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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
Commission File Number 333-64641
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Philipp Brothers Chemicals, Inc.
(Exact name of registrant as specified in its charter)
New York 13-1840497
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Parker Plaza, Fort Lee, New Jersey 07024
(Address of principal executive offices) (Zip Code)
(201) 944-6020
(Registrant's telephone number, including area code)
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Indicate by check mark whether the Registrant has (1) 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 the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Number of shares of each class of common stock outstanding as of February 10,
2000:
Class A Common Stock, $.10 par value 12,600.00
Class B Common Stock, $.10 par value 11,888.50
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PHILIPP BROTHERS CHEMICALS, INC.
Table of Contents
Page
----
PART I FINANCIAL INFORMATION (UNAUDITED)
Item 1. Condensed Financial Statements 4
Condensed Consolidated Balance Sheets 5
Condensed Consolidated Statements of Operations 6
Condensed Consolidated Statements of Changes
in Stockholders' Equity 7
Condensed Consolidated Statements of Cash Flows 8
Notes to Condensed Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURES 29
2
This Form 10-Q contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company's actual results could
differ materially from those set forth in the forward-looking statements.
Certain factors that might cause such a difference are discussed throughout this
Form 10-Q and are discussed in Item 2 of Part I of this Form 10-Q under the
caption "Certain Factors Affecting Future Operating Results."
PART I -- FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
3
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In Thousands)
December 31, June 30,
1999 1999
------------ ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,319 $ 2,308
Trade receivables, less allowance for doubtful accounts of $940
at December 31, 1999 and $886 at June 30,1999 56,900 69,113
Other receivables 7,152 9,961
Inventories 57,111 51,430
Prepaid expenses and other current assets 8,053 7,273
--------- ---------
TOTAL CURRENT ASSETS 132,535 140,085
PROPERTY, PLANT AND EQUIPMENT, net 70,127 66,040
INTANGIBLES 6,736 6,959
OTHER ASSETS 25,750 24,289
--------- ---------
$ 235,148 $ 237,373
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Cash overdraft $ 2,043 $ 1,438
Loans payable to banks 2,799 3,019
Current portions of long-term debt 1,682 1,450
Accounts payable 28,798 36,260
Other loans payable 715 182
Accrued expenses and other current liabilities 21,613 25,072
--------- ---------
TOTAL CURRENT LIABILITIES 57,650 67,421
LONG-TERM DEBT 144,393 134,088
OTHER LIABILITIES 10,971 11,524
--------- ---------
TOTAL LIABILITIES 213,014 213,033
--------- ---------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE SECURITIES:
Common stock 2,180 2,376
Common stock of subsidiary 330 581
--------- ---------
TOTAL REDEEMABLE SECURITIES 2,510 2,957
--------- ---------
STOCKHOLDERS' EQUITY:
Series A preferred stock 521 521
Common stock 2 2
Paid-in capital 878 816
Retained earnings 20,024 22,755
Accumulated other comprehensive income (loss) -
cumulative currency translation adjustment (1,801) (2,711)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 19,624 21,383
--------- ---------
$ 235,148 $ 237,373
========= =========
See notes to unaudited Condensed Consolidated Financial Statements
4
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands)
Three Months Ended Six Months Ended
December 31, December 31,
1999 1998 1999 1998
--------- --------- --------- ---------
NET SALES $ 78,227 $ 72,893 $ 148,546 $ 132,102
COST OF GOODS SOLD 54,728 53,072 104,956 99,702
--------- --------- --------- ---------
GROSS PROFIT 23,499 19,821 43,590 32,400
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 20,155 17,649 39,461 29,612
--------- --------- --------- ---------
OPERATING INCOME 3,344 2,172 4,129 2,788
OTHER:
Interest expense 3,598 3,297 6,988 6,019
Interest income (83) (130) (175) (473)
Other expense, net 1,134 848 2,035 1,188
--------- --------- --------- ---------
LOSS BEFORE INCOME TAXES (1,305) (1,843) (4,719) (3,946)
BENEFIT FOR INCOME TAXES (559) (595) (1,988) (1,609)
--------- --------- --------- ---------
NET LOSS $ (746) $ (1,248) $ (2,731) $ (2,337)
========= ========= ========= =========
See notes to unaudited Condensed Consolidated Financial Statements
5
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
FOR THE THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 1999
(In Thousands)
Common Stock Accumulated
Other
Class Class Paid-in Retained Comprehensive
Series A "A" "B" Capital Earnings Income (loss) Total
-------- -------- -------- -------- -------- ------------- --------
BALANCE, JULY 1,1999 $ 521 $ 1 $ 1 $ 816 $ 22,755 $ (2,711) $ 21,383
Foreign currency translation adjustment -- -- -- -- -- 1,384 1,384
Net loss -- -- -- -- (1,985) -- (1,985)
-------- -------- -------- -------- -------- -------- --------
BALANCE, SEPTEMBER 30,1999 $ 521 $ 1 $ 1 $ 816 $ 20,770 $ (1,327) $ 20,782
Foreign currency translation adjustment (474) (474)
Net loss (746) (746)
Receipt from principal shareholder 62 62
-------- -------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31,1999 $ 521 $ 1 $ 1 $ 878 $ 20,024 $ (1,801) $ 19,624
======== ======== ======== ======== ======== ======== ========
See notes to unaudited Condensed Consolidated Financial Statements
6
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
(In Thousands)
1999 1998
-------- --------
OPERATING ACTIVITIES:
Net loss $ (2,731) $ (2,337)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 5,982 5,066
Other 340 701
Changes in operating assets and liabilities, net of effects
of businesses acquired:
Accounts receivable 12,161 12,680
Inventories (5,682) (8,693)
Prepaid expenses and other current assets 1,670 102
Other assets (277) (298)
Accounts payable (7,463) (4,349)
Accrued expenses and other current liabilities (3,975) (2,368)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 25 504
-------- --------
INVESTING ACTIVITIES:
Capital expenditures (9,903) (5,885)
Acquisition of businesses, net of cash acquired -- (21,505)
Proceeds from property damage claim 872 --
Other investments (1,500) --
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (10,531) (27,390)
-------- --------
FINANCING ACTIVITIES:
Cash overdraft 605 173
Net increase in short-term debt 313 1,978
Proceeds from long-term debt 11,046 5,740
Payments of long-term debt (509) (130)
Proceeds from principal shareholder 62 --
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 11,517 7,761
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,011 (19,125)
CASH AND CASH EQUIVALENTS at beginning of period 2,308 24,221
-------- --------
CASH AND CASH EQUIVALENTS at end of period $ 3,319 $ 5,096
======== ========
See notes to unaudited Condensed Consolidated Financial Statements
7
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands)
1. General
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the financial position
as of December 31, 1999 and June 30, 1999 and the results of operations and cash
flows for the three months and six months ended December 31, 1999 and 1998.
