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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 March 31, 2000
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 May 12, 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 22
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 28
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 29
SIGNATURES 30
3
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
4
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In Thousands)
March 31, June 30,
2000 1999
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,986 $ 2,308
Trade receivables, less allowance for doubtful accounts of $974
at March 31, 2000 and $886 at June 30,1999 63,861 69,113
Other receivables 8,691 9,961
Inventories 61,791 51,430
Prepaid expenses and other current assets 8,037 7,273
--------- ---------
TOTAL CURRENT ASSETS 148,366 140,085
PROPERTY, PLANT AND EQUIPMENT, net 71,877 66,040
INTANGIBLES 6,906 6,959
OTHER ASSETS 25,923 24,289
--------- ---------
$ 253,072 $ 237,373
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Cash overdraft $ 3,283 $ 1,438
Loans payable to banks 4,386 3,019
Current portions of long-term debt 1,781 1,450
Accounts payable 33,740 36,260
Other loans payable 891 182
Accrued expenses and other current liabilities 25,971 25,072
--------- ---------
TOTAL CURRENT LIABILITIES 70,052 67,421
LONG-TERM DEBT 141,592 134,088
OTHER LIABILITIES 9,481 11,524
--------- ---------
TOTAL LIABILITIES 221,125 213,033
--------- ---------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE SECURITIES:
Common stock 3,162 2,376
Common stock of subsidiary 330 581
--------- ---------
TOTAL REDEEMABLE SECURITIES 3,492 2,957
--------- ---------
STOCKHOLDERS' EQUITY:
Series A preferred stock 521 521
Common stock 2 2
Paid-in capital 878 816
Retained earnings 29,942 22,755
Accumulated other comprehensive loss -
cumulative currency translation adjustment (2,888) (2,711)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 28,455 21,383
--------- ---------
$ 253,072 $ 237,373
========= =========
See notes to unaudited Condensed Consolidated Financial Statements
5
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands)
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
NET SALES $ 81,528 $ 79,497 $ 230,074 $ 211,598
COST OF GOODS SOLD 58,887 57,310 163,843 157,299
--------- --------- --------- ---------
GROSS PROFIT 22,641 22,187 66,231 54,299
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 19,988 20,774 59,449 50,099
--------- --------- --------- ---------
OPERATING INCOME 2,653 1,413 6,782 4,200
OTHER:
Interest expense 3,777 3,258 10,765 9,276
Interest income (292) (95) (467) (569)
Other expense, net 743 1,173 2,778 2,361
Gain from property damage claim (550) -- (550) --
Gain from sale of assets (15,539) -- (15,539) --
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 14,514 (2,923) 9,795 (6,868)
PROVISION (BENEFIT) FOR INCOME TAXES 4,596 (847) 2,608 (2,455)
--------- --------- --------- ---------
NET INCOME (LOSS) $ 9,918 $ (2,076) $ 7,187 $ (4,413)
========= ========= ========= =========
See notes to unaudited Condensed Consolidated Financial Statements
6
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
FOR THE THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 2000
(In Thousands)
Preferred
Stock 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
Foreign currency translation adjustment (1,087) (1,087)
Net Income 9,918 9,918
------- ------- ------- ------- ------- ------- -------
BALANCE, MARCH 31, 2000 $ 521 $ 1 $ 1 $ 878 $29,942 $(2,888) $28,455
======= ======= ======= ======= ======= ======= =======
See notes to unaudited Condensed Consolidated Financial Statements
7
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE NINE MONTHS ENDED MARCH 31, 2000 AND 1999
(In Thousands)
2000 1999
-------- --------
OPERATING ACTIVITIES:
Net income (loss) $ 7,187 $ (4,413)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 9,223 7,840
Gain from property damage claim (550) --
Gain from sale of assets (15,539) --
Other (2,349) 163
Changes in operating assets and liabilities,
Accounts receivable 5,165 9,244
Inventories (10,779) (9,142)
Prepaid expenses and other current assets 184 (1,333)
Other assets (805) (1,553)
Accounts payable (2,520) (5,326)
Accrued expenses and other current liabilities (8) 2,587
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (10,791) (1,933)
-------- --------
INVESTING ACTIVITIES:
Capital expenditures (13,921) (9,482)
Acquisition of businesses, net of cash acquired -- (21,505)
Proceeds from sale of assets 18,700 --
Proceeds from property damage claim 872 --
Other investments (3,000) --
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 2,651 (30,987)
-------- --------
FINANCING ACTIVITIES:
Cash overdraft 1,845 (426)
Net increase in short-term debt 2,076 2,627
Proceeds from long-term debt 19,249 9,210
Payments of long-term debt (11,414) (414)
Proceeds from principal shareholder 62 370
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 11,818 11,367
-------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 3,678 (21,553)
CASH AND CASH EQUIVALENTS at beginning of period 2,308 24,221
-------- --------
CASH AND CASH EQUIVALENTS at end of period $ 5,986 $ 2,668
======== ========
See notes to unaudited Condensed Consolidated Financial Statements
8
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 March 31, 2000 and June 30, 1999 and the results of operations and cash
flows for the three months and nine months ended March 31, 2000 and 1999.
