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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K/A
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CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
February 2, 2001 333-64641
- ------------------------------------------------ ----------------------
Date of Report (Date of earliest event reported) Commission File Number
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 Number)
One Parker Plaza
Fort Lee, New Jersey 07024
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(Address of Principal Executive Offices) (Zip Code)
(201) 944-6020
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(Registrant's telephone number, including area code)
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Item 2. Acquisition or Disposition of Assets.
Philipp Brothers Chemicals, Inc. (the "Company") is herewith filing the
financial statements required in connection with the acquisition by the Company
of certain assets relating to the medicated feed additives business of Pfizer
Inc. and certain of Pfizer Inc.'s subsidiaries (the "Acquisition"). The
Acquisition was reported on the Company's Current Report on Form 8-K, dated
December 14, 2000.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Statements of Assets Acquired as of December 31, 1999 and 1998, and
the related Statements of Revenues and Operating Expenses for the
years ended December 31, 1999, 1998 and 1997, with Independent
Auditors' Report thereon.
(b) Pro Forma Condensed Financial Statements (Unaudited) of the Company
giving effect to the acquisition.
2
PFIZER INC. MEDICATED FEED ADDITIVE BUSINESS
(A Business Within Pfizer Inc.'s Animal Health Group)
Financial Statements
December 31, 1999 and 1998
(With Independent Auditors' Report Thereon)
Independent Auditors' Report
The Board of Directors
Pfizer Inc.:
We have audited the accompanying statements of assets acquired as of December
31, 1999 and 1998, and the related statements of revenues and operating expenses
of a portion of the Pfizer Inc. Medicated Feed Additive Business (the
"Business") for the years ended December 31, 1999, 1998, and 1997. These
financial statements are the responsibility of Pfizer Inc.'s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.
The accompanying financial statements were prepared to present the assets of the
Business sold to Philipp Brothers Chemicals Inc. pursuant to the asset purchase
agreement described in note 1, for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission (the "SEC"), and for
inclusion in Philipp Brothers Chemicals Inc.'s Form 8-K. The financial
statements are not intended to be a complete presentation of the assets,
revenues, and expenses of the Business. The accompanying financial statements
have been prepared in lieu of the full financial statements required by Rule
3-05 of Regulation S-X of the SEC because Pfizer Inc. has not historically
maintained the Business as a separate reporting segment. The Business represents
a group of products within Pfizer Inc.'s Animal Health Group, a division of
Pfizer Inc. Certain costs have been allocated to the Business using bases of
allocation that Pfizer Inc.'s management believes are representative of the cost
to operate the Business.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the assets of the Business as of December 31, 1999 and
1998, and its revenues and operating expenses for the years ended December 31,
1999, 1998, and 1997, in conformity with accounting principles generally
accepted in the United States of America.
September 28, 2000
PFIZER INC. MEDICATED FEED ADDITIVE BUSINESS
(A Business Within Pfizer Inc.'s Animal Health Group)
Statements of Assets Acquired
December 31, 1999 and 1998
(In thousands)
1999 1998
-------- --------
Assets acquired:
Inventories $ 63,324 69,324
Inventories consigned to others 7,967 13,728
Property, plant, and equipment, less accumulated depreciation of
$20,230 and $32,821 in 1999 and 1998, respectively 32,908 46,965
Intangible assets, less accumulated amortization of
$470 and $376 in 1999 and 1998, respectively 1,227 1,321
-------- --------
Total assets acquired $105,426 131,338
======== ========
See accompanying notes to financial statements.
2
PFIZER INC. MEDICATED FEED ADDITIVE BUSINESS
(A Business Within Pfizer Inc.'s Animal Health Group)
Statements of Revenues and Operating Expenses
Years ended December 31, 1999, 1998, and 1997
(In thousands)
1999 1998 1997
-------- -------- --------
Net sales $162,645 187,785 224,957
-------- -------- --------
Operating expenses:
Cost of sales 106,873 112,676 126,017
Selling, general, and administrative expenses 34,953 46,766 43,612
Research and development expenses 1,522 1,618 2,342
Amortization of intangibles 291 3,184 3,184
Asset impairment -- 103,200 --
-------- -------- --------
Total operating expenses 143,639 267,444 175,155
-------- -------- --------
Excess (deficiency) of net sales over
operating expenses $ 19,006 (79,659) 49,802
======== ======== ========
See accompanying notes to financial statements.