The condensed consolidated balance sheet as of June 30, 1999 was derived
from audited financial statements, but does not include all disclosures required
by generally accepted accounting principles. Additionally, it should be noted
that the accompanying condensed consolidated financial statements and notes
thereto have been prepared in accordance with accounting standards appropriate
for interim financial statements. While the Company believes that the
disclosures presented are adequate to make the information contained herein not
misleading, it is suggested that these financial statements be read in
conjunction with the Company's consolidated financial statements for the year
ended June 30, 1999.
The results of operations for the three months and six months ended
December 31, 1999 and 1998 are not indicative of results for the full year.
2. Acquisition
On October 1, 1998, the Company acquired (the "ODDA Acquisition") all of
the outstanding capital stock of ODDA Smelteverk, AS, a Norwegian company, and
certain assets of the business of BOC Carbide Industries in the United Kingdom
(together "ODDA") from the BOC Group Plc for $19 million in cash and $18.2
million in debt. The acquisition has been accounted for using the purchase
method of accounting.
The unaudited consolidated results of operations on a pro forma basis as
if such acquisition had occurred at the beginning of fiscal 1998 are as follows:
Six Months Ended
December 31, 1998
-----------------
Net Sales $141,461
Net Loss (3,869)
3. Inventories
Inventories are valued at the lower of cost or market. Cost is principally
determined using the first-in, first-out (FIFO) and average methods, however,
certain subsidiaries of the Company use the last-in, first-out (LIFO) method for
valuing inventories.
Inventories at December 31, 1999 and June 30, 1999 are based on perpetual
records and consist of the following:
December 31, June 30,
1999 1999
------------ -------
Raw materials $25,868 $24,499
Work-in-process 6,868 5,409
Finished goods 24,375 21,522
------- -------
$57,111 $51,430
======= =======
8
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) -- (Continued)
(In Thousands)
4. Comprehensive Income
The Company's comprehensive loss amounts were computed as follows:
Three Months Ended Six Months Ended
December 31, December 31,
--------------------------- ---------------------------
1999 1998 1999 1998
------- ------- ------- -------
Net loss $ (746) $(1,248) $(2,731) $(2,337)
Change in foreign currency
translation adjustments (474) (210) 910 66
------- ------- ------- -------
Total comprehensive loss $(1,220) $(1,458) $(1,821) $(2,271)
======= ======= ======= =======
5. Contingencies
a. Litigation
The Company is party to a number of claims and lawsuits arising in the
normal course of business, including patent infringement, product liabilities
and governmental regulation concerning environmental and other matters. Certain
of these actions seek damages in various amounts. All such claims are being
contested, and management believes the resolution of these matters will not
materially affect the consolidated financial position, results of operations or
cash flows of the Company.
b. Environmental Remediation
The Company's domestic subsidiaries are subject to various federal, state
and local environmental laws and regulations which govern the management of
chemical wastes. The most significant regulation governing the Company's
recycling activities is the Resource Conservation and Recovery Act of 1976
("RCRA"). The Company has been issued final RCRA "Part B" permits to operate as
hazardous waste treatment and storage facilities at its facilities in Santa Fe
Springs, California; Garland, Texas; Joliet, Illinois; Sumter, South Carolina
and Sewaren, New Jersey. The Company has also obtained an interim status RCRA
permit for its Union City, California facility.
In connection with applying for RCRA "Part B" permits, the Company has
been required to perform extensive site investigations at certain of its
operating facilities and inactive sites to identify possible contamination and
to provide the regulatory authorities with plans and schedules for remediation.
Some soil and groundwater contamination has been identified at several plant
sites and will require corrective action over the next several years.
The Company has been named as a potentially responsible party ("PRP") in
connection with an action commenced by the Environmental Protection Agency
("EPA"), involving a third party fertilizer manufacturing site in South
Carolina. While the outcome of ongoing negotiation is uncertain, the Company has
accrued its best estimate of the amount for which this matter can be settled.
Based upon information available, management estimates the cost of further
investigation and remediation of identified soil and groundwater problems at
operating sites, closed sites and third party sites to be approximately $1,738
as of December 31, 1999, which is included in current and long-term liabilities.
9
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) -- (Continued)
(In Thousands)
6. Business Segments
The Company operates in two business segments: AgChem and Industrial
Chemicals. The AgChem segment manufactures and markets a variety of animal
nutrition and health products, copper based fungicides and growth regulators.
The Industrial Chemicals segment manufactures and markets a number of specialty
organic and inorganic intermediate chemicals for use in a broad variety of
industrial chemical applications. The Company aggregates certain operating
segments into its reportable segments. Management evaluates the performance of
its operating segments and allocates resources based on operating income.
Transfers between segments are priced at amounts that include a manufacturing
profit except that transfers of $2,682 and $2,508 for the three months ended
December 31, 1999 and 1998, respectively, and $3,599 and $3,941 for the six
months ended December 31, 1999 and 1998, respectively, from the Industrial
Chemicals group to the AgChem group are recorded at the cost of product
transferred. Other includes corporate expenses and elimination of intersegment
revenues.
Industrial
AgChem Chemicals
Group Group Other Total
------- ------- ------- -------
Three Months Ended December 31, 1999
Revenues - external customers $44,194 $34,033 $ -- $78,227
- - intersegment 1,223 6,378 (7,601) 0
------- ------- ------- -------
Total revenues $45,417 $40,411 $(7,601) $78,227
======= ======= ======= =======
Operating income (loss) $ 2,354 $ 3,698 $(2,708)(1) $ 3,344
Industrial
AgChem Chemicals
Group Group Other Total
------- ------- ------- -------
Three Months Ended December 31, 1998
Revenues - external customers $39,734 $33,159 $ -- $72,893
- intersegment 1,144 6,036 (7,180) 0
------- ------- ------- -------
Total revenues $40,878 $39,195 $(7,180) $72,893
======= ======= ======= =======
Operating income (loss) $ 2,490 $ 1,957 $(2,275)(1) $ 2,172
- ----------
(1) Represents corporate expenses and intercompany profit eliminations.