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 nine months ended March
31, 2000 and 1999 are not indicative of results for the full year.
2. Acquisition
On October 1, 1998, the Company acquired 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 1999 are as follows:
Nine Months Ended
March 31, 1999
-----------------
Net Sales $220,957
Net Loss (5,945)
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 March 31, 2000 and June 30, 1999 are based on perpetual
records and consist of the following:
March 31, June 30,
2000 1999
--------- ---------
Raw materials $25,424 $24,499
Work-in-process 8,050 5,409
Finished goods 28,317 21,522
------- -------
$61,791 $51,430
======= =======
9
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) -- (Continued)
(In Thousands)
4. Comprehensive Income
The Company's comprehensive income (loss) amounts were computed as
follows:
Three Months Ended Nine Months Ended
March 31, March 31,
------------------ ------------------
2000 1999 2000 1999
------- ------- ------- -------
Net income (loss) $ 9,918 $(2,076) $ 7,187 $(4,413)
Change in foreign currency
translation adjustments (1,087) (923) (177) (857)
------- ------- ------- -------
Total comprehensive income (loss) $ 8,831 $(2,999) $ 7,010 $(5,270)
======= ======= ======= =======
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 $1,703
as of March 31, 2000, which is included in current and long-term liabilities.
10
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 $1,470 and $2,038 for the three months ended
March 31, 2000 and 1999, respectively, and $5,069 and $5,979 for the nine months
ended March 31, 2000 and 1999, 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 March 31, 2000
Revenues - external customers $45,977 $35,551 $ -- $81,528
- intersegment 908 5,397 (6,305) 0
------- ------- ------- -------
Total revenues $46,885 $40,948 $(6,305) $81,528
======= ======= ======= =======
Operating income (loss) $ 2,990 $ 1,841 $(2,178)(1) $ 2,653
Industrial
AgChem Chemicals
Group Group Other Total
------- ---------- ------- -------
Three Months Ended March 31, 1999
Revenues - external customers $45,881 $33,616 $ -- $79,497
- intersegment 1,381 6,236 (7,617) 0
------- ------- ------- -------
Total revenues $47,262 $39,852 $(7,617) $79,497
======= ======= ======= =======
Operating income (loss) $ 3,281 $ 188 $(2,056)(1) $ 1,413
- ----------
(1) Represents corporate expenses and intercompany profit eliminations.
11
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
-------- ---------- -------- --------
Nine Months Ended March 31, 2000
Revenues - external customers $125,986 $104,088 $ -- $230,074
- intersegment 3,803 15,722 (19,525) 0
-------- -------- -------- --------
Total revenues $129,789 $119,810 $(19,525) $230,074
======== ======== ======== ========
Operating income (loss) $ 6,127 $ 7,686 $ (7,031)(1) $ 6,782
Industrial
AgChem Chemicals
Group Group Other Total
-------- ---------- -------- --------
Nine Months Ended March 31, 1999
Revenues - external customers $121,188 $ 90,410 $ -- $211,598
- intersegment 3,600 17,536 (21,136) 0
-------- -------- -------- --------
Total revenues $124,788 $107,946 $(21,136) $211,598
======== ======== ======== ========
Operating income (loss) $ 5,855 $ 4,072 $ (5,727)(1) $ 4,200
- ----------
(1) Represents corporate expenses and intercompany profit eliminations.
