filed in the Louisiana Court naming, among the
defendants, Vicksburg, Cedar and the Company. Also, 10 separate suits naming an
aggregate of approximately 4,000 plaintiffs (the "Mississippi Plaintiffs") were
filed in the Circuit Court of Hinds County, Mississippi naming, among the
defendants, Vicksburg, Cedar and the Company. Among other defendants included in
the 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 Company; and Kansas City Southern Railway
Company. The plaintiffs in these suits seek unspecified damages arising out of
the alleged exposure to toxic fumes and the City of Bogalusa seeks reimbursement
of expenses allegedly resulting from the chemical release. The suits were
tendered to the Company's liability insurance carriers for defense and
indemnification. Certain of the carriers have denied coverage. Vicksburg and
Cedar have commenced an action in the Louisiana Court against their insurance
carriers (whose insurance policies also included the Company as an additional
named insured) seeking a declaratory judgement that Vicksburg and Cedar are
entitled to defense costs and indemnification with respect to these claims.
During August, 1998, conditional agreements to settle the claims in the
Louisiana Class Action and the claims of the Mississippi Plaintiffs were entered
into on behalf of TRI, Vicksburg, Cedar and other affiliates of the Company
named as defendants (collectively the "Entities") and on behalf of the
plaintiffs. During March, 1999, amended and restated conditional agreements to
settle the claims (the "Amended Agreements") were executed by the parties.
The Company has recorded a charge of $36.2 million in 1998 (included in
the caption "Interest and other income (expense) - net" in the accompanying
December 31, 1998 Consolidated Statement of Operations) in connection with the
conditional settlement and the related legal expenses.
If the numerous conditions to the settlement are satisfied, the Entities'
funding obligation under the amended conditional settlement would be an
aggregate of approximately $32.4 million plus (i) an amount (estimated to
eventually be in excess of $4.5 million) equal to the amount which one of the
Settling Insurers (as defined below) shall have paid to the Entities for
reimbursement of defense costs (the "Defense Depletion Amount") and (ii)
interest payments on $17 million, as described below. The initial $10 million of
the funding obligation was deposited in an escrow account on August 31, 1998
and, upon execution of the Amended Agreements, was transferred to another escrow
account (the "Preliminary Escrow Account") established to hold the money in
escrow until the settlement is finalized or terminated. In addition, two
settling insurance carriers (the "Settling Insurers") are to contribute an
aggregate of $25 million, less the Defense Depletion Amount, and the Entities
will assign to the plaintiffs their rights under another $26 million of
insurance coverage.
Under the amended conditional settlement, the Entities are to deposit
$5 million into the Preliminary Escrow Account on March 31, 1999. On or about
April 1, 1999, one of the Settling Insurers is to deposit into the Preliminary
Escrow Account an amount equal to the difference between $15 million (the limit
of its policy) and the Defense Depletion Amount. On or about April 2, 1999, the
other Settling Insurer is to deposit $10 million (the limit of its policy) into
the Preliminary Escrow Account. The Entities are to make further deposits into
the Preliminary Escrow Account totaling $17 million as follows: (i) $6.8 million
on December 31, 2000; (ii) $5.1 million on June 30, 2001; and (iii) $5.1 million
on December 31, 2001. The Entities are also to make interest payments on the
balance of the $17 million which has not been deposited into escrow. The
interest rate is 6.25% per annum commencing on April 1, 1999. The Entities are
required to deposit the interest payments into the escrow account on the
following dates: (i) September 30, 1999; (ii) January 31, 2000; (iii) June 30,
2000; (iv) September 30, 2000; (v) December 31, 2000; (vi) June 30, 2001; and
(vii) December 31, 2001. Within one business day after the Louisiana Court gives
its preliminary approval of the Class
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settlement, the Entities are to deposit into the Preliminary Escrow Account an
amount equal to (i) the Defense Depletion Amount and (ii) the additional sum of
approximately $0.4 million, which is the portion of the anticipated settlement
payment from another insurance company that the Entities have agreed to
contribute to the Class settlement.
After: (a) (i) plaintiffs' counsel has obtained settlements and
releases from all plaintiffs who are not in the Class because they have opted
out (e.g., the Mississippi Plaintiffs have indicated that they will opt out of
the Class) or fall outside of the definition of the Class (the "Opt-Outs") or
(ii) the Entities have agreed to go forward with the settlement without such
settlements and releases from the Opt-Outs; and (b) the Louisiana Court gives
its preliminary approval of the settlement respecting the Class, the funds in
the Preliminary Escrow Account (including earned interest), less (x) the sums
needed to settle the claims of all Opt-Outs who settle, and (y) the sums to be
set aside for the Opt-Outs who do not settle (the "Non-Settling Opt-Outs
Escrow") and to cover certain claims (the "Uncovered Claims") which may not be
covered by the settlement (the "Uncovered Claims Escrow"), will be transferred
to a subaccount of the Preliminary Escrow Account which is to be used to fund
the settlement with the Class.
If the Entities fail to timely make the required payments and such
failure is not cured within a reasonable time (at least 30 days) after notice,
the plaintiffs' sole remedy under the settlement agreements is to terminate the
settlement. In addition, the Entities can terminate the settlement and the
Entities and the Settling Insurers can recover the escrowed amounts plus earned
interest (less a fixed amount which is to be paid to a small group of the
Mississippi Plaintiffs, who (through their counsel) have advised that they will
opt out of the Louisiana Class Action (the "Fixed Mississippi Settlement
Amount") ) if any of the following conditions, among numerous others, do not
occur: (a) the courts in Mississippi and Louisiana enter orders staying all
claims and cross claims against the Entities; (b) all the claims of the Opt-Outs
(including the 4,000 Mississippi Plaintiffs that opt-out) are settled by a
specified deadline; (c) the Louisiana courts give final approval to the
settlement with the Class; and (d) all Class members and all Opt-Outs agree to
reduce judgments against non-settling defendants to the extent necessary to
eliminate all cross claims and claims for contribution or indemnity against the
Entities and to indemnify the Entities against all such claims and cross claims.
No money will be disbursed to any plaintiffs from the escrow accounts unless and
until all of the conditions have been met or waived by the Entities.
If the Entities elect to go forward with the settlement without the
releases from all of the Opt-Outs and the Non-Settling Opt-Outs Escrow is
insufficient to satisfy the remaining claims of the Opt-Outs and pay for the
Entities' defense thereof or the Uncovered Claims Escrow is insufficient to pay
the Uncovered Claims, the Entities are responsible for the shortfall.
If all the conditions have not been met or waived and the settlement
terminates, the parties revert to their respective positions before the
settlement was entered into, the litigations will probably resume and the monies
deposited in escrow plus earned interest (less escrow fees and authorized
charges) will be returned to the Entities and the Settling Insurers, except only
that Fixed Mississippi Settlement Amount must be paid within 30 days after the
later of the Entities' receipt of a demand for such payment and the return of
the escrowed amounts to the Entities and the Settling Insurers.
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 Bogalusa Litigation 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, 1998.
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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 1996, 1997 and 1998, the Company
paid or declared cash dividends on its Common Stock in the amounts of $5.2
million, $3.7 million and $12.6 million, 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, 1998. 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,
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
(in thousands)
Results of Operations:
Revenues ......................................... $ 334,107 $ 385,564 $ 412,305 $ 376,531 $ 423,558
Operating costs and expenses:
Cost of goods sold ............................. 265,795 323,126 343,930 305,588 336,544
General and administrative ..................... 37,780 43,193 46,419 42,622 51,221
--------- --------- --------- --------- ---------
Operating income ................................. 30,532 19,245 21,956 28,321 35,793
Interest expense .................................... (28,369) (34,498) (32,195) (29,475) (37,605)
Interest and other income (expense) - net (1) .... 15,056 9,128 25,448 5,550 (8,624)
--------- --------- --------- --------- ---------
Income (loss) before income taxes,
extraordinary item and change in
accounting principle ........................... 17,219 (6,125) 15,209 4,396 (10,436)
Income tax provision ............................. 14,669 733 4,016 2,952 3,882
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item
and change in accounting principle ............. 2,550 (6,858) 11,193 1,444 (14,318)
Extraordinary item - net ......................... -- (103) (553) -- (11,328)
Cumulative effect of change in
accounting principle - net ..................... -- -- -- -- (1,253)
--------- --------- --------- --------- ---------
Net income (loss) ................................ $ 2,550 $ (6,961) $ 10,640 $ 1,444 $ (26,899)
========= ========= ========= ========= =========
Dividends:
Preferred stock .................................. $ -- $ 851 $ 851 $ 850 $ 850
Common stock ..................................... 4,466 856 5,208 3,736 13,376
- ----------
(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 ($1,178,000),
($413,000), $341,000, $2,713,000 and $1,948,000 for the years ended
December 31, 1994, 1995, 1996, 1997 and 1998, respectively, (c) foreign
currency gains (losses) of ($3,800,000), $5,400,000 and ($1,600,000) for
the years ended December 31, 1994, 1995 and 1996, respectively, (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, and (e) in the year ended
December 31, 1998, (i) a gain of $22,946,000 relating to the Company's
investment in Laser Industries Limited ("Laser") and its share exchange
with ESC, and (ii) a loss of $36,204,000 relating to the Company's
settlement of the Bogalusa Litigation. 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,
------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(in thousands)
Financial Position:
Cash and cash equivalents................... $ 15,571 $ 32,872 $ 29,112 $ 19,757 $ 12,387
Working capital............................. 66,294 82,011 86,986 73,597 110,134
Total assets................................ 550,954 467,102 426,631 462,016 599,286
Short-term debt, including current
maturities of long-term debt.............. 157,986(a) 46,848 32,829 49,660 49,248
Long-term debt, excluding current
maturities and subordinated debt.......... 102,059 174,506 152,539 154,726 414,432
Senior subordinated debt - net.............. 140,385 114,074 114,175 114,288 -
Junior subordinated debt - net.............. 7,981 - - - -
Stockholder's equity........................ 20,550 20,675 26,254 23,607 (38,843)
(a) Was collateralized, in part, by $100.0 million 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
See Part I - Item 1 - "Business" - "Special Note Regarding Forward-Looking
Statements".
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of revenues, certain items
appearing in the Consolidated Financial Statements.
