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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
Commission File Number 333-64641
Philipp Brothers Chemicals, Inc.
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(Exact name of registrant as specified in its charter)
New York 13-1840497
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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
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 14, 1999:
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 21
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 29
Item 5. Other Information 29
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,
ASSETS 1999 1998
------ --------- ---------
CURRENT ASSETS:
Cash and cash equivalents $ 2,668 $ 24,221
Trade receivables, less allowance for doubtful accounts
of $ 839 in March 31, 1999 and $ 751 in June 30,1998 54,903 57,560
Other receivables 4,032 6,000
Inventories 57,022 37,567
Prepaid expenses and other current assets 9,436 5,491
--------- ---------
TOTAL CURRENT ASSETS 128,061 130,839
PROPERTY, PLANT AND EQUIPMENT, net 65,785 40,510
INTANGIBLES 7,529 3,771
OTHER ASSETS
21,326 17,076
--------- ---------
$ 222,701 $ 192,196
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Cash overdraft $ 1,489 $ 1,915
Loans payable to banks 3,474 -
Current portions of long-term debt 2,702 1,646
Accounts payable 31,041 31,517
Other loans payable 127 492
Accrued expenses and other current liabilities 21,969 15,602
--------- ---------
TOTAL CURRENT LIABILITIES 60,802 51,172
LONG-TERM DEBT 128,093 102,158
OTHER LIABILITIES 12,255 10,103
--------- ---------
TOTAL LIABILITIES 201,150 163,433
--------- ---------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE SECURITIES:
Common stock 2,075 2,563
Common stock of subsidiary 799 2,623
--------- ---------
TOTAL REDEEMABLE SECURITIES 2,874 5,186
STOCKHOLDERS' EQUITY:
Series A preferred stock 521 521
Common stock 3 3
Paid-in capital 805 435
Retained earnings 18,808 23,221
Accumulated other comprehensive income -
cumulative currency translation adjustment (1,460) (603)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 18,677 23,577
--------- ---------
$ 222,701 $ 192,196
========= =========
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,
1999 1998 1999 1998
------------------- ---------------------
NET SALES $ 79,497 $ 73,764 $ 211,598 $ 204,071
COST OF GOODS SOLD 57,310 56,260 157,299 155,595
------------------- ---------------------
GROSS PROFIT 22,187 17,504 54,299 48,476
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 20,774 14,812 50,099 43,673
------------------- ---------------------
OPERATING INCOME 1,413 2,692 4,200 4,803
OTHER:
Interest expense 3,258 1,637 9,276 4,850
Interest income (95) (80) (569) (345)
Other (income) expense, net 1,173 221 2,361 824
------------------- ---------------------
INCOME (LOSS) BEFORE INCOME TAXES (2,923) 914 (6,868) (526)
PROVISION (BENEFIT) FOR INCOME TAXES (847) 439 (2,455) (143)
------------------- ---------------------
NET INCOME (LOSS) $ (2,076) $ 475 $ (4,413) $ (383)
=================== =====================
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 NINE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS)
Preferred Stock Common Stock Accumulated
---------------- -------------------- Other
Class Class Paid-in Retained comprehensive
Series A "A" "B" Capital Earnings Income Total
-------------- --------- ---------- ---------- ------------ ------------- --------
BALANCE, JULY 1,1998 $521 $ 2 $ 1 $ 435 $ 23,221 $ (603) $ 23,577
Foreign currency translation adjustment (857) (857)
Payment of note receivable from officer 370 370
Net loss (4,413) (4,413)
----- ---- ---- ----- -------- ------- --------
BALANCE, MARCH 31,1999 521 2 1 805 18,808 (1,460) $ 18,677
===== ==== ==== ===== ======== ======= ========
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 31,1999 AND 1998
(IN THOUSANDS)
1999 1998
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OPERATING ACTIVITIES:
Net loss $ (4,413) $ (383)
Adjustments to reconcile net loss to net
cash (used in) provided by operating activities:
Depreciation and amortization 7,840 7,722
Other 163 989
Changes in operating assets and liabilities,
net of businesses acquired:
Accounts receivable 9,244 (588)
Inventories (9,142) (3,476)
Prepaid expenses and other current assets (1,333) (515)
Other assets (1,553) (404)
Accounts payable (5,326) 2,459
Accrued expenses and other current liabilities 2,587 802
-------- -------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (1,933) 6,606
-------- -------
INVESTING ACTIVITIES:
Capital expenditures (9,482) (6,525)
Acquisition of businesses, net of cash acquired (21,505) -
Other - (520)
-------- -------
NET CASH USED IN INVESTING ACTIVITIES (30,987) (7,045)
-------- -------
FINANCING ACTIVITIES:
Cash overdraft (426) (372)
Net increase in short-term debt 2,627 788
Proceeds from long-term debt 9,210 3,840
Payments of long-term debt (414) (3,253)
Proceeds from life insurance - 6,045
Redemption of preferred stock - (6,131)
Distribution to principal shareholder - (1,500)
Repayment of shareholder note 370 -
-------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 11,367 (583)
-------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (21,553) (1,022)
CASH AND CASH EQUIVALENTS at beginning of period 24,221 4,093
-------- -------
CASH AND CASH EQUIVALENTS at end of period $ 2,668 $ 3,071
======== =======
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 except for the accrual of compensation expense for
separated employees in the third quarters of 1999 ($1.5 million) and 1998 ($1.1
million)) necessary to present fairly the financial position as of March 31,
1999 and June 30, 1998 and the results of operations and cash flows for the
three months and nine months ended March 31, 1999 and 1998.
The condensed consolidated balance sheet as of June 30, 1998 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, 1998.