7. Other Income
In April 1999, the Company suffered inventory, real property and equipment
loss at its Bowmanstown, Pennsylvania facility resulting from a fire. In the
last quarter of fiscal 1999, the Company recorded a gain of $3.7 million for the
excess of amounts reimbursable by the Company's insurance carrier over the net
book value of the damaged property and equipment. In March 2000, the Company
recorded an additional gain of $.6 million based upon additional reimbursements
agreed to during the quarter by the insurance carrier. In addition, negotiations
are continuing for reimbursement under business interruption coverage. No
reimbursements have been recorded under this coverage to date.
The Company's subsidiary, ODDA Smelteverk, AS, had a minority equity
investment in a local hydroelectric power company and also held contracts for
the purchase of hydroelectric power through the years 2006 to 2010. As a result
of legislative, regulatory and market developments occurring in Norway since the
1998 acquisition, the Company was able to sell its investment and related power
rights to a Norwegian "state-governed" power production company in January 2000.
The net sales proceeds of $18.7 million exceeded the amortized value assigned to
the investment and related power contracts as part of purchase accounting and a
pre- and after-tax gain of $15.5 million and approximately $11 million,
respectively, was recorded in the condensed consolidated statements of
operations for the three months and nine months ended March 31, 2000.
12
8. 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.
13
PHILIPP BROTHERS CHEMICALS INC.
CONDENSED CONSOLIDATING BALANCE SHEET (Unaudited)
AS OF MARCH 31, 2000
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Guarantor Foreign Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ (15) $ 558 $ 5,443 $ 5,986
Trade receivables 5,831 30,853 27,177 63,861
Other receivables 859 4,615 3,217 8,691
Inventory 4,502 35,287 22,002 61,791
Prepaid expenses and other 4,538 1,718 1,781 8,037
----------------------------------------------------------------------------------
Total current assets 15,715 73,031 59,620 -- 148,366
----------------------------------------------------------------------------------
Property, plant & equipment, net 762 21,187 49,928 71,877
Intangibles 18 2,384 4,504 6,906
Investment in subsidiaries 75,658 1,533 (3,142) (74,049) 0
Intercompany 67,884 (32,784) 1,997 (37,097) 0
Other assets 14,471 8,759 2,693 25,923
----------------------------------------------------------------------------------
Total assets $ 174,508 $ 74,110 $ 115,600 $(111,146) $ 253,072
==================================================================================
Liabilities and Stockholders Equity
Current Liabilities:
Cash overdraft $ 202 $ 1,025 $ 2,056 $ 3,283
Loan payable to banks -- -- 4,386 4,386
Current portion of long term debt 0 1,693 88 1,781
Accounts payable 1,805 14,744 17,191 33,740
Other loans payable 261 74 556 891
Accrued expenses and other 5,457 10,783 9,731 25,971
----------------------------------------------------------------------------------
Total current liabilities 7,725 28,319 34,008 -- 70,052
----------------------------------------------------------------------------------
Long term debt 130,348 1,374 46,967 (37,097) 141,592
Other liabilities 1,924 5,695 1,862 9,481
Redeemable securities:
Common stock 3,162 3,162
Common stock of subsidiary 330 330
----------------------------------------------------------------------------------
3,162 330 -- -- 3,492
----------------------------------------------------------------------------------
Stockholders' equity
Series "A" preferred stock 521 -- -- 521
Common stock 2 32 131 (163) 2
Paid in capital 878 34,040 2,856 (36,896) 878
Retained earnings 29,942 4,290 32,700 (36,990) 29,942
Accumulated other comprehensive
income (loss)- cumulative currency
translation adjustment 6 30 (2,924) 0 (2,888)
----------------------------------------------------------------------------------
Total Stockholders' equity 31,349 38,392 32,763 (74,049) 28,455
----------------------------------------------------------------------------------
Total liabilities and equity $ 174,508 $ 74,110 $ 115,600 $(111,146) $ 253,072
==================================================================================
14
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
====================================================================================
15
PHILIPP BROTHERS CHEMICALS INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Guarantor Foreign Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 9,066 $ 46,672 $ 34,127 $ (8,337) $ 81,528
Cost of goods sold 7,389 34,555 25,280 (8,337) 58,887
----------------------------------------------------------------------------------
Gross profit 1,677 12,117 8,847 0 22,641
Selling, general, and administrative
expenses 3,801 10,969 5,218 19,988
----------------------------------------------------------------------------------
Operating (loss) income (2,124) 1,148 3,629 0 2,653