Percentage of Revenues
Year Ended December 31,
1996 1997 1998
------ ------ ------
Revenues:
Specialty Plant Nutrients .................. 52.5% 58.6% 57.3%
Industrial Chemicals ....................... 28.4 28.9 29.4
Organic Chemicals .......................... 10.6 12.5 13.3
Potash ..................................... 8.5 -- --
------ ------ ------
Total revenues ............................. 100.0% 100.0% 100.0%
Operating costs and expenses:
Cost of goods sold ......................... 83.4 81.2 79.4
General and administrative ................. 11.3 11.3 12.1
------ ------ ------
Operating income ................................ 5.3 7.5 8.5
Interest expense ........................... (7.8) (7.8) (8.9)
Interest and other income (expense) - net .. 6.2 1.5 (2.1)
------ ------ ------
Income (loss) before income taxes,
extraordinary item and change in
accounting principle ....................... 3.7 1.2 (2.5)
Income tax provision ............................ 1.0 0.8 0.9
------ ------ ------
Income (loss) before extraordinary item
and change in accounting principle ......... 2.7 0.4 (3.4)
Extraordinary item - net ........................ (0.1) -- (2.7)
Cumulative effect of change in accounting
principle - net ............................ -- -- (0.3)
------ ------ ------
Net income (loss) ............................... 2.6% 0.4% (6.4)%
====== ====== ======
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1998 Compared with 1997
Revenues increased by 12.5% to $423.6 million in 1998 from $376.5 million
in 1997, an increase of $47.1 million. The increase resulted from (i) increased
sales of Specialty Plant Nutrients and Industrial Chemicals of approximately
$38.0 million principally due to an increase in quantities sold in 1998 versus
the prior year, which year was adversely affected by the HCL Labor Dispute, with
such increased sales partially offset by less favorable currency exchange rates
in 1998 and (ii) an increase in revenues of Organic Chemicals of approximately
$9.1 million. See Part I - Item 1 - "Business" - "Employees" above.
Cost of goods sold as a percentage of revenues decreased to 79.4% in 1998
compared with 81.2% in 1997. Gross profit was $87.0 million in 1998, or 20.6% of
revenues, compared with $70.9 million in 1997, or 18.8% of revenues, an increase
of $16.1 million. The primary factors resulting in the increased gross profit in
1998 were (i) increased Specialty Plant Nutrients and Industrial Chemicals
quantities sold as compared to 1997 primarily resulting from the adverse effect
of the HCL Labor Dispute, (ii) lower raw material and energy costs and certain
selling price increases and (iii) improved margins of Organic Chemicals. These
increases were partially offset by less favorable currency exchange rates in
1998 and by certain increased costs relating to production interruptions and
inefficiencies at HCL in 1998 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 increased to $51.2 million in 1998
from $42.6 million in 1997, an increase of $8.6 million (12.1% of revenues in
1998 compared to 11.3% of revenues in 1997). This increase was due to (i)
increased sales volume in 1998, and (ii) the general and administrative expenses
recorded by the businesses acquired by the Company in 1998 (see Part I - Item 1
- - "Business" above).
As a result of the matters described above, the Company's operating
income increased by $7.5 million to $35.8 million in 1998 as compared with $28.3
million in 1997. As a percentage of revenues operating income increased to 8.5%
in 1998 from 7.5% in 1997.
Interest expense increased by $8.1 million to $37.6 million in 1998
compared with $29.5 million in 1997 primarily as a result of (i) the March, 1998
issuance by the Company of its 10 3/4% Senior Notes and 12% Senior Discount
Notes, partially offset by the Company's repurchase of all of its 11 7/8% Senior
Subordinated Notes (see "Refinancing" below) and (ii) certain increased
borrowings relating to the Company's investment and capital expenditure program.
Interest and other income (expense) - net decreased in 1998 by $14.2 million,
principally as the result of the settlement of the Bogalusa Litigation,
partially offset by the gain related to the Laser/ESC combination (see Part I -
Item 3 - "Legal Proceedings" above and "Investment in Laser/ESC" below).
As a result of the above factors, income before income taxes,
extraordinary item and cumulative effect of change in accounting principle
decreased by $14.8 million 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 losses for which there is no current tax benefit.
In 1998, the Company acquired the total amount outstanding ($115.0
million principal amount) of its 11 7/8% Senior Subordinated Notes, which
resulted in a loss of $11.3 million (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 1997.
In 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 SOP 98-5. This change in accounting method resulted in a net
charge of approximately $1.3 million.
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1997 Compared with 1996
Revenues decreased by 8.7% to $376.5 million in 1997 from $412.3 million
in 1996, a decrease of $35.8 million. The decrease resulted from a $35.3 million
reduction in sales associated with the Company's sale of its potash operations
and a $3.9 million 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 $3.4 million. See "1996 Sale of Potash
Operations" below and Part I Item 1 - "Business" - "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 $70.9 million in 1997, or 18.8% of
revenues, compared with $68.4 million in 1996, or 16.6% of revenues, an increase
of $2.5 million. The primary factors resulting in the increased gross profit
were related to higher Organic Chemicals margins in 1997, 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 1997 of $15.0 million.
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
$3.1 million and $2.0 million in 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 $3.8 million to $42.6
million in 1997, from $46.4 million 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 1997,
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 $6.3 million to $28.3 million in 1997 as compared with $22.0
million in 1996. As a percentage of revenues, operating income increased to 7.5%
in 1997 from 5.3% in 1996.
Interest expense decreased by $2.7 million to $29.5 million in 1997
compared with $32.2 million 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 (expense) - net
decreased in 1997 by $19.9 million, principally as the result of the gain on the
sale of the Company's potash operations of $22.6 million in 1996, partially
offset by increased realized gains on sales of marketable securities in 1997.
As a result of the above factors, income before income taxes and
extraordinary item decreased by $10.8 million 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 1996, the Company acquired $19.1 million principal amount of its
Senior Subordinated Reset Notes, which resulted in a loss of $0.6 million. Such
loss (which has no current tax benefit) is classified as an extraordinary item
in the accompanying Consolidated Statement of Operations. No such debt was
acquired in 1997.
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1996 SALE OF POTASH OPERATIONS
On August 16, 1996, Cedar's wholly-owned subsidiary, NMPC, and EDP sold
substantially all of their assets for an aggregate consideration of $56.2
million, including a payment for working capital of $11.2 million and the
assumption of specified liabilities (but excluding, among other things, certain
antitrust litigation - see Part I - 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 $22.6 million. Such gain is included in
"Interest and other income (expense) - net" in the Consolidated Statement of
Operations for 1996. During the year ended December 31, 1996, the potash
operations contributed approximately $35.0 million (9%) 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.
INVESTMENT IN LASER/ESC
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 signed a definitive agreement (the "Agreement") to
combine the two companies through an exchange of shares. The transaction closed
on February 23, 1998. 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 is accounted
for pursuant to Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Security" ("SFAS 115").
As of December 31, 1997, the Company carried its investment in the Laser
shares at approximately $9.1 million, which amount is included in the 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 $22.9 million during the first
quarter of 1998, which gain is included in the caption "Interest and other
income (expense) - net" in the accompanying December 31, 1998 Consolidated
Statement of Operations. Subsequent to the exchange of shares, the Company
carries its investment in the ESC shares in "Other current assets" in the
accompanying December 31, 1998 Consolidated Balance Sheet. As of December 31,
1998, the quoted market value of the ESC shares declined to approximately $10.50
per share, resulting in the Company recording an unrealized loss of
approximately $18.3 million. Most of this decline occurred in the latter part of
September, 1998 and resulted from ESC's pre-announcement of third quarter 1998
operating results, which ESC indicated would show a decline when compared to
operating results for its second quarter of 1998. The unrealized loss relating
to ESC is included in the caption "Unrealized gains (losses) on marketable
securities" in the accompanying December 31, 1998 Consolidated Balance Sheet.
With respect to the Company's investment in ESC, Management of the Company is
not aware of any events that have occurred regarding ESC that would indicate an
other than temporary impairment of the Company's investment in ESC.
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 250,000 Laser shares. The Laser Warrant, which had a carrying value of
$0.75 million, was distributed as a dividend in February, 1998.
CAPITAL RESOURCES AND LIQUIDITY
The Company's consolidated working capital at December 31, 1998 and 1997
was $110.1 million and $73.6 million, respectively.
Operations for the years ended December 31, 1998, 1997 and 1996, after
adding back non-cash items, provided cash of approximately $31.0 million, $22.8
million and $11.1 million, respectively. During such years, other changes in
working capital used cash of approximately $38.7 million, $13.1 million and $7.7
million, respectively, resulting in
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22
net cash being provided (used) from operating activities and working capital
management of approximately ($7.7) million, $9.7 million and $3.4 million,
respectively.
Investment activities during the years ended December 31, 1998, 1997 and
1996 provided (used) cash of approximately ($95.5) million, ($33.5) million and
$35.3 million, respectively. These amounts include: (i) additions to property in
1998, 1997 and 1996 of $63.4 million, $26.9 million and $13.6 million,
respectively; (ii) purchases of marketable securities and other short-term
investments in 1998, 1997 and 1996 of $33.6 million, $7.7 million and $9.4
million, respectively; (iii) sales of marketable securities and other short-term
investments in 1998, 1997 and 1996 of $22.2 million, $8.0 million and $2.0
million, respectively; (iv) net assets acquired of operating businesses in 1998
of $9.3 million and (v) other items providing (using) cash in 1998, 1997 and
1996 of ($11.4) million, ($6.9) million and $56.4 million, respectively,
including (a) in 1998, approximately $11.0 million relating to the purchase of
approximately 42% of the equity of Lego and (b) in 1996, the gross proceeds
relating to the Company's sale of its potash operations. 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 MAP and MKP.
Financing activities during the years ended December 31, 1998, 1997 and
1996 provided (used) cash of approximately $95.8 million, $14.4 million and
($42.5) million, respectively. These amounts include: (i) in 1998, the
Refinancing described below and certain borrowings relating to the Company's
investment and capital expenditure program, and (ii) in 1996, the Company's
acquisition of a portion of its Senior Subordinated Reset Notes and the
prepayment of certain bank debt with a portion of the proceeds from the sale of
the Company's potash operations.
As of December 31, 1998, the Company had outstanding long-term debt
(excluding current maturities) of $414.4 million. The Company's primary sources
of liquidity are cash flows generated from operations and the unused credit
lines described in Note E of Notes to Consolidated Financial Statements.
REFINANCING
On March 11, 1998, the Company commenced a private placement of $100.0
million principal amount of 10 3/4% Senior Notes due 2008 (the "Senior Notes")
and $135.0 million principal amount at maturity of 12% Senior Discount Notes due
2008 (the "Senior Discount Notes"). The Senior Discount Notes provided gross
proceeds to the Company of approximately $75.4 million. The sale of the Senior
Notes and the Senior Discount Notes closed on March 16, 1998. A substantial
portion (approximately $118.0 million) of the net proceeds from the sale was
used in March, 1998 to purchase (pursuant to a tender offer and consent
solicitation) approximately $110.0 million principal amount of the Company's
11 7/8% Senior Subordinated Notes (the "11 7/8 % Notes") (the "Refinancing"). In
addition, in the four month period ended July, 1998, the Company repurchased or
redeemed the remaining $5.0 million principal amount of its 11 7/8% Notes. As a
result of the Refinancing and the subsequent repurchases or redemptions of the
11 7/8% Notes, combined with the write-off of certain unamortized issuance costs
associated with the 11 7/8% Notes, the Company recognized an extraordinary
charge for the early extinguishment of debt of approximately $11.3 million 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 to 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.