3
PFIZER INC. MEDICATED FEED ADDITIVE BUSINESS
(A Business Within Pfizer Inc.'s Animal Health Group)
Notes to Financial Statements
December 31, 1999 and 1998
(Dollars in thousands)
(1) Business and Asset Purchase Agreement
Pfizer Inc. Medicated Feed Additive Business (the "Business") is a group
of products within Pfizer Inc.'s Animal Health Group, a division of Pfizer
Inc. The Business sells a broad range of medicated feed additive products
to the global livestock industry, either directly to large integrated
livestock producers or through a network of independent distributors. The
activities of the Business (production, sales and marketing, and finance)
are integrated within Pfizer Inc.'s Animal Health Group. The Business
includes the following products:
o Anticoccidials, which include Aviax, Coxistac, and Posistac;
o Mecadox;
o Virginiamycin, sold under the brand name Stafac;
o Terramycin and Neo-Terramycin; and
o Other medicated feed additives, including Rumatel, Banminth, and
Bloat Guard.
Effective September 28, 2000, Pfizer Inc. sold certain assets of the
Business to Philipp Brothers Chemicals Inc. ("Philipp Brothers") pursuant
to an asset purchase agreement dated September 28, 2000. The assets
acquired included certain inventories throughout the world, manufacturing
plants and various equipment in Brazil and Belgium, and certain patents
and trademarks related to the products. The actual amounts of the assets
acquired are not based on the balances as of December 31, 1999 and 1998.
The asset purchase agreement provides for the contingent transfer of the
Belgian facility, the related equipment, and certain inventories. The
transfer is contingent upon Philipp Brothers obtaining certain operating
permits from governmental authorities. The net book value of the Belgian
facility and the related equipment included on the statements of assets
acquired amounted to $14,700 and $16,200 as of December 31, 1999 and 1998,
respectively.
Additionally, in accordance with the asset purchase agreement, certain
inventories may not be transferred to Philipp Brothers at closing for
various reasons, including expiration dates, location and quantities.
Accordingly, certain products whose inventories have been included in the
statements of assets acquired may be partially retained by Pfizer Inc. At
this time, the amount of inventories retained for these reasons cannot be
estimated and is not directly correlated with the 1999 inventory balances
included in the statements of assets acquired.
(Continued)
4
PFIZER INC. MEDICATED FEED ADDITIVE BUSINESS
(A Business Within Pfizer Inc.'s Animal Health Group)
Notes to Financial Statements
December 31, 1999 and 1998
(Dollars in thousands)
(2) Basis of Presentation
The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles. The preparation of these
financial statements in accordance with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates. Significant
accounting estimates used include depreciation, amortization, inventory
valuation allowances, sales provisions, and cost allocations. Management
believes that reasonable assumptions were applied in deriving these
amounts. The Business is subject to risks and uncertainties that may cause
actual results to differ from estimated results, such as changes in the
business environment, competition, foreign exchange rates, and
legislation.
Complete financial statements were not prepared as Pfizer Inc. did not
maintain the Business as a separate reporting unit. Accordingly, certain
balance sheet amounts such as cash, accounts receivable, and accounts
payable are not separately identified for the Business. The statements of
assets acquired include the assets of Pfizer Inc., which are being sold to
Philipp Brothers and which have been historically segregated by Pfizer
Inc. in its accounting records. Intangible assets in the statements of
assets acquired exclude purchased goodwill, which is not specifically
included in the asset purchase agreement. However, amortization of
purchased goodwill is included in operating expenses in the statement of
revenues and operating expenses. The statements of revenues and operating
expenses include the revenues and operating expenses directly attributable
to the development, manufacture, sale, and distribution of the products
comprising the Business. They also include an allocation of costs
attributable to the development, manufacture, sale, and distribution of
the Business, which have not been historically segregated by Pfizer Inc.
in its accounting records. These additional allocated costs are incurred
in the local markets in which the Business manufactures and/or distributes
the products. The statements of revenues and operating expenses do not
include interest expenses, foreign exchange transaction gains and losses,
income taxes, or any other indirect expenses not noted above.
All significant intercompany transactions and balances have been
eliminated from these financial statements. Assets acquired relating to
the foreign operations are as of November 30 of each year and the related
revenues and operating expenses are for the full-year periods ending on
the same dates.