Interest expense 2,223 75 1,479 3,777
Interest income (5) -- (287) (292)
Other expense -- -- 743 743
Gain from property damage claim -- (550) -- (550)
Gain from sale of assets -- -- (15,539) (15,539)
Intercompany allocation (2,757) 2,757 -- 0
(Profit) loss relating to subsidiaries (11,292) -- -- 11,292 0
==================================================================================
Income (loss) before income taxes 9,707 (1,134) 17,233 (11,292) 14,514
Provision (Benefit) for income taxes (211) (259) 5,066 -- 4,596
----------------------------------------------------------------------------------
Net Income (loss) $ 9,918 $ (875) $ 12,167 $(11,292) $ 9,918
==================================================================================
16
PHILIPP BROTHERS CHEMICALS INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Guarantor Foreign Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 8,995 $ 42,487 $ 36,964 $ (8,949) $ 79,497
Cost of goods sold 7,307 32,275 26,677 (8,949) 57,310
----------------------------------------------------------------------------------
Gross profit 1,688 10,212 10,287 0 22,187
Selling, general, and administrative
expenses 3,052 10,693 7,029 20,774
----------------------------------------------------------------------------------
Operating (loss) income (1,364) (481) 3,258 0 1,413
Interest expense 1,716 73 1,469 3,258
Interest income (3) -- (92) (95)
Other expense 0 -- 1,173 1,173
Intercompany allocation (2,359) 2,359 -- 0
(Profit) loss relating to subsidiaries 1,601 -- -- (1,601) 0
----------------------------------------------------------------------------------
Income (loss) before income taxes (2,319) (2,913) 708 1,601 (2,923)
Provision (Benefit) for income taxes (243) (940) 336 -- (847)
----------------------------------------------------------------------------------
Net Income (loss) $ (2,076) $ (1,973) $ 372 $ 1,601 $ (2,076)
==================================================================================
17
PHILIPP BROTHERS CHEMICALS INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)
FOR THE NINE MONTHS ENDED MARCH 31, 2000
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Guarantor Foreign Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 26,511 $ 129,477 $ 101,684 $ (27,598) $ 230,074
Cost of goods sold 21,421 95,099 74,921 (27,598) 163,843
-----------------------------------------------------------------------------------
Gross profit 5,090 34,378 26,763 0 66,231
Selling, general, and administrative
expenses 10,283 31,947 17,219 59,449
-----------------------------------------------------------------------------------
Operating (loss) income (5,193) 2,431 9,544 0 6,782
Interest expense 6,102 193 4,470 10,765
Interest income (17) (1) (449) (467)
Other expense (912) -- 3,690 2,778
Gain from property damage claim -- (550) (550)
Gain from sale of assets -- -- (15,539) (15,539)
Intercompany allocation (7,969) 7,969 -- 0
(Profit) loss relating to subsidiaries (8,590) -- -- 8,590 0
-----------------------------------------------------------------------------------
Income (loss) before income taxes 6,193 (5,180) 17,372 (8,590) 9,795
Provision (Benefit) for income taxes (994) (1,724) 5,326 -- 2,608
-----------------------------------------------------------------------------------
Net Income (loss) $ 7,187 $ (3,456) $ 12,046 $ (8,590) $ 7,187
===================================================================================
18
PHILIPP BROTHERS CHEMICALS INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)
FOR THE NINE MONTHS ENDED MARCH 31, 1999
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Guarantor Foreign Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 25,685 $ 118,285 $ 90,306 $ (22,678) $ 211,598
Cost of goods sold 20,991 90,702 68,284 (22,678) 157,299
-----------------------------------------------------------------------------------
Gross profit 4,694 27,583 22,022 0 54,299
Selling, general, and administrative
expenses 8,491 25,999 15,609 50,099
-----------------------------------------------------------------------------------
Operating (loss) income (3,797) 1,584 6,413 0 4,200
Interest expense 4,981 239 4,056 9,276
Interest income (351) -- (218) (569)
Other expense -- -- 2,361 2,361
Intercompany allocation (7,161) 7,161 0 0
(Profit) loss relating to subsidiaries 3,551 -- -- (3,551) 0
-----------------------------------------------------------------------------------
Income (loss) before income taxes (4,817) (5,816) 214 3,551 (6,868)
Provision (Benefit) for income taxes (404) (2,075) 24 -- (2,455)
-----------------------------------------------------------------------------------
Net Income (loss) $ (4,413) $ (3,741) $ 190 $ 3,551 $ (4,413)
===================================================================================
19
PHILIPP BROTHERS CHEMICALS INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)
FOR THE NINE MONTHS ENDED MARCH 31, 2000
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Guarantor Foreign Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