The results of operations for the three months and nine months ended March
31, 1999 and 1998 are not indicative of results for the full year.
2. Acquisition
On October 1, 1998, the Company acquired (the "ODDA Acquisition") all of
the outstanding capital stock of ODDA Smelteverk, AS, a Norwegian company, and
certain assets of the business of BOC Carbide Industries in the United Kingdom
(together "ODDA") from the BOC Group Plc for approximately $19 million in cash
and $18.2 million in debt. ODDA manufactures calcium carbide and dicyandiamide
which is distributed worldwide. The principal uses of calcium carbide are for
the production of acetylene for welding and cutting, and desulphurization of
iron and steel. The principal uses of dicyandiamide are for pharmaceutical
manufacturing and a fire-retarding agent for fabrics, wood and paint. 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 each of the nine month
periods being reported are as follows:
Nine Months Ended
March 31,
1999 1998
---- ----
Net Sales $ 220,957 $ 236,154
Net Loss (6,193) (531)
9
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - (Continued)
(IN THOUSANDS)
3. Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The condensed consolidated financial statements include the accounts of
Philipp Brothers Chemicals, Inc. and its subsidiaries, all of which are either
wholly owned or controlled (collectively, referred to as the "Company"). All
significant intercompany accounts and transactions have been eliminated in the
condensed consolidated financial statements.
The fiscal year of the Company and its subsidiaries (other than its
Israeli and Brazilian subsidiaries) ends on June 30. The fiscal year of the
Company's Israeli and Brazilian subsidiaries ends on March 31. Accordingly, the
accounts of the Company's Israeli and Brazilian subsidiaries are included in the
condensed consolidated financial statements on a three-month lag. The condensed
consolidated balance sheets include a receivable from the subsidiaries in the
amount of $261 at March 31, 1999, and $2,686 at June 30, 1998, included in other
receivables, which represent net transactions (merchandise purchases and cash
payments) with the subsidiaries.
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, 1999 and June 30, 1998 are based on perpetual
records and consist of the following:
March 31, June 30,
1999 1998
---- ----
Raw materials........................ $ 25,291 $ 18,511
Work-in-process...................... 5,111 2,604
Finished goods....................... 26,620 16,452
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$ 57,022 $ 37,567
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Comprehensive Income
Effective July 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), Reporting Comprehensive Income. SFAS
130 states that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in the financial
statements.
The Company's comprehensive income amounts were computed as follows:
Three Months Ended Nine Months Ended
March 31, March 31,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
Net earnings (loss) $(2,076) $ 475 $(4,413) $ (383)
Change in foreign currency translation adjustments (923) (48) (857) 313
-------- ----- ------- ------
Total comprehensive income (loss) $(2,999) $ 427 $(5,270) $ (70)
======== ===== ======= ======
10
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - (Continued)
(IN THOUSANDS)
4. 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. The Company has also received a settlement proposal approximating
$800, which it believes is unfairly high in relation to settlements offered to
other PRPs. While the outcome of ongoing negotiation is uncertain, the Company
has accrued in fiscal 1998, 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 $2,028
as of March 31, 1999, which is included in current and long-term liabilities.
5. Credit Facility
On August 19, 1998, the Company entered into a $60 million senior secured
credit facility with PNC Bank, National Association, as agent and on behalf of
itself ("Credit Facility"). The Credit Facility is structured as a five-year,
$35 million revolving credit facility subject to availability under a borrowing
base formula for domestic accounts receivable and inventories. The Company,
under terms of the Credit Facility, may choose between two interest rate
options: (i) base rate, as defined, or (ii) Euro rate as defined, plus 1-1/4%-2%
depending on the Company's operating performance. In addition, a two-year, $25
million acquisition line of credit is available to the Company. Drawdowns under
the acquisition line of credit shall amortize on a five-year basis with the
balances due at maturity. No amounts have been drawn down under the acquisition
line of credit.
11
PHILIPP BROTHERS CHEMICALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - (Continued)
(IN THOUSANDS)
5. Credit Facility (Continued)
The Credit Facility requires, among other things, the maintenance of
certain fixed charge coverage ratios and a certain level of net worth for the
domestic operations of the Company, as defined. In addition, there are certain
restrictions on additional borrowings, additional liens on the Company's assets,
guarantees, dividend payments, redemption or purchase of the Company's stock,
sale of subsidiaries stock, disposition of assets, investments, and mergers and
acquisitions.
At March 31, 1999, the Company was not in compliance with the domestic net
worth requirements of the Credit Facility. Subsequently a waiver has been
obtained from the lenders.
6. Subsequent Event
In April 1999, there was a fire at the Company's Bowmanstown, Pennsylvania
facility. The Company is filing claims under its insurance coverage for property
damage and business interruption. Management does not believe there will be any
material adverse effect on the Company's financial condition, results of
operations and cash flows.
7. Condensed Consolidating Financial Statements
In June 1998, the Company issued $100 million of its 9-7/8% Senior
Subordinated Notes due 2008 (the "Notes"). In connection with the issuance of
these Notes, the Company's U.S. Subsidiaries, the voting shares of which are
wholly-owned, fully and unconditionally guaranteed such Notes on a joint and
several basis. Separate financial statements and other disclosures concerning
the Guarantors are not presented because the Company has determined that they
are not material to investors. 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: PBC and its subsidiaries (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). The voting shares of the U.S.
Guarantor Subsidiaries are wholly-owned by the Parent, and the foreign
Non-Guarantor Subsidiaries are majority owned 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.
12
Philipp Brothers Chemicals Inc.