See Note G of Notes to Consolidated Financial Statements.
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23
FORWARD-LOOKING LIQUIDITY AND CAPITAL RESOURCES
Interest payments on the Senior Notes and interest and principal
repayments under other indebtedness 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. During the years ended December 31, 1998 and 1997, the Company spent
approximately $63.4 million and $26.9 million, respectively, on capital
projects, of which approximately $38.0 million and $10.8 million, respectively,
relates to the Company's 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 (the "Plan"). The Company plans to complete the
Plan by spending approximately $25.0 million during 1999. Ongoing maintenance
capital expenditures are expected to be approximately $16.0 million per year.
The Company's primary sources of liquidity are cash flows from
operations and borrowings under the credit facilities of the Company. As of
December 31, 1998, the Company had approximately $73.0 million of borrowing
availability, consisting of $26.0 million of borrowing availability of the
Company and the remainder at the Company's subsidiaries. In addition, during
1998 HCL entered into an $80.0 million credit facility which is being used to
finance its planned capacity expansion at its Mishor Rotem, Israel 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 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. See Part I - Item 1 - "Business" - "Special Note
Regarding Forward-Looking Statements".
FOREIGN CURRENCIES
The Company has no significant foreign currency denominated revenues
except at HCL. Approximately $167 million of HCL's total sales for the year
ending December 31, 1998 are estimated to 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,
1998, 1997 and 1996 would have decreased by approximately $1.4 million, $7.0
million and $5.3 million, 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.
On January 1, 1999, eleven of fifteen member countries of the European
Union established fixed conversion rates between their existing currencies
("legacy currencies") and one common currency - the Euro. On January 1, 1999 the
Euro began trading on currency exchanges and may be used in business
transactions. The conversion to the Euro will eliminate currency exchange rate
risk between the member countries. Beginning in January, 2002, new
Euro-denominated bills and coins will be issued, and legacy currencies will be
withdrawn from circulation. HCL, the
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24
principal subsidiary of TRI that will be affected by the Euro conversion, has
established plans to address the issues raised by the Euro currency conversion.
These issues include, among others, the need to adapt computer and financial
systems, the competitive impact of cross-border price transparency which may
make it more difficult for businesses to charge different prices for the same
products on a country-by-country basis, recalculating currency risk and
recalibrating derivatives and other financial instruments. The Company does not
expect any required system conversion costs to be material. Due to numerous
uncertainties, the Company cannot reasonably estimate the effects one common
currency will have on pricing and the resulting impact, if any, on the Company's
financial condition or its results of operations.
INFLATION
Inasmuch as only approximately $65.0 million 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, 1998, 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
(9.0%), (1.8%) and 6.9%, 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.
YEAR 2000 ISSUE
The term "Year 2000 ("Y2K") Issue" is a general term used to describe the
various problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other machinery as the year 2000 is
approached and reached. These problems generally arise from the fact that most
of the world's computer hardware and software have historically used only two
digits to identify the year in a date, often meaning that the computer will fail
to distinguish dates in the "2000's" from dates in the "1900's." These problems
may also arise from other sources as well, such as the use of special codes and
conventions in software that make use of the date field. The Y2K computer
software compliance issues affect the Company and most companies in the world.
In 1997, the Company created project teams to coordinate its activities
relating to becoming Y2K compliant (the "Y2K Project"). The Y2K Project for the
Company's internal systems and equipment covers both traditional computer
systems and infrastructure ("IT Systems") and computer-based manufacturing,
logistical and related systems ("Non-IT Systems"). The Y2K Project generally has
four phases - (i) an identification and inventory of all systems and devices
with potential Y2K problems; (ii) assessment (including prioritization); (iii)
remediation (including modification, upgrading and replacement) and testing; and
(iv) contingency planning.
The Company operates on a decentralized independent operating company
basis; consequently, the Y2K Project status may vary across TRI's various direct
and indirect subsidiaries. As of December 31, 1998, for both IT Systems and
Non-IT Systems, phases (i) and (ii) are generally complete and phase (iii) is in
process. Based on its assessment of its major IT systems, the Company expects
that all necessary modifications and/or replacements required in phase (iii)
will be completed in a timely manner to ensure that all of TRI's various direct
and indirect subsidiaries are Y2K compliant.
The Y2K Project also considers the readiness of significant customers,
suppliers and other third party providers. Each of TRI's various direct and
indirect subsidiaries are currently assessing the status of its significant
customers, suppliers and other third party providers with respect to their
becoming Y2K compliant.
The Company is revising its existing business interruption contingency
plans to address internal and external issues specific to the Y2K problem, to
the extent practicable. Such revisions are expected to be completed by mid 1999.
These plans, which are intended to enable the Company to continue to operate on
January 1, 2000 and beyond, include
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25
performing certain processes manually; repairing or obtaining replacement
systems; changing suppliers; and reducing or suspending operations. These plans
are intended to mitigate both internal risks as well as potential risks in the
supply chain of the Company's suppliers and customers. The Company believes,
however, that due to the widespread nature of potential Y2K issues, the
contingency planning process is an ongoing one which will require further
modifications as the Company obtains additional information regarding the
Company's internal systems and equipment during the completion of the Y2K
Project and regarding the status of its suppliers, customers, and other third
party providers in becoming Y2K compliant.
Through December 31, 1998 the Company estimates that it has spent
approximately $0.5 million in its efforts to achieve Y2K compliance, all of
which has been recognized as an expense in the Company's Consolidated Statements
of Operations. The Company estimates that the costs to be incurred subsequent to
December 31, 1998 in its efforts to achieve Y2K compliance will aggregate
approximately $1.0 million. The Company intends to fund from operations the
costs of becoming Y2K compliant.
The failure to correct a material Y2K problem could result in an
interruption in, or failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Y2K problem, resulting in part from the uncertainty
of the Y2K readiness of the Company's customers, suppliers, and other
third-party providers, the Company is unable to determine at this time whether
the consequences of any Y2K failures will have a material impact on the
Company's results of operations, liquidity or financial condition. The Y2K
Project is expected to significantly reduce the Company's level of uncertainty
about the Y2K problem. The Company believes that, with the implementation of new
business systems and completion of the Company's Y2K Project, the possibility of
significant interruptions of normal operations should be reduced.
The preceding "Y2K problem" discussion contains various forward-looking
statements which represent the Company's beliefs or expectations regarding
future events. When used in the "Y2K problem" discussion, the words "believes,"
"expects," "estimates" and similar expressions are intended to identify
forward-looking statements. Forward-looking statements include, without
limitation, the Company's expectations as to when it will complete the
remediation and testing phases of its Y2K Project as well as its Y2K contingency
plans; its estimated cost of becoming Y2K compliant; and the Company's belief
that its internal systems and equipment will be Y2K compliant in a timely
manner. All forward-looking statements involve a number of risks and
uncertainties that could cause the actual results to differ materially from the
projected results, including problems that may arise on the part of third
parties. Factors that may cause these differences include, but are not limited
to, the availability of qualified personnel and other information technology
resources; the ability to identify and remediate all date sensitive lines of
computer code or to replace embedded computer chips in affected systems or
equipment; and the actions of governmental agencies or other third parties with
respect to Y2K problems. If the modifications and conversions required to make
the Company Y2K compliant are not made or are not completed on a timely basis,
the resulting problems could have a material impact on the operations of the
Company. This impact could, in turn, have a material adverse effect on the
Company's results of operations and financial condition.
OTHER MATTERS
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 adoption of SFAS
131 did not have a material effect on the Company's reporting disclosures.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 requires that an entity recognize all derivatives as either
assets or liabilities and measure those instruments at fair value. Depending on
the intended use of the derivative, changes in derivative fair values may be
charged to operations unless the derivative qualifies as a hedge under certain
requirements. SFAS 133 is effective for all quarters of fiscal years beginning
after June 15, 1999 (January 1, 2000 for the Company). The Company is evaluating
the impact, if any, of SFAS 133 on its consolidated financial statements.
23
26
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to certain market risks which are inherent in the
Company's normal course of business. The Company may enter into derivative
financial instrument transactions in order to manage or reduce market risk. The
Company does not enter into derivative financial instrument transactions for
speculative purposes. A discussion and sensitivity analysis of the Company's
primary market risk exposures is presented below.
INTEREST RATE RISK
Since approximately $240 million of the Company's long-term debt at
December 31, 1998 is at variable interest rates, the Company is exposed to
changes in interest rates. Accordingly, based on the amount of variable rate
debt outstanding at December 31, 1998, every one percent change in interest
rates would impact the Company by approximately $2.4 million on an annualized
basis. From time-to-time, the Company has entered into financial instruments to
convert a portion of its variable rate debt to fixed, thereby managing, to such
extent, its credit risk. See Note M of Notes to Consolidated Financial
Statements.
FOREIGN CURRENCY EXCHANGE RATE RISK
The Company has no significant foreign currency denominated revenues except
at HCL. Approximately $167 million of HCL's total sales for the year ended
December 31, 1998 were 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 instantaneously weakens or strengthens by one percent from its
level of December 31, 1998 versus all foreign currencies as a group, (with all
other variables, including interest rates, held constant) HCL's results would be
favorably or unfavorably affected by approximately $1.7 million on an annualized
basis for each such one percent change. In order to mitigate the impact of
currency fluctuations against the U.S. dollar the Company has a general policy
of hedging a portion of its next twelve month's foreign sales denominated in
Western European currencies by entering into foreign exchange contracts. See
Note A of Notes to Consolidated Financial Statements.
Since the Company does not plan to repatriate foreign assets and considers
foreign earnings to be permanently invested overseas, the exposure to changes in
foreign currency exchange rates with respect to such assets is primarily limited
to cumulative translation adjustments, which have been reported in Comprehensive
Income.
MARKETABLE EQUITY SECURITIES
At December 31, 1998 the Company's portfolio of marketable equity
securities was recorded at $28.0 million and included net unrealized losses of
$19.1 million. Accordingly, to the extent quoted market values relating to the
Company's portfolio of marketable equity securities at December 31, 1998 change
by one percent, the Company's valuation of such portfolio would be impacted by
approximately $0.3 million for each such one percent change.
ITEM 8. Financial Statements and Supplementary Data
See Index to Consolidated Financial Statements and Schedule on page F-1.