(3) Summary of Significant Accounting Policies
Inventories - Inventories are valued at the lower of cost or fair value,
with cost determined for finished goods and work-in-process at the average
actual cost and raw materials and supplies at the average or latest actual
cost.
Inventories consigned to others - Certain finished goods are shipped and
title passes to customers pursuant to transactions that in-substance
represent consigned inventory. Such inventory is reported separately in
the statements of assets acquired. Revenue related to this inventory is
recognized when the risk of ownership passes to the customers, typically
upon resale to a third party.
(Continued)
5
PFIZER INC. MEDICATED FEED ADDITIVE BUSINESS
(A Business Within Pfizer Inc.'s Animal Health Group)
Notes to Financial Statements
December 31, 1999 and 1998
(Dollars in thousands)
Property, plant, and equipment - Property, plant, and equipment are
carried at cost less accumulated depreciation. Major improvements are
capitalized, while maintenance and repairs are expensed when incurred.
Depreciation is computed generally on a straight-line basis over the
following estimated useful lives:
Buildings 33-1/3 years
Machinery and equipment 8-20 years
Furniture, fixtures, and other 3-12-1/2 years
Intangible assets - Intangible assets are amortized on a straight-line
basis over their estimated useful lives.
Impairment of assets - Long-lived assets are assessed for recoverability
from future operations on a regular basis using undiscounted cash flows.
When necessary, charges for impairments of long-lived assets are recorded
for the amount by which the present value of future cash flows exceeds the
carrying value of these assets.
Foreign currency translation - The financial statements of operations
outside the U.S. are maintained in their local currency. Pfizer Inc.
translates assets and liabilities to their U.S. dollar equivalents at
rates in effect at the balance sheet date. Revenue and expense items are
translated into their U.S. dollar equivalents at average rates of exchange
for the period. Translation gains and losses are not included in the
accompanying statements of assets acquired because they have historically
not been separately identified for the Business. The financial statements
of operations in hyperinflationary countries are maintained in U.S.
dollars, the reporting currency.
Advertising expense - Advertising costs are expensed as incurred.
Advertising expenses were $4,087, $5,110, and $6,073 for 1999, 1998, and
1997, respectively, and are included in selling, general, and
administrative expenses.
Allocations of costs - Certain costs incurred at the production facilities
and distribution centers have been allocated to the Business on various
bases, including percentage of floor space and activity level. Management
believes that these allocations are representative of the activities of
the Business.
(4) Pfizer Inc. Corporate and Pfizer Inc. Animal Health Group Overhead Costs
Pfizer Inc. corporate overhead costs relating to functions such as
personnel, legal, accounting, treasury, and information systems have not
been allocated to the Business because these costs are not separately
identified in the accounting records for the Business. In addition,
management believe that these costs would not be representative of the
costs that would have been or will be incurred by the Business operating
independently from Pfizer Inc.
(Continued)
6
PFIZER INC. MEDICATED FEED ADDITIVE BUSINESS
(A Business Within Pfizer Inc.'s Animal Health Group)
Notes to Financial Statements
December 31, 1999 and 1998
(Dollars in thousands)
Pfizer Inc. Animal Health Group overhead costs relating to personnel,
quality control, regulatory compliance, finance, and business development
also have not been allocated to the Business, for the same reason as the
Pfizer Inc. corporate overhead costs noted above.
(5) Inventories
Inventories related to the products sold are located in various facilities
and distribution centers throughout the world and consist of the
following:
December 31
-------------------
1999 1998
------- -------
Raw materials $19,633 6,985
Work-in-process 8,174 27,445
Finished goods 37,572 42,194
------- -------
65,379 76,624
Less allowances for obsolescence and scrap 2,055 7,300
------- -------
$63,324 69,324
======= =======
(6) Property, Plant, and Equipment
Facilities and equipment being sold relate primarily to the manufacturing
plants in Guarulhos, Brazil and Rixensart, Belgium and consist of the
following:
December 31
-------------------
1999 1998
------- -------
Land and buildings $14,993 21,922
Machinery and equipment 32,049 52,032
Furniture, fixtures and other 1,280 2,838
Construction in progress 4,816 2,994
------- -------
53,138 79,786
Less accumulated depreciation 20,230 32,821
------- -------
$32,908 46,965
======= =======
Depreciation expense totaled $5,313, $5,688, and $4,701 for the years
ended December 31, 1999, 1998, and 1997, respectively.