- ------------------------------------------------------------------------------------------------------------------------------------
Operating activities:
Net income (loss) $ 7,187 $ (3,456) $ 12,046 $(8,590) $ 7,187
Adjustments to reconcile net income (loss)
to net cash (used in) provided by
operating activities:
Depreciation and amortization 405 3,329 5,489 9,223
Gain from property damage claim -- (550) -- (550)
Gain from sale of assets -- -- (15,539) (15,539)
Other 2,133 (467) (4,015) (2,349)
Changes in operating assets and liabilities:
Accounts receivable 248 914 4,003 5,165
Inventory (290) (8,744) (1,745) (10,779)
Prepaid expenses and other (2,440) 609 2,015 184
Other assets 19 (595) (229) (805)
Intercompany (24,081) 18,847 (3,356) 8,590 0
Accounts payable (162) 432 (2,790) (2,520)
Accrued expenses and other 2,796 (6,602) 3,798 (8)
----------------------------------------------------------------------------------
Net cash (used in) provided by
operating activities (14,185) 3,717 (323) 0 (10,791)
----------------------------------------------------------------------------------
Investing activities:
Capital expenditures (90) (6,185) (7,646) (13,921)
Proceeds from sale of asset -- -- 18,700 18,700
Proceeds from property damage claim -- 872 -- 872
Other Investments (3,000) -- -- (3,000)
----------------------------------------------------------------------------------
Net cash (used in) provided by
investing activities (3,090) (5,313) 11,054 0 2,651
----------------------------------------------------------------------------------
Financing activities:
Cash overdraft (75) 812 1,108 1,845
Net increase in short term debt 229 74 1,773 2,076
Proceeds from long term debt 16,807 1,566 876 19,249
Payments of long term debt (94) (464) (10,856) (11,414)
Proceeds from principal shareholder -- -- 62 62
----------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 16,867 1,988 (7,037) 0 11,818
----------------------------------------------------------------------------------
Net (decrease) increase in cash and
cash equivalents (408) 392 3,694 -- 3,678
Cash and cash equivalents at
beginning of year 393 166 1,749 2,308
----------------------------------------------------------------------------------
Cash and cash equivalents
at end of year $ (15) $ 558 $ 5,443 -- $ 5,986
==================================================================================
20
PHILIPP BROTHERS CHEMICALS INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)
FOR THE NINE MONTHS ENDED MARCH 31, 1999
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Guarantor Foreign Subsidiaries Consolidation Consolidated
Parent Subsidiaries Non-Guarantors Adjustments Balance
- ------------------------------------------------------------------------------------------------------------------------------------
Operating activities:
Net (loss) income $ (4,413) $ (3,741) $ 190 $3,551 $ (4,413)
Adjustments to reconcile net (loss) income
to net cash (used in) provided by
operating activities:
Depreciation and amortization 372 2,740 4,728 7,840
Other (133) (113) 409 163
Changes in operating assets and liabilities,
net of effects of businesses acquired:
Accounts receivable 26 6,661 2,557 9,244
Inventory 226 (7,024) (2,344) (9,142)
Prepaid expenses and other (2,599) (1,580) 2,846 (1,333)
Other assets (1,581) 16 12 (1,553)
Intercompany (16,339) 10,003 9,887 (3,551) 0
Accounts payable (596) (374) (4,356) (5,326)
Accrued expenses and other 1,076 1,233 278 2,587
-----------------------------------------------------------------------------------
Net cash (used in) provided by
operating activities (23,961) 7,821 14,207 -- (1,933)
-----------------------------------------------------------------------------------
Investing activities:
Capital expenditures (134) (5,492) (3,856) (9,482)
Acquisition of businesses,
net of cash acquired -- (2,505) (19,000) (21,505)
-----------------------------------------------------------------------------------
Net cash used in investing activities (134) (7,997) (22,856) -- (30,987)
-----------------------------------------------------------------------------------
Financing activities:
Cash overdraft (423) (3) -- (426)
Net (decrease) increase in short term debt (847) -- 3,474 2,627
Proceeds from long term debt 7,200 141 1,869 9,210
Payments of long term debt (81) (333) -- (414)
Repayment of shareholder note -- -- 370 370
-----------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 5,849 (195) 5,713 -- 11,367
-----------------------------------------------------------------------------------
Net (decrease) in cash and
cash equivalents (18,246) (371) (2,936) -- (21,553)
Cash and cash equivalents
at beginning of year 18,312 928 4,981 24,221
-----------------------------------------------------------------------------------
Cash and cash equivalents
at end of year $ 66 $ 557 $ 2,045 -- $ 2,668
===================================================================================
21
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 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 Chemical segment, from the date of
acquisition.