ITEM 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
24
27
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 53 Chairman of the Board and Chief Executive Officer
Thomas G. Hardy 53 President and Chief Operating Officer; Director
Gabriel Politzer 49 Senior Vice President
Lester W. Youner 53 Vice President, Treasurer and Chief Financial Officer and Secretary
John J. Lewandowski 43 Vice President-Corporate Development
Michael P. Oravec 47 Vice President-Corporate Taxation
Elan Yaish 29 Controller
Avi D. Pelossof 52 Director and Chairman of the Board of HCL
Martin A. Coleman 68 Director
Sash A. Spencer 67 Director
In addition, the following are key employees of the Company's
subsidiaries:
NAME AGE POSITION
---- --- --------
Esther Eldan 44 Managing Director of HCL
J. Randal Tomblin 56 Senior Vice President of Cedar and President of the Organic Chemicals
Division
John D. Kelly 57 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,
25
28
1998 and has been a director of ESC since February, 1998 (see Part II - Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" "Investment in Laser/ESC").
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 of the
Company 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.
Elan Yaish has been Controller of the Company since January 1, 1999. From
June, 1996 (when he accepted a position with the Company) until December, 1998
he served as the Company's Director of Corporate Reporting. From 1992 to 1996 he
was employed by Deloitte & Touche LLP, a public accounting firm, in positions of
increasing responsibility.
Avi D. Pelossof has been a director of the Company since February 26,
1999. In addition, he has been the Chairman of the Board of Directors of HCL
since April, 1998, was Active Co-Chairman of the Board of HCL from November,
1997 to April, 1998, was Deputy Chairman of the Board of HCL from May, 1997 to
November, 1997 and has been a director of HCL since March, 1997. He has been a
member of the law firm of Zellermayer & Pelossof, general counsel to HCL, since
1987. He was a director of Laser from 1996 to February, 1998 and has been a
director of Nilit Ltd., a nylon yarn producer, since 1995. From 1980 to 1986 he
was Managing Director and Chief Executive Officer of Elite Food Industries Ltd.
He was a member of the Israeli Securities Authority in the 1970's, a director of
the Tel Aviv Stock Exchange Ltd. in the 1980's and was Acting Chairman of the
Board in 1996. He was a director of Israel Aircraft Industries Ltd. from 1984
and was Chairman of the Board in 1987.
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 a private
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.
Esther Eldan has been Managing Director of HCL since April 1, 1998. From
January, 1996 until March 31, 1998 she served as the general manager of HCL's
Specialty Fertilizer Division. Previously, she was the Chief Financial Officer
of HCL for more than five years. Ms. Eldan joined HCL in 1981.
26
29
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.
John D. Kelly has been President of Vicksburg since March 1, 1999. From
1998 until February, 1999 he served as President of TRI Pro, Inc. an indirect
subsidiary of the Company and as a Vice President of Vicksburg. From 1976 to
1997, he served in various executive officer capacities at Na-Churs, his last
position being President.
Lawrence M. Small, 57, 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 1991 when Mr. Small
joined Fannie Mae, he had served as Vice Chairman and Chairman of the Executive
Committee of the Boards of Directors of Citicorp and Citibank, N.A. since
January, 1990. Prior to assuming that position, Mr. Small had been Sector
Executive since 1985, responsible for Citicorp and Citibank's Institutional
Bank. He had been associated with Citibank since 1964. Mr. Small is also a
director of Fannie Mae, the Chubb Corporation, Marriott International, Inc., the
Fannie Mae Foundation, the National Building Museum and New York City's Spanish
Repertory Theatre. He is a Trustee Emeritus of Brown University and of Morehouse
College; he is also a trustee of Mt. Sinai-New York University Medical Center
and Health System.
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.
27
30
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 its next four most highly compensated executive officers serving as such
at the end of the 1998 fiscal year:
ANNUAL COMPENSATION(a) ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(b)
- --------------------------- ---- ------ ----- ---------------
Arie Genger................................. 1998 $750,000 $ - $802,000
Chairman of the Board and Chief Executive 1997 750,000 400,000 797,000
Officer 1996 750,000 750,000 682,000
Thomas G. Hardy............................. 1998 450,000 - 7,000
President and Chief Operating Officer and 1997 425,000 150,000 5,000
Director 1996 400,000 175,000 1,405,000
Gabriel Politzer............................ 1998 300,000 100,000 6,000
Senior Vice President
Lester W. Youner............................ 1998 276,000 75,000 7,000
Vice President, Treasurer and Chief 1997 263,000 75,000 5,000
Financial Officer and Secretary 1996 251,000 100,000 5,000
John J. Lewandowski......................... 1998 130,000 35,000 6,000
Vice President-Corporate Development 1997 125,000 35,000 4,000
1996 120,000 105,000 4,000
- ----------
(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) For 1998 includes in the case of Mr. Genger the cost to the Company of
split-dollar life insurance policies on the life of Mr. Genger (the
"Split-Dollar Policies"). The Company paid premiums on the Split-Dollar Policies
of $289,000 in 1998. Additionally, for 1998, 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, $6,000 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, Politzer, Youner and Lewandowski, $6,000 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 and
disability insurance.
For 1997 includes in the case of Mr. Genger the cost to the Company of
the Split-Dollar Policies. The Company paid premiums on the Split-Dollar
Policies of $286,000 in 1997. 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 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 and disability insurance.
For 1996 includes in the case of Mr. Genger the cost to the Company of
the Split-Dollar Policies. The Company paid premiums on the Split-Dollar
Policies of $171,000 in 1996. 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
28
31
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".
The Company is entitled to a refund of the cumulative annual premiums
paid by it to the insurers pursuant to the Split-Dollar Policies before any
benefits are paid by the insurers to the owner or beneficiaries of the policies.
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 35% vested in the Allowance on December 31, 1998 and shall
continue to vest at the rate of 5% per year thereafter provided that he remains
in the employ of the Company. Notwithstanding the foregoing, the Allowance will
become 100% vested on the earlier of Mr. Youner's 65th birthday or the
occurrence of an acceleration event, including a change of control of the
Company. Mr. Youner forfeits the Allowance if his employment is terminated for
cause (as defined) or, if within two years after the voluntary termination of
his employment, Mr. Youner engages directly or indirectly in any activity
competitive with the Company or any of its subsidiaries. The agreement further
provides that in the event of Mr. Youner's death prior to his 65th birthday
while in the active employ of the Company, his designated beneficiary is to
receive an annual death benefit of $100,000 for 10 years. Mr. Youner's death
benefit is currently 100% vested.
The Company is also a party to certain agreements relating to the
Split-Dollar Policies 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
five 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
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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 29, 1999,
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 (ten persons)(b).......................... 3,000 100%
- ----------
(a) All of the shares of the Common Stock of the Company are pledged by TPR to
secure a TPR note in the principal amount of $7,000,000 issued to a former
indirect stockholder and director of the Company. TPR also owns all outstanding
shares of a non-voting preferred stock of the Company. See Note L of Notes to
Consolidated Financial Statements.
(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
carryforwards. However, TPR may, at its discretion, allow tax benefits for such
losses. See Note A of Notes to Consolidated Financial Statements.
During 1994, as a result of the settlement of certain litigation with a
former indirect stockholder and director of the Company, TPR (in addition to
acquiring certain financial assets) 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.
30
33
PART IV
ITEM 14. Exhibits, Financial Statement Schedule 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, 1998.
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34
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
and Secretary
Dated: March 29, 1999
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
and Secretary
By Lester W. Youner
----------------------------------
Lester W. Youner
For Himself and As Attorney-In-Fact
Directors:
Arie Genger Dated: March 29, 1999
Thomas G. Hardy
Avi D. Pelosoff
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 10 3/4% Senior Notes and 12% Senior Discount Notes.
32
35
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, 1997 and 1998......................................... F-4
Consolidated Statements of Operations,
for the Years Ended December 31, 1996, 1997 and 1998........................................ F-5
Consolidated Statements of Stockholder's Equity and Comprehensive Income
for the Years Ended December 31, 1996, 1997 and 1998........................................ F-6
Consolidated Statements of Cash Flows,
for the Years Ended December 31, 1996, 1997 and 1998........................................ F-7
Notes to Consolidated Financial Statements...................................................... F-8
SCHEDULE
Schedule I - Condensed Financial Information of Registrant,
for the Years Ended December 31, 1996, 1997 and 1998........................................ S-1
F-1
36
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 (the "Company") 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 19 percent and 22 percent of consolidated total assets as of
December 31, 1998 and 1997, respectively, and total revenues constituting 28
percent, 31 percent and 33 percent of consolidated total revenues for the years
ended December 31, 1998, 1997 and 1996, 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,
1998 and 1997, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, 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.
As discussed in Note A to the consolidated financial statements, the Company
changed its method of accounting for the costs of start-up activities in 1998.
Deloitte & Touche LLP
New York, New York
March 25, 1999
F-2
37
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, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, 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.
PricewaterhouseCoopers LLP
Memphis, Tennessee
February 12, 1999, except as to Note 12, which is as of March 25, 1999
F-3
38
TRANS-RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
------------
1997 1998
---- ----
(in thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................. $ 19,757 $ 12,387
Accounts receivable ....................................................... 82,551 90,998
Inventories ............................................................... 60,126 95,442
Other current assets ...................................................... 33,578 63,608
Prepaid expenses .......................................................... 16,122 16,477
--------- ---------
Total Current Assets .................................................. 212,134 278,912
PROPERTY, PLANT AND EQUIPMENT - net ............................................ 207,487 260,585
OTHER ASSETS ................................................................... 42,395 59,789
--------- ---------
Total ................................................................. $ 462,016 $ 599,286
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt ...................................... $ 13,080 $ 10,183
Short-term debt ........................................................... 36,580 39,065
Accounts payable .......................................................... 58,662 76,306
Accrued expenses and other current liabilities ............................ 30,215 43,224
--------- ---------
Total Current Liabilities ............................................. 138,537 168,778
--------- ---------
LONG-TERM DEBT - net:
Senior indebtedness, notes payable and other obligations .................. 154,726 414,432
Senior subordinated debt - net ............................................ 114,288 --
--------- ---------
Long-Term Debt - net .................................................. 269,014 414,432
--------- ---------
OTHER LIABILITIES .............................................................. 30,858 54,919
--------- ---------
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 ......................................................... 6,203 (34,922)
Cumulative translation adjustment ......................................... (67) (1,462)
Unrealized gains (losses) on marketable securities ........................ 829 (19,101)
--------- ---------
Total Stockholder's Equity ............................................ 23,607 (38,843)
--------- ---------
Total ............................................................ $ 462,016 $ 599,286
========= =========
See notes to consolidated financial statements.