(Continued)
7
PFIZER INC. MEDICATED FEED ADDITIVE BUSINESS
(A Business Within Pfizer Inc.'s Animal Health Group)
Notes to Financial Statements
December 31, 1999 and 1998
(Dollars in thousands)
(7) Intangible Assets
The carrying value of intangible assets being sold that are recorded by
Pfizer Inc. are as follows:
December 31
-------------------
1999 1998
------ ------
Trademarks $ 663 663
Covenant not to compete 608 608
Other 426 426
------ ------
1,697 1,697
Less accumulated amortization 470 376
------ ------
$1,227 1,321
====== ======
Amortization expense totaled $291, $3,184, and $3,184 for the years ended
December 31, 1999, 1998, and 1997, respectively, which includes
amortization of goodwill and Stafac-related goodwill of $197, $1,935, and
$1,935, respectively.
(8) Restructuring
In 1998, Pfizer's antibiotic feed additive, Stafac, was banned, effective
in mid-1999, throughout the European Union, resulting in asset impairment
charges of $103,200 ($85,200 was to adjust intangible asset values,
primarily goodwill and trademarks, and $18,000 was to adjust the carrying
value of machinery and equipment). As a result of this action, Pfizer
restructured its Stafac business, which resulted in the write-off of
approximately $3,000 of inventory and employee terminations of $2,000.
These charges are recorded in cost of sales and selling, general, and
administrative expenses, respectively. In addition, Pfizer restructured
other product lines within the Business, which resulted in the write-off
of inventory and employee terminations of approximately $4,000 and $3,500,
respectively. These charges are also recorded in cost of sales and
selling, general, and administrative expenses, respectively.
During 1999, additional restructuring charges were incurred related to the
manufacturing facility in Rixensart, Belgium. These charges of $3,600 are
included in cost of sales.
(Continued)
8
PFIZER INC. MEDICATED FEED ADDITIVE BUSINESS
(A Business Within Pfizer Inc.'s Animal Health Group)
Notes to Financial Statements
December 31, 1999 and 1998 (Dollars in thousands) (9) Geographic Data
The Business sells its products either directly to large integrated
livestock producers or through a network of independent distributors.
The United States and Japan were the only countries to contribute more
than 10% to net sales and Belgium and Brazil were the only countries to
have more than 10% of long-lived assets. The following table presents
this geographic information:
United All other
States Japan Belgium Brazil countries Consolidated
------ ----- ------- ------ --------- ------------
Net sales 1999 $62,748 16,816 8,240 13,372 61,469 162,645
1998 60,987 16,430 14,686 17,021 78,661 187,785
1997 67,559 20,958 14,378 17,048 105,014 224,957
Long-lived assets 1999 971 -- 14,733 18,175 256 34,135
1998 1,045 -- 16,150 30,815 276 48,286
9
Philipp Brothers Chemicals, Inc.
Contents Page Number
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Unaudited Condensed Proforma Balance Sheet as at September 30, 2000 2
Unaudited Condensed Proforma Income Statement 3
for the year ending June 30, 2000
Unaudited Condensed Proforma Income Statement 4
for the three months ending September 30, 2000
Notes to Unaudited Condensed Proforma Combined 5 - 9
Financial Statements
January 22, 2001
Philipp Brothers Chemicals, Inc.