Condensed Consolidating Balance Sheet
As of March 31, 1999 (Unaudited)
(IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------------
Parent U.S. Guarantor Foreign Subsidiaries Consolidation Consolidated
Subsidiaries Non-Guarantors Adjustments Balance
- --------------------------------------------------------------------------------------------------------------------------
Assets
- ------------------------------------------
Current Assets:
Cash and cash equivalents $ 66 $ 557 $ 2,045 $ 2,668
Trade receivables,net 5,624 21,784 27,495 54,903
Other receivables 1,361 701 1,970 4,032
Inventories 3,786 26,386 26,850 0 57,022
Prepaid expenses and other 5,789 2,180 1,467 9,436
---------------------------------------------------------------------------
Total current assets 16,626 51,608 59,827 0 128,061
---------------------------------------------------------------------------
Property, plant & equipment, net 995 17,348 47,442 65,785
Intangibles 265 2,858 4,406 7,529
Investment in subsidiaries 62,545 1,961 (3,570) (60,936) 0
Intercompany 49,621 (8,769) 1,110 (41,962) 0
Other assets 9,439 7,734 4,153 21,326
---------------------------------------------------------------------------
Total assets $139,491 $ 72,740 $ 113,368 $(102,898) $ 222,701
===========================================================================
Liabilities and Stockholders' Equity
- ------------------------------------------
Current Liabilites:
Cash overdraft $ 490 $ 999 $ - $ 1,489
Loans payable to banks 0 0 3,474 3,474
Current portions of long term debt 129 2,556 17 2,702
Accounts payable 1,772 11,425 17,844 31,041
Other loans payable 127 0 0 127
Accrued expenses and other 5,440 10,957 5,572 0 21,969
---------------------------------------------------------------------------
Total current liabilites 7,958 25,937 26,907 0 60,802
---------------------------------------------------------------------------
Long term debt 107,333 658 61,529 (41,427) 128,093
Other liabilities 1,923 6,703 3,629 0 12,255
Redeemable securities
Common stock 2,075 2,075
Common stock of subsidiary 799 799
---------------------------------------------------------------------------
2,075 799 0 0 2,874
Stockholders' equity
Series A preferred stock 521 0 0 521
Common stock 3 32 131 (163) 3
Paid in capital 864 34,040 2,784 (36,883) 805
Retained earnings 18,808 4,540 19,885 (24,425) 18,808
Accumulated other comprehensive income-
cumulative currency translation adjustment 6 31 (1,497) 0 (1,460)
---------------------------------------------------------------------------
Total Stockholders' equity 20,202 38,643 21,303 (61,471) 18,677
---------------------------------------------------------------------------
Total liabilities and equity $139,491 $ 72,740 $ 113,368 $(102,898) $ 222,701
===========================================================================
13
Philipp Brothers Chemicals Inc.
Condensed Consolidating Income Statement
For the Three Months Ended March 31, 1999 (Unaudited)
(IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------------
Parent U.S. Guarantor Foreign Subsidiaries Consolidation Consolidated
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 income (loss) (1,364) (481) 3,258 0 1,413
Interest expense 1,716 73 1,469 3,258
Interest income (3) 0 (92) (95)
Other expense 0 0 1,173 1,173
Intercompany allocation (2,359) 2,359 0 0
(Profit) loss relating to subsidiaries 1,601 0 0 (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 0 (847)
-----------------------------------------------------------------------
Net income (loss) $(2,076) $ (1,973) $ 372 $ 1,601 $ (2,076)
=======================================================================
14
Philipp Brothers Chemicals Inc.
Condensed Consolidating Income Statement
For the Nine Months Ended March 31, 1999 (Unaudited)
(IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------------
Parent U.S. Guarantor Foreign Subsidiaries Consolidation Consolidated
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 income (loss) (3,797) 1,584 6,413 0 4,200
Interest expense 4,981 239 4,056 9,276
Interest income (351) 0 (218) (569)
Other expense 0 0 2,361 2,361
Intercompany allocation (7,161) 7,161 0 0 0
(Profit) loss relating to subsidiaries 3,551 0 0 (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 0 (2,455)
--------------------------------------------------------------------------
Net income (loss) $ (4,413) $ (3,741) $ 190 $ 3,551 $ (4,413)
==========================================================================
15
Philipp Brothers Chemicals Inc.
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended March 31, 1999 (Unaudited)
(IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------------------------
Parent U.S. Guarantor Foreign Subsidiaries Consolidation Consolidated
Subsidiaries Non-Guarantors Adjustments Balance
- ----------------------------------------------------------------------------------------------------------------------------------
Operating activities:
Net income (loss) $ (4,413) $ (3,741) $ 190 $ 3,551 $ (4,413)
Adjustments to reconcile net income (loss)
Cash provided by operating activities:
Depreciation and amortization 372 2,740 4,728 7,840
Other (133) (113) 409 163
Changes in operating assets and liabilites:
Net of effect of business acquired:
Accounts receivable 26 6,661 2,557 9,244
Inventories 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 operaties activities (23,961) 7,821 14,207 0 (1,933)
--------------------------------------------------------------------------
Investing activities
Capital expenditures (134) (5,492) (3,856) (9,482)
Acquisition of businesses 0 (2,505) (19,000) (21,505)
--------------------------------------------------------------------------
Net cash used in investing activities (134) (7,997) (22,856) 0 (30,987)
--------------------------------------------------------------------------
Financing activities:
Cash overdraft (423) (3) 0 (426)
Net (decrease) increase in short term debt (847) 0 3,474 2,627
Proceeds from long term debt 7,200 141 1,869 9,210
Payments of long term debt (81) (333) 0 (414)
Repayment of shareholder note 0 0 370 370
--------------------------------------------------------------------------
Net cash provided by (used in) financing activities 5,849 (195) 5,713 0 11,367
--------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (18,246) (371) (2,936) 0 (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
==========================================================================
16
Philipp Brothers Chemicals Inc.