F-4
39
TRANS-RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1996, 1997 and 1998
1996 1997 1998
---- ---- ----
(in thousands)
REVENUES ......................................... $ 412,305 $ 376,531 $ 423,558
OPERATING COSTS AND EXPENSES:
Cost of goods sold ............................ 343,930 305,588 336,544
General and administrative .................... 46,419 42,622 51,221
--------- --------- ---------
OPERATING INCOME ................................. 21,956 28,321 35,793
Interest expense .............................. (32,195) (29,475) (37,605)
Interest and other income (expense) - net ..... 25,448 5,550 (8,624)
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES,
EXTRAORDINARY ITEM AND CHANGE IN
ACCOUNTING PRINCIPLE .......................... 15,209 4,396 (10,436)
INCOME TAX PROVISION ............................. 4,016 2,952 3,882
--------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM
AND CHANGE IN ACCOUNTING PRINCIPLE ............ 11,193 1,444 (14,318)
EXTRAORDINARY ITEM - Loss on repurchase
of debt (no income tax benefit) ............... (553) -- (11,328)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, net of income tax benefit of $80,000 -- -- (1,253)
--------- --------- ---------
NET INCOME (LOSS) ................................ $ 10,640 $ 1,444 $ (26,899)
========= ========= =========
See notes to consolidated financial statements.
F-5
40
TRANS-RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY AND COMPREHENSIVE INCOME
For the Years Ended December 31, 1996, 1997 and 1998
ADDITIONAL CUMULATIVE UNREALIZED
PREFERRED COMMON PAID-IN RETAINED TRANSLATION GAINS (LOSSES)
STOCK STOCK CAPITAL EARNINGS ADJUSTMENT ON SECURITIES
----- ----- ------- -------- ---------- -----------
(in thousands)
BALANCE, JANUARY 1, 1996.................. $ 7,960 $ - $ 8,682 $ 4,764 $ (594) $ (137)
Net income.............................. 10,640
Dividends:
Common stock......................... (5,208)
Preferred stock...................... (851)
Net change during year.................. 227 771
-------- ------ ------- --------- --------- --------
BALANCE, DECEMBER 31, 1996................ 7,960 - 8,682 9,345 (367) 634
Net income.............................. 1,444
Dividends:
Common stock......................... (3,736)
Preferred stock...................... (850)
Net change during year.................. 300 195
-------- ------ ------- --------- --------- --------
BALANCE, DECEMBER 31, 1997................ 7,960 - 8,682 6,203 (67) 829
Net loss................................ (26,899)
Dividends:
Common stock, including
non-cash dividend of $750,000... (13,376)
Preferred stock...................... (850)
Net change during year................ (1,395) (19,930)
-------- ------ ------- --------- --------- --------
BALANCE, DECEMBER 31, 1998................ $ 7,960 $ - $ 8,682 $ (34,922) $ (1,462) $(19,101)
======== ====== ======= ========= ========= ========
COMPREHENSIVE
TOTAL INCOME
----- ------
BALANCE, JANUARY 1, 1996.................. $20,675
Net income.............................. 10,640 $ 10,640
Dividends:
Common stock......................... (5,208)
Preferred stock...................... (851)
Net change during year.................. 998 998
--------- --------
BALANCE, DECEMBER 31, 1996................ 26,254 $ 11,638
========
Net income.............................. 1,444 $ 1,444
Dividends:
Common stock......................... (3,736)
Preferred stock...................... (850)
Net change during year.................. 495 495
--------- --------
BALANCE, DECEMBER 31, 1997................ 23,607 $ 1,939
========
Net loss................................ (26,899) $(26,899)
Dividends:
Common stock, including
non-cash dividend of $750,000... (13,376)
Preferred stock...................... (850)
Net change during year................ (21,325) (21,325)
--------- --------
BALANCE, DECEMBER 31, 1998................ $ (38,843) $(48,224)
========= ========
See notes to consolidated financial statements.
F-6
41
TRANS-RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1996, 1997 and 1998
1996 1997 1998
---- ---- ----
(in thousands)
OPERATING ACTIVITIES AND WORKING CAPITAL MANAGEMENT:
Operations:
Net income (loss) ...................................................... $ 10,640 $ 1,444 $ (26,899)
Items not requiring (providing) cash:
Depreciation and amortization of property, plant and
equipment and other assets .................................... 21,499 21,208 22,086
Amortization of deferred financing costs and accretion
of interest expense ........................................... 1,190 891 8,618
Gain on sale of potash operations (1996) and gain on
Laser/ESC share exchange (1998) ............................. (22,579) -- (22,946)
Extraordinary item - loss on repurchase of debt .................... 553 -- 11,328
Cumulative effect of change in accounting principle ................ -- -- 1,253
Provision for loss on settlement of Bogalusa Litigation ............ -- -- 36,204
Deferred taxes and other - net ..................................... (226) (762) 1,400
--------- --------- ---------
Total .............................................................. 11,077 22,781 31,044
Working capital management:
Accounts receivable and other current assets ....................... (3,912) (20,153) (8,274)
Inventories ........................................................ 5,603 (8,919) (28,896)
Prepaid expenses ................................................... 469 (1,487) (650)
Accounts payable ................................................... (11,239) 20,629 10,826
Accrued expenses and other current liabilities ..................... 1,360 (3,106) (11,759)
--------- --------- ---------
Cash provided by (used in) operations and working capital
management ................................................ 3,358 9,745 (7,709)
--------- --------- ---------
INVESTMENT ACTIVITIES:
Additions to property, plant and equipment ............................... (13,570) (26,862) (63,425)
Sales of marketable securities and short-term investments ................ 1,965 7,982 22,195
Purchases of marketable securities and short-term investments ............ (9,432) (7,743) (33,572)
Net assets acquired (excluding cash and cash equivalents) ................ -- -- (9,265)
Other - net, including proceeds from sale of potash operations (1996)
and purchase of an equity investment in Lego (1998) .................... 56,376 (6,909) (11,439)
--------- --------- ---------
Cash provided by (used in) investment activities .............. 35,339 (33,532) (95,506)
--------- --------- ---------
FINANCING ACTIVITIES:
Increase in long-term debt ............................................... 44,168 12,000 258,862
Repurchases, payments and current maturities of long-term debt ........... (89,769) (14,214) (151,470)
Increase in short-term debt .............................................. 9,203 21,232 1,929
Dividends to stockholder ................................................. (6,059) (4,586) (13,476)
--------- --------- ---------
Cash provided by (used in) financing activities ............... (42,457) 14,432 95,845
--------- --------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS ...................................... (3,760) (9,355) (7,370)
CASH AND CASH EQUIVALENTS:
Beginning of year ........................................................ 32,872 29,112 19,757
--------- --------- ---------
End of year .............................................................. $ 29,112 $ 19,757 $ 12,387
========= ========= =========
See notes to consolidated financial statements.
F-7
42
TRANS-RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SIGNIFICANT ACCOUNTING POLICIES AND OTHER ITEMS
Principles of Consolidation and Basis of Presentation
The consolidated financial statements of Trans-Resources, Inc. ("TRI"),
include TRI and its direct and indirect independently managed and financed
subsidiaries, after elimination of intercompany accounts and transactions. TRI's
principal subsidiaries are Cedar Chemical Corporation ("Cedar"), and Cedar's
wholly-owned subsidiary, Vicksburg Chemical Company ("Vicksburg"); Na-Churs
Plant Food Company ("Na-Churs"); Haifa Chemicals Ltd. ("HCL") and HCL's
wholly-owned subsidiary, Haifa Chemicals South, Ltd. ("HCSL"); and Plant
Products Co. Ltd. ("Plant Products"). 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, Inc. (name changed from New Mexico Potash
Corporation upon completion of the sale of its potash operations in August,
1996) and EDP, Inc. (name changed from Eddy Potash, Inc. upon completion of the
sale of its potash operations in August, 1996) 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 (expense) -
net" in the accompanying Consolidated Statement of Operations for 1996 (see Note
K). During the year ended December 31, 1996, the potash operations contributed
approximately $35,000,000 (9%) 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.
Investment in Laser/ESC
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. 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 is accounted for pursuant to
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115").
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 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
(expense) - net" in the accompanying December 31, 1998 Consolidated Statement of
Operations (see Note K). Subsequent to the exchange of shares, the Company
carries its investment in the ESC shares in "Other current assets" in the
accompanying December 31, 1998 Consolidated Balance Sheet. As of December 31,
1998, the quoted market value of the ESC shares
F-8
43
declined to approximately $10.50 per share, resulting in the Company recording
an unrealized loss of approximately $18,328,000. Most of this decline occurred
in the latter part of September, 1998 and resulted from ESC's pre-announcement
of third quarter 1998 operating results, which ESC indicated would show a
decline when compared to operating results for its second quarter of 1998. The
unrealized loss relating to ESC is included in the caption "Unrealized gains
(losses) on marketable securities" in the accompanying December 31, 1998
Consolidated Balance Sheet. With respect to the Company's investment in ESC,
Management of the Company is not aware of any events that have occurred
regarding ESC that would indicate an other than temporary impairment of the
Company's investment in ESC.
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 250,000 Laser shares. The Laser Warrant, which had a carrying value of
$750,000, was distributed as a dividend in February, 1998.
During the years ended December 31, 1996 and 1997, the Company recorded
equity in Laser's earnings, inclusive of goodwill amortization, of $2,280,000
and $1,558,000, respectively. Such amounts are included in "Interest and other
income (expense) - net" in the accompanying Consolidated Statements of
Operations (see Note K).
Acquisitions
During 1998, Company subsidiaries completed several small acquisitions.
Effective January 1, 1998, the Company acquired a Spanish company engaged in the
manufacturing and distribution of specialty plant nutrients; effective May 1,
1998, the Company acquired EMV Kft. ("EMV"), a Hungarian business engaged in the
manufacturing and marketing of organic chemicals; effective October 30, 1998,
the Company acquired Plant Products, headquartered in Ontario, Canada, which
manufactures and markets specialty plant nutrients for commercial horticulture,
specialty high value crops and retail markets; and effective December 18, 1998,
the Company acquired Alpine Plant Foods, Inc. (including its Canadian
subsidiary; together "Alpine"), which manufactures and distributes high purity
liquid fertilizers.
Each of these acquisitions have been accounted for using the purchase
method of accounting. The aggregate purchase price paid for these acquired
businesses was approximately $24,600,000 and resulted in approximately
$11,000,000 in goodwill, with such goodwill generally being amortized over a 20
year period. These acquisitions did not have a significant effect on the
Company's consolidated operations subsequent to their respective acquisition
dates during 1998. The aggregate consolidated revenues (unaudited) for these
companies for the year ended December 31, 1998 (or their most recent fiscal
year, as applicable) amounted to approximately $58,000,000.
In addition, effective February 4, 1998, a subsidiary of HCL purchased
approximately a 42% equity interest in Lego Irrigation, Ltd ("Lego"), an Israeli
developer, manufacturer and marketer of drip irrigation systems, for a purchase
price of approximately $11,000,000. On March 9, 1999, as contemplated by the
terms of the initial purchase of the Lego shares, the subsidiary of HCL
purchased, pursuant to an option, an additional 34% equity interest in Lego for
approximately $10,000,000.
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.
F-9
44
Operating Data
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.