Unaudited condensed pro forma balance sheet as of September 30, 2000
(In thousands)
PBC MFA Proforma Proforma
Historical Historical Adjustments Combined
Current Assets
Cash $ 5,864 $ 5,864
Trade receivables 67,870 67,870
Other receivables 4,314 4,314
Inventories 53,644 $ 53,151 $ 12,500 2(a) 119,295
Prepaid expenses and other current assets 9,675 9,675
--------------------------------------------------- ----------
Total Current Assets 141,367 53,151 12,500 207,018
Property, plant and equipment 75,103 31,035 (10,335) 2(a) 95,803
Intangibles 6,476 6,476
Other assets 27,538 1,600 2(a) 29,138
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TOTAL ASSETS $ 250,484 $ 84,186 $ 3,765 $ 338,435
=================================================== ==========
Liabilities and Stockholders' equity
Cash overdraft $ 3,675 $ 3,675
Loans payable to banks 7,078 7,078
Revolving credit facility - 55,231 2(a) 55,231
Current portion of long-term debt 1,296 1,296
Accounts payable 32,181 32,181
Accrued expenses and other current liabilities 25,222 25,222
--------------------------------------------------- ----------
Total Current Liabilities 69,452 - 55,231 124,683
Long-term debt 137,731 (8,080) 2(a) 129,651
Other liabilities 12,579 12,579
--------------------------------------------------- ----------
Total Liabilities 219,762 - 47,151 266,913
--------------------------------------------------- ----------
Redeemable securities
Preferred stock - - 40,800 2(a) 45,000
4,200 2(b)
Common stock 3,038 (420) 2(c) 2,618
Common stock of subsidiary 346 346
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Total Redeemable Securities 3,384 - 44,580 47,964
--------------------------------------------------- ----------
Stockholders' equity -
Preferred stock 521 521
Common stock 2 2
Paid-in capital 878 878
Retained earnings 29,689 (4,200) 2(b) 25,909
420 2(c)
Accumulated other comprehensive loss (3,752) (3,752)
--------------------------------------------------- ----------
Total Stockholders' Equity 27,338 84,186 (87,966) 23,558
--------------------------------------------------- ----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 250,484 $ 84,186 $ 3,765 $ 338,435
=================================================== ==========
2
Philipp Brothers Chemicals, Inc.
Unaudited condensed proforma income statement for the year ending June 30, 2000
(In thousands)
PBC MFA Proforma Proforma
Historical Historical Adjustments Combined
Sales $ 318,056 $ 154,309 $ 472,365
Cost of sales (229,553) (93,906) $ 6,597 3(a) (317,456)
706 3(b)
(1,300) 3(c)
----------------------------------------- ---------
Gross Margin 88,503 60,403 6,003 154,909
----------------------------------------- ---------
Selling, general and (74,310) (30,594) (2,250) 3(d) (108,648)
administrative expenses 291 3(e)
(1,785) 3(f)
Curtailment of operations at
manufacturing facility 1,481 -- -- 1,481
----------------------------------------- ---------
Operating income 15,674 29,809 2,259 47,742
Other:
Interest expense (14,754) -- (5,430) 3(g) (20,717)
(533) 3(h)
Interest income 600 -- -- 600
Gain from property damage claim 946 -- -- 946
Gain on sale of assets 13,763 -- -- 13,763
Other expense (2,230) -- -- (2,230)
----------------------------------------- ---------
Income before taxes 13,999 $ 29,809 (3,704) 40,104
=========
Provision for income taxes 3,946 10,040 3(i) 13,986
--------- --------- ---------
Net income $ 10,053 $ (13,744) $ 26,118
========= ========= =========
3
Philipp Brothers Chemicals, Inc.
Unaudited condensed pro forma income statement for the three months ending
September 30, 2000 (In thousands)
PBC MFA Proforma Proforma
Historical Historical Adjustments Combined
Sales $ 70,895 $ 24,268 $ 95,163
Cost of sales (51,833) (20,648) $ 2,518 3(a) (70,111)
177 3(b)
(325) 3(c)
---------------------------------------- --------
Gross Margin 19,062 3,620 2,370 25,052
---------------------------------------- --------
Selling, general and (17,652) (5,673) (562) 3(d) (23,707)
administrative expenses 73 3(e)
107 3(f)
Curtailment of operations at
manufacturing facility -- -- -- --
---------------------------------------- --------
Operating income (loss) 1,410 (2,053) 1,988 1,345
Other:
Interest expense (3,939) -- (1,357) 3(g) (5,429)
(133) 3(h)
Interest income 217 -- -- 217
Other expense (1,328) -- -- (1,328)
---------------------------------------- --------
Income (loss) before taxes (3,640) $ (2,053) 498 (5,195)
========
Provision (benefit) for income taxes (521) (598) 3(i) (1,119)
-------- -------- --------
Net income (loss) $ (3,119) $ 1,096 $ (4,076)
======== ======== ========
4
Philipp Brothers Chemicals, Inc.