Condensed Consolidating Balance Sheet
As of June 30, 1998 (Unaudited)
(IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------------
Parent U.S. Guarantor Foreign Subsidiaries Consolidation Consolidated
Subsidiaries Non-Guarantors Adjustments Balance
- --------------------------------------------------------------------------------------------------------------------------
Assets
- --------------------------------------------
Current Assets:
Cash and cash equivalents $ 18,312 $ 928 $ 4,981 $ 24,221
Trade receivables, net 5,729 27,999 23,832 57,560
Other receivables 952 60 4,988 6,000
Inventories 3,596 18,910 15,061 0 37,567
Prepaid expenses and other 3,599 1,241 651 5,491
---------------------------------------------------------------------------
Total current assets 32,188 49,138 49,513 0 130,839
---------------------------------------------------------------------------
Property, plant & equipment, net 1,163 12,590 26,757 40,510
Intangibles 15 3,136 620 3,771
Investment in subsidiaries 67,049 1,534 (2,483) (66,100) 0
Intercompany 28,932 (29,587) 655 0 0
Other assets 7,729 7,864 1,483 17,076
---------------------------------------------------------------------------
Total assets $ 137,076 $ 44,675 $ 76,545 $(66,100) $ 192,196
===========================================================================
Liabilities and Stockholders' Equity
- --------------------------------------------
Current Liabilites:
Cash overdraft $ 913 $ 1,002 $ - $ 1,915
Current portion of long term debt 144 1,491 11 1,646
Accounts payable 2,368 11,799 17,350 31,517
Other loans payable 492 0 0 492
Accrued expenses and other 4,223 8,281 3,098 0 15,602
---------------------------------------------------------------------------
Total current liabilites 8,140 22,573 20,459 0 51,172
---------------------------------------------------------------------------
Long term debt 100,199 2,575 34,775 (35,391) 102,158
Other liabilities 1,679 6,437 1,987 0 10,103
Redeemable securities
- ---------------------
Common stock 2,563 2,563
Common stock of subsidiary 2,623 2,623
---------------------------------------------------------------------------
2,563 2,623 0 0 5,186
Stockholders' equity
--------------------
Series A preferred stock 521 0 0 521
Common stock 3 0 0 3
Paid in capital 764 2,560 (429) (2,460) 435
Retained earnings 23,221 7,877 20,372 (28,249) 23,221
Accumulated other comprehensive income-
cumulative currency translation adjustment (14) 30 (619) 0 (603)
---------------------------------------------------------------------------
Total Stockholders' equity 24,495 10,467 19,324 (30,709) 23,577
---------------------------------------------------------------------------
Total liabilities and equity $ 137,076 $ 44,675 $ 76,545 $(66,100) $ 192,196
===========================================================================
17
Philipp Brothers Chemicals Inc.
Condensed Consolidating Income Statement
For the Three Months Ended March 31, 1998 (Unaudited)
(IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------------
Parent U.S. Guarantor Foreign Subsidiaries Consolidation Consolidated
Subsidiaries Non-Guarantors Adjustments Balance
- --------------------------------------------------------------------------------------------------------------------------
Net sales $ 8,783 $41,708 $ 29,997 $ (6,724) $73,764
Cost of goods sold 7,299 31,819 23,866 (6,724) 56,260
------------------------------------------------------------------------
Gross profit 1,484 9,889 6,131 0 17,504
Selling, general, and administrative expenses 2,893 8,109 3,810 14,812
------------------------------------------------------------------------
Operating income (loss) (1,409) 1,780 2,321 0 2,692
Interest expense 974 78 585 1,637
Interest income (51) 0 (29) (80)
Other expense 0 0 221 221
Intercompany allocation (1,517) 1,517 0 0
(Profit) loss relating to subsidiaries (1,073) 0 0 1,073 0
------------------------------------------------------------------------
Income (loss) before income taxes 258 185 1,544 (1,073) 914
Provision (benefit) for income taxes (217) 160 496 0 439
------------------------------------------------------------------------
Net income (loss) $ 475 $ 25 $ 1,048 $ (1,073) $ 475
========================================================================
18
Philipp Brothers Chemicals Inc.
Condensed Consolidating Income Statement
For the Nine Months Ended March 31, 1998 (Unaudited)
(IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------------
Parent U.S. Guarantor Foreign Subsidiaries Consolidation Consolidated
Subsidiaries Non-Guarantors Adjustments Balance
- --------------------------------------------------------------------------------------------------------------------------
Net sales $ 27,621 $ 117,613 $ 79,619 $(20,782) $ 204,071
Cost of goods sold 22,760 88,199 65,418 (20,782) 155,595
-------------------------------------------------------------------------
Gross profit 4,861 29,414 14,201 0 48,476
Selling, general, and administrative expenses 8,376 26,402 8,895 43,673
-------------------------------------------------------------------------
Operating income (loss) (3,515) 3,012 5,306 0 4,803
Interest expense 2,736 366 1,748 4,850
Interest income (197) (69) (79) (345)
Other expense 0 0 824 824
Intercompany allocation (4,370) 4,370 0 0
(Profit) loss relating to subsidiaries (767) 0 0 767 0
-------------------------------------------------------------------------
Income (loss) before income taxes (917) (1,655) 2,813 (767) (526)
Provision (benefit) for income taxes (534) (478) 869 0 (143)
-------------------------------------------------------------------------
Net income (loss) $ (383) $ (1,177) $ 1,944 $ (767) $ (383)
=========================================================================
19
Philipp Brothers Chemicals Inc.