The Company's revenues by region for the years ended December 31, 1996,
1997 and 1998 are set forth below:
1996 1997 1998
---- ---- ----
(in millions)
Europe ....................................................................... $160 $148 $168
United States ................................................................ 145 128 145
Asia ......................................................................... 37 29 28
Canada and Latin America ..................................................... 24 22 33
Israel ....................................................................... 23 19 19
Australia .................................................................... 6 6 8
Africa and other ............................................................. 17 25 23
---- ---- ----
Total ................................................................. $412 $377 $424
==== ==== ====
The Company has grouped its revenues into general product categories
that reflect the different product uses. These product groups are: Specialty
Plant Nutrients, Industrial Chemicals and Organic Chemicals, which contributed
the following revenues for the years ended December 31, 1997 and 1998:
1997 1998
---- ----
(in millions)
Specialty Plant Nutrients .......................................... $221 $243
Industrial Chemicals ............................................... 109 125
Organic Chemicals .................................................. 47 56
---- ----
Total .................................................... $377 $424
==== ====
As of December 31, 1997 and 1998, the Company's assets were located in the
United States (37% and 34%, respectively) and abroad (principally Israel) (63%
and 66%, respectively). The Company has no single customer accounting for more
than 10% of its revenues.
Functional Currency and Transaction Gains and Losses
The Company has no significant foreign currency denominated revenues except
at HCL. Approximately $167,000,000 of HCL's total sales for the year ended
December 31, 1998 were 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 operations currently. At December 31, 1997
and 1998, there were outstanding contracts to purchase $27,000,000 and
$24,100,000, respectively, in various European currencies, principally British
Pounds and Spanish Pesetas in 1997 and Deutsche Marks and Spanish Pesetas in
1998.
F-10
45
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, 1996, 1997 and 1998 would have
decreased by $6,900,000, $7,000,000 and $1,400,000, respectively, and income
before income taxes would have decreased by approximately $5,300,000, $7,000,000
and $1,400,000, 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 certain subsidiaries included in the following paragraph) are
maintained, in U.S. dollars.
The assets, liabilities and operations of certain foreign subsidiaries of
the Company are measured using the currency of the primary economic environment
in which the respective 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 subsidiarys' financial statements from their respective
currencies 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 amortized over the estimated
useful life of the respective asset. HCL recorded investment grants for the
years ended December 31, 1996, 1997 and 1998 amounting to $248,000, $1,646,000
and $16,692,000, respectively.
Investments In Marketable Securities and Other Short-Term Investments
In accordance with 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.
F-11
46
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, 1998, 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 1996, 1997 and 1998 the Company incurred environmental clean-up
costs of approximately $300,000, $400,000 and $900,000, respectively. In
addition, at December 31, 1997 and 1998, the Company has accrued approximately
$1,600,000 and $2,700,000, respectively, related to the estimated costs to be
incurred for various environmental liabilities.
Research and Development Costs
Research and development costs are charged to expense as incurred and
amounted to $2,693,000, $2,421,000 and $2,661,000 for the years ended December
31, 1996, 1997 and 1998, respectively.
Risk Management Derivatives
Amounts receivable or payable under interest rate swap agreements are
recognized as interest expense.
F-12
47
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, 1997 and 1998 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. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 establishes standards for reporting and
disclosing comprehensive income and its components. The adoption of SFAS 130 did
not have a material effect on the Company's reporting disclosures.
In June 1997, the Financial Accounting Standards Board issued 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 adoption of SFAS 131 did not have a material effect on the Company's
reporting disclosures.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 requires that an entity recognize all derivatives as either assets or
liabilities and measure those instruments at fair value. Depending on the
intended use of the derivative, changes in derivative fair values may be charged
to operations unless the derivative qualifies as a hedge under certain
requirements. SFAS 133 is effective for all quarters of fiscal years beginning
after June 15, 1999 (January 1, 2000 for the Company). The Company is evaluating
the impact, if any, of SFAS 133 on its consolidated financial statements.
Bogalusa Litigation
The Company is a party to litigation arising out of an October 23, 1995
release of nitrogen tetroxide at a Bogalusa, Louisiana plant of a customer of
Vicksburg. The nitrogen tetroxide had been produced and sold by Vicksburg. The
plaintiffs in these suits seek unspecified damages arising out of the alleged
exposure to toxic fumes. The Louisiana class action and the Mississippi suits
(collectively referred to herein as the "Bogalusa Litigation") named a number of
other defendants, in addition to TRI and certain of its subsidiaries. During
August, 1998 the Company entered into conditional agreements to settle the
claims in the Bogalusa Litigation. During March, 1999, amended and restated
conditional agreements to settle the claims were executed by the parties.
If the conditions to the settlement are satisfied, the Company's funding
obligation would be an aggregate of approximately $32,400,000 plus (i) an amount
(estimated to eventually be in excess of $4,500,000) equal to the amount which
one of the settling insurance companies shall have paid to the Company for
reimbursement of defense costs (the "Defense Depletion Amount") and (ii)
interest payments at 6.25% per annum beginning on April 1, 1999 on the not as
yet escrowed portion of $17,000,000, as described below. The initial $10,000,000
of the funding obligation was
F-13
48
deposited in escrow on August 31, 1998. In addition, two settling insurance
companies are to contribute an aggregate of $25,000,000, less the Defense
Depletion Amount, and the Company will assign to the plaintiffs its rights under
another $26,000,000 of insurance coverage. The Company is scheduled to escrow an
additional $5,000,000 on March 31, 1999, $6,800,000 on December 31, 2000,
$5,100,000 on June 30, 2001 and $5,100,000 on December 31, 2001.
The Company recorded a charge of approximately $36,200,000 (included in the
caption "Interest and other income (expense) net" in the accompanying December
31, 1998 Consolidated Statements of Operations - See Note K) to cover the cost
of the conditional settlement and the related legal expenses.
For further information regarding the Bogalusa Litigation and the
conditional settlement relating thereto see Part I - Item 3 - "Legal
Proceedings".
Reclassifications
Certain prior year amounts have been reclassified to conform to the manner
of presentation in the current year.
Change in Accounting Principle
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. 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. 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).
B. OTHER CURRENT ASSETS
Other current assets consist of the following at December 31, 1997 and
1998:
1997 1998
---- ----
(in thousands)
Marketable securities (carried at market) .................................................... $ 6,523 $28,009
Miscellaneous receivables, other securities,
deferred income taxes, etc .............................................................. 27,055 35,599
------- -------
Total .............................................................................. $33,578 $63,608
======= =======
F-14
49
The Company classifies all of its marketable securities (including U.S.
Government obligations) as available-for-sale securities as of December 31, 1997
and 1998:
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(in thousands)
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
======= ======= ======= =======
December 31, 1998
- -----------------
Foreign Government obligations $ -- $ -- $ -- $ --
Other debt securities ........ -- -- -- --
------- ------- ------- -------
Total debt securities ... -- -- -- --
------- ------- ------- -------
Common stocks and mutual funds
investing primarily therein 47,110 297 19,398 28,009
Preferred stocks ............. -- -- -- --
------- ------- ------- -------
Total equity securities . 47,110 297 19,398 28,009
------- ------- ------- -------
Total ................... $47,110 $ 297 $19,398 $28,009
======= ======= ======= =======
Gross realized gains and gross realized losses on sales of securities are
set forth below for the years ended December 31, 1996, 1997 and 1998 (see Note
K):
Gains Losses
----- ------
1996........................................... $ 411,000 $ 70,000
1997........................................... $3,052,000 $ 339,000
1998........................................... $3,365,000 $1,417,000
F-15
50
C. INVENTORIES
Inventories consist of the following at December 31, 1997 and 1998:
1997 1998
---- ----
(in thousands)
Raw materials........................................ $ 13,362 $ 21,301
Finished goods....................................... 46,764 74,141
---------- -----------
Total.......................................... $ 60,126 $ 95,442
========= ==========
D. PROPERTY, PLANT AND EQUIPMENT - NET
Property, plant and equipment at December 31, 1997 and 1998 consists of
the following:
1997 1998
---- ----
(in thousands)
Land................................................. $ 4,272 $ 5,186
Buildings............................................ 22,416 28,157
Machinery, plant and equipment....................... 279,734 316,379
Office furniture, equipment and water rights......... 9,714 10,310
Construction-in-progress............................. 20,339 51,502
---------- ----------
Total, at cost................................. 336,475 411,534
Less accumulated depreciation and amortization....... 128,988 150,949
---------- ----------
Property, plant and equipment - net............ $ 207,487 $ 260,585
========== ==========
The Company capitalized interest costs aggregating $0, $35,000 and
$896,000 during the years ended December 31, 1996, 1997 and 1998, respectively,
with respect to several construction projects. Certain property, plant and
equipment has been pledged as collateral for long-term debt (see Note G).
E. SHORT-TERM DEBT AND UNUSED CREDIT LINES
The weighted average interest rates for short-term debt outstanding at
December 31, 1997 and 1998 were 6.4% and 5.7%, respectively.
As of December 31, 1998, the Company and its subsidiaries have unused
revolving loan commitments and other credit lines from banks aggregating
approximately $73,000,000.
F. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following
at December 31, 1997 and 1998:
1997 1998
---- ----
(in thousands)
Compensation and payroll taxes....................... $ 7,104 $ 9,123
Interest............................................. 10,455 6,645
Income taxes......................................... 607 1,856
Other, including $5,000,000 relating to the Bogalusa
Litigation in 1998.............................. 12,049 25,600
--------- ---------
Total.......................................... $ 30,215 $ 43,224
========= =========
F-16
51
G. LONG-TERM DEBT - NET
Long-term debt consists of the following at December 31, 1997 and 1998:
Payable
Description Interest Rate * Through 1997 1998
----------- --------------- ------- ---- ----
(in thousands)
TRI:
Bank loans (1)....................................... Various 2007 $ 3,000 $ 14,000
$100,000,000 principal amount of 10.75%
Senior Notes (effective interest rate
of 10.75%) (2)................................. 10.75% 2008 - 100,000
$135,000,000 principal amount of 12%
Senior Discount Notes, net of unamortized
debt discount of $52,296,000
(effective interest rate of 12.0%) (2)........... 12.0% 2008 - 82,704
$115,000,000 principal amount of 11.875%
Senior Subordinated Notes, net of unamortized
debt discount of $712,000 in 1997
(effective interest rate of 12.1%) (2)........... 11.875% 2002 114,288 -
Subsidiaries:
Bank loans and other financing....................... Various 2020 164,806 227,911
--------- ---------
Total............................................ 282,094 424,615
Less current portion............................. 13,080 10,183
--------- ---------
Long-term debt - net............................. $ 269,014 $ 414,432
========= =========
* As prevailing on respective balance sheet dates. Such rates (other than
the senior, senior discount and subordinated debt) generally "float" according
to changes in the Prime or LIBOR rates. At December 31, 1998 such rates were
approximately 7.3% and 5.4%, respectively.