1. Basis of Presentation
(Dollars in thousands)
The proforma condensed combined financial statements are presented for
illustrative purposes only, giving effect to the acquisition as described and
therefore are neither indicative of the operating results that might have been
achieved had the combination occurred as of an earlier date nor indicative of
operating results which may occur in the future. The condensed statement of
operations of Philipp Brothers Chemicals, Inc. ("PBC") for the year ended June
30, 2000 is derived from the audited financial statements of PBC. All other
financial information is unaudited.
On November 30, 2000 PBC purchased the Medicated Feed Additives (MFA) business
of Pfizer, Inc. ("Pfizer"). The MFA business was a group of products within
Pfizer Inc.'s Animal Health Group, a division of Pfizer. The business produces
and sells a broad range of Medicated Feed Additive Products (MFAs) to the global
livestock industry, either directly to large integrated livestock producers or
through a network of independent distributors. The activities of the Business
(production, sales and marketing, and finance) were integrated within Pfizer's
Inc's Animal Health Group.
The contractual purchase price was $90,000, subject to adjustment for the level
of inventories at closing, plus certain contingent payments discussed below. The
purchase price reflected in the accompanying pro forma financial information
includes a reduction to $79,651 to reflect the MFA inventory levels at September
30, 2000 plus transaction costs of $6,700.
The purchase price of $86,351 (including transaction costs) was paid with cash
of $56,700 and the issue of a promissory note to Pfizer for $29,651. PBC
financed the $56,700 cash payment through the issuance of $40,800 of redeemable
preferred securities ($45,000 of redeemable preferred securities, less costs
connected with the issue of those securities of $4,200) and the remaining
$15,900 was financed through an extension of existing bank credit facilities. In
addition, under the terms of the purchase agreement, PBC is required to pay
Pfizer contingent payments for a particular product based on a percentage of
future net revenues of that product. The term of the contingent payments is five
years from November 30, 2000. The maximum contingent payments due under this
arrangement are limited to $55,000 of which the maximum annual payment is
limited to $12,000. In addition, PBC is required to pay Pfizer contingent
payments on other products based on certain gross profit levels of the MFA
business. The term of the contingent payments is five years from November
30,2000 and the maximum contingent payments due under this arrangement are
limited to $10,000. The contingent payment criteria related to the gross profit
levels were not met in the proforma periods presented.
The promissory note due to Pfizer matures in 2003. Interest at 13% is payable
semi-annually in arrears.
The redeemable preferred securities were issued to Palladium Equity Partners II
LP, Palladium Equity Partners IIA LP and Palladium Investors II LP, collectively
part of Palladium Equity Partners LLC, as follows:
Preferred B - $25,000 - 25,000 shares
Preferred C - $20,000 - 20,000 shares
The redeemable preferred stock is entitled to cumulative cash dividends, payable
semi-annually, at 15% per annum of the liquidation value. The liquidation value
of the Preferred B stock is an amount equal to $1 per share plus all accrued and
unpaid dividends (the "Liquidation Value"). The redeemable preferred C stock is
entitled to the Liquidation Value plus a percentage of the equity value of PBC,
as defined in the preferred stock agreements. The equity value is calculated as
a multiple of the earnings before interest, tax, depreciation and amortization
("EBITDA") of the combined PBC business ("Equity Value"). PBC may, at the date
of the annual closing anniversary, redeem the Participating Preferred B, in
whole or in part at the Liquidation Value, for cash, provided that if Preferred
B is redeemed separately from the Preferred C, then the Preferred B must be
redeemed for the Liquidation Value plus an additional amount which would
generate an internal rate of return of 20% to Palladium on the Preferred B
investment. Redemption in part
5
Philipp Brothers Chemicals, Inc.
of Preferred B is only available if at least 50% of the outstanding Preferred B
is redeemed. On the third closing anniversary and on each closing anniversary
thereafter, the Company may redeem for cash only in whole the Participating
Preferred C, at the Liquidation Value plus the Equity Value payment.
At any time after the redemption of PBC's Senior Subordinated Notes due 2008,
Palladium shall have the right to require the Company to redeem for cash the
Participating Preferred B at the Liquidation Value and the Participating
Preferred C at the Liquidation Value plus the Equity Value payment.
In addition, an annual management/advisory fee of $2,250 is payable to Palladium
until all of the Preferred Stock is redeemed. Payments are made quarterly in
advance.