Results of Operations
Sales
($000's)
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------ ------------------------
Operating Segments 2000 1999 2000 1999
--------- --------- --------- ---------
AgChem $ 46,885 $ 47,262 $ 129,789 $ 124,788
Industrial Chemicals 40,948 39,852 119,810 107,946
Elimination of intersegment sales (6,305) (7,617) (19,525) (21,136)
--------- --------- --------- ---------
$ 81,528 $ 79,497 $ 230,074 $ 211,598
========= ========= ========= =========
Operating Income
($000's)
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------- --------------------
Operating Segments 2000 1999 2000 1999
------- ------- ------- -------
AgChem $ 2,990 $ 3,281 $ 6,127 $ 5,855
Industrial Chemicals 1,841 188 7,686 4,072
Corporate expenses and eliminations (2,178) (2,056) (7,031) (5,727)
------- ------- ------- -------
$ 2,653 $ 1,413 $ 6,782 $ 4,200
======= ======= ======= =======
22
Comparison of Three Months Ended March 31, 2000 and 1999
Net Sales. Net sales increased by $2.0 million, or 2.5% to $81.5 million
in the three months ended March 31, 2000, as compared to the same period of the
prior year. Industrial Chemicals sales were higher by $1.1 million primarily due
to higher volume sales and higher prices of coal fly ash products ($.6 million)
and higher volume sales of organic intermediate products primarily for use as
pharmaceutical intermediates ($.5 million) due to increased demand. AgChem sales
were lower by $.4 million as compared to the prior period primarily as a result
of lower volume sales of the Company's animal nutrition and health products for
coccidiostats ($1.3 million).
Gross Profit. Gross profit increased by $.5 million or 2.0% to $22.6
million as compared to the same period of the prior year. This increase was
primarily attributable to higher profits ($.4 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 organic intermediate products
principally for use as pharmaceutical intermediates. Gross profit of the
Company's AgChem segment was mostly unchanged as compared to the same period of
the prior year. Gross profit as a percentage of net sales of 27.8% in the
quarter ended March 31, 2000 was mostly unchanged as compared to the same period
of the prior year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $.8 million or 3.8% to $19.9 million for the
three months ended March 31, 2000, as compared to the same period of the prior
year. The Industrial and AgChem segments of the Company both experienced almost
no increased expense as compared to the same period of the prior year.
Non-segment operating expenses in the three months ended March 31, 2000 include
a $1 million non-cash charge to reflect the increase in repurchase value of
redeemable common stock of a minority shareholder. The three months ended March
31, 1999 included an accrual for compensation expenses ($1.5 million) associated
with the termination of employment of an executive of a subsidiary of the
Company.
Operating Income. Operating income increased by $1.2 million or 87.7% to
$2.7 million in the three months ended March 31, 2000, 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 inorganic
intermediate chemicals. Operating income of the AgChem segment decreased by $.4
million primarily due to lower profitability of the Company's animal health and
nutrition products.
Interest Expense. Interest expense increased by $.5 million or 15.9% to
$3.8 million in the three months ended March 31, 2000, as compared to the same
period of the prior year primarily due to increased bank borrowings and higher
interest rates.
Other Expense, Net. Other expense, net, principally reflects foreign
currency transaction gain and losses of the Company's foreign subsidiaries.
Gain from Property Damage Claim. In April 1999, the Company suffered
inventory, real property and equipment loss at its Bowmanstown, Pennsylvania
facility resulting from a fire. In the last quarter of fiscal 1999, the Company
recorded a gain of $3.7 million for the excess of amounts reimbursable by the
Company's insurance carrier over the net book value of the damaged property and
equipment. In March 2000, the Company recorded an additional gain of $.6 million
based upon additional reimbursements agreed to during the quarter by the
insurance carrier. In addition, negotiations are continuing for reimbursement
under business interruption coverage. No reimbursements have been recorded under
this coverage to date.