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended March 31, 1998 (Unaudited)
(IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------------------------
Parent U.S. Guarantor Foreign Subsidiaries Consolidation Consolidated
Subsidiaries Non-Guarantors Adjustments Balance
- ----------------------------------------------------------------------------------------------------------------------------------
Operating activities:
Net income (loss) $ (383) $(1,177) $ 1,943 $ (766) $ (383)
Adjustments to reconcile net income (loss)
Cash provided by operating activities:
Depreciation and amortization 362 3,871 3,489 7,722
Other 142 784 63 989
Changes in operating assets and liabilites:
Net of effect of business acquired:
Accounts receivable 425 695 (1,708) (588)
Inventories (57) (4,968) 1,549 (3,476)
Prepaid expenses and other (1,468) 1,388 (435) (515)
Other assets (370) (113) 79 (404)
Intercompany 1,258 767 (2,791) 766 0
Accounts payable (1,229) 1,639 2,049 2,459
Accrued expenses and other 1,254 (218) (234) 802
-------------------------------------------------------------------------
Net cash (used in) provided by operaties activities (66) 2,668 4,004 0 6,606
-------------------------------------------------------------------------
Investing activities
Capital expenditures (310) (3,329) (2,886) (6,525)
Other (520) 0 0 (520)
-------------------------------------------------------------------------
Net cash used in investing activities (830) (3,329) (2,886) 0 (7,045)
-------------------------------------------------------------------------
Financing activities:
Cash overdraft (119) (253) 0 (372)
Net (decrease) increase in short term debt (206) (200) 1,194 788
Proceeds from long term debt 3,377 463 0 3,840
Payments of long term debt (370) (248) (2,635) (3,253)
Proceeds from life insurance 6,045 0 0 6,045
Distribution to principal shareholder (1,500) 0 0 (1,500)
Redemption of preferred stock (6,131) 0 0 (6,131)
-------------------------------------------------------------------------
Net cash provided by (used in) financing activities 1,096 (238) (1,441) 0 (583)
-------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents 200 (899) (323) 0 (1,022)
Cash and cash equivalents at beginning of year 263 1,049 2,781 4,093
-------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 463 $ 150 $ 2,458 $ - $ 3,071
=========================================================================
20
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 and industrial chemicals, which are sold world-wide for use in
numerous markets including animal nutrition and health, electronics, wood
treatment, agricultural, pharmaceutical and personal care products, 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 one industry segment, with revenues derived from
sales in four core product groups: Animal Nutrition and Health, Intermediates
and Industrial Chemicals, Electronics and Metal Treatment, and Crop Protection.
The revenues of each of the Company's product groups are affected by factors
such as trends in the industries of each of the customers of the Company, the
impact of lower prices for competing products, changes in production levels of
certain products resulting from expansion of Company production facilities, the
inclusion of revenues from acquisitions, and seasonality.
The Company's net sales have increased through internal growth, selective
acquisitions, strategic alliances and new product introductions.
Recent Developments
The Exchange Offer
On January 15, 1999, the Company consummated its offer to exchange, and
issued, $100,000,000 in aggregate principal amount of its 9 7/8% Senior
Subordinated Notes due 2008 (the "New Notes"), which have been registered under
the Securities Act of 1933, as amended (the "Securities Act"), in exchange for
an equal amount of 9 7/8% Senior Subordinated Notes due 2008 which were not
registered under the Securities Act (the "Old Notes"). The New Notes were issued
pursuant to a First Supplemental Indenture dated January 15, 1999 among the
Company, The Chase Manhattan Bank, as Trustee, and the current domestic
subsidiaries of the Company (the "Guarantors"). The terms of the New Notes and
the Old Notes are identical in all material respects, except that the offer of
the New Notes was registered under the Securities Act and, therefore, the New
Notes are not subject to certain transfer restrictions, registration rights and
related liquidated damage provisions applicable to the Old Notes. The issuance
of the New Notes satisfied certain obligations of the Company contained in the
Registration Rights Agreement dated as of June 11, 1998 among the Company, the
Guarantors and Schroder & Co. Inc., as the Initial Purchaser thereunder.
21
Results of Operations
NET SALES (In $000's)
Three Months Ended Nine Months Ended
March 31, March 31,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
Product Groups
Animal Nutrition and Health.................. $ 33,327 $ 35,631 $ 94,072 $ 98,985
Intermediates and Industrial Chemicals....... 26,804 18,731 69,227 55,950
Electronics and Metal Treatment.............. 9,033 9,683 25,420 29,202
Crop Protection.............................. 10,333 9,719 22,879 19,934
-------- -------- -------- --------
Total $ 79,497 $ 73,764 $211,598 $204,071
======== ======== ======== ========
Comparison of Three Months Ended March 31, 1999 and 1998
Net Sales. Net Sales increased by $5.7 million or 7.8% to $79.5 million in
the three months ended March 31, 1999 as compared to the same period of the
prior year. This increase was primarily due to higher net sales of $8.1 million
in the Company's Intermediates and Industrial Chemicals product group due to
dicyandiamide and calcium carbide sales ($9.9 million) as a result of the ODDA
Acquisition, and higher volume sales of coal fly ash ($1.1 million), partially
offset by lower volume sales of organic intermediate products ($1.7 million) due
to lower customer demand and competitive pressures. Higher net sales of $.6
million in the Company's Crop Protection products was primarily due to the
introduction of new fungicide products. Lower net sales of $2.3 million in the
Company's Animal Nutrition and Health products was primarily as a result of
lower customer demand for coccidiostats ($1.8 million) and lower selling price
for copper sulfate feed grade certain copper containing animal feed nutrient
additives due to competitive pressures and lower copper prices.