The Company has amended its existing $35,000 revolving credit facility with PNC
Bank to increase the facility to $70,000 and to provide for an additional
$15,000 facility for capital expenditure spending. The interest rate under the
amended credit agreement, will be the Euro Rate, as defined, plus 2 1/4% - 3%
per annum, depending on the Company's operating performance and whether the
drawdowns are under the revolving credit facility or the capital expenditure
facility. The facilities have a maturity date of three years from the date of
closing, that is three years from December 1, 2000, and would require the grant
of security interests in substantially all the Company's domestic assets as well
as certain of the capital stock of the Company's foreign subsidiaries.
The acquisition will be accounted for in accordance with the purchase method.
The purchase price is expected to be allocated to inventory and property, plant
and equipment. (Property, plant and equipment include two facilities, Rixensart,
Belgium and Guarahols, Brazil). The final allocation and actual lives to be
assigned will be determined by an independent valuation to be completed
subsequent to closing. The Company will also be assuming the employees in
Belgium and Brazil. Following the closing, the Company is operating under a
supply agreement with Pfizer in respect of the manufacturing facility in
Belgium, pending regulatory approval of the transfer of title, which is expected
to occur in the quarter ending March 2001. In addition, the transfer of
employees in Belgium is also pending such regulatory approval and is also
pending further negotiations of the settlement of the pensions. The Company
expects that the transfer of pension obligations is expected to be fully funded
by Pfizer. The Company is currently assessing the results of the environmental
review, which is expected to be finalized by March 2001. The Company does not
expect to incur any significant liabilities arising from the environmental
review.
The accompanying unaudited proforma balance sheet reflects the acquisition as if
it occurred at September 30, 2000. The accompanying unaudited proforma condensed
combined statement of operations reflects the acquisition as if it occurred as
of the beginning of the period presented. The financial statements of MFA as of
December 31, 1999 included in the Form 8-K/A, consisting of statements of assets
acquired and revenues and direct expenses were, as represented by Pfizer in the
purchase contracts, prepared in accordance with accounting principles generally
accepted in the United States.
The actual results of MFA will be consolidated with the Company from the date of
acquisition.
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Philipp Brothers Chemicals, Inc.
2. Pro Forma adjustments - Balance Sheet at September 30, 2000
(a) To record the purchase of the MFA business and related financing
based on a preliminary estimate of the purchase price allocation.
For purposes of the pro forma balance sheet, no effect has been
given to the contingent purchase price payments. The transaction
represents a bargain purchase (excluding the contingent payments).
Consequently, adjustments to reflect inventory at fair market value
result in a reduction in the carrying value of property, plant and
equipment. Contingent payments are expected to be allocated first to
property, plant and equipment to restore such assets to fair market
value with the balance recorded as product intangibles.
Purchase Price
Purchase price per contract formula $79,651
Estimated direct costs of acquisition 6,700
-------
$86,351
-------
Preliminary allocation
Inventories at estimated fair values $65,651
Property, plant and equipment 20,700
-------
$86,351
-------
Financing
Issuance of promissory note to Pfizer $29,651
Extension of bank credit facilities * 15,900
-------
45,551
Issuance of redeemable preferred securities 40,800
-------
Financing the acquisition 86,351
Bank financing costs * 1,600
-------
$87,951
-------
* The bank facility included under the long-term debt in the historical
PBC September 30, 2000 balance sheet of $37,731 has been reclassified to
current liabilities (in accordance with generally accepted accounting
principles in the United States) in order to conform with the presentation
of the bank facilities under the revised terms of the agreement with the
Company's bankers.
(b) The redeemable preferred securities are initially recorded at
$40,800, representing proceeds of $45,000, net of costs of issuance
of $4,200. In accordance with Article 11 of Regulation S-X, the
unaudited pro forma balance sheet gives effect to the acquisition as
if it had been consummated at September 30, 2000, hence the
preferred securities are required to be recorded at fair-value at
this date. Accordingly, the pro forma balance sheet includes a
charge of $4,200 to retained earnings to reflect the accretion of
the preferred securities to their fair market value as at the
closing date. The fair value of the Preferred B stock will need to
be accreted to its Liquidation Value, using the interest method, by
its mandatory redemption date. In addition, the fair value of
Participating Preferred C stock will also need to be accreted to the
Equity Value at the Mandatory Redemption Date of 2008. The Equity
Value is formula driven and is based on the Equity Value of the
combined PBC business as determined by the agreement with Palladium.