10
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) -- (Continued)
(In Thousands)
6. Business Segments (Continued)
Industrial
AgChem Chemicals
Group Group Other Total
-------- -------- -------- --------
Six Months Ended December 31, 1999
Revenues - external customers $ 80,009 $ 68,537 $ -- $148,546
- intersegment 2,895 10,325 (13,220) 0
-------- -------- -------- --------
Total revenues $ 82,904 $ 78,862 $(13,220) $148,546
======== ======== ======== ========
Operating income (loss) $ 3,137 $ 5,845 $ (4,853)(1) $ 4,129
Industrial
AgChem Chemicals
Group Group Other Total
-------- -------- -------- --------
Six Months Ended December 31, 1998
Revenues - external customers $ 75,307 $ 56,795 $ -- $132,102
- intersegment 2,219 11,300 (13,519) 0
-------- -------- -------- --------
Total revenues $ 77,526 $ 68,095 $(13,519) $132,102
======== ======== ======== ========
Operating income (loss) $ 2,574 $ 3,884 $ (3,670)(1) $ 2,788
- ----------
(1) Represents corporate expenses and intercompany profit eliminations.
7. Condensed Consolidating Financial Statements
In June 1998, the Company issued $100 million of its 9-7/8% Senior
Subordinated Notes due 2008 (the "Notes"). In connection with the issuance of
these Notes, the Company's U.S. Subsidiaries fully and unconditionally
guaranteed such Notes on a joint and several basis. Foreign subsidiaries do not
presently guarantee the Notes.
The following condensed consolidating financial data summarizes the
assets, liabilities and results of operations and cash flows of the Parent,
Guarantors and Non-Guarantor subsidiaries. The Parent is Philipp Brothers
Chemicals, Inc. ("PBC"). The U.S. Guarantor Subsidiaries include all domestic
subsidiaries of PBC including the following: C.P. Chemicals, Inc., Koffolk,
Inc., Phibro-Tech, Inc., MRT Management Corp., Mineral Resource Technologies,
L.L.C., Prince Agriproducts, Inc., The Prince Manufacturing Company (PA), The
Prince Manufacturing Company (IL), Phibrochem, Inc., Phibro Chemicals, Inc. and
Western Magnesium Corp. The Non-Guarantor Subsidiaries include the following:
Koffolk (1949) Ltd., Agtrol International, Ferro Metal and Chemical Corporation
and ODDA Smelteverk, AS. The U.S. and foreign Guarantor and Non-Guarantor
Subsidiaries are wholly-owned as to voting common stock by the Parent.
Investments in subsidiaries are accounted for by the Parent using the
equity method. Income tax expense (benefit) is allocated among the consolidating
entities based upon taxable income (loss) by jurisdiction within each group.
11
PHILIPP BROTHERS CHEMICALS INC.
CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)
AS OF DECEMBER 31, 1999
(In Thousands)
- --------------------------------------------------------------------------------------------------------------------------------
U.S. Guarantor Foreign Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
- --------------------------------------------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 7 $ 508 $ 2,804 $ 3,319
Trade receivables 4,794 27,431 24,675 56,900
Other receivables 964 4,299 1,889 7,152
Inventory 6,054 31,362 19,695 57,111
Prepaid expenses and other 4,235 1,560 2,258 8,053
------------------------------------------------------------------------------------
Total current assets 16,054 65,160 51,321 -- 132,535
====================================================================================
Property, plant & equipment, net 828 18,491 50,808 70,127
Intangibles 18 2,477 4,241 6,736
Investment in subsidiaries 64,165 1,533 (3,142) (62,556) 0
Intercompany 58,712 (21,359) 3,274 (40,627) 0
Other assets 13,021 8,874 3,855 25,750
------------------------------------------------------------------------------------
Total assets $ 152,798 $ 75,176 $ 110,357 $(103,183) $ 235,148
====================================================================================
Liabilities and Stockholders Equity
Current Liabilities:
Cash overdraft $ 533 $ 1,091 $ 419 $ 2,043
Loan payable to banks -- -- 2,799 2,799
Current portion of long term debt 19 1,653 10 1,682
Accounts payable 1,397 11,763 15,638 28,798
Other loans payable -- -- 715 715
Accrued expenses and other 2,984 13,552 5,077 21,613
------------------------------------------------------------------------------------
Total current liabilities 4,933 28,059 24,658 -- 57,650
------------------------------------------------------------------------------------
Long term debt 122,556 1,748 60,716 (40,627) 144,393
Other liabilities 1,891 5,776 3,304 10,971
Redeemable securities:
Common stock 2,180 2,180
Common stock of subsidiary 330 330
------------------------------------------------------------------------------------
2,180 330 -- -- 2,510
------------------------------------------------------------------------------------
Stockholders' equity
Series "A" preferred stock 521 -- -- 521
Common stock 2 32 125 (157) 2
Paid in capital 878 34,040 2,670 (36,710) 878
Retained earnings 20,024 5,161 20,528 (25,689) 20,024
Accumulated other comprehensive
income (loss) - cumulative currency
translation adjustment (187) 30 (1,644) 0 (1,801)
------------------------------------------------------------------------------------
Total Stockholders' equity 21,238 39,263 21,679 (62,556) 19,624
------------------------------------------------------------------------------------
Total liabilities and equity $ 152,798 $ 75,176 $ 110,357 $(103,183) $ 235,148
====================================================================================
12
PHILIPP BROTHERS CHEMICALS INC.
CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)
AS OF JUNE 30, 1999
(In Thousands)
- --------------------------------------------------------------------------------------------------------------------------------
U.S. Guarantor Foreign Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
- --------------------------------------------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 393 $ 166 $ 1,749 $ 2,308
Trade receivables 6,091 31,838 31,184 69,113
Other receivables 993 5,684 3,284 9,961
Inventory 4,212 26,543 20,675 51,430
Prepaid expenses and other 1,964 1,580 3,729 7,273
------------------------------------------------------------------------------------
Total current assets 13,653 65,811 60,621 -- 140,085
====================================================================================
Property, plant & equipment, net 964 17,377 47,699 66,040
Intangibles 268 2,668 4,023 6,959
Investment in subsidiaries 67,264 1,386 (2,995) (65,655) 0
Intercompany 52,393 (13,790) 364 (38,967) 0
Other assets 11,604 8,833 3,852 24,289
------------------------------------------------------------------------------------
Total assets $ 146,146 $ 82,285 $ 113,564 $(104,622) $ 237,373
====================================================================================
Liabilities and Stockholders Equity
Current Liabilities:
Cash overdraft $ 277 $ 213 $ 948 $ 1,438
Loan payable to banks -- -- 3,019 3,019
Current portion of long term debt 94 1,345 11 1,450
Accounts payable 1,967 14,312 19,981 36,260
Other loans payable 32 -- 150 182
Accrued expenses and other 2,660 17,385 5,027 25,072
------------------------------------------------------------------------------------
Total current liabilities 5,030 33,255 29,136 -- 67,421
------------------------------------------------------------------------------------
Long term debt 113,541 620 58,894 (38,967) 134,088
Other liabilities 1,876 5,981 3,667 11,524
Redeemable securities:
Common stock 2,376 2,376
Common stock of subsidiary 581 581
------------------------------------------------------------------------------------
2,376 581 -- -- 2,957
------------------------------------------------------------------------------------
Stockholders' equity
Series "A" preferred stock 521 -- -- 521
Common stock 2 32 127 (159) 2
Paid in capital 878 34,040 2,654 (36,756) 816
Retained earnings 23,096 7,745 20,654 (28,740) 22,755
Accumulated other comprehensive
income (loss) - cumulative currency
translation adjustment (1,174) 31 (1,568) -- (2,711)
------------------------------------------------------------------------------------
Total Stockholders' equity 23,323 41,848 21,867 (65,655) 21,383
------------------------------------------------------------------------------------
Total liabilities and equity $ 146,146 $ 82,285 $ 113,564 (104,622) $ 237,373
====================================================================================
13
PHILIPP BROTHERS CHEMICALS INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999
(In Thousands)
- --------------------------------------------------------------------------------------------------------------------------------
U.S. Guarantor Foreign Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
- --------------------------------------------------------------------------------------------------------------------------------
Net sales $ 8,735 $ 45,008 $ 34,596 $(10,112) $ 78,227
Cost of goods sold 6,974 32,506 25,360 (10,112) 54,728
-----------------------------------------------------------------------------------
Gross profit 1,761 12,502 9,236 0 23,499
Selling, general, and
administrative expenses 3,295 11,134 5,726 20,155
-----------------------------------------------------------------------------------
Operating (loss) income (1,534) 1,368 3,510 0 3,344
Interest expense 1,947 77 1,574 3,598
Interest income (5) (1) (77) (83)
Other expense (1,000) -- 2,134 1,134
Intercompany allocation (2,622) 2,622 -- 0
(Profit) loss relating to subsidiaries 1,286 -- -- (1,286) 0
-----------------------------------------------------------------------------------
(Loss) income before income taxes (1,140) (1,330) (121) 1,286 (1,305)
Benefit (Provision) for income taxes (394) (484) 319 -- (559)
-----------------------------------------------------------------------------------
Net (loss) income $ (746) $ (846) $ (440) $ 1,286 $ (746)
===================================================================================
14
PHILIPP BROTHERS CHEMICALS INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998
(In Thousands)
- --------------------------------------------------------------------------------------------------------------------------------
U.S. Guarantor Foreign Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
- --------------------------------------------------------------------------------------------------------------------------------
Net sales $ 8,742 $ 39,159 $ 33,441 $ (8,449) $ 72,893
Cost of goods sold 7,571 29,789 24,161 (8,449) 53,072
-----------------------------------------------------------------------------------
Gross profit 1,171 9,370 9,280 0 19,821
Selling, general, and
administrative expenses 2,861 8,341 6,447 17,649
-----------------------------------------------------------------------------------
Operating (loss) income (1,690) 1,029 2,833 0 2,172
Interest expense 1,492 78 1,727 3,297
Interest income (46) -- (84) (130)
Other expense 0 -- 848 848
Intercompany allocation (2,295) 2,260 35 0
(Profit) loss relating to subsidiaries 697 -- -- (697) 0
-----------------------------------------------------------------------------------
(Loss) income before income taxes (1,538) (1,309) 307 697 (1,843)
Benefit (Provision) for income taxes (290) (366) 61 -- (595)
-----------------------------------------------------------------------------------
Net (loss) income $ (1,248) $ (943) $ 246 $ 697 $ (1,248)
===================================================================================
15
PHILIPP BROTHERS CHEMICALS INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999
(In Thousands)
- --------------------------------------------------------------------------------------------------------------------------------
U.S. Guarantor Foreign Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
- --------------------------------------------------------------------------------------------------------------------------------
Net sales $ 17,445 $ 82,769 $ 67,591 $ (19,259) $ 148,546
Cost of goods sold 14,032 60,507 49,676 (19,259) 104,956
------------------------------------------------------------------------------------
Gross profit 3,413 22,262 17,915 0 43,590
Selling, general, and
administrative expenses 6,473 20,982 12,006 39,461
------------------------------------------------------------------------------------
Operating (loss) income (3,060) 1,280 5,909 0 4,129
Interest expense 3,879 119 2,990 6,988
Interest income (12) (1) (162) (175)
Other expense (912) -- 2,947 2,035
Intercompany allocation (5,212) 5,212 -- 0
(Profit) loss relating to subsidiaries 2,712 -- -- (2,712) 0
------------------------------------------------------------------------------------
(Loss) income before income taxes (3,515) (4,050) 134 2,712 (4,719)
Benefit (Provision) for income taxes (784) (1,465) 261 -- (1,988)
------------------------------------------------------------------------------------
Net (loss) income $ (2,731) $ (2,585) $ (127) $ 2,712 $ (2,731)
====================================================================================