Gross Profit. Gross Profit increased by $4.7 million or 26.8% to $22.2
million and 27.9% of sales in the three months ended March 31, 1999 as compared
to 23.7% of net sales in the same period of the prior year. This increase was
primarily attributable to higher sales in the Company's Intermediates and
Industrial Chemicals group products ($4.2 million) due to the ODDA Acquisition
and higher sales of coal fly ash products. The favorable impact on gross profit
of higher net sales of Crop Protection products ($.2 million) were offset by the
impact of lower sales in the Company's Animal Nutrition and Health products,
primarily coccidiostats and copper sulfate feed grade certain copper containing
animal feed nutrient additives.
Selling, General and Administrative Expense. Selling, General and
Administrative expenses increased by $6.0 million or 40.0% to $20.8 million for
the three months ended March 31, 1999 as compared to the same period of the
prior year. This increase was primarily due to the ODDA Acquisition ($4.2
million) compensation expenses associated with the separation of employment of
an executive of a subsidiary of the Company ($1.5 million), which was partially
offset by the reduction in costs associated with the 1998 curtailment of
operations at the Company's Sewaren, New Jersey facility. In the three months
ended March 31, 1998, a charge of $1.1 million was recorded for employee
terminations by the Company.
Operating Income. Operating income decreased by $1.3 million or 47.5% to
$1.4 million in the three months ended March 31, 1999 as compared to the same
period of the prior year primarily due to higher net sales and gross profits,
offset by higher selling, general and administrative expenses primarily due to
compensation expenses associated with the separation of employment of an
executive of a subsidiary of the Company ($1.5 million).
Interest Expense. Interest expense increased by $1.6 million or 99.0% to
$3.2 million for the three months ended March 31, 1999 as compared to the same
period of the prior year primarily due to increased
22
principal and interest expense associated with the $100 million Note Offering in
June 1998 and interest expense incurred by ODDA on its bank borrowings.
Other Expense, Net. Other expense, net reflects principally foreign
currency gains and losses of the Company's foreign subsidiaries.
Comparison of Nine Months Ended March 31, 1999 and 1998
Net Sales. Net Sales increased by $7.5 million or 3.7% to $211.6 million
for the nine months ending March 31, 1999 as compared to the same period of the
prior year. This increase was primarily due to higher sales of $13.3 million in
the Company's Intermediates and Industrial Chemicals product group for
dicyandiamide and calcium carbide ($20.2 million) as a result of the ODDA
Acquisition and higher volume sales of the Company's coal fly ash products ($2.1
million). This increase was partially offset by lower volume sales of organic
intermediate products ($6.1 million) due to lower customer demand and
competitive pressures and lower volume sales of inorganic intermediate products
primarily to the wood treating industry due to lower demand and lower copper
prices. Higher net sales of $2.9 million in the Company's Crop Protection
products was primarily due to higher volume sales of copper fungicides and the
introduction of new fungicide products. Lower net sales of $4.9 million in the
Company's Animal Nutrition and Health products was primarily as a result of
lower customer demand for coccidiostats ($4.2 million). Lower net sales of $3.8
million in the Company's Electronics and Metal Treatment was primarily a result
of lower volume sales of metal finishing and electronic chemicals and lower
recycling revenues due to lower customer demands.
Gross Profit. Gross Profit increased by $5.8 million or 12.0% to $54.3
million and 25.7% of sales for the nine months ended March 31, 1999 as compared
to 23.8% of net sales in the same period of the prior year. This increase was
primarily attributable to higher sales in the Company's Intermediates and
Industrial Chemicals products group ($7.6 million) due to the ODDA Acquisition
which was partially offset by lower sales of organic and inorganic chemical
intermediates. The favorable impact on gross profit of higher volume sales of
Crop Protection products ($1.1 million) were offset by the impact of lower net
sales of the Company's Electronics and Metal Treatment products ($1.1 million)
and lower sales of Animal Nutrition and Health products ($1.8 million) due to
lower sales of coccidiostats and lower prices of copper sulfate feed grade
certain copper containing animal feed nutrient additives due to lower copper
prices.
Selling, General and Administrative Expense. Selling, general and
administrative expenses increased $6.4 million or 14.7% to $50.1 million for the
nine months ended March 31, 1999 as compared to the same period of the prior
year. This increase was primarily due to the Company's acquisition of ODDA ($7.7
million) and compensation expenses associated with the separation of employment
of an executive of a subsidiary of the Company ($1.5 million), which was mostly
offset by the reduction in costs associated with the 1998 curtailment of
operations at the Company's Sewaren, New Jersey facility. The nine months ended
March 31, 1998 include a charge of $1.1 million for employee terminations by the
Company.
Operating Income. Operating income decreased $.6 million or 12.6% to $4.2
million in the nine months ended March 31, 1999 as compared to the same period
of the prior year primarily due to higher net sales and gross profits, offset by
higher selling, general and administrative expenses primarily due to
compensation expenses associated with the separation of employment of an
executive of a subsidiary of the Company ($1.5 million).
Interest Expense. Interest expense increased by $4.4 million or 91% to
$9.3 million for the nine months ended March 31, 1999 as compared to the same
period of the prior year primarily due to increased principal and interest
expense associated with the $100 million Note Offering in June 1998 and interest
expense incurred by ODDA on its bank borrowings.
Other Expense, Net. Other expense, net reflects principally foreign
currency gains and losses of the Company's foreign subsidiaries.
23
Liquidity and Capital Resources.