The accretion to equity value will be charged to retained earnings
each balance sheet date through the Mandatory Redemption Date.
(c) Pursuant to the terms of an agreement with a minority shareholder,
who is also an officer of the Company, the Company is required to
purchase Class B shares of such shareholder upon his death,
disability, termination of employment or upon his exercise of the
right to sell such shares at any time at a price based on the book
value of the Company's common shares. Adjustments to record the
shares at redeemable value are charged or credited to compensation
expense.
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Philipp Brothers Chemicals, Inc.
3. Pro Forma adjustments - Income Statement for the year ending June 30, 2000
and for the three months ending September 30, 2000
The unaudited proforma income statement assumes the purchase as of the beginning
of the period presented. The adjustments which follow are those which are
required by Article 11 of Regulation S-X. PBC believes the business will be
operated in a different manner than in 1999 as part of Pfizer. The resulting
proforma income statement is therefore not indicative of the results had the
business been purchased as of the beginning of the respective period. The
required preliminary adjustments are as follows:
Year Three Months
Ended Ended
June 30, September 30,
2000 2000
---- ----
(a) Manufacturing costs $6,597 $2,518
Under the terms of the asset purchase agreement, PBC has
entered into transition manufacturing agreements with
Pfizer for a periods of 18 to 36 months at contract
prices, which PBC believes reflect fair value.
Accordingly, costs associated with the manufacture of
inventory by Pfizer have been adjusted to reflect
contract prices.
(b) Reduction in depreciation expense $706 $177
The purchase price allocation results in a write-down of
property, plant and equipment pursuant to Accounting
Principles Board Opinion No. 16 "Business Combinations"
("APB 16"). Accordingly, a reduction in the depreciation
expense on the property, plant and equipment is
required.
(c) Amortization expense ($1,300) ($325)
Under the terms of the asset purchase agreement, the
Company is required to pay Pfizer contingent payments
for a particular product based on a percentage of net
revenues of that product. This entry records the
amortization expense for the contingent payments that
would have occurred on a pro forma basis for the periods
presented. A 10 year amortization period reflecting the
estimated useful life of the product and related
production equipment has been used, and the increase in
depreciation has been included in cost of sales.
(d) Annual management fee payable ($2,250) ($562)
Palladium Equity Partners LLC are paid an annual
management advisory fee until all of the participating
preferred stock is redeemed.
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Philipp Brothers Chemicals, Inc.
Year Three Months
Ended Ended
June 30, September 30,
2000 2000
---- ----
(e) Reversal of historic amortization expense $291 $73
To adjust for the amortization included in the
historical MFA income statement for intangibles.
(f) Compensation expense ($1,785) $107
To adjust compensation payable on redeemable Common
stock - refer to 2 (c) for details.
(g) Interest expense ($5,430) ($1,357)
To record interest expense at 13% on borrowings of
$29,651 payable to Pfizer. In addition, interest expense
has been recorded at 9% on the extension of the current
facilities by $17,500.
Each 1/8% change in the interest rate on variable rate
debt would increase/decrease interest expense of $23 for
the full year and $6 for the three months
(h) Interest expense - amortization of deferred financing costs ($533) ($133)
To record the increase in the amortization of deferred
financing costs
(i) Tax (expense)/benefit ($10,040) $598
To record the estimated income tax effect of the
historical financial results of MFA and the unaudited
pro forma adjustments using an effective rate of 36%
4. Items excluded from pro forma combined statement of income
The non-recurring impact on cost of sales of the write up of inventory to
fair-market value pursuant to Accounting Principles Board Opinion No. 16
"Business Combinations" is not reflected in the unaudited condensed pro forma
statement of income.
- --------------------------------------------------------------------------------
Statements made in this Form 8-K are forward looking statements made pursuant to
the safe harbor provisions of the Securities Litigation Reform Act of 1995. Such
statements involve certain risks and uncertainties that could cause actual
results to differ materially from those in the forward looking statements.
Information on other significant potential risks and uncertainties not discussed
herein may be found in the Company's filings with the Securities and Exchange
Commission included under the caption "Risks Factors" in its form 10-K for the
year ended June 30, 2000.
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 hereunto duly authorized.
PHILIPP BROTHERS CHEMICALS, INC.
By: /s/
-----------------------------------------
Jack C. Bendheim
President
Dated: February 2, 2001
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