16
PHILIPP BROTHERS CHEMICALS INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998
(In Thousands)
- --------------------------------------------------------------------------------------------------------------------------------
U.S. Guarantor Foreign Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
- --------------------------------------------------------------------------------------------------------------------------------
Net sales $ 16,690 $ 75,798 $ 53,342 $ (5,277) $ 140,553
Cost of goods sold 13,971 58,438 41,021 (5,277) 108,153
------------------------------------------------------------------------------------
Gross profit 2,719 17,360 12,321 0 32,400
Selling, general, and
administrative expenses 5,439 15,295 8,878 29,612
------------------------------------------------------------------------------------
Operating (loss) income (2,720) 2,065 3,443 0 2,788
Interest expense 3,265 166 2,588 6,019
Interest income (348) -- (125) (473)
Other expense -- -- 1,188 1,188
Intercompany allocation (4,801) 4,801 0 0
(Profit) loss relating to subsidiaries 1,779 -- -- (1,779) 0
------------------------------------------------------------------------------------
(Loss) income before income taxes (2,615) (2,902) (208) 1,779 (3,946)
Benefit for income taxes (278) (1,133) (198) -- (1,609)
------------------------------------------------------------------------------------
Net (loss) income $ (2,337) $ (1,769) $ (10) $ 1,779 $ (2,337)
====================================================================================
17
PHILIPP BROTHERS CHEMICALS INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999
(In Thousands)
- --------------------------------------------------------------------------------------------------------------------------------
U.S. Guarantor Foreign Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
- --------------------------------------------------------------------------------------------------------------------------------
Operating activities:
Net (loss) income $ (2,731) $ (2,585) $ (127) $ 2,712 $ (2,731)
Adjustments to reconcile net (loss)
income to net cash (used in)
provided by operating activities:
Depreciation and amortization 273 2,197 3,512 5,982
Other 1,106 (407) (359) 340
Changes in operating assets
and liabilities:
Accounts receivable 1,297 4,357 6,507 12,161
Inventory (1,842) (4,819) 979 (5,682)
Prepaid expenses and other (2,243) 533 3,380 1,670
Other assets 6 (76) (207) (277)
Intercompany (3,607) 7,426 (1,107) (2,712) 0
Accounts payable (570) (2,550) (4,343) (7,463)
Accrued expenses and other 323 (3,835) (463) (3,975)
-----------------------------------------------------------------------------------
Net cash (used in) provided by
operating activities (7,988) 241 7,772 0 25
-----------------------------------------------------------------------------------
Investing activities:
Capital expenditures (62) (3,085) (6,756) (9,903)
Proceeds from property damage claim -- 872 -- 872
Other investments (1,500) -- -- (1,500)
-----------------------------------------------------------------------------------
Net cash used in investing activities (1,562) (2,213) (6,756) -- (10,531)
-----------------------------------------------------------------------------------
Financing activities:
Cash overdraft 256 878 (529) 605
Net (decrease) increase in short
term debt (32) -- 345 313
Proceeds from long term debt 9,015 1,545 486 11,046
Payments of long term debt (75) (109) (325) (509)
Proceeds from principal shareholder -- -- 62 62
-----------------------------------------------------------------------------------
Net cash provided by financing
activities 9,164 2,314 39 0 11,517
-----------------------------------------------------------------------------------
Net (decrease) increase in cash and
cash equivalents (386) 342 1,055 -- 1,011
Cash and cash equivalents at
beginning of year 393 166 1,749 2,308
-----------------------------------------------------------------------------------
Cash and cash equivalents
at end of year $ 7 $ 508 $ 2,804 $ -- $ 3,319
===================================================================================
18
PHILIPP BROTHERS CHEMICALS INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998
(In Thousands)
- --------------------------------------------------------------------------------------------------------------------------------
U.S. Guarantor Foreign Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
- --------------------------------------------------------------------------------------------------------------------------------
Operating activities:
Net (loss) income $ (2,337) $ (1,769) $ (10) $ 1,779 $ (2,337)
Adjustments to reconcile net (loss)
income to net cash (used in)
provided by operating activities:
Depreciation and amortization 232 1,793 3,041 5,066
Other 103 (249) 847 701
Changes in operating assets and
liabilities, net of effects of
businesses acquired:
Accounts receivable 420 8,865 3,395 12,680
Inventory 926 (6,167) (3,452) (8,693)
Prepaid expenses and other (2,966) (896) 3,964 102
Other assets (176) 0 (122) (298)
Intercompany (14,892) 5,463 11,208 (1,779) 0
Accounts payable (663) (468) (3,218) (4,349)
Accrued expenses and other (1,035) (1,232) (101) (2,368)
-----------------------------------------------------------------------------------
Net cash (used in) provided by
operating activities (20,388) 5,340 15,552 -- 504
-----------------------------------------------------------------------------------
Investing activities:
Capital expenditures (97) (2,997) (2,791) (5,885)
Acquisition of businesses,
net of cash acquired -- (2,505) (19,000) (21,505)
-----------------------------------------------------------------------------------
Net cash used in investing activities (97) (5,502) (21,791) -- (27,390)
-----------------------------------------------------------------------------------
Financing activities:
Cash overdraft 30 (42) 185 173
Net (decrease) increase in short
term debt (909) -- 2,887 1,978
Proceeds from long term debt 3,400 75 2,265 5,740
Payments of long term debt (53) (77) -- (130)
-----------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 2,468 (44) 5,337 -- 7,761
-----------------------------------------------------------------------------------
Net (decrease) in cash and
cash equivalents (18,017) (206) (902) -- (19,125)
Cash and cash equivalents
at beginning of year 18,312 928 4,981 24,221
-----------------------------------------------------------------------------------
Cash and cash equivalents
at end of year $ 295 $ 722 $ 4,079 $ -- $ 5,096
===================================================================================
19
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This Form 10-Q contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company's actual results could
differ materially from those set forth in the forward-looking statements.
Certain factors that might cause such a difference are discussed throughout this
Form 10-Q and are discussed under the caption in this Item 2 entitled "Certain
Factors Affecting Future Operating Results."
Overview
Philipp Brothers Chemicals, Inc. ("Philipp Brothers" or the "Company") is
a leading diversified global manufacturer and marketer of a broad range of
specialty agricultural and industrial chemicals, which are sold world-wide for
use in numerous markets, including animal nutrition and health, agriculture,
pharmaceutical, electronics, wood treatment, glass, construction and concrete.