1. As of December 29, 1995 and as amended, the Company entered into a Loan
Agreement with a bank for borrowings upon the Company's request prior to June
30, 2000 in the aggregate principal amount not to exceed $40,000,000. The loan
matures on June 30, 2007. 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") were
scheduled to mature on July 1, 2002. 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 (the "Senior Discount Notes"). The Senior
Discount Notes provided gross proceeds to the Company of approximately
$75,400,000. 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 in March, 1998 to purchase (pursuant to a tender
offer and consent solicitation) approximately $110,000,000 principal amount of
the 11 7/8% Notes (the "Refinancing"). In addition, in the four month period
ended July, 1998 the Company repurchased or redeemed the remaining $5,000,000
principal amount of its 11 7/8% Notes. As a result of the Refinancing and the
subsequent repurchases or redemptions of the 11 7/8% Notes, combined with the
write-off of certain unamortized issuance costs relating to the 11 7/8% Notes,
the Company recognized an extraordinary charge for the early extinguishment of
debt of approximately $11,328,000 (no tax effect) which is classified as an
extraordinary item in the accompanying December 31, 1998 Consolidated Statement
of Operations.
F-17
52
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 to 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.
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 to 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, 1998, the
Company and its subsidiaries are in compliance with the covenants of each of the
respective loan agreements and the Indentures then in effect.
The aggregate maturities of long-term debt at December 31, 1998 are set
forth below.
Years Ending
December 31, (in thousands)
------------ --------------
1999......................... $ 10,183
2000......................... 9,749
2001......................... 39,380
2002......................... 46,765
2003......................... 54,797
Thereafter................... 263,741
----------
Total.................. $ 424,615
==========
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, Cedar and Plant Products have also been pledged to the
banks pursuant to these agreements. The Company's common stock is pledged to
secure the repayment obligations of TPR under a note issued by it to a former
indirect shareholder of the Company.
Interest paid, net of capitalized interest, totaled $31,672,000,
$28,193,000 and $33,034,000 for the years ended December 31, 1996, 1997 and
1998, 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, 1997
and 1998 include accruals of $1,653,000 and $1,330,000, respectively, for the
estimated unfunded liability of complete severance of all HCL employees. Costs
incurred were approximately $2,629,000, $1,912,000 and $2,100,000 for the years
ended December 31, 1996, 1997 and 1998, 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.
F-18
53
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").
The change in the benefit obligation based on an actuarial valuation
for Cedar's defined benefit pension plan is as follows:
For the Years Ended
December 31,
------------
1997 1998
-------- --------
(in thousands)
Benefit obligation, beginning of year ................................... $ 15,140 $ 18,215
Service cost ............................................................ 819 904
Interest cost ........................................................... 1,133 1,287
Amendments .............................................................. -- 64
Actuarial (gain)/loss ................................................... 1,591 1,254
Benefits paid ........................................................... (402) (448)
Expenses paid ........................................................... (66) (81)
-------- --------
Benefit obligation, end of year ......................................... $ 18,215 $ 21,195
======== ========
The following details the change in plan assets for Cedar's defined
benefit pension plan:
December 31,
------------
1997 1998
---- ----
(in thousands)
Fair value of plan assets, beginning of year .................... $ 12,157 $ 14,239
Actual return ................................................... 2,017 1,890
Employer contribution ........................................... 533 709
Benefits paid ................................................... (402) (448)
Expenses paid ................................................... (66) (81)
-------- --------
Fair value of plan assets, end of year .......................... $ 14,239 $ 16,309
======== ========
The reconciliation of the funded status for Cedar's benefit plan is as
follows:
December 31,
------------
1997 1998
---- ----
(in thousands)
Vested benefit obligation .................................. $(12,866) $(15,097)
Accumulated benefit obligation ............................. (13,614) (15,977)
Projected benefit obligation ............................... $(18,215) $(21,195)
Plan assets at fair value .................................. 14,239 16,309
-------- --------
(3,976) (4,886)
Unrecognized net loss/(gain) ............................... 2,419 2,991
Prior service costs not yet recognized ..................... 733 684
Unrecognized net transition obligation ..................... 234 176
-------- --------
Prepaid/(accrued) benefit cost ............................. $ (590) $ (1,035)
======== ========
F-19
54
Cedar's net periodic benefit cost for the years ended 1996, 1997 and
1998 was as follows:
1996 1997 1998
------- ------- -------
(in thousands)
Service cost ........................................... $ 796 $ 819 $ 904
Interest cost .......................................... 1,014 1,133 1,287
Expected return on plan assets ......................... (1,174) (1,119) (1,276)
Transition obligation recognition ...................... 59 59 59
Prior service cost amortization ........................ 109 109 114
Net loss recognition ................................... 37 29 65
Asset gain deferral .................................... 233 -- --
------- ------- -------
Net periodic benefit cost .............................. $ 1,074 $ 1,030 $ 1,153
======= ======= =======
Actuarial assumptions used at December 31, 1996, 1997 and 1998 were as
follows:
1996 1997 1998
---- ---- ----
Discount rate - projected benefit obligation.... 7.5% 7.0% 6.8%
Rate of increase in compensation levels......... 5.0% 5.0% 5.0%
Expected long-term rate of return on assets..... 9.0% 9.0% 9.0%
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. In addition, certain of the Company's Canadian
subsidiaries have contributory pension plans designed to conform with Canadian
regulatory requirements. These 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 Company's contribution expense
relating to these plans totaled $505,000, $202,000 and $298,000 for the years
ended December 31, 1996, 1997 and 1998, respectively.
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, 1998, minimum annual rental commitments under these leases are:
Years Ending
December 31, (in thousands)
------------ --------------
1999....................... $ 4,111
2000....................... 3,262
2001....................... 1,964
2002....................... 1,540
2003....................... 1,257
Thereafter................. 7,285
--------
Total.................. $ 19,419
========
F-20
55
Rent expense for 1996, 1997 and 1998 was $4,683,000, $4,489,000 and
$6,016,000, respectively, covering land, office facilities and equipment.
J. INCOME TAXES
The Company's income tax provision for the years ended December 31,
1996, 1997 and 1998 consist of the following:
1996 1997 1998
----- ----- -----
(in thousands)
Current expense (benefit):
Federal ........................................................ $ -- $ -- $ --
Foreign ........................................................ 3,146 652 904
State .......................................................... (121) 570 394
------- ------- -------
Total current ............................................ 3,025 1,222 1,298
------- ------- -------
Deferred expense:
Foreign ........................................................ 385 1,647 2,466
State .......................................................... 606 83 118
------- ------- -------
Total deferred ........................................... 991 1,730 2,584
------- ------- -------
Total .................................................... $ 4,016 $ 2,952 $ 3,882
======= ======= =======
The provision for income taxes for the years ended December 31, 1996,
1997 and 1998 amounted to $4,016,000, $2,952,000 and $3,882,000, respectively,
representing effective income tax rates of 26.4%, 67.2% and 37.2%, respectively.
These amounts differ from the amounts of $5,323,000, $1,539,000 and
$(3,653,000), respectively, computed by applying the statutory Federal income
tax rates to income (loss) before income taxes, extraordinary item and change in
accounting principle. The reasons for such variances from statutory rates were
as follows:
1996 1997 1998
------ ------ ------
Statutory Federal rates ........................... 35.0% 35.0% (35.0)%
Increase (decrease) in income tax rate resulting
from:
Foreign operations - net impact of foreign
statutory rates, effects of Israeli "inflation
allowances", withholding taxes, etc ............ 0.5 (33.9) (74.7)
Net losses without current tax benefit and other 13.4 56.5 143.7
Utilization of capital loss carryforwards ...... (22.6) -- --
Additional depletion expense ................... (2.0) -- --
State and local income taxes - net ............. 2.1 9.6 3.2
---- ---- ----
Effective income tax rates ........................ 26.4% 67.2% 37.2%
==== ==== ====
F-21
56
At December 31, 1997 and 1998, deferred tax assets (liabilities)
consisted of the following:
1997 1998
-------- --------
(in thousands)
Depreciation and property and equipment basis differences ......... $(33,534) $(39,873)
Nondeductible reserves ............................................ 4,582 5,565
Net operating loss carryforwards .................................. 28,744 37,916
Foreign tax credit carryovers ..................................... 5,427 3,865
Alternative minimum tax credit carryovers ......................... 5,401 5,401
Investment tax credit carryovers .................................. 200 200
Provision for settlement of lawsuit ............................... -- 12,147
Deferred interest ................................................. -- 3,061
Other ............................................................. 392 2,862
-------- --------
Deferred taxes - net, exclusive of valuation allowance ............ 11,212 31,144
Valuation allowance ............................................... (33,694) (56,656)
-------- --------
Deferred taxes - net .............................................. $(22,482) $(25,512)
======== ========
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". At December 31, 1998, deferred tax assets of
$5,320,000 are classified as "other current assets" and deferred tax liabilities
of $30,832,000 are classified as "other liabilities". Deferred tax liabilities
were increased in 1998 by approximately $446,000 as a result of deferred tax
liabilities of subsidiaries acquired in 1998 and purchase accounting
adjustments.
At December 31, 1998, the Company had various tax loss and credit
carryovers which expire as follows:
U.S. Federal
-----------------------------------------------------
Net Alternative State Net Foreign Net
Foreign Investment Operating Minimum Operating Operating
Expiration Tax Credit Tax Credit Loss Tax Credit Loss Loss
---------- ---------- ---------- ---- ---------- ---- ----
(in thousands)
1999.............. $ 3,701
2000.............. 41
2001.............. 32 $200
2002.............. 36
2003.............. 55 $ 4,165
2010.............. $22,208 $15,600
2011.............. 17,442 11,200
2012.............. 10,501 9,600
2013.............. 13,920
2018.............. 17,344
Unlimited......... $ 5,401 31,839
------- ---- ------- ------- ------- -------
Total $ 3,865 $200 $67,495 $ 5,401 $50,320 $36,004
======= ==== ======= ======= ======= =======
Income taxes paid, including prepaid amounts, totaled approximately
$3,100,000, $3,800,000 and $425,000, respectively, during the years ended
December 31, 1996, 1997 and 1998.
No taxes on income have been provided on approximately $66,000,000 of
undistributed earnings of foreign subsidiaries as of December 31, 1998, since
management believes these amounts to be permanently invested.