Gain from Sale of Assets. The Company's subsidiary, ODDA Smelteverk, AS,
had a minority equity investment in a local hydroelectric power company and also
held contracts for the purchase of hydroelectric power through the years 2006 to
2010. As a result of legislative, regulatory and market developments occurring
in Norway since the 1998 acquisition, the Company was able to sell its
investment and related power rights to a Norwegian "state-owned" power
production company in January 2000. The net sales proceeds of $18.7 million
exceeded the amortized value assigned to the investment and related power
contracts as part of purchase accounting and a pre- and after-tax gain of $15.5
million and approximately $11 million, respectively, was recorded in the
condensed consolidated statements of operations for the three months ended March
31, 2000. A total of $10 million in bank indebtedness was repaid from the
proceeds of the sale. As a result of the sale, the subsidiary's ability to
purchase power at cost terminated and it purchases power at prevailing market
rates.
Income Taxes. Income tax expense includes a provision related to the gain
on sale of assets at the Norwegian statutory rate of 28%. A tax benefit is
provided on interim losses to the extent income is projected for the fiscal
year.
23
Comparison of Nine Months Ended March 31, 2000 and 1999
Net Sales. Net sales increased by $18.5 million, or 8.7% to $230.1 million
in the nine months ended March 31, 2000, as compared to the same period of the
prior year. Industrial Chemicals sales were higher by $11.9 million primarily
due to a full nine months of dicyandiamide and calcium carbide sales ($6.1
million) of ODDA (acquired in October 1998), higher volume sale of coal fly ash
products ($3.9 million) and higher volume sales of inorganic intermediate
products, primarily to the wood treatment industry ($1.2 million) due to
increased demand. AgChem sales were higher by $5.0 million primarily due to
higher volume sales of the Company's animal nutrition and health products,
primarily coccidiostats ($1.0 million), feed pre-mixes ($5.9 million) due to the
December 1998 acquisition of a feed pre-mix business and higher volume sales of
the Company's crop protection chemicals ($1.6 million) due to increased demand
and introduction of new generic fungicides.
Gross Profit. Gross profit increased by $11.9 million or 22.0% to $66.2
million as compared to the same period of the prior year. This increase was
primarily attributable to higher profits ($7.9 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 ($3.6 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 to 28.8% in the nine months ended March 31, 2000 as
compared to 25.7% in the same period of the prior year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $9.3 million or 18.6% to $59.4 million in
the nine months ended March 31, 2000, as compared to the same period of the
prior year. In the Industrial Chemicals segment, the increase was primarily due
to the ODDA acquisition ($2.4 million) and higher distribution expenses
associated with increased sales of the Company's coal fly ash products ($3.0
million). In the AgChem segment, higher fixed selling and product promotion
expenses associated with the Company's crop protection products ($2.3 million)
and increased amortization expense ($.6 million) associated with label
registration rights for generic fungicides contributed to the increase. In
addition, in the nine months ended March 31, 2000, non-segment operating
expenses include a $.8 million non-cash charge to reflect the increase in
repurchase value of redeemable common stock of a minority shareholder. The nine
months ended March 31, 1999 included an accrual for compensation expenses ($1.5
million) associated with the termination of employment of an executive of a
subsidiary of the Company.
Operating Income. Operating income increased by $2.6 million or 61.5% to
$6.8 million in the nine months ended March 31, 2000, as compared to the same
period of the prior year. Operating income of the Industrial Chemicals segment
increased by $3.6 million due to increased profitability of coal fly ash
products and intermediate chemicals. Operating income of the AgChem segment
increased by $.3 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 $1.3 million in the nine
months ended March 31, 2000 as compared to the same period of the prior year.
Interest Expense. Interest expense increased by $1.5 million or 16.0% to
$10.8 million in the nine months ended March 31, 2000, as compared to the same
period of the prior year primarily due to increased bank borrowings and higher
interest rates.
Other Expense, Net. Other expense, net, principally reflects foreign
currency transaction gain and losses of the Company's foreign subsidiaries.
Gain from Property Damage Claim. In April 1999, the Company suffered
inventory, real property and equipment loss at its Bowmanstown, Pennsylvania
facility resulting from a fire. In the last quarter of fiscal 1999, the Company
recorded a gain of $3.7 million for the excess of amounts reimbursable by the
Company's insurance carrier over the net book value of the damaged property and
equipment. In March 2000, the Company recorded an additional gain of $.6 million
based upon additional reimbursements agreed to during the quarter by the
insurance carrier. In addition, negotiations are continuing for reimbursement
under business interruption coverage. No reimbursements have been recorded under
this coverage to date.