The Company also provides recycling and hazardous waste services primarily to
the electronics and metal treatment industries.
The Company operates in two industry segments: AgChem and Industrial
Chemicals.
On October 1, 1998, the Company acquired (the "ODDA Acquisition") all of
the outstanding capital stock of ODDA Smelteverk, AS, a Norwegian Company, and
certain assets of the business of BOC Carbide Industries in the United Kingdom
(together "ODDA") from the BOC Group Plc for $19 million in cash and $18.2
million in debt. The operating results of ODDA are included in the Company's
consolidated statements of operations, as part of the Industrial Chemicals
segment, from the date of acquisition.
Results of Operations
Sales
($000's)
Three Months Ended Six Months Ended
December 31, December 31,
------------------------ -------------------------
Operating Segments 1999 1998 1999 1998
--------- --------- --------- ---------
AgChem $ 45,417 $ 40,878 $ 82,904 $ 77,526
Industrial Chemicals 40,411 39,195 78,862 68,095
Elimination of intersegment sales (7,601) (7,180) (13,220) (13,519)
--------- --------- --------- ---------
$ 78,227 $ 72,893 $ 148,546 $ 132,102
========= ========= ========= =========
Operating Income
($000's)
Three Months Ended Six Months Ended
December 31, December 31,
--------------------- ---------------------
Operating Segments 1999 1998 1999 1998
------- ------- ------- -------
AgChem $ 2,354 $ 2,490 $ 3,137 $ 2,574
Industrial Chemicals 3,698 1,957 5,845 3,884
Corporate expenses and eliminations (2,708) (2,275) (4,853) (3,670)
------- ------- ------- -------
$ 3,344 $ 2,172 $ 4,129 $ 2,788
======= ======= ======= =======
20
Comparison of Three Months Ended December 31, 1999 and 1998
Net Sales. Net sales increased by $5.3 million, or 7.3% to $78.2 million
in the three months ended December 31, 1999, as compared to the same period of
the prior year. Industrial Chemicals sales were higher by $1.2 million primarily
due to higher volume sales of coal fly ash products ($1.2 million) and higher
volume sales of inorganic intermediate products primarily to the wood treating
industry ($1.2 million) due to increased demand. This increase was partially
offset by lower sales volumes and prices of dicyandiamide and calcium carbide
($1.5 million). AgChem sales were higher by $4.5 million as compared to the
prior period primarily as a result of higher volume sales of the Company's crop
protection chemicals ($2.1 million) due to increased demand and introduction of
new generic fungicides and higher volumes of feed pre-mix ($2.0 million) due
mainly to the acquisition of a feed pre-mix business in December 1998. Higher
volume sales of the Company's animal nutrition and health products for
coccidiostats ($.3 million) also contributed to this increase.
Gross Profit. Gross profit increased by $3.7 million or 18.5% to $23.5
million as compared to the same period of the prior year. This increase was
primarily attributable to higher profits ($2.1 million) from increased sales in
the Company's Industrial Chemicals segment due to higher volume sales of coal
fly ash products and higher volume sales of inorganic intermediate products
principally to the wood treating industry. Gross profit of the Company's AgChem
segment was higher ($1.6 million) primarily due to higher volume sales and lower
costs, principally raw materials, for the company's coccidiostats and higher
volume sales of the Company's crop protection chemicals. These factors also
resulted in an increase in gross profit as a percentage of net sales increased
to 30% in the quarter ended December 31, 1999 as compared to 27.2% in the same
period of the prior year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2.5 million or 14% to $20.1 million for the
three months ended December 31, 1999, as compared to the same period of the
prior year. In the Industrial Chemicals segment, this increase ($.3 million) was
primarily due to higher net distribution and administrative expenses associated
with increased sales of coal fly ash and intermediate chemicals. In the AgChem
segment, higher fixed selling and product promotion expenses associated with the
Company's crop protection products ($2.0 million) contributed to the increase.
Operating Income. Operating income increased by $1.2 million or 53.9% to
$3.3 million in the three months ended December 31, 1999, as compared to the
same period of the prior year. Operating income of the Industrial Chemicals
segment increased by $1.7 million primarily due to increased profitability of
coal fly ash products and intermediate chemicals. Operating income of the AgChem
segment decreased by $.1 million primarily due to increased selling expenses
associated with crop protection products offsetting increased profitability of
the Company's animal health and nutrition products. In addition, non-segment
operating expenses increased by $.4 million in the three months ended December
31, 1999 as compared to the same period of the prior year.
Interest Expense. Interest expense increased by $.3 million or 9.1% to
$3.6 million in the three months ended December 31, 1999, as compared to the
same period of the prior year primarily due to increased bank borrowings.
Other Expense, Net. Other expense, net, principally reflects foreign
currency transaction gain and losses of the Company's foreign subsidiaries.
Income Taxes. The Company provides a benefit on interim period losses to
the extent income is projected for the full fiscal year.
21
Comparison of Six Months Ended December 31, 1999 and 1998
Net Sales. Net sales increased by $16.4 million, or 12.5% to $148.6
million in the six months ended December 31, 1999, as compared to the same
period of the prior year. Industrial Chemicals sales were higher by $10.8
million primarily due to dicyandiamide and calcium carbide sales ($6.8 million)
as a result of the ODDA Acquisition in October 1998, higher volume sale of coal
fly ash products ($3.3 million) and higher volume sales of inorganic
intermediate products, primarily to the wood treatment industry ($1.1 million)
due to increased demand. AgChem sales were higher by $5.4 million primarily due
to higher volume sales of the Company's animal nutrition and health products,
primarily coccidiostats ($1.9 million) and feed pre-mixes ($2.0 million) due to
the December 1998 acquisition of a feed pre-mix business and higher volume sales
of the Company's crop protection chemicals ($1.1 million) due to increased
demand and introduction of new generic fungicides.