Net Cash Used In Operating Activities. Net Cash used in operations for the
nine months ended March 31, 1999 was $1.9 million, an increase of $8.5 million
from the same period of the prior year. This increase was primarily due to
decreased net income and increased purchases of inventories and reduction in
amounts due to vendors which were partially offset by higher collections of
receivables. Accrued expenses and other current liabilities at March 31, 1999
includes the accrual of $1.5 million of compensation costs associated with the
separation of employment of an executive of a subsidiary. In connection with
this separation of employment, the Company is also required to redeem common
stock of the subsidiary held by the executive and $1.3 million has been
reclassified from redeemable securities to accrued expenses.
Net Cash Used in Investing Activities. Net cash used in investing
activities for the nine months ended March 31, 1999 was $31 million, an increase
of $24 million, primarily due to the acquisition of ODDA and a higher level of
capital expenditures ($3.0 million).
Net Cash Provided By Financing Activities. Net cash provided by financing
activities for the nine months ended March 31, 1999 was $11.4 million, an
increase of $12 million from the same period of the prior year, primarily due to
increases in borrowings under the Company's Credit Facility. The nine months
ended March 31, 1998 included a distribution to the principal shareholder as
consideration for the purchase of Koffolk, Inc. ($1.5 million) reduced by net
borrowings.
Liquidity. As of March 31, 1999, the Company had $67.3 million of working
capital as compared to $79.7 million as of June 30, 1998. Cash on hand as of
March 31, 1999 amounted to $2.7 million. At March 31, 1999, the Company had $7.2
million outstanding borrowings under a $35 million Credit Facility. At March 31,
1999 the Company had an additional $23.2 million available under its Credit
Facility, under a 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.
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 and its
24
subsidiaries do 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. The
fair value of the Company's long-term debt is estimated using discounted cash
flow analyses, based on the Company's incremental borrowing rates for similar
types of borrowing arrangements. As of June 30, 1998 and March 31, 1999, the
fair value of the Company's total debt did not differ materially from its
carrying amount. A 100 basis point increase in interest rates could result in a
$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 German
deutsche mark 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 June 30, 1998 and March 31, 1999, the fair value did not differ
materially from its carrying amount. Based on the limited amount of foreign
currency contracts at March 31, 1999, the Company does not believe that an
instantaneous 10% adverse movement in foreign currency rates from their levels
at March 31, 1999, with all other variables held constant, would have a material
effect on the Company's results of operations, financial position or cash flows.
Also, the Company obtains third party letters of credit in connection with
certain inventory purchases and insurance obligations. At June 30, 1998 and
March 31, 1999, the contract values of these letters of credit were $4.6 million
and $7.1 million, respectively, and their fair values did not differ from
their carrying amount.
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 June 30, 1998 and March 31, 1999
would not be material when compared to the Company's earnings and financial
position.
25
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 that may result from the improper processing of dates and
date-sensitive calculations by computers and other machinery as the year 2000 is
approached and reached. These problems generally arise from the fact that most
of the world's computer hardware and software have historically used only two
digits to identify the year in a date, often meaning that the computer will fail
to distinguish dates in the "2000's" from 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.
The Company has 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 has replaced or upgraded most of
its Management Systems and Manufacturing Systems. The Company has substantially
upgraded its desktop computers, networks and servers and software applications
and packages. The Company has expended approximately $580,000, $587,000 and
$920,000 in the fiscal years ended June 30, 1996, 1997 and 1998, respectively,
towards compliance with Y2K issues. Such amounts during such periods were
allocated as follows: for 1996, $380,000 for outside consultants and $200,000
for internal costs (including internal programmers and MIS activities); 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. The Company believes that its Manufacturing Systems worldwide are
currently in Y2K compliance. With regard to its Management Systems, the Company
estimates that 90 percent of its U.S. operations are Y2K compliant, other than
the current conversion of the order entry and inventory tracking systems of one
of its domestic subsidiaries, resulting in estimated overall U.S. completion of
75 percent. The Company expects that its U.S. operations will be in full
compliance during calendar 1999.The Company's operations in France and the
United Kingdom are presently in Y2K compliance, while the Company estimates that
its Israeli and Norwegian operations are currently 90 percent and 75 percent
compliant, respectively, and that they will be in full compliance during
calendar 1999. The Company expects that any required modifications will be made
on a timely basis. The Company continues to test its Management and
Manufacturing Systems, on a system-by-system basis, as it completes its ongoing
compliance efforts. The Company estimates that future expenditures will not
exceed $150,000, of which $30,000 is expected to be spent on hardware, $70,000
on software modifications and systems testing by outside consultants and $50,000
is allocated to internal costs and contingencies. The Company's estimates of
completion are based on management's estimates of the number and complexity of
the systems involved and the status of its Y2K effort with respect to such
systems. Such estimates may not necessarily be consistent with the timing of the
Company's incurrence of Y2K-related expenditures.
As part of the Company's Y2K readiness program, the Company has identified
significant service providers, vendors, suppliers and customers ("Key Business
Partners") that it believes are critical to business operations after January 1,
2000 and has sent questionnaires in an attempt to reasonably ascertain their
stage of Y2K readiness. The Company may follow-up responses to the
questionnaires through interviews and other available means. In conjunction with
this effort, key utilities upon which the Company and its operating
26
subsidiaries rely will be approached on a worldwide basis to identify their
level of Y2K preparedness. In many cases, these entities (particularly outside
North America) have a lower level of Y2K awareness and are less willing to
provide information concerning their state of Y2K readiness.