24
Gain from Sale of Assets. The Company's subsidiary, ODDA Smelteverk, AS,
had a minority equity investment in a local hydroelectric power company and also
held contracts for the purchase of hydroelectric power through the years 2006 -
2010. As a result of legislative, regulatory and market developments occurring
in Norway since the 1998 acquisition, the Company was able to sell its
investment and related power rights to a Norwegian "state-owned" power
production company in January 2000. The net sales proceeds of $18.7 million
exceeded the amortized value assigned to the investment and related power
contracts as part of purchase accounting and a pre- and after-tax gain of $15.5
million and approximately $11 million, respectively, was recorded in the
condensed consolidated statements of operations for the nine months ended March
31, 2000. A total of $10 million in bank indebtedness was repaid from the
proceeds of the sale. As a result of the sale, the subsidiary's ability to
purchase power at cost terminated and it purchases power at prevailing market
rates.
Income Taxes. Income tax expense includes a provision related to the gain
on sale of assets at the Norwegian statutory rate of 28%. A tax benefit is
provided on interim losses to the extent income is projected for the fiscal
year.
Liquidity and Capital Resources
Net Cash Used in Operating Activities. Net cash used in operations for the
nine months ended March 31, 2000 was $10.8 million, an increase of $8.9 million
from the same period of the prior year. This increase 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 nine months ended March 31, 2000 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 Provided by Investing Activities. Net cash provided by investing
activities for the nine months ended March 31, 2000 was $2.7 million, as
compared to $31.0 million of net cash used in investing activities for the same
period of the prior year. The nine months ended March 31, 2000 period reflects
proceeds of $18.7 million from the sale of assets by the Company's Norwegian
subsidiary and $.9 million for property damaged from the aforementioned fire.
The increase in capital expenditures was primarily due to expenditures by the
Norwegian subsidiary (acquired October 1, 1998) for increased production
capacity. Also, during this fiscal 2000 period, the Company acquired minority
equity interests in two businesses for a combined $3.0 million. The nine months
ended March 31, 1999 reflects the purchase of ODDA ($19.0 million) and
acquisition of a feed pre-mix business ($2.5 million).
Net Cash Provided by Financing Activities. Net cash provided by financing
activities for the nine months ended March 31, 2000 was $11.8 million, an
increase of $.4 million from the same period of the prior year primarily due to
increased borrowing under the Company's credit facility and proceeds from
long-term equipment financing which was mostly offset by repayments of bank
indebtedness by the Company's Norwegian subsidiary, primarily from net proceeds
generated by the sale of assets.
Liquidity. As of March 31, 2000, the Company had $78.3 million of working
capital and $72.7 million at June 30, 1999. Cash on hand at March 31, 2000
amounted to $6.0 million, as compared to $2.3 million at June 30, 1999.
At March 31, 2000, the Company had $30.2 million outstanding borrowings
under its Credit Agreement with PNC Bank. In addition to amounts outstanding,
the Company had $4.1 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 April 1999, the Company suffered inventory, real property and machinery
loss at its Bowmanstown, Pennsylvania facility resulting from a fire. The
Company carries insurance coverage for property damage and business interruption
losses and has received $2 million in advance payments during the nine months
ending March 31, 2000. In April 2000, the Company received an additional $2
million in advance payments. The Company expects to receive additional funds to
cover its property damage and business interruption losses.
25
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 March 31, 2000, the fair value of the Company's senior subordinated debt is
estimated based on quoted market rates is $83.0 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 March 31, 2000, the fair value did not differ materially from its
carrying amount. Based on the limited amount of foreign currency contracts at
March 31, 2000, the Company does not believe that an instantaneous 10% adverse
movement in foreign currency rates from their levels at March 31, 2000, 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 March
31, 2000, 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.
26
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 March 31, 2000 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
27
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."
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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 March 31,
2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PHILIPP BROTHERS CHEMICALS, INC.
Date: May 12, 2000 By: /s/ NATHAN Z. BISTRICER
-------------------------------------------
Nathan Z. Bistricer, Vice President and
Chief Financial Officer
Date: May 12, 2000 By: /s/ JOSEPH KATZENSTEIN
-------------------------------------------
Joseph Katzenstein, Treasurer and Secretary
30