Gross Profit. Gross profit increased by $11.2 million or 34.5% to $43.6
million as compared to the same period of the prior year. This increase was
primarily attributable to higher profits ($8.0 million) from increased sales in
the Company's Industrial Chemicals segment due to the ODDA Acquisition, higher
volume sales of coal fly ash products and inorganic intermediate products
principally to the wood treating industry. Gross profit of the Company's AgChem
segment was higher ($3.4 million) than the comparable prior period, primarily
due to higher volume sales and lower costs, principally raw materials, for the
Company's coccidiostats and higher volume sales of the Company's crop protection
chemicals. These factors also resulted in an increase in gross profit as a
percentage of net sales increased to 29.3% in the six months ended December 31,
1999 as compared to 24.5% in the same period of the prior year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $9.8 million or 33.3% to $39.5 million in
the six months ended December 31, 1999, as compared to the same period of the
prior year. In the Industrial Chemicals segment, this increase was primarily due
to the ODDA Acquisition ($3.2 million) and higher distribution expenses
associated with increased sales of the Company's coal fly ash products ($2.0
million). In the AgChem segment, higher fixed selling and product promotion
expenses associated with the Company's crop protection products ($2.8 million)
contributed to the increase.
Operating Income. Operating income increased by $1.3 million or 48.1% to
$4.1 million in the six months ended December 30, 1999, as compared to the same
period of the prior year. Operating income of the Industrial Chemicals segment
increased by $2.0 million due to increased profitability of coal fly ash
products and intermediate chemicals. Operating income of the AgChem segment
increased by $.6 million primarily due to increased profitability of the
Company's animal health and nutrition products which was somewhat offset by
increased selling expenses associated with crop protection product sales. In
addition, non-segment operating expenses increased by $1.2 million in the six
months ended December 31, 1999 as compared to the same period of the prior year.
Interest Expense. Interest expense increased by $1.0 million or 16.1% to
$7.0 million in the six months ended December 31, 1999, as compared to the same
period of the prior year primarily due to increased bank borrowings.
Other Expense, Net. Other expense, net, principally reflects foreign
currency transaction gain and losses of the Company's foreign subsidiaries.
Income Taxes. The Company provides a benefit on interim period losses to
the extent income is projected for the full fiscal year.
22
PHILIPP BROTHERS CHEMICALS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Liquidity and Capital Resources
Net Cash Provided by Operating Activities. Net cash provided by operations
for the six months ended December 31, 1999 was $.1 million, a decrease of $.4
million from the same period of the prior year. This decrease was primarily due
to less favorable changes in working capital components including payments
associated with separation of employment of a key executive and payments for
obtaining label registration rights for generic fungicides.
In addition, reflected in the six months ended December 31, 1999 is $1.1
million of advance payments received from the Company's insurance carriers for
reimbursable business interruption losses in connection with a fire in April
1999 at the Company's Bowmanstown, Pennsylvania facility.
Net Cash Used in Investing Activities. Net cash used in investing
activities for the six months ended December 31, 1999 was $10.5 million, a
decrease of $16.9 million. The six months ended December 31, 1998 reflects the
purchase of ODDA ($19.0 million) and acquisition of a feed pre-mix business
($2.5 million). The increase in capital expenditures was primarily due to
expenditures by ODDA (acquired October 1, 1998) for increased production
capacity. Also, in 1999, the Company acquired minority equity interests in two
businesses for a combined $1.5 million.
Net Cash Provided by Financing Activities. Net cash provided by financing
activities for the six months ended December 31, 1999 was $11.5 million, an
increase of $3.8 million primarily due to increased borrowing under the
Company's credit facility and proceeds from long-term equipment financing which
was somewhat offset by repayments of short-term debt by certain of the Company's
foreign subsidiaries.
Liquidity. As of December 31, 1999, the Company had $74.9 million of
working capital and $72.7 million at June 30, 1999. Cash on hand at December 31,
1999 amounted to $3.3 million, as compared to $2.3 million at June 30, 1999.
At December 31, 1999, the Company had $22.4 million outstanding borrowings
under its Credit Agreement with PNC Bank. In addition to amounts outstanding,
the Company had $9.7 million available under the borrowing base formula. The
Company expects that cash flows from operations and available borrowing
arrangements will provide sufficient working capital to operate the Company's
business, to make expected capital expenditures and service interest and
principal on outstanding debt and meet the Company's foreseeable liquidity
requirement for the next twelve months.
In January 2000, the Company sold its minority interest in Tyssefaldene, a
company which operates power stations in the region in which ODDA is located.
The sale proceeds of $18.8 million will primarily be used for debt repayment,
capital expenditures and payment of related income taxes. The Company expects to
record a gain on the sale in the third quarter. As a result of the sale, ODDA's
ability to buy power at cost will terminate and ODDA will purchase power at
prevailing market rates.
23
Seasonality of Business
The Company's sales are typically highest in the fourth fiscal quarter.
The Company's sales of copper-based fungicides and other agricultural products
are typically highest in the first and fourth fiscal quarters, and its sales of
gibberellic acid are highest in the fourth quarter, due to the seasonal nature
of the agricultural industry. The Company's sales of finished chemicals to the
wood treatment industry are typically highest in the first and fourth fiscal
quarters due to the increased level of home construction during these periods.
Additionally, sales of these products may be more concentrated in one of these
quarters due to weather conditions.
Quantitative and Qualitative Disclosure About Market Risk
In the normal course of operations, the Company is exposed to market risks
arising from adverse changes in interest rates, foreign currency exchange rates,
and commodity prices. As a result, future earnings, cash flows and fair values
of assets and liabilities are subject to uncertainty. The Company uses a variety
of derivative financial instruments, including interest rate caps and foreign
currency forward contracts as a means of hedging exposure to floating interest
rate bank borrowings and foreign currency risks. The Company also utilizes, on a
limited basis, certain commodity derivatives, primarily on copper used in its
manufacturing processes, to hedge the cost of its anticipated purchase
requirements. The Company does not utilize derivative instruments for trading
purposes. The Company does not hedge its exposure to market risks in a manner
that completely eliminates the effects of changing market conditions on
earnings, cash flows and fair values. The Company monitors the financial
stability and credit standing of its major counterparties.