The Company is considering business interruption contingency plans to
address internal and external issues specific to the Y2K problem, to the extent
practicable. These contingency plans, which are intended to enable the Company
to continue to operate on January 1, 2000 and beyond, may include stockpiling
raw and packaging materials, increasing inventory levels, securing alternate
sources of supply, performing certain functions manually, repairing or obtaining
replacement systems to interface with third-party systems and other appropriate
measures. The Company's Manufacturing Systems rely on control systems which
include process manufacturing and mixing controls, production monitoring power,
and emission and safety. While comparable control systems are used at plants
having similar processes, specific facility-related configurations exist to meet
the needs of production equipment at each plant. If a failure were to occur, the
potential impact would be isolated to the affected facility and, more
particularly, the product or products manufactured with the affected equipment.
Also, in many cases, the Company has the ability to manufacture the same product
at different facilities. The Company's Management Systems include administrative
and financial applications, such as for order processing and collection. In the
event one of these systems were not corrected, the Company's ability to capture,
schedule and fulfill customer demands could be impaired. Similarly, if a
collection processing system were to fail, the Company may not be able to
properly apply payments to customer balances or correctly determine cash
balances. However, as discussed above, the Company will consider various
alternatives, including performing manually certain functions that it had
performed manually before the applicable computer system was in use.
The Company's plans are intended to provide a means of managing risk, but
cannot eliminate the potential for disruption due to third party failure. To the
extent that responses to Y2K readiness are unsatisfactory, the Company may
consider changing suppliers, service providers or contractors to those which
have demonstrated Y2K readiness. However, the Company believes that due to the
widespread nature of the potential Y2K issues, its contingency planning is an
ongoing process which will require further consideration as the Company obtains
additional information regarding the Company's internal systems and equipment
during completion of the testing of its systems and regarding the status of its
suppliers, customers and other third party providers regarding their becoming
Y2K compliant. The Company is defining a strategy based on the importance of
each relationship. The Company's efforts with respect to specific problems
identified will depend in part upon its assessment of the risk that such problem
may have an adverse impact on its operations. The Company has not yet developed
contingency plans in the event of a Y2K failure caused by a supplier or third
party, but would intend to do so if a specific problem is identified through the
program described above. In some cases, particularly with respect to its utility
vendors, alternative suppliers may not be available.
Because of the substantial number of Manufacturing and Management Systems
used by the Company and its operating subsidiaries, the significant number of
Key Business Partners, the extent of the Company's foreign operations, including
operations within countries that are not actively promoting remediation of the
Y2K issue, the Company presently believes that it may experience some disruption
in its business due to the Y2K issue. The Company currently believes that the
greatest risk of disruption in its business exists in certain international
markets. The possible consequences of the Company or Key Business Partners not
being fully Y2K compliant by January 1, 2000 include, among other things,
temporary plant closings, delays in the delivery of products, delays in the
receipt of supplies, invoice and collection errors, and inventory and supply
obsolescence.
The failure to correct a material Y2K problem could result in an
interruption in, or failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. More specifically, the
Company and its operating subsidiaries could be materially adversely affected if
utilities and private businesses with which they do business or that provide
essential products or services are not Y2K ready. Due to the general uncertainty
inherent in the Y2K problem, resulting in part from the uncertainty of the Y2K
readiness of the Company's
27
customers, suppliers, and other third-party providers, the Company is unable to
determine at this time whether the consequences of any Y2K failures will have a
material impact on the Company's results of operations, liquidity or financial
condition. The Company believes that, with the implementation of new business
systems and completion of the Company's Y2K modifications, the possibility of
significant interruptions of normal operations should be mitigated.
The preceding "Y2K Issue" discussion contains various forward-looking
statements which represent the Company's beliefs or expectations regarding
future events. When used in the "Y2K problem" discussion, the words "believes,"
"expects," "estimates," and similar expressions are intended to identify
forward-looking statements. Forward-looking statements include, without
limitation, the Company's expectations as to when it will complete the
remediation and testing phases of its systems as well as its Y2K contingency
plans, its estimated cost of becoming Y2K compliant; and the Company's belief
that its internal systems and equipment will be Y2K compliant in a timely
manner. All forward-looking statements involve a number of risks and
uncertainties that could cause the actual results to differ materially from the
projected results, including problems that may arise on the part of third
parties. Factors that may cause these differences include, but are not limited
to, the availability of qualified personnel and other information technology
resources; the ability to identify and remediate all date sensitive lines of
computer code or to replace embedded computer chips in affected systems or
equipment; and the actions of governmental agencies or other third parties with
respect to Y2K compliance which are not made or are not completed on a timely
basis. The resulting problems could have a material impact on the operations of
the Company, and could, in turn, have a material adverse effect on the Company's
results of operations, financial position or cash flows. See "Certain Factors
Affecting Future Operating Results."
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 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; the
seasonality of the Company's business; and risks associated with Year 2000
compliance by the Company and third parties.
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."
28
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On January 15, 1999, the New Notes were issued in accordance with the
First Supplemental Indenture upon consummation of the Exchange Offer. See Part
I--Item 2--"Management's Discussion and Analysis of Financial Condition and
Results of Operations--Recent Developments--The Exchange Offer."
Item 5. Other Information
At March 31, 1999, the Company had accrued $1.5 million of payments
associated with the anticipated separation of I. David Paley, the President and
Chief Operating Officer of the Company's Phibro-Tech subsidiary. In connection
with this separation, the Company will be required to redeem common stock of
Phibro-Tech held by Mr. Paley.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No report on Form 8-K has been filed during the quarter ended March
31, 1999.
29
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 14, 1999 By: /s/ Nathan Z. Bistricer
----------------------------------
Nathan Z. Bistricer,
Vice President and Chief Financial Officer
Date: May 14, 1999 By: /s/ Joseph Katzenstein
----------------------------------
Joseph Katzenstein
Treasurer and Secretary
30
Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
27.1 Financial Data Schedule
31