F-22
57
K. INTEREST AND OTHER INCOME (EXPENSE) - NET
Interest and other income (expense) - net for the years ended December
31, 1996, 1997 and 1998 consists of the following:
1996 1997 1998
---- ---- ----
(in thousands)
Interest and dividend income ........................................ $ 1,408 $ 1,131 $ 2,201
Security gains - net (see Note B) ................................... 341 2,713 1,948
Gain on Laser/ESC share exchange (see Note A) ....................... -- -- 22,946
Gain on sale of potash operations (see Note A) ...................... 22,579 -- --
Loss on Bogalusa legal settlement (see Note A) ...................... -- -- (36,204)
Equity in earnings of Laser - net (see Note A) ..................... 2,280 1,558 --
Other, including losses of $1,600,000 in 1996
relating to foreign currencies (see Note A) ................. (1,160) 148 485
-------- -------- --------
Total ....................................................... $ 25,448 $ 5,550 $ (8,624)
======== ======== ========
L. PREFERRED STOCK
The preferred shares are non-voting and have a cumulative dividend, at
the rate of $8.50 per share per annum. 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.
M. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In connection with a credit agreement, Cedar has entered into two
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, 1998:
Variable
Nominal Fixed Rate Rate Maturity
Amount Paid Received Date
------ ---- -------- ----
$ 5,000 5.27% 5.40% 2/99
15,000 6.70% 4.97% 10/01
The variable rate received is tied to the three-month LIBOR rate.
F-23
58
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, 1997 December 31, 1998
----------------- -----------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
(in thousands)
Assets:
Marketable securities (included within
"Other current assets") ............... $ 6,523 $ 6,523 $ 28,009 $ 28,009
Investments in certain securities
(included within "Other assets"
and accounted for by the equity method) 9,848 38,824 9,262 7,901
Liabilities:
Long-term debt ............................. 282,094 288,556 424,615 412,961
Off-balance sheet financial instruments:
Foreign currency contracts ................. 503 503 172 172
Risk management derivatives ................ -- (317) -- (685)
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 $27,000,000 and
$24,100,000 as of December 31, 1997 and 1998, 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, 1997 and 1998. 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.
F-24
59
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 Bogalusa Litigation 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 and other foreign jurisdictions 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 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.
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 on December 31, 1999 and 2005.
HCL currently sources phosphate rock from Rotem Amfert Negev Ltd. ("Rotem")
according to the terms of a contract which expires in 2001. 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.
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 a
labor dispute at HCL (the "Haifa Labor Dispute") - see Part I - Item 1 -
"Business" - "Employees".
F-25
60
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 HCL 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, HCL
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 through the
early part of 1998, the Haifa Facility 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.
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.
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. See Part I -
Item 1 - "Business" - "Special Note Regarding Forward-Looking Statements" above.
F-26
61
CONDENSED FINANCIAL INFORMATION OF REGISTRANT SCHEDULE I
TRANS-RESOURCES, INC.
BALANCE SHEETS
December 31,
------------
1997 1998
---- ----
(in thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................... $ 12,924 $ 5,826
Receivables and other assets ............................................ 8,854 26,712
Prepaid expenses ........................................................ 2,741 2,408
--------- ---------
Total Current Assets ................................................ 24,519 34,946
INVESTMENTS IN SUBSIDIARIES ................................................. 93,363 98,434
DUE FROM SUBSIDIARIES - net ................................................. 4,894 2,887
OTHER ASSETS ................................................................ 28,393 30,583
--------- ---------
Total ............................................................... $ 151,169 $ 166,850
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES -
Accrued expenses and other current liabilities .......................... $ 7,203 $ 5,881
--------- ---------
LONG-TERM DEBT - net:
Senior indebtedness, notes payable and other obligations ................ 3,000 196,704
Senior subordinated debt - net .......................................... 114,288 --
--------- ---------
Long-Term Debt - net (Note) ......................................... 117,288 196,704
--------- ---------
OTHER LIABILITIES ........................................................... 3,071 3,108
--------- ---------
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 ....................................................... 6,203 (34,922)
Cumulative translation adjustment ....................................... (67) (1,462)
Unrealized gains (losses) on marketable securities ...................... 829 (19,101)
--------- ---------
Total Stockholder's Equity .......................................... 23,607 (38,843)
--------- ---------
Total .......................................................... $ 151,169 $ 166,850
========= =========
- ----------
Note - The aggregate maturities of long-term debt during the next five years is
approximately as follows: 1999 - $0; 2000 - $700,000; 2001 - $700,000;
2002 - $700,000 and 2003 - $700,000.
S-1
62
CONDENSED FINANCIAL INFORMATION OF REGISTRANT SCHEDULE I
(continued)
TRANS-RESOURCES, INC.
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1996, 1997 and 1998
1996 1997 1998
---- ---- ----
(in thousands)
REVENUES - EQUITY IN NET
EARNINGS (LOSSES) OF SUBSIDIARIES:
Dividends received from subsidiaries ................................. $ 76,556 $ 13,400 $ 14,650
Undistributed (dividends in excess of)
earnings of subsidiaries .......................................... (55,685) 1,693 (11,160)
-------- -------- --------
Total ................................................................ 20,871 15,093 3,490
COSTS AND EXPENSES ....................................................... (4,559) (6,142) (7,451)
INTEREST EXPENSE ......................................................... (15,568) (14,324) (19,894)
INTEREST AND OTHER INCOME - Net .......................................... 2,024 3,666 7,823
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES,
EXTRAORDINARY ITEM, AND CHANGE IN
ACCOUNTING PRINCIPLE ......................................... 2,768 (1,707) (16,032)
INCOME TAX BENEFIT ....................................................... 8,425 3,151 1,714
-------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM
AND CHANGE IN ACCOUNTING PRINCIPLE ................................ 11,193 1,444 (14,318)
EXTRAORDINARY ITEM - Loss on repurchase
of debt (no income tax benefit) ...................................... (553) -- (11,328)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE - Net of income tax benefit of $80,000 ..................... -- -- (1,253)
-------- -------- --------
NET INCOME (LOSS)......................................................... $ 10,640 $ 1,444 $(26,899)
======== ======== ========
S-2
63
CONDENSED FINANCIAL INFORMATION OF REGISTRANT SCHEDULE I
TRANS-RESOURCES, INC. (CONCLUDED)
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1996, 1997 and 1998
1996 1997 1998
---- ---- ----
(in thousands)
OPERATING ACTIVITIES AND WORKING
CAPITAL MANAGEMENT:
Operations:
Net income (loss) ............................... $ 10,640 $ 1,444 $ (26,899)
Items not requiring (providing) cash:
Unremitted earnings of subsidiaries ........... 55,685 (1,693) 11,160
Depreciation and amortization of property,
plant and equipment ................ (325) 710 778
Amortization of deferred financing costs
and accretion of interest expense ... 803 653 8,291
Gain on Laser/ESC share exchange .............. -- -- (4,738)
Extraordinary item - loss or repurchase of debt 553 -- 11,328
Cumulative effect of change in accounting
principle ................................. -- -- 1,253
Deferred taxes and other - net ................ (4,834) (1,113) (235)
--------- --------- ---------
Total ......................................... 62,522 1 938
Working capital management:
Receivables and other current assets .......... (546) (312) 237
Prepaid expenses .............................. (175) (2,275) 333
Accrued expenses and other current liabilities (1,066) (2,696) (1,697)
--------- --------- ---------
Cash provided by (used in) operations and
working capital management .................. 60,735 (5,282) (189)
--------- --------- ---------
INVESTMENT ACTIVITIES:
Additions to property, plant and equipment ...... (21) (29) (59)
Sales of marketable securities and
short-term investments ........................ 1,987 8,035 20,481
Purchases of marketable securities and short-
term investments .............................. (9,354) (7,652) (33,572)
Other - net, principally additional investment
in subsidiaries in 1998 .................. 6,213 (823) (37,280)
--------- --------- ---------
Cash provided by (used in) investment
activities .................................. (1,175) (469) (50,430)
--------- --------- ---------
FINANCING ACTIVITIES:
Increase in long-term debt ...................... -- 3,000 193,997
Repurchases, payments and current maturities of
long-term debt ............................... (51,000) -- (137,000)
Dividends to stockholder ........................ (6,059) (4,586) (13,476)
--------- --------- ---------
Cash provided by (used in) financing
activities .................................. (57,059) (1,586) 43,521
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS .................................. 2,501 (7,337) (7,098)
CASH AND CASH EQUIVALENTS:
Beginning of year ................................. 17,760 20,261 12,924
--------- --------- ---------
End of year ....................................... $ 20,261 $ 12,924 $ 5,826
========= ========= =========
Interest paid ....................................... $ 16,446 $ 13,666 $ 15,846
========= ========= =========
Income taxes paid ................................... $ 2,268 $ 3,339 $ --
========= ========= =========
S-3
64
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 from), 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 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"), filed as Exhibit 4.4 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997 (the "1997 Form *
10-K"), which is incorporated herein by reference.
4.2 Form of 10 3/4% Senior Notes due 2008, Series B (contained in
Exhibit 4.1 as Exhibit B thereto). *
4.3 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"), filed as Exhibit 4.6 to the
1997 Form 10-K, which is incorporated herein by reference. *
4.4 Form of 12% Senior Discount Notes due 2008, Series B (contained
in Exhibit 4.3 as Exhibit B thereto). *
E-1
65
Exhibit Description Page No.
- ------- ----------- --------
4.5 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. *
4.6 Amendment No. 1, dated as of February 26, 1998, to the Cedar
Credit Agreement, filed as Exhibit 4.11 to the 1997 Form 10-K,
which is incorporated herein by reference. *
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, 1998.
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, filed as Exhibit 10.1 to the 1997 Form 10-K, which *
is incorporated herein by reference.
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.
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 For S-1, which is incorporated herein by
reference. *
E-2
66
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, filed as Exhibit 10.13 to
the 1997 Form 10-K, which is incorporated herein by reference.(1) *
10.14 Lease contract between Haifa Chemicals South, Ltd. ("HCSL") and
Israel Land Administration Authority, dated as of March 6, 1995,
concerning real property, filed as Exhibit 10.14 to the 1997 Form
10-K, which is incorporated herein by reference. *
10.15 Potash Sales Agreement between HCSL and Dead Sea Works Limited,
dated April 24, 1995, concerning the supply of potash, filed as
Exhibit 10.15 to the 1997 Form 10-K, which is incorporated herein
by reference. *
10.16 Supply Agreement, dated as of January 3, 1999, between Haifa
Chemicals Ltd., HCSL and Rotem Amfert Negev Ltd. E-5
10.17 Amended and Restated Conditional Agreement to Settle the
Louisiana Class Action, dated as of August 21, 1998, relating to
the Bogalusa Litigation. E-6
10.18 Amended and Restated Conditional Agreement to Settle the Claims
by the Mississippi Plaintiffs, dated as of August 20, 1998,
relating to the Bogalusa Litigation. E-7
E-3
67
21 Subsidiaries of the Company. E-8
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-9
27 Financial Data Schedule. E-10
----------------
* Incorporated by reference
(1) Management contract or compensatory plan or arrangement
E-4