Interest Rate Risk
The Company uses sensitivity analysis to assess the market risk of its
debt-related financial instruments and derivatives. Market risk is defined for
these purposes as the potential change in the fair value resulting from an
adverse movement in interest rates. The carrying amounts of cash and cash
equivalents, trade receivables, trade payables and short term debt is considered
to be representative of their fair value because of their short maturities. As
of December 31, 1999, the fair value of the Company's senior subordinated debt
is estimated based on quoted market rates is $88.5 million and the related
carrying amount is $100 million. A 100 basis point increase in interest rates
could result in approximately $6.0 million reduction in the fair value of total
debt.
Foreign Currency Exchange Rate Risk
A significant portion of the financial results of the Company is derived
from activities conducted outside the U.S. and denominated in currencies other
than the U.S. dollar. Because the financial results of the Company are reported
in U.S. dollars, they are affected by changes in the value of the various
foreign currencies in relation to the U.S. Dollar. Exchange rate risks are
reduced, however, by the diversity of the Company's foreign operations and the
fact that international activities are not concentrated in any single non-U.S.
currency. Short-term exposures to changing foreign currency exchange rates are
primarily due to operating cash flows denominated in foreign currencies. The
Company covers known and anticipated operating exposures by using purchased
foreign currency exchange option and forward contracts. The primary currencies
for which the Company has foreign currency exchange rate exposure are the Euro
and Japanese yen.
The Company uses sensitivity analysis to assess the market risk associated
with its foreign currency transactions. Market risk is defined for these
purposes as the potential change in fair value resulting from an adverse
movement in foreign currency exchange rates. The fair value associated with the
foreign currency contracts has been estimated by valuing the net position of the
contracts using the applicable spot rates and forward rates as of the reporting
date. At December 31, 1999, the fair value did not differ materially from its
carrying amount. Based on the limited amount of foreign currency contracts at
December 31, 1999, the Company does not believe that an instantaneous 10%
adverse movement in foreign currency rates from their levels at December 31,
1999, with all other variables held constant, would have a material effect on
the Company's results of operations, financial position or cash flows.
Other
The Company obtains third party letters of credit and surety bonds in
connection with certain inventory purchases and insurance obligations. At
December 31, 1999, the contract values of these letters of credit and surety
bonds were $1.4 million and their fair values did not differ materially from
their carrying amount.
24
Commodity Price Risk
The Company purchases certain raw materials, such as copper, under
short-term supply contracts. The purchase prices thereunder are generally
determined based on prevailing market conditions. The Company uses commodity
derivative instruments to modify some of the commodity price risks. Assuming a
10% change in the underlying commodity price, the potential change in the fair
value of commodity derivative contracts held at December 31, 1999 would not be
material when compared to the Company's earnings and financial position.
The foregoing market risk discussion and the estimated amounts presented
are Forward-Looking Statements that assume certain market conditions. Actual
results in the future may differ materially from these projected results due to
developments in relevant financial markets and commodity markets. The methods
used above to assess risk should not be considered projections of expected
future events or results.
Year 2000 Disclosure
The statements in the following section include "Year 2000 readiness
disclosure" within the meaning of the Year 2000 Information and Readiness
Disclosure Act.
The term "Year 2000 ("Y2K") Issue" is a general term used to describe the
various problems potentially resulting from the improper processing of dates and
date-sensitive calculations by computers and other machinery as the year 2000
was approached and reached. These problems generally arose 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 the 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.
Prior to December 31, 1999, the Company conducted a review of its core
management information systems and equipment with embedded chips or processors
("Management Systems") used in the Company's operations, and also its internal
manufacturing systems at its plants, including computer-based manufacturing,
logistical and related systems ("Manufacturing Systems").
Over the last three years, the Company replaced or upgraded most of its
Management Systems and Manufacturing Systems. The Company substantially upgraded
its desktop computers, networks and servers and software applications and
packages. The Company has expended approximately $587,000, $920,000 and $245,000
in the fiscal years ended June 30, 1997, 1998 and 1999, respectively, towards
compliance with Y2K Issues. Such amounts during such periods were allocated as
follows: for 1997, $72,700 for hardware, $9,000 for software, $300,800 for
outside consultants and $205,000 for internal costs; for 1998, $229,700 for
hardware, $35,600 for software, $235,000 for outside consultants and $420,000
for internal costs; for 1999, $168,000 for hardware, $53,000 for software,
$24,000 for outside consultants and nominal internal costs. The Company believes
that its Manufacturing Systems worldwide are currently in Y2K compliance. The
Company expended approximately $150,000 during the second half of 1999, of which
approximately $30,000 was spent on hardware, $70,000 on software modifications
and systems testing by outside consultants and $50,000 was allocated to internal
costs and contingencies.
Subsequent to January 1, 2000, the Company has experienced no interruption
in, or failure of, normal business activities or operations due to a Y2K Issue.
The Company believes that the implementation of new business systems and the
completion of the Company's Y2K modifications successfully mitigated the
possibility of significant interruptions of normal operations.
Certain Factors Affecting Future Operating Results
This Form 10-Q contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company's actual results could
differ materially from those set forth in the forward-looking statements.
Certain factors that might cause such a difference include, among other factors
noted herein, the following: the Company's substantial leverage and potential
inability to service its debt; the Company's dependence on distributions from
its subsidiaries; risks associated with the Company's international operations;
the Company's dependence on its Israeli operations; competition in each of the
Company's markets; potential environmental liability; extensive regulation by
numerous government authorities in the United States and other countries;
significant cyclical price fluctuation for the principal raw materials used by
the
25
Company in the manufacture of its products; the Company's reliance on the
continued operation and sufficiency of its manufacturing facilities; the
Company's dependence upon unpatented trade secrets; the risks of legal
proceedings and general litigation expenses; potential operating hazards and
uninsured risks; the risk of work stoppages; the Company's dependence on key
personnel; the uncertain impact of the Company's acquisition plans; and the
seasonality of the Company's business.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See Part I -- Item 2 -- "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Quantitative and Qualitative Disclosures
About Market Risk."
26
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
No report on Form 8-K has been filed during the quarter ended December 31,
1999.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PHILIPP BROTHERS CHEMICALS, INC.
Date: February 10, 2000 By: /s/ NATHAN Z. BISTRICER
-------------------------------------------
Nathan Z. Bistricer, Vice President and
Chief Financial Officer
Date: February 10, 2000 By: /s/ JOSEPH KATZENSTEIN
-------------------------------------------
Joseph Katzenstein, Treasurer and Secretary